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PAGING NEEDS TO CLOSE TECHNOLOGY AND FINANCIAL CREDIBILITY GAPS

NEW YORK-Paging, a veteran wireless player, has to go back to the trenches and prove itself anew to the investment community.

The “credibility gap” has three components, Sharon Armbrust, senior analyst for Paul Kagan Associates Inc., Carmel, Calif., said last week-technology, operations and finance.

In the technology arena, there has been a once bitten, twice shy sentiment among investors since late 1995 when the launch of SkyTel 2-Way messaging service by Mobile Telecommunication Technologies Corp. “didn’t meet expectations,” she said. “The skittishness of the market about VoiceNow, almost before (Paging Network Inc.’s) VoiceNow (voice paging) was out of the box, is indicative of the fear of (paging’s) dependence on future services and technologies.”

On the operations side, investors were given pause by MobileMedia Corp.’s bankruptcy filing, which revealed that “consolidations can cost more and posed more problems” than anticipated.

With respect to financial considerations, there is concern looking forward that, despite subscriber growth rates, revenues and cash flow per subscriber will continue to decline.

“Is all the bad news out?” Armbrust asked paging and investment banking executives at a Kagan Seminars Inc. conference on Wireless Telecom Values and Finance.

“The messaging industry will emerge and someone will deliver on the promise of narrowband PCS (personal communications services), causing a re-establishment of faith,” said John Stupka, president of Mtel, Jackson, Miss. “Some companies will position themselves to be truly messaging companies; it will happen in fits and starts … It will take time and will be like a roller coaster, but if you don’t believe in messaging, then you don’t believe in e-mail or the Internet.”

Messaging will emerge as a separate and intermediate category, Stupka said, between cellular and broadband PCS, which provide real-time voice communications and inefficient spectrum use, and one-way paging, which is “in time,” uses spectrum efficiently but doesn’t confirm message receipt or allow response. Messaging promises in-time communications, storage and delivery of messages, receipt confirmation, automatic location of the intended recipient to maximize spectrum utilization and response capabilities.

“I don’t know that you’ve given me any short-term comfort as an Mtel stockholder, but I see the light,” Armbrust commented in response to Stupka’s remarks.

Paging companies need to demonstrate more accurate benchmarks by which industry analysts can evaluate them, said Kenneth Sanders, chief financial officer of Paging Network Inc., Plano, Texas.

“The industry has been on this drug called net gains in recent years, but the market is telling us that operating cash flow and margins aren’t good enough; it’s free cash flow after debt service and capital expenditures,” Sanders said. “We are well on our way to being cash flow positive, i.e., having cash flow equal capital expenditures, for the first time in our history.”

While VoiceNow messaging is getting and giving good reception as it is rolled out, Sanders also stressed that PageNet’s one-way business, especially alphanumeric paging, “is healthy and getting stronger every day.”

For a look at the future of one-way paging, John Beletic, president and chief executive officer of PageMart Wireless Inc., Dallas, offered a demographics explanation. “Consider this. Every year, there are 4 million more 18-year-olds.” he said. “The growth we’ll see in this industry will be really exciting.”

Like PageNet, PageMart is a large holder of narrowband PCS licenses. Beletic said PageMart is waiting for PageNet to prove VoiceNow before PageMart emulates its strategy.

Despite industry executives’ optimistic outlook, it will take awhile for investors to overcome their realistic concerns about paging, said Mark Roberts, principal for telecommunications services at Montgomery Securities, San Francisco.

“Today, with the high leverage of companies, there’s not a lot of consolidation that can be done; if Wall Street is closed to capital, then there’s financial risk,” Roberts said.

During the next one to two years, however, he predicted, “another round of industry consolidation, with some of the problems of MobileMedia, as a number of smaller players look for a fire exit.”

Additionally, Roberts said he believed that American paging companies can and should take advantage of the revenue potential promised by machine-to-machine communications and opportunities for carriers in foreign countries.

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