Verizon Posts Loss on Pension Cost as IPhone Boosts Expenses - BusinessWeek

(Updates with comment from analyst in fourth paragraph.)

Jan. 24 (Bloomberg) -- Verizon Communications Inc., the second-largest U.S. phone company, reported a fourth-quarter loss after booking a pension charge and having higher subsidy costs for rising iPhone sales.

The net loss was $2.02 billion, compared with a profit of $2.64 billion a year earlier, New York-based Verizon said today. Earnings, excluding some items, fell to 52 cents a share, matching the average of estimates compiled by Bloomberg. The pretax charge for a pension-plan revaluation was $3.4 billion.

Verizon and rivals such as AT&T Inc. sell the Apple Inc. iPhone at a loss to get customers to sign up for contracts that typically run for two years. While iPhone sales more than doubled from the third quarter, total smartphone sales fell short, signaling waning demand for handsets that run on Google Inc.'s Android operating system, said Walt Piecyk, an analyst with BTIG LLC in New York.

“This is a little surprising during a holiday period, especially given all the marketing around 4G phones,” he said.

Verizon, which co-owns its wireless unit with Vodafone Group Plc, fell 1.9 percent to $37.67 in early trading. It added 12 percent last year, compared with a 2.9 percent gain by AT&T.

Smartphone Payback

On Jan. 4, Verizon Chief Financial Officer Fran Shammo said fourth-quarter iPhone sales topped 4 million units, weighing on margins. Total smartphone sales were 7.7 million units, 1.5 million fewer than Piecyk predicted.

The strategy of subsidizing smartphones helped Verizon add 1.2 million subscribers on monthly contracts, meeting the average estimate from 10 analysts surveyed by Bloomberg. The carrier is banking the initial subsidy cost pays off as the users spend on data and calling throughout the life of the contract.

“The question is -- will this drive greater profitability in the wireless business down the road?” James Ratcliffe, an analyst at Barclays Capital in New York, said before the report.

Total sales rose 7.7 percent to $28.4 billion, matching the average analyst estimate. The net loss per share was 71 cents, compared with a profit 93 cents a year earlier. Year-earlier earnings excluding some items were 54 cents.

Wireless revenue rose 13 percent to $18.3 billion, led by a 19 percent increase in data sales. Earnings before interest, taxes, depreciation and amortization from providing wireless service, a measure of profitability, was 42.2 percent of sales, down 5.3 percentage points.

Video Growth

The average monthly revenue per user among wireless contract customers fell to $54.80 from $54.89 in the third quarter. Analysts predicted $54.87 on average. Contract-customer churn, or the monthly defection rate, was 0.94 percent, compared with the 0.96 percent analysts estimated.

“The average smartphone customer will spend about $2,000 over the two-year contract, if the subsidy is $400, you're still getting $1,600, and that's very cash-flow positive,” Ratcliffe said.

Verizon is ahead of Dallas-based AT&T in building out a faster next-generation wireless network, helping it outpace the rival in subscriber gains.

At the wireline business, Verizon added 201,000 FiOS Internet customers and 194,000 FiOS TV subscribers. Michael Nelson, an analyst at Mizuho Securities USA Inc., estimated Verizon would add 200,000 Internet users and 200,000 TV customers.

--Editors: Ville Heiskanen, Cecile Daurat