Capex Is Back

Carrier capital expenditures will return to historic averages in 2004, analysts say, a sign that increased spending on new technology may not be far away (see Service Provider Capex Stabilizes). The forecasts vary slightly depending on the source, but the overall message is that the dark days of double-digit percent drops in spending are gone, for at least a couple of years.

North American service providers’ capital expenditures totaled $48.2 billion in 2003, down 22 percent from 2002, according to Kevin Mitchell, directing analyst for Infonetics Research Inc.. Carriers spent about 14.3 percent of their total revenues in 2003 on capex, he says.

The December 2003 issue of Light Reading Insider reported that capex levels have returned to historical averages of 13 percent to 15 percent of revenues after a fanatical spending binge in the late-nineties (see Carrier Capex Set for 2004 Rebound). That 90s spree exhausted 80 to 90 percent of carrier revenues on capital spending, leaving several service providers financially strapped.

For 2004, Lehman Brothers analyst Steve Levy predicts a 6 percent increase in carrier capex (see Lehman Says Capex Trend Has Turned). He says the uptick in 2004 may come because equipment vendors have cut their cost structures so substantially that even moderate growth in revenue will result in improved profit margins.

Levy says service providers will be especially focused on expanding wireless technologies. For example, Verizon Communications Inc. (NYSE: VZ) is planning a $1 billion broadband wireless initiative during 2004 and 2005. Additionally, thanks to increased DSL revenues, most carriers will expand their DSL networks (see DSL Subscriptions Reach 64M).

Infonetics’ prediction for 2004 isn’t quite as bullish as Levy’s. Its most recent report says North American service provider, ISP, and cable MSO spending will fall 2 percent in 2004 to $47.4 billion. But even that less rosy estimate signals that the industry is closer to stability than it has been in years.

Finally, some good news for equipment vendors: The bucket of dollars they’re competing for won’t shrink this year (see Capex is King). About 44 percent of capex went to equipment in 2003, and that number is expected to stay about the same this year, Mitchell says.

— Joelle Pauley-Fine, special to Light Reading

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