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Company Update
Report originally written: March 17, 1997
Analyst recommendation
remains intact as of:
September 3, 1997
Metro One Telecommunications
MTON
(1,2,3)
$6 1/2
($mil)
Q1/Mar
Q2/Jun
Q3/Sept
Q4/Dec
Year
P/E
52-Week
Range
$5 3/4 -
$16 1/4
1996
Rev
$4.2
$4.5
$4.4
$4.7
$17.8
Shares (mil)
12.3
EPS
$0.03
$0.05
$0.03
$0.02
$0.12
54.1x
Market Cap
(mil)
$80.0
Estimates
12 Mo. Sales
(mil)
$17.8
1997
Rev
$4.6
$5.2
$7.2
$9.0
$26.0
Price / Sales
4.8
EPS
($0.01)
$ 0.00
$0.07
$0.12
$0.18
36.1x
Book Value
PS
$1.91
Price to Book
3.7
1998
Rev
$40.1
W.C. per
Share
$1.59
EPS
$0.57
11.4x
(1)-- Black & Company makes a market in this security.
(2)-- Black & Company acted as lead manager for the Company's August 1996 IPO.
(3)-- Earnings per share are as reported (Our fully taxed estimates are $0.12 and $0.48 for 1997 and 1998, respectively).
Rating: Buy
Shawn P. Willard 503-248-9600
Metro One Reports Quarter in Line With Estimates
Metro One reported results on February 27, 1997 for the year ending December 31,
1996. Revenues for the quarter were $4.7 million, up 19% and net income increased from
a loss of $325,000 last year to a profit of $197,000, including a net charge of $83,000.
Excluding contracts which are less than one year old and contracts which ended during the
year, revenues from existing customers increased approximately 25% for the year.
Expenses in the quarter grew as expected due to the opening of the company's twelfth call
center (St. Louis) and the beginning of the necessary build out related to Sprint Spectrum.
These expenses will continue through 1997, but will be most apparent in the first half of
1997 until Sprint's call volumes reach material levels. The company will also be making a
material investment in new product and customer development throughout 1997. This
includes the development of an SS7 system and the continuation of an active new customer
trial program. While slightly dilutive to earnings in the short run, these types of investments
typically lead to significant returns over time. For fiscal 1997 the company expects to spend
approximately $8 million on capital expenditures.
During the conference call several key points were discussed, but the actual ramifications of
these points may not be readily apparent. During the company's IPO roadshow in late
August 1996, the company disclosed that a carrier had been connecting T-1 lines to various
Metro One call centers despite the fact that they did not have a formal contract in place.
Metro One's management could not guarantee that this would lead to a long term contract,
however they did believe it represented a "buying signal" by this particular carrier.
Approximately 2 months later a national contract with Sprint Spectrum was signed and
announced. We believe this is particularly important giventhat management recently
disclosed that 3 carriers were currently connecting T-1 lines to company call centers
despite the fact that they have not announced any new contracts. It is important to note that
the costs of connecting and maintaining a T-1 line are borne by the carriers not by Metro
One. Additionally, one of these carriers has had discussions with Metro One regarding how
billing information can be received electronically. While none of these events guarantees the
announcement of a new contract(s), it does seem likely that some type of decision by
several customers is forthcoming. Considering Metro One's high fixed costs, the operating
leverage of incremental revenues can quickly translate into earnings given its near breakeven
status.
The company recently announced the extension of its contract with Bell Atlantic for
Philadelphia through January of 1998. The other Bell Atlantic contract, for Baltimore,
expires in December of this year. While we view the extension of the Philadelphia contract
as a positive event, we are still unclear how the agreement with InfoNXX and TOMCOM
will affect this relationship, therefore our estimates continue to reflect the effect of not
renewing these contracts. More details on the nature of InfoNXX's relationship with
TOMCOM may be forthcoming, as we believe InfoNXX may be in the process of filing for
an IPO.
While the near term impact of the build out for Sprint is currently depressing earnings, we
believe it is important to look beyond the next two to three quarters. By late 1997 Metro
One will be operating 18 call centers throughout the United States, by the end of 1998 they
should have 24 call centers. This will make Metro One an attractive option for national,
regional and local loop carriers. By midyear 1997, Sprint Spectrum (including affiliates
APC, Cox-California, PhillieCo) plans to be in operation in 65 major U.S. cities. Today
they operate in only twelve minor cities. While there is some debate over the actual
penetration rates PCS will be able to generate domestically, it is interesting to note that after
24 months in Great Britain PCS represented approximately 45% of the wireless
marketplace.
Upside Opportunities for 1997
We continue to believe the upside potential for Metro One in 1997 is considerable. Over
the next 12 months there will be a significant number of PCS carriers who are looking to
outsource their enhanced directory assistance (EDA) needs. AT&T Wireless, Omnipoint
PCS Co., NextWave Personal Communications, PrimeCo PCS, GWI PCS Inc. and
Pocket Communications Corporation will all need directory service providers as they turn
on service. Given the high touch, feature rich image PCS advertising is promoting, it is likely
that several of these carriers will elect to offer an enhanced directory assistance service. As
the leading provider of EDA services Metro One should be able to win a significant share
of this business.
We continue to view Metro One as an attractive investment at current levels due to its play
on outsourcing, the growth of wireless subscribers and providers, its potential for additional
national contracts and its significant operating leverage potential. For these reasons, we
recommend investors take advantage of the current weakness in the stock price to
purchase the stock. We continue to maintain our $20 price target.
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which we consider to be reliable, but do not guarantee their accuracy or completeness, or may be
condensations of such material. Black & Company, Inc. or affiliated companies may make a market in
one or more of the securities mentioned, act as a principal for its own account or act as agent for both
the buyer and the seller, or their officers or employees may have a position in any of the securities
mentioned, or their underlying options. The opinions expressed are subject to change without
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