Telecom spending could drop quickly

Cuts would protect margins but hurt equipment makers

BARCELONA -- Telecom operators can cut capital spending quickly if a global economic downturn forces them to protect margins, an investor conference was told Wednesday, in what is potentially bad news for equipment makers.

With major European economies falling into recession during the third quarter, investors are looking for indications of how carriers will be affected and what measures they are considering to protect the dividends and buybacks shareholders demand.

"If we get a recession of six to eight quarters, of course that would affect us -- it must affect us -- but I'm not totally sure how," TeliaSonera chief executive Lars Nyberg said.

The flexibility of capital spending was a recurring question of investors during the first day of the Morgan Stanley Annual Technology, Media and Telecoms Conference in Barcelona.

Emerging market operator Millicom, which plans for $1 billion of capital spending in 2009 after as much as $1.4 billion this year, said its spending is now mostly about boosting capacity, which has lead times of only two to three months.

"We can react very quickly if something were to happen," Millicom chief executive Marc Beuls said.

Vodafone has the flexibility to cut capital spending where it is driven by market penetration, as in most emerging markets, chief executive Vittorio Colao said. With growth rates in the double digits, though, that question, for now, is only "intellectually interesting," Colao said.

TeliaSonera's capital spending will certainly not rise next year, but a major decrease is equally unlikely because it is bad policy over the medium to long term, Nyberg said.

"You can cut capex to zero for a quarter, more or less," he said. "You can probably cut marketing spending to zero as well if you want to. The question is what is the right thing to do medium, long term."

Telecom carriers are considered resilient, though not immune, to an economic slowdown, and cash generation is one of the key attractions for investors because it underpins dividend payouts and share buybacks.

"We have contingency plans in place, aimed at preserving cash flow, for different economic scenarios, ranging from a mild recession to a serious economic downturn," KPN chief executive Ad Scheepbouwer said.

Equipment makers such as Ericsson, Nokia Siemens Networks and Alcatel-Lucent are bracing themselves for lower carrier spending.

Nokia said last week that it expects the mobile and fixed infrastructure market and the related services market to be down in euro terms in 2009. Alcatel-Lucent said last month that the third quarter has seen a slowdown in spending by some customers in developed markets.

Cost control also was a key theme when Vodafone, the world's largest mobile group by sales, unveiled a new strategy last week. The company will cut 1 billion pounds ($1.5 billion) of annual costs by 2011 and, over time, bring capital intensity in its emerging-markets business down to Europe's 10% of revenue.