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PGHammer

join:2003-06-09
Accokeek, MD
reply to Video Guy

Re: ROIC and Let's Play "Hide the Pea with Expenses!"

said by Video Guy :

Keep in mind that Moffitt's argument is not whether FiOS was a good idea for customers (especially the tech-loving ones on forums like this). Clearly, it was/is. (I have it and like it.) He's arguing that using the cold calculating method of return on invested capital, FiOS was not the highest and best use of Verizon's money.

If you believe Moffitt's calculations are correct, Verizon will have lots of customers loving their fast fiber service (and hating their customer service and billing?), but Verizon will be worth *less* in terms of overall enterprise value (they move $23 Billion into capex and only $17 Billion into the present value of the return on that investment). What's the highest and best use of the investable dollars? Wireless and business services.

The most insightful point made in either the article or the blog was the following:

"Verizon is replacing expenses, which show up on its quarterly profit and loss statements, with capital spending, which appears on its balance sheet." from the Blog (»bits.blogs.nytimes.com/2008/08/1···pay-off/).

This means they are converting things that usually get expensed as operating expenses into capital expenses, which artificially pumps up net income compared to prior periods.

If you unwind all that capitalization pro forma you would see a much, much different cash flow picture for Verizon and their stock would probably be lower.

Illegal? No. The financial treatments are probably just fine under GAAP (Generally Accepted Accounting Principles). But the mirage is there, nonetheless. People naturally compare performance over time and most casual investors and even some analysts gloss those kinds of details. And things look rosier than they really are if you just look at the numbers as stated in their audited financials. A smart analyst unwinds those differences between periods and takes another look.

In the end, Verizon will be fine. Wireless and Business revenues will hide many sins (including a labor liability that is and will continue to hang around their necks).

AT&T and Echostar? They need to worry. A lot.
Yes; they do need to worry. Moffitt's thinking is very traditionally bearish; he is generally only in favor of *like-for-like* replacement (as the copper plant ages, replace it with more copper), as opposed to what VZ is doing (replace labor-intensive copper with much less labor-intensive fiber, saving on longer-term M&R costs despite the huge immediate capex penalties). Moffitt is also thinking that VZ won't be able to reduce their labor costs even as the amount of copper in VZ's footprint drops (by and large, the leadership of the CWA and IBEW is not happy with VZ as the copper footprint drops; that unhappiness is largely *because* of the validity of VZ's reasons for replacing copper with fiber)

While it may seem like a better idea to have invested the money in wireless and business services, a good portion of the FTTP/FTTH capex hit *directly* impacts business services, not residential services; however, the changes in business services aren't very obvious, and most won't take place until FTTP/FTTH gets further along in deploment in the urban areas where most businesses lie. Also, the structure of VZW itself limits how much VZ can invest directly in wireless (VZ did offer to by that portion of VZW they didn't own; however, Vodaphone plc said no). Moffitt would therefore have been more friendly toward seeing that money paid directly as dividends while VZ instead follows the AT&T model.

That is *precisely* the difference VZ and SBC as RBOCs (remember, it is SBC that is at the core of what is now AT&T). VZ thinks longer-term, while SBC is more *traditional*.


Video Guy

@verizon.net

Good point about the VZW-Vodaphone complication. That limits them somewhat.

To your point about FiOS for SMB, I have been waiting for that shoe to drop for a while now. There is something on their web site about FiOS for Medium business. I don't know if Moffitt's model shows that upside. Also not sure if he takes into account what will happen with equipment prices if/when other telcos jump in and start ordering equipment at scale, which should lower unit costs.



PGHammer

join:2003-06-09
Accokeek, MD

VZ *has* to have a care about getting into SMB, considering that the cable companies (Comcast in particular) are going full-tilt after those customers (the SMB market has also traditionally been where VZ had been selling Centrex and where UUnet and MCI had been selling data services; that area now operates under the Verizon Business imprint) not to mention enterprise markets (also under VZB). I'm actually surprised that VZB hasn't formed a JV with data-service providers (such as Bloomberg Business Information, LP) concerning reselling of Bloomberg data services to enterprise/SMB and even residential customers via FiOS.