Analysts put PSINet ahead of the field and say its aggressive acquisition strategy may see the ISP steal a 12-24 month technology lead on rivals such as UUNet Technologies, Concentric Network and GTE Internetworking. The Herndon, Virginia-based network services company has acquired no less than 20 smaller ISPs at a cost of $293.7m since the beginning of 1998. The volume and speed of these acquisitions exposes PSINet management to the problems of integrating the acquired companies. But in a market where market share and the deployment of cutting edge technology is what counts PSINet’s ability to deliver IP-based traffic around the globe is considered unique by analysts with BancBoston Robertson Stephens.
The company started 1999 by purchasing global and domestic fibre capacity from Hermes providing bandwidth configured as multiple rings linking 30 European cities. Also in January 1999 it bought fiber linking the UK and Japan from FLAG (Fibreoptic Link Around the Globe). By June 1999 PSINet is due to open a $48m, 45,000 square foot global internet hosting facility in London, UK that will provide web hosting, application hosting and high capacity access to the PSINet network. The center is one of two planned internet data centers being developed in partnership with Hewlett-Packard, adding to the one that’s operational at Herndon, Virginia. Another is outlined for Japan. Virginia Holt, managing director of PSINet Europe says the new centres will enable PSINet to establish itself as a major player in the rapidly growing application service provider application hosting market. Currently revenues from web hosting activities account for around 10% of total revenue in Europe, reported Holt, but by the end of June 2000 we expect this to have risen to around 30%. ASP business can potentially deliver gross margins of around 70%, PSINet believes.
The company’s most recent acquisitions came in February 1999 when two French ISPs Satelnet, and Planete.net were bought for an aggregate purchase price of approximately $3.6m. The deals added some 300 business and web services accounts, and 780 consumer dial-up customers. Both companies focus primarily on the business marketplace. Satelnet, based in Lyon, serves the business community with connectivity, web hosting, wireless services and custom applications such as security and firewall design. Planete.net, based in Montreuil, has a mix of corporate and consumer business. The company offers dial-up access, leased lines, web hosting and consulting services.
In total, acquisitions over the last 15-month period added 21,990 business and web services accounts, 211,860 consumer dial-up customers and over 150 POPs, to bring the total number of PSINet POPs to over 500. The new focus for PSINet’s acquisition activity is South America where the weakness of the local economies makes prospects easier targets. Its European shopping spree is far from over, however. Holt reports that a further three letters of intent are currently lodged with European companies, and that the company is looking to expand into both the Italian and Spanish markets as well as building upon acquisitions made in France and Germany.
Reported revenue for the first quarter 1999 ending 31 March stood at $104.8m representing a 136% increase on revenue for the first quarter 1998. Gross margins are reported as 27.5%. PSINet also claimed an increase in account growth of 4.05% for consumer accounts rising to 898,000 from 863,000 and a 9.15% increase in corporate accounts rising to 59,700 from 54,700 for the quarter. Revenue growth is accounted for by a 50-50 split between organic growth and growth through acquisition. Some 52% of revenues are derived from outside the US. In fiscal 1998 PSINet drew $64m from its UK operations. Total borrowings as of year-end December 1998 stood at $1.12bn against revenue for the year of $259.6m.
As of December 31, 1998, PSINet had approximately 1,817 full-time employees, 773 of these were based in the US. Elsewhere it has 1,044 staff including approximately 688 in data communications and operational positions. Holt reports a churn rate of only 5% – despite the fact that network engineers are reportedly the most sought after group of IT professionals.
PSINet’s service offerings are grouped around three key divisions of corporate network services (CNS), carrier and ISP services (CISP), and applications and web services (AWS). Its CNS division provides dedicated and dial-up access services targeted at commercial business users and accounts for around 60% of the company’s total revenue. Its CISP division provides communications connectivity and backbones for ISP and other carriers in addition to responsibility for driving off-peak utilisation of PSI’s global network. Products and services include dial up, private label services and peering and transit. This division currently contributes around 30% to total revenue.
The nascent application hosting, web hosting and high capacity access services provided by AWS account for just 10% of total revenue but as the services are gradually leveraged through PSINet’s existing customer base this should rise rapidly. Add-ons here include IP telephony and video streaming services.
PSINet’s shared web services manage and maintain customer applications including those involving transaction processing. This service is geared towards small businesses and will be low level in terms of revenue stream generation. Its managed service allows clients to own equipment and applications and set the terms by which PSINet will deliver the service. At the top-end, PSINet will host enterprise scale applications for large corporate clients and smaller, possibly start-up, operations able to take advantage of the functionality of enterprise scale applications without the need of incurring either the administrative or facilities overhead.
