Broadband Services: Path to Strong Growth
THURSDAY, MAY 11, 2000 5:39:00 PM EST
New York, May 11, 2000 (123Jump via COMTEX) -- "Dot.com" mania has cooled in the wake of colossal flops from Websites as varied as iVillage (IVIL), barnesandnoble.com (BNBN) and drkoop.com (KOOP). But there is still money to be made in Internet stocks.
For now, forget retail Web sites or companies that attempt to deliver a huge audience to advertisers by collecting buckets of information from varied sources and giving it away. Few doubt that the Internet will be as important to the 21st Century as railroads were to the 19th Century, but the Internet is still in its infancy and the best players continue to be companies that build the system up.
Broadband access - the pipe that delivers text, data, voice and video to users - will be a consistent winner. It is often overlooked by investors because it's so mundane, but there is solid growth ahead. Jupiter Communications, a market research firm, says the U.S. market for high-speed services will increase to 15.3 million customers in 2003 from about 2.2 million subscribers at the end of 1999.
An Early Mover: Excite @ Home (ATHM) is one of the first movers in the broadband sector and a stock to watch. The company is the largest high-speed Internet access provider in the U.S. On March 31, it had about 1.5 million subscribers. In the past year stock in the combined company has risen and fallen with the Internet tide. Excite@Home shares slumped throughout the summer and were trading close to a 52-week low of $15.85 on April 24 - a substantial fall from $36.04 in January 2000 and the 52-week high of $80.688 on May 12, 1999. However, on May 10, 2000, it was quoted at $ 18.875. Wall Street, nevertheless, continues to look favorably on the company and its stock as is evidenced by the fact that many equity analysts hold "buy" ratings on the stock. Industry analysts say Excite@Home is poised to capitalize on the growing market for high-speed Net access and related "broadband" services.
In addition, on April 20 brokerage house UBS Warburg said it had raised its rating on shares of Excite@Home Corp. to "strong buy" from "buy." Analyst Michael Wallace said that the company reported first quarter per share loss of $0.01, only narrowly below his estimate of $0.00. According to Wallace, growth on the broadband side was strong with the increase of 350,000 subscribers over last quarter, and was "way ahead of our estimate."
"In a move we view positively, ATHM announced a short-term push to focus on subscriber growth and international expansion," Wallace said. "This means more spending, so profits likely will be pushed out until next year. The international opportunity is large, and we expect at least one international joint venture IPO by year-end. At these levels, we see limited downside and significant long-term upside potential." It looks like he was right. Barely a year after the merger deal, for the fiscal year ended Dec. 31, 1999, Excite@Home's revenues totaled $337 million - up from $48 million in the year ago period. Net loss totalled $1.46 billion, up from $144.2 million. Obviously the Excite acquisition by @Home resulted in both increased revenues andnumber of subscribers, which was over one million.
In the first quarter of the new millennium ended March 31, the company continued to improve its performance. The Q1 revenues were $138 million, an increase of 75% compared to pro forma revenues of $ 78.7 million in the first quarter of 1999. Pro forma results combine the historical results of Excite, Inc. and At Home Corporation, which merged on May 28, 1999. Pro forma loss for the quarter was $4.6 million, or $0.01 per share - compared to a loss of $6 million, or $0.02 per share, in the first quarter of 1999.
There was a substantial increase in Excite@Home's residential broadband subscriber base (cable modem subscribers) from 350,000 to 1.5 million -an increase of 30% from 1.15 million at year-end 1999 and more than 220% compared to the year ago period. "This was our best quarter ever for broadband subscriber growth - the most important measure in defining broadband leadership," said Excite@Home's Chief Executive Officer George Bell.
Company History: At Home acquired Excite in January 1999 for $7.2 billion. The deal was one of the largest Internet deals at the time and many viewed it as a preview of things to come. Completed in May 1999, the merger combined @Home's high-speed cable Net services with Excite's Web content, creating a powerful one-two punch that includes content and distribution.
Excite@Home offers media services through Excite Network and broadband subscription services through @Home and @Work. The company has a worldwide coverage of 87 million broadband homes under long-term contracts. Excite@Home's MatchLogic subsidiary offers marketers industry-leading digital advertising services including media production, targeted ad and email services, datamart management, and analysis.
The Internet services provided by @Home are available to businesses and individuals either through cable television infrastructure or leased digital telecommunications lines. They are called @Home for consumers and @Work for businesses. The technology foundation of the @Home experience is the company's national Internet network - a "parallel Internet" that, according to the company, manages traffic routing, improves security and consistency of service, and facilitates end-to-end network management.
More Growth Ahead: Furthermore, in Q1 2000, Excite@Home's potential market for residential broadband services grew to around 26 million from newly upgraded cable homes, a 75% jump from 15 million homes a year ago. The increase in its broadband subscriber base to 1.5 million represents a penetration rate of 5.7% of the upgraded homes, up from 4.8% last quarter and 3.1% a year ago.
In a recent bid to extend its reach further, Excite@Home decided to offer high speed access through Digital Subscriber Lines (DSL) in areas not served by its cable lines. The company, in alliance with Rhythms NetConnections (RTHM), a leading DSL service provider, plans to offer broadband access and content services via DSL to consumers in 15 million homes located outside of Excite@Home's cable lines. Excite@Home and Rhythms expect to offer the service commercially later this summer with monthly pricing yet to be determined. It will utilize Excite@Home's existing broadband network, including its 15,000-mile fiber-optic backbone and its distributed array of regional high-speed transport and data-caching facilities.
Rhythms also will make a $15 million investment in @Home Solutions, the Excite@Home subsidiary aimed at offering high-speed Net access in smaller markets. Consequently, Excite@Home's global broadband reach will total 87 million homes - 72 million cable modem homes and 15 million DSL homes - all under contract with 20 cable partners and Rhythms.
The company's commercial services division, @Work, has not been idle and continues the overall corporate strategy of taking advantage of the Excite@Home network to provide connectivity and value-added services to businesses. In the first quarter of this fiscal, @Work has provided high-speed access to businesses, with total accounts activated exceeding 6,200 - up from 5,100 last quarter and 2,300 a year ago.
Much of Excite@Home's success in luring subscribers can be attributed to its aggressive media and marketing services strategies. Last month Excite@Home launched @Home 2000 to all of its broadband subscribers in the U.S. @Home 2000 combines a software package designed for broadband, including a customized browser, the latest multimedia plug-ins and a suite of security features from McAfee.com - complete with a new version of the Excite portal that is specifically suited for broadband.
Traffic on the Excite Network, which includes Excite@Home's broadband and narrowband media properties, rose to 144 million average daily page views in March - an increase of 17% over December 1999 and 85% over March 1999. It is therefore not surprising that Media Metrix, an Internet eyeball counter, placed the Excite network among the top five Web media networks in February, with over 30 million unique users, which is a whopping 42.9% of all Web users.
The launch of @Home 2000, according to CEO George Bell, underscores the fact that the company's leadership now extends to the delivery of broadband content, fulfilling the vision of the merger between Excite and @Home.
Overseas, Excite@Home has a broadband coverage of 13 million homesoutside of North America in five countries: the Netherlands, Belgium, Australia, Japan and Germany, as well as approximately six million homes in Canada.
End to Uncertain Future: Since its inception, Excite@Home has operated under an awkward ownership and governance structure that included significant input from three major companies: AT&T (T), Cox Communications (COX) and Comcast (CMCSA). Despite making major strides in the expansion of its "broadband" subscriber base, Excite@Home has often appeared confused strategically.
But last month, after nearly a year of uncertainty over Excite@Home's future, AT&T finally grabbed the reins of the high-speed Internet access company. On March 29, Excite@Home announced that it had extended its distribution pacts with its key cable partners and gave AT&T voting control of the company. In addition, Excite@Home said it scrapped plans to issue a tracking stock for its media assets. They also announced plans to assume majority control of Excite@Home's board of directors, to consolidate the company's financial results with its own, and has offered to buy the stakes of co-partners Comcast and Cox should those cable operators want to back away.
AT&T will hold a 25% equity stake in the company and more than an 80% voting stake. AT&T now has a 56% voting interest. "This allows the company to stop worrying about the boardroom and to focus on building the best service you can build," said Mark Stevens, executive vice president of business development for Excite@Home. "It's about execution without distraction." More importantly, the distribution deals are crucial for Excite@Home, which will have to battle the tremendous competition posed by America Online (AOL) which bought Time Warner (TWX) for cable and broadband access.
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