12:10pm EDT 5-May-00 Gerard Klauer Mattison & Co.
WGAT--1Q Results Announced; Outlook Positive-Reiterate BUY
WorldGate*+ (WGAT)--1Q Results Announced; Outlook Positive-Reiterate BUY
Michael Cristinziano Alan Gould Thomas Blakey
212) 885-4028 (212) 885-4085 (212) 885-4070 mcristinziano@gkm.com aagould@gkm.com tblakey@gkm.com
May 5, 2000
Price: 22.88^ 52-Wk Rng:55.75-13.00 Price Target:100 S&P 500: 1432
Shrs Out/Mk Cap: 21.6Mil/$493Mil 5YR Est Growth Rate: 100%
Avg Daily Vol: 0.5 Mil. L-T Debt/Cap: 0%
Float: 5.8 Mil.
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FY Ends -- EPS --
Dec. Curr Prior P/E
99A $(1.94) N.M.
00E $(1.60) N.M.
01E $(0.59) N.M.
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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 (0.43) (0.38) (0.32)
01E (0.26) (0.20) (0.12) (0.03)
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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 Company bullish regarding Comcast commercial launch in May, as well as progress with other large cable operators. Management indicated that Comcast is preparing for the much-anticipated commercial digital WorldGate launch in May. The service rollout will be accompanied by a strong marketing push and is to take place in suburban Philadelphia. While the Philadelphia launch will employ Motorola DCT2000 digital set-top boxes, we also believe Comcast is planning another WorldGate deployment in South Carolina using the Scientific-Atlanta Explorer 2000 digital box. We believe the company is in serious discussions with five of the top six cable operators in the US.
o OpenTV collaboration progressing, demo on display at next week's NCTA cable show in New Orleans. We are encouraged by the continued cooperation between OpenTV and WorldGate. The collaboration demonstrates that apparent competitors can cooperate, each contributing their own value add to an overall solution. It is particularly noteworthy that progress continued even after OpenTV's acquisition of Spyglass, which could have tempted OpenTV to cut out WorldGate.
o Mexico City deployment could yield 80,000 WorldGate subscribers by year- end. On Monday, WorldGate announced that Mexican cable operator Cablevision will commercially deploy WorldGate's Internet on EVERY TV service to all Cablevision's digital cable subscribers in Mexico City. On this morning's conference call, management indicated digital subscribers in this system could total 80,000 by yearend, up from 20,000 as of March 31. WorldGate's basic, first-tier services, which include Channel HyperLinking and limited access to local data, will be available free to all Cablevision digital cable subscribers. Hence, substantial subscriber contributions could result. WorldGate will receive a marginal monthly fee from Cablevision for these basic services and will share advertising and HyperLinking revenues. Additional WorldGate service-tiers that include e-mail, instant messaging and full Internet access may also be offered at an additional monthly charge.
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 a primary mode 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. Our 12-month price target of $100 implies a $2.2 billion plus market capitalization, which is significantly less than the present day market caps of comparable companies such as Liberate and OpenTV, which are valued at about $3.9 and $3.2 billion, respectively.
DISCUSSION OF 1Q RESULTS
Revenue of $1.6 million was below our estimate of $2.5 million, due to lower- than-expected headend server sales. The lower revenue was due to purchase delays of digital servers in the US and analog headends overseas. US cable operators, like Charter, are de-emphasizing analog cable in favor of digital cable. WorldGate just delivered a fully functional digital version of its system. The rate of its deployment by cable operators is complicated by broader interactive TV issues, such as the interactive program guide. These issues, which are somewhat technical in nature, are especially complex from a business point of view. In our opinion, the ongoing debates surrounding overall interactive strategy has slowed the committed deployment of digital WorldGate. Importantly, management indicated a more optimistic than ever expectation that Comcast will launch digital WorldGate service in suburban Philadelphia in May. International sales of analog headend servers, which shipped ahead of subscriber demand, have slowed as foreign cable operators (e.g., in Singapore, Peru and Argentina) are awaiting shipment of the new $99 SURFview analog set-top box from Motorola, which has WorldGate inside. The SURFview is on schedule for 2Q shipment.
The 1Q net loss of $(10.8) million, or EPS of $(0.50), was slightly below our expectation of $(10.0) million loss and EPS of $(0.46). The company had 19,000 subscribers at the end of 1Q, versus 15,000 entering the quarter--in line with our expectations. The company had about $65 million in cash and short term investments and is currently burning about $10.5 million per quarter. We are awaiting additional guidance from management before revising our model.
Outlook.
We expect WGAT will continue to be a catalyst-driven stock and therefore place less emphasis on near-term revenue, earnings and subscribers than on cable operator design wins and related deployments. We expect 2000 will be the year in which Internet TV proves to be a technically feasible and economically viable service, thanks in large part to WorldGate, in our opinion. With increased visibility over the coming months, we expect significant appreciation in WGAT shares. We reiterate our BUY rating and $100 12-month price target.
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