Even Good Reports From Wireless Won't Start a Rebound

With growth slowing and costs rising, carriers won't be able to back up last year's bold talk.
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Spring be damned, wireless carriers are layering on the wool sweaters, trying to fight off the economy's frost.

Investors kept the biggest names in wireless warm through 2001's broad market chill. But in 2002, carrier shares have dropped about 50%, and threaten further declines when earnings week begins.

Network operators are stuck in a blizzard of fear, now that subscriber addition numbers are slowing, capital spending is straining budgets and investors are calling 2002 EBITDA (earnings before interest, taxes, depreciation and amortization) projections into doubt. Typically, an unjustly punished sector gets a rebound when its quarterly results aren't as awful as expected; wireless carriers won't get any such break when they start reporting next week.

Back in January,

Sprint PCS

(PCS)

ambitiously forecast that it could double EBITDA in 2002 from 2001's $1.5 billion. Larger and less nimble,

AT&T Wireless

(AWE)

holds that it will better its $3.12 billion finish in 2001 with low- to mid-20% improvement.

Since then, AT&T Wireless has complained that competitors' pricing is cutting into its EBITDA, while Sprint PCS confirms it won't be able to continue 2001's torrid pace of new customer signups. Investors clearly aren't convinced that carriers can hit their 2002 EBITDA numbers, now that the U.S. market is maturing into slower growth and lower revenue per users, while the cost of doing business remains high.

"Generally speaking, EBITDA guidance for wireless carriers is too high," says Peter Friedland of WR Hambrecht. "Those numbers have the potential to come down for the year." Friedland doesn't know if carriers will update their full-year guidance in the next two weeks, but he thinks investors will be paying close attention to any company that's not on track for its projections.

AT&T Wireless' shares have held up better than its rivals', with a comparably light 44% drop since the beginning of the year -- given

Nextel's

(NXTL)

58% drop and PCS' 54% slide. Nonetheless, the company is the best example of the anguish of the business. Wednesday, it was reportedly forced to back off on the terms and size of a $3 billion debt offering announced a day earlier that would help fund its needs for the next year and a half.

Then again, AT&T Wireless benefits from a clearer financial structure than tracking stock Sprint PCS or

Verizon Wireless

(VZ) - Get Report

and Cingular, which are pieces of a larger telecom puzzle. Nonetheless, AT&T Wireless reportedly lowered its total bond offering to $2.5 billion, and to improve demand, made it more attractive to potential investors with higher interest rates.

Undercut

It's not surprising that investors aren't excited about AT&T Wireless' financial health. A month after CEO John Zeglis chastised fickle investors at the company's January analyst meeting, AT&T Wireless turned around in March and said it would have $100 million to $300 million less in EBITDA than it had forecast. After months of struggling to squeeze more money out of each customer, AT&T Wireless finally admitted it was being undercut by cheaper plans.

After pushing AT&T Wireless for more revenue per user, Wall Street acknowledged that AT&T Wireless' prices were out of whack, too expensive compared with the rest of the industry. So the company will have to find a way to offer cheaper plans and still keep revenue up, no easy task.

Jefferies analyst Ben Abramovitz sees the bond offering as a signal that AT&T Wireless won't drop any bombs when it reports quarterly results on April 23. "I believe they understand that they have nervous investors," he says. "They wouldn't do a bond offering now and a week later come out with bad numbers. That would create a huge credibility problem."

Carriers obviously are already suffering from such doubts and fears. For the past two years, investors thought the U.S. market could continue to surge, and pricey stocks would pay off in 2002. Instead, revenue for data-oriented 2.5G networks (an intermediate generation of networks) isn't expected until 2003. In the meantime, debts are swirling, capital spending maintains its costly heights and business plans are feeling the strain.

Hoping for sunny skies and budding flowers, wireless is surrounded by nothing but overcast skies and a persistent frost.