Market's Appreciation of Prodigy Ebbs and Flows

The pricing of ISPs is clearly an emotional issue, and perhaps an buyout artist in shining armor is what most firms are hoping for. But investors may someday recall this time as the best buying opportunity since 1995, when the Internet was a way to get to bulletin boards through Mosaic.

To see the calculations on which this report was based, go to this Excel spreadsheet or this HTML page.

by Manish Aurora of www.rationalinvesting.com [January 12, 2001]

Prodigy Communications (PRGY) is a classic example of an out-of-favor stock. The company is a DSL and traditional Internet Service Provider (ISP) for consumers and small businesses. Prodigy was one of the pioneers in this business. It now maintains a nationwide network covering more than 850 cities in 50 states.

It tailors its services and technology to three Internet markets: consumers, small business owners, and the US Hispanic population. Its content is provided by NBCi, which has further links with iVillage.com. They have an IM product, but it is a niche player. Prodigy manages DSL connections offered by SBC Communications. In return, it shares subscriber acquisition costs for such services.

Numbers
Total revenue for the third quarter increased 175% to $134.6 million from $48.9 million reported in the same period a year ago. Excluding integration and restructuring charges, EBITDA for the third quarter of 2000 was negative $6.5 million before non-recurring charges compared with an EBITDA loss of $11.9 million in the third quarter of 1999.

Internet subscribers for the third quarter grew 126% to 2.7 million compared to the third quarter one year ago. At the end of the third quarter, Prodigy owned and managed 338,000 Basic DSL Internet Service customers. This represents a 37% increase from last quarter. This is very strong growth for a market that is supposedly maturing.

In the third quarter, Prodigy's available cash position dropped from $21 million to $5 million, largely due to costs associated with the FlashNet and SBC transactions. The company continues to rely on its line of credit with Banco Inbursa for short-term cash. In addition, to reduce the up-front cash requirements associated with its DSL expansion, it has re-negotiated its payment of subscriber acquisition costs with SBC and spread them over a three-year period. This will substantially reduce the Company's cash burn rate in the near-term quarters.

Conclusion
The cash position probably continues to concern the market. Although Prodigy's efforts to obtain bank financing secured by long-term customer contracts have proved to be unsuccessful, the company continues to pursue long-term financing with the support of its principal shareholders SBC, Telmex, and Carso Global Telecom. Unlike most startups, this is a $500 million a year business that will find money as and when it needs. We do not believe there is a bankruptcy risk here.

PRGY anticipated having about 2.85 million managed subscribers by the end of 2000, of which approximately 500,000 would be DSL.

Our model says that PRGY is worth $16. It is currently trading at $3. We assume a terminal growth rate of 3% and a Beta of 1.75. DSL providers are not having a good time, but the risk/reward is pretty good at this price.

Important notes
The methods on which this report is based are described in "Pricing A Stock."

Please also read the disclaimer.

—End

Related articles:
	[Jan. 3, 2001]	Subscriber Values
	[Oct. 27, 2000]	PRGY's Q3 Report