NBMO - Mike Renegar: WinStar Rings in the Holidays With a Conference Filled with Surprises
WinStar announced plans to expand its switched services into a total of 110 markets worldwide within five years.
Included in WinStar's new 110 market strategy were the company's plans for building out the international market. WinStar announced plans to serve the following six markets by year-end 1999: Amsterdam, Paris, London, Tokyo, Sydney and Buenos Aires. By leveraging the Lucent Technologies relationship, WinStar plans to expand to a total of 50 international markets over the next five years.
At the conference a major agreement between WinStar and Williams Communications was announced. WinStar signed a $640mm deal with Williams to obtain dark fiber backbone assets and Williams signed a $400mm deal with WinStar to acquire a two percent share of
WinStar's wireless broadband network.
Initial results from the Project Millennium marketing campaign were released. For the month of November, more than 40% of new line sales were from designated on-net buildings. In New York, 93% of November line orders came from Millennium buildings.
WinStar sets record with 700 new building access rights in the current quarter. This gives WinStar a total of 4,200 commercial buildings nationwide, exceeding its 1998 goal, and on target for the company's goal of 8000 buildings nationwide by year-end 1999.
We believe the positive momentum surrounding WCII will continue over the near term and anticipate future positive announcements that will act to fuel the stock price. We are raising our price target to the mid $50 range on these prospects as well as our concerns being lifted on the stock. We reiterate our BUY recommendations.
Expansion to 110 Markets Worldwide
WinStar plans to double the U.S. reach of its broadband network to 60 major markets over the next two years, which represents greater than 80% of the commercial marketplace. The company feels it is crucial to extend the breadth of its network, so it can have the advantage of being first to market with a ubiquitous broadband network ready to meet the growing demand for broadband services. In order to meet this goal, WinStar is relying on Lucent Technologies' expertise in building networks not only domestically, but also around the world. Dan Stanzione, Lucent Technologies COO and President of Bell Labs, and Nina Aversano, Lucent Technologies President of Global Commercial Markets, addressed the conference to reiterate the importance of the partnership and Lucent's commitment to technical integration of the network. Both companies have teams of 25 people specifically dedicated to managing the relationship. In addition, Lucent's executives said there are 35 technical design and engineering people, 3000-4000 installers around the country, and Lucent people around the world ready to go to work.
Stanzione felt both companies shared a vision of next generation networks and how they will be used and that advancement in networks and services will only be realized by successful partnerships like Lucent and WinStar.
The company provided details on its international plans to expand into six markets by year-end 1999 and a total of 50 markets over the next five years. An experienced management team headed by David Schmieg is leading the international expansion. WinStar believes the time is right to target the international market because there is demand for broadband capacity, a favorable regulatory environment and a pricing structure that is three to five times as expensive as the U.S. market. WinStar estimates that the top eleven countries, including the US, represent 75% of the worldwide telecom opportunity. These markets represent 78% of WinStar's target markets. WinStar's initial focus will be on data services which will help to lower capital costs because it won't be necessary to install multi-million dollar voice switches. It plans to secure the necessary spectrum through grants, purchasing from investors, joint ventures, or auctions.
Europe will be the first market internationally to get rolled out. WinStar has obtained a license in the Netherlands and the build-out is in progress in Amsterdam for a March 99 launch. The company is in the process of filing for operator licenses and wireless licenses in other markets in Europe. In Japan, the company's best Asia/Pacific opportunity, WinStar is looking for a partner to seek an award for a
nationwide wireless license. They have identified two companies and are currently in negotiations with them. WinStar has also identified two potential partners in Australia and should finalize the purchase of an Argentinean company in January 1999. Canada and Mexico are target markets, but because of the existing foreign ownership restrictions, WinStar will delay entry into these markets.
WinStar and Williams Agreements
Williams Communications will obtain 2% of the long-term capacity of WinStar's fixed wireless broadband network for $400 million. They will make pro rata payments to WinStar over four years as WinStar completes its hub construction obligations. WinStar is required to construct a total of 270 hubs by the end of 2001. Approximately 60 of these hubs are constructed and will be available to Williams immediately. The charts below show the potential financial impact to WinStar. While Williams pays cash as capacity is delivered, WinStar has not decided how it intends to account for the revenues.
WinStar will obtain nationwide dark fiber backbone assets and network services from Williams for $640 million. WinStar will make even monthly payments to Williams over seven years. Williams will provide approximately 60,000 fiber miles (4 strands over 15,000 route miles) by end of 2001, plus all of WinStar's interim long-haul transport requirements.
We feel the Williams agreement is a favorable agreement for WinStar and demonstrates the value of their network. While the initial cost seems above average for these miles, the agreement has deeper implications as Williams was likely chosen for their wholesale focus and will not be a direct competitor. Also the reciprocal payments to WinStar further validates the value of broadband capabilities to the consumer. Because they have complementary strategies and networks, both companies will realize cost advantages as both are able to operate optimal end-to-end broadband networks.
Project Millenium
WinStar experienced tremendous success in the initial month of its Project Millennium marketing campaign. WinStar designated buildings in 13 of the 30 markets in which it offers service as Millennium buildings and for the month of November these markets were responsible for 40% of the line orders.
Penetration rates were 6% in Millenium buildings, which is just below the break-even penetration rate of 9%. These results have increased on-net results significantly in the Millennium markets. We feel this
trend should continue as the company de-emphasizes low margin resell business and increasingly focuses the sales effort on on-net selling by launching several new Millennium initiatives.
Building Access Rights
WinStar for Buildings, the unit responsible for acquiring building access rights, secured access rights to approximately 700 commercial office buildings nationwide in the current quarter, giving WinStar more than 4,200 commercial buildings nationwide. The company expects to obtain access rights to a total of 8,000 buildings nationwide by year-end 1999. WinStar's strategy for building access rights is to focus on the portfolio owner, or real estate investment trust (REIT). While portfolio owners only make up 2% of the owner population, they control 35% of the market.
Point to Multipoint
Winstar announced the connection of its point-to-multipoint (PTM) service to its first paying customer and gave a live demonstration at the conference. David Ackerman, WinStar Network Services EVP and COO, demonstrated the capabilities of the technology by showing full-motion video, establishing a high-speed connection to the internet, while making a telephone call all over the same connection.
Currently, WinStar chose Siemens/P-Com to roll out the point-to-multipoint radios which was a switch from Hughes, who had been a frontrunner. We expect more vendors in the future. WinStar plans to deploy PTM equipment nationally throughout 1999, which will allow more effective use of its spectrum. Also, it allows WinStar to go down market because it opens up more buildings for cost effective
service. The cost per building drops to $6,500 at over 200 Mb/s/channel, compared to point-to-point technology, which costs approximately $20,000 per building at 45 Mb/s/channel.
Summary
In summary, the initiatives outlined at the conference lifted a number of concerns for us. The point-to-multi-point technology up and running was very encouraging to see. This network will allow WinStar to
move down market in a cost effective manner moving forward. The strength of the agreement with Lucent was solidified by Lucent's COO as they are guaranteeing the technological implementation of the
network. The agreement with William's creates a long-haul solution as well as a valuable partner to grow the company. Internationally the seeds are planted and we believe the Lucent relationship could be of
assistance in winning business there. Considering the reasons mentioned above, we are realizing this greater opportunity by raising our price target to the mid $50 range and are reiterating our BUY
recommendation at this time. |
