The fourth quarter of 1998 marked both highs and lows for the various carriers that make up the
paging industry, with companies meeting both significant milestones and facing continued challenges.
Perhaps
deserving of the most attention are SkyTel Communications Inc. and Paging Network Inc., although for different
reasons.
SkyTel marked the fourth quarter with an industry milestone, becoming the first paging-only carrier to
reach profitability-since the industry’s troubles began-by reporting a positive net income. More on that
later.
PageNet’s fourth quarter earnings report revealed that significant strides were made in its restructuring
process-which began a year ago this month-as well as in its advanced messaging network buildout, but at the same time
raised concerns as to whether the company has the financial means to complete either effort.
Overall, financial
analysts have deemed PageNet’s fourth quarter to be a disappointment, the main reason being the company’s actual
fourth quarter results missed the pre-released expectations made in December. PageNet predicted its earnings before
interest, tax, depreciation and amortization-or operating cash flow-would come to about $75 million. Actual fourth
quarter EBITDA was $64.5 million.
The company also said in December it would lose about 275,000 to 325,000
subscribers, when in fact the company lost 388,000, its largest quarterly drop to date.
About 255,000 of the
reduction came from terminated reseller accounts that were priced too low or were bad credit risks, while the other
135,000 subtractions followed a review of accounts that were counted as units in service but in fact were not paging
customers, such as voice mail users.
Jack Frazee, PageNet chairman, president and chief executive officer, said he
expects to see further negative growth on the one-way side throughout the year, but not as dramatic as the past two
quarters. “We’ve probably seen the worst of it,” he said.
Net loss was $33.5 million, or 32 cents per
share, compared with $30.1 million, or 29 cents per share, for the previous fourth quarter and $16.4 million, or 16 cents
per share, from the third quarter of last year. Net revenue, however, grew 7.8 percent to $239.9 million from the fourth
quarter of 1997, and average revenue per unit climbed to $7.82, from $7.59 in the third quarter.
PageNet said its
restructuring and advanced messaging network rollout had significant impacts on these results. To date, about 75
percent of that network has been completed, with expectations that PageNet will launch a 1.5-way commercial service
in limited markets this quarter. The transition to Centers of Excellence, the primary focus of the restructuring effort, has
begun in Dallas and Salt Lake City. The COE initiative consolidates customer service, billing and other services into
four centralized centers across the nation.
But this progress has not come without its costs. The company has
invested about $650 million overall in the two-way network so far, with about another $50-$70 million to go before
completion. PageNet spent a total of $67.5 million on costs related to the Centers of Excellence effort-$37.5 million of
which was spent in the fourth quarter-and expects to spend another $32.5 million on the transition during the next few
quarters. The company said the COE transition will be complete by the end of the year, cost a total of $100 million and
result in annualized savings of $45-$50 million.
While analysts believe the advanced messaging network likely will
come online when expected, the same cannot be said for the COE effort. Bear, Stearns & Co. Inc., for one, remains
skeptical of the timing, total cost and expected savings estimates PageNet gave for the restructuring effort.
What
concerns financial analysts most is the company’s liquidity. PageNet essentially is counting on paying for the
restructuring through the financial growth it hopes to gain from the advanced messaging network.
But time is a
factor. PageNet can only borrow so much more before it violates its bank covenants and can no longer borrow money.
In a conference call with analysts detailing the fourth quarter results, Frazee said the company was not in danger of
violating its covenants, but Bear Stearns figured PageNet is about $100 million to $200 million away from its
borrowing limit.
Once it reaches its limit, PageNet will have to pay for operations itself, and Frazee said EBITDA,
or operating income, will pretty much stay flat over the year.
“They are under pressure to get back into a
financial growth phase,” said Jeanine Oburchay, associate director at Bear Stearns.
When the company
announced the restructuring plan last February, Frazee said it would be complete in nine to 15 months.
“That
clearly isn’t the case,” Oburchay said, “and the costs seem to be increasing from where we thought they
were going to be, based on operating income.
“I think the challenge to PageNet is to rebuild investor
confidence,” she continued. “I think investors don’t have a really good handle on what kind of costs are
going to be incurred and for how long.”
Much of this sentiment may be a result of PageNet’s past actions. The
company is known to embark on grand schemes that it says will change the very nature of the industry, only to find
itself scrambling for cover when the whole thing collapses.
One example of such was brought to closure in the
earnings conference when PageNet announced a fourth quarter write-off charge of $4.1 million for all Tenor pagers
bought from Motorola Inc. for its failed VoiceNow plan.
Once expected to be the next evolution in paging, the
VoiceNow rollout proved a disastrous failure that cost the company in excess of $120 million, sparked an upper-
management shakeup that resulted in an entirely new executive structure and left behind investors who are in no hurry
to get burned again.
SkyTel
SkyTel earned a positive net income in the fourth quarter, for the first time since
1993. However, due to a preferred stock quarterly dividend of $2.1 million, earnings per share still were listed as a loss,
albeit of less than one cent.
Consolidated net revenue was $138 million, a 22-percent increase from the previous
fourth quarter, and EBITDA was $36.8 million, an 83-percent increase from the year-ago period and 12 percent more
than the third quarter’s $32.9 million.
While focusing heavily on advanced messaging services, SkyTel’s one-way
business contributed $34.4 million to the company’s EBITDA on revenues of $87.2 million.
“The SkyTel one-
way business continues to post excellent financial results and steady subscriber growth,” said Robert Kaiser,
chief financial officer. “The combination of a sound one-way business and the fast-growing advanced messaging
business positions us well for 1999.”
The company said it added 65,800 advanced messaging units in service
for the quarter, bringing its total domestic units in service to 1.4 million. The advanced messaging division brought
revenues of $43.3 million, a 166-percent increase from the year-ago quarter, and EBITDA of $5.9 million, from $2.3
million during the previous quarter and a loss of $10.7 million a year ago.
Other carriers
Arch Communications
Group Inc. predicted operating cash flow of about $36.1 million for the quarter, compared with $33.9 million reported
for the year-earlier quarter, and net revenues of about $95.9 million, compared with $94.1 million the year
before.
Additionally, Arch said it expects to report total units in service for the year of 4.2 million. The company did
not pre-release its net loss expectations.
Metrocall Inc. reported a net loss of $44.8 million, or $1.08 per share, for
the fourth quarter, compared with $16.9 million, or 58 cents per share, the previous fourth quarter.
Net revenues
increased more than 100 percent from the previous quarter to $141.4 million, and the company added 112,472 units in
service.
The quarter also marked the closing of Metrocall’s acquisition of AT&T Wireless Services Inc.’s Advanced
Messaging Division, which added 1.2 million subscribers and raised Metrocall’s total subscriber base to 5.6 million.
