Copyright 2005

July 26, 2005 Tuesday 2:11 PM Eastern Time

By Scott Moritz, Senior Writer

From Lexis Nexis

Verizon is paying a bigger tab to cover growth expenses.

The New York phone giant says it will increase its 2005 capital spending budget to $15.3 billion, up from the $14.6 billion previously projected and $2 billion above last year's levels.

The company says it needed to pump more cash into spending to boost wireless network capacity and keep up with record-breaking subscriber growth in the quarter. Another big portion of the cash allotment will go toward Verizon's fiber optic expansion effort and the cost of stringing cables directly to homes.

Thanks to the blowout second-quarter numbers at the wireless unit, headlines by a record 1.9 million net new users and industry-leading customer loyalty levels with 1.2 percent monthly churn, Wall Street didn't focus too hard on the 5.5 percent decrease in Verizon's phone line count and the unexpected budget bulge.

But analysts and investors say they are concerned that Verizon's spending increases have been rapidly outpacing sales growth.

Revenue for 2005 is expected to grow about 3.5 percent over last year, but with the new budget forecast, capital spending will grow by 15 percent over 2004.

"Despite the very strong performance by Verizon Wireless, we believe that the market could react negatively to the increased capex guidance, which could put pressure on Verizon and its peer group," Lehman Brothers analyst Blake Bath wrote in a research note Tuesday.

The increase in spending is also adding to the company's debt load. After an impressive fiscal fitness program including spending and employee cuts, Verizon was able to trim its total debt from $60 billion thee years ago to below $40 billion in the first quarter. But the trend reversed in the second quarter. Verizon's debt increased to $41.8 billion in the second quarter from $39.2 in the prior period.

Verizon attributed the higher debt level to purchases of additional wireless spectrum and the buyout of MCI shares from Carlos Slim Helu.

On the merger front, Verizon says it expects to close the deal with MCI by year-end.

Looking ahead to the second half of the year, Verizon says it plans to make gains in broadband and in sales to businesses. On a conference call with analysts, company executives promised to get more aggressive with digital subscriber line service offerings.