US group is ‘firing on all cylinders’

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Denny Strigl, chief operating officer at Verizon Communications, is happy to reassure investors that things can only get better.

“I think we’re firing on all cylinders,” he says in an interview with the Financial Times. “But I think there’s more thrust to be gotten.”

Verizon’s reported earnings per share have been falling over the past three years, and the stock has underperformed the S&P 500 and the S&P telecoms index in the period since Ivan Seidenberg became chief executive in April 2002.

However, the value of Verizon’s stock has increased 14 per cent over the past six months, well ahead of the S&P 500 and slightly above the S&P telecoms index.

“It is coming together,” says Mr Strigl.

Like its arch-rival AT&T, Verizon is seeking revenue growth via mobile phone and television services for consumers, and serving companies’ telecoms and information technology needs.

Verizon Wireless, Verizon’s mobile joint venture with Vodafone, the UK wireless group, is the leading performer in the US.

In 2006, Verizon Wireless generated revenue of $38bn, up almost 18 per cent, largely by signing up 7.7m new customers. Cingular, AT&T’s mobile business, added 6.8m.

Cingular had 62.2m customers at the end of March, compared with Verizon Wireless’ 60.7m.

But Verizon Wireless’ margin on earnings before interest, tax, depreciation and amortisation was 44.3 per cent, compared with Cingular’s 37.5 per cent.

Last year Mr Seidenberg said Verizon wanted to buy Vodafone’s 45 per cent stake in Verizon Wireless.

Verizon has management control of Verizon Wireless. But its exposure to the growing mobile sector is lower than AT&T because of Vodafone’s stake.

AT&T is the sole owner of Cingular after last year buying BellSouth, a smaller US telecoms company that was a partner in the mobile business.

The problem for Verizon is that Vodafone has steadfastly refused to countenance selling its 45 per cent stake unless offered a stunning premium.

The longer the stalemate continues, the more difficult it appears to become for
Verizon.

Last year Morgan Stanley analysts estimated the equity value of Vodafone’s 45 per cent stake at $47bn, but that has been revised upwards to $58bn given Verizon Wireless’ performance.

Meanwhile, Verizon’s core fixed-line phone business, like those of its peers, is in decline. It reported income of $1.6bn in 2006, down 17 per cent.

Verizon is hoping the landline business’s long-term revival will follow its $25bn investment in a fibre network to deliver broadband and TV services.

The network, known as FiOS, involves extending the fibre connection all the way to people’s homes, so as to offer download speeds of up to 50 megabits per second currently, and 100 mbps or more in the future.

AT&T, by contrast, is only taking fibre as far as neighbourhood hubs and relying on telephone networks using copper wires for the “last mile” connection to individual homes.

It is making an initial investment of $6.5bn to improve its network, and though this will rise, it will not spend anything near Verizon’s $25bn.

AT&T’s upgraded network offers download speeds of about 25 mbps, but executives claim these can be increased to 50 mbps.

Verizon insists its investment will be vindicated because it predicts that more and more people will want to use bandwidth-hungry functions such as downloading videos and sharing photographs.

It is too early to tell. The FiOS TV service was launched in 2005, and has close to 500,000 customers. By 2010, it is supposed to be available to 18m homes.

Mr Strigl is upbeat about the prospects for growth at Verizon Business, which was formed last year after the acquisition of MCI, and serves the telecoms needs of medium and large US companies as well as some multinationals.

He admits AT&T’s enterprise division has “the lion’s share” of the business market in the US, but adds: “We think we have opportunity around the world.”

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