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Deutsche Telekom Cuts Adtran Spending After 5G Spectrum Splurge

Iain Morris
7/22/2019

Germany's Deutsche Telekom has cut spending on its broadband rollout with Adtran after splashing €2.2 billion ($2.5 billion) on licenses to provide new 5G services, according to the US equipment supplier and several analysts who track the market.

Adtran, whose kit features prominently in Deutsche Telekom's broadband network, has lowered its revenue guidance for later this year because of a slowdown in capital spending at a "Tier 1 European carrier customer," said Michael Foliano, Adtran's chief financial officer, during an earnings call with analysts last week.

While Adtran does not identify customers by name, analysts say the operator in question is Deutsche Telekom, which remains the only European client that accounts for at least 10% of Adtran's revenues.

Adtran is now guiding for $130-150 million in third-quarter sales, down from $156 million in the second quarter. The update came as a massive disappointment to analysts and investors and triggered a 23% slump in Adtran's share price on July 18, when results were announced.

To critics, the revelation may be taken as further evidence of the impact that costly spectrum auctions can have on market development. After Germany's recent auction raised more than €6.5 billion ($7.3 billion) for government coffers, Deutsche Telekom said the money could have been used to build approximately 50,000 new mobile sites, hinting that its spectrum outlay would chew into the budget for network rollout.

The operator had earlier promised to invest about €4.2 billion ($4.7 billion) through its German telecom subsidiary this year, about the same amount it spent in 2018. Besides introducing next-generation 5G services, its plans include further deployment of "supervectoring," a broadband technology that boosts connection speeds available on last-mile copper to a theoretical maximum of 250 Mbit/s.

Deutsche Telekom is under pressure from cable companies offering TV services and higher-speed broadband technologies. Its retail share of Germany's broadband market has fallen from 42.6% to 39.5% in the past five years, according to its own data, and a pending merger between Vodafone and Liberty Global's Unitymedia -- which regulatory authorities approved last week -- will make the competition even tougher.

Previously, Deutsche Telekom said it would extend supervectoring to around 28 million households by the end of the year. Speaking to analysts in May, CEO Timotheus Höttges said the rollout remained "well on track" and that supervectoring was already available to more than 20 million homes, up from 14 million in 2018.

But Adtran CEO Thomas Stanton told analysts the spending slowdown would have some impact on its Tier 1 customer's rollout schedule. "As far as supervectoring, yes, that continues on, albeit now a little delayed, but it continues on and the plans are for that to continue on into next year," he said in response to questions. "In fact, we're very hopeful that we'll not only continue on with the rollout but actually broaden our footprint next year within that customer base."

One possibility is that Deutsche Telekom is currently spending more with another supplier -- China's Huawei has previously been linked with its supervectoring deployment -- although this would be at odds with any increase in Adtran's footprint.

Deutsche Telekom declined to answer questions about spending cuts and whether these would have an impact on suppliers and broadband rollout targets, saying only that it "does not comment on any rumors or speculation."


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But analysts who cover the equipment sector say the spending slowdown could have broader ramifications. "The forecast is weaker than originally expected because of a pause on access gear spending, which may be a broader infrastructure spending pause as well at major customer Deutsche Telekom," said MKM analyst Michael Genovese in a research note about Adtran's results. "Last month, Deutsche Telekom spent more than $2 billion on spectrum for 5G, and it appears that it will lay out less on equipment for the rest of 2019 as well."

George Notter of Jefferies similarly notes the impact of the recent 5G auction. "[Adtran is] indicating that Deutsche Telekom spent too much on recent 5G spectrum auctions and it's impacting their current spending plans," he said in a research note. "Adtran expects the slow spending at Deutsche Telekom to remain through the end of the year."

Adtran anticipates a recovery next year and says it has also landed a major contract with the same operator for a deployment of Gfast, another technology for supercharging last-mile copper connections.

"The thing that gives us confidence is this carrier has typically been very forthright with us, and the timing of the resumption at the beginning of next year is the feedback that we've gotten directly from the carrier," said Michael Foliano, Adtran's chief financial officer. "And we also know that the requirement for the product itself continues -- so they still have things that they have to get done and that's not going to go away."

"As far as incremental pieces, I did mention the larger Gfast award with a Tier 1 European carrier, and, without getting into names, that's the same carrier," he added.

The service provider is planning a "nationwide" deployment of Gfast, according to Stanton, and will cover residential properties, including multi-dwelling units, as well as businesses. "It's not a specific small project," he said.

One issue is whether Deutsche Telekom has the distribution points needed for a more conventional rollout of Gfast, which loses its potency over longer distances. While BT has been using Gfast at local street cabinets, many of Deutsche Telekom's facilities may be too far from customer premises to support that type of deployment.

The German operator has previously talked about using Gfast in building basements -- where the length of the copper loop would clearly not be a concern -- but has had little to say about Gfast in recent months.

At the time of publication, it had not responded to a question about its award of a Gfast contract to Adtran.

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— Iain Morris, International Editor, Light Reading

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