1Q 1999 PCS VALUE METRICS PREVIEW
Bankers Trust Research/BT Alex. Brown Research
Jeffrey Hines,Bo Fifer
April 12, 1999
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AERIAL COMMUNICATIONS INC. [AERL] "MKT. PERFORM"
CLEARNET COMMUNICATIONS INC. [CLNTF] "STRONG BUY"
MICROCELL TELECOMMUNICATIONS INC. [MICTF] "STRONG BUY"
NEXTEL COMMUNICATIONS INC. [NXTL] "STRONG BUY"
POWERTEL INC. [PTEL] "MKT. PERFORM"
WESTERN WIRELESS CORPORATION [WWCA] "STRONG BUY"
1Q 1999 PCS Value Metrics Preview
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52-WK Earnings Per Share
FY Price Price 3-5 Yr
Est.
Ticker End 04/09/1999 Range 1998 1999 2000 Growth
Chg?
AERL 12 7.44 8-2 (4.71)A (4.32) (3.99)
N
CLNTF 12 14.13 19-6 (10.93)A (9.44) (7.71)
N
MICTF 12 7.88 10-4 (7.65)A (6.64) (5.74)
N
NXTL 12 39.38 43-15 (6.46)A (4.57) (2.91)
N
PTEL 12 20.13 24-9 (10.02)A (11.01) (8.85)
N
WWCA 12 41.50 43-14 (2.95)A (3.40) (2.34)
N
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HIGHLIGHTS:
-- With 1Q 1999 "earnings" season upon us, we've listed below detailed
tables containing our expectations for five key metrics we consider in
determining value creation for our PCS universe:
1. Penetration gain (growth)
2. Churn (disconnect rate)
3. Average revenue per unit (ARPU).
4. Cost of acquisition (COA)
5. Pre-marketing cash flow (PMCF).
-- PCS STOCK PERFORMANCE HAS BEEN SOLID: LTM, our PCS Index is up 48%,
ahead of the S&P500 (up 21%). YTD, our Cellular Index is up 64%, ahead of
the S&P500 (up 9%).
-- 4Q 1998 RESULTS REVIEWED: While one quarter does not a trend make, based
on our five "value metrics", the rankings (best to worst) for 4Q 1998 value
creation were as follows: 1)-tie Nextel, 1)-tie Microcell, 3) Western
Wireless / VoiceStream, 4) Powertel, 5) Sprint PCS, 6) Aerial, 7) Clearnet.
-- 1Q 1999 EXPECTATIONS DETAILED BELOW: As will be shown, WE EXPECT THAT
NEXTEL, POWERTEL, VOICESTREAM / SPRINT PCS (tie) will report the,
relatively speaking, top three results in terms of the 5 value metrics
described above.
DETAILS:
With 1Q 1999 "earnings" season upon us, below we've listed detailed tables
containing our expectations for five key metrics we consider in determining
value creation for our PCS universe:
-- INCREMENTAL PENETRATION GAIN (subscriber growth): Measures the Company's
success in penetrating the market. Annualized, this number is simply
calculated as follows: 4 x (Net Subscriber Additions) / (Total POPs). We
use total gross POPs, not currently built-out or covered POPs.
-- CHURN (disconnects): Churn, or the disconnect rate, is inversely related
to the average subscriber life, which is the period of time over which a
carrier expects to receive monthly ARPU. We use "fully-loaded" churn
values (either actual or estimated), i.e., inclusive of returns within any
applicable guarantee period.
-- AVERAGE REVENUE PER UNIT (ARPU): Measures the gross service revenues
generated per average subscriber, usually expressed per month.
-- COST OF ACQUISITION (COA): The sum of selling costs per gross addition
and the net subsidy applied to the handset by the carrier. These are cash
costs of adding an incremental subscriber.
-- PRE-MARKETING CASH FLOW PER UNIT (PMCF): Measures the ARPU less cost of
service and G&A expenses per average subscriber, expressed per month.
Below, we lay out our expectations for 1Q 1999 operational performance
among the major public North American PCS carriers in our universe relative
to these five "value metrics".
NET ADDITIONS/PENETRATION GAIN
NET ADDITIONS Est Est Est Est
1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99
Aerial 0.040 0.039 0.027 0.081 0.035 0.050 0.050 0.075
Clearnet 0.047 0.052 0.048 0.066 0.050 0.060 0.070 0.120
Microcell 0.032 0.053 0.031 0.101 0.040 0.058 0.058 0.125
Nextel 0.371 0.401 0.375 0.333 0.400 0.400 0.400 0.400
Powertel 0.038 0.025 0.047 0.067 0.045 0.045 0.045 0.065
Sprint PCS 0.227 0.256 0.380 0.836 0.700 0.700 0.700 1.000
VoiceStream 0.036 0.048 0.046 0.064 0.050 0.065 0.065 0.100
Total 0.838 0.935 0.971 1.651 1.405 1.473 1.493 2.050
Source: Company documents, BT Alex. Brown Incorporated.
PENETRATION GAIN Est Est Est Est
1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99
Aerial 0.59% 0.57% 0.39% 1.17% 0.50% 0.72% 0.72% 1.07%
Clearnet 0.61% 0.68% 0.63% 0.85% 0.65% 0.77% 0.90% 1.54%
Microcell 0.41% 0.69% 0.40% 1.31% 0.52% 0.74% 0.74% 1.61%
Nextel 0.55% 0.60% 0.56% 0.49% 0.59% 0.67% 0.67% 0.67%
Powertel 0.66% 0.42% 0.81% 1.14% 0.77% 0.76% 0.76% 1.10%
Sprint PCS 0.34% 0.43% 0.64% 1.39% 1.17% 1.16% 1.16% 1.65%
VoiceStream 0.50% 0.67% 0.63% 0.89% 0.69% 0.89% 0.89% 1.37%
Average 0.50% 0.56% 0.52% 1.00% 0.69% 0.80% 0.83% 1.28%
Source: Company documents, BT Alex. Brown Incorporated.
MONTHLY AVERAGE REVENUE PER UNIT (ARPU)
AVG. REVENUE PER UNIT (ARPU) Est Est Est Est
1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99
Aerial $55.36 $52.13 $49.96 $46.79 $49.00 $49.00 $48.00 $47.50
Clearnet $37.28 $38.23 $37.10 $35.83 $38.11 $37.89 $37.50 $36.91
Microcell $39.14 $38.76 $37.74 $37.31 $37.76 $37.27 $36.79 $36.30
Nextel $66.30 $69.00 $69.50 $70.00 $69.50 $69.00 $68.50 $68.00
Powertel $62.25 $60.99 $57.88 $52.41 $51.00 $50.00 $47.50 $47.50
Sprint PCS $57.00 $59.00 $55.00 $55.00 $54.00 $53.00 $53.00 $52.00
VoiceStream $51.81 $48.66 $48.71 $49.09 $48.50 $47.50 $47.50 $46.50
Average $53.28 $52.46 $50.59 $48.95 $49.11 $48.58 $47.97 $47.46
Source: Company documents, BT Alex. Brown Incorporated.
PRE-MARKETING CASH FLOW PER SUBSCRIBER
PRE-MARKETING CF (PMCF) Est Est Est Est
1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99
Aerial -$36.85 -$28.02 -$20.65 -$19.24 -$3.15 $5.57 $8.10 $9.44
Clearnet -$73.53 -$40.80 -$23.35 -$17.34 -$9.46 -$2.23 $4.63 $11.14
Microcell -$33.78 -$27.35 -$9.85 -$4.51 $6.51 $10.58 $14.00 $15.46
Nextel $23.43 $30.89 $34.19 $35.81 $36.59 $38.50 $39.36 $40.22
Powertel -$2.40 -$1.30 $4.25 $1.52 $3.25 $7.50 $7.78 $10.51
Sprint PCS -$45.11 -$30.41 -$13.42 -$3.34 $2.20 $6.80 $9.45 $16.50
VoiceStream-$14.81 -$7.34 $5.93 $8.76 $9.03 $12.25 $15.63 $15.88
Average -$31.41 -$17.83 -$11.80 -$3.68 $2.12 $7.33 $11.08 $14.55
Source: Company documents, BT Alex. Brown Incorporated.
MONTHLY DISCONNECT RATE (CHURN)
CHURN Est Est Est Est
1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99
Aerial 4.5% 6.3% 5.6% 5.1% 4.5% 4.5% 4.0% 4.0%
Clearnet 1.7% 1.7% 2.0% 1.9% 2.0% 2.0% 2.0% 2.0%
Microcell 2.1% 2.2% 3.3% 2.0% 2.3% 2.3% 2.3% 2.3%
Nextel 1.8% 1.6% 1.8% 2.0% 2.1% 2.2% 2.1% 2.0%
Powertel 4.2% 4.5% 4.7% 4.3% 3.5% 3.3% 3.0% 2.8%
Sprint PCS 3.5% 3.8% 3.9% 3.9% 3.8% 3.5% 3.3% 3.0%
VoiceStream 3.3% 3.0% 3.0% 3.0% 2.8% 2.5% 2.5% 2.5%
Average 3.0% 3.3% 3.5% 3.2% 3.0% 2.9% 2.8% 2.7%
Source: Company documents, BT Alex. Brown Incorporated.
COST OF ACQUISITION
COST OF ACQUISITION (COA) Est Est Est Est
1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99
Aerial $564 $416 $425 $364 $375 $350 $350 $325
Clearnet $485 $413 $426 $448 $431 $396 $357 $314
Microcell $616 $539 $449 $373 $407 $407 $407 $391
Nextel $441 $458 $450 $484 $425 $425 $400 $400
Powertel $395 $430 $389 $451 $375 $350 $350 $325
Sprint PCS $578 $536 $514 $527 $475 $450 $425 $400
VoiceStream $432 $402 $478 $470 $500 $475 $450 $425
Average $501 $460 $445 $451 $427 $410 $392 $373
Source: Company documents, BT Alex. Brown Incorporated.
SUMMARY VALUE
For COMPARISION only, we have rolled four of the five metrics into a single
subscriber value statistic (the statistic ignores growth). We calculate
this value by taking the present value of the pre-marketing cash flow over
1/churn months, discounted at 15% per year, and net of up-front acquisition
costs. While the results are not useful in predicting future value
creation, they do provide a useful tool for comparing company performances
(we've also shown the same calculation using average revenue per unit in
place of pre-marketing cash flow).
1Q 1999 SUBSCRIBER VALUE
Pen. ARPU PMCF
Gain ARPU Churn COA PMCF NPV NPV
Aerial 0.50% $49.00 4.5% $375 -$3.15 $571 -$436
Clearnet 0.65% $38.11 2.0% $431 -$9.46 $998 -$785
Microcell 0.52% $37.76 2.3% $407 $6.51 $875 -$186
Nextel 0.59% $69.50 2.1% $425 $36.59 $2,058 $882
Powertel 0.77% $51.00 3.5% $375 $3.25 $844 -$297
Sprint PCS 1.17% $54.00 3.8% $475 $2.20 $743 -$425
VoiceStream 0.69% $48.50 2.8% $500 $9.03 $910 -$238
Note: All companies on a US$-basis.
Source: Company documents, BT Alex. Brown Incorporated.
IN TOTAL, THE 5-METRICS POINT TO NEXTEL, POWERTEL, AND SPRINT PCS /
VOICESTREAM AS THE TOP THREE WHO ARE EXPECTED TO LEAD THE PACK IN TERMS OF
VALUE CREATION IN 1Q 1999
While one quarter's performance cannot be considered a trend or predictive
of future results, below we've ranked OUR EXPECTATIONS for each carrier,
from 1 (best) to 7 (worst) in each of the five value metrics and summed the
results to determine which carriers were adding the most "value" to their
shareholders. As in golf, low score wins:
1Q 1999 PCS Pen.
Metric Rankings Gain ARPU Churn PMCF COA Total
Nextel 6 1 2 1 4 14
Powertel 2 3 6 4 1 16
Sprint PCS 1 2 7 5 7 22 (tie)
VoiceStream 3 5 4 2 8 22 (tie)
Microcell 7 8 3 3 3 24
Clearnet 4 7 1 7 6 25
Aerial 8 4 8 6 1 27
* On a $US basis. |
