What's Next Move for Nextel?
Analysts say stock may founder until firm reveals plans for wireless network
IBD 31 Aug 2001
With final plans still not set, Nextel Communications Inc. is being tight-lipped about its new wireless network. For that, it's paying a price with some Wall Street analysts.
Nextel, the fifth-biggest U.S. provider of wireless phone services, has said it will shift its network to new technology . But the company hasn't provided details, and analysts are clamoring for more data. They want to know about costs, timing and how Nextel plans to fund the huge project, Most analysts say the price will be much higher than one Nextel executive's unofficial estimate of less than $3 billion. The questions are so big that until Nextel clears the air its stock may continue to founder, some analysts say. But Nextel executives say they'll unveil a fully funded plan before November .
"We've got the money," said Paul Blalock, Nextel's vice president of investor relations. "They (analysts) just want to know' exactly what we're going to spend it on. Until we tell them, there's going to be uncertainty." Nextel's directors haven't made firm decisions on the new network, Company executives, though, talked about new wireless technology during a conference call with analysts in July. That led Wall Street analysts to churn out reports speculating about Nextel's strategy and seeking details. Since mid-July, Nextel's shares have fall- en to about 12 from almost 18,
Creating Confusion
"The biggest factor affecting the stock is the uncertainty surrounding the timing, costs and funding associated with a potential overlay network," Cotette Fleming, an analyst at UBS Warburg LLC, wrote in a note to clients. "Nextel may have created some of the confusion by talking about (issues) on its second-quarter earnings conference call."
Nextel's current wireless network uses equipment from Motorola Inc. Reston, Va, based Nextel is the only wireless firm that uses Motorola's IDen, or integrated digital enhanced network. Nextel cobbled together a national network city by city in a unique way. It ac~quired licenses normally used for two-way dispatching services by taxi and truck fleets. To make use of this radio spectrum, Nextel needed specialized gear -iDEN from Motorola.
NeX:tel now needs a faster, higher-capacity network, partly because it has grown quickly. It serves 7.7 million U.S. subscribers. Its customer count has mote than doubled since mid-1999.
Nextel also plans to roll out faster wire-less data services. That will require more network capacity than iDen can provide. All signs point to Nextel's adopting wire-less technology called code-division multiple access. Sprint PCS and Verizon Communications Inc. already use CDMA net-works.
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" IDen will be with us for years to come."
-Paul Blalock, vice president, investor relations, Nextel
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Nextel has been testing an improved version of CDMA gear. Industry technical
groups dubbed it lxRTT. Nextel likely will build a lx CDMA network from scratch, bypassing earlier versions of CDMA technology, Blalock confirms.
"There's a misperception that there's some kind of upgrade path (from iDen)," Blalock said. "There's no such thing as upgrading. It's a new platform."
The iDen network, meanwhile, will operate separately. "iDen will be with us for years to come," Blalock said.
Almost half of Nextel's customers are small or midsize businesses. Many of them signed up with Nextel because of its Direct-Connect feature on phones. With Direct-Connect, subscribers pre-program phones to dial up many co-workers at once. All the people must have Nextel's service to take part in Direct-Connect calls, a feature available via only iDen.
At some point, Nextel expects, its business customers will own older iDen, phones
as well as the new CDMA models. Blalock says network software would handle connections between the two types of phones. It doesn't plan to sell phones
that operate in both iDen and CDMA modes. CDMA phones with Direct-Connection features haven't been produced yet. Nextel is talking with equipment makers on pricing and other issues. Blalock says most vendors are eager to win new business. That might help Nextel hammer out favorable terms. Though Nextel is the only carrier with
Direct-Connect and iDen, other carriers share the dilemma of just how to upgrade.
Bigger rivals Verizon, Cingular Wireless, A T &T Wireless and Sprint PCS also face costly upgrades to next-generation networks.
First Phase or Upgrades
AT&T Wireless and Cingular, a joint venture of SBC Communications Inc. and BellSouth Corp., plan to use the Global System for Mobile digital standard. Most carriers are just entering the first phase of network upgrades. "If you compare Nextel to Sprint and Verizon, (Nextel) has a lot more challenges and costs associated with its plans," said Jane Zweig of consulting firm Herschel Shosteck Associates. "But it's going to be very painful and very expensive for AT&T to upgrade." One issue involves cell sites equipped with radio antennas, which bring service to surrounding areas.
Nextel has about 15,000 cell sites. The company says CDMA antennas can be added to existing cell sites, thereby lowering costs. How many CDMA-ready cell sites Nextel needs for adequate geographic coverage is unclear.
Blalock estimates it will cost less than $3 billion to get a CDMA network up and running. Analysts' estimates range from $3 billion to $6 billion, with $4 billion often mentioned.
"The last thing you want to create with Wall Street is a funding gap in this kind of environment," Blalock said. "We have $6 billion available today, almost $5 billion in cash.
Cell phone pioneer Craig McCaw took control of Nextel in the mid-1990s. In the past, he's been able to raise money even when capital is scarce. His family bought another 10 million Nextel shares in July. Despite McCaw's business acumen, some analysts fret about Nextel's need for more radio spectrum. Nextel will invest in iDen upgrades even as it builds a CDMA network. Also, Nextel's money-losing operations overseas drain cash.
Nextel will' most likely start installing CDMA gear in early 2003, Blalock says. He says it may be delayed if the economy falls into a deep recession. |
