The New York local phone giant posted solid first-quarter financials Tuesday morning, driving its stock up around 2% in midday trading. Yet while bulls continue to see the company as the most stable bet in a teetering business, there are those who saw evidence that Verizon and its lush profit margins are being sucked into a sickly industry's price-cutting morass.
The most pressing concerns at Verizon center on the company's growth engine, its healthy wireless business. Though Verizon Wireless posted strong revenue growth in the latest period and continues to add subscribers at an impressive clip, the last quarter saw the average monthly wireless bill fall short of estimates. That could mean subscribers aren't taking the company up on its newer and more lucrative service offerings.
Moreover, the shortfall comes as the rest of the flagging telecom industry wages a battle of attrition at the low end of the price scale. And as the past few years have shown, the telecom market is only as strong as its weakest link. Cutthroat pricing and stingy customers have a way of draining everyone's spirits.
"As competition increases, it will be difficult for Verizon to sustain those margins," says a New York hedge fund analyst with no position in the stock. Verizon recently rose 47 cents, to $33.64.
In the wake of
lame results Monday, and with big phone peers
due to report their latest struggles Wednesday, Verizon fans can be forgiven for fretting about the industry's suspect stamina.
Now that Verizon has been forced to
take the low road and play by the rules of its rivals by offering flat-rate calling plans, many industry observers say that high-margin per-minute customers are likely to flock to cheaper plans.
So far, Verizon's cash-flow margin has remained relatively flat compared with last year's, at 42%. And Verizon executives on an earnings call with analysts Tuesday said they are happy with the margins on their bundled services, which include flat-rate plans.
But if many of Verizon's big-ticket per-minute customers opt for cheaper flat-rate plans such as MCI's neighborhood offer, those creamy margins may yet thin out.
Bill Me Later
Another troubling development was lodged within an otherwise sterling performance by Verizon's wireless unit. In the first quarter, the average monthly bill for Verizon's wireless customers grew by $1.19, or 3%, to $47.20. But that was $1 less than investors were expecting.
To some observers this means one or two things: In keeping with these belt-tightening times, customers are increasingly staying within their calling-time allocations to avoid higher charges. Or, disturbingly, the big investments in Verizon's wireless data network have yet to reap rich returns as subscribers shun the new services.
Investors are keen on the topic of average monthly revenues after
on Monday noted a sudden drop in the closely followed so-called ARPU figure, to $59 in the first quarter from the $62 in the fourth quarter and $60 for the same period a year ago.
But again, it's early, and to be sure, the rest of the wireless business results gave investors something to cheer. Revenue jumped 15% to $5.1 billion as total customers rose 12.6% to 33.3 million. The company had 833,000 net additions in the quarter.
As long as Verizon can ride on the fresh legs of its profitable wireless group, questions about its stamina will likely be muted.