Verizon Suppliers Get Good News

Verizon Communications Inc. (NYSE: VZ) may have announced a $1.46 billion net loss for the fourth quarter yesterday (see Verizon Reports Q4 Results), but behind that financial headline there was encouraging news for a number of equipment vendors as the RBOC announced a planned increase in capital expenditure, particularly for next-generation data gear (see Verizon Outlines 2004 Plans).

Compared with its 2003 capex outlay of $11.9 billion (below guidance of $12 billion to $12.5 billion), Verizon is planning to fork out between $12 billion and $13 billion this year. While the amount to be spent on its fixed network, between $6.5 billion and $7 billion, will be about the same as in 2003, a greater proportion will be spent on what the carrier calls "growth areas," including IP/MPLS, DSL, fiber-to-the-home (FTTH), and VOIP.

The RBOC's plans tally with the findings of last December's Light Reading Insider report, Capital Spending Outlook, (see LR Report Reveals US Capex Plans), though the proposed level of spending is even higher than the report's predicted $6.2 billion.

And the spending might not stop there. Verizon management say they'd be prepared to spend even more if the economy picks up notably or demand increases.

So who is set to benefit from this shift towards new-generation equipment? In a research note, analysts at Lehman Brothers say Verizon plans to spend about $1.6 billion on the "growth areas" during 2004, about 45 percent more than the $1.1 billion in 2003. This, they say, spells good news for:

• Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) and ADC Telecommunications Inc. (Nasdaq: ADCT) for FTTH gear (see Verizon Doubles FTTP Supply List)
  
  
• Alcatel SA (NYSE: ALA; Paris: CGEP:PA), AFC and possibly ADC and Adtran Inc. (Nasdaq: ADTN) for DSL equipment
  
  
• Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR) for routers
  
  
• Nortel Networks Corp. (NYSE/Toronto: NT) for its VOIP gear

Nortel has stolen a march on its competitors with its already announced VOIP deal (see Nortel Soars on Verizon VOIP Deal), but as already noted recently (see Is Lucent Sounding Out Sonus? ), this doesn't mean it has the field all to itself. The Lehman team believes the Nortel kit will initially replace "outdated" and "discontinued circuit switches" -- such as the Lucent Technologies Inc. (NYSE: LU) GTD-5 -- and that Verizon will begin to upgrade some Nortel switches to VOIP.

But this transition will happen at a gentle pace, believe the analysts, so leaving the door open for the likes of Lucent if it can prove it has a solid next-gen strategy. To date, Lucent has shown itself to be a bit of a ditherer regarding the VOIP kit market (see Russo's VOIP Spin Confounds), but a convincing story could see it win business to replace the bulk of its legacy switches over time. A foot in the door with Qwest Communications International Inc. (NYSE: Q) will at least give it some hope (see Lucent's VOIP Group Gets a Boost).

Of course, spending more on the new gear without increasing the overall wireline capex means cutbacks in legacy spending, though the Lehman team believes this reduction will be spread across the board and won't result in a significant reduction in outlay on Nortel DMS and Lucent 5ESS circuit switches that are still helping to generate healthy revenues.

As for Verizon, its fourth-quarter loss was the result of $3.1 billion in "special items," most notably the $2.9 billion related to the cull of more than 21,000 jobs (see Headcount: Company Makeover). Net income before those special items was $1.6 billion. The carrier's share price yesterday closed up 33 cents, nearly 1 per cent, at $33.09.

— Ray Le Maistre, International Editor, Boardwatch