Financial analysts continued their wait-and-see attitude toward Paging Network Inc. as the company released second-quarter earnings.
In contrast, Arch Communications Group Inc. completed its merger with MobileMedia Corp. in the second quarter, resulting in one of the lowest debt ratios in the industry and the company becoming the second-largest carrier after PageNet.
PageNet reported a second-quarter net loss of $95.3 million, or 92 cents a share, compared with a net loss of $15.6 million, or 15 cents a share, reported for the second quarter last year. The company’s second-quarter net revenues of $244.1 million exceeded analysts’ expectations and marked a 1 percent increase from the $241.3 million reported after the same period last year. Cash-flow figures also beat analysts’ expectations, at a reported $70.4 million.
However, PageNet reported a net reduction of 184,400 units in service, almost twice more than analysts’ predictions, and said it expected to record another 120,000 in lost units next quarter. The company added 4,000 SurePage 1.5-way service customers and 1,000 advanced messaging subscribers, which included two-way customers resold through SkyTel Communications Inc., Iridium satellite-based paging subscribers and VoiceNow voice paging users.
Analysts continue to watch PageNet’s increasingly limited borrowing capacity. The company has about $100 million available to fund operations before it either generates its own cash flow or defaults on its bank covenants and has nothing left to borrow.
Jack Frazee, PageNet chairman and chief executive officer, said PageNet remains in compliance with its debt structure covenants and believes the company will continue to operate without reaching its borrowing limit. PageNet enacted several cost-cutting measures that kept it below its allowed borrowing levels, but analysts say $100 million is not much borrowing capacity for a company that has borrowed close to $2 billion to date.
Chris Larsen, analyst with Prudential Securities, said PageNet desperately needs to get its advanced messaging network loaded with subscribers and bring to a close the money-swilling process of converting its support services to the Centers of Excellence infrastructure.
“They need advanced messaging to take off,” Larsen said. “They’re running a network with no one to pay for it.”
Launching two-way interactive paging services will not be possible until ReFLEX 25 paging devices are available and networks complete, expected in the fourth quarter.
While PageNet insists the COE infrastructure will result in millions in savings over time, Larsen said the transition process is a money-losing venture that could cause PageNet to go bankrupt, much like what happened to MobileMedia when it tried converting to a centralized billing platform.
PageNet admitted the process is taking longer than expected. Only 25 percent of its national offices have been converted to the new system.
Frazee took issue with the accusations made by other paging carriers that PageNet has not followed through on its promise to relieve pricing pressures in the reseller channel. He said the competitive nature of paging resale has forced the company to again lower prices in some areas.
“We are not going to participate in a blanket price war that further erodes the value of paging in our customers’ minds. On the other hand, we will not hesitate to do whatever is necessary to retain our valued customers that contribute to profitability today,” he said. “We have to be responsive to the pricing environment that exists. We will not let our customers be taken from us. We thought … that this sector had gotten it in its head that it could raise prices. This has not proven to be the case.”
One of the company’s accusing PageNet of creating resale price pressure is Arch, which reported what analysts feel was more positive second-quarter results.
The company posted a second-quarter net loss of $111.3 million, or $5.65 per share, compared with a net loss of $62.6 million, or $8.96 a share, reported for the same period last year.
The quarter’s obvious highlight was the completed acquisition of MobileMedia. The increased cash flow brought in from MobileMedia lowered Arch’s debt leverage ratio to 5.4 times cash flow.
Excluding MobileMedia, Arch’s cash flow, or earnings before interest, taxes, depreciation and amortization, was $42.4 million, and net revenues were $125.9 million. On a pro forma basis with MobileMedia, Arch reported $775 million in annualized net revenues and $250 million of annualized EBITDA.
The added cash flow and lowered debt ratio gives Arch a borrowing capacity of $150 million, with very little in capital expenditures going out, leaving it with a balance sheet second only to the profitable SkyTel Communications Inc.
Although Arch added 43,000 units during the quarter, rationalization of shared accounts with MobileMedia took away 39,000 units, leaving the total net adds for the quarter at 4,000.
Despite the relatively positive quarter, Arch stock continues to fall, along with that of the rest of the paging industry. Since the middle of July, industry stocks have dropped, following the brief rally instigated by Arch’s acquisition of MobileMedia and MCI WorldCom Inc.’s proposed buyout of SkyTel.
PageNet hit its six-month low on June 8 of $3.18, which rallied to a six-month high of $6.12 on July 7. After its second-quarter earnings conference call on Tuesday, the stock fell 81 cents to $3.43 and closed slightly higher at $3.75 the following day.
Arch enjoyed a six-month high of $10.59 on June 11, which slowly fell to $6.18 on Wednesday. PageMart Wireless Inc. posted a six-month high of $7.87 on July 26, and has remained relatively flat, along with SkyTel. Metrocall Inc. remains at $2.50.
“After the MobileMedia-Arch deal, there was some optimism,” causing stocks to rise, said Prudential’s Larsen. “That just fizzled out.”
The paging industry must meet the next milestone of launching ReFLEX 25-based two-way services and increase advanced messaging revenues before investors vote positively with their pocketbooks, Larsen said. Two-way services are not expected until the fourth quarter, at the earliest.
