Prodigy Communications' bid to take over much of SBC Communications' high-speed Internet business may be boosting subscriber lists, but it's also turning out to be a dangerous cash drain for the Internet service provider.
In announcing third-quarter earnings Friday, Prodigy said that its cash reserves had dipped from $21 million to just $5 million at the end of the quarter, forcing it back to a bank associated with its Mexican parent company for short-term credit.
Perhaps just as telling, the company also said it had renegotiated its up-front subscriber acquisition payments to SBC to extend them over a three-year payment plan, "substantially" reducing the company's cash burn rate. Since June, Prodigy has served as the ISP for many of SBC's consumer high-speed Net customers but continues to pay the telecommunications giant for that privilege.
Prodigy said that initial attempts to win new bank loans secured by long-term customer contracts had been unsuccessful but that it was continuing with its efforts backed by SBC and Mexican giant Telmex.
The company's earnings for the quarter did beat Wall Street's expectations with a loss of 90 cents per share as opposed to expectations of $1.02 per share. That compared with losses of 39 cents per share a year ago.
Despite the better-than-expected quarterly figures, Prodigy executives warned that their year-end earnings would fall short of analysts' previous predictions, as reported by First Call/Thomson Financial.
The cash burn and financial results show the downside of Prodigy's strategy of reinventing itself as a high-speed Net provider. Digital subscriber line (DSL) service is considerably more expensive to manage and operate than is dial-up service, and competition among subscribers has already forced prices down to the point where profit margins are low.
The company said it had 2.7 million Internet subscribers at the end of the third quarter, including 338,000 DSL customers. It acquired close to 900,000 subscribers this year from SBC and from its merger with FlashNet Communications.
Prodigy's major shareholders are SBC and Mexican giants Telmex and Carso Global Telecom. Both of the Mexican companies are controlled by magnate Carlos Slim, who also controls the bank now supplying Prodigy's credit line.
The ISP went public in February 1999, rising to nearly $50 per share before falling steadily to its current range. The shares were down more than 12 percent to $4.60 near the end of trading Friday.