Monday, August 2, 1999
HOW DID IT DOUBLE?
Utilitarian corporate names don't readily lend themselves to cool branding, but High Speed Access already had plenty of "buy-me" cachet when it went public June 4 at $13 a share. It quickly doubled.
High Speed offers Internet access via cable to consumers and businesses located in "exurban" markets. So High Speed appealed to investors enamored of Excite@Home (Nasdaq: ATHM) but looking for another way to invest in the growing demand for broadband connections that allow consumers to jet-ski the Web at speeds 100 times faster than 56K dial-up access.
The company also has first-rate backing from Vulcan Ventures, the investment vehicle of billionaire Microsoft (Nasdaq: MSFT) co-founder Paul Allen. Vulcan injected $20 million into the company last November and an additional $25 million in April.
The Allen-controlled Charter Communications (which has filed to go public) now claims roughly 6.2 million cable subscribers, making it the #4 U.S. cable operator and the core of Allen's burgeoning "wired world" empire. High Speed has an exclusive deal to market Internet access to at least 750,000 of Charter's customers. So High Speed should benefit from Allen's keiretsu, or interlocking network of businesses.
Other titans bought into High Speed as part of its initial public offering (IPO). Microsoft acquired a $10 million stake to seal a strategic marketing alliance. The software giant has numerous cable investments and has agreed to help High Speed market its services to cable operators.
Also, equipment suppliers Cisco (Nasdaq: CSCO) and Com21 (Nasdaq: CMTO) infused $7.5 million and $1 million, respectively, as part of the IPO. Such fast company helped High Speed's stock price accelerate.
Based in Denver, High Speed was founded in April 1998 by an investment group called Broadband Solutions, which acquired Denver-based High Speed Access Network and CATV.net of Louisville, Kentucky.
High Speed enters exclusive long-term contracts with cable operators to offer their customers Internet access. Consumers pay less than $40 a month for unlimited cable modem access plus 10 hours of dial-up access. It also rents users cable modems for an additional $9.95 per month.
The company hands cable operators a portion of the monthly fees. For example, High Speed pays Charter 50% of gross access service revenues, 15% of gross revenues for its "feeder" dial-up services, and 50% of gross revenues from additional services. Charter gets half of the equipment sales High Speed makes to Charter's cable customers.
Unlike its competitors Excite@Home or Road Runner, the cable modem service owned partly by AT&T (NYSE: T) and Time-Warner (NYSE: TWX), High Speed offers Internet access in exurban areas, defined as cable systems with fewer than 100,000 homes passed.
Exurban markets include 48 million homes, or nearly half of all U.S. cable-ready homes. Roughly 27.8 million of those homes (58%) are within systems owned by operators who have deals with @Home or Road Runner. However, operators usually sign agreements on a system by system basis, so some of these systems are still up for grabs.
Of the other 19.1 million exurban homes not already under contract to High Speed, some are being served high-speed access by smaller competitors or systems developed internally by the cable operator. Yet, many simply aren't being served.
As of early June, High Speed had exclusive deals with 20 cable operators covering 51 systems and nearly a million homes passed. It had also signed preliminary deals with 14 other cable operators covering another 0.3 million homes. It can prepare a system for cable modem services within 90 days of signing a pact with a cable operator.
At the time of its IPO, High Speed was fully operating in 21 systems covering 319,000 homes and had started operations in another 21 systems covering 402,000 homes. Yet, it had just 3,900 actual high speed customers.
After the IPO, Paul Allen's Vulcan Ventures owns 20.2 million shares, or roughly 38.9% of the stock. Including Vulcan, insiders own 34.5 million shares, or 59.5% of the stock.
These figures do not include warrants granted under performance agreements. For example, Charter Communications has warrants to buy 7.75 million shares at $3.23 per piece, but they become exercisable at the rate of 1.55 shares per additional home passed and committed to the company by Charter (in excess of the 750,000 homes already committed).
Microsoft has warrants to purchase 250,000 shares at $16.25 each, but they only begin to vest if Comcast (Nasdaq: CMCSK) offers High Speed access to more than 2.5 million of its customers by May 2002.
A deal confirmed July 28 created a 5-year partnership between High Speed and Road Runner according to which the companies will share subscription revenues wherever High Speed serves as a subcontractor of Road Runner branded services. For each home passed up to 5 million, Road Runner gets a warrant to buy one share of High Speed for $5.
12-month sales: $0.64 million
12-month income: ($18.01 million)
12-month EPS: ($0.98)
Profit Margin: N/A
Market Cap: $1,798.2 million
(*The loss includes $1.5 million in non-cash compensation. Market cap based on 51.84 million shares outstanding after IPO. That excludes about 1 million shares related to options that exercise at $3.23 or less, plus additional shares issuable related to the performance-based warrants.)
Cash: $206.5 million
Working Capital: $200.6 million
Long-term Liabilities: $0.8 million
(*Following the IPO.)
HOW COULD YOU HAVE FOUND THIS DOUBLE?
As the Fool's Rule Breaker Portfolio suggests, one way to invest in the Internet is to look for firms that bring a competitive advantage and smart backing to bear on a vast market opportunity. Arguably, High Speed's affiliation with Allen and its exclusive deal with the ever-expanding Charter Communications meant the company met at least those criteria of Rule Breakerhood.
Also, there's less competition in the exurban market, where cable operators have a greater need for a company offering turnkey Internet access services.
Shortly after the IPO, the stock fell back to $15 a share, as interest rate fears helped trigger a broad Internet selloff. Anxiety over the Portland court's June 4 decision regarding opening cable systems to various Internet access providers left an added cloud over all the industry players.
Still, here was a well-positioned access provider trading for less than 4 times book value -- most of which was backed by cash. Investors were basically being given a second chance to get in around the IPO price.
WHERE TO FROM HERE?
High Speed's figures from early June show 3,400 dial-up customers and 3,900 cable modem users. In a world where America Online (NYSE: AOL) claims 17.6 million AOL-branded customers and Excite@Home claims some 620,000 broadband subscribers, High Speed's numbers, including its revenues, seem paltry.
The company is also highly dependent on Charter, whose systems provide 39% of High Speed's current cable modem customers. Also, only a third of the cable systems that High Speed serves are upgraded for two-way, high-speed services.
Moreover, the company has done nothing but lose money so far and plans more of the same. High Speed will spend at least $20 million in 1999 rolling out its services, including installing headend data network hardware and software, creating a billing and customer care system, buying cable modems, and so on.
No surprise, the company expects to "experience substantial negative cash flow from operating activities and negative cash flow from investing activities for at least the next several years," according to the prospectus.
Another major caveat is that Vulcan has the exclusive right to designate High Speed's startup page, and thus claim any related revenues. Vulcan also controls what content is accessible through the service as well as whether or not High Speed can offer telephone services.
All of this suggests that investors should ignore the earnings estimates and focus instead on how High Speed fits into Paul Allen's "wired world." It seems clear that Allen is trying to create a broadband competitor to AOL, using his Charter cable systems as an initial customer base, High Speed as the Internet access intermediary, and Go2Net (Nasdaq: GNET) as the content partner for a pseudo-proprietary network.
What are the most valuable links in that chain? In a sense, that depends on what Allen wants them to be since he controls all three companies. In general, though, it's easy to see the access intermediary in such a chain getting squeezed by the cable and content providers.
Resolution of the "open access" dispute by the courts and/or the Federal Communications Commission (FCC) could also impact valuations by forcing cable operators like Charter to allow other Internet service providers (ISPs) to compete with the likes of High Speed -- or concluding that cable operators can appoint exclusive partners.
These are complicated matters. But investors looking for broadband winners should take a closer look at High Speed. Despite the question marks, the Allen alliance alone suggests the company could have a bright future.
-- Louis Corrigan
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