Verizon Uses Fios as Shiny Object in Q4

Mari Silbey
News Analysis
Mari Silbey, Senior Editor, Cable/Video
1/24/2017



After years of turning its focus away from Fios, Verizon is once again shining a spotlight on the consumer-facing wireline business. There are two reasons for this. One, Verizon's alternative Go90 mobile video service appears to be in trouble. And two, Verizon is now combining its Fios efforts with buildout plans to support 5G wireless broadband deployments, giving it new reason to extol the virtues of Fios fiber networks.

In its latest earnings report, Verizon Communications Inc. (NYSE: VZ) said that total Fios revenues rose to $2.9 billion in Q4, up 4.4% from the prior-year quarter. For the full year 2016, Fios revenues were up 4.6% to $11.2 billion. The telco also gained 21,000 Fios video subscribers and 68,000 Fios Internet subs in the quarter, bringing its total count to 4.7 million and 5.7 million Fios video and Internet customers respectively. (See Verizon Misses Estimate in Q4 Earnings.)

On a negative note, Verizon has confirmed that it laid off 155 employees from its Go90 business last week as first reported by Variety. While the company claims the layoffs were about getting rid of "duplicative resources" and "are not indicative to a change in our strategy," the lack of traction for Go90 makes the Fios video numbers more important. Verizon hasn't reported the consumer adoption rate for Go90, but signs have not been favorable. Verizon would only say today that average daily usage among Go90 customers hovers at about 30 minutes, while Go90 video represents less that 20% of traffic on the company's wireless network. (See also OTT Went Big in 2016, Aims Higher in 2017 and Verizon Backpedals on Go90.)

The Fios video additions may also not be as positive as they seem. Although Verizon added customers in 2016, it acknowledges that demand for Custom TV packages remains strong. Since Custom TV packages typically cost less than a traditional Fios video product, Verizon may be seeing its average revenue per user (ARPU) for Fios video headed downward. (See also Skinny Bundles Sock FiOS Video Revenues.)

There are also caveats to Verizon's Fios success on the broadband side. While the number of Fios broadband customers grew from 5.4 million at the end of 2015 to 5.7 million at the end of 2016, Verizon lost a total of 282,000 Internet subscribers for the year with DSL customers factored in. Those DSL subs are far less valuable to Verizon than Fios subs, however, and the shift in the company's customer base is undoubtedly making Verizon's wireline business more profitable.


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Speaking of profitability, better results in the wireline business aren't being by helped by Verizon's enterprise and wholesale operations. Even though EBITDA (earnings before interest, tax, depreciation and amortization) rose a whopping 17.7% to $1.9 billion for the wireline segment, Global Enterprise revenues were down 4.5% year-over-year in the quarter to $2.9 billion, and Global Wholesale revenues were down 7.5% in the same time period to $1.2 billion.

Total wireline revenues were down 3.1% to $7.8 billion, and Verizon said it expects to close on the sale of its data center business to Equinix Inc. (Nasdaq: EQIX) in Q2, which will affect future enterprise revenues further. (See Finally! Equinix Pays $3.6B for Verizon Data Centers.)

But thanks to cost-cutting measures, Verizon thinks its wireline profit margins will continue to rise.

"It would be reasonable to expect wireline margins for the year as a whole to be in the low twenties [in 2017] compared to the 19% that we saw for 2016," said Verizon CFO Matthew Ellis on the earnings call. "So we see a lot of improvements going through the business there. Obviously we're going to get the full-year benefit of the new labor contract through there, and we continue to manage costs in that business very closely."

Fiber is a key component to Verizon's wireline plans in 2017. The company is keen to emphasize both its One Fiber initiative in Boston, which is designed to bring new wireline and wireless services to the region, and its XO acquisition, which is expected to close this quarter and includes metro fiber rings in 45 of the top 50 markets in the US. (See Verizon Hails Boston Fios Launch but Eyes 5G and Verizon Bags XO for $1.8B.)

Ellis noted on today's earnings call that fiber to support Verizon's growth (both wireline and wireless) may also come from multiple different sources going forward.

"How we deploy that fiber can differ from location to location," said Ellis. "We certainly look where it makes sense for us to own the fiber. But if there's ways for us to partner with other people, or they can build the fiber on our behalf, we'd certainly do that as well. So it's a location-by-location, case-by-case basis. We look at the economics and we decide the best way to the fiber asset that we need."

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

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