early reports:
[many might note as previously announced that Bill Vogel is no longer
with NBMO - Mike Renegar (formerly of ABM AMRO) will continue coverage
of WCII for NBMO.]
----
BT ALEX BROWN
WCII: 3Q Results In Line--Point To Potential Growth And
Profitability -Strong Buy--
BT Alex. Brown Incorporated (B. Fifer/J. Hines) WCII
Fifer, Bo 11/05/1998
Hines, Jeff L
BT Alex. Brown Incorporated
----------------------------------------------------------------------
WINSTAR COMMUNICATIONS INC. (WCII) "STRONG BUY"
3Q Results In Line--Point To Potential Growth And Profitability
----------------------------------------------------------------------
Date: 11/05/1998 EPS: 1997A 1998E 1999E
Price: 29.63 1Q (1.27) (2.59) (3.16)
52-Wk
Range: 48 - 10 2Q (1.78) (2.77) (3.29)
Annual
Dividend: 0.0 3Q (2.01) (2.83) A (3.33)
Ann
Div Yld: 0.00% 4Q (2.56) (3.12) (3.41)
Mkt Cap
(mm): 1,970 FY(Dec.) (7.66) (11.31) (13.19)
3-Yr Growth: FY P/EPS NM NM NM
CY EPS (7.66) (11.31) (13.19)
Est. Changed Yes CY P/EPS NM NM NM
----------------------------------------------------------------------
....
WinStar reported strong 3Q 1998 results last night (5-Nov) after the close
that
we believe set the table for significant growth and improved profitability
moving forward.
Since the end of 2Q (and actually mostly since the end of 3Q), WinStar has
made
three key announcements that are likely to be viewed in retrospect as
game-changing in nature:
1) Lucent Facility: WinStar inked a $2 billion credit facility with
Lucent Technologies in mid-October in an agreement that partners the two
companies in all aspects of network design, integration, and construction.
The
deal marks WinStar's membership in the relatively exclusive "fully-funded"
club
for wireless (or wireline) telecom carriers. The deal also grants WinStar
access to capital for the expansion of its 40-market plan to include broader
domestic, and international, coverage.
2) Project Millenium: WinStar announced a "secret reserve" of 1,000
buildings in 13 markets to which it would offer free local phone service
until
the year 2000 with a 3-year contract. The plan, while obviously designed to
drive penetration, is by definition on-net traffic and should therefore help
to
accelerate WinStar's on-net traffic as a percentage of total access lines.
This is a key driver of margins and profitability.
3) U.S. General Services Administration contracts. WinStar quietly, and
successfully, sued the government over the summer to force the awarding of
telecom contracts to multiple vendors wherever possible. To date, WinStar
is
the only CLEC authorized to bid against the RBOCs for government telecom
traffic. The first contracts, in New York, San Francisco, and Chicago,
could
be awarded as early as late 4Q. New York alone is estimated to be a $200
million annual opportunity, of which we would expect WinStar to win some
(unknown) percentage.
Operational Metrics Are Right On Target
For 3Q, WinStar met or exceeded most expectations:
Metric 3Q 98A 3Q 97E 2Q 98
Line Installations 60,000 40,000 50,000
Lines/Subscriber 21.4 21.0 21.7
On-Switch Traffic 37% 37% 35%
On-Net Traffic 18% 17% 15%
Total Revenue $61.1M $66.1M $57.3M
EBITDA $(48.3)M $(49.8)M $48.6)M
Gross Margin 25% 20% 19%
Source: Company data, BT Alex. Brown estimates.
While total revenue of $61 million came in slightly under our estimate of
$66
million, over half of the spread came from the information services segment
(a
non-core business) with the remainder attributed to slight seasonal
revenue/line fluctuations.
The New York market, WinStar announced, achieved positive EBITDA during the
quarter after just 18-21 months of operation. Over 50% of total lines are
on-net and 80% are on switch. New York is WinStar's most-developed market
and
likely a good indicator of how new markets can be expected to perform.
We again caution investors that WinStar is still in early phases of
operations
and most, if not all, of the relevant metrics are subject to potentially
significant variability on a quarter-by-quarter basis as WinStar launches
new
markets and further expands its networks.
Given that gross margins on on-net customers are estimated to be in the 60%
to
70% range versus perhaps 10% for resale customers, we believe the key
figure to watch is WinStar's percent traffic on-net . In 3Q, WinStar
reported
18% of total lines were on-net and 37% were on-switch. While we expect
the Project Millenium and general network expansion to drive an acceleration
of
this performance, investors must expect variability as WinStar opens new
markets. On balance, we would expect WinStar to be very successful in
driving
customers on-net through 1999 as the company makes it a top priority.
Multipoint Update
Could we be nearing full commercialization of point-to-multipoint
technology?
While we still view that as an early 1999 event, WinStar did announce it
would
open its first multipoint markets by year-end. With Teligent recently
expanding to 12 multipoint markets, it appears that the industry is moving
forward with the technology roughly along the lines of our original estimate
of
being fully commercial in 1H 99.
NET-NET
WinStar posted very solid 3Q 1998 results broadly in line with our
expectations. We are excited about the groundwork WinStar has laid for
driving
more customers on-net in future quarters, where we estimate gross margins
are
approximately 60%-70%. We believe WinStar is among the only fully funded
CLECs
and could capitalize on recent setbacks at WinStar's fiber-based
competitors.
=======================
Legg Mason maintains conservative accumulate rating, noting:
-increase of on-net to 18% over 2Q's 15%, beating LM estimate of 16%
-gross margins and EBITDA expanded 600 basis points from 2Q98. -
-notes company's "concerted effort" to migrate on switch and net
-absolute cost of services declined.
-revenues $3.5MM lighter than expected, $2.4 from CLEC
-lower revenue per line (company explained due to summer seasonality) |
