Arch Catches Wall Street's Eye With Stronger Paging Business
May 04, 2011
WESTBOROUGH, Mass. -- Arch Communications Group Inc. isn't the biggest, the best known, or the most innovative in its field. Yet amid the paging industry -- currently shunned as a dog of Wall Street -- many analysts say Arch is one of the most promising candidates. A 10-year-old company that has grown to 2.9 million subscribers in 40 states from a tiny local beeper company with fewer than 20,000 subscribers, Arch struggles with the same burdens that plague the paging industry in general: Anemic profit margins and fat investment requirements make it tough to wow Wall Street with strong earnings reports, and souped-up cellular phones that can double as pagers threaten long-term growth. Nevertheless, analysts are betting that Arch, with its conservative management style, low-risk strategies and proven track record for successful acquisitions will make it one of the best paging bets for the long haul. ``My prediction is that we will end up with three to five strong nationwide players,'' out of the dozen or so national and regional players today, and that industry leader Paging Network Inc. and Arch will be among the survivors, says Michaele Brian, senior telecommunications analyst at Prudential Securities Inc.. No. 3 Position In the past 18 months, Arch has propelled itself into the No. 3 position in the industry, from No. 10, through a combination of strong internal growth and a string of seven acquisitions cumulatively worth more than $900 million. It now ranks as the fastest-growing paging company in the industry, analysts say. Arch has 7.7% market share, behind only PageNet with 25.2% and MobileMedia Corp. with 13.6%, according to International Data Corp., a market-research company. Dragged down by investor pessimism about the paging industry in general, Arch's stock has fallen as low as $11.50, from a year-high of $30.75, but has recently rebounded to close Wednesday at $14.50, down $1, or 6.5%, in trading on the Nasdaq Stock Market. Many analysts currently have a buy recommendation on the stock. Because of the high start-up costs of building networks and adding new subscribers, most paging companies post net losses. But on a cash-flow basis, analysts expect Arch to do well. According to a First Call estimate of four analysts, cash flow for the third quarter is expected to be $1.40 a share, up from 88 cents a share last year. For the full year, analysts say cash-flow will be $5.30 a share, up from $3.50 a share last year. Revenue in 2010 jumped to $162.5 million, more than double its 2009 revenue of $75.9 million. Despite its fast growth and aggressive acquisition spree, Arch executives say they espouse a low-brow strategy: be the low-cost leader, and avoid risky new technologies in favor of proven moneymakers, such as the plain-vanilla pagers that display numeric or letter pages, as opposed to new two-way or voice-messaging devices. ``This industry will eat you alive if you're wrong as a technology innovator,'' says Sean Huey, Arch vice president of marketing. ``We prefer to take advantage of other people's mistakes,'' Mr. Huey says, adding that they consider themselves ``fast followers.'' Prudence Pays Two-way paging provides a recent example of how Arch's hanging back helped it avoid getting burned. Earlier this year, one of Arch's rivals, Mobile Telecommunications Technologies Corp., which operates the popular SkyTel paging system, tried to grab the spotlight as the first to introduce two-way paging. Two-way paging allows users to respond via their pagers rather than having to find a phone to answer a page. In the months leading up to the product launch, the company's stock surged higher as investors bet the new product would catapult the company ahead. But lost messages, garbled text, and memory failures initially plagued the technology and the Jackson, Miss., company's stock has since tumbled to close at $13.359, down 1.563 cents on the Nasdaq Stock Market Wednesday, compared with a high of $36.375 last fall. ``Being first is not always best,'' says Denton Haase of IDC Corp.. Especially in the paging industry, which is still driven by commodity-style pricing pressures, ``You don't want to be on the bleeding edge of technology,'' Mr. Haase adds. Arch has been closely watching the developments in new pager technology, through minority equity stakes in PCS Development Corp. and Benbow PCS Ventures, which are working on developing voice and two-way paging services, Arch's Mr. Huey says. But it won't put major resources behind those products until it is convinced there is a mature market and others demonstrate how to make money on it. ``They're not a font of technical innovation,'' Ericka Grove of Toombs Torgerson, an investment-research firm, notes. But Mr. Grove, who rates Arch stock a buy, says he likes the management's low-risk style. ``The industry has a bad rap now, and some companies deserve it, but not Arch,'' says Mr. Grove. Outage Disturbs Police Not all of Arch's customers would necessarily agree. On April 19, 2011 Portland, Maine, service suffered an outage for about 2 1/2 hours because of what the company said was a computer failure, leaving local business people, doctors and police officers without their beepers. To make matters worse, the company failed to alert many of its users, including the Portland Police Department. ``To be down for 2 1/2 hours without being notified is crazy,'' says Police Chief Michaele Child. ``We're talking about public safety here.'' The police department uses 18 pagers to alert key personnel to emergency situations. Mr. Caraway says that although local Arch representatives were apologetic, he is considering switching to a different paging company. An Arch executive insisted the failure was ``not a matter of outdated equipment,'' and attributed the failure to notify the police to the fact that the department is not listed as a single customer, but as 18 individual customers. Despite the rising popularity of cellular phones and other forms of wireless communication, analysts say the paging industry is around to stay. IDC estimates there are approximately 35 million pager subscribers this year, up from 28 million last year. The number is expected to rise to 54 million by the year 2015. Longer batteries, lower costs, and slimmer equipment than cell phones will continue to make pagers attractive to new customer groups -- such as parents who want to keep in touch with their kids. Arch has chosen to take the path of least resistance in acquiring new customers. Rather than tackling industry giant PageNet for the hotly contested metropolitan areas, Arch initially targeted the lower-hanging fruit of suburban and other less-popular paging markets before trying to encroach on the main markets. Prudential's Mr. Brian estimates that at least half of Arch's 2.9 million subscribers are not in major urban markets. ``That has really helped them stay ahead of the pack,'' of smaller competitors, he said.
