Published November 07, 2012
AT&T Inc will boost capital spending by about 16 percent to $22 billion a year for the next three years to upgrade its wireless and wireline networks, the company said on Wednesday.
Its shares fell more than 3 percent after the news.
Rival Verizon Communications Inc is ahead in high-speed mobile services, and AT&T also must improve rural phone lines, comprised of outdated copper technology.
The company said it hopes the investments will boost revenue growth by allowing it to chase new opportunities such as adding wireless connections to cars and home security.
AT&T said upgrading its wireline network was more attractive than carving off the business or divesting parts of the network. Previously, it said it was considering selling some rural phone lines.
"This gives us the opportunity to improve our top-line growth and change our cost structure," Chief Executive Randall Stephenson told analysts at an AT&T event in New York.
Investors worried about the spending hike from AT&T's 2012 capital budget for $19 billion to $20 billion, although the company vowed to come in at the low end of the range this year.
"It's a big number and it's not just for one year," Hudson Square Research analyst Todd Rethemeier said.
Verizon Communications has sold off many hard-to-reach rural phone lines. AT&T was forced into the upgrade option because it could not find a buyer, Rethemeier said.
"They're doing it because they really have to do it," said New Street Research analyst Jonathan Chaplin, adding that "the pay-off is unclear."
AT&T said the investment would lead to revenue growth 100 basis points above the U.S. gross domestic product, supporting earnings per share growth in the mid-single-digit percentage range for the next three years.
But Chaplin was unimpressed with the growth targets.
"It looks like a giant boost of spending for the results we thought (they'd produce) all along," he said.
AT&T shares were down $1.18 or 3 percent at $33.62 on the New York Stock Exchange after the news. The S&P 500 stock index was down 2 percent.
The three-year spending plan includes a budget of $8 billion for expanding the wireless network and $6 billion for upgrading the wireline network, the company said.
It said this will boost capital expenses to the high end of its target for spending in the mid-teen percentage range of revenue for the next two years, with spending returning to normal levels in 2015.
Executives said AT&T's business customers are nervous about spending due to the weak economy and the looming U.S. "fiscal cliff" under which the White House and lawmakers have two months to agree on a plan to shrink the federal budget.
Failure to meet the self-imposed deadline will trigger $600 billion in spending cuts and higher taxes beginning in January.
A day after President Barack Obama was re-elected, AT&T CEO Stephenson said he hopes the government will focus on resolving the fiscal cliff. He told analysts the uncertainty is creating "a real throttle on this country's growth now."
Stephenson told Reuters he hoped Obama's re-election "will be a positive and get us going forward on this fiscal cliff."
AT&T plans to tap debt markets to take advantage of historically low interest rates. It expects its ratio of net debt to earnings before interest, tax, depreciation and amortization to rise to about 1.8 over the next two years from 1.42 at the end of the third quarter.
Chaplin said he expects AT&T will partially offset steeper spending by using additional financing to buy back shares.
The company also said it would raise its quarterly dividend to 45 cents per share from 44 cents.
AT&T said it would upgrade its wireline network with fiber to reach another 1 million business customers and provide high-speed Internet service to 75 percent of wireline customer locations. It will expand its U-verse services, which include high-speed Internet and television, by a third to cover 43 percent of its network by the end of 2015.
The wireline upgrade plans should benefit AT&T's main equipment vendor Alcatel-Lucent, and to a lesser extent Juniper Networks Inc, Cisco Systems Inc, Adtran Inc and Ciena Corp, Morgan Stanley analyst Ehud Gelblum said in a research note.
AT&T also plans to expand its high-speed wireless network based on the Long Term Evolution (LTE) standard to cover 300 million people, or most of the country, by the end of 2014. Its previously planned coverage of 250 million people by the end of 2013.
Bigger rival Verizon Wireless, a venture of Verizon and Vodafone Group Plc, says it will have upgraded its entire network with LTE by the end of 2013.
Ralph de la Vega, the head of AT&T's wireless business, said the company's upgrade plan calls for much deeper coverage than its bigger rival. "We might be more conservative in what we call ready than the other guy," he told Reuters. "If we can do it sooner we will but we're not going to compromise coverage."
The wireless upgrade should benefit Ericsson and Alcatel Lucent, according to Gelblum.
Chipmakers selling components used in telecom infrastructure, including Xilinx, Altera, Texas Instruments, Analog Devices, Freescale, Broadcom and Cavium, also stand to gain from AT&T's increased spending, analysts said.
AT&T plans to expand beyond cellphones by offering a wireless home security services next year. It also has deals with automakers for its connected-car initiative, according to de la Vega who declined to provide details.
De la Vega said AT&T aims for these businesses to become $1 billion annual revenue opportunities in two to five years.
Stephenson said AT&T could make small "tuck-in" acquisitions in these new market segments.
(Reporting by Sinead Carew in New York. Additional reporting by Noel Randewich in San Francisco. Editing by Gerald E. McCormick, James Dalgleish and Matthew Lewis)