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Excite@Home Reports, Plays Chello

A new international venture that raises the same problem issues that have impeded the company over the last year -- combined with evidence from the second quarter that domestic performance is not what it should be -- suggests that the turnaround of Excite@Home is not yet at hand.

By Nico Detourn
July 20, 2000

Shares of Excite@Home (Nasdaq: ATHM) were trading down this morning following the company's Wednesday evening announcement of mixed second-quarter results. June was the first complete quarter since the largest provider of high-speed cable Internet access announced its decision to forsake near-term profitability in favor of an intensified focus on growing its U.S. and international subscriber base. That decision was reflected in both yesterday's numbers and in an international agreement announced the day before.

Excite@Home reported a second-quarter loss of $45.3 million, or 11 cents per share, slightly better than consensus estimates of a 12 cent per share loss. This compares to a loss of $4.6 million, or 1 cent per share, in the first quarter of 2000; and a loss of $5 million, also 1 cent per share, in the second quarter of 1999. Revenues for the second quarter were $157.6 million, a 14% sequential increase from the $138.1 million reported in the first quarter of 2000; and a 57% increase from the $100.4 million reported for the second quarter of 1999.

But with increased expenses and losses understood as inevitable due to a rededicated growth strategy, attention is more properly focused on the growth statistics of the company's cable Internet access business and the Excite Network and Web portal.

Broadband subscription growth
Subscribers to @Home's service surpassed 1.8 million during the June 2000 quarter, a 190% increase from the approximately 620,000 subscribers of June 1999. Total subscribers added came to just over 300,000, an approximately 20% increase from the 1.5 million mark the company reached in March. Though respectable, the number represents a decline from the 30% sequential growth rate achieved in the March quarter, when the service added over 350,000 new accounts.

The subscriber shortfall is being blamed on a "temporary interruption" in the supply of cable modems to Excite@Home's cable partners, whose job it is to get the @Home subs surfing. The supply glitch thus casts some doubt on the company's ability to reach its goal of 3 million subscribers by the end of this year, with 6 million subs targeted for next year, and 10 million by the end of 2002. However, CEO George Bell said in a conference call yesterday that "modems are flowing" once again, and expressed confidence that the company would be able to add some 1.2 million new subscribers over the next six months.

Excite. Not.
Numbers for Excite@Home media properties were less than exciting. Traffic across the Excite Network, including both the free narrowband properties and the subscription broadband version of the Excite portal, averaged 137 million daily page views during the quarter, up 69% from June 1999. Unfortunately, that number represents a 5% decline from last March. Highly unusual for a top Web media network, the drop in page views is being blamed on "fluctuations in traffic" to Excite's Bluemountain.com greeting card site, whose traffic depends on the "occurrence of holidays."

Excite acquired Bluemountain.com for about $1 billion in stock last winter in a move to grow its Web properties, which are anchored by Excite, and to help drive subscribers to the @Home cable service. Although the seasonality of greeting card site is not a hard concept to grasp, a decline in absolute page views is not a healthy sign, especially when coupled with a trending decline in "unique viewers" and the total "reach" of the Excite Network. At least partly the consequences of the strategic confusion that has surrounded Excite@Home over the past year, these negative trends within Excite@Home's media business bear watching.

Broadband abroad
On Tuesday, one day before releasing second-quarter results, Excite@Home announced an agreement to merge its operations outside North America with European Internet company chello broadband. chello is a subsidiary of United Pan-Europe Communications, or UPC (Nasdaq: UPCOY), which is in turn a subsidiary of Netherlands-based UnitedGlobalCom (Nasdaq: UCOMA). The new company, to be called Excite Chello, will be the largest cable Internet service outside North America (where Excite@Home reigns), with a "footprint" of more than 30 million cable homes and over 300,000 active broadband subscribers in 15 countries throughout Europe, Asia, and Latin America.

The deal calls for the Excite brand to be "the consumer media experience" for all Excite Chello portal services, essentially the default "content" component; chello, in lower case will brand the new company's access services, including interactive set-top boxes. Excite@Home and UPC will each own 43% of, and jointly control, the new company. Liberty Media Group, which has a controlling stake in UnitedGlobalCom, will invest $187 million dollars in Excite Chello through a note convertible into Excite Chello shares.

Turnaround @ Hand?
The new Excite Chello venture is an outgrowth of Excite@Home's previously announced intention to expand its international broadband distribution footprint. It is therefore part of the strategy for which the company is sacrificing its near-term profitability. At the same time, the complex ownership structure of the new company echoes that of Excite@Home itself, as does the duel-track, access-plus-media strategy that Excite Chello plans to pursue.

The new deal thus raises the same issues of ownership and strategic direction that have impeded Excite@Home, at home, over the last year. That, combined with evidence from the second quarter that traction in domestic growth is not what it should be, suggests that the turnaround of Excite@Home is not yet at hand.

Your Turn:
Will Excite@Home find its way back to its promise of earlier days? Share your thoughts about the high-speed leader on the company's discussion board.

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