Nextel Communications Inc.

/ (NXTL- NASDAQ) / $31.08

This report contains substantially new material. Subsequent edition will have new or revised material highlighted.

Reason for Report: Quarterly Results for 1Q05.

Overview

Nextel Communications (NXTL), a FORTUNE 200 company based in Reston, Virginia,is a leading provider of fully integrated wireless communications services and has built the largest guaranteed all-digital wireless network in the country covering thousands of communities across the United States. Today 95% of FORTUNE 500® Companies are Nextel customers. Nextel and Nextel Partners, Inc. currently serve 297 of the top 300 U.S. markets where approximately 261 million people live or work.

Nextel Communication (NXTL) also operates analog wireless networkswhich provide analog specialized mobile radio (SMR) services. The company's digital network was developed to replace traditional analog SMR systems with advance mobile communication systems using digital technology. The services are provided principally in metropolitan markets throughout the United States. Nextel also owns and operates wireless communication systems in Latin America, Asia and Canada and provides services in ten of the world's 25 largest cities.Its website is

The Sprint/Nextel merger is scheduled for a2H:05 close, perhaps as early as August. The combination after the ILEC spin-off will be the largest wireless pure-play and will have three major strengths:a strong balance sheet, strong growth and strong spectrum profile.

Fiscal Year ends December 31.

Key Positive Arguments / Key Negative Arguments
  • Nextel taking a number of steps to maintain growth rate and sustain position as the provider of choice for business users.
  • Merger process going well
  • Merger with Sprint creates strong wireless pure-play
  • Rich spectrum position a key asset
  • For 2005, the Company expects to generate $2 billion or more in unleveled free cash flow.
  • ARPU of $67 better than expected.
  • Data accounts for roughly 4% of the totalrevenue.
  • Churn of 1.5% in line with consensus and down from 1.7% last year. The care and retention efforts appear to be paying off with low churn (although Verizon’s is lower at 1.3%).
  • Boost(prepaid product) ARPU impressive relative to other prepaid operators at $41 versus $20-30.
/
  • Boost churn of 5% is above that of TracFone’s, the largest prepaid operator, which is running at 3.8%.
  • With the 60-day disconnection policy, prepaid churn could have upward pressure over time.
  • Customer care and retention, as well as $10 million of merger costs, added to expenses this quarter.
  • The $10 million in merger costs is expected to rise in the coming periods.
  • Sprint Nextel Merger complicated, could take years to achieve synergies
  • EBITDA 10% year-over-year growth is the weakest to date.
  • Capital requirements rising
  • Wireless industry growth could slow
  • Affiliate consolidation must be dealt with; could result in significant value dilution

Sales

NXTL Sales (in Millions) / 2004A / 1Q05A / 2Q05E / 2005E / 2006E
Zacks Consensus / $13368 / $3608 / $3723 / $15256 / $16694
Digest High / $13368 / $3608 / $3876 / $15893 / $17280
Digest Low / $13368 / $3608 / $3600 / $14800 / $16103
Digest Average / $13368 / $3608 / $3764 / $15297 / $16807

Consolidated revenues for the quarter were $3.6 billion (up 16% from 1Q04), driven by strong subscriber growth. Total subscriber adds were 810,000, consisting of Nextel subscribers net adds of 496,000 and Boost Mobile net adds of 314,000. The Company operates through two revenue segments: Services Revenue and Equipment Revenue.

Revenue Segments(Million) / 2004A / 1Q05A / 2Q05E / 2005E / 2006E
Services Revenue / $11925 / $3256 / $3389 / $13724 / $15175
Equipment Revenue / $1443 / $352 / $371 / $1496 / $1469
Total Revenue / $13368 / $3608 / $3764 / $15297 / $16807

The Company reported 1Q05 ARPU (based on service revenues) of $71, compared to $71 in 1Q04, while ARPU — Average Revenue Per User (based on subscriber revenues) slipped to $67 from $69 in 1Q04. Management noted thatdata accounted for nearly $3 in ARPU, which has increased from the $2 in 4Q04. In the current quarter, post paid subscribers averaged 820 minutes of use per month, compared to 790 in 4Q04. Churn improved to 1.5% from 1.7% in 1Q04 (and was flat sequentially). The Company noted the lifetime value per subscriber of $4,500 for the quarter (flat sequentially), exceeded the estimated lifetime revenue per subscriber for NXTL’s nearest competitor by 20%.

With regard to Boost, its prepaid product, the Company provided additional Boost metrics as promised. Boost ARPU was $41 (of which $2 was from data services) for the quarter, churn was 5.0, and average Boost subscriber minutes of use were 450 per month (with walkie-talkie traffic accounting for more than 70% of these minutes). The Company estimates the lifetime revenue per Boost customer is $800, and noted Boost EBITDA was slightly positive during 1Q05. One analyst (Deutsche) notes that these results show the impact Boost has on the overall base and confirms that it is much better than the average prepaid product. However he is concerned about its massive churn rate that must be curtailed if it is to become a high performing product.

For more details, please see NXTL.xls

Capital Structure, Cash Flow, Capex, Other

One analyst (RBC Cap.) notes, during 1Q05, Nextel added approximately 500 new cell sites, bringing total cell sites on air to over 20,200. The Company spent $693M on Capex and expects 2005 Capex to be front-end loaded. The analyst had modeled $450M of Capex 1Q05. The higher 1Q05 Capex spend includes upfront equipment purchases (i.e. one-half of base stations needed in 2005 and power generators).

Management is guiding toward 3,000 cell site additions in 2005. Separately, $86M was spent during 1Q05 toward 800MHz rebanding, and management expects to spend close to $900M during 2005.Themanagementmaintained its fullyear2005 Capex guidance of $2.6B. One analyst (Deutsche) expects that longer term Capex needs will be higher than the market currently expects due to the requirement o maintain two separate networks until 2008-2009 and the challenges of integrating CDMA and iDen products.

At the end of 1Q05, the Company had $8.57B of long-term debt, $110M of 9.25% zero-coupon preferred stock, and $2.46B of cashand equivalents, equating to $6.22B of net debt.

Based on 1Q05, the Company's leverage ratio (net debt to EBITDA) was 1.2x.During the quarter, the Company obtained a new credit facility that replaced its previous facility; the annual interest expense savingsis expected to be $30M. In addition, the Company issued $77M of 5.95% notes and $56M of 6.875% notes in exchange for $122Mof if 9.5% senior notes.

One analyst (RBC Cap.) estimates the Company's current cost of capital to be just below 6%. Including cash and equivalents and$500M of undrawn capacity under its credit facility, the Company has $3B of liquidity.

Margins

EBITDA margin came under some pressure during the quarter, slipping to 40.7% from 43.4% in 1Q04. The analysts believe margin contraction was attributable to the higher-than-expected sub growth, as well as the increasing contribution from the lower margin Boost product, which represented $161 million revenues in 1Q05. Going forward, the analysts are increasingly concerned over margin pressures as Boost continues to demonstrate strong growth representing an ever-increasing percentage of

consolidated revenues.

For more details, please see NXTL.xls.

Earnings per Share

NXTL EPS (in Millions) / 2004A / 1Q05A / 2Q05E / 2005E / 2006E
Zacks Consensus / $1.80 / $0.40 / $0.44 / $1.78 / $2.04
Digest High / $1.80 / $0.39 / $0.47 / $2.01 / $2.59
Digest Low / $1.80 / $0.39 / $0.40 / $1.64 / $1.84
Digest Average / $1.80 / $0.39 / $0.44 / $1.79 / $2.06

EPS was $0.39 for the first quarter of 2005 in comparison with $0.51 in the prior-year period. This year- over-year decline is due to a higher tax rate.

Nextel provided FY2005 EPS guidance of $1.75 per share (which assumes earnings are fully taxed at 39%). The analysts note that the EPS guidance excludes the impact of adopting SFAS 123 (stock-based compensation), which could impact EBITDA by $100 million in non-cash expense if implemented in July 2005.

The mix of above-average ARPU and margins when combined with deleveraging, continues to drive earnings notes one analyst (Deutsche). ARPU is 25% above the industry average and margin at 41% compares to industry average margins closer to 35%.

For more details, please see NXTL.xls.

Target Price/Valuation

Target prices for NXTL range from a low of $21 (MorganStanley; stock rated Underweight) to a high of $39 (R W. Baird; stock rated Outperform). Most analysts have based their calculations on discounted cash flow analysis. At the low end, the analyst (MorganStanley) appliesDCF analysis using WACC of8.7% to calculate the target price. The digest average target price is $32.35.

Rating Distribution
Positive / 45%
Neutral / 36%
Negative / 5%
Not Rated / 14%
Avg. Target Price / $32.35

For more details, please see NXTL.xls

Long-Term Growth

One analyst (Prudential) thinks the Sprint Nextel merger is going well. Management indicated that

they are actually ahead of schedule. The filings have been made and the Company is in the process of

finalizing the proxy statement. The next step is to gain shareholders approval, which should happen soon. The Companies are still hoping for a summer close, but the analyst believes September may be more realistic given the recent commissioner movement at the FCC.

The combined Company plans to maintain and invest in both the CDMA and IDEN networks for several

years. It does not expect to force migration to CDMA and is therefore developing new gateway technology and dual mode handsets to provide push to talk service between the networks. The Companies are also working on a PTT application for the EVDO revA (upgraded CDMA) network that subscribers will eventually be migrated to (probably 2008 timeframe). Once the migration is complete, NXTL believes they can use the IDEN network for specific applications and customer segments, and are

currently exploring several options.

One analyst (American Technology) points that growth remains strong, but at the low end of the market. Boost prepaid for NXTL is about 8.5% of total subscriptions (up 175% year over year), and leads the growth rate over postpaid. ARPU of $41 for Boost is higher than what the analyst believes mostwould have for a prepaid service, but ARPU for postpaid dropped to $67 from $69.

One analyst (MorganStanley) feels, while the synergy potential for the Sprint NXTL merger is real, it will take several years to fully realizethe faces added to the technological complexity. The analyst remains concerned that the coming quarters at the combined entity could show decelerating growth, and pressure on profitability and cash flow. Investors may feel like there is no particular urgency to own these or other merger stocks in the next several months until some of the potential catalysts move closer into view.

Most analysts feel the merger with Sprint makes sense, as the combinedentity will have the necessary scale to compete on an equal footing with the wireless industrygiants—Cingular Wireless (jointly owned by SBC and BellSouth) and Verizon Wireless (jointly owned byVerizon and Vodafone). The businesses should be complementary, since Nextel’s strength is in thebusiness market whereas Sprint has historically focused on the consumer market. In addition, thereshould be significant operational and capital spending synergies from the merger.

Key Events

July 20,2005: 2Q05earnings report.

Individual Analyst Opinions

POSITIVE RATINGS

Dresdner-Buy ($33 price target) (05/03/2005): NXTL performance is tied to Sprint through its all-share merger deal. The analyst continues to rely on its DCF analysis for the $33 target price and maintains Buy rating.

Bancof America-Buy ($36 price target) (04/27/05):The analyst continues to believe the Sprint deal is positive for both companies, and that both Sprint and NXTL are undervalued at current levels. The analyst’sBuy rating onNextel is premised on a bullish view of the merger. Combined, the analyst sees synergies, an accretive local access line spin, and an enhanced value for the wireless pure play all yielding upside.

Bear Stearns-Outperform ($34 price target) (05/18/2005): The analyst reiterateshis Outperform rating and a price target of $34.The analyst believes that the combination of Nextel and Sprint will produce

an outstanding pure-play wireless investment. Risks to the target include continued competition in the

industry as well as potential operational distraction from the Sprint merger.

Prudential-Overweight ($31 price target) (04/28/05): The analyst projects an Overweight rating. The valuation method the analyst uses to determine the price target is based on a discounted cash flow analysis. The analyst’s discounted cash flow (DCF) analysis assumes that NXTL will reach a terminal growth stage after 2010, with a terminal growth rate of 3.5% and a cost of capital of roughly 9%. A certain amount of merger related risk exists due to the pending deal with Sprint.

RBC Cap.-Outperform ($31 price target) (05/17/2005): The analyst believes due to deterioration in the operating environment, the Company's subscriber growth rate, pricing, or retention ratewill remain pressured. There is a possibility that the planned acquisition by Sprint fails to occur, though the analystfeel this to be unlikely. Future performance of NXTL shares will be based on aggregate performance of Sprintand Nextel until the merger closes. The analyst reiterates Outperform rating on NXTL believingthat FON shares are significantly undervalued.

R W.Baird- Outperform ($39 price target) (04/28/2005):The analyst believes the Sprint-Nextel entity should be well positioned relative to other big-cap telcos. The analyst maintains Outperform rating and $39 target price.

NEUTRAL RATINGS

AG Edwards-Hold (No price target) (04/28/05):Slower-than-expected industry growth, problems with network performance, intense price competition, weaker economic conditions, issues with the merger, and difficulties in managing the rebanding process, lead the analyst to come up with a Neutral rating on the NXTL stock.

American Technology-Hold (No price target) (04/28/05): The analyst maintainshis Hold since NXTL is in a merger agreement with Sprint (FON), which the analyst feels happens to be one of the best managed Companies, but just not large enough to lead the industry anymore.

Fulcrum-Neutral (No price target) (04/29/05): The analyst feels if the pending transaction with Sprint were not completed, Nextel would have delayed the rollout of its wireless data network and subjected its organization to the disruptions of a large transaction. As a result, the analyst is projecting a Neutral rating on NXTL stocks.

Legg Mason-Hold (No price target) (04/28/05):Analyst believes the stock is fairly valued at current levels.The analyst continues to expect best-of-class operating results from the Company in the nearterm. The analyst maintains the Hold rating on NXTL stock.

Deutsche Bank-Hold ($30 price target) (04/28/05):His $30 price target for NXTL shares is derived on a price-arbitragebasis in light of the announced exchange ratio for the pending merger with Sprint.

In light of the overall stability of 1Q05 results, the analyst maintains $30 price target on NXTL shares, premised on assumed closing of the Sprintmerger.

Friedman, Billings-Market Perform ($31 price target) (04/29/05):The analyst lowered the rating on NXTL to Market Perform, but maintainsthe price target of $31, believing that upsidepotential remains limited in light of the Sprint merger.

Smith Barney-Hold ($30 price target)(04/28/2005):Analyst rates the shares of Nextel Communications as Hold. Nextel has created an attractive return profile for its differentiated service platform by maintaining strong customer quality, improving its cost structure through a series of outsourcing programs, and reducing its financial leverage.

Wachovia-Outperform ($36.50 price target) (04/28/05):The analyst arrived at a valuation range of $35-$38 by applying a P/E multiple of 20x to 2005 EPS estimate ($35) and a DCF analysis ($38). Risks to the shares achieving the range include the introduction of substitute products from other carriers, disruption in the planned merger with Sprint, and increasing price competition. The analyst continues to favor the underlying fundamentals of the NXTL story and views the upcoming Sprint / Nextel merger positively.

NEGATIVE RATINGS

MorganStanley-Underweight ($21 price target) (04/29/2005):The analyst maintains Underweight rating on Nextel, believing that the combined entity could show decreasing growth and would have a negative impact on profitability and cash flow.