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Analyst: AT&T Capex Spend Slowing

Light Reading
News Analysis
Light Reading
10/26/2006

AT&T Inc. (NYSE: T) has spent faster than expected on its fiber-based Project Lightspeed initiative, and is putting the brakes on overall capex in the fourth quarter as a consequence. (See Is Lightspeed Slowing?)

So says one analyst, George Notter of Jefferies & Co. Inc. , in a brief released to investors Thursday. Notter follows a group of telecom equipment vendors, several of which relied on AT&T for more than 10 percent of revenues in the third quarter.

"Over the past couple of days, we've been checking in with industry contacts for an update on AT&T's capex spending activity," Notter writes in the note. "Our checks indicate that AT&T is running ahead of its expected capex plan for 2006 and is currently putting the brakes on Q4 capital spending in order to hit full year guidance."

AT&T denies Notter's assertions. "Our capex is what we've said it was going to be all along," AT&T spokesman Wes Warnock told Light Reading Thursday. "We've said before, our capex was going to be between $8 billion and $8.5 billion for the year. When we announced earnings last week we said we were going to be at or slightly above that amount."

Warnock says his company spent $2.1 billion on capex in the third quarter and has spent $6.2 billion so far this year.

This year AT&T is expected to account for about 17 percent of overall capex spending in North America, and roughly 29 percent of wireline capex, Notter notes.

Notter says he's heard several theories on why AT&T might have spent more than expected earlier this year. Some of them concern AT&T's massive fiber-and-services initiative, Project Lightspeed. "One explanation suggested that the carrier has spent more money on Project Lightspeed than expected -- specifically, AT&T has been spending more-than-expected capital to condition copper loops in advance of turning up ADSL2+ based services."

Project Lightspeed, for the most part, runs fiber to a "node" in the neighborhood, then uses existing copper to carry services the rest of the way to the household. This puts a burden on the copper to deliver the kind of bandwidth needed for data, video, and, very soon, high-definition video. (See AT&T: We're Sticking With FTTN.)

AT&T has said it will put the fiber within reach of 19 million homes by the end of 2008. The fiber will run to nodes near 18 million of them. In another million or so new homes, the fiber will run all the way to the home, according to AT&T. Recent reports say AT&T is running fiber all the way to existing, or older, homes in some markets.

Conditioning the copper, Notter says, isn't the only budget-buster AT&T has encountered with Lightspeed. "We've heard that AT&T has required more-than-expected capital to trench in the fiber infrastructure behind the FTTN (Fiber-to-the-Node) and FTTP (Fiber-to-the Premise [sic]) initiatives," Notter writes. (See Lightspeed Slowing? Part II.)

Other Wall Street analysts aren't so sure about Notter's fears. "That rumor has been out there for about a month, that it's going to come to a screeching halt or that we'll see some kind of slowdown here in Q4," says Merriman Curhan Ford & Co. analyst Tim Savageaux. "I have not been able to confirm it." Savageaux points out that AT&T's third-quarter capex numbers looked "fine."

As for Project Lightspeed being the cause of overspending: "There are a number of guys [analysts] out there who have always been bearish on Project Lightspeed; but it's going through," Savageaux says. "That train has already left the station."

Notter and company believe the spending slowdown started in September and has persisted in October. Notter says companies that rely on AT&T spending for sizeable chunks of their total revenue could be hurt. Of the group of companies Notter covers, he points to Redback Networks Inc. , Adtran Inc. (Nasdaq: ADTN), and Ciena Corp. (NYSE: CIEN) as relying on AT&T for more than 10 percent of their revenue.

Notter says AT&T was the biggest customer of Adtran in the third quarter, generating 18 percent of the vendor's sales. AT&T buys both DSLAM and HDSL equipment from the vendor. "We believe that Adtran is already feeling the impact of the current situation at AT&T," he writes. (See Adtran Reports Q2.)

Redback took 13 percent of its revenues from AT&T during 2005, and Notter believes that number might have been larger in the third quarter of this year. "We suspect that Redback could feel the impact of the fourth quarter capex pullback at the RBOC -- despite relatively strong underlying DSL demand trends." (See Redback Reports Q3.)

Notter believes Ciena took 12.5 percent of sales from AT&T in the first three quarters of the 2006. AT&T buys optical switching gear from Ciena for several parts of its network. "We certainly expect that Ciena could feel some incremental pressure from the capital spending slowdown in the current October fiscal Q4 and into fiscal Q1."

Representatives from the vendors did not return calls for comment by deadline Thursday.

— Mark Sullivan, Reporter, Light Reading

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paolo.franzoi
paolo.franzoi
12/5/2012 | 3:36:52 AM
re: Analyst: AT&T Capex Spend Slowing

Has Notter ever been right about anything? He and Rich Church have to be the two worst analysts in the telecom space.

Sell Siders pretty much suck at this finance thing. If you have ever met them, most of them are like lemmings. They have no industry knowledge. Look at Notter - he may have been 28 or so when he started as a sell side analyst. I sure he has an MBA from a fine school but has never worked at a carrier, equipment company or a semiconductor company. They have huge issues with providing effective analysis during times of disruption (see today) and have no "gut" to fall back on.

seven
longshort
longshort
12/5/2012 | 3:36:51 AM
re: Analyst: AT&T Capex Spend Slowing
>> He and Rich Church have to be the two worst analysts in the telecom space. <<

I couldn't agree with you more on this.

optiplayer
optiplayer
12/5/2012 | 3:36:49 AM
re: Analyst: AT&T Capex Spend Slowing
I'll try complete my thought before hitting "Post Message" this time.

schmitt,

You didn't define the type of job in an industry. For example, I suspect most analysts could get a finance job with just about any company but I doubt that's what you mean. I assume you mean a marketing or biz dev type job.

While I would tend to agree with you regarding sell-siders, its not uncommon for buy-siders to cover 40-50 companies potentially covering many industries. For example, a fund might have a "tech" analyst who covers wireline and wireless telecom gear, enterprise gear, storage and maybe even some related chip companies. Its unlikely that such a person would have the breadth to work in each of those sectors which is why sell siders exist.
optiplayer
optiplayer
12/5/2012 | 3:36:49 AM
re: Analyst: AT&T Capex Spend Slowing
schmitt,

You didn't define the type of job in an industry. For example, I suspect most analysts could get a finance job with just about any company but I doubt that's what you mean. I assume you mean a marketing or biz dev type job.

While I would tend to agree with you regarding sell-siders, its not uncommon for buy-siders to cover 40-50 companies potentially covering many industries. For example, a fund might have a "tech" analyst who covers wireline and wireless telecom gear, enterprise gear, storage and maybe ev
Mark Sebastyn
Mark Sebastyn
12/5/2012 | 3:36:49 AM
re: Analyst: AT&T Capex Spend Slowing
The litmus test is any analyst, sell-side, buy-side or market research should be able to obtain a job in the industry they are covering.
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