For the past couple of weeks, rumor mongers on Wall Street have been gossiping about an additional 15 percent to 25 percent cut in capital spending from the company's estimated $15 billion to $16 billion 2002 budget. Verizon's overall budget was already expected to be down between $1.4 billion and $2.4 billion from the $17.4 billion spent in 2001.
"I think everyone expects cuts from them now," says one fund manager, who didn't want to be named. "The question is, how much?"
Long-distance provider WorldCom Inc. (Nasdaq: WCOM) has already been rumored to be cutting capex by $2 billion (see WorldCom to Cut Capex?). But Verizon is the first RBOC (regional Bell operating company) rumored to be cutting spending again this earnings season. These cuts are a significant indicator of how deep-rooted the problems in the telecom industry really are. The RBOCs have largely been viewed as the only carriers in the market with money to spend, so further cuts from an RBOC would be a terrible sign.
A spokesperson for Verizon reiterated the stated $15 billion to $16 billion capex guidance and declined to comment on the rumors of cuts.
Last week, George Notter, an analyst with Deutsche Banc Alex Brown LLC published a research note stating that he believed Verizon was about to make cuts in its budget again, mainly in its wireline spending.
"RBOCs continue to retest old network utilization assumptions and are unearthing additional network capacity," he writes. "Moreover, service and bandwidth growth are not robust enough to soak up existing capacity and reinvigorate spending in the near/intermediate term."
Coupled with the carrier's latest warning, this suggests that Verizon will most likely need to make further cuts. In its warning, the carrier said that it expects revenues to remain flat for the quarter and that it expects to take a $2 billion charge, associated with the declining value of some investments such as CANTV in Venezuela, CTI Holdings in Argentina, and Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX), a U.S. carrier that has warned it may file for bankruptcy. It will also take a $500 million charge for goodwill and other intangible assets on its balance sheet.
While Verizon appears to be in much better shape than most other carriers, there are still several red flags raised over the company financials, according to a report published in March by Optical Oracle called "Carrier Crisis Report." One major issue is the carrier's $64.3 billion worth of debt on its books, an increase of 12 percent from the fourth quarter of 2000.
Notter's research note suggests that vendors most likely to be hit by the cuts include:
- Lucent Technologies Inc. (NYSE: LU),
- Nortel Networks Corp. (NYSE/Toronto: NT),
- Alcatel SA (NYSE: ALA; Paris: CGEP:PA),
- Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI),
- Redback Networks Inc. (Nasdaq: RBAK),
- Ciena Corp. (Nasdaq: CIEN),
- Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), and
- Fujitsu Ltd. (KLS: FUJI.KL).
- Marguerite Reardon, Senior Editor, Light Reading
Editor's Note: Light Reading is not affiliated with Oracle Corporation.