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Prodigy Communications
SMA Financial Remarks
January 19, 2001
I. Intro and Safe Harbor by MWA
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II. Opening remarks by Charles Foster
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Good morning. Thank you for your time. My name is Charles Foster and I am
the chairman, CEO and president of Prodigy. You should have seen the news
we announced this morning. The significance of the new agreements with SBC
is two-fold:
First, it extends Prodigy's relationship with SBC and immediately puts
Prodigy in a much stronger financial position. As a result of the new
agreements, we expect Prodigy to be EBITDA positive this year, to improve
our cash flow, to reduce our operating costs, and to realize higher gross
margins per subscriber.
Second, the new agreements result in closer ties with SBC. This is a long-
term partnership between a national ISP and the nation's leading DSL
provider. The agreements leverage what each company does best - Prodigy's
portal and ISP experience and SBC's network services, distribution
channels, customer care and billing. Together, we expect to see many
opportunities nationwide.
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As many of you know, the current operating environment has been a
challenging one for many of the leading providers of Internet services,
including Prodigy. While rates of growth continue to be promising, the
combination of an aggressive pricing environment for retail services with
high upfront costs of initiating services to new customers has led to
significant cash and margin pressure. These pressures are particularly
acute for providers of broadband access. This environment has also
constrained the ability of operators to raise much needed capital from both
public and private sources. Prodigy is not immune from these pressures.
In response to this environment, Prodigy management has conducted an
exhaustive review of strategies that would materially reduce the costs of
expanding Prodigy's customer base while creating lasting value for Prodigy
shareholders.
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As a result of this process, Prodigy and SBC Communications have agreed to
new Strategic and Marketing Agreements. The changes in these agreements
primarily affect services provided to DSL and business dial-up subscribers
procured by SBC. The effect of these changes will be a significant
reduction in the costs to Prodigy of growing the DSL subscriber base and is
projected to significantly accelerate Prodigy's path to profitability. The
amended agreements will also expand the term and level of SBC's minimum
commitments to Prodigy to deliver the Prodigy Internet service to
subscribers.
Here are the top-line benefits of the new agreements:
. Prodigy and SBC will extend the term their relationship from three to
nine years;
. Prodigy retains the retail relationship with its consumer dial-up
subscribers, while SBC maintains the retail relationship with its DSL
and business dial-up subscribers;
. Prodigy will receive monthly per subscriber fees to provide SBC a
wholesale ISP service for e-mail, news and portal content for SBC DSL
and business dial-up subscribers;
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. SBC increases its MINIMUM subscriber commitment to Prodigy to
approximately 3.75 million DSL customers and 375,000 dial-up subscribers
over the nine year term;
. SBC will assume responsibility for acquiring the DSL and business dial-
up subscribers. SBC will provide customer care and billing, and assume
responsibility for networking costs for SBC DSL and business dial-up
customers. This enables Prodigy to realize significantly lower operating
expenses;
. SBC DSL and dial-up customers will use Prodigy's extensive roaming
network to access their accounts from anywhere; and
. In conjunction with these agreements, as was recently made public, SBC
will provide a $110 million line of credit to Prodigy.
In addition to these immediate financial benefits are the long-term
opportunities that Prodigy will realize due to its partnership with SBC.
SBC and Prodigy will continue to co-brand in advertising and both
parties will work together in affinity, OEM and new product marketing.
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We see these new agreements as very good news for both Prodigy and SBC. We
are taking advantage of each company's core strengths in order to give
customers- again, both Prodigy's and SBC's - the best Internet experience
in the market. With its improved financial position, Prodigy will have the
resources to build and maintain an Internet portal and ISP infrastructure
that will lead the industry.
I'll now turn the call over to Allen Craft, Prodigy's CFO, to review the
more specific financial implications of the revised agreements. Allen.[B
III. Financial review by Allen Craft
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Thank you Charles.
Today I will be giving information on how Prodigy's new operating model
will affect the company going forward. I will not be discussing results for
the fourth quarter and year ended December 31, 2000, at this time.
Let me also remind you that I will host a second conference call at noon
today to further discuss financial details of Prodigy's new operating
model.
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2001 Pro Forma
As Charles has already explained, the new agreements mean that in 2001,
Prodigy will realize significantly reduced operating expenses -specifically
those associated with costs of acquisitions, networking and line costs,
outsourced customer service contracts, and reduced billing expenses. At the
same time, we are projecting less total revenue this year because of the
pricing adjustments associated with the wholesale nature in the revised
agreements as well as a recent accounting change regarding the
classification of revenue. HOWEVER, with the drop in our expenses, we
expect to see SIGNIFICANTLY improved gross margins and positive EBITDA in
2001, which would not have been realized under the previous business model
until 2004.
In 2001, we expect our total net revenue to be in the range of $350 million
to $365 million. We will have the following revenue sources: dial, DSL, and
other non-subscriber related sources.
We anticipate the revenue mix will be represented by approximately 80% from
dial, 14% from DSL, and 6% from non-subscriber or other sources.
Gross margins for 2001 should be approximately 49%.
We expect to report EBITDA for the year in the range of $31 to $34 million,
or $.44 to $.49 per share.
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Net loss before adjusting for minority interest is expected to be
approximately $334 to $340 million, or $4.77 to $4.86 per share. This is
largely due to amortization expense associated with the goodwill Prodigy
booked as a result of the initial SBC investment.
Subscribers
As of the end of September 2000, Prodigy reported 2.74 million subscribers.
At the end of 2001, we expect to have between 3.1 to 3.7 million
subscribers.
Balance Sheet
In conjunction with our revised agreements, and as was previously
publicized, SBC will provide Prodigy with a $110 million line of credit. It
is not our plans to use this line of credit for operating cash, but instead
to have these funds available should opportunities arise that we want to
consider.
We would now be happy to answer your questions.
IV. Q & A
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