interesting comments about AWE
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AWEful
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By Porter Stansberry
"What divides men is less a difference in ideas than a
likeness in pretensions."
-- Pierre Jean de Beranger
*** The crowd wasn't pleased with my newsletter last month.
*** Says 'Zman' on the Pirate Investor message board, "I am
sure EVERY one including Porter will agree... the July
issue did not measure up to the high standard [of] stock
picks we've come to expect."
*** And I thought it was only my mother who presumed to
read my mind...
*** More sincerely, I have not received so much negative
feedback about a research report since 1999, when I wrote
for the first time that IBM was inflating its earnings and
that Lou Gerstner was destroying the company's balance
sheet. An IBM employee wrote to my publisher alleging libel
and many readers wondered aloud whether or not I had lost
my mind.
*** Being right is often cold comfort. Sure, shares of IBM
fell 50% from their peak for the same reasons I suggested
they must, but Uncle Lou still parades around like a
business visionary and recently spent $11 million buying
two premium pieces of property on Nantucket. Fate isn't
always determined by virtue...
*** Heretic members of Pirate Investor – those who do not
subscribe to my newsletter – may be wondering what I did to
earn such scorn last month. Normally I reserve my most
recent research for my paid-up subscribers, but, putting
finger to the wind, I detect few of my readers thought my
most recent issue was worth their time, nevermind their
money. Thus I doubt they'll mind my sharing it.
*** The hypothesis of my July newsletter was that AT&T
Wireless (NYSE: AWE) should, in a relatively short period
of time, go bankrupt. I reached this conclusion by
observing one significant and problematic trend: since
1994, the more subscribers AWE added, the more money it
lost.
*** Today, AT&T Wireless' executives want investors to
believe it has finally reached critical mass and turned the
corner to profitability. In bold print on its recent
quarterly earnings report, AWE's executives write, "OIBDA
Increases 16 Percent to Record $1.2 Billion OIBDA Margin
Rises to 30.1 Percent Services Revenue Grows 8.7 Percent
Operating Free Cash Flow Hits $546 Million"
*** What in the world is OIBDA, an investor might fairly
ask? OIBDA is what AT&T Wireless makes in lieu of real
profits. It is the money AT&T Wireless collected on its
operations, minus the real world cost of depreciation. I
can explain OIBDA best this way... Imagine if you were a
cab driver and it cost you $800 a month to lease your cab
and its license. Assuming you brought in $1000 a month in
fares, what would your profit be? You and me would say
$200. But AWEful's executives would claim, in bold letters
on their press release, that their cab made $1000 in OIBDA.
If you want more than OIBDA dividends, I suggest you look
more closely at AWEful's earnings report.
*** AWE's executives also brag they've earned something
called "Free Cash Flow." Now that sounds very promising,
doesn't it? But wait... much later in the press release...
you will read this: "AT&T Wireless cautioned investors not
to look at operating free cash flow for the first two
quarters of 2003 as representative of its performance... "
*** Or, in other words, "we know that we're not really
generating free cash flow, we're just bragging about it in
our headline in hopes that mutual fund managers don't read
any further... "
*** Here's the real problem with AWE. It costs the company
about $30 per month to service customers because it must
provision two separate nationwide cellular networks. This
botched technology is Ma Bell's dowry to its cellular
spin-off and it's a doozy. For comparison, consider it only
costs Nextel $11 per month to service each customer.
*** On top of these hugely inflated operational costs, AWE
also has capital costs to build and maintain its network.
Using OIBDA measure, these costs don't exist. And oh buy
those AWEful executives love to pretend that they don't
exist at all... if only they could get the banks and
bondholders to ignore those debts... But of course, these
costs exist in the real world: AWE's depreciation alone
runs $11 per subscriber, per month. Thus, total real costs
equal $41 per month, per subscriber. That compares to total
costs of $23 for Nextel.
*** AWE's executives made a big deal about increasing
revenues for the quarter. But this came from new
subscribers... who are expensive to service. Revenue per
subscriber was flat. Which means AWE isn't any closer to
having a sustainable, profitable business. The reason is
simple: it costs AWE too much to service each customer,
about twice as much as its most important competition.
*** This fall, along with soaring capital expenditures
(which must be made in order to meet a $9.8 billion network
build-out obligation) AWE must also deal with the new, FCC
wireless number portability rule.
*** When you can change your cell phone provider as quickly
and easily as you can change your long distance provider,
how well do you think the most expensive network provider
will fare?
*** AWEful is pinning a lot of hope on OIBDA. I'm betting
against. Call me crazy...
P.S. – Post your best suggested original acronym for what
O.I.B.D.A. really stands for on the Pirate Investor message
board. Here's my first shot: Only Idiots Believe
no-Depreciation Accounting
AI
