Will Verizon Lose its Wireless Customers Forever?

Verizon VZ was down in pre-market trading Tuesday before its earnings announcement as investors expected earnings of 53 cents per share. The stock fell further before the bell to lose over 2% after it reported a quarterly loss of 71 cents per share, or $2.02 billion, despite beating analyst expectations in the previous quarter and enjoying a profit of $4.65 billion, or 93 cents per share, a year ago. Despite the loss, Verizon's revenue grew again to a new record: $28.44 billion, up 7.7% on the same figure a year ago. That helps the telecom giant's yearly revenues to top the $100 billion mark again for the full year, with annual revenues for 2011 at $110.9 billion. The growth in revenue isn't too surprising, exceeding analyst estimates of $28.39 billion. The sources of revenue growth didn't surprise investors either, as the company announced 201,000 new FIOS internet connections and 194,000 new FIOS Video contracts, which help to expand the company's already considerable market share. The new contracts are worth a closer look at investors, because they are a market jump from Q3 2011 figures, when the company signed up 98,000 new broadband connections. This means that more consumers are choosing Verizon for broadband solutions over their competitors. This is one reason why Verizon's fall in price in early hour trading may make it a great bargain. Verizon's market share in the high-speed broadband market will no doubt increase for two reasons. Firstly, it has the largest fiber-optic network in the country and it has been investing in expanding that network to new areas. There are a lot of areas that still do not have Verizon FIOS service; even parts of Manhattan remain uncovered. This means Verizon is nowhere near market saturation, although investors should consider when it will pick up all the low-hanging fruit and begin to see a diminishing return on its infrastructure investments. That hasn't happened yet. The company's operating income margin on FIOS and wireline services increased slightly from 23.5% to 23.8% on a quarter-to-quarter basis. The company's margin increased over 2% from 2010's fourth quarter figure of 21.4%. While margin growth on a quarterly basis did slow slightly throughout 2011, it is still growing for this arm of the company. Wireless services did not fare so well, with 490,000 wholesale subscriptions lost. This figure may worry investors the most. With the advent of the iPhone and Google GOOG Android ecosystem, cellular services have become a necessity for a growing number of Americans who now compute on-the-go thanks to 3G and 4G data networks. Wireless computing on mobile devices has become a part of American culture, as the New Yorker famously lampooned on the cover of its 2009 Halloween issue (pictured). With the growth of 4G retailers such as Clearwire CLWR, broad wireless internet penetration is becoming a significant driver in the technology world. While Verizon has always been expected to keep up--JPMorgan JPM was expecting 367,000 wholesale wireless additions in the last quarter--the loss puts that in doubt. Not all is bad on the wireless front, as total net wireless connections added was 969,000, thanks mostly to a 50% growth in new net retail subscriptions. However, the wholesale loss means a 27% drop in total new connections. While the company's wireless market share is threatened, average revenue per user (ARPU) for the company's wireless arm fell slightly from $53.21 to $53.14. While it is a small drop, investors may worry that wireless becomes less lucrative for the company. The drop in ARPU for wireless services will put a bit of attention on the company's biggest competitors, as AT&T T, Sprint S, U.S. Cellular USM, and MetroPCS PCS, many of whom have smaller operating margins than Verizon and are trying to compete with Verizon on cost of services. Sprint's negative margin has made it a speculative bet for a long time, while AT&T's margin fell in 2011 from 15.61% in 2010 to 11.71% in Q3 2011. The increasingly competitive market has made the telecom companies tighten their belts, but Verizon seemed to be immune as its large market presence fueled greater expansion. Investors might begin to question that now. In the short term, we shouldn't expect Verizon's stock to fall too low, as its dividend yield has made it an attractive bet for income-seeking investors, and its enormous market presence makes it one of the safer bets in the technology world. Only AT&T has a higher dividend yield at about 5.85% (compared to Verizon's 5.21%), suggesting that there is marginal room for Verizon to decline as investors seeking a cheap, reliable dividend play will always drive it back up. In the long term, the market may forgive Verizon's results since they are largely due to one-time costs. A pension-plan revaluation cost the company $3.4 billion in a one-time cost, and higher subsidies on iPhone sales hurt the company's bottom line in the short term, but the rising sales should also translate to higher revenues in the long term as it means more contracted users. It should also help Apple AAPL, which was down nearly a percent as investors await that company's own quarterly results.