The nation's largest phone company and biggest telecom gear buyer will slightly exceed its capital spending target this year and should spend even more next year, CEO Ivan Seidenberg told an investment conference this week.
By year-end, Verizon will have spent about $13 billion on capital projects, Seidenberg told investors and analysts at the Goldman Sachs Communicopia conference Wednesday. Looking out to 2005, Seidenberg said that "directionally" he expected an increase in spending, "supported by cash flow and other things we've done."
Previously, Verizon had said it would spend somewhere between $12 billion and $13 billion for 2004 on projects such as network upgrades and the like. Many analysts estimated that total spending would fall somewhere in the $12.5 billion range, so the $500 million upside is good news for equipment makers that have seen little but spending cuts for the past three years.
Obviously, few companies could be as happy as Lucent. Lehman Brothers analyst Steve Levy estimates that Verizon has accounted for 28% of Lucent's sales in the first nine months of this year. Levy rates Lucent a buy, and Lehman has no underwriting ties to the company.
Lucent has benefited from Verizon's push into wireless data upgrades, as the company was picked earlier this year to supply evolution data only, or EV-DO, gear to the telco. Rival
got a smaller piece of the data contract.
Lucent has also been working with Verizon on its ambitious if nascent fiber-to-the-home effort. According to a recent reseach note by Freidman Billings Ramsey analyst Susan Kalla, Lucent is helping to create so-called operation support system, or OSS, applications so Verizon can begin preliminary use of its new fiber-optic network. Kalla writes that Lucent has seen a trickle of revenue from the project already. Kalla rates Lucent buy, and FBR has no banking ties to Lucent.
Investors say they expect Lucent to post solid earnings for its fiscal fourth quarter ended last month. Analysts are looking for a per-share profit of 4 cents on $2.3 billion in sales. That compares with a profit of less than a penny on $2 billion in sales during the year-ago period. In its fiscal third quarter ended in June, Lucent recorded a 4-cent profit on revenue of $2.2 billion.
Creditors also are starting to see a glimmer of stability at Lucent that hasn't necessarily been in ample supply in recent years.
According to a filing Thursday with the
Securities and Exchange Commission
, Lucent renegotiated some of its credit agreements with bankers and is now no longer required to apply cash as collateral to secure its loans. And while the collateral requirement has been lifted, the company is required to keep a minimum of $2 billion in cash on hand, just in case. As of June, Lucent had $3.2 billion in cash and equivalents on its balance sheet.
J.P. Morgan Chase analyst Ehud Gelblum sees Lucent as the biggest beneficiary of Verizon's increased spending plan, largely because the gearmaker figures so strongly in the telco's upgrade plans. "On the wireless side," writes Gelblum in a research report Thursday, "Lucent should continue to benefit from any acceleration of a Verizon Wireless network roll-out." Gelblum has a neutral rating on Lucent. J.P. Morgan Chase is one of Lucent's lenders.
And analysts expect the momentum to continue because Verizon plans to use its hefty capital spending budget to gain a wider lead on rivals in a race to add mobile data services to its wireless network.
On Friday, Verizon slipped 37 cents to $41.11 and Lucent rose 9 cents to $3.48.