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Transition cuts into PSINet

PSINet's stock plunges as low as 17 percent on news that its revenues for the fourth quarter will be lower than anticipated.

PSINet's (PSIX) stock plunged today on news that its revenues for the fourth quarter will be lower than anticipated.

PSINet's stock price closed at 10-3/4, down 2-3/8 of a point from Friday.

The company expects to report $22 million to $23.5 million in revenue, falling short of its previous expectations of $26 million to $28 million, according to company spokesman Brian Muys. PSINet also noted that revenues were hurt by its move away from the consumer Internet access business.

"The shortfall from our earlier expectations is due to slower-than-expected revenue growth from our wholesale business, sluggish sales from our software subsidiary, and slower revenue recognition from our European ventures," said Edward Postal, chief financial officer, in a statement.

Meanwhile, Montgomery Securities lowered its fourth-quarter estimate to a loss of 33 cents a share from a loss of 22 cents a share. The company also lowered its 1997 projections to a loss of 87 cents a share from a loss of 32 per share.

The losses, however, are not entirely discouraging to executives. "The core commercial Internet business is growing by leaps and bounds," Postal said.

Despite the revenue drop, the company announced that it has more than doubled its corporate customers during the fourth quarter compared with the same quarter a year ago. "Our sign-up rate is going up. We are obviously focused on our core business," said company chairman William Schrader.

But Montgomery analyst Mark Roberts says the company should avoid the business that PSINet has decided to target. "Wholesale has undue amount of risk associated with it. Their change in strategy is a disappointment."

But as PSINet continues to boost its number of corporate clients, "by exiting the consumer Internet [market] in midyear, revenue slowed immediately from this business unit," Schrader added in a written statement.

The company expects revenue growth from its wholesale ISP business unit in the first half of 1997. "We believe that we have sufficient capacity to double or triple our partners. Considering that we signed up 20 partners since June, it is very plausible that we will at least double that by the end of the second quarter," Muys said.

"The implication of the shortfall makes it very difficult to achieve the expectations for '97," said Montgomery's Roberts. PSINet projects that it will be on the plus side in the first half of 1997.

The corporate business continues to be the predominant focus of the company and is growing in line with expectations. "We have increased the number of resources, including people, bandwidth, more PoPs, and more equipment," Postal said.

The company plans to announce its quarterly results on February 11.