Taking a look at Verizon’s transcript with an eye toward broader sector/tech/macro trends they might reveal. Not much on macro or even adjacent sectors. And the Wireless business remains a snooze (profitable, but its basically counting noses and multiplying by ARPU). But FIOS fiber trends are pretty interesting (while AT&T’s faux-fiber build is looking more and more questionable). Cable is getting to be a real threat in SMB. And Telecom Equipment looks like it’ll do OK at VZ in 2014.
Look Boss, The Plane! Welcome to FiOS Island… The Acela corridor and other high-net-wealth areas of Verizon’s footprint aren’t just pulling away in terms of income inequality. They are going to be mostly fibered-up in the next 3-4 years. Note that Verizon has started filling in fiber to homes that haven’t actually signed up for FIOS service. No Google Fiber for you. Hopefully someday maybe out here for me?!?
Why fiber? The cost to maintain fiber is much lower than copper, the incremental capex is low (fiber’s already going by the house), and it gets them that much closer to being able to shut down the entire copper network support infrastructure (e.g. blowers that pressurize lines to keep water from seeping in). Glass fibers don’t mind getting wet. It also gets them that much closer to retiring the workforce that maintains that copper. Fiber needs fewer bodies – especially union ones.
- “We had 173,000 new FiOS Internet editions and now have 5.9 million subscribers, representing 39% penetration…. We also continue to make steady progress with Copper migrations. During the quarter, we converted about 80,000 customers. Through nine months, we converted nearly 250,000 customers, so we are on track to exceed our target of 300,000 customers for the year. By year end, we estimate that less than 1 million consumer customers will be remaining on Copper services within our FiOS footprint.
- So there will be less than 1 million customers that are on Copper within our FiOS footprint…. I think in the last two years… we will have moved close to 600,000 customers from our Copper network into our FiOS network… Now, if you think that we do 300,000 a year, you are looking at three more years to get that completed, but we will continue to try to accelerate as much as we can. And from a cost benefit, obviously what you are seeing is some of those benefits coming through the Wireline results today just from a repair metric, from a truck roll metric, the reliability of this network is drastically different than the reliability of the Copper network. So you are going to see us continue to invest in the FiOS infrastructure.
FIOS Hitting its Stride. Their fiber-to-the-home FiOS build was a source of much wailing an gnashing of teeth a few years ago. The concern was over incremental return on capital – would a dollar spent on FiOS wasn’t going to get any “new” revenues.
What the naysayers didn’t want to acknowledge about long-lived-asset businesses is that sometimes you just gotta spend dollars for the privilege to just keep the revenues you’ve already got. The question isn’t “incremental return.” The question is “staying in business.” If you don’t refresh that asset base, at some point it will generate decremental returns (both in terms of cost to deliver service and customer migration). To its credit, Verizon has stuck with it and FIOS has hit cruising speed. AT&T is still trying to get away with faux-fiber-on-the-cheap.
- “For the last five quarters, consumer revenues have grown in excess of 4% [this is a good number for a telco]. In the third quarter, revenues were up 4.3%, driven of course by FiOS, which now represents about 72% of consumer revenue. [they failed to mention that most of the TV “revenue” is shoveled right out the back door to ESPN and other cable channels, so this statistic is basically meaningless]”
- If you look at the next level of concentration we have had is, we are going after market share… there are some markets that were over 50% penetrated, so those markets have a slower growth, but we are still gaining share in some of our later markets like New York City, Philadelphia, Washington… If you look at our 39% penetration we still have a long way to go from a net add perspective, but the other thing that’s driving this growth and we can’t lose focus of it is the migration of these FiOS, of these Copper customers over to FiOS, and as we convert them… we get that uptick in our TV product along with that…. we think that we will continue this 4%-plus revenue increase with continued penetration and continued profitability on FiOS.
Fiber also Helps Protect Small-Medium Business Revenues From Increasingly Aggressive CableCo’s. Meanwhile, AT&T’s Just Lost the Starbucks WiFi Contract To Level3/Cable Because Their Speeds Were Too Slow….
- So on small business, look, I always split this between two segments. We have a segment that’s within FiOS and a segment that’s without, outside of FiOS….
within FiOS we are actually gaining share in the small business environment. The issue is that obviously we have to pass those small businesses with FiOS and quite honestly that has not been not been a concentration of ours. Most of it was to residential homes within our footprint. So now it’s building out all of those malls and so forth. So we have gone down the street. Now the issue is getting that in to the small stores of these small businesses. So within FiOS, we are doing a fairly good job.
- Outside of FiOS, it’s hard for me to compete with the speeds that cable can offer them through the DOCSIS 3.0 type technology. [NB: AT&T is not somehow magically exempt from this].
They are hopelessly behind Amazon’s AWS in Cloud Computing: The translation of the comment below is “we are still only in the beta of launching something that looks (vaguely) like Amazon’s AWS 3-4 years after it might have had a fighting chance.”
- On October 3, we launched a paid public beta of our new public cloud infrastructure… the ability for this cloud based infrastructure to handle enterprise level workload securely and a compliance with a lot of relevant requirements, which will provide flexibility and economic benefits of generic public cloud… So the launch of this cloud is just the next step in our cloud evolution. You are going to see a lot more of this come through in ’14. We will unveil new features. We have this technology established in seven of our data centers on a worldwide basis. You are going to hear more of this but it is a trial and a beta this point. And I think you are going to see us do a lot more in ’14 and you will start to see some of the benefits there.
2013 Capex. Up only 2.3% YoY but up 14% sequential into 4Q13 – a decent year-end budget flush. The actual equipment portion of capex (vs Real Estate, software, etc…) will probably be up more in 2015 – probably with a big chunk in the core networks vs edges.
- Capital expenditures for the quarter totaled $4.2 billion and were $11.8 billion year-to-date, up 4.3%. We estimate that full year 2013 capital spending will be approximately $16.6 billion… expect that our annual CapEx to revenue ratio will improve [a perennial promise often un-kept. Although they could for a while until they start rolling fiber to more marginal places. Which they will current protestations notwithstanding]
- Year-to-date, Wireless CapEx was $6.7 billion, 10.8% higher than last year. As noted on our last quarterly call, our 4G LTE coverage build is essentially completed. So our capital spending going forward will be focused on adding capacity and density to our existing coverage.
- In Wireline, capital expenditures totaled $1.5 billion in the quarter and $4.5 billion year-to-date, which was down 3.2% from last year. In terms of the balance sheet, total debt increased to $99.1 billion due to the permanent financing we have put in place related to the pending transaction to obtain full ownership of Verizon Wireless. However since we do have a cash until the close of the transaction, our net debt to adjusted EBITDA remained quite low at about 1.1 time.
Nominee for most call’s delusional (or more likely disingenuous) statement: Ask yourself – does offering 100+ megabit data speeds to rich people while redlining the poorer, rural areas into sub-10-megabit-in-the-real-world wireless data speeds to poor people seem like a sustainable strategy from a political/regulatory perspective? Especially with Google out publicizing Gigabit as the new base standard. See this recent NYTimes article on pushback to wireless-only in New Jersey http://tinyurl.com/kgx268g (and note that VZ already caved on Fire Island http://tinyurl.com/kgx268g). Expect Verizon’s fiber island to keep growing until if covers most of VZ territory (with higher capex as a side effect). And watch that be a very smart move from a long-term financial and political perspective. Lets just hope that Verizon themselves know they have to be bluffing about wireless as a real substitute.
“[Build Plans] outside of this core FiOS footprint?… Well what you are going to see us do is, but using Wireless, our Fusion technology, from a broadband perspective. So when we talk about converged solutions and bringing the best solution to our end user customer, this goes into what we do with our Copper customers outside of the FiOS footprint and what do we do for them from a voice perspective and also a DSL perspective. And obviously we have Home Phone Connect and we have Voice Link [a wireless substitute for wireline] on the Wireline side that we have already started to sell to our Copper voice customers as a substitute to the Copper product. So we have already done some of this but you are going to see more technology come out here in 2014 that’s going to address these issues.”
