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4/30/2004
02:07 PM
William Schaff
William Schaff
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Taking Stock: Can Investors Hear Verizon Now?

Verizon's stock may not be exciting, but it's been slow and steady.

Verizon's advertising may be annoying, but I do remember its wireless slogan. However, as an investor, one has to ask if this advertising has translated into better profitability for one of the leading U.S. telecom and wireless carriers.

Despite a 3.9% year-over-year increase in revenue to $17.1 billion in the first quarter of 2004, Verizon reported operating earnings per share of 58 cents, down from 69 cents a year ago--a decline of more than 15% year over year. On the positive side, Verizon continues to effectively bundle services such as long distance, DSL, and wireless with local services. The company disclosed another 490,000 Freedom bundle customers in the latest quarter, bringing the count to 3.6 million. The turnover rate for these customers is substantially lower than the overall customer turnover rate. The overall turnover rate is now down to 1.6% from 1.7% in the previous quarter.

Also, the average revenue per user increased 5% year over year for the bundled customers. Long-distance revenue grew to $1.0 billion, up 13% year over year, and now represents almost 6% of the total revenue. The company now has 17.6 million long-distance lines nationwide. It signed up 345,000 high-speed DSL customers during the quarter, bringing the total to 2.7 million subscribers. It also added 1.4 million wireless subscribers, up 55% year over year, with average revenue per user for wireless customers now up to $48 per month. And overall telecom-service demand should rise with the improving general economy.

On the negative side are the 4.0% and 4.6% declines in residential and business access lines, respectively. Verizon continues to lose customers to competitive wholesalers that offer attractive prices on unbundled service offerings. And finally, long-distance profitability is still lower than its local business.

In my opinion, Verizon is fully capable of competing at all levels, especially for large and midsize business customers. However, this doesn't come free. The company is expected to spend $12 billion to $13 billion on capital expenditures in 2004 just to stay competitive. It faces continued price competition from both local and long-distance providers, as well as competition from other technologies, such as voice over IP.

Though operating cash-flow margins, as measured by earnings before interest, taxes, depreciation, and amortization, seem to have stabilized, there are no guarantees they will stay that way. Verizon cut $900 million in debt this quarter, with targeted goals to end the year at $44.5 billion in debt. Going forward, the company expects to generate $1.3 billion in free cash flow each quarter. With 2,804 million shares outstanding, if it bought back shares at the current price of $37.50 per share, the company could buy back almost 5% of the total outstanding shares each year. If nothing else, the 4.1% dividend yield, subject to the lower dividend tax rate, is nothing to sneeze at.

Verizon might not be nearly as exciting as Google's initial public offering, but my guess is that some investors might prefer an investment that I really believe is slow and steady.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

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