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No payoff yet for PSINet

The ISP announces quarterly losses of $9.3 million but says its plan to focus on businesses is well under way.

After shedding the burden of its software venture, PSINet (PSIX) announced it isn't as far in the hole as analysts had expected.

Net losses for the first quarter ending March 31 were $9.3 million, or 23 cents per share, compared with net losses of $14.9 million or 39 cents per share in the first quarter of 1996.

Wall Street analysts were expecting the commercial ISP to report a loss of 35 cents a share, according to FirstCall.

Timothy Summers, an analyst with Principal Financial Securities, said that margins were better than he had expected and that the company is on its way to achieving cash-flow neutrality, which is a financial benchmark also known as EBITDA. "It is a significant milestone toward eventually becoming profitable," he added.

The first-quarter net loss included a $1.5 million nonrecurring expense and a one-time net gain of $5.7 million associated with the sale of InterCon Systems. Without these charges and gains, the net loss would have been $6.8 million, or a loss of 33 cents a share.

The company said that getting out of the software business was the final step toward refocusing on its core business: providing Internet services to businesses.

Revenues grew to $25.6 million, up from $17.2 million reported for the corresponding quarter last year, and increased 12.5 percent over the fourth quarter of 1996.

At the end of March, customer totals more than doubled to 20,900 corporate accounts, compared with 10,300 recorded at the end of the first quarter of 1996.

But one analyst noted that even though PSINet doubled in customers from one year to the next, the company is not keeping up with the explosive growth rate of the Internet.

Summers countered that in a relatively young market with not a lot of benchmarks, you have to let the numbers speak for themselves. "If they can double the size of their market growing year over year, they are clearly headed in the right direction."

The company said its wholesale business also grew. However, one analyst who asked not to be named said he doesn't think that can be profitable. He explained that as the ISP market consolidates there will be an ever-shrinking number of ISPs that need network support.

PSINet says it is making the most of its network. "Since we already have a network built, [providing ISPs with a network] is a minimum investment. The wholesale business is the gravy," said CFO Ed Postal.

The company is confident that it will reach its financial benchmark during the second quarter in May or June, according to Postal. "We are focused on more realistic planning. Generally speaking, most networks are built on speculation, but we grow our network on a case-by-case basis...We build to meet demand."

He added that building a network based on need is much more cost-effective because the company knows that every expansion it makes will be used, as opposed to expanding for the sake of expanding.

During trading today, PSINet's stock was trading level with yesterday's close of 6-1/2.