Broadband Equals Positive Cash Flow

Excite At Home CFO Mark McEachen says he's hardly the only one being grilled by suppliers' credit managers these days.
Joseph RadiganJuly 31, 2001

These days, Mark McEachen is getting phone calls that he never would have dreamed possible a few short years ago.

The CFO of Excite At Home tells that he’s been on the phone with his counterparts at several suppliers, discussing his company’s terms for business credit. The revelation followed the acknowledgement by the company’s management during its quarterly conference call that some suppliers are asking for tighter terms.

“I get a call CFO-to-CFO, and they say, ‘We want to make sure we have a good financial relationship,’” he says. “Years gone by, you never got a call from another CFO. Now what you see is more of a working-party relationship.”

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But McEachen also notes that the company is prepared to shell out “a couple of hundred million in cap ex” next year on high-speed Internet routers and fiber optic lines. Because the high-speed access component of the company’s business accounts for 75 percent of its revenue and is cash flow positive, suppliers haven’t shut the credit spigot entirely.

“They like the fact that we’re growing, and we’re growing our subscriber base,” McEachen says.

Lyle Wallis, vice president of the Credit Research Foundation in Columbia, Md., says credit managers are placing calls to CFOs at tech companies and firms in other sectors suffering through the economic downturn and asking questions about sales trends, cash flow, and liquidity—issues they didn’t bother with in 1999.

In the case of a company that is on the verge of receiving a major cash infusion, such as the $100 million commitment just received from AOL Time Warner, a credit manager might wait for the investment to come in before shipping supplies, Wallis says. In another example, if a dot-com customer is waiting for bank funding, the credit manger might call the bank to check if the bank will indeed extend the credit.

That’s a precaution credit managers didn’t bother with two years ago,” Wallis observes.

“If he’s a prudent credit manager, he calls the CFO of the business, and says, ‘I’m concerned you may not be able to pay me,’” Wallis says.

“Fortunately for Amazon, AOL is throwing in $100 million,” Wallis notes. “You can’t assume there will be a white knight for other companies.”

In Excite At Home’s case, the company is facing tougher requests from suppliers at a time when it is struggling financially. In the second quarter, revenue fell $10 million to $138 million, largely because of the collapse in its ad revenue from $74.7 million in the year-ago quarter to $28.6 million in the latest three-month period.

The flow of red ink on the bottom line deepened to $65 million from $38.6 million a year ago.

During the company’s conference call with analysts, management also acknowledged it would need to raise additional cash by year-end. The most likely scenario calls for the firm to sell off its portal business, or some portion of it, and rebuild its balance sheet with the proceeds.

McEachen told the analysts, “We see a need to raise additional cash by the end of the year.”

But the picture is not entirely bleak. McEachen notes that the company’s broadband business is already cash flow positive. Were it not for the media business, which is clearly struggling in the weak economy, the firm would not have been saddled with a negative EBITDA of $12.3 million in the second quarter.

“Our broadband business doubled in the past year,” McEachen says. The segment now accounts for 75 percent of sales, and is generating positive cash flow. A year ago, it was only 25 percent of revenue.

In the meantime, the advertising and content component now accounts for only 25 percent of revenue, whereas a year ago, it was 75 percent of the top line. Unfortunately, the negative cash flow generated here is more than enough to erase the positive cash flow produced by the broadband business.

“The focus of the company is to get out of the narrowband media world,” McEachen says. “That would allow us to do things in the broadband media world.”

Despite the restrictions suppliers are imposing, McEachen says Excite At Home is hardly the only firm seeing its suppliers impose tighter terms on business credit.

He has a point. Earlier this year, was the subject of news reports in The Washington Post and The New York Times that its suppliers were restricting their credit terms.

The Credit Research Foundation’s Wallis says that during the peak of the dot-com boom in 1999, credit managers could afford to be a little lax in their terms with dot-coms. That’s no longer true.

“Two years ago, they didn’t have to worry,” Wallis says. “You were dealing with a healthy economy, your business was spiking upwards, and you’re tending to think it’s going to last. It’s not so much the credit manager as senior management who thinks, ‘We can take additional risk. We have other customers.’ All of a sudden that’s changed.”

Wallis also says he’s seen another sign that the economy’s fortunes are worsening. For a while during the go-go ’90s, the Credit Research Foundation’s training courses on bankruptcy proceedings were sparsely attended. Among other things, the classes school credit managers on the ins-and-outs of putting their claim to be paid before a bankruptcy judge.

Suddenly the classes are popular again.

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