Capex after Q1

Now that the first-quarter numbers are out, a troubling trend is emerging: Practically every U.S. carrier reported capex well below expectations, according to Merrill Lynch.

The capex/sales ratio was only 10% for large carriers during the first quarter, the firm notes, with AT&T, SBC and Sprint PCS achieving single-digit levels. As a group, the fixed-line providers achieved an 8% level during the first quarter, Merrill found.

The firm was expecting capex/sales ratios in the teens.

The first quarter of 2003 capex was down 26% from the first quarter of 2002. As of two weeks ago, Merrill had been forecasting a 10% year-over-year decline for all U.S. carriers.

U.S. carriers spent 18% of their capital budgets in the first quarter when they usually spend 21%. This suggests there may be more downside to the numbers as the year progresses, which means more pressure on equipment vendors and the telecom economy overall.

The lower-than-expected spending was due to several factors, including:

* Waiting for the FCC ruling on UNE-P, which came in late February.

* Slowdowns caused by the harsh winter in the Northeast.

* War concerns.

* The overall sluggish economy.

As a result, Merrill has shaved 5%, or $1.8 billion, from its U.S. capex projections for 2003, from $38 billion to $36.2 billion. The firm expects U.S. capex to decline 14% this year from 2002.

The same patterns are emerging internationally as well, Merrill notes. Operators mmO2, Telmex and America Movil spent much less than expected during the first quarter, and Vodafone may lower its annual capex budget by nearly 10%, the firm notes.

Merrill now projects that 2003 global capex will decline 7% vs. 2002. Back in February, the firm expected global capex to decrease 5% for 2003.

Merrill continues to forecast a 1% drop in global capex in 2004.

For the equipment vendors, this data serves as a reminder that the environment remains troubled. But Merrill believes equipment sales expectations reflect the current environment.

For the carriers to reach end-of-year budgets, sequential improvement needs to be large, the firm notes. Yet Merrill expects vendors to experience a sequential decline 3% in sales for the June quarter.

For the year, Merrill expects a 12% decline in sales for vendors.