excerpt from CSFB's Doughty's look at CLECS' quarter (email request to
rencap@home.com gets the 10 company, 27 page full pdf)
During the second quarter of 1999, the CLEC group outperformed the broader
market (see Chart 1). Our CLEC stock index produced a 42% rise in the quarter
versus the S&P 500, which increased 6.1%, the NASDAQ which increased 7.7%,
and the Dow Jones Industrial Average, increased 11.6%. This compares to last
quarter's results in which the CLEC group was up 46% versus the S&P, which
was up 4.7%, the NASDAQ, which jumped 11.5%, and the Dow, which increased
6.6%. The CLEC average that we use here is calculated as a simple average –
not a capitalization weighted average of most publicly traded CLECs including:
ADG, ALGX, ARTT, CLEC, COVD, ELIX, ESPI, GSTX, HYPT, ICGX, ICIX, ITCD,
MCLD, MGCX, NXLK, RCNC, RTHM, TGNT, and WCII.
We believe that the outperformance by the CLEC sector versus the broader mar-ket
is due to several factors, including: (1) the growing awareness by investors
that the CLEC group was undervalued, providing a great opportunity to buy into
this burgeoning sector at attractive prices; (2) the FCC staff, SBC, and Ameri-tech
preliminary agreement to a comprehensive set of merger conditions which
will benefit CLECs targeting SBC/Ameritech territories; (3) recent M&A activity,
including Global Crossing's agreement to acquire Frontier and U S WEST (and
Qwest Communications' subsequent counter offer), helped to re-ignite investors
hopes that consolidation among industry players would intensify; (4) improved
operating performance; (5) the growing view that the CLECs can play a key role
in delivering broadband to the market.
Our continued positive stance on the CLEC group is based on two factors. One,
we believe growth for the sector will be strong. Two, broadband demand will be-come
explosive.
FCC Staff Recommendation Regarding SBC/AIT Merger Augurs Well
For CLECs
On June 29, the FCC, SBC Communications and Ameritech agreed to a compre-hensive
set of merger conditions which will benefit CLECs targeting
SBC/Ameritech territories. The 28 conditions were agreed upon after three
months of discussions between the companies and FCC staff. The full
commis-sion is expected to put the conditions out for public comment
and subsequently
rule on the merger soon.
The overall goal of the FCC was to accelerate local phone competition and ac-cess
to high-speed Internet services for consumers. Potential benefits to the
CLECs include: 1) provide discounts to competitors of up to 32% for resold
service and 25% for leasing unbundled loops; 2) streamline the companies' Op-erational
Support Systems interfaces across all 13 states which will allow com-petitors
to order services and network facilities more efficiently; 3) make high-speed
Internet access via ADSL more broadly available; 4) offer competitors who
resell SBC's ADSL service a 50% discount on local residential loops that are
used exclusively for ADSL; and 5) accelerate by six months its entry into 30 new
markets within 30 months after the merger closes (making any facilities-based
CLEC located in one of these 30 target cities a potential acquisition target). The
FCC staff is also recommending that these conditions also require stringent per-formance
monitoring, reporting and enforcement provisions that could trigger
more than $2 billion in payments by the company if certain goals are not met.
Access Line Growth Remains Strong
We are targeting approximately 900,000 new business lines to be added by the
publicly traded CLECs during the second quarter (see Chart 2). This compares
with 850,000 in the March quarter and 775,000 in the December quarter. In addi-tion,
we expect the ILECs to add approximately 620,000 lines versus 733,000 in
the prior quarter. Thus, this will be the fourth consecutive quarter in which the
CLECs have outpaced the ILECs in terms of business access line installations. A
trend which we expect to continue.
McLeodUSA For the second quarter, we expect McLeod to report EBITDA of
$10.5 million versus $8.8 million in the prior quarter. Revenues are expected to
increase 21% to $218.9 million versus the prior quarter. Our revenue breakdown
for the quarter includes: a 27% increase in network maintenance revenues to
$10.3 million; a 16% increase in private line/data revenues to $19.6 million; a
49% rise in long distance revenues to $60.3 million; a 10% increase in local
service revenues to $62.9 million; a 29% increase in telemarketing revenues to
$4.7 million; and a 7% increase in directory revenues to $52 million. Our loss
per share estimates for the quarter and year are $1.03 and $3.72, respectively.
In the second quarter, we have estimated that MCLD will install approximately
54,500 access lines versus 34,000 in the prior quarter.
During the quarter, MCLD announced that it agreed to acquire Access Communi-cations,
Inc. and SJ Investments Inc., which operate as Access Long Distance,
for 1.9 million shares of 144 (a) unregistered stock, $50 million in cash, and $97
million in debt. According to the company, the acquisition will increase its 10-year
addressable market to $80 billion from $65 billion. Importantly, MCLD adds four
additional states to its territory, including Arizona, New Mexico, Oregon, and
Washington. In addition, MCLD will add some experienced management and
local resources including a 110-person sales organization. The facilities-based
long distance carrier provides voice and data long distance services to over
30,000 customers in nine states. The acquisition is another positive step in
MCLD's expansion strategy.
During the quarter, MCLD shares increased 26% versus the CLEC average of
42%. We maintain our Buy rating on MCLD and our $83 year-end 1999 price
target.
NEXTLINK Communications For the second quarter, we expect NXLK to report
an EBITDA loss (excluding deferred compensation) of $52.4 million versus a loss
of $47.4 million in the prior quarter. Revenues should rise 15% sequentially to
$55.9 million versus $48.6 million in the prior quarter. Our forecast for breakdown
by category of revenues versus the prior quarter includes the following: an 28%
decline in dedicated services revenues to $4.8 million; a 28% increase in
switched services revenues (local and long distance) to $35.8 million; a 39% in-crease
in shared tenant revenues to $4.3 million; a 1% decrease in long distance
revenues to $5.8 million; and an 8% increase in enhanced services revenues to
$5.2 million. Our EPS estimates are for a loss of $2.73 for the quarter and
$10.57 for the year.
During the quarter we expect NXLK to install approximately 55,000 access lines
versus 50,531 added during the first quarter, representing a sequential a 9% se-quential
growth rate.
During the quarter, NXLK announced that it has expanded its business plan to
include a significant focus on the burgeoning data market. As part of that strat-egy,
management will focus on the private line, ATM, Frame Relay, DSL, web
hosting, and Internet access markets.
Currently NEXTLINK operates in 13 of the top 30 markets in the U.S. By the end
of this year, that number will increase to 20. The company expects to have net-works
deployed in the remaining 10 by the end of 2000. In addition, by 2008
NEXTLINK forecasts that total U.S. telecom revenue will be approximately $455
billion. NEXTLINK forecasts that it will have total marketshare of 2.3-2.5% (which
includes an estimated 2.5-3% of the data market). That is comprised of the fol-lowing
company estimates: 1.5-2% of business/residential voice revenues; 4-5%
of total long haul revenues; and 2-3% of total broadband (DSL, Internet, ATM,
Frame Relay, VPN, and Web hosting) revenues.
The news contributed to NXLK's strong second quarter price performance with
shares gaining 25%. We continue to recommend purchase of NXLK shares and
view it as one of the top picks in the sector. Our twelve-month price target is
$120.
WinStar Communications We are targeting second quarter revenues of $97.3
million and an EBITDA loss of $86.6 million versus a loss of $79.8 million in the
prior quarter. Our forecast for breakdown of revenues by category versus the
prior quarter includes the following: a 14% increase in CLEC revenues to $77.9
million; a 15% decline in other telecom revenues to $6.2 million; and an 8% in-crease
in information services revenues to $13.2 million. Our loss per share es-timates
for the quarter and the year are $3.69 and $12.76, respectively.
During the quarter, we expect WCII to add approximately 68,000 access lines
versus 65,000 in the prior quarter. Of its 380,000 total access lines in service,
approximately 24% are on-net.
WinStar shares increased 29% during the second quarter versus the CLEC aver-age
of 42%. WCII is in a unique position to capitalize on demand for local
broadband. Recent results indicate that it is effectively executing to capture this
demand. We maintain our Buy rating and our twelve-month price target of $70. |
