Download - M A Y 2 0 0 7 T E L E C O M S E C T O R : O V E R V I E W Presentation to FIN 824 (SPRING QUARTER) Marc Reitter Siddhesh Sankulkar T E L E C O M S E C

M A Y 2 0 0 7

T E L E C O M S E C T O R : O V E R V I E W

Presentation to FIN 824 (SPRING QUARTER)

Marc ReitterSiddhesh Sankulkar

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Agenda

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Sector Weights – SIM v S&P 500

Sector Overview

Telecom Sector Overview:

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Size & Composition 4

Sector Performance 5

Economic Analysis 6-10

Financial Analysis 11-14

Valuation Analysis 15-20

Domestic M&A Activity 21

Recommendation 22

S&P Telecom Sector S&P Telecom Sector

Sector overview – defined

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The Telecom sector is grouped into two primary segments:

Telecommunications Equipment Wireless, Satellite & Network

Telecommunications Services Cable & Satellite, Data Services, Wireless Communications

Telecom Industry Growth The worldwide telecom industry is in a strong growth mode, and

overall industry revenue is expected to climb to $1.3 Trillion in 2007.

Strong growth in wireless is leading the way as wireless service revenues are expected to grow at a compounded rate of nearly 10 percent over the next few years.

Source: Insight Research Corp. 2007 industry review

SIM overview: SIM overview:

Sector weights – SIM vs. S&P 500

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Current holdings:

Current holdings:

S&P 500 overview: S&P 500 overview:

SIM overweight Telecom by

3.43%

SIM overweight Telecom by

3.43%

YTD Return

-.62%

2.10%

2.85%

10.54%

-.79%

6.61%

.52%

8.59%

-3.96%

1.05%

7.98%

7.94%

6.80%

1.28%

15.61%

10.57%2.97%

21.54%

18.26%

7.06%

Consumer Discretionary

Consumer Staples

Energy

Utilities

Information Technology

Telecom

Industrials

Materials

Financials

Health Care

10.61%

9.36%

9.79%

3.67%

14.98%

3.20%

21.62%

12.14%

11.00%

3.63%

Consumer Discretionary

Consumer Staples

Energy

Utilities

Information Technology

Telecom

Industrials

Materials

Financials

Health Care

Size & composition Size & composition

Sector overview – company analysis

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Telecom defined within the S&P 500:

Current SIM holdings:

Source: Yahoo Finance & Bloomberg

Ticker Company Current Price Market Cap ($B) P/E YTD ReturnAT ALLTEL Corp. $64.18 $22.30 20.81 6.19%T AT&T Inc. $39.60 $248.20 21.08 13.31%CTL Century Telephone $48.77 $5.20 15.05 11.57%CZN Citizens Communications $15.55 $5.10 14.85 9.80%EQ Embarq Corporation $62.90 $8.80 11.08 20.71%Q Qwest Communications Int $9.51 $16.80 29.70 12.90%S Sprint Nextel Corp. $20.63 $59.60 44.83 9.24%VZ Verizon Communications $40.83 $110.10 17.71 11.84%WIN Windstream Corporation $14.80 $7.10 11.77 6.23%

Others:AMX America Movil $55.32 $92.31 23.35 23.11%DCM NTT DoCoMo Inc. $17.80 $76.22 18.37 12.10%TEF Telefonica SA $68.57 $110.89 12.91 7.61%

Ticker Company Current Price Market Cap ($B) P/E YTD ReturnAT ALLTEL Corp. $64.18 $22.30 20.81 6.19%T AT&T Inc. $39.60 $248.20 21.08 13.31%CTL Century Telephone $48.77 $5.20 15.05 11.57%CZN Citizens Communications $15.55 $5.10 14.85 9.80%EQ Embarq Corporation $62.90 $8.80 11.08 20.71%Q Qwest Communications Int $9.51 $16.80 29.70 12.90%S Sprint Nextel Corp. $20.63 $59.60 44.83 9.24%VZ Verizon Communications $40.83 $110.10 17.71 11.84%WIN Windstream Corporation $14.80 $7.10 11.77 6.23%

Others:AMX America Movil $55.32 $92.31 23.35 23.11%DCM NTT DoCoMo Inc. $17.80 $76.22 18.37 12.10%TEF Telefonica SA $68.57 $110.89 12.91 7.61%

Current Average Shares SIM Ticker Current SIM holdings Price unit cost owned weightAMX America Movil $55.32 $34.61 15,900 3.08%S Sprint Nextel Corp. $20.63 $21.01 14,600 1.25%WIN Windstream Corporation $14.80 $13.58 44,618 2.77%

Current Average Shares SIM Ticker Current SIM holdings Price unit cost owned weightAMX America Movil $55.32 $34.61 15,900 3.08%S Sprint Nextel Corp. $20.63 $21.01 14,600 1.25%WIN Windstream Corporation $14.80 $13.58 44,618 2.77%

Performance of S&P Telecom Services (SP50): Performance of S&P Telecom Services (SP50):

Sector overview – performance & strength

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Strength of S&P Telecom Services (SP50): Strength of S&P Telecom Services (SP50):

Sector Overview Economic Analysis

In 2006, the U.S telecommunications market grew at its fastest rate since 2000.

TIA states that the U.S Market grew 9.3% in 2006 to total $923 billion in revenue.

Projected revenue for the U.S Market in 2007 is at $1025 billion at 11.05%

Major drivers of high growth rates are expansion of wireless communication and broadband access.

Wireline is losing ground to wireless and VoIP

Telecom Sector Outlook is positive in the recent past and for the foreseeable future

Telecom Sector Outlook is positive in the recent past and for the foreseeable future

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Growth is expected in VoIP, as the broadband-based phone technology is forecast to make up 34% of all U.S residential landlines by 2010, up from just 10% in 2006.

Overall, the international market grew 12.1 percent in 2006. Middle East/Africa was the fastest growing region, expanding at 21.6%

By 2010, the global market is expected to reach $4.3 trillion in revenue, up from $3 trillion in 2006.

United States market is looking good but the real growth is overseas United States market is looking good but the real growth is overseas

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While growth in voice traffic continues to stimulate the wireless market, data and multimedia applications will drive wireless revenues in the future.

The number of broadband subscribers increased from fewer than 5 million in 2000 to nearly 57 million in 2006.

Dial-up subscribers fell to 35 million from a peak of 47 million in 2006.

With nearly 80% of all households already online and the majority of online households already having a broadband subscription, overall subscriber growth and broadband subscriber growth will necessarily slow.

‘Non-voice’ revenues on the rise ‘Non-voice’ revenues on the rise

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Sector growth is correlated with:

GDP (+)

Population Growth (+)

Unemployment Rate (-) Most pronounced

Wireline growth is more strongly correlated with above than wireless

Key Economic DriversKey Economic Drivers

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Key Economic Drivers – Unemployment Rate (-)Key Economic Drivers – Unemployment Rate (-)

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Sector Overview Financial Analysis

Income StatementS&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-WtdAs Reported Financials StockVal ®

FYE Dec Company Filings

2006 % Chg 2005 % Chg 2004 % Chg 2003 % Chg

Revenues ($ Mil) 48186.8 33 36114.4 0 36070.5 -10 40026.4 1

Cost of Goods & Services 19991.8 37 14559.2 2 14267.8 -10 15861.5 4

Gross Profit 28956.1 30 22203.2 -1 22404.0 -10 24811.4 0

S G & A Expense 13213.5 32 10006.9 -4 10379.3 -16 12421.9 5

R&D Expense

EBITDA 15675.6 31 11981.9 5 11414.4 -14 13275.2 38

Depreciation & Amortization 8576.3 26 6798.4 -4 7049.0 -13 8087.6 -4

EBIT 7099.3 37 5183.5 19 4365.4 -16 5187.6 319

Interest Expense 1746.4 13 1541.0 -8 1676.3 -19 2075.0 -7

Pre-Tax Income 5352.9 47 3642.5 35 2689.1 -14 3112.7

Taxes 1751.5 72 1016.3 22 830.2 -18 1011.5 124

Net Income Reported ($ Mil) 3945.1 21 3265.4 12 2923.8 -29 4111.9

Net Income Adjusted 4172.9 34 3121.3 15 2724.9 -19 3349.1 -15

EPS Reported 1.41 3 1.37 13 1.21 -32 1.78

EPS Adjusted 1.49 15 1.30 15 1.13 -22 1.44 -16

Shares Outstanding (Thou) 2799930 17 2401653 -1 2418956 0 2409361 0

Dividends Common (Per Shr) 0.86 -6 0.91 -12 1.03 -1 1.04 12

Dividends Preferred ($ Mil)

SP-50 Income Statement AnalysisSP-50 Income Statement Analysis

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SP-50 Cash Flow Statement AnalysisSP-50 Cash Flow Statement Analysis

Cash Flow AnalysisS&P TELECOM SERV. SECTOR COMP ADJ (SP-50) M-WtdAs Reported Financials StockVal ®

FYE Dec Company Filings

2006 % Chg 2005 % Chg 2004 % Chg 2003 % Chg 2002

FREE CASH FLOW

Net Cash From Operations 12643.1 14 11131.4 6 10478.3 -15 12363.2 -2 12624.5

Capital Expenditures 7962.6 28 6214.3 4 5948.6 -5 6284.4 -16 7516.0

Free Cash Flow 4680.5 -5 4917.1 9 4529.7 -25 6078.8 19 5108.5

Dividends Common ($ Mil) 2415.0 10 2194.6 -12 2501.3 0 2511.7 12 2241.3

Free Cash Flow After Dividends 2265.5 -17 2722.5 34 2028.4 -43 3567.0 24 2867.2

ADJUSTED CASH FLOW

Net Income Reported ($ Mil) 3945.1 21 3265.4 12 2923.8 -29 4111.9 -7001.6

Accounting Adjustment 227.8 -144.1 28 -198.8 74 -762.8 10955.2

Net Income Adjusted 4172.9 34 3121.3 15 2724.9 -19 3349.1 -15 3953.6

Depreciation & Amortization 8576.3 26 6798.4 -4 7049.0 -13 8087.6 -4 8382.4

Cash Flow Adjusted 12749.2 29 9919.7 1 9773.9 -15 11436.7 -7 12335.9

Capital Expenditures 7962.6 28 6214.3 4 5948.6 -5 6284.4 -16 7516.0

Free Cash Flow Adjusted 4786.6 29 3705.5 -3 3825.3 -26 5152.3 7 4819.9

Dividends Common ($ Mil) 2415.0 10 2194.6 -12 2501.3 0 2511.7 12 2241.3

Free Cash Flow Adjusted After Divs 2371.6 57 1510.9 14 1324.0 -50 2640.6 2 2578.6

CASH FLOW STATEMENT SUMMARY

Net Cash From Operations 12643.1 14 11131.4 6 10478.3 -15 12363.2 -2 12624.5

Net Cash From Investing -8671.3 -70 -5100.8 42 -8752.9 -60 -5483.9 13 -6321.9

Net Cash From Financing -3937.6 8 -4269.5 -195 -1447.8 81 -7757.0 -27 -6124.8

Other Cash Flows -431.3 48 -831.9 -35 -615.3 174.5 -72 632.7

Change In Cash & Equiv -397.2 929.1 -337.7 52 -703.2 810.4

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SP-50 Income Statement RatiosSP-50 Income Statement Ratios

SP-50 Cash Flow Statement RatiosSP-50 Cash Flow Statement Ratios

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SP-50 Prospective Growth and Margin DataSP-50 Prospective Growth and Margin Data

Prospective Growth & Margin Check StockVal ®

M-Wtd (SP-50)Price 30.827 04/27/07 Earnings Adjustments

Percent Change Actual Year Profit Momentum %

Quarter Revenue REV RPS EARN EPS EPS Ago Margin % SF REV EPS

Mar 05 9,105.5 1 3 0 2 0.30 0.29 7.8 -2 +1 +2

Jun 05 8,794.9 -3 0 21 25 0.35 0.28 9.2 -1 -3 +24

Sep 05 9,207.4 0 -1 23 22 0.36 0.29 9.4 -2 0 +21

Dec 05 10,238.6 12 2 27 17 0.34 0.29 8.7 -2 +12 +15

Mar 06 11,673.1 28 10 24 7 0.31 0.30 7.6 -3 +28 +6

Jun 06 12,039.7 37 12 20 -1 0.34 0.35 8.1 -3 +33 -1

Sep 06 12,315.5 34 16 23 7 0.38 0.36 8.7 -3 +29 +7

Dec 06 12,293.9 20 14 34 27 0.43 0.34 9.7 0 +18 +27

T4Q 48,322.2 29 13 26 10 1.46 8.5

Mar 07 E 48 49 0.47 0.31 +42

Jun 07 E 40 43 0.49 0.34 +37

Sep 07 E 31 32 0.50 0.38 +27

Dec 07 E 22 22 0.52 0.43 +20

F4Q E 34 35 1.98

Point-to-Point Growth Rates (%) Long-Term Growth Rate Estimates (%)

Years REV RPS EARN EPS Median Estimate 7.6%

1 29 13 26 10 Number of Estimates 10

3 6 1 6 1 Standard Deviation 3

5 3 0 -1 -4 Default GRE Estimate 5.6%

10 3 2 -1 -2 Analyst GRE Estimate 5.6%

15 4 2 3 2

20 4 3 3 2 Expected Report Date

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Sector Overview Valuation Analysis

2002 2003 2004 2005 2006 2007 2008

S&P TELECOM SERV. SECTOR COMP ADJ M-Wtd (SP-50)PRICE 30.83 DATE 04-27-2007PRICE 30.83 DATE 04-27-2007StockVal®

1313

1414

1616

1818

2020

2222

2424

2727

3030

33

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The Ohio State UniversityFisher College of Business

Price Change % Diff SP5

1-Day -0.57 -0.56

1-Week -1.68 -2.34

4-Weeks 5.53 0.50

QTD 5.00 -0.16

YTD 10.61 5.27

2006 20.46 6.84

2005 -13.23 -16.23

2004 10.34 1.34 FYE Dec 2006 EPS 1.46

First Call Data 2007 2008 2009

Mean Estimate 1.92 2.17 2.36Change +31% +13% +9%

High 2.11 2.44 2.65

Low 1.77 1.84 2.01

Total 28 27 9

# Up 12 11 5

# Down 3 3 2

House Estimate

PE Ratio 16.0 14.2 13.0

Revenues ($Mil) 48,322

Market Value ($Mil) 78,207

Shares Out (Mil) 2,537.0

Volume 60-Day Avg (Th) 14,282

Volume 60-Day Avg ($M) 440.3

Dividend Estimate 0.96

Payout Ratio 50%

Retention Rate 50%

Dividend Yield 3.12%

Data Page # 1

SP-50 Historical Sector Performance (5 Years)SP-50 Historical Sector Performance (5 Years)

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Price/Yr-Forward Earnings relative to S&P 500Price/Yr-Forward Earnings relative to S&P 500

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Price/EBITDA relative to S&P 500Price/EBITDA relative to S&P 500

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Price/Sales relative to S&P 500Price/Sales relative to S&P 500

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Price/Book Value relative to S&P 500Price/Book Value relative to S&P 500

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Price/Cash Flow Adjusted to S&P 500Price/Cash Flow Adjusted to S&P 500

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M&A activityA look at what is happening to the Industry in the US before we recommend

A look at what is happening to the Industry in the US before we recommend

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Sector Overview Recommendations

Hold current SIM overweight position of 3.43%

Divest holdings in Wireline companies which have no wireless component e.g. Windstream Corporation.

Invest more in US companies offering integrated telecom services i.e. wireless, wireline, broadband and video services. We see brightest prospects for the national carriers (AT&T, Sprint/Nextel, Verizon) which are able to market on a nationwide basis, offer nationwide calling plans, and carry most traffic on their own networks. They get to exploit both economies of scale and economies of scope.

Invest more in Wireless providers in emerging markets. General consensus of industry experts is that these providers will continue to realize double-digit subscriber and revenue growth in 2007, improving margins and profitability.

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Sector Overview Questions

Questions?

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Download - M A Y 2 0 0 7 T E L E C O M S E C T O R : O V E R V I E W Presentation to FIN 824 (SPRING QUARTER) Marc Reitter Siddhesh Sankulkar T E L E C O M S E C

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