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Verizon Communications, Inc. (NYSE:VZ)

Q4 2008 Earnings Call

January 27, 2008 8:30 am ET

Executives

Ron Lataille - Senior Vice President Investor Relations

Ivan Seidenberg - Chairman and Chief Executive Officer

Denny Strigl - President and Chief Operating Officer

Doreen Toben - Chief Financial Officer

Analysts

Tom Sykes – Barclays

John Hodulik – UBS

Mike McCormack – JP Morgan

David Barden - Banc of America

Simon Flannery - Morgan Stanley

Michael Rollins – Citi Investment Research

Jason Armstrong - Goldman Sachs

Tim Horan - Oppenheimer

Chris King – Stifel Nicolaus

Phil Cusick – Macquarie Research

Operator

Welcome to the Verizon fourth quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to turn the call over to your host, Mr. Ron Lataille, Senior Vice President Investor Relations of Verizon.

Ron Lataille

Good morning everyone and welcome to our fourth quarter 2008 earnings conference call. Thanks for joining us and I’m Ron Lataille. With me this morning are Ivan Seidenberg, our Chairman and Chief Executive Officer; Denny Strigl, our President and Chief Operating Officer and Doreen Toben, our Chief Financial Officer.

Before we get started, let me remind you that our earnings release, financial statements, the investor quarterly publication and the presentation slides are on the investor relations website. This call is being web cast. If you would like to listen to a replay, you can do so from our website.

I would also like to draw your attention to our Safe Harbor Statement. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. A discussion of factors that may affect future results is contained in Verizon's filings with the SEC which of course are available on our website.

This presentation also contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also on our website.

I’d like to very quickly cover the differences between reported and adjusted earnings for the fourth quarter. Reported earnings per diluted share were $0.43. Adjusted earnings per share before the effects of special items were $0.61. We are excluding two special items from adjusted results. The first is an after-tax charge of $424 million or $0.15 per share for severance and other related expenses. Included in this charge are pension settlement losses for employees receiving lump sum distributions resulting from our previous separation plan as well as charges associated with additional employee severance in 2009.

We are also excluding an after-tax charge of $35 million or $0.01 per share for merger integration costs as well as a charge of $31 million after tax or $0.01 related to an other than temporary decline in the fair value of our investments in certain marketable securities. With that I will now turn the call over to Ivan for some opening remarks.

Ivan Seidenberg

Thank you Ron and good morning everyone. Before Doreen presents a full financial review of the quarter’s results, Denny and I would like to provide a few opening comments.

To state the obvious, 2008 was a difficult economic environment and there was more than the usual uncertainty as we try to plan for 2009. It is pleasing to report however that throughout 2008 we stayed focused on our strategic business model and made progress in delivering value to our customers and shareholders. We were able to grow earnings more than 7%, increase the dividend by 7% and grow free cash flow before dividends by about 14%.

We feel confident that we took the right steps during the year to maximize growth and potential returns of the business going forward. For example, we improved our spectrum position with the purchase of nationwide 700 MHz licenses, we acquired the Rural Cellular and Alltel properties and we spun off some wire line properties in northern New England, passed more than 3 million additional phones with fiber, opened 3.3 million homes for sale of our FiOS TV service and expanded FiOS availability in big city markets like New York.

We also reached long-term agreements with our labor unions, the CWA and IBEW and very progressively put that issue behind us. As we expanded our worldwide reach, product and service portfolio and customer support capabilities for our large enterprise customers served by Verizon Business.

Our strategic investments are driving innovation and allow us to have better products and services and therefore be a very formidable competitor in every market we serve. As a result, we were able to effectively gain share and at the same time grow revenues by 5% and increase ARPU’s, the key metrics for our success.

Denny and Doreen will review many of the operating numbers with you but I think the results reflect solid execution by each business unit and in the context of 2009 indicate that we clearly have the potential to continue to perform well both absolutely and relatively in this very challenging market.

With that I would like to ask Denny now to provide us with some additional comments on our operational performance.

Denny Strigl

Thank you Ivan. Good morning everyone. I share Ivan’s confidence. Our business will continue to compete effectively and we think it will do so within any environment. Within each of our businesses that means we must continue to innovate and be leaders in the marketplace and I think we can demonstrate that leadership in each of our strategic areas in 2008 and I’d like to give you some examples.

In wireless we launched a total of 36 new devices in 2008, more than 1/3 of which were PDA’s or Smart phones and we already have about two dozen new devices scheduled to launch in the first half of 2009. We were the first to introduce nationwide unlimited plan aimed at the high end of the market and the first to introduce megabit pricing for data usage.

Our open development initiative is another platform for innovation and we made solid progress partnering with developers this past year with 29 approved open development devices. We were again recognized by industry organizations and publications in 2008 for providing the highest level of satisfaction and setting the standard for customer service for the wireless industry. Just last week our focus on providing customers with the most reliable network service paid off at the Presidential inauguration when our service held up under the strain of significantly higher than normal usage while others struggled.

FiOS was also a market leader in 2008. In terms of speed we expanded our industry leading consumer broadband connection speeds of up to 50MB downstream and 20MB upstream to our entire FiOS footprint. We expanded our high definition offer to include over 100 HD channels. We continued to add features, enhancements and upgrades that no other provider has matched in our home media DVR, interactive media guide, content search and interactive widgets. FiOS has been recognized by various publications and surveys as being a superior, best in class service.

In Verizon Business we continued to expand our capabilities as a leading provider of advanced communications and IT solutions to governments and businesses throughout the world. Nearly 70% of our customers have or are in the process of transitioning to private IP services. As in our other businesses, industry experts and partners gave us recognition for our capabilities throughout the year.

Although the environment continues to be challenging from both a competitive and economic perspective our strategic focus has not changed. We will continue to focus on growing revenue, taking share and at the same time improving profitability. So from our perspective the fourth quarter demonstrates that our business continues to perform well both operationally and financially. If you look at the fourth quarter in absolute terms or relative to our historic growth it was a good quarter.

We delivered year-over-year revenue growth in all strategic areas, over 12% in wireless, nearly 37% in broadband and video and over 8% in the key strategic services offered by Verizon Business. In addition, ARPU grew 1.4% in wireless and over 14% in consumer. Customer growth was also good this quarter. 1.4 million wireless net adds, record net adds for FiOS with over 300,000 new TV subscribers and 282,000 new FiOS internet customers.

We also saw some sequential improvement in retail residence primary line losses and DSL. We were also focused on productivity of course and improving productivity throughout 2008. Wireless once again showed improvement in our already industry-leading cash cost for subscriber metrics and we remain the industry leader in margins. In FiOS we reduced install times by 15%. In addition the Telco group reduced force by over 10,000 last year and by the way over 22,000 in the last three years.

So as we said in the third quarter, Verizon Business also saw some increasing competitive pricing pressures and some up front costs related to new contract wins that affected our margins. This quarter some volume declines tied to a weakening economy increased the pressures on margins.

In summary, we made progress but we can do more and we will stay operationally flexible and look for ways to simplify the business and manage the cost structure for long-term margin improvement.

Doreen, I will now turn it over to you for a review of the details of the quarter.

Doreen Toben

Thanks Denny. Turning to slide five, consolidated revenues grew nearly $1.1 billion or 4.6% in the fourth quarter, finishing the year at $97.1 billion representing top line growth of 5.1% in 2008. Our margins also expanded in the fourth quarter and full year. Operating income grew 6.6% in the fourth quarter and 9.2% for the year with full year margin expansion of 70 basis points.

EBITDA grew 5.4% in the fourth quarter and 6.2% for the full year with a 2008 EBITDA margin increasing to 33.5%. Finally, we ended the year with earnings from continuing operations of $2.54 per share, up 7.6%.

Turning next to cash flows and the balance sheet we ended the year with $26.6 billion in cash flows from continuing operations. As we expected, total capital spending declined $300 million year-over-year to $17.2 billion. A ratio of CapEx to revenue improved 120 basis points to finish the year at 17.8%.

In 2008 we also returned value to share owners paying $5 billion in dividends and repurchasing approximately 1.4 billion of our stock. Our balance sheet metrics remain strong with net debt of $42.2 billion including more than $9 billion in cash held in anticipation of the Alltel closing and net debt to EBITDA of about 1.3 times at the end of 2008.

With regard to the financing for the Alltel transaction we used a combination of Verizon Wireless and Alltel cash, proceeds from pre-funding and the $12.35 billion bank ridge loan to fund the acquisition. Looking ahead we anticipate the bridge loan will be paid off with Verizon Wireless free cash flow, proceeds from the required asset divestitures and turn out financing which we estimate will be somewhere between $6-7 billion.

Now let’s look at our segments beginning with wireless. Wireless had a strong quarter of high quality retail customer growth capping a year in which we added 5.8 million organic net new retail customers. Excluding divestitures, total net adds for the fourth quarter were 1.4 million, all of these were retail and 93% were post-paid. We divested a net 122,000 customers, primarily rural cellular markets as part of a previously announced exchange agreement with another carrier. We ended the year with a total customer base of 72.1 million, 67 million of which were retail post paid.

We have just over 3 million pre-paid customers and only 2 million customers from resellers. Retail gross adds in the fourth quarter were essentially flat both sequentially and year-over-year. On an annual basis retail gross adds were up 3.5%. Churn was up two basis points sequentially and on a year-over-year basis total churn was up 15 basis points to 1.35% and retail post paid churn was up 11 basis points to 1.05%.

We also maintained a strong wireless revenue performance delivering double digit revenue growth for the quarter and for the year. Total revenue grew 12.3% in the fourth quarter and 12.4% for the full year. Service revenue grew by 12% on both a quarterly and annual basis. Total service APRU increased 1.4% in the quarter and 1.2% for the full year making this 11 consecutive quarter’s of year-over-year growth in ARPU.

As we have seen all year, about 70% of service revenue growth is driven by wireless data. Wireless data represented 26.8% of total service revenue in the fourth quarter. Data revenue is now in excess of $10 billion annually, up 44% in 2008. Total data ARPU in the fourth quarter grew by $3.02 or nearly 28% year-over-year.

The main drivers of this growth continue to be broadband access and usage, email and messaging. Revenue from non-messaging data services represents more than half of the total wireless data revenue. Non-messaging data revenues grew 2% in the fourth quarter and 53% for the year. The fact is, we are still in the early stages of non-messaging services with relatively modest adoption rates so far so we continue to see plenty of upside potential as we further penetrate the customer base and as the proliferation of new devices stimulates demand for more and more wireless data usage.

Smart phone sales continue to accelerate representing more than 37% of the retail devices sold in the fourth quarter up from 30% last quarter. Obviously we expect that the ARPU, particularly the data component, will be significantly higher from these devices. With our enhanced spectrum position, 4G plans with LTE and our open development initiatives we are well positioned to compete for future wireless data growth. As it is today, our focus will be on driving revenue growth, increasing ARPU and generating cash flow.

We also enhanced our growth opportunities through the acquisition of Alltel. This acquisition has many compelling, long-term strategic benefits. It expands our network to cover nearly the entire United States population, improves our revenue mix by increasing the wireless portion to about 55% of total Verizon and makes us the largest U.S. carrier in terms of total customers which will be in excess of 80 million following the required divestitures.

In addition, the Alltel merger also provides us with significant synergy opportunities. To refresh your memory, we identified saving opportunities with a net present value in excess of $9 billion. Our estimate for cost synergies both capital and expense as well as the estimates for integration costs to achieve those synergies are unchanged from our announcement last June. Having just closed the transaction we are still reviewing the Alltel financials to determine our opening balance sheet. Higher than expected financing and interest costs will impact earnings accretion in the short-term however this is clearly a value creating transaction.

To summarize, Verizon wireless continues to demonstrate success in achieving both strong growth and profitability. Chart ten displays an impressive list of metrics for 2008. Our continued focus on increasing retail market share, retaining customers and improving operational efficiency has resulted in sustained double-digit revenue growth, increasing ARPU, industry leading margins and substantial cash flow.

The EBITDA margin on service revenue was 37.2% in the fourth quarter and 45.5% for the full year. We have some favorable impact in the fourth quarter which resulted in higher profitability than normal. Absent these items the fourth quarter and full-year margin would have been in the 45%+ range. Going forward you should continue to expect us to maintain EBITDA margins within the previously stated range of 43-45%.

Wireless capital spending for the year was $6.5 billion and the CapEx to ratio revenue was 13.2% at year end, an annual improvement of 160 basis points.

Let’s next move to wire line, starting with the consumer market. Our FiOS results this quarter demonstrate the power of our triple play offer and show the resilience of our value proposition even in a slowing economy. We had our best FiOS quarter ever with record net adds for both TV and internet. While we remain pleased with our progress in New York City I will once again say it was only one factor in a strong result across the board.

During the fourth quarter we added 303,000 new FiOS TV customers, ending the year with just over 1.9 million subscribers and a penetration rate of 21%. During 2008 we more than doubled our TV subscriber base, adding 975,000 customers and increased our penetration by roughly 500 basis points. At the same time we also significantly expanded the availability of the FiOS triple play, ending 2008 with 9.2 million homes open for sale for FiOS TV and a 57% increase in market availability in just one year.

More than 2.2 million of these homes opened for sale in the third and fourth quarters and earlier this month we passed the one million mark for premises open for sale in the multi dwelling unit or MDU category. So we are clearly building momentum and gaining critical mass. As we have previously said, there is a strong correlation between homes open for sale and customer growth in subsequent quarters.

On the broadband side, we added 214,000 net new subscribers in the fourth quarter, a 66% sequential improvement. We added a record number of new FiOS internet customers with 282,000 and we saw some sequential improvement in DSL. We ended 2008 with 2.5 million FiOS internet subscribers adding 956,000 customers during the year for an increase of 63%.

We also saw our penetration rate increase by about 400 basis points to 25%. From a FiOS deployment perspective, we have passed 12.7 million homes as of the end of 2008 so we are a bit ahead of our planned roll out schedule of 3 million homes per year. Fiber to the home now passes about 40% of the total households in our landline footprint and 93% of the 10 million FiOS data homes open for sale can purchase the triple play, up from 80% a year ago. We will continue to expand FiOS triple play availability as we further expand existing markets and enter new urban markets later this year.

On the traditional access line side of the business we saw some sequential improvement in retail residential primary lines which were down 460,000. Total switched access lines declined by 911,000. We continue to see an increasing correlation between our triple play availability and line retention. In the past, we have referenced an average improvement in line retention of about 250 basis points when we look at video markets open for sale for more than six months compared with markets with no fiber to the home.

By the end of the year we were tracking average improvements of about 400 basis points. As FiOS continues to scale and we extend triple play coverage we are optimistic that this correlation will strengthen and we see a more meaningful improvement in overall line loss trends.

FiOS remains at the center of our consumer strategy as our broadband and video services continue to drive consumer revenue growth. Legacy consumer revenues grew by 2.9% in the fourth quarter and were up 1.7% for the full year. Broadband and video revenues totaled $1.2 billion in the fourth quarter, up 42% and totaled more than $4.2 billion for the full year. We are also seeing consistently strong growth in consumer retail ARPU which increased 14.3% from fourth quarter a year ago. About 80% of this increase is attributable to new services we have introduced within the past few years.

Our overall FiOS ARPU continues to grow and now stands over $133 per month. The FiOS triple play ARPU is even higher.

Now let’s take a look at Verizon Business. Total revenues in the fourth quarter declined $124 million or 2.3% year-over-year. We are starting to see some revenue softness that we believe is cyclical and economy related due to a combination of delayed decision making on the part of the CIO’s and lower volumes tied to rising unemployment. With the strengthening of the dollar the negative FX impact this quarter was also significant.

As we said all along, there continues to be a shift within enterprise customer spending towards strategic services like private IP, managed services and security. Our strategic services now comprise 30% of the total Verizon Business revenues. Revenue from these services continues to grow up 8.4% in the quarter.

Looking ahead you can expect us to continue to be disciplined and balance new sales and profitability and we are focused on increasing the range of our professional consulting services and improving our competitive position in this area. In summarizing wire line I would emphasize that we made good progress in improving our revenue mix and competitive positioning. Broadband and video services now comprise more than 31% of legacy consumer revenue. FiOS is on plan both financially and operationally and will continue to provide us great opportunity to drive customer growth and revenue growth.

We are also very focused on continuing to improve capital and operational efficiency. In Verizon Business the continued shift to services like private IP resulted in strategic services revenue growth in excess of 16% in 2008. So we are well positioned to compete in all the strategic growth areas of the company.

As you can see, wire line EBITDA margin in the fourth quarter fell below the 27% we experienced in the first three quarters. There were several reasons for this. First, pressure in Verizon Business as significant increases in non-farm unemployment late in the fourth quarter resulted in volume declines in higher margin services as well as lower volumes for small business customers. In addition there were some timing issues related to force reductions and organizational realignments as well as increases in bad debt, marketing and some information system contracts.

To wrap up, from a financial perspective in 2008 we were able to continue growing revenues in the mid single digits, deliver bottom line earnings growth, generate solid cash flow growth and return value to share owners through dividend and share repurchases. We were able to arrange the necessary financing to fund the $28 billion acquisition of Alltel. All things considered, solid performance. Our balance sheet is healthy and we are in a strong financial position. Our investments are clearly paying off, driving volumes and revenues in our key strategic areas and the capital efficiency of the business continues to improve.

In terms of net pension and other post-retirement benefits expense, we are estimating an incremental negative impact on earnings per share of between $0.09 and $0.11 in 2009. From a funding perspective, we estimate a $300 million funding requirement in 2009 for our qualified pension trust which is slightly less than last year.

For 2009 we are targeting capital spending excluding amounts related to the Alltel acquisition to be less than the 2008 total of $17.2 billion. We have indicated that as a precautionary measure we intend to start out the year at a lower annual run rate and ramp up as we move through the year as appropriate. We expect that our ratio of CapEx to revenue will continue to improve.

Finally, we have confidence in our ability to generate cash, invest for growth and return value to share owners.

With that I will turn it back to you Ron.

Ron Lataille

Thank you Doreen. Stacy, Ivan, Denny and Doreen are now available to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Tom Sykes – Barclays.

Tom Sykes – Barclays

Can you describe the economic forecast that underpins your view you will be able to grow earnings this year? I think you previously said that. Are you assuming current trends will hold throughout the year or does growing earnings require some improvement in the economy? Then, secondly we are just through the election. Can you give us some early insight into whether or not you think the more radical net neutrality proposals might start popping up?

Ivan Seidenberg

I don’t think we have any magic economic forecast that we have looked at. Here is the theory of the case. When we look at 2008 our view is we stayed focused on our strategic innovation, capital investments and the execution on the part of Denny and his team. We obviously layer in things like the Alltel transaction and our view is, as I said earlier, we have the potential to continue to perform well absolutely and relatively. I don’t think we have any specific forecast. I think Doreen will reaffirm this but the idea is visibility in 2009 is less clear than it has been in other years but the pieces here for us it is clear to focus on out performing our competitors in the market and doing more relatively.

On the election, I think the new administration is very responsive. They have been reaching out. There is lots of dialogue. I think they recognize the most important issues they have right now are to focus on the balance in the stimulus package between tax benefits versus grant approaches to things. Stimulus spending versus tax. There are lots of meetings going on. The business roundtable is focused on this issue. We have been working with the administration. Net neutrality I haven’t had anybody ask me that in the last couple of weeks. I am sure it is out there some place but even some of the players in net neutrality have already modified their position on it. I don’t view that as an issue that will sort of dominate the headlines for awhile.

Operator

The next question comes from John Hodulik – UBS.

John Hodulik – UBS

If we could talk about margins real quick both on the wireless and wire line side. On the wireless side obviously above the long-term corporate guidance. Could you just talk about some of the drivers there and then as we look out into how the competitive environment keeps evolving is that sort of what we can expect going forward? On the wire line side obviously very different than your sort of longer term guidance. Is this the sort of level or in this range of what we could expect while the economy remains weak? It sounds like a lot of the drivers you talked about in the prepared remarks were really driven by the economy. Obviously it could be some time before things improve plus this sector is generally thought of as something of a lagging indicator. Is this sort of the right level for going forward in 2009?

Doreen Toben

I’ll start with the wire line and wireless margins. I think as I said every time I meet with investors there can always be a quarter that can bump up over the 43-45%. Clearly if you wanted to miss you want to miss on the upside. This quarter there were some one-times having to do with vendor credits, some other systems pieces so I would look at this as more of a one-time and we will go back to the 43-45%. Nothing earth shattering that happened. A lot of moving pieces this particular quarter.

John Hodulik – UBS

Can you maybe quantify for that or is it just a lot of little this and that’s you don’t want to break down?

Doreen Toben

Nothing was significant. I’m not going to give you the vendor credit number because that is not something we disclose but it was more significant than it typically is in the Q and the rest were this and that’s that added up to a number that bumped over the 45%.

Denny Strigl

On the wire line margin, I would make several comments on this. First of all FiOS is on plan and helping. EBITDA positive for the full year 2008. As we look at FiOS the strategic transformation has gone very well for us and of course there is always a lag in the margin when you go through a transformation like we have on FiOS. FiOS productivity is improving. On the line loss side as you have heard there is no change there. We continue to reduce force in areas that are not growing and we are in the process of consolidating our wire line, telecom and business network organization. We expect that will generate some efficiency and productivity improvements in the network planning area, engineering, the maintenance functions and we have a number of ongoing initiatives in the areas of customer self-service, process automation, flow through, back office productivity and so forth.

Longer term, our guidance on wire line margins really hasn’t changed.

Doreen Toben

One additional comment I would add is I did give the guidance of pension and [OPEB] between $0.09 and $0.11. You should think of that as almost exclusively as wire line which will hit obviously in 2009. So that will certainly be an impact for next year.

Operator

The next question comes from Mike McCormack – JP Morgan.

Mike McCormack – JP Morgan

On the wireless side can you just give us a little more data? You talked about non-messaging data revenue being an opportunity but maybe comments on the impact of the economy, headcount reductions, the use of BlackBerry and also the air card business and secondly on the enterprise side can you just give us some sense of the impact of FX on the international side? It certainly looked like it rolled over pretty hard on growth rates.

Doreen Toben

I’ll start on the FX and Denny do you want to go? The impact was the largest impact that we have seen ever to the tune of $110-120 million sequentially. We have a very sizeable international portfolio so it was in fact a very big number sequentially.

Denny Strigl

On the wireless question I guess the underlying question is there a slow down in wireless or what has changed in wireless. I think you need to look at a number of factors. Service revenue grew 12%. ARPU increased 1.4%. Data revenues for us continued to grow, about 41% as Doreen had said, and non-messaging revenue increased 52%. We are selling more Smart phones as Doreen mentioned in her comments, about 37% of the retail devices that have been sold. We are increasing our focus on the business segment where we have relatively lower share. Our growth drivers are clearly performing for us. We are first to report but I don’t think we lost share this quarter. Our reporting ratio actually improved. We have no evidence of slowing or customers trading down either on plans or features. Our churn did tick up a bit compared to the prior year, I think you saw about 11 basis points increase on post paid churn. I can give you specifically where we see most of that.

About 5 basis points from excess cards. That probably reflects the employment issue and the layoffs in many businesses. About 4 basis points on third and fourth line disconnects. We see no reporting evidence that they are going to other providers. I think that is economy related. I would just conclude that I think we are well positioned to compete and I think we will continue to have strong performance in our wireless company.

Mike McCormack – JP Morgan

As you look into 2009 with the boost of [metro] entering your markets is there anything you guys are going to do differently?

Denny Strigl

No. We are going to do nothing differently. This always comes up two or three times a year. If you look at Sprint, Boost, Leap, Metro I think as you know that is not our primary focus. Our primary focus is on the retail post pay market. That is not something that we are going after strongly and I don’t see it having any impact or at least a negligible impact to date. I don’t think there is any need for us to respond.

Mike McCormack – JP Morgan

Do you feel the same way on the wire line business from a replacement standpoint?

Denny Strigl

Yes. We do.

Operator

The next question comes from David Barden - Banc of America.

David Barden - Banc of America

Number one, if you could just share how the Qwest relationship impacted net adds reporting in the quarter. Obviously we were expecting you guys to see an acceleration in that bringing add over to your base over the course of the year. Second, maybe Doreen on enterprise obviously incremental to the currencies can you talk a little bit about the financial sector and some of the consolidation we are seeing there and what kind of impact that might have incremental to the stand alone currency impacts we saw year-to-date?

Denny Strigl

Let me start with your question and frankly I don’t have much to tell you there. Qwest started selling Verizon Wireless service to new customers in the fourth quarter. These are Verizon customers. It is not, I think as you know, a reseller agreement. Notification of Qwest’s Spring customers will occur starting this quarter so no specifics to give you but we expect Qwest to be overall a very good distribution partner.

Doreen Toben

I think we saw an impact in both the financial and retail sectors in particular in LD minutes after we started to see in November and December unemployment and the job losses is where we really saw it kick in. Verizon Business is probably the hardest visibility for next year. You saw all the job announcements yesterday so trying to determine what impact that is going to have on the different sectors has been difficult. The one thing is the financial and retail is the biggest changes in to date.

David Barden - Banc of America

Doreen, just on CapEx you have been talking about slowing it up a little bit at the beginning of the year and trying to come in lower than last year. Is this more of a containing wire line to right size the business? Is this maybe holding off on LTE deployments to see how the year unfolds? Where are the savings going to be emerging in this business?

Doreen Toben

I would say it is not a containment. It is really to start out slow, see what we need to do so we don’t get ahead of ourselves in putting in capacity that we don’t need.

Operator

The next question comes from Simon Flannery - Morgan Stanley.

Simon Flannery - Morgan Stanley

Denny I wonder if you could expand a bit on the open development initiative. You talked about 29 devices approved. Are we going to see those coming on line in the next month or two or is that somewhat longer term? Also, on the LTE if you could just update us on the timeline of what we might see in the remainder of 2009 and into 2010?

Denny Strigl

We are planning on the LTE piece to do our market trials later this year. So they are scheduled for 2009. We are working with our manufacturers. Very good cooperation in that regard. Commercial availability in 2010. Our goal is within the first half of 2010. On the ODI, those devices will come on line as we roll out our LTE initiatives so in conjunction with that. The 29 devices some of them are actually ready to go on our existing 3G network. I think it is positioned very well. Obviously machine to machine is the focus of our ODI and I think we have a good start in that regard.

Simon Flannery - Morgan Stanley

A delay on the digital TV shouldn’t cause problems there?

Denny Strigl

No it shouldn’t. We are trying to work through that issue but certainly later in the year had been our plan on the trials and we are trying to work through even with the DTV delay whether we could use some of that spectrum to work out the trial.

Ivan Seidenberg

Concerning the bill as we understand it, it allows certain programmers to cut over sooner if they are ready and it gives us a chance to use that spectrum where it is available for testing and to move forward. I think the way the bill is currently constructed the potential for further delay beyond the June 12 date is probably pretty low.

Operator

The next question comes from Michael Rollins – Citi Investment Research.

Michael Rollins – Citi Investment Research

A follow-up on the wireless side, as growth in the industry slows and potentially more of the growth comes from data and upselling customers, why wouldn’t margins improve above the guidance that you have had of 43-45% over time just as that marketing can be scaled across slower adds but better revenue from existing users?

Doreen Toben

This is sort of the age-old question and it is the same answer. We continue to balance growth and margins. So we want to make sure as the growth is available to us we don’t slow down the growth enough to impact the margins. So it is really a growth in margin and we just see that as continuing to see the right balance.

Operator

The next question comes from Jason Armstrong - Goldman Sachs.

Jason Armstrong - Goldman Sachs

First, one more on the wireless margin outlook maybe from a different angle. 43-45% range that we have talked about, the Alltel deal synergy targets get you somewhere in the range of 150-200 basis points of margin enhancement. I guess the question is what keeps us at the 43-45% in the context of the Alltel enhancement because what it implies if you stay there is that you intend to reinvest those synergies back into the business. Then, the second question on enterprise, you have obviously flagged the pricing pressure, there is the FX headwinds. Denny you mentioned volumes slowing down. Can you give us the outlook for this business? A lot of us look at a framework of the last cycle where enterprise was down double digits. Can you just help us think through that?

Doreen Toben

I guess if I start on the Alltel, I don’t know that I agree that is should kick us up above 45%. There clearly is reinvestment that we are doing. If you think about the handsets that need to be replaced for Alltel to enable us to get more data revenue growth that is probably a short-term piece. I still think 43-45% is alright and will not bump us up above that on an ongoing basis.

Denny Strigl

On the enterprise side, let me cover just a number of things that hopefully will help here. We did see of course specifically weakness in financial services and in the retail sectors. I think we are seeing a correlation between the significant force reductions. Certainly Doreen had mentioned this and the force reductions are causing lower volumes. LD usage dropped from quarter to quarter and was at the lowest level in at least two years. We expect the layoffs and consolidations will probably continue to have an impact through 2009. Certainly as Doreen indicated the announcements you heard yesterday will have an impact.

For our part though we are still focused on driving growth where we can and we are enhancing our long-term growth opportunities. Long-term enterprise customers we think will seek more bandwidth capabilities, add new applications, buy our managed services and we are well positioned to deliver in all of those areas. Of course we continue to manage the cost side of the business.

I might mention here too that we continue to look for ways to partner and you will soon see a formal press release that Verizon and Accenture have reached agreement on a strategic partnership that leverages our complementary assets and capabilities. We will do joint marketing sales initiatives which will be launched first in the United States and then will extend globally as opportunities arise. Again, you can expect to see a formal press release in that regard shortly.

Jason Armstrong - Goldman Sachs

Denny, on the enterprise side as you think about how we could bottom out this cycle how we bottomed out last cycle, people think the positive is that you have a lot more pricing discipline this cycle than the last cycle. The negative is this cycle is a heck of a lot more broad based across enterprise. If you look at a framework of down high singles, low double digits is it better or worse this time?

Ivan Seidenberg

I think we all have opinions but let me just make a couple of points. First of all we have a much better industry structure than we did the last time so we are more consolidated. We are more focused. We have better products. I think we have much better products to sell into the market once the market starts to pick up. My guess is there are some positives there. You are correct, it is broader, so you have some issues on that side but this is where I think Denny has talked about productivity and costs and building partnerships. So net to me the industry is healthier this time around so I think we should bottom out differently and we should see the upside in a much better way.

Operator

The next question comes from Tim Horan – Oppenheimer.

Tim Horan - Oppenheimer

Back to the enterprise front again. Can you talk about maybe what percentage of revenues are more usage base correlated there? Secondly, maybe where you think some of the pricing pressure is coming from because clearly the industry structure is a lot better than we saw last time.

Doreen Toben

The biggest usage base is LD and I don’t have at the tip of my tongue what percentage of it is really LD to be honest. Ron has it here. He thinks it is about 20-25% so that would be the usage piece.

The second part of your question?

Tim Horan - Oppenheimer

What do you think the pricing competition is coming from? Is it driven by customers? Because it doesn’t seem like you have an awful lot of competitors right now.

Denny Strigl

It is driven by contract renewals. So every time we see a customer, a 3 year or 4 year contract expiring, there is various competition and essentially that is where you see it. It is price take downs on renewals.

Tim Horan - Oppenheimer

Doreen, as you do all your puts and takes it looks like your mass market revenue should turn positive here in 2009. Do you think that [access] have peaked or how are you feeling about those trends in overall mass markets if not maybe this year when do you think that turns positive?

Doreen Toben

The consumer revenue is positive this quarter, right so if you take out when we have mass market we have if you will the old MCI long distance which is national so you have already seen consumer be positive this quarter. Obviously FiOS just gets better from here.

Operator

The next question comes from Chris King – Stifel Nicolaus.

Chris King – Stifel Nicolaus

First of all I was wondering if you had any broad commentary on the various stimulus proposals that have been flying around Washington over the course of the last couple of weeks and what you are looking for or what you would not like to see in any of those plans. Secondly, I was wondering you guys are evidently selling a Femtocell now over the course of the last couple of days. It really is just kind of a signal enhancer it appears at this point. Any kind of longer term plans for that product offering?

Denny Strigl

I’ll take the stimulus issue. I think we are part of the process. We appreciate to give you sort of a benchmark. What we like are things like depreciation and tax policy. What we probably don’t like are grants that have a lot of government conditions on them. So given those two benchmarks so far the dialogue has been pretty good and we will continue to comment on that. I think as you look at our company we have made a lot of investments in broadband and what we don’t want to see is additional government regulation on any new broadband that would have any sort of backward looking impact on the company.

Femtocell, as you know, is the secret weapon of the century. So you will I’m sure after one day of sales we can tell you it is the next millennium secret weapon.

Ivan Seidenberg

I do think it has opened some good opportunity for us. For those of you that haven’t followed this closely yet it is a signal enhancing device for both homes and businesses where we have weak signal. We just see a good opportunity here particularly as more and more customers begin to use broadband applications in the home and in business and want to be portable with those devices.

Nothing specific to tell you at this point.

Operator

The next question comes from Phil Cusick – Macquarie Research.

Phil Cusick – Macquarie Research

Working capital management was really good in this quarter and in particular inventories were down 16% sequentially which isn’t what typically happens. Can you talk about if that was an effort by you and if you expect that to go down further going forward or how are you think about it?

Doreen Toben

I think one of the biggest changes we had in the quarter was set top boxes and it was a concerted effort on our part to manage that process better. That was really the biggest change to tell you the truth and we are very focused on set top box management going forward. Also to some extent handsets. We had some handsets in the third quarter that we needed to work on and move those through which we did. Those are the two biggest changes that we will continue to work on all through 2009.

Phil Cusick – Macquarie Research

Do you expect that inventory to come down further going forward?

Doreen Toben

The absolute inventory number in the balance sheet I’m not sure. Do I expect the inventory in the set top boxes to come down? Yes.

Ron Lataille

I’d like to now turn the call back over to Ivan for some concluding remarks.

Ivan Seidenberg

Thank you Ron. Thank you all. We are exhausted from all these questions here. We appreciate all your interest and your interest in probing the business. Just a couple of comments. We think we had a very solid quarter. We had an excellent year and we think we have built solid momentum as we head into 2009. Hopefully you think of us in 2009 as having built a solid foundation on execution, great financial discipline and innovation. We see no reason why the momentum we have developed in terms of our progress in the marketplace should not continue in some way. Like all of you we don’t have perfect visibility into the economy so the level of success we have will be tempered somewhat by what the economy gives us. At this point our view is that we will continue to perform well absolutely and perform well relatively. We are looking to continue to be a formidable player in the markets we serve. As the year unfolds we will obviously have more insights to our view as we start to build a track record in 2009.

Ron Lataille

That concludes our call today. Once again I’d like to thank everybody for joining us and we will see you next quarter.

Operator

This concludes today’s conference. You may now disconnect at this time. Thank you for participating in today’s conference call.

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Source: Verizon Communications, Inc. Q4 2008 Earnings Call Transcript
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