John M. Celentano on AT&T 2006 Captial Expenditures
John M. Celentano publishes a newsletter about what telephone companies are spending for equipment. His November 1, 2006 report highlights are reprinted below.
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* AT&T’s 3Q06 wireline capital expenditures, reported on October 23, were $2.1 billion, down –5% from $2.2 billion in 2Q06, but up +50% over $1.4 billion in 3Q05.
* Revenues, that now include the former AT&T Corp. long distance services contribution, totaled $14.6 billion, up +58% on a YtY basis from $9.2 billion in 3Q05.
* Total switched access lines at end of 3Q were 47.1 million representing a decline of 824,000 from 2Q06, and losses of 3.1 million or –6% of lines in the past year.
* Consumer DSL lines reached 6.9 million, an increase of 336,000 on a QtQ basis and a +27% increase of 1.5 million lines from 3Q05.
* U-verse high-speed Internet access and video connections reached 3,000 lines or a 10% penetration in markets where Project Lightspeed is operational.
* For the quarter, capex/revenue was 15% and capex/EBITDA came in at 101%.
* The company maintained capex guidance of $8.0-8.5 billion for 2006 suggesting that it could be at the high-end, or just over the high-end estimate on the strength of both consumer and Enterprise data volume growth.
* Through 3Q06, AT&T invested $6.2 billion or 72% of its full-year 2006e capital spending budget.
Our Analysis:
* AT&T is just getting started!
* Project Lightspeed remains the company’s most significant strategic initiative. Fundamentally, it’s all about video!
* Being able to offer a triple-play bundle that includes IPTV, AT&T can offset persistent access line losses, and associated revenue declines, and thus drive a whole range of new service offerings and revenues.
* AT&T is controlling the U-verse roll-out. The first trial began in 1H06 in a 30,000 household target market in San Antonio.
* By end 3Q06, AT&T had a 10% penetration or 3,000 U-verse customers with 85% of them taking video.
* Houston is the next big target slated for a November launch. Through year-end 2006, AT&T plans to launch U-verse services in 15 MSAs across its 13-state footprint.
* U-verse is the service brand and Project Lightspeed is the infrastructure initiative on which U-verse rides. Project Lightspeed utilizes fiber-to-the-node (FTTN) for overlays, and fiber-to-the-premise (FTTP) for greenfield applications.
* Project Lightspeed is rolling now, and the number of living units- or homes-passed (H-Ps) is ramping. The company has a goal of 2.4 million homes-passed by year-end 2006, up 1.1 million H-Ps from 1.3 million at end 3Q.
* This is significant considering the company began deployments in 2006 from a standing start. To wit, the company had only 100,000 H-Ps at end of 1Q06.
* Note that the year-end plan of 2.4 million H-Ps is about 20% short of the 3.0 million H-Ps AT&T said a year ago that it would reach at the end of this year.
* Still, that’s a lot of equipment. To reach 2.4 million H-Ps, AT&T will establish nearly 6,000 nodes at existing serving area interface (SAI) sites.
* Creating a node involves new outside plant cabinets, DSLAMs, lots of fiber cable, a cross-connect field, protector blocks, and more often than not, a DC power plant and batteries. At many sites, construction is needed to expand the existing pad, and to trench new cable.
* AT&T plans to accelerate the ramp in 2007. The year-ago view was to reach a cumulative 9.0 million H-Ps by end 2007, and 19 million by 2008.
* We estimate that full FTTN deployment in 2007 and 2008 will involve almost 40,000 new nodes.
* The company has not changed its view on these H-P targets.
* Project Lightspeed capital budgets reflect that cycle with $1.4 billion in 2006, and $1.7 billion in 2007, then moderating to $1.3 billion in 2008 as the company achieves capex efficiencies in the latter stages of the project.
* Even as Project Lightspeed reaches its targeted coverage, AT&T is providing DSL service to many of its customers either directly from CO DSLAMs that reach customers within 3,000 feet of the CO, or via remote DSLAMs to serve customers at greater distances from the CO.
* So, AT&T is continuing apace with its DSL rollout. Since 1Q05, the company has averaged 400,000 net DSL adds per quarter. Consumer DSL penetration is now 31% of primary access lines and among the ILEC leaders.
* Even at modest penetration rates, DSL lines could tally 10 million by 2008.
* Either way, AT&T is in a race to extend broadband services to the majority of its customers in a compressed timeframe.
* Accordingly, the company is guiding to the high-end of its $8.0-8.5 billion wireline capex budget for 2006.
* Moreover, AT&T hints that it even may exceed that upper figure.
* Given its progress and goals for broadband, AT&T likely will remain in a heavy spending cycle for the next couple of years.