NEW YORK-Honesty may not have been the best policy for Cellular Technical Services Co., a Seattle-based provider of cellular fraud prevention systems.
If the securities analyst community has a mantra for the wireless sector, it might go something like this: “Don’t paint an overly rosy picture that sets investors up for disappointment.”
Using conservative accounting methods, the fraud management company announced year-end 1996 results Jan. 23 that did not include up to $7 million in revenue from its newly installed Blackbird Platforms because they hadn’t yet passed performance criteria set in customer contracts.
But this corporate candor apparently went unrewarded, and the company then saw its stock price bounce around. The share price has hit a 52-week high of $22.13, a 52-week low of $11.25, and closed Feb. 3 at $13.25.
In a letter Jan. 29 to shareholders, CTS Chief Executive Officer Stephen Katz attributed the “excessive volatility … in particular the aggressive selling that took place Jan. 28,” to an announcement the same day that Genesis Merchant Group, San Francisco, had changed its recommendation to hold from buy on the company’s stock, at least until mid-February.
Had the revenues in question been recognized rather than deferred, CTS’ revenues “would have exceeded our estimate by $1 (million) to $3 million,” William C. Watts, research analyst for Genesis said in his “hold” recommendation report. Recognition of that revenue “presumably” also would have brought CTS closer to Genesis’ estimates that the fraud prevention company would have earned $9 million to $10 million in fourth quarter revenues, and earnings per share of five cents to 10 cents, he said.
Instead, Cellular Technical Services estimated last quarter earnings of between $6 million and $7 million, or at least double the same period in 1995. For all of 1996, it anticipates revenues of $20 million, vs. $12.6 million during the prior year. However, CTS also said it anticipated a loss of 9 cents to 14 cents per share for the quarter, vs. a gain of two cents in fourth-quarter 1995; a loss of 29 cents to 34 cents per share for the year compared with no gain or loss per share during 1995.
By the end of last year, Cellular Technical Services said it had deployed its Blackbird and PreTect cellular fraud prevention systems in about 1,300 cell sites, “exceeding expectations for shipments by approximately 30 percent.” Some 600 of these were Blackbird platforms deployed during the last quarter, and this number represented a 60 percent increase compared with the third quarter.
Genesis said it attributed some of the fourth quarter losses by the company to “increased hiring and the installation of 1,300 units for the year, many more than we had expected.”
Because of increasing customer demand, CTS said it boosted its manufacturing capacity and was therefore able to produce 1,000 cell site units during the last quarter of 1996.
During the last six months of 1996, the company said its Blackbird Platform was deployed in at least 20 major United States cellular markets under contracts with carriers including: AirTouch Cellular, Ameritech Cellular Services, Bell Atlantic Nynex Mobile, GTE Mobilnet California and Cellular One.
“We’re pleased to have exceeded both our own and analyst expectations for shipping cell site units of the Blackbird Platforms during 1996,” Bob Dahut, president of CTS said. “Obviously, we would like to have been able to recognize more of the revenue associated with those shipments within calendar (year) 1996 and thereby have provided positive earnings for our shareholders. However, it is important to note that, because we’ve already expensed operating costs in the fourth quarter, the revenue we are deferring into 1997 carries strong gross profit margins, significantly above 50 percent.”
Watts’ report also said Genesis is uncertain whether CTS can meet its deployment targets for the first quarter of 1997. At the same time, he also said Genesis, “believes that the Blackbird product is a success commercially, and that our unit deployment targets of 3,000 cell sites for 1997 will in fact be met.”
Dahut said CTS is getting repeat orders from existing customers and “is making progress” on opportunities for new customers at home and abroad.
“We are unable to make an informed estimate of earnings for 1997 until the company has completed its re-budgeting process for the first quarter and finalized its revenues and earnings for 1996,” the Genesis report said. That process should be completed by mid-February, according to CTS executives.
