Verizon’s Ellis: Fiber deployments will help us overcome wireline copper, legacy declines

Verizon may still be wading through ongoing revenue challenges in its wireline segment, but the company thinks it has an ace in the hole: expanding and enhancing its fiber network.

Matt Ellis, CFO of Verizon, told investors during its fourth-quarter earnings call that Verizon’s ongoing fiber rollout could help ease wireline revenue pressure to satisfy consumer and business broadband desires.  

Verizon CFO Image: Verizon
Matt Ellis 

“Wireline will be on a similar trajectory that you've seen in the past few years,” Ellis said. “As we continue to deploy more fiber in the network, it gives us opportunities to replace some of those earnings that were on copper-based products with fiber-based products, which should be more sustainable.”

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However, turning the fiber network into revenue gold continues to be challenged by ongoing declines in its legacy copper-based businesses—a trend that continued into the fourth quarter.

Ellis noted that gains in fiber-based services like Fios and business services are being overshadowed by older generation losses.

“Growth in fiber-based services continues to be offset by secular pressures from legacy technologies and competition,” Ellis said.

Consumer hits, takes

Fios growth, for example, was overshadowed by linear video losses and DSL subscribers either migrating to Fios or churning to a faster speed from a cable competitor like Comcast.

Comcast, for one, has continued to ramp up its 1 Gbps rollouts across its footprint using DOCSIS 3.1 technology on its existing hybrid fiber coax (HFC) network platform. This allows the cable MSO to more rapidly scale its higher speed broadband base and steal away DSL customers where Verizon does not offer its Fios FTTH service.

These factors contributed to Verizon’s fourth-quarter consumer revenue decline.

“Consumer markets revenues decreased 1.4% in the quarter as Fios internet growth was overshadowed by declines in video and copper,” Ellis said.  

However, Verizon noted that Fios internet subscriber and revenue growth is being buoyed by the thirst for broadband.

“Consumer Fios revenue growth is primarily driven by an increase in the total amount of our customer base and strong demand for higher internet speeds, including our gigabit connection launched earlier in 2017,” Ellis said.

Business, wholesale challenges continue

Like the consumer segment, Verizon’s business and wholesale segments saw similar challenges to use the fiber-based services to overcome legacy service declines.

Verizon’s Enterprise Solutions segment declined 4.1%, reflecting how customer wins for next-gen services are being offset by what Ellis said was “secular and pricing pressures in our legacy offerings and technologies.”

Similarly, Verizon’s wholesale Partner Solutions unit revenue, excluding XO, also declined 5.8% as more of its customers transitioned away from TDM to fiber and Ethernet-based services. Ellis noted that its fiber-based products represent a large opportunity for the wholesale segment.

In Business Markets, revenue declined 5.6% due to a lopsided decline in older services that Verizon is still trying to overcome.

“We are competing and winning with our fiber-based products, but we continue to see declines in legacy technologies,” Ellis said.

Here’s a breakdown of Verizon’s key metrics:

Wireline revenues: Total wireline revenues increased 0.1% year over year in fourth-quarter 2017 and 0.6% for the full year, compared with 2016, to $7.6 billion and $30.7 billion, respectively. On an organic basis, excluding revenues from acquired operations, total wireline revenues declined 3.6%year over year in the fourth quarter.

Wireline operating income was $62 million in fourth-quarter 2017, and segment operating income margin was 0.8%. Full-year 2017 segment operating income was $380 million, and segment operating income margin was 1.2%.

Broadband and video: Total Fios revenues grew 2.3%, and consumer Fios revenues grew 1.7% year over year. During the fourth quarter, Verizon added 47,000 Fios Internet connections and lost a net of 29,000 Fios Video connections. The lower video additions continue to reflect the shift from traditional linear video to over-the-top offerings. As of the end of 2017, Verizon had 5.9 million Fios internet connections and 4.6 million Fios video connections.

“Wireline subscriber results were in line with estimates with total internet and TV subs coming in at -19K and -29K vs. our -35K and -20K, respectively,” said Scotiabank in a research note.

Business, wholesale services: As has been the trend in earlier quarters, Verizon saw mixed results across its business and wholesale units in the fourth quarter. Enterprise Solutions revenues were up slightly sequentially to $2.26 billion, but down year over year. Business Markets revenues were $903 million, down sequentially from $918 million in the third-quarter 2017. Finally, Partner Solutions revenue was $1.24 billion, down year over year from $1.26 billion.

Financials: Total consolidated fourth-quarter 2017 operating revenues $34 billion, up 5% from the fourth-quarter 2016. Full-year 2017 consolidated operating revenues were $126 billion. On a comparable basis excluding divestitures and acquisitions (non-GAAP), full-year consolidated revenues declined approximately 2% in 2017, compared with 2016. Net income was $18.8 billion in fourth-quarter 2017.

For 2018, Verizon expects full-year consolidated revenues will grow at low-single-digit percentage rates on a GAAP basis. On a GAAP basis, Verizon anticipates service revenue growth to turn positive around the end of 2018 or early 2019.