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Data Drives Verizon Q2 As Carrier Awaits iPhone 5

Bedminster, N.J. –
Sales of smartphones, tablets and other data devices drove up the number of net
new Verizon Wireless connections in the second quarter to their highest levels in years, with 4G devices and the
iPhone 4 accounting for 69 percent of 1.26 million retail postpaid subscriber
additions, Verizon executives said.

Nonetheless, the
penetration rate of smartphones in the company’s subscriber base is below
forecast, said Verizon Communications president/COO Lowell McAdam during an
investors’ conference call.

Although the
percentage of postpaid phone subscribers using a smartphone hit an all-time
high of 35.9 percent in the quarter, that percentage is about one financial
quarter behind what the company forecast in January, McAdam said. He attributed
the slower than expected migration in large part to the delayed rollout of the
iPhone 5 from the summer to what he said would probably be the fall.

McAdam will become
Verizon Communications CEO in August to replace Ivan Seidenberg, who will remain
board chairman, the company also disclosed.

Although smartphone
penetration isn’t at forecast levels, McAdam predicted smartphone sales will
“jump” in the fourth quarter with the expected iPhone 4 launch and that the
launch of more 4G products, including the 4G-equipped Samsung Galaxy Tab 10.1
now in preorder and expected to be available by the end of this month. He also
said the fourth-quarter product lineup would probably be the best-ever
fourth-quarter lineup in the carrier’s history.

Despite the missed
smartphone-penetration forecast, McAdam contended the carrier had done “quite
well” given that the iPhone 5 has been delayed for more than a quarter.

smartphone sales have been rising sharply, iPhone 4 activations in the quarter
were up only slightly in the quarter to 2.3 million from the first quarter’s
2.2 million, even though Verizon’s iPhone 4 didn’t go on sale until Feb. 10 and
distribution wasn’t completely rolled out until late March.

Executive VP/chief
financial officer Fran Shammo described sales only as “steady,” and analysts
attributed the minor sales increase in part to AT&T dropping the price of
an earlier iPhone version to $50.

AT&T’s iPhone
activations came to 3.6 million in each of the first two quarters of the year.

The iPhone nonetheless
is bringing new subscribers to the Verizon network, said Shammo. A total of 22
to 23 percent of iPhone purchasers in the first and second quarters were new to
the Verizon network, he said.

With data demand
and the subscriber base growing, total wireless revenues  — service
and handsets combined — grew 10.2 percent for quarter to $17.3 billion and
10.22 percent for the first half to $34.2 million. Data accounted for 35.9
percent of service revenues, up sequentially and year over year.

Operating income,
however, was up only 0.2 percent to $4.7 billion in the quarter, and 0.3 percent
in the half to $9 billion, because of operating expenses that rose 14.4 percent
in the quarter to $12.6 billion, and rose 14.3 percent in the half to $25.1

Despite the meager
increase, McAdam said Verizon’s wireless profitability was “industry-leading,”
pointing to second-quarter EBITDA service margins of 45.4 percent, up
sequentially but down from the year-ago 47.2 percent. Shammo said profitability
will improve as the carrier migrates users from 3G to more profitable 4G
service, which is more profitable. Shammo promised that more 4G smartphones,
tablets and data devices are in the pipeline for the second half. Also to
improve profitability, the company said it has begun to buy infrastructure
equipment jointly with partner Vodafone.

In other comments,
Shammo said the company will “continue its strong focus” on building share in
the retail postpaid market and pointed out that its 1.26 million gain in retail
postpaid subscriptions was the highest since the fourth quarter of 2008.

 In disclosing other sales and marketing data,
Verizon said:

  • the company’s
    total net new connections — consisting of retail postpaid, retail prepaid, wholesale,
    and M2M activations — rose to 2.21 million, also the most for any quarter in
    years, to bring the subscription base to 106.3 million; Verizon maintained its
    position as the top U.S. carrier when measured by number of connections;
  • the 35.9
    percent of second-quarter phone subscribers using a smartphone was up from the
    first quarter’s 32.2 percent and the year-ago 21.3 percent;

  • smartphones
    accounted for a growing percentage of retail postpaid phones sold, rising to
    59.5 percent in the quarter from a year-ago 39.5 percent although essentially
    flat with the first quarter’s 60 percent;

  • half of the
    data-only devices sold, such as USB modems and portable hot spots, were 4G
    devices in the second quarter;

  • churn rates fell
    to 0.89 percent, the lowest in three years, boosting the bottom line;

  • the company added
    61,000 net new retail prepaid subscribers, reversing five consecutive quarters
    of net losses; and
  • net new
    wholesale and M2M connections were a combined 890,000, down slightly from the
    previous quarter’s 897,000 and down from the year-ago 1.16 million.