No Spending Spree for SBC
If investors needed any more evidence that the telecom-equipment market isn't likely to recover this year, they found it in the words of
SBC Communications
(SBC)
and
Nokia
(NOK) - Get Report
on Thursday.
SBC reiterated that it expects its full-year earnings to grow by 5% to 7%, but the local phone service provider said meeting its goal of increasing revenue 1% to 3% might be "challenging." In addition, the company said its capital expenditures in 2002 will be below its original target range of $9.2 billion to $9.7 billion because of lower demand.
Although the company didn't offer a specific new capital spending plan, Tim Horan, an analyst at CIBC World Markets, estimates that expenditures will fall to $8.5 billion this year and to $8 billion in 2003.
"The telecom equipment guys are not happy about SBC's news today and the fact that a recovery in telecom isn't happening at the same time as a recovery in the economy," said Patrick Comack, an analyst at Guzman & Co. "But it shouldn't be a surprise to them."
SBC's announcement follows news from
Sprint
on Monday that it would
cut spending to $2.7 billion from $3.5 billion this year at the
Sprint Phone Group
(FON)
division.
Again Near the Bottom
SBC earned 51 cents a share in the latest first quarter, before the effect of a required accounting change, on revenue of $12.6 billion. In the year-ago quarter, the company earned 51 cents, excluding items, and posted a top line of $13.1 billion. Analysts polled by First Call were expecting earnings of 51 cents, but they were looking for revenue to also remain flat.
Shares of SBC were down 86 cents, or 2.5%, to $33.64 in afternoon trading on the
New York Stock Exchange. Earlier in the session, the stock hit a 52-week low at $32.84.
On a conference call, SBC Chief Executive Edward Whitacre said he believes the telecom industry is "very near the bottom," but he maintained that it's too early to draw conclusions because "the economy combined with the industry climate is difficult."
The local phone market has been pressured by a weak economy and by a shift to wireless phones and the Internet, which has reduced the number of access lines being used. In addition, sales of luxury items like second phone lines and high-speed Internet access have slowed, while pricing pressure and competition have intensified, analysts said.
The majority of SBC's revenue still comes from local phone services, although the company has been investing in other areas like data and wireless.
"We never had any illusions that the recovery was coming this year anyway, so this is confirmation of that," said Gabriel Lowry, a networking analyst at Credit Lyonnais Securities.
Lowry said the major carriers are going to be focused on improving their financial results this year in a very tough revenue and pricing environment, which means spending will have to be put on the back burner and networking companies like
Corning
(GLW) - Get Report
,
JDS Uniphase
(JDSU)
,
Lucent
(LU)
and
Nortel
(NT)
will all continue to suffer.
He also said that carriers are in the process of adjusting their capital expenditures to be more in line with their historical rates. Capital spending as a percentage of revenue peaked at around 28% in 2000, he said, but normally companies have used only about 19% of their sales toward capital projects.
In addition, he said carriers are "a bit confused" about how and where to spend money. "In the core business they're seeing slowing growth and pricing pressure and no single carrier has resolved how to generate meaningful profits in data," he said.
Now Everybody Has a Phone
Some analysts believe growth in the wireless industry will be limited, as several key markets are believed to have reached a point of saturation.
SBC reported weaker-than-expected subscriber growth at its
Cingular Wireless
joint venture Thursday, and Nokia cut its full-year sales forecast to between 4% and 9% from 15%. Nokia's management also slashed its estimates for global sales of mobile phones in 2002, saying it now expects the industry to sell between 400 million and 420 million phones worldwide. Nokia had previously forecast the industry would sell 420 million to 440 million handsets this year.
Wireless operators
Sprint PCS
(PCS)
and
Nextel Communications
(NXTL)
have also struggled with a slowdown in subscriber additions, although both companies posted flat gross subscriber growth from the fourth quarter, which some analysts took as a sign of stabilization.
Despite the general concerns about a pullback in carrier spending, Paul Sagawa, an analyst at Sanford Bernstein, remained hopeful about a recovery in the telecom equipment space in the second half of this year. He pointed out that Sprint's spending cuts came mostly in the first quarter that SBC was vague about its spending plans.
His optimism is based on historical spending patterns, strong cash flow at the carriers and what he characterized as deteriorating service quality. "They are realizing that they can only keep spending low for so long," he said.
But Guzman's Comack said a turnaround in the telecommunications market typically lags a rebound in the economy by about one to two quarters, and he said any recovery in the telecom equipment space would lag that, suggesting that phone gearmakers will continue to struggle throughout the remainder of the year.
Senior Writer Scott Moritz contributed to this report.
