Editor’s Note: The following information is from a Smith Barney Inc. analysis released Aug. 9. From time to time, RCR prints investment opinions and summaries about publicly traded telecommunications companies as a service to its readers.
AirTouch Communications Inc., rated buy, medium risk, recently reported its second quarter results. For the quarter, consolidated net revenues were $395.1 million, operating cash flow before depreciation and amortization was $85.5 million and net income was $38.7 million, or 8 cents per share. Results indicated fundamental strength, particularly in terms of top-line growth.
Subscriber totals in both domestic and international markets exceeded our expectations, as did proportionate cash flow. While we were on target with our net income estimate, consolidated operating cash flow was lower than expected due to higher selling and marketing costs.
Proportionate domestic cellular results: At the close of the second quarter, AirTouch added a record 140,300 subscribers to reach 1.8 million proportionate cellular subscribers, a 48 percent increase from the second quarter 1994 level of 1.2 million. Second quarter 1995 gross revenues attributable to proportionate cellular interests were $390 million, an increase of 31 percent, compared with $298 million in the second quarter 1994.
Average monthly revenue per unit decreased 12 percent year-over-year, from $81 to $71. The decline would have been 10 percent excluding the impact of cellular roaming fraud. Management indicated that the decline in average revenue per unit is a result of customer mix rather than price declines. Despite operating cash flow margins (based on gross revenues) decreasing from 45 percent in second quarter 1994 to 40 percent in second quarter 1995, operating cash flow (before depreciation and amortization) for the quarter grew to $155.3 million, up 17 percent compared with $133 million in the second quarter 1994. Churn was approximately 2 percent and penetration in all markets reached 5.1 percent.
Domestic paging results: AirTouch Paging added 128,000 subscribers to reach 1.76 million units in service, a 31 percent increase from second quarter 1994 subscriber levels of nearly 1.35 million. Second quarter 1995 gross revenues attributable to paging interests were $63.8 million, an increase of 13 percent, compared with $56.4 million in second quarter 1994.
Average monthly revenue per unit decreased 9 percent year-over-year from $11.50 to $10.40. Operating cash flow (before depreciation and amortization) for the quarter remained somewhat flat at $17.6 million as compared with $17 million a year ago; however, margins (based on gross revenues) slightly contracted from 30 percent in second quarter 1994 to 27.6 percent in the second quarter 1995.
Somewhat flat operating cash flow is a result of costs associated with start-up operations in Denver, Chicago, Ohio and the mid-Atlantic region. Excluding the impact of start-ups, operating cash flow would have been $20 million. Paging operations generated positive free cash flow even with the start-ups.
International operations: AirTouch added a record 98,000 subscribers in its international markets, up 131 percent over second quarter 1994 subscriber levels of 543,000. In Japan, ATI’s venture added 137,000 customers to reach 417,000. In Germany, Mannesmann Mobilfunk added more than 140,000 subscribers to reach 1.074 million customers; a lower tariff introduced in May helped account for the growth. In Sweden, NordicTel reported 119,000 subscribers, a 47 percent increase. In Belgium, Belgacom added 25,000 customers to reach 173,000-120,000 on its digital network and 53,000 on its analog network. In Portugal, Telecel added 22,000 customers to reach 122,000. Proportionate operating losses for international operations after taxes totaled $15 million. Losses were primarily a result of costs associated with strong growth in Sweden and Japan. In addition, approximately $4 million in losses are related to start-up operations in Italy, South Korea and Spain; however, these losses were offset by other one-time adjustments.
Projections: We had made projections for ATI operations on both a proportionate and consolidated accounting basis. While we have not changed our assumptions for any specific variable, our year-end estimates are slightly adjusted as a result of incorporating second quarter 1995 actual results. On a proportionate basis, 1995 estimated operating cash flow is lowered slightly from $702 million to $700 million; 1996 and 1997 estimates remain unchanged at $1 billion and $1.3 billion, respectively.
Consolidated operating cash flow in 1995 is lowered from an estimated $447 million to $426 million and our 1996 estimate is raised slightly from $763 million to $768 million. Our 1997 estimated consolidated operating cash flow remains unchanged at $1.1 billion. Net income in 1995 is raised slightly from an estimated $141 million to $142 million, both representing 29 cents per share. Our 1996 net income estimate is increased from $222 million, or 46 cents per share, to $240 million, or 49 cents per share; our 1997 estimate also increased from $476 million, or 96 cents per share, to $509 million, or $1.03 per share.
Please note that 1996 and 1997 earnings-per-share estimates do not include start-up costs associated with the build-out of broadband personal communications services licenses.
AirTouch Communications has been selected for Smith Barney’s Silver List. The company is a global, diversified wireless telecommunications company, that, in our opinion, offers investors a unique package of assets-both cash flow producing as well as emerging market focused. We believe that the sum of the parts is worth substantially more than the current market price. We recommend purchase at current levels with a 12-month target price of $43, based on a 25 percent discount to 1996 private market value.
