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FEBRUARY 15, 2002 SPECIAL REPORT: CELL PHONES AT THE CROSSROADS "Other Companies Sneeze, and We Get the Flu" CEO Tim Donahue insists Nextel's fundamentals are sound and that its Direct Connect technology will be unmatched for years NXTL ), the company with the nifty "walkie-talkie" feature built into its cell phones and a customer base of more than 10 million, mainly business users. Growing concern about liquidity throughout the telecom sector has made investors lose confidence in wireless stocks -- especially Nextel. Over the last two years, the shares have steadily declined, from $80 to $5.80 in February. During that time, Nextel's total debt and other obligations have risen from about $9 billion to more than $16 billion. During the past year, the company's debt-to-equity ratio has nearly doubled, from 7.2 at the beginning of 2001 to nearly 14 at the end of September, according to the most recent company filing. Most analysts carry a hold rating on the stock and consider it a high-risk investment -- even at its current price. If business spending doesn't improve soon, many analysts believe that Nextel will be in trouble. Already, it carries a B2 or Ba rating on different debt issues from Moody's Investors Service, meaning that its bonds and preferred stock are considered low-grade. However, because of its focus on wireless data services for business, Nextel remains insulated from the consumer wireless pricing battle that's afflicting the five other national carriers: Sprint PCS, AT&T Wireless, VoiceStream, Verizon Wireless, and Cingular. Nextel's push-to-talk technology also gives it a distinct advantage in selling to corporations and small businesses. For that reason, it's considered a takeover candidate -- despite its heavy debt burden. Can Nextel negotiate its way through the telecom morass without defaulting on its debt? CEO Tim Donahue thinks so. While reining in debt remains one of the company's highest priorities, he isn't concerned about talk of a default. And while he's hoping for a speedy economic recovery, he says the environment hasn't harmed Nextel's business as much as it has that of many other wireless companies. Donahue also believes Nextel's "Direct Connect" push-to-talk technology will continue to give the company an edge, arguing that competitors won't be able to unveil a product in the near future that works as smoothly as Nextel's. On Feb. 11, BusinessWeek Online reporter David Shook asked Donahue how he sees the wireless market evolving -- and where Nextel fits into the picture. Here are edited excerpts from that conversation: Q: Clearly, investors are taking a dim view of wireless stocks. Why do you think there is so much pessimism right now? A: Investors are looking at the wireless market with a jaundiced eye. Many are nervous about whether the growth opportunities in wireless are as robust as I think they still are. We see the market as having five national players that, in a sense, are all in the swamp -- competing on price. We've remained out of that fight. Q: If your company doesn't target the consumer market and therefore isn't trying to undercut other companies on pricing, why has Nextel's stock fallen so hard? A: It's as if other companies sneeze, and we get the flu. I don't know why. Maybe our balance sheet is the concern. From a liquidity perspective, we're in good shape. We have roughly $3.5 billion in cash and a $1.5 billion bank line of credit if we need it. We expect $2.5 billion in cash flow in 2002, and our business plan is fully funded. So the liquidity issue is not what we're concerned with. What's more of a concern is the debt we carry. Obviously, we don't need to bring any more debt into the company. We're being very careful as we look at repayment that we have strong performance on the cash-flow line. We know that the debt issue plays into investors' minds. This is something Nextel will be addressing over the next 12 to 24 months. Q: When you look at all the costs this company must incur to keep its network running smoothly, to constantly upgrade the technology, and to add new data features, are there any costs that could become a concern for the company? A: When you look at our business plan and the ability to generate the level of EBITDA [earnings before interest, taxes, depreciation, and amortization] that our plan calls for, I don't see any expenses that jump out at me as a serious risk. As I look at the cost side of the business, the largest expense would be the network, and the second largest is acquiring customers. But I don't see any significant risk in either of those. Q: Let's talk about Direct Connect. It's the most powerful asset Nextel has because emergency workers, construction companies, UPS personnel, and thousands of other commercial workers love to be able to push a button on their phone for instantaneous connections with their partners and associates. Will Sprint and other carriers that have made attempts to integrate this technology into their services catch up to Nextel? A: Sprint is going ahead with its own product developed with the company Winphoria Networks. And Winphoria is a good little company, but it's a switching company. It's our view that no one knows this technology like we do. I don't care what anyone else in the industry is saying. There's no way you'll see a Direct Connect-like product that has the robust features that ours has and will satisfy the business customer the way our does. We're going to have nationwide Direct Connect by the end of the year. That's pretty powerful if you think about it. With these other companies' technology, there's a latency issue. Their direct connection takes something like six seconds to set up, and that's just unacceptable in our view. We don't see anything like Direct Connect for years from other companies. Q: Where do you see Nextel's biggest opportunity to grow? Are you worried at all about saturation of the wireless market from too many carriers all competing for a shrinking number of potential customers? A: We are not concerned with saturation. Today, 95% of our customers come from other carriers, so there's still a huge opportunity for us. We're fairly well represented in the Fortune 500 companies. And that's where our biggest opportunity still lies. Q: Still, with more people and businesses signed up to multiyear cell-phone contracts, Nextel and every other carrier is picking from a shrinking pool. Other carriers are just now starting to market to the business sector, as you've been doing for years. Doesn't that threaten your bread-and-butter business? A: When people talk about saturation, I say bring it on. We're picking most of our new customers from other companies, so it's the customer introduction to the Nextel product set that helps us get the $70 a month [subscriber fees] and yet maintain the low 2.2% churn rate [the monthly rate at which Nextel loses and replaces customers]. We have the highest revenue per user among the national digital wireless carriers and the lowest churn rate. That says something about the quality of the customers we're signing up. Q: You've said that your company hasn't been hit hard by the recession. Can you explain how and why that is? A: There's no question that this has been a very difficult environment for everyone. But over the last three quarters, we have met or exceeded our expectations. And we continue to see some very strong results this year. We've seen the January results, and we continue to perform extremely well. I think in the business world today, productivity-enhancing products are the ones companies will continue to pay for. That's what we bring to the party. So far, we haven't been so adversely affected by the economic conditions. I'm confident that will continue. Q: If companies are looking to buy only the smartest technologies, what specifically does Nextel have an advantage in selling to businesses besides Direct Connect? A: We continue to see very promising demand for data services. More and more CIOs [chief information officers] are getting comfortable with new wireless-data strategies, more comfortable with applications such as wireless e-mail. We've organized ourselves into different business verticals, and we're now addressing the needs of large corporations more effectively. Over the next 18 to 24 months, I expect to see a takeoff in data, as the speed and security of these applications are addressed. Right now, we have more than 1.7 million wireless data customers -- more than any other company and almost 20% of our subscriber base. Q: Looking ahead, how do you see this industry changing? There are six national cell-phone carriers. You're the one with the biggest focus on businesses. Is something bound to give in this crowded field? A: As I look across the marketplace, my sense is that it is not an industry that can support six national players. I think consolidation is inevitable. But we like where we stand. We think we're well positioned. And we think the sell-off in the industry has been overdone.  Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | FEBRUARY |
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