BTAB on TGNT:
HIGHLIGHTS:
-- Teligent reported 4Q 1998 results after the market's close
yesterday (1-Mar). While it is still too soon to place much
emphasis on the financial results, TGNT reported in-line with our
expectations. We continue to believe that strategic events are a
more likely driver of the stock in the short term.
-- POSITIVE NEW NEWS: Teligent reported revenue of $0.5M and EBITDA of
- $78M, in line with our expectations. Management also released its
internal expectations for 1999 performance, which are largely more
bullish that our previous expectations, and reflect a less expensive
rollout of domestic markets:
TGNT-goal BTAB-prior BTAB-new BTAB
Metric 1999 1999 1999 2000
Revenue $35M $30M $33.6M $164M
EBITDA* -$350M -$380M -$356M -$300M
Subscribers 10,000 4,000 10,000 29,000
Access Lines 75,000 80,000 80,000 290,000
Capex $300M $287M $306M $279M
* Excludes non-cash compensation expenses.
-- NEGATIVE NEW NEWS: While Teligent announced 10,000 lines at YE
1998, we believe less than 40% of these are local voice access lines
(our estimate was 4,600). We believe Teligent is experiencing a delay
in adding local service to customers who have switched LD services
already as a result of inexperience in the installation process--an
issue Teligent is addressing with a larger install team and increased
training.
-- NET-NET: We believe Teligent, with over $1.2B in available funding,
is funded through the initial 40-market rollout and well into (if not
through) 2000, with 1999 now forecasted to be the peak EBITDA loss
year. We expect to see a significant ramp in access line growth in 2H
1999 as multipoint technology matures and the company optimizes its
deployment capabilities.
--VALUATION: Based on the lower operating losses forecasted for 1999
and 2000, we have raised our 12-month DCF-derived price objective to
$49/share. Maintain our "strong buy" investment rating on the shares.
DETAILS:
Teligent reported 4Q 1998 results after the market's close yesterday
(1-Mar). While it is still too soon to place much emphasis on the
financial results, TGNT reported in-line with our expectations. We
continue to believe that strategic events are a more likely driver of
the stock in the short term.
Management released internal projections for 1999 financial and
operating performance. In general, the company's expectations are
slightly more bullish than our previous estimates, and reflect a less
expensive rollout of domestic market builds. We have made the
following changes to our model:
TGNT-goal BTAB-prior BTAB-new BTAB
Metric 1999 1999 1999 2000
Revenue $35M $30M $33.6M $164M
EBITDA* -$350M -$380M -$356M -$300M
Subscribers 10,000 4,000 10,000 29,000
Access Lines 75,000 80,000 80,000 290,000
Capex $300M $287M $306M $279M
* Excludes non-cash compensation expenses.
Source: Company documents, BT Alex. Brown Incorporated.
We now believe 1999 will represent the high water mark for EBITDA
losses, and are forecasting EBITDA-breakeven in late 2001. We also
expect 1999 to be back-end loaded in terms of revenue, subscribers,
and access line growth. It generally takes at least a quarter for
salesperson to become fully productive, and most of Teligent's
salespeople either recently came on-line, or will be coming on-line in
the later in 1999.
OPERATING METRICS HOLD LITTLE MEANING, BUT PROVISIONING SOMEWHAT BEHIND
While Teligent announced 10,000 lines at YE 1998, we believe less than
40% of these are local voice access lines (our estimate was 4,600).
We believe Teligent is experiencing a delay in adding local service to
customers who have switched LD services already as a result of two
factors: longer lead times on obtaining leases for roof rights, and
inexperience in the installation force--something Teligent is
addressing with a larger installation team and increased training.
We believe Teligent has simply pushed forward its site acquisition
program by 1-2 months in advance of marketing services in new markets
to address the longer roof right lead time.
Provisioning is a more difficult challenge. Once Teligent makes a
sale, LD service can be provisioned same-day remotely, while
provisioning facilities-based local services requires access to the
subscriber's roof, a truck roll, antenna mounting, and system
optimization. We further believe that installing multipoint radios is
a more difficult process, and Teligent is currently spending a great
deal of time on each individual link with its equipment manufacturer,
Nortel.
We would expect Teligent to outgrow its inexperience rather quickly as
the installation process progresses, and as the installation workforce
moves up the learning curve. Management has targeted a 3-5 day
installation period for subscribers in buildings with a roof right
under contract by the end of the year for multipoint subscribers.
With all that said, Teligent has added about 200 buildings to its
wireless network, implying 5 customers per building on average. We
believe this is a very good number from which to begin operations, and
is likely to move higher over time. Approximately half of those
buildings are connected via multipoint radios. Management does not
expect that ratio to climb significantly until 2H 1999, which is
consistent with our view that multipoint technology will not be ready
for "prime time" until the second half of 1999.
FUNDING IN PLACE WELL INTO 2000
At YE 1998, Teligent had almost $1.3B in available funding, which we
believe is sufficient to fund the 40-market domestic buildout and will
get the company well into, if not through, 2000.
Sources of funds 1999-2000
Total Cash $481M
Unused Bank Facility $800M
Total Sources $1,281M
Uses of funds 1999-2000
EBITDA Losses $656M
Capex $584M
Cash Interest $137M
Total Uses $1,377M
Funding Deficit $159M
Source: BT Alex. Brown Incorporated.
We note that Teligent's agreement with Nortel allows the company to
pay for equipment only after successful deployment, and as such cash
capital expenditures could come in below our estimates, pushing
Teligent's funding requirements into 2000.
STRATEGIC UPDATE
We continue to believe that wireless CLECs are attractive
consolidation candidates for the following groups of telecom
companies:
Group Interest
IXCs Bypass local access fees, bottleneck
Foreign telcos Foothold in U.S. marketplace with sizeable footprint
ISPs Bypass last-mile bottleneck to deliver enhanced
content
Fiber CLECs Economically broaden scope of existing footprint
We believe that wireless CLECs we would likely to look for:
-- Intercity fiber--to form a broadband end-to-end network
-- Intracity fiber--backhaul to push hubs further out from city
centers
-- International fiber--to extend the broadband network on a global
scale
-- ISPs--to leverage their existing marketing/distribution
capabilities.
-- More Spectrum--we'd always be on the lookout for cheap spectrum,
both domestically and globally.
Our private market valuation for Teligent, based no our 10-year DCF
using a 10%-15% discount rate, is $68-$95/share, which we believe
adequately reflects the strategic position of wireless carriers and
the scarcity of that spectrum.
VALUATION
Based on the lower operating losses forecasted for 1999 and 2000, we
have raised our DCF-derived price objective to $49/share, using a 20%
equity discount rate and a 10x terminating multiple. Maintain our
"strong buy" investment rating on the shares. |
