Subject: [NEXTEL-1] J.P. Morgan On Nextel

From: Marcel <[email-masked]>
Date: Thu, 24 Apr 2003 16:38:40 -0400

24-Apr-03 J.P. Morgan (Thomas J. Lee, CFA () AWE NXTL
Nextel : Solid 1Q, but Very High Growth in Consumer
Nextel                                  Neutral
Ticker          NXTL        EPS            2001A   2002A  2003E
(Old) 2003E
(New)
Price(04/23/03) $13.67      1Q (Mar)      ($0.56) ($0.81)
$0.16      $0.20A
52-Wk.Range     $2.50-14.67 2Q (Jun)      ($0.56)  $0.35
$0.19       $0.24
Mkt.Cap(BN)     $14.68      3Q (Sep)      ($0.27)  $0.53
$0.22       $0.26
Fiscal Year     Dec         4Q (Dec)      ($2.28)  $0.27
$0.21       $0.22
Shares O/S(MM)  1,074.00    FY            ($3.66)  $0.34
$0.78       $0.93
                            Sales FY (BN)  $7.21   $8.19
$9.46       $9.38

Nextel reported results 1Q03 that were basically inline with our estimates - with net adds
of 480k (vs our 450k), and EBITDA of $906mm (vs our $904mm). After additional analysis of
the results and color from the conference call we wanted to make following observations:

* Point # 1:Meeting estimates through cost control (bad debt).

Nextel was basically able to meet our EBITDA estimate purely through cost control,
specifically very low bad debt expense at 2.6% (vs. 4.1% in 2002), which could be
difficult to sustain with higher emphasis on consumer subs.

* Point #2: ARPU going forward less robust, a negative sign.

The company missed our 1Q03 target by $1 ($67 vs. our $68). Going forward, higher ARPUs
appear to be challenging (only $1 increase in 2Q03 projected by management vs. $3 increase
from 1Q02 to 2Q02), which we belive could be attributed to lower priced plans targeted at
consumers.

* Point #3: Growth in "individual" or consumer base may cause higher churn and bad debt.
Approximately 60% of the new subs in 1Q03 were from the consumer segment. We believe going
forward the company may start to experience much higher levels of churn and bad debt as
the subscriber base becomes more consumer oriented.

* Point#4: CPGA is still very high. Nextel reported CPGA at $450, an up-tick from $442 in
prior quarter. Furthermore, considering that majority of growth for Nextel in 1Q03 came
from the individual segment, the company's current CPGA of $450 is very high and maybe
misaligned with the value proposition of the consumer subs.

* NXTL reported solid 1Q both on EBITDA and net adds, however it appears that NXTL was
able to achieve EBITDA goals mostly through lower bad debt expense.

Going forward, current APRU, churn and bad debt levels, especially, could be hard to
sustain as NXTL aggressively grows through consumer segment.  We reiterate Netral on NXTL,
and preffer AWE at 5.8X '03 EV/ EBITDA vs.
6.5X for NXTL.

The Portfolio Manager's Summary

Nextel reported 1Q03 results that were basically inline with our estimates - with net adds
of 480k (vs our 450k), and EBITDA of $906mm (vs our $904mm). The?  end results?were solid,
particularly EBITDA (up 54%) and operating income; however, achieving these results was
primarily via a reduction in bad debt while revenue per user came in lighter than
expected.The larger issue, in our view, remain structural on Nextel; specifically, the
company is likely to face substantial threat to its core product later this year (CDMA and
GSM-based push to talk), while we remain concern about current capex levels, risk of a
late vocoder and overall quality of earnings.Below are additional insights after the
conference call (our first take note was published yesterday immediately prior to the
call):

Point#1: Meeting estimates through cost control (bad debt). Nextel

was basically able to meet our EBITDA estimate ($906mm vs. our $904mm)
purely through cost control as ARPU actually felt short of our expectations
by $1 and marketing costs per gross adds were also ahead of our estimates at $450 vs.  our
$429 . Cost control appears to have been most influenced by very low bad debt expense at
2.6% of service revenues; the bad debt debt expense is a large improvement over last
year's results at 4.1% of service revenues.

Table 1: JPMorgan estimates vs. actual results

JPM Est.  Actual  Delta
Service revs             $2,251  $2,210  ($41) <--- ARPU shortfall
Pre-mkt expenses           $797    $744  ($53) <--- upside in Bad
debt expense
Pre-mkt EBITDA           $1,455  $1,466    $11

Marketing expenses         $550    $560    $10 <--- high CPGA
EBITDA                     $904    $906     $2
EBITDA Margin             40.2%   41.0%   0.8%

Source: Company reports and JPMorgan estimates.

Point #2: ARPU going forward less robust, a negative sign. As we mentioned earlier, the
company fell short of our ARPU estimate in 1Q03 by approximately $1 ($67 vs. our $68); and
was down sequentially by $2 from 4Q02 results, but since 1Q03 now includes repair,
maintenance and cancel fees, apples to apples ARPU was likely in the $65-$66 range in
1Q03.
The company indicated that they expected ARPU to rebound by approximately $1 to $68 in
2Q03; $1 rise next quarter would be below the seasonal trend, as ARPU last year jumped by
more $3 from $67.50 in 1Q02 to $71 in 2Q02.
Lower ARPU going forward is obviously negative and would dull the effect of robust
customer growth the company experienced in the quarter (more about this below).

We believe lower ARPUs could be attributed to the company's continued efforts in the
consumer segment. Growing the subscriber base through lower pricing (compared to
historical) could be a double edged sword as it may also cause many tradional business
subs to re-price their service. For instance, Nextel's Breakthrough plans that were
available during the Christmas season may have attracted lot of consumer subs, but could
also have caused many of the existing business users whose contracts were up in the
quarter to re-price their plans.

Point #3: Growth in consumer may cause higher churn and bad debt.  Although, the company
delivered solid net adds results in the quarter (480K vs. our 450K), we calculated that
approximately 60% of the new subs were from the consumer segment. Consumer have very
different subscriber characteristics than traditional Nextel' business base - they are a
lot more price sensitive and have lower utility from Nextel's differentiated Direct
Connect service. We believe going forward the company may start to experience much higher
levels of churn and bad debt as the subscriber base becomes more consumer oriented.

Below we discuss the sensitivity of the model from uptick in churn and bad debt.

Table 2: Composition of net adds
(subs in millions)
Net
Adds    % of
                                      4Q02    1Q03    % gth
1Q03   Total
Government and Large Enterprise        2.2     2.3       5%
0.1     20%
Small/Medium Business                  5.7     5.8       2%
0.1     20%
Individual                             2.7     3.0      11%
0.3     60%
Total                                 10.6    11.1       5%
0.5    100%

Source: Company reports and JPMorgan calculations.

Every 20 bps Increase in Churn Reduces 2003E EBITDA by $125mm
We believe the increase in the proportion of consumers in Nextel's subscriber base
mentioned above could pressure the company's industry low churn rate.In addition, Nextel's
bottom line is particularly sensitive to changes in churn due to the company's high
average CPGA of $450 which is more than $100 higher than the average 2003E CPGA of the
other five national carriers ($348).As demonstrated in the following chart, we estimate
that every 20 bps increase in 2003E churn would decrease 2003E EBITDA by approximately
$125mm.

Table 3: Sensitivity of 2003E EBITDA to Increases in Churn (subs in 000s, $ in millions)
2003E Churn                        2.13%        2.23%
2.33%        2.43%
bps change from current            0 bps       10 bps       20
bps       30 bps
Average Subscribers          11,488      11,488       11,488
11,488
Incremental Disconnects      -           138          276
414
x incremental CPGA                  $450         $450
$450         $450
EBITDA Impact                       $0.0      ($62.0)
($124.1)     ($186.1)
2003E EBITDA                      $3,886       $3,886
$3,886       $3,886
Modified 200E EBITDA              $3,886       $3,824
$3,762       $3,700
% change                            0.0%        -1.6%        -
3.2%        -4.8%
Source: JPMorgan estimates and company reports.

Every 100 bps Increase in Bad Debt Reduces 2003E EBITDA by $100mm
As stated above, we believe that increases in the proportion of consumers in Nextel's
subscriber base could lead to higher bad debt expense, which was one of the metrics that
enabled Nextel to meet its numbers in 1Q03.As demonstrated in the following chart, we
estimate that every 100 bps increase in 2003E bad debt expense increases 2003E EBITDA by
approximately $100mm.

Table 4: Sensitivity of 2003E EBITDA to Increases in Churn ($ in millions)

2003E Bad Debt                                2.4%
2.90%         3.40%
bps change from current                      0 bps         50
bps       100 bps
2003E Total Revenues1                      $10,065
$10,065       $10,065
Incremental Bad Debt Expense                    $0           -
$50         -$101
2003E EBITDA                                $3,886
$3,886        $3,886
Modified 200E EBITDA                        $3,886
$3,836        $3,786
% change                                      0.0%          -
1.3%         -2.6%

Source: JPMorgan estimates and company reports.
1Total Revenue includes service revenue plus equipment revenue.

Point#4: CPGA is still very high. Nextel reported CPGA at $450, an up-tick from $442 in
prior quarter. Furthermore, considering that majority of growth for Nextel in 1Q03 came
from the individual segment, the company's current CPGA of $450 is very high and may be
misaligned with the value proposition of the consumer subs.

Net-net:Nextel reported solid results both on EBITDA and as well as net adds, however it
appears that the company was able to achieve the EBITDA goals mostly through cost control,
specifically lower bad debt expense. We believe going forward the current bad debt levels
could be difficult to sustain, as the company continues to aggressively grow its consumer
subscriber base (in 1Q03 consumer subscriber growth represented approximately 60% of net
adds); churn and ARPU could also could come under pressure. We reiterate our Neutral
rating on Nextel as the company continues to trade at a premium to its peers;
AWE seems to be better value proposition at 5.8 times 2003 EV/ EBITDA vs. NXTL at 6.5
times.

Table 5: Nextel First Quarter Highlights

(subs in 000s, $ in mm except ARPU)
                                      1Q02         4Q02
1Q03E        1Q03
Net internal adds                      502          496
450         480
Subs, ending                         9,169       10,612
11,062      11,092
Launched pe gain                     0.25%        0.24%
0.22%       0.23%
Launched Penetration                 4.49%        5.16%
5.37%       5.38%
Customer churn / month               2.14%        2.10%
2.20%       1.90%
Avg monthly revenue                 $68.45       $70.24
$69.24      $67.88
% chg?y-t-y                          -4.7%         0.6%
1.2%       -0.8%
Total Service Revenues              $1,831       $2,184
$2,251      $2,210
% chg?y-t-y                          22.5%        23.9%
22.9%       20.7%
Pre-SAC/sub/month                   $26.91       $24.19
$24.50      $22.85
Pre-mkt cash flow                   $1,111       $1,432
$1,455      $1,466
Pre-mkt CFLO margins                 60.7%        65.6%
64.6%       66.3%
% chg?y-t-y                          23.2%        33.6%
30.9%       31.9%
Operating Cash Flow                   $586         $886
$904        $906
OCF margins?svc revs                 32.0%        40.6%
40.2%       41.0%
% chg?y-t-y                          66.1%        57.4%
54.3%       54.5%
Net Income (Loss) (MM)              ($653)       $1,463
$167        $208
EPS (loss)                         ($0.81)        $1.36
$0.16       $0.20
Capex (in 000's)                      $474         $545
$450        $305

Source: Company reports and JPMorgan estimates.

Valuation and Rating Analysis

At 6.5 times 2003E EBITDA, NXTL trades at the high end of valuations relative to other
national wireless carriers (AWE trades at 5.8 times and PCS trades at 5.9 times).

Risks to our Rating

Downside risks to our Neutral rating are a) dramatic deterioration to ARPU and churn
levels due to company's continued expansion into the consumer segment, b) the level of
success and timeliness of the push-to-talk rollouts by other national carrier that would
challenge Nextel's Direct Connect service and c) effect of overall economic slowdown on
Nextel's still largely business subs base. Upside risks to our Neutral rating are further
margin expansion (beyond current industry high 40% margins), and strong growth from
Nextel's traditional small and medium business markets (last year represented only
approximately 25% of total net adds).
5359
From: n_investment_group_moderator <n_investment_group_moderator@y...>
Date: Thu Apr 24, 2003 2:01pm
Subject: SG Cowen

24-Apr-03 SG Cowen Securities Inc. (Thomas Watts) NXTL VZ AT MOT AWE
NXTL: Consolidating Quality Lead with Superb Q1
Tom Watts, CFA         Jonathan Schildkraut

Conclusion: Nextel reported superb Q1 results,       NXTL (04/23)
$13.67
reinforcing an apparent Q1 industry theme of         Mkt Cap
$14.0B
focusing on quality subscribers and reducing churn,  Dil shares out
1027.1MM
but bringing ARPU down. Maintain Outperform.         Avg daily vol
23,040.1K
52-wk range
$3-15
Growth story intact. Q1 demonstrated 21%             Dividend
Nil
YOY revenue growth, driven by 480,000 net adds,      Dividend yield
Nil
6.7% above our 450,000 estimate.  EBITDA grew        BV/sh
$3.76
64% YOY.  Fully diluted pro forma EPS expanded       Net cash/sh
NM
to $0.21, above our $0.15 estimate.                  Debt/cap
76.5%
                                                     ROE (LTM)
NA
First to trade on earnings. We expect Nextel's       3-yr fwd EPS   NA shareholder base to
broaden as it demonstrates it        growth can achieve or surpass our prior EPS estimate
of $0.81. Based on that estimate and Tuesday's (4/22/03) close of $12.35, the stock traded
at only a 15.3x PE.
                                                     S&P 500
919.0
Raising our estimate. We are increasing our 2003E EPS estimate to $0.98, implying current
PE of only 13.9x. We believe 2003E EPS has additional $0.02 to $0.10 upside through
further debt retirement. Further, virtually all of Nextel's $12B in debt becomes callable
over next two years creating additional room for interest savings.
Competition to have impact, but remain inferior. We continue to expect competitive
launches later this year to put price pressure on Nextel, and have factored that in our
model, but expect Nextel to remain dominant in core markets.
Revenue $MM
FY      2002             2003E             2004E    2005E
Dec     Actual  Prior    Current  Prior    Current  Prior   Current
Q1      2,155.0 --       2,371.0A --       --       --      --
Q2      2,154.0 2,487.0  2,488.0  --       --       --      --
Q3      2,279.0 2,577.0  2,578.0  --       --       --      --
Q4      2,331.0 2,616.0  2,626.0  --       --       --      --
Year    8,919.0 10,057.0 10,064.0 11,053.0 11,136.0 --      --
EV/S    --      --       2.3x     --       2.1x     --      --

EPS $
FY      2002             2003E             2004E    2005E
Dec     Actual  Prior    Current  Prior    Current  Prior   Current
Q1      (0.35)  --       0.21A    --       --       --      --
Q2      (0.05)  0.20     0.24     --       --       --      --
Q3      0.14    0.23     0.27     --       --       --      --
Q4      0.21    0.22     0.25     --       --       --      --
Year    0.03    0.81     0.98     1.07     1.18     --      --
P/E     --      --       13.9x    --       11.6x    --      --

Consolidating Quality Lead With Superb Q1

Nextel reported superb Q1 results. The company remains on track to  become  the first
wireless company to trade on an EPS basis,  substantially  expanding  its potential
investor base. We are raising our full-year EPS estimate  from  $0.81 to $0.98. We have
performed analyses which show  further  potential  upside  of $0.02 to $0.10 from
additional debt reductions this year and  up  to  $0.12  in annual improvement if the
company were to pursue refinancing some of its higher interest rate debt.

The quarter's results also demonstrate an emerging industry theme  of  focusing on quality
subscribers, reducing churn, but bringing ARPU down. We maintain our Outperform rating.
As  it  becomes  clear  that  competitive  impacts  will  be limited, which we expect
later in the year, we anticipate taking an  even  more aggressive stance toward Nextel.

Top Line Outperformance

Nextel reported very strong top line  performance,  highlighted  by  increasing revenue
and solid subscriber net adds. On the financial metrics side,  revenues reached $2.37B up
21.2% from $1.96B in Q1:02 and 1.7%  from  $2.33B  in  Q4:02.
EBITDA also jumped from last year growing 54.6% from $586MM in Q1:02 to  $906MM this
quarter. Reduced interest cost due to debt reduction and  the  elimination of many
below-the-EBITDA-line expenses led to an upside surprise  with  EPS  of $0.21,  beating
our  estimate  of   $0.15,   and   demonstrating   substantial improvements over last
year's Q1 EPS loss of ($0.35). The following table shows actual results from Q1:02, Q4:02
and Q1:03 as well as our estimates for Q1:03.

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