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New business plan helps Netcom results

Netcom reports a better-than-expected second quarter thanks to a shift away from the consumer market.

    Netcom (NETC) today announced a better-than-expected second-quarter, as a result of its higher-price, higher-service business model.

    The net loss for the quarter decreased to $9.2 million, or 79 cents per share, compared to a loss of $12.6 million, or $1.09 per share in the second quarter of last year. The loss includes $1.7 million associated with the company?s restructuring of its U.K. operation from consumer connectivity toward small and medium businesses. (The company will account for the remaining $300,000 of the total $2 million charge in the third quarter.)

    Excluding the charge, the net loss would have been 64 cents a share, far exceeding analysts' expectations of an 80-cents-a-share loss, according to First Call.

    But despite the shrinking loss, the company stock in morning trading dropped nearly 10 percent to 15 from yesterday's close of 16-5/8.

    Netcom reported record revenue of $41 million for the quarter, a 46 percent increase from the $28 million recorded in the second quarter last year.

    The nationwide Internet service provider has been shifting its focus away from the consumer market toward the small- to medium-business market for the past several quarters. Netcom aims to increase revenue from this market through additional services such as high-speed connectivity, Web site hosting, and intranet services.

    In April, the company's dial-up service flat fee for new customers increased from $19.95 to $24.95, as part of its transition to the business market from the consumer arena. The flat fee still generates the majority of the company's revenue--about 85 percent in the past quarter, said David Garrison, Netcom chair and CEO.

    "We don't believe it is possible to provide high-quality service on $19.95 a month," said Garrison. "Our emphasis is on enhanced services. Instead of trying to be the provider with the most subscribers, we are putting money into network quality and services."

    Average per-customer revenue increased for the third consecutive quarter to $23.96, a 17 percent increase since the third quarter of 1996, as customers signed up for Netcom's new range of products. About 1,100 new customers who host Web sites or purchase dedicated lines were added in the first quarter of 1997, when 580,000 customers were recorded.

    Netcom CFO Clifton Weatherford told NEWS.COM at the annual shareholders meeting in May that the company is less concerned with the number of customers its signs up for services, and more concerned with the amount of revenue that each customer generates.

    "I don't care about growth in subscribers. We are growing revenue, not subscribers...Quarter over quarter, revenue continues to be record numbers," he said.

    During the quarter, Netcom achieved positive cash-flow neutrality, a financial benchmark also known as EBITDA (earnings before interest, taxes, depreciation, and amortization), before the restructuring charge.