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Carrier Scorecard: Economic Uncertainty

Raymond McConville
News Analysis
Raymond McConville
2/14/2008
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Blame Randall Stephenson. Ever since AT&T's CEO ran his mouth a while back about seeing softness in the consumer business due to the sagging U.S. economy, everyone's wondering how much everyone else has been affected. (See Whoa Mama Bell!)

The same analysts on each of the three U.S. incumbents' earnings calls all wanted to know, "Have you seen any softness in the business because of the current economic environment?" It may have been a question everyone wanted answers to, but it was a question no one wanted to give an answer to.

Insert the "closely evaluating the situation" response from your favorite RBOC CFO. Maybe throw in an "it's too early to tell" for good measure. As if quarterly earnings calls weren't enough of a broken record. (See Color Me Lumpy.)

Really, though, the health of wireline telecom is a question mark heading into 2008. Virtually every U.S. home is connected to some sort of telecom service, meaning the only growth potential is from new home constructions or customers upgrading to next-generation services. With the housing market screeching to a halt, and consumer spending slowing down, the pain might be more than some are willing to admit so far.

Each quarter, Light Reading publishes scorecards on the world's most influential, publicly held carriers, giving them a grade of A through F based on their financial and business performance. Our previous North American carrier scorecard is right here: Carrier Scorecard: Ma Bell Mania.

Receiving a grade of A is tough. You need to show strong growth across the board and obvious momentum for the future. The market is way too unstable to be handing out the top grade this quarter. But let's see who came the closest:

Verizon: B-
At this time last year, Verizon Communications Inc. (NYSE: VZ)'s broadband business was growing at a 36 percent clip. It is now half that. (If you're arithmetically impaired, that's 18 percent.)

No doubt FiOS has been a tremendous success thus far, with more than 1 million TV subscribers. (See Verizon Hits 1M FiOS TV Subs.) But a lot of Verizon's FiOS gains have come from cannibalizing its DSL business. Verizon acknowledged that it is struggling outside of FiOS and wireless by trimming its workforce by 9,000 in other parts of its business. (See You're Fired.)

We think Verizon is in the best long-term position of any of these three carriers with its fiber to the home (FTTH) network and strong wireless business. But we're focusing on the most recent quarter, and with how much money it has been spending lately on network upgrades and the shaky economy, we think the company is hurting a bit right now.

Table 1: Verizon's Q4 2007 Scorecard

4Q07 4Q06 Y/Y Change
Revenue (Millions) $23,840 $22,606 +5.5%
Earnings (Millions) $1,072 $1,032 +3.9%
GAAP EPS $0.37 $0.35 +5.7%
Access Lines 41,441,000 45,079,000 -8.1%
Broadband Subscribers 8,235,000 6,982,000 +17.9%
FiOS TV Subscribers 943,000 207,000 +355.6%
DirecTV Subscribers 891,000 540,000 +65.0%




AT&T: B
We've already mentioned Randall Stephenson's quote heard 'round the world. But before the AT&T Inc. (NYSE: T) CEO struck fear in investors, he boasted of the huge demand he was seeing for capacity upgrades. Other carriers seem to agree. (See AT&T Parties Like It's 1999 and Carriers Say Bandwidth Glut Is Gone.)

Optimism is nice, and it'll be fun to see if AT&T and others do in fact get to party like its 1999 and not 2002. So far so good, though. Ma Bell exceeded its goal of connecting 10,000 new U-verse customers per week by the end of 2007, hitting 12,000 per week. It also now says that its fiber to the node (FTTN) network is performing better than expected and has increased downstream speeds. (See AT&T Ups U-verse Downloads.)

Capacity demand may be going up, but there is still concern that demand in general is on the decline. All three carriers are seeing their broadband growth slow from what it was last year. (See US Broadband Growth Slows.) Later in 2008, we'll better understand how the economy is affecting AT&T, and we'll get year-over-year comparisons on the combined AT&T and BellSouth. Table 2: AT&T's Q4 2007 Scorecard
4Q07 4Q06 Y/Y Change
Revenue (Millions) $30,349 $15,891 +91.0%
Earnings (Millions) $3,136 $1,938 +61.8%
GAAP EPS $0.51 $0.50 +2.0%
Access Lines 61,582,000 66,469,000 -7.4%
Broadband Subscribers 14,156,000 12,170,000 +16.3%
U-Verse Subscribers 231,000 3,000 +7,600%
DISH Network Subscribers 2,116,000 1,507,000 +40.4%




Qwest: C+
It'd be very interesting to know just how much money Qwest Communications International Inc. (NYSE: Q) makes per month from each of its DirecTV Group Inc. (NYSE: DTV) and Sprint Corp. (NYSE: S) "customers." New CEO Ed Mueller describes its reseller partnerships as very successful, but it's hard to tell exactly what they're contributing to the bottom line.

Here's the good news. Qwest increased its broadband service more than AT&T or Verizon did. And while some argue that it's being too conservative with its planned FTTN expansion, the new bandwidth should help keep broadband services and revenues heading up. Besides, Qwest doesn't have the scale for an expensive fiber project, as Verizon does. No one lives in the mountain time zone except for Jeff Baumgartner.

The enterprise business also appears to be healthy, and Qwest is wisely focusing a lot of its limited resources on it. All in all, the only portion of its business not growing is the access line portion, a place where all carriers are suffering. But Qwest is least prepared of all the carriers to offset these losses. And with its revenue forecast being flat in 2008, Qwest is just treading water, which we feel is the best scenario for it anyway. (See Qwest Stays Frugal in Q4 and Qwest Wants More Wireless.) Table 3: Qwest's Q4 2007 Scorecard
4Q07 4Q06 Y/Y Change
Revenue (Millions) $3,435 $3,488 -1.52%
Earnings (Millions) $366 $194 +88.66%
GAAP EPS $0.20 $0.10 +100.00%
Access Lines 12,789,000 13,795,000 -7.29%
Broadband Subscribers 2,611,000 2,138,000 +22.12%
Video Subscribers 649,000 411,000 +57.91%




— Raymond McConville, Reporter, Light Reading

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