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RCN strategy starting to pay off

Since August, the new-generation telecommunications carrier's shares have moved higher despite a turbulent market.

RCN's strategy is beginning to pay off. Since August, when the new-generation telecommunications carrier reported strong second-quarter results, its shares have moved higher despite a turbulent market.

Second-quarter results
RCNC, which operates its own fiber-optic network in the Northeast region of the United States and provides voice, video, and cable television services, had second-quarter revenue of $50 million, or 25 percent sequential growth. This top-line growth primarily has been driven by a ramp-up in revenue from voice and data communications services.

Despite an increase in direct expenses, mainly associated with fiber-optic network expansion in New York City and Boston, the gross margin rose to 53.6 percent, compared with 52.1 percent during the previous quarter. Excluding charges for acquired research and development, the company's EBITDA (earnings before interest, taxes, depreciation, and amortization) loss widened to $9.6 million from a $8.3 million loss posted for the first quarter. The larger EBTIDA loss can be attributed primarily to a 24 percent jump in operating and SG&A expenses.

Thanks to an aggressive acquisition and infrastructure build-out strategy, RCNC already has established itself as the largest Internet service provider in the Northeast and the seventh biggest ISP in the United States. The company ended the second quarter with more than 400,000 Internet accounts, and there is substantial room for growth in the next few quarters.

Recently, RCNC acquired JavaNet, a smaller regional ISP, adding 30,000 consumer Internet access accounts to its subscriber base. With the acquisition of JavaNet, RCN will be able to compete in the market to provide Internet access to almost half a million students and faculty members in Connecticut and Massachusetts.

RCNC plans to expand its market. It's getting ready to start deploying its fiber-optic network in California. According to Merrill Lynch, construction is expected to start in the second quarter of fiscal 1999.

For aggressive investors
Despite an attractive business strategy and positive recent developments, only aggressive investors should approach RCN at this point. The company is highly leveraged. At the end of the second quarter, total long-term debt of $1.2 billion represented 63 percent of total capitalization. It is still a couple of years away from becoming EBITDA positive. Merrill Lynch estimates that RCNC will start generating cash some time during fiscal 2000.

With a price-to-trailing twelve month sales multiple of 8.5, RCN is not so cheap compared with some of its competitors, such as IXC Communications, which claims a multiple of 2.8.

Individual Investor Online is a periodic contributor to CNET NEWS.COM.

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