cnet.com
Wireless net adds information
J.P. Morgan sees slower growth but better profitability at wireless services firms in
report 10/15/02
10/15/02 07:44 AM
Source: JP Morgan H&Q
Analyst Thomas Lee expects third-quarter results to be affected by short-term issues, such as the churn related to former WorldCom
subscribers. He notes overall growth rates are slowing, which makes churn and pricing more important. Still, Lee says, the sector
seems to be expanding faster than the overall economy. And he sees growing operating cash flow margins. On the other hand, Lee
doesn't expect third-quarter results to change investment stances on wireless services firms, for reasons including excess competition
and concerns about consumer demand.
Visit the CNET Brokerage Center for daily reports from the top Wall
Street analysts.
Wireless Services
3Q02 Preview: Slower Growth but Better Margins
Analysts: Thomas J. Lee, CFA, John Cunney and Zachary Datikash
Wireless carriers will begin to report third quarter 2002 results this week,
led by Sprint PCS on Thursday.
* 3Q results are expected to reflect the transitory impact of carrier
strategies, rather than current long term trajectories – for instance, carriers
acquiring WCOM's reseller subs (AWE, Cingular and Verizon Wireless)
could see very high churn as many of subs will not accept the offer to
switch to a new carrier. At PCS, ClearPay transition issues have been
known and PCS has pre-announced negative net adds.
* On the upside, Nextel should easily come in above its stated guidance for 3Q EBITDA of at least $816 million, and Street
expectations place it closer to the mid to high $800 million range. As we noted last week, we see some timing benefits boosting their
results recently, and therefore view 3Q as benefiting from timing differences.
* Overall wireless growth rates are slowing. This suggests that the quality of the incremental user has less an impact on a carrier’s
overall results than the behavior and quality of the installed base. Consequently, whatever the existing 129 million users do with regard
to churn and pricing matter much more than the 2.5 million-plus net new customers.
* Lastly, investors still seem to be viewing U.S. wireless as “ex-growth”, although, as we discuss in our general observations below, the
sector seems to be generating growth rates faster than the economy and evidence of the scaling of the business continues.
* Net-net: We do not expect 3Q results to change the investment stance of any investor – the negative credit cycle, concerns about
consumer demand, the excess competition in wireless are all factors weighing on the stocks.
Important disclosures appear at the end of this report.
3Q Trends
Net Adds of 2.5 Million (Down 49.2% Year-Over-Year), Ending Base to Growth 14%
Gross adds (activations) are expected to be flat to slightly down for the third quarter to 13.5 million, leading to net adds of 2.5 million
(down 49.2%). If the industry achieves net adds at these levels, we would remain comfortable with our full year net adds expectations
of 14 million.
Churn is projected to be approximately 2.9% this quarter for the industry. Although somewhat high it represents only a 15 basis point
rise year over year, as third quarter is usually second highest churn quarter of the year. Moreover, 15 basis points of churn represent
approximately 500k additional disconnects or approximately the number of disconnects AWE and Cingular expect to have due to
WorldCom’s wireless unit closing.
Market share trends reflected in 2Q seemed to carry into 3Q—Verizon Wireless, Voicestream and Nextel gaining share, while AWE,
PCS and Cingular reflect higher than trendline churn (due to both Worldcom issues and poor quality sign-ups in previous periods).
Ending subs are expected to rise 13.9% year-over-year to 128.5 million, with base growth continuing to slow.
Average Monthly Bills (ARPU) is Essentially Flat, Leading to 12% Revs Growth
ARPU is expected to be essentially flat, as usage growth should offset per minute price deflation. We expect APRU to come in at $55,
2.3% lower than last year. As a result, revenues are projected to grow at 12% year-over-year to $83.9 billion annualized.
EBITDA Margins are up 2.9 Basis Points to 30.1%
Operating cash flow margins continue to expand, a function of scaling benefits of a higher revenue base (up 14%) while gross adds
(which drive marketing, or CPGA) are at flat levels. EBITDA margins are expected to hit 30.1%, up 2.9 basis points from last year’s
29.0% and down sequentially from 31.4% in 2Q02.
EBITDA (in dollars) are expected to reach $6.3 billion, up 24.3% from last year and obviously faster than the 12.2% growth in revenues.
At a minimum, the good news at the industry levels is that even as individual carriers struggle to gain visibility, the overall industry
figures reflect the benefits of scale.
Figure 1: 3Q02 Net Adds and Churn Expectations
Net Adds 3Q01/ Net Adds 3Q02E/ Churn 3Q01/ Churn 3Q02E
National
AWE 748 119 3.10% 2.97%
NXTL 481 475 2.10% 2.25%
Cingular 95 (25) 3.10% 3.00%
PCS 1,243 (8) 2.60% 3.82%
VZW 752 550 2.20% 2.35%
T-Mobile (DT) 373 767 5.10% 3.72%
Indep.
AT 124 80 2.50% 2.40%
LWIN 252 100 2.72% 4.00%
WWCA 41 15 2.50% 2.50%
Other 238 159 2.45% 2.18%
Affiliates
APS 88 19 2.70% 3.70%
PCSA 79 30 2.80% 3.40%
UPCS 40 17 2.88% 4.00%
UNWR 58 25 3.14% 4.10%
NXTP 75 91 1.60% 1.80%
National 3,693 1,878 2.81% 2.91%
Indep. 655 354 2.52% 2.49%
Affiliate 491 227 2.70% 5.12%
Total 4,839 2,458 2.76% 2.91%
Source: Company reports and JPMorgan estimates.
Note: Cingular is a subsidiary of SBC and Bellsouth. VZW is a subsidiary of Verizon.
Figure 2: 3Q02 ARPU and EBITDA Margin Expectations
ARPU 3Q01/ ARPU 3Q02E/ EBITDA Margin 3Q01/ EBITDA Margin 3Q02E
National
AWE $63.60 $60.00 25.1% 25.9%
NXTL $71.00 $71.00 31.2% 38.0%
Cingular $54.11 $51.75 35.7% 32.2%
PCS $63.76 $63.71 17.8% 22.9%
VZW $49.26 $48.64 39.0% 39.6%
T-Mobile (DT) $50.53 $48.00 -14.4% 13.0%
Indep.
AT $47.31 $47.61 40.1% 38.6%
LWIN $31.89 $35.00 -149.0% -2.4%
WWCA $63.71 $59.63 38.5% 41.0%
Other $47.98 $45.98 31.4% 33.2%
Affiliates
APS $91.81 $78.21 -11.4% 6.1%
PCSA $93.35 $79.40 -23.6% 2.7%
UPCS $106.93 $83.77 -45.6% -13.3%
UNWR $89.38 $84.20 -9.0% -0.1%
NXTP $85.40 $76.49 -19.8% 1.2%
National $56.80 $55.64 28.4% 30.7%
Indep. $48.88 $47.57 31.2% 33.9%
Affiliate $83.63 $78.67 -10.9% 6.1%
Total $56.43 $55.14 27.2% 30.1%
Source: Company reports and JPMorgan estimates.
Note: Cingular is a subsidiary of SBC and Bellsouth. VZW is a subsidiary of Verizon.
Figure 3: 3Q02 Reporting Dates
Earnings Release Date/ Earnings Release Time/ Conference Call Date/ Conference Call Time/ Conference Call Number
National
AWE 10/23/02 Aft. Mkt Close 10/23/02 5:00 PM 888-276-0005
NXTL 10/24/02 Bfr. Mkt Open 10/24/02 8:30 AM 800-548-9057
Cingular (BLS) 10/22/02 8:00 AM 10/22/02 10:00 AM 888-370-1863
PCS 10/17/02 4:00 PM 10/17/02 5:30 PM 866-215-1938
VZW 10/25/02 8:00 AM 10/25/02 9:00 AM 800-493-7629
T-Mobile (DT) 11/14/02 Bfr. Mkt Open 11/14/02 8:00 AM Webcast
Indep.
AT 10/25/02 Bfr. Mkt Open 10/25/02 8:00 AM 877-493-2983
LWIN 1st or 2nd week of November 1st or 2nd week of November
WWCA 1st or 2nd week of November 1st or 2nd week of November
Affiliates
APS 1st week of November 1st week of November
PCSA 1st week of December 1st week of December
UPCS 10/29/02 Aft. Mkt Close 10/30/02 8:30 AM Webcast
UNWR 11/13/02 Aft. Mkt Close 11/14/02 10:00 AM
NXTP 10/29/02 Bfr. Mkt Open 10/29/02 11:00 AM 888-677-5720
Source: Company reports and JPMorgan estimates.
Alltel(AT/$43.24/Overweight) AT&T Wireless Group(AWE/$4.24/Underweight) AirGate PCS(PCSA/$0.48/Neutral)
Alamosa(APS/$0.32/Neutral) Leap Wireless International(LWIN/$0.15/Underweight) Nextel(NXTL/$8.02/Neutral) Nextel
Partners(NXTP/$4.94/Overweight) Sprint PCS(PCS/$2.34/Neutral) US Unwired(UNWR/$0.41/Neutral) UbiquiTel
Inc.(UPCS/$0.25/Neutral) Verizon(VZ/$34.71/Neutral) Western Wireless(WWCA/$2.30/Overweight)
Additional information available upon request. JPMSI and/or its affiliates expect to receive, or intend to seek compensation for
investment banking from the companies whose stocks are recommended in this report in the next three months. JPMSI or its affiliates
make a market in the stock of Nextel Communications, Western Wireless, AirGate PCS, Inc., US Unwired, Inc., UbiquiTel Inc., Nextel
Partners, Leap Wireless International, Inc, Nextel Communications, Western Wireless, AirGate PCS, Inc., US Unwired, Inc., UbiquiTel
Inc., Nextel Partners, Leap Wireless International, Inc. JPMSI and/or its affiliates acted as lead or co-manager in a public offering of
equity and/or debt securities for AT&T Wireless Group, ALLTEL Corp., Alamosa Holdings, Inc., AT&T Wireless Group, ALLTEL Corp.,
Alamosa Holdings, Inc., Verizon Communications, Inc. within the past 12 months. A senior employee or executive officer of JPMSI
and/or its affiliates is a director of Verizon Communications, Inc.. The covering analyst, research associate, or member(s) of their
respective household(s) have a long position in the securities of ALLTEL Corp., ALLTEL Corp.. JPMSI and/or its affiliates received in
the past 12 months compensation for investment banking services from AT&T Wireless Group, Sprint PCS Group, ALLTEL Corp.,
AirGate PCS, Inc., Alamosa Holdings, Inc., AT&T Wireless Group, Sprint PCS Group, ALLTEL Corp., AirGate PCS, Inc., Alamosa
Holdings, Inc., Verizon Communications, Inc.. ________________________________
Copyright 2002 J.P. Morgan Chase & Co.-All rights reserved.
JPMorgan and JPMorgan H&Q are marketing names used on global equity research issued by J.P. Morgan Securities Inc. (JPMSI)
and/or its affiliates worldwide. JPMSI is a member of NYSE and SIPC. The analysts who write global equity research are employees of
JPMSI or its affiliated companies worldwide, including the following companies. J.P. Morgan Securities Ltd. (JPMSL) and J.P. Morgan
plc (JPM) are both authorised by the FSA and are both members of the LSE. J.P. Morgan Europe Limited (JPMEL) is authorised by
the FSA. J.P. Morgan & Cie S.A. is a member of the Association Francaise des Banques & the Association Francaise des
Etablissements. J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB.
J.P. Morgan Securities Asia Private Limited is regulated by the Monetary Authority of Singapore (MAS) and the Japan Financial
Services Agency (FSA). J.P. Morgan Securities (Asia Pacific) Limited and J.P. Morgan Securities (Far East) Limited are registered as
investment advisers with the SFC in Hong Kong and their CE numbers are AAJ321 and AAB026, respectively. J.P. Morgan Securities
Singapore Private Limited is a member of Singapore Exchange Securities Trading Limited and is regulated by the MAS. J.P. Morgan
Malaysia Sdn Bhd (18146-X) (formerly known as Pesaka Jardine Fleming Sdn. Bhd.) is licensed as an investment advisor by the
Securities Commission in Malaysia. J.P. Morgan Australia Limited (ABN 52 002 888 011) and J.P. Morgan Securities Australia Limited
(ABN 61 003 245 234, a Participating Organisation with the ASX) are licensed securities dealers. J.P. Morgan Securities New Zealand
Limited is a member of the New Zealand Stock Exchange.
Information has been obtained from sources believed to be reliable but J.P. Morgan Chase & Co. or its affiliates and/or subsidiaries
(collectively JPMorgan) do not warrant its completeness or accuracy. Opinions and estimates constitute our judgement as of the date
of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not
intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies
mentioned herein may not be suitable for all investors. The opinions and recommendations herein do not take into account individual
client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or
strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or
financial instruments mentioned herein. JPMorgan may trade on a principal basis, or may have undertaken or may undertake an own
account transaction in the financial instruments or related instruments of any issuer discussed herein and may act as underwriter,
placement agent, advisor or lender to such issuer. See above for specific disclosures relating to marketmaking, underwriting, analyst
ownership, firm ownership over 1%, and investment banking compensation. JPMorgan and/or its employees may hold a position in any
securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and
accepts responsibility for its contents. Clients should contact analysts and execute transactions through a JPMorgan subsidiary or
affiliate in their home jurisdiction unless governing law permits otherwise. Please read each report carefully for a discussion of valuation
methods used, and the reasonable basis for any price objectives (or price targets) including discussion of risks. The compensation of
equity research analysts responsible for preparation of this report is based on a number of factors, including the overall performance of
JPMorgan, the global investment bank, and institutional equities.
JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, this stock will outperform the average total
return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, this stock
will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight
[Over the next six to twelve months, this stock will under-perform the average total return of the stocks in the analyst's (or the analyst's
team's) coverage universe.] As of the most recently completed quarter, the percentage distribution of all the stocks rated by JPMSI
and/or its affiliates globally is 35% Overweight, 40% Neutral, and 25% Underweight. On a hypothetical basis, this would represent 35%
buy, 40% hold, and 25% sell and, within those categories, 38%, 39%, and 35%, respectively, were investment banking clients of
JPMSI and/or its affiliates globally within the past 12 months. Price charts showing rating and price target changes are available for all
companies under coverage for at least one year on JPMorgan's website researchwise.jpmorgan.com and accessible to
JPMorgan's clients via password.
U.K. and European Economic Area: Issued and approved for distribution in the U.K. and the European Economic Area ("EEA") by
JPMSL, JPM and JPMEL. All research issued to private clients in the U.K. is subject to the following: the investments and strategies
discussed here may not be suitable for all investors; if you have any doubts you should consult your investment advisor. The
investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange
may have an adverse effect on the value of investments.
Information contained on this page is provided to CNET directly from the investment firm cited in this report. |
