Goldman's Hoexter on WCII
Goldman, Sachs & Co. Investment Research
WinStar Communications, Inc.
* * Solid 2Q, Revs Strong, Soft Gross Margin, But EBITDA In-Line * *
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* WinStar reported solid second-quarter results, with stronger-than- *
* expected revenue growth and in-line EBITDA losses and access line net- *
* adds. However, we note that gross margins were 200 basis points shy of *
* our estimate due to strong hub site growth (although the extra network *
* cost was offset by lower-than-expected SG&A). *
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Ken Hoexter - Investment Research
==================== NOTE 8:56 AM August 11, 1999 =====================
Stk Latest 52 Week Mkt Cap YTD Pr Cur
Rtg Close Range (mm $) Change Yield
--- ------ ------- ------- ------ -----
WinStar Communications, Inc. MO 46.00 63-13 2190.6 18% 0.0%
--------------Earnings Per Share---------------
WCII Mar Jun Sep Dec FY CY
2000 FY -3.19 -3.18 -3.16 -3.12 -12.65
1999 FY -3.72A -3.53A -3.39 -3.11 -13.70
1998 FY(A) -2.51 -2.76 -2.83 -3.80 -11.97
-Abs P/E on- -Rel P/E on-- EV/NxtFY LT EPS
Cur Nxt Cur Nxt EBITDA Growth
----- ----- ----- ----- -------- ------
WCII FY -3.4X -3.6X -0.1X -0.2X -17.65 NA%
===========================================================================
o REVENUES INCREASE 10% SEQUENTIALLY. WinStar posted revenues of $97
million, a 10% sequential increase, in-line with first quarter's 9%
sequential increase, and ahead of our $94 million estimate. Second-
quarter's growth was driven by strength in core telecom revenues, which
increased 11% sequentially to $84 million, versus our $81 million
estimate. We have raised our revenue estimate slightly for 1999 to $443
million from $440 million due to this quarter's greater-than-expected
increase in core revenues.
o GROSS MARGIN IMPROVES BUT NOT AS MUCH AS EXPECTED. Gross margin
increased to 24%, slightly above first quarter's 23% margin, but below
our 26% estimate. Gross margin improvement was dampened by higher-than-
expected network expense as the company prepares to rollout to 14 new
markets by year-end. Additional expenses were created by the rapid hub
site deployment (to 97 hubs from 82) which increased cost of services
for the quarter to $73 million, above our $69 million estimate. We
expect gross margin to rebound in the second half of 1999, reaching
nearly 40% in the fourth quarter.
o EBITDA LOSS EXPANDS AS EXPECTED. The company reported EBITDA losses of
$83 million, in-line with our estimate. We believe that WinStar reached
its EBITDA loss trough this quarter and should reach EBITDA breakeven in
2001. We are expanding our 1999 EBITDA loss estimate slightly, to $286
million from $280 million, due to upfront network costs. Nevertheless,
we maintain our 2000 EBITDA loss estimate of $124 million.
o NET-ADDS ON-TARGET. As preannounced, WinStar installed 69,000 access
lines during the second quarter, a 5% sequential increase, and
essentially in-line with our 70,000 estimate. Approximately 48% of
second quarter's net adds were fully on-net, in-line with our nearly 50%
estimate, as the company focuses its sales efforts on on-net
initiatives, including "Project Millenium".
===========================================================================
INVESTMENT CONCLUSION
We reiterate our robust market outperformer rating on WinStar shares. The
company continues to demonstrate its ability to execute, migrate traffic on
net, and drive gross margin. The company has clearly taken significant
steps forward with its continued market rollout, international expansion, a
long-haul agreement with Williams, and a $2 billion vendor financing
commitment from Lucent. WinStar has the opportunity to provide broadband
services economically to a much greater audience than fiber networks,
providing services quickly and thus capitalizing on first to market
advantages.
WinStar is a CLEC operating via wireless point-to-point and point-to-
multipoint local loops. At the end of the second quarter of 1999, WinStar
offered service in more than 30 markets (including 2 international
markets). We continue to expect that WinStar will offer services in nearly
45 domestic and 6 international markets by year-end 1999.
DETAILS
REVENUES CLIMB 10% SEQUENTIALLY, STRONGER THAN EXPECTED
WinStar posted revenues of $97 million, a 10% sequential increase, in-line
with first quarter's 9% sequential increase, and ahead of our $94 million
estimate. Second-quarter's growth was driven by strength in core telecom
revenues, which increased 11% sequentially to $84 million, versus our $81
million estimate. Revenues from the company's new media division were
essentially in-line with our $13 million estimate. We have raised our
revenue estimate slightly for 1999 to $443 million from $440 million due to
this quarter's greater-than-expected increase in core revenues.
CORE REVENUES SHOW STRENGTH IN SECOND QUARTER
Sequential Difference
REVENUES ($ mil.) 2Q99A 1Q99A Increase 2Q99E from Ests.
Core Telecom $83.9 $75.9 11% $80.6 4%
New Media $12.6 $12.2 3% $13.0 -3%
Total Revenues $96.5 $88.1 10% $93.6 3%
ACCESS LINES MOVE ON-NET/ON-RADIO
Of the 69,000 net-lines WinStar added in the quarter, 48% were on-radio,
considerably higher than the 44% of first-quarter's net adds, as the
company shifts to on-net marketing. This quarterly growth raised on-radio
lines to 28% of the installed base, up from 24% at the end of the first
quarter.
TOTAL LINES INSTALLED End of 2Q99 2Q99 Net Adds End of 1Q99
On-Radio (on-net) 125.5 (28%) 33.1 (48%) 92.4 (24%)
On-Switch (no radio) 80.3 (18%) 3.5 (5%) 76.8 (20%)
Resale 71.0 (16%) 2.8 (4%) 68.3 (18%)
Total Lines Installed 276.8 (61%) 39.3 (57%) 237.5 (62%)
Data Lines 127.0 (28%) 27.6 (40%) 99.4 (26%)
Long Distance Lines 49.3 (11%) 2.1 (3%) 47.2 (12%)
Total Resale Lines 247.2 (55%) 32.4 (47%) 214.8 (56%)
Total WinStar CLEC Lines 453.0 (100%) 69.0 (100%) 384.0 (100%)
MATURE MARKETS DEMONSTRATE APPETITE FOR ON-NET LINES
WinStar's most mature markets - New York City, Los Angeles, Chicago,
Boston, and Dallas - added 62% of lines on-net during the quarter, allowing
WinStar to post its third consecutive quarter of positive EBITDA in New
York City. In WinStar's second round of mature markets - Denver, San
Francisco, and Washington, D.C. - 67% of lines added during the quarter
were on-net, led by 85% of net adds in Denver coming in on-net.
ROOF RIGHTS
At the end of the second quarter, WinStar had roof rights to more than
5,500 buildings, a 17% sequential improvement. Roof rights are a
burgeoning indicator of WinStar's addressable market. With 97 hub sites
deployed and each hub site able to address 25-50 buildings, WinStar can
address a total of 3,637 buildings. Thus, WinStar is able to address
appoximately 66% of the 5,500 buildings to which it has already acquired
roof rights. The company has reached a 15% building penetration across its
markets, surpassing its 10% target penetration. We continue to estimate
that WinStar will have access to 8,000 buildings by year-end 1999.
CAPITAL EXPENDITURES HIGHER THAN EXPECTED
During the second quarter, the company spent $323 million in capital
expenditures, approximately two-thirds of which ($213 million) were cash
costs (with the remainder related to Lucent's vendor financing package)
above our $158 million estimate as the company accelerated its hub site
deployment. We have raised our 1999 capital expenditure estimate to $620
million from $600 million to reflect the company's aggressive network
build, nevertheless we believe the company is funded through the end of
2003 (given available vendor financing).
WINSTAR SELECTED PERFORMANCE DATA
(act.) (est.)
2Q98 3Q98 4Q98 1Q99 2Q99A 2Q99E
Revenues ($ mil.) $56 $61 $81 $88 $97 $94
Annual Rev. Growth 244% 203% 170% 92% 72% 66%
Sequential Rev. G. 22% 9% 33% 9% 10% 6%
EBITDA ($ mil.) ($48) ($48) ($79) ($80) ($83) ($83)
EBITDA Margin -86% -79% -98% -90% -86% -89%
EPS ($2.76) ($2.83) ($3.80) ($3.72) ($3.53) ($3.45)
Access Lines ('000) 197 257 319 384 453 454
Net Line Adds ('000) 52 60 62 65 69 70
Hub Sites Operational 58 60 62 82 97 102
Capital Expend. ($ mil.) 91 103 211 81 213 158
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