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CapEx from wireless providers creeps north as 5G gets closer

As the wireless industry begins work on 5G, the next-generation of wireless technology, operators are bracing for increased capital expenditures.

For the first six months of 2017, capital expenditures from the four big wireless operators — AT&T Inc., Verizon Communications Inc., T-Mobile US Inc. and Sprint Corp. — totaled $23.65 billion, up slightly from the year-ago period when spending totaled $22.26 billion. Looking at the individual companies, AT&T's first-half capital expenditures rose to $11.22 billion, up year over year from $10.14 billion, while Verizon's slid to $7.01 billion, down from $7.27 billion. T-Mobile's capital expenditures totaled $2.88 billion, up from $2.68 billion in the year ago period, while Sprint spent $2.54 billion, up from $2.17 billion.

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In the past couple of years, AT&T has continued to pull away from its peers as it has ramped up capital spending. And the company has indicated that spending will continue, projecting full-year capital spending in the $22 billion range. By comparison, Verizon expects 2017 capital spending to be in the range of $16.8 billion to $17.5 billion.

"We continue to invest and improve our integrated networks," AT&T CFO John Stephens said during a July 25 earnings conference call, noting that in the top 100 metro areas, AT&T presently has about 100 MHz of spectrum deployed. But the company also has about 60 MHz of additional spectrum in reserve that it plans to deploy as it builds out a nationwide public safety broadband network as part of its contract with the First Responder Network Authority.

At the same time, the company is also moving forward on its 5G evolution, providing faster wireless speeds and lower latency.

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Stephens, however, has expressed confidence in the company's ability to manage costs.

"I don't want to give guidance outside of this year. But I don't want to signal in any way, shape or form, any significant changes in CapEx," the CFO said.

One significant advantage for the company, he noted, is the "significant copay" AT&T will receive from the FirstNet organization for the build-out. Under AT&T's contract, FirstNet will provide success-based payments totaling as much as $6.5 billion over the next five years.

"Some amount of that $6.5 billion will be allocated to expense," Stephens said, noting the payments from FirstNet would effectively reduce the total CapEx amount "because it's not a cash outflow — it would be a cash inflow to offset the expenses."

Speaking Aug. 8 at an investor conference, Stephens cited another advantage the company has when it comes to controlling costs: network virtualization. By virtualizing the network, the company relies more heavily on software upgrades rather than hardware replacements.

"When you do that, you make CapEx more efficient and you make … truck rolls and operating cost expense more efficient," Stephens said, noting that 40% of network functions had been virtualized as of the end of June. He said the company expects to be at 55% by the end of this year and 75% by 2020.

Verizon, meanwhile, has thus far focused its efforts on densifying its network with the deployment of small cells. During a July 27 earnings conference call, Verizon CFO Matthew Ellis said, "Small cells are playing a vital role in creating capacity," adding that the densification efforts "have been a focal point of our network strategy over the past several years."

Still, analysts note that the transition to 5G will require more than just small cells. It will also require more fiber deployment, as well as spectrum. Wells Fargo Securities analyst Jennifer Fritzsche asked during the call whether investors should expect "a huge increase in the CapEx level next year" based on the fiber plans Verizon has laid out.

Ellis said it was still "too early" to get into CapEx guidance for 2018. "But as we think about how we deploy fiber and so on, that will be part of the plans. And we'll share those as we get towards the latter part of the year and certainly into January," he said.

While AT&T and Verizon are more diversified telecommunications companies, T-Mobile and Sprint are smaller in size given that they are more squarely focused on wireless service. As such, their capital spending is significantly smaller than that of the two larger companies.

T-Mobile expects its capital expenditures to range between $4.8 billion and $5.1 billion in 2017, excluding capitalized interest. That figure obviously does not include the $7.99 billion T-Mobile paid as part of 600 MHz broadcast incentive auction. T-Mobile won a total 1,525 licenses across 414 partial economic areas or markets. T-Mobile's CapEx figure, however, does include some of the money the company will spend to deploy that spectrum. CFO J. Braxton Carter II said T-Mobile's CapEx in 2017 will "come in at the very high end of the guidance range as a result of our initial 600 MHz rollout."

Sprint, which is on a fiscal calendar, saw a significant jump in its capital expenditures during the first fiscal quarter ended June 30. Network CapEx, which excludes capital expenditures on leased devices, totaled $1.12 billion in the fiscal first quarter, up from $529 million on a sequential basis and up from $473 million year over year.

"The higher spending relates to ramping up our densification program," Sprint CFO Tarek Robbiati said during an Aug. 1 earnings conference call, adding that he expects future network CapEx to remain around the level seen in the June period for "the next several quarters."