Could carrier capital spending become less seasonal and more linear from quarter to quarter in the future?
The communications equipment research team at Raymond James & Assoc. believes that this could happen over time, and that there may already be evidence that it happened to some degree during the first quarter of 2014.
In a research note, Raymond James analysts say AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) in particular reported first-quarter capex above typically observed industry patterns. AT&T spent about 27% of its full-year forecast capex in Q1, and Verizon spent almost 25%, while patterns observed over several years suggest carriers usually spend around 21% of their annual capex forecast during the first quarter, with the second, third and fourth quarters playing out at around 25%, 25% and 29%, respectively.
"We are left suspecting that AT&T and Verizon might spend above the midpoint of their forecasts; whereas, typically, operators underspend capex forecasts," the note states. "Furthermore, we believe carriers intend to reduce seasonality going forward and will strive for more linear patterns in the coming years."
The first-quarter capex upswing did not carry through the entire carrier sector. For example, Sprint Corp. (NYSE: S) and T-Mobile US Inc. maintained forecast spending patterns for the quarter, the analysts say. However, as the two biggest carriers in the US, AT&T and Verizon wield the most influence on any shifts in capex trends.
The long-term effect of this possible new trend on equipment vendors in not so clear. Blaming "seasonality" for tepid first-quarter results is about as regular occurrence as, well, the change of seasons, in the vendor sector, and any signs of more linear spending don't appear to have altered the first-quarter vendor earnings reports we have seen thus far. Also, because neither AT&T nor Verizon have changed their full-year capex forecast as of yet, vendors that rigidly set their expectations by typical seasonal trends could face "downside risk" if quarterly spending proves to be more linear throughout this year.
Of vendors with some exposure to AT&T's and Verizon's spending trends, the Raymond James team notes that Juniper Networks Inc. (NYSE: JNPR), Adtran Inc. (Nasdaq: ADTN), and Ericsson AB (Nasdaq: ERIC) didn't report a direct effect from the trend, though it appears that CommScope Inc. did. It may be worth noting that Juniper and Infinera Corp. (Nasdaq: INFN), the latter of which doesn't have large exposure to the Big Two carriers, both did report increasing service provider spending overall during the first quarter that seemed to defy the usual Q1 doldrums. (See Juniper Rides Service Provider Revenue Growth and Infinera Confirms Level 3 Deal.)
— Dan O'Shea, Managing Editor, Light Reading