FiOS Sizzles In Verizon's Q2, Topping $2 Billion

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Verizon kept the FiOS fires burning in a solid second quarter, with the telco adding a net 184,000 TV and 189,000 Internet subscribers, even though legacy DSL and phone lines continued their downward spiral.

FiOS video, data and voice services generated $2.03 billion in the three months ended June 30, up 20.7% year over year, and now account for 57% of consumer revenue up from 48% a year ago, chief financial officer Fran Shammo said on the telco's earnings call Friday. Verizon now counts 3.85 million video customers, holding its spot as the nation's seventh-biggest pay-TV provider.

"FiOS margins continue to improve... We are very concentrated on the top-line growth of our revenue per customer," Shammo said. He added that the build-your-own-bundle FiOS offers are helping to drive up average revenue per subscriber, for example, by letting subscribers upgrade to higher-bandwidth tiers without expanding their TV package.

FiOS TV penetration was 29.9% compared with 25.9% in the year-ago period, while FiOS Internet penetration was 33.9% (versus 29.9% in the second quarter last year). The FiOS network passed 16.1 million premises as of the end of June, as Verizon nears the end of the fiber-optic buildout.

Verizon lost 123,000 DSL subscribers, which the FiOS Internet gains more than offset resulting in a net increase of 62,000 wireline broadband connections sequentially. Total voice connections, including both FiOS Digital Voice connections and traditional switched access lines, declined 7.9% to 25.0 million -- which Verizon touted as the smallest year-over-year decline since mid-2007.

The wireline business "was less of a drag than it has been in the past," Sanford Bernstein analyst Craig Moffett said in a research note. "Verizon's Enterprise segment is clearly gaining share... FiOS remains a steady grower with both in-line subscriber additions and solid ARPU growth."

Verizon's wireline segment income margin -- based on earnings before interest, tax, depreciation and amortization -- was 23.8% in the period versus 22.4% in the second quarter of 2010 and 23.6% in the first quarter of 2011.

On the mobile front, Verizon Wireless handily beat Wall Street expectations. The carrier added 2.2 million total connections, ending the quarter with 106.3 million total connections, up 6.6% year over year. Service revenue for the quarter was $14.7 billion, also up 6.6% from the year-ago period.

In the quarter, Verizon Wireless activated 2.3 million iPhone 4 smartphones, versus 2.2 million in the previous quarter when it first obtained the rights to offer the iPhone.

Verizon Wireless continued to roll out its 4G LTE mobile broadband network, which is currently available in 102 U.S. markets covering a population of more than 160 million. By the end of 2011, Verizon Wireless expects the LTE network to be available in more than 175 markets covering a population of more than 185 million. In the second quarter, it sold 1.2 million 4G LTE smartphones and Internet data devices.

On the earnings call, Shammo -- asked to characterize average connection speeds users are experiencing over LTE -- declined to provide a figure. "I think it's too early to really get a good average on what those speeds will be amongst all the different devices that we have there," he said.

Verizon chairman and outgoing CEO Ivan Seidenberg said that in terms of earnings growth and the acceleration of revenue growth, it was one of the company's best quarters since the 2008 economic downturn. "We expanded sequential margins in both our wireline and wireless businesses, and in the second half of the year we expect Verizon to build on this strong, positive momentum to continue to drive profitable, sustainable growth," he said in announcing the quarterly results.

Also Friday, Verizon announced that Lowell McAdam will succeed Seidenberg as CEO, effective Aug. 1.

Overall, Verizon posted second-quarter revenue of $27.5 billion, up 2.8% year over year, although last year's results included revenue from operations that have since been divested. Excluding those, Q2 revenue was up 6.3%, according to Verizon. Net income attributable to Verizon was $1.6 billion, compared with a net loss of $1.2 billion in the second quarter of 2010.

In the first six months of 2011, Verizon's capital expenditures totaled $8.9 billion, compared with $7.6 billion in the first half of 2010. Verizon said it continues to expect full-year 2011 capital spending to be similar to its 2010 investment of $16.5 billion.

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