I think I'll waste a couple post to post some of the narative from the CSFB report. It is a very decent, thorough evaluation, and should be recorded here for posterities sake. Those not interested in the report can jump ahead 5 posts, and sorry for the inconvenience.
WinStar is a competitive local exchange provider using 38 GHz technology to build out local telecom networks in major markets throughout the country.
Expedited Network Deployment Improves Growth Outlook
Progress at WinStar is exceeding our expectations. Recent acquisitions are speeding up the roll out into new markets and the deployment of an Internet/data strategy; newly developed point-to-multipoint radios should enhance the capability of 38 GHz technology as well as its efficiency, and key additions to management have been made to fill new needs. Responsible for the most significant impact to our earnings outlook for WinStar are the acquisitions of key assets such as switches, customers and employees. WinStar acquired these in its purchases of US One, MidCom and GoodNet. As a result of these purchases, WinStar has been able to accelerate by an entire year, its CLEC business plans. The acquisitions have substantially changed the financial outlook for the company, and we have adjusted our model to reflect this. In addition, the changes have altered our valuation target for the company. In line with management guidance, we are expecting that the acquisitions will be EBITDA neutral in 1998 and 1999, and will significantly accelerate EBITDA growth thereafter. Hence, our EBITDA estimates for 1998 and 1999 have not changed, staying at losses of $187 million and $53 million, respectively. Beginning in the year 2000, when the company now expects to be in 40 markets, we have significantly increased our targeted EBITDA growth rate, and now expect EBITDA to grow at a compounded annual rate of 80% from 2000 to 2007.
Using a 14% discount rate, a 9x terminal multiple of EBITDA, and a 20% private-to-public market discount, we reach our new year-end 1998 price target of $61. Our model reflects five and ten year revenue CAGRs of 57% and 35%, respectively. EBITDA is expected to turn positive in 2000, while the EBITDA inflection point (i.e. EBITDA losses start shrinking sequentially) is still expected to be hit in the fourth quarter of 1997 with a loss of $49.6 million.
Progress Report
Summary of Acquisition Benefits. Strategic acquisitions in the fourth quarter have positioned WinStar for an acceleration of its CLEC deployment. Through the purchase of key assets (i.e., switches and salespeople), as opposed to internally developing them, WinStar accomplishes two key goals. It is able to build out its local networks faster and with lower capital expenditures, and in turn, can begin earning positive returns more quickly and at a faster rate. The acquisitions also open new doors for WinStar to immediately begin offering data and Internet products. In response to WinStar's acquisitions we expect EBITDA growth will accelerate at a faster
rate than we had previously projected.
One Year Advancement. By acquiring the 14 installed switches from U.S. One (some of which have since been divested as planned); Internet access provider, GoodNet; and long distance reseller MidCom, WinStar essentially advances its CLEC buildout plans by one year. WinStar's revised plans are to be in 30 markets by year-end 1998 and 40 markets by year-end 1999. Original plans had called for being in 30 markets by year-end 1999. At year-end 1997 WinStar had switches in 15 markets.
Accelerated Access Line Growth. The accelerated entry into new markets should result in a much higher deployment of access lines. We are now targeting the addition of nearly 194,000 new lines in 1998, bringing WinStar's total number of access lines to about 276,000. (In 1997 WinStar matched our target to end the year with 82,000 lines.) By year end 1999 when WCII is expected to be in 40 markets, our model assumes 550,000 lines, and by year-end 2000 we are looking for end of period lines of about 992,000.
Change in Customer Behavior. Coinciding with the addition of new lines and the introduction of more advanced technology such as point-to-multipoint radios, we are anticipating a critical change in customer usage patterns. Currently, many of WinStar's customers are purchasing lines for use as back-up facilities, and not generating much in usage revenue for WinStar. This is evident in WinStar's low revenue per line in the low $50s, while most CLECs are at least $80. As WinStar's technology gains greater acceptance, the technology becomes more efficient (i.e., point to multi-point), and its data strategy is rolled out, we make the assumption that usage will grow significantly and increase the average revenue per line to $80 by 2001.
Lower Operating Costs. WinStar's plans to serve a greater proportion of customers on-net will be enhanced by the addition of the new switches and the expanded deployment of radios. The result should be lower operating costs, since there will be less resale of LEC loops. The promise of 38 GHz wireless is a more efficient deployment (faster, cheaper, more profitable) of local networks, with more customers being served on net. And in this case "on-net" means, using the CLEC's switch and wireless local loops. In New York, WinStar's goal is to have 50% of its lines on-net by year-end and two-thirds ultimately. By year-end 1998 we are expecting WinStar to have 25% of its total lines on-net and by year-end 2000 we are targeting 50% of lines will be on-net.
More Efficient Use of Capital. The acquisition of already installed switches, versus the purchase of new switches should reduce WinStar's initially planned capital expenditures for switches by 15-50% (depending on the sale of some of the switches), and cut the time to deploy them by one year. The efficiencies created by point-to-multipoint radio technology will also be material, and should help to expand the addressable market. Point-to-multipoint essentially allows WinStar to make more efficient use of its spectrum. It will be able to operate many buildings or radios off a single hub, as opposed to its current point-to-point method that requires one radio at the hub for each radio at the customer building. In addition, the point-to-multipoint radios are expected to be less expensive for a given amount of bandwidth, than those used today, allowing WinStar to more efficiently deploy capital. |
