Verizon shares drop on lower net income in Q3

Telecom meets Wall Street estimates, increases 2010 earnings forecast

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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.

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