NBMO:
Continued Progress on CLEC Expansion Plans; Reiterate BUY
- WinStar reported third quarter total revenue of $61.1mm, which was a 6.8% sequential
improvement from the previous quarter, but was below our estimate of $65.0mm. In its core
telecommunications business revenues were $37.2mm, which was a 24% sequential
improvement from second quarter's total of $30.0mm.
- The gross margin for the third quarter was $15.4mm, or 25%, compared to 19% for the previous
quarter. We expect this to gradually increase over the next few quarters as WinStar builds out
their network and drives more customers on-net.
- Third quarter EBITDA loss of $48.3mm showed a slight improvement compared to a loss of
$48.6mm in the second quarter. This was in line with our expectations.
- The ‘Project Millenium' marketing campaign presents an excellent opportunity for WCII to
capitalize on the recent progress it has made connecting new buildings to its fixed wireless
broadband network and initial sales results are very favorable.
- With the $2 billion Lucent strategic partnership announced last week, WinStar is now in a
position to aggressively increase penetration in its connected buildings and add customer lines
to its network. We expect management to elaborate on the details of the accelerated rollout
plan over the next month.
- We reiterate our BUY recommendation and $45 price target on the shares of WinStar.
3rd Quarter Results
Total revenues were $61mm and up 6.8% sequentially although slightly short of our expectations of
$65mm. The shortfall related to paring certain non-strategic long distance revenue and seasonality. We
expect continued decline over the next year in certain Midcom long distance as well as wholesale
segment. We expect the fourth quarter to rebound and show significant growth over the third quarter.
EBITDA was a loss of $48.3mm and showed slight improvement from the previous quarter and in
line with expectations. The New York market is operating with positive EBITDA now, after just 20
months. We expect this line item to improve marginally over the next few quarters as Winstar
continues to buildout their network.
Access line adds this quarter were announced previously at 60,000 lines and now total 257,000.
Overall, more than 37% of the company's lines are on-switch and 18% are now on-net. Our expectations
over the next year are for Winstar to increase the rate of additions by approximately 10,000 lines per
quarter and increase the number of higher margin connections.
Initial results on Winstar's recently launched sales campaign are very encouraging. The ‘Project
Millenium' marketing campaign allows customers to sign up for free local service up to $1,000 per
month, until the year 2000 if they sign up for a three year contract with WinStar between 10/31/98 and
1/31/99. In addition, these first time customers will receive a flat long distance of .09 cents per minute,
24 hours a day, with no conditions. For business customers, this becomes an appealing alternative to
local exchange companies.
These new customers will contribute to positive EBITDA immediately due to the high margin, on-net
nature of these customers. In addition, the customer pays the installation fees and must be locked
up for quite some time. We believe the awareness created by this campaign will create significant
mindshare and facilitate future sales.
Also mentioned on the call, Winstar has bid on GSA government contracts with Bell Atlantic in New
York. Winstar expects to win at least a portion of the business and these contracts could total $100-
$200+ million per year. This is potential upside that is not built into our current model.
Conclusion
Winstar remains on track to have 30 networks up and running by the end of the year, including
next-generation multipoint technology in certain markets. We believe Winstar is uniquely positioned to
take advantage of the accelerating growth of broadband connections and a desire for choice in
telecommunications service providers.
We expect management to give more guidance over the next month regarding future expansion
plans. This will most likely include reaching more than the current 40 market plan as well as
international expansion. The desire to control EBITDA losses will be balanced against the current
growth opportunity. We think Winstar should go for it. The market environment over the next few
years offers significant opportunity to capture customers with little in the way of competition. We
reiterate our BUY recommendation and $45 price target.
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