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Date Posted: 16:13:04 01/19/00 Wed
Author: warren
Subject: Hi everyone,here's some info on CLECs...

From the Bull Market Wireless Investor...

COMMENTARY

While the blockbuster AOL Time Warner deal is hogging the media spotlight,
we're going to start our review of specific industry segments in the
wireless industry with the Competitive Local Exchange Carriers (CLECs)
where one of our favorite companies, Nextlink (NXLK), is also making
merger headlines with its $2.9 billion acquisition of DSL provider
Concentric Networks (CNCX) (see story below).

As many of you know, CLECs compete with the Regional Bell Operating
Companies (RBOCs) by offering local, long distance, data, and Internet
access to end users using fixed wireless. With a modern infrastructure
and lower operating costs than RBOCs, CLECs have caught Wall Street's eye
enough to send the overall group soaring up 150% in 1999. Despite good
stock market gains though, CLECs have been more promise than reality
though, as they have not made too much actual progress against the
incumbent RBOCs. However, the year 2000, the year when content will
finally hit the broadband pipes, should firmly put the CLECs at the
forefront of the data communications revolution. Here's why.

CLECs are in a sweet spot of the communications revolution for two
reasons. One, what they sell, bandwidth to the end user, is in high
demand as Internet traffic growth is still multiplying exponentially --
some say it doubles every 100 days. Two, their primary competition is the
RBOCs who have been weaned on monopoly profits which they refuse to
cannibalize as today's market demands. With revenue increasing from both
Internet growth and from market share gained from RBOCs, successful CLECs
can realistically attain 5 year revenue growth exceeding 50% per year
(market research firm IDC forecasts that the U.S. market for services
delivered via fixed wireless technologies will balloon from $767 million
in 1999 to $7.4 billion by 2003). With this type of growth possible,
there is still significant upside potential available for the right CLEC.

Here's what to look for with CLECs in 2000. First and foremost, look for
the market turning to single source vendors for local, long distance, and
Internet data services. This will lead to increased market penetration
for CLECs which, hopefully, will result in actual earnings. CLECs have a
proven revenue model and, with actual earnings, the valuation methodology
will change from multiples of revenue to multiples of earnings (you gotta
have "E" to have a PE ratio). If business penetration levels increase to
the 9-11% level that we expect in 2000, and Internet data traffic
continues its exponential rise, we expect to see the more successful CLECs
sporting some pretty high forward PE ratios with rising earnings
multiples. They'll be deserving of it.

Second, look for consolidation with local Internet Service Providers
(already, the lines between and ISP and a CLEC are rather fuzzy) and
partnerships with other CLECs and backbone carriers. Given the valuable
last mile links provided by many CLECs, they may be attractive acquisition
candidates for many of the backbone carriers as well as other CLECs
seeking a national footprint.

Risks for CLECs are essentially management ones. While some CLECs seem to
be taking a "build it and they will come" approach, we think more is
needed. For the masses to cut their ties with the comfortable old RBOCs,
both a sales force and good customer service and back office support are
needed. Financing issues and cost controls on infrastructure build-out
are also key. However, in general, these risks are company specific risks,
not industry wide ones.

As you know, we think the best bets in this space are Nextlink (NXLK, $85)
and Winstar (WCII, $79). Nextlink, headed by wireless pioneer Craig
McCaw, is the Blue Chip CLEC as it offers a variety of wireless and fiber
technologies and has entered into some great alliances with other telecom
companies. Winstar has accumulated a huge inventory of wireless broadband
capacity in the 38GHz spectrum. If 38GHz spectrum becomes the wireless
broadband vehicle of choice which we think it will, Winstar wins big.
While not in our portfolio, for those interested in a pure play in up
spectrum wireless, Teligent (TGNT, $66) is well worth a look.

While management performance will be critical, a CLEC with a good sales
force and back office should be able to offer better services than most
RBOCs at roughly 2/3 the price. Pretty nifty trick. One well worth
investing in.

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