Will AT&T rely on NFV / SDN and IoT projects for growth

AT&T Multi-Layer Strategy for growth
Steve Vachon, research analyst at TBR, says revenue growth will become a greater challenge for AT&T in the second half of 2016.

Telecom network operator AT&T’s capital investment (Capex) was $5.6 billion in the second quarter of 2016. AT&T’s consolidated revenues in the second quarter reached $40.5 billion (+22 percent) largely due to the July 24, 2015 acquisition of DIRECTV. AT&T made a profit of $3.4 billion in Q2 2016 against $3.1 billion in the year-ago quarter.
AT&T cost structure

AT&T will be in a transitional phase in H2 2016 as the carrier will no longer be able to rely on DirecTV to sustain year-to-year revenue growth due to the timing of the acquisition. Revenue from AT&T’s traditional businesses will remain pressured, which will cause the carrier to rely on growth initiatives in NFV / SDN, IoT and media to ensure revenue growth. AT&T will also be more focused on providing access to its technology and expertise to assist other technology providers and developers to make headway in these emerging segments.

AT&T’s consolidated revenue increased 22.7 percent year-to-year in Q2 2016, mainly due to the DirecTV acquisition as the carrier experienced revenue declines across its Business Solutions and Consumer Mobility segments. Consolidated operating margins were also pressured in Q2 2016, declining 130 basis point to 16.2 percent, as synergies from DirecTV and lower wireless equipment costs were offset by higher International operating costs stemming from the expansion of AT&T Mexico. A bright spot for AT&T in Q2 2016 was the carrier reporting its second-lowest postpaid Mobility churn in the company’s history, which TBR believes was aided by wireless customers wanting to stay within the AT&T ecosystem to take advantage of exclusive integrated offerings such as DirecTV bundles.

AT&T is creating new revenue streams in NFV/SDN, IoT and Media to compensate for slowing growth in traditional services

TBR believes initiatives in NFV and SDN will help AT&T recover Business Solutions revenue over the next year. AT&T expanded its Network on Demand portfolio to reach 76 countries through the introduction of the Network Functions on Demand platform in July, enabling the carrier to gain a foothold in regions where competitors have yet to offer NFV/SDN-based enterprise services. Additionally, by providing the open source community access to ECOMP, the framework behind Network on Demand, developers will help the carrier to expedite troubleshooting and explore security gaps within the platform, enabling AT&T to strengthen the reliability of its NFV/SDN-based portfolio and ease enterprises that have concerns about adopting these new technologies.

AT&T will capitalize on the rapid growth of OTT and streaming video services through its acquisition of QuickPlay Media in June. In addition to supporting its upcoming DirecTV mobile video offerings, the acquisition enables AT&T to provide content delivery services for existing Quickplay Media customers including Verizon, Samsung and Rogers Communications. TBR believes QuickPlay Media provides significant growth opportunities for AT&T as more cable and wireline operators expand their TV Everywhere services and broadcasters introduce standalone OTT offerings such as HBO NOW.

AT&T is expanding its portfolio to help developers more easily create new IoT solutions through offerings such as the IoT Starter Kit as well as enabling solutions to be created on additional cloud platforms such as Microsoft Azure and the IBM Cloud. Helping developers accelerate the launch of new solutions provides AT&T opportunity to bolster IoT revenue by providing network connectivity to a greater range of devices.

Steve Vachon, research analyst at TBR