Subject: Change of Earnings Forecast
Industry: European Telecommunications
BEAR, STEARNS & CO. INC.
EQUITY RESEARCH
James H. Henry
Glenn A. Waldorf
Global TeleSystems Group, Inc.* (GTSG $26 11/16) - Buy
Revising GTS Revenue Estimates Downward
______________________________________________________________________________
Key Points
*** We Are Revising Our 2H99 Revenue Estimates Based On A Conversation With
GTS.
*** Results Are Impacted By Price Competition, Visibility Impacted By Multiple
Acquisitions.
*** We Cautiously Maintain Our BUY Rating - GTS's Asset Value Far Exceeds
Today's Price, in our opinion.
INVESTMENT VIEWPOINT
We are lowering our estimates for Global TeleSystems Group, Inc. following a
conversation with the company's management on Friday after the market closed.
Based on our conversation with the company, we believe that GTS will fall
short of our 3Q99 and full-year 1999 revenue estimates as a result of two
principal factors. First, price competition from the incumbent PTTs in France
and Germany has impacted national and international long distance pricing more
than GTS had anticipated. While Deutsche Telekom has publicly stated that it
is done cutting prices for the year, the impact of its 1H99 price cuts is
carrying through into 2H99. In addition, France Telecom has picked up where
Deutsche Telekom left off - as evidenced by its recent price cutting
initiative. Second, GTS does not yet have in place the internal systems
necessary to provide very clear visibility into the results of the various
entities that it has acquired. While the company has nearly 20-20 vision as
it relates to its GTS Carrier Services division, it still has a ways to go
with the integration of Esprit, InTouch, NetSource, and OmniCom. This issue
clearly presents a problem for the company as it attempts to provide guidance
to the Street. So what does this hiccup mean for the company? We think that
there are a few important implications that arise from this situation. First,
this is the second quarter in a row in which GTS has missed our numbers.
Needless to say, this fact coupled with a lack of clear forward visibility
raises a red flag. Second, the company's acquisition strategy and integration
capabilities will likely be very closely scrutinized going forward. Third,
GTS's CLEC strategy appears more important today than it ever has appeared.
The company must demonstrate clear progress in deploying the local networks
that will enhance its competitive position and reduce its vulnerability to
long distance price competition. While these circumstances would typically
dictate a downgrade, GTS already fell 9.2% on Friday in anticipation of bad
news and is down 41.7% from its 52-week high. We believe the company's asset
value and time to market are worth significantly more than is currently
reflected in the company's market value. We maintain our BUY rating.
REVISED ESTIMATES
As a result of these factors we are lowering our 3Q99 revenue estimate by 4.3%
to $220.0 million from our previous estimate of $230.0 million. We are
lowering our full-year 1999 revenue estimate by 2.9% to $850.0 million from
our previous estimate of $875.0 million. The fact that the full-year revision
is less than the 3Q99 revision is predicated on management's guidance that
4Q99 should be a very strong period for the company. In addition, we are
lowering our 2000 revenue estimate by 6.9% to $1.4 billion from our previous
estimate of $1.5 billion in order to maintain an enhanced level of
conservatism. While we are relatively comfortable with our revised revenue
estimates, we plan to wait until we get better guidance from GTS before
opining on the company's EBITDA estimates.
THE GTS INVESTMENT CASE
In spite of the cloud of uncertainty that will now loom over GTS, we believe
that the company offers a unique and highly compelling opportunity for
investors looking to capitalize on the historic opportunity created by the
deregulation of the European telecom market. The company has a first-to-
market advantage among the European new entrants and has aggressively
leveraged that position to accelerate the deployment of its network
infrastructure, the expansion of its product portfolio, and the growth of its
customer base. By year-end 2000, GTS will have an extensive end-to-end fiber
network connecting the top 50 cities in Europe and enabling it to address a
$175+ billion market opportunity. We believe that there are few--if any--
companies as well positioned as GTS to take significant market share away from
the incumbent PTTs in Europe and to capitalize on the burgeoning demand for
broadband data, Internet, and international services. As such, we believe
that the time is right for investors to take a close look at this company.
GTS's combination of scarce and strategic network assets, a broad product
portfolio, powerful distribution channels, and a strong balance sheet is a
compelling recipe for value creation. GTS should appeal to a broad base of
investors as one of only a handful of high-growth, large-cap telecom
SuperCarriers with solid competitive prospects, attractive liquidity profiles,
and compelling valuations. We would advise investors to watch this name
closely and opportunistically build positions. |
