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AT&T Cuts Capex by up to $3B

Ray Le Maistre
1/28/2009
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Hold on tight if you're on the 2009 telecom systems joy ride -- things could get a bit bumpy.

AT&T Inc. (NYSE: T) unveiled its fourth quarter and full year 2008 results this morning and, while highlighting significant progress in both fixed and mobile services uptake, especially in terms of iPhone subscriptions and U-verse uptake, the carrier delivered something of a bombshell to the telecom systems market with its 2009 outlook. (See AT&T Reports Q4.)

The carrier, upon which so many vendors rely for regular and, in many cases, significant revenues, says that, while it expects full year 2009 revenues to increase "in the low single-digit range" from 2008's $124 billion, it is cutting its planned capital expenditure (capex) budget by between 10 percent and 15 percent.

AT&T's 2008 capex total was $20.33 billion, comprising $19.67 billion of actual capex and $659 million of interest payments accrued during construction.

Using that 2008 total, AT&T's 2009 capex is set to be in the $17.3 billion to $18.3 billion range: That's a potential annual reduction of about $3 billion, which would average out at $250 million per month.

In 2007, AT&T's capex budget was $17.9 billion.

The news will likely have planners and accountants at multiple equipment firms, as well as a number of industry analysts, reaching for their calculators. (See Tellabs: Carriers Cautious on Capex, Ciena: This Ain't No 2001!, Sizing Up AT&T's Cuts (and Chops) , and Verwaayen Unveils AlcaLu's New Plan .)

Verizon Communications Inc. (NYSE: VZ) was less forthcoming yesterday as it announced its fourth-quarter numbers, saying only that it is "targeting capital spending, excluding amounts related to the acquisition of Alltel Corporation, to be less than the 2008 total."

AT&T's crucial fiber-based broadband access project looks to be a capex survivor: The carrier says it "expects to make continued good progress on its U-verse network build in 2009. Deployment currently reaches 17 million living units, and the company expects to reach its previously announced target of 30 million living units in 2011, a year later than its original plan."

AT&T ended 2008 with more than 1 million U-verse TV subscribers, having added 264,000 during the final three months of the year, its highest quarterly gain so far. (See AT&T Zeroes In on 1M U-verse Subs.)

Linked to that growth is AT&T's wireline IP data revenues. The carrier says those revenues grew by more than 14 percent in the fourth quarter, driven by growing demand for U-verse services and for "business products such as Virtual Private Networks (VPNs) and managed Internet services," though specific revenues numbers were not provided.

AT&T added 2.1 million net wireless subscribers in the fourth quarter of 2008 and 7 million over the whole year, bringing its total wireless subscriber base to 77 million at the end of 2008. Those subscriber growth numbers beat Verizon Wireless 's fourth quarter and 2008 subscriber additions of 1.2 million and 5.8 million, respectively. (See Verizon's FiOS Grows, Wireless Slows in Q4.)

Apple Inc. (Nasdaq: AAPL)'s 3G iPhone was a hot item again for AT&T in the fourth quarter as the operator reported 1.9 million iPhone activations. About 40 percent of those activations were new customers.

And those iPhone customers are valuable to AT&T. The operator says that iPhone customers have average revenue per user (ARPU) that is 1.6 times higher than its post-paid subscriber base.

Mobile data revenues in the fourth quarter were up 51.2 percent to $3.1 billion, compared with the same period last year. Data now accounts for 26.6 percent of AT&T's overall wireless service revenue, which is up from 19.9 percent in the fourth quarter last year.

AT&T reported wireless revenues of $12.9 billion in the fourth quarter, up 13.2 percent year-on-year. Wireless service revenues in the fourth quarter were up 13.3 percent year-on-year to $11.5 billion. Full-year 2008 wireless revenues were up 15.6 percent to $49.3 billion compared to 2007, driven by subscriber additions and data services.

AT&T's overall fourth-quarter revenues totaled $31.1 billion, up 2.4 percent from a year earlier, though net income was down 23.3 percent to $2.4 billion.

Full-year 2008 revenues of $124 billion were up 4.3 percent compared with 2007's total, while net income was up 7.7 percent to $12.87 billion.

"Despite the economic environment, we grew revenues in 2008, and I expect 2009 will be another year of overall revenue growth and solid progress for our company,” said CEO Randall Stephenson in a prepared statement used in the carrier's press release. “Looking ahead, while we are cautious about the economic environment, AT&T is well positioned with a strong balance sheet and premier operational assets, and I am very confident in our ability to execute.”

Just who they're going to execute, we don't know.

— Ray Le Maistre, International News Editor, and Michelle Donegan, European Editor, Light Reading

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digits,
User Rank: Light Beer
12/5/2012 | 4:13:06 PM
re: AT&T Cuts Capex by up to $3B
Ciena - down 4% (though it was also downgraded today by Credit Suisse, so that wouldn't help either)

Tellabs - down nearly 6%

Alcatel-Lucent - up nearly 1.5%

Sonus - flat
digits
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digits,
User Rank: Light Beer
12/5/2012 | 4:13:06 PM
re: AT&T Cuts Capex by up to $3B
So AT&T's capex budget could be cut by as much as 15% -- is that much bigger than people were expecting?

And which areas of its network(s) are likely to be hardest hit?

Ray
abashford
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abashford,
User Rank: Light Beer
12/5/2012 | 4:13:04 PM
re: AT&T Cuts Capex by up to $3B
"Much more than people were expecting?"

Depends on the people...

Analysts have stated CAPEX reduction numbers in the 30% range for North America. We now have the two biggest reporting, and the consensus between them appears to be somewhere between 0-15% drop.

So unless the smaller players are going to see SERIOUS reductions, that 30% number is too agressive.

Another key point to note is that CAPEX as % of revenue has dropped significanly from the tech. bubble days which is the last time that we saw 30%+ range drops in CAPEX industry wide.

Companies then were spending like drunken sailors in the 30-50% (or more) range of CAPEX to revenue. They have since dropped to much more sober 12-18% levels across most of the industry (except high growth areas like China). There is much less fat to trim these days.

If AT&T sees the revenue increase 'single digit' for 2009 and reduces CAPEX by 15% (high end) their CAPEX as % of revenue will be at ~12%, or its lowest level since before 2000 (where my data ends). This is in contrast to Verizon which expects to maintain an annual rate of ~17-18% CAPEX as % of revenue.

If AT&T really drops 15%, they run the risk of losing revenue to their competitors (like Verizon) who appear willing to invest in their future.

So in summary, it was more than I expected, but certainly less than some analysts...
photon2
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photon2,
User Rank: Light Beer
12/5/2012 | 4:13:02 PM
re: AT&T Cuts Capex by up to $3B
Read the fine print...U-Verse reduction will be in fiber nodes, copper and DSL, not IP routing or core optical equipment. Let's not panic folks....
Stevery
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Stevery,
User Rank: Light Beer
12/5/2012 | 4:12:55 PM
re: AT&T Cuts Capex by up to $3B
My crystal ball is different:

So unless the smaller players are going to see SERIOUS reductions, that 30% number is too agressive.

30% is coming from the import/export guys. Since shipping is currently down at these level, some folks are guessing that dependent industries will also be dropping by this amount.

If AT&T sees the revenue increase 'single digit' for 2009 and reduces CAPEX by 15% (high end) their CAPEX as % of revenue will be at ~12%, or its lowest level since before 2000 (where my data ends).

If ATT is planning on revenue increase in 2009, then they are seriously deluded.

This is in contrast to Verizon which expects to maintain an annual rate of ~17-18% CAPEX as % of revenue.

If AT&T really drops 15%, they run the risk of losing revenue to their competitors (like Verizon) who appear willing to invest in their future.


Conversely: if ATT conserves cash, they will be able to service their debt, which may not be true of their competitors.

General Comment

This is a new era. It is not about whether you are "losing revenue to your competitors". It IS about surviving through the coming 2 years, which may well be a depression unless the new administration delivers some tough love to the markets soon.
abashford
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abashford,
User Rank: Light Beer
12/5/2012 | 4:12:51 PM
re: AT&T Cuts Capex by up to $3B
Stevery,

"If ATT is planning on revenue increase in 2009, then they are seriously deluded."

Yah, I agree that is the weakest part of my argument. But the people in the best position to evaluate AT&T's revenue profile is AT&T... so unfortunately that is currently my best data point.

Where the data ends, and my 'gut feel' begins is more to do with prioritization of telecom services in the total household or business spend in a recession/depression.

Consumers will tend to spend more time at home to save money during hard times (assuming they haven't been evicted... and thus drive up the phone bill at their relatives places), and people out of work still want connectivity to get access to job opportunities.

Businesses will crunch down on air travel and prefer teleconferencing and video conferencing instead. However, this could put a pinch on the wireless side. AT&T's and other's 'high-use flat rate' plans might mitigate this somewhat.

Finally, the data traffic is still growing with leaps and bounds. Shopping on the internet is growing strong, as evidenced by Amazon's earnings. Companies are not going to want to reduce investment in their internet store fronts. While much of this is hosted, it still drives bandwidth and equipment.

You are on the -30% page? Or do you think it is going to be even worse?

Cheers.
Stevery
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Stevery,
User Rank: Light Beer
12/5/2012 | 4:12:50 PM
re: AT&T Cuts Capex by up to $3B
You are on the -30% page? Or do you think it is going to be even worse?

I reserve judgement, but I would certainly have a -30% plan within easy reach. I hope that Obama and company do what needs to be done to the nation's banks and home borrowers so that we don't get there (much pain for everyone). In no scenario do I see the real dollar value of the capex increasing.

For the record, I truly hope I am out-to-lunch in thinking -30% is possible.

One other nit: Yah, I agree that is the weakest part of my argument. But the people in the best position to evaluate AT&T's revenue profile is AT&T... so unfortunately that is currently my best data point.

I would normally agree with you. However, I find that management with a vested interest is too conflicted to deliver terrible news in advance. It tends to be bad for the career; that is why I am quite dismissive of their claim.
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