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Post by Peter Yallerious with Silicon Valley Cloud
Verizon Communications (VZ) is a leading global provider of telecommunication services. It is far ahead of the competition in developing 4G
LTE ("fourth generation long-term evolution") technology--industry speak for faster and more powerful connection
Recent acquisitions of cutting edge products further the upside in a Verizon investment. Add a jaw-dropping
5.6% dividend yield and you have a strong brand name with favorable risk asymmetry.
In late August 2011, the telecommunications company
purchased CloudSwitch in order to enhance exposure to cloud software. This acquisition also has considerable revenue and cost
synergies with the company's earlier acquisition of Terremark. I find that management is taking the right approach to consolidating
companies in an effort to gain customers and new capabilities.
To the extent that that the demand curve is more
inelastic than what investors might originally presume, shareholders can possibly reap a heavy gain if Verizon's technological
developments prove innovative. I believe the company could then raise prices on "hooked" customers with minimal
Management also has done an outstanding job in strategy. In a much publicized strike, Verizon did not cave in to
labor. Instead, it informed workers that should the strike persist, healthcare plus other benefits could be eliminated.
The plan worked and will enable Verizon to improve pay-for-performance and its ability to fire workers for cause going
forward. Management argued that it needed to be aggressive in order to make up for sagging sales in its wireline unit. The
fiduciary obligation of companies under US corporate law is to maximize shareholder value and Verizon's actions are bolder
in respecting that ethical conduct than many other leading multinationals.
In addition to mollifying workers,
Verizon also has continually impressed customers. Its 4G LTE network has been launched in over 38 areas as of the beginning
of 2011, while competitors struggle to keep up. AT&T has just started development in this technology.
was also minimally affected by Hurricane Irene and Tropical Storm Lee. It recently released a press release revising earlier guidance in EBITDA, dropping the estimate by
$200M - $250M for 3Q11. Installation backlogs will return to normal within 90-100 days and the company's wireless segment
was not affected.
Based on its multiples, Verizon appears to be undervalued. It is trading at 16.4x and 14.1x past and forward earnings,
respectively, and has an EV/EBITDA multiple of 4.3. The company, I believe, is safe from a possible double dip due to the
more inelastic demand it receives from the market. It also has low volatility with a beta of 0.64.
Verizon specializes in two segments:
domestic wireless and wireline. The former's 2010 revenues of $63.4B made up 60% of total sales, but I believe is fairly priced
by the market. On the other hand, wireline--which offers FiOS cable, voice, internet access, broadband, network access and
long distance--I believe is undervalued. I forecast the wireline segment growing faster than analyst expectations.
rate the telecommunications provider around a "hold", which I think is slightly negative for a company that offers
tremendous upside and minimal downside both in terms of volatility and dividend yields. My model forecasts wireless growing
by 9.6% to $70.1B in sales for 2011 and then by 5.5%, 4.1%, and 3.2% for the next few years.
During the same time,
I expect wireline revenue to decrease by 0.5% to $42.7B for 2011, and then to increase gradually by 0.6%, 1.5%, 2%, and 2.1%
for the following years. Consensus estimates for Verizon's EPS are that it will be flat for 2011 at $2.24 and then increase
by 16.1% and 13.8%...........................
WHAT OF THE LATEST 4G "HAPPENINGS?"
4G LTE Advanced refers to the evolved version of LTE that is being developed by 3GPP to meet or exceed
the requirements of the International Telecommunication Union (ITU) for a true fourth generation radio-communication standard
known as IMT-Advanced. 4G LTE, whose project name is LTE-Advanced, is being specified initially in Release 10 of the 3GPP
standard which came out in December 2010. The 4G LTE standard will continue to be developed in subsequent releases.
not only addresses basics and test challenges, but also outlines the technology, describes deployment and standard milestones
and offers resources for those requiring more in-depth LTE technology information.
We ALL offer greater insight
into LTE designs by providing greater insight into complex LTE technology, evolving LTE standards and how to test to them,
and deeper insight into the root causes of design problems. Agilent continues to play a pivotal role in the development, revision
and implementation of 3GPP and the new 4G LTE technology, as well as, continues to be the recognized leader for its contribution
to the future of wireless access.
Verizon FiOS Internet Service is a broadband
service designed to provide Internet access with maximum connection speeds up to 50 Mbps downstream and 25 Mbps upstream,
depending on where you live. FiOS is provided on our state-of-the-art fiber-optic network.
The consumer plans
include a standard suite of services including access to newsgroups, up to 9 Verizon.net email accounts, online services,
and 10 MB of personal Web space. Optional services are also available for a fee.
Connection speeds are between your location and the
Verizon central office serving your location.
Actual download and upload speeds will vary based on numerous factors,
such as the condition of wiring at your location, computer configuration, Internet and network congestion, and the speed of
website servers you access, among other factors. Speed and uninterrupted use of the service are not guaranteed. Where higher
upstream speeds are available, a hard wired connection is required to achieve maximum upstream speeds.
AND WHAT THE HELLO ABOUT SPEED ON THESE "SUPERHUMAN"
USA DEVELOPED 4G NETWOKS?
Verizon's first LTE dongle is startlingly large. But not as
startling as the speed.
These results are spot tests from all across the country: New York (Gizmodo & Engadget, Seattle (MSNBC.com), Philadelphia
GigaOM, Arizona SlashGear and Boston (NetworkWorld).
And they paint a pretty remarkable picture. Most of the "slow" results—around 7-9Mbps downstream—are
with a mere two bars of signal. MSNBC.com's crazy, fiber-fast speeds? Totally legit, Verizon told MSNBC.com super editor and
Coors Light fanboy Wilson
Rothman. It even trounced his home cable connection, again and again and again.
Our own results
are from deep within Gizmodo HQ in SoHo in downtown Manhattan, the average of five speed tests. By comparison, our WiMax dongle
from the same spot averaged a mere 2.7Mbps downstream and 2.8Mbps upstream, and the strength of the signal seemed a little
shakier. LTE is the real deal—right now anyway, while there's nobody but lucky tech journos stealing all the internets.
We'll have to see how well it holds up as more people pile on, but the initial results are stunning, to say the least.
of getting it set up is a little less fabulous. It's Windows-only for now (changing soon, hopefully!), and Verizon's Access
Manager is a terrible little piece of software which isn't even bundled on the dongle. The dongle itself is wide and bulbous,
a return to the USB dongles of three years ago that eat up gobs of real estate on the side of your PC. (The Clearwire WiMax
dongle is a classy affair by comparison, a metallic circle, drivers all neatly bundled.)
Dear lord, we can't wait
until there's an LTE MiFi card.
In the meantime, just be amazed at these speeds, finally available in America. Whether you wanna call it 4G or not,
the bottom line is that it's damn fast..........................
ABOUT 4G THROUGHPUT...IS NOT THAT IMPORTANT TOO?
By now you've seen all the ads pitching wireless companies'
new 4G mobile broadband
services and devices. But
beyond all the buzzwords and hype, which companies can reliably provide next-generation speed?
We decided to find out by testing each
of the four major national carriers--AT&T, Sprint, T-Mobile, and Verizon--in 260 locations spread among 13 U.S. cities.
We found some clear winners and losers, and some good news about wireless service in the United States as a whole. Here are
Wireless data speeds have soared: Since this time last year, the major wireless carriers, as a group,
have increased their average download speeds for laptop-modem users by more than threefold, an apparent result of their urgent
transition from 3G to 4G network technology.
(We measured the best service we could get--3G or 4G--in each testing location.) Over laptop modems, the Big Four carriers
now have a collective average download speed of roughly 3.5 megabits per second in our 13 testing cities, versus a nearly
1-mbps average download speed in those cities at the beginning of 2010, a remarkable improvement.
In our previous wireless-network performance studies, we measured the "reliability" of the data
service, expressed as the percentage of tests in which we could obtain a good connection. But our test results show that network
service has improved to the point where it's rare to find an unusable signal or no signal at all. So we have retired our reliability
measurement--another testament to the dramatic improvements of the past year.
4G LTE is for real: Verizon's 4G LTE service, which is now in 38 U.S. markets, was widely available in 12 of our 13 testing cities. (We didn't go out of our
way to test in areas served by Verizon's LTE network; we haven't changed our list of testing cities in the three years we've
done these tests.)
Our laptop-modem tests on Verizon clocked speeds that were far faster than those on competing 4G networks in
the same tests (twice as fast as the second-fastest service, in fact). Verizon's network had an average download speed of
roughly 6.5 mbps and an average upload speed of 5.0 mbps.
One important caveat: A relatively small number of Verizon customers currently
use this new network. During our testing period, Verizon offered only two laptop-modem models that worked on the network,
and none of the company's smartphones could take advantage of the new 4G speeds.
The performance of Verizon's
network could degrade as more people--and devices--connect to it.
And there's a downside to Verizon's 4G success. While the new 4G
LTE network is lightning-fast, our smartphone-based tests suggest that the 3G CDMA network that most Verizon smartphone customers
use today may actually be getting slower. The connection speeds we measured on our Verizon (3G CDMA) testing smartphone a
Motorola Droid 2 stayed the same or decreased in 10
of our testing cities since last year. And at the moment, those CDMA phones are all that's available to Verizon Wireless customers.
smartphones are fastest: Verizon may have the fastest network for laptops, but in our tests T-Mobile had the speediest
results for smartphones. The T-Mobile HTC G2
we used for testing produced a 13-city average download speed of almost 2.3 mbps; that's about 52 percent faster than the
second-fastest phone, Sprint's
HTC EVO 4G, which had an
average download speed of 1.5 mbps.
T-Mobile also impressed in our laptop-modem tests. Although only half as fast as Verizon's,
T-Mobile's download speeds averaged almost 3 mbps in our tests--more than a threefold increase from the carrier's nearly 0.9-mbps
average download speed in our January 2010 survey. With these laptop- and smartphone-based results, T-Mobile is proving to
be a worthy challenger to its much-larger competitors.
AT&T continues to grow,
but perhaps not fast enough: AT&T, the big winner in our January 2010 survey, has continued to ramp up throughput speeds at about the same
pace, judging from this year's survey results. Its average download speeds in our laptop-modem tests grew 76 percent to a
roughly 2.5 mbps average this year. But each of its competitors showed bigger jumps in download speeds over the past year,
resulting in a third-place finish for AT&T in this year's speed results.
And AT&T's speed gains didn't translate well to
our smartphone-based tests: The average download speeds we measured on our Apple iPhone 4 (1.4 mbps) increased only 15 percent over the speeds we measured on the same device in
early 2010. However, AT&T intends to launch its own 4G LTE network later this year, a move that might tip the balance
of the 4G speed race in its favor once again.
Sprint needs more 4G: In the cities where Sprint offers its 4G WiMax service, customers saw large speed increases
over the past year. Sprint's average download speeds grew 170 percent to 2.1 mbps in our tests this year; the result would
have been even better had the WiMax service been more consistently available throughout our test locations.
in cities such as New Orleans, Phoenix, and San Diego, where Sprint still relies on its 3G CDMA network for data service,
download speeds have fallen, and remain well below the 1 mbps mark.
THE HELLO IS CLOUDSWITCH? by paul saunders with la cloud pros inc
Verizon previous CloudAve coverage yesterday announced that they are acquiring CloudSwitch (previous CloudAve coverage),
the Burlington based company founded in 2008 to make life easy for enterprises to extend their datacenter into the cloud,
for an undisclosed sum.
With this move, Verizon has made it even more clear that they are serious about the enterprise
cloud play which first became evident through their Terremark acquisition.
It was a great exit for a team of talented people who got Amazon on its toes regarding their enterprise grade security. I
would even argue that it is CloudSwitch that pushed Amazon to innovate on their enterprise offering, Amazon VPC.
What is CloudSwitch, BTW?
To put it briefly, CloudSwitch makes
it easy for organizations to extend their secure network perimeter into the public clouds. For a more detailed explanation,
I will quote from my introductory
post on CloudSwitch.
a software appliance that can be installed by the enterprises on a VMware or Xen environment and can be used to securely extend
their datacenter to the public clouds. In spite of some of the problems that still persists in the public clouds (along with
the FUD unleashed by those with stakes in traditional IT world), enterprises are very keen on trying out the public clouds.
They may not put their mission critical workloads into public clouds yet but they want to push some of the applications into
the public clouds in order to take advantage of its low cost and elasticity. There are many solutions that help enterprises
push their applications to the public clouds. However, most of these solutions require enterprises to re-architect their applications
and/or use new management tools. With it also comes issues like modifying the enterprise IT policies to fit in the cloud.
What CloudSwitch wants to do is to extend the enterprise datacenter into the public clouds, like Amazon EC2 and Terremark,
by tapping a technology used in the old days called network bridge (which operates at Layer 2 of the OSI stack).
They took this technology along with layer 3 technologies to
build a hybrid bridge that securely links the datacenter to the public clouds. This is somewhat similar to Amazon VPC but
bridged much more deeply allowing enterprises to extend their datacenter IP addresses, MAC addresses, etc. inside the public
clouds. Since CloudSwitch offers full encryption and isolation in the public clouds, it helps reduce some of the enterprise
concerns about security in the public clouds.
Even though CloudSwitch now supports only Amazon EC2 and Terremark,
they are planning to add more cloud providers in the future.
Where does CloudSwitch fit into Verizon’s strategy?
cloud ambitions and their Terremark acquisition, one can safely speculate that it is more of a talent acquisition. If Verizon
wants to grab the enterprise cloud marketshare, they would want the enterprises flocking to Terremark than any other public
cloud providers. With this in mind, I don’t see a long term scope for CloudSwitch platform under Verizon as there is
no business reason for them to support other competing public clouds.
Clearly, Verizon sees value away from commodity
clouds in their strategy to lure large enterprise customers and this is evident from the blog post by John McEleney announcing the acquisition (emphasis mine).
that F1000 companies are looking for enterprise-class cloud services that cover a broad range of their needs – not
only commodity clouds, but also higher levels of SLAs, enterprise procurement processes, professional services, security
models and dedicated systems
With this strategy, there is no reason to believe that Verizon would want CloudSwitch technology
to help commodity clouds get “enterprise status”. When I pushed hard on it, Ellen Rubin from CloudSwitch told
me that they will continue to support other public cloud providers but she said the actual strategy will
be clear once CloudSwitch teams gets a chance to sit with Terremark team to discuss their future strategy.
see Verizon discontinuing the support for other cloud providers in the short term but I don’t expect them to keep this
product alive in the longer term. Verizon’s cloud ambition is not the only reason for my suspicion. Amazon will definitely
try to beef up their offering to “enterprise grade” without any support from their ecosystem partners. OpenStack
is also seriously pursuing a network component which will meet the needs of enterprises on security. Any cloud provider betting
on OpenStack will tap into this for their needs. Similarly, VMware has its own enterprise security strategy on the cloud.
There is no long term relevance for the CloudSwitch platform in the market. Verizon will be smart to put the resources on
improving their own public cloud offerings than continue to develop a platform that could support other public providers.
Either way, the
acquisition is great for the talented CloudSwitch team. Even as they fade into the cubicles of Verizon, we cannot deny the
fact that their technology is one of the reasons public clouds became palatable to the enterprises. Let me take this opportunity
to congratulate the friends at CloudSwitch and I will be keenly following Terremark as they try to get large enterprises into