LM: WinStar Communications (WCII)
Brad Wilson / Danny Zito
On-net statistics imply disciplined revenue growth
1Q99 Preview. After a sabbatical, WinStar pre-announced line and network statistics in advance of full quarterly release schedule for May 12th, 1999. WinStar reported 65,000 lines installed, slightly higher than our expectation. On-net installs represented roughly 40% of installs, improving the total on-net percentage to 24% up from 20% in 4Q98. The strength of these results reinforces our comfort with our outlook for the quarter. The remaining key metrics to watch for at WinStar are CLEC revenue ($63.9 million), gross margin (18%), EBITDA loss ($83.8 million), and On-Switch percentage (44%). Additionally, we believe the following factors should favorably impact the shares over the near term.
Recent Shares Performance Lags Peers. Since the start of bandwidth buying binge in mid-January, WinStar shares have significantly underperformed other fixed wireless providers. While WinStar shares are up 12% over the period, the group as a whole is up 41% with TGNT, ARTT and NXLK up 61%, 73% and 88%, respectively. We believe strong first quarter results with solid margins and a top-line beat will likely act as a catalyst to close the performance gap.
Strong Revenue Growth. We estimate WinStar will grow revenue 85% year-over-year driven by increased acceptance of the fixed wireless technology and deeper account penetration. Specifically we expected the company to further penetrate customer account with bundled local, long-distance, and Internet-related services taking greater advantage of the broadband capabilities of fixed wireless. In 1Q99 60% of new lines were for multiple products, up from just 24% in 1Q98.
Kicking the Resale Habit. Although WinStar has talked about de-emphasizing its resale strategy for a while, the preliminary numbers suggest tangible progress. The early success of Project Millenium combined with stepped up network deployment provides a solid foundation. The percent of lines on-net continues to improve as the company focuses its sales efforts on targeted on-net buildings. Specifically, we believe the on-net line percentage will expand by year-end 1999 to 33% from 20% at year-end 1998.
Margin Expansion. Driven primarily by an increased percentage of on-net lines and further penetration of existing accounts with bundled service offerings, WinStar should be able to expand gross margin to 34% in 4Q99, more than a three-fold improvement from current margin. |
