[details of BT Alex. Brown ARTT "Buy" Rating]
Thanks to SteveG for sharing this on the WCII thread. Highlights:
"We fully expect this market [Seattle] to be successful in proving out the company's technology and business strategy.
We believe the "bridge" [Lucent interim financing] will enable ART to prove out its technology and business plan and attract additional capital investment."
"[O]ur 12-month price objective for ARTT is $13/share."
mark
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ADVANCED RADIO TELECOM CORP. (ARTT) "BUY"
Initiating Research Coverage With A "Buy" Rating
[earnings table deleted]
HIGHLIGHTS:
-- We are initiating coverage of Advanced Radio Telecom (ART) with a "2-buy" inv (often referred to, incorrectly in ART's case, as the wireless competitive local exchange carrier, or CLEC) with a nationwide footprint of licenses to offer high-speed data services, primarily to business users.
-- The local business phone market is estimated at $35 billion annually, which we believe will grow to $60 billion in 10 years. Today, the incumbent local exchange carriers hold a virtual monopoly on local phone service. We believe as competition heats up, CLECs can ultimately win around 50% market share, up from essentially zero today, and perhaps an even greater share of the data and private network business.
-- We expect so-called point-to-multipoint (PMP) technology to be introduced commercially later this year that will significantly improve the returns on high-end subscribers and open up the lower-end market for penetration. This event will likely mark the true emergence of wireless as a viable local loop strategy.
-- ART began commercial operations in mid-September with the launch of the Seattle market as a wireless Internet Service Provider.
-- Stock Price Performance: ARTT has fallen 57% YTD, versus a 22% rise in our CLEC index and an 8% gain in the S&P 500.
-- Valuation: Based on our 10-year DCF, using a 25% equity discount rate to reflect an imminent need for capital and a 10x terminating multiple, our 12-month price objective for ARTT is $13/share. Despite the attractive upside potential, we believe the need for incremental capital is a significant source of risk, and hence offer a "2-buy" rating.
COMPANY DETAIL
ART owns licenses in the 38 GHz band in 90 of the top 100 markets covering approximately 186 million POPs and approximately 50%-plus of the nations business access lines. ART is not a CLEC, in the traditional sense of competing for "access lines" and "voice traffic" against the ILEC. ART's focus is centered on the data market and provisioning high-speed Internet and private network services to business customers over a 100% IP-enabled ATM network. In that sense, ART is still competing for "access" to the customer, but from a data perspective.
In early 1998, ART abandoned its original carrier's carrier strategy, in which it would provide wholesale capacity on its high-speed network as requested by resellers, in favor of the new data strategy and cut its buildout schedule down to three markets in 1998 and 9 more in 1999. ART's beta trial in Bellevue,WA became a commercial market in mid-September, with Phoenix and Portland to follow by year-end. ART is not reselling its primary services to the end user. Unlike other wireless access carriers, ART will not offer voice service until voice-over-IP technology matures.
We believe ART's initial voice product will be LD-origination and could follow one of two paths. Either ART could aggregate traffic for a LD company and provide access to the customers at a discount to the ILEC rates (remember,ART has what the IXC does not-direct access to the customer), or it could resell cheap LD and pay the IXC for long haul and termination. ART has never been a "CLEC", though it still faces the same fight against the RBOCs as its CLEC "cousins". Recently, ART completed a 21-customer trial in Bellevue. The company launched commercial service as an ISP on 15-Sept with five buildings and the ART hub with traffic backhauled from the hub to a router and internet POP in Seattle. For subscribers without a LAN, which accounts for about half of the beta subs, ART is selling a "LAN-in-a-box" solution. Access speeds on the LANs range from 64 kbps to 10 Mbps in the trial. We fully expect this market to be successful in proving out the company's technology and business strategy. If ART can raise the necessary capital, the return on that capital could be the highest in the group, given the extremely low cost of entering a market. We estimate a data switch (router) costs less than 10% as much as a voice switch. From there, most expenses are success-based.
Projections
We believe ART can achieve high-50% gross margins with a data-only strategy. We have to acknowledge that voice-over-IP is likely just a year or two away, but have not modeled any contribution from voice services at this time. ART's network architecture is well suited for the pay-by-the-bit model we believe communications companies will eventually adhere to.
By 2007, we expect ART to be providing data access and private networks services to almost 90,000 corporate subscribers at an average speed of 2.8 Mbps per subscriber (the equivalent of 1.8 T1 lines per sub). We are modeling two revenue streams for ART until voice-over-IP becomes more imminent: data services and internet services such as web page-hosting. Based on ART's efficient ATM network, we believe it will reach gross margins of 63% by 2007, with a corresponding EBITDA margin of 33%.
Financial Position
We expect ART to reach operating cash flow breakeven in early-2002 after incurring incremental losses beginning 3Q 1998 of approximately $1.0 billion as follows: $174 million EBITDA loss, $736 million CapEx requirements, and $74 million of cash interest payments.
The ART war chest currently amounts to $40 million in cash and short-term investments and the bulk of the Lucent facility described below. Art has one bond issue outstanding, a $135 million Sr. Notes issue with a 14% coupon due 2007. As noted, ART is operating under interim Lucent financing while it seeks out new capital.
ART has selected Lucent as a complete systems integrator for its wireless access network. Lucent is responsible for everything from network design and buildout, to the maintenance and upgrading of operating systems. In August 1998, the companies expanded an existing credit facility. Lucent now provides ART with a $10 million equipment facility for the purchase of network equipment and a $25 million facility for working capital needs. Upon completion by ART of another round of financing of at least $50 million, ART will pay back the original $25 million and Lucent will extend a credit facility equal to 2-times the amount of capital raised, up to $200 million, for equipment. At that point, the $10 million facility would be rolled into the new facility.
Lucent received warrants for 3.3% of ART's equity with an exercise price of $0.01 on the first 1.2% and market prices on the remainder, which are issued in proportion to the amount drawn on the $25 million facility. The Lucent facility solves ART's short term financing needs and facilitates the buildout of the first three "demo" markets, but ART will still need financing in 1999 to continue its roll out. We believe the "bridge" will enable ART to prove out its technology and business plan and attract additional capital investment.
In April 1998, WinStar purchased 3.3M shares of Advanced Radio Telecom from private investors for shares of WinStar stock. The deal valued ART shares at $17.39 per share. WinStar issued 1.525 million shares in the deal, which resulted in a 14.9% ownership of ART, at the time. After giving effect for recent spectrum acquisitions for stock by ART, WinStar's ownership currently stands at 12.9%.
Management
ART has shaken up the management group over the last 12 months. Harry Hirsch became chairman, president, and chief executive officer in November 1997 and developed the data-centric strategy for ART. Prior to joining ART, Mr.Hirsch spent almost a decade at the Williams Companies, most recently as vice chairman and CEO of Williams Communications Group and as president and CEO of WilTel before that.
On August 18, 1998, William Maxwell, who joined ART in December 1997 as Executive Vice President for Strategic Planning, Marketing, and Sales,became president and chief operating officer. Before joining ART, Mr. Maxwell was executive vice president of ICG Communications where he headed the CLEC business at ICG Telecom Group.
ART is currently searching for a CFO to replace Tom Grina, who left the company in August 1998 to pursue other interests. |
