Flame on dude!: "Metricom, Inc. - MCOM: Initiating Coverage With a HOLD Rating
McDonald Investments Inc., A KeyCorp Company David M. Walrod, CFA
High-Speed Wireless Data 216.443.4648
January 18, 2001 dwalrod@mcdinvest.com
Rating HOLD (3) Next Quarter December
Price $14.25 -$3.20
52-Wk Low $6 vs. -$2.51
52-Wk High $110 Reporting Date 2/8/01
12-Month Price Target NA Dividend $0.00
2001E -$18.45 Yield 0.0%
2000E -$7.63 Market Cap. $437.5
1999A -$5.13 Book Value $11.99
2001 P/E NM Estimated Growth 50
2000 P/E NM Trading Volume 1,161,339
EV/EBITDA 2000E NM Fiscal Year December
* * * McDonald Investments Inc. makes a market in this issue * * *
Metricom at a Glance
Metricom (NASDAQ: MCOM), headquartered in San Jose, CA, is in the process
of rolling out a nationwide high-speed wireless network. Service is
currently available in 12 major metropolitan areas and allows average
end-user speeds of 128 KBPS. There are two additional markets that
operate on the old 28.8 KBPS system for now. The network allows users
to access the internet from anywhere within the coverage areas, as well
as at 15 airports. The company's network operates under the brand name
Ricochet.
Summary and Recommendation
We believe that the company offers an exciting solution for wireless access
to the internet. The company rolled out high-speed coverage during 3Q00
in some major markets, and continues to add new markets. The company is
actively promoting the service, but at this time it is difficult to
gauge customer reaction. Due to our concerns about the speed of the
rollout and consumer acceptance, we initiate coverage of MCOM with a
Hold (3) rating. Our estimates for 4Q00 are ($3.20) vs. ($2.51), and
for FY00 ($7.63) vs. ($5.13). Our FY01 estimate is ($18.45).
Positives
Growing Market - The internet has become a valuable resource for both work
and personal use. IDC estimates that 40% of computer users worldwide
working for mid-sized and large enterprises would remotely access
corporate networks. Furthermore, they estimate that 47 million U.S.
workers will spend at least 20% of their time away from the office in
2003. We believe that these workers will be interested in being able to
access their network without going through the trouble of logging in
through a wired access point.
Microsoft (MSFT-NASDAQ) - At the COMDEX show in November 2000, MCOM
unveiled an application that allows users of MSFT Pocket PC operating
system hand held computers to access the internet using Ricochet. The
MSFT operating system is a challenge to the Palm (PALM-NASDAQ) OS. We
believe that Ricochet's compatibility with the MSFT operating system
will drive demand.
First to Market - The Ricochet network is a high-speed network that offers
users average connection speeds of 128 KBPS. We believe that this is
the fastest wireless access available today. Importantly, this service
is now available in 12 major metropolitan areas, and will be available
in 46 markets by the end of 2001. 3G, which is the next generation of
spectrum, is expected to provide similar connectivity speeds. However,
3G spectrum will not be auctioned in the U.S. until the second half of
2001. We do not believe that this spectrum will be available for
consumer use until late 2002 or 2003. This gives MCOM an early mover
advantage.
Channel Partners - MCOM has assembled a strong list of distribution
partners. These include some of the top names in the industry such as
Worldcom (WCOM-NASDAQ), Juno Online Services (JWEB-NASDAQ), Wireless
WebConnect, GoAmerica (GOAM-NASDAQ) and Aether Systems (AETH-NASDAQ).
In addition to these names, MCOM continues to seek out additional
distribution partners.
Financial Backers - There are several strong investors that are backing
MCOM wireless deployment. WCOM, which we mentioned above as a
distribution partner, purchased $300 million of preferred stock, and
assuming that MCOM meets certain conditions, has guaranteed payments of
$388 million over a five-year period. In addition to WCOM, Paul Allen,
through his Vulcan Ventures, also purchased $300 million in preferred
stock. This is in addition to the over 9 million shares of common stock
he owns.
Risks
Low subscriber base - The high speed Ricochet system went live during 3Q00.
At this point the subscription base is very small. The success of the
company is dependent on a large number of subscribers viewing this as
the best option for accessing the internet and their corporate network.
At this early stage it is difficult to gauge user demand for the
service.
Unproven technology - Among consumers, there remains some skepticism about
the reliability of the Ricochet system. The company plans a massive
advertising campaign in 2001, which will develop brand identity and
build consumer confidence.
Funding - As of September 30, the company had in excess of $700 million in
unrestricted cash and investments. However, additional funding is
needed to finish the build out of service and to fund ongoing operating
losses. The company estimates that it will need to raise an additional
$500 million before it is cash flow positive. With its share price at
current levels, and a very tight high yield debt market, where this
funding will come from remains undetermined..
What is the near-term outlook?
Quite simply, the near-term outlook is for MCOM to continue to generate
large operating losses as it works to complete its nationwide footprint
and to grow its subscriber base. We look for the company to have
approximately 35,000 to 40,000 subscribers by the end of 2000. At the
end of 3Q00, MCOM had 2,500 subscribers on its high-speed service. Our
average subscriber base for the quarter is 17,500. Our EPS estimate for
4Q00 is ($3.20) vs. ($2.51), bringing the year totals to ($7.63) vs.
($5.13).
2001 will be a crucial year in the operational development of MCOM. The
company has launched its high-speed service and now must work to develop
a subscriber base that will justify the investment in the system.
Furthermore, the company will continue its rollout of service to
additional cities. If the company maintains its current schedule, it
will add 34 cities in 2001. We expect the company to have approximately
500,000 subscribers by the end of 2001. These subscribers will add in
gradually over the course of the year as the system is rolled out. We
estimate an average subscriber base for the year of 187,500.
The above subscriber base drives revenues of $71 million, a 657% increase
over our estimated 2000 revenues. However, the company will continue to
generate significant losses. The cost of providing the service will
increase, as will the depreciation of the network building costs. Also,
the company plans on instituting a very aggressive marketing campaign to
build service and brand awareness. Therefore, we expect EPS to decline
further, to ($18.45) vs. ($7.63). Beginning in 2002, we expect the
losses to begin to shrink. |
