SASB: JACK B. GRUBMAN
(Somewhat post-OCR cleaned)
WCII Reports solid Q3 Earnings- -Migration To On-Net Continues
11/06/98 WinStar Communicatio (WCII $29.63,1-S,Tgt $52.00) Jack B.
Grubman --WinStar Communications, Inc. --Telecommunications Services
*WinStar reported solid Quarter Q3'98 results in line w/ our
expectations of EBITDA loss & net line adds
*Revs for Q3 were $61.1 mil., a EBITDA losses were $48. mil., slightly
better than Q2'98 EBITDA losses as expected. Gross margins improved
24.2% vs. 19.4% in Q2 due to more on-net lines.
*As preannounced by WCII, net adds were 60,000, or 20% sequential
growth.
*WCII continues to migrate its lines on-net and on switch w/ more than
37% of WCII lines on-switch (or roughly 95,000 lines) at the end of Q3
vs 69,000 at the end of Q2, a 38% increase in switched lines while
more than 19% of lines were on-net at the end of the Q3 (roughly
46,000 lines) vs. 30.000 lines on-net at end of Q2 or an increase of
56%.
*We reiterate our Buy rating and our $52 price target.
EARNINGS:
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/97 EPS $(1.27)A $(1.85)A a (1.97)A $(2.37)A $(7.49)A
Prev 12/98 EPS $(2.54)A $(2.77)A $(3.17)1 $(3.41)E $(11.89)
Current 12/98 EPS $(2.54)A $(2.77)A $(2.83)A $(3.41)E $(11.65)
Previous 12/99 EPS $N/A $N/A $N/A $N/A $(11.72)
Current 12/99 EPS $N/A $N/A $N/A $N/A $(11.72)
OPINION: WinStar reported Q3'96 results in line with our expectations
of EBITDA loss and net line additions. Total revenues of $6l.l million
were slightly lower than our estimate although sequential growth in
CLEC revenues was 24%. Operationally, WinStar continues to migrate
lines onto its own network with more than 37% of total lines on switch
and over 18% on-net, an improvement over last quarter's mix which we
provide more details on below. WinStar's New York market reached a
milestone and during the quarter reached EBITDA break-even in less
that 2 years of operation. WinStar's business plan is further enhanced
with its recent announcements regarding its $2 billion vendor
financing agreement/strategic relationship with Lucent, which as we
wrote in our note from 10/22 provides WinStar with financial
flexibility in running its business, and its Project Milennium (an
MCI-like promotion on the local level for businesses), which as we
wrote in our note from 10/27 should enhance revenues and margins given
that these Milennium customers will be on-net customers. While it is
too early to provide details on Project Milennium, the company has
received a lot of interest in its offer. Another development which
WinStar may benefit from is its federal court case which it won that
will potentially open federal local telecom contracts worth hundreds
of millions of dollars to bidding by WinStar and other CLECs. WinStar
expects the first contract to be awarded during the Dec/Jan time
frame. WinStar delivered solid quarterly results and is on-track to
roll out to 30 markets by the end of this year. We also expect WinStar
to roll out point-to-multipoint service by the end of the year in
select markets with a national launch slated for next year and thereby
increase the number of addressable buildings. As WinStar continues to
hit its financial and operational targets including adding more lines
in service, bringing more lines on-net and hub sites into operation,
obtaining more roof rights and deploying its point-to-multipoint
network, and turning on service in more markets, we believe its value
to players with national local aspirations greatly increases.
Operationally the company continues to migrate lines onto its own
switch and its own network which obviously improves margins. In fact,
more than 37% of WinStar's lines (or roughly 95,000) were on-switch at
the end of Q3 vs 35% on-switch (or roughly 69,000) at the end of Q2,
representing approximately a 36% sequential increase in switched
lines. On-net lines improved by 300 basis points to over let of lines
at the end of the Q3 (representing roughly 46,000 lines) compared with
15% at the end of Q2 (representing roughly 30,000 lines) or a
sequential increase of 56%.
On-Net and On Switch Lines
(Lines in 000s)
Q1' 98 Q2' 98 Q3' 98
Total lines 148 198 258
Net adds (b) 66 50 60
On-net 22 30 46
% growth (a) 34% 56%
% of total 15% 15% 18%
On- switch 44 69 95
% growth (a) 56% 38%
% of total 30% 35% 37%
(a) Sequential. (b) Ql'98 includes roughly 24,500 lines GooGNet and
PacNet acquisitions.
In WinStar's 5 "mature" markets--New York, Los Angeles, Boston,
Washington, DC and Dallas--which in last quarter's conference call
WCII defined as markets where it has a switch and at least 4 hubs 33%
(compared with 30% in Q2'98) of lines are on-net and 51% were
on-switch. In New York, roughly 80% of lines were on WinStar's own
switch which was unchanged from the Q2'98 mix with 54% fully on-net
(on WinStar's own switch and on its Wireless Fiber links). Over time,
the company expects each market to be at least two-thirds fully on-net
and 90% on-switch.
DETAILS ON THE QUARTER Revenues for the quarter were $61.1 million,
slightly lower than our
estimate while EBITDA losses were $48.3
million an improvement from Q2'99 EBITDA losses as expected (since
Q4'97 represented the peak EBITDA losses for WinStar). Gross margins
improved roughly 600 basis points to 25.2% from 19.4% in Q2'9S as a
result of the aforementioned improvement of on-net and on-switch
lines. We estimate gross margins of on-net services are in the 60%
range vs. l0%-15% on a resale basis. We believe gross margins will
improve as more traffic is put on-net, which will be facilitated by
WinStar's contract with Metromedia Fiber Networks (MFNX) and further
enhanced with the roll out of its Project Milennium. The CLEC
continues its solid growth posting revenues of $37.2 million versus
$30.0 million in Q2'99 or sequential growth of 24.1%. As mentioned
above and as preannounced by WinStar last month, WinStar lines
installed were 60,000, representing a 20% sequential growth in net
adds.
Lines in service at the end of the quarter were roughly 258,000
while
nearly 600 roof rights were added during the quarter for a total
of more
than 3,500 at the end of the quarter. Hub sites at the end of
the
quarter were 58 while the company's goal of more than 100 hub
sites by
year end remains intact, especially given that 26 are in
progress and a total of 94 hub leases are signed. WinStar has
targeted 4,000 roof rights and 30 markets in operation by year end and
we believe the company is on track to meeting these goals. WinStar
ended the quarter with a $176 million annual run rate of CLEC revenues
(based on September sales). WinStar's information services segment
posted revenues of $12.8 million, slightly above our expectations and
a slight improvement from Q2'9S. Other revenues, which include
revenues wholesale operations and MIDCOM long distance were $11.1
million, a decline from last quarter as expected. During the quarter
WinStar adopted a formal plan to dispose of its residential long
distance business which used to be included in other revenues.
NET/NET Winstar reported a solid quarter and is on target to meet
their year end operational goals. We continue to believe that as
WinStar continues to meet its financial and operational targets, its
value to players with national local aspirations greatly increases. We
reiterate our Buy rating and our $52 price target. |
