Verizon, AT&T show surprise increase in network spending in Q1

Both Verizon and AT&T spent more on their networks in the first quarter than some Wall Street analysts had expected, a noteworthy situation as both carriers race toward 5G network launches later this year.

“The biggest delta, or upside surprise vs. our estimates thus far has come from higher capex numbers at both Verizon and AT&T,” wrote the Wall Street analysts at Deutsche Bank Markets Research in a recent report to investors. They pointed out that Verizon spent fully $4.6 billion on its network during the first quarter, which they said was 29% more than they had been expecting and almost 50% more than what Verizon spent on its network during the same quarter last year.

AT&T’s capex (capital expenditure) during the first quarter was also above expectations, the analysts said – AT&T’s total capex of $6 billion was 9% above Deutsche Bank’s estimates and up 3% year over year.

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“Call commentary from both companies has indicated a strong focus on both wireless network investments, fiber-based expansion and densification, and laying the groundwork for 5G,” the Deutsche Bank analysts wrote. “As we’ve noted in the part, we believe a confluence of factors including tax reform/bonus depreciation, unlimited data plans, and an early 5G arms race are each key catalysts driving these trends.”

However, tempering its capex figure for the first quarter, Verizon’s CFO cautioned that the operator still expects to spend $17 billion to $17.8 billion on capex throughout 2018, which is the guidance the carrier provided in February. “I don't see us having a massive acceleration in capex,” Verizon’s Matt Ellis said during the carrier’s recent quarterly conference call, according to a Seeking Alpha transcript of the event. “And as we look forward, we continue to believe that we can deploy the network within the typical range. If we see an opportunity to accelerate because of the market, we're not afraid to do so, but it will be based off of the opportunity we have in the marketplace. But this really comes back to the design of the network over the past few years, by identifying the 4G network we've put a lot of the infrastructure in place that we need to deploy 5G, especially using millimeter wave spectrum.”

Concluded Ellis: “So we don't see this as being a massive uptick. This is not the same thing as when we adopted 4G and went from a CDMA based 3G network to the 4G LTE network. This is a very different network rollout. And I think you will see that in the capex as we go forward.”

Nonetheless, executives from the nation’s tower companies said they continue to expect increased overall spending from the nation’s wireless carriers due in part to 5G buildouts. “More U.S. consumers are using more advanced devices for more bandwidth applications every month,” explained American Tower’s James Taiclet during the company’s quarterly earnings call with investors, according to a Seeking Alpha transcript. “And to keep pace, our wireless carrier tenants are expected to spend over $30 billion in capex this year. Taking into account other multiyear initiatives like FirstNet, we believe we are well positioned for a sustained period of attractive U.S. organic growth.”

And Taiclet specifically pointed to 5G as driving a portion of carriers’ overall spending: “It seems more likely to us that the deployment of mobile 5G and the addition of associated transmission equipment on our tower sites will actually either coincide with or quickly follow millimeter wave rollouts in dense urban areas. In turn, that activity should help support strong organic growth rates for us, as 2G and 3G spectrum in suburban and rural and urban areas is refarmed and new spectrum assets are deployed,” he said.

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Tower companies weren’t the only ones cheering rising spending by U.S. operators. As noted by the Wall Street Journal, both Nokia and Ericsson pointed in part to early 5G deployments in the United States as an element in their improving financial outlook. Indeed, Nokia said it now expects sales in the overall global network equipment industry to fall just 1% to 3% in 2018, a better outlook than the 2% to 4% drop it offered in February.

The rise in spending by AT&T and Verizon in the first quarter was telegraphed earlier this year, when most of the nation’s wireless operators said they expected to spend more on their networks during 2018 than 2017. For example, the analysts at Deutsche Bank Research said earlier this year that U.S. nationwide wireless carriers are expected to increase their overall capex in 2018 by 14% over last year to $30.5 billion, which the analysts noted is the biggest capex figure they’ve seen since 2014.