my pleasure Dave. Playing late catchup, here's another - BTAB high yield on WCII:
WinStar reported results for the first quarter ended March 31, 1999 as follows:
Operating and financial results were solid, significantly topping estimates.
Revenue was $88.1MM, a 9% sequential increase over 4Q98's $81.1MM. The
growth can be attributed primarily to increased revenue per line, as the Company
has improved penetration and is selling more multiple service packages. EBITDA
came in at $(79.8)MM, only slightly wider than fourth quarter's $(79.2)MM. The
smaller EBITDA loss than anticipated can be traced to improved gross margins as a
result of signing up more on-net customers. Gross margins improved from 10.5%
in 4Q98 to almost 23% for 1Q99. Approximately 65,000 lines were installed in the
first quarter, bringing cumulative lines to 380,000. Of the new additions, more than
28,000 were on-net, bringing total lines on-net at 3/31/99 to 24%, up from 20% at
12/31/98.
In our opinion, WinStar is following a solid strategy by focusing on signing up on-net
customers and migrating parts of its existing off-net customer base to on-net.
This strategy will generate higher margins, as it eliminates the extra overhead off-net
lines generate from lease costs. We also believe that it is imperative for the
company to offer multiple service packages over long term contracts, whereby
consistent, high margin customers produce steady recurring revenues. We see
Winstar implementing this strategy; in the quarter, as approximately 60% of all new
customers ordered multiple services, and almost 60% of the contracts were for at
least three years.
The Company is also expanding its reach to grow its potential on-net customer
base. 17 hub sites were added during 1Q, establishing 79 hubs, with 36 hubs under
construction and over 20 more in the pipeline. The Company must leverage this
buildout by building its penetration levels. Winstar's original estimates called for
10% penetration, however the business is currently running at 14%. We will
monitor these levels closely as the number of buildings Winstar addresses is critical
to its success and should increase over the next three quarters. In the first quarter,
600 building access rights were added, bringing the total to about 4,800.
Management believes that the total number of building access rights will be 8,000
by year end.
We believe that enhanced data and Internet services enable companies to
differentiate themselves from competitors and create quality revenues. To this
effect, 27% of Winstar's new lines were data lines, which has helped put data and
Internet services on a $100MM annual run rate. The Williams backbone agreement
has allowed the Company to deploy these services over its own backbone and
switches, which drastically improves margins, often times up to 80% for some
services. Such bundling and differentiation enable Winstar to both more
successfully attract clients as well as to improve their retention, thereby reducing
churn.
Going forward, we look for a slight regression in WinStar's EBITDA loss in the
second quarter, however, this should mark the inflection point. SG&A as a
percentage of revenue was 113% in the first quarter, and this number should
increase in the second quarter, in line with the Company's expansion. After the
second quarter, though, revenues should push ahead at a faster pace, and SG&A as
a percent of revenue should settle into the 70-75% range by year end 1999. Gross
margins should also steadily improve over the course of the year, with 35-40%
levels by the end of the year. This will be the result of putting more traffic on the
lower-cost owned network, penetrating more buildings, and signing up more data
and multiple service customers. On the conference call, management stated that the
point to multipoint technology is operational in the Washington, D.C., market, and
that it is still on track for a multi-market roll out by year end as well. We believe
Winstar is well positioned from a liquidity standpoint. The Company spent
$224MM in capital expenditures for the quarter, and should spend approximately
$600MM for the entire year. Cash balance at 3/31/99 was about $410MM,
including equivalents and short term investments. Winstar's big advantage from a
funding perspective comes from its $2BB financing agreement with Lucent. This
should provide plenty of room to follow an aggressive expansion plan.
We believe that WinStar is on the right track and following what should be a
profitable strategy. In our opinion, as the Company continues to leverage its
network and attract more quality customers, it will drive higher margins and speed
the time to profitability. The point to multipoint roll out should only hasten this process. We continue to recommend that investors BUY Winstar's notes, while
keeping a close eye on the progress of the point-multipoint roll-out.
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