Carrier Capex Cuts to Slow a Bit

As the telecom downturn wears on, anxious investors demand to know: Will things get better in 2003? For the answer, many are looking to trends in carrier capital spending.

According to “Capital Spending Update,” the latest report from Optical Oracle, Light Reading’s subscription service, cuts in capex will continue in 2003 but will not be as steep as those in 2002. There are signs of improvement, as well as warning indicators. Carriers also have picked the spots where they're likely to spend in the near term.

To start at the top: The spending decline predicted in last November's Optical Oracle has proven conservative (see Optical Oracle: More Carrier Cutbacks ). Instead of the 35 percent that report forecast, capex is down 44 percent for the first three quarters of 2002. What's more, this figure includes only the eight carriers that remain of the 11 tracked in last year's report. Not only are individual companies' reductions part of the trend, but consolidation is shrinking the available pool for capital spending.

In one respect, the above trend is positive. During the bubble years 1999 through 2001, carrier captial spending accounted for more than 80 percent of incoming revenues -- unsustainable levels. Historically, capex has been under 20 percent of revenues, and it's been a slow and painful process to bring spending back in line with that norm. Now the excess has been removed, but the Optical Oracle report cautions against drawing hasty conclusions. It would be nice to see the ratio of capex to revenue stabilize and gradually increase in coming quarters (as long as the increase is achieved by higher capital spending and not lower revenues).

As the capsized capex boat gets righted, some carriers are revealed as worse off than others. The WorldCom Inc. (OTC: WCOEQ) bankruptcy story has proven that incumbent status doesn't guarantee long-term viability. AT&T Corp. (NYSE: T) and Sprint Corp. (NYSE: FON) are still on shaky ground, while Broadwing Inc. (NYSE: BRW), Level 3 Communications Inc. (Nasdaq: LVLT), and Qwest Communications International Inc. (NYSE: Q) are clearly distressed.

Still, the report's analysis reveals that three of the ex-RBOCs -- BellSouth Corp. (NYSE: BLS), SBC Communications Inc. (NYSE: SBC), and Verizon Communications Inc. (NYSE: VZ) -- appear to be managing their significant debt levels better than other carriers. Leverage is high, but cash balances are adequate and cash flow has been consistently positive.

But there's still the chance for another leg down in the washout. Carriers that filed for bankruptcy this year -- 360networks Inc. and Williams (now WilTel Communications Group Inc.), for example -- appear to be emerging from Chapter 11, ready to compete aggressively on price in areas such as dedicated IP and wholesale transport services, where excess capacity is greatest. If a predatory pricing environment is prolonged, recovery will be delayed. A second shakeout will likely occur, resulting in more bankruptcies.

Despite these dire possibilities and the ongoing dramatic decline in capex, the billions being spent by the remaining IXCs and RBOCs are going somewhere; and the remaining, solvent carriers will have budgets for new deployments.

In a detailed, carrier-by-carrier, vendor-by-vendor listing of current RFP activity, the Optical Oracle concludes that next-generation Sonet equipment, ATM multiservice gear, and operations support systems (OSS) software are likely to continue to attract investment, albeit on a reduced scale.

Voice over IP, access other than DSL, and optical switching have been relegated to the back burner.

— Mary Jander, Senior Editor, Light Reading
www.lightreading.com The current Optical Oracle report, “Capital Spending Update,” is available here. A single-user license to the report is $400. Annual single-user subscriptions to the Optical Oracle, which include access to the entire archives, the current report, and each of the monthly reportes issued over the next 12 months, is available for $1,250 per year.

Want to know more? The big cheeses of the optical networking industry will be discussing carrier capex plans at Lightspeed Europe. Check it out at Lightspeed Europe 02.

Editor's Note: Light Reading is not affiliated with Oracle Corporation.

jssreenath 12/4/2012 | 9:19:08 PM
re: Carrier Capex Cuts to Slow a Bit Cap ex cuts to slow? Certainly you can craft a better title than that.
mr0carrier 12/4/2012 | 9:19:04 PM
re: Carrier Capex Cuts to Slow a Bit We are just playing a waiting game for better prices. Sure we need to grow our networks but they need to be cheap. While we wait, prices come down, plus it is fun to keep the vendors on the line but not real them in. We also need to wait a little while for Joe public and the SEC to stop watching us so closely so we can get back into the games.


BobbyMax 12/4/2012 | 9:19:03 PM
re: Carrier Capex Cuts to Slow a Bit Carriers were destablized by the vendorsby selling equipment which they did not need. Of all carriers, Verizon has the most debt ( about $64Billion). Most of the RBOCs stocks have lost almost 80% of the value in the last two years.

There has been enticement to carriers by some equipment vendors to sell them equipment which they did not need. Vendors have invaded the access network, metro network, core network, long-haul network with all kind of equipment which are not needed by the carriers. One prome example is Software Switches.

Carriers' capex is diminishing fast. They are not in a position to buy switches, routers, multi service switches and many other items every month.

According to my analysis carriers are not likely to recover until the year 2010. There will be alot of mergers and acquisitions, exiting from certain market segments, and reduced business size. Capex will continue to decline drastically until the year 2010.
opticalwatcher 12/4/2012 | 9:18:55 PM
re: Carrier Capex Cuts to Slow a Bit Bobbymax, in general I agree with your statements (for once). I don't agree that capex will continue to be drastically reduced as far out as 2010. I think spending has come in line with revs, well, at least current revs. But changes are on the way over the next five or so yrs which should have a profound impact on the telecom biz as a whole.
Sat communications will begin to play a more prominant role than the last 10 yrs.

Many current players will drop off the map.

Demand for communication worldwide will continue to develop requiring more from the carriers.

Video services. This requires bandwidth.

I think we're going to have a hang-over for quite some time, but I think companies have moved quickly to make changes. I believe that's why this bubble has burst so hard and fast. The healing process and future growth will come around 2005.

Obviously - JMHO!
whyiswhy 12/4/2012 | 9:15:36 PM
re: Carrier Capex Cuts to Slow a Bit What????!!!!????

That's like (pick one or more):

1) A prostitute saying the reason she sells her body is because bad men offer her money!
2) A priest saying the nasty boys enticed him!
3) Clinton saying he did not have sex with that woman, or that he did not inhale!
4) Gore saying there was no controlling legal authority or that he invented the internet!

How foolish can one get?

The carriers did it to themselves, just like they are doing it in wireless now. Offering services for way below their actual cost, to try to get market share, and screwing the wired residential and business customers in the process. Why in the Hexx do you think they are making such a fuss about UNE-P?

You continuously demonstrate not only your general ignorance, but your low intelligence and your unabashed eagerness to share both with the other posters on LR; I think it is time to refer to you by your initials, BM.

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