As hurricane-force winds pelt the telecom industry,
is nailing plywood on the windows and locking down the storm doors.
Long seen as the safest of the Baby Bell safe havens, the New York-based telco is due to report second-quarter earnings Wednesday morning. But with worries about mounting debt service requirements hitting the stock hard in recent weeks, investors haven't been focusing on the company's solid bottom line. Now, people familiar with the company expect Verizon to slash its capital spending target by as much as $3 billion in an effort to shore up its waterlogged balance sheet.
With more than $60 billion in debt, Verizon suddenly finds itself in a liquidity-obsessed market's cross hairs despite its generally robust operations. Worries about the big telcos' ability to finance their businesses have risen since the collapse this month of
; only last Friday those concerns took a huge chunk out of another big industry player,
. If Verizon does cut capital spending by as much as 20%, as these people suggest, it could signal yet another setback for suppliers and vendors up and down the telecom foodchain.
Past as Prologue
As usual, Verizon isn't the only big telco cutting back its spending on equipment. Last week, fellow Ma Bell siblings
both cut $500 million from their capex budgets, signaling that the rest of the industry was going in that direction.
And the pressure on Verizon itself is far from new. Declining revenue, big interest payments and a roster of deadbeat phone partners have forced Verizon to lop its network upgrade budget before.
In April, for instance, Verizon cut its 2002 capital outlay projection by $1 billion to $14.5 billion. If the company trims the current target by 20%, as some expect, it will be on track to spend $11.6 billion -- 34% below 2001 levels.
Needless to say, that's not great news for Verizon's top suppliers, namely
. It's also not a surprise given the poor condition of the phone service providers large and small this year.
Telecom-gear bulls point out that Verizon actually underspent its budget in the first quarter, laying out less than $3 billion.But Verizon has been turning more of its spending control over to financial officers and away from the network engineers, which suggests there is some more belt-tightening ahead, says Lehman Brothers analyst Blake Bath. "I'd guess that their spending cut will be somewhere between 10% and 20%," says Bath, who has a strong buy rating on the stock.
With layoffs continuing across the financial services sector, Verizon is likely to feel more of the pinch than its Bell peers. Some of the nation's top banking centers, namely New York, Washington and Boston, make up a high percentage of its sales. Job cuts typically translate to fewer access lines.
On the positive side, Verizon's earnings call is expected to highlight the quarter's strong wireless growth and the company's free cash flow performance. One of the reasons investors feel safer with the big Bells is the strength of their cash flow and the predictable nature of their recurring revenue.
But investors will want to hear how the company plans to lower its debt load and that it believes wireless partner
won't sell its stake in the venture for another year. The prospect of a big dilutive event like Vodafone's divestiture have also helped to push Verizon's stock down; the shares, down 43 cents at $30, are more than 40% below their 52-week high. And concerns about a credit downgrade have put pressure on the bond prices. Verizon bonds trade at a 3.5% discount to similarly performing peers.
The Bells are what pass for strength in telecom these days, but given the health of the field, that comparison could be a bit too flattering.