CSFB - Kathy Littlefield/Frank Governali:
WinStar held an analysts meeting yesterday, during which it made three signifi-cant disclosures. One, it announced a broad ranging strategic relationship with Williams Communications. Two, it gave some insight into the success of its on-net line growth effort (Project Millenium). And three, it announced an expansion of its network build. These announcements will boost EBITDA losses in the short term, but should create value longer term. The combination of the three announcements produced a very positive and appropriate response in its and other companies' share price. We still need to access the impact on our model of the higher spending levels along with the higher revenue potential. Thus, for the time being we haven't adjusted estimates.
Implications of the Announcements
We view these announcements as positive for several reasons:
1) Williams involvement with WinStar represents an independent vote of confi-dence in WinStar's strategy, its ability to execute, and its management;
2) Succesfully generating orders for on-net buildings at least partially demon-strates the wisdom of the marketing program (since getting the vast majority of customers on-net is the whole purpose of the wireless strategy;)
3) Successfully generating the on-net orders should also demonstrate the ability of reducing operating losses and improving long term returns by carrying the majority of the traffic on net;
4) Getting the on-net line orders should permit WinStar to prove in the next couple of quarters that its network works, and that it can actually install lines on a timely basis – these are two things that negative pundits have criticized it for in the past. The implicit assumption in the stock price rise yesterday obviously was that these concerns have now been addressed. In reality the results of the next couple of quarters should provide this evidence.
5) Gaining access to the Williams long distance network provides Williams with another anchor tenant, but importantly for WinStar, it obviously reduces future operating costs.
6) Industry implications – WinStar's announcement doesn't upset the com-petitive balance in the industry at all. It provides further prove of the oppor-tunity for well-run CLECs to penetrate the local market. In addition though, it proves that being a well-run CLEC is not an easy task, and requires a great deal of blocking and tackling in a number of areas. WinStar now has the or-ders on-net, it must provision them efficiently, which will be the real proof of its success. Similarly, by having the ability to combine a local and long dis-tance
offering, WinStar has the opportunity to boost margins and accelerate
market penetration, but needs to demonstrate this over the coming year. Other well-run CLECs have the same challenge and opportunity. In particu-lar, WinStar's progress in selling on-net services should also give a boost to the other major wireless CLEC, Teligent. Teligent's rollout is somewhat dif-ferent than WinStar, but with its excellent management, it should also be able to address the local market opportunity.
The Announcements Summarized
· Williams to pay $400 million over four years to obtain 2% of the capacity on WCII's network. - 270 hubs to be built over the next 3 years will be made available to Williams, with 60 being available immediately. WinStar predicts that this arrangement will produce an incremental $400 million of EBITDA over the next five years.
· WinStar to pay $640 million over seven years to control 15,000 miles of four strands of dark fiber on William's planned 32,000 mile network. – Prior to the transfer of this fiber to WinStar, Williams will provide all of WinStar's long haul transport needs. These payments do not represent any increase in spending over that which WinStar is already paying other long distance carriers today.
· WinStar plans to expand network to 70 additional markets (110 in total around the world over five years, and 45 total domestic markets and 6 in-ternational markets in 1999.
· Network expansion will produce upwards of $350 million to $400 million of incremental EBITDA losses, with $25 to $35 million occurring in this fourth quarter.
· On-net line sales through Project Millenium have substantially increased the level of full on-net service, demonstrating the efficacy and effectiveness of the wireless strategy. Project Millenium is a marketing program targeted at 1,000 buildings in 13 cities, where customers can get up to one year free local service if they sign multi-year contracts with WinStar. This program has stimulated line growth in these buildings, which are all on-net. As a re-sult,
WinStar reports that over 40% of November line orders came from
these 1,000 buildings, and therefore are all on-net. In WinStar's largest mar-ket, New York, over 93% of orders came from on-net buildings. Installations are beginning, with the revenue impact expected to begin in the first quarter. The on-net orders in November in other markets were reported as follows: Boston – 73%; Chicago – 65%; Dallas – 65%; Los Angeles 56%.
· WinStar reports that it now has rights to 4,200 buildings nationwide, with 700 being added in the fourth quarter.
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CSFB WMB note - fwiw:
Williams signs deal with WinStar (WCII, $37, BUY)
Gains access to the local loop!
WMB gives 4 dark fiber strands on 15,000 miles for $640M
WMB gets 2% of WinStar's local loop capacity for $400M
· This is a major revenue producing bandwidth sale.
· This is a major dark fiber sale.
· This agreement should boost earnings by cutting WMB's payments to local phone companies for completing calls.
· Williams becomes much more attractive to resellers, now that they can of-fer complete “end-to-end” service packages. |
