Some light on the horizon for vendors as US mobile network capex recovers

Ericsson and Nokia remain downbeat about operator spending on networks in 2018 (see separate item), and warn that they will also see pressure on profits from making 5G investments which will not pay off, to any great degree, until 2020. However, others are offering a slightly more hopeful outlook. Respected mobile infrastructure analysts at Dell’Oro Group have predicted a positive five-year CAGR (compound annual growth rate) in the sector, for the first time since 2011. And the US operators, especially AT&T and Sprint, look set to invest more than expected during this year in capex terms.

Sprint’s increased budgets come against a context of severely reduced spending in 2016 and 2017 of course, but AT&T said last week that it plans capex expenditure of $25bn this year, a lot higher than most Wall Street predictions, and up significantly on last year’s $21.6bn and 2016’s $22.4bn.

This is partly because of the investment in the FirstNet public safety network and the recent tax reforms in the US. The operator said in a statement accompanying its Q4 results: “Capital expenditures approaching $25bn; $23bn net of expected FirstNet reimbursements and inclusive of $1bn incremental tax reform investment.”

Analysts at Barclays had estimated AT&T’s 2018 capex figure would be $22.6bn. After the announcement, their counterparts at Deutsche Bank Markets Research said the news would be positive for towercos like Crown Castle, writing in a client note: “AT&T expects gross 2018 capex of $25bn ($23bn net of FirstNet reimbursements); this is above the $22bn it spent in 2017. The delta is tied to increased fiber spend (+$1bn), as well as FirstNet-related wireless builds (and associated build-outs of AWS-3/WCS spectrum). As we have noted in the past, we expect this to drive significant revenue tailwinds for the US wireless tower companies; with 100% US exposure, Crown Castle (CCI, Buy) is our top pick.”

Immediately after the US government passed its tax reforms, reducing corporation tax from 35% to 21%, AT&T said it would spend an additional $1bn in 2018 However, Verizon is not following suit. On its own earnings call, the operator’s CFO Matt Ellis said: “We expected consolidated capital spending [in 2018] to be between $17bn and $17.8bn including the commercial launch of 5G.”

At Sprint, thanks to a new injection of capital from parent Softbank of Japan, the operator will increase network capex by at least $1bn in the coming year to boost its 5G efforts. Having been the most conservative of the big four about the need to deploy 5G urgently, it is now promising mobile 5G in the first half of 2019 – even earlier than AT&T, which is targeting mid-2019 and has admitted there will not be mainstream smartphones available at that stage.

Undaunted by the lack of a 5G iPhone, Sprint CEO Marcelo Claure said on the firm’s earnings call: “We’re working with Qualcomm [and others] in order to deliver the first truly mobile 5G network in the US in the first half of 2019.” He said the network will be deployed in Sprint’s plentiful nationwide 2.5 GHz spectrum, using 100 MHz channels. “We have the spectrum to lead on 5G, and basically lead in a different way,” he said. Questioned about AT&T CEO Randall Stephenson’s comment about smartphones, Claure said Sprint had a commitment from a “leading Korean” device vendor that it will offer a 5G device in time for launch.

New CFO Michel Combes said Sprint’s total capex spending for fiscal 2017 (ending on March 31) will be between $3.5bn and $4bn while this will increase to between $5bn and $6bn in fiscal 2018. The spending will go to increase the number of macrocells by 20%, and support triband services (2.5 GHz, 1.9 GHz and 850 MHz) on nearly all existing macro sites (up from about half now). In addition, the operator will deploy more than 40,000 outdoor small cells, and “more than 1m Magic Boxes” (the product from Airspan which improves indoor coverage). Sprint also plans to move to Massive MIMO in 2018, which Claure has described as a “bridge to 5G”.

However, the CEO said there would be more job cuts at Sprint, even at the executive level, to achieve a “leaner and more agile company” and Combes said he was looking for more ways to “decrease cost structures” at Sprint.

According to Dell’Oro’s forecasts, there will be healthy growth in the RAN market in 2021 and 2022, which has pushed it to a positive five-year outlook. “The combination of the successful completion of the first 5G NR standard, accelerated 5G roadmaps in China, and more operators coming to terms with the fact that the eMBB use case is enough to justify the 5G NR business case, form the basis for the renewed optimism about the potential RAN growth in the outer part of our forecast,” said Stefan Pongratz, senior director at the company, in a statement.

He added: “While we are not suggesting that 5G will fix the underlying demand challenges that characterize the industry, capital intensities have a tendency to deviate from the norm during the coverage phase and it is highly probable that there will be some aberrations in the capex/revenue ratio towards the outer part of the forecast as operators accelerate their 5G NR investments.”

The report sees 5G base station shipments overtaking those of 4G base stations in 2022, and by that year, it expects small cells to account for about 20% of total RAN infrastructure revenues, both trends reflecting the expected growth in mobile data traffic – sixfold or sevenfold over the next five years.

Reflecting the news from AT&T, Dell’Oro said North American RAN investments had fallen by about 35% between their peak in 2011, and 2016, but that the market would grow at 2% CAGR between now and 2023. Pongratz said: “Our forecast assumes AT&T and Verizon will respond and both operators will have around 75,000 5G macro sites by the end of the forecast period.”