Taking Stock: Investors Just Don't Hear The Call

A stocking full of coal is all that shareholders of Boston Communications Group Inc. have gotten this year. As of Dec. 10, the company's stock price was down 38% since the beginning of the year. You might presume revenue is down and the company is losing money every quarter, but that isn't the case. There are, however, other reasons behind the decline.

Boston Communications offers prepaid wireless phone systems to carriers such as Verizon Wireless and Cingular. Normal wireless phone service, referred to as post--paid, is when payment is made after actual usage. Post--paid subscribers have been the major source of revenue growth for carriers. As penetration rates have passed the 60% mark, growth has slowed, so wireless carriers have turned to other sources of growth: people who don't qualify for or don't want a post--paid calling plan. Examples are teenagers, people with poor credit, and recent immigrants, who don't have a credit history.

As with so many other telephone services, getting the billing right is often the hardest part. Prepaid wireless billing needs to be real time, or else a call could continue beyond the paid--for time. Boston Communications is one the few companies that offers a true real--time system. The company also makes it easy to add time on its prepaid system.

Boston Communications gets paid per minute of use across its network. As minutes of use have increased in the last couple of years, revenue has grown. In the third quarter of 2003, revenue increased 59% over last year. Meanwhile, gross margin expanded by more than 9 percentage points to 73.1%. For the next quarter, Boston Communications expects revenue from billing and transaction--processing services (90% of third--quarter revenue) to be up 60% year over year, with earnings per share hitting 23 to 24 cents, more than double that of last year.

Two issues cloud Boston Communications' future. First, Freedom Wireless has sued the company, claiming that the intellectual property at the heart of Boston Communications' offering belongs to Freedom. The lawsuit is pending. The bigger issue is the possibility of customer defection. Verizon Wireless is Boston Communications' largest customer, accounting for about half of revenue. Recently, Verizon started to develop its own prepaid platform. Information about the success of Verizon's efforts, I believe, will likely trickle out next year, with Boston Communications not taking a hit until 2005. On the positive side, Nextel has tested Boston Communications' prepaid wireless offering and may select it as a national partner. This could make up for some revenue lost if Verizon defects.

Boston Communications' stock price got clobbered once the Verizon news hit. At current levels, the market appears to be pricing the company as if the loss of Verizon is a done deal, so the stock is trading at eight times First Call '04 earnings--per--share estimates. If the stock continues to fall, it may be cheap enough for me no matter what Verizon decides to do.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

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