Late last month, Paging Network Inc. passed the 5 million subscriber mark, yet another milestone for a company that seems unstoppable.
The nation’s leading paging provider has a subscriber base three times larger than its nearest competitor and a transmission system covering 90 percent of the country. In 1994, PageNet chalked up the best year in its history, recording a 43.7 percent gain in net new pagers in service. Net revenues topped $411 million and operating cash flow-a key performance indicator in paging-hit $140 million. Operating cash flow margins were 34 percent higher than the industry average.
Through volume purchases of subscriber units and other economies of scale, PageNet continues to post some of the lowest operating costs in the industry. In 1994, PageNet’s average unit cost was $6.05 below the industry average.
PageNet emphasizes a low-cost, high-quality business philosophy. Local paging costs $7-$9 per month for unlimited airtime. The customer cancellation rate is low. About 70 percent of Fortune 1000 companies are among PageNet’s direct customers. Last year, the company snagged customers Hewlett-Packard Co. and Apple Computer Inc. Reseller agreements with AT&T Corp.’s Wireless Services, Ameritech, USA Mobile and A+ Communications Inc. strengthened distribution.
In March, MCI Communications Corp. began reselling PageNet services through the long-distance carrier’s Friends and Family Connections program. By mid-May, MCI had signed 10,000 new customers to the service.
“It’s a successful ramp-up,” says Paul Adams, spokesman for MCI Business Markets. “The service’s big advantage is the ability to send e-mail and news to the pager.”
With industry penetration at only 10 percent, PageNet has plenty of room for further domestic expansion. During the last two years, the company has added 28 offices to its decentralized operations. Both these new offices and mature operations contributed substantially to growth.
Still ahead:
Rollout of PageNet’s narrowband PCS network, operating at 112 kilobits per second in a 50 kHz channel-the highest-speed wireless network to date.
Leaps into consumer and foreign markets where the company must develop more expertise. Although PageNet has successfully managed dramatic growth and appears ready to graduate to new levels of technological and marketing sophistication, analysts have some concerns.
First, the network provider has vacancies in several key management positions. Chief Executive Officer Terry Scott, whose stock is worth $12 million, announced he’ll leave in October for personal reasons. The company has no management information systems director and has not replaced its chief operating officer and head of marketing, whom it let go.
“PageNet’s stock has been under severe pressure due to the management changes,” says John Bauer, senior vice president of Lehman Brothers.
Second, further consolidation in paging-which has more than 600 service providers-and continued wireless industry competition will challenge PageNet’s reputation as a low-cost provider.
“Pricing has to come down,” says David A. Freedman, managing director of Bear Stearns & Co. Inc., who recommends PageNet. According to Freedman’s projections, revenue per unit in the domestic paging industry will fall every year over the next 10 years.
In an in-depth interview, PageNet Chairman George Perrin talked candidly about the company he founded 14 years ago and its expansion.
“This industry continues to grow at 25 percent per year and that growth covers a lot of sins,” Perrin commented. “We’ve all been blessed by this industry. PageNet may have done a bit better than others. We had a critical (subscriber) mass, hit the industry at the right time and made some right decisions early on in terms of frequencies and their utilization. However, the real strength of this business is the people in the field. It’s fun to watch them go after the next level of opportunity.”
Management changes
To guide that effort, PageNet will need a solid management team, but the company has several executive positions to fill. Perrin said the board of directors is down to the last four or five CEO candidates. “There are many qualified people; the challenge is to make sure they’re the right cultural fit. I’m hopeful that by the end of June we can announce Terry’s replacement. We’re turning our MIS area into a value-added or competitive advantage [function] and have been looking for a MIS director for some time. We expect to fill that position by the first of June. We also have a senior marketing individual whose challenge will be to arrive at a different marketing plan; we expect to fill that position by mid-June.”
Concerning the CEO position, Perrin said the company wants someone with experience running a company that does $1 billion annually in revenue and operates on a geographically dispersed basis. “This individual must have managed through significant growth or introduced a significant new product. When you describe the job as I have, it almost immediately forecloses anyone within the close-in environment of paging or cellular. It would not surprise me if marketing were the leaning of the individual, but an engineering background would be a surprise.”
Acquisitions
Along with its other transactions, PageNet has acquired ComTech and has pending acquisitions with SNET Paging and two PageAmerica Group subsidiaries for a total of about $88 million. “SNET will close in June or July, PageAmerica in August or September. These [purchases] are driven by our desire to acquire the spectrum we need to grow our own business; the subscriber base that came with the properties is almost incidental. Making a subscriber acquisition for us is more diversionary than positive because frankly, with the growth rates we’re experiencing, it’s harder to integrate 10,000 units than it is to sell them. We’re continuing to look at strategic acquisitions, but there are fewer of those on the horizon.”
Perrin said the merger between Arch Communications and USA Mobile Communications Holdings, expected to create the nation’s second largest paging business, means business as usual for PageNet.
“As critical mass becomes more important, there has to be some rationalization of this industry,” Perrin said. “I haven’t studied the intricacies of each of the acquisitions, but I think the [companies’] overriding objective is to get to a better position to compete with us. Acquisitions have their own problems; none of these are slam-dunk clean deals. Some of the smaller players who have no existing base tend to become aggressive in pricing and services on a spotty basis. When you see people who are trying to get toward a consolidation or sale you see some strange activities in an attempt to make numbers look good in the short term. It’s easier for us to compete against players who have a more standard pattern of operation.
MCI rumors
Prior to MCI’s announcements last month that it would invest in News Corp. and buy Nationwide Cellular Service, rumors were circulating that the long-distance carrier would buy PageNet. “Obviously, we have a close relationship with those guys,” Perrin said. “I have a couple of friends who work there and I spend a fair amount of time with them socially, so I suspect people are speculating. However, there’s no reason for us to throw our lot in with anybody else. PageNet is self-financing and we’re on the forefront of some things that could create additional value for shareholders. If an offer came in, I’d be obligated to look at it on behalf of the shareholders. [A purchase] has not been discussed with MCI, although there have been many rumors to the contrary.”
Other partnerships
Regarding future strategic relationships, Perrin said the company continues to have discussions with parties on two major ends of this opportunity.
“On one end there’s the applications and devices arena where our network can be the carrier of choice for a product or servic
e. On the other end, we’re having more discussions with companies that could provide vertical marketing and distribution alliances; those will be important to us. We have a large sales force and a large reseller base, but large in our terms as opposed to large in overall consumer terms is vastly different. We’re filling out either side of the network to gain the fullest utilization we can.”
Perrin said that in the past, PageNet would market to industry segments-such as energy, security and sales force maintenance-by selectively sending out its direct sales force or pointing its resellers in that direction. “To get the fullest penetration over emerging markets, I expect we’ll have sales teams focused on those industries,” he commented. “As we go forward, the challenge for us will be to develop tailored products and applications and present those to user groups to solve ongoing communication problems.”
One of those applications is a wireless fax technology tested by PageNet that could be a low-cost alternative to broadcast fax. “We’re testing it with good results,” Perrin said. “Right now our focus is to get the InFLEXion network on the air and introduce VoiceNow. It’s going to be the highest capacity digital network on the ground and we want to find additive revenue opportunities [for it]. Fax delivery is one of those opportunities.”
The international front
Will PageNet play an international role in MCI’s recently announced arrangement with News Corp.?
“I don’t think MCI understands all the elements of the News Corp. deal yet,” Perrin stated. “MCI would like to tie a bow around content, using their own delivery system and PageNet’s delivery system to provide information. It’s no secret we’ve been talking to MCI about joining some [Mexico-based entities] in a partnership so MCI could access our network in Mexico [as it does] in the U.S. Because of foreign ownership restrictions, we can’t own all those international operations anyway. There’s a perfect marriage between the two of us and markets [like Mexico]. However, we’ve had discussions with other parties too. Like everybody else, we will form a crisscross of strategic relationships.”
Money
PageNet could spend up to $1 billion on domestic and international expansion, including the cost of PCS licenses won last year. Funding to support that expansion is to come from a shelf registration of up to $600 million and a new line of credit. Perrin said he hopes the company gets to “spend more than a billion because the lion’s share will be spent on subscriber units, which go in lockstep with growth. Everybody knows we spent $200 million to buy [PCS] radio spectrum. The number to build the network is $100 million to $200 million, which would aggregate to $300 million to $400 million and the rest is a variable expense with growth relative to units themselves. Those are revenue additive when you put them in service.
“Of the $600 million mentioned, we have already raised $300 million with an earlier subordinated debt offering. We just increased our line of credit [with NationsBank, Toronto Dominion and Bank of Boston] from $450 million to $750 million so we’ve added $300 million there. We have $300 million more under our current shelf available to us.
“We’re not feeling that cash is a constraining feature; it’s a matter of establishing a strategy and making sure it fits with the marketplace. If we’re able to spend that much money, the revenue thrown off as a result ought to generate just that much more capability on our part to raise debt financing or some other subordinated financing that would be appropriate. The good news is that we have not found it necessary to go to the equity markets to raise any of that money so the shareholders benefit to the greatest degree and that’s everybody’s goal.”
However, at the annual meeting held in May, shareholders approved an amendment to the certificate of incorporation authorizing 25 million shares of preferred stock. Perrin said the company is doing that as a planning feature for the future. “We don’t have any plans short-term or long-term to issue that [stock], but it was something we wanted to have in our arsenal. As we look at an industry in constant change, [authorization] seemed prudent so we would have as many tools as possible.”
Based in Santa Rosa, California, Judith S. Lockwood, founding editor of RCR, writes for a number of telecommunications publications and consults in the electric utility industry.
