CSFB TELECOMMUNICATIONS 7/12/01
CLECs: Telecom Services -- CLECs & Data CLECs
2Q01 CLEC Vital Signs Preview: 2Q01 Results Expected to be In-Line with Expectations. 2H01 Growth Outlook and Funding Remain the Issues Overhanging the Stocks.
We expect the companies in our CLEC coverage universe will report in line results in terms of revenues, line adds and EBITDA for 2Q01. However, CLEC sector stock price performance will most likely remain disappointing until greater visibility arises concerning: 1) the impact of the weakening economy on 2H01 revenue growth; and 2) the improvement in funding situations at those CLECs that recently implemented scaleback initiatives. In addition, we continue to monitor the funding situations of Adelphia Business Solutions, Electric Lightwave, Focal and Rhythms as we estimate each is only funded through 2H01.
We forecast that CLEC revenues grew 10% sequentially on a weighted average basis during 2Q01, an acceleration from the 8% sequential growth rate we saw during 1Q01. We anticipate the strongest sequential top line growth will be reported by Allegiance (+17%), Allied Riser (+16), and CTC Communications (+12%).
We expect CLEC sector (including local efforts of the long-distance companies) access line "additions" decreased 8% sequentially to 1.2 million during 2Q01 following a 7% sequential decrease in 1Q01. The continued slowdown reflects the impact of the slowing economy on new demand, the expected rise in the churn off of customers of bankrupt CLECs, and a slowdown in net adds across many surviving CLECs which have announced scalebacks to existing business plans.
We estimate that sequential DSL line growth for the remaining public data CLECs decreased 16% on a weighted average basis during 2Q01 versus a 31% decline in previous quarter. During the quarter, Covad, which pre-released line statistics on July 11, added approximately 23,000, down 49% versus 1Q01, while we estimate Rhythms added 28,100 lines, up 75% versus 1Q01.
We expect all of the CLECs under coverage to report sequentially improved EBITDA during 2Q01. Of the larger CLECs under our coverage, we believe McLeodUSA and XO will show the largest sequential improvements in EBITDA during the quarter.
During 2Q01 stocks in the CLEC sector declined 43% on a market cap weighted average basis versus a 6% rise in the S&P and 17% rise in the NASDAQ. Year-to-date, stocks in the CLEC sector decreased 72% on a market-cap weighted average basis versus an 11% decrease in the S&P and a 20% drop in the NASDAQ. Our top pick in the CLEC sector remains McLeodUSA (MCLD, Strong Buy, $2.86) based on an attractive current valuation, consistent execution by a solid management team, and its ability to maintain a fully funded business plan. |
