AT&T will weigh build, buy fiber options for 5G, business needs

Randall Stephenson, CEO and chairman of AT&T, told investors during the first-quarter earnings call that having a combined wireless and wireline business is paying off.

As AT&T prepares to take its 5G wireless service to 20 metros by the end of the year, the service provider is looking at purchasing or building fiber-based backhaul facilities outside of its wireline footprint.

AT&T comes to the table with plenty of its own fiber from three of its own existing investments: the Project VIP fiber to the building initiative, a large local exchange company business footprint, and the legacy AT&T long-distance business fiber. Randall Stephenson, CEO and chairman of AT&T, told investors during the first-quarter earnings call that having a combined wireless and wireline business is now paying off.   

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“We gave some thought and consideration of whether we would create value if we separated our wireline and wireless business,” Stephenson said. “The thing that caused us the greatest pause was that this wireless business is going to need that fiber access.”

AT&T is not the only integrated wireless/wireline operator making a big fiber push that will accommodate its wireless, business and consumer needs. Fellow telco and wireless comrade Verizon recently announced a $1 billion purchase agreement with Corning for fiber.

Verizon is realigning its network around a next-gen fiber platform that will serve multiple purposes: improve 4G LTE coverage, speed 5G deployments, and deliver fiber-based broadband to homes and businesses. Similar to AT&T, Verizon is going to either build out its own fiber or rent fiber from other providers like Zayo or a regional competitor.

John Stephens, CFO of AT&T, said that it will examine what makes the most economic sense for fiber-based backhaul for towers and small cells.

“With regard to backhaul for towers and those kinds of fiber initiatives, we’ll look at all the opportunities out there and decide it’s cheaper to buy or build,” Stephens said. “We feel like we have a big lead because of what we were doing with Project VIP investments over the past five years.”

FTTH build is on track

But 5G backhaul is only one part of AT&T’s fiber story. The service provider continues to make progress with its ambitious FTTH build-out, regularly announcing new cities and towns several times every quarter. On Monday, AT&T announced plans to bring its fiber network to parts of eight new metro areas, meaning AT&T plans to offer the service to customers across at least 75 major metros.

The service provider markets its 1 Gbps service to 4.6 million locations across 52 major metros, and it expects to add 2 million locations in 2017. Stephens said that AT&T is on track to “reach 6 million customer locations with fiber by the end of this year.”

As part of its acquisition agreement for DirecTV, AT&T said these near-term goals will put it one step closer to reaching its goal to serve at least 12.5 million locations by mid-2019. Stephenson said as AT&T continues to expand fiber to more homes, the service provider can extend those facilities to accommodate businesses and backhaul needs.

“As we’re deploying fiber to 12.5 million homes, you’re looking for the capillaries,” Stephenson said. “If you deploy to a home what capillaries does that make available to deploy small cells and what capillaries are now being run to business and the incremental cost of that next layer of fiber goes down.”

Broadband, business growing pains continue

While AT&T has set a sound fiber-centric future for itself, the service provider is seeing near-term legacy to next-gen transition issues. As customers transition to IP-based broadband and business services, they are seeing a loss of legacy TDM and DSL broadband revenues.

Here’s a breakdown of AT&T’s key first-quarter metrics:

Entertainment Group: AT&T’s Entertainment Group reported it added 242,000 IP broadband subscribers. AT&T added a total of 115,000 total broadband customers, reflecting a loss of 127,000 DSL subscribers. Broadband revenues were up nearly 3% in the quarter with IP broadband growing by 7.7%.

Business Services: Total first-quarter revenues from business customers were $16.8 billion, down 4.3% versus the year-earlier quarter due to declines in legacy wireline services and fewer wireless equipment upgrades. Business wireless revenues were down 2.1% year over year to $9.4 billion due to lower equipment revenues from lower sales.

Strategic business services revenues were $223 million, up 8.1%, versus the year-earlier quarter. These services represent 40% of total AT&T business wireline revenues and an annualized revenue stream of nearly $12 billion. Growth in strategic business services helped offset a decline of $743 million in legacy services in the quarter.

Financials: AT&T's consolidated revenues were $39.4 billion, down from $40.5 billion in the year-ago quarter due to what it said was record-low equipment sales in wireless. After adjusting for amortization, merger- and integration-related and other items, operating income was $8.2 billion versus $8.1 billion, and operating income margin was 20.7%, up 80 basis points versus the year-ago quarter.

Looking forward, AT&T has forecast adjusted earnings per share growth in the mid-single-digit range. The service provider also expects capital expenditures in the $22 billion range and free cash flow in the $18 billion range.