<...SteveG, thanks for all your excellent reporting lately,...>
Thanks for the appreciation Bow. I feel indebted to you and some
others here for the ample substantive discussions that got me up to
speed on WCII early on. Actually, I was recently thinking I missed
those thorough analyses, but I guess it's partly that we pretty much
know the core business details and partly that WinStar's volatility
has enough people burned out that our more substantive contributors
don't feel to contribute that often anymore. Guess I understand.
Hopefully, we'll continue executing, more of the street will hop on
board, we'll retire the converts and reduce the shorts and be home
free until a takeout offer puts us into play. Then a once a week "Go
WinStar" is all the time we'll need spend. Here's hoping that plays
out soon.
I'll post a few of the reports this am. Here's BTAB:
WinStar reported 4Q 1998 results after the close today (4-Mar) that
were in line with our expectations. We note that the stock has sold
off in the wake of a follow-on equity offering in early February,
and in the face of a strong strategic quarter as well.
IN LIGHT OF THE RECENT SELL-OFF OF WCII SHARES, WE WOULD BE
AGGRESSIVE BUYERS FOR THE FOLLOWING 4 REASONS:
1. Fundamentals on track in 4Q 1998. Any concerns regarding
WinStar's ability to meet quarterly expectations were effectively
answered with this afternoon's solid earnings release. The company
met or exceeded nearly all of our expectations, and more importantly,
we believe the company will meet 1999 expectations as well. See below
for more details on 4Q 1998 results.
2. Strategic announcements still likely, if not imminent. We believe
much of the recent selling pressure has come from investors who were
waiting for a major strategic announcement following the equity
offering in early February. While such expectations may or may not
have been fair, management must accept some responsibility for setting
these expectations. We still wouldn't hold our breath for a major
strategic announcement, although we believe it is highly likely that
WinStar is in discussions with strategic investors who bring any or
all of the following assets to the table:
* Intracity fiber, both domestically and internationally. This is
the more difficult kind of fiber to come by, and is important for
quickly rolling out networks and efficiently designing the network.
* Intercity fiber in Europe, which is becoming increasingly
available and, like the Williams deal in the U.S., would be used to
provide the LD portion of the network.
* Undersea cabling. Likely first to Europe, then to Japan, and
ultimately South America, this piece sews together the various local
networks into a seamless global broadband pipe.
We believe WinStar may be past the stage of identifying potential
partners, and into discussions about what form a strategic
relationship would take, i.e., an asset swap such as the Williams deal
or an outright sale of equity to the partner, among other
possibilities.
4. M&A likelihood remains high. There are obviously any number of
carriers who would enjoy a piece of WinStar's local access, which
effectively bypasses the incumbent local bottleneck. Long haul
capacity is not a scarce commodity, but ubiquitous, broadband, local
access is very difficult to come by. At the end of the day, we
believe WinStar--and in fact all of the wireless access
companies--will ultimately be acquired for this access. In the
interim, WinStar is putting together the pieces for a successful
stand-alone company.
5. Technology concerns have been successfully addressed. We
continue to believe that point-to-multipoint (PMP) technology will
be commercially available in quantity and quality beginning in 3Q
1999. ART, another 38 GHz provider, publicly stated as much on their
earnings conference call Tuesday (2-Mar), and we believe WinStar is
likely to receive 38GHz PMP radios before ART. While other telcos
have been talking about the declining costs and increasing prospects
for competing technologies (most notable xDSL solutions), we continue
to believe each technology addresses a slightly different market
segment, and firmly believe that NO technology can match the
cost/capacity proposition of wireless.
In addition, we would throw two other thoughts into the mix:
international and the Internet. First, WinStar is slowly acquiring
spectrum around the globe, aiming ultimately to be in the top 50
international markets by 2004. We do not believe any value is
assigned to this opportunity at present (we aren't explicitly
modelling any benefit from international markets pending greater
visibility). Second, WinStar owns a scarce commodity: low cost,
high speed access to the end user. Setting valuation aside, we
believe WinStar (and all wireless access companies) are uniquely
positioned to benefit from the impending boom in data traffic due to
its superior cost/capacity ratio. We believe ultimately our data
forecasts (relatively moderate today) will prove to be wildly
understated in the future.
4Q 1998 Results In Line With Expectations
To be fair, WinStar's results were not exactly overwhelming. But they
were in-line with to slightly ahead of expectations and we
believe it is important for management to begin the process of
demonstrating the ability to meet its goals under the "new"
operating strategy. In that regard, 4Q 1998 was certainly a success.
HEADLINE PERFORMANCE METRICS
Metric 4Q98A 4Q98E 1998A 1999E
Revenue $81.1M $78.0M $247M $444M
EBITDA -$79.2M -$80.4M -$225M -$274M
EPS ($3.80) ($3.79) ($11.96) ($14.90)
Access Line Additions 62,000 60,000 219,000 285,000
Gross Margin 11% 17% 16% 32%
% On-Net Lines 20% 20% 20% 40%
% Line Additions On-Net 28% 29% 23% 54%
Source: Company documents, BT Alex. Brown Incorporated.
The one weak number in the quarter was gross margin, which came in at
10.5% versus our expectation of 17%. We recently warned of "lumpy"
results among the start-up phase wireless access companies, including
WinStar. The company's gross margin is a clear example of this
lumpiness as the costs of launching new markets caught up with an
otherwise perfectly in-line quarter. More importantly, we believe
WinStar is well positioned to meet or beat our expectations moving
forward into 1999.
We believe one of the most crucial variables in WinStar's quarterly
performance, if not the most crucial, is % on-net lines. It affects
gross margin, it affect service costs, and therefore it directly
affects profitability. Of course, driving on-net penetration is the
whole idea behind project Millennium. 4Q 1998 on-net performance
objectives were met without the benefit of Project Millennium
customers, which are 100% on-net. These subscribers are being
provisioned in 1Q 1999. We believe WinStar can ride the strength of
new Millennium subscribers to 40% on-net lines by YE1999. We also
believe that will drive gross margins to 40% by 4Q 1999, as well.
We have made only minor changes to our model for 1999, although our
per-share estimates are affected by the issuance of 4.2M new shares
in early February. WinStar remains fully funded for its domestic
business plan, and we suspect the international operations will
ultimately be funded separately although WinStar enjoys about $1
billion of "extra" liquidity through 2001 for international uses.
NET-NET
We know of no fundamental reason for the recent sell off in WCII. We
believe the selling pressure can be attributed mainly to a lack of
strategic news. We also believe investors with the patience to ride
out the volatile price movements will be rewarded with a long-awaited
strategic announcement. Quarterly results are not likely to be the
near-term drivers of the stock, but long-term fundamental outlook
remains extremely bullish in our opinion.
VALUATION
Based on our 10-year DCF using a 20% equity discount rate and a 10x
terminating multiple, our 12-month price objective for WCII is
$64/share. Our private market value, based on our DCF but using a 15%
discount rate, would be over $90/share. We also note that our $64
price objective is based on a fully diluted share count which
incorporates the 4.2M shares from the February offering. |
