BTAB (Bo Fifer / Jeff Hines) reiterates Strong Buy, sets higher price
target:
-- We have raised our 12-month price objective on WCII to $64/share
(from $51) based on our 10-year DCF using a 10x terminating multiple
and a 20% equity discount rate. Maintain "strong buy" rating.
-- WHY THE CHANGES: We have adapted our model to incorporate the
expanded domestic and international market launch schedule announced
by WinStar last month, and to account for the deal with Williams
Communications to sell capacity on WinStar's local network and
purchase dark long-haul fiber from capacity on WinStar's local network
and purchase dark long-haul fiber from Williams.
-- NEW 4Q 1998 AND 1999 EXPECTATIONS: While the rapid launching of
new domestic and international markets improves the present value of
our long-term DCF, we have lowered our 1998 and 1999 EBITDA estimates
(we expect WinStar to report full 4Q 1998 results in early March).
Metric 4Q98E 1998E 1999E
CLEC Revenue $53.4M $139.2M $332.4M
Total Revenue $78.0M $243.8M $434.9M
Net Line Additions 60,000 215,000 285,000
Access Lines 315,000 315,000 600,000
EBITDA -$80.4M -$226.3M -$266.9M
-- NET-NET: WinStar remains favorably positioned to win market share
in the local phone market, in our view. We believe that
inter-exchange carriers, foreign telcos, Internet service providers,
and fiber-based CLECs would be interested in WinStar either to gain a
foothold in the U.S. market or to bypass the incumbent's local loop.
DETAILS:
We have raised our 12-month price objective on WCII to $64/share (from
$51) based on our 10-year DCF using a 10x terminating multiple and a
20% equity discount rate. Maintain "strong buy" rating.
FOCUSED ON "ON-NET" TRAFFIC
WinStar announced a re-tooled strategy at its analyst meeting last
month with decidedly greater emphasis on "on-net" traffic. Increasing
the amount of traffic "on-net" can be accomplished in two ways. 1)
reducing dependence on resold RBOC lines, and 2) expanding the network
footprint. WinStar made three announcements relative to these
initiatives that really drive the changes to our model.
First, Project Millennium was designed to focus the marketing effort
on buildings which are already part of the WinStar network. By
driving penetration in on-net buildings, WinStar can rapidly improve
its on-net traffic and, subsequently, its margins. We expect this
move to result in slightly lower access line growth, but much greater
profitability.
Second, WinStar announced an expanded domestic and international
market rollout schedule, and now plans to be in 45 U.S. and 6
international markets by YE 1999. As WinStar's footprint grows, so
should the amount of traffic that remains on WinStar's networks.
Third, WinStar acquired a nationwide (dark) fiber network from
Williams Communications (and in return sold capacity on its own local
network). On top of providing WinStar with a source of cash over the
next three critical years of WinStar's development, moreover the deal
will allow WinStar to keep its long distance traffic on its own
network, making WinStar a true nationwide, end-to-end broadband
communications carrier.
NEW 4Q 1998 AND 1999 EXPECTATIONS
While the rapid launching of new domestic and international markets
improves the present value of our long-term DCF, we have lowered our
1998 and 1999 EBITDA estimates (we expect WinStar to report full 4Q
1998 results in early March)
THE EXPANDED MARKET ROLLOUT EFFECT
WinStar estimates that the effect of entering incremental markets both
domestically and abroad are as follows:
Revenue EBITDA
4Q 1998 Impact NM -$25M - -$35M
1999 Impact NM -$140M - -$160M
Source: Company documents.
THE WILLIAMS EFFECT
Based on the conservative accounting that we believe WinStar will
employ in recognizing revenue from Williams (treating the Williams
capacity as an IRU and amortizing the $400M cumulative payments over a
29 year period), we estimate the effect of the Williams deal will be
as follows:
Revenue EBITDA
4Q 1998 Impact -- --
1999 Impact $14M $12M
Source: Company documents.
We note that our EBITDA estimate for 1999 decreased by approximately
$106M versus the company's estimate of $130M to $150M because our
previous model already considered a full 60 market domestic build out
by 2000 (and 45 by YE99).
What effect does the money WinStar is paying Williams for LD capacity
have?
Early on, not much, as WinStar would have been paying a cost of
service component for LD anyway. However by mid-1999, when WinStar
has reached critical scale in its LD traffic, we would expect margins
to increase as the benefits of "owning" the network (as opposed to
leasing on a per-minute of use basis) are realized.
NET-NET
WinStar remains favorably positioned to win market share in the local
phone market, in our view. We believe that inter-exchange-carriers,
foreign telcos, Internet service providers, and fiber-based CLECs
would be interested in WinStar either to gain a foothold in the U.S.
market or to bypass the incumbent's local loop.
CORRECTION
In a table at the end of a piece dated 15-Jan-99, certain licenses
were omitted by mistake. The corrected table follows:
Spectrum (MHz)
-----------------------------
POPs NXLK WCII TGNT ARTT
1 Los Angeles, CA 14.550 1,300 600 400 100
2a* "Outer" New York, NY 9.504 1,150 900 -- 200
2b* Manhattan/Borroughs, NY 9.434 150 1,750 400 100
3 Chicago, IL 8.182 1,300 700 400 200
4 San Francisco, CA 6.421 150 1,650 320 --
5 Philadelphia, PA 5.899 1,150 600 320 200
6 Detroit, MI 4.705 1,300 600 400 100
7 Dallas-Ft. Worth, TX 4.330 1,150 800 400 300
8 Boston, MA 4.134 1,300 600 400 500
9 Washington, DC 4.119 1,150 500 400 300
10 Houston, TX 4.054 1,150 900 400 300
11 Miami-Ft. Lauderdale, FL 3.271 1,150 1,000 400 200
12 Atlanta, GA 3.197 1,300 900 400 200
13 Cleveland, OH 2.894 150 500 320 300
14 Minneapolis-St. Paul, MN 2.841 1,300 700 400 200
15 St. Louis, MO 2.742 1,300 900 400 200
16 Seattle-Tacoma, WA 2.709 1,150 800 400 200
17 Pittsburgh, PA 2.508 1,150 600 400 300
18 San Diego, CA 2.498 150 400 320 300
19 Baltimore, MD 2.431 1,300 600 320 300
20 Phoenix, AZ 2.405 -- 700 400 200
21 Tampa-St. Petersburg, FL 2.249 1,150 1,000 400 200
22 San Juan, PR 2.170 -- 500 -- 100
23 Denver, CO 2.074 -- 700 80 200
24 Cincinnati, OH 1.990 150 900 240 300
25 Kansas City, MO 1.840 150 600 320 100
* WCII owns the original LMDS license for New York City of 850 Mhz,
while NXLK's A-block license from the LMDS auctions covers ONLY the
surrounding areas.
Note: Spectrum positions as of 12/97 (11/98 for ART).
Note: Market rankings and POPs based on 1998 LMDS auction statistics. |
