With the advent of the cell phone and mobile communication devices like Research In Motion's
Considering the state of the industry, it stands to reason that most investors would shy away from buying shares in the buggy whips of electronic communications. And when you see that USA Mobility's shares are down 20% from where they were recommended a year and a half ago, it's understandable that subscribers might be less than enthusiastic about the company's performance. But perhaps things aren't all that they seem.
USA Mobility was formed with the merger of the original Hidden Gems pick Arch Wireless and its arch-competitor Metrocall. It created the country's largest paging company, albeit in a dwindling, though not necessarily dying, industry. It's been pointed out numeroustimes that there are some hardcore users of pagers who swear by their reliability -- people like doctors and truckers, for example, who find it essential that messages and pages get through. While cell phones and such are improving their capabilities, there are still many places where signals are weak or non-existent, and calls, messages, and pages -- yes, some of these devices can double as pagers -- get dropped or lost, or simply evaporate into the ether. It's rare for that to happen with pagers.
Part of the problem with the merged businesses, however, aside from the dwindling number of users (though the rate of dwindle has slowed), has been the costs and logistics associated with meshing the two companies together. For example, there has been a lot of overlap in coverage areas between former Arch Wireless and Metrocall customers, each of which had its own transmission towers with long-term leases. Deciding which towers to keep and where, and what to do with the remaining ones, has been a problem. You also don't need to have the same number of employees the two companies had separately hired, and relocation and termination costs have resulted in $2.4 million in charges to USA Mobility earlier this year.
The company is seeking to rectify the transmission tower lease problem by reducing the number of networks by 50% by 2008. It has entered into an agreement with Global Signal
No analysts cover USA Mobility, so it has no fear of running afoul over missing estimates when it reports earnings in the next week or so. Yet investors should watch the number of units in service that the company reports, as well as the average revenue per unit (ARPU) realized. As noted above, the units in service continue to decline. In March, the number of units declined by 347,000 over the prior quarter (which was down 388,000 from the quarter before that), and in June it declined by 272,000 units. Revenue was down slightly to $9.89 per unit compared with $9.96 in March.
Yet as costs are contained, subscriber losses slow, and revenue per unit stabilizes, USA Mobility should be able to continue its cash-generating ways -- cash on the balance sheet grew to $42.6 million as it finished paying off the loan it had taken out to complete the merger with Metrocall. With an enterprise value-to-free cash flow ratio of just 11, it looks as though this might be a gem worth dusting off.
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