Yet another Merrill Lynch research report. Hey, where were these guys in 2002? Either telecom is hot or covering oil companies is just plain boring ;-)

Telecomm: Conference Highlights - USA


On March 7-9, Merrill Lynch hosted its Communications Forum in Dallas, with over 40 telecom services and equipment companies. Key takeaways from the conference included: confirmation of our view that wireless growth remains solid, the equipment provider implications of FTTx and HSDPA rollouts, that handset inventory is above Qualcomm's desired level, and that the status quo remains likely for the telecom regulatory environment in the intermediate term.

First, we think that underlying wireless growth remains solid, within the context of an improving market structure. Relative pricing stability has emerged as a theme, following a fairly benign holiday promotional season. During 1Q 05, Cingular raised the entry point on family plans and T-Mobile USA ended a promotion. Further, we believe that the actual implementation of Cingular's system migrations will start later in 2005 and continue into 2006. Therefore, the migration of AT&T Wireless customers is currently occurring "naturally" as customers change plans. We believe that the potential disruption associated with forced migrations could be some time off. On the themes of wireless, valuation and long-term strategic position, we maintain our Buy ratings on Sprint (FON, C-1-7, $23.34) and ALLTEL (AT, C-1-7, $56.60).

Second, the divergence with regard to fiber overbuild strategies was highlighted by SBC and Verizon. In our view, the divergence relates to cost and speed of deployment versus bandwidth, along with the condition of the existing plant.

Third, our sessions with Nortel focused on the theme of wireless broadband and 3.5G, with HSDPA now expected to fulfill the promise to operators of 1-4 Mbps. Nortel contends that existing first generation UMTS base stations may not be able to fulfill the power requirements for optimal HSDPA performance. Nortel believes it delivers a performance advantage and argues the opportunity for it to take share exists. This will no doubt continue to be debated among the large equipment providers with actual share implications unfolding in contract announcements and roll outs.

Fourth, per Qualcomm's presentation, the current handset inventory seems to be above the desired level of 18 weeks. We have reduced our June quarter EPS forecast from $0.30 to $0.29.

Fifth, our telecom regulatory panel discussions indicated that merger approvals are likely without significant concessions, that intercarrier compensation and USF changes will take time, and that TV franchising authority will stay at the local level. With regard to the RLECs and managing regulatory risk, we think that carriers can more likely influence matters at the state (rather than federal) level. This could be a relative advantage for some, such a Neutral rated Iowa Telecom (IWA, C-2-7, $19.96).