Verizon Keeps on Building

The big telco's plans to boost capital spending by 15% raise eyebrows in an otherwise ho-hum report.
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Verizon

(VZ) - Get Report

is paying a bigger tab to cover growth expenses.

The New York phone giant says it will increase its 2005 capital spending budget to $15.3 billion, up from the $14.6 billion previously projected and $2 billion above last year's levels.

The company says it needed to pump more cash into spending to boost wireless network capacity and keep up with

record-breaking subscriber growth in the quarter. Another big portion of the cash allotment will go toward Verizon's fiber optic expansion effort and the cost of stringing cables directly to homes.

Thanks to the blowout

second-quarter numbers at the wireless unit, headlines by a record 1.9 million net new users and industry-leading customer loyalty levels with 1.2% monthly churn, Wall Street didn't focus too hard on the 5.5% decrease in Verizon's phone line count and the unexpected budget bulge.

But analysts and investors say they are concerned that Verizon's spending increases have been rapidly outpacing sales growth.

Revenue for 2005 is expected to grow about 3.5% over last year, but with the new budget forecast, capital spending will grow by 15% over 2004.

"Despite the very strong performance by Verizon Wireless, we believe that the market could react negatively to the increased capex guidance, which could put pressure on Verizon and its peer group," Lehman Brothers analyst Blake Bath wrote in a research note Tuesday.

The increase in spending is also adding to the company's debt load. After an impressive fiscal fitness program including spending and employee cuts, Verizon was able to trim its total debt from $60 billion thee years ago to below $40 billion in the first quarter. But the trend reversed in the second quarter. Verizon's debt increased to $41.8 billion in the second quarter from $39.2 in the prior period.

Verizon attributed the higher debt level to purchases of additional wireless spectrum and the buyout of

MCI

(MCIP)

shares from Carlos Slim Helu.

On the merger front, Verizon says it expects to close the deal with MCI by year-end.

Looking ahead to the second half of the year, Verizon says it plans to make gains in broadband and in sales to businesses. On a conference call with analysts, company executives promised to get more aggressive with digital subscriber line, or DSL, service offerings.

Breaking from tradition, the company says it will offer DSL service to customers that don't already have Verizon phone service. The telco also said it would cut prices in an effort to gain more broadband market share at the expense of cable companies like

Comcast

(CMCSA) - Get Report

,

Time Warner

(TWX)

and

Cablevision

(CVC)

.

Verizon shares rose 19 cents to $34.21 in midday trading Tuesday.