Verizon shares drop on lower net income in Q3

Telecom meets Wall Street estimates, increases 2010 earnings forecast

Shares of Verizon Communications (NYSE: VZ) were down 71 cents, or 2.2 percent, to 31.80 in noon trading on Friday after the telecommunications giant released third-quarter earnings showing a 25 percent decline in net income from the year-ago quarter. Verizon's operating revenue also declined, by 3 percent from last year's third-quarter, while its Verizon Wireless subsidiary added fewer new contracted customers than AT&T (which on Thursday announced its Q3 earnings) in the three-month period ended Sept. 30.

Wall Street's initial reaction, while harsh, probably could have been worse, especially when you consider that Verizon has been trading near a 52-week high set earlier in October. But several factors mitigate the damage. First, the hard numbers: Verizon's net income was $881 million, or 31 cents a share, versus $1.18 billion, or 41 cents a share, in last year's third quarter. Operating revenue was $26.5 billion -- meeting consensus estimates of $26.3 billion -- down 2.9 percent from $27.3 billion in the same quarter a year ago. Verizon Wireless, meanwhile, added 997,000 subscribers in Q3, far less than the 2.6 million AT&T claimed on Thursday for its third quarter. Why it's not as bad as it looks: * Net income included 25 cents a share in one-time charges (primarily related to pension settlements). Take that out of the equation and Verizon's net income for Q3 would have been 56 cents a share, down from 60 cents a share (excluding one-time charges) last year, but above analysts' predictions of 54 cents. * Last year's operating revenue, which was 2.9 percent higher than Q3 2010's, included "revenues from operations that have since been divested." * Verizon Wireless still has more customers (93.2 million) than AT&T, which reported 92.8 million on Thursday. More importantly, Verizon has an ace in the hole: A new deal with Apple that will allow Verizon Wireless to sell iPhones for the first time, beginning early next year. AT&T assuredly will lose iPhone users to Verizon Wireless. The question is how many. * The company said earnings in the second half of 2010 will be at the high end of its previous guidance. Based on adjusted EPS of $1.01 in the first half of the year, Verizon estimates adjusted EPS for the second half of the year will be 5 percent to 10 percent higher than $1.01. The big thing, obviously, is the iPhone deal. With AT&T's exclusive contract out the window, Verizon Wireless stands to gain millions of disaffected AT&T customers. As I wrote yesterday, while the iPhone deal won't be reflected in Verizon's bottom line until the carrier begins selling the smartphone, it likely will affect AT&T's business in the current quarter by "freezing" potential subscribers who know they'll soon have a carrier alternative. It'll be interesting to see how AT&T responds. I may have more on that later.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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