April 10, 2020 / 12:39 PM / By Fitch Ratings / Header
Image Credit: CNBC
The pace of capital spending aimed at
building out faster next-generation 5G wireless networks in the US is unlikely
to be slowed by the coronavirus shock, says Fitch Ratings. Although wireless
leaders Verizon, AT&T and T-Mobile will face revenue pressures resulting
from reduced business and consumer demand, still adequate cash flow and
liquidity flexibility should support a continuation of planned 5G capex and
broader introduction of 5G service later in the year.
We believe the telecom sector has a lower level of risk to economic pressures
as a result of the coronavirus, particularly when compared with other sectors,
such as airlines, non-food retail, restaurants, lodging and leisure,
automotive, and media. The lower risk is due to the integral nature of wireless
services in consumers' day-to-day lives with predictable recurring payments
supported by low post-paid churn levels. As such, wireless phone services have
a high position in consumer priority payments.
For wireless carriers with stronger balance sheets, notably AT&T and
Verizon, we expect the coronavirus to have a limited effect on FCF before
dividends relative to prior expectations for 2020. Reductions in operating
expenses and non-strategic capex would be prioritized over material pullbacks
in strategic investments in 5G networks and related fiber spending. Dividend
cuts would be a last option, and we are not building any changes in dividend
policy into our updated forecasts.
Verizon announced on March 12 it planned to boost 2020 capex levels modestly,
targeting spending in a range of $17.5 billion to $18.5 billion, compared with
prior guidance of $17 billion to $18 billion. Much of the company's increased
capex budget is directed toward 5G infrastructure spending, alongside
continuing deployment of fiber and investments in existing 4G network capacity.
Job losses and increasing economic stress on US households will lead to more
significant pressure on carriers' consumer business results this year. We
expect to see an increase in service termination and defaults on device
financing plans. Some lower-income customers may convert post-paid accounts
into pre-paid/lifeline service in an effort to cut costs. We expect this to
affect consumer wireless business performance negatively, although effects will
be more limited as average revenue per customer is lower in this segment of the
market. T-Mobile faces higher levels of exposure to subprime receivables than
Telecom companies are confronting new operational challenges in wireless and
wireline networks that could persist throughout much of the year. The rapid
transition to work-at-home and online learning arrangements resulting from
social distancing measures have shifted data and voice traffic patterns but
service degradation has so far not been an issue. Carriers have noted overall
data usage levels have not changed dramatically in recent weeks, while
emphasizing that networks are designed to cope with large increases in demand.
Use of virtual private networks (VPN) continues to grow week by week, with
Verizon reporting last week that VPN traffic was up by 52% over a typical day.
Mean download speeds over mobile and fixed broadband networks have declined
only modestly in North America, according to Ookla network performance reports.
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