Updated April 18, 2013, 1:03 p.m. ET
Verizon's Profit Rises 16% as Margins Improve

By THOMAS GRYTA
Verizon Communications Inc.'s VZ +2.77%first-quarter profit rose 16% as its wireless business continued to add customers and reached its highest profitability ever.
The carrier has been outperforming its rivals in recent years in grabbing market share, retaining customers, all the while squeezing more profits out of its business as demonstrated by its highest-ever wireless-service margins reported Thursday.
The wireless operation, a joint venture with Vodafone Group VOD.LN +1.72%PLC, added 677,000 contract customers, the lowest in a year but still notable compared with the 1.4 million AT&T Inc. T -0.11%added for all of 2012. The smaller players, Sprint Nextel Corp. S +1.41%and Deutsche Telekom AG's DTE.XE +0.71%T-Mobile USA lost a total of about 3.2 million contract customers last year while Verizon Wireless gained more than five million.
"Verizon continues to be the one clear winner in the U.S. telecom services industry," Christopher King, an analyst with Stifel Nicolaus, said in a note to clients. He estimates that Verizon's stock is fully valued, but he sees the company's operational performance continuing. Shares of Verizon recently rose 3.5% to $51.27 and are up 26% in the last 12 months.
The recent customer additions likely widened Verizon Wireless' lead over rival AT&T, which reports first-quarter results on Tuesday, and had about 71 million contract customers at the end of December. Verizon Wireless ended March with about 93.2 million contract subscribers.

A flurry of deal-making has broken out as smaller players consolidate to gain the needed scale and capital that has brought success to Verizon Wireless and AT&T.
Meanwhile, speculation also has picked up in recent months about Verizon buying out Vodafone's 45% wireless stake. Chief Financial Officer Fran Shammo reiterated Verizon's interest in such a deal, which could top $100 billion according to analysts, while he asserted that tax concerns for Vodafone could be avoided.
"We are very confident that there is not a large tax consequence for Vodafone to sell their stake in Verizon Wireless, and we believe we have a very efficient tax structure to accomplish that with no tax gain for them," he said. He declined to provide details on that structure.
Verizon's net income rose to $1.95 billion, or 68 cents a share, from $1.69 billion, or 59 cents a share, a year earlier. Revenue jumped 4.2% to $29.42 billion. The per-share results exceeded analyst expectations of 66 cents a share, according to Thomson Reuters, while revenue was just below an estimate of $29.55 billion.
Wireless service margins rose to 50.4%, their highest ever, up from 46.3% a year ago and 41.4% in the fourth quarter. Verizon has targeted wireless margins in 2013 of 49% to 50%, aiming for cost cuts of $2 billion this year with flat capital spending.
Smartphone sales of 7.2 million slowed down from the fourth quarter's 9.8 million, powered by holiday spending and strong sales of Apple Inc.'s AAPL -2.67%(AAPL) iPhone 5.
In the first quarter, Verizon Wireless activated four million iPhones, up from 3.2 million a year ago but down from 6.2 million in the previous quarter. The sequential drop is typical of a quarter following the strong initial demand of a new iPhone launch. About half of the iPhones activated in the quarter were the iPhone 5, the carrier said.
The company said Thursday that it expected wireless customer additions in 2013 to follow a similar pattern as last year, when they rose sequentially each quarter. In the year-ago quarter, Verizon Wireless added 501,000 contract customers and brought in 2.1 million in the fourth quarter.
In a possible sign of its position over smaller players that are fighting to grab customers, or stop them from leaving, Verizon Wireless actually kicked off an increased number of customers in the quarter. The company changed its procedures in order to catch nonpaying subscribers sooner and disconnect them from service. This "nonvoluntary" churn sped up the exit of customers that would have left the carrier later in the year, Mr. Shammo said, and should improve the future churn rate.
Churn, or cancellations, in the quarter was 1.01%, the highest in two years at Verizon Wireless but still low compared the rest of the industry.
Write to Thomas Gryta at thomas.gryta@dowjones.com
　
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