The first full-quarter results of two now-combined paging companies are in, and the numbers show precisely why it was necessary to form USA Mobility (NASDAQ:USMO) through the merger of Arch Wireless and Metrocall. Neither could have survived without the other.

Subscriber numbers continued to decline, as did revenues per unit in service. It's still a cash-generating business, though. USA Mobility was able to pay off a huge chunk of the long-term debt it assumed to pay Metrocall shareholders when the merger was completed -- yet the industry remains in a state of freefall. There was a reduction of 344,000 units in service for the fourth quarter, out of 5.9 million total, and the revenue per direct unit in service was $9.72, off 6% from the same period last year. Earnings were off as well, at $0.05 a share, down from $0.24 last year.

Pagers have a die-hard base of subscribers around whom USA Mobility's business is firming. Doctors and truckers, among others, need the reliability that pagers offer. But while one-way paging is becoming a bit anachronistic, two-way units are also dwindling. The rate of decline has slowed, however, which has management somewhat heartened. Though subscriber numbers declined by 344,000 units, it was less than the 384,000 pro forma losses realized in the fourth quarter and the substantial 499,000 pro forma losses realized one year ago. Still, the fact that you're losing customers at a slower rate is nothing for investors to cheer about.

Service improvements by the cellular telephone industry are the paging industry's main problem. Cellphone providers have reduced dropped calls, dead zones, poor reception and such, while providing many of pagers' features. A Nextel (NASDAQ:NXTL) phone, for example, offers reliable walkie-talkie-like service just about anywhere (as you've probably realized from the annoying chirp before and after each Nextel phone's radio transmission.) Even Research In Motion's (NASDAQ:RIMM) Blackberry can provide numeric and alphanumeric pages.

USA Mobility faces an uncertain future, and it has been a difficult selection for the Motley Fool Hidden Gems service. First recommended by hedge fund manager and Fool contributor Whitney Tilson, it was seen not as a growth business or an asset play, but as a cash-generating company whose future free cash flows were considered undervalued at then-current prices. Interestingly, despite some synergistic problems it may face in reconciling service areas and overlapping facilities, the company's shares are only 7.6% lower than when it was first recommended.

As the business solidifies around its core user group, and revenues stabilize, it may yet be seen as a cash-rich company -- perhaps subject to a merger of its own. Yet with a trailing P/E still circling above 40 and an EV/FCF over 27, I find it lacking on valuation and would be hard-pressed to recommend an investment here.

Want to know the best-performing companies in Motley Fool Hidden Gems ? Sign up for a free trial today and get access to the current issue, plus our archives and subscriber-only discussion boards.

Page through these related bits of Foolishness:

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article.