Verizon Wireless posts strong Q1 ARPU, margin growth

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Following a rough fourth quarter in which strong iPhone sales hit its bottom line, Verizon Wireless’ first quarter results showed the fruit of that labor by posting robust growth in average revenue per user and increased wireless margins.

The nation’s largest operator posted a 3.4% increase in overall retail ARPU, from $51.88 during the first quarter of 2011 to $53.66 this year. Retail postpaid ARPU increased even more, surging 3.6% year-over-year to $55.43. Data services continued to make up an increasing share of ARPU, with Verizon Wireless reporting a 16% increase in data ARPU to $23.80 during the first quarter, or roughly 43% of total ARPU.

Wireless margins also saw a sharp increase after taking a hit during the final three months of last year. Verizon Wireless reported wireless margins increased from 42.2% during the fourth quarter of 2011 to 46.3% during the first quarter, which analysts noted bodes well for the carrier’s plans to return to last year’s margins. Also expected to help improve that metric was the carrier’s recent decision to implement a $30 upgrade fee for new device sales, which should help take a bit of the sting out of increasing sales of smartphones and their corresponding higher subsidies.

Highlighting the evolving nature of the domestic market, Verizon Wireless posted a 16.5% drop in net customer additions, falling from 879,000 during the first quarter of 2011 to 734,000 net customer additions this year. Impacting growth was a 12% drop in gross customer additions to just over 3 million, showing that the market’s saturation has resulted in an increased emphasis on stealing customers from rivals and protecting one’s own customer base.

The drop was most dramatic for its postpaid operations, which saw a 44.7% decrease to just 501,000 net customer additions in 2012. Prepaid direct net additions, on the other hand, surged from a loss of 27,000 customers during the first three months of 2011 to a gain of 233,000 net customers this year. Verizon Wireless ended the quarter with nearly 93 million direct connections on its network, including 88 million postpaid and 5 million prepaid connections.

Customer churn dipped slightly from 1.33% during the first quarter of 2011 to 1.24% this year, while postpaid churn fell below 1%.

Verizon Wireless said it sold 3.2 million iPhones during the quarter, helping to push the percentage of customers with smartphones from 32.2% at the end of the first quarter in 2011 to 46.8% this year. Verizon Wireless added that 72.8% of postpaid phone sales during the first quarter were smartphones, compared with 60% last year.

Sales of Apple’s iPhone were down from the 4.2 million it sold during the final three months of 2011 following the launch of the latest iPhone 4S model. Verizon Wireless also reported that just over 9% of its customer base was using LTE-enabled devices, which excludes the 3G-only iPhone.

Verizon Wireless also made a play to support a third ecosystem in the smartphone space, hinting that it would throw some of its support behind Microsoft’s latest Windows Phone OS. Verizon Wireless currently offers just one smartphone running Microsoft’s OS, but is expected to begin adding options later this year.

Overall wireless revenues increased 8.2% year-over-year to $18.3 billion, making up 64.7% of total revenues for parent company Verizon Communications. This was up from the 62.5% of total revenues reported for the first quarter of 2011.

Wireless operating expenses increased 4.2% to just over $13 billion for the quarter, which helped grow operating income up nearly 20% to $5.2 billion.

Capital expenditures dropped more than 31% year-over-year to just under $1.9 billion for the quarter highlighting the carrier’s slowing LTE build out as it moves from its initial launch phase to expanding overall coverage as well as what the carrier described as an impact from increased spending last year associated with bolstering its 3G network ahead of the initial iPhone launch. Verizon Wireless noted earlier this week that it was set to expand its LTE service to 27 new markets and expand coverage in 44 current markets, which the carrier said will push overall market coverage to 230 total markets and more than two-thirds of the nation’s population. The carrier said it expects to further expand coverage to more than 400 markets and 260 million potential customers covered by the end of the year, and hit parity with its current 3G footprint by mid-2013.

The carrier also announced last month plans to close three U.S.-based call centers in a move that could impact 3,175 jobs, and said during its first quarter results that it looking to squeeze $2 billion in expense reduction this year. Much of that is expected to come from reduced spending on its 3G network.

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Dan Meyer

Editor-in-Chief, Telecom Software, Policy, Wireless Carriers
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Dan Meyer started at RCR Wireless News in 1999 covering wireless carriers and wireless technologies. As editor-in-chief, Dan oversees editorial direction, reports on news from the wireless industry, including telecom software, policy and wireless carriers, and provides opinion stories on topics of concern to the market such as his popular Friday column “Worst of the Week.”