Nextel - NASDAQ.com

Communications Nextel
Nextel makes the right
Telecomms operator Nextel is focusing on high-margin business to stay
ahead of the competition, president and CEO Tim Donahue tells Paul Taylor.
14 NASDAQ MAR/APR 2003
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enables Nextel customers to use their handsets
like long-range ‘walkie-talkie’ radios as well as
to make regular cell phone calls.
Donahue, an industry veteran who joined
Nextel in 1996 and became CEO three years later,
is a long-time associate of wireless pioneer Craig
McCaw, who came to Nextel’s rescue with a $1.1
billion investment in 1995. Since then, Donahue
has helped Nextel outshine its larger rivals.
“Three years ago, we developed a strategy to
stay focused on business customers,” says
Donahue. “Direct Connect is the lure for these
high-value customers. With it, they can communicate internally at a fraction of the cost of a
phone call,” he adds. Since his arrival, Donahue
has increased the sales force, to sell more phones
and services to existing business customers.
Today, roughly 90 percent of Nextel’s
customer base are business customers. “Even in
this challenging climate, we continue to see great
p18
CEO Donahue: “By
every industry metric,
we are ahead of the
competition.”
Photography: Martin Simon
I
n the midst of the gloom of the battered U.S.
telecommunications sector, one wireless
telecomms network operator – Reston, Virginiabased Nextel (NASDAQ: NXTL) – stands out. By
offering high-margin business customers products
they can’t get anywhere else, Nextel is adding
customers – and making a profit.
Nextel was the fifth-largest U.S. wireless operator at the end of the third quarter of 2002 with 7.4
percent of the market, according to Merrill Lynch.
It is thriving while rivals stumble, thanks to a
two-pronged strategy: providing targeted products
to high-value business users in sectors such as
construction, financial services, retail, utilities
and the emergency services. And it has developed
a unique service, Direct Connect, to do this.
According to Tim Donahue, president and CEO
of Nextel, the Direct Connect technology gives
the company a huge advantage, as none of its
rivals have anything like it. Direct Connect
NASDAQ MAR/APR 2003 17
Graphics: Nigel Hawtin
Communications Nextel
opportunity for growth in the Fortune 1000, small
and mid-sized businesses, government and other
vertical industries, and the high-end individual
decision-maker,” says Donahue.
This customer set has helped make Nextel one
of the few bright spots in the telecomms sector, and
one of the few companies that is gaining market
share. “By every industry metric, we are ahead of
the competition,” claims Donahue.
While most other wireless telecomms network
operators are struggling to keep existing subscribers,
Nextel has steadily increased its U.S. subscriber
base. It added 480,000 subscribers in the third
quarter of 2002, to take the total to more than 10
million – “an important milestone”, says Donahue.
“Our customer base is growing thanks to Direct
Connect, as well as our ‘always-on’ packet data
network. We have demonstrated four consecutive
quarters of improving financial results, eliminated a sizeable portion of debt, and
sustained a subscriber turnover, or ‘churn’,
rate that’s among the lowest in the
industry,” he adds.
Nextel’s business customers are
among the most loyal in an industry
notable for high rates of churn – a
Left: Connecting
without calling – at
the press of a button,
Nextel’s Direct
Connect technology,
which is built into all
of its handsets,
enables subscribers to
reach other Nextel
users in a local Direct
Connect call area.
Like a walkie-talkie,
the phone can be held
away from the head.
measure of the number of customers leaving a
network. Nextel’s churn rate is 2 percent, compared
with the U.S. average of 2.7 percent, says Donahue.
This helps Nextel push down costs, a key element of
its strategy. “Nextel is improving its back-office
systems, scaling network expenditures, and keeping
network quality and customer satisfaction at high
levels while reducing churn,” says Donahue.
Advanced technology
At the heart of Nextel’s success is its technology.
Not only do Nextel customers have a phone and a
walkie-talkie in one, but they can use their handsets overseas on GSM (global system for mobiles)
networks and plug in to 2.5G-style, higher-speed
data services. These typically offer between 15,000
and 20,000 bits of information a second (BPS),
compared with 9,600BPS for older-style CDMA
(code division multiple access) and GSM networks.
New software is planned that will double the
voice capacity of Nextel’s existing network, and
compression technology has afforded a lift in data
rates to between 30BPS and 50BPS, both without
the need for massive capital expenditure.
These technical advantages have enabled Nextel
to carve out a lucrative niche in the mobile voice
and data market. As Donahue points out, Nextel is
“by far the largest provider of data services in the
U.S.”. Roughly 20 percent of its customers regularly
use Nextel’s wireless network for data, and more
than a third of its enterprise customers run at least
one data application over the Nextel network.
Customer take-up of these additional services
has allowed Nextel to steadily increase its average
revenue per subscriber (ARPU). Nextel collects an
average of $71 a month from each of its subscribers.
The figure for the U.S. wireless industry as a whole
is just $50, according to Merrill Lynch.
Those enterprise customers using the network’s
data capabilities have an even higher ARPU ($95
each per month) and a churn rate of less than 1
percent. The lifetime value of a Nextel customer,
says Donahue, is around $3,500, compared with an
average $2,200 for rival U.S. wireless carriers.
Donahue believes these figures reflect the
company’s focus on higher margin business
customers and the fact that for these customers, in
particular, “Nextel is very important”.
To further drive adoption among enterprise
customers, Nextel is launching enhanced services
such as GPS-enabled (global positioning system)
handsets, designed to be used by fleet dispatchers
and others in charge of mobile workforces.
“Dispatchers know the location of every truck at
all times,” says Donahue. “As a result, they can send
the driver better information – a new bill of lading,
for example, or a change in delivery schedules.” For
this kind of application, Nextel can charge $13-16 a
month per vehicle for fleets of 6,000-10,000 longhaul trucks, in addition to the voice service.
Direct Connect success
But while these services are popular with business
customers, it is Nextel’s Direct Connect service that
defines the company and sells it to customers such
as the Las Vegas-based MGM/Mirage hotel group
and General Motors. All Nextel handsets come with
a large button on the side – press it and you can
talk immediately to another Nextel user or a
defined group of co-workers.
No other U.S. operator at present has the technology to offer a comparable service. The cost and
complexity of developing one deters potential
rivals, says Donahue. Analyst Ben Abramovitz, of
Jefferies & Co., agrees. “Nextel remains insulated
[from competitors] as we continue to believe that a
competitive, commercially viable push-to-talk
[Direct Connect] product won’t be available for
some time from the CDMA operators,” he says.
Donahue intends to build on this advantage.
“We’ll continue to lead the industry with rational
pricing of our wireless service, price plan packages
and equipment subsidies,” he says. “Because we
deliver what no other company can, we’re able to
price our service to deliver greater value, while
giving our customers an obvious return on their
investment through greater productivity.”
The combination has worked well so far. Today
Nextel and Nextel Partners (NXTP), a separate but
associated company, serve 197 of the top 200 U.S.
markets where approximately 240 million people
live or work, the company says. Last year, U.S.
revenues totaled just over $7 billion with EBITDA of
$1.8 billion. In the third quarter of 2002 ending 30
September, Nextel recorded margins of 41 percent
and posted EBITDA of $878 million, compared with
$526 million a year earlier. For the full year, Nextel
has told analysts to expect EBITDA to top $3 billion.
“By all measures, 2002 was an extremely
successful year for Nextel,” says Donahue. “Not
only did we accomplish our goal to gain more than
1.9 million net new subscribers, but we expect to
generate at least $3.1 billion in operating cash flow
and also reduce capital expenditures by more than
20 percent over 2001 to under $1.9 billion.”
Nextel retired $2.6 billion in debt, convertibles
and preferred stocks by 30 September 2002, realizing around $235 million in annual savings from
avoided interest and dividend payments. By
focusing on margins, keeping a tight rein on capital
spending and operating expenses, Nextel has
improved its results at a time when most of its
Direct Connect: reaching across the U.S.
Nextel’s subscribers make more than 150
million Direct Connect calls every day using
the Direct Connect button on the side of
every Nextel wireless phone. Pressing the
button enables subscribers to reach other
Nextel customers within a local Direct
Connect calling area, which can extend for
hundreds of miles, in milliseconds without
placing a phone call. And at a fraction of the
cost of a regular cell phone call.
Nextel is able to offer Direct Connect
because its all-digital network was built
around Motorola’s integrated Digital
Enhanced Network (iDEN) wireless technology
– the first to combine enhanced digital
cellular, two-way radio and text/numeric
paging in one phone. This packet-based
technology was launched in Chicago in
September 1996, a few months after Nextel
placed a $100 million order with Motorola for
iDEN equipment. By the end of 1996, Nextel
had made available the service in Detroit, Las
Vegas, Denver, Boston and Atlanta. Today
Nextel and Nextel Partners serve 240 million
people in 197 of the top 200 U.S. markets.
Starwood Hotels and Resorts Worldwide
uses Nextel’s Direct Connect and two-way
messaging services on more than 2,000
handsets for communication across North
America. Nextel and Starwood are now
partners in providing wireless data
applications for the hospitality industry.
At Nestle’s R&D facilities in Marysville,
Ohio, a team developing coffee, ice cream
and confections uses Direct Connect to keep
in touch as it’s cheap, quick and efficient.
And Tennessee’s Shelby County Sheriff’s
office uses Direct Connect for its
communications and Nextel’s wireless web
and Java-enabled handsets to provide secure,
real-time mobile access to data in state and
local law enforcement databases, such as
arrest records and vehicle registrations.
This year, Nextel is launching Nationwide
Direct Connect, which will allow customers to
communicate across the country. Scheduled
for completion by mid-2003, the year-long
roll-out began in the fourth quarter of 2002,
with phase one offered in Nextel’s New York
and Boston markets.
Nextel’s services provide multiple users with direct, instant and secure all-digital communication.
Instead of dialing a number, the
Direct Connect user simply presses
a button on the side of the phone
and connects to another user as if
they were using a walkie-talkie radio.
The Direct Connect call is
processed on the Nextel network
in milliseconds and sent through
to one or more recipients, who
can be hundreds of miles away.
“We’ll continue to
lead the industry
with rational
pricing of our
wireless service,
price plan packages
and equipment
subsidies”
CEO Tim Donahue
Users can use the phone like
a walkie-talkie rather than a
cell phone, allowing them to
hold the handset away from
the ear and head.
rivals are struggling. The company turned earnings
positive in the second quarter this year and expects
to have positive free cash flow in early 2004 or
sooner, say senior Nextel executives.
This looks good to analysts. According to Peter
Friedland of WR Hambrecht: “Nextel’s strong results
provide evidence of its ability to scale to positive free
cash flow, while its focus on swapping out debt and
preferred stocks for common equity is resulting in a
vastly improved capital structure and balance sheet.”
All of this makes Donahue confident about the
outlook for this year. “All our indications are
pointing to achieving positive free cash flow in
2003. We’ll do this by maintaining our focus of
attracting and keeping the most valuable customers
in the wireless industry, while at the same time
streamlining our cost structure.” N
Paul Taylor is based in New York and writes regularly for the
Financial Times.
www.nextel.com
NASDAQ MAR/APR 2003 19