this is a must read article, and clarifies many questions posed on this thread.
Inter@ctive WeekDecember 22, 1997
PSINet Rings In Telecom Strategy
By Randy Barrett
7:45 AM EST
PSINet Inc. said it is about to embark on an aggressive growth strategy that will include the creation of an Internet-based telephone subsidiary, according to Chief Executive Officer William Schrader, who has been trying to raise funds on Wall Street to back the expansion plan.
Company chief William Schrader told Inter@ctive Week last week that he will seek to double the company's revenue every year for the next three years through domestic and international acquisitions as well as $310 million in capital spending designed to boost the capacity of its Internet backbone network. Along the way, the company plans to seek status as a competitive local exchange carrier, allowing it to achieve low-cost access to its backbone network in local markets across the country.
"The 21st century telecom company is Internet-optimized - that's us," Schrader said.
PSI Operations Officer Pete Wills said the company could begin offering Internet Protocol-based telephone services in early 1998. The new subsidiary, called PSINet Telecommunications, is intended to develop those capabilities.
Schrader was careful to say that PSINet will not directly enter the traditional voice telephony market. The company plans to use its existing telephone company license and its future status as a competitive carrier primarily as leverage to lower its networking costs in local markets and gain market share in Internet-based telephony.
The reformation of PSINet comes as its stock languishes at $5.50 per share, near its 52-week low of $5.25. Its market value is $220 million, making it, in theory, a cheap acquisition target.
But potential buyers, including WorldCom Inc., have been spurned, and Schrader appears committed to keeping the company independent. His expansion plans come as chief rivals, such as UUnet Technologies Inc., have already sold out to large telephone companies - and have grown more rapidly than self-reliant PSINet.
UUnet, now part of acquisition-hungry WorldCom, saw its Internet access business grow to $351.4 million in 1997, double the size of PSINet's $145.8 million, according to Maloff Group International. In 1996, UUnet's business amounted to $96.5 million, about 40 percent more than PSINet's estimated revenue of $68.4 million.
"Yes, we are responding to changes in the environment. We are competing head-to-head with WorldCom," Schrader said.
WorldCom, in addition to acquiring UUnet, has already bought MFS Communications Co. Inc., a competitive local phone company, and is trying to acquire MCI Communications Corp., the nation's second largest long-distance company.
Schrader said the new PSINet will aggressively pursue market share - and profit.
"We are telling the Street we intend to grow our revenue 100 percent per year over the next three years, and we expect to be break-even in 1999," he said.
In its most recent quarter, PSINet reported a net loss of $10.6 million on revenue of $32.0 million. A year ago, Wills and Schrader had said the company would turn profitable by now.
That left financial analysts skeptical of PSINet's plans.
"They've burned Wall Street so much in the past, it's a wait-and-see kind of thing," said Miles Russ, an Internet analyst with Wheat First Butcher Singer Inc.
Ulric Weil, a senior technology analyst with Friedman Billings, Ramsey & Co. agreed: "They've painted similar rosy pictures in prior years. This is a 'show me' situation."
Central to the strategy is the acquisition of fiber to grow the PSI network. The company plans to spend $100 million in cash to buy at least 12,000 more route miles of transmission capacity over the next three years. Schrader said ownership of the fiber will produce a 10-to-1 cost savings over leasing. This fiber will be in addition to the 10,000 route miles IXC Communications Inc. traded to PSI in return for a 20 percent equity stake in the company in July. The IXC fiber will begin coming online in early 1998.
PSI also plans to build more than 20 high-speed modem access centers around the U.S. and Europe that will allow more incoming connections to its network. Price tag: $90 million over three years.
Finally, the company plans to spend $120 million on general network upgrades by the year 2000.
Schrader was confident he can raise the needed $310 million in capital, mostly through vendor equipment financing and possibly a public debt offering. The company has $43.5 million in cash reserves and long-term debt of $25.3 million, which already amounts to 43 cents for every $1 of shareholder equity in the company. Generally, a company is considered heavy on debt if it takes on more than $1 of debt for every $1 of owners' equity, which combines shareholders' investments in the company and profits earned over the company's history.
PSINet will try to counter the combination of WorldCom and MCI with expanded operations and acquisitions in Europe and Asia. As well, the company has officially offered to freely exchange data traffic with any and all Internet service providers (ISPs), a strategy Schrader hopes will differentiate his company from WorldCom, which is asking most ISPs to pay for access to its network.
Analysts said Schrader is under intense pressure to improve stock performance. Under the deal with IXC, if its 20 percent stake in the company doesn't reach $240 million in value by 2000, PSI will have to pony up cash to make up the difference.
"This stock needs to be worth $24 per share in three to four years, or PSI will have to give up [an additional] 25 percent of the company to IXC," Russ said. |
