By Crayton Harrison

July 28 (Bloomberg) -- Verizon Communications Inc., the second-biggest U.S. phone company, reported a 12 percent increase in second-quarter profit as customers bought mobile phones that can access the Internet, boosting wireless revenue.

Net income climbed to $1.88 billion, or 66 cents a share, the New York-based company said today in a statement. Wireless revenue rose 12 percent to $12.1 billion. Home-phone lines fell and residential high-speed Internet growth was slower than some analysts estimated, sending the shares lower.

Chief Executive Officer Ivan Seidenberg, 61, used advanced handsets such as LG Electronics Inc.'s Voyager to lure wireless customers who might otherwise have opted for Apple Inc.'s iPhone, offered by market leader AT&T Inc. Subscribers spent 31 percent more on data services such as downloads and Web surfing, helping increase monthly bills even as prices fell for voice calls.

``They'd like to keep the wireline customer and the wireless customer, but there's a tradeoff that's happening in this economy,'' said Todd Rosenbluth, an equity analyst at Standard & Poor's in New York. He advises buying the shares. ``Wireless is the key driver.''

Total sales rose 3.7 percent to $24.1 billion, less than the $24.2 billion average estimate of analysts in a Bloomberg survey. Leaving out merger costs, profit was 67 cents a share, compared with the 65-cent average estimate of analysts. Last year's second-quarter net income was $1.68 billion, or 58 cents a share.

Verizon fell 85 cents, or 2.5 percent, to $33.60 at 4 p.m. in New York Stock Exchange composite trading. The shares have lost 23 percent this year.

Fiber-Optic Unit

The wireless results bolstered earnings as growth in the company's fiber optic unit fell short of estimates. Verizon is spending $23 billion over seven years to extend fiber lines into homes to boost Internet speeds and carry TV signals. It plans to have the service available in 18 million homes by the end of 2010, twice last year's total.

The company added 176,000 TV customers and 187,000 Internet subscribers to the fiber-optic network. Those results missed projections for 208,000 new video lines and 205,505 Internet connections by William Power, an analyst at Robert W. Baird & Co. in Dallas.

``You're feeling the cracks in the economy in these numbers,'' said Jennifer Fritzsche, an analyst at Wachovia Securities Inc. in Chicago. ``If that's the only growth initiative they have in wireline and it might be eroding, that's a concern.'' She expects the shares to perform in line with the rest of the market.

Promotion Ends

A promotion that offered new fiber customers a free flat- panel television ended in the quarter, which probably hurt subscriber additions, said Power, who has a neutral rating on Verizon shares.

Verizon has added promotions this quarter that are boosting fiber sales, President Denny Strigl said today on a conference call with analysts.

Internet customers using the older digital subscriber line technology decreased by 133,000. The struggling economy may have played a part in the losses, Rosenbluth said. College students also typically switch off their Internet connections in the second quarter when they return home from school, he said.

Home-phone lines fell 11 percent to 22.4 million, compared with the 22.5 million estimate of JP Morgan Securities Inc. analyst Mike McCormack. Total phone lines, including business customers, fell 8.5 percent to 38.3 million, meeting Power's projection.

Record Low Churn

Verizon added 1.5 million mobile customers last quarter, compared with AT&T's 1.3 million. Its wireless customer turnover rate, or churn, narrowed to a record low of 1.12 percent from 1.26 percent a year ago, Verizon said. That compared with Power's 1.2 percent estimate.

``You're seeing real resilience in this industry. It's been extremely strong,'' Chief Financial Officer Doreen Toben said in an interview today. Verizon's board is considering a ``modest'' increase in the 43-cent quarterly dividend, reflecting confidence in the company's cash flow, she said. The company last raised its dividend in September, adding 2.5 cents a quarter.

Verizon agreed in June to buy Alltel Corp. for $28.1 billion in cash and debt, allowing it to vault past Dallas-based AT&T as the biggest U.S. wireless carrier. Verizon has said it expects to complete the deal by the end of this year.

The company transferred its phone lines in Vermont, Maine and New Hampshire to FairPoint Communications Inc. last quarter to focus more on the mobile-phone and television businesses. Without those lines, last year's second-quarter sales would have been $23 billion, Verizon said.

To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net.

Last Updated: July 28, 2008 16:10 EDT