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Verizon Tallies 3.7 Million FiOS TV Subs

Verizon Communications kept the FiOS fires burning strong in the first three months of the year -- adding 192,000 net new FiOS TV and 207,000 FiOS Internet customers -- although analysts questioned whether that growth will taper off now that the company's fiber-optic buildout is winding down.

Revenue for Verizon's FiOS fiber-optic services to consumer retail customers grew 23.7% over the year-ago period, to about $1.8 billion. That's approximately 54% of consumer wireline revenues in the first quarter of 2011 versus 45% a year ago.

Verizon stood at 4.3 million FiOS Internet and 3.7 million FiOS TV connections at the end of March. Overall, average revenue per unit for wireline services was $90.55 in the first quarter 2011, up 10.5% from a year earlier, driven by FiOS -- which has ARPU of more than $146.

"FiOS net addition results were closely in-line with expectations. But expansion of the footprint is slowing dramatically," Sanford Bernstein senior analyst Craig Moffett wrote in a research note. "Homes open for sale expanded by 9.6%, but based on their public comments, it is likely that homes passed are now barely growing... The question from here is whether growth can be sustained after the available footprint has reached full maturity."

Nevertheless, Verizon is now a significant player in the pay-TV industry, bigger than Cablevision Systems, which has 3.3 million basic video customers. Even at a lower rate of growth FiOS poses an ongoing threat to cable competitors. AT&T, for its part, has kept up the momentum with U-verse, adding 218,000 TV subscribers in the first quarter to reach 3.2 million.

FiOS TV penetration was 29.1% with the product available for sale to 12.6 million premises at the end of the quarter -- compared with 25.4% and 11.5 million, respectively, at the end of the first quarter of 2010. FiOS Internet penetration was 33.1% by the end of the first quarter available for sale to 13.0 million premises, compared with 29.0% and 12.0 million a year ago.

Verizon resells DirecTV service in areas where it does not offer FiOS, but does not report how many subscribers take satellite TV.

On the DSL front, Verizon continued to struggle, losing 109,000 connections in the quarter. The FiOS Internet adds more than offset the decrease in DSL, with net increase of 98,000 broadband connections sequentially -- the most broadband net additions since the second quarter of 2009. Verizon ended the quarter with 8.5 million total broadband subs, up 3% year-to-year.

Total voice connections, which include FiOS Digital Voice, fell 8.2% from the year prior to 25.5 million -- the smallest year-over-year decline in three years, according to Verizon. On the business services front, Verizon noted that it completed the $1.4 billion acquisition managed IT infrastructure provider Terremark Worldwide earlier this month.

Meanwhile, Verizon Wireless -- the joint venture with Vodafone -- turned in solid results, activating 2.2 million iPhone 4 smartphones in the last eight weeks of the quarter. The wireless carrier's revenue increased 6.3% year-over-year to $14.3 billion.

Verizon Wireless launched its 4G LTE mobile broadband network in 38 markets in December 2010, and has targeted more than 100 additional markets where 4G LTE is being rolled out. By the end of 2011, the carrier expects 4G LTE to be available in more than 175 U.S. markets, covering a population of more than 185 million people throughout the country. Verizon Wireless said it activated more than 260,000 of its first 4G LTE smartphone, the HTC ThunderBolt, and also added about 250,000 4G devices on retail postpaid plans.

Overall, Verizon reported total operating revenue of $27.0 billion in first quarter of 2011, up 0.3% compared with the first quarter of 2010 (while the company noted that last year's results included revenue from operations that have since been divested including the operations sold to Frontier Communications). Net income attributable to Verizon was $1.44 billion versus $443 million in Q1 2010 (in which the company took a $962 million charge for reduced tax benefits related to retiree health care).

Verizon's wireline margin was 23.6%, compared with 21.1% in first-quarter 2010 -- the fourth consecutive quarter of sequential margin expansion. The telco's wireline workforce was 92,000 at the end of the first quarter, a 15% year-over-year decline of 16,000 employees (adjusted for divested operations). Verizon said the reductions primarily were the result of incentive offers that led to voluntary separations.

AT&T, by contrast, reported wireline segment margin of 21.9% for the first quarter of 2011, down from 23.0% in the year-ago period. Verizon's "strong margin results stand in stark contrast to AT&T's weak margin result in Wireline yesterday, and will fuel anew the questions whether Verizon's FiOS plant puts Verizon on a better trajectory than AT&T's U-verse," Moffett said. Currently Moffett rates Verizon "underperform" and AT&T "outperform" based on valuation.

For the full year 2011, Verizon is targeting comparable top-line revenue growth of 4% to 8% and earnings per share growth of 5% to 8% over a comparable adjusted base of $2.08 per share in 2010.

Verizon continues to expect 2011 capital spending to be "essentially flat" with 2010 capex of $16.5 billion.

Cash flow from operations was $5.0 billion in the first quarter of 2011, down from $7.1 billion in the year-ago period. The company said operating cash flow from higher net income in the first three months of 2011 was offset by the launch of the iPhone as well as the satisfaction of Verizon's full-year 2011 pension funding obligation of $392 million. Verizon also pointed out that the first half of 2010 included cash flows from since-divested operations.