Subject: [NEXTEL-1] The Next Generation VIII

From: [email-masked]
Date: Tue, 16 Mar 2004 23:31:29 -0500

The Next Generation VIII

Highlights:
??We finally got the start of US wireless consolidation in 2004. We
think the Cingular/AT&T Wireless deal will be approved, possibly with
market divestiture requirements. In our view, the prospects for deal
number two are less clear for the near term. In addition, with the
Sprint PCS tracking stock recombination, the US wireless sector in terms
of pure plays has further consolidated. What is the outlook for 2004?
??First, it seems that on a global basis wireless subscriber estimates
continue to surprise on the upside. We think this is possible in the US
wireless market in 2004E. On our bottoms up estimates, we are increasing
our estimate for 2004E industry net additions from 13 million to 14
million, for ending industry subscriber base growth of 8.8% yoy.
??Second, while the holiday 2003 period saw its share of promotions, in
our view, activity with regard to service plans was not as aggressive as
it had been during the prior year.  Then again, promotional activity
centered more on handsets and family plans. With that backdrop, while
the impact of family plan additions will develop during the year and
while the first quarter is typically a seasonally light period with
regard to average revenue per unit (ARPU), perhaps this bodes well for
ARPU in 2004E as usage, substitution and data trends progress.
??Third, assuming that the overall US wireless top line environment is
solid in 2004, we think that Verizon Wireless could continue to take
share. Is there enough growth to go around for the others? We think the
answer could be yes, with the Cingular/AT&T Wireless transaction pending
approval and integration.  ??Fourth, for 2004E, the free cash flow story
for US wireless has been degraded as carriers increase capital spending
in order to bolster their respective longer-term positions. And, while
the impact of wireless local number portability (WLNP) has yet to fully
play out, thus far while retention costs have increased, churn has not
significantly increased.  ??In the near term, we have a number of issues
that could cause uncertainty within US wireless: the prospects (or the
lack thereof) for another deal, the proposed spectrum swap with Nextel,
and roaming. In our view, it could be mid-year when we see the next
seasonal spurt in wireless usage and revenues—similar to what we saw in
2003.  ??On valuation, we continue to prefer European wireless to US
wireless. Our top global wireless recommendation remains Vodafone
(VOD/VODPF, B-1-7/B-1-7, $24.30/133p). With regard to the US stocks,
within the context of an overall solid top line environment, based on
valuation and the potential for positive earnings catalysts (with regard
to incremental Universal Service Fund revenues and share repurchase), we
are upgrading ALLTEL (AT, B-1-7, $50.76) from Neutral to Buy. So, while
the US wireless space has been consolidated, we may not have reached the
final frontier yet. At least, we are another step or two along the way.
See our in depth report for the full details.

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