ML on QWST analyst conference:
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ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Overweight (07-Mar-1995)
Growth: Overweight (07-Mar-1995)
Income & Growth: Overweight (07-Mar-1995)
Capital Appreciation: Overweight (20-Jan-1999)
In a well-attended and bullish analyst meeting
on 2/24, QWST reaffirmed financial targets
for '99 and '00 and highlighted many
opportunities to beat current analyst
expectations.
· New initiatives highlighted during the meeting
include: (1) local fiber network build-out in
key cities; (2) expansion into Asia-Pacific
region; (3) expansion of US network to close
an additional ring in the Midwest; and (4) the
roll-out of a new nationwide ad campaign.
· In addition, QWST shared details of its roll-out
schedule for advanced IP, web hosting and
e-commerce services.
· The meeting provided us with a greater degree
of comfort in QWST's ability to meet or
exceed our current projections. We reiterate
our Accumulate opinion on QWST shares and
believe the stock will continue to trade up
toward to our $78 DCF-driven PMV.
Fundamental Highlights:
· We continue to forecast communications
services revenue of $3.38B in '99, EBITDA of
$678M and EPS (including gains for dark
fiber sales of $0.12) of $0.20.
Qwest management expressed comfort in current
analyst expectations for '99 and '00, contrary to recent
market speculations that QWST was lowering its
expectattions for 1999. QWST is targeting revenue for
communications services of $3.4-3.5B in '99, growing to
$4.5B in 2000. We forecast $3.38B in '99, growing to
$4.6B in '00 as we believe QWST will beat top-line targets
as many of the new initiatives highlighted at the meeting
begin to contribute significant revenues in 2000. Qwest
EBITDA targets are $750M in '99 (including gains on
dark fiber sales of about $70M) and $1.1B in '00. Both
years are consistent with our forecasts. Excluding gains on
dark fiber sales, we forecast EBITDA of $678M in '99 and
$1.1B in 2000, in line with company targets. Data and IP
based business services likely will be the key drivers for
revenue growth.
For the first time, QWST publicly revealed its plans to
gain fiber connectivity in key local markets to
compliment its nationwide backbone. In fact, Qwest
already has local facilities in 10 markets and plans to add 9
more this year. Qwest was able to quietly add local
facilities in 10 cities with limited additional CAPX
($100M) through leases, fiber swaps and joint builds. We
view this as a clear positive for Qwest as it extends its “on-network”
broadband reach closer to its customers. For
example, its fiber ring in Seattle runs through the
Microsoft campus – an important element in its network
relationship with Microsoft. Similarly, its DC ring (a joint
build/swap with Espire) covers several government
buildings (e.g. the Pentagon, CIA, and Library of
Congress), a critical factor in expanding its relationship
with the federal government. We expect a more detailed
announcement of Qwest's local plans mid-year.
Qwest has already completed and lit more than 70% of
its 18,500 mile network and has construction begun on
over 99% -- remains on target to complete by 2Q99.
Qwest announced plans to add an additional 300 miles in
the Midwest to close a ring there through Memphis,
bringing its total miles to 18,800 by the end of ‘99. By the
end of '99, Qwest plans to have over 50,000 OC-48 miles
lit, double the capacity it has lit today. Upon completion
of the network, the company believes it can eliminate 2/3
of its existing leased network expense – an important
driver of margin expansion in 1999. In addition to the US
network active today, Qwest has about 2,000 miles
complete in Europe (w/KPN), and over 11,500 miles
transatlantic in service. It remains on target to add another
7,000 miles in Europe (w/KPN) by 2000, 1,400 miles in
Mexico by 2Q99 and 13,000 miles transpacific by 2000.
Leveraging its global multi-media network, Qwest plans
to roll-out a broad spectrum of IP-based services
including e-commerce, web-hosting, intranet ,
WAN/LAN management and other advanced network
services. Qwest plans to rapidly move up the value chain
from transport services that exist today to value-added
applications and content management. By late 1999 or early
2000, QWST plans to be offering a full line of IP-based
services, including direct internet access, dedicated web-hosting,
virtual private network services, voice and fax over
IP, e-commerce solutions and much more. Qwest believes it
can take over 50% share of the OC-N internet access
market, 10% share of the hosting market and 15-20% of the
internet access market in the1999-2000 time frame. Longer-term,
Qwest targets 50% of the voice/fax over IP market and
30% of the network-based VPN market.
To gain market share, QWST hired more than 400 new
sales reps in the fourth quarter, bringing its year-end
count to 900. Qwest targets 1,100-1,200 reps by YE99
and 1,300 by YE00. Salesforce productivity has improved
steadily with average monthly production jumping from
$4,500 in July '98 to over $8,000 in January '99. The
company targets $11,000 by January '00, as a result of
moving up-market to large business contracts and adding
new services. In addition to the additional salesforce,
Qwest previewed a new national ad campaign that will be
launched over the next few weeks highlighting is business
services capabilities.
On the international front, Qwest's JV with KPN
remains on target. It will have 2,100 miles complete by
the end of 1Q99 covering 9 cities and another 7,000 miles
by the end of 2000. The company targets over $350M of
revenues in year 1 (2001), growing at 35-40% and
EBITDA of $80M. Through EUNet, it has 85,000
customers and 450 POPs in 42 countries. In Mexico, its
1,400 mile network is in on track to be completed by mid-99.
Lastly, for the first time, Qwest publicly discussed
interest in entering the $150B Asia-Pacific
communications market. Although specific plans were not
announced, we believe this expanded geographic reach
will prove to be positive for Qwest and we anticipate
future announcements on this front.
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