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

As the top five telcos look to complete transitions via acquisitions and broadband expansion efforts, they have forecast varying 2017 carrier capital spending plans.

In our new capex report, we took a look at the 2017 spending plans of the five largest telcos—AT&T, Verizon, CenturyLink, Frontier and Windstream—and compared 2017 forecasts to 2016 spending trends.

S&P Global Ratings said in a recent research report that while telco capex could level off in 2017, wireline capital will be required to stave off cable competitors.

“We expect flat to slightly lower capex as carriers have largely completed their 4G LTE deployments and fiber buildouts, although we believe further fixed network upgrades will be needed to compete with cable for broadband customers,” S&P said in a recent report.

RELATED: How AT&T, Verizon, CenturyLink, Windstream and more stacked up in Q4 2016: The top 11 carriers

Out of the top five, AT&T surpassed its 2016 capex forecast plans, investing $22.9 billion after issuing guidance of $22 billion. AT&T has forecast 2017 capital expenditures to be in the $22 billion range with a key focus on integrated wireless and wireline business solutions.

Over 40% of the telco’s 2016-17 capex total will be dedicated to expanding and enhancing its global portfolio of mobile and integrated business solutions across six areas: software-centric solutions, cybersecurity, internet of things (IoT), collaboration, connectivity and Wi-Fi.

Alternatively, Verizon’s 2016 capital spending came in at $17.1 billion, falling below its guidance of $17.2 billion to $17.7 billion. For 2017, Verizon has forecast capital spending between $16.8 billion and $17.5 billion. 

Verizon’s CFO Matt Ellis told investors during the company's fourth-quarter earnings call that a key focus for Verizon’s capital spending in 2017 will be on enhancing its wireline and wireless networks.

“Some of the other businesses are not as capital-intensive as our network business,” Ellis said. “You should expect to see the capex will continue to be focused on the network side of the business as we go into 2017.”

As it defers spending on projects from synergies via its Level 3 acquisition, CenturyLink expects to spend $400 million less in capex year-over-year. For 2017, CenturyLink reduced its expected capital spend to $2.6 billion.

The following chart chronicles the capital spending trends of the top five telcos in 2016 and 2017.

Service provider 2016 capex 2017 capex Spending targets Acquisitions
1. AT&T  $22.9B $22B enterprise, broadband, wireless Time Warner
2. Verizon  $17.1B $16.8 B - $17.5B fiber, wireless XO Communications
3. CenturyLink $3B $2.6B fiber, broadband Level 3
4. Frontier  $1.25B - $1.4B  $1B - $1.25B  broadband, business services Verizon's properties
5. Windstream $800M - $850M $790M - $840M broadband, business service expansion EarthLink

Frontier, Windstream adjust spending

Following its acquisition of Verizon's California, Texas and Florida (CTF) wireline assets, Frontier expects full-year 2017 capital expenditures to be in the range of $1 billion to $1.25 billion, down from $1.25 billion to $1.4 billion in 2016. 

Perley McBride, CFO of Frontier, said that the lower capex budget represents its greater scale.

“This is a decline from 2016, as our larger size has enabled greater efficiencies, including better pricing in procuring goods and services,” McBride said during Frontier’s fourth-quarter earnings call.

However, Jennifer Fritzsche, senior analyst for telecommunications services at Wells Fargo, said in a research note that Frontier will have to consider revamping network spending to stay on par with cable.

“It is hard to fix a problem just by cutting costs when your competition (cable) is only pressing its foot heavier on the capex and fiber pedal,” Fritzsche said.

Likewise, Windstream, which just completed its EarthLink acquisition, has forecast adjusted capital to be between $800 million and $850 million.

But as it winds down 2017, the service provider expects adjusted capital expenditures to be between $790 million and $840 million.

“At the midpoint of our capex guidance, we are targeting total adjusted capex of $815 million as we pursue strategic initiatives to advance our high-speed internet capabilities, strategically expand the wholesale network, enhance overall network performance and reduce network operating expenses,” said Bob Gunderman, CFO of Windstream, during the company's fourth-quarter earnings call.

The M&A effect

The ongoing completion of acquisitions in 2017 will affect capital spending. This is due to the fact that some service providers have acquired a set of assets (i.e., fiber) that fulfill a specific market need.

CenturyLink told investors that its capital spending reduction for 2017 is related to its Level 3 acquisition.

Stewart Ewing, CFO of CenturyLink, told investors during the recent Deutsche Bank investor conference that it could use Level 3’s existing unused fiber conduit, for example.

“We really wanted to get the Level 3 assets in-house and understand more of what the opportunities are there from a network synergy standpoint,” Ewing said. “We just felt like it was prudent to reduce capex by $400 million to essentially defer or delay some projects that otherwise may be taken care of by the Level 3 acquisition.”

Verizon, which purchased XO Communications, suggested it could look at similar multiuse fiber network builds like it is conducting in Boston.  

“We have mentioned fiber is a consistent part of our business, so that's something you should expect to see us continuing,” Ellis said. “We have talked about what we are doing in Boston.”

Windstream and Frontier are seeing similar network synergies from their acquisitions of EarthLink and Verizon’s assets.

Given the growth-related spending in wholesale and the ability to leverage EarthLink’s fiber network, Windstream expects lower capex in 2017, down 9% year-over-year. In particular, the EarthLink deal deepens its fiber reach in the Southeast.

The service provider sees a similar reduction in 2018 as several IT projects wind down. On a longer term basis, Windstream expects capital intensity levels in the 13%-15% range.

“We would expect to see that maybe take another step down in 2018 as we wrap up some of the bigger projects on the Windstream legacy side this year,” Gunderman said. “Obviously, the EarthLink merger, billing system conversions will go on a little bit longer, but that's obviously going to be a little bit of a tailwind for us on the capex side as well.”

Broadband investments ramp

Broadband expansion remains a top priority for all five of the top telcos’ capital spending plans.

AT&T will expand FTTH beyond the 12.5 million homes it agreed to meet based on the FCC requirement to get its DirecTV deal approved.

As of the end of 2016, AT&T reached a total of 46 markets with its FTTH network, surpassing an earlier goal to reach at least 45 major metro areas.

CenturyLink, Windstream and Frontier are also expanding their broadband footprints.

CenturyLink set a goal to have 10.5 million, or over 85%, of addressable broadband-enabled units at 40 Mbps or higher speeds in its top 25 markets by 2019. Within that time frame, the telco said it will have 7 million, or over 55%, of addressable broadband-enabled units at 100 Mbps or higher. The service provider could also reduce the percentage of customers it will enable with 40 Mbps and 100 Mbps.

Ewing said the capex reduction won’t impact its broadband expansion goals.

“For the stand-alone company, we believe we can continue the path that we need to upgrade speeds for our customers with less than the $3 billion a year of capex we have been spending,” Ewing said.

While Frontier may be in cost-cutting mode, the telco noted half of its 2016 capital spending supported three goals: broadband expansion, speed upgrades and FTTH. Frontier enabled 1 million households with 50 Mbps and higher speeds. The service provider also added 200,000 new copper broadband builds in its CTF region, 190,000 CAF-II households and 500,000 households in adjacent areas.

However, given challenges related to video content costs, Frontier has pulled back on its video expansion plan.

“We slowed new video deployments as we evaluate the opportunities now available as technology in this area continues to evolve,” McBride said.

Like Frontier, Windstream is looking to enhance its broadband speeds, particularly in more rural areas via its Project Excel initiative, which it plans to complete in the first quarter.

This project calls for Windstream to equip its remote DSLAMs with fiber and VDSL2 capabilities to deliver 25 Mbps and higher speeds.

“Where that capex actually lands in terms of completion, some of it bleeds over into the second quarter as the vendor invoices come in, but we’re excited about getting that wrapped up real soon,” Gunderman said. “The team is pushing really hard to really finish that off and get an even greater set of speed capabilities into the hands of our customers.”