AT&T (NYSE: T) is confident that next-gen IP business service revenues--much like the trend it has seen in the consumer space--will eventually outpace legacy losses from declining services like T-1 access and frame relay.
While he could not offer a specific timeline as to when it would happen, John Stephens, CFO of AT&T, told investors during the Jefferies TMT Conference on Wednesday that as strategic services like cloud and Ethernet make up a greater part of its revenue mix, a similar trend will take place in the business segment.
"As we see those strategic services move up towards that 40 percent or greater share--and it's been growing two to three percent in every quarter--you'll see that same aspect happen that we saw on the consumer side where strategic services is going to outpace the pressures we're getting from legacy," Stephens said. "We haven't given a projection or guidance on when we think that's going to happen, but we feel confident we're on the path to get that done."
Stephens said that while next-gen strategic services don't initially have the same margins as legacy services, once it scales them to a higher amount of customers it can drive more services to customers while reducing capital spending on network maintenance.
"These new strategic services may not have the initial margins so it gives you the opportunity to upsize and upsell much more quickly and much more dramatically," Stephens said. "Secondly, they are more efficient on their capital requirements because they require less truck rolls and they are much more software initiated, so there's real opportunity to scale."
Stephens added that with initiatives like its fiber-to-the-building (FTTB) program or its SDN-based network on demand feature for Ethernet, AT&T will have an opportunity to improve business wireline margins.
"As you look at network operations, whether it's network on demand or software defined networking or this extensive fiber build, you'll see an opportunity to improve margins over time," he said. "We do expect we're going to get back to 30 percent more traditional wireline margin levels in the future, which will take place not in the 2015-2016 time frame, but after that as Project Agile and the other cost initiatives take effect."
Evidence of this growing strategic trend was seen in the first quarter.
Sales of Ethernet, VPN and cloud services continued to be the star in AT&T's first-quarter wireline business portfolio, growing 14.8 percent year-over-year to $2.6 billion. In addition, the company added 27,000 U-verse IP broadband business subscribers.
Despite seeing slower small business sales, AT&T is seeing some signs of life, particularly with businesses that reside in buildings it has equipped with fiber. To date, AT&T has passed more than 800,000 buildings in its territory with fiber.
Stephens said that despite economic challenges, it continues to see more businesses adopting strategic services.
"We continue to see people express interest in investing in strategic services," he said. "When you hit that tipping point, I think you'll see additional gross domestic product as people continue to vote for security, high speed and quality of strategic services."
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