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By Sinead Carew
July 18 (Reuters) - Verizon Communications Inc saidstrength in its wireless business was tempered by weakness inits traditional wireline unit, producing softer-than-expectedrevenue growth for the quarter and sending its shares downnearly 2 percent.
The telecommunications company said on Thursday thatcorporate and government customers were cutting costs, partlyoffsetting better-than-estimated wireless customer growth. Also,wireless profit margins were hurt by higher costs.
While analysts described the results as solid, they notedinvestors would have liked better news since Verizon shares hadrisen more than 17 percent since the end of 2012 in anticipationof strong growth prospects.
"The results were very good but at these valuations evenvery good might not be good enough," said Moffett Researchanalyst Craig Moffett.
Some of Verizon's strong valuation has been due to investorexpectations it would be able to increase its earnings by buyingout Vodafone Group Plc's 45 percent stake in theirVerizon Wireless venture.
But Chief Financial Officer Fran Shammo did not address thematter during his earnings call. "Their silence on the topic ofbuying in the Vodafone stake could be disappointing to someinvestors," Moffett said.
In an interview with Reuters, Shammo declined to comment onthe prospects for a Vodafone deal.
The executive said about 60 percent of its decline inwireline revenue was due to shrinking government spending whilethe rest came from corporate spending cuts. He added that he wasnot expecting any big turnaround for the rest of the year.
While operating revenue rose 4.3 percent at $29.8 billionfrom $28.55 billion, it was shy of estimates of $29.83 billionaccording to Thomson Reuters I/B/E/S.
Its wireless profit margin came to 49.8 percent, based onearnings before interest, taxes, depreciation and amortization,which was below five analyst estimates between 50 percent and50.9 percent.
Evercore analyst Jonathan Schildkraut noted thathigher-than-expected wireless customer departures, known in theindustry as churn, would have increased the company's costs.Verizon reported churn of 0.93 percent, compared with hisexpectations for 0.9 percent.
Verizon may have lost some customers to No. 4 U.S. wirelessprovider T-Mobile US Inc, according to Moffett.T-Mobile US is pushing hard to stem customer net losses byaggressive cost-cutting and marketing.
NOT A 'BLOW-DOWN-THE DOORS' QUARTER
Analysts said ahead of the earnings report that they expectVerizon, the first of the U.S. telecommunications companies toreport second-quarter results, to take the lion's share ofmobile customer growth in the quarter.
But they also expect competition to get tougher as the yearprogresses because No. 3 U.S. mobile service provider SprintCorp, which was recently bought by Japan's SoftBank Corp, may be able to compete much better with the help ofSoftBank's investments.
On the plus side, Verizon Wireless, the biggest U.S. mobileservice provider, added 941,000 subscribers in the secondquarter, which compared well with the average expectation for836,500 from six analysts contacted by Reuters. Estimates rangedfrom 700,000 to 909,000.
It also forecast that net subscriber additions wouldincrease sequentially in the remaining two quarters of 2013.
"It wasn't a blow-the-doors-down quarter, but it was a solidquarter," said Schildkraut, who was impressed with Verizon'scustomer growth. "It's an expensive stock and they need to do alot to support that."
Excluding a pension-related gain, Verizon said it earned 73cents per share, compared with expectations for 72 cents,according to Thomson Reuters I/B/E/S.
Verizon said it increased its capital spending budget tobetween $16.4 billion and $16.6 billion for the full year,compared with its previous target of $16.2 billion.
The company said it will need to spend more as itanticipates higher demand for wireless data services, and willhave to start using a new chunk of wireless airwaves.
Verizon added 161,000 net new FiOS Internet customers and140,000 net new FiOS video connections in the quarter.
Verizon's earnings rose to $2.25 billion, or 78 cents pershare, from $1.83 billion, or 64 cents, in the year-ago quarter.
AT&T Inc, the No. 2 U.S. mobile provider, is scheduledto report earnings on July 23, and Sprint is due to report onJuly 30.
Verizon shares were down 92 cents, or 1.8 percent, at $49.82in late-morning trade on New York Stock Exchange.
