Wireless Networks Stink -- And That's Good for Capex

Wireless carriers still have to spend to solve their service issues.
By Tish Williams ,

Put Nokia (NOK) - Get Report on pause. Wireless investors are moving their worries on to Nortel (NT) and the continuing capex spending slowdown.

All the news about a fiber-optic rollout-driven bandwidth glut casts a long shadow across 2000's gangbuster spending on wireless equipment. Fear not, skittish equipment lover, wireless spending is still mostly intact. In the wireless market, wallets may be staying in back pockets longer than they did last year, but ultimately there's no capacity glut and money has to be spent on the fledgling U.S. networks and their more mature European counterparts.

AT&T Wireless

(AWE)

has projected a $5 billion build-out in 2001 and Sprint PCS updated its spending numbers at the end of the first quarter in anticipation of $3.2 billion in equipment buys this year. Industry spending has been trimmed back to demonstrate a little fiscal restraint in trying capital markets -- both U.S. and European carriers are super-leveraged, either to build out networks here or to pay the staggering cost of 3G licenses abroad. But carriers need to keep spending, if at a more moderate pace than last year, to provide the services for which customers pay the big bucks.

Dain Rauscher

analyst Mike Walkley relates that in Europe carriers are awaiting the arrival of the stepping stone to third-generation service, general packet radio service (GPRS), and that many already have networks in place. This leads Walkley to expect "flattish spending in Europe for the rest of summer, picking up slowly in the fourth quarter" as those data services begin to be offered to customers. (None of the banks mentioned have performed recent underwriting for

Motorola

(MOT)

, Nokia or

Ericsson

(ERICY)

.)

In the U.S., however, carriers are still playing catch-up, and as anyone who can't get coverage or loses calls on a mobile phone knows, network growth has not outpaced use. "In wireless, we're not building capacity for a rainy day like in wireline," explains Todd Bernier of

Morningstar

. "Right now calls get dropped, you can't get through, the signal is crappy. There are still not enough cells."

Walkley acknowledges that U.S. equipment spending was "soft" in the first quarter, and he wouldn't be surprised if it stayed that way in the second, but along with most of his peers he believes that in the second half of the year "spending needs to pick up due to quality-of-service issues." Specifically, Bernier says he expects the carriers to hold off on next-generation technology buys: "We see a slowing for 2.5 and 3G, push that out a few quarters. Obviously no one can say 'we're not going to do it,' but the industry is going to build out less quickly." The expected roll-out of GPRS data services has been pushed out from the end of this year to the middle of next.

In the same vein, after Nokia's warning last week,

Lehman Brothers

analyst Tim Luke took the opportunity to cut his expectations for the systems side of Ericsson's business to 4% growth in both 2001 and 2002. Lehman expects a flat-to-down second quarter for overall equipment spending as carriers set a more reasonable pace.

Nonetheless,

Sanford Bernstein

analyst Paul Sagawa drew a straight line between

Nortel's woes and the wireless equipment providers. (Nortel warned of $4.5 billion in second-quarter revenues vs. an analyst consensus of $6.22 billion, according to

Thomson Financial/First Call

. Tuesday, communications equipment maker

Tellabs

(TLAB)

followed with a

warning of its own based on restrained carrier spending habits.) Based on a "capex crisis" he believes "has intensified and spread to Europe and Asia," Sagawa predicts, "It is quite possible Ericsson and Motorola will come in weaker than expected" in the second quarter. Sagawa points to "

Solectron

(SLR)

, Nokia, take your pick," as harbingers of poor results to come.

Expectations aren't very challenging: Analyst consensus estimates are for a $7.93 billion quarter for Motorola with a 12 cent loss (vs. $7.75 billion and a 9 cent loss last quarter), according to

Multex.com

. Ericsson is expected to post $5.89 billion in revenue with a 5 cent loss (vs. $5.7 billion in revenue and a 5 cent loss in the first quarter). To meet year-end revenue estimates, Motorola will have to scare up more than a $1 billion more in revenue in each of the next two quarters. Ericsson bumped into a 52-week low in early Wednesday trading at $4.75, while Motorola was almost $3 above its yearly low at $13.35. At those levels, Dain Rauscher's Walkley thinks disappointment is built into the prices of Ericsson and Motorola.

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