Goldman Sachs Ken Hoexter, Richard Klugman
December 18, 1998
WinStar Communications, Inc.
** Analyst Meeting Filled With Positive News; **
* WinStar released a flurry of announcements during its analyst
meeting yesterday including (1) an expansion to 110 markets (60
domestic and 50 international) Over the next five years; (2) a fiber
lease from Williams in exchange for 2% of WinStar's local capacity;
(3) roof rights that surpassed our year end goal of 4,000, and (4)
roll-out of commercial point-to-multipoint services.
* We believe the net effect of these announcements is very positive
for WinStar, and while we maintain our market outperformer rating on
WCII shares, we do view the stock more positively.
ANNOUNCES MARKET EXPANSION. WinStar announced that it will increase
its buildout to 110 domestic and international markets over the next
five years from its previous target of 40 domestic markets at yearend
1999.
We believe the staged expansion plan that WinStar announced is the
right way to expand, rather than spreading itself too thin by trying
to expand all at once.
ACCESSES LONG-HAUL FIBER WinStar announced an agreement to purchase
60,000 dark fiber miles from Williams (4 strands in a 15,000 mile
network) for $640 million in cash. In exchange, Williams will
purchase $400 million worth of local capacity from WinStar, or 2% of
the company's capacity on its targeted 270 hub network. (See our
other note this morning 'WCII-WMB Swap: Bullish For Both, And Long
Haul Carriers')
SURPASSES OUR ROOF RIGHTS ESTIMATE. The company announced that it has
accessed 4,200 roof rights, surpassing our 4,000 yearend estimate and
has 60 hub sites operational (with another 49 under construction) .
We are very encouraged by the increased focus on network installation
as the company focus on-net, and away from resale.
PROJECT MILLENIOM INCREASES ON-NET PERCENTAGES. Early returns suggest
WinStar's Project Millennium is off ro a very success£ul start with
on-net sales in New York increasing to over 93%. WinStar's margins
should benefit directly as the company increases its on-net
subscribers due to network cost savings (5%-l5% gross margin for
resale vs. 70%-90% for on-net)
ROLLS OUT POINT-TO-MULTIPOINT (PMP) SYSTEMS. WinStar announced that
it has rolled out commercial PMP services in Washington, D.C.. We
believe PMP could lower its network deployment costs and increase the
number of prospect buildings, contributing at least a hundrEd basis
points to cost of services.
EBITDA LOSSES LIKELY TO INCREASE IN THE NEAR TERM. WinStar announced
that losses are likely to expand in fourth quarter by $25 million (We
currently assume a $47 million loss), which could raise our loss
estimate to $72 million. The increased losses are attributed to start
up losses from new market entry. Additionally. the next three years
could see incremental EBITDA losses of $350 million, offsetting the
positive $175 million we anticipated cumulatively £rom 1999-2001
(leaving a negative $175 million) - However, these estimates are
preliminary and we anticipate revisiting over the next few days as we
also see details of the Williams contribution, which could offset part
or most of the $350 million in start up losses.
INVESTMENT CONCLUSION
We reiterate our Market Outperformer rating on WinStar, although we
note that after yesterday's analvst meeting we view the
stock-more-positively based on the company's considerable expansion
plans announced yesterday. We believe the company gave a very credible
presentation on increased business prospects, which warrants a closer
look. WinStar has the opportunity to provide broadband services
economically to a much greater audience than fiber networks, providing
those services quickly, and thus capitalizing on its first to market
advantages.
EXPANDING ITS ADDRESSABLE MARKET. WinStar announced that it will
increase its network buildout to 110 markets (60 domestic and 50
international) over the next five years. The company plans to enter
the 60 domestic markets by the end of 2000, double the 30 currently in
service. WinStar now plans on having 45 domestic markets in service
by the end of 1999, an increase from its previous goal of 40.
Additionally, WinStar announced plans to buildout 6 international
markets by the end of 1999, including Buenos Aires, Sydney, Tokyo,
Paris, and London. We believe the company is attacking its expansion
opportunities intelligently as it paces its new market builds,
especially At it Cnters the international arena. We are also
encouraged by the increased working relationship between Lucent and
WinStar in building out the markets as Lucent has clearly given a vote
of confidence to the wireless local loop business, and WinStar
specifically.
WILLIAMS DEAL GIVES ACCESS TO NATIONWIDE FIBER. WinStar announced an
agreement with Williams where Williams will obtain 2% of the long-term
capacity of its fixed wireless network for $400 million. Additionally,
WinStar will pay for $640 million of nationwide dark fiber from
Williams. On its end, WinStar is expected to construct 270 hubs sites
by the end of 2001 (60 are already operational) WinStar should be
paid $400 million over 4 years as it constructs the hubs = Llin
increasing telecom revenue beyond our previous $1.8 billion
expectations ('99-'0l) Williams will provide 60,000 fiber miles,
consisting of 4 strands over 15,000 route miles and becomes WinStar's
preferred network provider on an ongoing basis. WinStar will pay
willaims S640 million on a fixed monthly basis of $7.6 million per
month, evenly over 7 years. We believe this works to expand WinStar's
backbone, allows it to begin offering wholesale products, and
maintains its first to market advantage to many buildings. We believe
Ehis could have significant banefits to WinShar's long term EBITDA
margins, increasing margins as much as 300-400 b.p.
OBTAINS ADDITIONAL ACCESS RIGHTS. WinStar announced it has signed an
agreement with Spieker Properties, a REIT, for 600 roof rights (in Los
Angeles, San Francisco and the Bay Area, Seattle and San Jose),
enabling WinStar to reach over 4,200 buildings today, above our 4,000
forecast. The company also announced plans to add another 4,000 roof
rights during 1999, doubling its current serviceable market.
We believe thi5, along with the company's announcement to keep its
salesforce at current levels emphasizes the company's dedication to
getting its traffic on-net and control its costs.
PROJECT MILLENNIUM UPDATE - INCREASES ON-NET PENETRATION.' HALTS
RESALE OFFERING. Project Millennium, WinStar's offer of free local
service until 2000 for new customers in its 1,000 on-net buildings
(within 13 of its 30 operational markets), allowed WinStar to
tremendously increase its on-net sales. In New York, WinStar's most
mature market, 93% of all new customer orders (not installs) were in
on-net buildings This is reinforced by the company's decision to
stop selling resale local services in all of its markets. We believe
the response rate to Project Millennium has been extremely positive as
indicated by November's results.
November On-Net Lines Sold
New York 93% Currently 18% of all installed lines
Boston 73% are fully on-net. 30 NET-ADDS
Chicago 65% showed improvement but were still
Dallas 65% only 28% on-net Project Millennium
Los Angeles 56% % increases are a solid improvement.
Source: WinStar
After less than three months of the Project Millennium offering, 40%
of Millennium buildings have one or more customer, the overall
penetration rate in Millennium buildings has reached 6%, and average
lines per customer is topping 21, well above the company's low teens
average.
WinStar announced that it would stop offering local ralc to new
customers, being the second carrier this week to do so (e.spire
announced that it was suspending its resale offering to new customers
on Monday) . We view this move positively as the focus migrates
toward profitable revenues, not just revenue growth for growth sake.
ROLLS OUT POINT-TO-MULTIPOINT SYSTEMS. WinStar announced that it has
rolled out commercial point-to-multipoint services in Washington, D.C.
and New York, which we believe should lower its network deployment
costs and increase the number of prospect buildings. Currently a
point-to-point hub can addrsss 50 buildings, usually due to limited
physical space on building rooftops. However, the number of buildings
within line-of-sight for PMP is usually much grcater. This aspect
enhances the value of rolling cut point-to-multipoint, which one hub
building can 'see' a much greater number of customer antennas. Over
the next few years, WinStar should have line-of-sight to over 10,000
customer buildings, almost equal to all buildings connected with fiber
today. WinStar management stated an optimistic goal of increasing its
line-of-sight to 50,000 buildings by the end of 2000 (with some
potential legislative victories that would allow the company access to
buildings that it is currently restricted from serving - near term
action is pending in 4 states).
VALUE SHOULD PAY OUT OVER TIME AS NEAR TERM EBITDA LOSSES WIDEN WITH
INCREASED BUILDOUT While we are not adjusting Our estimates today, we
do recognize that our fourth quarter EBITDA loss estimate should
increase to more than $70 million from our Current $47 million loss
estimate. Additionally, 1999 EBITDA loss might be larger than our
current $125 million estimate as lack of local revenues from on-net
Project Millennium customers during 1999, start up Expansion expenses
and the Williams long-haul network leases should be larger than new
revenues from Williams contribution for local network leases.
1999-2004
Williams Revs +$400-$450 mil. (cumulative)
Williams EBITDA Contrib. +$350-$400 mil (cumulative)
Capital Expenditures -$640 mil. (cumulative)
Network Expansion/PMP Rollout 4Q98e 1999-2000
& PMP Rollout EBITDA Losses $25-$35 -$325 to -$375 mil
While we believe the company has enough cash to cover its planned
capital expenditures (including the $2 billion vsndor financing), we
believe the company will need cash for working capital with the
potential increase in EBTTDA losses sometime around 2000-2001
DAN STANZIONE, COO OF LUCENT TECH., PROVIDED KEYNOTE LUNCH SPEECH -
REITERATED TIES BETWEEN LUCENT & WINSTAR
Throughout the conference and highlighted by Dan Stanzione, Lucent's
COO, in his keynote speech, was the integration between Lucent and
WinStar for turn-key solutions as WinStar enters new markets and in
augmenting its buildont in existing markets, Lucent will aid WinStar
in planning, design, buildout services, network integration,
operational and business support systems. Clearly Lucent's $2 billion
vendor financing package was a vote of confidence, and it we believe
it was an extra vote of confidence that Stanzione agreed to be the
keynote speaker for WinStar's Analyst Day. |
