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Friday, October 06, 2006

Analyzing Verizon's (V) Quarter

By Yaser Anwar, CSC of Equity Investment Ideas

Verizon reported 2Q06 revenue of $22.7 billion. Pro forma earnings totaled $0.64 per share after excluding $0.09 for charges related to merger integration and pension & severance benefits. Operating expenses surged to 84.2% of revenue as compared to a very respectable 78% YoY.

This is the 2nd straight Q in which the expense ratio exceeded, what I believe is a minimum requirement for sustaining profitability as a telecom carrier, 78% of revenue.

Similarly, return on equity was depressed by the cost containment measures, 15.5% vs 23% YoY.

Verizon fell back in Q2. Wireless remained a bright spot, revenue up 18% YoY, operating margin of 25.6% vs. 22.7% YoY. After showing much needed improvement in the previous quarter, cash flow decelerated in Q2, down 11% QoQ to $5.45B.

There could be some seasonality in the comparison, so investors should give Verizon another quarter to get things straightened out.

If the amount of cash generated from operations fails to show marked improvement in the 3rd Q, it could be a cause for major concern.

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