The new question about
is whether its pacesetting wireless unit can maintain its blistering expansion.
The nation's largest phone company has long been troubled by line losses in its core local phone business. On Tuesday, Verizon posted another
weak quarter on that score. But as has been the case lately, those numbers were offset by strong results at the fast-growing
With the latest mixed numbers, Verizon joins Baby Bell peers
wringing more revenue out of offerings such as fast Internet access and cell-phone service. In fact, Verizon executives on Tuesday trumpeted the fact that sales are now split between those so-called growth businesses and the eroding basic local phone operation.
That sounds like good news. But Tuesday's land-line numbers were even weaker than expected. And now there's doubt in some quarters about whether even Verizon Wireless, the nation's No. 1 cell-phone service provider, can keep up with its recent growth kick.
Verizon shares slipped 53 cents to $37.21 in midday trading.
The New York phone giant's first-quarter report showed the balancing act. Wireless subscriber growth and customer loyalty exceeded many estimates, as Verizon Wireless added 1.4 million net new users. Better yet, the company reported a churn rate, reflecting monthly customer defections, that improved to an industry-leading 1.6% from 1.7% in the December quarter.
But Verizon's core wire-line revenue dipped lower than hoped, as the popularity of cell-phone service continues to eat away at local calling operations everywhere. Meanwhile, the economy's strong start to 2004 failed to lift the larger Verizon ship.
"They are doing the best they can in a real difficult industry," says Craig Nedbalski, a money manager with Victory Capital Management. "But there's some fundamental weakness in their consumer and normal old wire-line business. They have not participated in the economic recovery."
That weakness is well understood by investors, who have mostly stopped paying attention to the wire-line results reported by the Baby Bells. With the wireless industry growing by leaps and bounds and consolidation getting under way with February's $41 billion Cingular-
merger agreement, Wall Street's focus has been firmly on the wireless side.
But a looming concern among investors is whether Verizon's wireless business, a joint venture between Verizon and
, can sustain its recent level of performance. Even fans of Verizon Wireless wonder if the company may have picked all the wireless industry's low-hanging fruit in recent periods.
Mass defections from AT&T Wireless, starting in the last quarter of 2003 and continuing through the first quarter ended last March, have clearly contributed to Verizon's gains. But judging by AT&T Wireless' comments last week, the stampede of customers seeking greener pastures has already slowed. And as the flow turns to a trickle, Verizon could soon be vulnerable to its own round of customer defections.
As money manager Nedbalski points out, in the summer of 2002 Verizon started an aggressive push to sign customers to two-year contracts. Now, as those contracts end, Verizon could face large groups of users debating whether to stay or go.
Of course, unlike struggling rivals such as AT&T Wireless and
, Verizon boasts a best-in-the-business network and solid reliability scores. Even so, Deutsche Bank analyst Viktor Shvets expects Verizon's churn rate to rise in coming quarters. Shvets has a buy rating on the stock, and Verizon is a banking client of Deutsche Bank.
Any slowdown at Verizon Wireless, no matter how minor, could yank the cushion out from under the weakening wire-line business and draw attention to troublesome line-loss trends.
No matter what, says Nedbalski, "they are still going to need some help from the economy."