U.S. Wireless Carriers Slow Equipment Spending

Wireless carriers are still spending money on equipment, but they're not going to spend as much this year as expected, Verizon Wireless' three-year, $5 billion announcement Monday notwithstanding.

The first indication of this new trend came last week when Tim Donahue, Nextel Communications (NXTL Quote) president and CEO, said that the fifth-largest wireless carrier in the U.S. plans to spend less this quarter than it did in the fourth quarter. He also hinted that Nextel will reassess its capital spending requirements for the year as a whole.

And when Sweden's Ericsson (ERICY Quote) announced last week that it will miss its earnings target, the world's largest maker of wireless infrastructure equipment cited U.S. carriers that are postponing their capital expenditures as part of the reason.

A slowdown makes sense because carriers had really ramped up their spending. The six national carriers spent a staggering $17.38 billion in 2000. That's 65% more than the year before, according to a Lehman Brothers report.

But there's more to it than the carriers simply taking a breather. The weak U.S. economy also is affecting them. After all, the carriers aren't sure that consumers will have the money or inclination to sign up for their services available after their networks are built out. Blame it too on investor weariness toward underperforming wireless carriers (down anywhere from 42% to 82% from their 52-week highs), because that sentiment makes it difficult for some of them to raise the cash they need for the extensive build-outs.

Casualties

The slower wireless spending could hurt suppliers like Ericsson and Canada's Nortel Networks (NT Quote), some of which already are feeling the effects of weaker spending by traditional telecom companies.

After spending $900 million on capital expenditures in the fourth quarter, Nextel's Donahue noted that figure will come down in the first quarter, though he didn't specify by how much. "Given the economic times, we are revising our capital for 2001," he said. "We'll see where this economy leads us. It's prudent to manage our capital and maybe postpone coverage for awhile."

Of course, Nextel is the only nationwide carrier that's said spending will come down for the quarter, if not the year. But it's conceivable the same thing might happen to the other major carriers, even if they're all denying it right now.

Spokesmen for No. 1 Verizon Wireless and No. 4 Sprint PCS (PCS Quote) confirmed the previous spending guidelines for their respective companies and indicated those numbers weren't changing. A spokeswoman for No. 2 Cingular Wireless had no comment. Meanwhile, calls to No. 3 AT&T Wireless (AWE Quote) and No. 6 VoiceStream Wireless (VSTR Quote) weren't returned.

According mainly to company projections, Lehman expects the six nationwide carriers to spend a total of $19.82 billion in 2001, an increase of 14% over last year. Peter Friedland, an analyst at W.R. Hambrecht, doesn't think the carriers will spend that much, though he believes they will spend more than last year's $17.38 billion. "It remains to be seen whether there will be a slowdown in the guidance," Friedland says.

Checking the Account

For some companies, it's a question of whether they'll be able to come up with the money to spend. Take Sprint PCS: Last November, the company said it would raise $3.4 billion for its 2001 capital needs, including the beginning of an upgrade to a higher-speed wireless network, by selling stock in the equity market. However, "they can't raise equity in this environment. And if they raise debt, they risk their investment-grade credit rating," says Bill Benton, an analyst at William Blair & Co. (He rates Sprint PCS a strong buy, and his firm hasn't done underwriting for the company.)

Verizon Wireless -- which filed for an initial public offering last August and has yet to go public because of the dismal conditions -- can testify that it's tough to raise money by selling stock. Cingular is also hoping to go public sometime this year, but that seems like only a pipe dream now. Sprint, however, like Verizon, does have the luxury of a corporate parent with vast resources that could foot the bill if necessary.

And even companies that don't face funding questions may still have problems. Take AT&T Wireless, which in November got $6.2 billion from NTT DoCoMo, Japan's largest wireless company. Though financially sound, there are still fears that AT&T could expand its network and improve the quality of its coverage, but not find any takers.

So carriers have to be selective when deciding how best to use their money. "The tap's not shut off, but it's shut off for certain types of coverage," explains David Chamberlain, research director of Probe Research's Wireless Internet Service monthly bulletin. "If I were a carrier, I'd be trying to make the Wall Street boys as happy as I could, and I'd do that by spending on net adds."

The Key

The number of net additions, or new subscribers, that a company takes on is the measurement that analysts have used to determine the value of the wireless carriers. Thus, it's in the carriers' best interest to spend money on pulling in new customers, especially because many of them didn't add as many customers as expected in the fourth quarter.

To do this, carriers should expand their coverage areas rather than improve the quality of coverage in areas they're already in, Chamberlain says. That's the opposite of what Nextel says it will do: pulling back some coverage and dropping back on net adds in the meantime. Donahue said first-quarter net adds will likely come in at 500,000, lower than the company's original 530,000 to 540,000 estimate, and he also acknowledged that Nextel may not make its goal of 2.1 million to 2.2 million net adds for the year.

Despite that, capex spending will continue to go up this year because carriers need to support their current customers as well as attract new ones, argues Friedland of W.R. Hambrecht. And there are some who say capex spending will increase substantially because the carriers will want to use the wireless spectrum they just spent $16.9 billion on in January's auction. Chamberlain counters that the carriers have five years to provide 50% coverage using that spectrum, so there's no rush.

And there's certainly no rush for carriers to ramp up their networks if they're not sure people are set to use them.