Verizon raised 2020 5G capex guidance as COVID-19 spread
The outbreak of the COVID-19 pandemic is unlikely to slow the pace of capital spending aimed at building out 5G wireless networks in the US, according to a recent report by Fitch Ratings.
“Although wireless leaders Verizon, AT&T and T-Mobile will face revenue pressures resulting from reduced business and consumer demand, still adequate cash flow and liquidity flexibility should support a continuation of planned 5G capex and broader introduction of 5G service later in the year,” Fitch Ratings note said.
“We believe the telecom sector has a lower level of risk to economic pressures as a result of the coronavirus, particularly when compared with other sectors, such as airlines, non-food retail, restaurants, lodging and leisure, automotive, and media. The lower risk is due to the integral nature of wireless services in consumers’ day-to-day lives with predictable recurring payments supported by low post-paid churn levels. As such, wireless phone services have a high position in consumer priority payments.”
For wireless carriers with stronger balance sheets, notably AT&T and Verizon, the ratings agency expect the coronavirus to have a limited effect on FCF before dividends relative to prior expectations for 2020. Reductions in operating expenses and non-strategic capex would be prioritized over material pullbacks in strategic investments in 5G networks and related fiber spending.
Fitch Ratings noted that Verizon announced on March 12 it planned to boost 2020 capex levels modestly, targeting spending in a range of $17.5 billion to $18.5 billion, compared with prior guidance of $17 billion to $18 billion. Much of the company’s increased capex budget is directed toward 5G infrastructure spending, alongside continuing deployment of fiber and investments in existing 4G network capacity. “We’re looking towards the future and increasing our investments so that we’re poised to offer even more robust networks, to meet future demands, in the years to come,” CEO Hans Vestberg said.
The ratings agency also highlighted that job losses and increasing economic stress on US households will lead to more significant pressure on carriers’ consumer business results this year. “We expect to see an increase in service termination and defaults on device financing plans. Some lower-income customers may convert post-paid accounts into pre-paid/lifeline service in an effort to cut costs. We expect this to affect consumer wireless business performance negatively, although effects will be more limited as average revenue per customer is lower in this segment of the market. T-Mobile faces higher levels of exposure to subprime receivables than competitors.”
“Telecom companies are confronting new operational challenges in wireless and wireline networks that could persist throughout much of the year. The rapid transition to work-at-home and online learning arrangements resulting from social distancing measures have shifted data and voice traffic patterns but service degradation has so far not been an issue. Carriers have noted overall data usage levels have not changed dramatically in recent weeks, while emphasizing that networks are designed to cope with large increases in demand. Use of virtual private networks (VPN) continues to grow week by week, with Verizon reporting last week that VPN traffic was up by 52% over a typical day,” Fitch added.
