Another Research Capital ReportJUST OUT... A MINI REPORT BEFORE THE REAL ONE IS OUT SOON...
4GNT First to Implement Wi-LAN’s Network Living Concept
HIGHLIGHTS
• Wi-LAN receives its largest purchase agreement to date from Dallas based start-up 4G Network Technologies (4GNT). The initial 18-month US$31 million purchase agreement is for 2.4GHz Hopper Plus Ethernet Bridges and 5GHz I.WiLL products. Additional purchases of US$1.4 billion are forecasted to the end of 2004.
• 4GNT expects to leapfrog the market for portable broadband services by three years. Envisioned network is faster than speeds of future 3G networks.
• The names of major wireless infrastructure companies backing 4GNT financially should be announced within a month. First strategic partner/customer(s)expected to be signed within three months.
• A full Wi-LAN report will be issued in the coming weeks. Our target price is under review pending the release of this report.
Per Share Data
Target Price (one year): Under Review
Projected Return: N/A
Year End: October
(Revenue figures in ‘000s)
1998A 1999A 2000E* 2001E*
FY Rev $5,768 $6,062 $87,000 $202,000
FY EPS -0.36 -0.24 -0.52 -0.42
Market Cap. (fd): $987.4M
THE DEAL
Wi-LAN and privately held start-up 4G Network Technologies (4GNT) announced a US$31 Million purchase agreement on June 7, 2000. The US$31 million is part of a longer five-year agreement to build a 4 th Generation Cellular Network in the U.S. and other countries. The initial order will cover Wi-LAN's Hopper Plus Ethernet Bridges and new I.WiLL shipments - these orders are US$2 million in 2000 and US$28 million in 2001. Future orders are forecasted at US$203 million in 2002, US$502 million in 2003 and US $698 million in 2004. Wi-LAN also owns a 10% equity stake in 4GNT. 4GNT feels that this announcement may have surprised the market. Phillip Barber, 4GNT's CEO, feels the Company is about three years ahead of the market. Indeed, the throughput speeds promised by 4GNT exceed future 3G offerings. If 4GNT’s vision unfolds as expected, it may leapfrog many of the advantages of 3G technologies. Upon our visit to Supercomm2000, we feel it has become evident that many telecom players also feel 3G cellular technologies will be “too little, too late” - or as Barber puts it, +too expensive, too late+.
4GNT, THE COMPANY
4G Network Technologies, headquartered in Dallas, Texas was created to facilitate, design, deploy, and operate a highly advanced wireless network for delivering convergent broadband services domestically and internationally. Although 4G Network was just formed as a legal entity last November, CEO Phillip Barber has been in discussions with Wi-LAN for about two and a half years. In that time, Barber's vision for future wireless networks has become increasingly synerginistic with Wi-LAN's Network Living concept. Currently, 4GNT has about 12 employees and no revenue. 4GNT is in the final stages of securing US$42 million financing from industry partners. While not disclosing the individual companies, CEO Phillip Barber assured us, +You will definitely recognize the industry names. They are not VCs+. Although Wi-LAN was
provided a 10% equity stake in the Company as a strategic partner, it is not contributing any material amount to this financing.
4GNT's business model is to become a Carrier's “Carrier”. Essentially, 4GNT plans to build its networks under a model similar to Qwest (NYSE:Q) and Level 3 Communications (NASD:LVLT). 4GNT will build and operate the networks and obtain private branding through indirect distribution with strategic partners. The Company expects to announce initial telecom partner(s) within three months. 4GNT is pursuing traditional telecom customers like Southern Bell (NYSE:BLS), GTE (NYSE:GTE), SBC (NYSE:SBC), and MCI Worldcom (NASD:WCOM). Traditional telecom companies will not want to share the network amongst their telecom competitors but may share networks with non-traditional competition.
Thus, 4GNT will also pursue non-telco partners like ISPs, utilities, financial services and computing companies. 4GNT envisions a hypergrowth consumer model, whereby consumers get plug and play functionality and complete coverage with service provisions and billing provided by established carriers or other suppliers. Phillip Barber and his team provide some noteworthy U.S. carrier experience to 4GNT. Barber's background includes previous work experience at ProNet, at the time the world's 5 th largest paging company. During his tenure, Barber was in charge of the division that grew the subscriber base from 120 thousand users in 12 cities to 1.5 million in 100 cities in 24 months. Barber also drove the merger activity overseeing 23 acquisitions. Most of the current staff at 4GNT have followed Barber from his ProNet days. We feel this U.S. carrier experience should be beneficial for both 4GNT and Wi-LAN.
TECHNICAL
4GNT’s network design is a fully scalable, cellular-format ubiquitous local loop network utilizing Wi-LAN’s patented spread spectrum technologies. This local loop is integrated with high-bandwidth backhaul and all packet-based backbone, transported through SONET fiber for regional, national and inernational connectivity. The network also plans to offer advanced wireless IP telephony including integrated voice, data and video phones. Boasting initial speeds of 30 Mbps, high-speed will be a big differentiator for 4GNT, particularly for portable applications. This makes 4GNT’s network 15 times faster than future 3G-PCS or DSL, 20 times faster than Cable Modem, 75 times faster than Satellite, over 225 times faster than an ISDN line and over 500 times faster than a 56Kbps modem. 4GNT will work to ensure that no end user gets less than 768 kbps. The monthly price level for such a service is expected to be about US$40 /mo. Additional levels of burstable throughput of 2Mbps and higher may also be purchased at incremental cost. Portable wireless modems are expected to retail for less than US$300. For fixed multipoint commercial installations, industrial grade integrated transceiver assemblies are approximately $5,000 each, with monthly service near $1,500.
4GNT can obtain speeds like this due to use of Wi-LAN's W-OFDM technology. Furthermore, the network will be initially deployed over 5GHz U-NII bands that provide more bandwidth and are far less crowded than the lower license-exempt bands. The use of 30 to 40 channels will eliminate most potential interference. However, there will still be some challenges for 4GNT. While OFDM is recognized as providing the best bandwidth efficiency it comes at a cost.
Processing OFDM-based signals requires far more power than traditional spread spectrum technologies. As a result, battery life suffers. Long battery life is key for successful mobile solutions. Moreover, the PCMCIA transceiver modems needed for notebooks and PDAs have inherent limits on power consumption. The Company told us it has reviewed Wi-LAN's roadmap and is satisfied this power issue will be largely resolved with the 2 nd generation equipment announced at Supercomm2000. The Company will negotiate with individual tower companies to share tower space with PCS companies. Tower companies consider companies like 4GNT “marginal tenants”. A marginal tenant is one that does not require many of the additional services PCS equipment need like air-conditioning. As a result, 4GNT expects shared space on these towers to cost far less than half price of PCS companies. (PCS companies typically pay about US$1,500/mo per tower).
In many ways, the portable aspect of 4GNT’s network is similar to Metricom's (NASD: MCOM) Ricochet network. Metricom designs, provisions, and operates digital networks and services for mobile users offering an always-on, high-speed, secure solution. Ricochet is currently available in three cities with speeds up to 28.8 kbps. This network is currently being upgraded to 128 kbps with planned coverage in 21 U.S markets. Unfortunately, Metricom operates in the crowded and small 902-928 MHz band limiting performance. Compared to the envisioned 4GNT network, Ricochet radios are deployed more densely increasing the cost of both infrastructure and ongoing maintenance. If 4GNT is successful, we feel it could quickly marginalize Ricochet’s slower network. Why buy a wireless modem from Metricom at 128kbps when you can get a plug-and-play 768kbps+ solution for roughly the same price from a well-established vendor like MCI Worldcom (a potential strategic partner of 4GNT)?
ROLLOUT PLANS
4GNT plans initial rollout this fall in Forth Worth, Dallas. This is the site of numerous fixed broadband trials including MCI Worldcom's MMDS and AT&T's Project Angel. Forth Worth is ideally suited for wireless trials because it is topographically featureless (flat) and enjoys a sizable population of about 2.4 million. In addition, 4G will likely place some +sticks+ in selected markets like Los Angeles, San Francisco, and New York to service individual customers in the near-term. 4GNT ultimately plans rapid nationwide deployment by targeting the top 60 Metropolitan Statistical Areas in the U.S. When complete, 4GNT will have a network footprint covering approximately 65% of all POPs in the 48 contiguous states, or well in excess of 150M people. 4GNT also has worldwide plans and will purse international markets with joint venture partners. The markets that appear most interesting due to high wireless penetration rates and ease of regulatory environment are Europe and Japan. 4GNT plans to enter these markets soon after beginning the US build-out.
We feel the earliest 4GNT could enter these markets is 2002. 4GNT expects to be cash flow positive by the end of 2001. As a result, many options should be available when additional capital expenditures are needed for the second phase rollout. 4GNT anticipates obtaining additional capital from either an IPO, the current round of equity partners, debt financing or some combination thereof. Approximately 95% of the money raised will be used for equipment so debt financing could become a suitable option. In an industry where a debt leverage ratio of over four to one is common, 4GNT should be able to easily obtain debt financing if cash flow projections prove correct.
SUMMARY
This US$31 million purchase agreement is the largest to date for Wi-LAN. Moreover, it marks the Company's first significant foray into the lucrative North American market. Despite 4GNT being a startup, we believe the $31 million order is solid due to the soon-to-be-completed US$42 million financing. The revenue forecast thereafter should be highly discounted until 4GNT demonstrates successful execution of the first phase of this contract. Nevertheless, 4GNT potentially represents a very lucrative opportunity for Wi-LAN - from both an ownership and supplier perspective. Wi-LAN’s 10% equity position could provide very attractive upside if 4GNT becomes even a fraction as successful as some other Carrier’s “Carriers” like Qwest and Level 3.
We feel the market may be disappointed that Wi-LAN did not sign a deal with a large recognizable telco. In one sense, we agree. A market leader’s endorsement would provide enormous credibility to Wi-LAN’s business model. However, we also recognize that incumbent industry leaders do not usually spearhead potentially disruptive technologies. Those companies have much to lose by disrupting the status quo and gain little by displacing their current technologies. We feel it is almost inevitable that this type of network will be designed by risk taking startups. Besides, without deploying major capital resources, telecom companies can still participate in this opportunity with virtually no downside risk by becoming an early strategic partner of 4GNT. Once some strategic partnerships are announced in a few months (as indicated by 4GNT) investors should see the endorsements they are seeking.
We view this contract very positively and believe that 4GNT has the potential to deploy the most advanced broadband wireless network in the world using Wi-LAN’s technology. As 4GNT secures its financing, consummates partnership agreements and launches trials over the next few months we see these events having a positive effect on Wi-LAN’s stock.