Verizon Profitability Surges as Bills Rise on IPhone

Verizon Communications Inc., the second-largest U.S. phone company, reported an increase in profitability at its wireless unit that topped analyst estimates as sales of Apple Inc.’s iPhone boosted customers’ bills.

The profit margin in the Verizon Wireless business, based on earnings before interest, taxes, depreciation and amortization, rose to 50 percent in the third-quarter from 49 percent in the previous quarter, the New York-based company said today in a statement. The average estimate of eight analysts compiled by Bloomberg was for 48.4 percent.

Verizon Wireless, 45 percent owned by Vodafone Group Plc (VOD), added 1.54 million net contract customers in the quarter, beating the 901,000 estimate by analysts. More smartphone users watching videos or streaming music meant bigger phone bills and a 6.5 percent rise in the price for the average monthly contract account to $145.42. The wireless gain helped offset slumping sales to business customers.

“‘This is a stellar set of Verizon Wireless results,’’ said Oriel Securities Ltd. analyst John Karidis. ‘‘I would expect Vodafone to do better because of that.’’

Vodafone, the second-biggest mobile-phone company, rose as much as 2 percent in London trading and was up 1.3 percent as of 11:59 a.m. Verizon yesterday rose 1.5 percent to $44.72 in New York. The shares have climbed 11 percent this year.

IPhone Boost

Verizon’s third-quarter per-share earnings excluding some items were 64 cents, compared with 56 cents a year earlier. Net income attributable to Verizon rose 16 percent to $1.59 billion. Third-quarter sales climbed 3.9 percent to $29 billion. Profit and sales were in line with analysts estimates.

Last month, Apple released the iPhone 5. The company sold 5 million of the smartphones during its debut weekend, though sales have been held back by supply constraints. Verizon Wireless sold 6.8 million smartphones in the third quarter, boosting the proportion of retail contract phone connections to 53 percent from 39 percent a year earlier.

‘‘They really jacked up their advertising in the past few months,’’ said Colby Synesael, an analyst at Cowen & Co. in New York. ‘‘Verizon has been very aggressive with marketing and it helped with sales.’’

Wireless Users

Since the June introduction of the Share Everything plan that allows users to share one data allocation with as many as 10 devices, Verizon has been trying to capitalize on heavier data users. As part of the switch, Verizon has started reporting average revenue per account instead of average revenue per user, or ARPU.

Verizon Wireless also began to extract more money from renewing customers. Starting April 22, it imposed a $30 upgrade fee on all customers buying new smartphones. AT&T Inc. (T), its biggest rival, charges $36 for upgrades, and Sprint Nextel Corp. (S) has an $18 fee plus an additional $10 monthly smartphone charge.

Total revenue for the land-line business in the third quarter was $9.9 billion, down 2.3 percent from a year ago.

Capital spending in the first nine months was $11.3 billion, compared with $12.5 billion in the year-earlier period. Chief Financial Officer Fran Shammo last month told investors that total capital spending this year will be ‘‘slightly down’ from the $16.2 billion level in 2011.

Verizon Chief Executive Officer Lowell McAdam said today the company remains on track to meet its full-year financial targets.

Pension Obligations

Verizon yesterday said it’s transferring about $7.5 billion in pension obligations, or one-fourth of the total, to Prudential Financial Inc. in a drive to remove risk from its balance sheet. Prudential, the second-largest U.S. life insurer, will take on responsibility for making future annuity payments to certain management retirees of the phone company.

Verizon is using the agreement to lower risks related to pensions while improving its financial profile. It follows General Motors Co. in paying Prudential to assume the risk that market returns are inadequate or that beneficiaries live longer than expected. Transferring obligations can reduce swings in earnings tied to securities and relieve companies of the need to manage large pools of money.

(Source: Bloomberg)