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Report: Carrier Capex Cuts Continue

Light Reading
News Analysis
Light Reading
3/25/2003

If you thought carrier capital spending couldn’t go any lower, think again. According to an Infonetics Research Inc. report out this week, service providers are expected to keep right on slashing their capital budgets in the year to come (see RBOCs Spending to Slide in '03).

The report, titled “Service Provider Roll Call and CapEx Analysis, North America 2003,” predicts that most service providers will continue cutting back on their capital spending this year, but that the regional Bell companies will wield the capax more than their competitors. After chopping capex by a staggering 41 percent last year, the RBOCs are expected to cut their spending this year by an additional 9 percent, to $23.3 billion from $25.4 billion in 2002.

Of course, as in the past, the Bells won’t be shaving equal amounts. SBC Communications Inc. (NYSE: SBC) will cut the most, according to Infonetics analyst and author of the report Kevin Mitchell, who expects the carrier to chop close to 20 percent off its capital budget this year. At the other end of the scale is Verizon Communications Inc. (NYSE: VZ), which is expected to spend only 1 percent less this year than it did last.

In all, the report evaluates 67 public and 37 private North American facilities-based carriers, reviewing past analyses and crunching the numbers, percentages, and forecasts made available by the companies themselves. All together, the 104 RBOCs, CLECs, ILECs, IOCs, IXCs, MSOs, and BFDs tracked for the study are expected to cut their capital budgets by 6 percent in 2003, down to a total of $54 billion.

“The CLECs are cutting slightly less as a percentage than the RBOCs,” Mitchell says. He points out, however, that CLEC spending is a lot less significant for the industry than what the Bells spend. This year, the competitive carriers are expected to spend just under $2 billion. That’s down from the bubblicious $21.4 billion they spent in 2000.

While equipment providers continue to suffer under the downward slide in capital spending, the capex cuts for CLECs especially have been necessary. “The capex-to-revenue ratios for the CLECs has certainly been unsustainable in the past,” Mitchell says. Two years ago, he points out, these companies spent 131 percent more on capital expenditures than they were making in revenues. This year, that ratio is expected to be 11 percent -- significantly lower than the expected RBOC ratio of 16 percent.

So when will the elusive turnaround in the industry come? “Until top-line revenues start growing again, you’re not going to see capex grow,” Mitchell says. “But that doesn’t mean that specific categories can’t grow… We’re seeing a shift from legacy products like legacy voice products and Frame and ATM gear to stuff like MPLS… IP, Voice over IP, and softswitches.” Infonetics did not track what carriers were spending most on in this study, he says.

On a positive note, Mitchell says the downward drive of telcom capex won’t be sustainable for very much longer and that he expects to see spending next year flatten or even increase a little, noting that carriers "can’t cut too much more without crippling their long-term viability."

Instead of saving money on cutting capital spending further, he says, service providers are going to soon be forced to move their focus to cutting operational expenses more. “To do that, they’ll have to invest in next-gen technology… like next-gen edge and core routers, multiservice switches with MPLS, etc… That’s starting to happen already.”

— Eugénie Larson, Reporter, Light Reading

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