Thursday, August 19, 1999

Telescan Inc.
(Nasdaq: TSCN)
Phone: 281-588-9700
Website: http://www.telescan.com
Price (8/18/99): $17 1/4


Most small-cap companies would be happy just to be featured on CNBC's popular financial news. Telescan prefers to host that news via CNBC.com, the network's new business portal. And CNBC's parent, General Electric (NYSE: GE), liked its host well enough to go in on the party. It has now pumped cash into Telescan twice this year.

For a company that already enjoyed the long-term backing of Microsoft's (Nasdaq: MSFT) billionaire co-founder Paul Allen, but experienced troubles raising additional cash as recently as May 1998, GE's endorsement was a shot in the arm.

In the original deal announced January 14, NBC and GE Equity picked up 1.22 million shares of Telescan for $9.4 million ($7.70 apiece). That helped the stock double in no time. The second agreement, announced July 27, entailed NBC's purchase of 1.1 million shares for $25 million ($22.50 per share) and signaled a broader alliance between the two companies.

For example, NBC extended for 5 years its arrangement to license Telescan's technology, financial content, and hosting services for CNBC.com. Telescan will receive monthly license and maintenance fees plus a cut of net revenue derived from the site. GE also added an option to extend the deal for still another 5 years.

Meanwhile, Telescan has grown by acquisition. In April, it announced that it would use 2.3 million shares of its stock to purchase INVESTools.com, which offers subscriptions to investment newsletters and claims annualized revenue of nearly $4 million.

With investors bidding up the shares of online brokers and other firms serving the burgeoning community of investors hitting the Web, Telescan's stock has scanned 450% higher since putting in an October low of $2 5/8.


Based in Houston, Telescan provides Internet services to financial and publishing service companies, including proprietary analytical tools (like D-cipher) that help individual investors research and track investment ideas.

The company has agreements to offer private-label versions of its proprietary Internet technology to firms such as American Express (NYSE: AXP), Citigroup (NYSE: C), Time-Warner's (NYSE: TWX) Fortune.com and Money.com, and Playboy (NYSE: PLA). These arrangements generally involve both recurring licensing fees and revenue-sharing agreements.

Telescan also operates its flagship Wallstreetcity.com site, which provides search and financial analysis tools. Monthly page views have tripled in the last year to 17 million, making it a second-tier player, but a growing one.

Consistently ranked among the leading investment sites by Barron's, INVESTools expands the company's product line by offering online access to investment newsletters such as Al Frank's The Prudent Speculator and George Putnam's The Turnaround Letter. It also expands Telescan's reach. Although INVESTools has just 13,000 paying subscribers, it claims 300,000 unique visitors per month and 125,000 investors who receive its regular e-mails.

INVESTools also provides newsletter publishers turnkey online publishing/marketing services. For example, it recently signed a deal with Phillips Publishing (500,000 total customers) to host sites for four of Phillips' most popular newsletters. This arrangement is expected to generate $1.5 million in first-year revenues, with INVESTools earning $500,000 while also participating in revenue sharing.

Telescan also operates websites for non-financial companies, such as Adweek, Billboard, and The Hollywood Reporter. For the first half of FY99, the financial segment accounted for 89.0% of revenues versus 89.6% in the year-ago period. Telescan's own online services have generated 36% of its overall revenues year-to-date.

The latest proxy shows that executives and directors own 14.5% of the stock while major investors like Paul Allen's Vulcan Ventures and GE's NBC own 8.4% and 8.0%, respectively. But this tally doesn't account for the July NBC deal, which raised GE's stake to 14.2%.

In June, the company terminated its contract with Web Street Securities and has begun legal efforts to get Web Street to pay its $437,000 tab. This receivable hasn't yet been written off.

On July 29, the company moved from the Nasdaq SmallCap to the Nasdaq National market system.


Income Statement*
12-month sales: $21.8 million
12-month income: ($7.83 million)
12-month EPS: ($0.57)
Profit Margin: N/A
Market Cap: $283.9 million
(*Pro forma to include INVESTools results. Losses include $3.2 million Q2 acquisition charge. Calculations adjusted for NBC stock purchase.)

Balance Sheet*
Cash: $39.0 million
Current Assets: $45.19 million
Current Liabilities: $8.66 million
Long-term Debt: N/A
(*As of June 30, but adjusted to include $25 million from NBC. Cash includes some marketable securities in GlobalNet Financial.com)

Price-to-earnings: N/A
Price-to-sales: 13


Telescan traded for less than 3x book value or about 2x run-rate sales when it got slammed below $3 a share during the October '98 market mayhem. And the company was operating at close to breakeven. These might have been interesting stats for the small-cap investor who believed the market gloom would lift.

Plus, unlike many startups hatched to take advantage of the boom in Internet stocks, Telescan has been in business since 1989 and sports a cast of seasoned managers, such as the 58-year-old Chair/CEO David Brown, co-author of Cyber-Investing and other guides to online investing.

Such experience had already translated into a number of high-profile, private-label technology deals with financial services behemoths like Charles Schwab (NYSE: SCH), Fidelity Investments, and McGraw-Hill's (NYSE: MHP) Standard & Poor's in 1996. The next year saw deals with Time and the Citibank unit of Citigroup.

One major investor took advantage of the late summer decline to buy buy buy.

Then again, Telescan had negative working capital as recently as May 1998, when it was forced to accept the kind of floating-price discounted convertible financing deal that suggests a very weak company.

And frankly, the folks running the two limited partnerships that put up the cash were apparently too gun shy to take advantage of last fall's market dip to convert their preferred into common. Had they done so, they would now have some 1.2 million shares of Telescan common stock rather than 120,000 preferred shares currently convertible into just 348,027 common shares.

Telescan also has conducted a significant amount of work for Telebuild, a company controlled by Telescan director G. Robert Friedman. Such related-party transactions often deserve skeptical scrutiny.


Though the stock trades at decent discount to what NBC paid just a month ago, the current quote is right around NBC's overall average cost per share of $14.80. Also, the spate of insider selling during the spring makes a convincing case that insiders think the stock is pretty fairly valued around NBC's July purchase price in the low $20s. INVESTools founder and new Telescan director Laird Foshay, for instance, took money off the table at $19.50 per share on August 2.

Still, the company is doing better than it might seem at first glance. Second quarter revenues teleported 51.3% to $6.8 million. That puts run-rate sales at $27.1 million and means its enterprise value is about 7.4x run-rate sales. Some analysts consider 25x sales a reasonable high-side multiple at this point for potentially high-margin Internet information providers.

The Q2 results also include a $3.2 million one-time acquisition charge. Excluding that charge plus the distribution of a preferred dividend, Telescan would have lost just $97,000 or $0.01 per share versus a loss of $709,000 or $0.05 per share in the year-ago period. On a similar basis, year-to-date net income is a positive $20,000 versus a loss of $2 million last year. So Telescan is at core a profitable Internet company.

Moreover, one can see the potential operating leverage in the year-to-date comparisons. Cost of services has dropped to 52.07% of service revenues from 65.14%; selling and marketing expenses have dipped to 17.06% of overall revenues from 19.85%; and general and administrative expenses have declined to 30.53% of revenues from 40.89%.

That operating leverage is one reason that the only analyst covering the company, Stonegate Securities' Tim Stobaugh, is looking for FY99 profits of $0.21 per share and FY 2000 EPS of $0.50. However, his estimates have been overly optimistic thus far.

Although the public filings don't lay out the specifics of Telescan's various partnerships, it appears that most should create recurring revenues. And as traffic to these sites grows, Telescan should benefit. The partnership with CNBC is particularly compelling because the network reaches millions of viewers and can constantly plug its expanded website, which could become a major financial portal.

Then there's Wallstreetcity.com, which recently signed a three-year agreement with Finance America Mortgage Lending to expand the site's mortgage content and services. Telescan will have to spend more to market this site, but the company's search technology should continue to draw sophisticated individual investors.

Interest rate fears have created recent turbulence for small-cap Internet financial companies, and this could continue for a while. Moreover, the discounted convertible preferred is still hanging over the stock.

Investors probably ought to play hard-to-get with Telescan. Still, the company merits some preliminary research, if only because of GE's sponsorship.

-- Louis Corrigan

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