Verizon Excels With DSL

Verizon Communications Inc. (NYSE: VZ) planted a big, wet kiss on its DSL equipment suppliers today in the form of first-quarter earnings that showed greater-than-expected growth in the carrier’s DSL business.

But what DSL subscribers giveth, they taketh away from Verizon's residential telephone lines, which declined 4 percent year-over-year during the quarter.

Overall, Verizon’s results for the quarter ended March 31 were positive. The company reported earnings of $1.6 billion, or 58 cents a share, before special and non-recurring items, beating analysts’ consensus estimate by 1 cent, according to First Call. Operating revenues rose to $17.1 billion, a 3.9 percent increase from the first quarter of 2003. The quarterly growth rate was Verizon’s highest since the first quarter of 2001.

“Our first-quarter results reflect strong operating performance in our key growth areas, particularly in wireless, consumer broadband, and business data transport,” said Doreen Toben, Verizon’s CFO, in a conference call today with analysts. “We continue to allocate more capital to our growth areas and new technologies such as Enterprise Advance, voice, and broadband technologies such as EV-DO and FTTP.” More than half of Verizon’s $2.6 billion in capital expenditures during the quarter went toward these growth businesses (see Verizon Suppliers Get Good News).

During the quarter, Verizon added 345,000 new DSL lines -- the most it has ever added in a quarter -- bringing the company’s total DSL lines in service to nearly 2.7 million. The company’s consumer DSL revenues during the quarter grew 42 percent year-over-year and 15 percent from the previous quarter.

That’s good news for Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), which supplies DSL equipment to Verizon. AFC has not yet reported first-quarter results, but in a research note issued today, Simon Leopold, an analyst at Morgan Keegan & Company Inc., estimated that AFC derived 6 percent of its sales from Verizon last year and could derive 11 percent this year (see Smith Barney Pumps Up AFC).

Verizon’s DSL growth also potentially benefits Adtran Inc. (Nasdaq: ADTN), which, according to Leopold, is bidding for some of Verizon’s remote terminal business. In a conference call today with analysts, Verizon management repeatedly mentioned remote terminal deployment as a contributor to the carrier’s DSL growth in the first quarter. Sales to Verizon comprised 15 percent of Adtran’s revenue last year and 16 percent during this year’s first quarter.

The DSL growth came at the expense of second telephone lines that customers previously used for dial-up Internet connections. Verizon’s total switched access lines were down 4.3 percent year-over-year, though losses slowed slightly from the previous quarter. “If you look at consumer DSL and residential switched access lines together, you will see that we are relatively flat during the quarter, as DSL line significantly improved and switched access line losses slowed down somewhat,” Toben said.

Verizon’s enterprise data business improved during the quarter, too. Adtran, which also supplies HDSL equipment to Verizon, stands to gain from increased demand for the carrier’s DS1 service. “We are seeing some encouraging signs on the data transport side," said Toben, "as DS1 volumes have grown almost 5 percent year-over-year."

Verizon added that testing of its fiber-to-the-premises initiative is proceeding on schedule -- another encouraging sign for AFC. Deployment of Verizon’s FTTP service is scheduled for June (see AFC Finalizes Verizon FTTP Contract).

— Justin Hibbard, Senior Editor, Light Reading