PSIX: EBITDA Break-Even & Profitability Postponed-AGAIN!
12:08pm EST 5-Mar-98 Friedman, Billings, Ramsey &Co (Ulric Weil 703-312-9565)
Friedman, Billings, Ramsey & Co.
1001 Nineteenth Street North
Arlington, VA 22209
Continuing Coverage
PSINet (PSIX - $7 3/4) ACCUMULATE
EBITDA Break-Even & Profitability Postponed--AGAIN!
Ulric Weil (703) 312-9565 uweil@fbr.com
Dan MacKeigan (703) 312-9666 dmackeigan@fbr.com
March 5, 1998
* Management's aggressive strategy may work out longer-term--BUT
* EBITDA is unlikely to turn positive until 1Q99--AND
* True profitability may not be achieved until 1Q2000--BECAUSE.
* Interest expenses, acquisition costs and D&A are higher than expected
52-Week Range: 9 3/4 - 4 1/4
Shares Outstanding: 50.50 Mil.
Float: 34.37 Mil.
Avg. Daily Volume 557,233
Market Capitalization: 391.38 Mil.
Institutional Holdings: 19.3%
Insider Holdings: 16.0%
Cash & Equivalents (12/97): $54.00 Mil.
Shareholders Equity (12/97): $73.50 Mil.
Long Term Debt (12/97): $30.60 Mil.
Book Value Per Share (12/97): $1.46
FY ROE P/E Revenue
1996A NM NM $89.76 Mil.
1997A NM NM $121.90 Mil.
1998E NM NM $233.35 Mil.
1999E NM NM $391.00 Mil.
Quarterly EPS 96A 97A 98E 99E
Q1 (Mar.) (0.39) (0.33) (0.58) (0.34)
Q2 (0.28) (0.28) (0.41) (0.25)
Q3 (0.31) (0.26) (0.39) (0.16)
Q4 (0.42) (0.36) (0.37) (0.06)
Full Year EPS (1.40) (1.14) (1.72) (0.81)
Since the fall of 1996 management has promised repeatedly that EBITDA break-even
was just around the corner, i.e., 6-8 months ahead. But then, not
unreasonably, management elected to pursue new front-end loaded
strategies--wholesaling Internet access, international expansion, e.g., the
Korean deal, and the stock-for-high capacity fiber swap with IXC. Accounting
rules regarding the latter transaction explain much of the increase in quarterly
amortization from hereon.
Longer-term each of these strategic moves may be rewarding. But near-term
management's timetable to become profitable is delayed again and again. Even
the most patient investors (and die-hard analysts) may question whether the
uncertain rewards down the road justify the already excessively long wait.
A recurring question among investors relates to the likelihood that PSIX
can/will be acquired. Given the prices GlobalCenter, Erol's, and Earthlink
recently fetched. PSIX should command an attractive premium over its current
depressed stock price. Currently, the Company is valued at only 1.7 times this
year's estimated revenue (1 times 1999 estimated revenue). However, management
seems to be holding out for a valuation approaching $18 per share. Good luck.
Mindspring, a primarily consumer-oriented ISP, has stuck to one well thought out
strategy and, as promised, turned profitable in 4Q98. That company's surging
stock price (over $50, up from $20 about 12 months ago) sends the message that
investors are tiring of PSIX's frequent profit delaying 'strategic' shifts and
turns. The stock of IXC, now the owner of 20% of PSIX's equity, has zoomed.
Among others, investors may speculate that in a couple of years IXC can acquire
majority control of PSIX 'on the cheap', i.e., if the PSIX stock price
languishes around its recent range ($7-$11).
Recommendation: Risk-oriented investors, who for whatever reason and on whatever
basis 'smell' a deal, may accumulate the shares. Patient, but aggressive,
investors (an oxymoron?) also may begin to accumulate figuring the stock price
already discounts 'the end of the world'. At their current price, the shares
have little downside risk, and on a take-out a potential acquirer would have to
pay a considerable premium.
Risks: Cet par, ISPs are attractive acquisition targets as recent deals
evidence, e.g., BBN, Digex, Cerfnet, Netcom. But the Street actually may believe
management's repeated assertion that at currently prevailing valuations the
Company is NOT FOR SALE. If so, the PSINet shares may not be a rewarding
investment until achievement of positive EBITDA is clearly visible.
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