Verizon's profits hit by smartphone subsidies

Smartphone subsidies hit Verizon's fourth quarter earnings, which fell to 45 cents per share, missing Wall Street forecasts. It is usually the iPhone-reliant AT&T which complains most loudly about the profit squeeze from subsidies, a factor that is driving cellcos such as T-Mobile USA and others round the world to seek other ways to attract high value users. But this time Verizon was feeling the pinch too, partly because the expensive iPhone is an increasingly important part of its own smartphone base.

In Q412, there was an accelerated shift towards smartphones in Verizon Wireless's footprint. The mobile joint venture with Vodafone added a record net figure of 2.1m contract subscribers, with 87% signing up for smartphones. The operator sold 6.2m iPhones in the period, half of them the LTE model, and it activated 7.3m LTE devices. At the end of the year, smartphones accounted for 58% of the total postpaid base of 98.2m subscribers.

These devices drive greater data usage and more expensive tariffs, and operators make their money back over the life of the lock-in - but with a top end model, sometimes not until well into year two. In the short term, rising numbers of high end handsets puts pressure on profits, a factor which figured in a warning to investors, made earlier this month.

So it came as little surprise that Verizon's margins fell in the quarter. Wireless operating income margin was 24%, down from 31.8% in the third quarter of 2012, while wireless EBITDA margin was 41.4%, down from 42.2% a year earlier and 50% in Q312. Verizon expects the latter figure to rebound rapidly and to be close to 50% for the full year.

"It's a big upfront cost on smartphones and a short term hit," Avi Greengart, an analyst with Current Analysis, told Bloomberg. "They have to offer enormously expensive phones at affordable prices to move customers onto higher priced plans." Some carriers, such as TMo and Spain's Telefonica, are experimenting with offering alternative incentives such as financing plans or cheaper data deals, to reduce the impact of subsidies.

However, there are upsides to smartphone growth of course, notably in postpaid revenues. The carrier no longer reports ARPU, but instead measures average revenue per account (ARPA) because of the importance of its shared data plans. Postpaid ARPA rose by 6.6% year-on-year thanks to rising data usage, reaching $146.80, though even this figure was just below analyst expectations. Total wireless revenues were $20bn for the quarter, up 9.5% year-on-year, and offsetting a 1.5% sales decline (to $10bn) on the wireline side.

Overall, Q412 sales rose by 5.7% to $30bn for the group, which posted a net loss of $1.9bn, largely because of a pre-tax charge of $7.19bn related to severance and benefit expenses and pension liabilities. The impact of Hurricane Sandy was also cited. A year earlier, Verizon made a loss of $212m. For the full year, Verizon's revenues totalled $115.8bn, up 4.5%.

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