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MTEL STILL A STRONG FIRM IN 1995 BUT ANALYST DOWNGRADES RATING

Editor’s Note: The following information is a protion of a Smith Barney Inc. analysis released Aug. 10. From time to time, RCR prints investment opinions and summaries about publicly traded telecommunications companies as a service to its readers.

Mobile Telecommunication Technologies Corp., our Top Pick for 1995, reported solid second quarter results on July 26. Results indicate that Mtel continues to bring all aspects of its business together. The financial turnaround of SkyTel Corp., the company’s core operation, continues to remain on track as evidenced by achieving not only positive operating cash flow but sustaining net income.

The impact of SkyTel, however, was somewhat mitigated by higher-than-expected losses in international markets. In addition, Mtel’s personal communications services subsidiary, Destineer Corp., appears to be on track for commercial launch in the second half of 1995 as anticipated.

Although we expect fundamentals to remain strong and the company to meet its stated goals, we are lowering our rating on Mtel from 1H (Buy, High Risk) to 2H (Outperform, High Risk) based solely on price. We also are revising our estimates, primarily in 1995, to account for higher-than-expected losses in international markets. At the current price, Mtel shares are trading at a 31 percent discount to 1995 estimated private market value of $44 per share and just below our target price of $33 per share. Our 1996 estimated private market value is $50 per share, implying a 12-month target price of $37.50 per share, predicated at a 25 percent discount to 1996 estimated private market value.

Rating change: Our decision to change Mtel’s rating is valuation and price driven. Mtel has recognized significant stock appreciation over the past few weeks. We believe there are three factors driving the momentum behind Mtel shares: 1) a greater focus on the rollout of Destineer; 2) a belief that Mtel’s reselling agreements with MCI Communications and Sony Electronics will have a significant impact on top-line growth; and 3) a belief that Microsoft Inc.’s interest in Mtel will have increasing importance as Destineer is rolled out commercially. Although we believe that further momentum remains in the shares, at these levels, we would look to 1996 estimated private market value and an appropriate target price ($37) as indications for upside potential.

Estimate revisions: We are revising our consolidated 1995 operating cash flow and net loss estimates primarily to account for higher-than-expected losses in the international segment. We believe that SkyTel remains on track to reach 25 percent operating cash flow margins by year-end and that the rollout for Destineer will remain on schedule. Our consolidated operating cash flow estimate in 1995 is lowered from $28 million to $21.4 million. Offsetting the revision in cash flow is interest income, which continues to remain high as indicated in the current quarter. As a result, 1995 estimated net loss also is narrowed from 72 cents per share to 36 cents per share.

Operating results: (Note: Second quarter 1995 results are compared with first quarter 1995 results to indicate the sequential improvement of the company’s financials.) Consolidated net revenues for the quarter were $56.9 million, compared with $38.1 million in the second quarter of 1994, a 49 percent increase, and first quarter 1995 revenues of $50.6 million, a 12 percent increase. Operating cash flow (before depreciation and amortization) for the second quarter was $3.5 million, a 92 percent improvement from first quarter operating cash flow of $1.8 million, or 6 cents per share, inclusive of the dividend vs. a net loss of $5.7 million, or 16 cents per share, in second quarter 1994 and $6.1 million, or 13 cents per share, for the first quarter 1995. Of the 6 cents per share loss, 7 cents came from SkyTel, a loss of 8 cents came from international, 5 cents came from Destineer, 4 cents came from other divisions and a loss of 4 cents came from the dividend. Discrepancies with our estimate are primarily a result of higher-than-expected losses for the international segment.

Worldwide: Mtel more than doubled its units in service worldwide, increasing units 103 percent from second quarter 1994 units of 403,500 to 817,800 as of the second quarter 1995. Included in this growth in 71,600 units from United States Paging Corp., acquired by Mtel on Feb. 17.

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