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STOCKS CLAMOR FOR WALL STREET FAVOR WITH CONSERVATIVE APPROACH

Belt-tightening, steady growth of one-way services and advances in two-way and voice paging are winning the paging sector renewed interest on Wall Street.

“I think there are people in the investment community beginning to kick the tires,” stated Jeanine Oburchay, paging analyst at Bear Stearns & Co. Inc., New York. “Few of those have stepped up to the plate yet, but I think that’s about to change.”

Free cash flow

Across the board, paging stocks are down dramatically since 1995.

“The market has been putting pressure on the industry to produce free cash flow,” continued Oburchay. A few years ago, a carriers’ course was to grow subscriber bases, spending money on infrastructure and pagers and marketing services to be extremely competitive, said Oburchay. Today, there is greater concentration on profitability, tapering spending and increasing revenue per unit.”

“Over the last three months, as capital has been constrained by paging companies, we have been seeing more responsible behavior in terms of only taking on business that produces shareholder value,” said John Beletic, president and chief executive officer of PageMart Wireless Inc.

Several carriers aim to generate true free cash flow in 1998. For the first quarter 1997, some operators are reporting free cash flow before interest expense, an “indication a company is moving toward profitability,” said Beletic. “This wasn’t happening a few years ago.”

Free cash flow before interest expense amounts to EBITDA (earnings before interest, taxes, depreciation and amortization) less capital expenditures and before interest expense. True free cash flow is EBITDA less capital expense and interest expense.

“We have positive net income and free cash flow,” said Charlie Jackson, president of AirTouch Paging. “If other paging carriers focused more on profitability perhaps Wall Street would respond favorably.”

Oburchay said sequential growth in service revenues, from quarter to quarter, also is a current measure of a company’s value. She expects service prices to firm up, capital expenses to decline and carriers to begin generating free cash flow.

ProNet Inc. and Arch Communications Group Inc. reported free cash flow before interest expense during the first quarter. Paging Network Inc. expects to reach that target by the end of the year.

Several operators have shifted marketing efforts to increase pager sales, as opposed to leasing units, because a leased unit is still carried as a capital expense. But this is a balancing act. Sales relieve capital expenses, but leased units can generate more recurring revenue and allow carriers to upgrade customers to pagers and services that produce greater revenue.

“Leasing makes sense when the return is better than the carrying cost,” said Jenny Haynes, PageNet’s vice president of investor and public relations.

“We make a very good return on our leased business. Some companies, because of their inability to get capital, have been unable to lease units. The ability to lease means we have a very good total package to offer to government organizations and businesses that would prefer to lease their units. To get into those organizations you are getting into companies and concerns that pay well, pay on time and have a lower disconnect rate than consumers.”

However, “for VoiceNow, we expect about 75 percent of those pagers to be customer-owned because of the differences in the way we will be selling it.”

“All of investors and analysts are very keyed in on what companies are doing leverage-wise,” said Kelly Love, manager of investor relations at ProNet. “I think the first company to go out and take their leverage down is going to be rewarded.” Love added, “If everyone can perform, it brings credibility back to the group.”

Carriers “develop independent business personalities. However we’re viewed by the outside as basically all the same,” said Owens. “If one company has a problem, we all have a problem. This is difficult. There are knee-jerk reactions to the whole industry. All the paging stocks are closely aligned.”

“Stock prices are going to go up and paging health return when providers stop focusing solely on unit growth and take a more balanced view on profitability and unit growth,” commented Steve Gross, senior vice president of marketing, MobileMedia Corp. “We are very focused on driving growth and profits, and we are taking very dramatic action to make that happen quickly.”

Continued growth and profitability in core operations is expected to prove a strong measure of a carrier’s value over time.

Part of the investment community fears paging growth is slowing down, said Beletic. “We we are not seeing that,” he countered. The rate of growth has decreased by percent, but this measure doesn’t reflect the continuing success of the sector, which currently claims more than 40 million subscribers, said Beletic. “Ten percent compounded growth rate over the next five years would still be exciting,” he added.

Value-added services are a critical component for increasing profitability.

“We grew up on the value-added mentality,” said ProNet’s Love. “If you go into a hospital or business, they are willing to pay more if you can provide the right solution. We will focus on that even more this year. This is something we can take over into commercial business.”

In itself, the consistent trend toward free cash flow and increased profitability is expected to benefit carriers.

“When the leaders of the sector are saying similar things it indicates we are thinking clearly and that we will make good on all those things,” said Baker.

Success in two-way messaging and voice paging services is expected to stimulate investment in the sector, say most industry leaders. There are two critical parts to this. Paging companies need to prove two-way and other advanced services do actually work and that there is demand for the services in markets distinct from those demanding broadband PCS.

While PageNet’s VoiceNow voice paging service-introduced in February-hasn’t grown at the rate some anticipated, the company and industry are encouraged. Research forecasts strong interest in voice paging and PageNet’s VoiceNow networks are functioning properly.

“After using the system, with the general service price points in Dallas, we believe that PageNet will have a home run on its hands,” said New York-based Prudential Securities Inc.’s telecom group in a recent report.

“Wall Street is starting to understand what the power of narrowband PCS will be,” said Beletic. “We’re big believers in what Mtel is doing with its 1.5 alpha service. It is very similar to the nationwide service that PageMart will launch,” said Beletic.

Mobile Telecommunication Technologies Corp.’s SkyWord Plus is an alphanumeric one-way paging service running on a ReFLEX two-way channel, which provides a return path for the network to acknowledge a message has been received.

PageMart plans to launch a ReFLEX 25-based two-way service.

Mtel conducted focus groups with existing one-way paging users and asked what would they like most from their paging service that is not currently offered, said company spokesman Johnny Hales. Many of those users said they want the assurance all pages are received.

“One or both of us (PageNet or Mtel) needs to show the market (advanced services are) really here, and I think that will happen 1997,” commented John Stupka, president and CEO of Mtel. “When investors see this, the stocks will rise accordingly.”

The PCS scare fades

Initial promotion of broadband PCS promised the wireless silver bullet: phone, pager and answering machine in one! As a result, “some investors would say `why would anyone want paging?’ and stopped looking at the group,” said Oburchay. Yet, broadband and digital cellular have not killed paging.

“My early sense is it’s having no effect at all. I think we are going to find broadband PCS ultimately was a non-event in the growth of pag
ing,” said Oburchay. “Most of the evidence so far is pretty anecdotal.”

“The same thing happened in the early eighties with cellular,” said Jeff Owens, ProNet’s chief technology officer, about the perceived threat of broadband PCS. As such, “this is the 15th year of the paging industry’s demise,” he joked. “The only difference (today) is that in the ’80s there were no public paging companies. You didn’t see the financial impact you do today.

“Speaking for ProNet and some of my counterparts in the industry, in markets where PCS has opened up … and been around for six months to a year, we’ve seen an increase in our business,” added Owens.

“Broadband PCS or digital cellular operators are currently in 30 percent of Arch’s markets, and we have seen no impact at all,” said Arch President, CEO and Chairman Ed Baker. “Talking with capital markets there is evidence this is a diminishing fear.”

“Wall Street is starting to recognize these are separate sectors. There are systems designed for narrowband PCS messaging and for broadband PCS. Narrowband is built and optimized for messaging,” said Stupka. “Where broadband PCS has come up, our growth has been just fine.”

“People are seeing that broadband is really a competitive product to cellular and that it doesn’t do paging very well,” said PageNet’s Haynes. “The sooner they get rolled out the better off we’ll be. In markets where there is broadband service, our paging operations have grown more than in the rest of our company. This is illustrative of the fact people are becoming more aware of the benefits of wireless.”

The company has to continue to show that its traditional paging business is strong, quarter after quarter, said Haynes, and show that VoiceNow is going to be a good product. “The downside risk for VoiceNow is very small for us. We have a good product in VoiceNow and we just need some time to roll the product out and demonstrate the strength of that product.”

PageNet’s average revenue per unit is $7, which is lower than previous quarters because the company is selling more airtime wholesale to the indirect market, said Haynes.

“Increased cellular and broadband usage increases paging usage,” said PageMart’s Beletic. He said broadband “is actually a benefit. The perceived threat of today will end up being the bonus of next year … Broadband increases the wireless phenomena in the U.S. As wireless develops, and picks up steam, it suddenly hits the inflection point. The feeling of the society is that we must all remain in touch, and at that time society just goes nuts for wireless connectivity.” Beletic said 25 percent penetration in Singapore and Hong Kong illustrates this point.

Part of the wireless phone to pager connection is a result of new phone users deciding to equip their families with wireless as well, but not at a high price. Pagers satisfy the need with little expense, added Beletic.

Paging and broadband are complementary, agreed Kevin Goulet, director of paging for Ameritech Cellular and Paging. Awareness of either contributes to growth of both.

“As awareness grows from any sort of (wireless) advertising, all the players in all the segments have opportunity to benefit,” commented Larry Conlee, general manager of Motorola Inc.’s advanced messaging systems division. “People go into stores, listen more and choose to buy products and services. A high percentage of U.S. cellular customers have pagers. People see (the pager) as a complementary device to their telephone service. The inherent value and cost advantage of paging will continue to earn a substantial market.”

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