FiOS TV Pace Falls Off In Q2

Verizon Cites Reduced Marketing Spend For Sequential Decline In Net Video Adds

By Todd Spangler -- Multichannel News, 7/28/2008 9:28:00 AM

Verizon Communications signed up a net 176,000 FiOS TV subscribers in the second quarter, bringing its video customer count 1.4 million to date, but the additions were below the 263,000 new video entrants the telco gained in the first three months of the year.

On a call with Wall Street analysts Monday, Verizon president and chief operating officer Denny Strigl said the company anticipated the drop.

“FiOS [TV] net adds in the second quarter were about what we had expected coming off a very good first quarter,” Strigl said. He added that the growth in the first part of the year was fueled by a free high-definition TV that the telco offered to new triple-play subscribers.

Sanford Bernstein senior analyst Craig Moffett called the decline in FiOS TV adds “a startling development.”

While the end of the free HDTV promotion, seasonality and competitive response account for some of the slowdown, “given the still very rapid rate of network extension, it is remarkable to see FiOS growth already slowing,” Moffett wrote in a note to investors.

Verizon expects FiOS TV to pick up the pace in the third quarter, especially with the launch of the service in New York City and increased marketing spending in the market, Strigl said.

Also Monday, Verizon announced it now offers 100 high-definition channels in the metro New York market, beating the HD channel counts of Time Warner Cable and Cablevision Systems. In the Big Apple's five boroughs, service will be available initially to 300,000 households in 108 neighborhoods. By the end of 2008, Verizon expects to offer FiOS TV to 500,000 homes in New York City.

Strigl said the telco doesn’t anticipate earnings for the second half of 2008 to be seriously hurt by the slowing U.S. economy. “While we may see some softening in some of our volumes, we do not expect a significant impact on our results for the second half of the year,” he said.

Across all markets, FiOS TV – available to 7.0 million households – had 19.7% penetration at the end of the second quarter. More than half of those markets had more than 20% penetration, Verizon chief financial officer Doreen Toben said on the earnings call.

Verizon reported a net decrease of 133,000 DSL-based Internet connections, while it gained 187,000 net new FiOS Internet customers. Strigl said Verizon signed up its 2 millionth FiOS Internet customer last week.

FiOS Internet, available to 8.4 million homes, had a 23.5% penetration rate with “a few” markets north of 30%, Toben said. Consumer broadband and video revenues topped $1.0 billion in the second quarter, representing year-over-year growth of 52.9%.

As expected, Verizon continued to lose traditional phone-line customers, with a net drop of 823,000 for the quarter (including 773,000 consumer lines).

Over all, Verizon posted growth on the top and bottom lines. Verizon's total operating revenues grew to $24.1 billion in the second quarter 2008, up 3.7% from the year prior. It reported 66 cents in diluted earnings per share for the quarter, compared with 58 cents per share in the second quarter 2007.

Capital spending was $8.4 billion through the first six months of 2008, down more than $100 million over the same period last year.

Verizon Wireless continued to show solid growth with 1.5 million net new customers, to end June with 68.7 million total customers, and had a record-low churn rate of 1.12%.

The telco faces the possibility that a large portion of its workforce will go on strike. Verizon is currently negotiating contract terms with two unions, the Communications Workers of America and the International Brotherhood of Electrical Workers. 

“A work stoppage, should it come to that, would likely mean an effective halt to Verizon's wireline growth initiatives FiOS and DSL,” Moffett wrote. “And unlike in previous work stoppages -- again, should it come to that -- this time there is a cable competitor looking to capitalize on disruption, and not just in consumer but in [small and medium business] as well. Customers lost during a work stoppage because of failure to repair or inability to install would likely be lost forever.”