New Pricing Gains Traction; Sales Hiring Slower
THINK ACTION:
On December 4, Towerstream began a limited offering of its mid-capacity service for $1,000 per month. We believe the new simplified pricing, enables even inexperienced sales agents to close new business, thereby, driving productivity. We believe the sales staff, while up from third quarter's 58, is short of our year-end 2007 target of 106. As a result, we are reducing our expectations of 2008 revenues from $15.9M to $14.7M, with EPS dropping slightly from ($0.11) to ($0.12). We are establishing new 2009 estimates at $41.2M and ($0.22) with breakeven set for 4Q09. We maintain our Buy rating and $5 target.
KEY POINTS:
We believe that trained sales staff and sales productivity are the key metrics for Towerstream. We estimate that year-end sales staff was 90-95, versus the expected 106. Compensating for this softness was a radically new pricing plan, centered on the 4"8 Mbps "mid-cap" service, now available for $1,000 monthly with a 24 month contract, previously $1,650/month.
As previously reported, the pricing trial was remarkably effective. We now believe that the broader rollout maintained that momentum right through the holiday season. Between new customers and upgrades of lower-speed customers, Towerstream may have added 100 contracts (60-70 of which are new customers) during December. While installations can still take a couple of weeks for more complex orders, we understand that added installation resources may already be reducing the order-to-install interval.
Towerstream's participation in the 700 MHz auction has been a lively subject since it appeared on the "qualified" list on December 18.
Despite speculation that it could get into mobile services and even into consumer services, we believe that Towerstream will bid for more spectrum to continue providing business-class ISP services through its various wireless facilities. With greater capacity to provide its services, we believe Towerstream will continue to innovate with a variety of services, business models, price points, etc. The opportunity to provide building-wide ISP services is merely one of these more likely models.
We believe sales agents are the harbinger of Towerstream's future revenues. In our opinion, a simplified TWER revenue model is a function of the number of trained sales agents and their productivity building a base of customers who contribute revenues every month, ideally for a very long time. In the case of TWER, we believe these revenues are highly profitable, with marginal profitability near 80%.
Our new estimates for 2008 and 2009 are $14.7M/($0.12) and $41.2M/($0.22). We anticipate Towerstream will ramp its markets from 8 to 20 and its sales force to 275 agents by 2009. Our $5 price target is based on a 5x EV/EBITDA multiple on projected 2011 EBITDA of $71M, discounted at 20% to 2008. We maintain our Buy rating.
RISKS TO PRICE TARGET:
We note the competitive landscape for communication services is intense and includes pressure from entities that have longer operating histories than Towerstream and that are better capitalized. Multiple factors could create hurdles for expansion including competition from incumbents to general business conditions. If the market conditions change, or if the company does not meet its expectation in performance, Towerstream may not be able to raise capital for operations and expansion needs. As with most developmental stage companies, the biggest risk is a failure of the business to reach its potential. Causes of such failure in TWER are most likely due to failure to build its sales force, to secure attractive base station sites, to retain and attract company leadership, and to manage the logistics of expansion to additional facilities.
COMPANY DESCRIPTION:
Towerstream provides fixed wireless broadband services to commercial users based on monthly subscriptions. Towerstream establishes proprietary wireless networks in each market by installing antennae on towers, rooftops or other structures to transmit its wireless signals.
Services are provided to small, medium, and large businesses.
