ML on TGNT (following TGNT's post-Hodulik damage control):
Investment Highlights:
· On August 11, TGNT released strong 2Q99
results with both revenue and EBITDA
performance in line with expectations and
with line adds better than our forecast.
· Raising 12-18 month price objective 6% from
$66 to $70 to reflect higher terminal yr.
margins from the announcement of a facilities-based
ISP initiative. Reiterate intermediate
term Accumulate and long term Buy opinions.
Fundamental Highlights:
· 2Q revenue reached $4.0M, up 164% sqt'ly
and in line with our forecast.
· During 2Q, TGNT installed approx. 20,000
lines, up 134% sqt'ly and 33% above our
estimate of 15,000 line adds.
· Quarterly EBITDA loss equaled $89.7M, an
$11.4M widening versus 1Q due to continued
heavy spending requirements related to
network deployment.
· At quarter end, buildings connected rose 90%
sqt'ly from 799 to 1,520 while buildings where
TGNT had secured access rose 37% to 4,252.
· No change to FY'99 revenue; increasing
FY'99 EBITDA loss est. by $15M to $363M to
reflect costs associated with ISP initiative.
After the market close on August 11, Teligent reported
strong 2Q99 results with both revenue and EBITDA in line
with expectations and with line adds better than our
forecast. Overall, Teligent continues to demonstrate
impressive progress on the deployment of its network
facilities. To reflect the impact from the facilities-based
ISP announcement, we are raising our terminal year gross
margin est. by 100 basis points, and we are in turn raising
our price objective by 6% from $66 to $70, or 12% upside
from the current price. We reiterate our intermediate term
Accumulate and long term Buy opinions.
Highlights of the 1Q99 results were as follows:
Revenue: 2Q revenues were $4.0M, up 164% sequentially
and in line with our estimate. We note that revenue mix
continues to be skewed towards long distance (LD) with
this segment representing 65% of total quarterly revenue
vs. our 45% estimate and 1Q's 60%. Rounding out the
quarterly revenue mix was: 1) local at 20% of total
revenue vs. our 38% estimate and flat with 1Q; and, 2)
data at 15% of total revenue vs. our 18% estimate and
1Q's 20%. We attribute this variance in revenue mix to a
number of large LD customers who were brought on board
during the quarter. Our view remains that revenue mix
should begin to shift more heavily to voice during 2H99.
Access Lines in Service: During the quarter, Teligent
installed almost 20,000 lines (comprised of local, LD, data
connections and T-1 circuits), a 134% sequential increase
vs. 1Q and 33% above our estimate of 15,000. Total lines
in service at quarter end were 37,526, a 113% sequential
increase and 15% above our forecast. Teligent ended the
quarter with 11,550 local lines, up 97% vs. 1Q's 5,871.
Revenue per line was about $50 per month, 25% above the
$40 seen in 1Q and in line with our expectation as local
line provisioning intervals improved during the quarter.
EBITDA: Reported 2Q EBITDA loss was $89.7M, a
$11.4M widening versus 1Q and in line with our
expectation. Quarterly EBITDA performance continues to
be impacted by the heavy spending requirements related to
commercial deployment of Teligent's broadband fixed
wireless networks and rapid buildup of a direct salesforce
and back office infrastructure.
Cap Exp: Capital spending for the quarter totaled $35M, a
38% reduction from 1Q's $57M and 53% below our
forecast of $75M. We attribute the variation to Teligent's
effort to add more buildings to existing “nodes” or point-to-
multipoint hubs during the quarter vs. increasing the
actual number of nodes. We make no change to our FY'99
capital expenditure forecast of $300M as we expect the
company to make up the variance during 2H99.
2 New Markets Added During 2Q: During the quarter,
Teligent rolled out commercial service in 2 add'l markets,
and one more has been subsequently added in July. Total
markets in commercial service are now 29, up 12% vs. 1Q.
Teligent appears on track to meet our expectation of 40
markets with commercial service by year end '99.
Building Access and Roof Right Acquisition: Buildings
connected to Teligent's network rose 90% sequentially
from 799 to 1,520 at quarter end. Of this total, 737 or 48%
were via wireless facilities, up 56% from 1Q's 471, and
783 or 52% were connected via wireline facilities, up
139% from 1Q's 328. Teligent had leases or lease options
secured for 4,252 buildings at quarter end, up 37%
sequentially and 18% above our estimate of 3,600.
New Data Initiative: In a strategic move to lower data
costs, Teligent announced a new initiative to become a
facilities-based Internet Service Provider (ISP) in lieu of
its current outsourcing relationship with Concentric
(CNCX, No Opinion, $19 3/8). We expect that EBITDA
losses will widen by $15M for ‘99 due to additional
operational expenses required to support the ramp up of
this effort, and we forecast that the service will begin to
provide cost savings to Teligent starting in '02.
Full Year Forecast Revisions: We remain confident that
the company is on track to meet our expectation for FY'99
revenue of $33M, but we are widening our FY'99
EBITDA loss estimate from $348M to $363M to account
for the newly announced ISP strategy described above.
Table 1: 2Q Results Vs. Our Forecast
($ millions) 2Q99A 2Q99E % Var 1Q99A
Sqt'l
Chg.
Local Services 0.8 1.5 -47% 0.3 164%
LD Services 2.6 1.8 44% 0.9 186%
Data Services 0.6 0.7 -14% 0.3 98%
Total Revenues 4.0 4.0 0% 1.5 164%
EBITDA -89.7 -89.8 NM -78.3 NM
Cap Exp 35 75 -53% 56.7 -38%
Lines Added 19,926 15,000 33% 8,500 134%
Buildings Connected 1,520 1,500 1% 799 90%
Leases or Options 4,252 3,600 18% 3,100 37%
Source: Merrill Lynch Estimates and Company Reports |
