Verizon Communications CEO Lowell McAdam was joking with analysts on Tuesday that the company might update its advertising slogan from “Can you hear me now?” to “Can you see me now?”
McAdam was referring to the declining importance of voice calls and the fast-rising use of data for video calls and everything else people do on their smartphones. But the question might be equally apt for Verizon investors, analysts, and customers trying to make sense of the McAdam’s complicated, multi-faceted transition strategy for the telecommunications giant.
Tuesday’s second quarter earnings report offered a peek behind the strategic curtain and didn’t exactly reveal a neat and tidy operation.
Revenue overall was down 5% to $30.5 billion, as Verizon’s wired telephone, Internet, and cable side continued to shrink. The wireless side, which used to be the engine of growth, was hit by customers moving to cheaper, unsubsidized plans and upgrading fewer phones. While revenue would have been even lower absent last year’s purchase of AOL, it would have been a bit higher if Verizon (VZ) hadn’t sold off landline businesses in three states last year. But even taking both deals into account, revenue would have down 3.5%, the company said.
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Unpacking the 17 cents of earnings per share—down from $1.04 a year ago—was even more complicated, with tax and pension adjustments, divestments, debt repayments, and the recent seven-week strike all figuring in. Adjusted EPS was still down to 94 cents per share.
McAdam and his top lieutenant, CFO Fran Shammo, weren’t in denial about the challenges and tried to explain the various aspects of their strategy to get revenue growing again. And post-earnings, they’re hitting the road for the next few weeks to meet with major investors. But at least so far, they’re struggling to convince the skeptics. Verizon shares lost 2% in midday trading on Tuesday.
This week’s $4.8 billion purchase of Yahoo (YHOO), combined with last year’s $4.4 billion AOL buy, is supposed to create a new advertising revenue stream. Big investments in wireless infrastructure are intended to ready Verizon’s network for next generation, or 5G, offerings at 100 times the speed of current 4G LTE starting in 2018. And the 5G technology, in turn, is planned as a way to slash the cost of providing Internet and cable TV connections to customers in their homes. All the while, Verizon is still trying to pay down its $100 billion debt load left over from buying out its minority wireless partner, Vodafone, over two years ago. A tiny but fast growing business connecting smart devices, the “Internet of things” market, fits in somehow, as well.
But the hodgepodge effort is a mix of businesses that couldn’t make it on their own, like Yahoo and AOL, and immature technologies like 5G and IoT. And Verizon’s recent price hike on basic mobile service plans could backfire if competitors Sprint (S) and T-Mobile (TMUS) decide to compete more on price.
Already, there have been stumbles along the way. The $1.4 billion purchase of cloud services host Terremark in 2011 never worked out as planned and Verizon has been shopping the unit for possible sale. The effort is reaching “the end of the process” and a decision about whether to sell is likely in the third quarter, CFO Fran Shammo told analysts on Tuesday.
The FiOS service, that was supposed to compete with cable TV and Internet providers using fast fiber optic connections, proved too expensive. Verizon halted FiOS expansion and last year sold its operations in California, Florida, and Texas to Frontier Communications.
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Now McAdam wants to revive FiOS by using 5G wireless technology to deliver TV and data to customers. He’s already struck a deal with Boston and said he is looking to expand to more cities, even outside of the company’s current Washington to Boston footprint. San Francisco is one possibility, he said on Tuesday.
But 5G standards are still in the works and Verizon (VZ) hasn’t even tested the technology in real-world neighborhood settings. A field test covering 200 homes, with all the kinds of outdoor challenges that can block wireless signals like tall trees and bad weather, is just coming up, McAdam said.
McAdam’s plan for lower-cost connections makes sense, since half the cost of installing FiOS is wiring up the inside of a customer’s home and wireless 5G won’t need that. But how reliable such a system will be or whether customers will go for it remains to be seen. And while government regulators are moving to push 5G forward, they are going more slowly in reviewing a key piece of Verizon’s nationwide 5G strategy, the acquisition of XO Communications’ 26,000-mile U.S. fiber network.
It’s a challenging set of moves to pull off successfully, as even McAdam acknowledged. “We don’t kid ourselves about execution,” McAdam said at the end of his analyst call. “We’ve been executing bringing new businesses into the portfolio since we started this back in ’99. But just as we have in the past, we’re determined to lead the next growth surge.”
But long time telecom analyst Craig Moffett of MoffettNathanson was a bit sanguine, particularly about the ad business. “We think the strategy has merit,” Moffett wrote. “But investors should be sober about how difficult it will be to execute… and how little impact it may have on the battleship that is Verizon even if it does.”