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PSINet gets $30 million infusion

In the wake of the approved MCI-WorldCom deal, competitor PSINet announces that it has received a $30 million investment to bolster its operations.

In the wake of the approved MCI/WorldCom deal that creates one of the world's largest Internet service providers, competitor PSINet (PSIX) today announced that it has received a $30 million investment to bolster its operations.

PSINet faces a challenge as companies look for one-stop shopping in communications services and conglomerates scoop up an increasing share of customers. Those value-added services have advantages over smaller players because they have the benefits of scale and can offer a single bill for a round of services, one analyst said.

While the model of the "super-carrier" is about five years away, PSINet needs to make changes now to be ready for the phenomenon, said Stephen Franco, an analyst at Pacific Growth Equities.

"Long-term, they need to compete at the same scale," Franco said, adding that PSINet's recent acquisitions, including its takeover of Canadian ISP iStar, poise the company for a merger. Acquisitions in foreign businesses, especially overseas business, are one of the reasons that BBN was such an attractive acquisition for GTE, for example.

In the mean time, PSINet may benefit from the distraction of the MCI/WorldCom merger. Franco said that, as the sales forces of the two companies are merged, there is some attention to detail that can get lost in the shuffle. That leaves opportunities for the smaller players to gain market share, because as the list of mergers gets longer, the list of smaller players gets shorter.

Under the terms of the financing deal, PSINet received $30 million in exchange for the issuance of new convertible preferred stock. The lead investor was Brown Simpson Asset Management, and other investors included SBC Warburg Dillon Read, Lehman Brothers, and KA Investments, LDC.

Franco said PSINet would have run out of cash by July 1998 if it had not received an infusion of funds. He explained that, in PSINet's recent financial statements, the ISP indicated it would increase sales and marketing spending in the fourth quarter of 1997 and forgo near-term profitability in exchange for faster top-line growth.

"[The investment] gets them to a point of cash flow break-even, and there is now no immediate need to look for a merger partner," said Franco.

PSINet's net loss for its most recent quarter was $10.7 million, or 26 cents per share, compared with a net loss of $12.5 million, or 31 cents per share, for the same quarter a year ago. Revenue was $32 million, a 33 percent increase over the $24.2 million reported a year ago.

The company is expected to encounter more losses in 1998, due to building out its business, Franco said, noting that growth of PSINet's customer base has slowed.

While analysts expressed concern over the company's slowing expansion, PSINet CFO Ed Postal said the company's strategy is to selectively expand customer base, targeting customers who want a greater variety of services and are willing to pay more, rather than just increasing the number of basic accounts.

The financing roughly doubles the cash that PSINet currently has, said Postal. He said the cash would be used for general corporate purposes and will support its recent acquisitions, which include one in Canada and one in France.

"In a business as dynamic as ours, we need to continue to grow and it will take money to do that," he said.

Postal added that this financing is a signal of a recognition and reinforcement of the company's overall strategy.