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Readers of the Verizon (NYSE: VZ ) fourth quarter earnings report may get whiplash from looking first at the company's non-GAAP adjusted EPS of $0.52 ($0.01 lower than estimates) and then at that GAAP figure of a $0.71 loss per share. And this came on record revenues, an increase of 7.7% over the same period last year. So what gives?
Not gives, but takes … which would be a pre-tax $3.4 billion pension-plan charge bringing the company's net loss to slightly over $2 billion. Need I say that there is quite a gap between GAAP and non-GAAP auditing procedures?
But once investors leave their chiropractors' offices, they should check out Verizon's cash flow statement, which should provide some relief. Free cash flow for the year was $13.5 billion, which enabled the company to payout $5.6 billion in dividends to investors, a yield of about 5.3%. And Verizon raised its dividend to $0.50/share, the fifth consecutive year of dividend increases. The free cash flow to payout ratio for that dividend was a comfortable 41%.
There was another cause for head scratching, too. For example, how can Verizon's wireless segment sell a record number of iPhones in the quarter, 4.3 million units -- double the previous quarter's figure -- and yet see its operating margin decrease? The explanation is simple, if somewhat troubling: Verizon and the other carriers which sell Apple's (Nasdaq: AAPL ) iPhone -- AT&T (NYSE: T ) and Sprint Nextel (NYSE: S ) -- have to subsidize much of the cost of those iPhones to entice customers to sign a two-year contract. That subsidy is what's shaving profit margins.
On Verizon's conference call, CFO Francis Shammo addressed that problem -- kind of -- saying, "We sold almost 15 million Android-based products and … about 10.8 million iPhone products, so they are both extremely significant to our portfolio. I would expect that in 2012, we will get back to and continue to improve on the wireless margin." I think Mr. Shammo may be implying that larger margins on the other smartphones will make up for the iPhone's profit shortcomings.
But I only think that's what he means.
Some things Verizon did pull off this quarter rang clear as a bell. Take the company's December coup in which, for $3.6 billion and the reselling rights to its wireless services, it acquired a large cache of Advanced Wireless Spectrum, or AWS, from SpectrumCo, a consortium of cable companies made up of Comcast, Time Warner Cable (NYSE: TWC ) , and Bright House Networks.
While AT&T put much of its resources into chasing that infamous merger deal with T-Mobile, Verizon sat back and made this deal under the radar. However, even though the first examples of the Verizon/Comcast co-marketing arrangement have come to life in Seattle and in Portland, Ore., the Federal Communications Commission has been drawn back into the limelight by complaints from several companies and public interest groups -- Sprint and T-Mobile are just two -- that the details of the Verizon/cables co-marketing arrangements should also come under FCC review. So, the jury is still out on the future of this deal as it was originally envisioned.
Verizon Wireless was the favored child in the fourth quarter. Total revenues for the period were $18.3 billion, up 13% year over year; it added 1.5 million net subscribers, the largest increase in three years; and its Average Revenue Per Unit, or ARPU, grew 2.6% for retail service over the same quarter last year.
It also greatly expanded its already industry-leading 4G LTE coverage, important not only in that it draws customers away from the other carriers, but also since, as the company moves more and more subscribers onto its LTE network, it frees up 3G capacity for improved iPhone service. There's been no word from Cupertino on when to expect a 4G LTE iPhone.
Wireline was the weaker sibling this quarter, with total revenue down 1.5% over last year's fourth quarter and full-year wireline revenue down 1.3% over 2010. But, breaking the segment down further, consumer revenue grew by 1.3% year over year. FiOS led the way here with 18.2% growth.
And here's some more good news … or, actually, it's less-bad news. Verizon lost 183,000 retail residential connections in the quarter, but that's better than the 303,000 connections lost in the same quarter last year.
Good news for real here: FiOS Video added 194,000 subscribers in the quarter. This bucks the trend among cable companies, which have been seeing their video customers dropping away in favor of streaming programs over the Internet.
Finally, the bottom line
Certainly, if I compared Verizon's financial tushy to that of Apple's, you, dear reader, would fall off your chair laughing. So I won't. But there is one really big thing that Verizon offers to its investors that Apple investors can only dream about. Yes, I'm talking about that dividend. Who's laughing now?
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