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I composed the following analysis of Worldgate Communications for SI Project Hunt.
Posted below for those interested.
Comments please.
Worldgate Communications (WGAT) Project Hunt Report
1. Company Overview
WorldGate Communications provides a television-based Internet service that delivers the Internet through cable television systems. The WorldGate Service provides high speed, easy to use, low cost Internet access without a personal computer, modem or special purpose set-top appliance; full-featured Internet functionality and content that can be accessed within seconds; and a television-based portal enabling viewers to dynamically link from television programming and advertising to related Web sites. The WorldGate Service employs only a television, a remote control or WorldGate wireless keyboard, and a WorldGate capable digital or advanced analog cable box. No additional set-top appliance, personal computer or modem is required. With the press of a button, subscribers can connect within seconds to the Internet where they can, among other activities, browse the World Wide Web, send and receive e-mail and participate in chat sessions and shop on-line.

2. Revenues
WorldGate Announces Fourth Quarter Results with 65% Increase in Revenue over Prior Quarter
Trevose, PA, February 23, 2000 - WorldGate Communications, Inc. (Nasdaq: WGAT) today reported revenues of $2.7 million for the fourth quarter ended December 31, 1999, a 65% increase over revenues of $1.6 million reported in the third quarter ended September 30, 1999, and a 472% increase over revenues of $468,000 for the fourth quarter ended December 31, 1998.
The net loss for the fourth quarter was $10.8 million or $0.50 per share, compared to $9.5 million or $0.44 per share in the third quarter. For the fourth quarter ended December 31, 1998, the Company reported a net loss of $12 million or $1.31 per share. Excluding a non-cash charge for the accretion on the preferred stock, the net loss for the fourth quarter 1998 was $10 million or $1.10 per share.
For the twelve months ended December 31, 1999, the Company reported revenues of $5.6 million and a net loss of $38.1 million or $2.13 per share. This compares to revenues of $1 million and a net loss of $33.3 million or $3.66 per share for the same twelve-month period in 1998. Excluding a one-time charge of $1 million for the early extinguishment of debt (in the second quarter 1999) and non-cash charges for the accretion on the preferred stock, the net losses for the twelve-month periods in 1999 and 1998 were $34.7 million or $1.94 per share and $27.1 million or $2.98 per share, respectively.
Cash, cash equivalents, and short-term investments amounted to $75.7 million as of the end of the fourth quarter, as compared to $88.1 million at the end of the third quarter. Capital expenditures in the fourth quarter 1999 of $1.4 million were made for office, engineering and test equipment.

3. Management
Worldgate made the Forbes ASAP list of the top 20 best-managed and fastest-growing tech companies worldwide. WorldGate is listed at number 18 in the April 3 issue of Forbes ASAP, a bi-monthly technology magazine published by Forbes that is made available to all of its 784,000 subscribers.
In the article, entitled "Ramp Champs. The best-managed, fastest growing tech companies in the world," Forbes ASAP contacted 200 industry analysts and asked them to score each organization from the list of the 100 fastest growing companies, based on year-over-year sales. Each company on that list was then evaluated based on management, finances, market opportunity and competitive position. Of the top 20 companies selected from the results of the analysts' evaluations and criteria, WorldGate is positioned at number 18.
"The Forbes ASAP ranking recognizes WorldGate's position as a leader in the interactive television industry," said Hal Krisbergh, Chairman and CEO of WorldGate. "The evaluation went beyond just looking at our financial performance and measured our technology, intellectual property and the leadership of our company. The results speak for themselves and we are truly honored to be on this list."

4. First Mover
The WorldGate Service is the only Internet access service currently commercially deployed for both digital and advanced analog set-top boxes, giving it a significant first mover advantage. This competitive advantage is further strengthened by WorldGate's installed base of headend equipment, as well as the patents on its Channel HyperLinking and Ultra-Thin ClientSM technologies. In addition, there are approximately 10 million advanced analog and digital set-tops in the field that can take a software download of the WorldGate Service. Because of these advantages and demonstrated consumer acceptance of its product, the Company believes it is well-positioned for future growth.
WorldGate is the first company to bring high-speed, low-cost Internet access over the existing cable infrastructure to countries outside the U.S.
"In many countries a computer is a major investment for average people. That's why we focus on low-cost Internet access via existing cable lines," says Krisbergh.
He says the explosive popularity of the Internet in the West is fueled by the existing technology infrastructure, especially the relatively cheap personal computers. But there's no reason why the cost of a computer should hold back emerging markets from getting online, according to Krisbergh.
"China's telephone infrastructure is relatively poor, but the country's cable infrastructure has leapfrogged," he says.
China currently has about 40 million cable subscribers, second only to the 65 million people who get cable TV in the U.S. And the popularity of cable TV is surging in China with the rise of the country's new middle class. The lure of Internet access is likely to bolster this trend, according to Krisbergh.

In June of 1999 Worldgate penned an agreement yesterday with the post and telecommunications administration of China's Hunan province that would give the region's burgeoning middle class access to the Internet without the need for a costly personal computer or a home phone. Yesterday's agreement is just the first step in what could be a rapid expansion in China and other markets, according to WorldGate's Chairman and CEO Hal Krisbergh, a cable TV veteran who founded the company in 1995.
"We're already talking with other provinces about similar agreements, and we're about two years ahead of the competition," says Krisbergh.

5. G/K Characteristics
A. Is there a discontinuous innovation or a proprietary open architecture?
I believe so.

WorldGate's technology is reminiscent of WebTV in the U.S., with one major difference: access to the Internet is over TV cables rather than telephone lines. Subscribers use a wireless keyboard to surf the net. The keyboard will initially be available with English characters, but WorldGate is moving quickly to introduce a Chinese-character keyboard. The software that enables web surfing resides on the head of the cable set-top box.

The WorldGate Channel HyperLinkingSM service enables cable subscribers to access the Internet, e-mail and other interactive services through their television and existing cable connection. WorldGate does not require an in-home computer, phone line, costly set-top appliance, special training or high monthly service charges. All the intelligence and control is at the headend, enabling the cable operator to provide the most flexible, feature-rich, co-branded interactive service available.
All that cable subscribers need to get to the Internet is:
 An advanced analog or digital cable box
 A remote control or a wireless keyboard
The cable box, remote control, and wireless keyboard are supplied by the cable operator.

B. Are there high barriers to entry and high switching costs?
It would seem so on the basis of their patents. The WorldGateSM Service marries WorldGate's proprietary technology with the cable television platform to use either the existing advanced analog or digital cable converter along with a remote control or wireless keyboard to bring the Internet to cable subscribers. Using advanced analog converters, the Service operates at more than 2 times the speed of a standard 56 Kbps telephone modem. With digital converters, the Service operates at speeds up to 38 Mbps, over 3.5 times faster than a typical cable modem. In addition, the Company's Channel HyperLinking technology allows viewers instant access from the program they are watching to a related Web site or locally available information sources.

WorldGate, Channel HyperLinking and Internet on EVERY TV are service marks of WorldGate Communications, Inc.

I would like someone to volunteer to research Worldgate's patents and offer a more informed opinion.

C. Have value chains developed?
WorldGate has agreements with the leading suppliers of set-top boxes, General Instruments (nyse: GI) and Scientific-Atlanta (nyse: SFA). In fact, the two companies are WorldGate's second- and third-biggest investors after Citigroup (nyse: C).

D. Have they crossed the chasm?
Yes, WorldGate is currently deployed domestically in cable systems owned by Buckeye CableSystems, Charter Communications, Click! Network, Comcast Cable Communications, Massillon Cable and Prestige Cable. In addition, WorldGate has international deployment and trial agreements with 19 multiple system operators in 13 countries worldwide.

E. Existence of Hypergrowth?
Based upon the Forbes article and revenues listed above it would appear so.

6. Competition with other Gorilla Candidates
Tinker, (or someone else) help me out with this one.
On the surface it might appear that they are in direct competition with Gemstar (GMST), but upon second glance I think that there are two different games. GMST will dominate interactive TV while it appears WGAT could dominate internet access over TV cable lines. Patent protection is the key. If sufficient patent protection is in place it would seem to me that WGAT could be another merger candidate with GMST.

6. Summary and Analysis
This is a fast growing, well managed company, with increasing revenue streams. They appear to be a first mover in the internet TV business with a building value chain. I like their ?Internet on EVERY TV? trademark.

7. News References
03/23/00: WorldGate Makes Forbes ASAP?s List of the Top Twenty Best-Managed and Fastest-Growing Tech Companies in the World
03/22/00: WorldGate and Charter Communications partner with The city of LaGrange, GA to become first city in the country to provide free internet access over the TV
03/02/00: WorldGate Receives Notice of Allowance for Patent Protecting Elements of Ultra-Thin ClientSM Architecture and Channel HyperLinkingSM
02/29/00: and WorldGate Team Up to Provide U.S. Hispanic Internet Access on Cable Television
02/23/00: WorldGate Announces Fourth Quarter Results with 65% Increase in Revenue over Prior Quarter
01/24/00: WorldGate Introduces Interactive Television to Peru with Telefonica Multimedia Deployment
01/19/00: WorldGate Starmedia Network and WorldGate Communications Team Up To Deliver Internet Access on Cable Television To Latin America and Spain
01/12/00: WorldGate and Switchboard Sign Agreement To Expand Local Content Options for Interactive Television Customers

8. Disclosure
Long on WGAT and GMST

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