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ILEC 3Q11 Results Summary: Verizon

iPhones and FiOS Continue to Fuel Verizon

The major trends in Verizon’s (NYSE:VZ) growth, financial and stock price performance over the past year can be summed up in two words: “FiOS” and “iPhones.”

Overall, wireless revenues rose 6.1% YoY in 3Q11, to $15b, at Verizon. Fueling the growth, data revenues shot up 20.5% YoY in the quarter to $6.1b. Verizon’s retail postpaid ARPU ticked up 2.4% YoY, but more significantly its postpaid data ARPU jumped 15.7% in 3Q11 to $22.22, moving in lockstep with the overall demand for mobile data.

While the increasing popularity of all smartphones has driven Verizon’s wireless gains, the iPhone is really what has pushed the needle for the company over the past few quarters.  Since unveiling the Verizon iPhone in February, the company has activated 6.5m of the smartphones in fewer than nine months, as it has grown its industry-leading wireless connections to near 108m.

In Verizon’s wireline segment, 3Q11 revenue was down 1.3% YoY to $10.1b, mainly due to a loss of 2m voice connections over the past year. On a positive note, FiOS’ contribution to wireline consumer revenues continues to grow, as it now accounts for 60% of wireline revenue. Verizon’s average take from FiOS customers was $146 for the quarter, 55% greater than the overall wireline ARPU of $94.20. It added 689k FiOS television and 731k FiOS Internet subs in the past year, driving wireline ARPU up 8.8% YoY in 3Q11.

With higher-margin FiOS offerings making up a larger percent of its wireline revenues, and consumers spending more on wireless data, Verizon grew its OIBDA margins 8% YoY in 3Q11, up to 31.6%. It appears poised to finish out 2011 with its second straight year of margin growth, although its OIBDA margins did stumble 3% QoQ in 3Q11 thanks to a $250m impact due to storms and the workers strike over the summer.   

The market has rewarded Verizon’s performance over the past eighteen months, as its stock price has increased 18% over its 1Q10 close. During the same time frame, the S&P 500 has given back 3.4%. Verizon experienced its most significant stock price appreciation in the quarters before and after its iPhone release, jumping 18% from its 3Q10 close to $38.54 a share at the close of 1Q11. It has lost about 5% since, ending 3Q11 at $36.80.

While Verizon remains the top wireless provider in the U.S., some threats to its wireless market share do exist. AT&T posted better gross (5.9m to 5.4m) and net (2.1m to 1.4m) customer adds than Verizon in 3Q11, appearing to have weathered the storm after the Verizon iPhone frenzy in 1Q11 and 2Q11. And armed with the iPhone 4S and unlimited data packages, Sprint also could steal some market share from Verizon.

Preliminary numbers on iPhone 4S users bear out these concerns. According to a Localytics study, Verizon maintains 40% of the iPhone 4 market, but its share of the iPhone 4S has dropped to 32%. Meanwhile Sprint has taken 12% of the 4S market, a majority of which it took at Verizon’s expense.

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