(next three OCR'd somewhat imprecisely) SSB - JAck Grubman -
Christine Gocciuco WCII-Analyst Meeting Upbeat
12/18/98 Winstar Communicatio (WCII $37.C0,l-S,Tgt $52.00)
*Winstar held an analyst meeting yesterday and provided details of
their updated business plan. The tone of the meeting was upbeat.
*The company expanded the number of markets in which they will provide
service to 45 domestic markets by YE'99 up from their previous goal of
40 and plans to be in 60 domestic markets by YE'00.
*In addition, WCII will provide service in 6 int'l markets by YE'99
and at least 50 in five years.
*Fixed wireless pt-to-multipt technology is operational (the
technology works) in Washington DC a will be deployed nationally
during 1999.
*WCII's Project Millennium has received a positive response.
*Strategic arrangement with Williams a real positive and demonstrates
the value of capacity.
-OPINION;
Yesterday at its analyst meeting, WinStar provided an update on its
progress to date and made a few announcements including agreements
with Williams Communications for swapping network capacity with the
net result to WCII being $400 million of cash coming in over the next
3 years with $640 million going out over the next 7 years.
specifically, in its first investor meeting WinStar announced its
expanded business plan, provided an update on the results from its
Project Millennium innovative marketing campaign, provided a
successful demonstration of its fixed wireless point-to-multipoint
broadband service and introduced many investors to its management team
which has extensive telecom experience. clearly, the potential of
fixed wireless and in particular point-to-multipoint technology which
is only at the beginning of its commercial deployment has provided
WinStar as well as Teligent with a unicue strategic asset in the
industry.
UPDATED BUSINESS PLAN. WinStar announced its plan to expand its
network to 110 markets worldwide--60 domestic and no international
markets. By the end of 1999, WcII will be operating in 45 domestic
markets and 6 international markets including Amsterdam (March 99
expected launch), Paris, London, Tokyo (Q2'99), Sydney and Buenos
Aires (Q1'99). This is an increase from WCII's goal of 40 cities by
the end of 1999. By year end 2000, WCII will add an additional 15
markets domestically for a total of 60 domestic markets and by 2004,
WCII will be in 110 cities worldwide- -60 domestic and 50
international markets. In Europe, Winstar has identified the first
five countries in which it will provide service: Netherlands, France,
Germany, Belgium and the UK. WcII has obtained the appropriate
licenses in the Netherlands and has filed for licenses in France and
Germany with plans to file in Belgium and the UK in January 1999,
Planning has also begun for its Japan, Australia, and Latin America.
Aiding in the expansion plan, especially internationally will be
Lucent, which will manage WarT's accelerated buildout as part of
the alliance formed by the two companies in October.
WinStar estimates that this additional market expansion will have
minimal revenue impact on Q4'9S and in 1999 but clearly expands WCII's
addressable market in the years beyond 2000. However, due to the
buildout of these new markets EBITDA losses will increase by $350-$400
million over the next three years with an additional $140-$160 million
in EBITDA losses in 1999. However, by virtue of the Williams deal,
WCII is getting $400 million of cash over the next three years and
depending on the accounting treatment for this, WCII's actual reported
EBITDA may not be impacted very much by the new buildout. We are in
the process of updating our model to include the impact of the market
expansion (which is clearly positive to NPV since WCII's return on
capital in a fully developed market is roughly twice its cost of
capital) as well as the Williams transaction which we describe later
in the note.
In addition, WCII obtained building access rights to an additional 700
buildings, bringing the total to 4,200 and exceeding its target of
4,000 by YE'98. By the end of 1999, the company plans to bring total
access rights to 8,000 buildings. Buildings are obviously the key to
driving revenue, thus, the faster buildings come on board, the better.
PROJECT MILLENNIUM. WinStar also provided an update on its recently
announced Project Millennium which will drive on-net customers and
margins. Project Millennium is WinStar's plan to roll out an on-net
point-to-point product in 1,000 buildings in 13 cities where
customers, if they sign up for a three year commitment and take
intralata toll services from WinStar will get a one year waiver on the
fixed monthly rental for the phone line. The customers will continue
to pay for in stallation of lines, subscriber line charges, long
distance (if they choose to take LD from WinStar), and any vertical
and enhanced services. The line orders from this innovative offering
have been quite strong and has accounted for more than 40% of November
line orders, which is particularly impressive given that Project
Millennium is only offered in 13 of its 30 markets in which WinStar
offers services. The percentage of overall November line orders that
came from Millennium buildings was 93% in New York, 73% in Boston, 65%
in Chicago, 65% in Dallas and 56% in Los Angeles. WCII has already
begun to install these orders and will begin to see the impact of the
installations in Ql'99. Importantly, these represent all completely
on-net lines- -meaning on-switch and on the wireless tail circuits.
Although Project Millennium is in its early stages, its penetration
rates for customer orders is impressive. Overall penetration of
Millennium buildings is already 6% with up to 50% in some buildings.
In 40% of Millennium buildings, WinStar has one or more customers and
the average lines per customer improves to 21 lines.
FIXED WIRELESS POINT-TO-MULTIPOINT TECHNOLOGY. WinStar provided a
demonstration of its point-to-multipoint technology at its meeting (in
fact, many of the courtesy phones at the meeting used this technology)
and began commercial deployment in Washington DC. The first customer
using this technology was installed this week and point-to-mulltipoint
will be deployed nationally in 1999. This should dispel any doubts
that the technology works. We believe fixed wireless,
point-to-multipoint will be the most cost effective way for broadband
services into end user buildings with 60% of US business lines in
buildings where fixed wireless is more cost effective than fiber or
Bell copper.
WILLIAMS CONTRACTS. WinStar signed a $400 million contract with
Williams whereby Williams will obtain 2% of the long-term capacity of
WinStar's fixed wireless network. If one did an NPV of WCII's
network, it would suggest a Sl5-$20 billion value compared with WCII's
firm value today of $3 billion. Obviously, we do not think WCII
should trade at a $l5-$20 billion firm value but its does indicate how
valuable WCII's network/asset are. Williams will use this capacity to
offer integrated local/long distance services to its wholesale
customers. In addition, if Williams chooses to sell local service,
WCII will be its preferred supplier. Thus, WCII has upside potential
beyond this deal. The agreements call for WinStar to construct a
total of 270 hubs by the end of 2001. Approximately 60 hubs have
already been constructed and will be made available to Williams
immediately. Williams will make prorata payments to WinStar over four
years as WinStar completes its hub construction obligations under the
agreement. Thus, since 60 hubs have already been constructed, roughly
ago million is currently owed by Williams. The Williams agreement is
expected to provide $15-$l25 million in revenue and $l4-$ll0 million
in EBITDA in 1999. The reason for the wide range is due to accounting
treatment, not cash which will come in the door as the hubs are built.
One method of revenue recognition would be to recognize revenue as
cash comes in (which makes sense) or recognize revenue over a 25 year
amortization period. Obviously, in the first scenario reported
revenues and EBITDA are higher.
In addition, WinStar will obtain nationwide dark fiber from Williams
Communications for $640 million and will make payments to Williams
over seven years. This is financially attractive to WCII since the
annual cash outlays roughly equal what WCII pays today for long-haul
network expense and obviously WCII's growth over the next seven years
would result in higher network expense even accounting for lower
transport rates. Furthermore, WCII can treat these payments as
capital outlays not expense, thus, WCII's EBITDA should be enhanced by
$80-$90 million per year, all things being equal. On top of the
financial impact WCII is getting dark fiber and network support on a
newly built network which will allow WCII to dramatically enhance its
ability to offer data and IP services. Williams is expected to
complete a 32,000 route mile network by the end of 2000 (15,000 new
miles) and will provide four strands of fiber over approximately
15,000 route miles (60,000 fiber miles) to WinStar together with other
network-related items such as co-location with POPs, operating and
maintenance costs. Therefore, WinStar is paying roughly
$10,000-$11,000 per fiber mile which is a good deal for WCII yet
is higher than where the other fiber network companies are trading
such as Qwest which obviously has all the installation, maintenance
and service level requirements embedded in its value per fiber mile.
Prior to lighting the fiber, Williams will also provide all of
WinStar's long-haul transport requirements by delivering full groomed
circuits.
NET IMPACT OF WILLIAMS DEAL AND BUILDOUT
Depending on how the Williams deal can be accounted for, in particular
the cost of network treatment and revenue recognition, WCII could
actually see a net positive impact to reported EBITDA even after
incurring higher !SSTDA losses from the market expansion. Thus, if
the accounting treatment falls the right way, the Williams deal will
pay for the buildout on an EBITDA basis. The table below lays out the
various possible scenarios.
($ in millions)
ANNUAL IMPACT OF WILLIAMS DEAL
1999 2000 2001
SCENARIO 1
Revenue: $100 $100 $100
COG (network expense
going to capital) (85) (85) (85)
------------------------------------------------
EBITDA $185 $185 $185
SCENARIO 2
Revenue: $ 15 $ 15 $ 15
COG (network expense
going to capital) (85) (85) (85)
-------------------------------------------------
EBITDA $100 $100 $100
BUILDOUT EBITDA
LOSSES $160 $120 $120
NET WILLIAMS+BUILDOUT
SCENARIO 1 $ 25 $ 65 $ 65
SCENARIO 2 (60) (20) (20)
NOTE: WCII is getting cash over the next 3 years.
*Scenario 1: Assuming recognize WMB revenue over next 3 years as
network is built
*scenario 2: Assuming recognize VOS revenue over 25 year amortization
*COG (same in both cases): WCII spends $85-$90 million per year on
transport which is now a capital outlay via Williams.
WILLIAMS DEAL UNDERSCORES VALUE OF BANDWIDTH
When one looks at the value chain, the fact is capacity is going to be
very valuable and the most valuable networks will be local fixed
wireless, long-haul fiber, local dense fiber network, Pan-European and
subsea networks. Some companies have the scale and scope to be
completely end-to-end like WorldCom. Others, like WinStar, Teligent,
Global Crossing, Metromedia Fiber Network and Qwest, will optimize on
one or more elements of the value chain and through partnerships or
other arrangements will be part of an end-to-end solution although we
believe Qwest has the ability to evolve into a full scale end-to-end
player on its own.
NET/NET: WinStar through its fixed wireless technology and vast
spectrum in the top 50 markets in the US is clearly a unique strategic
asset. With its innovative products WinStar is leveraging its high
capacity network and increasing the number of on-net customers. We
believe WinStar's expansion into new markets and agreements with
Williams has created value for its shareholders. |
