NEW YORK-The financial services industry is developing new kinds of snapshots for a clearer picture of paging companies’ underlying strengths and weaknesses in the brave new world of increased competition.
Market share is fast becoming a key criterion for predicting success, “because the gain or loss of a small percentage will have significant impact on profitability,” said David Abraham, president of David Abraham & Co., Westport, Conn.
Overall operating margins-the traditional benchmark-will remain a useful tool for evaluating companies’ performance, he said. However, Abraham predicted that analyzing incremental cash flow and incremental margins will become more important indicators of the fiscal health of paging and other wireless providers playing in competitive arenas.
“It is in this milieu that the success or failure of companies will be determined,” Abraham said. His firm provides financial advisory services to middle-tier media companies engaged in the private placement of debt and equity, and in mergers or acquisitions. It is currently involved in six transactions in the wireless telecom sector, particularly paging.
“Let’s say I start with $100 in revenues and add $10 in revenues by providing value-added services to increase market share,” Abraham said. “My fixed costs remain the same and my variable costs go up $2, so a small change in revenues causes a dramatic swing in income.” Likewise, small decreases in market share create a large negative ripple effect, he said.
Michael Elling, senior telecom analyst for Prudential Securities, New York, offered a similar assessment from the viewpoint of the public capital markets. Prudential is a leader among Wall Street firms involved in the paging sector.
“Historically, value per subscriber” has been the primary evaluating measure, “but this doesn’t tell you about the underlying value of a company,” Elling said. “We’ve been pushing forward cash flow for the past year or so because of the inherent discount in it, and this (measure) has become more pervasive throughout the sector recently.”
Forward cash flow analyses take into account four perspectives on incremental cash flow to evaluate the benefits of the mergers and acquisitions likely to occur as companies engage in and respond to competition for market share: cost and growth synergies and service and distribution leverage.
“Two 10 percent growers together won’t get 20 percent growth right away,” Elling said. “But a company chugging along by itself at 30 percent probably won’t do that much worse, so it’s likely to beat the combination of the two 10 percenters.”
