WIRELESS CLECS: TELIGENT INC AND WINSTAR COMMUNICATIONS UNDERVALUED
BROADBAND ASSETS
Lehman Bros
Telecom Services
Bill Garrahan
Blake Bath
Geoffrey Stricker
(intro excerpt from the 42 page pdf full report. Feel free to email
me a request for a copy. I'll send out all requests at same time
later this week)
- We have launched coverage of WinStar with a 1 Buy rating and a price
target of $53 and Teligent with a 1 Buy rating and a price target of $50.
These wireless are using high-capacity wireless local loop technology to bypass
the RBOCs and provide voice and high-speed data/Internet services to midsize
business locations in the largest 60-70 cities in the country.
- The opportunity is huge, and growth is accelerating. The overall business
market represents $100 billion in revenue with 40%-plus EBITDA margins.
Demand for high-bandwidth “last mile” capacity, which is critical to the growth
of data and Internet, is expected to increase to 4 times today's levels by 2002.
- Local bottleneck still exists, especially for high-capacity services. The
RBOCs control the last mile bottleneck today and take 30-90 days to deliver
high-cap service. It is estimated that CLEC fiber reaches just the largest
buildings (less than 5% of all buildings) and about 30% of all business lines.
- Wireless solves bottleneck for 50%-60% of the market. Wireless will be the
most cost-efficient technology (cheaper than fiber) for midsize buildings that
account for 50%-60% of business lines. On-net gross margins should be 20-25
percentage points higher than for off-net leased RBOC loop access.
- Wireless model should prove itself in 1999. Total wireless lines should grow
to more than 250,000 from 64,000. Hubs should increase to 350 from 140, and
multipoint should be rolled out to 50% of these hubs. WinStar's gross margins
should improve to 36% from 12%, validating the economic model.
- Large long distance companies are potential partners or acquirers. As the
model proves itself, large long distance company acquisitions or partnerships
could occur, just as they did when fiber CLECs (Teleport and MFS) and high-speed
cable access (TCI) began to prove in. We think the long distance access
savings alone could cover much of the cost of the acquisition.
- Key investment risks include (1) significant funding requirements and capital
expenditures, (2) execution and multipoint technology rollout, and (3) fairly rich
near-term valuation multiples.
- Our 10-year DCFs assume each of these companies captures just 4.0%-5.5% of
the business telecom market, with EBITDA margins reaching 36%-38%. MFS
and Teleport were bought for about $12 billion each, 6 times PP&E, and $350
per addressable line. Teligent and WinStar trade at $2.7 billion and $3.4 billion,
respectively, which is 2.5-4.0 times estimated 2001 PP&E and about $100 per
addressable line.
OVERVIEW
Summary and Description
Wireless CLECs (WLECs) are installing high-bandwidth wireless local loop
technology that should offer a cost-competitive bypass of the RBOC last-mile
bottleneck for customers in midsize business locations. We believe that this
technology will be cheaper than fiber and cost-competitive with DSL for midsize
locations (50%-60% of the market). We estimate that the largest 3%-5% of all
buildings and 30% of the business local opportunity will be addressed with fiber and
that DSL and single lines will cover the midsize and low ends of the market.
WLECs are using the wireless asset to build full-service telecom businesses targeting
business customers. Because of the scale economies, and because the large long
distance companies need high-capacity local bandwidth, we also believe these
WLECs will develop significant wholesale businesses.
WinStar and Teligent are two of the three largest holders of fixed wireless bandwidth
in the country (NEXTLINK is the other large holder), with spectrum covering over
80% of U.S. business office space. We expect these CLECs to add local and long
distance fiber capacity and to connect these wireless networks to build end-to-end
high-capacity networks. WinStar has bought four fibers on 15,000 miles of Williams
network and 1,400 miles of local fiber from MFN in six cities primarily for POP-POP
capacity (both are 25-year IRUs). Teligent is also leasing POP-POP fiber.
Both Teligent and WinStar say they plan to add more local fiber capacity through
swaps, leases, builds, or acquisitions.
A HUGE OPPORTUNITY WITH ACCELERATING GROWTH
The retail business telecom market is huge, with 90 million lines (of which 30
million are high-capacity T1 or higher), $100 billion in revenue, and 40%-plus
EBITDA margins (30% long distance and 50%-60% local). The market is growing
7%-9% per year, with data and Internet revenue growth exceeding 25%. We expect
revenue to reach $200 billion in 10 years. These WLECs are targeting business
customers in the top 60-70 cities of the country (which account for about 70% of the
lines in the country). Demand for the critical high-bandwidth, last-mile capacity
required to fuel growth of the Internet, data, and multimedia communication is
expected to continue to grow 35%-40% annually to 120 million lines by 2002 from
30 million today, a fourfold increase.
SIGNIFICANT INVESTMENT IN BROADBAND TECHNOLOGIES
The expected acceleration in the growth of high-bandwidth services, combined with
the RBOC bottleneck (installation intervals for T1 services is 30-90 days), has been
driving significant investment in broadband services. Acquisitions of high-bandwidth
local networks (Teleport, MFS, Brooks Fiber, TCI) have totaled $70
billion. New long distance networks have a combined value of $40 billion, and fiber
CLEC assets are valued at $20 billion. The growth in broadband services has also
been a primary driver behind the multibillion-dollar increase in the market value of
large incumbent long distance companies and RBOCs.
There have been two types of investment: 100% bypass, which includes cable
companies and cable modems at the low end and fiber at the high end, and bypass
using RBOC low-speed loops and digital subscriber line (DSL) technology to
increase capacity (ADSL serves the residential market with one-way high-speed
Internet access up to 9 Mbps, and HDSL and SDSL serve the business market with
two-way T1 services up to 1.5 Mbps).
We believe that broadband wireless will attract the same focus and increased
investment that cable and fiber have received as the model proves itself in 1999.
Broadband wireless serves the midsize business market, where demand for high-capacity
T1 access has driven growth rates of 35%-40% over the past few years and
has pushed RBOC delivery times to 30-90 days. CLECs have invested heavily in
fiber to bypass this bottleneck, but CLEC fiber reaches just the largest buildings (less
than 5% of all buildings) and about 30% of all business lines.
We believe that both WLECs and DSL CLECs (DSL technology increases the
capacity of an RBOC's copper loop) have cost advantages over fiber and have
market opportunities to address the 70% of the market not served by fiber.
WIRELESS SOLVES BOTTLENECK FOR 50%-60% OF THE MARKET
We believe that wireless is the most cost-efficient high-bandwidth technology for
50%-60% of the market. Figure 6 shows capital costs for wireless versus fiber, DSL,
and leased RBOC T1s. Wireless is significantly cheaper than leased RBOC T1s,
which cost about $350 per T1 per month. Moreover, we believe that wireless will be
cheaper than fiber and at least cost-competitive with DSL for buildings with 5-28
T1s (2DS3s).
Given the high growth and share we expect (10%-20% per building), this cost-efficient
range will correspond to the more than 100,000 midsize buildings in the
country (25,000-200,000 square feet; 100-1,000 employees per building). This
group of 100,000 midsize buildings contains 50%-60% of the local line market. |
