Goliath vs. Goliath: Comparing AT&T’s and Verizon’s 2Q11 Results

The Chosen Path of the Duopolists

As I reviewed the transcripts for the 2Q11 investor conference calls held last week for both AT&T (NYSE:T) and Verizon (NYSE:VZ), the first thing that struck me is just how similar the comments were! The two 800-pound gorillas in the industry are clearly taking virtually the same path in terms of their growth strategies—whether in wireless, wireline, consumer services or enterprise services—and their results in the latest period were, in many respects, eerily alike. There are differences in the details, but compare these comments from their respective conference calls:

1) Verizon:

“We had strong top-line growth in the second quarter, with consolidated revenue increasing to $27.5 billion, up $1.6 billion or 6.3% year-over-year. By capitalizing on the growth opportunities in Wireless, FiOS, and Enterprise strategic services, together with improving our Wholesale business, our consolidated revenue trends continue to be very positive.”

1) AT&T:

"Consolidated revenues totaled $31.5 billion, up $687 million versus the second quarter a year ago due to continued strong mobile broadband growth, U-verse revenue growth of more than 50% and increasing stability in Wireline business revenues with strategic business service revenues growing almost 20%."

2) Verizon:

“About 77% of our revenues are in strategic areas of higher growth, up from about 70% two years ago.”

2) AT&T:

“76% of our revenues came from these next-generation services. That's up from 71% a year ago and 66% just 2 years ago.”

3) Verizon:

“In terms of capital expenditures, while we have had a higher level of spending in the first half compared with last year, our additional investments are in support of increased customer volumes and higher revenue growth in Wireless. First-half CapEx this year totaled $8.9 billion, of which $5.4 billion was Wireless. To date, our network spending on 3G is well ahead of our capacity requirements for the full year, and we have also spent a bit more on 4G LTE, consistent with our deployment plans.”

3) AT&T:

“Capital expenditures were $9.5 billion, with a 29% year-over-year increase in Wireless capital to reach $4.4 billion. Wireless capital includes work with our LTE build, which is on track to be launched later this summer. And as noted in our earnings release, we're slightly increasing our guidance for full year capital investments. We now anticipate capital expenditures in the $20 billion range as we continue to invest in our wireless network.”

4) Verizon:

“In Wireless, we had an outstanding quarter of customer growth, with strong demand for smartphones and Internet data devices and increasing service revenue, driving total revenue growth of 10.2%.”

4) AT&T:

“Our focus on mobile broadband continues to drive impressive revenue growth. Total Wireless revenues were up $1.4 billion or 9.5%.”

5) Verizon:

"Total quarterly data revenue grew to $5.8 billion, up $1.1 billion or 22.2% year-over-year. Data revenue now represents 39.5% of our total service revenue. As you know, a key driver of data growth has been the increased penetration of smartphones. We continue to make good progress on that front, increasing penetration of our retail postpaid phone base from 32% last quarter to 36% this quarter. Just one year ago, smartphone penetration was 21%.”

5) AT&T:

“We grew data revenues more than 23%. That's up more than $1 billion year-over-year. We had another record quarter with smartphone sales, 5.6 million units, both upgrades and new subscribers, our best second quarter ever. The smartphone subscribers now make up half of our postpaid subscriber base, up from just 36% a year ago.”

6) Verizon:

“With regard to Apple iPhone 4, we activated 2.3 million units this quarter, bringing our total to 4.5 million since we started selling the phone in early February.”

6) AT&T:

“We had 3.6 million iPhone activations during the quarter, up about 11% from the second quarter a year ago when the iPhone 4 was first introduced near the end of June.”

7) Verizon:

“Within the postpaid category the significant unit growth in Internet data devices, while adding total service revenue growth and expansion of the category, is having a dilutive effect on the total postpaid ARPU rate of growth at this point in time. Within the Internet data device category, we are seeing strong demand for our Mobile Hotspot or MiFi devices, dongles, and tablets. While the unit growth is very strong and a key area of focus for us in expanding this category, the average ARPU on these devices is less than $54 and is declining on a year-over-year basis.”

7) AT&T:

“But specifically, with our tiered [wireless data] pricing and our $15 and $25 plans that we have out there, as well as our new emphasis on postpaid computing devices, we are getting into a segment of the market that has somewhat lower ARPUs than are standard but are still very profitable for us. We're not going to turn away those sales. Those are very good, profitable sales. But they do have some slight impact on the postpaid ARPU [growth] percentages.”

8) Verizon:

“Finally, I am pleased with the evolution of our partnership with Vodafone. We are clearly moving from a purely financial partnership to an operating partnership. We are now facing our largest multinational customers as one team. We have aligned our product and our technology roadmaps, and we are beginning to purchase infrastructure together. All of these actions will begin to enhance our revenue and our cost profiles.”

8) AT&T (on the pending T-Mobile acquisition):

“We remain comfortable with the process so far and the pace at which we're moving. The staffs at the Department of Justice and the FCC, the 2 federal agencies that must approve the transaction, are working extremely hard…In in response to questions, we have developed a very detailed engineering and economic analysis valuing the enormous efficiencies that will result from the combination of the AT&T and T-Mobile networks. We have revealed to the agencies the results of the analysis and the magnitude of the efficiencies…The facts also demonstrate that the consumer and public interest benefits are enormous. These include better service in the form of fewer dropped calls, faster speeds and a better overall customer experience, more mobile broadband access for more Americans. By expanding our 4G LTE deployment to more than 97% of the U.S. population, some 55 million more people will receive LTE coverage in America than would have occurred without this merger. And billions of dollars of increased investments in the U.S. economy, which drives more jobs and economic growth. “

9) Verizon:

“In Mass Markets, our FiOS broadband and video products continue to drive a positive shift in our revenue mix. FiOS now accounts for 57% of consumer revenue, up from 48% a year ago. FiOS revenue in the quarter grew 20.7% year-over-year, and FiOS ARPU is more than $146.”

9) AT&T:

“U-verse continues to be strong, adding subscribers, increasing triple-play ARPU and is now a $6.5 billion annualized revenue stream. In fact, fast-growing consumer IP data now represents about half of our total consumer revenues.  More than 3/4 of our U-verse video subscribers have a triple- or quad-play bundle with us. ARPU for these customers now reaches $170, up more than 8% year-over-year.”

10) Verizon:

“As we have said, strategic services are becoming a much larger portion of our revenue mix, now representing 48% of total Enterprise. Within this category, advanced services like managed network solutions, contact center solutions, IP communications, and our cloud offerings are growing very nicely.”

10) AT&T:

“And strategic business services had almost 20% revenue growth, its best performance in 6 quarters…In our global enterprise operation, there is strong growth in IP data, outsourcing and integration services...while businesses continue to work their way through the economic downturn, they are still investing in services that help drive productivity and efficiency. We see this in strong IP data growth. We also see it in continued strong growth of our strategic business services, which is now a $5 billion annual revenue stream.”

And so on...So, the big boys are counting on wireless broadband and FTTX initiatives, along with managed services for growth in enterprise revenues.  They're both looking to expand via acquisition or expansion of an existing relationship to broaden their reach.  They're investing heavily in 4G wireless.  And they're selling iPhones as fast as they can get them...

My point? These two companies are formidable players in the telecom world and smaller participants would be remiss not to take note of their efforts and areas of focus.

The only question I have now is when will AT&T start selling off its less profitable access lines, the way that Verizon has been doing for about six years now? And an even more interesting question, who will buy them?

4Q10 ILEC Quarterly Review - Windstream

Focus on Business and Broadband 

As with all ILECs, access line declines continue to weigh on traditional bread and butter revenue streams.  But over the last two years Windstream (Nasdaq:WIN) ceo Jeff Gardner has pursued an aggressive acquisition strategy aimed at building Windstream’s business and broadband revenues, so far successfully. During 2010 alone the company spent nearly $3b to complete four deals. Windstream completed its $643m buy of CLEC NuVox on February 8, 2010, adding approximately 90k business customers; its $1.2b deal for incumbent LEC Iowa Telecommunications on June 1, 2010; its $310m acquisition of data center provider Hosted Solutions on December 1, 2010; and its $782m deal for Q-Comm Corporation (including Q-Comm’s wholly-owned subsidiaries– network provider Kentucky Data Link and CLEC Norlight) on December 2, 2010.

Although on a pro-forma basis revenues for the full year 2010 were $4.1b, a 2% decrease from the prior year, business services revenue increased 0.5% during the year to $1.95b. Consumer broadband revenue increased 9% from the prior year to $429m. The company’s OIBDA margin has slipped recently, falling to 45.8% during 4Q10 from 49.5% in 4Q09.  For the full year the OIBDA margin was 46.4%.  I expect this to improve over future periods as company integrates its recent acquisitions and begins to realize efficiencies.

I’ve noted in the past that Windstream’s “Price for Life” promotion and other bundles of services seems to be slowing access line losses somewhat– voice connections actually increased 0.6% during 4Q10 from 3Q10. But, voice connections were down 4% for the year. Partially offsetting access line losses were gains in broadband and video customers. The company added more than 12k new high-speed Internet customers during the fourth quarter alone, and total broadband connections ended 2010 up 6% at nearly 1.5m. 

Looking to the future, Windstream plans “to invest in success-based initiatives that will help us grow the business, including fiber-to-the-cell projects and data center expansions as well as additions to our broadband network funded in part by federal stimulus awards.” Speaking of stimulus awards, Windstream was awarded more than $163m in grant funding under the RUS’ Broadband Initiatives Program. The awards are for “last mile” projects that will deploy ADSL2+ broadband in unserved portions of 13 states.

4Q10 ILEC Quarterly Review - WVT Communications

Trouble at OCP?

WVT Communications’ (Nasdaq:WWVY) story remained the same in 2010 as the company’s investment in the Orange County-Poughkeepsie Limited Partnership (OCP) brought in enough income to offset operating losses, fund shrinking capital expenditures, and maintain WWVY’s dividend, which was recently increased  8.3% to $1.04 annually during the first quarter of 2011.  The importance and size of OCP relative to WWVY is significant, considering that OCP represented 15% of WWVY’s total assets as of year-end 2010,  and 299% of “income before income taxes” for 2010.  2% revenue growth was primarily attributable to the first full year of US Datanet operations as well as the growth in WWVY’s wholesale product line and an increase in access service revenue due mainly to an increase in USF funding.  Operating margins deteriorated significantly in 2010 due to a one-time impairment loss on landline video assets, a full year of US Datanet expenses and depreciation, and the increase in operating costs and compensation attributable to WWVY’s strategy to grow the ILEC broadband Internet, VoIP and CLEC businesses.

WWVY’s President and CEO’s report addressed how the company performed against the 2010 business plan.  The first initiative to “ Transform the ILEC” into a broadband driven business was met through an 80% increase in 15Mb+ coverage and the migration of landline TV customers (-1,650 customers) to DIRECTV (+575 customers).   The second initiative to “Grow the CLEC” through increased penetration and an expansion of wholesale products and sales was met through a 32% increase in hosted IP seats in service and a 96% increase in wholesale revenue.

During 2010, WWVY’s New Jersey telephone operations were granted pricing flexibility in 2010 for certain intrastate retail services for three years. The company subsequently raised New Jersey prices in July. 

WWVY recently learned that Verizon (NYSE:VZ), the general partner for OCP, has decided to exclude future income for 4G services from the OCP partnership. WWVY has strenuously objected to this determination and is currently exploring all of WWVY’s rights as a limited partner under the agreement. VZ has advised WWVY that the decision will not have any short term adverse impact on the income derived by WWVY from OCP.  WWVY has begun a dialogue with VZ in an effort to come to a mutually satisfactory arrangement regarding OCP and 4G. Dialogue is in the very early stages and terms have not been discussed in any meaningful specificity.

On May 5, 2011, Kenneth H. Volz resigned his position as Executive VP, CFO and Treasurer.   Ralph Martucci, WWVY’s Director of Finance was been selected as Kenneth H. Volz’s replacement. 

4Q10 ILEC Quarterly Review - Verizon

The Company to Beat

Verizon (NYSE:VZ) has steadfastly executed on its core strategies over the past few years, and its performance in 2010 demonstrated the benefits of that focus.  Those core strategies? Move away from consumer wireline services, with the exception of where it has deployed FiOS, and embrace and dominate in the consumer (and enterprise) wireless market.  The company’s consolidated revenue fell marginally in 2010 versus 2009, but that was largely due to its sale of access lines to Frontier Communications (NYSE:FTR).  In fact, the sale of those rural lines combined with strategic cost-cutting helped Verizon improve its wireline margin in 2010.

At the end of 2010, Verizon was generating more than half of its total revenue from wireless services, including wireless data—up from about 36% four years earlier.  The company’s significant investment in consolidating other wireless providers (Alltel, Rural Cellular) as well as its substantial 700 MHz spectrum buy at auction in 2008, have positioned the company well; it is presently the leading provider of 4G LTE service nationwide in terms of POPs covered—although to date the service can only be used with dongles—it hasn’t yet introduced an LTE handset.

Finally, Verizon has embraced the cloud, as most clearly evidenced by its recent acquisition of Terremark.  The company sees “significant growth in cloud computing services” and continues to “shift businesses toward secure IP and managed services."  Verizon expects data usage to be 44x present levels by 2020 and sees demand for broadband speed growing to 100 Gbps by 2015.

Lastly, the company is working to become more global in focus—it now has offices in 75 counties and IP network facilities in 2,700 cities (159 countries), and claimes to be #1 in Security Services.  Verizon is also strengthening its relationship with minority Verizon Wireless owner Vodafone.

The solid financials reflect the company’s sharp focus, and while many complain that Verizon (and AT&T) have become too powerful in terms of market share and control, there’s no doubt that for now at least, Verizon is the company to beat.

4Q10 ILEC Quarterly Review - Telephone & Data Systems

TDS’ Carlson Stubbornly Insists the Company Doesn’t Need to Consolidate

TDS Telecom (NYSE:TDS) and majority-owned U.S. Cellular (NYSE:USM) each had a tough year in 2010.  The top line fell, cash flow and operating income fell, and connections fell…yet speaking at a recent Credit Suisse investor conference, president/ceo Ted Carlson made it very clear that the company does not intend to sell, neither 81% owned U.S. Cellular, nor its wireline assets.

Carlson believes that both of its major segments are poised to grow and create value for investors from what he sees as substantial upside still ahead.  And outstanding, highly concentrated, local customer service will be how the companies distinguish themselves from the major players like AT&T,  Verizon and the cablecos. 

Additionally, Carlson indicated that U.S. Cellular doesn’t need additional spectrum in order to remain competitive as its rivals deploy LTE, although it would be open to acquiring more in some markets:

“We don’t think that we have a spectrum problem. We always have the opportunity to do other creative things, offload to WiFi. We also anticipate that LTE is more efficient and we’ll be turning up several markets this year. Next year we’ll have a significant roll out.  We always have the opportunity to split cells in the more urbanized areas where an issue might arise.

“We’re not going to hit a wall, though we are looking for more spectrum.  We have enough to roll out LTE, though in some places it’s more of a challenge.  We’d have to do a 3 by 3 channel initially in Chicago, but the vendors have provided for that in the standard, it just means we won’t have a 5 by 5 channel at first.”

Carlson indicated that the company wouldn’t be interested in working with Lightsquared or Clearwire, noting that its reputation for “outstanding network quality” might be compromised if it entered into a network sharing agreement.  He also pointed out the challenges of finding handsets that work across numerous spectrum bands.

On the wireline side, TDS is focused on improving its broadband speeds, deploying IPTV and Carlson indicated that TDS might be seeking a “third leg for the business.” Pressed as to what that third leg might be, he hedged: “Utilities, tower industry, fiber…there’s a whole range of things we could look at.”  He added that the company doesn’t intend to sell its tower portfolio; it prefers to maintain control of the structures and rent them to other tenants.

The ceo acknowledged that the companies’ assets are not getting due credit in the equity markets and added, “That’s why we’re buying our stock back.”