NXTL: Outstanding 2Q Results: Raising Target Price To $62 - Pt 1
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research Americas
U.S./Wireless Telecommunications Services
Cynthia M. Motz, CFA
Robert J. Hordon
BUY
LARGE CAP
Nextel Communications (NXTL
Second quarter 1999 results exceed our expectations across
the board; raising target price from $41 to $62.
Summary
Nextel reported second quarter 1999 normalized earnings of $(1.27),
versus our estimate of $(1.44) and $(1.46) in second
quarter 1998.
Driven in part by accelerating penetration of the white
collar business user market, Nextel posted record levels of
440,000 net adds and ARPU of $74, 7% and 6% ahead of revised
upward estimates, respectively.
Most impressively, Nextel delivered consolidated cash flow of
$108.9 million, 82% ahead of expectations, despite strong
subscriber growth. Margins in the domestic operation were up
3,300 basis points.
Nextel is executing extremely well in almost all facets of
the business. We are raising our 12-month target price from $41
to $62 and our 1999 earnings estimate from $(5.18) to $(5.03).
Price Target Mkt.Value 52-Week
7/14/991 (12mo.) Div. Yield (MM) Price Range
$52.69 $62 NA NA $24,278 $52.69-15.38
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share2
12/99E $(5.03) $(5.18) NM NM 48.2X $1.64
12/98A $(5.80) NM NM NM $(0.79)
12/97A $(4.78) NM NM NM $(1.65)
March June Sept. Dec. FY End
1999E $(1.66)A $(1.27)A $(1.17) $(0.93) Dec.31
1998A $(1.53) $(1.45) $(1.39) $(1.43)
1997A $(0.93) $(1.08) $(1.26) $(1.48)
ROIC (12/99) (3.6)%
Total Debt (6/99)3 $8.3B
Book Value/Share (6/99) $0.30
WACC (12/99) 7.7%
Debt/Total Capital (6/99) 99%
Common Shares 302.6
EP Trend5 Positive
Est. 5-Yr. EPS Growth4 NA
Est. 5-Yr. Div. Growth NA
1On 7/14/99 DJIA closed at 11148.1 and S&P 500 at 1398.2.
2Refers to total consolidated EBITDA. 3L-term debt.
4Although earnings are negative until 2001, thereafter
company shows 59% CAGR through 2008.
3Economic profit trend. NM=not meaningful.
With licenses for over 270 million POPs throughout the United
States and approximately 225 million proportionate POPs in
emerging markets worldwide, Nextel is able to provide
customers with an integrated wireless service that allows for
digital cellular, paging and voice dispatch in a single handset.
Investment Summary
Nextel reported second quarter 1999 normalized earnings of $(1.27),
12% ahead of our estimate of $(1.44), and 13% better
than the $(1.46) reported in second quarter 1998. Nextel
posted an excellent quarter in virtually all areas. Domestic
digital net adds came in at 440,000, a historical record for
Nextel, which was 6.0% above our recently revised upward
estimate of 415,000. With substantial growth in usage-there
were approximately 4.3 billion total minutes of use (versus 2.2
billion in second quarter 1998) and 425 minutes of use per
user per month (versus 400 in second quarter 1998), Nextel
reported ARPU of $74, 6.1% ahead of our estimate of $69.75
and 7.2% ahead of second quarter 1998. The $74 is
significantly higher than anything seen in the entire
domestic cellular or PCS arena right now, and Nextel revised
its forecast upward for the year to include ARPUs of low $70s
throughout 1999. The ARPU improvements are largely explained
by Nextel's progress moving up-market to the white collar
business user segment, which has shown strong acceptance of
the compact, multi-featured i1000 handset. The composition
of minutes of use increased to 48% interconnect (cellular)
minutes, versus 46% in the first quarter 1999, and 52% direct
connect (dispatch) minutes, versus 54% in first quarter 1999.
The company estimates that 30-40% of new subscribers are
white collar business users, who generate higher monthly bills
than traditional blue and grey collar users.
However, the biggest positive surprise was cash flow. Nextel
posted $155.5 million in domestic EBITDA, 41.8% ahead of our
estimate. On a consolidated basis, Nextel posted its second
consecutive quarter of positive operating cash flow of $108.9
million, 82.3% ahead of our estimate. We think this
improvement is truly remarkable in light of the record growth.
To put this in perspective, Nextel's domestic operating
cash flow margin swung from (13)% in second quarter 1998 to 20%
in second quarter 1999-a 3,300 basis point improvement.
Based on the strong results posted this quarter, we are
raising our public 12-month target price from $41 to $62, and
we are increasing our private market valuation from $48 to $69.
Additionally, we are raising our earnings estimate for
1999 to $(5.03) to $(5.18). Although we expected Nextel to
have a strong quarter, the results were significantly higher
than we were looking for. We think this clearly points to
excellent execution (particularly in terms of cost control as
Nextel exceeded our net add and cash flow forecasts at the
same time) and increasingly strong acceptance of its unique
service offering. With the Nextel OnLine data offering
currently being tested and expected to be rolled out
nationwide in mid- or third quarter 2000, as well as the
i2000 world phone in the future, we are optimistic that
Nextel will be able to further entrench itself in the
business user market and continue to grow its industry
leading ARPU. We believe Nextel has now hit a "sweet spot"
where results should look very strong for a long while from
here, since achieving the very important milestone of positive
EBITDA in first quarter 1999. We reiterate our Buy on Nextel.
Conference Call Highlights
On the conference call following the earnings release, Nextel
attributed its momentum in terms of subscriber growth and
ARPU to strong acceptance of its differentiated service
offering, as evidenced by the pattern of increased minutes of
use subscribers are generating. Nextel believes its products
are becoming an increasingly important tool for it business
customers, many of whom leave the phone on all day and only
shut it off at night to recharge for the next day. Driven by
sales of the compact i1000 handset, Nextel continues to
penetrate the white collar business user segment.
Interconnect (cellular) minutes now represent 48% of total
minutes (the remaining 52% being Direct Connect or dispatch
minutes), versus 46% in the first quarter 1999. Nextel
estimates that 30-40% of new users are white collar business
customers. Nextel's corporate accounts group has sold phones
to 210 of the Fortune 500 companies. Nextel's increase in
ARPU is being largely driven by the shift toward interconnect
users, who generate higher monthly bills. Nextel also
believes it is having great success with the Nextel Business
Networks program launched in early 1998. Nextel Business
Networks connects communities of interest, such as builders
in a given market, through the dispatch feature. During the
quarter, Nextel surpassed one million customers who are
participating in the program, approximately 30% of its
subscriber base. Nextel is encouraged by the progress of
this program, since subscribers patched into the Business
Networks program demonstrate much lower churn rates. Total
Nextel churn for the quarter came in at 2.0%, one of the lowest
in the industry, and flat with last quarter.
Data Strategy
With the Internet-capable i1000+ handset having been
introduced during the second quarter, Nextel's plans to
deliver its Nextel OnLine wireless data service remain on
track. Nextel is now testing the service in six cities, and
expects to launch the service in these cities in the first
quarter of 2000. A nationwide launch is expected in mid year
to third quarter of 2000. Nextel views the data offering as
another differentiated service that enhances the utility of
its products for its target market of business users. Nextel
believes that the success of its one-way short messaging
service (Nextel users can currently receive but not send
short text message) is a very encouraging indication of
demand for the two-way messaging capability that will be part
of Nextel OnLine. In the second quarter 1999, the number of
short text messages sent to Nextel handsets was 5.7 million-a
68% increase over the 3.4 million sent in first quarter 1999.
We believe this bodes very well for the future of the data
product.
International
On the international front, Nextel stated that it has an
excellent management team in place that is now intensely
focusing on distribution and marketing. Nextel
International's priorities at this point are to expand
distribution and to invest in positioning the product to
educate the international markets about the advantages of its
fully integrated service offerings. Nextel International
reached 248,700 proportionate subscribers, a 20.4% sequential
increase. Nextel International's 42,200 net adds were short
of our estimate of 50,000 by 15.6%. Based on consolidated
international revenues of $21.9 million, an increase of 130.5%,
approximately 9.9% below our estimate, we believe
international ARPU was around $32 per month. The
international segment posted a $46.5 million operating cash
flow loss, which is 145% greater than the loss posted in
second quarter 1998 and slightly below our estimate of a loss
of $50 million; Nextel expects the international operating
cash flow losses to decrease throughout the year. International
capital expenditures totaled $43.6 million, a decrease of 10.4%
sequentially.
Management Changes
Nextel recently announced that Tim Donahue, President of
Nextel, will takeover as CEO, replacing Dan Akerson, who will
go on to join Craig McCaw as co-chairman of Eagle River
Investments LLC, McCaw's private investment firm. Although
Akerson will remain Nextel chairman through the end of 1999,
Craig McCaw is expected to take the helm as Chairman of
Nextel as of 2000. Mr. Akerson discussed this transition on
the conference call, noting that he has full confidence in
the management team that he and Mr. Donahue have put together
over the past three to four years. He added that he also
views himself more as a "fixer or a builder," than an
operator and believes that Donahue is the ideal candidate to
run the company at this stage of its development. Akerson
expects to continue be associated with Nextel for many years
into the foreseeable future. He noted that, in the past, the
threesome consisting of himself, Donahue and Craig McCaw,
have shifted roles in the company but have continued to work
closely together in guiding the company through the strategic
challenges and opportunities it has faced. He expects this
collaborative approach will continue with Donahue as CEO. We
believe that Akerson, Donahue, Schindler (CFO), McCaw and all
of the Nextel team have done a phenomenal job in turning the
company around and creating a nationwide wireless powerhouse
. We believe that their success will continue, and that
McCaw's greater involvement may mean further relationships/
workings with other McCaw related entities in the future. As
a tremendously successful wireless pioneer and visionary, we
believe Craig McCaw is likely to continue to add value to
whatever enterprise with which he associates himself.
Guidance
Nextel stated that it is very pleased with its performance
thus far into 1999, but cautiously issued fairly conservative
guidance for the rest of the year, noting that second quarter
is typically the strongest. In terms of net adds, Nextel
stated that it expects increases in the third and fourth
quarters similar to the increases experienced in the first
two quarters. Nextel commented that it may not be able to
sustain ARPU at the $74 level going forward but is
comfortable with forecasts of ARPU in the low $70s for the
balance of the year. Nextel stated that it expects to exceed
$650 million in domestic operating cash flow in 1999.
Although Nextel expects to have higher capital expenditures
in the second half of 1999 than the first half, it believes
it can still deliver a 10-15% improvement in cap ex per net
add (versus $1,050). To date the company has spent $863.6
million. Our expectation is currently $1.6 billion. However
, based on the stronger than anticipated growth, this number may
need to be raised in the future.
Earnings Summary
Nextel reported earnings per share on a normalized basis of $(1.27),
substantially better than our estimate of $(1.44) and
$(1.46) in second quarter 1998. On a reported basis,
including the company's $70.3 million gain on the sale of its
stake in NEXTBAND to NEXTLINK Communications, Nextel posted a
loss of $(1.04), which compares to a reported $(1.94) in
second quarter 1998. The better than expected earnings were
driven by consolidated operating cash flow of $108.9 million,
which was ahead of our estimate by 82.3%. Operating cash
flow margin on a consolidated basis was 13.7%.
Domestic
Nextel gained 440,000 net adds this quarter, which represents
an increase of 9.8% from second quarter 1998, and was above
our estimate of 415,000 by 6.0%. Nextel's domestic digital
subscriber base is now up to 3,592,900 subscribers, which is
up 75.9% from last year and up 13.9% sequentially. Churn
came in at about 2% per month for the quarter, in line with
our expectations. Nextel reported total domestic revenues of
$771.2 million, an increase of 87% over second quarter 1998
and 20% sequentially. ARPU for domestic digital subscribers
came in at $74, which was 7.2% higher than the $69.00 posted
in second quarter 1998 and 6.1% ahead of our estimate of $69.75.
Nextel reported 4.3 billion minutes of use on the network,
which represents an approximate 90% increase over the
second quarter 1998. The average Nextel subscriber used over 425
minutes per month, an approximate 6.3% sequential increase.
Domestic operating cash flow in the domestic operation was
$155.5 million, versus a loss of $53.3 million in second
quarter 1998. Despite the higher than anticipated growth,
the operating cash flow results were substantially ahead of
our estimate of $109.7 million by 82.8%. Domestic
capital expenditures totaled $396.4 million, a 5.7% sequential
increase.
Companies mentioned in this report: (Closing prices are as of
July 14, 1999)
|
