Subject: [NEXTEL-1] 16-Oct-03 Merrill Lynch On Nextel

From: [email-masked]
Date: Sun, 19 Oct 2003 10:22:53 -0400

16-Oct-03 Merrill Lynch (L.Mutschler  NXTL
NEXTEL:Top Line Surprise
NEUTRAL     Volatility Risk: HIGH

Reason for Report: Quarterly Earnings Update
Highlights:

o    On Thursday, October 16(**th), Nextel reported strong 3Q 03 results-in
particular, with regard to the top line.

o    With regard to 3Q 03 for US wireless, we think that Nextel's results may bode
well for others in terms of subscriber growth, ARPU and usage.  As we have said
before, we think that wireline substitution (of access lines and minutes) and
demographic trends are in part fueling the recent pick up in wireless growth.

o    For 2003E, we are revising our estimates to 2.35 million net additions (from
2.2 million), to 1.6% churn (from 1.7%), to EBITDA of $4.18 billion (from $4.04
billion), to capex of $1.7 billion (from $1.8 billion), and to free cash flow of
$1.14 billion (from $908 million).

o For 2004E, we estimate net additions of 2.0 million, churn of
1.8%, ARPU of $69, and EBITDA of $5.06 billion (for a 43.7% service margin and an
increase of 21.0% year-over-year).  We estimate that 2004E EPS will be
approximately $2.10 per share.

o Adjusted for taxes, applying a normalized tax rate and including the present
value of tax credits, we estimate that Nextel for 2004E trades at approximately
16.3x earnings with a 5-year CAGR of approximately
9.1%.  We estimate that Nextel's adjusted (for taxes) 2004E FCF yield is
approximately 6.8%, compared to AT&T Wireless at 5.9% and Sprint PCS at 6.3%.

o Risks include the outcome of the proposed spectrum swap and implications for
future spectrum costs, the introduction of wireless local number portability in
November and the potential for multiple competitive push-to-talk products in
2004E.  However, given trends with regard to growth, churn and ARPU, Nextel may be
relatively less exposed. We maintain our Neutral rating.

Price:                             $22.36
Estimates (Dec)                        2002A   2003E  2004E
EPS:                                  d$0.05   $1.24  $2.10
P/E:                                      NM   18.0x  10.6x
GAAP EPS:                              $1.62   $1.24  $2.10
GAAP P/E:                              13.7x   18.0x  10.6x
EPS Change (YoY):                                 NM  69.2%
Consensus EPS:                                 $1.11  $1.47
(First Call: 16-Oct-2003)
Q4 EPS (Dec):                          $0.21   $0.45
Cash Flow/Share:                       $3.37   $2.98  $3.88
Price/Cash Flow:                        6.6x    7.5x   5.8x
EBITDA ($B):                          $3.166  $4.179 $5.059
EV/EBITDA:                             10.6x    7.6x   5.8x
FCF/Share:                            d$0.38   $1.07  $2.19
FCF Yield:                                NM    5.0%  10.3%
Dividend Rate:                           Nil     Nil    Nil
Dividend Yield:                          Nil     Nil    Nil
Opinion & Financial Data
Investment Opinion:   C-2-9
Mkt. Value / Shares Outstanding (mn):   $23,478.0 / 1,050
Book Value/Share (Sep-2003):   $4.52
Price/Book Ratio:   5.0x
ROE 2003E Average:   33.1%
ROTC 2003E Average:   13.1%
Total Debt / Capital:   70.8%
Est. 5 Year EPS Growth:   9.3%
Stock Data
52-Week Range:   $21.78-$7.84
Symbol / Exchange:   NXTL / NASDAQ
Institutional Ownership-Vickers:   76.4%
Brokers Covering (First Call):   35

Nextel Reports 3q 03 Results

For 3Q 03, reported average revenue per unit (ARPU) was $71, versus our estimate
of $69.3 and $69 during 2Q 03. Management attributed the strength to a continued
focus on high value customers, solid usage trends, data and messaging, and an
uptake of Nationwide Direct Connect.

The stronger than expected ARPU result in 3Q 03, along with somewhat lighter than
expected gross additions, drove better than expected EBITDA of $1.13 billion,
versus our estimate of $1.06 billion, for a 43.4% service margin and an increase
of 28.6% year-over-year.

In Table 1, we summarize Nextel's operating results for 3Q 03 versus our
estimates.

Table 1: Nextel 3Q 03 Actuals vs. ML Estimates
($millions)         3Q 03A  3Q 03E Act/Est.   2Q 03   3Q 02

Net Additions      646,000 600,000     7.7% 591,000 480,000
Churn                 1.4%    1.6%    -0.2%    1.6%    2.0%
Reported ARPU        $71.0   $69.3     2.5%   $69.0   $71.0
Minutes of Use         740     730     1.4%     720     650
Service Revenues     2,599   2,520     3.1%   2,385   2,139
Total Revenues       2,887   2,697     7.0%   2,556   2,279
Reported CPGA         $450     N/M      N/M    $460    $460
EBITDA               1,129   1,060     6.5%   1,004     878
Capex                  403     500   -19.4%     402     401
FD EPS (Pro Forma)   $0.32   $0.35    -9.1%   $0.27   $0.14

Source: Merrill Lynch research estimates and company data. With regard to 3Q 03
for US wireless, we think that Nextel's results may bode well for others in terms
of subscriber growth,  ARPU and usage.  As we have said before, we think that
wireline substitution (of access lines and minutes) and demographic trends are in
part fueling the recent pick up in wireless growth.

Given the impressive strength in ARPU, we wonder if the substitution trends are in
fact continuing and could therefore be sustainable for some time.

Then again, if this is indeed the case, we think it could lead to increasingly
competitive responses by the wireline operators-for example with regard to the
pricing of bundled offerings so as to protect in part fixed line services.

Looking forward, in addition to the positive growth trends with regard to
subscriber and revenue growth, we think that investors will continue to focus on:
(1) Nextel's capital spending needs for 2004E, (2) the outcome of the proposed
spectrum swap and implications for future spectrum costs, (3) the introduction of
wireless local number portability in November, (4) the potential for multiple
competitive push-to-talk products in 2004E, and (5) valuation.  However, given
trends with regard to growth, churn and ARPU, Nextel may be relatively less
exposed to some of the competitive factors.

What were the highlights in 3Q 03

ARPU.  Nextel's reported average revenue per unit (ARPU) was $71 in 3Q 03, versus
our estimate of $69.3 and $69 during 2Q 03.  Calculated ARPU, which includes
revenues from Boost, roaming, analog and other was $72.  We estimate that Nextel's
ARPU during 3Q 03 was made up of the following components: access charges 77%,
overage (i.e., fees for usage over included minutes) 14% and other 9%.  We believe
that the contribution to ARPU from data was approximately 2%.

Nextel started charging subscribers for Nationwide Direct Connect on August
1(**st).  Initial pricing of Nationwide Direct Connect was $10 per month for
unlimited usage or $0.10 per minute.  However, more recently, Nextel has
introduced new add-on options and promotional plans such that depending on the
specific plan, the Nationwide Direct Connect feature could be purchased at an
effective additional $3 to $5 per month.

According to Nextel, over 90% of its subscribers use the Direct Connect feature
and approximately one-third of subscribers used Nationwide Direct Connect during
August and September.  Clearly, the introduction of Nationwide Direct Connect
contributed to the sequentially improving ARPU.

In addition, on September 9(**th), Nextel and NII Holdings announced the
availability of Nationwide Direct Connect and wireless data service in the
northern region of the Mexican state of Baja California (cities covered include
Tijuana, Ensenada, Rosarito, Mexicali and Tecate.)

What about "other" charges?

On October 3(**rd), Nextel reached a settlement of a class action lawsuit relating
to Nextel's Federal Programs Cost Recovery Fee.  Since early 2002, Nextel has
introduced charges of up to $1.55 per customer per month to offset the costs
associated with federally mandated programs. Under the terms of the settlement,
Nextel will continue its billing practices with regard to these charges and has
agreed to continue to make certain disclosures.  If approved, the members of the
class will receive value in the form of minutes or other benefits, depending on
the class of impacted customers (i.e., current, former or returning) to which they
belong.  We believe that the potential cost impact is minimal.

Bottom line, as we have said before, we think it will be increasingly difficult
for carriers to introduce incremental "other" charges, given the growing level of
consumer awareness.  Nevertheless, it appears that the current level of "other"
charges is likely to remain. Minutes of use (MOU) averaged 740 minutes during 3Q
03, versus 720 minutes during 2Q 03 and 650 minutes during 3Q 02.  The proportion
of MOU attributable to Direct Connect was 31% during 3Q 03, versus 30% during 2Q
03 and 33% during 3Q 02.  We think that the sequential uptick was due in part to
the take up of Nationwide Direct Connect.

Subscribers. Nextel had 646,000 net additions during 3Q 03, versus our estimate
of 600,000, due to lower than expected churn of 1.4%.  This was partially offset
by slightly lower than expected gross additions of 1.15 million, versus our
estimate of 1.19 million, for a sequential increase of approximately 1%.

In Table 2, we compare the subscriber mix at Nextel as of 3Q 03, 2Q 03 and 1Q 03.
Growth in the high-end individual segment and government and enterprise segment
continues to outpace growth in the general business segment.

With regard to net additions in 3Q 03, high-end individuals were approximately 57%
of the net additions.  We believe that high-end individuals made up about 67% of
the net additions during 2Q 03 and about 60% of the net additions during 1Q 03.
So, the mix continues to shift toward the high-end individual category-while key
operating metrics continue to improve.

Table 2: Nextels Ending Subscriber Mix

3Q 03   % 2Q 03   % 1Q 03   %
Government/Enterprise  2.6M 21%  2.4M 21%  2.3M 21%
General Business       6.0M 48%  5.9M 51%  5.8M 52%
High End Individual    3.8M 31%  3.4M 29%  3.0M 27%
Source: Merrill Lynch research estimates and company data.

Not included in the ending subscriber numbers are subscribers from Boost Mobile.
Subscribers at Boost Mobile increased by 102,000 to 245,0000 at the end of 3Q 03.

Churn. During 3Q 03, churn was 1.4%, versus our estimate of 1.6%.Cost per Gross Addition (CPGA) was $450 (reported) during 3Q 03. This compares to
reported CPGA of $460 during 2Q 03 and $460 during 3Q 02.

During 3Q 03, gross additions gained through lower cost company stores, web sales
and telesales were 30% of the total, versus 22% of gross additions a year ago and
29% of gross additions in the prior quarter. CCPU.  Nextel's CCPU (cash cost per
user) was approximately $24 per average subscriber per month during 3Q 03.  This
compares to our CCPU estimate of $23.1 and $23 during 2Q 03. We think that
retention costs increased during the quarter.  For example, Nextel reported that
selling and marketing and handset related costs (not included in CPGA) increased
from $68 million in 2Q 03 to $89 million in 3Q 03-for an incremental contribution to CCPU of
approximately $0.58 by our estimate.

EBITDA. During 3Q 03, Nextel generated EBITDA of $1.13 billion for a 43.4% service
margin and an increase of 28.6% year-over-year, versus our estimate of $1.06
billion and consensus estimate of $1.07 billion.  Nextel reported EBITDA of
slightly over $1.0 billion during 2Q 03 (for a 42.1% service margin) and $878
million during 3Q 02 (for a 41.0% service margin).

Capital Expenditures. Nextel reported capex of $403 million during 3Q 03, for
14.0% of total sales, below our estimate of $500 million.  This compares to capex
at 15.7% of total sales during 2Q 03 and 12.9% of total sales during 1Q 03.
As a result, we are reducing our 2003E capex estimate from $1.8 billion to $1.7
billion, which translates to capex of approximately $590 million during 4Q 03E.

Update on the Spectrum Swap

The timing on a possible ruling by the FCC with regard to the spectrum swap
proposal continues to shift out in time. It now appears that the FCC could rule
in late 2003 or even into early 2004. More recently, in our view, Nextel
management has indicated possible flexibility with regard to the various elements
of the proposal.  As we have said for a while, we think that the potential for
rebanding within the 800 MHz band is very real, while the inclusion of the
proposed 1.9 GHz spectrum is more problematic.  Obviously, Nextel's offer to
contribute to the relocation effort (currently at $850 million for the full plan)
will likely vary depending on the outcome.

Nevertheless, we think that the outcome will have implications for future
investments by Nextel with regard to spectrum and technology.

What About Refinancing?

During 3Q 03, Nextel continued to redeem higher coupon debt and preferred
securities, in part funded by Nextel's recent issuance of $2 billion in serial
redeemable notes. Specifically, Nextel:

1)Redeemed $2.2 billion in principal amount of outstanding debt for
approximately $1.76 billion in cash and 30 million common shares valued at $584
million (for an average price of $19.47 per share).

2)Expects another $1.3 billion of redemptions to close during 4Q 03.

Based on our revised estimates (and assuming the completion of the
redemptions in 4Q 03), we estimate that for the end of 2003E, Nextel's ratio of
Net Debt and preferreds to EBITDA will be approximately 2.2x.

Moreover, we estimate that Nextel's Net Debt to EBITDA during 2004E will be
approximately 1.3x, making it possible for Nextel to reach investment grade status
in the future.

What's left to refinance?

With regard to the remaining higher coupon notes (e.g., a portion of
the $896 million 9.5% senior serial redeemable notes, the remaining approximately $793 million of the 9.95% senior serial redeemable discount notes,
and the $1,599 million 9.375% senior serial redeemable notes), which are
redeemable between the present time and November 2004, we estimate that
refinancing to current market rates could contribute approximately $0.05 per share to annual
earnings.

The Outlook for 4Q 03E and 2004E.

Estimates for 2003E
For 2003E, we are revising our estimates to 2.35 million net additions (from 2.2 million), to 1.6% churn (from 1.7%), to EBITDA of $4.18
billion (from $4.04 billion), to capex of $1.7 billion (from $1.8 billion), and to free
cash flow of $1.14 billion (from $908 million).

For 2003E, we estimate that Nextel will generate FD EPS of approximately $1.24 per share, versus our previous estimate of $1.18 per share.

Estimates for 4Q 03E

For 4Q 03E, we estimate net additions of approximately 633,000,
churn of 1.5%, subscriber ARPU of $70 (with ARPU including other revenues of $71),

EBITDA of $1.14 billion (for a 42.2% service margin) and capex of $590 million
for 19.7% of sales.  We estimate that 4Q 03E FD EPS will be approximately $0.45
per share.

Estimates for 2004E

For 2004E, we estimate net additions of 2.0 million, churn of 1.8%,
ARPU of $69, and EBITDA of $5.06 billion (for a 43.7% service margin and an
increase of 21.0% year-over-year). We estimate that 2004E EPS will be approximately $2.10 per share.

What about the potential impact of wireless local number portability?
Looking forward, we believe that Nextel could be somewhat impacted
by the introduction of wireless local number portability.  However, we
think that its distinct Direct Connect feature and its large user base at this
point, along with steady market share trends for Nextel, should help to buffer
the upward pressure on churn that some of its national peers could be more
exposed to.

In Table 3, we perform a simplistic analysis with regard to the
potential impact on some of our 2004E estimates due to a change in churn rate-
holding all other parameters constant.  As you can see, the impact can be
material.

Table 3: Churn Sensitivity 2004E
Churn Rate         Base = 1.8%   1.6%   2.0%   2.2%

EBITDA ($millions)       5,059  5,209  4,856  4,680
% Change vs. Base           NA   3.0%  -4.0%  -7.5%
FD EPS                  $2.10  $2.24  $1.93  $1.77
% Change vs. Base           NA   6.2%  -8.4% -15.8%
Source: Merrill Lynch Research Estimates

What About 2004E Capex?

With regard to capital expenditures in 2004E, Nextel did not provide an outlook.
We are maintaining our estimate of $1.6 billion (for 12.5% of sales). Management
has stated that it would be biased to spending incremental dollars for network
coverage. As a measure of capital expenditures, we continue to look at capex per
incremental system minute of use.  We estimate that Nextel will continue to
compare favorably in 2004E relative to the national carrier average.

Table 4:  Capex Per Incremental MOU
2001   2002  2003E  2004E
AT&T Wireless                $0.17  $0.13  $0.10  $0.10
Cingular Wireless            $0.11  $0.16  $0.16  $0.13
Nextel                       $0.12  $0.09  $0.06  $0.05
Sprint PCS                   $0.12  $0.06  $0.06  $0.08
T-Mobile USA                 $0.08  $0.09  $0.05  $0.05
Verizon Wireless             $0.16  $0.11  $0.07  $0.07
Total - National Operators   $0.13  $0.10  $0.08  $0.07
Source: Merrill Lynch Research Estimates

What About Valuation?

If we adjust FCF estimates using normalized tax rates and adjusted market cap for
the value of any tax credits, Nextel's adjusted 2004E FCF yield is approximately
6.8%, compared to AT&T Wireless at 5.9% and Sprint PCS at 6.3%. On P/E for 2004E, we estimate that Nextel trades at approximately 10.6x with a
5-year CAGR (04E-09E) of approximately -1.4% (reflecting income tax implications
in future years).

Adjusted for taxes, applying a normalized tax rate and including the present value
of tax credits, we estimate that Nextel for 2004E trades at approximately 16.3x
earnings with a 5-year CAGR (04E-09E) of approximately 9.1%. Simplistically, applying an 18 times multiple to our after tax earnings estimate
for 2004E of approximately $1.27 per share, and adding in our estimate for the
present value of the tax credits, yields a theoretical fair value estimate of
approximately $24.50 per share.

With regard to our discounted cash flow (DCF) valuation analysis, as highlighted
in Table 5, we generally estimate the weighted average cost of capital (WACC) for
Nextel to be in the range of approximately 10% to 11%.  We estimate the perpetual
FCF growth rate to be in the range of 2% to 3%.

Therefore, our revised estimates yield a range of theoretical prices of between
$20 and $26 per share, for an average of approximately $23 per share.

Table 5:  DCF Sensitivity for NXTL Shares
Perpetual  FCF Growth Rate
WACC     0%     1%     2%    3%

8%      $25    $28    $32   $37
9%      $22    $24    $27   $30
10%     $19    $21    $23   $26
11%     $17    $18    $20   $22
12%     $15    $16    $18   $19
Source: Merrill Lynch research estimates.

Competitive Push-to-Talk Products

With regard to Verizon Wireless, during our store visits in September, most of the
stores we spoke to had sold a single digit number of units only-and most of the
sales have been to existing Verizon Wireless subscribers. For the most part, we
think that in the near term, the primary opportunity is for Verizon Wireless to
upsell within its current subscriber base.

Verizon

Wireless continues to currently offer only the Motorola V60p push-to-
talk phone, but we heard during our store visits that a second handset
could be available during October.

As we've said before, we think the impact of a competitive push-to-talk products
really won't be a 2003 issue-but more likely a 2004 issue.  We would expect
push-to-talk GSM products, possibly supporting interoperability among GSM
carriers, to be available by mid-2004E.

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