Verizon Communications Inc. (VZ -Analyst Report) reported disappointing financial results for the third quarter of 2014. Both the top and bottom lines failed to meet the respective Zacks Consensus Estimate despite year-over-year growth. Lower-than-expected financial results were primarily due to higher cost of services and sales and higher interest expenses. Verizon currently holds a Zacks Rank #2 (Buy).

Quarterly net income came in at $3,794 million or 89 cents per share compared with $5,578 million or 78 cents per share in the year-ago quarter. However, earnings per share of 89 cents fell below the Zacks Consensus Estimate of 92 cents. The year-over-year earnings growth was buoyed by strong revenue contribution from wireless services and increased demand for FiOS services.

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Quarterly total revenue increased 4.3% year over year to $31,586 million but lagged the Zacks Consensus Estimate of $31,707 million. The year over year growth was driven by increasing demand for Verizon Wireless, FiOS and Strategic enterprise services.

Total operating expenses in the reported quarter was $24,696 million, up 6.7% year over year. Operating income decreased 3.3% year over year to $6,890 million. Operating margin came in at 21.8% against 23.5% in the prior-year quarter.

Cash Flow & Liquidity

During the first nine months of 2014, Verizon generated $23.2 million of cash from operations compared with $28.4 million in the year-ago period. Free cash flow in the reported quarter was $10.5 million compared with $16.6 million in the prior-year period.

At the end of the third quarter of 2014, Verizon had $7.85 billion of cash and short-term investments and $109.23 billion of debt outstanding compared with $54.1 billion of cash and short-term investments and $93.59 billion of debt outstanding at the end of 2013. Debt-to-capitalization ratio was 0.86 at the end of the reported quarter against 0.48 at the end of 2013.

Wireless Segment

Total revenue for the segment was $21,835 million, up 7% year over year. Retail Service revenues were up 4.6% to $17,556 million. Other Service revenues were $800 million, up 8.1%. Equipment revenues increased 28.9% to $2,480 million and Other revenues were up 4.2% to $999 million.

Operating expense increased 10.1% to $14,880 million. However, operating income also grew 1% to $6,955 million. Quarterly operating margin came in at 31.9% against 33.8% in the year-ago quarter. Segment EBITDA increased 1.7% to $9,094 million. EBITDA margin was 49.5% compared with 51.1% in the prior-year quarter.

At the end of the third-quarter 2014, Verizon had 106.156 million retail subscribers, up 4.9% year over year. Out of this, Retail postpaid subscriber count was 100.103 million, up 5.2% and Retail prepaid subscriber count was 6.053 million, up 1.5%. During the reported quarter, the company added 1.516 million postpaid customers (up a whopping 63.5% year over year) and 0.009 million prepaid customers (down a massive 93.3% year over year).

Quarterly retail postpaid churn rate was 1% compared with 0.97% in the year-ago quarter whereas total retail churn rate was 1.29% against 1.28% in the year-ago quarter. Retail postpaid average revenue per account (ARPA) grew 3.5% to $161.24.

In the reported quarter, 91% of total phone activated were smartphones compared with 84.9% in the prior-year quarter.  Strong sale of Apple Inc.’s (AAPL- Analyst Report) iPhone and increased adoption of Google Inc.’s Android-based smartphones and Microsoft Corp. (MSFT - Analyst Report) developed Windows smartphones also increased the subscriber numbers.

Wireline Segment

Total revenue for the segment was $9.576 million, down 0.8% year over year. Consumer retail revenues were up 4.5% to $3,902 million. Small business revenues were $613 million, down 4.1%. Strategic services revenues climbed 1% to $2,068 million. Core revenues were down 11.7% to $1,316 million. Global wholesale revenues decreased 4.8% to $1,552 million and Other revenues increased 10.6% to $125 million.

Operating expense decreased 1.7% to $9,351 million. Operating income also jumped 53.1% to $225 million. Quarterly operating margin came in at 2.3% against 1.5% in the year-ago quarter. Segment EBITDA dropped 0.8% to $2,203 million. EBITDA margin was 23%, remaining same year over year.

At the end of the third-quarter 2014, FiOS video subscriber base was 5.533 million (up 7% year over year), FiOS Internet subscribers were 6.471 million (up 8.8%) and FiOS digital video residence connections were 4.514 million (up 10.9%). In the reported quarter, Verizon added a net 114,000 FiOS video subscribers, 162,000 FiOS Internet subscribers and 74,000 FiOS digital video residence connections.

High-speed Internet connection dropped 12.3% to 2.675 million, total broadband connections grew 1.7% to 9.146 million, Primary residence switched access connections decreased 15.1% to 5.794 million and Primary residence connections fell 5.3% to 10.308 million. Total retail residence voice connections dropped 5.9% to 10.743 million and total voice connections decreased 6.4% to 20.089 million.

On a quarterly basis, consumer ARPU was $125.32, up 10.3% year over year. FiOS revenues were $3,200 million, up 13.4% year over year. Strategic services as a percentage of total Enterprise revenues were 61.1% compared with 57.9% in the year-ago quarter.

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