Subject: [NEXTEL-1] SoundView On Nxtl Q3-03

From: [email-masked]
Date: Fri, 17 Oct 2003 17:12:19 -0400

SoundView On Nxtl Q3-03

17-Oct-03 SoundView Technology Corp. (Michael Bowen) NXTL T Q BLS SoundView: NXTL:
Increasing Estimates and Price Target; Reiterate Outperform Sector: Wireless
Services:

Nextel (Outperform)
NXTL : Increasing Estimates and Price Target; Reiterate Outperform
Rating

Estimates Change * Price Target Change * Analysis of Sales/Earnings

Stock Net:  Nextel exceeded financial and operating expectations for 3Q03 and has
raised guidance for 2003. Accordingly, we have increased our financial estimates
and are increasing our 12-month price target to $27 from $26.

Nextel remains our top pick, and we expect the company to continue to produce the
highest ARPU and margins in the sector, coupled with the lowest monthly churn.

|
|
| Fiscal Year Dec      Fiscal Year        Last Qtr.  Curr Qtr.  Next
Qtr.|
|                      F03E  F04E  F05E   3Q03A      4Q03E
1Q04E    |
| Revenue(Current$)    10.8B 12.7B 13.9B  2.9B       3.0B
3.0B     |
| Revenue(Previous$)   10.3B 11.6B 12.7B  2.6B       2.8B
2.8B     |
| Revenue(Consensus$)  10.3B 11.5B --     2.6B       2.7B       --
|
| EPS(Current$)        1.17  1.69  1.90   0.33       0.34
0.39     |
| EPS(Previous$)       1.12  1.51  1.81   0.31       0.32
0.33     |
| EPS(Consensus$)      1.11  1.47  --     0.32       0.31       --
|
| P/S(Current)         2.1   1.8   1.7    --         --         --
|
| P/E(Current)         19.1  13.2  11.8   --         --         --
|
| P/E(Consensus)       20.1  15.2  NaN    --         --         --
|
|
|

| Ticker:             NXTL        |
| Price (10/16/2003): $22.36      |
| 52-Wk. Range:       $22.23-$8.71|
| Market Cap (B):     $23.2       |
| Shares Out. (M):    1,052       |
| Rating:             Outperform  |
| Price Target:       $27         |

Industry Opinion: U.S. wireless subscribers will grow 6.9%/year and take share
from wireline providers. Business and data growth will drive margins, though churn
from WLNP will increase 30--50 basis points in 2004. U.S.  wireless revenue will
grow 8.2%/year vs. -2%--4% for wireline.
Company Description: Nextel Communications provides wireless services over an
all-digital packet data network based on Motorola's iDEN technology.  The company
differentiates itself through Nextel Direct Connect, a long-range walkie-talkie
service.

* We have raised our financial estimates, and our 12-month price target goes to
$27 for Nextel as a result of the company exceeding 3Q03 expectations and our
belief that Nextel will continue to outperform its peers and generate
sector-leading ARPU, margins and churn rates.

* Nextel plans to introduce two new Motorola phones next week, and five new phones
will become available over the next several months, which we believe will help
maintain momentum.

* While other push to talk (PTT) services are becoming available, we do not
believe a competing service with equivalent functionality will be available for at
least several quarters, and entrance of other PTT offerings is increasing
awareness of PTT, with a positive derivative effect on Nextel.

* We have raised our estimated net subscriber additions to 2.3 million and 1.95
million subscribers in 2003 and 2004, respectively. Our EPS increases to $1.17 and
$1.69 in 2003 and 2004, respectively.

Overview

As we anticipated, Nextel Communications posted strong 3Q03 results,
but even more importantly, the company increased full year 2003 guidance
across the board, which enables us to increase our 2004 estimates as well. We
have not found much in the way of underlying concern relative to the quarter
results, and accordingly, we are raising our 2003 and 2004 estimates to
reflect what we believe will be continued strength in net subscribers, average
revenue per user (ARPU), and the best EBITDA margins in the sector currently and
going forward. We were most surprised by the company's ability in 3Q03 to
not only increase ARPU by $2 sequentially to $71, but also to lower cost per
gross addition (CPGA) to $450 compared to $460 in 2Q03; this compares
favorably to our estimate of $469.

We continue to believe that Nextel will retain strength in the grey collar market,
and management indicated that it continues to experience strength in its
government business segment. Upon the introduction of wireless local number
portability (WLNP) on Nov. 24, 2003, we expect Nextel will be a net beneficiary
relative to its peers, and we expect churn across the industry to increase by
30--50 basis points in 1H04. We note that the company's 1.4% churn in 3Q03
compares favorably to our 1.7% estimate, which is low for the industry, and leaves
some room for the company to encounter higher churn from WLNP in 2004 without
substantially impacting operating and financial results relative to the other
carriers.

Investment Thesis

Our estimates for each wireless carrier we cover are wrapped within the context of
three basic themes, which lead us to position the wireless sector as having better
fundamental prospects for continued growth than the wireline sector. Despite some
near-term uncertainty regarding wireless local number portability, we believe the
wireless carriers that are more oriented to the enterprise segment will maintain
stronger revenue per subscriber and margins.

Nextel and AT&T Wireless remain our two favorite wireless carriers in this
scenario. As a reminder of some of our key themes for the sector, we present the
following three categories:

1) Wireline to Wireless Migration: We believe that wireline to wireless migration
is nearly inevitable, and we expect U.S. wireline access lines to decline 3%--5%
annually over the next five years, while we estimate wireless subscribers to
increase 6%--8% annually over the next five years.  Wireless to wireless migration
is essentially a zero-sum game other than increasing overall U.S. penetration
rates. However, we believe that eventually wireline to wireline porting will be
required for all wireline access lines, not just the current 12%--15% within fixed
line rate centers.

2) Business Customers and Data Growth: We believe carriers that focus on the
higher value business customer segment will ultimately generate more favorable
margins than consumer-focused carriers. AT&T Wireless' business customer mix is
approximately 35%, second only to Nextel's 85%-plus mix percentage. We expect that
business customers will help drive wireless data revenue to approximately 20% of
total U.S. wireless revenue by 2007 from just 1.4% of U.S. wireless revenue in
2002. It follows that increased data usage
by business customers should help to increase business ARPU +4.5% over our
forecast period, while in contrast, we estimate that consumer ARPU will decline
-0.5% over the forecast period.

3) WLNP and Churn Rates: We have estimated that wireless local number portability
(WLNP) should increase sector churn rates by 30--50 basis points in 1H04. However,
as a result of increased efforts by the carriers, approximately 75%-plus of
subscriber bases are locked into one- to two-year contracts at a minimum. We
expect that due to these contractual levels, churn rate increases may not spike
upward to the levels that some have estimated.

However, it is plausible that moderately higher churn rate levels
may be somewhat sustained for several more quarters than initially believed.
Operating Results Nextel's focus not only on business subscribers but also on
specific vertical markets is contributing to its increasing subscriber base and
high ARPU.

Nextel added approximately 200,000 corporate and government subscribers, 100,000
small and medium-sized business subscribers, and 400,000 individuals.

Nextel delivered total net subscriber additions for 3Q03 of 646,000 compared to
our estimate of 526,000 and net subscriber additions of 591,000 in 2Q03.

ARPU increased sequentially to $71 in 3Q03 from $69 in 2Q03. We believe
improvement in ARPU is attributable to increased MOUs, particularly the use of
nationwide direct connect minutes and overage minutes. While we believe wireless
subscribers will continue to increase MOUs, we do not believe increased ARPU is a
sustainable trend and estimate a steady decline in ARPU throughout our projection
period as a result of increased competition and WLNP.

Nextel's churn decreased sequentially to 1.4% from 1.6% as a result of the
implementation of customer care measures, which resolve network service issues,
and thereby reduce voluntary churn. We were surprised at the company's ability to
reduce sequential CGPA to $450 in 3Q03 compared to $460 in 2Q03, which was below
our 3Q03 estimate of $469. However, we believe this is partially due to Nextel's
success with add-on business through existing accounts where customer acquisition
costs are less than first-time subscriber costs. Nonetheless, we anticipate CPGA
to increase in 4Q03 to $459 as WLNP takes effect on Nov. 24 and carriers spend
more heavily to acquire new customers as well as retain existing customers and
encounter costs associated with customers who switch from competitors.

Solid metrics contributed to Nextel's total services revenue of $2.6 billion in
3Q03, which was above our estimate of $2.4 billion and the $2.4 billion in 2Q03.
The company reported 3Q03 services margin of 43.4% vs. our estimate of 42.8% and
42.1% in 2Q03. EPS for 3Q03 of $0.33 was slightly above our and consensus
estimates of $0.31 and $0.32, respectively.

Boost

While prepaid subscribers efforts have not typically proven to be successful
programs, Nextel appears to have implemented a margin-enhancing prepaid model, at
least in its early stages. Nextel launched Boost, the company's prepaid program,
marketed toward the youth segment, in 1Q03 in two trial markets, San Diego and
Nevada. Since inception, Nextel has attained 245,000 Boost subscribers, 102,000 of
which were added in 3Q03. We are not currently including Boost estimates in our
subscriber estimates, but we believe the program may provide upside potential to
our net subscriber estimates in future periods. However, there remains the risk
that rapidly increasing customers from the Boost program could dampen EBITDA
margins going forward, and we will be watching this trend very carefully.

Guidance and Financial Model

The company raised 2003 guidance for EPS from $1.00 to at least
$1.15 per share, net additions from 1.9 million to 2.2+ million, operating
income before depreciation and amortization of $4.1 billion or more, up from $3.9
billion, and free cash flow from $600 million to more than $1 billion. Our
new and old estimates are shown in Figure 2; we have generally increased our
estimates slightly above the company's guidance.

Price Target Valuation and Risks

We reiterate our Outperform rating and are raising our 12-month price target to
$27 from $26 per share based on our 10-year discounted cash flow analysis, as well
as sector multiple comparisons. Nextel currently trades at a 10%--15% discount to
its peer group using a multiple of enterprise value to 2004 EBITDA, which we
believe is the most appropriate metric in the sector.

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