Verizon Sees Margin Gains

The company reiterates its plan to cut costs.
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Verizon

(VZ) - Get Report

pledged continued cost-cutting vigor, saying it will cut 3,500 jobs in its business telecom unit this year.

The big New York telco, which recently completed its acquisition of MCI, said it sees opportunities to beat "synergy targets" related to that deal. Verizon has said it would save $8 billion through cost reductions, including 7,000 job cuts, and revenue enhancements. But comments late Tuesday by President Lawrence Babbio indicate the company expects to cut deeper.

"Our business model focuses on creating value and driving earnings and growth," Babbio said in a press release issued during an investors' conference. "Having the best networks has proven over the years to be the most efficient way to run the business and, ultimately, also the best way to generate steady margins, solid returns on capital, strong cash flows and substantial financial performance."

The company also took another opportunity to defend its costly rollout of fiber to the home in the name of offering consumers the triple threat of voice, data and television service. That plan has come under fire from investors worried about its costs, as rival service providers claim the so-called FiOS service has failed to make a dent in their markets. Verizon last talked up that effort Monday, when it

updated financial guidance and rolled out a buyback.

Cablevision

(CVC)

said on an earnings call Monday that it isn't seeing much impact from Verizon's expansion effort. The executives estimate that Verizon's FiOS offer has been taken by about 2% of the customers in Cablevision's market.

"They are building a me-too product at a great expense," said executives on the conference call.

But Babbio sees the picture quite differently.

"We have a very clear financial plan that, as we see this technology scale, we will rapidly and dramatically improve the financial impact that we see in the coming years," Babbio said.

Babbio said the company has targeted costs of $890 in 2006 to pass a home or business with a fiber-optic network capable of providing Verizon's advanced FiOS data and video services. This cost, which includes a blend of aerial and underground deployment, had averaged $1,400 at the start of 2005.

Babbio said that at the beginning of 2005 Verizon's fiber network was passing an average of 100,000 premises per month, and by the end of the year it was passing an average of 235,000 premises per month, as the deployment ramped up to its current and ongoing run rate.

In January 2005 Verizon's connection costs averaged $1,200, and the goal in 2006 is $715. Verizon expects to build out a network capable of delivering new FiOS TV services to a total of 3 million to 4 million premises by year-end 2006, Babbio added.