Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Broadband Wireless Access [WCII, NXLK, WCOM, satellite..] -- Ignore unavailable to you. Want to Upgrade?

To: SteveG who wrote (949)	12/16/1999 8:20:00 AM
From: SteveG	Respond to of 1860

(will make time for a couple that are out) PW's John Hodulik ups to $90: WCII: Microsoft Leads $900 Million Investment December 16, 1999 KEY POINTS * WinStar announced a $900 million investment in the company by a group led by Microsoft, Credit Suisse First Boston, and Welsh, Carson, Anderson and Stowe. These three companies will contribute approximately $250 million each and Cascade will contribute roughly $150 million. * The investment comes in the form of a 5 3/4%, 10-year preferred convertible into common stock at a price of $67.50 per share after three years. After this investment the group will control approximately 13% of the company and receive two board seats. * We believe this investment gives a further endorsement to the company's position as a leading fixed wireless provider and reinforces the importance of fixed wireless technology as an alternative means to avoid the bottleneck of the local loop. * Going forward, Microsoft and WinStar will work closely in developing new applications to be delivered to small and medium-sized businesses over the company's broadband end-to-end networks. * The cash can be used to accelerate the company's business plan and improve its debt heavy balance sheet. Additionally, we believe substantial synergies will emerge and help improve WinStar's core business. * We are reiterating our Buy rating on WinStar shares while increasing our 12-month price target to $90 from $62 per share based on relative multiple analysis using the closest comparable companies as our guide. We are employing this interim valuation technique until better able to reflect the effects of this alliance on our long term model. Overview WinStar announced a $900 million equity investment from a group led by Microsoft, Welsh Carson, and Credit Suisse First Boston. These companies will each invest approximately $250 million while Cascade Investments will put in roughly $150 million. Cascade is an investment firm managing the personal funds of Microsoft Chairman Bill Gates, adding another dimension to the relationship between the two companies. Representatives of Welsh Carson and CSFB will join WinStar's board of directors. The investment comes in the form of a preferred stock paying 5 3/4% quarterly dividend which WinStar can be required to be converted into common stock after three years. After ten years, the company can redeem these shares in cash or common stock at its discretion. Expect substantial synergies As part of the deal, WinStar and Microsoft have agreed to cooperate on the development and marketing of applications to be delivered to the small and medium-sized business market over the company's end-to-end broadband networks. WinStar is currently building the infrastructure required to host Microsoft and other applications. Three Supercenters are under construction that will provide 250,000-300,000 square feet of data center space once completed. Additionally, the company is facilitating a number of its 45 central offices in major cities that will bring these applications closer to the end user to improve reliability and download speeds. Meanwhile, the development of office.com, the company's portal addressing the needs of small and medium-sized businesses, will continue to develop as the gateway through which many of these services will be provided. We continue to believe that competitors in the Internet Infrastructure space will be a major beneficiary of the trend toward rented applications (See PaineWebber note "PaineWebber ASP Conference Affirms Market Opportunity for Hosting Firms," 12/15/99). The alliance with Microsoft and prior efforts to develop office.com and the hosting infrastructure, combined with the company's core competency in broadband fixed wireless will enable WinStar to participate in the growth of this market as it continues to evolve. At a base level, the $900 million in cash will improve the company's balance sheet and help fund additional expansion of its fixed wireless and data service footprint. WinStar is currently burdened by a large amount of high interest debt, with some issues paying in excess of 14%. We expect the company to refinance a portion of this debt to take advantage of its improved capital structure. From an operational standpoint, the investment should improve WinStar's ability to sell its services on the strength of the Microsoft name. One of the hurdles the company has had to overcome is its lack of brand recognition in the small and medium-sized business market. Sales of co-branded data services should improve revenue growth in two ways. First revenue per customer should grow as the company bundles these new services into its product offering. Second, the addition of new customers should increase as the Microsoft brand name and efforts of the joint sales and marketing program improve distribution capabilities. Valuation and Summary Management suggested that the partnership with Microsoft could boost revenues in 2000 by $20 million with the full effect hitting the income statement in 2001. While we are not increasing our 2000 revenue estimate of $645 million at this point, we are more inclined to believe it will prove conservative. Although the platform provided by this WinStar-Microsoft agreement should improve revenue growth in high margin data services, details regarding the rollout of these new services have not yet been disclosed and we are unable to work the effects into our model at this time. Despite this fact, we are increasing our price target on WinStar shares to $90 per share based on a relative multiple analysis using NEXTLINK (NXLK-$71.94)[2] and Teligent (TGNT-$62.00)[2] as the closest comparables. Based on our estimates for 2000 revenues for both companies, NEXTLINK and Teligent both trade at an enterprise value to 2000 revenue estimate of roughly 30x. On a pro forma basis, WinStar will have 99 million shares outstanding (including conversion of the Series A, D, and F preferred issues and all issued options and warrants) giving the company a market capitalization of roughly 7.2 billion at $72.50 per share. Adding debt less cash brings the total enterprise value to approximately $8.0 billion. This equates to 12.4x our estimate for revenue in 2000, a substantial discount to the NEXTLINK and Teligent valuation. However, these companies are currently growing at a faster rate than WinStar and therefore deserve a higher multiple. We have employed a 15x multiple to our estimate for 2000 revenues in our interim valuation, a conservative number equal to one-half the multiple earned by the comparables. This provides us with a new 12-month target price of $90 per share.

To: SteveG who wrote (949)	12/16/1999 8:25:00 AM
From: SteveG	Respond to of 1860

WCII: SHARP GAINS DRIVEN BY STRONG FUNDAMENTAL CATALYSTS--STRONG BUY Deutsche Banc Alex. Brown - US Equities Bo Fifer,Jeffrey L. Hines December 15, 1999 HIGHLIGHTS: --WCII up 61% (versus 9% gain in S&P 500) post year 2000 revenue guidance announcements. We believe three factors are driving the stock: 1) Bullish expectations for 4Q99 and 2000 remain intact. 2) Valuations catching up with other mature CLECs (or at least beginning to). 3) Office.com represents significant "hidden" asset. --NET-NET: We continue to view the wireless access companies (including WinStar) as long-term data plays. While our voice-centric models measure access lines, ultimately data throughput per customer and, of course, revenue per customer will be the key metrics for these bottleneck-breaking stocks. Our 12-month price objective on WCII, based on our DCF, is $73/share. Maintain STRONG BUY investment rating on the shares. DETAILS: Following the debacle surrounding WinStar's guidance on 2000 revenue that was significantly below consensus, the Company's stock bottomed out at $37/share on 26-Oct. Since that point, WCII has rebounded 61% (versus a 9% gain in the S&P 500) and is within 2 points of it's all-time high. Stock/Index Last 4 Weeks LTM YTD WinStar +14% +72% +61% Nextlink +15% +178% +135% CLEC Index +8% +90% +77% S&P 500 -1% +18% +14% Source: FactSet Data Systems, Deutsche Banc Alex. Brown. We believe three factors have contributed to this success: (1) Expectations Remain Bullish We expect WinStar to post strong operating and financial results for 4Q99 and 2000, and continue to forecast $700M of revenue in 2000 (at the high end of Street expectations). We believe the conditions exist for a series of upgraded expectations from the Street moving forward as the Company posts sequentially improving results. Our gross margin forecast of 50% exiting 2000 may well be conservative, which COULD lead to EBITDA breakeven a quarter or so earlier than expected (although we continue to forecast a 2001 breakeven). Metric 4Q 99E 2000E Revenue $136.9 MM $702 MM Gross Margin 35.5 % 44.8 % EBITDA -$63.6 MM -$142 MM Access Line Adds 80,000 370,000 Source: Deutsche Banc Alex. Brown. (2) Getting Credit For Advanced Operations WinStar has built a "blueprint" off of which we believe other successful nationwide CLECs will run their own operations. WinStar has assembled the various components of a nationwide local network--wireless access, local access fiber, local backhaul fiber, long distance fiber, and now a global presence--which should enable the Company to drive on-net performance (and gross margins). Yet WCII has historically traded at a discount to the CLEC group, which generally has a LESS well-developed network/customer base. With investors beginning to reward management, strategic, and financial differentiation, we believe WinStar will ultimately be recognized as an industry leader. Company/Group EV/Access Line EV/Gross PP&E EV/2000 Revenue WinStar $14,250 4.6x 10.8x Nextlink $37,400 11.8x 26.5x CLEC Group $17,131 6.8x 13.1x Source: Company data, Deutsche Banc Alex. Brown. (3) Office.com Our model incorporates zero impact from Office.com, the business to business destination site on the Internet in which WinStar owns 67% (the other 33% being owned by CBS). It is interesting to note that Office.com's closest comparable (VerticalNet) trades at a $4 billion-plus market capitalization. A similar valuation on Office.com--which we expect WinStar to take public early in 2000 as market conditions permit--would imply $20/share of INCREMENTAL potential upside to our target even after taking a 40% tax haircut. Of course, basing private Internet company valuations on public market levels may not be appropriate, but whatever the value, we are confident it is higher than the $0 in our model! NET-NET We continue to view the wireless access companies (including WinStar) as long-term data plays. While our voice-centric models measure access lines, ultimately data throughput per customer and, of course, revenue per customer will be the key metrics for these bottleneck-breaking stocks. Our 12-month price objective for WCII, based on our DCF, is $73/share. Maintain STRONG BUY investment rating on the shares.

To: SteveG who wrote (949)	12/16/1999 8:26:00 AM
From: SteveG	Respond to of 1860

WCII: Microsoft/WinStar to Deliver Broadband Services--Reiterate STRONG BUY Deutsche Banc Alex. Brown - US Equities Bo Fifer,Jeffrey L. Hines HIGHLIGHTS: -- WinStar announced (15-Dec) a convertible preferred investment of $900 million by a Microsoft-led group. Deal highlights value of fixed wireless in driving high bandwidth to the masses, and the new applications that will ride over the new high speed network. -- WinStar gains valuable strategic partner (perhaps the one element lacking from the Win Star story until now), and the ability to co- brand its local services with Microsoft. We view WinStar as a clear leader in the CLEC arena, and wonder how long the market's extreme discount relative to its peers can last. -- Management expects "only" approximately $20M of revenue in 2000 from this new relationship, but we have now identified approximately $50M of revenue incremental to management's guidance of $650M (in line with our $700M estimate). -- Office.com and international operations remain SIGNIFICANT hidden assets. -- NET-NET: We are raising our 12-month price objective on WCII to $81/share from $73/share, based on our DCF. Maintain STRONG BUY rating. DETAILS: Almost one year to the day after WinStar announced its ground-breaking deal with Williams for long haul fiber, today (15-Dec) Win Star announced a $900M investment from a group led by Microsoft. Microsoft will invest $250 million, along with approximately $150 million from Bill Gates' investment vehicle, Cascade Investments, and other financial investors. We have raised our 12-month price objective for WCII by $8 to $81/share based on our DCF. Generally, we expect the opportunity for greater bandwidth services to result in greater revenue per sub and overcome the dilutive effects of the deal. Investment Details The preferred carries a 5.75% coupon, paid in-kind, common, or cash at Win Star's discretion (they'll pay in-kind, at least for now). The stock is non-callable for 3 years and the investment group at day one will own 13% of Win Star's fully diluted shares (and growing), including approximately 6% by Microsoft/Gates. The convertible preferred stock carriers a $67.50 strike price representing a 25% premium to WinStar's 30-day moving average (and in line with other recent wireless CLEC deals). Two of the financial investors will receive board seats. We are unaware of any board-level participation from Microsoft or Cascade. Why Microsoft Makes Sense? We have long considered software companies to be among the five industries likely to have a strategic interest in the wireless access carriers (WACs) such as WinStar. Driving broadband access to the mass market (as Win Star and the other WACs are doing) should lead to an explosion in the demand for new applications that make use of that bandwidth. Who better to capture that demand than the world's largest software manufacturer? Moreover, we believe this deal, on top of Microsoft's recent investment in Teligent, signifies a strong desire on the part of Microsoft to crack the new applications market by pushing bandwidth further out to the edge of the network. Under such conditions, Microsoft--and their carrier partners-- benefit from a new generation of distributed applications. We still believe, however, that wireless carriers remain attractive assets to at least four other groups, including long distance carriers, CLECs, ISPs, and foreign telcos, and nothing in this deal with Microsoft would preclude another company from acquiring/partnering with Win Star. Wireless is important because running a 10 Mbps LAN and serving applications remotely (off-site) only makes sense if the user can extend that 10 Mbps pipe out to where the applications reside. In other words, a small/medium business with dial-up access (or even, say T1 access at 1.544 Mbps) will not be able to access the applications without delay relative to the current LAN model. The internal 10 Mbps pipe is connected to an external 1.5 Mbps pipe, which is over 6 times slower (and over 66 times slower than popular Fast Ethernet technology!). Because we believe WinStar can drive broadband access to the largest segment of the business market at speeds of up to 155 Mbps today (55% faster even than Fast Ethernet), we believe the network computing model may in fact be DEPENDENT on wireless in buildings unserved by fiber or other high speed media (into which category the overwhelming majority of buildings fall). Strategic Backing Secure The one area in which WinStar was arguably NOT a market leader was on the strategic front (unless you consider the efficient wireless assets to be strategically important, as we do). With Microsoft as a strategic partner, that is no longer the case. Nextlink has Craig McCaw/Forstmann Little, Teligent has Microsoft, Advanced Radio has Qwest, and now Win Star has Microsoft. In addition to WinStar's strong strategic partner, the Company is very strong financially with well over $2.5 billion of available capital to build out the domestic and international networks, or to restructure the (admittedly messy) balance sheet. We believe WinStar now has sufficient CASH to last well into 2001 and more than enough capital inclusive of the Lucent facility to fund operations to free cash flow sometime in 2002. We should also emphasize that WinStar retains the right to co-brand its offering with Microsoft, which could potentially lead to greater subscriber growth. Also, as new broadband services get deployed, the demand for broadband access should grow and revenue per customer should accelerate. Recognizing The Value WinStar has built a "blueprint" off of which we believe other successful nationwide CLECs will run their own operations. WinStar has assembled the various components of a nationwide local network--wireless access, local access fiber, local backhaul fiber, long distance fiber, and now a global presence--which should enable the Company to drive on-net performance (and gross margins). Yet WCII has historically traded at a discount to the CLEC group, which generally has a LESS well-developed network/customer base. With investors beginning to reward management, strategic, and financial differentiation, we believe WinStar will ultimately be recognized as an industry leader. Company/Group EV/Access Line EV/Gross PP&E EV/2000E Revenue WinStar $15,400 5.0x 11.7x Nextlink $38,600 12.2x 27.4x CLEC Group $17,300 6.9x 13.2x Source: Company data, Deutsche Banc Alex. Brown. Even after the $1.5 billion of market capitalization added to the Company post today's announcement, WinStar continues to trade at a discount to its peer group, despite its clear leadership position. Will Voice Or Data Drive These Models? No question in our mind: data. Today we (and we believe the Street) have a voice-centric model that tracks access line growth. Moving forward, we believe data services will be the key driver of this (and the other wireless CLEC) stocks. More important will be the average bandwidth demand per customer and average revenue per customer. Bundled services will likely include local, long distance, data, and maybe multimedia, but delivered over a much different network. We look forward to incorporating the data opportunity more appropriately into our model, but for now view these services as largely incremental to our model (and our targets!) "Hidden Assets" Perhaps Deserve Some Attention We have identified Office.com as a potentially significant source of upside potential to our model. It is interesting to note that Office.com's closest comparable (VerticalNet) trades at a $4 billion-plus market capitalization. A similar valuation on Office.com--which we expect Win Star to take public early in 2000 as market conditions permit--would imply $16/share of INCREMENTAL potential upside to our target even AFTER taking a 40% tax haircut. Of course, basing private Internet company valuations on public market levels may not be appropriate, but whatever the value, we are confident it is higher than the $0 in our model! WinStar's international operations also represent $0 of value in our model (although we suspect the Street has built some impact from this business into the stock price). We expect to explicitly account for international operations in 2000 in advance of what we believe could be a significant ramp in 2001. NET-NET Management indicated that the Microsoft relationship could account for perhaps $20M of revenue in 2000--or only a 3% boost to management's $650M guidance. However, we continue to believe our estimate of $700M is well within reach, given the recently signed deals with Cignal and Microsoft, and a favorable outlook for Office.com advertising revenue--which we believe account for $50M of incremental revenue to the official guidance. That alone would get us to $700M. We have adjusted our model in two ways: we have increased our out-year (2002 and beyond) revenue per subscriber forecasts as a result of greater bandwidth demand associated with new applications. We also believe that the Microsoft brand, if implemented, could result in higher sales but we have not explicitly accounted for this potential. We have also incorporated the (fairly significant) dilution from the convertible preferred shares. We have assumed conversion after 3 years, for a total of 15.6 million new, dilutive shares. We have not made significant changes to our model in 2000 or 2001. The net effect of the deal is to raise our 12-month price objective by $8 to $81/share. We are maintaining our STRONG BUY rating.

To: SteveG who wrote (949)	12/16/1999 8:30:00 AM
From: SteveG	Read Replies (1) \| Respond to of 1860

AG Edward's (more conservative) Dave Heger: [aside - since CSFB is restricted, AND since Reingold/Kastan have not yet opened coverage on their universe, nothing yet out of them - but as WCII's banker, suspect positive comments. Likewise w/Grubman, also not out as yet. Also, Renegar is gone from BofA and Tanner can't publish externally until they bring in someone - w/rumors of DBAB's Conrad being spoken with. Zito purportedly gone from Legg, possibly winding up at Lehman, and Merrill feeling a BIG vacuum] WINSTAR ANNOUNCES $900 MILLION INVESTMENT BY MICROSOFT & OTHERS ------------------------------------------------------------------------------ WinStar Communications, Inc. (WCII/72 9/16) BUY/SPECULATIVE ----------------------------------------------------------------------------- Winstar announced today that Microsoft, Credit Suisse First Boston Equity Partners, Welsh, Carson, Anderson and Stowe, and Cascade Investments will invest $900 million in new capital into the company in the form of convertible preferred stock. By our estimates, this investment, plus previous equipment financing commitments from Lucent Technologies, will fund Winstar's business plan through 2003. Besides eliminating near term funding issues, we feel the investment represents a strong "seal of approval" regarding Winstar's broadband wireless technology and its more recent efforts to enter the application service provider arena. We are reviewing our valuation on Winstar shares since the capital infusion will decrease the investment risk associated with the stock. We will assume a slightly lower cost of equity capital in our discounted cash flow model. Winstar can further decrease its cost of capital if some of the cash is used to pay off a portion of its debt that pays annual interest of 14 - 15%. Our preliminary analysis yields a valuation of $76 per share, but this could increase with the inclusion of an additional year in our discounted cash flow model. We recommend investors hold off buying shares for now, however, until the initial exuberance surrounding today's announcement settles. Microsoft and Winstar have entered a strategic relationship to deliver and promote broadband applications. The two companies will collectively market e-commerce and other business applications that will help small and medium size businesses use the Internet in their daily operations. Also, Microsoft will license its software solutions on an applications service provider (ASP) basis, meaning that Winstar will host Microsoft applications on its servers on behalf of end user customers. When a customer needs to use an application, he accesses the application via Winstar's network. As a result, small businesses have access to advanced applications at a reasonable cost and do not have the expense of purchasing and maintaining their own software and servers. Microsoft and Winstar will also jointly develop additional services that use Winstar's broadband network. Winstar will participate in the Microsoft Partner Solution Center and will concentrate on high bandwidth services, such as IP videoconferencing. The two companies will also develop other applications, such as e-commerce and media streaming. The new investment provides cash for Winstar at a relatively low cost. The $900 million in convertible preferred stock converts to common stock at $67.50 per share and pays a dividend of 5 3/4%. The dividend is payable in cash or Winstar common shares, at the discretion of Winstar management. The stock is not callable for three years, but after that time, Winstar can force conversion at 155% of the conversion price. The convertible preferred will add about 13.3 million shares to Winstar's fully diluted share count, increasing total diluted shares of 99 million. Winstar can use the capital to fund operations, as well as pay down some of its existing debt. We had been projecting that Winstar would need to raise additional capital at the end of next year to fund its operating cash flow losses. The $2 billion in Lucent financing that Winstar secured in 1998 is only applicable to network investments and cannot be used to fund operating losses. Winstar may choose to apply some of the cash to pay down some of its existing debt, which would lower its cost of capital. We feel that the investment reduces WCII's investment risk and cost of equity capital. Up until today, we calculated Winstar's historical cost of equity capital at 22%. If this cost of capital drops to 19%, our valuation on WCII shares in our discounted cash flow model increases to $76. We are in the process of further assessing the value of Winstar shares, as we are extending all of our CLEC models out to include estimates for year 2009 since we are approaching the end of the current year. We anticipate this analysis will further increase our valuation on Winstar shares. We recommend that new investors stand on the sidelines for right now. Although we continue to like the long-term outlook for Winstar, we feel that the initial market exuberance following the announcement today is not the time that investors should be adding to their positions. Instead shares may settle back a little more over time, offering a more favorable opportunity. We will soon follow up with additional thoughts on our valuation of WCII shares. Our initial view is that it could be in the low $80 range.