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Verizon: Wireless Funds Fiber

Verizon Communications Inc. (NYSE: VZ) said profits for the quarter ending March 31 shrunk a bit from the prior year's quarter, due to costs related to its acquisition of MCI LLC , as well as additional costs related to the company's massive fiber optics projects. Sales and subscriptions were up, though, thanks to the booming wireless business.

Verizon earned net profits of $1.632 billion for the quarter, or 56 cents per share, compared to $1.757 billion, or 63 cents per share, in the same quarter last year.

Shares of Verizon initially rose on the news, but ended the day falling $0.15 (.46%) to $32.64.

The company reported revenues of $22.74 billion, up 25 percent from $18.18 billion in the first quarter 2005, due largely to the acquisition of MCI, which closed in January 2006.

Verizon Wireless added 1.7 million customers in the quarter, for a total of 53 million customers, up 16.7 percent from the first quarter 2005. That's slightly behind market leader Cingular Wireless , which ended its first quarter with 55.8 million customers. (See Cingular Churns Out Profit in Q1.)

The company also reported a record-low churn, or customer turnover, of 1.18 percent for the quarter. Cingular's churn for its quarter was 1.9 percent, while Sprint Corp. (NYSE: S) first-quarter churn was 2.1 percent, at least among post-paid wireless customers. (See Sprint Nextel Revenues Up, Profits Down.)

"It is amazing that all the big guys have reduced churn and yet are still growing," says Phil Redman, research vice president at Gartner Inc. .

Verizon's wireless data services revenues more than doubled from the previous year, contributing $872 million for the quarter. This included 9.6 billion text messages, which contributes to a growing share of business: 11.5 percent of wireless service revenues came from data services this quarter, up from 6.3 percent the same quarter the previous year.

Verizon Wireless is a joint venture with Vodafone Group plc (NYSE: VOD), which owns 45 percent, although Verizon clearly wants to own the whole thing.

"We still remain interested in purchasing the 45 percent that Vodafone owns of Verizon Wireless," said Ivan Seidenberg, Verizon's chairman and CEO, in an earnings call with analysts. "The decision is really more in their court at this point."

During the quarter, the company expanded its retail wireless service channels, most notably by offering pre-paid service packages at Wal-Mart stores across the country. But company officials seem to prefer the loyalty of customers who buy service directly from Verizon Wireless. "We have found that customers who buy through direct channels have lower churn," said Doreen Toben, chief financial officer at Verizon. "Unlike those who buy from retail or from MVNOs, these customers are our customers."

On the wireline side, revenues grew 33 percent to $12.5 billion, due to corporate customer business that the company gained from MCI. Wireline data revenues were $3.9 billion, up almost 90 percent from the year-ago quarter.

Officials acknowledged that the MCI merger cut into profit margins, as did the company's dedication to fiber. Verizon has been investing heavily on its FiOS fiber optic cable network.

By the end of the first quarter, the company was selling FiOS broadband data services in 15 states, covering a total of 3.6 million homes and businesses, the company reported. But earnings dilution from the FiOS buildout was six cents per share for the quarter. In the markets where Verizon offers IPTV services over fiber, 80 percent of video customers are triple play customers, meaning they order TV, Internet, and wireline telephone services from the company, Toben said.

"Our investments are focused on this initiative," Toben explained. "We're well on our way to 30 percent penetration in five years."

— Carmen Nobel, Senior Editor, Light Reading

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