Verizon Wireless expects to report a 6% decline in its fourth quarter gross profit margins due to strong sales of the Apple Inc iPhone and other devices, according to a top executive for its parent company. Verizon Wireless' costs rose in the fourth quarter because the venture with Vodafone Group Plc sold 4.2 million iPhones and 2.2 million other smartphones using Verizon's highest-speed wireless network.
High smartphone sales always pressure margins because operators pay higher subsidies to offer advanced phones at discounted prices. In exchange, consumers must sign a two-year contract. Subsidies for the iPhone have historically been higher than for other smartphones.
Shares in Verizon Communications (New York) fell 1.3% after Chief Financial Officer Fran Shammo said during a webcast on Wednesday that wireless profit margins fell to a range of 42% to 43% in the quarter from 47.8% in the third quarter.
For 2012, Shammo said the company plans cuts in wireless expenses similar to last year's. In 2011 costs were reduced by $1.8 billion. But he noted that the company's pension contribution obligations would rise to $1.2 billion in 2012 from about $400 million in 2011. The additional pension funding will come from the company's traditional telephone business, Shammo said.
Shammo said the company was pleased with the strong smartphone sales as these customers spend more money with Verizon in the long run.
"This gives us a great momentum going into 2012," the executive said.
He also noted that the strong fourth quarter sales brings Verizon Wireless "extremely close" to its target for 11 million iPhone sales in 2011. Shammo also said the company ended the year with a backlog of 120,000 iPhone orders.
In terms of wireline services, Shammo said the company was looking into the option of offering Internet-based video services outside of its service region.
Asked about the impact of Netflix, a key rival in this space, on Verizon's current wireline business, Shammo dismissed market speculation that Verizon might buy that company.
"There's been a lot of rumors in the marketplace about what I'm buying and not buying," Shammo said. "I'm not buying anything."
Instead Shammo said that Verizon could look at partnerships with a potential revenue sharing element in this market.
(Reporting By Sinead Carew; Editing by Richard Chang)