Verizon Says 'Probably No' to Capex Increase After Tax Cut

Dan Jones
1/9/2018
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Verizon's new CTO, Hans Vestberg, poured cold water today on the idea that corporate tax reform would trigger a ramp in its capital spending for deploying and updating networks in the US.

"Quick answer is probably no," said Vesterberg -- formerly Ericsson's CTO -- when asked, at a Citi analyst conference in Las Vegas, if tax reform would stimulate Verizon Communications Inc. (NYSE: VZ) capital expenditure (capex) in 2018. He stressed that CFO Matt Ellis would lay out the final guidance as the provider reports its fourth quarter results at the end of January.

"You don't want to have big surges in capital allocation as it creates ineffencies," Vestberg elucidated further.

In fact, the CTO is expecting to play his part in cutting costs over the next four years by up to $10 billion as Verizon deploys more software-based, virtualized network gear, moves to a common core, and runs all of its business units over the same fiber network.

"I feel responsible for a big part of that $10 billion," Vestberg said. He expects the savings to come out of both capital and operating expenses.

AT&T Inc. (NYSE: T), in contrast, has pledged an additional $1 billion in "capital investment" in 2018. (See AT&T Pledges $1B Capital Investment After Tax Reform.)

Vestberg, meanwhile, said that he saw the passage of the 3rd Generation Partnership Project (3GPP) Release-15 5G specification on December 21 -- the same day as legislators passed the tax bill -- as the more important occurrence of the two.

Vestberg didn't add any new detail to the anticipated Verizon mobile 5G timeline. Executives have previously said that the operator won't rapidly move from fixed 5G to mobile 5G in 2018. (See Verizon Says Fixed 5G Will Happen in 2018, Less Clear on Mobile.)

Instead, Vestberg's comments suggest a late 2019 to 2020 launch for Verizon's mobile 5G. "From there it is a year before you have something," Vestberg said of the 3GPP 5G ratification. "Commercially, maybe a little bit more [time]."

AT&T says it expects to have mobile 5G in late 2018 in 12 markets in the US. (See AT&T's Mobile 5G Plan Leaves as Many Questions as Answers.)

— Dan Jones, Mobile Editor, Light Reading

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Duh!
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Duh!,
User Rank: Blogger
1/9/2018 | 3:48:31 PM
Tax cut != capex
His candor is much appreciated. The capex budget was decided long before the tax cut bill. These companies work on 3-5 year planning cycles. There is no backlog of "shovel-ready projects" waiting for cash flow to free up.

I still expect VZ capex to trend upward over the next few years, for OneFiber and 5G roll-out. Because it tracks with their announced strategy.  Not because of a tax bill.
DanJones
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DanJones,
User Rank: Blogger
1/10/2018 | 12:29:54 PM
Re: Tax cut != capex
The difference in approach is notable though. AT&T comes out with a $1B commitment right off the bat.
Duh!
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Duh!,
User Rank: Blogger
1/10/2018 | 2:04:48 PM
Re: Tax cut != capex
Alternate hypothesis: the tax cut gives them cover to do what they were going to do anyway, while not upsetting Wall St. And AT&T would not be the first corporation to give Trump credit for things he had nothing to do with.
DanJones
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DanJones,
User Rank: Blogger
1/10/2018 | 3:28:12 PM
Re: Tax cut != capex
could be!
brooks7
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brooks7,
User Rank: Light Sabre
1/10/2018 | 7:13:05 PM
Re: Tax cut != capex
I think there is this massive disconnect around the value of a tax break as it relates to the deployment of capital.

Essentially, a Tax Cut adds money to the company below the EBITDA line.  It doesn't change the operating conditions in the slightest.  

The idea of a tax cut to feed CAPEX would be that the company would take the extra money and deploy it.  However, this is only one of a multitude of choices including:  Debt Reduction, Stock Buybacks, and Dividend Increases.

The one thing I reject is that these companies are at the point where they don't have enough projects that generate a positive ROI. It is HOW positive the ROI of most of them are.  Note:  A Tax Cut does not impact ROI calculations at all because they are done (in general)above the EBITDA line.  You can know the depreciation of the equipment - if you can figure out the tax treatement (which is changing in some ways as part of the bill).  But the rest of it I, T and A have little or no direct impact from an individual deployment.

As to AT&Ts claim.  It can not be proven.  They could put it out to help in the press, but I have no idea what projects constitute that $1B.  I note the changes from original press at the Carrier Plant in Indiana.  I think any notion that there is direct linkage is PR and not reality.

seven

 
Austin Idol
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Austin Idol,
User Rank: Moderator
1/9/2018 | 7:33:28 PM
Tax Cuts / Whacking Net Neutrality
It won't show up in year one but there will be incremental cap ex 3-5 years out. These companies are giant freighters and don't move on a dime. But the author easily makes his political leanings clear.
DanJones
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DanJones,
User Rank: Blogger
1/9/2018 | 10:14:39 PM
Re: Tax Cuts / Whacking Net Neutrality
Wait, what?
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