PW's Hodulik: TGNT: Lowering Rating to Attractive Based on Price
August 13, 1999
[has to be just a matter of time before PW and others raise or
reiterate buy ratings on WinStar, based on current price. The current
concern is the interest rate environment that DCF driven CLECs are
sensitive to]
KEY POINTS
* We are lowering our rating on Teligent shares to Attractive from Buy
based largely on the recent run-up in the company's shares. We continue
to believe in the company's business model and have confidence in
management's ability to execute. As a result, we are increasing our price
target to $70 per share based on modifications to our discounted cash flow
analysis.
* Yesterday, Teligent reported second quarter numbers that were
slightly below our estimates despite strong operating results and the
successful roll-out of service in two additional cities during the quarter
(See "Teligent: Q2 results mixed despite strong line growth", 8/12/99).
The company now operates in 29 major U.S. markets putting it well within
reach of hitting its goal of delivering service in the top 40 by year-end
1999.
* The company continues to make progress in securing building leases,
adding buildings to its networks and acquiring new customers in those
buildings, priming the company for a solid second half.
* On the call, management discussed initiatives to establish its own
Internet service provider (ISP). This development should improve the
company's ability to deliver high margin IP services, lowering costs while
better leveraging the company's fixed wireless capabilities.
* In sum, we remain bullish on Teligent and on the important role
fixed wireless will play in an evolving "Net-centric" marketplace.
However, given the current price we are taking a more conservative stance
on the stock.
THE NUMBERS
Teligent reported second quarter revenues that were slightly below our
estimates. Revenues came in at $4.0 million versus our expectations of
$4.5 million. Local service revenues accounted for 20% of revenues while
long distance made up 65% of the total, up from 60% in the first quarter.
The mix is the result of the longer sales cycle required to sell local
service and should swing back toward a more equitable mix as the company
better penetrates its existing customer base.
During the quarter the company installed just under 20,000 new access
lines, easily beating our estimate for 14,000. Roughly 30%, or
approximately 11,550 of the company's 37,526 lines provide local service.
We expect this percentage to grow, boosting revenue per line, as the
company's markets mature. Total lines in service remain above our
expectations and it appears clear that the company will exceed our
estimates for roughly 88,000 lines by year-end.
EBITDA losses were somewhat higher than expected, coming in at $89.7
million versus our expectations for a loss of $88.5 million.
Figure 1
Teligent
2Q99 EST. 1Q99 %chg
Net adds 20,000 14,000 7,579 163.9%
Revenue (mm) $4.0 $4.5 $1.5 166.7%
EBITDA (89.7) (88.5) (78.3) NM
Source: PaineWebber and company data.
PROGRESS ON THE FW FRONT
Despite the company's growing revenue base, Teligent remains in the
network deployment phase of its business model. During the last three
months, it deployed service in three additional cities bringing the
company's total to 29.
On-net buildings grew to 1,520, almost double the company's total in the
first quarter. Half of these buildings employ FW connections while the
other are brought on-net using leased facilities. Management continues to
expect 2/3 of on-net buildings to employ FW connections by the end of the
year.
Sales of the compandy's SmartWave, DSL-like service are ahead of plan and
should begin to contribute to revenues in the second half. The product
has been rolled out in 27 markets and is being offered in a total of 388
buildings. Roughly 30% of customers now take multiple services
Teligent made $35 million in capital expenditures for the second quarter
and now has approximately $360 million in cash and equivalents on its
books. The company continues to have access to roughly $600 million from
a revolving credit facility that has not been drawn down. Equipment
financing is also likely to be made available to the company. In June,
the company filed a $1 billion shelf registration to raise additional
capital to fund its build out plan. Given Teligent's strategic asset base
and first rate management team, we do not believe liquidity to be a major
risk factor for the company.
ISP STRATEGY
Teligent recently announced plans to build its own IP platform to allow it
to offer a full suite of Web-centric services to new and existing
customers. Management expects to incur approximately $15-20 million in
additional operating expenses in 1999 to roll these services out. These
costs include efforts to ramp the company's data sales force and other
technical expertise required to execute the strategy. As a result, our
estimate for EBITDA losses for 1999 grow to $370 million from original
estimates of $350 million. The required capital commitment is included in
our current estimates and should be minimal due to the company's ability
to leverage off its current asset base.
The positive impact of this investment should begin to be realized in late
-2000 in the form of reduced costs of services. Management expects to
save $75-100 million over the next five years as a result. Bringing these
capabilities in-house should also improve the company's ability to
provision these services and control quality.
VALUATION
Teligent now operates in 29 of the top markets in the U.S. and is well
within reach of its goal of providing service in the top 40 markets in the
country by year-end. We believe the progress the company has shown thus
far removes some of the business risk from the company's operations,
allowing us to modify our valuation parameters.
We have reduced our discount rate to 14% from 15% and maintain our 11.0x
2008E EBITDA terminal value and 20% public market discount. Based on
these changes, we are increasing our 12-month price target on Teligent
shares to $70 from a previous target of $64.
CONCLUSION
We continue to believe that fixed wireless will play a major role in
delivering broadband services to the business and residential markets as
we move to a "Net-centric" world. Larger carriers such as MCI WorldCom,
Sprint, and Qwest have come to a similar realization having made major
investments in spectrum assets in the past eight months. Teligent,
WinStar and NEXTLINK are well positioned to capitalize on the growing need
for broadband connectivity and the improvements in FW technology that will
make it the most economical solution for a large percentage of the
marketplace. However, due to the impressive run-up in the stock price, we
have decided to take a more cautious stance on the company's shares in
lowering our rating to Attractive.
RISKS
Risks include regulatory change, ability to execute, reliance on the
capital markets, financial leverage, increasing competition, the
probability of technological change, and illiquid shares.
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