Wireless Gains Power Verizon

The big telco adds 1.4 million wireless subscribers, offsetting drops in the local phone business.
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The hits keep on coming in the hard-charging U.S. cell-phone industry.

On Tuesday, giant telco


(VZ) - Get Report

posted solid first-quarter numbers, as strength on the wireless side offset the ongoing erosion of the company's local phone business.

For its first quarter ended March 31, Verizon posted a profit of $1.2 billion, or 43 cents a share. That's down from the year-ago $2.4 billion, or 88 cents a share. Earnings in the latest quarter were reduced by a charge related to employee buyouts, and those in the year-ago period were boosted by an accounting adjustment. On an apples-to-apples basis, earnings fell to 58 cents this quarter from 68 cents a year earlier.

Revenue rose 4% from a year ago to $17.1 billion, boosted by 21% revenue growth at the company's 60%-owned Verizon Wireless unit.

Wall Street analysts had expected the New York company to post a 57-cent profit on sales of $17.2 billion.

Verizon said domestic telecom revenue fell 3.3% in the latest quarter to $9.6 billion, while long-distance revenue jumped 13.3% to $1 billion. The company added a million long-distance lines in the quarter and 345,000 digital subscriber lines for Internet access. Those adds brought Verizon's total to 17.6 million long-distance lines and 2.7 million DSL lines.

Verizon Wireless added 1.4 million new users, and its so-called churn, or monthly customer defection rate, slipped to 1.6%. Average monthly service revenue per customer was $48, up 1.8%, and the operating income margin at the company rose to 19.5%.

"In the first quarter, Verizon extended its leadership position by accelerating organic growth, while maintaining solid margins," said CEO Ivan Seidenberg. "While Domestic Telecom revenues were down, we recognize that this is part of the evolution of our business model, and we are on track with where we want to be. It's significant that new growth businesses, such as wireless, data, long-distance and broadband, now account for more than half of our revenues."

Verizon is only the latest of the so-called Baby Bell local phone outfits to report vigorous growth in their wireless and Internet businesses. That expansion is important because the companies' local phone operations continue to lose customers to wireless service and other options. The regional Bells have also started to focus on selling their customers so-called service bundles including local, wireless and Internet access plans.

Last week, San Antonio-based rival




progress in its bundling efforts as driving a solid first-quarter profit. Driven by growing sales of digital subscriber line, or DSL, fast Internet access, bundling is seen as one of the keys in helping the Bells to retain customers and maintain profit margins.

Meanwhile, the strength of Verizon's

Verizon Wireless

operation continues to grab headlines. The company, a joint venture with Britain's


(VOD) - Get Report

, is the leading U.S. wireless service provider. Verizon Wireless' expanding subscriber rolls have been the envy of the industry, and the company has lately been among the beneficiaries of the

stunning exodus from No. 3 service provider

AT&T Wireless



Verizon and walkie-talkie favorite



have increasingly lined up as the winners in the cell-phone industry sweepstakes. Because the industry has reached so many users, observers now expect only the strongest players to continue putting up head-spinning subscriber-addition figures. Where Nextel's signature two-way radio phones helped it capture a solid niche and Verizon's perceived network superiority has won it wide recognition, the rest of the players have few distinguishing characteristics, putting them at an immense disadvantage.

Tuesday's earnings report comes at the end of an eventful month for Verizon. On April 1, the company was

named to join the closely watched

Dow Jones Industrial Average

, replacing onetime parent and long-distance titan


(T) - Get Report

. Observers said at the time that Verizon's election illustrated the ongoing shift in the telecom industry, where sales of plain vanilla local and long-distance services continue to tumble but the wireless industry is hotter than ever.

Then, on Monday, the California public workers retirement plan said it would

withhold support from four Verizon nominees in upcoming annual director elections. Calpers made the move as part of a management-accountability crusade.



has reported, Verizon's board has come under fire in the past for the

cozy arrangements that some critics link to

rich executive pay packages and

jaw-dropping severance deals.

Meanwhile, investors continue to await word of what the future will bring at Verizon.

For its second quarter ending in June, analysts expect Verizon to earn 60 cents a share on $17.4 billion in revenue. That's down from the year-ago earnings of 69 cents a share but slightly up from the year-earlier revenue of $16.83 billion.