A Sprint to Pain

Sprint Corp.'s (NYSE: FON) financial update last night prompted cries of pain across the industry today (see Sprint Lowers Capex, Guidance).

The carrier has shaved $100 million off capital expenditures for its wireless and wireline groups. And it expects revenues for the FON Group, which includes local and long-distance wireline services, to decline this year by "mid-single digits" as opposed to "low single digits" cited in earlier guidance. Revenue should total about $16 billion for that group in 2002.

Sprint also says overall reduced growth in wireless subscriptions nationwide, as well as "competitors' promotional pricing plans," are making it tough to stay optimistic on its wireless Sprint PCS (NYSE: PCS) Group estimates. While EBITDA (earnings before interest, taxes, depreciation, and amortization) predictions for that group remain unchanged (at least for now), the carrier says it's going to fall 10 percent to 15 percent short of its original goal of signing three million wireless subscribers this year.

The news is the latest in a series of guidance reductions and adjustments that seem to show that the telecom downturn hasn't hit bottom yet, despite claims by numerous suppliers and carriers that it has. Indeed, most major incumbents have lowered their capex and revenue estimates repeatedly over the last few months (see Capex Cuts: How Low Can They Go? and Verizon Next for More Capex Cuts?).

Table 1: Cuts and More Cuts
Carrier 2001 capex 2002 (estimated) capex 2002 (estimated) revenues
AT&T $5.8B business and consumer; $3.5B broadband $3.8 to $4.2B business/consumer; $4.2 to $4.4B broadband $11.32B consumer (down 25%); $26.04 business (excluding Concert - down 7%); $10B broadband (up 10%)
BellSouth $5.5B (approx.) $4.2 to $4.4B $29.8B (up 1%)
Qwest $8.54B $3.1 to $3.3B $18 to $18.4B (down 6-8%)
SBC $11.2B $9.2 to $9.7B $11.4B (down 1-3%)
Sprint $5.3B $2.6B FON Group; $3.3B PCS Group $16B wireline (down 5%); $9.7B wireless (flat)
Verizon $17.4B $4.4 to $4.7B wireless; $8.8 to $9.3B wireline $43B wireline (flat to up 1%); $17.4B wireless (n/a)
WorldCom $7.9B $4 to $4.5B $21 to $21.5B (flat to down 1%)
Sources: Optical Oracle, company documents

Sprint was thought in some quarters to be doing a bit better than its competitors in maintaining equilibrium during the downturn (see Hope Springs From Sprint). At last week’s Supercomm tradeshow in Atlanta, CEO William T. Esrey was bullish on the future (see Esrey Talks Tough, Touts Future). If Sprint keeps dropping its estimates, the thinking goes, the rest of the industry surely hasn't stopped its slide.

Analysts say this thinking was flawed to start with: The industry's problems are more severe than originally thought, and they're affecting all carriers in different ways to different degrees.

"You didn't really think we'd reached the bottom, did you?" says Frank Dzubeck of Communications Network Architects. "We've got at least another quarter or two to go before things bottom out." Further, he says it's unlikely carriers will need to start spending on new equipment until late in 2003, making next year probably as dreary as this one.

In Sprint's case, as with most other incumbents, the carrier's long-distance business has taken a walloping from the growth of wireless and data services. What's more, Sprint's suffered from pricing by competitors AT&T Corp. (NYSE: T) and WorldCom Inc. (Nasdaq: WCOM), which, Dzubeck says, have both been selling blocks of wireline voice time in a manner that mimics sales of time in wireless services.

"It's a competitive thrust by wireline carriers to compete against wireless pricing," Dzubeck says. And it's undermined Sprint's usual ability to compete on price in long distance.

Sprint's also facing increased competition in its wireless business. "There are more competitors, and Verizon and Cingular have taken the gloves off," says Patrick Comack of Guzman & Company.

Others say Sprint's having to contend with the ongoing metamorphosis of carrier networks. "The impact of IP on circuit-switched infrastructure hasn't played out yet," David Passmore, research director at the Burton Group. He says the industry should expect even more "Darwinian natural selection" to happen before it's apparent which carriers will emerge in good shape and which won't.

Passmore also notes that Sprint's wireless strategy, while the right one, is expensive to build and maintain. "They're growing revenues OK on PCS, but they have to make substantial investments in the infrastructure."

— Mary Jander, Senior Editor, Light Reading
BobbyMax 12/4/2012 | 10:15:42 PM
re: A Sprint to Pain The path to future profitability for SBC and Quest is very doobtful. SBC, especially, the Pacific Bell part of its business is very expensive. SBC has failed to trim its idling staff and has taken other steps to control its expenses. The merger of Ameritech to SBC will bring more misery to the shareholders.

SBC has not made any inroads into the data networking business. The wireless business of SBC is also stagnatiing.

Qwest is in the worst shape. It probably will never return to profitability. The new management is busy in granting itself stock options and other compensations which are not in the best interest of the shareholders. The Board of Directors has vested interest and are unable to function independently. ONe board member does a substantial businees witb Quest. The current management does not have any experience in running telephone business. The company is almost bankrupt with huge debt.

The IP technology is essentially a data networking technology and will have no impact on its revenue stream.Moreover, all RBOC can readily adapt IP technology.
rickaty 12/4/2012 | 10:15:33 PM
re: A Sprint to Pain SBC only has 11 Billion in revenue for 2002? Seem way too low; Must be a typo.

BenGrahamMan 12/4/2012 | 10:15:25 PM
re: A Sprint to Pain I have been trying to figure out what the addressable market for Capex could be.

Here is what I am coming up with .

A. Total telecom Capex is historically 16 - 22 % of ISP revenues. I have been using 18 % as historical and future average.

B. Equipment sales are approximately 60 % to 2/3 of (A) that Total capex.

Now the tough question is.... How much of the capex on Equipment is allocated to

1. networking gear
2. wireless
3. optical components
4. other ????

does anyone have any insight, links , reports, paid reports etc, which may answer this question ?
facetious 12/4/2012 | 10:15:17 PM
re: A Sprint to Pain Estimates I've seen indicate that global wireless capex is around 30-35% of capex overall.

Another estimate, although from a notoriously unreliable source, puts the total market for terrestrial optical components at US$3Bn - US$4Bn during the years to come. If correct, this translates to 3-4% of global wireline capex.

Regards / f
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