Lehman/Garrahan CLEC 1Q Preview (4/9/99)
Highlights:
* While all high bandwidth network & Internet stocks should continue to do
well, we see the possibility of near term upside results or news surprises
from McLeodUSA (MCLD, 44, 1) , WinStar (WCII, 40 1/2, 1), CTC (CPTL, 17 1/2,
1) and ICG (ICGX, 24 1/4, 2).
* We think the catalyst for McLeodUSA will be announcements of its
data/Internet and high bandwidth progress and strategy which we expect will
come in the next 30 days.
* We believe that WinStar will report gross margins of 18-20% vs consensus of
16-17% (an increase of 750+ bps), showing that they are starting to get the
uplift from their wireless network.
* We expect CTC to beat 1Q revenue by 2-4% highlighting its 25%+ sequential
growth rate. We believe ICG will soon communicate more details on the
progress of its Internet network business and some early customer wins.
* McLeodUSA is trading at 3.8x '00 rev. vs 7.0x for Qwest, despite similar
growth rates. CTC is trading at just 1.5x '00 rev. vs 4x-6x for the CLEC
group.
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Summary:
The CLECs begin to report earnings at the end of the month (through May).
1Q99e Seq. Growth Stock Return
Revenue EBITDA Installs % $ vs. 12/31
------- ------- -------- ----- ------ -----------
CTC 23.8 (9.3) 29.0K 25.2% 4.8 109%
ELIX 35.8 (20.2) 13.0K 13.6% 4.3 59%
ICG 128.8 8.1 64.8K 5.9% 7.2 13%
ICIX 201.3 15.6 36.4K 4.1% 7.8 75%
Local/Data/Inet 111.0 8.1% 8.3
MCLD (1) 180.1 8.7 90.5/33K 8.8% 14.6 41%
Telecom 126.5 5.2% 6.3
NXLK 48.4 (48.0) 42.0K 11.9% 5.2 122%
CLEC 33.3 21.9% 6.0
TGNT 1.4 (87.1) 5K-10K 187.9% 0.9 63%
WCII 84.8 (84.3) 65.0K 4.6% 3.7 4%
(1) 90.5K include lines from DTG & Ovation acquisitions; McLeodUSA standalone
estimate is 33K lines.
Rating Earnings Report/Conf. Call Date
-------- ------- -------------------------------
CTC Comm. 1-Buy Middle of May
ELIX 1-Buy Week of May 3 (ELIX, 13, 1)
ICGX 2-Outperform April 28
Intermedia 3-Neutral April 28 (ICIX, 30 1/8, 3)
McLeodUSA 1-Buy April 29 (earnings out April 28 after close)
NEXTLINK 1-Buy April 29 after mkt close (NXLK, 63 1/8, 1)
Teligent 1-Buy Week of May 10 (TGNT, 46 7/8, 1)
WinStar 1-Buy Week of May 10
COMPANY UPDATES/ISSUES
CLEC stocks have shown recent strength due to the surge in valuation for high
bandwidth networks and internet companies, expectations to meet/beat 1Q
numbers, and view regional CLECs will start to consolidate over next 12-24
months.
CTC - We believe revenue will come in 2-3% ahead of estimates. On track to
complete its 22 node network by June. 5-10 sites operational today, and will
begin to beta test customers in May. Plans to take a 1-time charge of $6-7M
for legal fees and winding down accounts receivable balance from agency days.
ELIX - Expect good topline growth. The issue will be reciprocal compensation
and prepaid card which could be 35%-50% of growth. Quarter should be peak
EBITDA loss, usually catalyst for multiple expansion and expect news about
financing in next few weeks. In the quarter, ELI announced capacity swap
deal with Touch America (Enron), gaining low cost capacity in its core
Western region.
ICGX - The good news for ICG is we expect the company to communicate more
details of its Internet networking business and announce some key customer
wins. The issue is that we expect 60% of revenue growth to be recip. comp.
We estimate topline growth will be negatively impacted by roughly $1M as 9K+
resold lines churned away in 4Q.
ICIX - Revenue growth should start to pickup as the drop in long distance
appears to be bottoming out. LD has been flat last 3 months and local and
data continue strong growth. Web hosting business should show strong topline
growth, with capacity increasing 7x by summer time. Announced plans to spin
off estimated $50M ('99) web hosting business has helped to propel the stock.
Lowering full year revenue and EBITDA to come in line with consensus.
MCLD - We think McLeodUSA will soon begin to spell out a more aggressive data
strategy and provide details on its margin-improving network buildout and
migration. We expect 50% of McLeodUSA's installs to be on its own switches
in '99 and 65% in '00. McLeodUSA should end '00 with about 30% of all lines
on its switches and a 51% gross margin.
NXLK - We expect revenue growth of 12% and CLEC revenue growth of 22%. Loss
of key enhanced services customer drives $1M+ loss of revenue. Announced
acquisition of WNP Communications to extend its broadband fixed wireless
coverage. NEXTLINK is acquiring national, intercity fiber on the Level 3
build, has fiber rings deployed in major metropolitan markets, and will begin
to deploy broadband fixed wireless networks late in '99.
TGNT - Launched 11 new markets in the quarter, and on track to reach 40
markets by year-end. Teligent has deployed radios on roughly 400 buildings
and is on target to reach 2000 by year-end. Teligent has deployed
approximately 50 wireless hubs.
WCII - 1Q gross margin is likely to come in ahead of our 16.5% est., driven
by cost savings from moving local traffic on to its wireless network and long
distance traffic to Williams. We est. the company will install 21.6K
wireless lines in 1Q, up from last quarter 17.5K, and on-radio lines will be
33% of total 60k-65k installs, and 22% of total lines, up from 20% last
quarter.
VALUATION
McLeodUSA trades at 3.8x '00 rev. vs 7.0x for Qwest, despite similar growth
rates. CTC trades at just 1.5x '00 rev. vs 4x-6x for the CLEC group.
Fully Current FV/Revenue(1) FV/PP&E(2)
Price Dil. Shrs. Net Debt FV '99 '00 '99
CTC $17 1/2 15M $51M $307M 2.3x 1.5x n/a
ELIX $13 50M $0.4B $1.1B 6.1x 4.8x 1.7x
ICG $24 1/4 55M $1.5B $2.9B 4.8x 4.1x 2.2x
ICIX $30 1/8 49M $2.7B $4.1B 4.5x 3.7x 2.4x
McLeodUSA $44 80M $0.8B $4.3B 4.9x 3.8x 4.6x
NEXTLINK $63 1/8 62M $1.5B $5.5B 22.1x 15.7x 5.1x
WinStar $40 1/2 61M $1.3B $3.7B 8.4x 6.0x 3.8x
Teligent $46 7/8 62M $0.2B $3.1B 94.7x 27.0x 7.8x
Stock prices as of 04/08/99 |
