Device subsidies associated with the launch of Apple’s latest iPhone at the beginning of the fourth quarter had a pronounced impact at Verizon Communications (VZ) with the company just missing earning per share estimates and margins taking a sequential hit.
Verizon Wireless reported that smartphones accounted for more than 70% of postpaid devices sold during the fourth quarter of 2011 compared with just under 50% in 2010. The carrier added that 43.5% of its postpaid customer base was using smartphones at the end of last year, an increase from the 28.1% at the end of 2010.
Fourth-quarter wireless revenues increased 13% year-over-year from $16.1 billion in 2010 to $18.3 billion last year, which was offset by a 23.2% increase in wireless expenses that hit $13.9 billion in 2011. The biggest increase in expenses was attributed to “cost of service and sales,” which includes device subsidies that analysts noted have increased due to increased smartphone sales.
Overall, Verizon Wireless’ operating income dipped 10.7% to $4.3 billion and a margin drop from 30.1% in 2010 to 23.7% this year.
Wireless earnings before interest, taxes, depreciation and amortization also took a hit, dropping from $6.7 billion during the fourth quarter of 2010 to $6.38 billion in 2011, with margins sinking from 47.5% to 42.2% over the same time frame.
Verizon Wireless said it added 969,000 million net customers during the fourth quarter of 2011, which was a 15.1% drop compared with Q4 2010 results. Hitting the bottom line was a significant drop in wholesale and “other” connections, which dropped from a net gain of 338,000 customers in 2010 to a loss of 490,000 customers in 2011.
On the direct side, Verizon Wireless posted a robust 81.7% year-over-year gain in net customer additions from 803,000 in 2010 to 1.459 million in 2011. That growth was boosted by a 38.4% increase in direct postpaid net customer additions to just over 1.2 million and a significant turnaround in its direct prepaid net additions from a loss of 69,000 subscribers in 2010 to a gain of 252,000 customers in 2011. Analysts were expecting Verizon Wireless to post around 1.1 million direct postpaid net additions for the quarter.
Direct customer churn also increased year-over-year from 1.37% during the fourth quarter of 2010 to 1.23% in 2011. Direct average revenue per user also increased from $51.79 in 2010 to $53.14 last year due to increased smartphone penetration. This was also evident in the 14.3% increase in postpaid data ARPU, which hit $22.76 during the fourth quarter of 2011.
Verizon Wireless also slashed capital expenditures during the final three months of 2011, with total capex dropping from $2.2 billion in $2010 to 1.79 billion last year. Analysts noted that a majority of the carrier’s initial spend on deploying LTE services has been completed with Verizon Wireless hitting more than 200 million potential customers covered by the end of 2011, while 3G spending is also expected to decline going forward.
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