Despite sky-high expectations, wireless capex shows signs of sluggishness

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Operators may not spend as much as expected on their networks in 2018. (Pixabay)

At the start of 2018, a wide array of analysts predicted a dramatic upswing in the amount of money wireless network operators would spend improving their networks this year compared with spending in previous years. Indeed, the analysts at Deutsche Bank Research in February predicted nationwide carriers would increase their overall capex during 2018 by 14% over last year to $30.5 billion—which they pointed out would be the market’s biggest capex figure since 2014.

And if anything, those forecasts seemed low in June, when the analysts at Oppenheimer raised their capex figures for Verizon (by 2% to $18.2 billion) and AT&T (by 3% to $25 billion).

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Now, though, the capex situation in the U.S. looks decidedly less rosy.

Sprint, Verizon and AT&T have all reduced their overall capex numbers for 2018. The operators cite a variety of reasons, from timing issues to more efficient network technologies. But the ultimate result is the same: Where there was once excitement, now there’s a decided sense of pragmatism.

“Dare we say it: Capex intensity is declining,” wrote the analysts at Wall Street research firm Scotiabank in a recent note to investors. The analysts cited Verizon specifically, which last month said it now expects to spend a total of between $16.8 billion and $17 billion on its network during the course of 2018—a range that is down notably from the $17 billion to $17.8 billion the operator gave at the beginning of the year.

“Verizon’s lower wireless capex is due to lower 4GLTE and efficiency before 5G capex kicks in,” the Scotiabank analysts wrote. “Verizon is not slowing its 5G-related capex on small cell deployment and fibre. The decline is due to lower spending on 4GLTE. As we wrote last month, with 5G revenue opportunities likely not materializing in a material way until 2022 in the United States, we will likely see a ‘capex holiday’ until 5G capex ramps up, with equipment standards being finalized and revenue opportunities becoming clearer. We believe this driver is more timing related.”

AT&T similarly hinted at lower-than-expected capex. “We continue to expect our capital spending in the $22 billion range this year. But we don't expect as much vendor financing in the fourth quarter as before. So now we expect to be in the $24 billion range in gross capital investment for the year,” AT&T Chief Financial Officer John Stephens said last month, according to a Seeking Alpha transcript of his remarks. AT&T at the beginning of the year had forecasted up to $25 billion in capex.

“We expect the company [AT&T] to slash capex/opex/interest expenses by 2% per year driven by virtualization technologies. This will enable 7%/year FCF growth,” noted the analysts at Oppenheimer following the release of AT&T’s third-quarter earnings figures last month.

The decrease in AT&T’s capex is mainly due to a change in the payments the carrier expects to receive from FirstNet, according to the analysts at Cowen, and the situation is “simply a timing issue.”

Nonetheless, Verizon and AT&T weren’t the only ones reducing their capex numbers. Sprint said its cash capital expenditures, excluding leased devices, will be between $5 billion and $5.5 billion for 2018, which is at the lower end of the carrier’s previous expectation of $5 billion to $6 billion.

“We expect this will decline further in FY19/FY20,” wrote the analysts at Macquarie Research of Sprint’s capex. “Sprint’s capex is primarily being used for tri-band upgrades and 2.5GHz deployments now on 70% of its macro sites. Additionally, the carrier also added 000’s of new small cells including mini macros and strand mounts.”

T-Mobile, so far, is the only nationwide wireless carrier that might come in on the high end of its own capex guidance; the carrier said last month it expects to get close to the high point of the $4.9 billion to $5.3 billion capex range it set at the beginning of the year.

All that said, the nation’s tower companies remained positive in their comments on the overall network-spending climate among the nation’s largest wireless network operators. “In the U.S., new business signed up continued to be healthy, increasing from Q2 levels. This activity came primarily from the big four carriers, with all of them contributing to our results. Our leasing and services backlogs remain high, giving us comfort and a strong finish to the year,” said SBA Communications chief Jeff Stoops on his company’s quarterly conference call.

“Ericsson estimates that 5G will account for nearly 50% of mobile subscriptions in North America by 2023, compared to just 20% globally. According to industry estimates, mobile data traffic in North America will increased by 40% per year between now and 2023, resulting in a staggering eight fold increase in the volume of data writing across mobile network,” explained Crown Castle’s Jay Brown last month. “This growth and data will require substantial densification of wireless networks.”

And those tower executives aren’t alone in their rosy outlook. Research firm IDC this week said it expects the global 5G and 5G-related network infrastructure market (including 5G RAN, 5G NG core, NFVI, routing and optical backhaul) to grow from $528 million in 2018 to fully $26 billion in 2022, at a compound annual growth rate of 118%.

"Early 5G adopters are laying the groundwork for long-term success by investing in 5G RAN, NFVI, optical underlays, and next-generation routers and switches. Many are also in the process of experimenting with the 5G NG core,” said IDC’s Patrick Filkins in a release from the firm. “The long-term benefit of making these investments now will be when the standards-compliant SA 5G core is combined with a fully virtualized, cloud-ready RAN in the early 2020s. This development will enable many communications SPs to expand their value proposition and offer customized services across a diverse set of enterprise verticals through the use of network slicing.”