RO: A Preview To Carrier Reporting (Part 1 of 4)

01:21pm EST  3-Apr-02 Robertson Stephens (Johnson, Paul) JNPR NT

April 3, 2002

 

Technology Research

A   P r e v i e w   T o   C a r r i e r   R e p o r t i n g

 

A Q1 Score Card For Key Service Provider Metrics

 

Paul Johnson, CFA 

Paul Silverstein 

Eileen M. Segall 

Sachin Divecha 

 

Key Points

 

As we enter the reporting season for first quarter earnings, there are  several

major service provider metrics we believe the telecom equipment investor should

track.  As we have done for the last few quarters, we provide  here  scorecards

to help  investors  track  these  data  points  throughout  the  first  quarter

reporting season.

* Capital Expenditures.  Although we expect a precipitous  falloff  in  carrier

  spending in the first quarter, we believe stabilization may occur as early as

  the end of second quarter. Implicit is the assumption that service  providers

  will not further substantially reduce their  2002  capex  guidance  and  that

  carriers will aggressively cut capital expenditures in the first quarter.  We

  will therefore watch carefully for any significant change to  carriers'  2002

  spending forecasts, as well as first quarter carrier capex.

* Data Revenues.  Although data revenues declined both sequentially  and  year-

  over-year in the fourth quarter of 2001, we note that data revenues  continue

  to increase as a percentage of total revenues.  We believe this reflects  the

  increasing percentage of capital spent on digital networks, a trend we expect

  to continue in the first quarter and beyond.

* Cable Modem and DSL Line Deployment.  As evidenced by our estimates  for  DSL

  and cable modem deployments in  fiscal  2002,  we  believe  deployments  (and

  therefore demand for bandwidth) will grow at a  healthy  pace.    That  said,

  first quarter broadband access  deployment  should  be  weak  relative  to  a

  seasonally strong fourth quarter 2001, which was further enhanced by  end  of

  the year promotions offered by several of the large broadband access  service

  providers.

 

Tracking the Carrier Market for Networking Equipment Vendors

As we approach the first quarter reporting season we will follow the results of

not only networking equipment vendors, but also of their telecom carrier

customers.  The downturn in the service provider market has severely affected

companies in our universe, and though we do not expect a significant recovery

in the service provider market in the near-term, we believe the stabilization

may occur as early as the end of the June quarter.  We believe evidence of a

turnaround in the networking equipment market will be reflected in the metrics

we follow   capital spending, data revenues, and broadband access deployment.

For the first quarter, we provide here a reporting date schedule for the

largest U.S. wireline and wireless service providers:

 

Table 1   First Quarter Reporting Schedule   Largest U.S. Carriers

 

Sprint FON            April 16, 2002

Sprint PCS            April 16, 2002

Nextel Communications April 17, 2002

SBC                   April 18, 2002

Bell South            April 19, 2002

Verizon               April 23, 2002

AT&T                  April 22 - 26, 2002

Worldcom Inc.         April 22 - 26, 2002

Qwest                 April 22 - 30, 2002

 

Source: StreetEvents, Robertson Stephens estimates.

 

Carrier Spending: A Proxy For Spending on Networking Equipment

We track carrier capital expenditures as a proxy for what carriers spend on

equipment (they do spend money on other things).  We currently forecast that

U.S service providers (wireline and wireless) will spend roughly 30% less on

equipment in the first quarter than they did in the preceding quarter and that

total capital expenditures will decline almost 30% year over year in 2002.

Within our 2002 estimate, we expect wireline service providers to spend 40%

less and wireless service providers to spend essentially the same amount as in

2001. That said, we believe it is possible networking equipment vendors may see

stabilization by the end of the second quarter, with very modest sequential

growth in the second half of 2002 (as further detailed in our recently

published note, Will March Quarter Showers Bring June Quarter Flowers?, March

13th, 2002.)  Implicit is the assumption that service providers will not

further substantially reduce their 2002 capex guidance and that carriers will

aggressively cut capital expenditures in the first quarter.  We will therefore

watch carefully for any significant change to carriers' 2002 spending

forecasts, as well as first quarter carrier capex.  If carriers do not cut

spending as aggressively as we expect in the first quarter, spending may

continue to decline in the second quarter.

 

In Tables 2 and 3, we highlight the largest U.S. carriers  quarterly capital

expenditures and our estimates for the first quarter, in particular, so that

investors may compare results as each carrier announces them.

 

In Table 2, we focus on the largest wireline carriers, which today represent

the greatest source of revenues to the companies in our universe.  Our 2002

estimates are derived from carriers  own spending forecasts.

 

Table 2   Wireline Carrier Capital Expenditures ($ in millions)

 

Calendar Quarter     1Q01A  2Q01A  3Q01A  4Q01A  1Q02E     1Q02E   2002E 2002E

                                                        Annualized  NEW  CURR.

 

Bell South

(Wireline)

Capex                1,477  1,417  1,138  1,093  1,000     4,000         4,800

 

q/q growth           -6.5%  -4.1%  -19.7% -4.0%  -8.5%

 

Verizon (Wireline)

Capex                3,450  3,248  2,296  3,190  2,300     9,200         10,000

 

q/q growth           -8.6%  -5.9%  -29.3% 38.9%  -27.9%

 

Qwest

Capex                2,943  2,616  2,232    752    650     2,600         3,700

 

q/q growth           31.6%  -11.1% -14.7% -66.3% -13.6%

 

SBC (Wireline)

Capex                2,777  2,887  2,317  3,050  2,200     8,800         9,200

 

q/q growth           -20.5%  4.0%  -19.7% 31.6%  -27.9%

 

Worldcom Inc.

Capex                2,387  1,881  1,818  1,800  1,400     5,600         5,500

 

q/q growth           -11.8% -21.2% -3.3%  -1.0%  -22.2%

 

AT&T (Wireline excl.

Cable)

Capex                1,134  1,301    974  1,485  1,000     4,000         4,200

 

q/q growth           -43.3% 14.7%  -25.1% 52.5%  -32.7%

 

Sprint FON

Capex                1,119  1,500  1,280  1,396    800     3,200         3,000

 

q/q growth           -22.8% 34.0%  -14.7%  9.1%  -42.7%

 

Quarter               1Q01   2Q01   3Q01  4Q01A  1Q02E

 

Total Capital Spent: 15,287 14,850 12,055 12,766 9,350     37,400        40,400

 

q/q growth            -11%    -3%   -19%     6%   -27%

 

Source: Company reports and Robertson Stephens estimates.

 

In Table 3, we focus on the largest wireless carriers, as wireline equipment

vendors are increasingly exploiting this relatively healthy market opportunity.

Our 2002 estimates are derived largely from carriers  own spending forecasts.

 

Table 3   Wireless Carrier Capital Expenditures ($ in millions)

 

Calendar Quarter     1Q01A  2Q01A  3Q01A  4Q01A  1Q02E     1Q02E   2002E 2002E

                                                        Annualized  NEW  CURR.

 

Verizon Wireless

 Capex                 988  1,384    970  1,664  1,350     5,400         5,000

 

    q/q growth       -49.2% 40.1%  -29.9% 71.5%  -18.9%

 

Cingular

 Capex                 401    611    710  1,700  1,350     5,400         5,000

 

    q/q growth       -60.6% 52.4%  16.2%  139.4% -20.6%

 

AT&T Wireless

 Capex               1,122    978  1,055  1,890  1,300     5,200         4,800

 

    q/q growth       25.5%  -12.8%  7.9%  79.1%  -31.2%

 

Sprint PCS

 Capex                 655  1,060  1,146    890    800     3,200         3,400

 

    q/q growth       -30.1% 61.8%   8.1%  -22.3% -10.1%

 

 Nextel

 Capex                 640    616    534    594    500     2,000         2,300

 

    q/q growth       -33.5% -3.8%  -13.3% 11.2%  -15.8%

 

Quarter              1Q01A  2Q01A  3Q01A  4Q01A  1Q02E

 

Total Capital Spent: 3,806  4,649  4,415  6,738  5,300     21,200        20,500

 

    q/q growth        -34%    22%    -5%    53%   -21%

 

Source: Robertson Stephens estimates and Company reports.

 

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RO: A Preview To Carrier Reporting (Part 2 of 4)

01:21pm EST  3-Apr-02 Robertson Stephens (Johnson, Paul  JNPR NT

Although carriers do not report the breakout of capital spending on equipment

used to support the generation of data revenues, we use data services revenue

growth as a proxy for the growth in data equipment spending.  Contrary to

historical trends, data revenues have been impacted by the downturn in the

market for telecommunications services, declining both sequentially and year-

over-year in the fourth quarter.  We note, however, that data revenues continue

to increase as a percentage of total revenues.  We believe this reflects the

increasing percentage of capital spent on digital networks, a trend we expect

to continue in the first quarter and beyond.

 

Table 4 presents the revenue split between data and voice for all of the U.S.

incumbents carriers but AT&T, which does not break out data revenues.  We note

that the largest decline in data revenues has been among the incumbent IXCs,

Sprint (FON), WorldCom, and Qwest.

 

Table 4  Data Versus Voice Revenues ($ in millions)

 

Calendar        1Q00   2Q00   3Q00   4Q00   1Q01   2Q01   3Q01     4Q01  1Q02E

Quarter

 

Bell South      4,504  4,595  4,558  4,540  4,686  4,799  4,807    4,823

Voice           3,693  3,726  3,664  3,574  3,652  3,710  3,667    3,616

 

Data              811    869    894    966   1034   1089   1140    1,207

% of Total      18.0%  18.9%  19.6%  21.3%  22.1%  22.7%  23.7%    25.0%

 

q/q growth       6.7%   7.2%   2.9%   8.1%   7.0%   5.3%   4.7%     5.9%

y/y growth      30.6%  26.9%  28.1%  27.1%  27.5%  25.3%  27.5%    24.9%

 

Verizon        10,912 11,221 10,928 10,935 10,920 10,953 10,666   10,539

Voice           9,565  9,741  9,371  9,284  9,219  9,207  8,890    8,725

 

Data         1,347    1,480  1,557   1,651  1,701  1,746  1,776    1,814

% of Total      12.3%  13.2%  14.2%  15.1%  15.6%  15.9%  16.7%    17.2%

 

q/q growth       2.2%   9.9%   5.2%   6.0%   3.0%   2.6%   1.7%     2.1%

y/y growth      30.3%  31.8%  28.1%  25.3%  26.3%  18.0%  14.1%     9.9%

 

SBC             9,643  9,989 10,126 10,218 10,107 10,333 10,200   10,042

Voice           8,122  8,254  8,111  8,017  7,980  8,114  8,023    7,750

 

Data            1,521  1,735  2,015  2,201  2,127  2,219  2,177    2,292

% of Total      15.8%  17.4%  19.9%  21.5%  21.0%  21.5%  21.3%    22.8%

 

q/q growth   -0.3%  ^  14.1%  16.1%   9.2%  -3.4%   4.3%  -1.9%     5.3%

y/y growth      40.3%  34.1%  47.0%  44.3%  39.8%  27.9%   8.0%     4.1%

 

Sprint (FON)    2,472  2,515  2,488  2,476  2,487  2,483  2,437    2,196

Voice           1,780  1,795  1,795  1,724  1,736  1,708  1,692    1,508

 

Data              692    720    693    752    751    775    745      688

% of Total      28.0%  28.6%  27.9%  30.4%  30.2%  31.2%  30.6%    31.3%

 

q/q growth       2.7%   4.0%  -3.8%   8.5%  -0.1%   3.2%  -3.9%    -7.7%

y/y growth      36.2%  31.6%  19.1%  11.6%   8.5%   7.6%   7.5%    -8.5%

 

WorldCom        4,089  4,207  4,283  4,330  4,493  4,624  4,721    4,533

Voice           1,824  1,773  1,731  1,708  1,726  1,666  1,629    1,570

 

Data            2,265  2,434  2,552  2,622  2,767  2,958  3,092    2,963

% of Total      55.4%  57.9%  59.6%  60.6%  61.6%  64.0%  65.5%    65.4%

 

q/q growth      10.3%   7.5%   4.8%   2.7%   5.5%   6.9%   4.5%    -4.2%

y/y growth      38.4%  38.1%  32.1%  27.7%  22.2%  21.5%  21.2%    13.0%

 

Qwest                                5,018  5,051  5,222  4,766    4,704

Voice                                3,864  3,788  3,813  3,670    3,670

 

Data                                 1,154  1,263  1,409  1,096    1,034

% of Total                           23.0%  25.0%  27.0%  23.0%    22.0%

 

q/q growth                                   9.4%  11.6% -22.2%    -5.7%

y/y growth                                                        -10.4%

 

TOTAL

 

Data            6,636  7,238  7,711  9,346  9,643 10,196 10,026    9,998

% of Total      21.0%  22.3%  23.8%  24.9%  25.5%  26.5%  26.7%    27.1%

 

q/q growth       4.8%   9.1%   6.5%   6.2%   3.2%   5.7%  -1.7%    -0.3%

y/y growth      35.9%  33.8%  33.0%  29.4%  26.3%  21.4%  15.8%    -4.1%

 

Source: Company reports and Robertson Stephens estimates.

 

Cable and DSL: Driving the Demand for Bandwidth

We use DSL and cable modem deployment  as  a  proxy  for  end-user  demand  for

broadband services, as the edge will always drive bandwidth consumption in  the

public network.  Bandwidth demand in turn  drives  telecommunications  services

revenue and spending on communications equipment, though the cause  and  effect

relationship may lag in a declining market (as it has over the past  year.)  As

evidenced by our estimates for DSL and cable modem deployments in fiscal  2002,

we believe deployments (and therefore demand for  bandwidth)  will  grow  at  a

healthy pace, with high-speed data cable modem deployment continuing to outpace

DSL line deployment.  That said,  first  quarter  broadband  access  deployment

should be weak relative to a seasonally strong fourth quarter 2001,  which  was

further enhanced by end of the year promotions offered by several of the  large

broadband access service providers.

Table 5 tracks DSL line deployment trends over the last two years, and presents

our estimates for DSL line deployment in 2002.

 

Table 5  DSL Line Deployment (subscribers in thousands)

 

Calendar Quarters 1Q00  2Q00  3Q00  4Q00   1Q01   2Q01  3Q01  4Q01  1Q02E 2002E

Total

DSL Subscribers     629 1,007 1,420 2,051  2,602  2,951 3,376 3,953       6,085

 

DSL Net Adds        227   378   413   631    551    349   425   577

DSL Net Adds q/q        66.5%  9.3% 52.8% -12.7% -36.7% 21.8% 35.6%

growth

 

SBC

Lines Installed     201   399   516   767    954  1,037 1,187 1,333       2,000

Quarterly Lines      86   198   117   251    187   83 *   150 146

Installed

% of Total Lines  32.0% 39.6% 36.3% 37.4%  36.7%  35.1% 35.2% 33.7%

 

Bell South

Lines Installed     150   221   352   540 720      840    975 1,200       1,900

Quarterly Lines      60    71   131   188    180    120   135   225

Installed

% of Total Lines  23.8% 21.9% 24.8% 26.3%  27.7%  28.5% 28.9% 30.4%

 

Verizon

Lines Installed      49    74   134   215    303    381   463   621       1,100

Quarterly Lines      19    25    60    81     88     78    82   158

Installed

% of Total Lines   7.8%  7.3%  9.4% 10.5%  11.6%  12.9% 13.7% 15.7%

 

Qwest

Communications

Lines Installed     136   175   213   255    306    360   405   448        670

Quarterly Lines      26    39    38    42     51     54    45    43

Installed

% of Total Lines  21.6% 17.4% 15.0% 12.4%  11.8%  12.2% 12.0% 11.3%

 

Covad

Lines Installed      93   138   205   274    319    333   346   351        415

Quarterly Lines      36    45    67    69     45     14    13     5

Installed

% of Total Lines  14.8% 13.7% 14.4% 13.4%  12.3%  11.3% 10.2%  8.9%

 

*SBC 2Q01: DSL Additions in the quarter would have totaled 170 but had to be

adjusted down to include the impact of ISP failures

 

Source: Company reports and Robertson Stephens estimates.

 

Table 6 shows that cable modem subscriber additions for high-speed data have

followed DSL deployment s trends.  We believe cable MSOs, however, have been

able to maintain their lead over those deploying DSL as a result of the

relative ease in deploying cable modems from a technical, consumer, and

regulatory standpoint.  The following table tracks cable modem deployment

trends over the last two years, and presents our estimates for cable modem

deployment for high-speed data (Internet access) in 2002.

 

Table 6   High-Speed Data Cable Deployment (subscribers in thousands)

First Call Corporation, a Thomson Financial company.

All rights reserved.  888.558.2500

----------------------------------------------------------------------------

RO: A Preview To Carrier Reporting (Part 3 of 4)

01:21pm EST  3-Apr-02 Robertson Stephens (Johnson, Paul (646) 366-4415) JNPR NT

Calendar     1Q00   2Q00   3Q00   4Q00   1Q01   2Q01   3Q01   4Q01  1Q02E 2002E

Quarter

Total

HSD Cable    1,576  2,004  2,527  3,333  4,253  4,872  5,551  6,375       9,625

Subscribers

 

HSD Cable             427    524    806    920    619    679    824

Net Adds

HSD Cable                  22.5%  53.9%  14.2% -32.7%   9.8%  21.3%

Adds q/q

growth

 

AT&T

Broadband

Total       15,930 14,511 13,733 13,805 15,873 14,440 13,750 13,560

Subscribers

Digital      1,966  1,951  2,016  2,327  3,125  3,116  3,165  3,475

Subscribers

Data           529    604    744    958  1,280  1,346  1,387  1,512       2,100

Subscribers

Data Net               75    140    214    322     66     41    125

Adds

 

AOL Time

Warner

Total       12,686 12,617 12,619 12,752 12,796 12,671 12,654 12,798

Subscribers

Digital        613    889  1,259  1,738  2,138  2,511  2,861  3,332

Subscribers

Data           447    573    719    946  1,183  1,409  1,661  1,917       2,930

Subscribers

Data Net              126    146    227    237    226    252    256

Adds

 

Comcast

Total        8,330  8,340  8,352  8,388  8,435  8,425  8,437  8,471

Subscribers

Digital        879  1,072  1,284  1,520  1,678  1,879  2,122  2,336

Subscribers

Data           246    297    368    479    574    676    793    948       1,400

Subscribers

Data Net               51     71    112     95    101    117    155

Adds

 

Charter

Communicati

ons

Total        6,804  6,835  6,897  6,925  6,926  6,961  6,970  6,954

Subscribers

Digital        318    478    761  1,178  1,454  1,700   1951  2,145

Subscribers

Data            87    117    158    229    325    405    508    608       1,180

Subscribers

Data Net               29 41         71     96     81    102    100

Adds

 

Cox

Total        6,136  6,138  6,163  6,193  6,214  6,167  6,207  6,238

Subscribers

Digital        447    560    683    842    961  1,071  1,228  1,386

Subscribers

Data           260    320    399    482    587    668    779    884       1,300

Subscribers

Data Net               60     79     83    105     81    111    104

Adds

 

Cablevision

Systems

Total        2,915  2,959  2,962  2,960  2,968  2,999  2,989  3,008

Subscribers

Digital                                                          17

Subscribers

Data             8     93    140    239    304     68    423    507        715

Subscribers

Data Net               86     46     99     65     64     55     84

Adds

 

Note: When possible, results have been normalized to reflect acquisitions and

sales.

 

Source: Company reports and Robertson Stephens estimates.

 

We believe that the MSOs are currently generating the most fear among the RBOCs

domestically   in both the consumer and enterprise markets.  If the RBOCs

represent one monopoly in the telecommunications landscape, the cable MSOs

represent the second monopoly.  The MSOs own their own local access fiber plant

and are relatively healthy (compared to the rest of the telecommunications

industry) from both an operating and a balance sheet perspective.  Competition

from cable MSOs should increasingly fuel the deployment of high-speed Internet

access even in the face of a weakened economy and regulatory uncertainty.

Competition will likely prove to be a more potent economic catalyst than even

end-user demand.

 

Companies Mentioned in this Report:

 

Adelphia         ADLAC $10.07 not rated Cox               COX  $35.42      Buy

Communications                          Communications

AOL Time Warner   AOL  $23.45   Market  Nextel            NXTL $5.18    Strong

                               Perform  Communications                    Buy

                                        (a)

AT&T                T  $15.17   Market  Qwest               Q  $7.71    Market

                               Perform  Communications                 Perform

Bellsouth Corp.   BLS  $36.55   Market  SBC               SBC  $37.58   Market

                               Perform  Communications                 Perform

Cablevision       CVC  $29.39 not rated Sprint PCS (b,s)  PCS  $10.81   Strong

Communications                                                            Buy

Charter          CHTR  $10.11 not rated Sprint            FON  $14.77 not rated

Communications a

Comcast          CMCSK $30.23      Buy  Verizon            VZ  $45.56   Market

Corporation a                           Communications                 Perform

                                        Worldcom Inc. (a) WCOM $6.62    Strong

                                                                          Buy

Our rating system is based upon 12-month price targets that assume a flat

market.

 

For stocks with market cap of $2 billion or greater:

Strong Buy describes stocks that we expect to appreciate by 25% or more.

Buy describes stocks that we expect to appreciate by 10-25%.

Market Perform describes stocks that we expect to change plus or minus 10%.

Market Underperform describes stocks that we expect to decline by more than

10%.

 

For stocks with market cap of less than $2 billion:

Strong Buy describes stocks that we expect to appreciate by 50% or more.

Buy describes stocks that we expect to appreciate by 20-50%.

Market Perform describes stocks that we expect to change plus or minus 20%.

Market Underperform describes stocks that we expect to decline by more than

20%.

 

 

Additional information is available upon request.

Robertson Stephens, Inc. ( Robertson Stephens ) is an NASD member and a  member

of all major exchanges and SIPC.

 

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fact respecting any  company,  industry  or  security.  Although  opinions  and

estimates expressed herein reflect the current judgment of Robertson  Stephens,

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necessarily updated on a regular basis; when it is, the date of the  change  in

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change without notice. This Report contains forward-looking  statements,  which

involve risks and uncertainties. Actual results may differ  significantly  from

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meant for private customers.

 

Unless otherwise noted, prices are as of intraday Wednesday, April 3, 2002.

 

 

Paul Silverstein

Paul, a principal and senior analyst at Robertson Stephens, joined the firm  in

1996 and currently covers communication equipment companies. He joined the firm

from Columbia Business School and previously practiced corporate and securities

law for five years.  Paul  holds  a  BA  in  history  and  economics  from  the

University of Pennsylvania, a JD from  Cornell  Law  School  and  an  MBA  from

Columbia Business School.

 

Paul Johnson, CFA

First Call Corporation, a Thomson Financial company.

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RO: A Preview To Carrier Reporting (Part 4 of 4)

01:21pm EST  3-Apr-02 Robertson Stephens (Johnson, Paul) JNPR NT

Paul joined the firm in 1994 as a managing director covering the networking and

telecommunications industries. He has been a technology analyst  for  14  years

and has been named one of the nation's best analysts by Institutional  Investor

for three consecutive years. In 2001, Paul was  the  fifth-ranked  analyst  for

picking Internet stocks in The  Wall  Street  Journal's  annual  "Best  on  the

Street" survey. Paul is also a professor of securities analysis at the Graduate

School of Business, Columbia University. He holds a BA in  economics  from  the

University of California, Berkeley, and an MBA in finance  from  the  Executive

Program at the Wharton School of the University of Pennsylvania.

First Call Corporation, a Thomson Financial company.