Verizon Communications Inc said strength in its wireless business was tempered by weakness in its traditional wireline unit, producing softer-than-expected revenue growth for the quarter and sending its shares down nearly 2 percent.
The telecommunications company said on Thursday that corporate and government customers were cutting costs, partly offsetting better-than-estimated wireless customer growth. Also, wireless profit margins were hurt by higher costs.
While analysts described the results as solid, they noted investors would have liked better news since Verizon (New York City, New York, USA) shares had risen more than 17 percent since the end of 2012 in anticipation of strong growth prospects.
"The results were very good but at these valuations even very good might not be good enough," said Moffett Research analyst Craig Moffett.
Some of Verizon's strong valuation has been due to investor expectations it would be able to increase its earnings by buying out Vodafone Group Plc's (Newbury, UK) 45 percent stake in their Verizon Wireless venture.
But Chief Financial Officer Fran Shammo did not address the matter during his earnings call. "Their silence on the topic of buying in the Vodafone stake could be disappointing to some investors," Moffett said.
In an interview with Reuters, Shammo declined to comment on the prospects for a Vodafone deal.
The executive said about 60 percent of its decline in wireline revenue was due to shrinking government spending while the rest came from corporate spending cuts. He added that he was not expecting any big turnaround for the rest of the year.
While operating revenue rose 4.3 percent at $29.8 billion from $28.55 billion, it was shy of estimates of $29.83 billion according to Thomson Reuters I/B/E/S.
Its wireless profit margin came to 49.8 percent, based on earnings before interest, taxes, depreciation and amortization, which was below five analyst estimates between 50 percent and 50.9 percent.
Evercore analyst Jonathan Schildkraut noted that higher-than-expected wireless customer departures, known in the industry as churn, would have increased the company's costs. Verizon reported churn of 0.93 percent, compared with his expectations for 0.9 percent.
Verizon may have lost some customers to No. 4 U.S. wireless provider T-Mobile US Inc (Bellevue, WA, USA), according to Moffett. T-Mobile US is pushing hard to stem customer net losses by aggressive cost-cutting and marketing.
NOT A 'BLOW-DOWN-THE DOORS' QUARTER
Analysts said ahead of the earnings report that they expect Verizon, the first of the U.S. telecommunications companies to report second-quarter results, to take the lion's share of mobile customer growth in the quarter.
But they also expect competition to get tougher as the year progresses because No. 3 U.S. mobile service provider Sprint Corp (Overland Park, KS, USA), which was recently bought by Japan's SoftBank Corp (Tokyo), may be able to compete much better with the help of SoftBank's investments.
On the plus side, Verizon Wireless, the biggest U.S. mobile service provider, added 941,000 subscribers in the second quarter, which compared well with the average expectation for 836,500 from six analysts contacted by Reuters. Estimates ranged from 700,000 to 909,000.
It also forecast that net subscriber additions would increase sequentially in the remaining two quarters of 2013.
"It wasn't a blow-the-doors-down quarter, but it was a solid quarter," said Schildkraut, who was impressed with Verizon's customer growth. "It's an expensive stock and they need to do a lot to support that."
Excluding a pension-related gain, Verizon said it earned 73 cents per share, compared with expectations for 72 cents, according to Thomson Reuters I/B/E/S.
Verizon said it increased its capital spending budget to between $16.4 billion and $16.6 billion for the full year, compared with its previous target of $16.2 billion.
The company said it will need to spend more as it anticipates higher demand for wireless data services, and will have to start using a new chunk of wireless airwaves.
Verizon added 161,000 net new FiOS Internet customers and 140,000 net new FiOS video connections in the quarter.
Verizon's earnings rose to $2.25 billion, or 78 cents per share, from $1.83 billion, or 64 cents, in the year-ago quarter.
AT&T Inc (Dallas, TX, USA), the No. 2 U.S. mobile provider, is scheduled to report earnings on July 23, and Sprint is due to report on July 30.
Verizon shares were down 92 cents, or 1.8 percent, at $49.82 in late-morning trade on New York Stock Exchange.
(Editing by Chizu Nomiyama and Jeffrey Benkoe)