x
Optical/IP

Capex Cuts: How Low Can They Go?

Sources say capex reductions just announced by Qwest and BellSouth could be just the tip of the iceberg.

Service providers will likely keep cutting capex, sources say, and they even stand ready to postpone the spending to which they've already partially committed, in requests for proposal (RFPs). These bids on new work, even if they have been awarded to specific vendors, are no guarantee that money will actually be spent on new equipment or facilities.

Visible Cuts

Let's take it from the top; that is, the spending cuts that are plain for all to see:

These look like the latest of what will be an ongoing stream of capex cuts from leading carriers, continuing for months to come. Last night, Qwest's Nacchio was asked whether the carrier might cut down to $1.5 billion or $2 billion, the very least Qwest has said it needs just to maintain its network. Nacchio equivocated: Estimating spending, he said, "is not a precise science; it's an art form."

RFPs: Hidden Cuts?

While most carriers say it's unlikely for existing RFPs to be affected by capex cuts, analysts predict they will probably lie fallow for many months more.

"[Carriers] are going to wait it out," says Frank Dzubeck, president of consultancy Communications Network Architects. "Lots of these proposals aren't going anywhere for a while."

Even proposals for which vendors have already been chosen will probably be stymied. James Jungjohann of CIBC World Markets says he and his colleagues have discovered in interviews with carrier personnel that there is "a disconnect between what is being quoted to vendors versus what is actually planned." (See Don't Trust the Techies)

"The timing of new RFPs being released to OEMs should be viewed with [suspicion]," he wrote in a client note yesterday. In one case, he says, a CTO told vendors that a large next-gen deployment was planned for the fall. The same carrier's internal personnel in charge of actual construction say the work likely won't begin until the summer of 2003. Elsewhere, Jungjohann cites an optical switch manufacturer that was led on by an international PTT, which had even approved a budget for the project; now "the negotiations have stalled, as the carrier appears unwilling to make any capital commitments."

Reticence on the part of carriers and their would-be suppliers is clearly evident in recent doings. While most carriers remain cagey about the status of well-known upcoming RFPs (see SBC, Verizon Mull Metro Buys), some resolutions have apparently been reached in would-be contracts at Verizon -- but no one's talking about the next steps.

Even though no public announcements have been made, sources at Verizon say Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) has won the initial bid in the carrier's broadband crossconnect RFP, a project involving the addition of next-generation gear to Verizon's network. Verizon also plans to make a decision by June 2002 on its long-awaited next-generation metro Sonet RFP, these sources say.

In late March, analysts at UBS Warburg estimated the worth of the Verizon crossconnect project at $50 million to $100 million, with the likely winner being Tellabs' 6500. Other bidders that may still be chosen for portions of the work include Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU), according to the Warburg note.

For Verizon's Sonet project, Warburg said in March that a decision was initially expected in January 2002 and that it would be worth $750 million to $1 billion to the winner. According to Warburg analyst Nikos Theodosopoulos and colleagues, finalists include Fujitsu Ltd. (KLS: FUJI.KL), Lucent, and Nortel Networks Corp. (NYSE/Toronto: NT).

Other sources have alerted Light Reading that Verizon has picked Lucent as the key vendor in its "ring DWDM" RFP. This proposal apparently was open for some time (see Tellabs Losing Its Edge?) and calls for ring capabilities in metro DWDM gear.

Lucent has not announced any RFP wins at Verizon.

Despite the apparent good news implied by these RFP selections, analysts say none of them will be considered "done deals" until the checks for equipment are written. And Jungjohann and his colleagues suggest the gap between selection and payment could be widening, as carriers seek to put off decisions as long as possible.

"Contract awards don't happen until the exec in charge of contracting signs the check. And that's not likely to happen in many of these instances," says CIBC analyst Steven Kamman. "Postponements will give carriers breathing room, and they'll likely continue well into next year."

Even Verizon concedes there may be a wait before many projects are realized in the network. "Any proposal is subject to a very rigorous shakedown cruise," says a spokesperson. "How long between an official selection announcement and deployment is anybody's guess."

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com
fiber_diet 12/4/2012 | 10:34:05 PM
re: Capex Cuts: How Low Can They Go? Especially when the price erosion of equipment costs is around 20-30% (and sometimes greater).

The article though is somewhat misleading. Just because someone announces a 20% budget cut doesn't not necessarily translate into less equipment being deployed. If one assumes a price erosion of around 20% and a carrier cutting capex by 20%, you end up with the same amount of equipment being deployed.

zweisel 12/4/2012 | 10:34:05 PM
re: Capex Cuts: How Low Can They Go? They will still spend a whopping $35B in CAPEX which is still a huge market once the industry consolidates. Basic business sense.
reality check 12/4/2012 | 10:34:04 PM
re: Capex Cuts: How Low Can They Go? zweisel wrote:

They will still spend a whopping $35B in CAPEX which is still a huge market once the industry consolidates. Basic business sense.

------------------------------

Perhaps you should go back to B-school zweisel (if you ever took a course). CAPEX stands for capital expenditures. And it means exactly that! Capital expenditures includes everything from building new central offices to refurbishing old ones to replacing major building equipment infrastructure (like battery banks and back-up diesel generators).

If you were to break-down CAPEX expenditures for any of these service providers, you would find that 90% + is for the items I've mentioned above. Perhaps back when the money was flowing like the champane from an IPO party, and the CAPEX numbers were two to three times what they are today, there was significant money for new products and service roll-outs, but those times are long gone.

Whe you additionally factor in the spending carriers do each quarter to maintain their current equipment (new cards, software releases, etc (yes, these are all under CAPEX too)), that is a huge chuck of whatever is left over, and it will all go to the incumbent equipment providers (Cisco, Lucent, Nortel, Acatel, etc). How else do you think they announce 2-3 Billion in revenues these days? It's not because they are winning contract for new services roll-outs.

The bottom line is that the start-ups are waiting outside the door hoping for some scraps of CAPEX to get past the infrastructure guys and the incumbent equipment vendors. The latest words of even more CAPEX cuts will surely hit start-ups the most.
Phonon-Ex 12/4/2012 | 10:33:58 PM
re: Capex Cuts: How Low Can They Go? I don't understand - if $35Billion
translates into "a huge market" from
"basic business sense", then why
are so many qualified professionals
in the field getting laid off?
SFanalyst 12/4/2012 | 10:33:57 PM
re: Capex Cuts: How Low Can They Go? If you look at just the RBOCs, capex has dropped from $48b in 2000, to what is projected to be around $32b this year, assuming no more cuts. So, equipment vendors will give up $16b in revenue -- on just these 4 companies alone. Ouch.

Then consider the drop in prices cited already. So it's lower revenues AND lower profits.
bitdropper 12/4/2012 | 10:33:25 PM
re: Capex Cuts: How Low Can They Go? "Any proposal is subject to a very rigorous shakedown cruise," says a spokesperson. "How long between an official selection announcement and deployment is anybody's guess."

-------------------------------------------------
It is not uncommon for RBOCs to exaggerate the deployment quantities on RFPs, in order to drive the price down on the commodity. They are well-practiced at this technique. Vendors immediately rush off to Wall Street, waving an award announcement that may have little to do with the actual business generated. RBOCs will then sign contracts containing minimum volume commitments, safe in the knowledge that there are few vendors who are stupid enough to sue their own giant customers. It merely gets "re-negotiated" out of the sight of the same investors who rushed to buy stock when the award was announced.

Back up and look at the big picture!
HOME
Sign In
SEARCH
CLOSE
MORE
CLOSE