Capex-capades

Carrier capex, shorthand for capital expenditures, is one of the most closely-watched financial metrics in telecom.  Why?  Quite simply, capex is what the carriers invest in their networks for equipment and systems needed to meet current or expected demand for new services from their customers.

Capital intensity (capex/revenues) tells us whether carriers are investing in their networks to meet current or anticipated demand, or simply maintaining what they have.  For instance, today's norm is in the mid- to high-teens as a percentage of revenue.  High double-digit percentages suggest that the carrier is building capacity ahead of demand.  Low teens or single-digit percentages suggest that the carrier is in maintenance mode.

Looking from the supply side, capex is what carriers spend with their suppliers to add or upgrade equipment and plant in their networks.  As capex goes, so go the vendors. Carrier capex is the life-blood of the telecommunications equipment suppliers.

We've crunched the numbers based on year-end 2008 results for our just-published CapEx Report™_Annual Issue that covers 50 U.S. wireline and wireless carriers.  Here is a snap shot.

In 2008, aggregate wireline and wireless capex tallied $62.7 billion, down -4% from $65.1 billion spent in 2007.  Given current guidance by the carriers, we expect aggregate capex for 2009 to come in at $57.4 billion, down another -8% from 2008.

Yes, spending is going to be down again this year but not as much as we might expect.  Certainly, the weak economy and a stagnant housing market have reduced demand for new services.  And, carrier consolidation has had a dampening effect on the capital spending plans of the merged companies; these deals are sold to investors by touting the synergies and capital efficiencies that result from economies of scale.

But, if we dig a little deeper, it's not as dire as it looks.  Understand that the aggregate capex figure comprises a lot of moving parts; all moving at different rates; some up, some down; and that these rates are affected by a mix of internal and external factors.

For example, broadband is one key area where capex is not slowing at all.  Wireline and wireless carriers alike are scrambling to make high-speed Internet data and video connections available to more of their customers in the face of intense competition and declining basic voice revenues.  Broadband capital spending is growing even as the carriers cut back on investments in legacy systems.  Now, with talk of a national broadband plan and ARRA stimulus funding becoming available, investment in broadband network infrastructure will likely accelerate.  (The details are still being worked out but this funding represents an injection of capex above and beyond what we're talking about here)