02:12pm EST 3-Nov-00 Gerard Klauer Mattison & Co. (Cristinziano, M. 212-885-4
WGAT--3Q00 Shows Big Revenue Upside; Progress on Multiple Fronts--BUY
WorldGate*+ (WGAT)--3Q00 Shows Big Rev Upside; Progress on Multiple Fronts--BUY
Michael Cristinziano Thomas Blakey
(212) 885-4028 (212) 885-4070
mcristinziano@gkm.com tblakey@gkm.com
November 3, 2000
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Price^ 16.81 52-Wk Rng:50.00-13.00 New Price Target:58 NASDAQ^:3432
Old Price Target: 100
Shrs Out/Mk Cap: 22.5Mil/$378.3Mil 5YR Est Growth Rate: 100%
Avg Daily Vol (90 Day Avg): 171,000 L-T Debt/Cap: 0%
Float: 13.2 Mil.
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FY Ends -- EPS --
Dec. Curr Prior P/E
99A $(1.94) N.M.
00E (2.11) $(1.93)E N.M.
01E (1.27) N.M.
____________________________________________________________________________
Qtrly -- 1Q -- -- 2Q -- -- 3Q -- -- 4Q --
EPS@ Curr Prior Curr Prior Curr Prior Curr Prior
99A $(0.65) $(0.42) $(0.44) $(0.50)
00E (0.50)A (0.51)A (0.57)A $(0.48)E (0.52) $(0.44)
01E (0.52) $(0.46) (0.38) (0.26) (0.29) (0.10) (0.11)
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+ Gerard Klauer Mattison & Co., Inc. is a market maker in the security of
this company and may have a long or short position.
* Within the past three years, Gerard Klauer Mattison & Co., Inc. was the
manager (co-manager) of a public offering of the securities of this company
and/or has performed other banking services for which it has received a fee.
@ Quarters may not total due to rounding and/or weighted average share count.
^ Priced intraday.
N.M. - Not Meaningful
o 3Q00 results show strong revenue and subscriber growth; reiterate BUY.
WorldGate reported 3Q00 revenue of $6.6 million vs. $1.6 million and an EPS
loss of $(0.57) vs. $(0.44). Revenue was over 40% higher than our $4.7
million estimate and up 85% sequentially. The less-relevant EPS figure fell
short of our estimate of $(0.48) due primarily to one-time deployment and
marketing costs of $0.06 per share. Gross margins improved, but were still
poor at (37)%. We believe cost reductions will drastically improve gross
margins over the next few quarters. We are slightly upping our 2000 revenue
estimate but lowering our 2000 EPS estimate to a loss of $(2.11) from
$(1.93). 2001 estimates remain unchanged. We are reiterating our BUY rating,
but reducing our price target to $58 (from $100), based on a comparable
analysis. Our price target reduction is not an indication of waning
enthusiasm for WorldGate on our part, but instead, just a recognition of more
modest stock market valuations.
o Subscribers grew 58% sequentially to 68,000, at the high end of
expectations. We believe the company is on track to meet our full-year
subscriber estimate of 100,000. About 50% of subscribers are international.
We are also reiterating our expectation for a cumulative subscriber count of
600,000 for 2001.
o TVGateway headend installations and deployments have begun; but veil of
secrecy continues. Due to the clandestine nature of the TVGateway
consortium, WGAT did not provide specific revenue breakdowns. We are
troubled by the lack of detail (e.g., what was TVGateway's contribution to
revenue versus InternetTV? What was subscription revenue?). However, we
continue to trust management at this time and believe the company's
allegiance to its cable partner's interests will serve it well in the long
run. Nonetheless, the skeptics may believe something is being hidden.
o We have confirmed AT&T deployment with Iowa field personnel; contract
announcement imminent. Although not yet announced, AT&T has commercially
launched WorldGate service in Waterloo, Iowa, according to AT&T's field
office personnel at that location. Here, all digital subscribers get
WorldGate bundled with the digital cable package. We believe such a bundling
is an intelligent approach to offering iTV services since it should serve to
increase the value proposition of the digital tier of service. If this
deployment strategy spreads throughout AT&T Broadband, WorldGate-based
services could spread to many of the over 3-million already-deployed digital
boxes throughout its 16 million subscriber system. With the deployment
already begun, we believe a contract announcement will be soon to follow,
likely before the Western Cable Show later this month.
INVESTMENT CONCLUSION
WorldGate enables a new television-based Internet service that allows cable
television subscribers to access the Internet through their televisions. We
believe the company is extremely well positioned at the intersection of
television and the Internet. Over time, we expect the TV, in conjunction with
the cable set-top box, to become one of several modes of Internet access. By
leveraging cable operators' existing network infrastructure, we believe
WorldGate could turn Internet TV into the most common mode of Internet access
within the next 10 years. The company's technology, management and financial
participation in the TVGateway consortium give us confidence that four of the
top six US cable operators are committed to WorldGate, the degree to which
should become apparent over the coming months.
The third quarter showed strong revenue and subscriber growth, with better-
than-expected progress on all fronts with the exception of gross margins. We
are encouraged by the progress the company has made in the past few months
with the largest US cable operators and fully expect an announcement
regarding an AT&T deployment. We reiterate our BUY rating on WGAT but are
lowering our 12-month price target to $58 (from $100) given investor's
revaluation of speculative high-tech companies
DISCUSSION OF 3Q00 RESULTS
WorldGate reported 3Q00 results that exceeded our estimates for both revenue
and subscriber growth:
GKM
Actual Estimate
Revenue $6.6 million $4.7 million
Gross Margin -37% -20%
Subscribers (at end of qtr.) 68,000 60,000 - 70,000
Recurring EPS $(0.57) $(0.48)
Source: Gerard Klauer Mattison and corporate reports.
Revenue of $6.6 million was 40% higher than our estimate of $4.7 million, due
to strong headend server sales related to TV Gateway and Internet TV servers.
The 3Q00 net loss per share of $(0.57), was above our expectations of $(0.48)
predominantly due to one-time product deployment and marketing costs as well
as lower gross margins. We believe, the lower than expected gross margins
were attributable to costs associated with analog boxes that should not
reoccur and lower-than-expected cost improvements with regard to headend iTV
servers. We expect the positive product mix shifts and technological
improvements to the iTV headend servers as early as next quarter. The
company had 68,000 subscribers at the end of 3Q00, up 58% from last quarter
and within our expected range. We forecast that WorldGate will have 100,000
subscribers by the end of the year.
WorldGate announced they are currently deployed in 19 locations that serve a
total of 1.5 million subscribers and 3.6 million homes are passed. Adding
existing trials to this total, the number of potential subscribers and homes
passed is 4.4 million and 8.4 million, respectively. Notably, management
commented that its relationship with AT&T is strong and trials are moving
forward. We strongly believe that WorldGate will announce an agreement
regarding deployments with AT&T either at or before the Western Show.
The company's cash increased $4 million to $53.9 million at September 30,
2000, reflecting the $24.5 million investment from the TV Gateway Consortium
MSOs and the $19.2 million cash burn during the quarter. The company claimed
they have enough cash to last the next 12 months and are working on
technological and financial improvements to help elongate this period.
Approximately $1.7 million of this cash burn is tied up in inventory, which
increased to $12.2 million at the end of 3Q00. Adding to the balance sheet's
strength was a 27-day decrease in DSOs to 118.
Outlook and revision of price target due to market correction. In the past we
had stated that WGAT would continue to be a catalyst-driven stock; therefore,
we placed less emphasis on near-term revenue, earnings and subscribers than
on cable operator design wins and related deployments. We believe WorldGate
has made it to the next level by solidifying its first-mover advantage in the
interactive television (iTV) market on the current generation digital cable
network. As the company journeys its way through this next stage of growth,
we expect that subscriber count will grow as will corresponding revenue and
ultimately profitability. At such time, traditional ITV/cable metrics such
as subscriber count, revenue mix and EPS will become more important. We
continue to forecast profitability for WorldGate in 2Q02. Our thesis of a
viable, affordable iTV solution to emerge during 2000 seems to be taking
form. With recent announcements surrounding TVGateway, Internet on EVERY TV
Service and the financial results reported today, we believe WorldGate has
succeeded in accomplishing its goal of becoming one of the "winners" in the
ITV space, in our opinion.
Positive trends at the company and within the industry aside, iTV stocks have
been reevaluated by the market. Comparable valuations, our benchmark for our
WGAT $100 price target, have decreased significantly. Liberate's market
capitalization, excluding cash, is $1.6 billion and OpenTV has sunk to a
market value of approximately $1 billion, excluding cash. Liberate and
OpenTV are down 86% and 88% off their 52-week highs, respectively. Believing
that WorldGate is, at the very least, on par with these companies in terms of
initial traction in the cable-based iTV space via relationships, trials and
deployments and well ahead, in our opinion, with regard to current-generation
cable digital set-top box deployment opportunities, we believe WGAT shares
should trade in line with the other leading players. Thus, splitting the
difference and assuming a $1.3 billion market capitalization, our new 12-
month price target for WGAT shares is $58, which provides over 240% price
appreciation from current levels. We reiterate our BUY rating.
Other Companies Mentioned (Priced intraday on November 3, 2000):
Adelphia (ADLAC - 32.31) Charter (CHTR - 19.81)
Comcast+ (CMCSK - 39.44; BUY) Cox Comm. (COX - 41.38; BUY)
Liberate Tech.+ (LBRT - 21.00) AT&T (T - 21.94)
OpenTV (OPTV - 29.00) |
