Cellular Services, Part 4
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Sector Snapshot
Cellular Services, Part 4 |
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Introduction
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Time to decipher the alphabet soup of acronyms that manage to cause confusion when discussing wireless technology. Unfortunately, technology-inspired marketing agendas have served to muddy already cloudy waters. The fundamental question raised by consumers and potential investors alike is: If people can easily understand wireless phone conversations at marginal signal strength levels with analog technology, why even bother with digital technology? All it seems to do is open a Pandora's box of perplexing technologies and technology standards. The bottom line is that digital wireless communications provide significant enhancements of bandwidth. In tandem with this improvement in bandwidth is the ability to deliver data services (remember, bits are bits regardless of their content). Since wireless technology is all about bandwidth (because capacity improvements translate directly into revenue gains), the shift to digital can be seen as part of the natural evolution of wireless. Another ancillary but equally important benefit is the shift of the signal processing burden to digital integrated circuits. The full benefits from the digital electronics cost curve have yet to be realized. This has prompted some industry watchers to opine that digital products will decrease in price more rapidly than existing products from the already squeezed lemon of analog. Overview of Mobile Communications Formats & Technology The ability to deliver bandwidth is a function of three variables: spectrum availability, signal strength, and the dimensions of signal processing that can utilize frequency, time and coding. These "dimensions" have been increasingly kicked around in popular literature and are referred to as frequency division multiple access (FDMA), time division multiple access (TDMA), and code division multiple access (CDMA). The first large scale cellular system used the single dimension of frequency to transmit information. This was known as Advanced Mobile Phone Service (AMPS). Burgeoning demand led to service declines as usage overwhelmed capacity. Clever equipment manufacturers developed new designs that used more signal dimensions to attain higher capacity and divided this capacity among users by utilizing sophisticated access control methods. AMPS AMPS transmits information by varying the pitch of the radio signal. Both the end user and base station "talk" at the same time but on different radio frequencies so that both sides of the conversation can be heard. This two-way communications approach is known as frequency division duplex (FDD). Splitting the call across two different frequencies allows both sides of the conversation to be transmitted simultaneously. As users are added to the system they are assigned two additional frequencies. This method of handling multiple users on different frequencies is called frequency division multiple access (FDMA). Employing separate frequency bands for duplexing (FDD) and access control (FDMA) is an easy and simple way of handling multiple two-way conversations. The obvious capacity constraints of the system stem from the ever-narrowing frequency bands as more users are added to the system. DAMPS Enter Digital Advanced Mobile Phone Service (DAMPS). In order to get beyond the capacity constraints of AMPS as well as reduce the cost per subscriber, digital modulation was employed in second generation cellular systems. DAMPS employs both the time and frequency dimensions for voice transmissions. The digitally encoded speech is transmitted as short bursts of data. Since normal speech occurs very slowly relative to the speed of electronics, the seemingly brief silences in conversations can be used by other calls. In this way, multiple users are involved in a form of communications timesharing. Each user is assigned a time slot with three slots per frequency channel. This method of access control is known as Time Division Multiple Access (TDMA) and results in three to four times more call carrying capacity than AMPS. From an operational perspective, the great advantage of DAMPS is that it uses the same radio channels as AMPS. This is why the first DAMPS phones are in fact "dual-mode," using digital technology if detected, otherwise defaulting to analog transmission. GSM The Global Special Mobile (GSM) system is the most widely adopted and has the broadest future deployment plans of any other digital radio telephone system. Just like DAMPS, GSM is a FDMA/TDMA-based system. (By now you should be undaunted by sentences that have almost as many acronyms as words!) In GSM, a single-frequency channel supports eight users who take turns transmitting data from the handheld units to the base station, with the other half of the conversation transmitted on a second frequency channel. It is important to note that GSM has been better received for its voice quality than has DAMPS, largely due to the higher rate voice coders that eat into its system capacity. CDMA In Code Division Multiple Access (CDMA) systems, the voice information is spread over a wide frequency band using a specially selected bit stream (code). Each channel is spread using a different code, minimizing interference and allowing all voice signals to be broadcast on the same frequency at the same time. This approach to increasing capacity is known as the "spread spectrum" technique of CDMA. The use of a single frequency channel greatly simplifies the build out of cells within a system by eliminating the necessity for frequency planning. New cells do not interfere with old cells. Unfortunately, using a single frequency can result in some high power transmissions jamming the reception of all users on the channel. Thus CDMA utilizes a great deal more signal processing power than a similar capacity FDMA-based solution because continuous monitoring and control of power transmission by handsets is required, which also increases the cost of the system. |
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Cash/Share: A measure of how much cash per share a company currently has. Current: The Current Ratio is a measure of liquidity. You just take the Current Assets and divide by the Current Liabilities. Ideally, this is 1.0 or greater in financially strong companies. DSO: Days Sales Outstanding measures the company's control on receivables. A company whose DSO is 50 takes 50 days to collect accounts receivable. Smaller numbers mean the company can use that money---a good thing. The figures herein use fiscal year receivable figures. EV/SR: The Enterprise Value/Sales Ratio is a better indicator than the PSR of the true value of a company. Where the PSR uses the company's market cap for the numerator, EV/SR looks at the Enterprise value. Both ratios use the denominator of trailing revenues. To get the company's enterprise value take the market cap (share price times shares outstanding), add the long term debt, and then subtract the cash and cash equivalents. GM: Gross margin, a measure of what percentage of each dollar of sales they get to keep after paying for the costs of manufacturing it. Market Cap = Market Capitalization. This is the number of shares outstanding times the current share price. Essentially, this is what the company is currently on sale for -- or at least what someone who acquired the company would have to pay. PEG: Price/Earnings Ratio over earnings per share (EPS) Growth Rate. This is a Foolish valuation that is also known as the Fool Ratio. It is detailed in our PEG area in Stock Research (Fool Main Screen --> Stock Research --> The Fool Ratio). Essentially, this is a short-hand for how underpriced or overpriced a stock is given the assumption that the Price/Earnings ratio should equal the rate of EPS growth. P/E: The Price/Earnings Ratio, this essentially gives you a ratio of how much you are paying for a dollar of earnings, allowing you to compare a stock to its peers on an apples to apples basis. PSR or P/S: The Price/Sales Ratio, this is dervived from dividing the current market capitalization of the company by the last four quarters trailing revenues. This gives a guide to how a company is valued relative to its peers when it does not have earnings to currently compare. PM: Profit margin, a meaure of what percentage of each dollar of sales a company gets to keep after paying for everything. RS: Relative Strength, a measure of how well the stock has performed relative to the market over the past two years. Scored on a scale of 1 to 99 with 99 being the best. Surprise: This ratio represents the latest quarter's EPS divided by the EPS that had been estimated. So, a 6% surprise simply means that EPS were 6% greater than expectations. WC/MC: Working capital is the difference between current assets and current liabilities. This is a measure of what percentage of the market cap is currently found in the working capital, signaling value. (WC-I)/MMC: Working Capital minus the Inventory divided by the Modified Market Cap. (Modified Market Cap. is the Market Cap. plus the company's long-term debt.) This ratio measures the working capital that's not tied up in inventory relative to its current market value. This is a measure of the working capital that can be used to growing the business. The inventory is subtracted from the working capital because in this industry the liquidation value of the inventory is lower than what the FIFO or LIFO value would indicate. YPEG: The Year-ahead PEG, this guy is also detailed in our PEG area in Stock Research (Fool Main Screen --> Stock Research --> The Fool Ratio). Essentially, this is a short-hand for how underpriced or overpriced a stock is given the assumption that the Price/Earnings ratio should equal the estimated long-term growth rate. |
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In June 1993, the FCC initiated the sale of radio frequency spectrum ostensibly for "the next generation of cellular," presently coalescing around PCS. As part of the US Government's licensing process the USA was divided into 51 Major Trading Areas (MTAs) and 492 Basic Trading Areas (BTAs). Two PCS licenses were issued per MTA and four per BTA, making a grand total of 2,070 new mobile licenses available throughout the US. The FCC then spliced the spectrum into blocks, creatively designating them A through F, and began to offer them up for sale to the highest bidder. The broadband spectrum was allotted both 10mhz and 30mhz of bandwidth (the size of the section of frequency spectrum). Hence the term "broadband," which operates in the 1850-200mhz range. The result of the first three rounds of the auction are shown in the Carrier Technology Standards Chart. As can be seen, the three dominant players are Sprint Telecom, AT&T, and NextWave (reselling service under MCI brand name). It's not surprising that the three largest carriers have their hands in the wireless cookie jar, with the future hopes of providing complete turnkey telecommunications packages. This "marathon of industry giants" is just beginning to show promise that there will be quite a battle in the stretch. A look at the competing technology standards and their implications for the battle to come is illuminating. Standards & Companies A look at the Digital Standards Chart shows the international technology breakdown by country while the Carrier Technology Standards Chart shows the technology standards implemented by the major players. This serves as the entry point for our analysis. Current PCS customers (as defined by the FCC) are all using GSM based PCS1900 equipment. Early handsets that were developed utilize single mode/single band technology that only work on PCS1900 systems. The European origins of PCS1900 make the networking protocols incompatible with North American analog cellular networks. This is not the case with DAMPS and CDMA, which were born and raised domestically. Network incompatiblity means that PCS1900 subscribers are not able to roam across America's amber waves of grain (cellular 800mhz networks). Nowhere is this technology issue more pressing than with Sprint's existing PCS build-out in the Washington area. Looking at the list of top 10 markets near the bottom is a company called APC, Bethesda, MD based American Personal Communications. APC's technology preference reveals GSM based PCS1900. It just so happens that APC use's the Sprint brand name in marketing Sprint Spectrum PCS. A look at parent company Sprint's technology preference reveals CDMA, which the company hopes to have built-out in 16 MTA's by summer, under the name Sprint PCS. The company is overlaying a CDMA network in the Washington area, where subcribers to Sprint Spectrum utilize GSM phones. Since GSM phones are incompatible with a CDMA network an eventual hurdle will have to be surmounted by the company. Ultimately, perhaps a small problem for the company, but essential conceptually for understanding the standards issues that are being raised. |
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Although Aerial Communications is a new company, it is backed up by a firm with 25 years of experience in the telecommunications and wireless industry. Aerial Communications is a subsidiary of Telephone and Data Systems, Inc. (AMEX: TDS), a $1 billion diversified telecommunications company. TDS provides local telephone, cellular, and paging services to more than 1.8 million customer in 37 states and the District of Columbia. TDS has grown it revenue at an annual rate of 26 percent since 1990. Aerial Communications is strengthened by its association with TDS and its affiliated companies: United States Cellular, a top 10 cellular company serving over 650,000 customers in 142 markets; TDS Telecom, which operates 102 telephone companies in 28 states; and American Paging, Inc., with more than 802,000 customers. In addition TDS owns 80% of APT. American Portable Telecom (APT) has licenses to provide digital wireless Personal Communications Service (PCS) in several major US markets, including Houston, Minneapolis-St. Paul, Pittsburgh, and Tampa-St. Petersburg-Orlando, covering more than 25 million of the US's population. The company plans to launch digital wireless service (including voice service, high-speed data, fax, and two-way text messaging) in these markets in 1997. |
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CellStar is an integrated wholesaler and retailer of cellular phones and other wireless telecommunications consumer products, with operations in the United States, the Asia-Pacific region and Latin America. It distributes phones made by Ericsson, NEC, Nokia, and Motorola to retailers, carriers, exporters, and dealers in the US and abroad. It also provides cellular service activation. The company is also known for its sale of phones to underserved less developed countries in order to meet their ever-burgeoning demand The Company experienced a net loss of $12.3 million in the third fiscal quarter, primarily due to unusual expenses incurred in its South American operations. The South American loss was attributable to $14.9 million of unusual expenses including an $8.5 million increase in trade accounts receivable reserves and a $2.0 million write-off of a deferred tax asset. Total revenues increased $25.3 million, or 12.8%, from $198.3 million in the third fiscal quarter of 1995 to $223.6 million in the third fiscal quarter of 1996. |
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CommNet Cellular operates, manages, and finances cellular telephone systems mostly in rural regions of the US. The company provides a whole host of telecommunications services, including wireless local and long-distance telephone service through mobile, portable, or fixed telephone equipment. Presently the company owns interests in over 80 licensed cellular telephone systems, primarily in rural areas, in New Mexico, North Dakota, Wyoming, Utah, Colorado, South Dakota, Idaho, Iowa, and Montana. The company also operates about 20 CommNet Cellular retail stores and several company-staffed kiosks in Wal-Mart stores. The Company stated that managed market subscribers increased 39% to 211,278. This is an increase of 59,796 subscribers or 14% more customers added than in the fiscal year ended September 30, 1995. The Company also reported that consolidated operating cash flow was up 95% to $38.2 million which was actually ahead of the prior year's growth. Operating cash flow in the fourth quarter was seasonally strong representing 43% of thetotal cash flow for the year. In addition, the Company announced that during the fourth quarter it had achieved a significant milestone in generating consolidated, quarterly net income, on a pure operating basis, for the first time in its history. |
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InterDigital Communications develops advanced digital wireless telecommunications systems for voice and data. Its premiere product is the UltraPhone radio telephone system that uses patented TDMA technology to provide businesses and households with access to wireless basic telephone service. InterDigital sells the phones primarily to telephone companies, which sells them to users in rural and near-urban areas where the high cost of telephone line installation makes conventional telephone service undesirable. The company is working with German conglomerate Siemens and South Korea's Samsung Electronics to develop new wireless technology. InterDigital's total third quarter revenues were $9.4 million compared to $5.8 million for the third quarter of 1995. The net loss for the third quarter of 1996 totaled $8.3 million compared to a loss of $3.3 million in the comparable quarter of 1995. The Company reported a loss of $0.18 per share for the third quarter of 1996 compared to a loss of $0.07 per share in the prior year period. |
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PriCellular owns and operates FCC licensed cellular telephone systems in 6 market regions in the US. An alliance with telecommunications giant McCaw Cellular Communications gives PriCellular access to that company's cellular network. PriCellular plans to grow its cellular network by purchasing other systems and offering service to additional subscribers. Upon acquiring a cellular system, PriCellular effects significant management, operational, and organizational changes to increase the number and quality of subscribers. PriCellular markets its service under the CELLULAR ONE brand name and participates in the North American Cellular Network, which links cellular systems nationwide to form a seamless network. |
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Racotek provides mobile data communication software products and services that extend corporate information systems to people in the field. In addition to its software products, the Company provides professional services, systems integration, training, and end-to-end mobile network system support. Racotek targets its products and services at organizations in the transportation, field service, sales/order entry and utility markets. Net revenues for 1996 were $6,883,000, compared to $6,088,000 for 1995. Product revenues for 1996 were $1,906,000, compared to $3,298,000 in 1995. Service revenues for 1996 were $4,977,000, compared to $2,790,000 in 1995. The 1996 net loss was $10,244,000 or $0.42 per share, compared to $12,347,000 or $0.52 per share in 1995. |
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The SpectraLink Pocket Communications System provides business users with wireless phones for use in the workplace. By placing small digital radiotransceiver cells called Remote Cell Units throughout a building or campus, users can make and receive calls anywhere in the facility using five-ounce portable Pocket Telephones. The Pocket Communications System attaches to an existing PBX, key system or Centrex service. Because all calls are routed through the existing phone system, there are no air-time charges or monthly usage fees. The company's third quarter net income was $460,000 on sales of $5.1 million, compared to $237,000 and $4.4 million in the third quarter last year. On a per share basis, second quarter net income was equal to $0.02 per share, compared with $0.02 a year ago. For the nine month period, SpectraLink achieved net income of $2.5 million on net sales of $16.8 million, compared with $491,000 and $11.7 million respectively, last year. On a per share basis, nine month net income was equal to $0.14 per share, compared with $0.03 in the comparable period last year. |
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360 Communications Company and its subsidiaries provide wireless voice and data telecommunications services. The Company operates as a general and limited partner and majority owner of cellular systems in various metropolitan and rural service areas and as a limited minority partner or manager in other cellular systems. On October 14, 1996, the Company announced plans to consolidate the North Carolina region with the Southeast region. The expanded region includes all markets in North Carolina, South Carolina, Florida and Alabama and is called the Southeast region. The Company operates in three additional regions in the United States: Mid-Atlantic, Midwest and West. The Company formerly was a wholly-owned subsidiary of Centel Corporation, which was a wholly-owned subsidiary of Sprint Corporation. The company was spun off in March of 1996. |
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Digital Cellular Ticker PE Price/Ca PSR ROE LT Debt/Eq
Aerial Communications AERL NA 2.52 NA -7.62% 0.03
CellStar CLST NA 38.16 0.45 -8% 0.82
Commnet Cellular CELS NA 18.62 3.20 -7.60% 4.22
Interdigital IDC NA 4.83 7.17 -9.29% 0.05
Pricellular PC NA 3.40 3.78 -15.44% 1.91
Racotek RACO NA 7.84 14.28 -54.37% 0.00
Spectralink SLNK
360 Communications XO 52.04 287.50 2.62 25.11% 4.57
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