Verizon Q1 FiOS revenue rose 15.5% to $3B, but weather issues slowed installations

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Verizon (NYSE: VZ) reported that despite seeing a slowdown in overall customer additions due to weather issues in the Northeast, FiOS revenues still rose 15.5 percent to $3 billion.

The increase in FiOS revenues drove up consumer revenues 6.2 percent to $3.8 billion. However, overall wireline revenues declined 0.4 percent due to ongoing declines in legacy POTS voice service revenues.

The business markets and wholesale segments continued to be affected by slower spending patterns and expected ongoing declines in legacy voice revenues.

Here's a breakdown of Verizon's wireline metrics:

Broadband and video: FiOS continued to be a key driver in the telco's wireline portfolio. It added 98,000 net new FiOS Internet connections and 57,000 net new FiOS video connections. At the end of the quarter, Verizon had a total of 6.2 million FiOS Internet and 5.3 million FiOS Video connections, representing year-over-year increases of 9.9 percent and 8.7 percent, respectively.

FiOS Internet penetration was 39.7 percent at the end of the first quarter of 2014, compared with 38.2 percent in the year-ago quarter, while FiOS Video penetration was 35.0 percent, compared with 34.1 percent in the same period a year ago. As of the end of the first quarter, the FiOS network passed 18.9 million premises.

Overall FiOS customer additions were lower in the first quarter compared to the fourth quarter of 2013, when it reported that it signed up 126,000 net new FiOS connections and 92,000 FiOS video connections.

Fran Shammo, EVP and CFO of Verizon, said the slowdown was due to three factors: a price increase, weather conditions and cable operators being aggressive with new pricing and speed tiers.

"We did a price increase in the fourth quarter and every time we do a price increase we always see some churn pressure in the following quarter" Shammo said during the earnings call. "We also had one of the worst winters on record and people did not want us in their houses to install FiOS."

Shammo added that the weather also impacted their ability to respond to a number of cable operator promotions.

"The competitive pressure from cable did increase in the first quarter and we did not respond immediately because of the environment we were dealing with weather, but we became more aggressive in March and our pipeline has grown and I have a viewpoint that the second quarter will be back on track from a net add perspective," he said.

Similar to earlier quarters, the telco reported that more customers were subscribing to the higher speed Quantum speed tiers. By the end of first-quarter 2014, 51 percent of consumer FiOS Internet customers subscribed to FiOS Quantum, which provides speeds ranging from 50 to 500 megabits per second, up from 46 percent at year-end 2013.

Another positive effect on FiOS in the first quarter was its copper-to-fiber migration strategy. During the quarter, the service provider migrated 78,000 of what it calls "chronic" copper customers to fiber, a move that it says enables it to upsell customers enhanced service and reduce maintenance costs.

"We have begun to see the benefits from a maintenance perspective in what was one of the worst winters in recent memory in the Northeast," Shammo said. "Aside from the maintenance savings and improvements in customer satisfaction, conversions to fiber also provide a long-term opportunity to purchase additional FiOS services, which would result in additional recurring revenue."

The telco had a total of 9.0 million customers at the end of first-quarter 2014, a 1.5 percent year-over-year increase. Net broadband connections increased by 16,000 in first-quarter 2014, as FiOS Internet net additions more than offset declines in DSL-based connections.

Business services: In the enterprise space, the challenge continues to be balancing the growth of strategic revenue from services such as cloud and Ethernet against the backdrop of declining legacy ATM and frame relay revenues.

Global Enterprise Strategic enterprise revenue declined 4.4 percent to $3.6 billion, while strategic service revenue rose 1.8 percent to $2.1 billion.   

What continues to be a challenge for Verizon is slower spending patterns by its larger business customers, particularly in the public sector, all of which are being more cautious about spending.

"In general, enterprise customers continue to be more focused on improving their cost structure rather than investing for growth, which creates top line pressure for us," said Shammo.

Wholesale: Global Wholesale revenues were $1.59 billion, down 6.4 percent from $1.69 billion in the first quarter of 2013. Ongoing Ethernet and IP sales continued to be offset by declines in legacy voice and data services.

"While we had healthy demand in Ethernet services for the quarter, it was not enough to offset the impacts of technology migration, price compression and other secular challenges," Shammo said.

From an overall financial perspective, total first-quarter 2014 were $30.8 billion, up 4.8 percent year-over-year. It said this was the company's highest quarterly growth rate in the past five quarters.

Driven by what it expects to be positive contributions to profitable growth from both wireless and wireline, Verizon has forecast consolidated top-line growth of 4 percent and adjusted consolidated EBITDA margin expansion in 2014.

Shares of Verizon were trading at $47.65, up 22 cents or 0.46 percent, in morning trading on the New York Stock Exchange (NYSE).

For more:
- see the earnings release
- see Verizon presentation (PDF)
- here's FierceCable's take

Special report: Wireline telecom earnings in the first quarter of 2014

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