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THE DAY AHEAD: plots local content course

Internet service provider (Nasdaq: ONEM) has exceeded most analyst targets, has 535,000 subscribers through Sept. 27 and could be viewed as a takeover target. But it still can't win Wall Street's popularity contest.

"It's frustrating," said CEO Stephen Smith, in an interview this week with ZDII. "We priced at 22, went to 46, drifted to the 30s and 20s, shot up again and now are around 16." The stock performance (chart) is even more frustrating because the company is on schedule or ahead of schedule with many of its initiatives, said Smith. Just for good measure, he expects a strong third quarter that should easily top estimates (Wall Street is expecting a loss of $1.16 a share). An ISP value?

Onemain's plan is to be the ISP for the unreachable regions -- the farmers who want Net access and the clusters of folks in Russell, Kansas, Bean Blossom, Indiana and other parts off the beaten path. According to Smith, Onemain can grow quickly and own these markets because they are underserved.

And coming up in November, Onemain will unveil its latest growth plan -- local geographic portals. Instead of CitySearch, think RuralSearch. Onemain plans to target its users with locally important information such as high school football scores, church schedules and classified ads.

"Being an ISP is secondary," said Smith. "We are going to be a local content aggregator."

Smith estimated that sponsorships and e-commerce opportunities could add $1 a month in revenue for every customer by the third quarter of 2000. Onemain charges $19.95 a month for service. Analysts estimate Onemain also has one of the lowest churn rates in the industry coupled with some of the highest revenue per customer totals.

"They have shown tremendous internal growth," said John Bain, an analyst with Hoak Breedlove Wesneski, a firm that doesn't have underwriting ties to Onemain. Wesneski rates Onemain a "buy."

So why isn't Wall Street showing Onemain any love?

For starters, Onemain went public, raised a lot of money and orchestrated a roll-up plan, buying 17 ISPs right out of the gate. In fact, we panned Onemain for a prospectus that was more theory than practice. Because of those acquisitions, Onemain carries around a lot of goodwill that lessens its appeal as a takeover candidate.

In addition, roll-ups don't have the best reputation. Smith said the roll-up strategy was just to acquire critical mass quickly. He frowned on the roll-up moniker.

And speaking of acquisitions, Onemain has to integrate all those companies -- not to mention an additional two that were acquired since the IPO. Smith said all of his subscribers will be on a common platform for billing by the end of the first quarter of 2000.

That common platform is crucial to cutting expenses. Bain said once Onemain gets all its customers on a common platform, it will have better leverage to negotiate with Internet backbone providers. For now, Wall Street is taking a watch-them-integrate approach with Onemain.

But there are plenty of reasons to keep an eye on the company. Here are some mileposts to watch.

  • The company's third quarter earnings report. Onemain topped estimates in the first and second quarters (see statement) and Smith said there's upside to the third quarter report. Onemain is one of those EDITDA (earnings before interest, taxes, depreciation and amortization) companies and look good if you factor out goodwill and the bad stuff.

  • The company will hold its investor meeting Oct. 21 at its Reston, Va. headquarters. The company will demonstrate its local portal strategy.

  • Onemain will launch its local portal strategy in mid-November. Among the early plans are to poll subscribers every few months to give users what they want.

  • An ISP stock rebound. For now there are concerns about everything from free Internet access to the effects of broadband. Smith isn't worried. Free ISPs don't extend into Onemain's territory. Why would a small-town user pay a toll call for a free service and a bunch of ads? As for broadband, Smith said Onemain's customers are also price conscious and won't fork out a lot of dough for bandwidth.

    Besides, digital subscriber line and cable broadband services aren't coming to Onemain's regions anytime soon. Most cable companies in Onemain's core areas don't have more than 30 channels. Onemain offers DSL in 25 percent of its markets and has been surprised by the relatively light demand.