FWIW, here's the notes Stephanie came out with Friday.
'Bout the most positive she's ever sounded, isn't it.
MORGAN STANLEY DEAN WITTER
Equity Research
Briefing Note
This memorandum is based on information available to the public. No
representation is made that it is accurate or complete. This
memorandum is not an offer to
buy or sell or a solicitation of an offer to buy or sell the
securities mentioned. Please refer to the notes at the end of this
report.
## .SCOM, .US, I/TEL, ICIX, MCLD, ITCD, GSTX, ICGX, ELIX
WinStar(WCII): 2Q Highlights
Stephanie Comfort (303) 740-6695
Peter Kennedy (212) 761-8033
Stephen Flynn (212) 761-8294 Date: August 7, 1998
Industry: Telecommunications Services Type: Sales/Earnings Analysis
___________________________________________________________________
Rating: Neutral Price: $30.13
52-wk Range: $30 - $48 Price Target: N/A
___________________________________________________________________
FY Ends ----EPS---- ----CEPS---- Rel. P/E
Dec Curr Prior P/E Curr Prior P/CE (S&P 500) Pr/Bk
97A $(7.48) NM $(6.59) NM % x
98E $(11.81) $(11.47) NM $(9.98) $(9.58) NM % x
99E $(10.37) NM $(8.08) $ NM % x
___________________________________________________________________
Qtrly ---- 1Q ---- ---- 2Q ---- ---- 3Q ---- ---- 4Q ----
EPS Curr Prior Curr Prior Curr Prior Curr Prior
97A $(1.30) $(1.83) $(1.97) $(2.37)
98E $(2.54)A $(2.77)A$(2.70) $(3.07) $(2.92) $(3.37) $(3.22)
___________________________________________________________________
5 Yr. EPS Growth: NM Debt to Cap.: %
Dividend: NM Yield: NM Mkt Cap./1998E Rev: 7.2x
Shares Outst.: 61.3 MM Mkt Cap.: $1.9 B
5Yr Hist Rel P/E Rng NM 5 Yr. Est. ROE: %
___________________________________________________________________
KEY POINTS
WinStar reports 2Q operating results which were
essentially in line with our forecast.
- Revenues of $57.2 million compared with our estimate
of $59.3 million
- Lines installed (as pre-reported) rose to 50,000 - in
line with our estimate.
- EBITDA of $(48.6) million correlated with our $(48.5)
million estimate.
We continue to rate WinStar shares Neutral. We believe
the current valuation adequately reflects the opportunity
based on both our 10-year DCF and comparable CLEC
valuations.
DETAILS:
WinStar reported second quarter operating results. In
general, the highlights of the quarter included strong access
line installations, continued good revenue growth, gross
margin expansion and the narrowing of EBITDA losses.
We are maintaining our forecast for 1998. We look for
total revenues of $262 million with EBITDA of $(192)
million for the full year. We continue to expect lines in
service to reach 266,000 for the year, up from 170,000
currently.
WinStar's revenues grew 20.8% sequentially. CLEC
revenues (ex-data and long distance) grew 55% from the
first quarter to $22.3 million versus $14.3 million in 1Q98.
The strength in CLEC revenues we believe reflects several
factors including strong access line adds, an increase in
revenue per customer to $1,200 and average revenue per
line per month up to $50 (from $40) as well as an
expansion of the product set sold to customers.
WinStar preannounced access line gains of 50,000 in the
second quarter taking total lines up to 195,000 in service
and 75,000 lines ordered in the period. As we indicated in
our earlier note (WinStar: Apples and Oranges, July 16,
1998) approximately 25% of the net lines added were data
lines, 60% were local and 15% were long distance lines.
While we concur that first acquiring customers by
providing more readily available long distance services
thereby facilitating the penetration of local and other high
margin services into an established customer base - we are
not as comfortable with including long distance-only lines
in the CLEC line total.
The company appears to be executing on its goal of adding
high-end national accounts to its customer focus. The
company expects to grow its base of larger customers
offering a bundle of products using WinStar's recently
acquired IP, Frame Relay and ATM data services (GoodNet
and MidCom's PaNet).
WinStar exited the quarter with services provided in 26
markets (versus 21 at the end of March). The company's
CLEC operations reached over 9,000 customers compared
with 7,000 three months earlier. In addition, the company
expanded its roof rights by 500 to 3,000.
WinStar continues to expect point-to-multipoint radios in
service by the end of the year 1998. Point-to-multipoint
will enable the company to better use its spectrum and
provide customers with bandwidth-on-demand by
reallocating spectrum to different users when capacity is
needed.
We have tweaked slightly our 1998 revenue forecast to
$260 million from $264 million reflecting essentially
softening revenues at MidCom long distance. This is a
result of management's focused efforts to de-emphasize
residential long distance.
On the gross margin side, 2Q gross margins improved to
19.4% from 9.8% in the previous quarter better than our
estimate of 14%. The expansion of gross margins reflects
several key trends in WinStar's operations. These include
migration of customers on net the expansion of product
offerings through upselling the customer base and the
maturation of markets in service. The company did
emphasize however that as they bring additional new
markets on service, it could temporarily reduce gross
margins.
The company provided a sketch of the New York market
which is now up and running for 18 months. New York
City revenue reached $4 million in the quarter. As well,
the on-net focus in this market has yielded gross margins of
37%. The company expects EBITDA breakeven by 3Q98.
Currently, the New York market is posting EBITDA of
approximately $(400,000).
Our forecast calls for gross margins to expand to the mid-20%
range by 4Q 1998 and above 30% in 1999. The
company's SG&A expense increased to $59.6 million in
the quarter up from $53.6 million in the first quarter. The
company continues to make inroads in reducing SG&A as a
percent of revenue which in previous quarters has been as
high as 200% and in the second quarter declined to 104%.
We look for SG&A in absolute dollars to continue to
increase over the next several quarters as the company
continues to expand its salesforce to address its accelerated
network deployment.
WinStar's EBITDA loss decreased to $(48.6) million from
$(48.9) million in the first quarter. This was in line with
our 2Q forecast. We continue to look for $(192) million in
EBITDA in 1998. This reflects a slow decrease in
EBITDA losses in the second half of the year.
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