LEHMAN BROTHERS INC. NEXTLINK Communications: Initiating Coverage With
a Buy Rating
Ticker : NXLK Rank(Old): 9-Not Rated Rank(New): 1-Buy
Price : $36 3/16 52wk Range: $49 - 10 Price Target (Old): $N/A
Today's Date : 02/19/99 Price Target (New): $51
Fiscal Year : DEC
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EPS 1997 1998 1999 2000
QTR. Actual Old New Old New Old New
1st: -0.83A - -1.19A - -2.16E - -
2nd: -0.98A - -1.42A - -2.11E - -
3rd: -1.08A - -1.57A - -2.32E - -
4th: -1.09A - -1.86E - -2.53E - -
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Year:$ -3.91A $ - $ -6.04E $ - $-9.12E $ - $ -
Street Est.: $ - - $ -6.05E $ - - $-8.88E $ - - $ - -
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Price (As of 2/19): 36 3/16 Revenue (1999): 247.3 Mil
Return On Equity (99): N/A Proj. 5yr EPS Grth: N/A
Shares Outstanding: 52.4 Mil. Dividend Yield: - -
Mkt Capitalization: 1.90 Bil. P/E 1999; 2000 : N/A; N/A
Current Book Value: $-2.63 /sh Convertible: YES
Debt-to-Capital: 110.0 % Disclosure(s): C
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* We are launching coverage of NEXTLINK (NXLK, 36 3/16 ,1) with a
1-Buy rating and a price target of $51. NEXTLINK is building a
national end-to-end local and long distance network using fiber and
broadband wireless to bypass the RBOCs to provide high speed data and
voice services to business customers.
* NEXTLINK is building a set of end-end assets that few others have.
We believe the value of this national network will increase as demand
for high bandwidth service accelerates and as demand for integrated
local/long distance services pushes the long distance carriers to add
local capabilities.
* This end-to-end multi-technology network should provide the most
cost efficient method of reaching all but the smallest business
locations. This should allow NEXTLINK to carry up to 70% of its
traffic on its network where gross margins are 20 to 25 percentage
points higher than leasing RBOC loops.
* Catalysts include: continued strong execution, the success of their
wireless deployment as well as WinStar (WCII, 31 3/4, 1) and
Teligent's (TGNT, 34, 1) wireless deployment and the increasing
possibility of long distance company or RBOC wholesale deals or
acquisitions.
* We've valued NEXTLINK using our standard DCF analysis. NEXTLINK's
current firm value is $3.7B which is 4x YE '99 PP&E. This compares to
MFS and Teleport, the other two large national CLECS, which were both
bought for about $12B or 6x PP&E.
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Summary and Description - NEXTLINK is in the process of building a
nationwide long haul and local network in the top 30 U.S. markets,
using both fiber and wireless. No other company has put this set of
assets together. NEXTLINK is building just the third, and only
independent, nationwide local fiber network. AT&T and MCI WorldCom
own the other two and they have little wireless (AT&T has some
wireless and Williams now owns 2% of WinStar's network). We believe
that the combined long distance and fiber and wireless local assets
gives NEXTLINK the ability to carry up to 70% of its traffic on its
own network.
Local Fiber - NEXTLINK's local fiber networks are its crown jewel.
NEXTLINK is operational with 2150 miles of local fiber networks in 10
of the top 30 largest markets today and 36 cities overall, currently
over 750 buildings are connected to the fiber network. Plans are to
expand to 20 major markets by the end of '99, and 30 by the end of
2000.
Local Broadband Wireless - The company recently purchased 40 LMDS (28
Ghz) licenses from WNP group to add to the 42 LMDS licenses it held.
NEXTLINK now has licenses that cover 136M POPs, 27 of the top 30
markets and 39 of the top 50. The company plans a limited rollout of
its wireless network in '99 with more extensive deployment in '00 and
'01.
Long Distance Fiber - NEXTLINK has bought 24 fibers, one empty conduit
and options on additional fiber, on Level 3's 16K mile nationwide long
distance network. This network is planned to be complete in '01.
NEXTLINK focuses on selling a bundled product of local/LD (and data
in '00)- to business customers. The company has recently begun to
sell internet access, and plans to ramp its data product initiatives
later this year and into '00 as its long haul network becomes
operational. NEXTLINK has a solid financial track record, meeting
analyst expectations each quarter since its IPO. Revenue is currently
growing at a 70-80% annual rate and we expect 3-Year CAGR of 65%. We
estimate that the company will hit its low point EBITDA loss in 4Q99
or 1Q00 and hit EBITDA breakeven in late '02. Craig McCaw owns
about 1/3 of NEXTLINK's stock and has voting control.
NEXTLINK Qwest WinStar
1999 Revenue Estimate 247M 3.5B 437M
Local Fiber 2150 Route Miles none Some in 6Cities
Leased from MFN
Wireless Spectrum
Pop Coverage 136M none 200M
Long Distance 24Fibers, 48 Fibers, 4Fibers,
Fiber 16kMiles 18.5k Miles 15kMiles
Major Markets 10 fiber 70+ long distance 30 wireless
In Operation
Local Bottleneck Persists... (...boilerplate...)
...Fiber/Wireless Provides Bypass for Majority of Market- Based on our
analysis we think that the combination of fiber and wireless will
provide the cheapest bypass for all but the smallest buildings. Fiber
costs between $100k-$200k per building and is most economical for very
large buildings and wireless costs about $20,000/building which means
lower capital costs per T1 for mid-sized locations.
1999 Should Be Key Year for Proving Wireless Model We believe 1999
will be the key year for proving that the wireless model works and we
think NEXTLINK's, WinStar's and Teligent's success will be a catalyst
for NEXTLINK.
Key milestones in 1999:
- Wireless lines increasing from 64K today (WinStar) to 270K by year
end (WinStar + Teligent).
- Multipoint wireless technology deployed in 50% of Teligent's and
WinStar's hubs. Multipoint deployment is important because it
provides the most economical and practical architecture for large
scale wireless deployment. Point to point works today but multipoint
is just being rolled out commercially.
- Improvement in WinStar's gross margins from 12% in 4Q98 to 36% in
4Q99.
(...boilerplate...)
...We believe that Long Distance Companies are Potential Wholesale
Customers or Acquirers of national fiber and wireless assets with the
chances of deals increasing as 1) the wireless model proves itself, 2)
demand for high capacity services grows and 3) the demand for
integrated local/long distance services pushes the long distance
companies (including the incumbents, Qwest, Level 3 and others) to add
local capabilities. As RBOC's move closer to entry into long distance
we think long distance company's need for integrated local and long
distance products increases.
(...boilerplate, see WCII post...)
Valuation - We've valued NEXTLINK using a DCF assuming that NEXTLINK
captures 5% share of the $100 billion Year 2008 addressable market (so
far NEXTLINK plans to cover the top 30 markets or roughly 50% of the
year 2008 $200 billion business telecom market). We also note that we
expect that wholesale revenues could reach $1+ billion per year which
reduces the retail share required. We've used year 2008 EBITDA
margins in the high 30%, 14%-15% discount rate and terminal EBITDA
multiple of 10x - 11x with a 25% public market discount. We believe
that the share and EBITDA estimates are reasonable given the cost
advantages we expect that national fiber and wireless technology will
provide. CLEC models generally assume that a CLEC captures 7% - 10%
market share by the terminal year and has EBITDA margins in the high
20% range to the mid 30% range.
While NEXTLINK is trading at high near term multiples vs other CLECS
we believe that the cost advantages, national scale and scope and
strategic value justifies the premium. Teleport and MFS were both
purchased for about $12 billion, 6x PP&E or about $350/addressable
line compared to the current valuation of NEXTLINK of $125/addressable
line and 4x YE '99 PP&E.
(...boilerplate, see WCII post...)
Estimates
4Q98 1Q 2Q 3Q 4Q '99 '00
Revenue 43.1 50.1 57.5 65.6 74.2 247.3 409.6
EBITDA (41.4) (47.0) (52.6) (58.8) (65.1) (223.4) (224.4)
Lines 174.2 216.1 259.5 305.4 354.6
Major Markets 10 20 30
In Operation
Total Cities 36 45 60
BUSINESS DESCRIPTION: NEXTLINK is building a national end-to-end
local & long distance network using fiber and broadband wireless to
bypass the RBOCs to provide high speed data and voice services to
business customers. |
