Verizon Profit Rises; Broadband Growth Shows 35% Decline

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Verizon Communications' second-quarter results met forecasts, but its shares dipped as broadband subscriber growth disappointed and it announced a deal to buy small wireless firm Rural Cellular. (NASDAQ:RCCC)

Verizon Wireless, jointly owned with U.K.-based Vodafone VOD, agreed to acquire Rural Cellular RCCC for $757 million in cash. That's a 40% premium to Rural Cellular's closing stock price Friday. Verizon (NYSE:VZ) also will assume $1.9 billion in debt.

While wireless consolidation is expected, a sudden dip in broadband subscriber growth among phone companies has surprised Wall Street. Verizon VZ added 288,000 high-speed Internet customers in the three months ended June 30, down 35% from a year earlier.

AT&T's T broadband customer additions fell 15% in the second quarter to 400,000. Comcast CMCSA, the nation's No. 1 cable TV firm, added 330,000 broadband customers -- below analyst estimates but about the same as a year earlier. AT&T (NYSE:SBT) (NYSE:T) and Comcast cited end-of-school-year disconnects as one reason for their broadband results.

With about half of U.S. homes now getting broadband, some observers say growth will be tougher to come by for phone and cable firms. Other analysts caution that one quarter doesn't make a trend.

"Is broadband hitting a wall? It's probably too early to tell on the basis of one quarter," said Bruce Leichtman, president of Leichtman Research Group. "Phone companies may not be pushing quite as hard, with (lower-priced) introductory promotions as they've been."

Global Broadband Slowdown

UBS Research on Monday said while "broadband in the U.S. is seeing more aggressive deceleration" many other countries are in the same boat. It calls slowing broadband a "global phenomenon."

Broadband growth has been crucial for phone companies because it has helped offset the loss of residential phone lines to wireless and cable competition.

Verizon shares fell 1.2% Monday, closing at 41.51.

Verizon sells two broadband products. It added 203,000 customers in the second quarter for its superfast, fiber-optic Internet service, up 18% from 177,000 the previous quarter.

But Verizon added only 85,000 subscribers for slower digital subscriber line Internet service. That DSL number is down from 329,000 a year earlier.

Why the sharp drop? Analysts say some of Verizon's existing DSL customers have been upgrading to its fiber-based service, called FiOS.

Usually those customers buy a package of video, phone and Internet services, says Christopher King, an analyst at Stifel Nicolaus. Last quarter, Verizon added 167,000 TV customers via FiOS, up from 141,000 in the first quarter.

"DSL adds were a little weak, but there are far better economics associated with FiOS than DSL," King said. "They're pricing DSL at $15 to $20 these days."

Verizon's FiOS package of phone, Internet access and TV service costs $95 to $100. It has 515,000 FiOS TV customers and 1.07 million FiOS Internet customers.

The FiOS project is costly. Verizon says it will spend $18 billion on its FiOS network through 2010.

Verizon is aiming for 4 million TV customers and 7 million data customers via FiOS by the end of 2010.

Focus On FiOS

Aside from revenue growth, Verizon's goal is cutting down on customer losses. Verizon had 26.34 million consumer lines as of June 30, down 10.3% from a year earlier. But the loss rate slowed in the second quarter, Dennis Strigl, Verizon's president, said Monday in a conference call with analysts.

"We continue to be focused on improving our line loss," Strigl said. "It comes from the FiOS rollout and (product) bundles."

Verizon said its per-share profit rose 5% to 58 cents from 55 cents.

Boosted by wireless, Verizon's revenue rose 6.3% to $23.3 billion from $21.9 billion a year ago. Wireline revenue fell 1.1% to $12.6 billion,

On average, analysts polled by Thomson Financial expected a profit of 58 cents on sales of $23 billion.

Verizon Wireless added 1.3 million wireless customers in the quarter, less than AT&T's 1.5 million.

Verizon lost about 300,000 wholesale subscribers because Amp'd Mobile, which leased airtime on Verizon's network, shut down.

Verizon will pay $45 per share for Rural Cellular. Its stock closed Friday at 31.81. Rural Cellular has 716,000 customers in 15 states.

Verizon is keeping pace with rival AT&T, which on July 1 said it would buy small wireless firm Dobson Communications (NASDAQ:DCEL) DCEL for $2.8billion in cash. AT&T paid $13 per share for Dobson, a 17% premium. Dobson has 1.7 million customers.