Verizon Has a Plan

When you need your spine adjusted, you go to a chiropractor. But telecom giant Verizon (NYSE: VZ  ) prefers to build out its favorite backbone one acquisition at a time, with Matrix-like tendrils reaching into ever more living rooms across America.

More on that in a moment; first, a look at Verizon's second-quarter earnings. Revenue rose 25.6% year over year, landing at $22.7 billion, while earnings (excluding one-time items) amounted to $1.87 billion, or $0.64 per share. Analysts expected higher sales but lower earnings, so the results were a mixed financial bag.

The strong bottom-line performance rested on growth and cost control in the wireless services segment. Landlines are dwindling as more people switch entirely to cell phones or voice over Internet protocol (VoIP) services from companies like Vonage (NYSE: VG  ) or Verizon's own VoIP offering.

On the flip side of the coin, Verizon is investing heavily in the future, with an expanded rollout of "fiber to the premises" under the FiOS brand name. The high-speed connection directly to consumers' homes gives the company a triple threat of voice, data, and television services similar to what cable companies like Time Warner Cable (NYSE: TWX  ) and Comcast (Nasdaq: CMCSA  ) already offer, but at even higher speeds.

Yesterday, Verizon announced FiOS availability in a large part of Pasco County, Fla., including the zip codes to the east, west, and northeast of my house. While I wouldn't necessarily jump on FiOS the minute it becomes available, it does look like a compelling alternative to my current cable modem and digital cable TV service, and it's understandable if the cable companies are getting a bit nervous. Verizon's capital expenses dropped a bit year over year in every segment except Wireline; that division, which includes fiber operations, saw a 20% boost in spending.

Verizon could stand to tighten its operations these days. The company boasts the best gross margins in the major telecom industry, but that advantage is lost as you proceed down the income statement. Alltel (NYSE: AT  ) and BellSouth (NYSE: BLS  ) both sport higher operational margins, and AT&T (NYSE: T  ) performs better in bottom-line margins. That leaves only Deutsche Telekom (NYSE: DT  ) and its T-Mobile subsidiary eating Verizon's dust, but on the other hand, that competitor is growing significantly faster.

Beset on all sides by traditional and nontraditional competition, Verizon is betting heavily on an increasingly digital and wireless future -- as it should. It's trying to exit the phone book business, either through a sale or a spinoff of that division, and I think that its MCI acquisition earlier this year was all about controlling a few more vertebrae of the Internet backbone. It sounds like the right strategy at the right time, and with the possible exception of AT&T, I don't see the other majors keeping up.

Dial "F" for further Foolishness:

Time Warner is aMotley Fool Stock Advisorrecommendation, while Alltel is anIncome Investorpick. Check out our entire suite of newsletters by clickinghere.

Fool contributorAnders Bylund holds no position in any of the companies discussed here, though his home phone is a Vonage line. Love the service, hate the business. Foolishdisclosure never gives you a busy signal. Check outAnders' holdingsfor yourself.


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