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Strategies & Market Trends : Guidance and Visibility -- Ignore unavailable to you. Want to Upgrade?

To: Bob Biersack who wrote (32191)	11/20/2001 12:58:55 PM
From: r.edwards	Read Replies (1) \| Respond to of 208838

DCEL , Dobson Wireless,16-Nov-2001 03:46 DCEL APCS AW Dobson Communications: Reports 3Q, Updates Strategy (part 1 of 2) Lehman Brothers PRICE: (USD 9.75) EPS (FY Dec) ----------------------------------------------------------------------------- 2000 2001 2002 % Change Actual Old New St. Est. Old New St. Est. 2001 2002 1Q (1.26) (0.68)A (.68)A 2Q (0.46) (0.57)A (.057)A 3Q (0.47) (0.46) (0.48)A 4Q (0.71) (0.54) (0.61) ----------------------------------------------------------------------------- Year (2.90) (2.24) (2.33) (1.37) ----------------------------------------------------------------------------- P/E Market Data Financial Summary Market Cap 984.5M Revenue FY01 $870.6M Shares Outstanding (m) 103.0M Five-Year EPS CAGR - - Float 16.4M Return on Equity - - Dividend Yield 0.00 Current BVPS - - Convertible No Debt To Capital 76% 52 wk Range $22 - $8 Disclosure(s) A,C ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Rating Target ---------------------------------------- New: 1 - Strong Buy New: 28.00 ----------------------------------------------------------------------------- INVESTMENT CONCLUSION : * DCEL reported a strong 3Q01 and stated that it is no longer for sale. We reiterate our 1 Strong Buy rating with a $28 price target. SUMMARY : * DCEL added 41.5K subs vs. our 38.0K est. Churn of 1.9% was in line with our est. Total svc. rev. of $238M was higher than our $235M est, due to greater subs. EBITDA of $105M was higher than our $104M est. * DCEL is selling 5 properties to Verizon Wireless for $550M. We have revised our 2002 est. lower for the divestiture. We expect net adds of 175K, total svc. rev. of $889M, and EBITDA of $366M. * Mgmt. announced the co. was no longer looking at strategic alternatives involving change in control, which we think is a positive given current low valuation. DCEL PERFORMS AND WILL CONTINUE TO GO IT ALONE Dobson Communications reported a strong 3Q01, especially in light of the difficult operating environment and trends evidenced by other wireless operators. With the company meeting or beating all but one of our estimates, Dobson is bolstering its reputation as a consistent operator. Given the weakening cellular comps and misperceptions around the strategic position of the company, shares of DCEL have languished. With market valuations at current levels, Dobson has decided not to pursue strategic alternatives that involve a change in control. We are encouraged by the 3Q01 operating performance and think the future looks bright for Dobson. A STRONG QUARTER IN A DIFFICULT ENVIRONMENT On a proportionate basis, the company added 41,500 net new subscribers, 9% higher than our 38,000 estimate. The company was able to beat our estimate for net additions, despite witnessing retail traffic slow after September 11. While we had seen such outperformance on the subscriber acquisition front across much of the industry, Dobson seems to have bucked the trend by adding higher quality subscribers. Unlike its competition, churn of 1.9% was in line with expectations and remained at an industry leading level. Dobson attributed such low churn to the improvement in its network and the migration to digital which has resulted in a higher level of customer satisfaction. Both home service and roaming revenue were slightly better than expected. Home average revenue per user (ARPU) of $42 was in line with our estimate and when combined with the higher than expected subscriber additions resulted in home service revenue of $131.2 million versus our $129.9 million estimate. Roaming revenue of $106.9 million was also slightly greater than our $105.4 million estimate. On both the home and roaming sides, Dobson is experiencing the benefits of its conversion to digital, as digital subscribers and roamers are driving usage. Management highlighted that 95% of new subscribers opted for digital plans and the company ended 3Q01 with 68% of its subscriber base on such plans. Furthermore, 84% of total system minutes of use (MOU) were digital. DOBSON: PROPORTIONATE ESTIMATED VERSUS ACTUAL 3Q01 RESULTS Estimated Actual 3Q01 3Q01 Comments --------- -------- -------- Net Adds 38,000 41,500 Nice beat Churn 1.9% 1.9% Industry-leading Home ARPU $42 $42 In line Roaming ARPU $34 $35 In line Total ARPU $76 $77 Service Rev $129.9M $131.2M Roaming Rev $105.4M $106.9M Total Rev $235.3M $238.1M CCPU $31 $31 CPGA $383 $391 EBITDA $103.8M $105.0M Revenue beat Capex $38.5M $37.1M Moving to the expenses, cash cost per user (CCPU) of $31 was in line with our estimate, which is a good sign given all the misses we have seen this quarter. Cost per gross addition (CPGA) of $391 was 2% higher than our $383 estimate. As shown in our variance analysis, the increase in subscriber additions and CPGA resulted in absolute acquisition costs being $1.8 million higher than expected. EBITDA of $105.0 million was higher than our $103.8 million, driven by the greater revenue. DOBSON: VARIANCE ANALYSIS OF 3Q01 RESULTS All Figures Lehman DCEL Outperf./ $M Est. Actual Underperf. Comments ----------- ------ ------ ---------- ---------- Total Svc Rev 235.3 238.1 +2.8 Greater subs COS/GA 94.4 94.3 +0.1 In line Acq. Costs 37.1 38.9 -1.8 Greater adds ----------- ------ ------ ---------- EBITDA 103.8 105.0 +1.2 Revenue beat Capital spending for the quarter of $37.1 million was roughly in line with our $38.5 million estimate. FULL YEAR GUIDANCE STANDS On the conference call, management reaffirmed its previously stated full year guidance. We have, therefore, left our estimates for 4Q01 largely unchanged. While subscriber growth was strong during 3Q01, management stated that store traffic declined noticably after September 11 and, while it has since improved, remained below historical levels. The company expects the holiday season to be in line with its expectations, but we are cautious given the statements about retail traffic in October. With this in mind, we are reducing our 4Q01 net addition estimate by the 3,500 subscriber beat experienced in 3Q01, and therefore, are leaving our full year 2001 net addition estimate at 172,000. Given consistent performance, we have left churn unchanged at 1.9% for the full year. Our home service revenue estimate increases to $136.4 million from $134.3 million due to the increase in average subscribers. We have also reduced roaming revenue slightly to $86.9 million from $88.1 million, due to the slightly lower yield witnessed in 3Q01. While CCPU was in line for 3Q01, we feel that we had been overly aggressive in our estimates for the full year and have, therefore, raised 4Q01 CCPU to $29 from $28. We have adjusted CPGA slightly to $356. These adjustments in cost result in a full year EBITDA estimate of $352.2 million, which is at the low end of company guidance of 16% - 18% growth over 2000 pro forma EBITDA of $306 million. Given that we are at the high end of the range for net additions, it makes sense that we would be at the low end of the range for EBITDA. We have increased 4Q01 capex to $35.2 million in order to offset the slightly lower than expected 3Q01 spending. The company reiterated its full year guidance of $165 million in capital spending on a proportionate basis.