Rahul Kenkre, Prashant Padelkar and Nisha Parmani contributed to this note

Verizon Wireless (VZ) has announced its plan to acquire Alltel Corp. (AT) which would make it the largest cellular carrier in the U.S. This acquisition should not only push Verizon past AT&T Inc. (T) in terms of number of subscribers, but also put additional pressure on T-Mobile USA Inc. and Sprint Nextel Corp. (S). read more…

Satyam Kumar also contributed to this note

The communications equipment industry has experienced solid market growth over the past several years, after recovering from sharp spending cutbacks in 2001 and 2002 by the service providers. Over the years the growth in communication equipments industry has been led by its primary customers, the telecommunications service providers. However, if one takes a look at the recently concluded Sep07 quarter there are some interesting trends to watch for. Current growth in the industry is being fueled by the enterprise/government customers (Exhibit 1) as enterprises look to embrace more web-based business models and upgrade their existing networks.
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Capex as a percentage of revenue for US telecom service providers has slowed in FY07. We attribute this slowing to a combination of already high penetration and coverage quality, and accelerated capex in FY06 arising from network restructuring. We find that growth pockets are limited to a few high growth companies with national network expansion ambitions.

The current capex trend is downward. Our study of capex and revenue trends of US telecom service providers leads us to conclude that capex spending trended down during the period studied for big telecom companies in North America. Looking at the average capex as a percentage of revenue, we see that the 5 largest telecom providers in North America spent 18% in FY05 and 17% in FY06 and 12% through the first 3 quarters of FY07. We have compiled 26 North American companies’ capex and revenue trend for this analysis and have done quick analysis of capex of five major US telecom companies.

What are the potential catalysts? It is possible that the current slowdown is a breather before service providers scale up capex post the 700MHz auction in early FY08 and commit more to 3G network and broadband infrastructure rollout. However, slowdowns in consumer spend and in the related areas of housing and infrastructure remain a key risk to capex growth in FY08.

The Gridstone platform currently covers 62 of the largest global telecom companies, and it regularly tracks as-reported-by company data on segment revenue, capex and other financial and operating metrics. For a complete list of telecom coverage see Appendix A. read more…