CSFB: "We view WCII as one of the best opportunities in the emerging
telecom area"
4Q98 results were slightly better than our est. Rev was $81.1
versus our est. of $80 mil; CLEC rev was $55.6 versus $54 mil
; EBITDA loss of $79.2 mil versus $80.9 mil; and 61,000 line
adds beat 60,000 est.
WCII is meeting key operating goals needed to drive future
growth: winning mkt. share; increasing product mix on lines;
moving lines on-net; and increasing salesforce, building
access rights and hubs.
WCII's stock price is off 26% from its 1999 high of $44 7/16
. We believe there are no fundamental reasons for this
decline and that investors should buy on the weakness. 1999
yearend price target is $63.
There is no change to our 1999 and 2000 financial outlook.
Our rating remains a Buy. WCII is one of only a handful of
CLECs that has been able to execute its game plan effectively
without negative surprises.
Price Target Mkt.Value 52-Week
3/4/991 (yr end) Div. Yield (MM) Price Range
32.69 $63 $1,814.3 $48 - 10
Annual Prev. Abs. Rel. EBITDA/
EPS EPS P/E P/E Share
12/99E $(13.32) NA NA $(6.45)
12/98A (11.96) NA NA (5.86)
12/97A (7.49) NA NA (4.76)
March June Sept. Dec. FY End
1999E $(3.89) $(3.99)(3.58) $(2.87) Dec.31
1998A (2.54) (2.77) (2.83) (3.80)
1997A (1.27) (1.85) (1.97) (2.50)
ROIC (12/97) (19.9%)
Total Debt (9/98) $1,313
Book Value/Share (9/98) NM
WACC (12/97) 12.3%
Debt/Total Capital (9/98) 95%
Common Shares3 55.5 mil
EP Trend2 Down
Est. 5-Yr. EPS Growth
Est. 5-Yr. Div. Growth
1On 3/4/99 DJIA closed at 9467.4 and S&P 500 at 1246.6.
2Economic profit trend.
3Shares outstanding represent fully diluted shares.
WinStar is a competitive local exchange provider using 38 GHz
technology to build out local telecom networks in major
markets throughout the country.
Investment Summary
As expected, WinStar reported fourth quarter 1998 results
slightly ahead of estimates. The quarter illustrated once
again that management is achieving its operating goals while
meeting promised financial objectives. In an industry sector
where so many companies fail to meet either operational or
financial goals, WinStar's continuing success is notable.
Fourth Quarter Results
WinStar added 61,000 access lines, versus our estimate of 60,
000 for the fourth quarter, achieving a sequential growth
rate of just about 2%. The average revenue per line was in
the $50 range, and was down slightly from the third quarter
due to seasonality. We continue to expect the average
revenue per line will increase over time as WCII increases
the sale of its data products.
Total revenues were $81.1 million compared with our estimate
of $80.2 million. CLEC revenues of $55.6 million beat our
estimate of $54.4 million, likely because of the slightly
higher number of lines added. WCII ended the quarter with 20
% of its customers on-net and 40% on-switch. In the New York
market WCII had 55% of its customers on-net. And, in WCII's
five most mature markets (Boston, Chicago, Los Angeles,
Dallas and New York), it had 34% of its customer base on-net
and 52% on switch. We expect these statistics to show
significant improvements as the company's Project Millenium
kicks-in for 1999 and promotes on-net sales.
"Other Revenues," which are comprised of wholesale and the
old MidCom customers, were reportedly $9 million, right in
line with our target. Info service revenues were also in
line with our estimate at $16 million.
The EBITDA loss in the quarter was $79.2 million, slightly
better than our $80.8 million loss estimate. This compares
with a loss in the fourth quarter of 1997 of $40.6 and a loss
in the third quarter of 1998 of $48.3. The dramatic increase
in negative EBITDA in the fourth quarter was a result of
WinStar's expanding investment in international markets
during the quarter (WCII reports it has already started to
build in Amsterdam) and the company's investment in Williams
. WinStar reported a loss per share from continuing
operations of $3.80, just beating our estimate of a loss of
$3.87.
Given that the fourth quarter hit our targets, we're not
making any changes to our WinStar model.
Momentum Building As Resources Are Positioned For Growth
As announced in the fourth quarter, WCII is now planning an
expanded network build, hitting a greater number of cities,
both domestically and internationally. WinStar's plan is to
be operational in 45 domestic cities and five international
cities by the end of 1999. In 2000 it expects to reach 60
domestic and 15 international markets. In order to
successfully build out in these markets, WCII needs the right
partners, a strong balance sheet, the rights employees and a
successful marketing strategy. We believe that WinStar is
making progress In all of these areas:
Partnerships established - During the fourth quarter WCII
made several announcements that should help it successfully
execute its current expansion plans. First, it announced a $
2 billion vendor financing agreement with Lucent that should
aid WCII in funding its network buildout. WCII plans to
access funds from this agreement as needed. The company says
that during the fourth quarter it utilized about $77 million
from this facility, and to date has a bit over $100 million
drawn down. The second big announcement made in the quarter
was a partnership with Williams Companies whereby WCII will
provide WMB with access to its local markets in exchange for
long haul capacity. This arrangement was key for two reasons
first, it provides an important vote of confidence in WCII's
wireless CLEC strategy. Second, it should improve WCII's
margins in the long run as expenses are reduced by owning its own
long-haul transport.
Strengthening balance sheet - During the first quarter of 1999
, WCII successfully completed an equity offering that raised $
167 million. At the end of the fourth quarter, WCII had $313
million in cash on its books. After the offering cash rose
to over $500 million. In addition to the cash infusion from
the recent offering, WCII has access to the $2 billion vendor
financing agreement with Lucent discussed above. Between
these two, WCII can handily cover its expected 1999 capital
expenditure of $600 million. Cap ex in the fourth quarter was
$211 million.
Assets being put in place - During the fourth quarter WCII
increased its sales force to 500 from 336 at the end of 1997
. It increased its building access rights to 4,200 (with
wireless radios installed in about half the buildings) after
adding 715 in the quarter. It has 71 hub sites today with
another 26 under contract and 119 leases signed. It was
operating in 30 U.S. markets at the end of the year up from
27 at the end of the third quarter, and it had 23 switches in
place up from 19 at the end of the third quarter.
Marketing the right stuff - In the fourth quarter WCII
launched a successful test of its point to multipoint product
and says it is on target for a nationwide launch of the
technology in 1999. This technology is key to WCII's overall
strategy as it is much more cost efficient than current point
to point technology. In addition to improving margins and
reducing capital requirements, it should provide customers
with greater flexibility in bandwidth demands, giving WCII
greater efficiencies over the use of its spectrum.
Project Millennium Is Improving Efficiencies And Capturing
Market Share
Project Millennium was launched during the fourth quarter.
It targets specific on-net buildings and markets a special
sales offer to these buildings' tenants. WinStar expects to
provision service to these new customers during the first
quarter. Therefore, the financial and operational impacts
from Project Millennium won't actually be felt until first
quarter results are announced. There were, however, some
meaningful statistics disclosed that indicate that this sales
effort is already achieving success.
Early signs of market share gains. During the fourth quarter
, according to WinStar it succeeded in winning 7% market
share in its Millennium buildings. This is particularly
impressive as WCII's long term local market share goal in all
of its markets is 11%. Of course going from 7% in specific
buildings to 11% in entire urban markets requires a major
scaling-up of operations, but this early success is a hopeful
indication of future success.
Improving product mix. WCII reports that many of its new
Millennium customers are opting to purchase more than one
service per line. Actually, in return for purchasing service
from WCII and receiving free local service throughout 1999,
these customers must also buy long distance service. Thus,
the product mix is primarily local and long distance. Data is
, as of yet, not a predominant seller among this customer base.
Customers are signing long term contracts - giving WCII a
distinct early to market advantage. When New Millennium
customers sign up for service each is given one of three
options: 1) sign a one year contract and receive three
months of free local service; 2) sign a two year contract and
receive six months of free local service; or, 3) sign a three
year contract and receive a full year of free local service.
Approximately 60% of the Millennium customers are signing
three year contracts. By locking these customers into long
term contracts, WCII is creating a nice buffer between its
market entry and the market entry of other competitors to come.
Improving on-net statistics. Since WCII is only providing
its Millennium service offering in buildings that are on-net
it is expected that it should also be able to improve its on-
net percentage. This should significantly enhance margins
over the life of the contracts. Excluding results from
Project Millennium, WCII ended the quarter with 20% of its
customers on-net and 40% on switch. In the New York market
WCII had 55% of its customers on-net. And, in WCII's five
most mature markets (Boston, Chicago, Los Angeles, Dallas and
New York), it had 34% of its customer base on-net and 52% on
switch.
First quarter outlook - the impact of Millennium. We are not
modeling a material impact from Project Millennium in the
first quarter of 1999. Access line additions are targeted to
be around 63,000, just over this quarter's net adds of 61,000
. WCII has not been expanding its new sales per quarter
recently, as the fourth quarter demonstrated and our first
quarter outlook suggests. We think limitations on
provisioning systems is holding back an expanded provisioning
flow at WCII, as it is for most other integrated carriers
from the largest to smallest. This constraint does not
concern us at this point, although we expect major increases
by the end of this year for all of the successful CLECs.
Recent Stock Weakness Continues to Present a Buying
Opportunity
WinStar's stock price is off 26% from its 1999 high of $44 7/
16. We see no fundamental reason for this decline: earnings
were slightly better than expected; management is meeting
operational goals while hitting financial targets; and the
financing and assets are in place to drive expansion plans.
There is no change in our year-end 1999 price target of $63.
We view WCII as one of the best opportunities in the emerging
telecom area.
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