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Technology Stocks : Winstar Comm. (WCII) -- Ignore unavailable to you. Want to Upgrade?

To: NoMoreRBOC who wrote (6194)	5/18/1998 1:09:00 PM
From: Steven Bowen	Read Replies (1) \| Respond to of 12468

Part of todays Jefferies report, answers some of those questions we get asked over and over; Investment Thesis In most respects, WinStar is similar to other competitive local exchange carriers (CLECs). The Company offers customers the usual CLEC fare of local and long distance telephone service in addition to enhanced services, data and Internet access. It offers the convenience of "one-stop" shopping at competitive prices with a standard 99.999% network performance guarantee. In one respect, however, the Company is radically different from the majority of its peer group. WinStar's networks are wireless. As a result, they can be built at a fraction of the cost and time typically associated with comparably sized fiber networks. As a low cost provider with a speed-to-market advantage, the Company is extremely well positioned to take its share (perhaps more than its share) of a telecommunications market that we estimate currently tops $150 billion. Given these prospects we believe the stock could be trading at $61 over the next twelve months. Low Cost Provider Fiber rings are best laid underground because aerial rings are exposed to potential service disruptions (hunters shoot, cars hit, ice collapses - telephone polls). Reflecting this wisdom, most fiber rings are built underground, out of harms way. Since construction costs typically represent nearly 90% of the cost of building a fiber ring (the balance is comprised of outlays for electronics), declining technology costs only modestly impact the cost of placing a wireline ring in service. As a result, the cost of subterranean networks is high and should remain high for the foreseeable future. This impacts the economics of subterranean CLECs. WinStar on the other hand can reach a customer by installing a single 12" dish antenna on the customer's roof so as to ensure an unobstructed line-of-site to one of WinStar's hubs. Once installed, voice and data traffic are transmitted to the nearest hub and from there, sent on to its final destination. Speed-To-Market Advantage Wireless networks can be deployed more rapidly than fiber networks for obvious reasons - the permit, acquisition and construction time required to lay fiber in the ground far exceeds the time required to secure roof rights and install antennas. As a result, WinStar can (and plans) to be the first operator in many of its markets. The Company's ability to provision service quicker than its subterranean counterparts should also enhance its competitive position when other CLECs ultimately enter these markets. Reliable "Work-Horse" Technology During the early 1990's, misnomers regarding the performance and reliability of wireless networks were rampant; "they don't work in heavy snow", "rain causes signal fade", "birds can disrupt transmissions", etc.. Today, these misnomers represent little more than good war stories for WinStar and others in the industry who have fought to correct these perceptions for over half a decade. Today, 38 GHz networks are universally acknowledged to perform on par with fiber networks in terms of bit transmission error rates (10-13) and reliability (99.999%). Plenty Of Capacity Every 38 GHz license authorizes the exclusive use of 100 MHz - enough to support full broadband capability. According to management, a single 38 GHz DS-3 channel at 45 Mbps can transfer data at a rate 1,500 times faster than the fastest dial-up modem currently in use (28.8 Kbps) and over 350 times the rate of the fastest ISDN line currently in use (128 Kbps). Data transfer rates of a 38 GHz DS-3 channel even exceed the data transfer rates of cable modems (30 Mbps) In addition, 45 Mbps transmission rates allow end users to receive full motion video and 3-D graphics and to utilize highly interactive applications on the Internet. Huge Untapped Market Less than 3% of the 750,000 commercial buildings in the U.S. have broadband access (i.e., fiber to the building). A portion of these buildings will never generate sufficient revenues to justify connectivity via fiber link. As a result, WinStar (and other wireless CLECs) will have this market to themselves. Given WinStar's competitive advantages vis-a-vis its subterranean counterparts, we believe the Company's market share in certain markets could approach 20% - a possibility not accounted for in our forecast. Valuation WinStar's addressable markets contain an estimated 25 million business access lines. Our forecast calls for this addressable market to grow by 6.2% annually to 50 million by 2008 and for the Company to capture 5.2 million (10.37%) of these lines. Our revenue forecast calls for each line to generate approximately $70 per month and our cash flow forecast calls for margins to plateau at 35%. The resulting free cash flows and terminal value (9x 2008 cash flow) discounted to a net present value using a 15% rate total $6.17 billion. Net of debt, this figure approximates $4.86 billion or $87 per share. Our year-end 1998 target price of $61 per share reflects a "historically normal" public market discount of 30%. The 55% upside implied by this target price supports our Buy rating on the stock. During the first quarter, WinStar formed and launched a new organization to build its broadband data business, broadened the scope of its sales effort to include a new focus on large accounts, digested (and integrated) the acquisitions of GoodNet, PacNet, and MIDCOM (a major focus of management attention), created a new stand-alone division to concentrate on securing building access rights (roof rights), and formed "WinStar Network Services" to centralize responsibility for the deployment and operation of the Company's national local network. Add to these initiatives the launch of four markets (followed by three more over the last few weeks). With that said, it's fair to conclude it was a busy quarter.