Here’s a scary thought – one of the biggest carriers on the planet is scaling back on its network investments at a time when all the market drivers are pointing to significant need for new, high-speed infrastructure.
Verizon just reported its third quarter 2018 results and once again lowered its guidance for full-year 2018 capital expenditures now to the $16.6-17.0 billion range.
Recall that in its first quarter 2018 earnings call, the company highlighted its capex outlook for the year, “We maintain our 2018 guidance range for capital expenditures of $17.0 billion to $17.8 billion. We expect capital expenditures to be more evenly distributed throughout 2018 than in previous years.”
How did that work out? It turns out not very well.
The company’s Q218 wireless network investment took an unexpected downturn that was atypical of prior year investment levels for the period, and that spooked investors and suppliers alike. We looked at what happened in an Inside Towers analysis on August 10.
In its Q218 earnings call, Verizon offered some explanation of the downturn and adjusted its guidance, “We currently expect capital expenditures for the full year to be closer to the lower end of our guided range of $17.0 billion to $17.8 billion, driven by efficiencies from our business excellence initiatives and CapEx management process, as well as the Intelligent Edge Network design. 2018 capital expenditures include deploying 5G for both residential broadband and mobility launches.”
Wireless capex in Q318 rebounded somewhat to $2.1 billion. That figure is up 29 percent over the $1.7 billion low-point in Q218 but still down 20 percent from the $2.7 billion invested a year earlier.
The company touts that it is managing its network investments more efficiently. In wireless, capital efficiency, sometimes called capital intensity, which is the ratio of capex-to-service revenues, has been well off the mark. Normally a 15 percent and above figure indicates network growth and expansion. Verizon Wireless capex hit 15 percent in Q118 then fell off to 10 percent in Q218 and inched back up to 13 percent for Q318. This is effectively maintenance-only mode. Our projections suggest that capital efficiency could hit 15 percent again in Q418 but overall less than 15 percent for the year.
The problem is flat or slow-growth service revenues. Flat-rate wireless data plans and low new net adds in a highly-competitive market is prompting Verizon to conserve its cash. Anecdotally, when Verizon talks about managing it capital more efficiently, we hear of vendor financing and extended payment terms.
Verizon points out that through the first three quarters 2018, its cumulative capital spending including wireless, wireless and enterprise was $12.0 billion compared to $11.3 billion over the same period in 2017. Interestingly, the wireline network investment is progressing better than wireless. This increase largely is due to the 5G Home deployments in select cities around the country. Keep in mind that 5G Home is a Fixed Wireless Application (FWA) that substitutes for its FiOS Fiber-To-The-Home (FTTH), to provide high-speed Internet and video to customer’s in Verizon’s out-of-region markets. We talked about how 5G Home compares to FiOS and that it is not a true 5G standards-based service.
Note that 5G Home investments are made from the wireline, not the wireless, capex budget. In fact, Verizon Telecom offers Verizon Wireless customers discounts to take the 5G Home service.
Certainly, Verizon is in good shape with the specter of 5G and significant network investment still ahead. It’s just that the quarterly capex ups and downs seem like Verizon’s own version of the Monster Mash.
John Celentano is an Inside Towers contributing analyst. He can be reached at [email protected].
by John Celentano, Contributing Analyst to Inside Towers
October 31, 2018