A recent report from Lehman Brothers Equity Research suggests that Cingular Wireless L.L.C. plans to cut its capital expenditures next year by $1.5 billion, a 20-percent drop from the $7.5 billion the nation’s leading carrier is planning to spend this year. However, Lehman Brothers said it believes other carriers, including T-Mobile USA Inc., Sprint Nextel Corp. and Verizon Wireless will offset the decline, leading to increased wireless infrastructure sales next year.
Lehman Brothers explained that the bulk of Cingular’s capex reduction is likely a result of its reduced GSM network integration costs following the acquisition of AT&T Wireless Services Inc. in late 2004.
“Cingular had anticipated being able to simply relocate [L.M.] Ericsson and Nokia [Corp.] base stations and order a modest amount of new equipment to swap out Nortel [Networks Ltd.] and Siemens [AG] base stations,” stated the report. However, the report points out that Cingular recently indicated it spent more than it expected on integration equipment in 2006 and expects to reduce capex due to the conclusion of its Nevada and California build and by reducing its UMTS spending.
“Cingular believes it can slow, if not pause, its UMTS spending for at least a year as its coverage is at plan, but the network is fairly empty at present,” read the report.
Nonetheless, Lehman Brothers said it’s important to understand that carriers’ capex budgets can differ materially from actual spending, and capex spending often tends to be higher than what was initially planned.
“Cingular may feel tempted to match the aggressive capex plans of Verizon and Sprint, which both plan to raise capex in 2007,” said the report.
Overall, Lehman Brothers said offsets in 2007 capex spending on infrastructure is “clouded by uncertainty associated with the [advanced wireless services] auctions and Sprint’s plans for its 2.5 GHz spectrum.” Yet, the equity research firm indicated that the theses driving capex in the past two years are still in place, namely the growing penetration of the youth market, increasing wireline cannibalization and swelling data usage. That said, the firm projects that the U.S. infrastructure market is set to grow in the mid-single digits in 2007, similar to its 2006 pace.
The report also spelled out that the AWS auction, set to take place in late August, should drive a significant amount of spending next year, especially if T-Mobile USA acquires enough spectrum to support a UMTS buildout to begin in early 2007, which could raise its capex budget by about 35 percent.
And while the firm said it expects Verizon Wireless, Leap Wireless International Inc. and MetroPCS Communications Inc. to be active in specific markets, it said Cingular and Sprint Nextel appear content with their spectrum holdings.
Another capex driver identified by the firm is the impending availability of CDMA2000 1x EV-DO Revision A equipment this fall. “We believe Verizon in particular has proceeded cautiously with its spending in 1H06 following broad availability of its EV-DO network.”
The report indicated that Sprint Nextel’s EV-DO spending this year has been fairly heavy and noted that the carrier is probably gearing up to begin migrating iDEN subscribers over to its CDMA network, boosting its CDMA spending as its iDEN spending declines moderately. In all, the report estimated that Sprint Nextel’s capex should grow about 10 percent in 2007 compared to 2006.
Interestingly, the report mentioned that Sprint Nextel is still evaluating technologies to use in its vast 2.5 GHz spectrum holdings and said a decision ought to come this year. Vying for Sprint Nextel’s business are Qualcomm Inc. and its Flarion Technologies OFDM technology, IP Wireless Inc.’s UMTS TD-CDMA and several WiMAX vendors.
