Woe is this wireless stock: Outsourcing firm WFI tries to rebound

When Wireless Facilities Inc. went public on Nov. 5, 1999, the first-day run-up of the company's per-share price put it on par with hit Internet plays. WFI priced 4 million shares at $15 each. By the end of the first day's trading, the stock hit $62, a 313% jump that put WFI's market capitalization at $2.4 billion - not bad for a firm that posted $14 million in revenue and $1.1 million in net income for 1998.

The big first-day "pop" was not unusual in a market where many technology companies avoid earnings and trade at large multiples to sales. What has been unusual is WFI's precipitous decline since. The stock has sunk as low as the mid-30s, although it recently bounced back to the $46 range. In an earlier era and in a different business, the decline might not mean as much. But in the booming U.S. equities market, a poorly performing stock can tarnish a company's image. Furthermore, because young companies increasingly rely on potentially lucrative stock option packages to attract personnel, a tepid stock can hamper recruiting and retention. That goes double for services firms such as WFI.

By any measure, WFI's business is solid. The company provides an unequaled range of network planning, RF engineering and maintenance services to cellular carriers and equipment vendors building wireless networks. A typical assignment, which includes the buildout of 100 to 1000 cell sites, yields from $12,000 to $50,000 per site of revenue, according to a report by Credit Suisse First Boston analyst Marc Cabi.

Since its founding in 1997 by brothers Massih and Masood Tayebi (CEO and president, respectively) WFI has completed projects for 95 customers in 26 countries, including AT&T affiliates Telecorp and Triton PCS, Metricom and Siemens. The exploding demand for mobile voice and data services will mean big bucks for WFI, analysts said.

The back-of-the-envelope market analysis WFI uses to determine its addressable market says that every new PCS or cellular customer that's added to a voice network represents about a $50 service opportunity, said Tom Munro, chief financial officer of WFI.

Worldwide, wireless subscribers are expected to grow from 303 million in 1998 to 1.1 billion in 2003, according to IDC statistics. That adds up to a $30 billion opportunity for deployment services.

WFI also sees growth in network management outsourcing, Munro said. In such engagements, a project team stays in-market and drives testing for coverage and quality. This third leg of service could generate annual recurring revenue of $35 per wireless subscriber, or a total opportunity of $38.5 billion by 2003, Munro said.

So what's keeping investors from viewing WFI as a high-growth wireless play? One possible explanation is the lack of a peer company with which to compare WFI's valuation.

"We have three different analysts publishing on us, and all three pick a different basket of `comps,' [based] primarily on the analyst's background," Munro said.

For example, Hambrecht & Quist analyst Dirk Godsey uses as comparisons a combination of Internet professional services companies, such as Scient, Viant and Sapient and wireless network operators such as Advanced Radio Telecom, Teligent and Winstar Communications. Most of these companies' stocks have outperformed WFI and trade at higher price-to-sales multiples than WFI's.

"The market is there - it's really an issue of them getting better known," said Craig Ellingsworth, a senior analyst with The Yankee Group. In the long term, the network management piece of the business may not be the cash cow that the company expects, he said. Wireless carriers have been loath to outsource network operations so far because it doesn't save much money. Carriers also must have a lot of faith in the outsourcer's ability to meet service level agreements, he said.

The view from inside WFI is a little different. Wireless carriers increasingly will differentiate their services on functionality, feature sets and pricing as customers take quality and coverage for granted, Munro said. "The sheer temptation as prices fall will be to outsource to reliable trusted partners that remaining piece - network management."

The weak performance of WFI's stock is tied to a lack of news since the company went public, Munro said. After WFI posts its fourth-quarter earnings on Feb. 3, he expects higher trading volumes.

"I'm confident that there's ample room for us to demonstrate more value than it's priced at today," Munro said. Meanwhile, "there's a $10 fine for mentioning the stock price during business hours."