Cingular Presses the Pain

Updated from 3:27 p.m. EDT

Cingular's plan to slash spending confirms an unwelcome trend for suppliers.

The integration of AT&T Wireless' network is nearly done, and with its 90-city expansion goal for 3G service called universal mobile telecommunications systems, or UMTS, in sight, Cingular is expected to cut spending by $1.5 billion, or 20%, next year, say Lehman Brothers' analysts in a note Thursday.

By Lehman's estimates, Cingular's 20% cut would represent about 5% of total wireless spending in the U.S. next year.

Cingular is jointly owned by AT&T (T) and BellSouth (BLS). And for the telco's investors, the idea of a cost clampdown means better cash flow and higher earnings.

But for shareowners of wireless infrastructure outfits such as Powerwave (PWAV), Ericsson (ERICY) and Lucent (LU), the news that a big customer will spend less next year fits an all-too-familiar pattern.

"This isn't really a surprise," says one hedge fund manager. "We saw what happened to Powerwave in the first quarter after Cingular made its cuts." In April, Powerwave warned of a 20% sales shortfall due to order cancellations by Cingular.

Powerwave is already down nearly 50% from March, when it hit its high for the year. "I'm pretty sure the price reflects what's going on, but this brings visibility into 2007 a lot closer," says the hedge fund manager.

A Cingular representative said next year's budget hasn't been released so he couldn't comment on the Lehman report. Cingular has about 18 cities and surrounding suburbs covered by the UMTS network. The goal is to have nearly 100 communities blanketed with the faster wireless data service by year end. Though not yet officially announced, Cingular turned on the UMTS service in New York on June 21.

Cingular is running a distant third place in a three-way wireless broadband race with Verizon Wireless, which is co-owned by Verizon (VZ) and Vodafone (VOD), and Sprint (S). Cingular's UMTS, like Verizon and Sprint's evolution data-only, or EV-DO, technology, is designed to offer users mobile Internet connections at relatively fast speeds. But the service is expensive, around $80 a month, and aimed primarily at laptop-carrying business customers.

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