November 9, 1999 - 6:18pm
Credit Suisse First Boston Corporation
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CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Wireless Telecommunications Services
BUY
LARGE CAP
Nextel Communications (NXTL)
CSFB hosts very bullish dinner meeting with Nextel management.
Summary
"We're blessed"-that's what Nextel President and CEO Tim Donahue had to say
about his company and its differentiated, three-in-one service offering, at a
dinner hosted by CSFB last night in New York.
Nextel offered an extremely bullish-and compelling-case for the future of
wireless in the United States. Nextel believes it is the leading provider of
wireless services to business users, a position that it intends to occupy for
many years into the future.
Nextel provided considerable detail about its data offering, potential for
international, and other opportunities, all of which should be positive
catalysts for the stock going forward.
We believe Nextel is exceptionally well-positioned to take advantage of the
positive future trends in wireless. We are raising our price target from $86
to $98.
Price Target Mkt.Value 52-Week
11/9/991 (12mo.) Div. Yield (MM) Price Range
$89.06 $98 NA NA $29,140.4 $92.38-19.94
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share2
12/00E $(3.00) NM NM 23X $4.28
12/99A $(5.00) NM NM 63X $1.62
12/98A $(5.97) NM NM NM $(.67)
March June Sept. Dec. FY End
1999E $(1.66)A $(1.27)A $(1.10)A $(0.97) Dec. 31
1998A $(1.53) $(1.45) $(1.56) $(1.43)
1997A $(0.93) $(1.08) $(1.26) $(1.48)
ROIC (12/99) (3.6)%
Total Debt (9/99)3 $8.8B
Book Value/Share (9/99) $0.17
WACC (12/99) 7.7%
Debt/Total Capital (9/99) 99%
Common Shares 327.2
EP Trend5 Positive
Est. 5-Yr. EPS Growth NA
Est. 5-Yr. Div. Growth NA
1On 11/9/99 DJIA closed at 10617.3 and S&P 500 at 1365.2. 2Refers to total
consolidated EBITDA. 3Net debt.
4Economic 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
We had the opportunity to host a dinner for Nextel management in New York
City last night, featuring president and CEO Tim Donahue, vice president and
treasurer John Brittain, and director of investor relations Paul Blalock. We
think it is clearly an exciting time for Nextel, which continues to be one of
the fastest growing carriers in the country, with the highest ARPU and
probably the lowest churn, and we felt management did an excellent job
conveying why the company has performed so well recently, and why we can
expect even better performance in the future. Speaking about his company's
success, Tim Donahue stated that "we're blessed" in having an integrated
service offering that is of great value to business users, but has not been,
and for the foreseeable future will not be, replicated by competitors. Below
, we have done our best to summarize the company's comments, which we think
contained some extremely interesting information and insights about big
picture competitive issues, wireless data, the international properties and the
company's expectations for the future.
We are taking this opportunity to revisit our model and raise the target
price on Nextel to $98 from $86. While Nextel has enjoyed a tremendous run
this year, based on our growth expectations for the company in terms of
subscribers, ARPU and cash flow, we believe further upside exists.
Additionally, we believe that as the company makes progress with the wireless
data offering, international properties and other areas, substantially more
upside exists over the long-term. We were thoroughly impressed with the
level of enthusiasm exhibited by Nextel's management team, and believe the
future looks brighter than ever for this dynamic company. We reiterate our Buy
rating on Nextel.
Nextel in the competitive landscape of the future
One of the most interesting topics discussed during the dinner was Nextel's
view of the future of wireless in the United States and how it conceives its
own place within the industry. In general, Nextel believes all wireless
carriers will benefit from increased penetration and usage for many years
into the future, as the United States, now at 25-30% penetration, catches up
to Europe and Asia, which are closer to 50%. Nextel thinks that over the
next 3-5 years, we will see the emergence of five dominant nationwide
wireless networks: Nextel, WorldCom/Sprint PCS, AT&T, AirTouch/Bell Atlantic/
GTE, and a rolled-up GSM company. Nextel believes it is, and will continue
to be, the leading wireless provider for business users. As evidence of this
dominance of the high end business user segment, Nextel has the highest ARPU
($74 in third quarter 1999) and probably the lowest churn (approximately 2%) of
any major wireless carrier.
The Nextel Competitive Advantage
Nextel thinks it will be able to defend this position based on several factors.
Above all, the three-in-one differentiated service offering, which allows
cellular telephony, dispatch, and short messaging in a single handset, offers
business users tremendous value, as it eliminates the need for redundant
wireless systems. Typically, Nextel finds that it can help its customers
reduce total wireless spending by 20-40% through its integrated products.
When asked about whether competitors will develop comparable service
offerings to compete in this space, the company pointed out several barriers
to entry that will prevent competition (in terms of an integrated cellular
and dispatch product) from emerging any time soon. First, Nextel believes
the required capital investment to install a dispatch functionality into a
cellular/PCS network would be "billions" of dollars. Second, developing and
deploying the technology to undertake such a project could take 2-5 years.
Third, in the time it may potentially take to develop such an offering,
Nextel will further build out its network, expand its data capabilities, and
more deeply connect itself to its customers through the data offering and
programs like Nextel Business Networks; a business customer with 1,000
handsets, for example, will then have little motivation to swap out all of
its phones to go with a new, untested system, even if rates may be a little
lower. The company noted that others' attempts to mimic Nextel's service
have fallen short of the mark, and that there is no service or technology out
there that comes close to its own in terms of the push-to-talk dispatch feature.
To solidify Nextel's competitive advantage in the business user segment, Tim
Donahue said he "would not be shy" about deploying capital to improve and
expand coverage. Although Nextel's churn is among the lowest, lack of
coverage is the number one reason customers do disconnect. With usage in
markets like New York growing at rates of 5-7% per week, Nextel believes it
is imperative to keep well ahead of the curve in terms of capacity.
Nextel warming up to bundling
To the extent Nextel decides it should have a bundled offering of
telecommunications services, the company believes it has several options
available in the future. In one scenario, Nextel could at some point be
acquired by a large telecom player. In another, Nextel could work with the
other "Next" companies owned by Craig McCaw (NextLink, NextBand, InterNext).
Tim Donahue mentioned that Nextel is already doing some initial work with
NextLink, of which Dan Akerson, former CEO of Nextel, is now CEO. Although
in the past, Nextel has not been a big fan of bundling, we believe they seem
to be warming up to the idea, which may indicate a greater willingness to
partner.
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Wireless Telecommunications Services
BUY
LARGE CAP
Nextel Communications (NXTL)
CSFB hosts very bullish dinner meeting with Nextel management.
Expectations for the rest of 1999 and 2000
While the conversation centered mostly around big picture strategic issues,
Tim Donahue took the opportunity to provide some guidance for fourth quarter
1999 and 2000. Based on initial results in October and November, he believes
the fourth quarter will be a strong one, with good year over year comparables
, although, being the big consumer quarter (as the company has stated earlier
), it is typically not Nextel's best. Nextel believes 2000 will be an even
stronger year, as the company makes further inroads with the white collar
segment. At one point Donahue conceded that a run rate of 500,000 net adds
per quarter was not unthinkable. Nextel hopes to add three times as many
subscribers from large corporate accounts in 2000 versus 1999. While top
line growth will remain a priority, Nextel will continue to "put stakes in
the ground" and not accept growth as an excuse for poor cash flow performance
. Nextel estimates that its current cash flow conversion ratio (the
percentage of incremental revenue that falls to the bottom line) is 59%, a
figure which Nextel believes can grow to 70% next year. Nextel also stated
that it is close to announcing a second supplier of handsets, which could have
product available within 12 months.
The data strategy
While 2000 should be a good year for all wireless players, Nextel believes it
will especially benefit from the introduction of data services. Nextel is
currently testing its data network and continues to expect a six city rollout
in first quarter 2000, with a full nationwide rollout expected in the second
quarter or early third quarter. Nextel expects three major benefits from its
Nextel Online wireless data offering, which will serve as (1) a
differentiating factor that will attract new customers; (2) a source of
additional revenues from existing subscribers; and (3) a way to reduce back
office costs. Nextel currently has some 100 developers (from other companies
) working on applications for the Nextel Online offering. Nextel ultimately
expects to generate fees from horizontal applications (services like weather,
news, stock quotes, and calendar reminders that can be used by all customers
), vertical applications (in which large customers like Federal Express co-
develop customized wireless data applications for their employees), and
transactional fees (based on e-commerce transactions conducted over Nextel
phones). Nextel believes it can eventually sell data services to more than 30
% of its existing subscribers, and that the take rate will be much higher
among new customers. As all Nextel handsets currently being sold have the
data capability, by the time Nextel Online is turned on in mid-2000, the
company expects 2 million handsets within the existing base will be data
capable. In terms of cost savings, Nextel believes it can substantially
reduce costs in a number of areas like customer service and order fulfillment
as customers communicate with Nextel over the Internet. Nextel believes as
much as 20% of its customer base will use the Internet to conduct business
with Nextel. As an illustration of what this means for Nextel, order
fulfillment today costs $25-$35 per phone; order fulfillment online is
estimated to cost only $10 per phone. The company added that the data
network required an investment of only $125 million, as it was an easy
enhancement to packet-based iDEN network. It was also noted that the
agreement with Microsoft is non-exclusive and that Nextel has the ability to
turn to other parties to augment its online capability. We believe that
Nextel will have an advantage in wireless data given the fact that its
network is packet-based as opposed to circuit-switched. This difference bodes
very well for the efficiency with which data can be handled in the future.
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