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THE DAY AHEAD: Don&#039t discount the Excite side of Excite@Home

The common perception of Excite@Home (Nasdaq: ATHM) is that the @Home part is the future and much more valuable than the narrowband Excite side of the equation. That perception, however, is flawed.

In the first full quarter as a merged company, Excite@Home delivered solid results (full statement) and an upside surprise in revenue courtesy of that good old portal business. Third quarter revenue came in at $113 million, about $5 million ahead of estimates, and operating results met expectations.

Is the Excite part of Excite@Home underappreciated?

"Broadband has driven the valuation, but Excite has driven the business," said Abhishek Gami, an analyst with William Blair.

The third quarter validates Gami's point.

The @Media group, which includes the Excite portal, Matchlogic and Enliven, represents roughly 60 percent of Excite@Home's revenue.

The common knock against Excite is that the page view growth isn't there. And the growth isn't there when compared to Yahoo! Inc. (Nasdaq: YHOO), but much of that anemic traffic growth can be chalked up to poor marketing and the end of an agreement with Netscape, now a part of America Online (NYSE: AOL). In addition, analysts point out that Excite hasn't been focused on page views because it chasing the "revenue per page view" metric.

Excite traffic averaged 89 million page views a day in September, slightly higher than analyst expectations and up about 10 percent from the second quarter. Registered users jumped to 44 million, up 16 percent from the second quarter.

Although you could quibble about Excite's standing in the portal world, the page view figures don't indicate the true worth of the narrowband side of the business. Using Matchlogic's direct marketing database, Excite@Home can generate subscribers for the cable service. And Matchlogic, which Excite brought to the table, is the hidden jewel of the company. Matchlogic has 72 million profiles, up from 65 million in the second quarter.

Gami said Excite brings a prominent global brand to the company -- something that can't built overnight, especially for the U.S.-based @Home service.

Of course there are concerns about the portal side of the business -- Excite has lost momentum, but plans to step up marketing and may consider an acquisition. Henry Blodget of Merrill Lynch notes that few Web properties have regained momentum after they have lost it.

But it's certainly worth noting that Excite is holding the fort while @Home's cable access service gets all the attention.

Broadband dreams in 2000

Excite@Home's cable subscribers showed sharp gains in the quarter with 840,000 users. That total topped both Blodget's and Gami's expectations.

@Home's subscribers are up 35 percent from the previous quarter and the company now reaches 3.9 percent of its 21 million possible homes.

The next quarter and beyond will be telling for the @Home service. For starters, cable modems will be available at retail. In addition, PC makers Dell and IBM will ship cable-modem-equipped computers before the end of the year. Both of those developments should put @Home on the path to some serious subscriber growth.

Excite@Home has exclusive agreements with cable operators, which analysts believe will provide an easy path to 10 million subscribers in a couple years.

The company expects to meet its goal of 1.1 million subscribers by the end of the year.

Rumors overshadow results

So why isn't this stock taking off (chart)? The short answer would be: indecision by shareholder AT&T Corp. (NYSE: T), regulatory concerns over cable access, and one jumbled corporate governance set-up.

First there's the ongoing rumors. AT&T doesn't want content, but wants just the pipes. Or does it? Ma Bell doesn't even know, but recently issued a statement that raised more questions than it answered. Why say anything at all?

Then there's the issues surrounding whether AT&T has to open up its cable pipes. If AT&T were forced to open up cable access to others, Excite@Home would lose its chance at netting subscribers before competition from AOL arrived.

The good news is that management has remained focused. In fact, Excite@Home officials stick to their "we talk to everybody" line.

Meanwhile, the Federal Communications Commission is expected to side with AT&T on the open access issue and many analyst expect AT&T, Excite@Home and AOL to swing a deal in the near future. And don't underestimate the resignation of AT&T cable chief Leo Hindery as a good sign for Excite@Home. Hindery was publicly at odds with Excite @Home management on many issues.