Neha Marwah

 Investment Positives Advantage of its Spectrum ABC possesses huge amount of unused spectrum while its rivals are facing shortage for the same and looking for consolidation to meet the need. ABC, thus, enjoys one of the largest spectrum position of all the service providers in the US, holding over 46 billion MHz-POPs of spectrum I n the 2.5 GHz band in their portfolio. The Company’s extensive spectrum position clubbed with its 4G mobile broadband network equips it to offer its subscribers significantly higher data bandwidth compared to any other wireless carriers in the US. Deployment of 4G mobile services and Agreement with DEF The Company recently signed a deal with DEF whereby the later offers $1.6 billion to ABC in exchange of unlimited access to its WiMax service to meet the increasing 4G data demand. The deal comes as a rescue to the Company especially at a time when it is in want of additional capital to fund working capital requirement including the deployment of mobile 4G Long Term Evolution (LTE) technology. This agreement is essential for ABC in extending its current 4G network as well as laying the groundwork for the deployment of LTE Advanced-ready overlay network. DEF shall pay up to $350 million over the next two years to install the LTE 4G network. Losses to diminish with positive cash flow The operational loss of the company is narrowing every quarter and the company is expected to break even in the near future and attain positive cash flow. The Company intends to increase focus on its wholesale revenue and undertake cost reduction measure primarily in the retail business. Exhibit 1 shows the rising contribution of the wholesale revenue. Also, the contract with its largest wholesale partner, DEF, should assist ABC in the deployment of its LTE technology to meet its funding requirements and improve its operational efficiency. Exhibit 1: Revenue Contribution from retail, wholesale and others Source: Company Filings Increasing Subscriber base The subscriber growth rate has been increasing over 2% in the last three quarter. Most of the increase has been driven by the growth in the wholesale subscriber base which increased over 28% in the last quarter. This has driven the revenue growth and narrowed the operational losses driving the company towards positive returns. Exhibit 2 shows the increasing subscriber base with the churn rate:- Exhibit 2: Subscriber base of retail, wholesale and churn rate Source: Company Filings The Company added 1.9 million subscribers in the latest quarter representing 25% sequential growth. The subscriber base is expected to rise, primarily driven by the growth in the wholesale subscriber segment. Investment Risks Continuous loss ABC has reported net losses since inception and continues to expect the same in the near future as it develops its network and expand its services. Revenue might fluctuate substantially as the company is exposed to risk related to technologies such as LTE which reduces the demand of its current services. The deployment of LTE technology requires substantial investment. Further, in case of high churns the operating results of the entity shall be adversely affected challenging its business prospects, financial condition and daily operational activities. Requirement of additional capital to deploy LTE and meet other expenses The Company needs to develop its network in the near and long term. The recent proceeds of $734 million from public offering and DEF is to be utilized for general corporate and working capital purpose which includes the deployment of mobile 4G LTE technology and the mobile 4G WiMAX technology. Fund is also required to meet its financial obligation, for the operation and maintenance of its network as well as fees and related expenses for the above offering. In the absence or shortage of such capital the company shall be unable to deploy the LTE network which would significantly hinder its ability to add new wholesale relationships as well as adversely affect the existing wholesale relationships. Dependence on wholesale partners Wholesale subscribers have been the primary driver of revenue growth in the recent past which was mostly due to the robust smartphone demand. Wholesale revenue comprises over 41% of the total revenue of ABC and the company continues to add numbers to the wholesale client list. The Company’s business is getting significantly dependent on wholesale partners, especially DEF, which is its largest customer and major stakeholder. The Company’s revenue from DEF is largely dependent on the number of DEF subscribers utilizing ABC’s 4G services and the total usage of the network by the subscribers. Moreover, apart from the prepayment commitment from DEF Wholesale Amendment, the 4G MVNO Agreement does not necessitate DEF or any other wholesale partners to resell any of ABC’s services. Also, none of the wholesale partners have any minimum payment obligation after 2012. Shifting its focus from the retail business, ABC is significantly depending on its wholesale relationships to bring a turnaround in its revenue and drive towards positive cash flow. Stiff Competition from better established players ABC competes with several other players in the market which have greater resources and better developed network services and support systems and stronger relationships with suppliers and customers. Many of them also have better financial position, technical strength and market resource. A number of its fellow competitors offer their broadband connectivity packaged with additional products and services at significantly lower prices, putting a downward price pressure on ABC’s offerings. Industry Wireless Industry The wireless industry is witnessing continued innovation, growth and competition as consumers put pressure for data and voice services. Mobile service providers are facing acute shortage of spectrum as smartphones and tablet sales soar. Huge data is occupying the existing wireless spectrum and leaving even the big carriers with very less of unused capacity to meet the mounting requirement. However, what’s more challenging is that wireless spectrum is in control of the Federal Communications Commission (FCC). 3G networks are struggling to satisfy the growing need of the users as they require huge data from the internet. 4G and LTE networks are more efficient in this regards but the current spectrum of the carriers are already in use for their 2G and 3.5G users. Also, one of the most talked about offerings in the wireless market has been the LTE technology in the US. US wireless consumers have had LTE network services since 2010 with carriers continuing with major deployment in 2011 and 2012. Exhibit 3 shows that while the proportion of population of US in comparison to the world is just 5.0%, its proportion of LTE subscribers in comparison to the world is as high as 86.6%. Exhibit 3: US Share of Global Population & Wireless Subscribers, Q3 2011 Source: Informa Telecoms & Media Group, WCIS+ database Current Performance The major players in the wireless arena are Verizon, AT&T, DEF and T-Mobile. Verizon’s LTE offering is already available to over 200 million Americans and proposes to cover two third of US’s population by mid 2012. While AT&T’s LTE network provides service to more than 74 million consumers and expects the deployment process to wind-up by end 2013. DEF proposes to serve around 176 million customer and 250 million pops by the end of 2013 offering them a mix of LTE and WiMax services. Among the regional providers such as ABC, U.S. Cellular and Cricket Communications, all have plans to deploy the same. The Company Business Description ABC Corporation provides 4G wireless broadband services. Its 4G mobile broadband network reaches over 130 million people in US covering more than 70 of the top US markets. Headquartered in Bellevue, Washington, the company makes next generation mobile broadband network that gives high speed mobile Internet and residential access services, and residential voice services. It markets its 4G services through its own brand called CLEAR. One of the fastest growing companies in the wireless industry, ABC serves over 4.4 million customers catering to the US, Belgium and Spanish markets. Recently the Company also announced an agreement with DEF Nextel (NYSE:S) whereby DEF offered it $1.6 billion over the next four years in exchange of unlimited 4G WiMAX Services in 2012 and 2013. In addition, the deal gives DEF access to its WiMAX network at least till 2015. Apart from DEF, the Company has wholesale relationship with Comcast, Time Warner Cable, Locus Telecommunications, Cbeyond, Mitel, United Online and Best Buy. Products & Services The Company serves 88 markets in the US catering to 114.2 million people and 4 markets in Europe serving 2.9 million people. The Company’s 4G mobile broadband network provides connection within the coverage area. Its unprecedented spectrum advantage makes it the 4G mobile internet leader. The following are the services offered by ABC Corporation:- ABC provides 4G mobile broadband services through its wholesale partners. The Company’s initial wholesale partners offer ABC’s services in their own brand names. Its wholesale subscribers are given in the diagram below:- The Company provides its 4G mobile broadband network in the US and Europe under the CLEAR brand retail service. It serves 112.0 million people in the US and approximately 1.6 million in Europe through its retail distribution channels through cellular retailers, consumer electronics stores, satellite television dealers, telesales centers, hired salesperson and other agents. The Company distribution channels in given in the chart below:- Business Strategy The Company intends to concentrate on specific areas and meet its business strategies in order to improve its revenue and produce positive cash flow and make it commercially viable as well as profitable. The following are its area of focus:- Growth Drivers Deployment of 4G Mobile LTE technology The installation of 4G mobile broadband services is a key driver to the revenue growth of the company. It is expected to increase wholesale revenue from existing and future wholesale partners. The additional capital raised through public offering and the fund received as part of the deal with DEF is to be utilized for working capital purpose which includes the deployment of 4G mobile LTE technology with the mobile 4G WiMax technology. The initial installation program will be covered in the existing market where there is higher concentration of usage. Growing subscriber base The subscriber base has been increasing at a strong rate driving the revenue of the Company. The wholesale subscriber base was the primary driver behind the record hitting revenue of ABC in the latest third quarter results. The subscriber base is expected to cross 10 million end 2011. Moreover 20% of DEF’s traffic is estimated to runs over the Company’s network by end 2011. Further, their 4G WiMax customers are all on ABC’s network giving all reasons for the subscriber base to witness steady growth. Spectrum depth In a scenario where big wireless carriers such as AT&T, Verizon Wireless and others are facing acute shortage of spectrum, ABC’s unused spectrum is a boon to the Company. Much of the Company’s spectrum lies unused primarily because of undercapitalization which has kept the Company from rolling out its services. However, the recent deal with DEF and the public offering has brought funds into its pocket to offer its wireless services. Moreover, the fact that larger carriers cannot readily convert their spectrum to 4G services as the existing spectrum is utilized for 2G-3.5G services to the current users, is in favour of ABC. The wireless data usage is growing at a fast pace and ABC’s spectrum depth combined with the 4G wireless network is a perfect match. Competitive Landscape The broadband services market is highly competitive offering a wide range of services including 4G, cable, DSL, satellite and other emerging technologies at extremely competitive prices. Other than price competition, ABC faces challenges from companies with stronger financials, better developed network services, stronger supply chain and support systems. ABC primarily witnesses competition from cable and DSL operators, Wi-Fi, other wireless and 4G service providers, satellite providers and others. A number of players such as AT&T and Verizon Wireless have either begun to deploy or either have plans to deploy 4G services. These companies already have broader geographic coverage with their 2G and 3G networks. Stiff competition is also faced from peers like Time Warner Cable and Comcast which offer internet connectivity through modems or DSL. Competitive Advantage ABC’s unprecedented combination of its spectrum and 4G mobile broadband network technology gives it a competitive edge over its fellow players. Spectrum’s advantages are speed, which provides people with high speed 4G services; huge capacity, which allows movement of large data; and value, by supporting 4G devices at a competitive price. This assists the Company to offer higher mobile data bandwidth when compared to the bandwidth capacity of other wireless carriers in the US. ABC’s spectrum has helped it to continuously build its subscriber base. To sum it all, the Company is the only carrier that offers the network along with the spectrum depth to its subscribers. It clearly gives ABC a competitive edge over its rivals who have a shortage of the much need spectrum Financial Summary Valuation Forecasts Exhibits