Verizon's (NYSE: VZ) Global Business division continues to operate in a challenging environment as the newer IP-based services aren't making up for declines in legacy TDM.
Speaking to investors during the Bank Of America Merrill Lynch 2015 Media, Communications & Entertainment Conference, John Stratton, EVP and president of operations for Verizon, said that the copper to fiber migration and IP price compression are two near term issues they expect to continue to ride through.
"As we look at the performance of network business, this is where all the pressure is: from two flavors," Stratton said. "One is the secular decline of the core copper network and we see technology displacement to fiber and Ethernet and with IP networking we have seen in the last 18 months some pretty significant compression on the retail rate per bit."
Stratton added that "stabilizing the IP revenue stream is essential because it's a big business."
While Verizon is seeing growth in new Ethernet, cybersecurity and cloud services it is not making up for the declines in TDM-based T-1 and ATM services customers are shutting down.
This trend was evident in the second quarter. The telco reported that Global Enterprise revenues were $3.2 billion, down from $3.4 billion in the same period a year ago.
"As we think about the growth sides of the business such as cloud computing, cybersecurity, and IP communications, which are achieving nice growth levels, they are not of a scale and size yet that their improvement is outrunning the decline in our core networks," Stratton said. "The lever is the IP networking business and stabilizing that business would allow us to come through the other end of this."
Besides the ongoing declines in TDM-based services, Verizon continues to face stiff challenges, particularly on the Ethernet side, from a host of domestic and global players such as BT (NYSE: BT), Orange and Level 3.
In its latest Global Ethernet Leaderboard, Vertical Systems Group noted that in the middle part of the top five global Ethernet players, Verizon (NYSE: VZ) lost market share while Colt and AT&T (NYSE: T) moved up. However, another shift could occur this year, as these carriers were very close in terms of ports sold.
Verizon is also facing strong challenges on the domestic Ethernet front from competitive players such as Level 3 and Comcast Business. VSG noted in its year end 2014 U.S. Carrier Ethernet Services Leaderboard, Level 3 surpassed Verizon for the first time due to its $5.7 billion purchase of TW telecom. Further market disruption in the Ethernet market could occur when Charter Communications (NASDAQ: CHTR) completes its proposed acquisitions of Time Warner Cable (NYSE: TWC) and Bright House.
As it works through the ongoing secular challenges in the Global Business unit, Verizon will also look for ways to take costs out and drive further efficiencies in running the Global Business unit.
"In the meantime, we continue to improve the bottom line of that business. So [we're doing] aggressive work to restructure fundamental processes to not only improve the quality of support provide our Tier 1 enterprise and government customers, but also the cost of providing it," Stratton said. "We have maintained a very disciplined focus on that side of the ledger and that needs to continue."
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