By Sinead Carew
NEW YORK (Reuters) - Verizon Communications Inc on Thursday posted stronger- than-expected third-quarter earnings and revenue driven by wireless growth, sending its shares up 4 percent.
While wireless customer growth was slightly below Wall Street estimates, its Verizon Wireless venture with Vodafone Group Plc posted good profit and revenue growth as customers spent more on data services. Verizon has agreed to buy out Vodafone's 45 percent share of the venture.
The subscriber shortfall caused some concern that the company, the first U.S. telephone operator to report this quarter, was losing market share to rivals such as T-Mobile US Inc.
New Street analyst Jonathan Chaplin said that while Verizon's financials were "outstanding," "there were clear signs that a resurgent TMUS is impacting even Verizon."
Chief Financial Officer Fran Shammo conceded some lower-spending customers moved to rival services in the quarter even as he told analysts on the company's quarterly conference call that "we continue to gain market share."
Instead, he blamed the subscriber shortfall on shortage of Apple Inc's iPhone 5S. About one-half of the Verizon Wireless smartphone activations were iPhones, representing roughly 3.9 million iPhone activations.
"The shortage on the 5S was a significant issue for the quarter," Shammo told Reuters in an interview.
The executive said that 8.4 percent service revenue growth at Verizon Wireless was sustainable in the short term but expected the growth rate to decline in the future.
Verizon Wireless added 927,000 net retail subscribers in the quarter, compared with Wall Street expectations of about 1 million customers, according to eight analysts, with estimates ranging from 900,000 to 1.2 million.
While much of Verizon's growth was from customers connecting devices like tablet computers, Verizon said phone customers, still made up the most of its growth at 481,000.
Verizon said it expects wireless customer growth to improve sequentially in the fourth quarter but did not give specific estimates.
Verizon reported a third-quarter profit of $2.2 billion, or 78 cents per share, compared with $1.59 billion, or 56 cents per share, a year ago.
Excluding unusual items, Verizon earned 77 cents per share in the quarter, compared with Wall Street expectations of 74 cents, according to Thomson Reuters I/B/E/S.
Its wireless profit margin was 51.1 percent, based on earnings before interest, taxes, depreciation and amortization(EBITDA) as a percentage of service revenue, and above its target range of 49 percent to 50 percent for the full year.
Hudson Square analyst Rethemeier said the profit margin would likely come down in the fourth quarter due to steep holiday season costs, since the company kept its wireless margin target for the year despite the strong third-quarter number.
Revenue rose 4.4 to $30.28 billion from $29.01 billion. Wall Street expected $30.16 billion, according to Thomson Reuters I/B/E/S.
Strong wireless service revenue growth for the quarter was offset by a decline of 3 percent in its global enterprise business and a slower 4.3 percent rise in its consumer business, which includes its FiOS television service.
Verizon's enterprise business was affected by government budget cutbacks and cost cuts in the private sector, according to Shammo, who expects the business to remain flat in 2014.
"Generally speaking, enterprise customers continue to be cautious regarding new investment decisions," Shammo said.
Verizon, which competes with cable companies in television and broadband services, said it added 173,000 net FiOS Internet connections and 135,000 net FiOS video customers in the quarter.
Shammo said Verizon terminated a technology joint venture with cable rivals Comcast Corp, Time Warner Cable and privately held Brighthouse Networks for competitive reasons.
The venture, which had worried some consumer advocates, was set up to develop converged wireless and wireline products for consumers when Verizon agreed to buy wireless spectrum for its cable rivals.
The cable operators still resell Verizon Wireless services in markets where they do not compete but Shammo said that the technology venture was killed because of competition concerns.
"What was realized was that the cable companies didn't want to jointly develop something that FiOS was going to get at the end of the day and of course we weren't doing to jointly develop something that FiOS wouldn't get," Shammo said. "There was no meetings of the minds."
Verizon shares rose 3.9 percent to $49.14 in afternoon trade on the New York Stock Exchange.
(Reporting by Sinead Carew; Editing by Jeffrey Benkoe and Marguerita Choy)