Portion of H&Q report yesterday where they reiterated a "buy" rating. Jeff
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Controlling the Cable Pipes
Excite@Home has exclusive relationships with cable operators representing
roughly 60% of the domestic market for cable television. We believe that much
of the company's valuation is derived from these exclusive relationships. As
a result, recent uncertainty surrounding the future of the company's exclusive
control of its partners' cable networks has pressured shares. We believe that
pressure on ATHM shares related to this uncertainty could provide a buying
opportunity for two reasons:
*By the time the majority of the exclusivity agreements expire in 2002, we
expect Excite@Home to serve over 5 million customers or roughly 60% of the
market for cable modem service and over 40% of the entire broadand market,
giving the company an "AOL-like" competitive position among consumer Internet
service providers.
*Even if Excite@Home exclusivity is terminated, the company has built an
infrastructure that could be utilized to serve other ISPs delivering cable
modem service. In other words, Excite@Home could actually benefit from
forthcoming potential modem competition.Excite@Home Distribution Via Dell
Excite@Home announced a partnership with Dell Computer that will allow Dell
customers to sign up for @Home's high-speed cable Internet service. Dell
customers will be able to place orders for the @Home service with a Dell
customer service representative when ordering a Dell Dimension desktop
computer or Inspiron notebook PC. We believe the Dell partnership provides
@Home with a significant distribution channel for its high speed Internet
service. By partnering with Dell, @Home has access to new computer buyers,
who are primed to sign up for Internet access. Furthermore, we expect that
Dell will ultimately pre-install Excite@Home software and hardware,
significantly expediting the deployment process. While we are not raising our
@Home subscriber numbers, we believe the Dell partnership could potentially
accelerate @Home subscriber acquisition.Excite@Home Deutschland
Excite@Home announced a joint venture with Tele-Columbus and Deutsche Bank
Investor to offer the broadband Excite@Home service in Germany. We expect
Excite@Home to launch a broadband consumer Internet service in Germany that is
comparable in speed and features to the company's leading broadband service in
the US. In addition, Excite@Home Deutschland should offer content tailored to
German users.
Tele-Columbus, Germany's second largest cable operator behind Deutsche
Telekom, serves 1.7 million customers in a cable footprint of 2.2 million
homes passed (roughly 10% of Germany's households). The agreement also
includes other cable systems that Tele-Columbus's parent company Deutsche Bank
Investor may acquire in the future. With 27 million homes passed, Germany is
the second largest cable market in the world behind the United States.
Furthermore, with roughly 11 million users, Germany is the third largest
Internet market in the world behind the US and Japan.
Excite@Home Deutschland should strengthen the company's position in the
growing market for Internet service in Western Europe, where IDC estimates
home connections to the Internet will grow at a compound annual rate of 39%
between 1998 and 2003, compared to our estaimte of 16% compound annual growth
in the US during the same time period. The German service should also
compliment the company's other international initiatives including @Home
Nederland in the Netherlands, @Home Japan (a joint venture with Jupiter
Telecommunications and Sumitomo Corporation), and @Home Australia (a joint
venture with Cable&Wireless Optus). Excite@Home's cable footprint now stands
at 69 million homes passed, 16.3 million of which are outside the United States.
Third Quarter Preview
By the end of September 1999, we expect Excite@Home's subscriber base to climb
to 780,000, representing 160,000 net broadband subscriber additions and 26%
sequential growth (over 270% annual growth). The continued explosive
subscriber growth should fuel third quarter sequential @Home revenue growth of
31% (over 400% annual growth) to over $26 million. Media revenue, which
includes revenue from the Excite portal business, should remain flat
sequentially at under $71 million as a result of the termination of the
Netscape agreement. With an additional $11 million from the @Work business,
Excite@Home total third quarter revenue should pass $108 million, representing
87% annual growth.
Modest improvements in cost structure should allow Excite@Home to narrow its
operating loss to $6.5 million, from $7.1 million in the second quarter. We
still expect the company to break even on the operating line in the fourth
quarter of this year. Our third quarter recurring EPS estimate is a loss of
$0.01. Including merger-related expenses, our EPS estimate is a loss of $0.05.
Conclusion
With 620,000 customers, Excite@Home is the largest provider of consumer
broadband Internet service. In late May, the broadband ISP merged with
Internet portal Excite, giving the combined company two components of what
could become a complete, next-generation consumer online service. While
Excite@Home shares could experience pressure related to the company's ability
to maintain its exclusive relationships with the cable operators, we believe
that by the time these regulatory and market issues are resolved, the company
will have garnered enough market share and market power to establish it as one
of the leading operators in the consumer online service space. We believe
that continued dominance of the consumer broadband market as well as the
potential for consolidation activity will drive shares. Our rating remains Buy.
All stocks were priced after market close on September 27, 1999.
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