Verizon Hits 10-Year High on 4 Million iPhone Sales

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

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

In 2012, the weakness of Sprint and T-Mobile helped both Verizon and AT&T ( T) consistently pick up new subscriber and smartphone market share.

"Last year, postpaid subscriber losses at Sprint and T-Mobile equated to some 50% of postpaid net adds at Verizon and AT&T," Simon Flannery, a Morgan Stanley telecoms analyst, wrote in an April 17 note to clients.

"We believe that this trend may be peaking, and that consensus may be too optimistic on 2013 subscriber growth which will also allow DISH to pursue a more aggressive broadband/video strategy."

Verizon and AT&T also face tough year-over-year earnings comparables given the impact of handset subsidies and sharp 2012 share price gains.

"While we expect a solid report, we maintain our Hold rating in light of Verizon's recent outperformance and given our views of limited upside potential to EPS estimates, overheated expectations for a near-term VOD/VZW deal and the stock's steep premium to the S&P 500," Brett Feldman, a Deutsche Bank analyst wrote in an April 15 note to clients.

For more on Verizon shares, see why the carrier faces risks in a potential $100 billion-plus deal with Vodafone ( VOD)

-- Written by Antoine Gara in New York.

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