Some Holes Seen in Verizon Story

Analysts question the uniqueness of some of its 'one-time' items.
Publish date:

Updated from 8:29 a.m. EDT

Unlike its baby-bell competitors,


(VZ) - Get Report

managed to post a small rise in sales during the second quarter, thanks to strength in its wireless operations. But analysts weren't universally impressed with the firm's financial metrics, which included a better-than-expected operating profit of 69 cents a share.

A 14.3% jump in sales at Verizon Wireless, its joint venture with the U.K.'s Vodafone Group, sent the firm's overall revenues up 0.5% in the second quarter, beating both

SBC Communications





, which reported single-digit revenue declines last week.

Jefferies & Co. analyst Richard Klugman pointed out, however, that the sales number includes 100% of consolidated Verizon Wireless, even though the company owns just 55% of the unit. "Normalizing for the wireless stake, revenues were more realistically flat year over year," he said.

Numerous-Time Items

Klugman also took aim at Verizon's operating profits, saying that some of the one-time charges excluded from this number may be recurring items.

Verizon posted a profit of $300 million, or 12 cents a share, including $1.6 billion in special charges, compared with a loss of $2.1 billion, or 78 cents a share, last year. Excluding charges, the firm said it earned 69 cents a share in the second quarter, a penny better than expectations.

Klugman said a 33-cent charge related to the sale of its stake in a Mexican wireless carrier was rightfully considered a one-time expense, but costs for severance, debt retirement and lease impairments "are arguably recurring in nature."

In a conference call Tuesday morning, Verizon reiterated its full-year guidance of between $2.70 and $2.80 a share but said profits would likely come in "at the low end" of that range. Analysts are currently calling for a profit of $2.72 a share.

The company expects to grow revenue by up to 2% this year and plans to spend $12.5 billion to $13.5 billion on capital expenditures. It also intends to reduce debt by $3 billion to $4 billion to a range of $46 billion to $47 billion. Meanwhile, the firm said labor negotiations with its unions are still "intense."

Alive as You or Me

Although Chief Executive Officer Ivan Seidenberg said he is hopeful that a new contract will be negotiated by the deadline of midnight Aug. 2, he said the firm does have contingency plans in place if talks aren't successful. He also noted that he would quantify the financial impact of this "a few weeks" after the deadline has passed.

The union, which comprises about half of Verizon's workforce, is attempting to gain more job security and greater control over the organization of its wireless workers.

Verizon said revenues rose to $16.8 billion in the second quarter. Excluding $246 million of revenue in the year-ago quarter related to switched access lines that have since been sold, revenue rose 2% in the latest quarter, year over year.

In domestic telecom, Verizon's revenue fell 3.4% to $9.9 billion, despite a 17.2% jump in long-distance services to $900 million. The firm has faced brutal competition from landline and cell-phone services. At wireless, total revenue jumped 14.3% to $5.5 billion. Company-wide services revenue rose 14.7% to $5 billion.

Within the wireless segment, the company added a net 1.3 million subscribers and said retail customers made up 96% of its total 34.6 million wireless customers at quarter's end. Churn, a wireless industry metric that measures the rate at which customers cancel service, was 1.7% in quarter, the lowest for any quarter in Verizon's history. The company expects to add a net 4 million or more retail wireless subscribers for the full year.