|AT&T $22~$19.75 spoils the party , reports 2004 Capex Spending Cut $900mil (26%)|
By Scott Moritz
TheStreet.com Senior Writer
01/22/2004 02:53 PM EST
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Merger mania aside, the early season earnings reports aren't boding well for the telecom group.
The telecom news cycle has been dominated in the young year by two themes: First, there's the prospect of consolidation, in the form of ongoing Cingular-AT&T Wireless (AWE:NYSE - commentary - research) merger rumors. And second, there's talk of an industrywide network-spending increase, which in part explains the massive run-up in network-equipment stocks.
But if the first thesis remained intact Thursday, the second came under serious fire as investors took a look at the outlooks for the big telecom service providers.
Top business communications and long distance provider AT&T (T:NYSE - commentary - research) posted weaker-than-expected fourth-quarter results, dropping its 2004 outlook below expectations under strain of intense competition. The grim view caused credit rater Fitch to downgrade its debt to its lowest investment grade.
More bad news at erosion-prone AT&T is hardly a surprise. The development that could come to rattle tech investors, however, is how AT&T plans to share its pain: The company cut 2004 capital spending by $900 million, or 26% from 2003 levels. That could hamstring 2004's young but powerful telecom-equipment rally.
Other big spenders such as Verizon (VZ:NYSE - commentary - research) and SBC (SBC:NYSE - commentary - research) have nudged their network spending plans higher, helping to ignite the early January networking surge. Even so, the size and swiftness of AT&T's cut clearly undermines the bullish thesis on these stocks.
Wall Street reacted quickly Thursday, sending networking gearmakers Lucent (LU:NYSE - commentary - research), Nortel (NT:NYSE - commentary - research) and Tellabs (TLAB:Nasdaq - commentary - research) down 8%, 5% and 9%, respectively.
On the wireless side, courting players AT&T Wireless and Cingular both reported a surge in customer acquisition costs as they fought to keep their subscriber ranks from shrinking. AT&T Wireless narrowly made the cut: Though more than 2.3 million people joined its rolls during the latest period, some 2.2 million users fled. Thanks to heavy advertising and 50% boosts to sales commissions, the nation's poorest rated cell-phone service ended up posting a net gain of 128,000 subscribers.