Verizon CFO promises to increase wireless capex, margins

A top Verizon Communications (NYSE: VZ) executive said the carrier doesn't plan to reduce spending on its wireless network, despite the fact that it has largely completed its nationwide macro LTE buildout. At the same time, Verizon CFO Fran Shammo said the carrier plans to increase its margins in its wireless business over time.

Speaking at the UBS Annual Global Media And Communications Conference today, Shammo said that Verizon continues to expect to spend roughly $17 billion this year on capital expenses across its wireless and wireline business, which he said is at the high end of the carrier's guidance for the year. Shammo said he would provide Verizon's exact capex guidance for next year during the carrier's fourth-quarter earnings report in January.

However, he did say that Verizon's wireless capex will continue to trend up and that the carrier's wireline capex will continue to trend down. "The reason wireless isn't declining is because with an LTE network … you have to continue to invest in that network," he said, noting Verizon's macro LTE network buildout is now largely complete, and so the carrier will now turn to densifying its network by building out small cells and diversifying its antennas in order to stay ahead of customer demand for mobile data. "You have to stay ahead of that," he said.

"I don't anticipate that wireless (capex) will come down," Shammo said. "And quite honestly, that's a good thing because as we continue to invest in wireless, that means usage is going up and revenue will continue to accrete. … The day that we start to cut wireless capex, that's the day that we should start to wonder where the future of the business is going. I don't believe that wireless capex will decline."

As for Verizon's margins in its wireless business, Shammo said investors can expect them to rise. "Over time we believe we will continue to increase margins," he said, noting that Verizon sees additional ways that it can take cost out of its business.

Verizon said its wireless operating income margin in the third quarter was 31.9 percent in the quarter, down from 33.8 percent in the year-ago quarter. The company said its segment EBITDA margin on service revenues was 49.5 percent, down from 51.1 percent in the year-ago period.

Shammo's comments on Verizon's capex spending are noteworthy in light of recent capex discussions from other carriers. Notably, AT&T (NYSE: T) recently said that it expects its 2015 capex to be around $18 billion, down from this year's spending of around $21 billion. The news surprised analysts, who had expected AT&T to spend roughly $20.7 billion on capital expenses next year. However, AT&T didn't break out its wireless and wireline capex spending expectations.

"Our sense is that AT&T--given its relatively low cash position and pending cash outflows for DirecTV (NASDAQ: DTV) and potential spectrum purchases--has hit a point where they have to manage for cash balances. Hence, they're cutting next year's capex," Jefferies analysts wrote recently in response to AT&T's capex announcement.

Even more surprising is Sprint's (NYSE: S) capex plans for this year. The carrier last month lowered its capital expense forecast for 2014 to just below $6 billion, from its previous forecast of $8 billion that it made at the beginning of this year. Sprint CFO Joe Euteneuer has explained that the carrier lowered its network capex forecast for this year because its LTE network buildout eliminated its need to invest in CDMA 3G network capacity. Further, he said Sprint's parent SoftBank has helped reduce the cost of its network equipment due to economies of scale.

According to a recent report from Jefferies, Verizon Wireless and T-Mobile US (NYSE:TMUS) have been spending capital on wireless network enhancements at a fairly steady clip, while AT&T and Sprint have hit some snags in their capex spending--though the outlook for next year looks better. In a detailed research report, Jefferies analysts dissected the North American capex market, primarily with an eye for what it means for several vendors. "Not surprisingly, our checks suggest that the capital spending environment remains somewhat soft overall," they wrote. "The outlook for early next year is much more hopeful however."

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