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TheStreet Open House

Verizon Hits 10-Year High on 4 Million iPhone Sales

Stocks in this article: AAPL VZ T PCS S

Updated from 8:14 a.m. ET to reflect 10-year stock price high and analyst comments

NEW YORK ( TheStreet) -- Verizon (VZ - Get Report) reported better-than-expected first-quarter earnings as the company activated about 4 million Apple (AAPL - Get Report) iPhone handsets.

New York-based Verizon reported earnings of 68 cents a share on revenue of $29.4 billion, generally beating analyst estimates. Verizon was forecast to earn 66 cents in adjusted earnings on revenue of $29.6 billion, according to consensus estimates polled by Bloomberg.

The earnings and a strong rise in wireless margins helped to push Verizon shares sharply higher to a new 10-year high.

Verizon shares were rising 3.2% in Thursday to $51.12. Year-to-date, Verizon shares have added 18%, more than double gains on the S&P 500 of just over 8%.

The company's 15% year-over-year earnings growth was driven by a 6.8% rise in wireless service revenue, as well as rising margins in the unit. Those figures offset a flat-to-declining performance from Verizon's wireline business, which accounts for about a third of overall revenue.

Verizon's wireless business posted better-than-expected revenue of $19.5 billion, 677,000 post paid subscriber additions and average revenue per account (ARPA) of $150.27 a month. Wireless profit margins came in at 50.4%.

The wireless business solidly beat expectations. Prior to earnings, analyst estimates polled by Bloomberg forecast wireless margin of 48.92%, according to 10 estimates, and postpaid APRA of $149.07, according to five estimates.

Verizon also activated about 4 million Apple iPhones in the quarter, according to Walt Piecyk of BTIG Research, in-line with forecasts. On a conference call with analysts, Verizon confirmed those iPhone sales figures, which represented a 25% increase from the first quarter of 2012.

Those iPhone sales figures, however, didn't provide a lift to Apple shares, which fell below $400 a share in early Thursday trading.

Overall, Verizon said 7.2 million smartphone devices were activated in the quarter, including 5.9 million 4G LTE devices. Total smartphone activations represented a 28% increase from year-ago levels, while the company also said 54% of total data traffic was on its 4G LTE network.

According to Morgan Stanley forecasts, Verizon was expected to sell 3.75 million Apple iPhones in the quarter. Overall, the company was forecast by analysts to add just under 630,000 new postpaid subscribers, according to nine analyst estimates polled by Bloomberg.

Wireline revenue of $9.9 billion generally met expectations, and reflected a slight year-over-year drop in sales.

"Verizon is off to an excellent start in 2013," Lowell McAdam, Verizon chairman and CEO, said in a statement.

"With ongoing improvements in operating efficiency, we expect continued growth in free cash flow and earnings as we move through the year."

Overall, wireless margins in excess of 50% turned out to be the biggest positive surprise for Verizon in the quarter. Most analysts forecast such margins at the end of 2013 or in early 2014, after margin declines in recent quarters.

"Net/net, Verizon's performance - particularly on the wireless side - was solid, with the strong increase in sequential margins confirming our view that the upgrade cycle is increasingly seasonal," Jonathan Schildkraut, an Evercore Partners telecoms analyst, wrote in reaction to earnings.

New pricing plans offered by the likes of T-Mobile are expected to pressure Verizon's wireless growth in coming quarters.

"We expect wireless net adds to be under pressure in the first quarter ," Thomas Seitz, a Jefferies analyst, wrote in a note to clients prior to earnings.

"In the postpaid market T-Mobile has been a source of subscribers for the rest of industry. However, the company reported a postpaid net loss of just 199k in 1Q13, down from 515k in 4Q12. It also began selling the iPhone on 4/12, on its new installment based no-contract plans, further increasing competition for subscribers in 2Q13."

Verizon's earnings also come amid a frenzy of merger activity in the telecom sector that raises the prospect industry laggards Sprint (S), T-Mobile and MetroPCS (PCS) revive their competitiveness.

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