While its wireless business remains the star, Verizon Communications Inc. (NYSE, NASDAQ:VZ) reported yesterday that it also saw year-on-year growth in consumer wireline revenues in its fiscal second quarter, thanks mainly to its FiOS services. However, overall operational revenues from wireline operations continued to decline, while FiOS additions slowed sequentially.
Verizon says its various FiOS offerings now account for 65% of its wireline consumer revenues, with approximately 70% of FiOS customers opting for a triple-play package. Wireline customer revenues from all sources grew 2.5% in the second quarter compared with the same quarter in 2011. Overall consumer wireline ARPU exceeded $100 for the first time, Verizon added, an achievement aided by the fact that the ARPU from FiOS customers now stands at $149.
The service provider also reported it added 134,000 net new FiOS Internet connections and 120 net new video connections during the three months ended June 30. These additions brought total FiOS Internet connections to 5.1 million (a 36.6% penetration rate) and video connections to 4.5 million (a 32.6% penetration rate). Verizon says it now has a total addressable market of 17 million premises for its FiOS network.
However, FiOS growth slowed sequentially Verizon added 193,000 FiOS Internet and 180,000 FiOS Video net connections in the first quarter of the year (see “No more DSL in FiOS territories, says Verizon”). This lower level will become the norm, Fran Shammo, Verizon executive vice president and CFO, told analysts on the earnings call held July 19.
“We continue to seek ways to drive the FiOS revenue growth, improve operating and capital efficiencies, and maximize profitability. Key parts of this strategy include targeted pricing actions, further differentiating our services with the offers like FiOS Quantum, our copper-to-fiber migration in areas with chronic repair issues within FiOS markets, and a number of other cost-management initiatives,” Shammo explained. “In light of these actions, we feel a more natural range for FiOS quarterly net adds going forward should be about 20,000 to 30,000 less than our previous range of 180,000 to 200,000. We are confident that at these levels we can still maintain an increasing revenue growth trajectory and expand profitability.”
Shammo blamed seasonality and price hikes for the fact that second quarter additions didn’t achieve even these lower thresholds.
Broadband connections hit 8.8 million during the quarter, which represents an increase of 2.6% from the year-ago quarter. This total includes a net loss of 132,000 DSL subscribers during the recently concluded three months.
Looking at wireline operations in general, the segment continued to struggle in the second quarter. Operating revenues came in at $9.9 billion, down 3.1% versus the same quarter of 2011.Operating income margin was 1.9%, up sequentially from the first quarter’s 1.6% but short of the 3.1% enjoyed in 2Q11.
“We estimate that about 65% of the overall wireline revenue decline this quarter was a result of our own deliberate actions to improve profitability,” Shammo told the analysts. “Examples include the de-emphasis of drop-ship CPE; the continued exit from certain international wholesale routes and contracts; decommissioning end-of-life products, like ATM, frame relay, and IP VPN; no longer offering dry-loop DSL or selling DSL in FiOS markets; and exiting nonstrategic product lines like calling cards and payphones.”
Overall, Verizon had a good second quarter, which repeated the first quarter’s double-digit gains in operating income and earnings per share. At least part of this performance derived from reductions in capital spending compared to last year’s levels. The company spent $2 billion on its wireless operations in the quarter, which was 23% lower than last year at the same time. Wireline capex during the second quarter came in at $1.6 billion, a year-on-year decline of 5.3%. For the first half of the year, Verizon’s wireless capex was $3.9 billion, down 27% from the same six months of 2011, while wireline capex was flat versus the year-ago time frame at $3.1 billion. The carrier’s overall capex to revenue ratio in the first half of 2012 was 13.1%, down from 16.4% over the first half of 2011.