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.
------------------------------------------------------------------------------- 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.
The information contained herein is not a complete analysis of every material fact respecting any company, industry or security. Although opinions and estimates expressed herein reflect the current judgment of Robertson Stephens, the information upon which such opinions and estimates are based is not necessarily updated on a regular basis; when it is, the date of the change in estimate will be noted. In addition, opinions and estimates are subject to change without notice. This Report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from the results described in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Investment Risks." Robertson Stephens from time to time performs corporate finance or other services for some companies described herein and may occasionally possess material, nonpublic information regarding such companies. This information is not used in the preparation of the opinions and estimates herein. While the information contained in this Report and the opinions contained herein are based on sources believed to be reliable, Robertson Stephens has not independently verified the facts, assumptions and estimates contained in this Report. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information and opinions contained in this Report. Robertson Stephens, its managing directors, its affiliates, its employee investment funds, and/or its employees, including the research analysts authoring this report, may have an interest in the securities of the issue(s) described and may make purchases or sales while this Report is accessible. Robertson Stephens International, Ltd. is regulated by the Financial Services Authority in the United Kingdom. This publication is not 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. ------------------------------------------------------------ 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. |
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