Subject: [NEXTEL-1] 16-Oct-03 Wachovia Securities On Nextel

From: [email-masked]
Date: Sun, 19 Oct 2003 11:33:05 -0400

16-Oct-03 Wachovia Securities (Fritzsche,Jennifer M. NXTL: Reports
Strong Q2'03 Results--Raising EPS Estimates

### ###                       WACHOVIA
SECURITIES                       ### ###
October 16, 2003
NXTL: Reports Strong Q2'03 Results--Raising EPS Estimates Earnings Estimates
Revised Up Nextel Communications, Inc. (NXTL-               Stock Rating:
OUTPERFORM

Price:            $22.12                 Jennifer M. Fritzsche / 52-
Wk. Rng.:      $22-8                       Gray Powell, CFA / Shares
Out.:(MM)  1,091.0
Market Cap.:(MM)  24,132.9

EPS       2002A           2003E            2004E
REV.2003     2004
FY(Dec.)  Current  Prior  Current  Prior   Current  Prior

Q1(Mar.)  ($0.35)  NC     $0.21A   $0.20A  NE       NC
$2,371.0MM  NE
Q2(June)    0.06   NC      0.28A    0.27A  NE       NC
2,556.0    NE
Q3(Sep.)    0.13   NC      0.44A    0.34   NE       NC
2,887.0    NE
Q4(Dec.)    0.19   NC      0.43     0.33   NA       NC
2,815.5    NE
Full FY    $0.12   NC     $1.35    $1.14   $1.70    $1.48
$10,629.5MM
$11,974.0MM
FY P/E    184.3x          16.4x            13.0x
Full CY    $0.12   NC     $1.35    $1.14   $1.70    $1.48
CY P/E    184.3x          16.4x            13.0x

Source: Company data and Wachovia Securities estimates.  NA = Not Available, NC =
No Change; NE = No Estimate; NM = Not Meaningful Reflects continuing EPS, which
excludes non-recurring items.

Float:(MM)          883.7          LT Debt:(MM)             $12,512.0
Avg. Daily Vol.:    17,829,400     LT Debt/Total Cap.:      78.5%
S&P 500:            1,050.82       ROE:                     33%
Div./Yield:         $0.00/0.0%     3-5 Yr. Est. Grth. Rate: 7%
CY2003Est. P/E-to-Grth.: 2.3x

Long term debt reflects Q2'03 balance.
Key Points

* NXTL GENERATED SOLID Q3'03 RESULTS ACROSS THE BOARD.  Net subscriber additions,
ARPU, EBITDA, and EPS were all better than our expectations.

* MORE UPSIDE TO EPS ESTIMATES THAN IMPLIED BY GUIDANCE - RAISING
EPS ESTIMATES
SIGNIFICANTLY.  The company's $1.15 2003 EPS guidance includes a $0.13/share
non-recurring charge in Q3'03 for debt retirement costs and an undisclosed charge
in Q4'03 for pending debt retirements.  In other words, there appears to be more
upside to our prior 2003 continuing EPS estimate of $1.14/share than is implied by
the company's guidance.  As such, we are increasing our 2003 EPS estimate to $1.35
from $1.14 and our 2004 EPS to $1.70 from $1.48.

* NATIONWIDE DIRECT CONNECT EXPERIENCED EARLY SUCCESS.  One third of customers
used nationwide direct connect in the months of August and
September.  We believe that this bodes well for the future levels of ARPU.

* BALANCE SHEET IMPROVEMENTS CONTINUE.  NXTL remains focused on reducing debt
levels and obtaining an investment grade credit rating.  In recent months, the
company has paid down $3.5 B in LTD with an average coupon of 10.6% and reduced
its weighted average cost of debt to below 7%.

* WE REITERATE OUR OUTPERFORM RATING ON NXTL SHARES.

Valuation Range: $28 to $30

We arrive at our 12 month valuation range of $28 - $30 using a DCF Analysis
assuming a 10.5% discount rate / WACC and an 7.5 terminal multiple
($28) and a P/E multiple of 25x applied to our 2004 EPS estimate adjusted as if
it were fully taxed at 35% ($30). Risks to the shares achieving our
valuation range include the company's inability to hit quarterly forecasts,
management's inability to execute on business plans, and increased pricing
pressures that could result from a weakening economy.

Investment Thesis

We continue to favor the underlying fundamentals of the NXTL story, as well as the
company's recent de-leveraging efforts.  The company has clearly executed in the
past several quarters and has continued to underpromise and over deliver.

SUMMARY

We reiterate our Outperform (1) rating on the shares of Nextel. This morning, NXTL
reported very strong Q3 2003 results characterized by record EBITDA ($1.13),
record low churn (1.4% - the lowest rate since 1997!), and record net additions
(646K).  We summarize the quarter's results relative to our expectations in the
table below.

SUMMARY OF RESULTS
(In millions, except where noted)   3Q03A    3Q03E

Net adds (000s)        646    576
EOP subs (000s)        12,339       12,268
Churn                  1.40%  1.65%

ARPU - actual $'s      $71.00       $69.23
CPGA - actual $'s      450    452
CCPU - actual $'s      23.9   22.6

Total revenue          2,887  2,653
EBITDA                 1,129  1,073
margin %             43.4%  43.1%

Adjusted Diluted EPS   $0.44  $0.34

Source:  Nextel Communications and Wachovia Capital Markets, LLC
estimates

As expected, the company raised its guidance for 2003.  As such, we are raising
our 2003 net subscriber addition assumption from 2.17 MM to 2.27 MM.
Consequently, we are increasing our 2003 total revenue assumption from $10.3 B to
$10.6 B.  We are also increasing our 2003 EBITDA estimate from $4.06 B to $4.17
B.  Finally, we are raising our 2003 EPS estimate from $1.14 to $1.35.  We are
also increasing our 2004 EPS estimate from $1.48 to $1.72.  Our 2004 revenue and
EBITDA estimates are $12.0 B and $4.79 B, respectively.  Nextel continues to
pursue high-value customers and is clearly focused on EBITDA improvement at this
point in its business cycle.  With its current packetized data platform and
speeds, we believe Nextel can "hold its own" against any of the other 3G platforms
currently being marketed or future competitors in the push to talk arena. We
arrive at our 12 month valuation range of $28 - $30 using a DCF Analysis assuming
a 10.5% discount rate / WACC and an 7.5 terminal multiple ($28) and a P/E multiple
of 25x applied to our 2004 EPS estimate adjusted as if it were fully taxed at 35%
($30). Risks to the shares achieving our valuation range include the company's
inability to hit quarterly forecasts, management's inability to execute on
business plans, and increased pricing pressures that could result from a weakening
economy.

Q3 2003 Earnings Details

Subscriber Growth - In Q3 2003, Nextel added a record 646,000 net new subscribers
for a total subscriber base of 12.3 MM digital customers at the end of September.
Our net addition estimate was 576,000.   NXTL's subscriber base may be broken down
into three main customer segments:  21% government & corporate (2.6 MM
subscribers), 48% small and medium business (6.0 MM subscribers), 31% high-end
individual / consumer (3.8 MM subscribers).

Churn - NXTL reported  record low churn of  1.4%.  This compares to our 1.65%
estimate and 2.0% in the year-ago period.   We believe this will prove to be the
lowest churn rate among all national operators in the United States.  Management
attributes its high retention to its recent "Touchpoint" effort which actively
monitors where customers are in the average life cycle - both in terms of customer
care and collections.

Revenue and ARPU - Total revenue reached $2.9 B in Q3 2003 vs. our $2.7 B estimate
and compares  $2.3 B in the year-ago period.  Average revenue per user (ARPU) for
Q3 2003 came in at $71, up from $69 in the prior quarter and flat with the
year-ago period.   Our estimate had been $69.23.
Contributing to the sequential increase in ARPU was robust usage, greater overage
MOU and the wide acceptance of the National Direct Connect offering.

Officially launched in late July, National Direct Connect helped drive NXTL's ARPU
trends.  While management would not offer many specifics as to the actual number
of users who have subscribed to the $10 / month "all you can eat" National Direct
Connect service, they did indicated roughly one-third of the local direct connect
users (which represents 90% of its total subscribers, or 11 MM users) have used
national direct connect.  In our view, this represents a rather large uptick given
that the service was only available for 2/3 of the quarter.  We continue to
believe National Direct Connect will help increase / stabilize ARPU trends
near-term.    MOU were solid in the quarter at 740.  This was up 3% on a
sequential basis from the 720 seen in Q2 2003.  This sequential uptick is not
surprising given the higher usage typically seen in the summer months.  Revenue
per MOU (or ARPU / MOU) remained flat on a sequential basis at roughly $0.10 /
minute.

EBITDA - Nextel's operations produced record EBITDA of $1.13 Bil (ahead of our
$1.07 Bil estimate) vs. $878 MM in Q3'02. EBITDA margin in the quarter improved to
43.4% vs. the 42.1% margin in Q2 2003.  Driving this margin enhancement was both
solid top-line growth and record low churn (1.4%).  As mentioned, ARPU levels for
Q3 2003 remained solid at $71.

CPGA continues to be a struggle or area of weakness for the company.  In Q3 2003,
CPGA was $450.  While this was in-line with our estimate and was down from $460 in
the prior quarter, it remains one of the highest CPGA metrics in the industry.
However, we would note that while NXTL's CPGA metric may remain high as the
company aggressively markets to new customer segments, the fact that NXTL's churn
(at 1.4%) is one of the lowest in the industry allows the company to still make a
significant profit on these subscribers.  Taking the inverse of churn (or 1.4%),
we conclude the average customer stays with NXTL just under 71 months (close to 6
years).  Conservatively assuming a $68 ARPU per month, the average lifetime
revenue per user is over $4800+ (71 months x $68)
or over 10x the original CPGA investment.

Cash cost per user (CCPU) for the quarter was $24 - this was slightly up from $23
in the prior quarter, yet remains one of the lowest CCPU metrics in the industry.
CCPU declined 6% on a year-over-year basis. Helping the CCPU metric was lower bad
debt expense in the quarter. Specifically, Nextel's bad debt expense in Q3 2003
decreased to 0.7% of revenue.  This compares to 1.0% in Q2 2003 and 2.4% in Q1
2003.   Nextel's bad debt expense as a percent of revenue continues to be one of
the lowest among the industry's national players.

Customer retention is the one cost component that is not captured by NXTL's
reported CPGA or CCPU line items.  However, when examining the footnotes that
detail the components of CPGA, one can find that the calculation excludes roughly
$89 MM in costs "unrelated to initial customer acquisition".  While some of this
includes costs associated with Boost Mobile, we believe a large part of these
costs are associated with retention costs. Retention costs remain one of our main
concerns for the wireless industry going into the wireless number portability
(WNP) event.  While this particular line item has been increasing in recent
quarters, we feel that the expense is justifiable given NXTL's low churn rates and
high lifetime value per subscriber.

Network Upgrade - In terms of its network upgrade, Nextel has begun the rollout of
its  6:1 vocoder upgrade (Nextel's version of a 2.5G upgrade) with Motorola.

This is in-line with its the original time table for the upgrade.  The company
plans to rollout as many as five new vocoder enabled handsets before year-end (2
as soon as next week).   Similar to the 1XRTT upgrade for CDMA carriers, the
vocoder is expected to double the voice capacity of Nextel's network.   Through
compression technology, Nextel should have enough capacity to last through at
least 2006 and support 22MM customers. Our model assumes Nextel will have roughly
16.4MM customers in 2006.

During Q3 2003, NXTL spent $431 MM in capital expenditures.    This was lighter
than our $555 MM estimate.  We would have expected a larger sequential increase in
cap-x (NXTL spent $402 MM in Q2'03).  Interestingly, the company's guidance for
2003 cap-x remained unchanged at "$1.8 Bil or less".  If the company reached the
$1.8 Bil level, that would imply $660 MM in cap-x in Q4 2003.  While we would
expect a sequential uptick from the $431 MM spent in Q3'03, we would not be
surprised if total 2003 cap-x came in less than the company's $1.8 Bil guidance.

EPS - Nextel reported $0.33 in basic GAAP earnings per share in earnings for the
quarter.   We would note this includes a $0.13 charge related to the early
retirement of debt and does not account for the dilutive nature of the company's
class A convertible preferreds or options in its Equity Incentive Plans.
Therefore, on a "normalized" basis Q3 2003 earnings were $0.44 / share.  This
compares to our $0.34 estimate and  consensus estimate of $0.32.  The company also
raised its guidance for its 2003 EPS outlook from $1.00 to $1.15 or more.

We would note this guidance is on Basic GAAP earnings only.  Therefore, in our
view, the "normalized" number (excluding charges related to the early retirement
of debt and other issues) is closer to $1.35.

Boost Mobile Offering

In August 2002, Nextel announced the creation of Boost Mobile, a new strategic
marketing initiative targeting the youth market in the United States.   The
company launched this service in California and Nevada test markets in September
2002.    During the quarter, Boost added 102,000 net subscribers (vs. 80,000 in
Q2'03) for a total base of 245,000 users.  We would note these subscribers are not
included in NXTL's Q3 2003 net additions of 646,000.  The company remains focused
on four main criteria with the Boost project  (1) an established brand name; (2) a
higher revenue per minute than Nextel's existing customer base; (3) lower CPGA
levels than Nextel's current base; and (4) a lower cost to serve this customer.
As Nextel owns 60% of this venture (40% owned by Boost), NXTL consolidates Boost
results with its own financials.

NXTL indicated the company plans to rollout its Boost offering in a "limited
geographic rollout" in 2004.  While the company would not comment on which cities
it plans to launch the service, we view this as a positive for 2004 growth levels.

Balance Sheet Update

Nextel remains focused on improving the balance sheet and obtaining an investment
grade credit rating - through the aggressive repurchase of its outstanding debt.
In Q3 2003, Nextel retired an additional $2.23 B in debt and preferred stock for
$1.76 B cash and 30 MM shares of common stock valued at $584 MM.  Additionally,
the company has announced intentions to pay down another $1.27 B in long term debt
through transactions that will close in Q4'03.  These transactions, which totaled
$3.5 B, bared an average coupon of 10.6% and will reduce NXTL's average cost of
debt to under 7%.
As of the end of the September, Nextel had bank facilities totaling $5.6 Bil, of
which over $4.4 Bil is already drawn and $1.2 Bil remains available.
Additionally, the NXTL had cash and equivalents of $3.6 B as of 9/30/03, giving
the company at total $4.8 B liquidity position.  We would note that the company
will apply $1.32 B of this position to the recently announced debt reduction
transactions.  We believe Nextel will continue to have substantial breathing room
relative to its covenants.  Importantly, Nextel's debt maturities do not begin in
significant measure until after 2006.

In the quarter, Nextel generated $478 MM in free cash flow (defined as EBITDA less
interest less capex) vs. our estimate of $303MM.  Given the strong quarterly
trends, we are raising our 2003 FCF estimate to $1.50 B from $1.39 B, previously.
Additionally, NXTL raised their guidance for free cash flow to "more than $1.0
billion" from "$600 MM or more", previously.  We note that NXTL's definition
differs from our simplified definition of FCF as it includes changes in working
capital, payments for spectrum, and preferred stock dividend payments.

MODEL ADJUSTMENTS & FINANCIAL OVERVIEW

As mentioned, Nextel raised guidance for the full year 2003 on a number of
metrics.  The company now expects to generate free cash flow of $1.0 B or more, up
from $600 MM or more.  EPS should be "$1.15 or more", up from "$1.00 or more".
EBITDA should be $4.1Bil, up from $3.9 Bil, and net adds are expected to be 2.2 MM
or more, up from 1.9 MM.  Capx remains unchanged at $1.8 Bil or less.
As a result of Q3 2003 results, we are making some model adjustments.  We are
raising our 2003 net subscriber addition assumption to 2.27 MM from 2.17 MM.

Consequently, we are increasing our 2003 total revenue assumption to $10.6 B from
$10.3 B.  We are also increasing our 2003 EBITDA estimate to $4.17 B  from $4.06
B.   Finally, we are raising our 2003 EPS estimate to $1.35 from $1.14,
previously.  While our 2003 EPS estimate appears high relative to NXTL's guidance,
we note that the company's guidance relates to basic GAAP EPS, while we focus on
continuing diluted EPS.  Thus NXTL's guidance does not reflect $0.24 of
non-recurring charges primarily related debt retirement and does not account for
the dilutive nature of the company's class A convertible preferreds or options in
its Equity Incentive Plans.  As a result, our estimates look higher relative to
guidance.  Thus, on an apples-to-apples basis, we forecast $1.16 in basic EPS
versus the companies $1.15 guidance, but note that our $1.35 continuing EPS
estimate is the number on which investors should focus.

Lastly, we are increasing our 2004 EPS estimate to $1.70 from $1.48.  This mainly
reflects improved operational performance, continuing debt reductions, and the
write down NXTL's investment in NXTP on the balance sheet, which resulted in the
company no longer booking its proportionate share of NXTP losses on the income
statement.  As such, we slightly increased our 2004 revenue and EBITDA estimates
to $12.0 B from $11.6 B and $4.77 B from $4.59 B, respectively.

We have highlighted our estimates for 2003 and 2004 below.

SUMMARY OF ESTIMATES
(In millions, except where noted)     NEW   OLD   NEW  OLD
2003E 2003E 2004E  2004E
Net adds (000s)    2,269       2,174  1,691  1,747
EOP subs (000s)    12,891      12,795       14,582     14,542
Churn              1.65% 1.76% 1.95%  2.00%

ARPU - actual $'s  $69.09      $68.38       $68.40     $66.67
CPGA - actual $'s  452   454   461    463
CCPU - actual $'s  23.1  22.7  22.7   22.3

Total revenue      10,629      10,320       11,974     11,574
EBITDA             4,167       4,059  4,771  4,586
margin %         42.4% 42.1% 42.3%  41.9%

Adjusted Diluted EPS     $1.35        $1.14  $1.70     $1.48
Source:  Nextel Communications and Wachovia Capital Markets, LLC
estimates

VALUATION & OPINION

Nextel continues to add customers and experience healthy revenue and cash flow
growth by serving a specific market niche. With its current packetized data
platform and network, we believe Nextel can "hold its own" against any of the
other 3G platforms currently being marketed or push to talk competitors coming
later this year. Nextel clearly has differentiated itself from an otherwise
commodity-driven industry.   We arrive at our 12 month valuation range of $28 -
$30 using a DCF Analysis assuming a 10.5% discount rate / WACC and an 7.5 terminal
multiple ($28) and a P/E multiple of 25x applied to our 2004 EPS estimate adjusted
as if it were fully taxed at 35% ($30). Risks to the shares achieving our
valuation range include the company's inability to hit quarterly forecasts,
management's inability to execute on business plans, and increased pricing
pressures that could result from a weakening economy.

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