Verizon filed an SEC form 8K today, indicating that it would take a $5.8 billion impairment charge in its Verizon Business wireline group in the fourth quarter of 2023.
The company said that its Verizon Business group had been experiencing “secular declines, as well as continuing competitive and macroeconomic pressure, in wireline revenue across its customer groups.”
In the fourth quarter of 2023, as part of its annual budget process, Verizon completed a comprehensive five-year strategic planning review of its Business group, resulting in lower financial projections compared to the prior year five-year strategic planning cycle. It conducted a goodwill impairment test and determined that the fair value of the Business reporting unit was less than its carrying value.
“As a result, in the fourth quarter of 2023, Verizon recorded a non-cash goodwill impairment charge of approximately $5.8 billion,” stated the 8K, “resulting in the goodwill balance of the Business reporting unit of $1.7 billion as of December 31, 2023.”
Recon Analytics analyst Roger Entner said he thinks the impairment charge stems largely from the fact that businesses have, for several years now, been replacing their MPLS lines with software-defined wide area network (SD-WAN) technologies. SD-WAN allows businesses to use multiple redundant types of connectivity - such as 5G, LTE, fiber broadband, satellite, etc. – and the software chooses the best option at any given moment.
Entner said “The shift from MPLS to SD-WAN is a huge shift.”
He said carriers such as Verizon used to get a lot of money from selling MPLS circuits to business customers. But now, even though the carriers may still retain those customers, they only get a portion of the pie. The other providers of connectivity also get a portion. And the biggest portion goes to the SD-WAN vendor.
“Where the money goes has shifted away from telcos to software providers,” said Entner. “If the telcos had been the ones who provide the software we wouldn’t see these declines.”
Dave Heger, senior analyst of securities research with Edward Jones agreed. He said, “Verizon may not be losing the customer, but as they migrate to SD-WAN, the bill for the customer goes down.”
He said Verizon’s move to take the $5.9 billion impairment is a recognition that some of their investments in Business wireline, which they hoped might start stabilizing, are probably not going to stabilize.
“Probably another factor is competition,” said Heger. “The cable companies have been highly competitive for business services. We’re even starting to see them penetrate into the enterprise.”
Although cable companies have been offering business services for years, they started with small and medium sized business and are now going after large enterprises. “There’s been a pretty big pie to go after,” said Heger.
What does the $5.9 billion impairment mean to Verizon’s financials?
Heger said: not that much. Verizon has taken a look at assets related to business wireline and re-calculated their present value. And it’s taking a write-down.
He said analysts are well aware of the challenges in business wireline for both Verizon and AT&T, and have probably already accounted for those challenges in their models.
"It’s multiple things catching up – the ongoing decline of voice services, the SD-WAN effect where newer techs save the customer money and then the competitive dynamics,” said Heger.
Verizon Business
The long-time Verizon executive Kyle Malady was promoted to CEO of Verizon Business in March 2023.
On the company’s Q3 earnings, Verizon Business reported 151,000 wireless phone net adds in the quarter across enterprise, public sector and small and medium businesses. The company also mentioned that its fixed wireless access (FWA) volumes “continue at a strong pace in Business” with 132,000 net adds in the third.
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Asked if FWA or wireless phone could be cannibalizing wired connections in the Business group, Entner said those things were small factors and wouldn’t account for the massive $5.9 billion impairment.