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Tuesday, January 25, 2011, 06:15 pm PT (09:15 pm ET)

Verizon execs: Apple's iPhone could drive 'explosive' growth

Despite a conservative estimate of 11 million iPhones sold in 2011, Verizon executives hinted Tuesday that the iPhone, which comes to the network on Feb. 10, could help growth on the largest wireless carrier in the U.S. to "really explode over the next several years."

Verizon's top brass made the comments Tuesday during an earnings call for the fourth quarter of 2010. Though Verizon's earnings of 54 cents per share just missed analysts' average estimate of 55 cents, the company still reported strong results, including record high profit margins and impressive smartphone conversion rates.

The carrier expects to nearly double its smartphone penetration from 26 percent at the end of 2010 to 50 percent at the end of 2011. According to Verizon's officials, such growth would be driven largely by the iPhone, though the adoption of 4G LTE devices would also play a part.

"While we've made rapid progress in a relatively short period of time, adding 9.3 million smartphone customers this year and substantially increasing data ARPU (Average Revenue Per User), we strongly believe both connections and data ARPU growth could really explode over the next several years with proliferation of 4G LTE devices and the iPhone opportunity," said Verizon Executive VP and Chief Financial Officer Francis Shammo.

However, Verizon is wary of overstating the potential volume of the iPhone. Citing possible supply issues and the mix of sales versus upgrades, Shammo used a consensus estimate to project an estimated 11 million iPhones sold in 2011.

"If you think about this, there are a lot of things that go in to projecting what the iPhone volume could be. So one, it's all about supply. Two, it's the mix of sales versus upgrades. Three, it's about what is our projection going to be? So I'm probably going to disappoint everyone, but I'm not going to give you an exact forecast that Verizon has for the iPhone because there's too many variables that go into this," Shammo said during the call.

"So what I've done is I've taken the consensus' average, which is 11 million phones, we've put that into the model, and given everything else the Verizon's going to do in 2011 based on 11 million units of the iPhone, you will get a 5% to 8% EPS accretion in 2011."

When asked whether the company expects supply to keep up with pent up demand for the Verizon iPhone, Chief Operating Officer Lowell McAdam remarked that executives had spent time talking with Apple's Steve Jobs and Tim Cook about what to expect. McAdam pointed to shortages of screens and other components last year as a reason for uncertainty about Apple's ability to supply iPhones.

"So on the supply side, you all see the different forecast. And we've spent a lot of time with Steve and Tim, talking about what we might expect, not only existing iPhone subscribers, but there's a lot of people on other networks that are interested in that device on the Verizon network," said McAdam.

"So from that part, you could be wildly optimistic or you could be conservative. Now you also have to factor — and you remember last year, we ended up with a shortage of screens and some of the basic components because as we started to come out of a little bit of a downturn. So our hesitancy to give you a strong number on supply is just we don't know whether we'll be able — the demand is very variable and some of the components are variable. But we feel very good on hitting the kind of numbers that [Shammo] talked to you about."

For its part, Apple admitted during its own earnings call last week that it has had trouble keeping up with iPhone demand. "We're going to do everything possible to get the iPhone into as many hands of those customers as possible," Cook said of the Verizon launch.

Cook also noted during the call that the iPhone maker expects "huge" results from sales of the iPhone on Verizon. "We are working around the clock to build more."

Even as carriers jockey for an early lead in the 4G market, Verizon sees the iPhone 4 as continuing to push 3G growth.

"Also in 2004, we ushered in the area of mobile data by launching our 3G Wireless network, which made us the largest, most reliable Wireless voice and data network in the U.S. Now since that time, we've doubled our 3G capacity every year, consistently investing in cell sites, spectrum and backhaul, and increasing our throughput speeds. We've bulked up our 3G capacity again in advance of our iPhone launch. Now I hope you all had a chance to look at the iPhone in the back of the room. I can tell you, I've been using this personally, and this is a terrifically performing device, and we expect great things of it as we add it to the network."

Verizon also warned that the success of the iPhone on its network would dampen revenues in the short-term because of costly subsidies for the smartphone. When asked why Verizon's expected 50 percent smartphone penetration and increased margins weren't reflected in the bottom line, Shammo replied, "I think you have to look at the holistic picture. But obviously, it's because of the iPhone and the subsidy on the iPhone."

Shammo sees an internal smartphone revolution as a golden opportunity for Verizon, in addition to new subscribers cannibalized from other networks. "If you look at our current base today, 52% of that base is on feature phones with no data plan. There's another 15% on multi-video type devices, which only had a $10 data plan at that time, which you know now, we have discontinued that line. So within our own base, there are 67% of the people who can upgrade and bring more ARPU with them."

"So if you think about a feature phone customer going to a smart phone, the ARPU on that is 2x what they deliver on a feature phone. So I think it's important because I don't know exactly what the mix will be at this point in time. But I think it is important to know there is tremendous growth within our own base by moving that base to smartphones, whether it be an iPhone or a DROID or some other device. So I think as you think through that, I think you have to look at the overall base, plus what would be coming in from new."

After weeks of speculation, Verizon revealed details about its data plans for the iPhone Tuesday. A $30 unlimited data plan will be available at launch, but the carrier plans to phase it out in favor of a tiered pricing structure. Customers looking to tether their iPhones using the "personal hotspot" feature will pay an additional $20 a month for 2GB of tethered data. Each additional gigabyte of data will cost $20.