Verizon's enterprise weakness is offset by FiOS revenue strength in Q3

Verizon (NYSE: VZ) reported that third-quarter consumer wireline results rose 4.5 percent to $3.9 billion, a factor that's helping it to offset ongoing legacy enterprise weakness. 

FiOS Internet penetration was 40.6 percent at the end of third-quarter 2014, up from 39.2 percent at the end of third-quarter 2013. In the same period, FiOS video penetration was 35.5 percent, compared with 34.9 percent at the end of the third quarter of 2013. By the end of third-quarter 2014, Verizon passed 19.7 million premises with fiber.

Despite the gains, total wireline revenues were $9.6 billion, down 0.8 percent year-over-year due to a decline in legacy POTS and DSL broadband service revenues.

Similar to the second quarter of 2014, the rise in FiOS revenues helped drive up both total wireline and consumer revenues, helping to offset legacy declines in its business and wholesale divisions.

Here's a breakdown of Verizon's key wireline metrics:

Broadband and Video: During the third quarter, Verizon added 162,000 net new FiOS Internet connections and 114,000 net new FiOS Video connections. The service provider ended the quarter with a total of 6.5 million FiOS Internet and 5.5 million FiOS video connections, representing what it said were year-over-year increases of 8.8 percent and 7 percent, respectively.

Ongoing adoption of FiOS drove up consumer ARPU 10.3 percent year-over-year to $125.32 per month.

Verizon continues seeing consumers continue to purchase higher speeds. The telco reported that 57 percent of FiOS Internet customers are subscribing to FiOS Quantum, which provides speeds ranging from 50 to 500 Mbps, up from 55 percent at the end of the second quarter of 2014.

At the same time, Verizon has upgraded almost 5 million FiOS customers to the symmetrical "SpeedMatch" program it launched for consumers in July and later in September for its SMB customers.

"In July, we introduced SpeedMatch, a service upgrade that increases customer upload speeds to match their download speeds," said Fran Shammo, EVP and CFO of Verizon, during the third-quarter earnings call. "This competitive advantage provides FiOS customers with faster and more consistent upload speeds, which is compelling for gaming and social media."

Overall broadband connections totaled 9.1 million at the end of the third quarter of 2014, up 1.7 percent year-over-year. Verizon's net broadband connections increased by 69,000 in third-quarter 2014, as FiOS Internet net additions more than offset declines in DSL-based connections.

Verizon continued to make progress with its copper-to-fiber network migration effort, one that it says helps provide customers with a better experience and reduces maintenance. During the third quarter, the telco moved another 55,000 customers over to fiber, bringing the year-to-date total to about 200,000.

"This network evolution initiative is enabling us to systematically upgrade the network and provide higher quality of service to customers," Shammo said. "Aside from the maintenance savings and improvements in customer satisfaction, conversions to fiber provide a long-term opportunity for customers to purchase FiOS services, which result in recurring revenue."  

Business Services: In Verizon's Global Enterprise segment, the growth story was centered on strategic services such as cloud and Ethernet, which rose 1.0 percent year-over-year to $2.1 billion.

Despite the gains in strategic services, overall enterprise sales were $3.38 billion, down 4.4 percent from $3.5 billion in the third quarter of 2013 due to ongoing declines in legacy services and CPE.

Shammo reiterated his sentiment that they will challenges in the global enterprise market.

"I think we have a lot of headwinds right now in enterprise and honestly I don't see that changing for at least the next couple of quarters at this point in time," Shammo said.

Another challenge for Verizon is the migration from TDM-to-IP-based services and the associated price compression.

"What we're faced with as we have major customers coming off three and five-year contracts they're being priced back into the IP market, which is pretty significantly lower than it was three to five years ago," Shammo said. "We're gaining new business, but it's coming in at a lower rate and we still have that decline of voice and long distance going away and it just can't offset it."

It also saw declines in the small to medium business (SMB) arena, where cable has been taking market share in markets where Verizon does not offer FiOS services today. SMB service revenues were $613 million, down from $639 million.

Shammo said that the decline in SMB revenue was "due to a year-over-year comparison and some of it was due to some one-time things and I think that will come back in the fourth quarter."

Global Wholesale: Global wholesale declined year-over-year to $1.55 billion from $1.6 billion in the same period a year ago.  

Similar to the enterprise business, Shammo said that while it is seeing strong uptick in next-gen IP and Ethernet services, the company continued to be challenged by continued declines in TDM-based circuits.

"Healthy demand for Ethernet services in each of the last two quarters has offset a larger portion than expected of revenue declines from price compression, technology migration, and other secular challenges," Shammo said.

From an overall financial perspective, total third-quarter operating revenues were $31.6 billion, up 4.3 percent year-over-year. Taking out the third-quarter 2013 revenues of the public sector business Verizon divested at the beginning of the quarter, the comparable growth rate (non-GAAP) would have been 4.9 percent.

Shares of Verizon were listed at $47.88, down 60 cents, or 1.24 percent in Tuesday pre-market trading on the Nasdaq stock exchange.

For more:
- see the earnings release
- hear the webcast (reg. req.)

Special report: Wireline telecom earnings in the third quarter of 2014

Related articles:
Verizon's FiOS revenues rise 14.4% to $3.1B on strong broadband, video adds
Verizon expected to report higher profit
Verizon makes all of its FiOS broadband tiers symmetrical, upgrades new, existing users for free

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