Coming into 2018, we were all feeling pretty good about the prospects for increased investment in wireless network infrastructure, what with surging mobile data usage, 5G rising, more spectrum allocations, IoT forecasts off the charts, and FirstNet.
No surprises then that carriers and tower companies alike reported positive operating results in their 2Q18 earnings calls.
Verizon highlighted $7.8 billion in aggregate capex (wireless, wireline, enterprise) through the first half of 2018 compared to $7.0 billion for the same period in 2017.
But we took a closer look at Verizon Wireless’ Q2 capital expenditures and … boom! (My Whiskey Tango Foxtrot moment!)
VZW spent $1.65 billion in 2Q18, down 30 percent from $2.37 billion in 1Q18 and down 32 percent from $2.44 billion spent in 2Q17. Capital intensity (capex/service revenues) dropped to maintenance mode (10 percent in Q2) from expansion mode (15 percent in Q1.)
VZW actually got off to a very good start with $2.37 billion spent in 1Q18, up 29 percent over $1.83 billion in 1Q17 and close to the $2.42 billion in 1Q15 when VZW’s 4G LTE deployment was in full swing.
Then, the bottom fell out.
The chart shows that VZW QTQ capex in 2018 is atypical of past spending patterns. Through the first half, VZW spent $4.0 billion or 39 percent of its full-year 2018 projection of around $10.2 billion. Despite the Q2 downturn, we expect steady capex increases through the end of the year.
When we asked why the decline, the company pointed to recorded remarks from its July 24 earnings call: “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.”
The company’s party-line response just raises more questions: Why the precipitous drop in Q2 capex compared to both historical trends and in the face of significant network expansion drivers? Can Verizon be in a cash flow crunch? Is this sharp drop in capex the reason for delayed payments to its tower contractors?
There must be a logical explanation. Verizon has not provided one yet.
John Celentano is a contributing analyst to Inside Towers. He is a highly-regarded independent analyst and marketing consultant with years of experience in telecommunications. He regularly writes and speaks on wireless and wireline issues and trends, and advises investor groups on telecom mergers and acquisitions. John can be reached at jcelentano1@gmail.com.
August 10, 2018
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