WCII: To Provide Private Network Backbone--Raising Price Objective to $94/Share
Deutsche Banc Alex. Brown - US Equities
Bo Fifer,Jeffrey L. Hines,Christopher H. Avery
January 10, 2000
HIGHLIGHTS:
-- WinStar announced (10-Jan) a major investment in, and network service
deal with, private company WAM!NET to provide nationwide local and
long haul facilities for WAM!NET's private network services.
-- We believe this deal highlights the extreme potential for WinStar (and
other wireless carriers) to provide high speed access to businesses.
We believe private network applications will become an increasingly
significant part WinStar's data revenue stream and expect similar
deals to be announced going forward.
-- We have increased our forward looking revenue projections beginning in
2002 based on greater bandwidth demand for WinStar's customers.
Therefore, we are raising our 12-month price objective to $94 from $81
(with plenty of upside potential) based on our DCF. Maintain STRONG
BUY rating.
-- We are also raising our confidence that WinStar will meet both our 4Q
1999 expectations (expected in early/mid-February) and our CY2000
revenue estimate of $700M (high-end of the Street).
DETAILS:
WinStar announced (10-Jan) a major investment in, and network service deal
with, private company WAM!NET to provide nationwide local and long haul
facilities for WAM!NET's private network services.
WAM!NET provides private networking services to the entertainment,
publishing, and media industries. In addition to the traditional file
sharing applications, this deal will allow WAM!NET to advance its business
plan to the next level--video conferencing, remote multi-media
presentations, and a whole host of other applications that until now
businesses have only hoped for.
Under terms of the deal, WinStar will invest $50M in WAM!NET in WinStar
common stock at $70/share (0.714M new shares) for a 10% stake in WAM!NET
with an option to invest another $50M at WinStar's discretion. We believe
WAM!NET's last funding round was completed at an implied valuation of
nearly $1 billion. Along with Office.com, WAM!NET now becomes a "hidden"
asset for WinStar that we expect could ultimately come public at a
significantly higher valuation. For now, we have not included upside
potential from either operation in our target price.
The WAM!NET shares will be restricted until WinStar's next equity
registration, which we currently believe will be at least 12 months from
now.
In return, WAM!NET has agreed to purchase $250 million of services from
WinStar over the next 20 years (which we believe will be front-end
weighted) to provide its own customers with high speed data services.
PRIVATE NETWORKS AS A "KILLER" APPLICATION FOR WIRELESS NETWORKS
We believe this deal highlights the extreme potential for WinStar (and
other wireless carriers) to provide high speed access to businesses. We
believe private network applications will become an increasingly
significant part of WinStar's data revenue stream and expect similar deals
to be announced going forward.
Because private networks are only useful if the network reaches all of the
customer's locations, we believe the breadth of WinStar's local access
coverage is perfectly suited for this particular service. In fact, we
believe only WinStar can currently provide the combination of on-net long
haul and extensive local broadband coverage that WAM!NET (and likely
others) are seeking.
INCREASING EXPECTATIONS
We have increased our forward looking revenue projections beginning in 2002
based on greater bandwidth demand for WinStar's customers. The services
contemplated under this agreement--which we believe is the future of fixed
wireless--require massive amounts of bandwidth, far greater than the 2 to 3
T-1 equivalents we are currently forecasting in our model. We have bumped
up our forward estimates for customer demand to reflect this new
"generation" of services, with we believe plenty of upside to our current
estimates.
We are also raising our confidence that WinStar will meet both our 4Q 1999
expectations (expected in early/mid-February) and our CY2000 revenue
estimate of $700M (high-end of the Street). Recall that most analysts
brought their 2000 estimates down to, or near, Company guidance of $650
million for CY 2000 revenue. While Company guidance remains $650M, we are
even more comfortable with our estimate of $700 million and continue to
expect a series of upgraded estimates from the Street moving forward.
METRIC 3Q99A 4Q99E 2000E
Revenue $120M $137M $702M
Gross Margin 30% 36% 44%
EBITDA -$73M -$64M -$142M
Access Line Additions 80,000 80,000 370,000
Source: Company data, Deutsche Banc Alex. Brown estimates.
NET-NET
Based on our higher revenue expectations, we are raising our 12-month price
objective to $94 from $81 (with plenty of upside potential) based on our
DCF. Maintain STRONG BUY rating.
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