CSFB : 5/7/99 AM Call: VYTL: 1Q Highlights Positive Catalysts
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research Americas
U.S./Telecommunications Services/Long Distance Carriers
Frank J. Governali
Robert Pomeroy
Kathryn D. Littlefield
John D. Doughty
BUY
MID CAP
Viatel, Inc. (VYTL)
First quarter operating results highlight positive catalysts.
Summary
Reported 1st quarter results exceeded our estimates for
revenue growth and improvement in margins. Yesterday's
conference call highlighted several positive catalysts.
Viatel's share price has appreciated roughly 55% over the
last four weeks. We intend to adjust our estimates and
reconsider our share targets after further reviewing the
first quarter and our model.
Similar to Level3, Qwest, Global Crossing and Williams,
Viatel stands to benefit from the new, Internet-driven
economy which increasingly demands faster and fatter
telecommunications networks.
Viatel's pan-European Circe network is a key differentiating
factor which places Viatel at the nexus of the new economy
driven by the Internet and the benefits of silicon economics.
Viatel, Inc. BUY
Price Target Mkt.Value 52-Week
5/06/991 Dec.'00 Div. Yield (MM) Price Range
$47.25 - - - $1,436.4 $7-49
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
12/00E (7.90) NA NA 57.6X -
12/99E (7.49) (7.83) NA NA - -
12/98A (5.67) NA NA - -
March June Sept. Dec. FY End
2000E NA NA NA NA Dec. 31
1999E (1.65A) (2.23) (1.93) (1.68)
1998A (0.57) (2.36) (1.25) (1.47)
ROIC (12/98) (8.1%)
Total Debt (12/98) $885 mil.
Book Value/Share (3/99) ($4.37)
WACC (12/98) 9.8%
Debt/Total Capital (12/98) 53%
Diluted Shares 30.4 mil.
EP Trend2 Positive
Est. 5-Yr. EPS Growth -
Est. 5-Yr. Div. Growth -
1On 5/06/99 DJIA closed at 10,946 and S&P 500 at 1332.
2Economic profit trend.
NA = Not available.
Note: Estimated market float is 18.8 million shares, or $ 815
million.
Viatel Inc. is a U.S.-based competitive multinational carrier
whose business plan is centered on opportunities in Europe.
The first phase of Viatel's planned 8,700 route-kilometer pan-
European fiber optic network began carrying commercial
traffic on March 15,1999.
Investment Summary
In our view, Viatel has a focused, Euro-centric business plan,
effective management, a track-record of high top-line
organic growth, and building momentum in European retail revenue.
Viatel's share price has appreciated roughly 55% over the
last four weeks. Recently, the shares marked a new 52-week
high by approaching $50 before backing off. The share price
advanced strongly again yesterday following the release of
1st quarter operating results exceeding expectations.
Since Viatel's share price appreciation has exceeded our short
-term expectations, we intend to adjust our estimates and
reconsider our share targets after further reviewing the
first quarter operating results and talking to management.
First Quarter Highlights
Reported revenue of $61.6 million in the quarter were 14%
greater than our estimate of $54 million. The reported gross
margin of 17.2% exceeded our estimate of 13% by more than 400
basis points. Reported SG&A expenses were 30% of revenues
versus our estimated SG&A expenses as 34% of revenues.
Viatel reported negative EBITDA of $8.2 million versus our
estimated negative EBITDA of $11.7 million.
Viatel's revenue mix improved dramatically from 1998's 4th
quarter as retail revenues replaced carriers' carrier or
wholesale revenues. Retail telecom revenues accounted for 66%
of revenues in the 1st quarter versus 43% of revenues in
the 4th quarter of 1998.
Continued network construction remains on track and in line
with expectations. As reported previously, Circe Phase One
was put into service on March 15. Viatel expects to complete
Circe Phases Two and Three on schedule. Phase Two should be
ready for service early in the third quarter of 1999. Circe
Phase Three is expected to be completed early in the first
quarter of 2000.
Reported capacity sales can be expected to be unevenly
distributed throughout the year since revenues will be booked
as contracts are signed. However, we believe Viatel remains
on track to post our estimated $75 million in capacity sales
in 1999. Reported 1st quarter Circe capacity sales consisted
exclusively of the planned 20-year IRUs with no heavily
discounted sales of dark fiber. The capacity prices
indicated by 1st quarter sales exceeded our expectations and
indicate that average capacity prices in 1999 may exceed the
estimates in our model.
Potential Upsides to our Model
Overall, our model primarily reflects the economics of circuit
-switched, long-distance voice traffic, both retail and
carriers' carrier. We think our current estimates and model
do not adequately reflect the value of new revenue streams
from sophisticated data services and Internet connectivity
enabled by Viatel's growing pan European fiber optic network
assets. New revenue streams could lead to sustained revenue
growth and margins exceeding our current estimates. Viatel
is putting the personnel and infrastructure in place now in
order to begin offering data communication services beginning in
1999's third quarter.
Management expects to achieve 40% gross margins in 2001,
while our model forecasts 35% gross margins in 2001. In
addition, our estimated gross margins never exceed 37% in our
forecast. Gross margins rising higher and faster than our
current estimates would add significantly to projected equity
values.
|
