From ATHM thread..........
Excite@Home
ATHM M E R R I L L L Y N C H Research Comment
Internet \ Electronic Commerce Reference Number 20110531
United States Apr/14/2000 08:53
Henry Blodget (1) 212 449-0773
ACCUMULATE
Long Term
BUY
Reason for Report: ATHM Reports Wed. April 19
Price: $25
Estimates (Dec) 1999A 2000E 2001E
EPS: d$0.04 $0.09 $0.26
P/E: NM NM 118.0x
EPS Change (YoY): NM 188.9%
Consensus EPS: $0.10 $0.35
(First Call: 24-Mar-2000)
Q1 EPS (Mar): d$0.02 $0.00
Cash Flow/Share: NA NA NA
Price/Cash Flow: NM NM NM
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: D-2-1-9
Mkt. Value / Shares Outstanding (mn): $11,075 / 443
Book Value/Share (Sep-1999): $16.69
Price/Book Ratio: 1.8x
LT Liability % of Capital: 4.3%
Stock Data
52-Week Range: $99-$26 3/4
Symbol / Exchange: ATHM / OTC
Options: AMEX
Institutional Ownership-Spectrum: 21.0%
Brokers Covering (First Call): 17
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: Overweight (07-Mar-1995)
Income & Growth: Overweight (07-Mar-1995)
Capital Appreciation: In Line (28-Jan-1999)
Market Analysis; Technical Rating: Average (25-Oct-1999)
**The views expressed are those of the macro department and do not necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o Excite@Home will report Q1 results this Wednesday April 19. We are
estimating Q1 revenues of $142mm ($84mm advertising and $58mm subscription), up
10% sequentially and Q1 EPS of $0.00 per share.
o For @Home, we are estimating ending subscribers of 1.45mm, a 300K increase
vs. a 310K increase in Q4. For @Media (Excite, Matchlogic/Enliven, and
Bluemountain.com), we are projecting 120mm ADPVs for March (down 4% from
December, a seasonally strong month for BlueMountain.com).
o On March 29, AT&T announced it had granted to Comcast and Cox the right to
put their ATHM shares to T at $48 per share, beginning January of 2001.
Comcast and Cox also have the right to end their exclusivity agreements with
@Home in June of 2001, a year earlier than originally contracted.
o Just over two weeks ago, our breakup valuation for ATHM was $40-45 per
share. Based on current market prices of comparable companies, however, our
breakup valuation is now $25-$30 per share, ATHM's current price.
o
Q1: What We're Expecting
Key Metrics. We believe the most important metrics for tracking ATHM are 1)
revenue for each of the advertising and subscription businesses; 2) adjusted
EPS; 3) @Home subscribers, including number, growth and penetration; and 4)
Excite traffic metrics, including unique visitors, registered users and
pageviews. Our estimates, which are in line with concensus, call for the
following:
$142 million in Q1 revenues, up 10% sequentially. We are expecting $84 million
in advertising and $58 million in subscription revenues. This would represent
sequential growth of 4% in advertising revenues (from $81 million) and 21% in
subscription revenues (from $48 million).
Adjusted Q1 EPS of $0.00 per share (excluding goodwill and all non-cash items),
based on adjusted net income of about $2.1 million.
For @Home, we are estimating ending subscribers of 1,450,000, up 300,000 from
last quarter (26% sequential growth). This would represent 5.6% penetration of
high-speed enabled cable homes passed, up from 4.8% last quarter. 300,000 net
new adds in Q1 compares to 310,000 net new adds last quarter. We think it is
also important to note where new @Home subs are coming from -- international,
Canada, Excite online referrals, marketing with cable partners, retail cable
modems, etc. It appears that last quarter retail was not a big contributor to
sub growth, and we expect the company will continue to rely on marketing
through its cable partners and on online referrals for new subs this quarter.
For @Media, we are projecting 120 million ADPVs (down 2.5% sequentially,
because BlueMountain.com is seasonally strong in December). Excite@Home is
reportedly selling ads on 25% of the BlueMountain.com pageviews, which we
estimate to be 10-12mm (vs. 17mm in December.) (At the time of the
acquisition, the company expected to generate $25 million in incremental @Home
and @Media revenues from BlueMountain.com in 2000, and up to $100 million by
2002.) If we back out our estimate of BlueMountain.com pageviews from total
@Media pageviews, we are projecting about 4% seq. pageview growth for the core
Excite business. This could very well come in higher, based on pageviews from
Freelane (Excite's free access service) which launched in mid-January.
Hidden Jewels: Matchlogic and Enliven. Last quarter Excite@Home reported
metrics for its marketing services business of 72 million anonymous profiles,
15 billion ads served and 50 million emails delivered. This sounds remarkably
similar to the assets of Engage, prior to its acquisition of ad networks
Flycast and AdSmart. We believe the marketing services businesses are hidden
jewels within Excite@Home.
Canada: a Bigger Contributor than We Thought. As of the end of February,
Canadian cable operators Rogers and Shaw represent 420,000 @Home subscribers.
This is almost 30% of our ending Q1 subscriber estimate. In its quarterly
earnings release yesterday, Shaw stated that Rogers and Shaw had agreed to
merge the operations of @Home Canada and Excite Canada (a 50/50 partnership
between Excite@Home and Rogers Media) into a single national broadband and
narrowband portal. The ownership of the combined entity will be Rogers 51%,
Shaw 22.5% and Excite@Home 22.5%. @Home currently derives about 22% of its
revenues from Canadian subscribers. It was unclear from our discussions with
Excite@Home whether the restructuring of the Canadian @Home and Excite
businesses will impact @Home's revenues from its Canadian subscribers.
Recent Announcements
Excite@Home announced the appointment of a new president to head
Matchlogic/Enliven. The press release mentioned that revenues are growing 100%
per year. The appointment of a president to head these businesses seems to us
an appropriate step, and one that occurred to us as a potential precursor to a
spin off or spin out
Earlier this week, Excite@Home announced it would offer DSL outside its cable
footprint, in a deal with Rhythms NetConnections. Rhythms reaches 15 million
homes in 46 cities, ultimately expanding the @Home cable footprint to 87
million. (Though ATHM will not be able to offer service to those until cable
exclusivity expires.) While we think this is a logical step for Excite@Home,
we do not view this as particularly meaningful. In marked contrast to cable
broadband, DSL service is offered by multiple service providers, and so is a
much more competitive business (and in some areas, quality of service appears
to be a problem). In addition, although recent legislation is attempting to
lower costs, network costs for DSL are higher than for cable.
(Panel 1)
Convertible Alternatives: Excite@home 4.75% 12/15/06 q@ (144A*)
(Data as of 13-Apr-2000)
Market Value: USD 377 Mn Current Yield: 6.30%
Conversion Ratio: 17.69 Yield Gain vs. Stock: 6.30%
Theoretical Value: 80.029 % Theo Value Disc: 5.81%
(Panel 2)
Convertible Alternatives: Excite@home 4.75% 12/15/06 q@ (144A*)
(Data as of 13-Apr-2000)
Recent Price: 75.38 USD YTM/YTP: 9.87%
Parity: 46.11 USD Breakeven: 6.16
Call Info: 12/02 @ 102.71 Premium: 63.45%
We estimate over one year this issue will return +13.62% and +1.41% in a stock
price move of +/- 25%.
To calculate theoretical values and return profiles, Merrill Lynch uses a
proprietary arbitrage model to value the convertible as a combination of
embedded options. The model is sensitive to, amongst other factors, the
following inputs: stock volatility, dividend yield, interest rate levels, and
credit spread, all of which we hold constant. Further, we assume a similar
discount/premium persists over the entire investment horizon. Our theoretical
valuation in no way constitutes a fundamental opinion, nor does a theoretical
discount necessarily constitute a recommendation.
*144A. This security may only be offered or sold to persons in the U.S. who
are Qualified Institutional Buyers (QIBs) within the meaning of Rule 144A
under the Securities Act of 1933, as amended. |
