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 Arterial Vascular
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Losers:
 ATC Communications
 Data Race Inc.
 Cellular Technical
    Services
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The Best and Worst Stocks of 1997
12/19/97

Loser -- Cellular Technical Services

(Nasdaq: CTSC) Price -- $2 1/4
Phone: (206-443-6400)
Move: Down 89.82% through December 15, 1997

The Company's Biz. Cellular Technical Services protects the wireless telecommunications industry from fraud, preventing hackers from stealing precious phone time from legitimate users. The company's main vehicles for doing this are its Blackbird fraud prevention application and its No Clone Zone roaming fraud prevention service. The company has significant agreements with Airtouch Cellular, Ameritech Cellular, AT&T Wireless, and GTE Mobilenet of California and Virginia.

By using the PreTect application developed on Cellular's Blackbird platform, a wireless service provider can set up a "user/device authentication" system that "proactively prevents cloning fraud in real-time." All of the company's products use radio frequency-based fingerprinting. The company's major competitor in this arena is the recently public Corsair Communications (Nasdaq: CAIR).

The Story. Many stories of companies locked in the share price decline death spiral begin with no history of sustained profitability. This story is just like all of those others and worse, given that Cellular Technical threw in some changes in its revenue recognition policy in the fiscal first quarter that really gummed up the works. Although the company was confident that its ability to deploy the Blackbird system justified recognizing revenue faster, future orders did not come through, leaving management holding the bag. Looking at a graph of the last seven quarters of revenues is like looking at a very thin mountain peak -- never the sort of pattern you want in an investment.

Even though the company booked a record $17 million in revenues in the first quarter reported in mid-February, management disclosed some deployment timing issues that put a damper on the party, as did the resignation of the company's chief operating officer. When orders expected at the end of the second quarter did not materialize as planned, the company was forced to forecast a loss in early July. Questions about whether or not the company even had a patent for its Blackbird system dogged the shares mid-year. The late July second quarter earnings statement came complete with a warning that orders in the second half would get worse, something that the company proved in early October when it reported $993,000 in revenues versus $10.3 million the year before.

How Could You Have Avoided This Loser. The warning at the beginning of the year was pretty bold, particularly considering that, in spite of what appeared to be short-term problems, insiders responded by filing for a 400,000-share offering two weeks before investors found out about this gem. Combined with management defections, changing accounting standards, and a total lack of any history of profitability, this company could never have been considered a safe bet.

Added to all of the uncertainty is the fact that the company's products are focused on analog cellular, meaning that they are not useful for PCS and digital cellular applications. Even considering that the analog market is currently the largest available cellular market and that the company believes its products could be adapted for use in digital markets, this could still represent a significant limitation to the company's future growth.

The Future. While Cellular Technology has been struggling to make sales and complaining of longer order cycles holding up adoption of its Blackbird platform, its competitor Corsair has been reporting consistent earnings growth. Given Cellular Technical's rate of cash burn, unless it starts generating cash the company will run out of it in the next two or three quarters. With mounting losses, a price/sales ratio that still is above 2.0, and a pretty limited balance sheet, investors might consider retrieving what they have left in the stock and moving on.

-Randy Befumo (TMF Templr)

Next Article: Loser -- Boyds Wheels

 

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