Verizon Holds the Fort

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Looking at Verizon's (NYSE: VZ  ) latest results, which slightly beat estimates, I get the impression that management has a good understanding of the kind of numbers that its shareholder base wants. From all indications, management runs the company with the goal of pleasing the risk-averse retail and institutional investors who are prone to sinking large amounts of money into a local phone giant.

These people aren't looking for the next or Intuitive Surgical. They're just looking for slow, steady growth, and the promise of a reliable dividend. And for the most part, Verizon is doing a respectable job of delivering on that goal.

While rival phone giant AT&T (NYSE: T  ) saw its Q3 revenues fall by 1.6% year over year, Verizon reported a slight increase, even after adjusting for its acquisition of rural wireless carrier Alltel. Considering the boost that AT&T has received from the runaway success of Apple's (Nasdaq: AAPL  ) iPhone, and that Verizon, like AT&T, has to deal with a declining local phone business, that's an impressive feat. And it owes a lot to the size and success of the company's wireless unit.

The domestic wireless division, boosted by the Alltel acquisition, accounted for nearly 58% of Verizon's Q3 revenues, compared with 40% of revenues for AT&T's wireless division. Verizon was still able to add 1.2 million wireless subscribers this quarter -- no doubt a sign of further market-share gains at the expense of T-Mobile and rival carrier Sprint (NYSE: S  ) . Data services grew to account for more than 30% of all wireless service revenues, and domestic wireless' operating margin came in above 28%. That goes to show that there are worse things for a cell-phone carrier to do than offer superior network coverage and focus on reeling in high-margin business customers.

It's impossible to know for sure if Apple will eventually offer the iPhone through Verizon, once its exclusivity agreement with AT&T runs out. But with Apple having recruited engineers experienced with the EVDO 3G technology that Verizon uses, it's not farfetched to think that it'll eventually happen. And if it does, Verizon's superior network would give it a good chance of taking market share from AT&T. In the meantime, phones such as Research In Motion's (Nasdaq: RIMM  ) BlackBerry Storm and Motorola's (NYSE: MOT  ) Droid, built on Google's (Nasdaq: GOOG  ) Android platform, should compensate a bit.

Verizon was also able to show a slight revenue gain in part because of the success of its FiOS "triple-play" platform for offering TV, phone, and Internet services. With 2.7 million TV subscribers, FiOS is well ahead of the 1.8 million TV subscribers claimed for AT&T's U-verse platform. And because FiOS, unlike U-verse, delivers fiber-optic connections directly into homes, it has also produced 3.3 million Internet subscribers looking to take advantage of its blistering connection speeds.

Verizon does have its shortcomings. Thanks largely to phone services weakness, its wireline division revenues fell by 4.8% compared with a year ago. And FiOS subscriber additions, at 191,000, fell steeply from the 300,000 reported last quarter, likely because of lower promotional spending. Verizon plans to offer FiOS to 18 million of the 32 million homes covered by its local phone network. Considering the pressures faced by the wireline division as a whole, that's an underwhelming number.

Even if slow and steady growth is the goal, Verizon can't afford to get too conservative with its network investments. But as long as it doesn't, the quality of its wireless and triple-play infrastructures should leave it on pretty sound footing to keep giving its shareholders what they want.

Care to agree or disagree? Let your voice be heard in the comments section below.

Fool contributor Eric Jhonsa wishes it were easier to find TastyKakes in New York. He has no position in any of the companies mentioned. Google and Intuitive Surgical are Motley Fool Rule Breakers picks. Apple and are Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 27, 2009, at 3:44 PM, mnkalner wrote:

    You have captured my own thinking about investing in VZ. The dividend is compelling, and the company seems to have a good business plan. What are the chances down the road of working out a deal with Vodafone to get 100 percent control of Verizon Wireless? Also, what is the possibility of buying Direct TV? Would that be a smart move?

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