Slowdown Squeezing Spending at Verizon

More bad news for the networkers, and some areas to watch at the big phone company.
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Verizon (VZ) - Get Report trimmed equipment spending for the rest of the year, dealing the wobbling network gearmakers yet another blow.

Meanwhile, Verizon detailed how third- and fourth-quarter profits were hit by the costs of Sept. 11's terrorist attacks on New York, where the company is the biggest phone service provider. The New York-based company said its core telecom service revenue fell 1.9% from a year ago, while debt rose 16%, hitting $63.8 billion. The stock fell 89 cents Tuesday to $49.30 as stocks sold off for the second day running.

Long seen as the most defensive-oriented telecom investment because of its strong acquisition record and lush cash flow, Verizon will likely pull back broadly on spending in coming periods as it seeks to reduce costs amid a widespread recession.

As

TheStreet.com

has

detailed, equipment spending is among the easiest levers for phone companies to pull as they seek to align costs with slowing sales.

"That's more debt than they'd like at this point in the game, but it's not unreasonable," says Michael Kaufman, a hedge fund manager with K Capital Partners in Boston, which has no position in the stock. "I think they'll deleverage themselves once they start cutting back on capex."

A Verizon spokesman said the company was comfortable with its debt level, considering the firm's ample cash flow.

Moving along the deleveraging track, Verizon said Tuesday it would cut its 2001 network equipment budget by about $400 million, or 2%. Verizon offered no projections for next year's budget, though CFO Fred Salerno hinted that it, too, would shrink.

"Every screw is being tightened down," Salerno told investors and analysts on an earnings call Tuesday. Verizon is slated to spend around $17 billion this year; with most rivals having cut spending by around 20%, many analysts expect Verizon to follow suit, holding 2002 spending to around $14 billion. That will mean fewer deals for networkers like

Cisco

(CSCO) - Get Report

,

Lucent

(LU)

and

Nortel

(NT)

, all of which are struggling to varying degrees in their own right.

Verizon said the continued decline of the nation's economy dampened its financial performance in the third quarter. Costs related to last month's terrorist attacks cut 3 cents from earnings, bringing third-quarter profits to $2 billion, or 75 cents per share. Revenue was $17 billion, in line with projections and a 3.7% increase over last year.

Verizon expects it will cost $1.9 billion to replace and upgrade equipment and facilities damaged in the attack. The company said it had hired accountants to speed up the assessment and recovery process.

Attack costs also will drag down Verizon's fourth-quarter performance, say company executives. Profits are now expected to fall in a range between 77 cents and 80 cents per share. Analysts surveyed by Thomson Financial/First Call had expected earnings of 80 cents. The company also lowered its fourth-quarter revenue growth forecast by 1% to a range between 4% and 5%.

While Verizon had some areas of solid revenue growth -- 13% in wireless, 14% in data services -- its core phone-service business shrank.

Meanwhile, on the debt front, Verizon expects to make a public offering of its wireless business in the first half of 2002. Proceeds will go toward payment of an estimated $7 billion worth of wireless spectrum licenses from the insolvent NextWave Telecom.

Verizon is also selling rural phone lines in three states to pay down debt. To date, Verizon has agreed to sell 675,000 phone lines in Alabama and Missouri to

CenturyTel

(CTL) - Get Report

for $2.1 billion. A similar deal in Kentucky is expected shortly.

So while the Lucents of the world continue to scrape for every penny, Verizon and its chums are having to watch theirs even more closely.