Subject: [NEXTEL-1] 17-Oct-03 RW Baird On Nextel

From: [email-masked]
Date: Mon, 20 Oct 2003 18:25:22 -0400

Action

William V. Power, CFA This morning Nextel reported strong Q3 results across the
board with higher-than-expected net additions and ARPU as well as lower churn.
Revenue, EBITDA and EPS were each better than expected. We are raising our  target
price from $22 to $25 and maintaining our Outperform rating. Our target price is
based on a 7.0x multiple of our 2004 EBITDA forecast of $4.9 billion.

Sara E. Litton

Summary

* Nextel reported revenue of $2.9 billion, above our estimate of $2.6 billion and
the year-ago
result of $2.3 billion, driven by better-than-expected subscriber growth and ARPU.

* Nextel reported diluted GAAP EPS of $0.32, compared with our estimate of $0.31
and the year-ago result of $0.14. However, excluding debt retirement charges, the
company would have reported diluted operating EPS of $0.44, well above our
comparable forecast.

* The company retired an additional $2.2 billion in debt in the quarter through
the issuance of cash
and stock, ending the quarter with $3.6 billion in cash and $12.2 billion in debt.

* Nextel raised its operating and financial forecasts, including full-year free
cash flow of at
least $1.0 billion versus previous guidance of $600.0 million.

* We are raising our net addition estimate to 2.3 million versus 2.1 million
previously, with
churn expected to be close to 1.6% for the full year. We expect full-year EBITDA
of $4.16 billion
versus $4.0 billion previously, driven by strong subscriber growth and full-year
ARPU of $70, almost $2 above our previous forecast.

* We reiterate our Outperform rating and are raising our target price from $22 to
$25. Our target price is based on a 7.0x multiple of our revised forecast of $4.9
billion, the same multiple we use previously. The stock is trading at 13.0x
our revised 2004 EPS forecast of $1.73, and 18.0x on a fully taxed basis, assuming
no value for the company's NOLs.

Summary

This morning Nextel reported strong Q3 results, surpassing our revenue, EBITDA and
EPS forecasts. ARPU was better than expected, with churn at a six-year low. In
addition the company retired an additional $2.2 billion in debt in the quarter,
using a combination of $1.7 billion in cash and the issuance of 30 million shares
of stock. The company also raised its full-year subscriber growth, cash flow and
EPS guidance.

Subscriber Growth

Nextel added a company record 646,000 new subscribers in the third quarter, driven
by solid gross adds and lower churn, compared with our recently raised forecast of
550,565 and the year-ago figure of 480,000. Churn declined 20 bps sequentially to
1.4% versus our forecast of 1.65%, the best rate reported since 1997. The company
attributed its churn improvement to its successful TouchPoint strategy, which
addresses all potential points of customer satisfaction. During Q3, the company
experienced strong growth across all of its customer segments, adding roughly
200,000 corporate and government users, 100,000 small and medium business users
and 400,000 high-end individual users.

At the end of the quarter, the company's breakdown of its 12.3 million total
subscribers included 6.0 million general business subscribers, 3.8 million
individual subscribers and 2.6 million corporate and government subscribers.

Close to 90% of the company's subscribers use local Direct Connect on a daily
basis. Of those users, over one-third have used nationwide Direct Connect in
August and September. Nationwide Direct Connect was launched in July. Priced at
$10 per month for unlimited usage, nationwide Direct Connect already appears to be
contributing a few dollars to ARPU. During the fourth quarter, the company
anticipates the launch of several new phones, targeted at its business segments
and incorporating the use of nationwide Direct Connect and data services. In fact,
next week, the company plans to introduce the i-205, which will target the blue
collar business segments, including field and construction workers, and the i-730,
the company's second available color phone, which will target employees in the
financial services, healthcare and real estate fields.

The company's distribution mix in the quarter was 52% direct and 48% indirect,
consistent with last quarter. Nextel continues to focus on its retail stores,
websales and telesales, which generated 30% of gross adds in the quarter versus
29% last quarter and 22% in the year-ago quarter.

Boost Mobile, a prepay offering targeting the youth market, added 102,000 net
subscribers in the third quarter, up from 80,000 added last quarter, bringing the
total subscriber base to 245,000. While Boost's subscriber results are not
included in the company's reported net adds, revenues and expenses are
incorporated into the company's overall financial results. The company has now
been in a trial period for its prepay offering in California and Nevada for a
year, and expects limited geographical expansion to occur in 2004.

Revenue

Total revenue grew 26.7% YOY to $2.89 billion versus our estimate of $2.59
billion. ARPU was up $2 sequentially to $71 compared with our estimate of $68,
driven by increased data revenues and nationwide Direct Connect usage. Total
revenue was positively impacted by an accounting change whereby the company now
recognizes handset sales at the time of purchase, rather than amortizing the
revenue over the life of the customer. Service revenue, a better apples-to-apples
comparison, increased 21.5% YOY. Minutes of use also attributed to the increased
ARPU, reaching 740 minutes in Q3 compared with 720 last quarter and 650 in the
year-ago quarter. With the industry-leading churn and ARPU rates, the company
reported average lifetime revenue per subscriber of $5,071, according to our
calculations, versus $4,313 last quarter.

EBITDA

Quarterly EBITDA of $1.13 billion was higher than expected, compared with our
estimate of $1.04 billion and the year-ago figure of $878.0 million. The EBITDA
margin of 43.4% was the highest in the company's history and represents six
consecutive quarters of margins of 40%+. CPGA improved slightly to $450 in the
quarter versus $460 last quarter and last year, despite the newly launched
advertising campaign, offset by greater gross additions. CCPU totaled $24, with
bad debt representing less than 1.0% of total revenue, the best ratio in five
years.

Capex

Capital expenditures totaled $403 million in the quarter, or roughly 16% of
service revenues, below our estimate of $500 million. The company reiterated its
full-year capex guidance of $1.8 billion or less, as it plans to spend more in the
fourth quarter on more network coverage sites. Nextel has begun to deploy its 6:1
vocoder software across its network, which should generate capacity improvements
as handsets are filtered into the customer base.

EPS

The company reported Q3 diluted operating EPS of $0.44 versus our estimate of
$0.31 and the year-ago figure of $0.14. This number excludes the $132 million, or
$0.13 per share, in debt retirement charges incurred during the quarter.

|(000s)         |Q3'03A    |Year-Ago  |% Change|Estimate  |% Change|
|Revenue        |$2,887,000|$2,279,000|26.7%   |$2,587,405|11.6%   |
|Domestic EBITDA|1,129,000 |878,000   |28.6%   |1,041,846 |8.4%    |
|Net Income     |346,000   |526,000   |-34.2%  |331,459   |4.4%    |
|Diluted Op. EPS|$0.44     |$0.14     |214.3%  |$0.31     |41.9%   |
|Net Additions  |646,000   |480,000   |34.6%   |550,565   |17.3%   |
|Churn Rate     |1.40%     |2.00%     |(60bp)  |1.65%     |(25bp)  |
|ARPU           |$71.00    |$71.00    |0.0%    |$68.00    |4.4%    |
|CPGA           |$450.00   |$460.00   |-2.2%   |$460.00   |-2.2%   |
|MOUs           |740.0     |650.0     |13.8%   |720.0     |2.8%    |

Local Number Portability

The company indicated that it is prepared for local number portability, which is
still scheduled to be implemented on November 24, and has already incurred most of
the necessary upfront costs for implementation. Nextel has signed SLAs (service
level agreements) with two carriers so far to facilitate LNP, and expects to sign
agreements with the remaining carriers by the 24th.  Despite the agreements, the
company has begun testing for LNP across all of the carriers. The company strongly
believes that the FCC should implement wireline porting, as well, as more
customers desire to cut the cord and use wireless communications exclusively. We
believe Nextel could be a modest net beneficiary of WNP, though it is likely to be
a zero sum game for the industry.

Capital Structure Analysis

At the end of the quarter, the company had $3.6 billion in total cash and
short-term investments and $1.2 billion in committed, but undrawn credit, for a
total liquidity position of $4.8 billion. Long-term debt totaled $12.2 billion,
including the current position, with an additional $96.0 million in preferred
stock. When previously announced debt redemptions are
completed, the company's total debt/annualized EBITDA will drop to 2.4x versus
3.1x
last quarter.

The company retired a total of $2.2 billion in total long-term debt
and preferred stock during the quarter in exchange for roughly $1.76
billion in cash and 30 million shares of common stock valued at $584 million. In
addition, the company announced plans to retire an additional $1.3 billion in
debt in the fourth quarter using cash on hand. The current net debt
position stands at less than $9.0 billion, a number we expect to drop to $7.0
billion by the end of 2004.

In the third quarter, Nextel also issued $2.0 billion in senior notes due 2015
with a coupon rate of 7.375% and raised $500 million through the sale of 27
million shares from its Direct Stock Purchase Plan.

Updated Guidance
The company now expects to add 2.2 million net subscribers in 2003
versus 1.9 million previously and our previous estimate of 2.1 million. It
raised its full-year EBITDA guidance to $4.1 billion versus $3.9 billion
previously, with capex forecasted to remain at $1.8 billion or lower. As a result,

the company raised its free cash flow guidance from $600 million to $1.0 billion
versus our previous estimate of $854.6 million. The company raised its full-
year GAAP EPS guidance from at least $1.00 to at least $1.15, which includes debt
retirement charges.

Revised Estimates

We are raising our full-year estimates to reflect a strong Q3 and
updated company guidance. We are raising our net addition estimate to 2.3
million versus 2.1 million previously, with churn expected to be close to
1.6% for the full year. We are raising our service revenue forecast to $9.8
billion versus $9.5 billion previously, with ARPU at close to $70, roughly $2
higher than previously projected. We expect full-year EBITDA of $4.16 billion
versus $4.0 billion previously. We are raising our full-year diluted EPS
estimate to $1.32 compared with $1.09 previously. We have also raised the
full-year
diluted share count from 1.052 billion to 1.083 billion to reflect the equity
issuance
used to reduce debt.

|Full - Year 2003 estimates|           |           |
|(000s)                    |Previous   |Revised    |% Change|
|Service Revenue           |$9,528,767 |$9,826,666 |3.1%    |
|Total Revenue             |$10,167,092|$10,741,456|5.6%    |
|EBITDA                    |3,977,466  |4,155,184  |4.5%    |
|Net Income                |1,129,629  |1,210,790  |7.2%    |
|Operating EPS             |$1.09      |$1.32      |21.1%   |
|Net Additions             |2,123,783  |2,290,605  |7.9%    |
|Churn Rate                |1.77%      |1.63%      |(14bps) |
|ARPU                      |$68.04     |$69.90     |2.7%    |
|MOUs                      |703.7      |714.3      |1.5%    |
|CPGA                      |$457.28    |$453.87    |-0.7%   |

Conclusion

We believe Nextel is positioned to continue to post strong operating and financial
results over the next 12-18 months, tempered somewhat by concerns over wireless
number portability, scheduled to be implemented November 24. We are raising our
target price from $22 to $25, based on a 7.0x multiple of our revised 2004 EBITDA
forecast of $4.9 billion. Though not fully taxed, applying a market multiple of
17.0x to our 2004 EPS estimate of $1.73 produces a target of $29. The stock is
currently trading at 18.0x our fully taxed 2004 EPS estimate of roughly $1.20.
Applying a 23.0x multiple to our fully taxed 2004 EPS forecast and adding back $2
for the company's NOLs produces a target price of $30. In summary, we believe as
investors begin to value Nextel on a P/ E basis, there could be upside to our
revised target. We reiterate our Outperform rating and would be buyers of the
stock.

Investment Thesis

In addition to impressive subscriber growth, Nextel has been able to consistently
generate one of the highest ARPUs in the wireless business and a churn rate of
below 2.0%, one of the lowest in the wireless business. We believe Nextel
Communications is well positioned to deliver solid growth over the next several
years. We believe the company could benefit from M&A activity, the proposed public
safety spectrum swap, wireless data inroads and an improvement in
telecommunications fundamentals in general.

Risk & Caveats

Wireless telecommunications continues to be a very competitive business, with most
operators savoring the types of customers that Nextel has flourished at adding
high-use, high-ARPU, high-retention customers. With pricing pressure continuing to
heat up, Nextel is likely to face accelerating competition in the business
marketplace. Other risks include wireless local number portability, the company's
lack of a definitive path to 3G and the capital availability for such an endeavor,
as well as its dependence on Motorola as the sole vendor producing iDEN products.

Company Description

Nextel Communications' digital mobile network constitutes one of the
largest integrated all-digital wireless communications systems in the
country. With licenses covering nearly 238 million POPs and 12.3 million
subscribers, the company uses a single transmission technology developed by
Motorola,
Inc. called iDEN, or integrated Digital Enhanced Network. This technology
permits a Nextel customer to access digital mobile phone service, digital two-
way radio dispatch service, paging, text messaging and Internet access all on
one network. Nextel has added subscribers at an impressive rate over the
past several years, and is now the fifth-largest wireless operator in the
U.S. in terms of subscribers.

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