November, Teledotcom - Strictly Business for Nextel
Infusion of big money and top talent pays off
for wireless carrier
By John T. Mulqueen. John T. Mulqueen is a freelance
business writer based in New Rochelle, N.Y.
Funny how a little business expertise and a few billion dollars
can turn a company around. Wireless carrier Nextel
Communications Inc. (McLean, Va.) is living proof. It's not
that Nextel is making truckloads of money. The carrier is still
hurting, and last month it saw its third-quarter losses increase
by 50 percent, to $442 million, due largely to preferred stock
dividends, one-off losses on interest rate hedging and setbacks
on international operations. However, it also reported a
positive operating cash flow on domestic operations during the
quarter, which it claims is a first, not just for Nextel but for any
digital wireless operator in the Western Hemisphere.
Impressed? The gains are even more astounding when you
consider Nextel's stormy (and brief) history. The carrier made
a sensational splash on Wall Street in the early 1990s by
raising more than $100 million on an initial public offering.
With cash in hand, it then set off with an aggressive plan to buy
old analog radio dispatch systems-called specialized mobile
radio (SMR)-and replace them with a national digital or
enhanced SMR network.
The idea sounded great. Nextel snapped up mom-and-pops
as well as bigger SMRs all over the country. But everything
began to unravel when Nextel discovered the digital
technology it bought from Motorola Inc., called integrated
digital enhanced network, didn't work. Nextel bled money and
seemed near collapse in 1994 when Craig McCaw, of
McCaw Cellular Communications Inc. (Kirkland, Wash.)
fame, stepped in. He brought in cash-$600 million immediately
with a promise of more than $400 million more-and started
supplying aggressive new managers. This helped relieve
Nextel's founders, Washington, D.C., lawyers Morgan
O'Brien and Brian McAuley, of running the company. The
new managers immediately began revising the company's
strategy. Nextel, in effect, gave up on the residential market to
go after business customers through a series of pricing and
service packages geared to their needs.
The shift paid off. In the last two years Nextel has become one
of the country's fastest-growing wireless operators. At the end
of the third quarter, it had more than 2.4 million digital units in
service, up from 1.27 million at the end of 1997, 300,300 in
1996 and 85,000 in 1995. "It will have 2.5 million at the end
of the fourth quarter and more than 4.3 million customers at
the end of 1999," says Chris Larsen, a securities analyst at
Prudential Securities Inc. (New York). The stretch also
includes a growing number of operations in Mexico, South
America and Japan, as well as a move to eventually offer
landline services over a new fiber optic network.
At this rate, Larsen says, Nextel services will produce $1.85
billion revenue in 1998 and $3.1 billion in 1999. That's a steep
rise from the $712 million recorded in 1997. This type of
growth means Nextel is poised to record positive cash flows
through the next quarter and all of next year, says Larsen. It's
still expected to post a $225 million operating loss this year,
but Larsen says these rising revenues should help it report a
profit of more than $500 million next year in terms of earnings
before interest, taxes, depreciation and amortization
(EBITDA).
Technological Top Guns
The turnaround certainly began with McCaw's investment,
which currently gives him and his family about 23 percent of
the stock. More important, however, may have been his ability
in 1996 to lure in Daniel Akerson as chairman and Timothy M.
Donahue as president and chief operating officer. Akerson
was formerly president of MCI Communications Corp.;
Donahue was an executive at McCaw Cellular and later
AT&T Wireless Services Inc. (Kirkland, Wash.) after AT&T
bought McCaw Cellular for $12 billion.
"The first hurdle was to fix the technology," Donahue says.
"The idea was brilliant, but the execution was lousy. Having
Craig McCaw associated with Nextel, we could talk to the
highest levels of Motorola and put some influence into fixing
the technology. Motorola did it."
Then there was the money side. Not even McCaw is rich
enough to foot all the bills. "We have been very successful at
raising capital," Donahue says in an apparent understatement.
Through a combination of bond and preferred stock offerings,
Nextel raised $2.1 billion in 1997 and another $1.8 billion in
1998. In March 1998 it replaced an old $2 billion bank line of
credit with a $3 billion line. Yet the influx hasn't guaranteed
success. At the end of 1997, Nextel had an accumulated
deficit, or accumulated losses, of $2.7 billion.
The money hasn't been sitting by idly, either. Capital
expenditures jumped to $1.6 billion last year, an almost 400
percent increase from 1996. This year they'll be off a little but
still substantial at $1.3 billion. "We built 2,200 cell sites this
year and will have 6,000 sites at the end of the year," Donahue
says. More outlays are expected, although Donahue admits
Nextel is still looking for capital to finance network
construction and expansion.
Money, investments and technology improvements aren't the
only factors buoying Nextel. Focusing on the business market
has also helped. This was spurred on by precedent-setting
service and pricing introductions, like the elimination of
roaming charges and a change in the rate structure that allows
charges to be billed by the second after the first minute,
instead of rounding up to the next minute. Nextel's
business-focused services also include short messaging and
direct connect, a two-way conferencing and group calling
option that only SMRs can offer. Nextel has even introduced a
new slimline phone aimed at white-collar businessmen, the
i1000.
Direct connect's capability to handle traditional wireless calls
and data transmission in the same handset is one of Nextel's
strongest features, says Patrick Sweeney, president of The
Bishop Co. (Kalamazoo, Mich.), which recently published a
study of the wireless data operations. Sending data over the
airwaves is critical for emergency services, such as police, and
important for field technicians and salesmen, Sweeney says.
Outside the United States, Nextel plans to offer roaming-free
communications for customers who travel in Canada through
its partner, Clearnet Communications (Scarborough, Ontario),
and in Mexico through Comunicaciones Nextel de Mexico
(Mexico City), which it owns, Donahue says.
Free roaming and the other services are doing more than just
drawing in customers. They are helping to hold them. Larsen
says Nextel has one of the lowest churn rates in the wireless
industry, about 1.6 percent, compared to 2.5 percent for the
rest of the industry.
On a broader front, Nextlink Communications Inc. (Bellevue,
Wash.), another McCaw company, and Eagle River
Investments LLC (Bellevue, Wash.) have formed Internext
LLC (Bellevue, Wash.) and agreed to spend $700 million to
help Level 3 Communications Inc. (Omaha, Neb.) build its
national fiber network. In return, Internext gets 24 fibers and
one empty conduit. Donahue says Nextel will use the facility to
connect its switches, cut costs and possibly offer wireline
long-distance services. It's the kind of expansion that might
just push Nextel over the edge-into profitability.
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