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Friday, June 18, 1999

Prodigy Communications Inc.
(Nasdaq: PRGY)
Website: www.prodigy.com
Phone:  914-448-8000
Price  (6/17/99): $22 15/16


Prodigy has come full circle. After being bought in a leveraged buyout (LBO) by company insiders in 1996, Internet service provider Prodigy was sold to the public markets again this past February. After those investors with connections were able to buy shares at the $15 offering price, the shares took off in a rampage along with numerous other scorching IPOs at the time. Unfortunately, Prodigy's upward movement proved to be little more than a flash in the pan.

Three days after the IPO the shares eclipsed the $50 mark, more than tripling the offering price in less than a week. Fast forward another week and the shares were trading below $30 a share, giving a perfect case study of exactly how volatile new issues can be.

The market has cooled in recent weeks to many stocks related to the Internet, and Prodigy is among the long list of online companies that have seen their share prices recently chopped in half. While the volatility and trading volume in Prodigy's shares has waned significantly since the post-IPO days, the market's interest in the stock has also faded.


Prodigy Communications is one of the largest Internet Service Providers (ISPs) in the nation with roughly 600,000 subscribers to the firm's Prodigy Internet service. The company has outsourced much of its content-building business to Excite@Home (Nasdaq: ATHM) and now concentrates on providing nationwide connectivity (and not much else) at a low price.

Prodigy is among the oldest names in the online universe. With backing from corporate behemoths IBM (NYSE: IBM) and Sears (NYSE: S), the company was the first in the country to offer a commercial online service when it opened up its modems in 1988. Even though the company was one of the first to offer online shopping, banking, and stock trading, it was all done before the average consumer was ready for e-commerce. Plus, the company's competitors proved to be much more adept at providing a service that online users wanted.

Prodigy's service was preempted first by CompuServe and America Online (NYSE: AOL) and later by scores of other "plain vanilla" ISPs. The pioneering Prodigy Classic service only has slightly more than 100,000 faithful left on the online service, and Prodigy Classic is scheduled to go offline later this year. Many of the old Prodigy Classic subscribers have relocated over to Prodigy Internet.

Helped by investment group International Wireless, Prodigy was bought by the company's management for a paltry $250 million back in 1996. The company was then brought public again in February of this year. The day after the company's public offering this year, the firm was valued at roughly $1.7 billion.

The ISP business is undergoing significant consolidation, and Prodigy is among those having the urge to merge. In late May it was announced that Prodigy was buying the American ISP business of the British firm Cable & Wireless PLC (NYSE: CWP). The actual cost of the transaction will depend upon how many customers actually make the switch over to Prodigy.

Mexican investment firm Carso Global Telecom owns approximately 48% of Prodigy while Telmex (NYSE: TMX) owns roughly 19% of the firm. One of the company's new strategies is to target its online service to the Spanish-speaking markets in both Mexico and America.


Income Statement
12-month sales:      $138.6 million 
12-month income:     ($64.2 million)
12-month EPS:         ($1.40)
Profit Margin:          N/A
Market Cap:         $1398.7 million

Balance Sheet 
Cash:                $127.8 million
Current Assets:      $163.4 million
Total Assets:        $225.0 million
Current Liabilities:  $50.5 million 
Long-term Debt:        None
Total Liabilities:    $50.5 million

Price-to-earnings:  N/A  
Price-to-sales:        10.1


Internet is the name, and running on red ink is the game. Just like many of its competitors, Prodigy is bleeding red ink in copious amounts. But unlike other companies that are going through the start-up process, Prodigy has been around for many years and done nothing but lose money. The most recent balance sheet shows retained earnings of negative $308.5 million, which represents the net losses over the years. Historical performance is no guarantee of future results, but it is a pretty darn good indicator.

A more relevant way to have perhaps avoided the Prodigy trouble would have been to look at the market capitalization per subscriber, an extremely handy metric for assessing the valuation the market is putting on online companies. At its peak in February when the company had a market capitalization near $3 billion, Prodigy was valued at roughly $4400 per subscriber. While this was less than the approximately $6000 per subscriber America Online was trading for at the time, it was higher than what other ISPs without significant content and e-commerce offerings were trading at. Most other "vanilla" ISPs trade anywhere from roughly $1000 to $2500 per subscriber.


As mentioned earlier, Prodigy has lost a significant amount of money from its operations over the past several years. When looking at what the analysts predict from the company in the future, nothing but losses are expected. Prodigy is a company that has had an extremely difficult time creating shareholder value in the past, and the competition is not getting any easier.

Not only does the company have to worry about competing with its old foe America Online, the company is also battling with the likes of EarthLink (Nasdaq: ELNK), Mindspring (Nasdaq: MSPG), and hundreds of other smaller ISPs that are competing on price. Of potentially heavier importance will be the company's positioning when broadband technologies, namely cable modems and xDSL, become widely available. It's anything but certain how the broadband cards will fall, but Prodigy has yet to make a serious attempt to get into what will be the biggest game in a few years.

While the company has been adding to its Prodigy Internet rolls over the past several quarters, much of the growth has come from users switching from the old Prodigy Classic offering. Regardless, the company is still one of the top ten ISPs in the country, and it is a fairly safe bet that the company will continue to acquire smaller firms in the future.

It will also be interesting to see how the company's initiatives to reach the Spanish-speaking market pan out. Not many other online companies are catering to the 2 million households that speak Spanish in this country, and there may very well be a niche there for Prodigy. The company and its partner Telmex are also hoping to grab a significant chunk of the largely unpenetrated Mexican market. Even though far fewer homes south of the border have computers or even access to telephone or cable, the potential market is huge. But then again, Prodigy did prove to be too early to a market once before.

Prodigy may have a long string of losses behind it, but the company actually has a relatively healthy balance sheet thanks to outside investments and the recent IPO. That reduces the risk to equity holders and also gives Prodigy ammunition to continue its marketing shift. Nevertheless, there are significant issues yet to be resolved with Prodigy, and investors would probably be best suited to watch rather than play at this point.

-- Paul Larson (TMFParlay@aol.com)

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