PeoplePC sees positive cash flow in second half

PeoplePC posted a narrower-than-expected loss in its first full quarter as a public company and predicted an end to cash losses by the second half of the year.

After market close Wednesday, PeoplePC (Nasdaq: PEOP)--which provides PCs, Internet access and other services in exchange for a monthly fee--reported a fourth-quarter operating loss of $49.6 million, or 46 cents per share, excluding amortization costs. Underwriters for PeoplePC, which went public in August, predicted a fourth-quarter loss of 63 cents per share for the December quarter.

During a conference call with analysts, PeoplePC executives said they would speed up the company's profit expectations. "We are now planning to turn cash flow positive in the second half of 2001," said Nick Grouf, chairman and CEO.

Fourth-quarter net revenue increased 81 percent year-over-year to $45.9 million. Gross margin came in at a much-better-than-expected 18.89 percent, executives said, because more than half of the company's new members upgraded to higher-margin computer bundles, compared to 35 percent in the third quarter.

Membership rose to 430,000, up 42 percent from the third quarter. That member total was slightly lower than PeoplePC's original target, because the company chose to delay its corporate programs in Europe, to take advantage of new tax laws that went into effect in January, CFO John Adams said.

PeoplePC expects to add 1.2 million to 1.6 million members in 2001, with the growth rate rising "dramatically" after the first quarter, he said. The company sees first-quarter net revenue of $43 million to $47 million, with a gross margin of 5 to 10 percent. That margin would be "well ahead of where we originally expected," Adams said.

Adams predicted a first-quarter operating loss of $42 million to $45 million, and a full-year loss of $175 million to $180 million.

"We expect to see a dramatic improvement in our operating results throughout the course of the year," Adams said.

Enterprise business protects PeoplePC against the recent downturn in the PC market, Grouf said. "We are very much insulated from the ups and downs of the PC market because of these long-term contracts," he said.

About 75 percent of PeoplePC's new members came through corporate partnerships and affinity programs, executives said. The company is shifting its focus away from consumer business.

"Shifting that emphasis allows us to speed our path to cash flow breakeven and profitability," Grouf told analysts.

Shares of PeoplePC fell 3 cents to $1 in Wednesday's regular trading ahead of the fourth-quarter report.>