When asked "do you feel better about the telecom business today than you did a year ago?", Larry Babbio, Vice Chairman and President of Verizon Communications, replies with an unequivocal "yes" -- except on the regulatory front. Speaking at the Goldman Sachs Communacopia XII Conference, Babbio said traditional telecom services now represent 45% of Verizon's' overall revenues, compared to 52% in the first half of 2001. The revenue mix is shifting from POTS to new growth areas. Customers are continuing to adopt new technologies at a significant pace and Babbio believes there are significant growth opportunities for a whole range of new services, especially broadband and wireless. Verizon's challenge is to redesign its business around these new growth opportunities while remaining profitable. Some highlights of his presentation:
- Verizon has already moved aggressively to update its core infrastructure. The company has the necessary optical and data backbone capacity for significant traffic growth -- its next challenge is to upgrade the access portion of its network.
- Verizon is committed to a large-scale fiber-to-the-premise (FTTP) deployment. Verizon is negotiating with key industry partners and the RFP process will be completed this month. FTTP deployments will start next year. Babbio said Verizon is committed to reaching 60% of its consumer revenue base with a fiber solution within 5 years. Regarding content partners for the FTTP launch, Babbio said Verizon continues to study its options. No decision on a satellite TV partner or other content aggregator has yet been made.
- Verizon's wireline CAPEX budget for 2004 will be similar to 2003. Spending will shift to FTTP from other areas in the network.
- Verizon believes its has the most advanced wireless network in the U.S. and is moving ahead with 3G 1EV-DO upgrades. Babbio argues that the network is the platform for innovation and will be the key differentiator when mobile penetration rates reach saturation levels. Verizon Wireless in on-track to add 4.5 million customers this year. During the first month of Picture Phone service, customers sent over 1 million such messages. "Push-to-talk" service is selling ahead of expectations.
- Long distance and DSL services are both selling well. Verizon now has 14.6 million long distance customers and 2 million DSL lines. By the end of the year, 80% of Verizon lines will be DSL-eligible. Babbio acknowledged that Verizon's DSL deployments have lagged behind cable modems because they were late to market. He believes that DSL momentum is growing and that Verizon will be able to capture more than 50% of the new broadband adds in its region.
- Verizon's "Enterprise Advance" initiative is on track. The company has 32 enterprise services to date and signed contracts with 59 Fortune 500 firms. A nationwide network rollout is still underway.
- Babbio described the FCC's recent Triennial Review Order as a "huge disappointment" and said Verizon will continue to fight with every legal channel available.
- Verizon had 154,000 employees at the end of Q2 2003, down from 178,00 in Q4 2001
- Verizon's CAPEX / Revenue ratio for 2003 will be in the range of 17.6% to 18.7%, compared to 27.5% in 2001 and 19.4% in 2002.
- During the first half of the year, Verizon generated $3.6 billion in free cash flow, compared to $2.8 billion for the second half of last year
- Overall debt has been reduced from $57.8 billion in Q2 2002 to $48.1 billion in Q2 2003
- Verizon continues to have margins in the 40-42% range
- In September 2003, Greg Evans, Vice President of Service & Access Technology for Verizon Communications, confirmed that the FTTP RFP launched earlier this year has resulted in a short-list of three potential suppliers. The FTTP architecture is based on the international FSAN standard. The process has now entered a lab testing phase to verify critical requirements and Verizon Communications has entered into private negotiations with all three of the suppliers on the short list. Each of the RBOCs will establish separate contracts with suppliers although the architecture would remain common. Verizon's vendor(s) selection could occur by the end of this month. More on Verizon's FTTP project.
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