Ali
could this article explain the sudden drop in price today ?
IN JUST SIX years, this heretofore largely unknown wireless telephone operator has become a major player on Wall Street as well as, lately, a favorite (though not easy) target of short-sellers. After orchestrating a reverse merger with a nearly defunct beauty products business, WinStar added a technologically savvy management team and set about piling on what now totals more than $1.7 billion in debts as well as another $1 billion in shareholder investment in the stock… all in hopes of building a profitable nationwide network of telephone services for small to medium business in the nation's major urban markets.
On Oct. 22 that bet potentially doubled yet again, with the announcement by WinStar Chairman and CEO, William J. Rouhana Jr., that the company had signed a $2 billion, five-year “vendor financing” agreement with Lucent Technologies Inc. — the Rolls Royce of telecommunications switch makers. The purpose of the deal: for Lucent to supply and finance equipment of various sorts to help WinStar construct its planned network.
On October 22, WinStar CEO William Rouhana was interviewed on CNBC about the deal with Lucent Technologies
If the bet pans out, WinStar will find itself in the enviable position of being one of only a handful of so-called “Competitive Local Exchange Carriers” (CLECS), able to turn a profit on deeply discounted rates against established rivals like Bell Atlantic in large urban markets across the country. Bulls on the stock say that within a decade the company could be bringing in revenues of $6.4 billion annually while earning close to $10 per share on a whopping 53 percent gross margin. Rouhana himself told me this week that he now expects his company to reach “break-even” on an earnings basis by the year 2000.
On the other hand, if the bet fails — or if the payoff is postponed to the point where Wall Street loses interest in supporting the company — it is hard not to see WinStar collapsing in a heap of financial rubble from which little if anything will be salvageable at all. And as we'll see shortly, the highway is littered already with the wrecks of earlier and similar business forays into one aspect or another of wireless telecommunications technology.
In Winstar's case, the business it hopes to build is designed to exploit the high cost of delivering fiber optic telecommunications services door-to-door to small-to-medium customers. Though fiber optic cable can carry vastly more data than copper wire, and has thus rapidly become the backbone of the nation's telecommunications infrastructure, it is hugely expensive to install. And that in turn means that although nearly all major urban markets now have fiber optic cable in place, only a small fraction of the office buildings in those cities have themselves been wired up with fiber optic cable to feed into and connect with the fiber cables running under city streets.
ROOFTOP RETROFITTING
A number of telecommunications giants, as well as cable companies like Time Warner and TCI (now merging with AT&T) are working to extend their own fiber optics networks to close this gap. Until recently, various wireless cable companies had been trying to carve niches for themselves in the cable TV end of the market by providing satellite rooftop delivery systems for urban apartment buildings not yet upgraded for fiber optic — which is needed for interactive cable TV. But the effort hasn't borne fruit and many of the companies have either been bought out, gone out of business or are struggling to stay afloat. One wireless cable operator, CellularVision USA, sold for close to $9 share a year ago. Today it sells for barely 50 cents.
WinStar Communications, Inc. (WCII)
price change
$25.88 -1.563
Full quote data:
price:
$25.88
change%:
-5.69%
volume:
1,066,900
day high:
$27.63
day low:
$25.81
Data: Microsoft Investor and S&P Comstock 20 min.delay
Rouhana hopes to succeed on the telecommunications end of the business where others have failed on the cable TV side by offering a quicker and cheaper way to complete this “last mile” and deliver broadband telecommunications services to customers ahead of the majors. Instead of digging up side streets, laying fiber cable in the ditches, then snaking the cable up through office buildings to reach customers, the WinStar folks plan to complete the loop by using rooftop antennas and wireless radio frequency signals.
The idea: put radio antennas on building rooftops all over town, using them as transmission points to relay phone calls back and forth from a WinStar head-end hub where the messages are routed in and out of the nation's actual telecommunications network. Says Rouhana, “It costs an average of $300,000 to retrofit a building for fiber optic cable, but we can do the job for $20,000. Our prices are thus 15 percent to 20 percent cheaper than the rates charged by the Bell operating companies, and we also provide better support and service for small to medium companies than they do.”
The whole “wireless fiber” arrangement is viewed as both workable and feasible because so-called broadband radio frequency signals can carry virtually as much traffic as fiber optic cable itself. This means WinStar will be able to sell phone services as well state-of-art Internet connection and data transmission services without any major increase in investment to deliver the package.
Moreover, instead of having to wire up the whole building, or even an entire neighborhood, with fiber optic cable just to reach a handful of potential customers, WinStar simply puts a reception antenna on the roof, a signal processing unit in the customer's office, and uses existing coaxial cable in the building — the sort of wire that comes out of the back of your cable TV box — to connect the antenna to the processing unit. Thereafter, regular phone lines carry the service throughout the office.
LINE-OF-SIGHT LIMITATIONS
There are, however, problems with the approach. For one thing, the sorts of signals that WinStar needs to transmit from its head-end to those rooftop antennas can only travel by line-of-sight. This means the signals can only reach antennas that can actually be visibly seen from the head-end itself.
As a result, if a building, a bridge, a hill or what-have-you obstructs the view, relay towers have to be set up to bounce the signals back and forth around the obstruction. In a place like New York — Winstar's major target market — this obviously can get very complicated… and costly too, since the company has to obtain easement rights from building owners to put towers of various sorts on their roofs.
It is also unclear just how reliable the service will actually turn out to be. Rouhana says Winstar's service has been tested and proven reliable 99.999 percent of the time. But no nationwide network is yet operational so, as a practical matter, no one really knows how the service will perform over time — a potentially big marketing negative for customers who, in spite of all the complexity surrounding long distance service in this country, still can count on virtually 100 percent reliability with local phone service. Will customers be willing to trade that for cheaper service that may turn out to be reliable only “most” of the time?
Nonetheless, in keeping with America's boundless — and usually well-placed — faith in technology, all such problems are viewed by the company's backers on Wall Street as surmountable. And that in turn helps explain why investors have poured more than $1.7 billion into WinStar junk bonds and preferred stock in the last three years alone.
But revenues to date have been meager at best ($205 million annualized from the rate of the January-June 1998 period), and losses have been running at a phenomenal — and steadily escalating — pace that currently amounts to $1.86 of red ink for every $1 of revenues collected. Even bulls on the stock, like the analyst team at BT Alex Brown & Co. don't see the company moving into the black on an earnings and cash flow basis until 2006 at the earliest — which is six full years beyond Rouhana's prediction. Alex Brown itself says the company faces at least $6.6 billion in more junk debt borrowings in the coming eight years.
Numbers like that have attracted short-sellers to the stock, which fell from a high of $48.12 in June to a market-slide low of $10.25 on Oct. 8., reflecting the apparent belief that investors simply wouldn't continue providing the sort of financing WinStar seems to need. With the company's debt rated at a near-bottom-of-the-barrel CCC and CCC+ by Standard & Poor, and the company having thus already had to sell two tranches of costly preferred stock to raise additional capital, it was beginning to look as if the company's days were numbered.
But the short-sellers got badly mauled on Oct. 22 when the market turned around and, not long afterward, WinStar announced its $2 billion financing deal with Lucent — a package that seemed to take the pressure off the company's balance sheet, at least for the time being. The news sent the shorts rushing to cover their positions, causing the stock price to spurt from $10 to its current price of close to $27 in less than a month.
In fact, the Lucent financing comes with plenty of strings attached — the most significant being that Lucent has reserved the right to finance no more than $500 worth of sales if it can't thereafter turn around and resell the resulting financing contracts to investors.
In the deal, WinStar has agreed to pay just a floating interest rate that currently works out to just over 8 percent on the purchases. But because of the way the asset-backed securities market works, Lucent will have to sell the contracts at enough of a discount to make them appealing to investors — especially since Lucent officials tell me they won't be guaranteeing the paper if WinStar defaults.
Lucent officials declined to say how much, if any, of a discount they'd be offering on the paper, insisting instead that they've had “plenty of interest” from financing companies and institutional investors already. But there's no doubt that the paper will be marked down somewhat or else no one will buy it.
And that in turn means that Lucent will have to mark up the initial price of its equipment to WinStar accordingly. In other words, WinStar is likely to wind up paying more — maybe much more — for its equipment than would a cash customer.
Given all that, an investment at $27 per share in WinStar seems speculative to say the least. Though the stock has been kicked aloft on short-covering, whether it stays there is doubtful. Every three months Winstar's management must confront the one thing no company wants to face: an earnings announcement that discloses yet more losses. And with each such announcement, all that investors in the stock can do is keep their fingers crossed and hope that other holders of Winstar's shares don't say, “Aw, nuts to this, I've had it with these losses…” and reach for the phone to call their broker. Next earnings release? Thursday, Nov. 5.
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