DBAB: WCII: 2Q 1999 RESULTS SET TABLE FOR STRONG SECOND HALF
--STRONG BUY
Deutsche Banc Alex. Brown - US Equities
Bo Fifer,Jeffrey L. Hines
August 11, 1999
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WINSTAR COMMUNICATIONS INC. [WCII] "STRONG BUY"
2Q99 Results Set Table for Strong Second Half
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Date: 08/10/1999 EPS 1998A 1999E 2000E
Price: 46.0 1Q (2.51) (3.72) (3.17)
52-Wk Range: 64 - 10 2Q (2.77) (3.53)A (3.06)
Ann Dividend: 0.0 3Q (2.83) (3.41) (2.76)
Ann Div Yld: 0.00% 4Q (3.80) (3.18) (2.49)
Mkt Cap (mm): 3,786 FY(Dec.) (11.89) (13.84) (11.48)
3-Yr Growth: FY P/EPS NM NM NM
CY EPS (11.89) (13.84) (11.48)
Est. Changed Yes CY P/EPS NM NM NM
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Industry: COMMUNICATIONS
Shares Outstanding(Mil.): 82.3
Return On Equity (1998) : 0.0%
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HIGHLIGHTS:
--After previewing solid roof right and access line growth, WinStar
reported generally strong financial results last night (10-August),
including what should be the high-water mark for EBITDA losses (i.e., it
should only get better from here).
--We believe the key metric is gross margin, which WinStar reported at 24%
versus our expectation of 25%. However, given the amount of network
build completed in 2Q 99, we are maintaining our target of 38% - 40% by
YE 1999.
--With the continued uptake of data services, the average monthly revenue
per WinStar customer came in at $1,366, compared with our estimate of
$1,224, based on core revenue of $76.9M. As data services increasingly
take hold, we believe this number will ultimately trend higher.
--We estimate WinStar is sitting on a $940M funding SURPLUS--enough to
build out U.global network, reach free cash flow, and say "so long
capital markets."
--NET-NET: Recent moves by a fractionalized group of local phone carriers
to improve the RBOCs' ability to compete in the local phone market,
along with general market malaise, have resulted in (severe) declines in
WCII shares. We believe these declines have left investors with an
excellent opportunity to buy into the strong fundamental performance
demonstrated by WinStar in 2Q 1999, and the outlook for a favorable 2H
1999 progression. Maintain STRONG BUY rating with a 12-month price
objective of $69/share, based on our DCF.
DETAILS:
After previewing solid roof right (8-July) and access line growth (3-
August), WinStar reported generally strong financial results last night (10-
August), including what should be the high-water mark for EBITDA losses
(i.e., it should only get better from here).
2Q HEADLINE RESULTS
Metric 2Q99E 2Q99A 2Q98A
Telecom Revenue $74.7M $83.9M $30.0M
Total Revenue $95.4M $96.5M $56.2M
EBITDA -$83.7M -$83.1M -$48.1M
Subscribers 23,215 20,000 9,000
Gross Margin (%) 25% 24% 18%
Access Lines* 454,000 453,000 195,000
Roof Rights** 5,500 5,500 2,950
* Pre-released 3-August and 8-July
Source: Company data, Deutsche Banc Alex. Brown Incorporated estimates.
Access lines, reported earlier this month, demonstrated continued
improvements in on-net focus, and now number over 0.453M. Approximately
44% of new lines installed in 2Q 1999 were on-net, bringing the installed
base to 27% total.
Metric 2Q99A 1Q99A
Access lines (Mil.) 0.453 0.384
% On-Net 27% 24%
% On-Switch 47% 45%
% Resale 26% 31%
Net Lines Add's (Mil.) 0.069 0.065
% On-Net 44% 44%
Source: Company data, Deutsche Banc Alex. Brown Incorporated estimates.
TABLE IS SET FOR RAPID GROWTH AND MARGIN EXPANSION IN 2H 1999
We believe the key metric at this stage of WinStar's development remains
the gross margin, which WinStar reported at 24% versus our expectation of
25%. However, given the amount of network build completed in 2Q 99, and the
continued success at driving on-net traffic and data services, management
has maintained its goal of 35% - 40% by YE 1999. We are modeling a 38%
gross margin by 4Q, which implies 55% to 65% of line growth is on net for
the remainder of the year.
FINANCIAL CONCERNS PRACTICALLY NON-EXISTENT
Given the current state of the capital markets, investors may
(appropriately) be more heavily discounting under-funded stories. WE
BELIEVE WINSTAR HAS SUFFICIENT CAPITAL TO BUILD OUT ITS 60 MARKET DOMESTIC
NETWORK, AND ITS 50 MARKET INTERNATIONAL DATA NETWORK, AND TO SEE THE
BUSINESSES THROUGH TO FREE CASH FLOW. In other words, goodbye capital
markets (excepting, of course, any acquisitions or changes to the business
plan as it stands today).
Capital Requirements Through 2001 (2 1/2 years from now)
EBITDA Loss/(Gain) ($ 78M)
less Cash Interest $ 365M
less Capex $1,069M
Total Funding Requirement $1,356M
Cash On Hand (6/30/99) $ 611M
Receivables Financing $ 35M
Lucent Facility Available $1,650M
Total Funding Available $2,296M
Total Funding Surplus $ 940M
Source: Company data, Deutsche Banc Alex. Brown Incorporated estimates.
Bottom line: it isn't even close. WinStar has as strong a financial
position as any CLEC, and with arguably the largest opportunity (at least
for now). Yet the market seems to be discounting WinStar at a heavier rate
than other comparable names, which defies logic at least as we know it.
According to WinStar, it has an opportunity to target roughly 1,000
buildings per market over 10 years (just domestically), or approximately
60,000 buildings. At just 15% penetration of the, say, 30 customers per
building (WinStar's average), the company would acquire 270,000 customers.
At today's $1,400 per customer, WinStar would realize annual revenue of
$4.5 BILLION. If data services take the average revenue per customer to
"just" $2000, the annualized revenue stream would be more like $6.5
BILLION. This is why we believe data services are the key driver of value
in the wireless CLEC model.
While we have not made any wholesale changes to our model (yet), we are
becoming increasingly uncomfortable with the level of conservatism built
into our model, and expect to break out international and data services
soon.
NET-NET
Recent moves by a fractionalized group of local phone carriers to improve
the RBOCs' ability to compete in the local phone market, along with general
market malaise, have resulted in (severe) declines in WCII shares. We
believe these declines have left investors with an excellent opportunity to
buy into the strong fundamental performance demonstrated by WinStar in 2Q
1999, and the outlook for a favorable 2H 1999 progression. Maintain STRONG
BUY rating with a 12-month price objective of $69/share, based on our DCF. |
