Subject: [NEXTEL-1] Thomas Weisel Partners On Nextel

From: Marcel <[email-masked]>
Date: Wed, 23 Apr 2003 21:12:32 -0400

23-Apr-03 Thomas Weisel Partners LLC
 NXTL: Strong Subscriber Growth and Churn in 1Q03 Report

Ned P. Zachar, CFA
Sophia C. Hardy
James D. Breen, Jr., CFA

 Ratings System
Sector Ratings
OW Overweight      MW Market Weight   UW Underweight
Stock Ratings
O Outperform       P Peer Perform     U Underperform
S Suspended Rating NR Not Rated       NC Not Covered

Key Data
Price$12.35
52-Week Range:$3-$15
Market Cap.(mn):$12,930.5
Shares Out.(mn):1047.0
Avg Daily Vol.:21,851,016
Fiscal Year End:December
Sector Rating:UW
Stock Rating:O

Debt/Total Capital:85%
Price/TTM Sales:1.4x
Net Cash/Share:NM
Book Value/Share:$2.94
Price/Book Value:4.2x
Secular Growth:25%
Price Target:NE

FY           2002      2003      2003 Prv  2004       2004 Prv
EPS
Q1           ($0.65)A  $0.21A    $0.19E    NE         NE
Q2           $0.39A    $0.19E    $0.19E    NE         NE
Q3           $0.58A    $0.24E    $0.22E    NE         NE
Q4           $1.49A    $0.22E    $0.24E    NE         NE
Year         $1.81A    $0.86E    $0.84E    $1.31E     $1.32E
P/E          6.83x     14.44x              9.42x

Revenue(mn)
Q1           $1957.1A  $2371.0A  $2385.3E  NE         NE
Q2           $2154.0A  $2450.3E  $2443.0E  NE         NE
Q3           $2279.0A  $2534.4E  $2527.3E  NE         NE
Q4           $2331.0A  $2587.5E  $2576.0E  NE         NE
Year         $8721.1A  $9943.2E  $9931.7E  $10907.8E  $10841.9E
TEV/Sales    2.8x      2.5x                NE

Executive Summary

* The Results-Nextel Communications reported first quarter earnings this morning that
generally met expectations.  The company added 480,000 subscribers during the quarter,
ahead of our 425,000 estimate and only slightly down from 4Q02 net adds of 496,000.  As we
anticipated, first quarter ARPU of $67.00 fell short of our estimate of $69.00.  Total
revenue for the quarter was $2.37 billion, below our estimate of $2.39 billion.

EBITDA of $906.0 million was also slightly lower than our estimated $917.4 million, but
strong margins during the quarter offset nearly all the effect of the lower ARPU.  The
first quarter EBITDA margin was 38.2%, versus 29.9% in 1Q02 and 38.0% in the previous
quarter.  EPS of $0.21 was just above our estimate of $0.19.

* Notably, churn declined from 2.1% in the prior quarter to 1.9% in Q1.
Lifetime revenue per subscribers based on first quarter ARPU and churn is a strong
$3,526.  Strong quarterly subscriber growth and impressive churn demonstrate the continued
strength of Nextel's differentiated products and services, in our view.

* The Numbers.  In light of Nextel's solid first quarter and continued positive outlook
for the full-year 2003, we are making only modest revisions to our estimates.  Our models
can be found beginning on page 3.  We expect Nextel to add just over 1.7 million new
subscribers in 2003, up slightly from our previous 1.65mm figure.  We have made no
adjustments to our quarterly projections, but our annual estimate is higher due to the
stronger-than-expected performance in Q1.  Our quarterly ARPU estimates remain the same,
but ARPU for the full year is modestly lower for the year at $67.50 versus our previous
estimate of $68.00 due to the first quarter decline.  We have decreased our quarterly
churn estimate from 2.1% to 2.0% for the second and third quarters of 2003.  We are
leaving our churn estimate for 4Q03 at 2.1% to factor in the beginning effects of wireless
number portability implementation.  Our FY03 total revenue and EBITDA projections of $9.9
billion and $3.8 billion, respectively, remain unchanged, but we are raising our EPS
estimate from $0.84 to $0.86 based on the 1Q beat.

* During the first quarter, Nextel retired $568.0 million in principal amount of its
outstanding debt and redeemable preferred stock in exchange for approximately $570.0
million in cash.  Over the last year, Nextel has retired about $3.8 billion in debt.
Still, at quarter end, Nextel had cash and cash equivalents of $2.28 billion and an
additional $1.5 billion in available financing.

* On March 28th, Nextel Communications filed a shelf registration that will allow for the
direct stock repurchase of up to $500 million and gives the company access to the capital
markets quickly and effectively to offer up to $5 billion in debt securities, preferred
and common stock, depository shares, and other securities.  Nextel has no plans to raise
capital at this time, but management is prepared to do so if the opportunity exists.
Proceeds could be used to fund network expansion, strategic investments, working capital
needs, debt service requirements, and/or for general corporate purposes.  We think the
shelf is likely aimed at helping to simplify or refinance the company's substantial
capital structure.  Nextel has roughly $3.0 billion in debt maturing in the 2006-2007 time
frame.  By filing this mixed shelf, Nextel can now rapidly tap the corporate debt market
to refinance or eliminate maturities.  We fully expect Nextel to take advantage of the
positive interest rate and high yield market if current market conditions persist.

* Valuation.  Nextel Communications shares are trading at 6.4x 2003 estimated EBITDA and
5.6x 2004 estimated EBITDA, a slight premium to both AT&T  Wireless and Sprint PCS.  On a
P/E basis, Nextel shares (EPS expected five-year CAGR is 24.4% beginning 2003) are trading
at 14.4x our 2003 EPS estimate of $0.86 and 9.4x our 2004 EPS estimate of $1.31.  Our
five-year DCF analysis suggests a fair value for NXTL shares currently of $22.00, using a
WACC of 11.4% and a 7.0x terminal multiple.

* Nextel completed the first phase of the nationwide Direct Connect implementation
(traveling Direct Connect) during the first quarter and has initiated the second phase,
market-by-market deployment. A commercial roll-out of nationwide Direct Connect is
expected in August 2003.  We view the expansion of Nextel's service as a positive for the
stock.  While it is clear that a competitive push-to-talk product will be launched within
the next year, it is unclear how comparable the product will be. Our view is that the
launch of competitive push-to-talk products by Verizon, Alltel, or Sprint PCS will (1) not
be likely to affect Nextel's numbers (primarily subscriber adds) in a way that is not
reflected in our net adds over the next three years (1.7 million in 2003, 1.3 million in
2004 and 1.0 million in 2005); and thus, (2) will likely target the estimated 130 million
customers that do not have or use push-to-talk capabilities on their phones currently. We
reiterate our OUTPERFORM rating on the shares of
Nextel Communications.

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