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February 23, 1999


By CBR Staff Writer

By Nick Patience

Last year was undoubtedly a banner year for PSINet Inc, when it finally got taken seriously by all observers as a major player in the ISP space and one that is moving aggressively into telecommunications markets around the world. During the year, it acquired 17 companies and raised more than $1bn in debt financing, in addition to moving into the voice-over-IP market and acquiring fiber capacity circumnavigating the globe. By one measure, PSINet expects to break even in one of the following two quarters, but in terms of net income, the Herndon, Virginia-based ISP does not expect to get to that stage until some time after 2001 – analysts don’t predict any further than that at present so the exact date is not clear. The measure PSINet chooses is EBITDA, or earnings before interest, taxes, depreciation and amortization, but as we’ve said before, if you can’t pay the interest on your debt, you’re bust, so it doesn’t really mean anything. The company narrowly beat Wall Street’s loss forecasts for its fourth quarter, which it reported yesterday. It saw net losses per share of $1.02 before charges, against First Call’s average estimate of $1.07 per share. Overall, net losses for the fourth quarter were $82.8m, or $1.61 per share, including a $30.4m charge for purchased in-process research and development, up from $14.3m losses last year. Revenues for the quarter rose 169.8% year-on-year to $93.9m. The major acquisition during the year was of Japan’s Tokyo Internet in October, which adds $35m to the top line and 6,500 business and 10,000 SoHo customer to PSINet’s totals. PSINet’s business accounts totaled 54,700 at the year-end, up from 26,400 a year earlier, while its carrier and ISP end users and SoHo customers rose to 863,000 at the year-end, up from 257,000 at the end of 1997. Of those totals, 208,800 of the new carrier and ISP end users and SoHo customers came from acquisitions worldwide, while 20,200 of the new business customers were acquired. The average annual new contract value increased to $6,000 during the year, from $5,400 in 1997 – and was $6,300 in the fourth quarter. The full-year retention rate was 79% and one percent lower in the fourth quarter. Most of the interest on the analysts’ conference call centered on PSINet’s move into the wireless internet access space with its InterSky service. PSINet is using spread spectrum signals, which are not subject to licenses in the US. It says the service has been tested for about a year and will roll out in selected US cities by the end of this year, but an initial roll out is planned in 10 cities in the Southeast region of the country by the end of the second quarter. PSINet says each tower it erects costs between $50,000 and $60,000 and the switching equipment at the bottom of the tower is licensed on an OEM basis from an unnamed manufacturer. The equipment at the customer end is from Cisco Systems Inc. It reckons it needs around three towers per city for its first locations, which are not believed to be the largest cities around, and each tower can serve a radius of about three miles. PSINet says this service, which it maintains replaces the local loop, is at least one year ahead of any of its competitors in the US. WinStar Communications Inc and Teligent Inc already have wireless local loop services rolled out, but those two are using it for voice calls, not internet access. PSINet chief executive William Schrader says he is talking to other companies in the field and, when asked if he would consider seeking licenses for other types of bandwidth to maintain a hold on the local loop, Schrader indicated that that was his plan. PSINet is now in 12 of its targeted top 20 telecommunications markets in the world and during the year completed acquisitions of enough fiber to provide a link around the world. More acquisitions are expected during this year as it looks to plug gaps in its list of target markets. It believes it is the first independent ISP to achieve that. It placed $950m of senior notes at 10% and 11.5% in April, October and November and raised about $220m through other financial instruments in the fall. At year’s end cash and equivalents stood at $485.0m, which includes an escrow of $122.0m to pay the next four installments on its $600m debt offering, which was completed in April 1998. Debt obligations stood at $1.1bn at the end of the year, compared with just $73.4m 12 months earlier. Net losses for the year were $212.9m, after $70.9m in charges for acquired research and development, up from $45.6m losses in 1997, on revenues that rose 113% to $259.6m. PSINet does not pay any income taxes as it has thus far amassed cumulative operating losses of $217m, which gives it tax benefits of about $90m to work with. Schrader reiterated his we are not for sale mantra, but said that if Wall Street’s valuation of his company ever reaches the internal valuation, then he would consider selling. PSINet closed up $1.625, or 4.7%, at $36.125.

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