Here's some Christmas cheer for all those who supply equipment, software, and services to operators: It looks as if carriers are going to spend more money in 2004 than they did this year.

Analysts at Lehman Brothers are forecasting a "sharp rebound" in European capex "that paints an upbeat outlook for equipment vendors."

The Lehman telecom team believes total operator capital expenditure will rise by 9.9 percent in 2004 compared with 2003, to total €23.08 billion (US$28.66 billion) compared with €20.99 billion ($26.06 billion) this year, following two years of capex cuts.

Table 1: European Wireline Capex

Table 2: European Total Capex

The analysts expect that the upturn will continue in 2005 and 2006, though the increases in those years will not be as dramatic as the leap in 2004; they're forecasting barely better than flat revenue growth for fixed-line carriers.

In the fixed-line sector, DSL uptake is regarded as a key driver of increased capex, as broadband usage continues to rise (see Probe: European DSL Up 24% by 2008). Despite greater broadband penetration in Europe, the Lehman team writes in their report that "concerns over the vulnerability of fixed line revenues to voice over IP are seen as overplayed while the upside potential from DSL seems under appreciated."

A significant portion of its 2004 wireline capex forecast will come from one carrier, Deutsche Telekom AG (NYSE: DT), which is due to increase its capex in 2004 by about 50 percent year-on-year to more than €2 billion, though this figure may be cut back a bit during the coming year.

Overall in the European fixed-line market, the ongoing growth in broadband means that DSL remains a key investment area. This should benefit Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Siemens AG (NYSE: SI; Frankfurt: SIE) most of all, given their strength in the European broadband access market.

There's encouraging news from the Asia/Pacific region, too, as Infonetics Research Inc. believes 2003 has proved to be a growth year for carriers in terms of revenues and capex (see Infonetics: Asia/Pac Capex Hits $30B). A strong second half of the year will see services revenues increase year-on-year by 15 percent to $139 billion, and capex rise 3 percent to $30 billion.

This shows that the Asia/Pacific operators are spending a greater percentage of their revenues on capex than the Europeans. The capex-to-revenues ratio in Asia/Pacific is 22 percent for 2003, while in Europe (fixed and wireless spend) it is half of that, 11 percent. This probably reflects the greater pressure European carriers are still feeling from the debt burdens caused by very high capex levels in 2000 and 2001, and the billions of euros spent on 3G wireless licenses.

Infonetics analyst Richard Webb notes that Asian carriers are experiencing strong growth in new services such as DSL and metro Ethernet, and he expects the uptick in revenues and customer demand for new services to result in an increase in capex again in 2004.

Last but not least, there's encouraging news from the North American market. The latest Light Reading Insider report, "Capital Spending Outlook 2004," analyzes the spending plans of the six largest service providers in North America (see LR Report Reveals US Capex Plans). It notes that capex has been growing throughout 2003 and is set to rise further in 2004, with next-generation Sonet, efforts to drive fiber to the premises, IP/MPLS gear, and softswitching the most likely hot growth areas for carrier capex in 2004.

Table 3: Capex as a % of Revenues

The report notes that a reversion to historical capex-to-sales ratios should provide a stabilization of spending. Ah, but there's a caveat: "This ratio requires that sales (revenues) either remain flat or increase slightly. If revenues continue to decline, so will capital spending," the report states.— Ray Le Maistre, International Editor, Boardwatch