UBS: Capex Shift to Hit Vendors

Lopsided spending by carriers in 2004 means vendors could see their sales growth weaken in the second half of this year and into next year, according to figures from UBS Investment Research.

Capex was up 13 percent year-over-year in the first half, mainly because service providers chose to splash out on wireless equipment. Since capex as a whole remains flat, that leaves carriers with less cash to spend for the rest of the year, says UBS, which projects an overall 6 percent sequential decline in the third quarter.

Spending on wireless alone was equal to 52 percent of the budget for the entire year, offsetting a 6 percent sequential decline in wireline capex.

This was reflected in vendors' results for the second quarter – for example, Lucent Technologies Inc.'s (NYSE: LU) wireless revenues increased 58 percent year-over-year, while its wireline revenues fell 12 percent. Revenues for Tellabs Inc.'s (Nasdaq: TLAB; Frankfurt: BTLA) 5500 digital crossconnect grew 200 percent year-over-year for wireless, but wireline revenues for the same product were up only 2 percent.

Table 1: Aggregate Carrier Capex of Major US Telcos ($ Millions)
1H03 2H03 Implied 2H04 1H04/1H03 % 2H04/2H03 %
ILEC capex 6,395 8,854 8,549 3 -3
IXC capex 2,224 2,448 1,866 -31 -24
Wireline capex 8,619 11,302 10,415 -6 -8
Wireless capex 6,023 9,756 8,157 41 -16
Total 14,643 21,058 18,572 13 -12
Includes Alltel, AT&T, AT&T Wireless, BellSouth, Cingular, Nextel, Sprint, SBC, and Verizon
Source: Company reports and UBS estimates

The decline in wireline spending, especially by long-distance providers, is likely to continue in the long term, according to UBS, as revenue growth remains "elusive." Since carriers are focusing more on investing for future growth, wireline vendors are likely to see less of the budgets, although IP networking, broadband access, and voice over IP are growth areas that still hold interest.

UBS notes that Verizon Communications Inc.'s spending on equipment for "growth initiatives" such as fiber to the premises (FTTP), VOIP, and CDMA2000 1x EV-DO increased to $3.2 billion in the first half, up 56 percent sequentially and 45 percent from a year ago.

— Nicole Willing, Reporter, Light Reading

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