October 29, 2015 — The financial news from Verizon Wireless is upbeat.
Verizon corporate third quarter financials, reported on October 20, showed positive gains for Verizon Wireless: nearly 1.3 million new subscribers, postpaid churn below 1 percent, and $7.7 billion in operating income. Moreover, Verizon corporate maintained guidance for overall 2015 capital expenditures (capex) at $17.5-18.0 billion. We estimate that total 2015 capex budget breaks down roughly: $11.8 billion for wireless, $4.8 for wireline, and $1 billion for corporate.
For the third quarter, Verizon Wireless reported capex of $2.9 billion, down 7 percent from $3.1 billion in 2Q15 but up 18 percent year over year from $2.5 billion in 3Q14. Note that the third quarter dip was not unexpected and is in line with historical network spending patterns.
Third quarter capex accounted for 25 percent of the projected wireless network investment, estimated at $11.8 billion, for the year. Year-to-date, Verizon Wireless has invested 72 percent of its full-year 2015 budget. Capex/service revenues came in at 18 percent for the quarter indicating that the carrier is in an expansion mode.
One point of clarification: Some Wall St. analysts have suggested that Verizon is shifting its capex away from its wireline network in favor of its wireless network. Verizon’s own numbers do not support that view. The chart shows that Verizon’s investments in its wireline network have been the minor portion of its overall capex budget for the past several years.
Get Ready – a Big Uptick is Coming!
Based on full-year guidance, we think 4Q15 wireless capex will come in around $3.3 billion. That’s a 14% jump quarter to quarter, and up 23 percent over the $2.7 billion spent in the fourth quarter 2014. This means that 4Q15 capex will account for 28 percent of the full-year budget.
Verizon Wireless’ infrastructure equipment vendors and contractors should feel good about this outlook. Its capex is ramping through year-end 2015, and spending momentum likely will carry into 2016.
Where is the Wireless Capex Being Spent?
We estimate that that Verizon Wireless’ capex budget splits roughly 70/30 between radio access network (RAN) and the core switching infrastructure.
RAN includes deployments and upgrades of macrocells, small cells, and distributed antenna systems (DAS) used for in-building wireless. Radio gear still accounts for the majority of RAN capex. The balance goes into the RF subsystem including antennas and cables along with towers, shelters and power. RAN capex includes capitalized labor for site acquisition, engineering and installation (E&I). Where carriers own their backhaul systems, that investment is accounted for in RAN capex as well.
Core capex includes routers and switches, network management and operations support systems, and billing systems along with capitalized E&I. Core capex also includes investments in software-defined network (SDN) and network function virtualization (NFV) capabilities.
For now, Verizon Wireless’ focus is on increasing its network densification. This means putting radios closer to customers with high-speed connections that handle growing volumes of mobile data and video. Densification is facilitated with small cells along urban or suburban streets, and DAS inside buildings.
Stay tuned for more in-depth carrier capex analysis. Contact me with any questions.
John Celentano is a principal at Skyline Marketing Group and is on the marketing team of AGL Media Group. [email protected]