Subject: [NEXTEL-1] 20-Oct-03 UBS On Nextel

From: [email-masked]
Date: Wed, 22 Oct 2003 08:32:34 -0400

20-Oct-03 UBS (US) (Fleming, Colette) NXTL
Nextel "Boosting Price Target On Heels of Strong 3Q03 Results" Nextel
Communications, Inc.
(NXTL.O) (USNXTL)
RATING:BUY 2
Price         Price Target      52-week range        Mkt Cap
--------      ---------------   -----------------    ----------
US$21.81      US$29.00(-%)      9.69 - US$22.36      US$21.4bn
--------      ---------------   -----------------    ----------

* Increasing Price Target to $29 from $25:
Primary changes to our model include: higher subscriber results (based primarily
on lower churn), higher ARPU, more retention costs (higher CCPU), and Boost
assumptions incorporated more fully.

* Another Impressive Quarter for Nextel:
Standout metrics include stronger than expected net adds (due to much lower than
expected monthly churn) and higher than expected ARPU. In this note, we provide
additional breakdown on NXTL's results as compared to our estimates.
In addition, we include some key takeaways from the NXTL's conference call.

* 2003 Guidance Raised, Again:
NXTL raised guidance for: free cash flow of more than $1 bn (from $600 MM);
EPS of $1.15 or more (from at least $1.00); OIBDA of $4.1bn or more (from $3.9
bn); and, net adds (excl. Boost) of about 2.2 MM (from 1.9 MM or more).
Our updated model is slightly above management guidance.

* Valuation: Detailed Discounted Cash Flow Analysis Performed We arrive at our $29
price target using a detailed discounted cash flow analysis. We use a weighted
average cost of capital (WACC) of 9.6%, which is based on a 6.5% cost of debt, a
25% target debt ratio, and an 11.5% cost of equity. We arrive at our terminal
multiple of 6.6 times 2010 EBITDA assuming a 2% growth in perpetuity.

Increased 2003 Guidance

For the second consecutive quarter, Nextel raised its guidance for a number of
metrics. Below we detail the company's new guidance and compare it to our updated
projections. Also, in Table 1, we show the key valuation drivers for our updated
model, as compared to our prior projections.

Net subscriber additions (excluding Boost Mobile) of approximately 2.2 million (up
from last quarter's guidance of 1.9 million or more and the company's previous
guidance of 1.7 million). Our updated model forecasts 2.217 million net additions
for 2003, compared to our prior projection of 2.071 net additions. We raised our
fourth quarter 2003 net addition projection from 450,000 to 500,000.

Free cash flow (FCF) of more than $1 billion up from last quarter's revised FCF
guidance of $600 million or more. The company's previous FCF guidance was $500
million or more. Our updated model projects 2003 free cash flow of $1.089 billion
(compared to our prior estimate of $738 million). We note, however, that this
figure includes $144 million in spectrum purchases by Nextel for the MCI wireless
assets. We believe that it is likely that this transaction could close in 2004,
rather than in the fourth quarter of 2003, which would increase Nextel's 2003 free
cash flow.

Basic EPS of $1.15 or more up from at least $1.00. The company's previous guidance
was $0.75 or better. The company's EPS guidance is based on primary shares, and
includes charges related to its early retirement of debt. Our model has been
updated to reflect the recent $500 million debt financing (at a 6.875% coupon
rate). Also, we have factored into our projections Nextel's announcement on
October 17, 2003 to redeem the remainder of its 9.95% Senior Serial Redeemable
Discount Notes due 2008 and all of its outstanding 4.75% Convertible Senior Notes
due 2007 in the fourth quarter of 2003.
Our model projects that Nextel will have charges of about $102 million in the
fourth quarter of 2003 related to early retirements of about $2 billion of debt
instruments. This compares to the third quarter 2003 charge of $132 million for
the early retirement of about $2.2 billion.

After factoring in the stronger than expected 3Q03 operating results, and the
expected charges for the early retirement of debt in 4Q03, we are increasing 2003
diluted EPS estimate, including charges, from $1.09 to $1.16. For basic 2003 EPS
our estimate is $1.19 which is slightly above company guidance.

The company maintained its full year capital expenditure guidance of $1.8 or less,
which is consistent with our estimate of $1.78 billion.

Adjustments to Our Model
As a result of the strong third quarter results, we adjusted a number of the key
metrics in our model. A comparison of our new model to our previous version can be
found in Table 1. Our updated Annual and Quarterly models can be found below in
Tables 2-7. First, since the company has been taking slightly more gross
subscriber share in the marketplace and, consequently, slightly beat our 3Q03
gross subscriber estimate, we slightly increased our 4Q03 gross subscriber
addition projection as well our estimate for share going forward. Our 3Q03 gross
subscriber addition estimate was 1.124 million versus the 1.150 million the
company actually posted. Accordingly, our 4Q03 gross subscriber addition estimate
is now 1.142 million versus our previous 1.123 million estimate.

Next, since the company posted much stronger than expected 3Q03 monthly churn
(1.4% versus our 1.6% estimate), we lowered 4Q03 churn to 1.7% from our previous
1.8% estimate. Due to the reduction in projected 4Q03 churn, our 2003E churn falls
to 1.65% from 1.72%. For 2004, we lowered our churn estimate for 2.1% from 2.2%.
We believe these assumptions are conservative.  The main reason for the step-up in
estimated 2004 churn versus projected 2003 churn (i.e., 1.65% churn increasing to
2.10% in 2004) is due to potential negative impact from competitive push-to-talk
(PTT) offerings (i.e., Verizon Wireless's current offering as well as Sprint PCS's
expected PTT plans) as well as prospective negative implications from the
enactment of wireless local number portability which is scheduled to become
effective on November 24, 2003.

As a result of the changes in gross additions and churn, our 4Q03 net subscriber
addition estimate moves to 500,000 from 450,000 and our 2003 net subscriber
addition estimate becomes 2.217 million from 2.071 million.

Also, due to the stronger than expected 3Q03 subscriber ARPU ($71 actual versus
$69 projected), we moved our 4Q03 ARPU estimate to $69.00 versus our previous
$66.50 projection. The change in the 4Q03 ARPU estimate moves our 2003 ARPU
estimate to $69.02 from $67.86. We moved our 2004E ARPU to $68.22 from $67.20. As
will be discussed in more detail below, management attributed the strong 3Q03 ARPU
result to more overage revenues, growth in data and SMS (short message service)
revenues and strong uptake of nationwide Direct Connect.

Next, we increased Other Service Revenues as a result of the ramp in Boost
customers and associated service revenues. Nextel books service revenues from its
Boost subscribers in Other Service Revenues. Accordingly, reported ARPU and
subscriber revenues exclude Boost service revenues. We also increased cost of
service due to the increased usage from Boost customers.

We increased our estimate for 4Q03 monthly non-marketing cash costs (CCPU) to
$25.98 from $25.33 as a result of increased estimates for retention (handset
upgrade costs) as well as Boost expenses (including Boost subscriber acquisition
costs, which are excluded from Nextel's CPGA calculation). In 3Q03, CCPU was
$26.38 versus our $25.79 for these reasons. As a result, our 2003E CCPU becomes
$25.60 from our previous $25.27 estimate.

After factoring in the above operating assumptions and the recent refinancing
activities, our diluted EPS estimates for 2004 and 2005 are $1.93 (from $1.83) and
$1.77 (from $1.65), respectively. Our 2005 EPS estimate assumes an effective tax
rate of 38% for book purposes.

Net Additions Well Above Expectations Due to Much Lower Churn and

Slightly

Higher Gross Additions

Nextel reported 3Q03 domestic digital net additions of 646,000 versus our estimate
of 550,000 and 480,000 a year ago. In fact, Nextel reported its highest quarterly
net addition figure in its history. The stronger than expected net additions were
mostly attributable to monthly churn of 1.4%, which was 20 basis points better
than our 1.6% estimate. Monthly churn was down from an already impressive 1.6% in
the second quarter and 2.0% in the third quarter a year ago. In fact, reported
churn in the third quarter of 2003 was the lowest it has been since 1997.

Slightly higher than expected gross additions also helped Nextel beat our net
addition estimate. Gross additions in 3Q03 grew 7.2% over 3Q02 to 1.15 million and
exceeded our estimate of 1.12 million. The company again attributes its retention
success  (i.e., low churn) to its "customer touch point" (CTP) strategy. CTP
enables Nextel to identify and address the major problems for each point in the
customer life cycle, from sales and fulfilment to activation, billing, collection,
and customer care activities. The goal of this strategy is to resolve customer
issues and increase customer satisfaction at every turn.

According to the company, involuntary churn represented 22% of the disconnects
(versus 19% last quarter and 21% in 3Q02), with voluntary churn comprising the
remaining 78%. On August 28, 2003, Nextel announced that it had been recognized by
J.D. Power and Associates in its 2003 Wireless Customer Care Performance Study as
ranking the highest in overall customer care among the top seven national wireless
providers, tied for first with one other carrier. At the end of the quarter,
Nextel had approximately 2.6 million corporate and government users, six million
small and medium sized business users, and 3.8 million high-end individual users.

Calculated ARPU Slightly Better than Expected

Subscriber ARPU in 3Q03 was $70.88, which was higher than our estimate of $69.00.
Other revenues (including analog, roaming revenues from Nextel Partners and other
service revenues, such as Boost) were also higher than
expected. As a result, total ARPU of $72.16 was $2.50 higher than our estimate of
$69.66. We would note that 3Q03 total ARPU was basically equal to the figure
posted in 3Q02 of $72.19.

Management attributed the strong ARPU result to more overage revenues, growth in
data and SMS (short message service) revenues and strong uptake of nationwide
Direct Connect. Given the company's ARPU and churn, its 3Q03 lifetime revenue per
subscriber (using Total Service Revenues) was an extraordinary $5,154 versus our
$4,354 projection.

Nextel reported 3Q03 monthly usage per average digital subscriber (MOU) of roughly
740 minutes, which was above our estimate of 720 minutes.  This represents an
annual increase of 13.8% in average MOU per subscriber versus the 3Q02 MOU of 650.
Interestingly, it appears that year-over-year minute growth is still very strong.
The 13.8% growth rate is the strongest such rate since 1Q02.

We calculate the implied revenue per minute of use, the revenue yield (ARPU
divided by MOU), was approximately $0.10, which represents a 12.2% decline from
the calculated yield of $0.11 in 3Q02. The calculated price elasticity (which is
the change in usage compared to the change in yield) was an impressive 113.8%
(versus 87.8% in 2Q03).
According to the company, about 31% of total MOUs were Direct Connect minutes with
the remaining attributed to interconnect (cellular).

Breakdown of CPGA and Other Costs

CCPU Was Higher than Expected Due to Higher Handset Costs and Boost

Expenses

(which we include in our CCPU calculation)

The calculated CCPU (including upgrade costs and Boost expenses) of $26.38 was up
from $25.91 in 3Q02 (1.8% year-over-year) and up from $25.11 in 2Q03 (sequential
increase of 5.1%). Our 3Q03 CCPU estimate was $25.79.  CCPU is calculated by
taking the sum of cost of service, general and administrative costs, and "costs
unrelated to initial customer acquisition" (which includes handset upgrade costs
and Boost subscriber acquisition costs) and dividing by the average subscribers
(divided by three to put the metric on a monthly basis). The deviation in CCPU can
be attributed to higher than expected upgrade and Boost costs and somewhat higher
costs of service per average subscriber per month, which was somewhat, offset by
lower bad debt expense.

Nextel excludes the handset upgrade costs and Boost related costs from its CPGA
calculation, therefore we have included these costs in our CCPU calculation.
General and administrative expenses during the quarter were $420 million versus
our $423 million estimate. Much lower than expected bad debt expense - which was
only partially offset by higher other G&A expenses - explains the bulk of the
deviation. As shown in Table 1, bad debt expense in 3Q03 was $20 million versus
our $50 million projection. As a percentage of total revenues bad debt expense was
a remarkable 0.7% versus our estimate of 1.8%.  The company noted on its
conference call that as of the third quarter it was fully reserved for accounts
aged over 60 days.
Nextel reported cost of service of $441 million, which was $8 million higher than
our $433 million estimate and was up 8.1% and 15.1% over 2Q03 and 3Q02
respectively. The increase is likely attributed to the strong usage experienced
during the quarter. In particular, total minutes of use on the company's network
increased by 7.7 billion minutes or 40% from 3Q02.  We calculate that cost of
service as a percentage of service revenues was roughly 17.0%, which was down from
17.1% in 2Q03 and down from 17.9% in 3Q02. Cost of service per average subscriber
per month was $12.24 versus $12.93 in 3Q02 and $11.94 in 2Q03. Our estimate for
this metric was $12.07.

We would point out that while handset upgrade costs and Boost acquisition costs
were higher than expected at $89 million versus our $69 million estimate, churn
was lower than expected. Accordingly, a clear argument can be made that Nextel's
money was well spent. During the quarter, we believe about 6% of Nextel's
customers upgraded their handsets, up from a historical 4% - 5% level.

Calculated Cost per Gross Addition Slightly Lower than Expected We calculate CPGA
for the third quarter was $452, which was in-line with our $453 estimate. The
company reported CPGA of $450 in 3Q03, which likely differs from our calculated
figure due to rounding and a slight deviation in our gross addition estimate (an
exact number of gross additions are not given, therefore, we calculate gross
additions from the reported net additions and churn rate). Reported CPGA was down
$10 from 3Q02 and 2Q03.

The company now reports the selling and marketing costs and handset subsidies
related to existing customers and Boost subscribers ("costs unrelated to initial
customer acquisition," as it is termed in NXTL's press release). These expenses
are excluded from the CPGA calculation, since this metric looks at the cost of
acquiring a new customer and Boost subscribers are currently not included in the
subscriber count. So, for the CPGA calculation, we start with total selling and
marketing costs, which is equal to equipment subsidies (equipment costs less
equipment revenues) plus selling and marketing. Then, we subtract out expenses
related to existing customers and Boost subscribers, which were $89 million in
3Q03. Finally, we divide this figure by gross additions to arrive at CPGA. The
components of the CPGA calculation are spelled out in detail in Nextel's press
release.

Approximately 52% of NXTL's gross additions came through its direct channels while
48% came through indirect channels. Within the direct channels, the company is
continuing to invest in its retail stores, web-sales, and tele-sales operations
because the cost to acquire subscribers through these channels is significantly
lower than the company average. About 30% of Nextel's 3Q03 gross adds came through
these low-cost acquisition channels, up from 22% of the company's gross adds in
the year-ago period. Finally, approximately 41% of Nextel's gross additions were
from existing accounts.
EBITDA Stronger than Expected

Nextel reported EBITDA was $1.129 billion (43.4% EBITDA margin) versus our $1.064
billion estimate. Better than expected service revenues (mostly due to higher
ARPU) and lower than expected bad debt expense more than
offset higher than expected cost of service, retention costs, and total
acquisition costs
(due to stronger gross additions).

For the quarter, EBITDA per average subscriber per month was $31.35 versus our
$29.67 estimate. EBITDA per average subscriber per month was $29.63 in 3Q02 and
$29.39 in 2Q03.
Capital Expenditures Once Again Below Expectations
Nextel reported capital expenditures of $403 million, which was $97
million below our $500 million estimate. Year-to-date, Nextel has spend $1.1
billion on capex. The company is maintaining its guidance for full year
capital expenditures in 2003 of $1.8 billion or less, which suggests a ramp-
up in spending in the fourth quarter. Specifically, NXTL said that it will
be building more coverage cell sites.

Management said that it is now deploying 6:1 vocoder software in the network to
facilitate significant increases in network capacity. In its 2Q03 conference call,
Nextel said that had deployed its new 6:1 vocoder in Florida on time and on
budget. Management said that it will also introduce new 6:1 handsets with assisted
GPS and improved battery life in order to take advantage of the improved calling
capacity the 6:1 vocoder offers.

However, Nextel won't likely experience meaningful benefits from the new
vocoder until 2004.

Earnings Per Share

For the quarter, basic EPS was $0.33, including the impact of debt retirement
charges of $132 million (or $0.13 per basic share). This was equal to our Basic
EPS estimate of $0.33, however our forecast incorporated $67 million of charges
for the early retirement of debt. Basic EPS, excluding early retirement of debt
charges was $0.46 versus our estimate of $0.39.
Year-to-date, Nextel has reported basic EPS, including charges for early
retirement of debt, of $0.81. The company raised its guidance for 2003 to $1.15 or
more for basic EPS (including charges), which implies at least $0.34 in EPS in the
fourth quarter of 2003. Our model calls for basic EPS (including charges) of $0.38
which brings our basic EPS estimate for 2003 to $1.19.

Continuing to Strengthen Balance Sheet

For the quarter ending September 30, 2003, Nextel retired approximately $2.2
billion in principal amount of its outstanding indebtedness in exchange for
approximately $1.76 billion in cash and 30 million shares of common stock valued
at $584 million. Additionally, Nextel announced another $2 billion of redemptions
to be completed in the fourth quarter. When the announced redemptions are
complete, Nextel's average cost of debt will drop below 7%.

During the quarter, Nextel also raised approximately $2.0 billion of 12 year
7.375% Senior Notes and approximately $500 million from equity issued under the
Direct Stock Purchase Plan. Also, on October 17, 2003, Nextel sold $500 million in
6.875% Senior Notes at par.

Nextel closed the quarter with about $3.6 billion of cash and short-term
investments and $1.2 billion of committed and undrawn credit for a total liquidity
of $4.8 billion. As of the end of the quarter, Nextel's net debt balance was less
than $9 billion reflecting about $12.2 billion of long-term debt and approximately
$3.6 billion of cash and short-term investments.

Nationwide Direct Connect Launched in July

On July 29, 2003, Nextel and Nextel Partners announced the availability of
Nationwide Direct Connect service one month ahead of schedule.  During the
conference call, management indicated that about approximately 90% of Nextel
customers use Direct Connect service daily and that more than one-third these same
customers have used nationwide Direct Connect since its launch.

To highlight the popularity of its Direct Connect service, in its July 29 press
release Nextel indicated that approximately 190 million Direct Connect calls are
made daily and that more than 32 billion Direct Connect calls had been made thus
far in 2003. Moreover, Nextel said that more than 62 billion Direct Connect calls
were made in 2002.

On September 9, 2003, Nextel and NII Holdings announced that Nationwide Direct
Connect service extends internationally to the northern region of the Mexican
state of Baja California. Cities covered in this region include Tijuana, Ensenada,
Rosarito, Mexicali and Tecate. The press release also indicated that Boost Mobile
now provides Boost Walkie-Talkie service to and in northern Baja California.

Boost Ramping Nicely

Nextel reported that Boost had about 245,000 subscribers at the end of 3Q03, up
102,000 net subscribers during the quarter. We believe these results are quite
impressive given the service is only available in California and Nevada.
Management indicated that it will introduce a limited geographical expansion of
the service in 2004.
According to Nextel, the results from Boost are not included in the company's
calculation of subscriber ARPU, net additions, total subscribers, or CPGA.

However, the effect of Boost is included in the operating results, and we estimate
that it is a drag on EBITDA at this time. We have included the expenses associated
with Boost in our CCPU calculation. Also, the revenues from Boost are included in
the total ARPU calculation.

New Advertising Campaign Introduced (TAXI!)

On September 15, 2003, Nextel rolled out its new advertising campaign.
Management said the new campaign focuses on "do'ers," achievement oriented people
who demand comprehensive communication tools. The new print campaign features
yellow and black logo ads while television spots highlight the immediacy of Direct
Connect for getting things done.

This is the first campaign unveiled by Nextel since announcing its new
relationship with TBWA\Chiat\Day and Mindshare.
Service Level Agreements (SLAs) Signed to Facilitate Wireless Local Number
Portability

On September 29, 2003, Nextel and Sprint announced the completion of a SLA to
facilitate the porting of phone numbers between non-affiliated carriers. Then, on
October 13, 2003, Nextel and Cingular Wireless announced the completion of their
SLA. Management indicated that it is working to complete further SLAs in advance
of the November 24, 2003, LNP start date. SLAs are contractual agreements between
service providers that are intended to facilitate the porting process and,
ultimately, result in a quick and consumer-friendly port between carriers.

Spectrum Swap Update

During the call, management said that it is encouraged that it believes the FCC
has concluded that a re-tune of the 800 MHz band is absolutely necessary. NXTL
said that it hopes the issue won't spill into next year but it could potentially
drag into 1Q04.

HIGHLIGHTS & PROFITABILITY/VALUATION

(US$Millions)                12/01      12/02     12/03E
12/04E     12/05E

Revenues                     7,689      8,919     10,767
12,565     13,521
EBITDA                       1,800      3,190      4,195
5,022      5,549
EBIT                            54      1,578      2,487
3,042      3,493
Net income (UBS)           (2,858)      1,659      1,258
2,167      1,988
EPS (UBS, US$)              (1.87)     (0.04)       1.16
1.93       1.77

5-yr hist.av.      12/02     12/03E
12/04E     12/05E

EBIT margin %                    -       17.7       23.1
24.2       25.8
ROIC (EBIT) %                    -        9.9       15.6
19.3       22.7
EV/revenues x                    -        1.8        2.7
2.1        1.8
EV/EBITDA x                      -        5.1        6.9
5.3        4.3
PE (UBS) x                       -          -       18.8
11.3       12.3

Source: Company accounts, Thomson Financial, UBS estimates. UBS EPS is adjusted by
adding back goodwill amortization.
Valuations: based on an average share price that year, (E): based on
a share price of US$21.81 on 17 Oct 2003

For full version of note with charts and tables, please refer to:
http://www.ubs.com/investmentresearch
EPS (UBS, US$)
12/02     12/03E      Prior      Cons.
Q1     (0.35)      0.20A      0.20A          -
Q2     (0.05)      0.27A      0.27A          -
Q3       0.14      0.32A      0.32A          -
Q4       0.22       0.37       0.30          -
FY     (0.04)       1.16       1.09          -

FORECAST RETURNS
Forecast price appreciation                         +33.0%
Forecast dividend yield                               0.0%
Forecast stock return                               +33.0%
Market return assumption                              6.8%
Forecast excess return                              +26.2%
Net DPS (03E)                                      US$0.00
Trend EPS growth rate                                 +15%

TRADING DATA
Price                                             US$21.81
52-wk. range                                 US$22.36-9.69
Market cap.                                      US$21.4bn
Shares o/s                                            980m
Free float                                             84%
Average volume ('000)                               18,156
Convertible                                             No
Volatility                                            High

BALANCE SHEET DATA 12/03E
Shareholders' equity                             US$5.32bn
P/BV (UBS)                                            4.4x
Net cash (debt)                                (US$9.39bn)
-

STATEMENT OF RISK

* Risks associated with Nextel include the advent of competitive walk-talkie
products from operators such as Verizon Wireless and Sprint PCS.

20-Oct-03 Lehman Brothers (Bath, Blake 202-452-4732) NXTL AWE BLS Nextel
Communications: The Power of a Well-Run Co. on a Roll PRICE: (USD 22.36)
EPS        (FY Dec)

2002            2003                    2004              %
Change
Actual   Old     New   St. Est   Old     New   St. Est
2003    2004
1Q   (0.35)  0.20A   0.20A   0.20A     NA      NA    0.32E
157      NA
2Q   (0.05)  0.27A   0.27A   0.27A     NA      NA    0.37E
640      NA
3Q    0.14   0.32E   0.32E   0.32E     NA      NA    0.39E
129      NA
4Q    0.21   0.36E   0.39E   0.31E     NA      NA    0.38E
86      NA

Year  (0.05)  1.15E   1.17E   1.10E   1.65E   1.66E   1.47E
2,440     42

P/E                   19.1                    13.5
Market Data                             Financial Summary

Market Cap                    25763.2M   Revenue
FY03                 $9,816M
Shares Outstanding (Mi          1152.2   Five-Year EPS
CAGR               12%
Float                              818   Return on
Equity                 11%
Dividend Yield                      NA   Current
BVPS                   $4.52
Convertible                        Yes   Debt To
Capital                  25%
52 wk Range               21.78 - 7.25

Stock Rating:              Target:
New: 1-Overweight          New: 28.00
Old: 1-Overweight          Old: 28.00
Sector View:2-Neutral

INVESTMENT CONCLUSION :
*  Nextel reported a strong 3Q03, well above expectations. Given increasing
estimates and momentum, we expect Nextel to continue to perform well in 4Q03 and
2004. We reiterate our 1-OW rating and $28 price target on Lehman 10 Uncommon
Value Nextel.

SUMMARY :

*  For 3Q03, Nextel added 646K net adds vs. our 625K est., due to churn of 1.4%
vs. our 1.6% est. ARPU of $72 was also stronger than expected, driving higher revs
of $2.6B and EBITDA of $1.1B.

*  Nextel also raised guidance for 2003 to levels in line or exceeding our prior
estimates. While the co. has not given guidance for 2004, we expect recent
momentum to continue, and believe our outlook for EBITDA of $4.7B and EPS of $1.66
is conservative.

*  On an `04 EBITDA basis, NXTL trades at 6.8x vs. AWE and PCS at
5.4x. On an `04 EPS basis, NXTL trades at 13.5x our $1.66 est. (19.1x normalized
EPS of $1.17), still cheap relative to its growth outlook.

NEXTEL CONTINUES STRING OF OUTPERFORMANCE - REITERATE 1-OVERWEIGHT

Yesterday, Nextel Communications reported extremely strong 3Q03 results, which
even exceeded our recently raised estimates.  In addition, Nextel significantly
raised guidance for the full year 2003.  While we had always expected Nextel, and
the industry in general, to post a strong quarter, we see the degree of Nextel`s
outperformance as a strong start to the wireless carrier reporting season.  With
its differentiated product offering and strong execution, we continue to view
Nextel as the best positioned pure play wireless operator and reiterate our
1-Overweight rating and $28 price target on Lehman 10 Uncommon Value Nextel.

For the quarter, primarily due to extremely low churn of 1.4%, Nextel added
646,000 new subscribers, exclusive of a further 102,000 added to its Boost Mobile
prepay product, ahead of our recently raised 625,000 estimate.  Average revenue
per user (ARPU) of $72 was higher than our $70 estimate, resulting in service
revenue of $2.6 billion vs. our $2.5 billion estimate.
Nextel reported $1.13 billion in EBITDA vs. our $1.05 billion estimate, as margins
expanded to an industry leading 43%.
Given such strong results and confidence that such trends will continue, Nextel
management raised guidance for the full year 2003.

*  Net adds raised 300k, or 16%, from 1.9 million to 2.2 million (Lehman estimate:
2.3 million)

*  EBITDA guidance raised from $3.9 billion to $4.1 billion (Lehman estimate:
$4.2 billion)

*  EPS raisedfrom $1.00 to $1.15 (Lehman estimate: $1.17)

*  Capex unchanged at $1.8B (Lehman estimate: $1.8B)

*  Free cash flow raised 67% from $600mm to $1.0B (Lehman estimate: $1.0B) We
consider company guidance to be rather conservative and foresee potential upside
to guidance/estimates as management cited strong momentum entering 4Q03.  We think
shares of Nextel are attractive and reiterate our 1-Overweight rating.  Nextel
trades at 13.5x our 2004 EPS estimate of $1.66 (19.1x normalized, fully-taxed EPS
of $1.17).  As we stated in our note from October 15, in which we raised our
Nextel estimates, after yesterday`s announcement of such strong results, we expect
consensus estimates for Nextel to increase significantly and for valuation to
improve even further.

3QO3 RESULTS - LOW CHURN, HIGHER ARPU DRIVE STRONG RESULTS

Nextel reported a very strong third quarter yesterday morning.  The company added
a full 646,000 net new subscribers, exclusive of a further 102,000 added to its
Boost Mobile prepay product, even exceeding our recently raised expectation of
625,000 net additions as well as consensus.  The net addition beat was driven by a
better than expected churn level of just 1.4%, lower than our 1.6% estimate and
the company`s lowest churn level since 1997.

Nextel`s 1.4% churn was even 20 bps below its strong 1.6% level reported in 2Q03.
We attribute such subscriber retention success to Nextel`s differentiated product
offering (even in the face of Verizon Wireless` recent competing PTT launch),
increased customer satisfaction from the company`s `touch point` strategy and the
network effect of its embedded customer base.

Nextel also reported ARPU of $72 (calculated using total service revenue and
reported subscribers, excluding Boost), which exceeded our $70 estimate and the
$70 posted in 2Q03 and $68 in 1Q03.  Last quarter, we noted Nextel`s $2 sequential
uptick in ARPU was primarily the result of increased subscriber usage, as
demonstrated by monthly MOU of 720 per subscriber versus 650 in 1Q03.  This
quarter, however, we note the sequential ARPU increase is still $2 while per
subscriber MOU increased only slightly to 740.  Thus, assuming Nextel`s
incremental data results were only marginal, we point to the adoption of Nextel`s
new Nationwide Direct Connect as the primary driver of the improved monthly
revenue result.  On the call, Nextel management indicated that 1/3rd of
subscribers have used Nationwide Direct Connect in the last 60 days.  As awareness
increases, we expect this product`s penetration to increase as well, buoying ARPU
with its $10 per month or $0.10 per minute revenue contribution.  We expect the
other national wireless carriers to, once again, post ARPU figures at meaningful
discounts to Nextel, evidence of Nextel`s continued differentiation.

On the expense side, Nextel continues to perform well.  3Q03 EBITDA margin came in
at 43%, above our 42% estimate and the 42% posted in 2Q03, and likely to be
industry-leading once again.  As a result, EBITDA was $1,129 million, $79 million
above our $1,050 million estimate.  We note that the 134 bps sequential margin
increase was largely the result of lower handset subsidies, with slight scaling in
the expense areas of cost of service and marketing and selling.  Nextel`s expense
management continues to be prudent and its focus on enhancing profitability
remains strong, as evidenced by its continued robust margin levels.  We also note
the company`s continued collection and customer screening efforts which resulted
in bad debt expense at just 70 bps (as a % of service revenue) down from 100 bps
in 2Q03 and 240 bps in 1Q03.

We calculate the company`s current allowance on accounts receivable at just 7% (as
a % of gross A/R) from 10.5% at 12/31/02, which when combined with management`s
comments on the call that the company is actually fully reserved for accounts
greater than 60 days past due, indicates to us that bad debt levels will continue
to be very low.
Nextel reported EPS for the quarter of $0.32, in line with our estimate.  We note
the EPS result included $132 million, or $0.13 per share, of charges related to
Nextel`s approximate $2.2 billion debt retirement in the quarter.
Excluding the impact of the debt retirement, Nextel reported $0.45 in EPS on a
diluted basis.

Nextel invested just $403 million in capex in the quarter, significantly below our
estimate of $570 million.  Aided by less than expected capex spend and better
operating results, Nextel reported 3Q03 free cash flow of $410 million.

2003 OUTLOOK - 4Q03 ESTIMATES RAISED ON IMPROVED OUTLOOK

In addition to reporting very strong 3Q03 results, Nextel significantly raised its
guidance for 2003, putting its expectations at or above our prior estimates.
Given stronger than expected quarterly performance and momentum, we have increased
accordingly our 2003 estimates.  Despite yet another round of estimate increases,
we continue to think that expectations for Nextel are achievable and that upside
exists to current estimates.

We now estimate 2.3 million net additions for 2003, up from 2.1 million previously
and compared to guidance of 2.2 million.  For 4Q03, we are maintaining our 550,000
net add estimate even though such an estimate indicates a sequential decline from
3Q03 net adds of 646,000.  Nextel has never been as exposed to the retail holiday
selling season as the other more consumer-focused wireless carriers, so we think
it appropriate to have slightly more conservative growth expectations for 4Q03.
Despite such conservatism, our estimate remains roughly 100,000 net adds ahead of
company guidance.
Given strong performance through 2003, we have increased slightly our 2003 ARPU
estimate to $70 from $69.  When combined with increased subscriber growth
estimates, the increase in ARPU results in service revenue of $9.8 billion versus
our prior estimate of $9.7 billion.  We also think that Nextel`s strong
profitability can continue into 4Q03 and have raised our full year EBITDA estimate
to $4.2 billion from $4.0 billion and compared to guidance of $4.1 billion.  The
improvement in profitability flows through to the bottom line, resulting in a
slight increase in our 2003 EPS estimate to $1.17 from $1.15.
Nextel continues to opportunistically retire debt and expects to retire an
additional $1.3 billion in debt in 4Q03.  Based on Nextel`s disclosure, we
estimate the announced retirements will have a $0.04 to $0.05 negative impact on
EPS in 4Q03.  Given the announcement late yesterday that Nextel plans to issue
another $500 million in debt, we would expect that additional refinancing may
occur.

We note also, that the company reiterated full year 2003 capex guidance of $1.8
billion, in line with our current estimate.  Thus, given its year-to-date spend of
just $1,137 million and consistent with management comments on the call, we expect
Nextel to spend on the order of 35% to 40% of its full year capex budget in 4Q03
and have raised our 4Q03 estimate to $675 million from $520 million.  In 4Q03,
Nextel also plans to pay $144 million to MCI as consideration for MMDS spectrum
licenses.  The combination of back-end loaded capex and the spectrum acquisition
result in our forecast of free cash flow of ($13 million) in 4Q03.  For 2003, we
estimate $1.0 billion in free cash flow, up from our prior estimate of $820
million and in line with guidance.

OPERATIONAL EXCELLENCE + RISING ESTIMATES+RESOLUTION OF OVERHANGS =
OUTPERFORMANCE
While the company has not provided 2004 guidance, we expect that the recent
success will continue into next year.  We expect subscriber growth to be 2.3
million, on par with our expectations for 2003 and well above recent consensus,
which we estimate at 1.5 - 1.7 million.  We estimate ARPU of $68,  representing a
$2 decline from our $70 2003 estimate, which results
in service revenue of $11.4 billion.  In anticipation of continued strong
subscriber growth, we estimate flat margins of 42%, resulting in $4.7 billion of
EBITDA.  We estimate EPS of $1.66, or $1.17 on a fully-taxed normalized
basis.  At the moment, Street estimates are spread over a wide range and we would
expect over the coming quarter that both 2003 and 2004 consensus estimates will
increase substantially. Aside from the continuation of strong operating
performance, during 2004, we expect the spectrum swap proposal and Boost Mobile to
be in focus.  Management have expressed encouragement with the progress being made
at the FCC on the Consensus Plan spectrum swap proposal and have indicated that a
decision may be reached by the end of 2003 or in early 2004.  Chief Technology
Officer Barry West stated that there was a `growing agreement` at the FCC that a
retune of the 800 MHz band was necessary and that the Consensus Plan remains the
only plan that is truly a viable solution to the interference problems.  While we
believe acceptance of the Consensus Plan would be an important positive for Nextel
and have accounted for the $850 million retuning investment in our model, we
believe Nextel is unlikely to get everything it has requested in the proposal.
Nevertheless, we think that Nextel has sufficient operating and financial
flexibility to acquire and utilize other spectrum should the plan not be accepted
by the Commission.
Additionally, Nextel continues to experience success with its Boost Mobile trial.
Even though it is only offering Boost service in California and Nevada, it added
102,000 net additions in 3Q03.  While accounting for only a small portion of the
company`s subscriber base, we expect it to become an increasing point of focus and
a growth engine for Nextel.  While Boost caters to the youth market, which
generally has poorer demographics than Nextel`s core customers, we think it is a
good sign that Nextel has been able to consistently increase its EBITDA margin
while entering into this new market.

Finally, we believe Nextel`s valuation continues to be depressed by concerns about
push-to-talk wannabes infringing on its core market.  As we have said repeatedly,
and as the 3Q03 results underscore emphatically, we believe the threat of PTT
competition is vastly overstated given Nextel`s network effect, superior product
capability, and differentiated marketing and customer care approaches.  It is our
view that as Nextel continues to post strong results, even with a greater number
of PTT competitors, this concern will fade and NXTL`s multiple will rise.

VALUATION METHODOLOGY

Our DCF model yields an end of 2004 private market enterprise value for Nextel of
$42.2 billion.  Subtracting $6.7 billion of year-end 2004 net debt gives an
estimated private market equity value of $35.5 billion. Applying a 10%
private-to-public market discount gives an end of 2004 public market value of
$31.9 billion.

To this we add $905 million for Nextel`s 32% investment in Nextel Partners and
$542 million for its investment in Nextel International.  With 1,210 million fully
diluted shares, our price target is $28.

Nextel trades at 6.8x 2004 EBITDA, versus AT&T Wireless and Sprint PCS at 5.4x.
One of the few wireless companies to have positive earnings per share, Nextel
trades at 13.5x our 2004 estimate of $1.66 (19.1x normalized EPS of $1.17).

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