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Prodigal Sum? Dialing Into Prodigy's Planned IPO

Gone in mostly everything but name, Prodigy wants to capture some of the interest in consumer ISPs with its own dialing-for-dollars attempt on Wall Street with an IPO. The challenge, as we see it, is convincing investors that Prodigy still means anything as just an access provider.

The math behind the moves: Both Earthlink (NASDAQ:ELNK) and Mindspring (NASDAQ:MSPG) trade north of $1,000 per subscriber. If Prodigy's 638k subs were valued at similar levels, it implies a $600-plus million valuation for the reborn outfit.

If so, that's not a bad return on investment for the Mexican-led investment group that took over the last vestiges of a once-great and clear leader in the online space.

Prodigy (in mil.)
Revenue six mos. to 6/98  
Prodigy Internet 0.386
Prodigy Classic 0.252
Possible value  
@ $500 each $ 319
@ $750 each $ 479
@ $1,000 each $ 638

Two years ago, after 15 years of growing it to be the leader in online services only to see it decline, Prodigy's original founders, IBM and Sears, finally sold the struggling online service to International Wireless, controlled by Grupo Carso SA de CV.

But first, how did Prodigy blow the lead they once enjoyed?

In 1995 Prodigy was king of the online world in a vision of instant stock quotes, chat, e-mail, news, easy sign up and a whole lot more. On 12/31/95 the service had 1.1 million subscribers.

Then management came up with the brilliant notion to charge its users for every e-mail above a monthly limit. $0.25 per e-mail, if memory serves.

At the same time, AOL carpet bombed the planet with its sign-up disks, recruited ex-Prodigyites with special forums on AOL where they could console themselves for not paying e-mail fees. AOL built a better interface, and IBM and Sears agreed to disagree about Prodigy's direction.

The Internet showed signs of threatening "online" services, the Web browser debuted and usurped some of the pizazz for user-interface and shifted focus to an "open" network. GNN/Yahoo/Magellan/Infoseek/Lycos/Excite(Architext) popped up, and Prodigy limped along thinking it was 1993 and not the dawn of the TCP/IP era.

Where is Prodigy today? For the six months ending June, it generated $67.3 million revenue. Annualized, that implies $134.6 million. If we take the per-sub comps, back out some value vs. its peers for it playing "catch up" in a race it once ruled, we think Prodigy could go public anywhere between 3x to 5x revenue.

Holding it back in valuation in our view: the radically different nature of the current enterprise vs. its original offing, the AOL gorilla factor (it owns CompuServe now and has 13 million global subscribers), the MSN as portal/access reborn-again effort, Earthlink and Mindspring, and 4,000 ISPs coast-to-coast who offer exactly what the new-fangled Prodigy does: access.

The $31.9 million losses for the first half of the year also won't help. But to be fair, Earthlink posted a $4.8 million loss before charges for its second quarter.

Some 45% of new enrollments to Prodigy come through PC bundling deals. Prodigy has $35 million cash on hand, some of that thanks to an infusion by Telmex this year of $45 million (it owns 20.9% of Prodigy, while Carso Global Telecom owns 65.3%).

New subscribers cost about $120 in marketing fees for any ISP. Or they can outright acquire them for $200 per-sub as Mindspring often does.

While Prodigy has lost a substantial amount of its subscribers over the years, going from more than 2 million to a fraction of that, its latest quarter showed that subscribers began growing again as its Classic subscribers switched to Prodigy Internet (access with a front end supplied by Excite).

If, and once public, Prodigy will have to have its stock go on a shopping spree for more subs, other ISPs, and boost working capital to market the service. AOL is in a different league than Prodigy today. Earthlink, with a Sprint deal that feeds it subs annually, and Mindspring, which buys ISPs at the rate of about one a week, are the ones to beat. But catch it first.

The question is, how much will a brand that has lost its original luster generate the sort of interest of front and center Internet stocks, gross proceeds, prodigal sums?