Paging Network Inc.’s share price fell 25 percent last week and several financial analysts abandoned
their Buy ratings on the company after PageNet disclosed it anticipates fourth-quarter results below analysts’
expectations.
The company’s stock price was sliding slowly from a two-month high of $7 on Dec. 4 to $5.25 on
Dec. 18. It then fell to $3.93 on Dec. 21 after PageNet issued a press release announcing greater-than-expected
operating costs in the fourth quarter. The stock closed up at $4.25 at RCR press time.
PageNet said the increased
costs were derived from implementing its restructuring plan, which consolidates several company functions from
regional offices to national, so-called Centers of Excellence.
To date, PageNet opened its customer service national
center in Salt Lake City and is in the process of opening both the accounting and billing and network monitoring
national centers in Dallas. Those centers have begun servicing the Dallas and Salt Lake City markets only. The
company expects to transition all markets over to the new centers over the course of the year.
“As we have
said before, our office conversion schedule will result in duplicative operating costs in the near term,” said John
Frazee, PageNet chairman, president and chief executive officer. “Once these markets are complete, we will
begin to transition the remaining offices to the new infrastructure, and that will result in the recurring annual savings of
$45 million to $55 million that we are looking forward to.”
PageNet said it hopes to have 50 local offices
transitioned to the national centers by the end of the year.
“Our COE (Centers of Excellence) infrastructure
will depress margins for the next two quarters … This relationship will quickly reverse, and we expect margins to
steadily improve in the second half of 1999 as we complete the transition to our field offices, ” said Mark
Knickrehm, PageNet’s executive vice president and chief financial officer.
However, the news sparked the recent
stock drop. Going further, Reuters reported Bear Stearns & Co. lowered its rating on PageNet shares from Buy to
Neutral and that ABN-AMRO Inc. lowered its rating from outperform to hold.
Other potential reasons for PageNet’s
waning popularity are its expectation that earnings before interest, taxes and depreciation and amortization will fall as
much as 15 percent compared with last year’s fourth quarter, and that the company expects to drop up to 325,000 units
in service.
This will mark the second consecutive quarter PageNet will experience negative net adds. The company
reported it lost 137,654 subscribers in the third quarter. While analysts have been skeptical of PageNet’s promise to thin
out its resale channel, the company said the bulk of its fourth-quarter subscriber base reduction will come from the
indirect side.
“A significant number of our negative nets are a result of cleaning up the reseller channel and
accounting for only those units in service that generate revenue,” said Knickrehm.
The company said it
expects to achieve positive net income in 2000.
