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Lehman article on Telecom Equipment/Data Networking.
TCG
lehman.com
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Headline: Telecom Equipment/Data Networking:Highlights From US Capex Survey, PART 1
Author: Tim Luke 1(212)526-4993
Company: LU,NT,ADCT,TLAB,CS,CSCO,BAY,COMS,ADTN,ECILF,ERICY,GILTF,MOT,NWK,NOKA,PAIR,C
MVT,DIGI,NICEY,QCOM,ASND
Country: ECO CUS
Industry: AEROSP,TELECM
Today's Date : 03/19/98
* Our recent update of Lehman Brothers US Telecommunications Capital
Expenditure Forecast confirms early indications of steady increase in
investments by wireline service operators in 1998 although at a more modest
growth rate than 1996 and 1997.
* While operators often understate investments early in the year & capex
includes plant & property as well as equipment, survey highlights spending mix
favoring key target areas of data networks, transmission/network bandwidth and
software.
* As expected, after surge in spending on PCS buildouts & digital upgrades in
1997, operators suggest overall US Wireless capex growth may moderate in 1998,
however, spending may be shifting from real estate & towers towards capacity
enhancing systems
* While survey broadly confirms prior expectations, it highlights importance
of data offerings & international sales for major vendors with further upside
likely to be driven by share gains (often prompted by operator consolidation)
& gross and operating margin improvements.
* Following recent rise in shares of leading vendors, maintain our positive
ratings on NT and LU ahead of what are likely to be strong 1Q98 results, LU
estimates raised today. Reiterate Buy Ratings on core data/bandwidth growth
plays Cisco & Tellabs.
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LEHMAN BROTHERS US TELECOM CAPITAL EXPENDITURE FORECAST
WIRELINE SERVICE PROVIDERS: 1996 1997 1998E
% change
RBOCs, GTE, SNET 22420 24480 25900
7% 9% 6%
Long Distance & IXCs 14070 18020 19675
34% 28% 9%
CLECs 832 2012 2855
189% 142% 42%
Total Wireline Capex Growth 37322 44512 48430
17% 19% 9%
MAJOR WIRELESS OPERATORS 1996 1997 1998E
% change
RBOC Wireless Divisions 3280 3266 3260
16% 0% 0%
AT&T 1900 1500 1350
27% -21% -10%
Sprint (D&E) 0 0 1700
PCS Operators 3109 5815 4680
87% -20%
Cellular Operators 1761 1990 1951
20% 13% 2%
Total Wireless Capex Growth 10050 12571 12941
73% 25% 3%
TOTAL WIRELINE & WIRELESS CAPEX
47372 57083 61371
26% 21% 8%
Source: Company Data, Lehman Brothers Estimates
Lehman Brothers Telecom Capital Expenditure Survey Reveals Focus On Data,
Transmission And Software
Having recently completed updating Lehman Brothers Survey of US Wireline And
Wireless Telecommunications Service Providers Capital Expenditure Plans, we
have found operators spending plans appear to be broadly in line with our prior expectations. While operators capital expenditure plans have often
proved an inprecise barometer of overall equipment demand trends since service
providers have habitually understated their investment needs at the beginning
of the year and because they include property and plant as well as equipment,
our survey points to a steady increase in investments by wireline operators in
1998 although at a more modest rate than that seen in 1996 and 1997. At this
early stage, we look for wireline capital expenditures to rise around 9% to
$49 Billion after surging 19% and 17% respectively in the last two years.
Our conversations with operators appear to have confirmed a trend towards an
increased focus on investments in the key areas of data networking and high
bandwidth transmission. We note that Bell Atlantic for example has stated it
intends to increase its investments in data from $1.1 Billion in 1997 to $1.6
Billion in 1998 out of a total wireline budget of around $6.3 Billion. MCI has
indicated it aims to spend as much as $1.5 Billion on its data and Internet
infrastructure this year. In addition to focusing on investments in frame
relay networks, remote access and internet/intranet services, operators appear
to be highlighting new spending on meeting rising bandwidth demands with
increased deployments of ATM backbones, digital cross connects and Dense Wave
Division Multiplexing (DWDM) systems.
Investments in software and services are often expensed by service providers,
and are therefore, not fully reflected in capital expenditure schedules,
however, our discussions with operators appear to highlight strong investments
in solving Year 2000 issues and in delivering number portability solutions.
We believe that services and software are likely to remain important
investment themes in 1998.
Wireless Infrastructure Sales May Grow Despite Current Capex Indications
After recording strong increases in spending on PCS buildouts and digital
upgrades over the last two years, US wireless operators are claiming that
growth in their infrastructure investments should moderate considerably in
1998 and 1999. Results from our survey currently point to an increase of
around 3% in 1998 versus a rise of approximately 25% in FY97. We note,
however, that wireless operators have consistently underestimated their
overall capex needs and while early expenditures may have included investments
in real estate for cell sites and offices, a greater share of the capex pie is
now likely to be devoted to actual infrastructure systems and new channels of
capacity as opposed to land and towers. We would also highlight that the use
of vendor financing techniques by many of the wireless operators for large
infrastructure orders has at times also tended to lead to capital investments
being understated since service providers have been able to treat vendor
financing as an expense.
Based on our analysis of initial spending plans, including some of the larger
deployments, such as Sprint's bold plan to spend up to $1.8 Billion this year
on its D&E block licenses, we believe actual investments in infrastructure
systems and software in the US could increase by as much as 10-20% in 1998.
Early trends seen by the major systems vendors such as Nortel, Lucent,
Motorola and Ericsson appear to indicate a solid demand picture. We note that
these indications have contrasted with a more challenging outlook for radio
tower antennae vendors such as Andrew.
Headline: Telecom Equipment/Data Networking:Highlights From Capex Survey, PART 2
Author: Tim Luke 1(212)526-4993
Company:
Country: ECO CUS
Industry: TELECM
Today's Date : 03/19/98
(CONTINUED FROM PART 1)
Service Provider Consolidation Adds Uncertainty And May Favor Larger Vendors
Service provider consolidation has clearly added an additional element of
uncertainty for telecom equipment suppliers. We would highlight, for example,
that vendors with exposure to the different sides of the Worldcom/MCI
combination may see sharply different trends. MCI has publicly indicated it
plans to reduce its capex levels in 1998 by almost $1 Billion to around $3
Billion while Worldcom has stated that its expects to raise its investments
from around $2.6 Billion approximately $3.1 Billion.
In general, industry consolidation may be presenting large vendors such as
Nortel and Lucent with opportunities to gain market share. As the newly
enlarged operators look to streamline their supplier lists, we believe they
may favor full line end-to-end systems vendors. Nortel, for example, may be
well placed to benefit from the Worldcom/MCI merger at the expense of DSC
Communications with Worldcom potentially favoring its established switching
supplier as the combined entity's primary switch vendor.
Stock Recommendations & Updates
Following strong recent appreciation of the shares of several of the leading
telecom equipment vendors, we are maintaining our positive position towards
the group. While we acknowledge that the stocks may potentially pause for
breath at their current levels, a network investment spending mix that favors
the key growth areas of high speed transmission, data and software solutions
could prove especially beneficial to several of our primary recommendations
including wide area data networking powerhouse Cisco Systems, bandwidth
management leader Tellabs and full line vendors Lucent and Nortel. In
addition, a steady increase in overall US wireline capital expenditures should
provide a healthy backdrop for leading vendors with exposure to several US
infrastructure markets such as ADC Telecom (ADCT, $25, 1) and ECI Telecom
(ECILF, $28 11/16, 1). We also maintain that enhanced services suppliers such
as Comverse Technology (CMVT, $44 1/8,1) should benefit from an increasing
focus on software solutions to generate incremental revenues. We believe the
oulook for wireless innovator QUALCOMM (QCOM, $48 9/16,1) should improve in
2H98 as international CDMA opportunities, outside of troubled Korea region,
come on stream and as US subsciber growth accelerates.
Lucent (LU, $120 11/16, 2)
Estimates raised today as gross margin assumptions improve driven by
increasing sales of higher margin data, software and transmission products.
Strong sales trends in current 2Q98. Target $130-135 or 20x new CY99 estimate
range of $4.15-$4.30.
Nortel (NT, $62 , 1)
Excellent positioning in growth markets of wide area networking (Magellan,
Concorde, Vector) and high speed transmission (notably in OC-192). Broadband
Networks division seeing strong momentum while Wireless Divisions is gaining
ground in international markets and will participate in major US buildouts in
1998 including Sprint's D&E licenses. Strong international presence and
beneficiary of both European deregulation (24% sales) and privatizations in
Latin America. Operating expense leverage. Target $70 or 30x CY99 estimate of
$2.30
Tellabs (TLAB, $65 1/16, 1)
Key play on bandwidth management and high speed transmission. Core Titan and
Martis lines seeing good momentum, new ATM product and higher end Martis line
to launch by year end. Target $75 or $30-35x CY99 estimates of $2.25.
Cisco Systems (CSCO, $63 9/16, 1)
Key beneficary of growth in operator spending on wide area networks.
Excellent early positioning in voice/data integration, stengthening high end
sales to telcos may to help offset pricing preasure in lower end of corporate
market. Target $70-75 or 30x CY99 estimate of $2.37.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities. |
