AT&T, Verizon and CenturyLink business services revenue struggles continued in the third quarter, where these carriers saw softer results in a market that generates $90 billion in annual revenues.
MoffettNathanson said in a research note that while the business wireline market has been “fairly stable since the end of the Great Recession,” the research group added that “we saw a precipitous drop in end market revenues with growth sinking to -2.6%, the worst result since the recession ended.”
Each of these three providers saw different dynamics during the quarter.
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AT&T, the largest of this trio, reported third-quarter business services revenues of $17.1 billion, down 0.7% from $17.8 billion in the same period a year ago. Per the industrywide trend, legacy services pressure revenues as the structural transition of business wireline continues.
Unsurprisingly, new services like Ethernet and VPN drove gains in strategic business services. The service provider continued to make efforts to migrate more of its network functions to SDN. As of the end of the quarter, 45% of AT&T's network functions were virtualized. AT&T is beginning to generate significant cost savings from its NFV/SDN initiatives.
“AT&T’s business services growth rate remains depressed at -6.0%, but is consistent with the growth rate posted in Q2,” Moffett Nathanson said. “Commentary from management suggests that the rate of decline may moderate in coming quarters because of improvements the company is seeing in terms of pricing, but this has yet to show up in the numbers and could easily be offset by legacy revenue pressures.”
Verizon may have seen some slight uptick from its XO acquisition and data center sale, but that wasn’t enough to stop the Enterprise and Business market revenues from declining 5% and 5.8% to $2.2 billion and $933 million, respectively, in the third quarter. Verizon noted that it was seeing growth in fiber services, but that growth had not been enough to overcome the losses during the quarter.
“Verizon recovered slightly from its slowdown with growth (pro forma for XO and the sale of its data centers) clocking in at -4.9%,” said MoffettNathanson. “While this is a slight improvement over the last two quarters, growth still remains quite weak when compared to historical results.”
Over at CenturyLink, revenues were impacted by the sale of its colocation assets and the decline in legacy data and integration revenues. As a result, CenturyLink’s business revenues declined 11.2% year over year to $2.17 billion.
Taking out the impacts of the colocation sale and a price reduction for a wholesale customer, CenturyLink’s enterprise strategic revenues grew 4.2% and high-bandwidth data services revenues increased 5.5% year over year.
“CenturyLink’s enterprise segment delivered the strongest results (although “strong” may not be the best word to describe them), shrinking at a 3.3% YoY rate compared to the 4.9% decline from last quarter (both numbers pro forma the sale of its data centers to Cyxtera),” MoffettNathanson said.
Level 3, Cogent, and Zayo deliver mixed results
In the competitive business service provider market, the narrative is mainly driven by Level 3, now part of CenturyLink, Cogent and Zayo.
MoffettNathanson said that these service providers saw unevenness during the quarter.
“The alternative players also delivered mixed results in Q3, with Level 3 (which was acquired by CenturyLink on November 1) and Zayo seeing moderate improvements in their growth rates, while Cogent saw a deceleration,” MoffettNathanson said.
While Cogent continued to see positive results, the research firm said that the 7.7% growth was the lowest since 2012. Cogent’s management said the drop was due to a dip in internet traffic going across its network.
Being an alternative provider, Cogent noted during its earnings call that it sees opportunities to steal incumbent MPLS share by eventually rolling out its own SD-WAN service. The service provider is currently conducting a series of field and lab trials of various vendor’s SD-WAN gear, but has not revealed when it will start offering the service.
Zayo reported total first fiscal quarter 2018 revenue of $643.5 million with gains in dark fiber, transport, and enterprise services.
“The 5% growth (expressed in sequential annualized terms) that Zayo delivered (communications infrastructure-only; 3% including Allstream) was an uptick when compared to the 3% seen the last couple quarters but is still below historical levels and the 6-8% goal that management has outlined,” MoffettNathanson said.
Finally, Level 3 reported that Core Network Services (CNS) revenue was $1.96 billion in third quarter 2017, rising 1.8% year over year on a reported basis. Total Enterprise CNS revenue, excluding U.K. Government revenue, was $1.45 billion, which grew 3.4% year over year.
While Level 3 saw growth, MoffettNathanson said it was not entirely impressive.
Level 3 saw a pickup in terms of activity in its North America segment as well, but 1.6% growth is nothing to write home about,” MoffettNathanson said.
A bigger concern about Level 3 is how it will help CenturyLink further its business revenue share at a time when the market is still soft. The acquisition of Level 3 means that over 70% of its total revenues will come from business services.
“While revenue from wireline business customers is just 14% at Verizon and 19% at AT&T (16% if it can close on Time Warner), and even lower for the cable operators, CenturyLink derives 70% of its total pro forma revenues from businesses,” MoffettNathanson said. “An explicit purpose of its deal with Level 3 was to get bigger in this market, especially among larger accounts. A slower market is another headwind for the combined company, especially if this soft environment continues into 2018.”
Cable remains steady
Cable operators, while still relative new players in the medium and large business segment, did not see a big impact from the broader softness in the wireline business services market.
Comcast Business reported double-digit growth with revenue increasing 12.6% to $1.6 billion during the quarter, a factor the cable MSO said was driven by customer growth.
The cable MSO has positioned itself for future business growth opportunities by not only expanding its fiber network into more business parks, but also extending its DOCSIS 3.1-based 1 Gbps services and, more recently, SD-WAN services to business customers.
Likewise, Charter is seeing growth opportunities. During the third quarter, Charter’s commercial revenues rose to $1.5 billion, up 8% year over year and driven by 7.4% SMB revenue and 8.9% enterprise revenue growth.
Charter has also begun customer field trials of its own SD-WAN service with select customers. The service provider said that its hybrid SD-WAN solution will allow businesses to leverage the performance of Ethernet, ubiquitous broadband internet connectivity and SD-WAN to create what the service provider calls Hybrid WANs by stitching together native Ethernet WANs and Internet-based SD-WAN connections.
“In aggregate, Cable’s business services segments remained largely unaffected by the slowdown seen in other portions of the commercial wireline market,” MoffettNathanson said. “Comcast’s growth rate stayed steady at 12.6% while Charter’s sank 160 basis points from 9.4% last quarter to 7.8% this quarter (Exhibit 5). However, this is likely a function of ARPU compression as customers are migrated from higher legacy Time Warner Cable pricing onto lower Spectrum pricing.”