NBMO on WCII:
WinStar Begins 1999 With Solid Results & Strong Gross Margin Performance
u WinStar reported 1Q99 revenue of $88.1 million, which was a 9% sequential improvement
from the previous quarter, and was $4.6 million above our estimate of $88.1 million. EBITDA for
the quarter was a loss of $79.2 million, which was in line with our estimate of $82.7 million.
u Gross margins for the quarter improved to 23% from 11% in the previous quarter and
were better than our 14% expectations. Due to the increased on-net traffic, higher margin
data revenue and improved backbone costs, the company's margins more than doubled and we
expect to see a sequential increase for next quarter.
u Project Millennium and increased on-net building penetration led to another solid
quarter of line additions. The company installed 65,000 lines in the quarter, in line with our
expectations, with total lines at the end of the quarter reaching 384,000. More than 40% of line
installations were on-net, bringing the total customer base to 24% on-net.
u The increased focus on new on-net buildings and increased penetration into existing
on-net buildings is beginning to drive improved gross margins ahead of schedule. We
expect these trends to continue and have increased confidence in WinStar's ability to continue
driving shareholder value. We reiterate our BUY recommendation and $54 price target.
First Quarter Results
Revenues & EBITDA
Total revenues were $88.1 million up 8.6% sequentially and $4.6 million above our
expectations of $83.5 million. Core telecommunication services revenue totaled $68.6 million, $8.6
million more than we expected, and up 23% sequentially over 4Q98 revenue of $55.6 million. Both data
services revenue and voice revenue (formerly know as CLEC revenue) showed approximately 23%
sequential improvement. We estimate data services to be about 30% of core telecom revenue with the
remaining being attributable to voice revenue, except for the $1.1 million booked this quarter related to
sale of capacity to Williams (WMB, $48 1/4) that is starting to be recognized.
Project Millennium continues to prove successful with more than 60% of new customers in
1Q99 signing 3-year agreements. These contracts provide up to $1,000 per month of free local phone
charges when they sign a 3-year contract. We feel this program helps market the WinStar brand and
develops long-term relationships, which creates opportunities to sell additional services. This leads to
"sticky" revenue as these customers rely on WinStar for multiple communication needs. WinStar's
bundled offering is already experiencing success as 60% of new lines this quarter took multiple services,
up from 25% in 1Q98.
Gross margins for the quarter improved to 23% from 11% in the previous quarter and were
better than our 14% expectations. Due to the increased on-net traffic, higher margin data revenue
and improved backbone costs, the company's margins more than doubled and we expect to see a
sequential increase for next quarter ending the year at approximately 40%. The company continues to
market heavily to on-net buildings with penetration levels in on-net building averaging 14%. WinStar's
presence in existing buildings continues to be enhanced by its numerous marketing efforts resulting in an
increased percentage of one-call sales closings from 7% 4Q98 to 19% 1Q99. Also, as the Williams
backbone is integrated into the business it's driving the cost of revenue down because WinStar has an
owned asset that gives them more capacity instead of paying out long distance charges for limited
capacity.
EBITDA for the quarter was a loss of $79.2 million, which was better than our estimate of
$82.7 million. Although SG&A increased as a percentage of revenue from 108% in 4Q98 to 113% in
1Q99 this was in line with our expectations. We expect the company to continue incurring significant
SG&A costs as they expand into additional markets.
Line Additions & Building Acquisitions
WinStar added 65,000 installed lines in the quarter, bringing its total installed lines to
384,000. The company continues to focus on selling to on-net customers and is only doing resale where
they need to accommodate a customer. Of the 65K lines added 40% were on-net bringing the total on-net percentage to 24% up from 20% in 4Q98 and we expect this on-net percentage to accelerate in 1999 due to
the success of Project Millennium and the continued expansion of the network.
The company obtained building access rights, which is the first step in the process of bringing a
building on-net, to more than 600 buildings in 1Q99, bringing the current total to more than 4,800. This
puts WinStar on target to reach their 1999 goal of 8,000 building access rights.
Capital Position
WinStar ended the quarter with $409.564 million in cash. The company has been drawing on
the $2 billion Lucent vendor financing facility and we estimate they've accumulated approximately $185-
200 million worth of drawdowns to date. Capital expenditures for the quarter were $224 million. Of the
total spent in CAPX approximately $35 million was cash that WinStar disbursed, the remaining CAPX
was funded through the Lucent & Williams transactions. We feel this is a significant point as WinStar
was able to deploy $224 million worth of capital in the quarter using $35 million of its own cash and by
leveraging the financing arrangements it has with Lucent & Williams.
With its cash position and the Lucent financing, the company should be funded through
1999. We expect capital expenditures for 1999 to be $600 million, primarily focused on the network
buildout, operational support systems, and payments for the William's network.
Conclusion
WinStar continues to execute on the plans the company laid out in the fourth quarter and has started
out 1999 with a solid first quarter. With the accelerated network buildout, the expansion into 21 new
markets in 1999, and the continued focus to drive customers on-net, we expect WinStar to continue to
execute on its strategy and to drive shareholder value. We reiterate our BUY recommendation and $54
price target. |
