AT&T’s dedication to NFV, SDN technologies will enhance business profitability, says analyst

AT&T may have seen its business revenues slip during the second quarter due to wireline pressure from legacy services and equipment sales, but its dedication to network virtualization could help reverse that downward trend.

During the quarter, AT&T reported that Business Solutions segment revenues were $17.1 billion, down 2.7% year over year due to continued declines in legacy services and fewer wireless equipment upgrades, partially offset by growth in strategic business.

However, sales in strategic business services like Ethernet and cloud continue to rise.

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John Stephens, CFO of AT&T, said the company will continue to focus on cost management initiatives and process automation service delivery efficiencies, as well as SDN and virtualization, a process that is already paying off for the telco.

John Stephens

He pointed out that while legacy voice and data business revenues declined over $500 million year over year, “EBITDA grew by more than $70 million, and EBITDA margins improved by 150 basis points.”

“We're doing this by driving hard on cost management initiatives,” Stephens said. “Our focus is having the industry's best cost structure, and one way to do that is by implementing process automation and service efficiencies.”

Focus on virtualization

One way AT&T will also enhance its business services revenue is its ongoing focus on virtualizing more functions in its diverse network.

In 2016, AT&T enabled 34% of its network with software, bringing the telco another step closer to reaching its goal of virtualizing a large portion of its network with software by 2020.

After reaching that goal, AT&T raised the bar further by telling attendees during its Innovation Summit in January it would equip 55% of its network with software by the end of 2017.

“While the team's doing a really good job getting it up to 34% at the end of last year, they were reinvesting to get there, and they're reinvesting money this year to get to 50% to 55% by the end of the year,” Stephens said. “But once you get over that 50% level, the benefits will exceed any of that additional investment in a clearer picture.”

Steve Vachon, an analyst for TBR, said in a research note that AT&T’s move to open-source could reduce its reliance on more expensive proprietary hardware solutions to run its network.

“AT&T will improve the profitability of its Business Solutions division long-term by adopting NFV and SDN technologies,” Vachon said. “Integrating open-source technologies and white box hardware will provide cost savings by enabling the carrier to become less dependent on more costly, proprietary infrastructure.”

Vachon added that AT&T’s recent acquisition of Brocade’s Vyatta assets will also be a factor.

“TBR expects the acquisition of Brocade’s Vyatta network operating system will enable AT&T to meet its goal of virtualizing 75% of its network by 2020,” Vachon said.

New services, structure

Besides focusing more attention on reducing costs, AT&T is creating new revenue streams by introducing new software-driven services like its Flexware platform and its own SD-WAN service.

AT&T cited that SD-WAN will be a big focus for the company particularly in the smaller business segment.

Vachon said that while AT&T’s move to offer SD-WAN validates the segment and will add additional service growth, the telco is going to face a group of well-established providers like Verizon and CenturyLink. It will also face a threat from Comcast, which is trialing an SD-WAN service with its business customers.

“In addition to cost savings, AT&T is creating revenue streams by introducing new software-mediated network services to its portfolio, including an upcoming SD-WAN service in collaboration with VeloCloud,” Vachon said. “However, AT&T will be disadvantaged by its relatively late entry into the SD-WAN market as competitors including Verizon and CenturyLink have already begun to cement leading positions within the segment.”

At the same time, AT&T is enhancing its focus on key verticals like the public sector. Earlier this year, AT&T announced it was consolidating its government and education operations, which generated about $15 billion in sales in 2016, into the new Global Public Sector division.

To improve Business Solutions revenue, AT&T is targeting growth from government customers.

Vachon said that this consolidation will enable AT&T to “improve cohesiveness and foster partnerships across agencies in different sectors.”

AT&T secured a key win in the public sector division with its participation in FirstNet, a broadband network dedicated to America's police, firefighters, EMS and other first responders.

AT&T was awarded the 25-year contract to provide a nationwide mobile broadband network for first responders in the U.S., beating out rival bidder Rivada Mercury, which recently lost an appeal over its exclusion from the tender. The FirstNet system will cover all 50 states, five U.S. territories and the District of Columbia, creating 10,000 jobs during the first two years and “tens of thousands” of jobs during the entire contract period.