<A> SMARTMONEY DAILY SCREEN: Wireless For The Wary
By Tiernan Ray
SmartMoney Interactive
NEW YORK (Dow Jones)--Since the middle of April, wireless equipment firm Innova (INVA) is down 70%; cellular telephone supplier Audiovox (VOX) has been cut in half since November; and millimeter-wave radio maker P-Com (PCMS) just hit a new 52-week low, at 12.
Is this as bad as it gets? Or are wireless stocks in for another round of painful losses?
You can safely blame Asia for the sluggishness in analog and digital handset sales. Equipment makers, as well as the chipmakers that supply them, also have been hit hard as distributors readjusted inventory amid the slackening demand. But in a generally lackluster market for technology stocks, it seems wireless plays are taking a bruising in general, regardless of whether or not they serve the cellular phone companies.
In today's screen of wireless equipment deals, you'll find plenty of companies that felt the pain from the spring selloff in wireless stocks. We've assembled a list of 39 companies that deal in wireless products in some form or another; 42 in total, if you add in the three largest vendors of cell phones: Nokia (NOKA), Ericsson (ERICY) and Motorola (MOT). (We excluded the three from the final screen.)
We chose companies ranging from microwave radio outfits such as P-Com to chip companies with a substantial interest in the wireless world, such as Triquint Semiconductor (TQNT) and VLSI (VLSI), which makes fully one-third of its sales off Ericsson's wireless business. (VLSI announced today a new chip for digital cell phones.)
Many of these stocks have gotten hammered in the past few weeks, including Cellular Technology (CTSC), the biggest loser, down 52% in the past four weeks, and Sawtek (SAWS), a maker of filters for radio systems, was sawed almost in half on Thursday, from 22 and a quarter to 13, when its CEO warned there'll be little growth if any in the September quarter.
You might be tempted to assume these erstwhile high-fliers have simply been oversold and jump in. After all, the promise of the wireless world stretches way beyond mere cell phones to embrace a range of futuristic high-bandwidth wireless applications. In the end though, we blinked. We devised a screen designed to find companies making money in all this mess. Our pick is International Telecommunications Data Systems (ITDS), which has had a good record of remaining profitable in the cellular business and that is finally playing the game of managing expectations on Wall Street, just a year and a half after its October 1996 IPO.
ITDS handles billing for the cell phone networks, running two service bureaus, in Stamford, Conn., and Champaign, Ill., and making between a dollar and two dollars on every bill it collects from a wireless phone user. ITDS' nearest competitor is a local phone company and telemarketer called Cincinnati Bell, which we've written about in these pages. (See 'The Cincinnati Kid,' March 24.)
ITDS is not really an equipment company, true, but the company spends a substanti al portion of revenue on R&D to develop the sophisticated billing software at the heart of what it does. That's a key difference, because ITDS has built its business servicing small wireless operators, such as Nebraska-based Aliant Communications (ALNT), that can't afford to build their own in-house billing systems, says Hampton Adams, an analyst who tracks the company for Furman Selz. Adams thinks it's a trend that could grow, based on the need to have one consistent billing system: 'I don't think t he trend is to move toward in-house solutions [for billing]. Most of the carriers will outsource a lot of this stuff.'
How much growth is there in cellular, if equipment stocks are falling apart? Industry analyst firm Paul Kagan and Associates in Carmel, Calif., suggests there are about 51 million cellular subscribers as of last year, and that number is expected to grow steadily, to 62 million by 2002. Predictions come and go, but it does seem that next-generation digital cell phones, dubbed PCS, will start to take over the cell phone market in the next couple of years.
Folks at the PCIA, the industry group for the carriers that run PCS networks, estimate subscribers will grow from 2.5 million last year to 9 million in 1998, while revenues are expected grow to $3.2 billion this year from $750 million last year. Craig Mathias, a wireless industry observer with Chelmsford, Mass.-based consultancy the Farpoint Group, thinks PCS is off to a slow start, much like the early days of cellular, and t hat carriers will need to devise competitive pricing arrangements for customers before things really take off.
'You're not going to find people upgrading [to digital] just to upgrade,' says Mathias, 'So, carriers will be holding onto customers by changing their billing plans, lowering the prices.' Slow growth, maybe, but maybe more business for ITDS, too, as the rapidly changing pricing environment increasingly requires ITDS' products.
In the meantime, ITDS is able to continue making money by leveraging its valuable expertise to reach new customers and by acquiring companies within the conventional cellular market. Earlier this year the company acquired its largest rival, TRIS, a billing services division of data services giant Computer Sciences Corp. (CSC) for about $85 million in stock and borrowed cash. The deal instantly boosted ITDS' subscriber base from 700,000 to 4 million.
That's like striking gold in the phone business. And the company has won two really large customers, cellul ar provider Western Wireless of Issaquah, Wash., and Nextel, an ambitious startup that is finally gaining converts to its proprietary wireless phone network. But ITDS' costs increased, too, from about $3.5 million to $21 million, suggesting that the company will need some time to streamline TRIS and bring it in line with ITDS' other operations.
After steady but modest growth in '96 and after missing Wall Street's calls last year by a few pennies in each quarter, ITDS brought in 11 cents in the December quarter and 14 cents in March, right in line with estimates. At the current rate of growth, which Zacks estimates to be 187% over the next two years, ITDS is expected to bring in about $27 million this quarter, up from $26 million in the first quarter of this year - more than the company earned in all of 1997.
The stock has been pressed down in the past few weeks, despite estimates for this year and next having been bumped up a penny, largely because the company issued a secondary publi c offering of 3.7 million shares at the end of May. The shares are intended for payback of the acquisition price of TRIS.
There's some heightened degree of uncertainty in ITDS' stock, given that the company collects its revenue on a month-to-month basis, so depending on how much churn there is in the customer subscriber base, revenue growth could vary quite a bit.
As for the future, the convergence of voice and data networks is going to happen in the wireless world as well. And just this week Bos ch Telecom struck a deal with Cisco Systems (CSCO) to integrate its wireless technology with the latter's data packet gear. What kind of future does that spell for ITDS' billing system?
Furman Selz's Adams suggests that even if the wireless networks get taken over by packet data, a services company with really smart software will still have a place. 'If the world was just a wireline world, it would be very simple to collect information,' says Adams. 'If you've got Internet packets, data packets, v oice packets, going on the network at the same time, it's gonna make it much more confusing. Someone's got to count those packets, see what's in them. It's not simple anymore.'
In other words, it's a near perfect world for a company like ITDS. For more information and analysis of companies and mutual funds, visit SmartMoney Interactive at smartmoney.com |
