FCC panel: No silver bullet for telecom’s recovery

A panel of financial advisors and economists, convened today by the FCC to discuss the financial state of the telecom industry and the sector’s eventual recovery, told the commission there were no “silver bullet” solutions and predicted a gloomy outlook for long-distance providers, incumbent carriers and wireless providers over the near term as investors continue to have reservations about the industry.

Rob Gensler, portfolio manager for T. Rowe Price, said the flow of monies into investor funds “is still OK” and even “modestly positive.” But he added that investors increasingly are demanding that management of telecommunications companies “give their money back” through higher dividends, stock buy-backs and the pay-down of debt because they are not seeing adequate revenue growth.

Traditionally, about 20% of revenues are reinvested into telecom companies each year--the level was 30% or higher at the height of the boom--but that figure will shrink to 15% or lower next year, said Gensler.

“If we don’t see prospects for growth, the money doesn’t get reinvested,” he said.

Right now, portfolio managers are focusing on near-term fundamentals, long-term growth outlook, pricing power, margin outlook, maturity of product cycles, balance sheets, free cash flow, return on investor capital and valuations, said Gensler. He added that many of those metrics are “bleak or problematic” for telcom companies, and “there’s nothing the commission can do [about that].”

“The near-term fundamentals are bleak because of the economy. And the long-term growth outlook is troubling because [while] units of consumption in telecom are growing nicely, there is no pricing power at all,” Gensler said. “There is both retail and wholesale rate regulation, so what we get is good unit growth but very little revenue growth.”

Robert Konefal, managing director at Moody’s Investors Service, said all three sectors have weak outlooks, with long-distance being the weakest. He predicted further declines in revenues and operating income for long-distance carriers as the sector is pressured by wireless substitution and Bell incursion into the market.

“The weakness in the debt and equity markets is most pronounced for the long-distance companies,” Konefal said.

In the past year, Moody’s has downgraded the debt of the long-distance carriers “by multiple notches,” and recently placed the Bell companies under review for downgrade. However, Konefal predicted any downgrade would be “very modest,” and that the Bells and the other ILECs “would remain the highest-rated companies in the sector by a significant margin.”