Tag Archives: stock buy-back

Labor Downsizing

I’ve been mystified for most of my career when large ISPs and carriers have significant layoffs at a time when they seem to be doing well. It’s a pattern that we’ve seen over and over during the last several decades.

The latest big layoff is coming from T-Mobile, which announced in August that it is eliminating 5,000 jobs, about 7% of its total workforce. The announcement made to employees is that the layoffs will involve corporate, backoffice, and some technology jobs. The company says this round of cuts will not impact retail and consumer care employees. The company expects to take about a $450 million one-time hit in the third quarter to reflect the cost of the workforce reduction. However, a reduction of this size will boost earnings in the future.

When John Legere purchased Sprint he promised employees that the combined company would protect existing jobs and add more jobs. Even before this current downsizing, T-Mobile was down 9,000 jobs since the merger. T-Mobile executives have been quoted in saying the current cuts are about coming efficiencies from AI, automation,  and other technology tools that will allow T-Mobile to operate more efficiently. But unless T-Mobile is onto some amazing innovations that the rest of the industry doesn’t know about, those future efficiencies are not here yet.

What mystifies me is that, from every public perspective, the company is doing great. In the last year, T-Mobile added 6.3 million postpaid cellular customers, 280,000 prepaid cellular customers, and over 2.1 million FWA broadband customers – an overall customer growth of 7.8%. Many of the employees being eliminated must have played an important part in that growth.

The company’s earnings are up, with the company announcing earnings per share for the year ending June 2023 at $5.02 per share, up significantly from $1.37 per share for the previous year. Stock prices have also been doing well, up 8.5% for the last year on the date I wrote this blog, and 15.3% for the previous year.

This has been a recurring theme in the industry. During my career, I’ve seen huge layoffs from other big carriers like AT&T and Verizon that also came when the companies were seemingly doing great. It’s easy to understand when companies have layoffs when times get tough. For example, a few of the vendors that sell 5G cell site equipment have had recent layoffs as the big carriers have cut back on equipment spending for 5G.

It doesn’t take a lot of digging to understand the real reason for the T-Mobile layoffs. In the last twelve months, T-Mobile has spent over $11 billion to buy back shares of its own stock, about 7% of all outstanding shares.

Buybacks are a huge drain on corporate earnings. The 465 companies in the S&P 500 Index spent well over $4 trillion on buybacks in the 2010s – equal to 52% of the net incomes of the businesses. The companies spent more than $3 trillion on dividends, another 39% of earnings over the period. Buybacks began in the mid-1980s when the Security and Exchange Commission adopted Rule 10b-18, that gave corporate executives a safe harbor against stock price manipulation while buying back stock.

Companies like T-Mobile are putting free cash into buying their own stock to the detriment of growth or employees. Corporations have drastically cut back on research and development at the same time as buying back stock. You have to wonder how large T-Mobile could grow in the long run if $11 billion per year was spent on R&D or expansion instead of stock buybacks.

I’m sure it’s no solace to the folks who are getting laid off that their jobs were largely sacrificed so that their corporate bosses buy back the company’s stock. While this is being explained as innovation and AI, the layoffs are all about executives valuing stock prices more than the employees that have brought them success.

AT&T Cutting Capital Spending

AT&T announced it will be reducing capital spending in 2020. That news is significant for several reasons. AT&T’s capital plans are always big news because they have the largest annual capital budget of the big telcos and cable companies. The AT&T capital budget for 2019 was $23 billion. It’s big news when they are only planning on spending $20 billion in 2020.

It’s worth noting that some of AT&T’s capital spending is not being done with their own money. In 2020 they will be receiving the final installment of $428 million for the sixth year of the CAF II program. AT&T recently announced that they are 75% finished the construction of the FirstNet network for first responders, so the company should be receiving the last 25% of the $6.5 billion of federal funding next year. In future years AT&T will likely be collecting some significant share of the recently announced $9 billion 5G Fund paid out of the Universal Service Fund to bring better cellular service for the most rural parts of the country.

There are ripples throughout the telecom sector when AT&T increases or decreases its capital budget. For example, a significant slash of AT&T spending has a significant impact on the various major electronics vendors that will now have to lower their revenue expectations for 2020. While the whole telecom sector is busy, this still means lower revenues for the major telecom vendors.

This reduction in AT&T spending makes me wonder about the 5G war we are supposedly having with China. If you listen to the carrier-driven rhetoric in Washington DC, you would think that there is an urgent need to spend huge amounts of capital immediately on 5G infrastructure. It was that rhetoric that gave the FCC cover to double the size of the recently announced 5G Fund to $9 billion.

It’s hard to imagine that AT&T would be cutting its capital budget if 5G implementation was truly a national priority and a crisis. The truth about 5G can be seen by how the cellular carrier CEOs communicate with their stockholders – the big carriers are struggling right now to find an immediate business case that justifies huge spending on 5G. It turns out that much of the public isn’t willing to pay more for faster cellular broadband. Every carrier has a list of future benefits from 5G, but there are no applications that will create the quick revenues that would prompt AT&T to keep spending capital at historic levels.

This is not to say that AT&T and the other wireless carriers aren’t spending money on 5G – but AT&T is fitting 5G expansion into its shrinking capital budget. Contrary to everything that the carriers have been telling Washington DC, the carriers are not planning on spending massive amounts of their own money on 5G just yet.

Lower capital spending by AT&T also takes the wind out of the sails of the FCC’s argument that net neutrality was holding back the big ISPs from making capital expenditures. This was the primary reason cited by FCC Chairman Ajit Pai for killing net neutrality and Title II regulation. He argued that overregulation was stopping the big carriers from investing, and he’s still making this same argument today to justify his decision. If Chairman Pai was right, we should be seeing AT&T increase capital spending rather than cutting it.

The idea that there is a direct correlation between capital spending and regulation was always fictional. Big ISPs spend money on capital that they think will increase future returns – it’s hard to imagine regulations that would stop the big companies from pursuing good business ideas. AT&T’s capital spending is much more related to what its competitors like Verizon, T-Mobile, and Comcast are doing. When the FCC killed Title II regulation and net neutrality, the agency was removing the last regulations major from a broadband industry that was already barely regulated. It’s hard to think that change had much impact in the Board room or the business development groups at the big ISPs.

It’s worth noting that AT&T has now joined many other big US corporations and is using free cash to buy back its own stock. The company already announced plans to buy back $4 billion of its own stock in the first quarter of 2020 – retiring roughly 100 million shares. I’m sure that decision had some impact on the capital budget. This might mean that AT&T upper management values stock buy-backs to increase earnings per share more than they value capital spending.