October 28, 2008

FiOS Spark: Verizon Shares Make Big Gains

Wall St heftily rewarded Verizon for its 3Q results Mon, with shares closing up 10%. Bloomberg reports that the stock saw its largest rise in more than 8 years, with sales for the Q up 4.1% to $24.8bln and net income up 31%. The telco was proud of FiOS numbers, despite what it called the "rhetoric of the cable companies." In its first 3 months in Staten Island, FiOS TV has achieved a 10% penetration rate, execs said. "On average FiOS TV achieves 17% penetration in just 12 months and over 26% penetration within 2 years," said pres/COO Denny Strigl, noting that Verizon will be 2/3 through with its fiber buildout in the coming months. "These numbers are better than we had anticipated." Verizon entered NYC in 3Q and began marketing to an additional 1.2mln homes. It added 233K new FiOS TV HHs in the Q. In the "coming soon" category, Verizon plans to allow DVR programming via cell phone ( AT&T's U-verse already does this) as well the ability to view Facebook and YouTube on the TV. Access lines continue to fall, and DSL lost 96K subs. FiOS Internet gained 225K subs, giving Verizon a net gain of 129K broadband customers. "We're not surprised at the access line loss. We've been saying now for a couple years that DSL itself was going to become less potent. Wireless is obviously much more of a substitute capability going forward," said chmn/CEO Ivan Seidenberg. Telco brass said spending has begun on LTE wireless technology, but declined to disclose a specific figure. "I can tell you looking at our capital spend plans for next year, we'll continue to bring our spend as a percent of revenue down," Strigl said. S&P maintained its "buy" rating on the stock. "Despite economic and competitive pressure that we contend led to 9% access line losses, we are encouraged by VZ's strong 1.5mln organic wireless additions and the continued rollout of its FiOS offerings," it said. Somewhat more cautious was Sanford Bernstein's Craig Moffett, who described Verizon as "dodging a bullet, for now. Wireless (1.5mln adds/2.13 when acquisitions are included) and enterprise beat his expectations, while wireline remains "bleak" even though margins held at 27.3%, flat sequentially and approximately flat versus a year ago. "The problem, of course, is that Verizon's guidance maintains an expectation of expanding wireline margins in the face of declining wireline volumes over the next few years (and so do consensus forecasts)," Moffett said in a note to clients. And while FiOS turned EBITDA positive this Q, he expects it to be a drag on margins until its own margins crosses 27%, which is the avg for the wireline division.