Verizon Communications Inc posted a weaker-than-expected wireless operating profit margin due to hefty costs from smartphones like Apple's iPhone, but the U.S. telephone company promised a big improvement this year as it cuts costs.
While Verizon's fourth-quarter bottom line was weaker than anticipated, investors were encouraged when Chief Financial Officer Fran Shammo said on Tuesday that the company could be in a position to buy back shares sooner than expected and that wireless margins could rise this year to as high as 50 percent.
Shammo said the numbers will be helped by $2 billion in cost cuts at Verizon Wireless, Verizon's mobile venture with Vodafone Group Plc (Newbury, UK), on top of $5 billion in cuts there in the last three years.
The cuts at Verizon Wireless - the biggest U.S. mobile service provider - will not require extensive layoffs and will come in areas such as call center consolidation and increased efficiency in logistics, Shammo told Reuters.
Shammo also hinted that Verizon (New York, USA) may not have to wait until the end of 2013 to buy back shares as he had previously indicated, thanks to the strength of its balance sheet.
"We could do share buybacks at any point in time right now," he told analysts, without giving a specific time frame.
Verizon shares were up 0.6 percent at $42.80 on Tuesday afternoon.
But while some analysts were impressed with the 2013 margin target, others questioned whether it is realistic, considering the prospect of stiffer competition from rivals. Pivotal Research Group analyst Steve Sweeney said the target is "aggressive."
Softbank Corp (Tokyo, Japan) is seeking to buy 70 percent of No. 3 U.S. mobile service provider Sprint Nextel Corp (Overland Park, USA), and Sprint is looking to buy out Clearwire Corp (Bellevue, USA). Also, No. 4 U.S. mobile service T-Mobile USA (Bellevue, USA), a Deutsche Telekom AG (Bonn, Germany) unit, is merging with rival MetroPCS Communications Inc (Richardson, USA).
"2013 will have a much different competitive landscape," Sweeney said in a research note. "Both new entities will be larger and better capitalized companies than they were in 2012 and represent incremental competition for both Verizon and AT&T [Dallas, USA]."
Verizon Wireless reported a fourth-quarter service profit margin of 41.4 percent based on earnings before interest, taxes, depreciation and amortization, compared with analyst hopes for 42 percent, and with 42.2 percent in the year-ago quarter.
The lower fourth-quarter margin was due to higher-than-expected subsidies paid to smartphone makers such as Apple Inc (Cupertino, USA) so that Verizon Wireless could offer a phone discount to customers who sign a long-term contract.
Rival AT&T Inc has also warned that high smartphone sales hurt its wireless profit margins because of subsidies.
While Shammo was bullish about the wireless business and Verizon's FiOS home Internet and television services, he warned that the best he could hope for in the company's enterprise business is that 2013 revenue and profit margins stay flat with 2012 because of a lack of clarity on U.S. economic issues.
"In Enterprise, we still see uncertainty around the debt ceiling, deficit reduction, and tax reform," Shammo told analysts on a quarterly earnings conference call where he also cited worries about international economic growth.
The company's fourth-quarter net loss widened to $4.23 billion, or $1.48 per share, from a loss of $2.02 billion, or 71 cents per share in the year-ago quarter.
Excluding unusual items such as the charge from Superstorm Sandy and pension liabilities, Verizon would have earned 45 cents per share, well below Wall Street expectations of 50 cents per share, according to Thomson Reuters I/B/E/S.
Operating revenue rose 4.5 percent to $30.05 billion, compared with expectations of $29.83 billion, according to Thomson Reuters I/B/E/S.
Capital spending for the year was $16.2 billion, including $135 million related to Sandy recovery efforts, and was in line with 2011 spending. Shammo said he expects 2013 capital spending to be flat with 2012.
Verizon said it added 144,000 net customers to its FiOS high-speed Internet service and 134,000 net FiOS TV customers in the quarter. It had already announced 2.1 million net additions of wireless contract customers in the fourth quarter.
AT&T, The No. 2 U.S. mobile service provider, is set to report results on January 24 and Sprint is due to report February 7.
(Additional reporting by Sayantani Ghosh in Bangalore; editing by Jeffrey Benkoe, Maureen Bavdek, Tim Dobbyn and Matthew Lewis)