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Verizon Next for More Capex Cuts?

Rumors of capital spending cuts at Verizon Communications Inc. (NYSE: VZ) have heated up after the incumbent local telephone provider warned on Tuesday (April 9) that it expects to take a $2.5 billion charge and to report weak financial performance for the first quarter.

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, which supplies Verizon with circuit switches, ATM switches, Sonet OC48, and WDM, is likely to be the most at risk. According to Lucent's most recent 10-K filing with the Securities and Exchange Commission (SEC), Verizon represented 17 percent of its sales in fiscal 2001.

- Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
edgecore 12/4/2012 | 10:36:53 PM
re: Verizon Next for More Capex Cuts? But Verizon is the first RBOC (regonal Bell operating company) =

EC
Bumper_car 12/4/2012 | 10:36:27 PM
re: Verizon Next for More Capex Cuts? I work with new communications technology standarization. There of us that work in that field that have years of service provider experience, enough to really tell what is going on. If you attend some of these "meetings" and note where the service providers (SPs) are currently putting their efforts (now that they are forced to restrict their resourses) you will find that the legacy SPs concentrating on commodity technology for their existing infrastructure. They are not looking to do much build out of new infrastructure and services.

The existing technolgies have hit a deployment plateau that extends into new technologies and services. What is out there is overbuilt to an extent that the SPs have to generate new business for what they already have. Any new technology that is not absolutely commondity priced will have an uphill strugle to see any extensive deployment, inspite of any hype to the contary.

This does not bode well for expensive MPLS systems. It may even limit the deployment of new Ethernet subscriber technology from the EFM vendors. Both of these are new technologies that are targeting the "packet" services markets which are already being "pounded" by extensive compitition.

This does not look good for the "packet" based technolgies that were the darlings of the hype market just two years ago.
bitdropper 12/4/2012 | 10:36:05 PM
re: Verizon Next for More Capex Cuts? "They are not looking to do much build out of new infrastructure and services.

"This does not look good for the "packet" based technolgies that were the darlings of the hype market just two years ago."

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So, that takes care of anything old (legacy, SONET, etc.); and anything new (packet, Ethernet, etc.)

Do they intend to buy *anything* other than toilet paper and coffee cups?

cfaller 12/4/2012 | 10:36:04 PM
re: Verizon Next for More Capex Cuts? "Do they intend to buy *anything* other than toilet paper and coffee cups?"
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Well, no, not really. Haven't you been paying attention to all the announcements about cutting the capex budgets? There's a spending freeze going on...
bitdropper 12/4/2012 | 10:36:03 PM
re: Verizon Next for More Capex Cuts? "Well, no, not really. Haven't you been paying attention to all the announcements about cutting the capex budgets? There's a spending freeze going on...

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Then what's the point in posting what they're *not* spending it on? :)
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