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Prodigy sees gains in revised deal with SBC

The ISP expects the new pact to help boost its financial standing by tapping 3.75 million DSL customers and 375,000 dial-up subscribers via SBC Communications.

Aiming to improve its cash position, Prodigy Communications on Friday said it has revised initial agreements with SBC Communications intended to brighten the Internet service provider's gloomy financial outlook.

For Austin, Texas-based Prodigy, the new pact is expected to help boost the company's cash position and financial standing by tapping a minimum of roughly 3.75 million SBC digital subscriber line (DSL) customers and 375,000 dial-up subscribers over the next nine years. Initially, the two companies had agreed on a three-year contract.

As a result of the revised agreements, Prodigy said it expects to see "significantly" improved gross margins and positive earnings before interest, taxes, depreciation and amortization (EBITDA) in 2001.

SBC, which is a major shareholder in Prodigy, closed its Net subscriber merger with the company last June, making Prodigy a preferred Net access provider to most of the Baby Bell's Internet customers. Though the deal has helped bolster Prodigy's subscriber base, it has also recently started to turn out to be a dangerous cash drain for the ISP.

When Prodigy reported better-than-expected third-quarter earnings last October, it had also said its cash reserves had dropped from $21 million to just $5 million by the end of the period.

The cash burn showed the downside of Prodigy's strategy of reinventing itself as a high-speed Net provider. DSL service is considerably more expensive to manage than is dial-up service, and competition among subscribers has already forced prices down to the point where profit margins are low.

After Prodigy reported it was low on cash, SBC, which holds close to a 45 percent stake in the company, gave the ISP a $110 million line of credit.

Under the new agreements Friday, SBC, which continues to co-brand its offerings with Prodigy, will assume responsibility for acquiring the DSL and business dial-up subscribers, handle customer care and billing, and assume responsibility for networking costs--freeing Prodigy to realize significantly lower operating expenses and increase its gross margin per customer, both companies said.

As part of the deal, Prodigy said it will receive monthly subscriber fees to provide SBC's Internet customers with e-mail, news and portal content.

Going forward, Prodigy see story: Find a broadband providersaid it expects total revenue for 2001 to be in the range of $350 million to $365 million, with gross margins of at least 49 percent. EBITDA for the year is expected to be in the range of $31 million to $34 million, or 44 cents per share to 49 cents per share. Still, Prodigy anticipates a net loss of approximately $334 million to $340 million, or $4.77 to $4.86 per share.

The revised agreements became effective Jan. 1. All of SBC's consumer and small-business dial-up and DSL customers are expected to be moved to Prodigy's systems in 2001.