Telco capex: AT&T, Verizon remain kings, while CenturyLink, Frontier and Windstream adjust integration, cost-containment plans

As the top five telcos look to complete network transitions via acquisitions and broadband expansion efforts, they have forecast varying 2018 carrier capital spending plans.

In our latest capex report, FierceTelecom looked at the 2018 capital spending plans of the five largest telcos—AT&T, Verizon, CenturyLink, Frontier and Windstream—and compared 2018 forecasts to 2017 spending trends.

S&P Global Ratings said the telecom sector should remain largely stable through 2018, even though it cited a larger negative bias on rating outlooks than in 2016. The ratings company attributes this change to weaker balance sheets, as well as structural and competitive factors in maturing markets, especially the U.S.

RELATED: Telco capex: AT&T’s spending remains steady, while Verizon and CenturyLink adjust targets

Overall, the wireline industry segment remains challenged due to two key factors: replacing declining legacy business revenues with next-gen services like Ethernet and consumers migrating to IP voice and cable broadband. 

“Telecom operators' wireline business is also struggling with persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data and video) offerings by cable MSOs (multi service operators),” said Zacks Equity Research in a recent Nasdaq report. “These are weighing on the company's revenues and margins.”

Unsurprisingly, the capex plans across the top five service providers varies widely, according to their key priorities.

The following chart chronicles the capital spending trends of the top five telcos in 2018. 

Top Five Service Providers' 2018 Capex     
Service Provider  2017 capex  2018 capex  Acquisitions
1. AT&T  $22B $25B Time Warner
2. Verizon $16.8 B - $17.5B
$17B - $17.8B
XO, WOW's Chicago fiber
3. CenturyLink  $2.6B ~16% of revenue  Level 3
4. Frontier  $1B - $1.25B  $1B - $1.5B  N/A
5. Windstream $790M - $840M $750 - $800M Mass Communications

AT&T, Verizon set high bars

Out of the top five telcos, AT&T and Verizon set the highest rate of capex spending for 2018.

AT&T told investors in its fourth quarter earnings call that it would spend $25 billion this year in capital expenses, a figure higher than most Wall Street estimates. AT&T said the increase—from around $21.6 billion in 2017—is partly due to the recently passed tax reform as well as its FirstNet efforts.

Stephens AT&T
John Stephens

“As promised, we'll increase 2018 capital investments by $1 billion with tax reform. Even with that, we expect significant free cash flow growth in 2018 and going forward with our dividend payout ratio improving into the high 50% range this year,” said John Stephens, CFO of AT&T, during the fourth quarter earnings call.

Business customer spending will be a factor AT&T will watch throughout 2018. Although it did not call out business services spending plans, AT&T said that it is seeing signs that its large business customers may start buying new services again. 

“We have pretty good expectations on the B2B side of our house, our enterprise business side could catch some tailwinds,” Stephens said. “We don't have that build in the guidance we've given you because it's just too early right now.”

Fellow telco Verizon, which has set an aggressive 5G wireless build out schedule, said its internal capital decision process and return objectives have not changed.

Matt Ellis, CFO of Verizon told investors during its fourth-quarter earnings call that it expected “consolidated capital spending to be between $17.0 billion and $17.8 billion including the commercial launch of 5G,” coming in slightly higher than the $16.8 billion and $17.5 billion in capex it forecast for 2017. 

A big priority for Verizon will be on building out its own fiber and purchasing fiber from other dark fiber providers for business services and to support 5G. The service provider previously signed two multi-billion-dollar fiber purchase agreements with Corning and Prysmian. Verizon also purchased XO Communications and part of WOW!'s Chicago fiber network. 

“VZ prefers a steady and methodical approach to capex, although did note that tax reform gives VZ additional flexibility to accelerate capital spend if they can achieve a reasonable return on capital,” said Wells Fargo in a research report.

Like AT&T, Verizon also sees a potential spending shift in the business services arena. Lowell McAdam, CEO of Verizon, said that while tax reform is still early days, it will let the market demands dictate how it invests in next-gen infrastructure to support business customer needs.

Lowell McAdam
Lowell McAdam

“Where we build our fiber, where we're deploying 5G, what enterprises are telling us they want to do with our Intelligent Edge Network is influencing where we put our capital dollars,” McAdam said. “And I expect this to continue and I expect to see things pickup.”

CenturyLink, Windstream focus on integration

For Windstream and CenturyLink, which made large M&A moves in 2017, the focus will be on integrating the new sets of assets they gained via acquisitions of Level 3, EarthLink and Broadview.

CenturyLink made one of the largest acquisitions in its recent history by purchasing Level 3, a deal that immediately enhanced its fiber footprint in the United States and other regions to better respond to domestic and international multinational corporation (MNC) business customer service needs.

Having completed its acquisition of Level 3, CenturyLink did not reveal specific capital budget plans other than to say capex will be 16% of its total revenues. The initial focus will be on finding synergies with its Level 3 acquisition as well as focusing on new opportunities to enhance its revenue mix.

CenturyLink said it remains confident in its ability to achieve our targeted adjusted EBITDA synergies of $850 million and capex synergies of $125 million.

Glen Post, CEO of CenturyLink, told investors during its fourth quarter earnings call that the service provider will allocate capital towards projects that have high rates of returns.

Glen F. Post
Glen Post

“We have to keep driving profitable growth,” said Glen Post, CEO of CenturyLink during the fourth quarter earnings call. “Most of it will be success based. The allocation of capital [will] shift harder in making sure it's for return profiles that are higher, take advantage of our on-net footprint, and are predictable whether it's a cost reduction or driving profitable margin growth.”

Now they have had time to swallow their respective acquisitions of EarthLink and Verizon’s California, Texas and Florida (CTF) assets, Windstream and Frontier appear to be focusing on cost-containment measures.

For 2018, Windstream said its adjusted capital expenditure plan will be $775 million. The service provider said the midpoint of its guidance range would represent a $64 million reduction from 2017 levels or an approximate 8% decline.

“We continue to look for those opportunities and find efficiencies in the business,” said Bob Gunderman, CFO of Windstream, during the fourth quarter earnings call. “Capex, again, is about 10% [lower] year-over-year. We think that's a very good level of investment to ensure that we can continue to make progress on top line and drive the business in the right direction longer-term.”

Gunderman said that throughout the rest of 2018 and into 2019, Windstream will be focused on a company-wide integration effort, one that “has allowed us to more efficiently manage our product catalog, price quoting and order management systems, and eliminate duplicative systems as well as generate meaningful cost savings.”

After making several multibillion-dollar acquisitions in the past five years of wireline assets, Frontier has shifted its focus on cost containment. The service provider has set 2018 capex spending levels of $1 to $1.15 billion, reflecting a slight decline from $1 billion to $1.25 billion.

Perley McBride, CFO of Frontier, who is known for his cost-cutting abilities, said that the telco will focus on finding ways to reduce costs to drive efficiency.

Perley McBride, CFO of Frontier Communications
Perley McBride

“We believe that we're becoming better and better and more efficient at how we prioritize and spend our capital,” McBride said. “And I think that's a good capital number for us. And we continue to invest in all of the right priorities to drive the top line to take cost out of the business.”

CenturyLink, Frontier, Windstream accelerate broadband 

A key element of the top five telco’s capex spending plans for 2018 will clearly focus on expanding and enhancing the broadband experience for customers at a time when cable operators have been gaining an upper hand in the subscriber race.  

Like other telcos, CenturyLink, Frontier and Windstream have continued to see their broadband subscriber bases continue to dwindle as more customers are churning from low-speed DSL to cable's higher speeds.

CenturyLink, which bled yet another 90,000 broadband subscribers in the fourth quarter, will now focus its efforts on two key initiatives: increasing speeds in existing markets via copper and FTTH and leveraging CAF-II funding to drive rural broadband expansion.

“We've got to do well with the households that have enabled with higher speeds, which has increased quite significantly over the last couple of years with the money that CenturyLink has spent on whether it's a factoring or bonding or just pushing the fiber footprint deeper,” Post said. “And two, we continue to believe both with CAF funding and other more specific market opportunities, we've got the ability to invest money to push the fiber deeper in both enable more households and succeed better with them.”

Likewise, Frontier will enhance broadband via its own internal expansions and using the FCC’s CAF-II program.

Specifically, Frontier will allocate its capital to fund FTTH builds in new subdivisions where it does not have existing facilities. Already serving 4 million homes with FTTH today, Frontier’s CEO Dan McCarthy told investors during its fourth quarter earnings call that it will be “expanding that number as we complete organic growth in the areas” to “30,000 to 50,000 new households.”

At the same time, the service provider will continue to allocate capital to expand its FTTN capabilities to provide 100 Mbps as well as the CAF-II program for rural areas.

As of December 31st, Frontier had reached the 40% milestone in all 29 states. Frontier is on track to meet its 2018 goals with three states already exceeding the 60% threshold as of January 2018. Frontier now offers broadband capability to 351,000 locations in its captive eligible areas with our goal to pass 774,000 locations by the end of 2020.

Now that it has extended 25 Mbps and higher speed tiers to 24% of its footprint, Windstream will focus its broadband capital spending on two key goals: bring more higher speeds to more subscribers and reduce the network activation costs.

During 2017, Windstream more than doubled its penetration level of those higher speed tiers. By the end of 2018, it expects the penetration of 25 Mbps or greater speeds to be 36%.

“We're going to accelerate our ability to have faster speeds, but then we've also been working to ensure we minimize the capital it takes to put broadband into the network, so we can obviously expose faster speeds to more customers,” said Tony Thomas, CEO of Windstream, during the fourth quarter earnings call. “You see our continued commitment to our broadband expansion in our capital budget. We're going to be investing significant capital there in 2018 to bring those speeds – put those speeds in the hands of our customers.”