Verizon (NYSE: VZ) may have the right next-gen business service tools in place, but the near-term reality of legacy declines and an uncertain economic environment is dampening overall enterprise revenue growth.
Speaking at the Bank of America Merrill Lynch 2014 Media, Communications & Entertainment Conference, Fran Shammo, CFO and EVP of Verizon, said that strategic business services won't surpass legacy declines for a few years.
"If you look at certain portfolios in the enterprise business around IT, security, data centers and cloud, it's all growing nicely," Shammo said. "The problem is the core LD and voice is more than offsetting that and that's part of the issue in enterprise."
Shammo likened the legacy-to-next-gen-revenue disconnect to how its fiber-based FiOS has begun to outpace legacy landline POTS losses.
"Just recently in the last two years we have crossed those lines where FiOS now is a bigger piece than the access lines, and that's what's going to happen in the enterprise business," Shammo said. "The new strategic services will eventually outpace those declining services and we'll get back to a growth business, but I don't think we'll see that happen in the next year or so though."
What's also complicating matters is a still weak economy that's not growing, the U.S. having one of the highest tax rates in the world, and a lack of incentives for investments.
In order to turn the tide, Shammo contends that if lawmakers can't reform the tax policies, they would need to do something to address the extenders that were helping the economy.
"I don't see us having huge amounts of investment until we solve this tax problem," Shammo said. "There's too much uncertainty for enterprises."
Shammo added that there's not a lot of businesses upgrading their LAN infrastructure or switch from TDM to IP-based voice technology due to the tax law issue.
"There are not a lot of incentives to invest in those two technologies because there's too much uncertainty on what that investment is going to return with the tax law," he said.
Such a trend was evident in the Verizon's second-quarter financial results.
The service provider's sales of strategic services such as private IP, Ethernet, data center, cloud, security and managed services to enterprise customers rose 3 percent year-over-year.
Despite these gains, overall Global Enterprise revenue declined 1.9 percent, or $70 million year-over-year, due to more of its customers migrating off of legacy TDM, frame relay and ATM services.
Two potential bright spots of revenue are in the federal and state and local government agency vertical segment. The service provider is seeing uptick in new orders, particularly from federal agencies.
"We have actually have seen positive trends in both the federal government and within the state and local segments, but keep in mind as you start to see these bright lights come, you're still talking about 6-8 months down the road where you start to see the billed revenue come in," Shammo said. "These projects generally take longer to implement, but we are seeing more activity around the federal government around things like security."
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