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

To: SteveG who wrote (9160)	11/6/1998 10:48:00 AM
From: SteveG	Read Replies (1) \| Respond to of 12468

Governali: BUY WinStar Communications (WCII) Summary The revenues and EBITDA WinStar reported for its third quarter were slightly below our estimates, however, demand trends continue to accelerate and the company continues to successfully meet its previously stated business plan. In addition, WinStar has made several strategic announcements since the beginning of the fourth quarter that should help to ensure that its current build out plan are not curtailed and that management is taking steps to improve the efficiency of its execution. We are making no changes to our estimates or our Buy rating. Price Target Mkt.Value 52-Week 11/05/981(Y-E) Div Yield (MM) Price Range 29.625 $61 None None $1,182.0 47 - 13 Annual Prev. Abs. Rel. EBITDA/ EPS EPS P/E P/E Share 12/99E (10.68) NA NA (2.73) 12/98E (11.35) NA NA (4.99) 12/97A (7.68) NA NA (4.65) March June Sept. Dec. FY End 1999E (2.85) (2.81) (2.61) (2.42) Dec. 31 1998E (2.54)A (2.77)A (2.83)A (3.05) 1997A (1.29) (1.85) (2.01) (2.50) ROIC (12/97) Total Debt (9/98) $1,694 mil Book Value/Share (9/98) NM WACC (12/97) Debt/Total Capital (9/98) 108% Common Shares 39.9 mil EP Trend2 Est. 5-Yr. EPS Growth Est. 5-Yr. Div. Growth 1On 11/05/98 DJIA closed at 8915.5 and S&P 500 at 1138.9. 2Economic profit trend. WinStar is a competitive local exchange provider using 38 GHz technology to build out local telecom networks in major markets throughout the country. Summary WinStar reported third quarter revenues and EBITDA slightly below our targets. Revenues were $61.1 million compared with our estimate of $64.5 million and EBITDA was a loss of $48.3 million compared with our estimated loss of $47.6 million. Despite the slight downside in the quarter we remain confident that management is on track to execute on its game plan, that demand trends remain strong, and that greater efficiencies should continue to be incorporated into the business. Therefore, we are not altering our current EBITDA loss estimates for 1998 and 1999 of $191.8 million and $112.7 million, respectively. The reported loss per share of $3.36 included a $0.53 charge per share for discontinued operations. The normalized loss per share of $2.83 was just a penny better than our estimated loss of $2.84. Revenues Off Slightly Despite Strong Demand Total revenues were $61.1 million compared with our estimate of $64.5 million. All revenue lines were a shave off from our estimates. CLEC revenues were $37.2 million versus our $39.4 million estimate. These results were despite higher line growth than our model had targeted. As previously disclosed, WinStar added 60,000 lines in the quarter compared with 50,000 last quarter and our estimate for the quarter of between 58,000-59,000. Sequential growth in line additions this quarter was 20% compared with 22% last quarter. Total lines in service now equals 255,000. WinStar includes in its line count long distance customers that do not purchase local service. It has indicated that 15% to 20% of the total "lines in service" are long distance only customers. The slight revenue shortfall this quarter was likely a function of lower than expected revenues per access line. Our model had targeted that the revenue per line this quarter would remain flat with last quarter, however, the company reported that this statistic actually declined a bit during the third quarter because of lower business usage during the summer months. Management explains this occurrence as a seasonal phenomenon that it had not factored into its internal modeling and guidance. We think that the mix of business also explains at least partially the decline in revenue per line. During September, WinStar reported that its CLEC revenues were about $15 million, generating an annual run rate of close to $180 million. Using the $15 million per month run rate, we believe we could expect revenues in the fourth quarter of at least $45 million. Then applying a conservative 25% sequential growth rate (lower than the 27% growth reported in the third quarter) we arrive at a fourth quarter estimate for CLEC revenue of between $55-$57 million, leaving us comfortable with our current fourth quarter estimate of $55 million. Other revenues (primarily WinStar's long distance resale business that it has stated plans to eliminate) were $11.2 million versus our $12 million estimate. WinStar must have been able to shed more of these long distance customers during the quarter than we had expected. Information services revenues were $12.8 million, just slightly below our $13 million target. Improving Efficiency In Third Quarter and Going Forward In the third quarter WinStar reported an EBITDA loss of $48.3 million. This compares with our estimated loss of $47.6 million and last quarter's loss of $48.6 million. WinStar's business plan has been to improve upon EBITDA each quarter, after having reached its EBITDA inflection point in the fourth quarter of 1997. Thus far, management has achieved this goal every quarter and we believe that certain strategies that are being folded into its business will help it to continue to meet this promise. For instance, the Millenium marketing plan that WinStar announced a few weeks ago that offers $1,000 of free local service to new customers in specified buildings that are on WinStar's network should significantly increase the percent of customers that WinStar has operating on-net and on-switch. Currently, WinStar's reported on-switch percentage is below the CLEC industry norm which is between 50-80%. This is largely due to the fact that the company put a priority on generating revenues in markets and buildings even before facilities were constructed. In the third quarter WinStar reported that about 18% of its subscribers were on-net and 37% were on-switch. However, excluding WinStar's long distance only lines, which we noted represent between 15-20% of its total CLEC lines, its statistics appear a little better. Assuming 20% of lines are long distance only, and also assuming that these lines are never counted as either on switch or on net, the denominator in the calculation of on switch and on-net shrinks, raising the percentages to 23% and 46%, respectively. While this isn't a huge change, it is slightly better and closer to industry norms. WinStar also indicated that its provisioning rate improved this quarter, but at this point, we haven't yet obtained the actual data. Also notable in the third quarter, WinStar's New York operations reportedly turned EBITDA positive. This was achieved after 18-21 months of operations. The New York operations had 54% of its customer on-net and 80% on-switch at the end of the quarter. Logic would suggest that if WinStar is successful in bringing more customers in its other markets on-switch and on-net and churning out its existing long- distance only customers, it should be able to break EBITDA positive in its other markets within the same time-frame, if not faster. The Millenium sales initiative should again assist in this goal if the cost of customer acquisition and maintenance remains within plan. Vendor Financing Increases Comfort Level For Future Outlook WinStar recently announced a $2 billion vendor financing facility with Lucent Technologies. The funding becomes available in $500 million tranches as Lucent syndicates the outstanding loans to banks. This arrangement covers WinStar's financing requirements through cash flow positive and earnings positive plans. It should allow WinStar to easily follow through with its existing business plan to be in 40 cities in the U.S. by year-end 1999. It should also assist WinStar in entering additional U.S. cities, if desired, or to enter the international arena as WinStar has indicated it would like to pursue. Since the financing agreement provides WinStar greater flexibility in its ability to roll out its networks, we remain confident in our existing 1998 and 1999 EBITDA estimates, assuming WinStar does not accelerate or expand upon its currently stated business plans.

To: SteveG who wrote (9160)	11/6/1998 11:03:00 AM
From: SteveG	Read Replies (4) \| Respond to of 12468

NBMO: Continued Progress on CLEC Expansion Plans; Reiterate BUY - WinStar reported third quarter total revenue of $61.1mm, which was a 6.8% sequential improvement from the previous quarter, but was below our estimate of $65.0mm. In its core telecommunications business revenues were $37.2mm, which was a 24% sequential improvement from second quarter's total of $30.0mm. - The gross margin for the third quarter was $15.4mm, or 25%, compared to 19% for the previous quarter. We expect this to gradually increase over the next few quarters as WinStar builds out their network and drives more customers on-net. - Third quarter EBITDA loss of $48.3mm showed a slight improvement compared to a loss of $48.6mm in the second quarter. This was in line with our expectations. - The ‘Project Millenium' marketing campaign presents an excellent opportunity for WCII to capitalize on the recent progress it has made connecting new buildings to its fixed wireless broadband network and initial sales results are very favorable. - With the $2 billion Lucent strategic partnership announced last week, WinStar is now in a position to aggressively increase penetration in its connected buildings and add customer lines to its network. We expect management to elaborate on the details of the accelerated rollout plan over the next month. - We reiterate our BUY recommendation and $45 price target on the shares of WinStar. 3rd Quarter Results Total revenues were $61mm and up 6.8% sequentially although slightly short of our expectations of $65mm. The shortfall related to paring certain non-strategic long distance revenue and seasonality. We expect continued decline over the next year in certain Midcom long distance as well as wholesale segment. We expect the fourth quarter to rebound and show significant growth over the third quarter. EBITDA was a loss of $48.3mm and showed slight improvement from the previous quarter and in line with expectations. The New York market is operating with positive EBITDA now, after just 20 months. We expect this line item to improve marginally over the next few quarters as Winstar continues to buildout their network. Access line adds this quarter were announced previously at 60,000 lines and now total 257,000. Overall, more than 37% of the company's lines are on-switch and 18% are now on-net. Our expectations over the next year are for Winstar to increase the rate of additions by approximately 10,000 lines per quarter and increase the number of higher margin connections. Initial results on Winstar's recently launched sales campaign are very encouraging. The ‘Project Millenium' marketing campaign allows customers to sign up for free local service up to $1,000 per month, until the year 2000 if they sign up for a three year contract with WinStar between 10/31/98 and 1/31/99. In addition, these first time customers will receive a flat long distance of .09 cents per minute, 24 hours a day, with no conditions. For business customers, this becomes an appealing alternative to local exchange companies. These new customers will contribute to positive EBITDA immediately due to the high margin, on-net nature of these customers. In addition, the customer pays the installation fees and must be locked up for quite some time. We believe the awareness created by this campaign will create significant mindshare and facilitate future sales. Also mentioned on the call, Winstar has bid on GSA government contracts with Bell Atlantic in New York. Winstar expects to win at least a portion of the business and these contracts could total $100- $200+ million per year. This is potential upside that is not built into our current model. Conclusion Winstar remains on track to have 30 networks up and running by the end of the year, including next-generation multipoint technology in certain markets. We believe Winstar is uniquely positioned to take advantage of the accelerating growth of broadband connections and a desire for choice in telecommunications service providers. We expect management to give more guidance over the next month regarding future expansion plans. This will most likely include reaching more than the current 40 market plan as well as international expansion. The desire to control EBITDA losses will be balanced against the current growth opportunity. We think Winstar should go for it. The market environment over the next few years offers significant opportunity to capture customers with little in the way of competition. We reiterate our BUY recommendation and $45 price target.