The big U.S. wireless carriers are reporting positive results for the full-year 2018 performance. But putting on a happy face and still paying a dividend to shareholders belies looming financial challenges. The question is: Do they have the cash flow to fund a massive 5G deployment?
Consider Verizon Wireless (VZW). The company reported $63 billion in 2018 retail (prepaid and postpaid) service revenues, essentially flat with $63.1 billion in 2017, even as the subscriber base grew steadily to 118 million. VZW’s service revenues peaked at over $70 billion in 2015, free falling ever since. The decline is mainly attributable to a switch from usage-based wireless services to flat-rate, unlimited data plans. In this environment, wireless carriers have become cash-constrained yet must continue investing and expanding their networks just to keep up with mobile data demand.
With a flat revenue outlook for 2018, VZW slashed its capital expenditure (capex) budget. Full-year 2018 capex came in at $8.5 billion, down 18 percent from $10.3 billion in 2017 and well off the $11.7 billion peak in 2015. Capex per subscriber has declined at a 12 percent CAGR from a peak of $104 in 2015 down to $72 in 2018.
We previously flagged that trouble could be brewing when VZW’s 2Q18 (capex) nosedived unexpectedly (see, VZW 2Q Wireless CapEx-A Real Stunner!). For 2018, VZW’s capex efficiency dropped to 13 percent, its lowest point in five years. At any level below 15 percent, the company effectively is in a maintenance mode and not expanding or modernizing the network.
For its part, Verizon Corp (VZ) claims network investment efficiencies through its CapEx Management program. On the surface, this program seems designed to get the ‘biggest bang for the buck.’ How it works is not disclosed but anecdotally, the company demands preferred prices (read, deep discounts) from equipment vendors and is stretching out contractor payments.
Across the board, carriers’ numbers are not encouraging as they all prepare for 5G. VZW and AT&T are out on a limb, claiming 5G “firsts” ahead of the 3GPP 5G standards release. Yet service revenues are unlikely to grow while flat-rate, unlimited data plans prevail. The opportunity to generate sufficient cash flow is stunted at best. Sprint and T-Mobile US already raised that flag as they justify their proposed merger.
How to ease the capex crunch?
Initially, target 5G in selective high-value use cases (Enterprise, Industrial IoT, Smart Cities) that are outside of flat-rate plans versus a wholesale network upgrade. Secondly, separate the services business from the infrastructure side.
Note that VZ will activate in 2Q19 what it calls Verizon 2.0, a major reorganization into three customer-facing units – Consumer, Business, and Verizon Media Group/Oath. As a further step, VZ could retain its spectrum holdings but spin off into a standalone operation the Global Network & Technology (GNT) organization that manages VZ’s wireless/wireline and IT infrastructure. Customer-facing units could buy or lease network capacity and coverage from GNT which in turn could raise needed capital from a variety of customer, vendor and investor sources (see, The Rise of Wireless Infrastructure Companies). Thirdly, generate cash by leasing spectrum to service providers in rural areas where the Tier 1 carriers do not play.
Whatever the solution, the carriers face a rocky financial road if they attempt to stay their current course while charging headlong into 5G.
John Celentano is an Inside Towers’ Contributing Analyst. Reach him at: [email protected].
by John Celentano, Inside Towers Contributing Analyst
February 21, 2019