Vendors Stumble in the 3G Gap
Ericsson AB (Nasdaq: ERIC) is the latest vendor to feel the burn. It posted a 63 percent profit drop for the second quarter this week. This follows profit warnings from both Alcatel-Lucent (NYSE: ALU) and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) (See Ericsson Sets Q2 Benchmark, AlcaLu Issues Full-Year Profit Warning and ZTE Issues H1 Profit Warning.)
In part, it's because vendors -- in particular AlcaLu and Ericsson -- are waiting for 4G Long Term Evolution (LTE) network spending. Verizon Wireless , which awarded AlcaLu a US$4 billion contract for 3G CDMA and LTE, illustrated the problem for vendors in its conference call Thursday morning. CFO Fran Shammo said that capital expenditure will be "flat to down" for the year as the operator cuts spending on CDMA EV-DO.
This comes as Verizon undertakes a program to deploy LTE across its 3G footprint by the middle of 2013. "Wireless is utilizing capex extremely effectively," Shammo commented on the call. (See US Carrier Capex: Wireless Squeezing Wireline.)
A Jefferies & Co. Inc. analyst expects to see continued downward pressure on 3G spend as carriers move to LTE and sees this as bad news for AlcaLu.
"Looking at vendors, we note that the Verizon results are consistent with our negative EVDO Rev A investment thesis on Alcatel-Lucent," George Notter at Jefferies writes. "Verizon reiterated the fact that they've curtailed investment in EVDO -- we believe these cutbacks will intensify going forward."
The question then becomes when 4G spending might rise to take up the slack. Jefferies has previously suggested that some American carriers, specifically Sprint Corp. (NYSE: S) and T-Mobile US Inc. , might start to ramp up spending in the second half of the year. (See 4G (Finally) Starting to Boost US Capex Spend? and Wireless Capex to Grow 13% in 2012.)
Meanwhile, analyst Notter is concerned by Verizon's guidance on capex for the rest of the year. "This is the first time we've heard the 'down' portion of this guidance publicly -- previous guidance called for 'flat' to 'roughly flat'," he writes.
It might be the first time Verizon has actually voiced the "down" part, but analysts seem to have been expecting it. The consensus has been that Verizon's 2012 capex would fall 2 percent from 2011, to $15.9 billion, Simon Leopold of Raymond James Financial Inc. (NYSE: RJF) remarked in a research note published Thursday. Leopold's estimate is that capex will be more like $15.7 billion.
— Dan Jones, Site Editor, Light Reading Mobile