Cingular Capex Cure Coming?
George Notter of Jefferies & Company Inc. writes in a research note that "industry checks indicate that Cingular is preparing to crank up its capital spending significantly for the second half of 2007." Notter writes that he expects Cingular to spend roughly $4.6 billion this year with $3.6 billion of it coming in the second half alone.
The vendors who would stand to gain the most from this include Carrier Access Corp. (Nasdaq: CACS), Sonus Networks Inc. (Nasdaq: SONS), and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), some of whom have directly cited Cingular and/or AT&T during recent earnings calls as reasons for missing guidance. (See Tellabs Earnings Drop on Access and Wireless Cuts Clobber CACS in Q4 .)
Cingular was expected to be spending somewhere in the low double digit range as a percentage of revenues. A representative from AT&T confirmed that wireless capex would be 11 percent of wireless revenues in 2007 which would equate to $4.6 billion in capex assuming Cingular hits revenue estimates. Cingular took in $10 billion in revenue for the first quarter this year so with a flat growth the rest of the year, capex would be $4.4 billion.
Since AT&T reported only $500 million in wireless capex for the first quarter and is expected to spend a similar figure in the second quarter, it is clear that a jump in capex is in order for the second half of 2007.
Notter points out that in 2006, Cingular accounted for 13 percent of all equipment capex in the industry and 28 percent within the North American wireless sector. He estimates that in the first quarter of this year, those numbers have dropped off to 10 percent and 20 percent respectively making vendors with significant Cingular exposure hurt badly.
Carrier Access is one of those vendors and had been generating 48 percent of its sales from Cingular prior to the announcement of the merger. In the third quarter of 2006, those sales dropped to 22 percent. "When Cingular's capital budgets loosen up, Carrier Access' business could benefit significantly," writes Notter.
Tellabs has seen a drop in sales for its 5500 cross-connect business with Cingular and is also expected to benefit from the return in capex. But Tellabs has also been hurting on the wireline side of its AT&T exposure with questions still looming over its fiber access business and whether or not AT&T will buy its 1100 Multiservice Access product for its FTTN plans. As such, Notter still maintains an underperform rating on the stock.
While a return to business as usual from Cingular is certainly a welcome change for equipment vendors, and equally welcome change would be for AT&T to sort out its equipment plans for the Bellsouth region which has put its fair share of stress on the vendors as well.
But for now, the reemergence of Cingular has been moving the market. Shares of Carrier Access closed up $0.51 (12.44 percent) to $4.61 and Tellabs was up $0.32 (2.91 percent) to $11.32 yesterday on the Nasdaq.
— Raymond McConville, Reporter, Light Reading