No more penny pinching: Wireless carriers’ capex to surge in 2018

Wall Street research firm Barclays shows capex trends between 2015 and 2018 for the nation's four biggest wireless carriers. (Barclays)

“Indications suggest 2018 is going to be a big year for telecom-related spending,” wrote the analysts at Wall Street Research firm Barclays in a recent note to investors. Specifically, the analysts said they expect capex among the “big four” (Verizon, AT&T, T-Mobile and Sprint) to rise by 10% this year, which they said would be the largest increase in the past five years.

That growth is likely to be driven mainly by AT&T and Sprint. Both companies have made it clear that they are getting ready to open their purse strings in order to grow their respective network strategies.

For Sprint, the carrier’s significant increase in network spending is mostly due to a renewed commitment to the carrier by Japanese parent SoftBank. And AT&T’s increase is due in part to savings from the government’s recent tax reform and partly due to its own pledge to build out FirstNet’s 700 MHz spectrum for public safety users.

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Nonetheless, it’s clear that “that the tides are turning in the U.S. market,” said Dell’Oro Group analyst Stefan Pongratz.

Pongratz acknowledged that Sprint and AT&T will drive much of the increase in the coming months, but he hinted that the rise in overall capex in the United States in 2018 portends a general, gradual relaxing of carriers’ penny pinching.

“The upside for the mobile infrastructure vendors can to some degree be attributed to the expected focus on macro related capex—small cell investments tend to deliver a smaller portion of the capex to the equipment vendors. At the same time, we have to account for the fact that a significant portion of the capex upside will be utilized to deploy new macro sites, which will drive down the equipment over total capex ratio and introduce uncertainty about the expected likelihood of completing all the projects,” Pongratz said. “But overall we are optimistic that the strengthening momentum in the U.S. market will play an important role offsetting the more subdued 2018 capex outlook in Europe and China.”

Pongratz’s comments dovetail with Dell’Oro’s wider forecast for the global mobile radio access network (RAN) market for equipment vendors, which predicts a positive five-year compound annual growth rate—the first time the firm has predicted a rise in that metric in the past seven years.

The firm said its forecast assumes “healthy growth” in the space in 2021 and 2022.

But this year in the United States, what exactly are carriers spending their money on? The Barclays analysts said that operators in 2018 are putting their cash toward two major endeavors: getting fiber and building out new spectrum bands.

On fiber, the analysts cited commentary from fiber suppliers like Corning and Dycom, citing increasing demand from carriers for fiber backhaul for their tower and small cell sites.

And for spectrum, the Barclays analysts noted that “it’s time to deploy what’s already been paid for.” The analysts pointed to AT&T’s 700 MHz, AWS and WCS spectrum as ready to be put into use, while T-Mobile will spend to build out the 600 MHz spectrum it won in the FCC’s 2017 auction. Meantime, Verizon plans to deploy its millimeter-wave spectrum holdings, while Sprint will continue to build out its 2.5 GHz licenses.

However, it’s important to note that 5G doesn’t appear to be driving much actual network spending. At least not yet.

“We're at the conversation stage around 5G, so we don't believe hardly any of the activity that we're currently seeing is really 5G-related,” Crown Castle CEO Jay Brown said during the company’s quarterly conference call with analysts, according to a Seeking Alpha transcript of the event. Crown Castle is one of the nation’s major tower companies.

But that 5G ambivalence will likely change in the coming years, according to Pongratz.

“The combination of the successful completion of the first 5G NR standard, accelerated 5G roadmaps in China, and more operators coming to terms with the fact that the eMBB use case is enough to justify the 5G NR business case form the basis for the renewed optimism about the potential RAN growth in the outer part of our forecast,” Pongratz said in a recent release.

Here’s a deeper dive into each carrier’s capex outlook for 2018:

Verizon

The analysts at Scotiabank said they expect Verizon’s overall capex for 2018 to clock in at $17.6 billion, of which around $12 billion will go toward the carrier’s wireless network.

Verizon’s overall capex figure for 2018 is roughly equal to what the carrier spent on capex the past few years. Indeed, Verizon’s CTO said the carrier likes to keep things uniform.

“You probably don’t want to have big spikes in the capital allocation because then in the end it drives inefficiencies. We want to be consistent,” said Hans Vestberg, Verizon’s new CTO, during an investor event in January. “From an execution point of view you want to be consistent.”

“There's a lot of planning that goes into our capital spending before we get to it,” Verizon CFO Matthew Ellis reiterated during the carrier’s earnings call with analysts, according to a Seeking Alpha transcript of the event. “But you will see us do it methodically and do it in the way that creates the greatest value.”

Verizon’s management did point to the carrier’s interest in obtaining additional fiber for its network, which they said would be critical to the launch of the operator’s 5G network.

AT&T

AT&T said it expects to spend up to $25 billion this year in capital expenses, a figure notably higher than most Wall Street estimates. AT&T said the increase—from around $21.6 billion in 2017—is partly due to the recently passed tax reform as well as its FirstNet efforts.

Specifically, AT&T is gaining access to around 20 MHz of nationwide 700 MHz spectrum through its FirstNet contract, and analysts expect the company to begin building that spectrum out alongside AT&T’s WCS and AWS-3 spectrum licenses.

“As we have noted in the past, we expect this to drive significant revenue tailwinds for the U.S. Wireless tower companies,” the analysts at Deutsche Bank Markets Research wrote of AT&T’s capex plans.

And like Verizon, AT&T too said it would continue to invest in a fiber-powered network backbone.

T-Mobile

The analysts at Deutsche Bank said they expect T-Mobile to spend around $5.3 billion on capex in 2018, a figure that’s roughly in line with what the carrier spent last year but is an increase from the $4.7 billion T-Mobile spent in 2016.

Importantly, T-Mobile’s CFO Braxton Carter said the carrier’s capex expectations for 2018 include its 5G efforts and its small cell build-out plans (the company said it plans to roll out 25,000 small cells in 2018 and early 2019).

“And we've also consistently discussed that we don't see any large step function increase in capex when we look out into the future. It's been going up. It's been going up slightly every year. But Neville [Ray, T-Mobile’s CTO] has always had a project. And as we complete these projects, significant dollars roll into the next project. And I think it's really innovative and really industry-leading that Neville is getting so far ahead on the 5G bill,” T-Mobile’s Carter said during the carrier’s earnings call with analysts, according to a Seeking Alpha transcript of the event.

Carter explained that, as T-Mobile adds 600 MHz capabilities to its towers, it also plans to add 5G hardware that can be activated through a software upgrade.

T-Mobile has promised to launch nationwide 5G by 2020.

Sprint

Of all the nation’s major operators, Sprint’s capex is poised to change the most. The company plans to increase its capex to $5-6 billion this year, from a recent low of $2 billion. That increase reflects the collapse of merger negotiations between Sprint and T-Mobile and SoftBank’s subsequent plan to raise its investment in Sprint.

Sprint’s capex this year will be largely dedicated to adding 2.5 GHz capabilities to the other half of the carrier’s towers that don’t yet have it. Sprint also plans to increase the number of its macro tower sites by around 20%, as well as deploy around 40,000 outdoor small cell solutions, 15,000 strand mounted small cells through the company’s partnerships with cable companies and up to 1 million Sprint Magic Boxes.

And that work, Sprint said, will allow the carrier to launch mobile 5G services on its 2.5 GHz spectrum holdings on a nationwide basis in the first half of 2019.