Line Losses Vex Verizon

Shares sink as investors shudder at shrinkage.
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Verizon's (VZ) - Get Report growth grab stung shareholders Monday.

Shares of the New York phone giant dipped 4% as investors grew concerned about the quickening pace of erosion at its core business, along with the higher costs of its fiber-optic-network expansion effort.

Verizon posted

solid overall numbers for the third quarter. That was mostly thanks to the wireless unit, which captured strong subscriber growth and wider-than-expected margins.

But the glitter in wireless wasn't enough to overcome the latest round of dull results for the company's wireline business.

For the third quarter, Verizon's total-access line count fell 7.5% from year-ago levels -- exceeding the industry's 6% shrinkage rate. Perhaps even more alarming was the 9.8% year-over-year decline in residential lines.

"If you lose 9% of your lines a year, life isn't much fun," says one investor who was selling Verizon.

"Free cash flow is intrinsically tied to the number of lines you have," says the money manager. "If you are losing lines, and this trend continues, you have a problem."

The increased line loss has a lot to do with competition from wireless telcos and cable companies, such as


(CMCSA) - Get Report

that have had success combining phone service with a bundle of Internet and video offerings.

On a conference call with analysts, Verizon said some of the line loss also came from its own customers, who are taking the broadband service and canceling second lines.

Taking the long-term view, CEO Ivan Seidenberg told analysts on the call that network upgrades will eventually help curb the declines.

"We will continue to see pressure on access lines," Seidenberg said on the earnings call. "As we look out in the future," the investments in the network "will arrest that."

But investors weren't getting much comfort from that big-picture forecast.

Verizon says, near-term, the fiber-optic expansion project, called FiOS, is expected to drag fourth-quarter earnings down about 2 cents more than originally projected.

Analysts and investors point out that right now, Verizon is losing lucrative higher-margin residential lines and gaining money losing FiOS customers.

This trend was evident in the five-percentage-point decline in Verizon's third-quarter EBITDA margins from the year-ago levels.

Selling more FiOS is obviously going to hurt margins for a while, says the money manager. "This isn't a disaster, though -- they have wireless to bail them out."

Verizon shares were down $1.45 to $37.39 in midday trading Monday.