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Verizon Profit Rises 12%, Led By Wireless

Verizon Communications posted a higher quarterly profit on wireless sales, but its shares fell on worries about declining land lines as growth in its FiOS television subscribers missed some estimates.

Verizon
Verizon

FiOS, an advanced high-speed Internet and video service, is a key part of Verizon's strategy to bolster its home phone business and compete with cable companies' all-in-one phone, video and Internet offerings.

Analysts said the results showed the company's massive investment in FiOS was failing to stem a loss in traditional phone subscribers amid a weak economy.

Residential switched access lines fell 11.4 percent in the second quarter from a year earlier, while total lines fell 8.5 percent, Verizon said Monday.

"It's no surprise Verizon is losing access lines, but the rate at which they're losing them is enough to make you blanch," said Bernstein analyst Craig Moffett, adding the rate of access line losses was the "worst in history."

Verizon shares were down 2 percent at $33.78 at midday.

Verizon said it added 176,000 new FiOS TV customers in the quarter, bringing the total to nearly 1.4 million. It added 187,000 FiOS Internet customers, to a total of 2 million.

UBS analyst John Hodulik had expected a gain of 230,000 FiOS TV customers.

"Residential metrics offset solid business results," he said.

Verizon Chief Operating Officer Denny Strigl said FiOS growth slowed after a promotion giving free flat-screen TVs to new customers ended, but that, as a result, the costs of acquiring subscribers also fell.

Wireless Strong

Despite the disappointment over FiOS, Verizon's wireless growth was solid and its wireless profit margin of 45.6 percent was ahead of expectations. Stifel Nicolaus analyst Chris King and Bank of America analyst David Barden both expected a wireless margin of 44.9 percent.

Second-quarter profit rose to $1.88 billion, or 66 cents a share, from $1.68 billion, or 58 cents a share, a year earlier.

Excluding items such as merger integration costs, earnings per share were 67 cents, beating the average analyst forecast for 64 cents a share, according to Reuters Estimates.

Revenue rose 3.7 percent to $24.12 billion, in line with analysts' forecasts.

Stifel's King said Verizon's territory, which includes New York and New Jersey, helped it weather the economic downturn more easily than industry leader AT&T , which serves areas such as Florida, hit hard by the housing crisis.

"You are clearly seeing some geographic differences in the areas they operate in with regards economic pressures," King said, even as he noted that Verizon's FiOS growth was weaker than he expected.

Verizon Wireless, owned by Verizon and Vodafone Group , said last week it added a 1.5 million subscribers in the quarter, taking its total subscriber base to 68.7 million.

Verizon plans to buy rural wireless provider Alltel, a move that would replace AT&T as the top U.S. wireless provider. It reaffirmed plans to close the deal by the end of the year.

Strigl said the weaker U.S. economy was not hurting its business so far. Sales to clients in the financial sector could soften, but the impact would be small.

"Although we may see some softening in some of our volumes, we do not expect any significant economic impact on our financial results in the second half of the year," he said, adding the company was "comfortable" considering a dividend increase in the fall.

Verizon also said it was positive it could resolve a dispute with union workers over a labor contract that is set to expire Aug. 2, thereby avoiding a strike.

A strike would be a blow as the company is ramping up its expansion of FiOS. It begins to roll out FiOS in New York City Monday, competing with cable service providers such as Time Warner Cable and Cablevision System .

"I know that our employees know FiOS is creating new jobs and also, plenty of work for our existing employees," Strigl said.

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