Excite@Home's third-quarter results included great numbers for subscriber growth, but revenue per subscriber fell again, both in the Subscribe and Media segments of the business. Making money off its subscribers is what Excite@Home intends to do. It needs to start doing it.

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By Brian Lund (TMF Tardior)
October 26, 2000

Good day, Fools. Many of you saw yesterday how favorably the market responded to Amazon.com's (Nasdaq: AMZN) third-quarter report. Those who acted on my column last week, in which I made the argument for shorting Amazon, felt that gain personally. Amazon is up over 50% since my story was published.

Ooops. Um, did I say that Amazon is volatile? I meant to. It's a good example of the potential pain of shorting and the riskiness of taking positions in individual stocks. And of the potential pitfalls of mimicking us.

But I digress. Most of you probably didn't see the market's reaction to Excite@Home's (Nasdaq: ATHM) third quarter. It was quite positive at first, with the stock rising over 5% in the morning, before everyone realized that the market was tanking and bailed, dropping it 5% lower than the previous day's close. Portrait of an efficient market at work.

So, aimless trading volatility aside, how were the results for the third quarter? Allow me to take a shot at them. After the second quarter, as an  Excite@Home shareholder bubbling with frustration, I spewed a parody-cum-rant after listening to the conference call. This time I'm calmer, ready to do a little more quantitative analysis.

Subscribers
@Home, even before the Excite merger, has emphasized subscriber numbers. Chairman and soon-to-be-former CEO George Bell said in the call that it's "the metric that you have told us is the bellwether of our franchise." (I love that transference of opinion. Hey, he's just telling us because we keep emphasizing it. George should run for public office after they find a replacement CEO.)

Sub numbers were great, coincidentally: 510,000 new people ordered cable broadband services from Excite@Home in the third quarter. Well, 60,000 of those came through an acquisition by a joint venture, but the number still beat the company's estimate. That puts total subs at 2,313,000 -- about 28% higher than the previous quarter. To reach the target of 3 million by the end of the year, the company just needs to boost it another 30%. With the new self-install kits available in Radio Shack, that should be doable.

(I still don't understand why anyone would buy one of these, by the way. Management made a good argument for why the company would like it, since it means that the customer and not a paid technician will do most of the work. Still, why would I pay to do myself what someone from the company would do for free? But I digress again.)

Subscribers vs. Revenue
It was somewhat surprising, however, that revenue did not rise accordingly. Pro forma revenue rose only 8% sequentially to $170 million -- substantially below the last estimate I saw, $200 million, from both Prudential and Jefferies & Co. Those reports came out in late June, so they're a bit dated, but I hadn't heard any subsequent warnings. Pro forma net income of $0.10 per share was in line with estimates.

What's the problem here? One problem is that media revenues weren't very good -- again -- growing 4% sequentially and only 22% year-over-year, while total revenue was up 51% year-over-year. Nico Detourn has made the argument before that media revenues have not kept up with subscriber revenues. Let's look at her metrics -- sub revenue per sub (SR/S) and media revenue per sub (MR/S) -- for the latest quarter. I'll update her numbers, since hers didn't include international revenues in each segment.

               2000Q3 2000Q2 2000Q1 1999Q4 1999Q3
Subs (thou)      2313   1803   1500   1150    843
Seq. growth       28%    20%    30%    36%    36%
Sub Rev ($thou) 78000  67795  56723  46553  36952
MediaRev($thou) 92000  80926  81340  82200  75610
SR/S           $33.72  37.60  37.82  40.48  43.83
Seq. growth      -10%    -1%    -7%    -8%    N/A
MR/S           $39.78  44.88  54.23  71.48  89.69
Seq. growth      -11%   -17%   -24%   -20%    N/A

Not only is media revenue falling rapidly relative to subscriber numbers, but subscriber revenue is straggling, too. The situation is even worse domestically. Subscription revenue per domestic sub was $32.17 in Q3.

This may be a short-term phenomenon. Those who live in an @Home marketing area are deluged with offers to sign up for $19.99 or less per month for the first six months, then rising to $39.99. Prices are set primarily by the cable companies who make the offers, and Excite@Home takes its 35%. If Big Cable (as Al Gore might say) sets prices lower, Excite@Home's revenue dives accordingly.

For fun, I also calculated total operating costs per sub (OC/S) -- want to hear the results? I'll tell you anyway:

                 2000Q3 2000Q2 2000Q1 1999Q4
Op Costs ($thou) 217207 203844 145864 130653
OC/S             $93.91 113.06  97.24 113.61
Seq. growth        -17%    16%   -14%   -20%

A mixed bag. Still, the number's better this quarter, right? Let's put our revenue per sub numbers together to get the company's total revenue per sub (TR/S remember, I've included international revenues in with the component media and subscriber revenue segments) and compare:

                 
             2000Q3 2000Q2 2000Q1 1999Q4
TR/S         $73.50  82.49  92.04 111.96
OC/S         $93.91 113.06  97.24 113.61
Op Margin/Sub  -28%   -37%    -6%    -1%

Shouldn't those numbers be going the other way?

George (or your successor), this is your shareholder speaking. I've got a new favorite metric: Revenue per subscriber. I don't mind seeing margins decrease while a company seeks to build a permanent customer base -- that's a very Rule-Breaking approach. I do, however, want the company to show that it can profit from those customers once acquired.

Right now, it looks like Excite@Home has got a lot of customers who don't return what they cost. That's no way to make money. When are we going to see some return for scaling? Oh, that's right -- you said in the call that you wouldn't give guidance for 2001. I guess we'll just have to trust you.

Breaker companies report
Breaker holding Celera Genomics (NYSE: CRA) reported its first-quarter results this morning. The news wires dutifully reported that the company beat estimates, as if that meant anything at this stage in Celera's development. CEO Craig Venter said that he expects revenue for 2001 to come in around $86 million, double the total in 2000. Check out our Fool News story for more information.

After the bell today, Amgen (Nasdaq: AMGN) will report. We'll discuss those results soon.

--Brian Lund, who gets more TMF Tardior every day.