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Verizon Communications Inc. (VZ)

Q2 2007 Earnings Call

July 30, 2007 8:30 am ET

Executives

Ron Lataille - IR

Ivan Seidenberg - Chairman and CEO

Denny Strigl - President and COO

Doreen Toben – CFO

Analysts

Chris Larsen - Credit Suisse

Mike McCormack - Bear Stearns

David Barden - Banc of America Securities

John Hodulik - UBS

Simon Flannery - Morgan Stanley

Jason Armstrong - Goldman Sachs

Michael Rollins - Citigroup

David Janazzo - Merrill Lynch

Tom Seitz - Lehman Brothers

Presentation

Operator

Good morning and welcome to the Verizon second quarter 2007 earnings conference call. (Operator Instructions) It is now my pleasure to turn the call over to your host, Mr. Ron Lataille, SVP Investor Relations of Verizon.

Ron Lataille

Good morning and welcome to our second quarter 2007 earnings conference call. Thanks for joining us this morning, I'm Ron Lataille. With me this morning are Ivan Seidenberg, our Chairman and CEO; 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 webcast. 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. Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which 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 would now like to turn the call over to Ivan Seidenberg for some opening remarks.

Ivan Seidenberg

Thank you and good morning, everyone. We appreciate your dialing in this morning. In just a moment, we will go over our quarterly results. We're pleased with the performance there, and you will see that we have lots to talk with you about on our performance in the second quarter.

You also know that we just announced this morning an acquisition of Rural Cellular Corporation's assets. I thought at the beginning of the call, we would take just a moment to provide you with some information and some color about this. Rural is an attractive corporation. They operate in the 850 megahertz cellular footprint. We understood over the past several days that they wanted to complete their transaction and the sale of the company by this weekend.

This is an asset that we have had under some surveillance for awhile. We constantly look at these things. We thought there was a significant synergy opportunity for our company. It would provide a meaningful expansion of our footprint, as well as improve service for our existing Verizon Wireless customers. Of course, we believe that the valuations for both Rural’s shareholders and Verizon’s shareholders were in line, and therefore, we moved forward over the weekend.

Just a couple of quick details about the transaction. As you read in the press release, purchase price was $2.67 billion, $45 per share. Broken down the equity price is $757 million; the residual of that is debt, for a combined total of enterprise value of $2.67 billion. The $45 represents a 16% premium over the last ten trading days and a 41% premium over the closing price on Friday. We think there are opportunities for more than $1 billion in synergies through reduced roaming and operating expense savings. We think obviously this transaction will be attractive to our shareholders. It will be neutral to modestly accretive in 2008 and accretive in 2009 and thereafter.

One interesting point about this is the customer base for Rural is over 700,000. They operate in about 15 states. We think regulatory approvals will take some time during the second quarter, no later than the first half of '08. Lastly, this company operates both GSM and CDMA networks. Our plan would be -- just to make sure there's clarity about it -- would be to build an overlay CDMA network, convert their existing customers to CDMA, but we will continue to operate the GSM network to serve the roaming needs of the GSM carriers that utilize those facilities.

We're excited about the transaction. We think it was opportunistic. Rural is a good company. We think this is very attractive for Verizon shareholders both strategically and financially. So with that, Ron, let's go back to the routine call, and we will pick up on the quarterly results. Thank you.

Ron Lataille

Thank you, Ivan. Before turning the call over to Doreen for a review of our results, I would like to point out that both reported and adjusted earnings per diluted share were $0.58 for the second quarter. The only special item that we're excluding from adjusted results is relatively small, a $17 million after-tax charge for merger integration costs.

With that, I will now turn the call over to Doreen.

Doreen Toben

Thanks, Ron and good morning, everyone. Our second quarter results were strong and we sustained our momentum. Verizon Wireless had an excellent quarter with a continuation of their very strong growth in customers, revenues, margins and cash flow. We also saw higher wireline revenue growth in both consumer and global enterprise services. Top line growth continued to accelerate this quarter as consolidated revenues grew 6.5% compared with last year.

We also improved margins as operating income increased 14.9% year-over-year. Our $0.58 of adjusted EPS from continuing operations resulted in another quarter of double-digit growth, up 11.5% from a year ago. For the first half of the year, EPS from continuing operations grew 13.1%.

Let's take a closer look at consolidated revenues and margins. Our accelerating growth has resulted in a $2.6 billion increase in consolidated revenues year-to-date. 90% of our revenue base had positive year-over-year growth. In the second quarter, we continued to see organic growth across all business units. Verizon Wireless revenues were up 17.1%, legacy consumer revenues grew 3.4% and Verizon Business had 2.4% growth. Operating income grew to $8.1 billion in the first half, an increase of $1.2 billion versus last year. So, as you can see, very profitable revenue growth as we continued to drive the business to accelerate revenues and expand margins.

Cash flows from continuing operations in the quarter were strong. Our first-half total of $11.6 billion represents 7.5% growth over last year. Total debt was $32.5 billion at the end of the quarter, down $2.2 billion since last quarter and just under $10 billion lower than a year ago.

We have continued to repurchase shares. During the quarter we bought back more than 500 million of our common stock. In early July we passed the 1 billion mark for the year. Again, our intention is to repurchase at least 2 billion over the course of this year. Our capital spending was on target at $8.5 billion for the first six months with both wireline and wireless right where we expected them to be. You see the improvement in our CapEx to revenue ratio this year compared to last.

Let's begin our segment review with wireless on slide 6. As you know, the retail market is our key focus. More customers use Verizon Wireless than any other wireless brand. We had another strong quarter of customer growth with more than 1.6 million retail net adds, increasing our retail customer base to 60.1 million or 96.8% of total. Retail postpaid customer grew 1.5 million to 57.7 million.

We continued our industry leadership in customer loyalty. Retail churn was 1.08%, and retail postpaid churn was a record low, 0.85%. Retail gross adds increased 2.2% year over year and were up nearly a 1% sequentially with more than two-thirds of these retail sales coming from direct channels. Total net adds for the quarter, including wholesale, were 1.3 million. During the quarter the wholesale customer base declined by about 300,000 primarily due to one reseller. We have removed all customers associated with this reseller from our subscriber counts this quarter.

Turning to slide 7, total service revenues were up 17% in the second quarter, sustaining our strong growth trends and marking the sixth consecutive quarter of better than 15% year-over-year growth. Retail service ARPU of $51.84 was up 3% year over year and 2.2% sequentially. This growth is the highest we have seen in the past two years.

Data products and services continue to be a significant driver of growth. In fact, more than half of the growth in total service revenues was from data. Data revenues grew 70% year-over-year and represented 19% of total service revenue, up from 13% a year ago. Retail data ARPU grew to $9.84, up 48% from a year ago. Almost two-thirds of our retail customers are data users. More than one-third of all retail data revenues came from business applications, and nearly 60% of our data revenue growth was from services other than messaging.

During the quarter customers using our VCast service completed about 25 million music and video downloads. Customers sent or received over 28 billion text messages in the second quarter with 10 billion in the month of June alone.

Verizon Wireless continues to lead the industry in retail customers, total revenue, customer loyalty and profitability. As you can see on slide 8, we have sustained a steady growth trajectory in revenues which were $10.8 billion in the second quarter. Quarterly EBITDA was well in excess of $4 billion, up 8% sequentially and 21% since last year. Our second quarter EBITDA margin was a very strong 45.8%, and we intend to sustain our leadership by differentiating ourselves from the competition.

Earlier this month we announced that we have expanded Rev. A to 100% of our EV-DO footprint, which covers more than 210 million pops. In May we introduced our global BlackBerry service and the new BlackBerry 8830 world addition. Both of these have been extremely well-received as we are getting great feedback from customers, particularly business travelers. We have enhanced our music capabilities with VCast Online service, which enables over-the-air recognition of tunes for digital downloading, and our VCast Mobile TV service is now available in more than 30 markets. All-in-all another excellent quarter for wireless.

Within wireline we had a strong quarter of residential customer growth, particularly with our FiOS services. We also saw some line loss improvement. In FiOS TV we added 167,000 net new customers to end the quarter with 515,000, a penetration of more than 13%. That is an average of about 2,600 net adds per business day this quarter. When you add in our DirecTV bundled customers, we now have nearly 1.3 million video subscribers. At the end of the quarter, we were marketing our FiOS TV service to about 3.9 million homes, up from 3.1 million at the end of first quarter and our FiOS TV ARPUs remain within industry norms.

We are also doing well with our FiOS Internet service. We added 203,000 net new FiOS Internet customers this quarter, which is about 15% more net adds than in the first quarter. We now have 1.1 million customers representing a penetration of 19% of homes open for sale. During the quarter, we averaged about 3,200 net adds per business day. Six of our state markets have FiOS Internet penetration rates over 20% and one state exceeds 35%. In virtually all markets, except those in which we've just introduced the service, we reached double-digit penetration.

Total broadband subscribers increased to 7.7 million in the second quarter, up 1.6 million or about 26% from a year ago. During the quarter there were 288,000 net broadband heads. As I noted, 203,000 of these net adds were FiOS Internet customers. Although we usually see seasonally slower DSL net adds in the second quarter, this quarter's 85,000 DSL net adds were lower than consensus. However, as we continue to scale up the availability of FiOS, some reduction in DSL volumes should be expected. Overall about 22% of FiOS Internet sales are migrations up from DSL service.

Overall FiOS TV and broadband, as well as our bundling initiatives, are improving customer growth trends. The total number of primary consumer units grew 2% year-over-year, and we ended the quarter with 32.4 million total RGUs, which are up on both a year-over-year and sequential basis. We have also seen an increase in retail residential bundled customers this past year. Clearly broadband and video products have proven to be more retentive, and we have seen some improvement in line losses this quarter, which is certainly a change from recent trends. The amount of total quarterly line losses have improved by 15% since the second quarter last year. On a percentage basis, the 7.8% year-over-year decline is also slightly better than last quarter.

Of note, the improvements were in retail lines and can be attributed to an aggressive retention program as well as win-back efforts. More specifically, retail residential line losses have improved sequentially on both an absolute and percentage basis. During the quarter, we lost 579,000 lines or 9.2% year over year. This compares with 619,000 lines or 9.3% at the end of first quarter. Clearly we see a correlation between FiOS penetration and line loss improvements in some markets.

Our consumer retail business is increasingly centered on broadband, video and bundles. As I mentioned earlier, our legacy consumer revenue growth was positive again this quarter, increasing 3.4%, more than doubling the rate of growth in first quarter. Broadband and video revenues grew 55% this quarter compared with the year ago. Last quarter that growth rate was 46%.

Increases in broadband and video revenue, more bundled customers, as well as certain strategic pricing changes all helped drive consumer retail ARPU up $5.64 or nearly 11% year over year. The 3.3% sequential growth in ARPU is primarily broadband and video-related. In Texas the retail ARPU growth was in excess of 20%, and there are several other large markets with double-digit growth including New York, New Jersey and Virginia. We continue to see growth and retention opportunities in the retail consumer market, particularly as we introduced new bundles, many of which will include wireless.

Let's turn now to Verizon Business on slide 11 where we are taking advantage of the positive trends in the large enterprise market to increase market share. In discussions with investors over the past few months, there seems to be less focus here than any of our other units. Our opportunities in this market should not be overlooked. Verizon Business revenues now represent 23% of our consolidated year-to-date total; which, by the way, is about 40% larger than our legacy consumer unit and there is significant upside potential here.

Our 2.4% revenue increase is the third consecutive quarter of positive year-over-year revenue growth, and we're seeing this growth across all units: enterprise, wholesale and international. In enterprise, which includes premier multinational customers as well as domestic and government accounts, revenues grew to $3.7 billion, up 2.7% sequentially and 2.8% year over year. Wholesale revenues, which are domestic only, grew 1.6% since last year to $844 million. International revenues, which includes services from non U.S.-based retail and wholesale customers, were just under $800 million, up 1.3% year over year.

Strategic services posted a 25.5% revenue increase over last year. As you can see on slide 12, strategic services is also showing strong sequential growth, increasing 9.3% over first quarter. This grouping of services which includes IP, managed services, as well as Ethernet and optical ring services, are becoming a much more larger percentage of total Verizon Business, currently representing 24% of total, up from 19% a year ago.

We saw strong growth in a number of products including private IP, contact center solutions and Ethernet services. Revenues also increased in managed services like enhanced 911, IP VPN and security solutions. The year-over-year growth in strategic services revenues exceeded the decline in core service revenues for the second consecutive quarter. We believe this is significant, and we are very focused on continuing this trend.

As noted last quarter, the impact of rate writedowns from renewal contracts is improving; nearly a 40% reduction in the rate of decline from a year ago. With the majority of our customers transitioning to IP, we see significant opportunities to increase our market share. We believe we are very well-positioned to take advantage of the global demand for IP, managed services, security and hosting.

The wireline business model continues to evolve. Even though we have fewer customers in total, we have increased the revenue or value per customer. This has resulted in improved revenue growth. Revenues have continued to show steady improvement as the year-over-year rate of decline has lessened each quarter. Second quarter revenues declined 1.1%, a significant top line improvement from a 6.2% decline a year ago. Excluding former MCI mass market, wireline revenues actually increased 0.6%.

As in wireless, data services are a big driver of growth in wireline revenues. Data now represents 35% of total wireline revenues. This quarter data revenues grew an impressive 11.6%. Our wireline operating income margins were essentially flat on a sequential basis and down 60 basis points versus last year. The year-over-year change is due primarily to FiOS customer growth and the cost of provisioning significantly more new customers in the current quarter than a year ago.

Our focus on growth by driving ARPU and improving customer retention carried with it some higher marketing and advertising costs this quarter, when viewed on a sequential basis. We are sharply focused on driving continuous improvements in our cost structure, not only in FiOS provisioning but throughout the entire wireline unit. We continue to target margin expansion in 2007 and beyond. FiOS earnings declined sequentially to $0.10. We are pleased with our progress in this area and expect productivity improvement to continue as we gain scale.

A few concluding comments, and then we will answer questions. Growth is accelerating in all our key markets. Two-thirds of our revenues now come from wireless and global business. As I said earlier, 90% of our revenue base is growing. In the consumer market, our broadband, video and bundling initiatives are driving ARPU expansion and improving retention. We are building very positive momentum in FiOS, and we have many growth opportunities ahead of us. We're making good progress in improving profitability. We still have work to do, but wireless margins remain the highest in the industry. Our strong balance sheet gives us the financial flexibility to invest in growth initiatives and return capital to shareowners.

In summary, we are very pleased with our second-quarter and first-half results, making us very confident as we enter the second half of the year. With that, I will turn it back to Ron so we can answer your questions.

Ron Lataille

Thanks, Doreen. Operator, Ivan, Denny and Doreen are now available to take questions.

Question-and-Answer Session

Operator

Your first question comes from Chris Larsen - Credit Suisse.

Chris Larsen - Credit Suisse

Thanks and good morning. A couple of questions on the Rural Cellular transaction, if you don't mind. Ivan, I think you said in your comments that they wanted to get the transaction wrapped up by this weekend. Is there anything specific of why that had to be done?

Secondly, how was the transaction going to be structured in relation to how it impacts the Vodafone relationship? Will this be all-cash out of Verizon Wireless and it does not change that?

Third, Doreen, on the synergies that you outlined of about $1 billion, can you break those synergies down between the roaming synergies and the actual operating call synergies that might come out of that?

Ivan Seidenberg

I will deal with that, Chris. On the first question, I think they had a process that has been open since May, and I think they felt that they wanted to get it completed. I think they had indicated they were looking to close it during the window prior to August 10 or 11, I believe. So there was nothing unusual as far as we were concerned, and we were able to move quickly and seize the opportunity. But I think this was really driven by the seller, and you might check with them, but we detected nothing unusual about it.

This will be an acquisition made by Verizon Wireless, and Vodafone enthusiastically supported it. We obviously covered it with them at a Verizon Wireless board meeting.

At this point, it is probably premature on the synergy question. I think we have over $1 billion. Over the course of the next six to eight months, it will be clear what that breakdown might look like, but you should expect that the vast majority of those savings will come from savings in roaming.

Chris Larsen - Credit Suisse

A second one on the wireless side. Data ARPU continues to grow very rapidly. Could you give us as sense for what the ARPU growth might be without data cards? Are the data cards, the EV-DO cards, a big driver of the data growth, or is it mostly the messaging?

Denny Strigl

It is mostly the messaging at this point.

Chris Larsen - Credit Suisse

Thanks.

Operator

Your next question comes from Mike McCormack - Bear Stearns.

Mike McCormack - Bear Stearns

On the consumer side, just looking at the revenue growth opportunity there, how much longer do we have before the old MCI legacy consumer stuff rolls off?

Second on the enterprise side, I guess the trend there is slowing down a bit. So maybe you can give us a sense for the puts and takes there whether it is product mix shift that is impacting that or contract repricing really hit in the past quarter? Thanks.

Doreen Toben

I will start with the consumer piece of it. They have sort of been down 25 to 30% each quarter. I think this is going to continue to roll at those kinds of levels into '08 and probably into '09. So it will take actually a couple of years before we think it rolls off in total.

Ivan Seidenberg

Mike, if you look overall at the VZB revenue growth, market and customer spending trends continue to be strong. We have completed over 50% of the IP migration, and after the migration, we're seeing stronger revenues. We are also, as we reported last quarter, seeing longer contracts with less pricing pressures, and we see improved global opportunities as we continue to focus on the multinational accounts.

Mike McCormack - Bear Stearns

Thanks, guys.

Operator

Your next question comes from David Barden - Banc of America Securities.

David Barden - Banc of America Securities

Just on the consumer wireline, legacy wireline business, a couple of important inflections. One is on the line losses. I am wondering if you believe that that is related to a saturation effect in market share, if you will, the beginning of a saturation effect and whether you expect this can continue? The same question on DSL. Big slowdown there, obviously seasonal trends; probably people are waiting around for FiOS to show up, but are you starting to see some saturation there?

If I can ask a follow-up on that prior question on business. A lot of questions about where we are in the business cycle, Denny. Are we seeing the enterprise business start to roll over, or are we seeing some incremental strength? Are we building or diminishing on that segment? Thanks a lot.

Ivan Seidenberg

David, several questions there. Let me again begin with the access line loss question. First, I would say that access lines did not improve enough, and we continue to be focused on improving our access line losses. The improvement that we did experience was not unexpected. It comes from a rollout of FiOS and bundles and a great focus in the business on retention and win back. So we expect to lose fewer lines.

Looking at the DSL question, I agree that 85,000 net adds were lighter than what they should have been this quarter. As Doreen mentioned, as FiOS scales up, we do expect to see a reduction in DSL volumes. But I would also add that DSL was frankly not our focus this quarter. We quickly moved and trained service reps, installation forces that normally handled DSL, we moved them to FiOS in some markets like New Jersey, California, Florida, also Indiana toward the end of the quarter. So overall we expect broadband net adds to continue to grow, and we will roll out FiOS just as fast as we can. We are also back-filling on the DSL side, the service reps and the installation forces that we move. So our expectation is going forward more focus and better DSL results.

On the enterprise side, you ask if the business cycle is rollover or incremental. I think as we said last quarter, we are not the market share leader in the business market so we are tending to take more share from our competitors. I think this is a good story for us. We are seeing some rollover signup business, but frankly we have got some very good growth opportunity in taking share from our competitors.

David Barden - Banc of America Securities

Thanks, guys.

Operator

Your next question comes from John Hodulik - UBS.

John Hodulik - UBS

Thanks, good morning. Just a quick question on wireline margins. Doreen, during your remarks you mentioned that you were going to focus on some cost cutting. We also saw the FiOS dilution come down in the quarter. Can you give a little bit of a forward-looking view of how would you expect that to trend? I know that you've got quite a bit lower EBITDA margins than some of your wireline compatriots. How do you expect that to trend, not only through the end of the year but maybe into '08 as well?

Ivan Seidenberg

Okay. John, if we look at the overall margins, they were flat, even given the lower FiOS dilution that we experienced. So they were flat sequentially, but this was not unexpected. And, in fact, we have said that we would see some lumpiness in our margins. As Doreen mentioned, we have been accelerating growth in our legacy consumer services in the small business and also in enterprise. Although some of the expenses were up for the quarter, marketing expenses in particular, I am confident that we will continue to drive our top line growth to the bottom line. We continue to be very focused on improvement in productivity and also cost reductions going forward.

John Hodulik - UBS

Are those marketing expenses expected to continue to reoccur throughout the rest of the year, or is it just a second quarter issue?

Ivan Seidenberg

No, it is not a second quarter issue. Our marketing expenses will be up probably on the level like we have seen in the second quarter. But I also think that our continued productivity improvements and cost reductions we will continue to see in the third and fourth quarter of this year.

John Hodulik - UBS

Thanks.

Operator

Your next question comes from Simon Flannery - Morgan Stanley.

Simon Flannery - Morgan Stanley

Thanks a lot, good morning. Doreen, very strong wireless margins. You have given a guidance range here of the mid-40s, low-40s over the last several quarters. Is there a chance here that we can -- if the trend stays down here -- take that margin up to a new higher range, or is this sort of the upper end of the range and it will stabilize from here in the second half?

Doreen Toben

Hi Simon. No, I think we're going to stay with our 43% to 45% margin and guidance, so no change to that really.

Simon Flannery - Morgan Stanley

So what was it this quarter that sort of gave you the particularly strong numbers that will reverse next quarter?

Ivan Seidenberg

I think, as you have seen in our number, our growth was 1.6; subtract from it the 300,000 in the reseller side, but frankly we had a little bit lower growth than what we had anticipated.

Simon Flannery - Morgan Stanley

Thank you.

Operator

Your next question comes from Jason Armstrong - Goldman Sachs.

Jason Armstrong - Goldman Sachs

Good morning. Thanks for taking the question. Maybe a couple of follow-ups on Rural Cellular and then one on the auction. On Rural Cellular, can you talk about how this impacts dividend timing out of Verizon Wireless? You've talked about 2009 as an estimated timeframe before for implementing the dividend again. Was there an assumption in there for this type of deal? I know there were assumptions built around auctions expanding there, so does this sort of delay the timing beyond 2009?

A second question on Rural Cellular. You are migrating a large amount of GSM subs over to CDMA. We have seen this be problematic before in the industry. What gives you confidence here that this process will be seamless?

Ivan Seidenberg

On the first question is this transaction is not all that gigantic. So I think when you look at the dividends, it will not impact it materially. I think that when we talked this over with Vodafone, they understood that quite correctly. Their assumption on the dividends is, I think the way they look at it has been accurate. I think absent other changes to what we do with Verizon Wireless, they have been anticipating free cash flow opportunities. So I think the way you should think about this, Jason, is that our first goal -- and it always has been -- is to continue to grow both the top line and the bottom line of Verizon Wireless. I think in this case we can deploy capital better by reinvesting in the business than moving toward a quicker dividend. I think the 2009 timing could be impacted, but it is too soon to really determine the exact date of that.

I think on the build what gives us the view of this, I could say this and I will say it very clearly, I don't think that Verizon Wireless misses many operating targets or misses the opportunity to do these integrations. They have done probably 60 or 70 of them over the course of the last four or five years. So I think they will be careful, and they will look at it very carefully. Remember, we're going to do something on a dual basis here. We will continue to run the GSM network so that we can take care of roaming partners, and at the same time, we will have a careful transition of new customers onto the CDMA network.

Jason Armstrong - Goldman Sachs

That is great. Just one follow-up question on the auctions related to accepting the new rules last week, can you just sort of walk us through the perspective there?

Ivan Seidenberg

Well, I think there is a couple of things. First of all, there is a block of spectrum is going to be auctioned off. Assuming it looks roughly like the AWS spectrum, there could be four or five licenses per market. We have made our position clear about the FCC not putting any unnecessary restrictions on any of these blocks. What we need to do now is see what the rules say and then develop a bidding strategy accordingly. I think it should be obvious to most people that the reason we're interested in the spectrum is it is attractive spectrum in the right bands and that we have had such extraordinary growth over the last few years that we tend to put the spectrum to use pretty quickly.

So we will just take a wait and see attitude, and I think that we will be in a position to decide how and whether we bid on any portions of any of the licenses that are open, and we will see how this unfolds during the year.

Jason Armstrong - Goldman Sachs

Great, thank you.

Operator

Your next question comes from Michael Rollins - Citigroup.

Michael Rollins – Citigroup

Thanks for taking my question. I was wondering if you can give us an update on the MCI integration process with respect to how the profit contribution is comparing to your original numbers? Within that context, as the integration continues, is there a point where MCI margins can take a significant step upwards? Thanks.

Doreen Toben

As far as the original guidance that we gave in synergies, we're actually on target and really ahead of target, so no issue there. We have done extremely well. We are very quick to move all the traffic onto our own network, which gave us an awful lot of the synergies very quickly. We have done a lot of things between the wireline and wireless to give us even more synergies.

What was the second part of your question?

Michael Rollins – Citigroup

As the integration continues, can margins take a step function up at some point from where they are today?

Doreen Toben

Absolutely. I think what we said coming in was that MCI was at very low margins compared to their peers and we think over the next two and three years their margins will significantly improve. We have talked to you before about the fact that we're investing in what we call our 10-point plan to reduce access costs this year. We are heavily into that. We're doing some trunking and rearrangements in co-location cases, which will give us an opportunity to significantly increase our margin going forward.

Michael Rollins – Citigroup

Thank you.

Operator

Your next question comes from David Janazzo - Merrill Lynch.

David Janazzo - Merrill Lynch

Denny, you had mentioned some of the productivity and cost reduction initiatives and you continue with some of the organizational alignments, the latest being the CTL. At the corporate level, you have talked about common platform and processes. Can you update us on any initiatives, targets or timeframes related to overall productivity?

Denny Strigl

We continue to focus on the productivity gains, both in our customers’ premises and in our garages, preparing our installation crews to get out to do the work. We have also in some of our jurisdictions been adding a lower-paid technician. Frankly, we have appointed a new executive this last week. I think you saw the appointment of Dick Lynch. Dick will be focused on all three of our networks, productivity gains and cost efficiencies, and I think you will see further improvement going forward.

David Janazzo - Merrill Lynch

Any specifics you can give us on some of the initiatives?

Denny Strigl

Not in this call.

David Janazzo - Merrill Lynch

Just one last one. Can you update us on the FairPoint process?

Ivan Seidenberg

Yes, I will do that. The FairPoint process has moved along. I think you know we have a shareholders meeting scheduled for August 22 I believe it is, so they have cleared the SEC. We have gotten the documents out. They are going to have a shareholder meeting. There's lots of activity in all three Northern states. To us this is all part of the process, and we will work through all the issues. FairPoint is doing a good job at making its case, and we're doing what we need to do to support them.

So the next step will be shareholder approval, and what we are looking for is almost all of the decisions by the Public Service Commission should be completed late this year. So we are looking for hopefully a late this year, early next year close on this transaction.

David Janazzo - Merrill Lynch

Thanks.

Operator

Your next question comes from Tom Seitz - Lehman Brothers.

Tom Seitz - Lehman Brothers

Thanks for taking the question. Just a follow-up on wireline margins. Can you tell us where you are at in the process of deploying the $300 million in CapEx related to bringing down access charges? I imagine the strength in enterprise sales, while you're still paying more access than you want, hurts the margin here in the near term. I am wondering if you will give us some sort of timing as to when we will start to see that savings flow through?

A second question, I know it is not this quarter but I think everyone is interested. Can you give us some idea as to porting activity in wireless, whether a certain other carrier perhaps is getting more ports or whether they did for the first two weeks in July and maybe that slowed down? Thanks.

Ivan Seidenberg

Let me begin first, Tom, with your last question. We did see an impact in our porting rates for a short period of time. But in the last week, we returned to a net positive position against all of our competitors. In fact, we are now back to approximately two customers are in for every customer that we lose.

The first part of your question was the $300 million in CapEx?

Doreen Toben

We are not quite halfway through that program. As you would expect, that is really capital not so much an expense, and it takes some time to capture those savings. So I would say we are very early into getting the benefits in the first half of the year from those. The bigger impact will come in '08. We will start to see some, especially in the fourth quarter, smaller in the third quarter, but the real big impact I would say comes much more in '08.

Tom Seitz - Lehman Brothers

Great, thank you very much.

Ron Lataille

Operator, I would like to now hand the call over to Ivan Seidenberg for some concluding remarks.

Ivan Seidenberg

Thanks, Ron. Just a couple of quick comments. I think when we look at the quarter, we are all very pleased with the fact that we sustained and built on our excellent momentum on the top line. So we have been deploying capital and making investments internally to create the kind of organic momentum that Doreen and Denny talked about here. That has also converted itself into some double-digit EPS growth, which is for us two quarters in a row a good milestone for us.

A lot of questions on this call about margins, so just let me comment from my perspective on this. I think what you are hearing, and all the questions are really very good. Our view on this is that the margin issue will continue to improve. You need to develop momentum on this. I think we have develop momentum on the top line, and I think as we make investments in IT and the network and marketing and improve productivity as Denny said, and start to deal with a lot of the longer-term synergy opportunities from the transaction with MCI, we will see this pick up momentum as we head into late '07 and into '08. But this is an issue of momentum. I think first you get the momentum on the top line, and then I think you will start to see momentum on the margin line. Nevertheless, we still had double-digit earnings growth this quarter, and we're making good progress.

I would also make the comment that we are in a situation where we have the best balance sheet we have ever had in our company. I think that gives us enormous flexibility, particularly in light of all of the recent crunches in the credit markets and all the things that are going on. So this has given us the ability to reduce debt. It has given us the ability to make a couple of transactions here, with CyberTrust and now Rural. So I think that we have the opportunity to acquire strategic assets to sustain both top line and EPS growth.

I think it also gives us a chance -- and Doreen will do this over the course of the next six months -- to think about new ways of improving returns to shareholders, given the place that the company is in. So all of the growth services that we have in wireless, broadband and managed network services in our three units are doing well. In our Verizon services organization, which basically focuses on productivity improvements and management of our infrastructure, they are also gaining momentum as we head into the year.

So we feel very good halfway through the year that we are positioned the way we want to be positioned, and we are very focused on increasing returns to shareholders and driving our stock price to continue to move in the right direction. Thank you.

Ron Lataille

That concludes our call today. Thank you all for joining us.

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Source: Verizon Q2 2007 Earnings Call Transcript
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