Verizon Communications Inc. Q3 2009 Earnings Call Transcript

| About: Verizon Communications (VZ)

Verizon Communications Inc. (NYSE:VZ)

Q3 2009 Earnings Call

October 26, 2009 8:30 am ET


Ron Lataille - Senior Vice President, Investor Relations

John F. Killian - Chief Financial Officer

Ivan G. Seidenberg - Chairman and Chief Executive Officer


John Hodulik - UBS

Simon Flannery - Morgan Stanley

Michael Rollins – Citi Investment Research

David Barden - BAS-ML

Phil Cusick - Macquarie Research Equities

Chris King - Stifel Nicolaus

Tim Horan – Oppenheimer & Co.

Jason Armstrong - Goldman Sachs


Good morning and welcome to the Verizon third quarter 2009 earnings conference call. (Operator Instructions) It is now my pleasure to turn the call over to your conference host, Ron Lataille, Senior Vice President, Investor Relations of Verizon.

Ron Lataille

Good morning and welcome to our third quarter 2009 earnings conference call. Thanks for joining us this morning. I'm Ron Lataille. With me this morning are Ivan Seidenberg, our Chairman and Chief Executive Officer, and John Killian, 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 available on our Investor Relations Web site. This call is being webcast and if you would like to listen to a replay you can do so from our Web site.

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 Web site.

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 Web site.

Next, I would like to quickly cover the difference between reported and adjusted earnings for the third quarter. In the third quarter, reported earnings per diluted share were $0.41. adjusted earnings per share, before the effects of special items, were $0.60.

We are excluding the following special items from adjusted results. The first item is an after-tax charge of $372.0 million, or $0.13 per share, for pension settlement losses resulting from our separation plans. Pension accounting rules require that settlement losses be recorded once prescribed payment thresholds have been reached.

The next item is an after-tax charge of $103.0 million, or $0.04 per share, which is for merger, integration, and acquisition costs relating to Alltel.

We are also excluding a $41.0 million after-tax charge, or $0.02 per share, for non-operational costs incurred in connection with the spinoff of our local exchange business in 14 states. These costs are primarily related to network, software, and other activities required for these facilities to function as a separate company.

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

John F. Killian

Good morning to everyone. Before we get into the details of the third quarter, I want to make just a few general comments. When I look at the quarter, I believe the results show good financial discipline throughout the business, which is driving excellent growth in cash flow from operations and free cash flow.

We continue to tightly manage capital spending and while the economy continues to create headwinds for us, we are taking steps to offset the current impacts as much as possible and I am confident that as the economy gets better we will see improvements in our results. We are also taking longer-term actions to significantly reduce our cost structure to improve productivity as our business evolves.

With that, starting on Slide 3, you can see that we produced $0.60 of adjusted earnings per share in the third quarter, bringing our year-to-date total to $1.86 per share. Cash flow from operations of $23.1 billion in the first nine months increased $3.2 billion, or 16% year-over-year, driven by strong cash generation in wireless. Free cash flow of $10.7 billion year-to-date was significantly higher than last year, up $3.3 billion for 45%. We have seen strong cash flow growth each quarter this year, and particularly this quarter, reflecting growth in strategic areas and our continued focus on operating and capital discipline.

Capital expenditures, including amounts related to our Alltel acquisition, were down $125.0 million, or 1% year-to-date, reflecting the tightness with which we are managing capital. And our capex to revenue ratio continues to improve. As you know, our board of directors approved a 3.3% dividend increase in September, which on an annual basis, increases our dividend from $1.84 to $1.90 per share. This is the third consecutive year that our board has approved a dividend increase, for a cumulative total of 17.3%.

These dividend increases demonstrate our board's confidence and the strength of our cash flow and balance sheet, our financial discipline, and our commitment to return cash to shareholders while continuing to invest for long-term growth.

We also reduced debt this quarter. On a consolidated basis, net debt at the end of the third quarter was $61.6 billion, down $2.5 billion since the end of June, which is about 1.7x EBITDA for the last twelve months on a pro forma basis.

Let's take a closer look at the revenue trends, starting on Slide 4. In spite of the challenging environment, third quarter consolidated revenues grew both sequentially and year-over-year. Similarly, last quarter, top-line results were mixed. All of our strategic areas continue to post good growth, particularly wireless data and files, but we continue to see weakness in the business markets, primarily in volume-driven voice products.

Let's move to the segments next, starting with Wireless on Slide 5. Our Wireless business turned in another quarter of solid revenue growth, industry-leading profitability, and exceptionally strong cash generation. Total operating revenues for the quarter were $15.8 billion, up 24.4% from a year ago. On a pro forma basis, total operating revenue growth was 4.9% while total service revenue was up 6.1% year-over-year.

EBITDA was $6.2 billion in the quarter, up 9.2% from last year on a pro forma basis. And our EBITDA margin on service revenue remained very strong at 46.1%. Wireless capital spending was $1.8 billion in the third quarter, bringing us to a year-to-date total of $5.1 billion. EBITDA less capex was $13.3 billion year-to-date, which is very strong cash flow performance.

The integration of Alltel is going according to plan. Our store rebranding efforts across the country are complete. Network conversions are well underway and on track. Essentially all of the former post-paid Alltel customers have been converted to our billing system, and prepaid customers will be completely converted by the end of November.

So another quarter of disciplined performance by our Wireless business as we continue to effectively balance both growth and profitability.

Let's take a closer look now at the Wireless retail market on Slide 6. Retail continues to be our primary focus and represents the largest portion of our Wireless business. 97% of our 89.0 million customer base is retail. 81.0 million, or 91%, are retail, post-paid subscribers.

In terms of customer growth, we continue to take a strong share of overall gross adds and maintain excellent churn metrics. Gross adds were 5.2 million in the quarter, total net adds were 1.2 million with 970,000 retail additions, 943,000 of which were retail post-paid.

Net adds from resellers totaled 270,000 in the quarter, including one-time customer conversions from some of our reseller partners. An example would be Great Call, which announced in August that its Jitterbug cell phone would utilize the Verizon Wireless network through our open-development program.

I would also note that we have no arrangements with resellers that provide for unlimited usage for a fixed price. My key point here is that we look for opportunities to capture share in both the retail and reseller markets on a profitable basis. But as I said earlier, our primary focus continues to be on the retail, post-paid market.

Moving to our churn metrics, retail post-paid churn of 1.13% was up 5 basis points year-over-year and total churn was up 6 basis points, which are improvements over the past several quarterly comparisons. We continue to attribute these upticks primarily to cyclical factors that have driven business customers-related disconnects of PC cards and voice lines.

Retail service revenue in the third quarter grew 6.4% year-over-year. Retail post-paid ARPU of $52.78 was stable with 0.2% growth compared with the third quarter of last year. We did see some year-over-year declines this quarter in air time usage in prepaid and reseller, which resulted in a 0.5% decline in retail service ARPU and a 0.8% decline in total service ARPU.

We still believe that strong data growth will continue to offset pressures on the voice side, particularly on a retail, post-paid base. The continued introduction of new smartphone devices and increased adoption of mobile broadband should drive retail, post-paid ARPU and overall revenue growth.

Total data revenues, as highlighted on Slide 7, topped the $4.0 billion mark this quarter, up more than $900.0 million, or nearly 29% growth. Growth in wireless data has been nothing short of remarkable. Think about this: in 2006 data revenues for the year totaled $4.0 billion. Now, less than three years later, we are generating $4.0 billion per quarter, and we are planning for continued growth, driven by increasing mobile broadband adoption in innovative new applications. Total data ARPU was up 20.7% and retail data ARPU was slightly higher, with 21.6% growth.

Data revenues represented just over 30% of total service revenues this quarter compared with 25% a year ago.

Non-messaging services, which make up about 60% of total data revenue, increased 34% compared with third quarter last year. Clearly, more and more customers are taking advantage of data products and applications that leverage our extensive 3G data network capabilities. Messaging, which makes up the remaining 40% of data revenue, grew 22% versus the same quarter last year.

PDAs and smartphone sales remained strong, once again representing about 40% of new device sales this quarter. The percentage of retail post-paid customers with these devices nearly doubled in the past year and now represent 23% of our base.

And there is certainly upside to further penetration as we introduce more of these high-end devices, which generally require data plants. In addition, continued growth in mobile broadband devices, including new products like netbooks and MiFi devices, are also helping to expand the wireless data market.

We also recently expanded our data pricing plans to include two new lower-cost usage-based options for customers with feature phones who may not necessarily want to pay for unlimited data. We think the new plans will be an attractive for moderate data users and will stimulate demand and expand the market.

So looking ahead in the wireless market, we see plenty of revenue growth opportunities, driven, of course, by mobile broadband. We see several catalysts for the next phases of growth, including innovative devices, applications and content, and the much higher bandwidth and capacity of 4G technology.

In the near term, we are very excited about our new device lineup, which we think will create demand and stimulate further broadband data usage. We also see exciting development in terms of applications and content, including the launch of our Vcast application store soon.

Our recent announcement with Google, which leverages our network and the Android open platform, gives us a great opportunity to innovate and accelerate delivery of unique applications to customers.

The 4G technology evolution with LTE is a huge growth opportunity for us and one that we believe we are uniquely positioned to capitalize on. We have the largest and most reliable 3G network today and we will extend our leadership position with our 4G network. We are on schedule for commercial introduction LTE next year with 25 to 30 markets, covering approximately 100.0 million POPs [points of presence] by year end.

We expect to have nation-wide 4G coverage with LTE, featuring our contiguous, coast-to-coast 700 Mega Hertz spectrum with its unmatched capabilities for speed and network efficiency by the end of 2013.

Let's move now to our Wireline segment on Slide 9. In the Wireline business, bios continue to gain scale and broadband and video drive growth and consumer revenue. As I mentioned earlier, business revenues have been adversely affected by the economy but we are competing well and we had several large customers wins in the enterprise market in the last few months.

From a profitability perspective, Wireline margins continue to be pressured by both cyclical and secular effects, as well as incremental pension and OPEB costs. EBITDA declined $69.0 million sequentially, resulting in an EBITDA margin of 23.7% this quarter. We expect margins will improve over time through a combination of better revenue performance, an improving economy, ongoing workforce reductions, and other cost-saving initiatives.

Earlier this month we announced a reorganization of our Wireline segment. We believe combining our telecom and business groups into one will enhance our effectiveness, and more significantly, reduce our costs. I will provide more details on our Wireline transformation and cost initiatives in a few minutes, but before I get to that, let's take a closer look at Wireline revenues, starting with mass markets.

In mass markets, demand for our broadband and video products continues to drive revenue and ARPU growth. Consumer revenues in the third quarter grew 1.2% over last year, quarterly FiOS revenues totaled more than $1.4 billion, up 56% compared with the third quarter last year. Consumer ARPU also increased to just over $75.00 this quarter, up 12.6% from a year ago. And FiOS ARPU remains very strong, at more than $137.00 per month.

Let's take a closer look at our FiOS results on Slide 11. On a year-to-date basis, we have added about 18% more FiOS TV and Internet customers than last year. This growth comes from both new markets and deeper penetration in existing markets. In the third quarter we added 191,000 FiOS TV and 198,000 FiOS Internet customers, increasing our penetration to 25% for TV and 29% for Internet.

Although net adds were less than the record adds of the last two quarters, FiOS continues to have good momentum in the market. Churn remained low in the quarter, gross sales were lower, primarily due to a change in promotional activity.

Overall, we are on track from a deployment standpoint, with about 45% of our premises passed. FiOS Triple-Play availability has expanded to 10.9 million homes, or about 34% of total households. And last week we announced new Quad-Play and Triple-Play bundles in several East Coast markets, so we continue to believe we can add about 1.0 million new FiOS customers each year.

Let's turn next to the rest of our Wireline revenues, which include a global enterprise and global wholesale. In our global markets I see mixed results and a continuation of some trends that have been affecting both the retail and wholesale markets. On a positive side, we generated sequential growth of 2.5% in global enterprise revenues in the third quarter, primarily driven by continued demand for IP services. We also had a smaller impact from foreign exchange effects in the quarter. However, the cumulative effect of unemployment continues to impact usage volumes. We are also not seeing any significant change in capital or IT spending by our large customers.

The primary leading indicator for sustained improvement in the business market will be a return to hiring on the part of our enterprise customers. We did see a pickup in CPE sales from our existing customers this quarter but not enough for me to get too optimistic. While certain volumetrics have shown some stabilization, I am still not seeing meaningful improvement. For example, enterprise business long distance voice minutes were down 4.5% year-over-year but were stable on a sequential basis.

So while I'm certainly not comfortable calling a bottom, I would say that I am cautiously optimistic. As I said a few minutes ago, we had several very good wins this quarter, including Jet Blue, Manulife Financial, and several government contracts. Some of these wins included integrated IT and communication solutions as well as security and consulting services. Enterprise customers are increasingly interested in managed and professional services capabilities and I believe we are well positioned in these areas.

One last area I would like to discuss is the evolving Wireline business model. Specifically I am referring to the continuing transformation of our network, products and services, customer interfaces, capital programs, workforce, and cost structure.

I think you are well aware of the strategic divestitures and investments we have made to accelerate growth in the consumer broadband and video market and in the global enterprise market. And you also know that these transformative moves have changed our revenue mix and driven improvement in top-line performance. But there is more to do. The investments in broadband video and global IP will also help us transform the cost structure of our business.

For example, the FiOS platform creates an enormous opportunity for consumers to purchase innovative products and services which will drive revenue growth. But it also enables us to develop a business model with a different lower cost structure, with less reliance on a traditional copper network infrastructure.

The changes we recently made in our wireline organization are to simplify the business and accelerate getting bottom-line performance. We believe this is the right time to do this and we are in the process of aligning our cost structure to improve productivity.

From a headcount prospective, as the businesses change, we have been shifting forth to the growth areas and steadily reducing our overall workforce, but we need to do more and at an accelerated pace. Our goal in the second half of 2009 is to downsize by more than 8,000 in workforce and contractors. We reduced Wireline headcount by 4,000 in the third quarter and we are on track to downsize by at least that amount in the fourth quarter. Total headcount was down 5,000 from the end of last quarter.

Along with these force reductions, we are also looking at a comprehensive redesign of our entire call center infrastructure, including the reducing of the number of call centers and improving our utilization and efficiency metrics, and we have a Wireline network convergence initiative underway that will result in operating efficiency improvements.

Throughout the year we have been very focused on improving our capital efficiency and operating with a great deal of financial discipline. Wireline capital spending is down by $704.0 million, or 9.6% year-to-date, and should continue to run below last year's levels.

I mentioned earlier how tightly we were managing these costs and we will continue to do so. I am expecting that we will substantially complete our FiOS build program by the end of 2010, which alone should result in about $2.0 billion of capital savings each year. Obviously this will significantly reduce our capital requirements beginning in 2011, thus improving free cash flow and investment returns.

I am confident that the steps we will be taking will simplify our organization, improve our ability to capitalize on new areas of growth, and achieve improved levels of productivity.

So to quickly sum up, we turned in another quarter of solid growth in all our strategic areas. Our cash flow growth remains strong and our balance sheet is healthy and will continue to improve over the next few years as we reduce wireless debt. We have industry-leading margins in our Wireless business, with tremendous growth opportunities ahead in mobile broadband. As I just discussed, we will continue transforming the Wireline business.

On the strategic front, our Alltel integration continues to go very well and our access line divestitures are on track.

And with that, I would like to turn it back to Ron.

Ron Lataille

Ivan and John are now available to take questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Hodulik - UBS.

John Hodulik - UBS

Could you talk a little about the wireless market in terms of the competitive pressure you're seeing? We saw some new pricing out from T-Mobile today and correspondingly, I think both Verizon and AT&T saw lower minutes of use, so if you could talk a little bit, maybe separate the data side from the voice side and what you see going forward.

And then, Ivan, while we have you, could you just update us on where we are in terms of the access line spin, if you are seeing any potential slowdown from a regulatory standpoint in light of what we saw from FairPoint?

John F. Killian

I will start on the wireless side. You know, we were pleased with our quarter. When you look at net adds, 1.2 million in total, 970,000 on the retail side, we thought it was a very good performance in the third quarter. We are very excited about the opportunity ahead of us in the fourth quarter. Many of you have seen the advertising that we've had out for the launch of the Droid.

We announced, really today, that the Storm 2 will be available starting Wednesday. I happen to be using the Storm 2 and it's a great enhancement from where we were before. The Droid device, a number of our wireless team and Chingon are using it in pre-launch and really think it's going to be ground-breaking and have a lot of opportunity.

We continue to see very good growth on data ARPU. Obviously we are watching all of the pricing changes. The T-Mobile changes just came out overnight. They look to be on the conservative side of what all the rumors were, in terms of what was going to happen with that pricing. We really don't see it breaking new ground, don't see, in our mind, a need to respond to that.

I think the other point here I would make is our network, we believe, continues to differentiate ourselves and puts us in a very good position.

Ivan G. Seidenberg

And on the access line spins, the regulatory proceedings are moving along. There are three or four jurisdictions that are getting closer to decisions. Frontier has done a very good job at differentiating why this transaction is different than any of their previous transactions, so we are still confident that this will get closed on time.


Your next question comes from Simon Flannery - Morgan Stanley.

Simon Flannery - Morgan Stanley

You talked in your comments about the LTE roll out. Can you help us think about the capital spend and the potential dilution from that? What are we seeing in terms of your spending in the second half of this year and next year? Are you able to pretty much incorporate this into a sort of run rate capex and run rate margins or is there likely to be some additional pressure from that?

John F. Killian

From a capex perspective, we put guidance out back in September for the full year of 2009 of a range of $17.4 billion to $17.8 billion. I am sure you have already done the math and in order to hit the low end of that, we would have to spend about $5.0 billion of capex in the fourth quarter. We have been spending something like $4.3 billion, around that, per quarter, in that range.

So at worst case, we're going to be on the very low end of the $17.4 billion to $17.8 billion. I actually think we'll do better than that and run below that for the full year.

The LTE roll out, we are spending some capital on LTE in 2009. As you know, we're in trial mode right now. I do not see that being incremental. I see our ability to absorb that within run rates of existing capital. We have, as you look ahead to 2010, in 2009 we had more spending on Alltel integration capital. We won't have much of that in 2010 so I don't think you're really going to see any blip whatsoever from the LTE program.


Your next question comes from Michael Rollins – Citi Investment.

Michael Rollins – Citi Investment Research

Just a follow-up on some of your comments on the enterprise side of the business, and wholesale as well. Enterprise and wholesale showed upticks sequentially. Should we be surprised by that in the context of the comments that you made about still the business condition as being on the software side. And as you look at the competitive landscape, are you seeing more pricing pressure or is the pressures on revenue in the year-over-year basis more a volume issue?

John F. Killian

We are very pleased with where our enterprise business is. We've been saying that repeatedly over the last couple of quarters. We've had great success in the marketplace with customer relationships. We've won several new deals. We really have had virtually no defections, so the business is performing extremely well. We were pleased with the sequential growth in revenue that was up 2.5%. We are showing improvements there. I think a lot of that is driven by the success we've had with various wins in the marketplace.

We're seeing CIOs start to be a little bit more willing to spend on new capital, new initiatives. We still see a slight drag from employment, that we think once employment really comes back in a bigger way, we will do extremely well in the enterprise space and we are very well positioned.

Our sales funnels are very strong. The sales force, I still have personally a lot of discussions with the sales team, visit customers with them from time to time. I think we have a lot of opportunities globally in front of us, not just domestically in the U.S.

Another point we made was we saw basically no sequential decline in LD minutes going over the network. So sequentially we saw some stabilization there. Year-on-year we were down but from that perspective. You know, pricing is about where it is. We haven't seen much of a drop on the pricing side. We've seen more stability. That's what we would expect as we go through and enter 2010.


Your next question comes from David Barden - BAS-ML.

David Barden - BAS-ML

A couple on wireless if I could. John, with respect to the Alltel transaction and the synergies we were targeting for run rate by the end of this year and into next, could you update us with respect to your thinking on balancing how you are deploying that margin competitively in the market from a handset perspective, and should we be seeing now, even though it's a seasonally tougher market quarter, should we be looking for rising margins again in wireless as a function of that.

And if I could, on wireline, go back to comments you made a few weeks ago about wireline. You were more conservative on wireline margins coming into the third quarter, looking for growth into fourth quarter and 2010. I'm wondering if, based on your plans, you can reiterate or clarify those expectations for wireline margin.

John F. Killian

A lot there in the question so let me see if I hit the items. When you take Alltel, to begin with, we are very pleased with the Alltel transaction. We are well ahead in terms of integration. We have converted all of the four area billing systems onto Verizon. Our team has done a terrific job with rebranding, capturing the roaming synergies. We said for the full year we would have $500.0 million to $600.0 million of expense synergies. We are very confident with that and think we will have a nice contribution in 2010.

From a margin perspective, we've have three quarters in a row of 46%. We have always said we're very focused on balancing both growth and profitability and we continue to be focused there. The synergies, there are a number of moving parts in the wireless business beyond just the synergy in equipment subsidies or cost of acquisition. If you actually look at equipment subsidies, they were down, on a per unit basis, in the third quarter from the second quarter.

Our operating team, at times, wanted to be a little more aggressive in the quarter. We intentionally held them back, recognizing that we had more of our product launches coming in the fourth quarter and we're very excited about the product launches we have coming along.

So we are very confident in the wireless business continuing to grow, continuing to deliver the industry-leading profitability that it has been delivering, continuing to grow cash flow, because cash flow is extremely strong in that business.

Now on the wireline side, we are very confident that we have all of the right initiatives in place to improve margin over time. We are focused on the FiOS side, we are pleased with FiOS development, focused on continuing to drive penetration and we continue to look at all kinds of revenue opportunities in that business. We think FiOS will continue to expand opportunities to enhance revenue.

From a cost standpoint, there isn't a line of costs that we're not focused on. As you know, we had said we would reduce the workforce, including contractors, by at least 8,000 in the second half of the year. Total business, we reduced 5,000 this quarter; the wireline side, we reduced 4,000. We are well on track for the cost-reduction efforts we have. All other areas of both SG&A—real estate, procurement, cost centers—we have plans in all of those areas to continue to take costs out of the equation.

We are also watching our capital spend in that business. We think we will get some help ultimately as the economy comes back, in the enterprise and wholesale space. So we think we've got all the right initiatives to drive that margin improvement over time.


Your next question comes from Phil Cusick - Macquarie Research Equities.

Phil Cusick - Macquarie Research Equities

Can we talk about your device strategy a little bit? You're integrated devices are ramping up really quickly. Where do you expect that to be as a portion of the mix next year?

And then how do you plan to focus? Do you want to focus on, really, the differentiated devices here but you've got Palm Pre and we believe Pixie coming fairly soon. Are you just going to have a wide range and then focus on a couple that are very differentiated?

And finally, within that, also, the sort of Android App Store, Palm App Store, versus your own application suite, how do you think about that these days? Does it even matter anymore?

John F. Killian

From a device perspective here, we have always said that we were going to have a wide array of product offerings in our lineup. We have continued to do that. We rolled out, in July, the BlackBerry Tour. That has done extremely well for us; we believe it will continue to do well. Storm 2 being launched this week. I mentioned on the front end here, we're working very closely on Android-based devices.

And I want to make the distinction that the Droid will have very different capabilities. Yes, it uses the Android open platform but the design of the set by Motorola, the browsing capability, the speed, we believe will really set those apart.

We will be introducing the Palm early next year but our focus right now is maximizing the devices that we're launching in the fourth quarter right now.

From an applications perspective, we will be launching the Vcast applications store later this year. We are working with over 1,000 developers on that right now. We had our open development conference. So we see a huge opportunity to generate additional data revenue, additional subscribers, from the applications work that we're doing. So we think we're in a very well, good position.

Ivan wants to add a comment.

Ivan G. Seidenberg

Just to add sort of a strategic framework for this, the other way that we would ask our investors to think about this is when you deploy 4G that really pushes you to think about a broad array of devices as opposed to just the specific smart devices that we see out there now. The ones that are out now are terrific, they're getting better. So when you look at 4G and then you look at machine-to-machine, data revenue opportunity will come in so many different places that we would want to make sure that our strategy has the breadth to capture a lot of things and not to focus just on any one or two or three devices.

So our view is to lay the groundwork for a very broad array of data growth, which leads, obviously, to the combination of integrated applications, video, and also to sophisticated data applications.


Your next question comes from Chris King - Stifel Nicolaus.

Chris King - Stifel Nicolaus

Two quick questions. First of all, with respect to LTE, just to follow-up on your last comment there, was wondering if there was any change, really, in the LTE handset development time line that you were looking at from your various vendors? In other words, are you guys still planning on essentially doing broadband laptop cards and the like next year over the 100.0 million POPs or so that you would plan to have done by year end?

And secondly, it may be a little too early for this, but just wanted to see if you had an initial take on pension and OPEB costs going into 2010 and how we should begin to think about that from an earnings standpoint?

John F. Killian

On LTE, in terms of devices, really no change from what we were thinking before. The initial roll out will be with laptop air cards, broadband access applications. I think we do believe as LTE begins to get more and more excitement, which we think it is and you see more and more carriers start talking about it, even on the handset side, people will start looking to move more aggressively. But that is our initial plan there.

On pension and OPEB, it's too early to give you any kind of indication for 2010. Obviously the factors that will drive this is what's the ROA this year on our assets. We're performing well, as you would expect, through the end of September and October looks like it's going to be a pretty good month so we think that will probably be good. Discount rate will be another factor. We will have to see where that is as we end at year end.

Our employee levels are changing and that will also be an impact here but we're not ready to provide any guidance on 2010.


Your next question comes from Tim Horan – Oppenheimer & Co.

Tim Horan – Oppenheimer & Co.

Ivan, while we have you, maybe a couple of strategic questions. Can you maybe talk about where we think the initiatives going with wireline/wireless integration? Is it more important to enterprise versus consumer?

And I guess related to that, the second part of that is how important is having this capability on a global basis? It seems like you were emphasizing it a little bit more in the press release.

And then third, maybe you can't comment on it too much, but on the iPhone, could you talk about if you would like to get the iPhone or not and maybe why Apple wouldn't build a cd-made version of the iPhone for the U.S.

Ivan G. Seidenberg

I think the way we think about what you call wireline integration is we have a chance of developing combinations of applications around the services, so rather than just a bundling of the products—as you know, we've just introduced a quad-play—we have other forms of products that we have in the pipeline where you would be able to use your handsets from wireless to do different things on your fixed-line network.

So our view of this integrations is very important and I think it's important because it adds a marginal expansion of revenue growth in places where we can develop these kind of cross-integration products.

And I think globally the reason we emphasize that is that we feel we have a really strong BlackBerry lineup and we have a lot of new devices coming out. We have lots of great capabilities in our global IP network, and as John said earlier, we feel we're well positioned in our enterprise space.

So I think you will see us, from a global standpoint, focus mostly our efforts there on the business market. We're doing that.

Now in terms of the iPhone, there's nothing really different about this. I think Lowell would remind us all that this is a decision that's exclusively in Apple's court. We obviously would be interested at any point in the future they thought it would make sense for them to have us as a partner. And so we will leave it with them on that score.

I have no further thoughts about why they may have done whatever they did. What they've done has been successful so we have to sit back and give them credit for that. But in the future, what we've done is what John said earlier, we've expanded our BlackBerry base, we've expanded our base of other devices. We now have the Droid coming out. We have an updated Storm coming out. We have application stores coming out. So I think our view is to broaden the base of choice for customers and hopefully along the way Apple, as well as others, will decide to jump on the bandwagon.


Your next question comes from Jason Armstrong - Goldman Sachs.

Jason Armstrong - Goldman Sachs

Couple of questions, but maybe first back to just the wireline margin compression we've seen. Just maybe more of a hindsight-type of question. If you think about the different segments—enterprise, wholesale, and consumer—which segment would you say you are experiencing sort of disproportionately higher margin pressure to this point?

And then, quickly, on FiOS symmetrics, you took up pricing in the quarter, you pulled off some other promotional activity, which had an unexpected hit to the net add trajectory, to some extent. As we look forward, is this a new run rate of net add growth that we should think about if you look to balance growth with the return profile?

John F. Killian

If you look at the margin compression, enterprise has held up fairly well. We've had the revenue declines but on a relative basis we knew that was coming, we were able to take costs out fairly early in the process, so enterprise has held up relatively well.

Consumer, we've had a little bit more pressure. Now, that was expected, as you're in the middle of the FiOS roll out, you're being aggressive in terms of customer acquisition. You have some of the secular change going on, you experience a little bit more pressure on that side.

From a wireless run rate, we indicated that we thought we had the ability to continue to grow at about 1.0 million post-paid net adds per quarter, a million net adds, and we performed well in the third quarter. We are not about to say we're going to limit the possibility of growth. We think we have a great lineup in the fourth quarter, a great lineup as we enter 2010, with LTE coming. We think there are substantial growth opportunities ahead of us.

I mentioned earlier, we kind of kept our powder a little bit dry. We actually spent less advertising dollars in the third quarter than we had in the second quarter. Part of that was we knew that the new device lineup was coming in the fourth quarter.

So we are still very optimistic and bullish about the ability to grow the wireless business.

Jason Armstrong - Goldman Sachs

Thanks. On the second part of the question, it was actually more on FiOS metrics, on the wireline side, where you had took up pricing and then pulled off some of the promotions. Just wondering if we sort of reset to a new net add profile on that side of the business.

Ivan G. Seidenberg

I think I would like to answer that from an operating standpoint and then if John wants to clarify further—I don't think we intend to reset. What happened is that in the very beginning of the year we had targeted about a million plus and we had a couple of good quarters in a row and so we try to see how much we can continue to super charge that. As it turns out, we had a couple of promotions that worked, didn't work as well, so I don't think it's a question of are we resetting it, we've never changed our view of the million. What happened is we had a couple of better quarters and we toyed with how we could sustain that and found that it was difficult in light of maintaining a fiscal discipline against it. So the issue is we've never changed off the million plus.

Ron Lataille

That concludes our questions session. What I'd like to do now is hand it over to Ivan for some concluding remarks.

Ivan G. Seidenberg

Just a couple of quick points. I think the third quarter for us was a good balancing quarter for us to get line of sight on what we feel we need to do for the rest of this year and as we prepare ourselves for 2010. What we found is that we focused a great deal on balancing our growth against our margin performance and our net income performance and as we go forward we have better of line of sight now, in terms of what we feel that we need to do to accelerate data growth and wireless through handset deployment, applications deployment, and focus on the fundamentals in that business, to improve our net add performance as we go into next year.

In the wireline business our view there is, as John said, we have good line of sight in where we think enterprise is and what we need to do in consumer is maintain the focus on revenue growth as it relates to FiOS and data and to balance the net add costs but at the same time pick up the pace on our efficiency initiatives, which we have a lot in place and you're seeing the benefits of some of that begin to take hold in the third and fourth quarter of this year.

So looking out into 2010, I think our company feels that we have good line of sight in terms of what we need to do to do a better job next year than we've done this year.

Ron Lataille

That concludes our call today and I thank everybody for joining us.


This concludes today’s conference call.

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