Subject: [NEXTEL-1] SG Cowen Securities Inc- On NXTL Q3-03

From: [email-masked]
Date: Fri, 17 Oct 2003 16:36:42 -0400

17-Oct-03 SG Cowen Securities Inc. (Thomas Watts) NXTL NXTL: Simply Amazing -
Blow-out Q3. Thesis Still Working.
United States                                  Wireless Services
Nextel Communications
Strong Buy (1)                                  October 17, 2003

Tom Watts, CFA         Jonathan Schildkraut

Conclusion: Q3 was another blow-out quarter for        NXTL
(10/16)   $22.36
Nextel, highlighted by 646K net adds, churn of 1.4%    Mkt
Cap        $24.5B
(best since 1997) and pro-forma EPS of $0.44. The      Dil shares
out 1096.0MM
quarter confirmed our thesis of rising EPS and FCF.    Avg daily
vol  18,013.3K
Further gains ahead.                                   52-wk
range    $7.8-22.5

Dividend       Nil
Simply amazing, another blow-out quarter. NXTL         Dividend
yield Nil
beat estimates across the board with revenue of $2.9B
BV/sh          $-1.75
(+8.7% from Q2:03), EBITDA of $1.13B (+7.8%),          Net
cash/sh    NA
EPS of $0.44 (+34.5%), and industry-leading
Debt/cap       71.1%
EBITDA service margins of 43.4% (+120bps). Other       ROIC
(LTM)     NA
highlights include net adds of  646K (vs. forecast of  3-yr fwd
EPS   NA
500K), churn of 1.4% (vs. 1.8%), ARPU of $71 (vs.      growth
$68.50), and CPGA of $450 (vs. $475).
EPS and FCF surpass forecasts. EPS of $0.44 beat
ours and consensus estimates of $0.33 and $0.32,
respectively.  Positive FCF of $377MM easily           S&P
500        1050.1
surpassed our forecast driven by lower than expected capital spending.
Rising ARPU, falling churn, and Boost point to future gains. Nationwide Direct
Connect help drive a 3.7% sequential increase in ARPU, while churn of 1.4% makes
the $91MM in retention costs appear well spent. Boost subscribership grew by 102K,
driving a 40% rise in wholesale revenues.
Management raises guidance again. Mgmt again raised guidance for 2003, increasing
its estimates for EPS , FCF, net adds and EBITDA.
Valuation - it's still cheap. NXTL now trades at 12.0x our newly raised $1.83 EPS
estimate for 2004 and at only 15.4x our new 2004 FCF per share estimate of $1.42.
Revenue $MM
FY      2002             2003E             2004E                2005E
Dec     Actual  Prior    Current  Prior    Current  Prior    Current
Q1      2,155.0 --       2,371.0A --       --       --       --
Q2      2,154.0 --       2,556.0A --       --       --       --
Q3      2,279.0 --       2,887.0A --       --       --       --
Q4      2,331.0 2,723.0  2,934.0  --       --       --       --
Year    8,919.0 10,307.0 10,748.0 11,369.0 12,204.0 11,998.0 13,076.0
EV/S    --      --       3.1x     --       2.7x     --       2.5x

EPS $
FY      2002             2003E             2004E                2005E
Dec     Actual  Prior    Current  Prior    Current  Prior    Current
Q1      (0.35)  --       0.21A    --       --       --       --
Q2      (0.05)  --       0.28A    --       --       --       --
Q3      0.14    --       0.44A    --       --       --       --
Q4      0.21    0.34     0.43     --       --       --       --
Year    0.03    1.17     1.38     1.60     1.83     1.93     2.20
P/E     --      --       16.2x    --       12.2x    --       10.2x

Simply Amazing - Blow-out Q3. Thesis Still Working.
Nextel  reported  another  quarter  of  outstanding  results.  With its  fifth
consecutive quarter of positive EPS, NXTL  has  solidified  our view  that  it
should trade on an EPS basis. We are raising our 2003 EPS estimate from  $1.17 to
$1.38 and our 2004 EPS estimate from $1.60 to $1.83. We note that these  EPS
projections  are  on  cash  taxes  paid,  excluding  potential accruals   that
management may adopt next year.
Thus far this year, NXTL has executed or announced transactions to redeem $2.3B in
debt and  preferred  securities,  and  refinance  an  additional $2.0B.  We
continue  to  believe  there  is  further  upside  to  our  EPS estimate  from
refinancing. We believe that NXTL will likely redeem the  remaining $499MM  on
9.95% notes in February, the next scheduled step  down  in redemption  premia.
Since our June 10th report  highlighting  $0.23  in  upside  to our  2004  EPS
estimate from refinancing, the company has announced transactions which  should
deliver $0.19 of that $0.23 estimate.
NXTL is trading 12.0x our newly raised $1.83 EPS estimate for 2004 and at  only
15.4x our 2004 FCF per share estimate of $1.42. With the additional  $0.05  of
upside from refinancing yet to be in our model, NXTL share price has  room  for
continued appreciation.
Continuing to Crush Estimates
NXTL beat ours and consensus estimates across the board in Q3. On the financial
metrics side, revenue reached $2.9B, up 8.7% from $2.6B in Q2:03, and up  26.7%
from $2.3B in Q3:02. EBITDA was also impressive,  reaching  nearly $1.13B,  up
12.5% from $1.0B in Q2:03 and up 28.6% from $878MM  in  Q3:02.  EBITDA  service
margins continued to lead the industry, again achieving record levels at 43.4%, up
from 42.1% in Q2:03, and up from 41.0%  in  Q3:02.  NXTL  posted its  fifth
consecutive quarter of positive EPS, coming in at $0.44, up 58.8% from $0.28 in
Q2:03, and up a massive 213.7% from $0.14 in Q3:02. The following table  shows
actual results from Q3:02, Q2:03 and Q3:03 as well as our estimates for Q3:03.
On the operating metric side, NXTL also  returned  a  superlative performance,
with particular strength in net adds, churn and ARPU. Net adds came in at 646K,
well ahead of our forecast of 500K and whisper  numbers  of  550-600K.  Helping
drive this sustained growth in subscribers was  another  very  low quarter  of
churn coming in at the best levels since 1997 a only 1.4%, down 20bps from 1.6% in
Q2:03, and down 60bps from 2.0% in Q3:02. ARPU remained at the top  of  the
industry increasing by $2 sequentially to $71. ARPU was up  2.9% from  $69  in
Q2:03, and inline y/y. ARPU surpassed our expectation of $68.50  by 3.7%.  The
following table compares the key operating metrics at NXTL for Q3:02, Q2:03 and
Q3:03 as well as our projections for Q3:03.
EPS and free cash flow easily surpass forecasts. Guidance raised
EPS of $0.44 handily beat both ours and consensus estimate of $0.33 and  $0.32,
respectively. Positive FCF of $377MM beat our  estimate  by  nearly 50%.  With
results continuing to make even last quarter's revised guidance for 2003  look
grossly inadequate, NXTL increased its outlook for the  final quarter  of  the
year. Once again, management enthusiastically added the phrase "or more" to all
new guidance. Below, we have outlined the revised guidance:
* Net adds: (excluding Boost Mobile): raised from 1.9MM to approximately 2.2MM
* EPS: raised from $1 or more to $1.15 or  more  (this  is inclusive of all
announced one-time charges)
* EBITDA: raised from $3.9B or more to $4.1B or more
* FCF: raised from $600MM or more to $1.0B or more

We view these increases in guidance as another positive signal that management is
pleased with performance to date. We  believe  these  new  goals should  be easily
achievable, and in most cases we  are  above  or  at  the high  end  of guidance.
We note the following:
* EPS:  Management  new  guidance  of  "$1.15  or   more," validates our
previous  above  consensus  estimate  of  $1.17.  On the  call, management
clarified that its new EPS estimate was inclusive of all  announced one-time
charges, such as those associated with the early retirement  of  debt and
preferred securities. This new guidance of $1.15 corresponds to  our  more
optimistic 2003 GAAP EPS estimate of $1.22. However, we generally do not  focus on
our GAAP EPS projections, but rather on fully diluted pro-forma
EPS,  which excludes one-time charges. Our 2003 fully diluted  pro-forma  EPS
estimate  is $1.38.
* FCF: We also view management's new guidance of $1.0B  or more in FCF as
achievable. Year to date, NXTL has generated (using management's definition of
FCF) positive FCF of $925MM. Coming in Q4:03,  NXTL will  likely pay $144MM to
acquire the Worldcom MDS/MMDS spectrum. As  the timing  of  this cost is not
certain (management says it could occur  in  Q1:04), we  have  not placed it in
our model. However, taking this expense  into  account management guidance is
inline with our current forecast.

Other Key Issues: ARPU, Churn, Boost, and LNP
* ARPU: ARPU of $71 was up an impressive 2.9% from  Q2:03, and inline with ARPU of
$71 in Q3:02. Contributing to this rise were  increased usages/overage charges,
increased data consumption and  SMS messaging,  and  a strong uptake of nationwide
Direct Connect (NDC). Although management indicated that more than 30% of
subscribers used NDC during  the  months  of
August  and
September, we estimate that only 15-20% of subscriber signed up for
the service
-- NXTL offer two options for NDC: either $10 per month of  $0.10 per  minute.
Using the $10 monthly charge, we project that NDC accounted for $1.00 to  $1.33 of
the increase in ARPU. The following table shows a NDC's contribution to ARPU
across a sample range of NDC take-rates:
* Churn: NXTL continues to impress us  with  its  industry leading low churn
rates. This quarters 1.4% churn rate was the best achieved by the company since
1997. We believe NXTL is  spending  an  increased amount  on retention, which is
paying dividends (so  to  speak)  on  the company's  churn figure. In the quarter,
NXTL spent $89MM on retaining customers, up from  $68MM in Q2:03. We estimate that
this translates into $300 per subscriber  in  order for NXTL to retain a customer
who would otherwise churn. We consider this money well spent as it cost the
company 50% more in Q3:03 to acquire a new  customer (CPGA was $450). In addition,
existing customers do not require any costs to be incorporated into the billing
and customer databases. The following table  lays out our retention analysis. In
order to analyze  retention  cost per  retained subscriber, we assume (1) gross
adds would be constant regardless of  retention spending, (2) without retention
spending churn would have been at our  estimate of 1.6%, rather than the reported
1.4%, and (3) the difference in churn  rates is brought about by the incremental
spending on retention:
* Boost Mobile: Boost the company's  prepaid  youth-orient product continues to
show that it is worthy of a nationwide rollout.
In  Q3:03,
Boost subscribers  (which  are  not  included  in  NXTL's subscriber  figures)
increased by 102K, or over 70%, to 245K total subscribers. Even more amazing is
that 102K adds came from only two states -- California and  Nevada.  Management
indicates that it will increase the number of Boost markets in 2004, though  it
did not indicate a nationwide rollout. We believe one reason for the hesitation is
the logistical costs of prepaid -- we look for NXTL to transition Boost from a
prepaid product to a pay-in-advance  product  before  going nationwide  (the
difference being in the payment method, where pay-in-advance is directly linked to
a credit card or bank account). For now, the revenue  generated from  Boost
subscribers flows into the NXTL P&L  though  the  wholesale revenue  line.  We
estimate the average Boost subscriber generates nearly $50 per month  in  ARPU,
slightly below  the  blended  ARPUs  of  national  carriers Verizon  Wireless,
Cingular, and T-Mobile. The following table shows our Boost ARPU analysis.
* LNP: We continue to consider NXTL  best  positioned  for local number
portability, which is scheduled for implementation on November 24.
In addition to having approximately 65% of its customers on contract  (average
contract life is estimated by management at  1.5  years),  we consider  NXTL's
enterprise base as least likely to switch. We believe the  value of  DC  grows
exponentially with each additional user added to the work group -- thus,  there is
no value in push-to-talk for a subscriber who defects from NXTL, unless  all her
colleagues switch to a new carrier as well. In the  last quarter,  41%  of NXTL's
gross additions came from existing accounts, indicating that more people are
joining NXTL's workgroups, as opposed  to  preparing  to leave.  While  we
continue to believe LNP will increase industry wide churn  by 30bps  following
implementation, we view NXTL as best insulated from these effects.  In order  to
be conservative, however, we have modeled into our forecast the industry  wide
churn increase.
Update on Spectrum Issues
Although the status and timing of a possible resolution to the 800MHz rebanding
issue remains uncertain, we now believe that the rebanding approach proposed by
NXTL has some support within the FCC. John  Muleta,  the  chief  of the  FCC's
Wireless Telecommunications Bureau, recently signaled that  he supported  some
form of rebanding of the 800MHz channels. Muleta also noted that it may not  be
until early next year before a decision is reached.
Muleta comments come in contradiction to those of Edmond Thomas, chief  of  the
FCC's Office of Engineering and  Technology,  who  clearly indicated  that  he
favored using filters, as opposed to rebanding,  to  solve  the public  safety
interference issues in the 800MHz band.
While we continue to believe the FCC could support rebanding  in 800MHz  band,
which would be favorable to NXTL, we find it increasingly  unlikely that  NXTL
will  receive  a  10MHz  block  of  spectrum  in  the  1.9GHz  band (the  most
controversial point of the  plan).  Management  currently indicates  that  the
Consensus Plan is an all or nothing situation, though we  wait  for the  final
decision before holding the company to that position.  Regardless, we  believe
that there  continues  to  be  ample  spectrum  available  to NXTL,  and  that
resolution of this issue will allow the company to move forward in making  its
spectrum decisions.
One of the spectrum options available to NXTL, should the Consensus Plan not be
approved, would be to purchase complementary spectrum  in  the 900MHz  auction
scheduled for February 2004. We look for a decision from the FCC on the  800MHz
rebanding prior to the 900MHz auction.
Raising estimates
Based on the Q3 results and new guidance, we are refining our model  -  raising
growth and ARPU estimates. We also note that NXTL changed the way it  accounted
for equipment revenue and costs in order to comply with a FASB ruling. In Q3:03
and going forward, NXTL will no longer defer equipment revenues or costs,  but
account for them in the quarter in which they occur. Net/net  this should  not
affect EBITDA, but will increase the reported revenue and costs figures.
* Raising  estimates:  For  Q4:03,  we  are  raising   our estimates for revenue
by $211MM to $2.9B, EPS by $0.09 to $0.43, net  adds  by 125K to 575MM and ARPU by
$1 to $69.50, while lowering churn 20bps to 1.7%.  In 2004, we are raising our
estimate for revenue by $835MM to $12.2B, cash EPS  by $0.23 to $1.83, net adds by
165K to 1.5MM, while lowering  churn
by  10bps  to
2.1%. In 2004, we are also increasing our ARPU assumption by $1.
* Longer-term  growth:  We  are  increasing  our  net  add estimates for 2005,
2006, and 2007 by 140K, 100K,  and  20K, respectively,  to 1.2MM, 900K, and 700K,
respectively.  We  believe  NXTL  has proven  that  its products have a broader
reach than with just the niche  blue-collar enterprise market. Notably, these
estimates are still exclusive of any Boost subscribers.

Valuation PE's
NXTL now trades at 16.0x our newly raised $1.38 2003 EPS estimate and  at  only
12x our new 2004 EPS per share estimate of $1.83.  Applying  the current  2003
multiple to our 2004 estimate suggests stock price potential of over $29.

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