Subject: [NEXTEL-1] The Other Nextel-

From: [email-masked]
Date: Thu, 06 May 2004 17:57:07 -0400

Adviser Soapbox
The Other Nextel
Nikhil Hutheesing, Forbes Wireless Stock Watch, 05.06.04, 3:00 PM ET

Nextel Partners, the Kirkland, Wash.-based wireless-service provider
formed
in 1998 by Chief Executive John Chapple and Craig McCaw, is among the
fastest-growing wireless service providers in the U.S. It focuses its
business
in midsized and rural markets.

The company got its beginnings because telecom
pioneer McCaw believed that large, highly leveraged
wireless companies such as Nextel
Communications (nasdaq: NXTL - news - people )
would not be able to build out their networks fast
enough to satisfy market demand in secondary
markets. By creating a separate company, he
reasoned, Nextel Communications could more easily raise additional
capital
and add to its subscriber base by offering service in smaller
markets--often
getting there long before other wireless carriers.

The strategy worked, and shortly after Nextel Partners (nasdaq: NXTP -
news -
people ) was formed, it entered into an exclusive agreement with Nextel
Communications to offer its wireless service in midsized and smaller
markets
throughout the U.S. In February 2000, Nextel Partners went public,
generating
proceeds of $500 million.

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While Nextel Partners targets second-tier markets, it does benefit from
being
the younger sibling of Reston, Va.-based Nextel Communications, which
targets the biggest markets in the U.S. to deploy its services. For
example, in
exchange for a fee based on Nextel Communications' cost to provide the
service, Nextel Partners has the right to utilize portions of Nextel's
network
infrastructure, including certain switching facilities and network
monitoring
systems. It makes sense for Nextel Partners to do that until its own
customer
volume makes it worthwhile for it to build its own network in a
particular
region.

Many investors and consumers, however, don't realize that Nextel
Communications and Nextel Partners are two distinct companies. Their
networks are seamless, allowing a customer of Nextel Communications in
New York City, for instance, to get service on the network of Nextel
Partners in,
say, Louisville, Ky. Besides that, Partners uses Nextel Communications
systems and back-office support centers to service its customers. For
that,
Nextel Communications charges the company a low annual fee--about $4.5
million--to handle things like customer care, account activations,
fulfillment
and billing, which it will not increase as Partners expands its
business.

In many respects, metrics for the two companies track each other
closely. In
2003, for example, Nextel Communications' churn rate (the rate at which
existing subscribers cancel their service and sign on with a competitor)
was
1.6% --the same as the churn rate for Nextel Partners. Average revenue
per
user (not including roaming) was about $69 for Nextel Communications and

$68 for Nextel Partners.

Despite their similarities, the companies do target different markets
and are in
different stages of development, so Nextel Partners' strategy differs
from that
at Nextel Communications.

At the recent Cellular Telecommunications and Internet Association
conference in Atlanta, Chapple told me his immediate goals are not only
to
improve the quality of Partners' service but also to rapidly increase
its
subscriber count. To do that, Partners is building 300 additional sites
and
plans to open at least 30 new retail stores building on the success of
its 40
retail locations opened during the past two years. Last year, Chapple
told me
about 16% of new subscribers came from its retail stores, and he hopes
to
bump that number up to the mid-20% range this year.

Partners also aims to offer the same new and compelling services to
attract
customers that Nextel Communications gets in the big cities. Perhaps the

most important service the company offers is Nationwide Direct Connect.
The
walkie-talkie service lets you connect--in less than a second--with more
than
13 million Nextel users anywhere in the country. This service alone,
which
costs about 10 cents per minute or $10 per month, has increased average
revenue per user by over $1.

Another part of Nextel Partners' strategy is to raise the bar for
customer
satisfaction. To do that, Chapple has tied compensation to customer
satisfaction thresholds, monitored by an independent third party. That
applies
not just to senior management but also to customer service
representatives in
Panama City Beach, Fla., and technicians in Louisville. Nextel Partners'
low
churn rates proves that the strategy is working.

Partners is also focusing on signing up corporate and government
accounts,
which today account for about 70% of its customers. Partners operates in
11
state capitals. Going after this target has been a profitable strategy,
because
these government customers are willing to pay more than corporate
customers do, and they also tend to be more loyal, staying with the
service
provider longer.

By going after midsized markets, Partners has an edge. In some cases,
there
are fewer carriers competing for customers. In the cases of secondary
markets where Verizon Wireless and AT&T Wireless (nyse: AWE - news -
people ) are competitors, Partners seems to have the edge because it's
more
solely focused on these markets. Partners has grown quickly and now
operates in 31 states and has 1.25 million subscribers. Combined, the
two
Nextels have licenses that cover the entire U.S.--about 250 million
people.

It seems that Partners' strategy is working well. Partners released its
first-quarter earnings on April 28, and as I predicted, the company
posted its
first profit one quarter earlier than expected. In the first quarter,
Partners
generated $15.3 million in free cash flow, compared with a negative free
cash
flow of $68.2 million in the first quarter of 2003. Total revenue was
$306.1
million, up from $207.8 million in the first quarter of 2003. Net income
also
improved. Partners posted a profit of $4.6 million, up from a loss of
$49
million in the year-ago period.

As for subscribers, the company added 88,800 subscribers during the
first
quarter to end the period with 1,322,000 digital subscribers,
representing 37%
subscriber growth over the past year.

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I believe that shares of Partners are attractively priced. Like other
stocks in this
sector, the stock has risen significantly from depressed levels. It is
up 237%
over the past 52 weeks. However, Partners has retreated about 15% over
the
past few months to $13.

Cut through the stock market noise, and you realize that this company is

among the fastest-growing wireless operators in the U.S. It has 1.32
million
subscribers, and its subscriber-growth rate in 2003 was 40%, compared
with
21% for Nextel and 5% for AT&T Wireless. This year, Partners should
increase
its subscriber base by 27%--still much greater than Nextel at 14% and
AT&T
Wireless at 1.3%.

In terms of earnings before interest, taxes, depreciation and
amortization,
Partners should increase by 88.8% this year, compared with Nextel
Communications' expected growth of 19% in 2004 and zero growth expected
for AT&T Wireless. Partners has $28 million in cash and $1.4 billion in
long-term debt, which represents 28% if its total capitalization. The
company
is aggressively refinancing its debt. In December, Partners refinanced
its
$475 million senior secured credit facility to reduce interest rates and
extend
maturity dates. It also spent $77.2 million to pay off $67.7 million
worth of
12.5% debt, which wasn't due until November 2009.

The stock has a forward price-to-earnings ratio of 20, compared with 40
for
Sprint PCS (nyse: PCS - news - people ) and 52 for AT&T Wireless. Its
price-earnings-to-growth ratio is 1.58, higher than Nextel
Communications'
0.84. But the real story here is future growth in earnings and revenue.
Partners' enterprise value to revenue growth from 2004 to 2007 is 14.5%,

much higher than Nextel Communications at 9.4%, Sprint PCS at 5.3% and
Alltel (nyse: AT - news - people ) at 1.4%.

As a wireless service provider, Partners is in a unique position. Not
only does
the company focus on midsized and rural markets, but it also has the
backing
of its heavyweight sibling. This relationship, among other things,
reduces its
need to invest a lot in research and development. Partners is also in
the
enviable position of focusing solely on its smaller secondary markets,
where
the competition is less intense.

In the next year I expect Partners to continue to add subscribers at a
rapid
pace and keep its churn rate low. It should also continue to remain
profitable. I
recommend purchase of the shares of NXTP at $13, with a target price of
$20
within 12 months.

Excerpted from the April 16 issue of Wireless Stock Watch

http://www.forbes.com/investmentnewsletters/2004/05/06/cz_nh_0506soapbox.html?partner=yahoo&referrer=

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