AT&T's Stephens: Next-gen business services need to surpass tipping point to achieve revenue growth

AT&T (NYSE: T) continues to see strategic business services be the key growth engine for the enterprise services business, but legacy declines and the overall economy continue to outweigh its gains.  

"We have a collection of high quality new services, but the challenge for us is that it's 27 percent of the 100 percent and not 50 or 60 of the 100 percent," said John Stephens, senior SVP and CFO of AT&T, during the Jefferies 2014 Global Technology, Media and Telecom Conference. "We need strategic services to continue to grow, accelerate our growth, and get it up above that tipping point to cause total enterprise growth."

During the first quarter, the telco reported that strategic business services grew 16.1 percent year-over-year. These services represent an annualized revenue stream of more than $9 billion and are more than 26 percent of wireline business revenues. However, overall business services revenues declined 2.7 percent to $8.7 billion due to ongoing declines in legacy products like ATM and Frame Relay.

Besides the ongoing declines in legacy services, the U.S. economy continues to be a challenge.

"What we are seeing is the economy is not necessarily helping anyone," Stephens said. "While unemployment rates are going down, we see that as much more of a function of the change in the participation rate so it's not generating people at call centers that demand and drive our business services."

Stephens said it is also not seeing businesses make new investments in technology or they are delaying purchases. "We are not seeing business fixed investment," he said. "Corporate investment in the United States capex is low, and when it gets higher they demand more telecom services."

AT&T is hardly alone in seeing slow business buying patterns. Verizon's (NYSE: VZ) CFO Fran Shammo expressed a similar trend in their first-quarter earnings call.

Despite the near-term slowness, AT&T is seeing some signs of life in the business segment as service revenues grew slightly during the quarter.  

Stephens cautioned that "I don't want to oversell or point to a transformational point, but it's a sign that we're starting see some green chutes when you combine business with wireless we're seeing that grow."

He added that our "integrated carrier model is leaving us with some real positive views, but the real story in the enterprise space not only for telecom and most American industries is you have to get capital investment going into the United States to drive jobs and you'll drive demand for everybody's products and services."

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