3rd UPDATE: Verizon Posts 2Q Loss; Gains On Smartphone Traction

23rd Jul 2010 17:02

(Updates with background and executive comments throughout) By Roger Cheng Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Verizon Wireless, helped by its Droid franchise, is making inroads towards closing the gap on AT&T Inc.'s (T) pole position in smartphones. The wireless carrier, jointly owned by Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD, VOD.LN), said Friday the percentage of smartphone users grew to 20% of its customer base in the second quarter, up from 15% at the end of last year, underscoring the accelerating demand for high-end devices. Two out of every five customers purchased smartphone in the period. Verizon Wireless has lagged behind in its selection of smartphones, but has quickly made up ground over the past several months with the introduction of several Droid smartphones, which run on Google Inc.'s (GOOG) Android software. This quarter, it was able to add more contract customers than AT&T, which still benefits from its exclusive deal to sell the Apple Inc. (AAPL) iPhone. High-profile smartphones have become the key tool carriers use to win over a shrinking base of high-end consumers willing to sign a long-term contract. The smartphones also contribute to a higher monthly phone bill because they require pricier data plans. "We still see a lot of upside here now that we're in a much better position from a device line-up perspective," Chief Financial Officer John Killian told Dow Jones Newswires. AT&T, which doesn't disclose the number of smartphone users in its base, is believed to still hold a significant lead. More than 53% of its postpaid base carry either a smartphone or a messaging device, compared with 35% for Verizon Wireless. Verizon Wireless launched two high-profile devices in the quarter, the Droid Incredible by HTC Corp. (HTCXF, 2498.TW) and the Droid X by Motorola Inc. (MOT). The steady release of multiple flashy smartphones kept the carrier's postpaid subscriber growth relatively strong. In the period, it added 665,000 contract customers, down 40% from a year but still above Wall Street expectations and AT&T's postpaid growth. "Verizon likely took share in the quarter despite the launch of a new iPhone," said Mike McCormack, an analyst at J.P. Morgan. The carrier likely benefited from the timing of the iPhone 4 launch, which hit the market with only a week left in the quarter. AT&T and Apple primarily sold the device to existing subscribers in the second quarter, limiting how many new customers could get their hands on the phone. A wider supply of iPhone 4s could draw in new consumers. AT&T Chief Financial Officer Rick Lindner said in an interview that he expects subscriber growth to rebound in the third quarter. As a result of the higher focus on data-intensive smartphones, the average revenue per user has risen. Verizon Wireless's average monthly bill in the second quarter was $51.56, up nearly 1% from a year ago. AT&T's performance is even stronger, with its average revenue per user at $62.63, up 3.4% from the year-earlier period. Verizon reported a loss of $198 million, or 7 cents a share, compared with a profit of $1.48 billion, or 52 cents a share, a year earlier. Excluding the impact of its divestiture of landline assets to Frontier Communications Corp. (FTR) and Alltel wireless assets to AT&T and Atlantic Tele-Network Inc. (ATNI), as well as charges for its voluntary work force reduction program, earnings fell to 58 cents a share from 63 cents as revenue dipped 0.3% to $26.77 billion. Analysts polled by Thomson Reuters most recently forecast earnings of 56 cents a share on $27.11 billion in revenue. On Thursday, AT&T reported a 26% increase in second-quarter earnings, with strength in the wireless business driven by sales of Apple's iPhone and iPad and continued cost cuts. Like Verizon, the number of new contract customers fell from a year earlier. The results don't bode well for Sprint Nextel Corp. (S) and T-Mobile USA, both of which are struggling to return to postpaid customer growth. In anticipation of the slowdown, the carriers have sought new revenue streams. AT&T has focused on increasing the number of customers with data plans, as well as with connecting nontraditional devices such as electronic-book readers. It added more than three times as many connected devices as its rival. Verizon Wireless has focused on the prepaid market, adding 896,000 customers through its wholesale partners in the quarter. The carrier preferred to keep an arm's length from the prepaid segment; its own service ceded more than 200,000 customers in the period. Verizon's wireline operations continued their descent, with total lines falling 9.2% and revenue of $11.1 billion falling 3.3% from a year earlier. Verizon added 174,000 FiOS TV customers and 196,000 FiOS Internet customers, offsetting continued declines in its traditional DSL business. The company said it expects 11,000 "voluntary separations" this year as it sheds jobs in its slower growing businesses. The company cut 3,800 wireline jobs in the period, and Killian said the company would look at additional work-force reductions in other areas of the business. Verizon's global business services unit reported a slight uptick in revenue, although its wholesale wireline traffic business fell 8.3% from a year earlier. Verizon shares rose 4% to $28.09 in recent trading. -By Roger Cheng, Dow Jones Newswires; 212-416-2153; [email protected] (END) Dow Jones Newswires July 23, 2010 12:02 ET (16:02 GMT)