A look at the service providers’ financials

Things which matter most must never be at the mercy of things that matter least. Goethe

Things which matter most must never be at the mercy of things that matter least.Goethe

Dear Vorticians,

Shortly after sending last week’s missive on the fate of service providers, I received two unusual e-mails. First, a longtime reader sent along my faux horoscope from The Onion. It read as follows: “Taurus (April 20 – May 20): Please stop comparing your own experiences to those of Sisyphus, who, unlike you, at least tried to get stuff done.”

Hmmm. Shortly afterward, I received this note from Vortician Jeff Engel: “Maybe I’m not paying attention in class, but I don’t have a clue about the identity of ‘service providers.’ I’m used to feeling vague uncertainty about acronyms, but when such simple words carry no definite connotation, I get worried. Should I visit an Alzheimer’s service provider? Or should you be less assumptive that the audience gets it? I was going to Google ‘Ed Whitacre’ to get a clue, but I decided to instill doubt instead.”

Those were real confidence builders, eh? As if I needed anyone else to instill doubt. I’m quite capable of painful self-questioning on my own, thank you very much.

Anyway, having clarified the meaning of ‘service providers’ in a personal note to Vortician Engel, I now return to the subject at hand: the future of said vendors. I asked a couple weeks ago if the telecom market is ‘back’ and many of you have responded. Before I share those responses, let me take you through some numbers that may help you decide for yourself what ‘back’ means.

First, let’s look at recent financials for some of the major service providers. They’re a mixed bag, but would be decidedly grim were it not for the performance of the carriers’ wireless units (where applicable).

At the long-distance companies, AT&T’s first quarter earnings declined 47%, on revenue down over 11% compared to the same period last year. Revenue for the full year is expected to be down 7%-10%. In the first quarter, the company saw retrenchment in both business and residential revenue, with the decline in the latter being steeper – 16% consumer vs. 9% in business services.

Sprint’s first-quarter profit dropped from $1.6 billion to $222 million, down 87%, mostly due to a big accounting change that boosted last year’s numbers. Overall revenue rose 5.8%, but revenue for landline services fell 1.7%. Sprint’s wireless unit saw revenue up a delightful 17% and as well as a nice hike in profit. Sprint’s global markets business was down 6.5%. MCI came out of bankruptcy this week, which is either good news or bad news depending on whether you are a customer or competitor.

At the Baby Bells, SBC’s profit fell 61% in the first quarter, although the previous year’s quarter was boosted by a sell-off of some assets. Revenue fell 2.4%. New services really helped SBC, with DSL and long-distance showing nice gains. However, voice revenue, the biggest piece of SBC’s business, dropped nearly 10%. Down at BellSouth, first-quarter profit rose 30%, but that was owing to a sale of assets. Without that one-time spreadsheet item, the carrier’s earnings actually fell a couple cents a share on revenue that slid to $4.98 billion from $5.01 billion a year earlier.

Verizon has yet to post first-quarter results, but analysts who predict these things say that revenue will be up about 4% while earnings are expected to drop as much as 16%.

Based on those numbers, it’s certainly not clear that the service providers are making any substantial comeback. To be fair, that assessment doesn’t cover the full spectrum of service providers, which also includes competitive local exchange carriers and,

increasingly, cable companies.

But if it isn’t yet a stirring financial comeback, are we seeing a comeback in capital spending by the service providers? The picture’s mixed there, too. According to International Data Corp., 2004 is “a pivotal year as telecommunications spending turns upward for the first time in three years.” IDC says capital spending by what it calls ‘network service providers’ will increase just under 8% from 2003 – going from $27 billion to $29 billion. That number, which doesn’t include “traditional telecommunications equipment” such as central offices switches and SONET gear, will grow to nearly $50 billion by 2008.

IDC says the growth in spending stems from “widespread broadband adoption, enhanced IP services, deployment of wireless data networks and the migration of the voice network from (time-division multiplexing) to packet architectures…”

Infonetics Research is less optimistic, at least for North America, saying that capex spending will dip by “only” 2% in 2004, after a precipitous fall of 22% last year.

But the interesting thing to note in Infonetics’ study is the statement from the lead author Kevin Mitchell that ” . . . North American service providers returned to sustainable norms, spending 14.3% of their revenue on capex. The severe aggregate capex cuts are behind us, and service providers are transitioning capital budgets to next-generation technologies to introduce new services offerings and promote revenue growth.”

So maybe that’s the answer. By no stretch of the imagination are service providers back to the glory days before the Internet crash. But if carriers have really come around to “sustainable norms” of capital spending and balanced, thoughtful investment in the next portfolio of services, maybe they are “back.”

As always, your thoughts are welcomed. Reach me at jgallant@vortex.net. Bye for now.