continued
The spectrum situation
Although Nextel continues to be under a gag order with the NextWave spectrum,
the company acknowledged it has several options with regard to financing just
raised. We believe the company would consider options like domestic and
international acquisitions or potentially looking at other revenue
opportunities with NextLink. The NextWave situation is a very difficult one
right now and, although we may have better visibility in 60-90 days times, we
believe that the government and the courts are going to be fighting this out
for a while. While we still believe there is a decent likelihood that Nextel
could gain access to the spectrum at some point, we think there will be
challenges from other players (although many of the larger players are tied
up with their own issues in front of the FCC or pending). We believe that
Nextel is aware of the challenges of this situation and that they are
considering a variety of opportunities. However, Nextel once again
emphasized that its current spectrum position is adequate to meet and exceed
its business plan. Nextel is always interested in acquiring new spectrum,
because it makes radio frequency engineering easier and is often a more cost
effective way to add capacity. If Nextel did manage to gain access to the
NextWave spectrum, we believe it could be a very positive event for the
company, one that would enable the company to dramatically alter and expand
the business plan. We believe the opportunity for Nextel in data or possibly
even the consumer market (although this is not their main focus-they do not
want to be "me too" but differentiated) would be much more significant than
we have contemplated if they did attain a sizable new block of spectrum. If
Nextel were to secure all or part of this spectrum, it would have the option
of using some of it to move current customers upband to the 1.9 GHz range, or
reserve it for 2½ and 3rd generation applications.
International is turning around
Although Nextel was initially disappointed with its international efforts, it
has made certain management changes and repositioned its products to convey
the uniqueness of the Nextel service offering. Nextel International now
expects a good fourth quarter and a strong 2000, during which Nextel believes
the market will begin to attribute value to these properties. Additionally,
the i2000 handset will support seamless roaming in some 130 countries.
Nextel intends to offer the "best international roaming in the business" and
stated that it has received inquiries from international carriers who wish to
offer multi-mode Nextel handsets to customers who frequently travel to the U.S.
Rationale for target price increase
We are raising our twelve month target on Nextel from $86 to $98. We have
been on restriction with the company, and based on our current view, we have
decided to revise upward our ARPU estimates in the long-term model which is
driving longer-term accelerated cashflow growth. Our earnings estimates are
not changed at this time. When we consider the consistently strong
performance of Nextel to date, listen to the enthusiasm of the management
team for future prospects, and note the reasons why things like ARPU have
been consistently rising, we decided it was time to take another look at some
of the assumptions in our long-term model. We admit that we have been
somewhat reluctant to increase the longer term ARPU drivers in our model in
the past, simply because while trends are positive now, trends can shift
depending upon other industry forces like competitive movements, customer
demand, and new services.
However, as noted earlier, Nextel has several unique advantages which we do
not believe are going to fall away any time soon, and while we could keep
simply assuming ARPUs are going to come crashing down because of some
arbitrary belief that in fact, "ARPUs must fall simply because they shouldn't
remain in the $60s or $70s," that just does not seem very logical given that
the overall trends in wireless (not just for Nextel, but for companies like
VoiceStream and AT&T, etc.) show very strong minutes of use coming over from
the wireline networks, which is fueling rising ARPUs.
So What Do We See Here?
We see the following trends: 1. Minutes of use continue to rise. At 430
minutes per month per customer, Nextel has one of the largest average usage
rates of all wireless carriers, topped only by Voicestream this quarter with
510 minutes. With most digital operators seeing minutes in the range of 300-
400 minutes per month, we do not think this number of minutes is unusual, and
we would note that it has continued to grow over time. As Nextel continues
to grow its network, why shouldn't customers continue to log on more minutes
simply because they can talk in more areas? Our fundamental thesis about why
wireless is so great continues to be, why won't people use more wireless
minutes if the price per minute gets cheaper, the handsets get easier to use,
and the coverage gets better? However, we really did not alter our minutes
of use forecasts significantly from where we already were before; we have
minutes of use growing at about 5% per year which may be very low, since
Donahue indicated that in certain places like New York City, minutes of use
have been growing at 5-7% sometimes in one week.
2. For Nextel, there is an advantage in having a distinct revenue stream with
the dispatch service that no one else has. Hence, when we consider that
Nextel has the highest ARPUs in the industry at $74 per customer per month (
and then maybe, conclude that because they are the highest now, they have to
come down), we are not really taking into account that Nextel is not just
cellular interconnect (like AT&T at $66 or a VoiceStream at almost $66), but
is probably somewhere on the order of $55-$58 for interconnect, with the
remainder being attributable to dispatch services. Hence, Nextel may still
have room to move up on the interconnect side if minutes of use are increased
there-with those minutes being much more lucrative to Nextel as well.
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.
3. As Nextel moves up market, it should continue to see a larger proportion
of cellular interconnect, which should continue to help ARPUs increase.
Although similar to other carriers, Nextel is seeing the benefit of
additional minutes of use, they are also seeing more and more interconnect
minutes on their network as a result of having a handset that is very
attractive to white collar business customers (it has only been about a year
since they have had these comparably small handsets, so business users are
still just discovering Nextel), having enough coverage to service the higher-
end business customer, and coming up with more and more business applications
that make use of the dispatch function to promote the concept of the Nextel
service as a productivity tool. We see a huge amount of upside here for
Nextel because although they have done quite well in terms of initial
penetration of this segment, they have really only just begun to scratch the
surface. We would only expect that as Nextel begins to reach more and more
businesses that they will begin to add more and more customers (and minutes)
in this segment, which should really help maintain or even increase ARPUs
over time. Hence, with Nextel now up to 50% interconnect and 50% dispatch
minutes, we thought our assumptions of around 40% interconnect and 60%
dispatch for the near future was way out of date, and in updating it for the
reality of the current situation, ARPUs look much more stable (as opposed to
our originally assuming a 7% decline between 2000 and 2001 (we had ARPUs falling
from about $72 to $66.85 in one year, which is unrealistic).
4. Although we still do not feel comfortable (nor does the company or any
wireless company for that matter-they all seem to balk at the specific
quantification of wireless data to ARPU or cashflow except in very broad terms
) projecting substantial upside in our numbers for wireless data in the future
, we know that upside exists. Although we did put in some small contribution
for wireless data in our ARPUs, it is really negligible beginning at around $0
.25 in 2000 per customer to $2.25 per customer by the end of 2008 (
representing only .2%-1.4% of total revenue even nine years out). We still
think there is considerable upside in our numbers here, particularly since
Nextel has a packet-switched network and based on other companies' estimates
for the future. Companies like Sprint PCS have identified numbers such as
the following: $1-$2 billion in wireless data revenues; then said $2-$3 per
subscriber in two to three years, and Bell Atlantic Mobile said 8-10% of
revenues in five years, moving up to as much as 20% in ten years; Sonera sees
7% of their total revenues from wireless data now, moving to 20% in the future
. We just do not think it is prudent to build this into the numbers right
now until we can see more evidence of the promise of wireless data in the
future.
Hence, as a result of considering the aforementioned, we believe that our
assumptions with Nextel's ARPUs have been far too conservative. There is no
real reason (given current trends and expected future ones) that Nextel's
ARPUs should fall off from around $74 to $66 or so, as we had previously
assumed in our most recent model. Hence, our model now contemplates a more
steady level of ARPU beginning at around $72 (our estimated average for 1999
) to $68 by the end of 2008. We would say that this may likely turn out to
be conservative if Nextel continues to turn in the minutes higher than
expected, possibly raises prices, or sees good performance from wireless data
. ARPU is probably one of the most sensitive drivers in any wireless model,
and is the main reason our target price is rising from $86 to $98.
As a result of the strong minutes of use, and subscriber growth, we also
bumped up our capital expenditure estimates throughout the entire forecast.
We also bumped up the number of shares, and use a fully-diluted share count
to compute valuation in our model. Based on the recent issuance of 30
million new shares, we now use a fully-diluted figure of 394 million. We
would point out that the model may be somewhat lopsided now in that we have
the share count in the valuation, but we really do not know what the upside
is going to be here-because we do not know what Nextel is going to do with
recent funds it has raised. When this becomes clear (i.e., if they obtain
the NextWave spectrum and decide to truly ramp-up data or make an acquisition
and have a new revenue stream from that), we will build it into our model.
Although our discount rate remains the same, based on the stronger ARPUs, we
believe cashflows will accelerate in the model, and we have bumped up the
terminal model by a half of one multiple to 12.0X versus 11.5. Given
Nextel's continued progress with operating cashflow growth, we do not believe
this is aggressive at all.
Companies mentioned in this report: (Closing prices are as of November 8, 1999)
AT&T (T, $45.81, Not Rated)
Bell Atlantic (BEL, $62.81, Not Rated)
GTE (GTE, $73.38, Not Rated)
MCI WorldCom (WCOM, $85.19, Not Rated)
NextLink (NXLK, $57.69, Buy)*
Sprint PCS (PCS, $76.50, Buy)
Vodafone AirTouch (VOD, $52.38, Buy)*
VoiceStream (VSTR, $93.81, Buy)
* Followed by a different CSFB analyst.
N.B.: CREDIT SUISSE FIRST BOSTON CORPORATION may have, within the last three
years, served as a manager or co-manager of a public offering of securities for
or makes a primary market in issues of any or all of the companies mentioned.
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Copyright 1999 CREDIT SUISSE FIRST BOSTON CORPORATION, All rights reserved.This
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