Verizon's Shammo: We'll look at FiOS expansions once it returns the cost of capital

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Verizon Communications (NYSE: VZ) has made it clear that it won't bring FiOS to any new markets, but CFO Fran Shammo told investors it would consider expansions once the current buildouts have given it the best return on its investment.

 Fran Shammo Verizon

Shammo

Speaking at the Deutsche Bank Media, Internet & Telecom Conference, Shammo said the company would not consider other markets until it generates more cash within the wireline business.  

"I am not going to build beyond the current LSAs that we have built out," Shammo said. "We have to generate more cash within the wireline business and once we do that and I feel that FiOS has returned its cost of capital, then we can look at expansion, but at this point we're happy with what we have."

In the near-term, the focus will continue to be on expanding its penetration in its existing markets.

Today, there are about four markets where Verizon has over 40 percent penetration in FiOS broadband. While it expects to continue penetration to grow throughout 2016 and beyond, net adds will level off.

"As we go out over the next two to three years that penetration is still going to grow, but as that penetration grows obviously growth is going to slow," Shammo said. "I think you should anticipate us slowing in net adds."

Interestingly, the growth of FiOS broadband continues to outpace its linear TV product.

"The divergence between TV and broadband will continue as you have what we call the 'never cords,' who are people that never take linear TV and then the cord cutters that have a linear TV product, but feel that they get the speeds of broadband they can get their content in other ways," Shammo said. "I think you'll see broadband grow faster than TV."

Even with the disparity between TV and broadband, FiOS overall continues to be a dominant driver of wireline growth for the telco.

During the fourth quarter, Verizon added 126,000 net new FiOS connections and 92,000 FiOS video connections. It ended the quarter with a total of 6.1 million FiOS Internet and 5.3 million FiOS video subscribers, up 11.9 and 11.3 percent year-over-year, respectively.

Part of the FiOS growth will be driven by its ongoing initiative to migrate more of its problem copper customers to fiber.

In 2013, the telco completed 330,000 customer copper to fiber migrations.

"We're continuing to migrate those copper customers over to the FiOS base," Shammo said. "Last year we completed 330,000 and we'll be on track to do that this year and that helps the cost structure of the wireline business."

Verizon will soon face a stronger cable competitor in Comcast (Nasdaq: CMCSA), which is in the process of buying Time Warner Cable (NYSE: TWC).

To further differentiate FiOS from competitors like Comcast, Verizon introduced its "double up" promotion, which is aimed at driving sales of FiOS triple-play bundles and smartphones that run on its 4G LTE network.

Shammo said that its ability to bundle wireless with wireline broadband is something that cable can't match.

"I don't think that any cable provider can bundle wireless with broadband," he said. "We did that in our FiOS footprint and we think that's a very unique offer for our customers."

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