Network Advances PSINet's Prospects
By Bob Starzynski
PSINet's new high-speed fiber links connecting London, New York, Los Angeles and Tokyo are the latest testament to the turnaround of an Internet services company that experts doubted would make it alone.
The completion of the network, scheduled for the week of Aug. 10, gives PSINet customers an end-to-end Internet connection stretching halfway around the globe - a network owned and operated entirely by the company.
The international fiber connection PSINet has pieced together rivals - and in some cases beats - the networks constructed by much larger companies, such as AT&T, Worldcom and GTE, according to analysts.
"Our sentiment is, 'We told you so,' " said Pete Wills, chief operating officer of the 1,200-employee business in Herndon, Va. "It is very possible that we are the first in the industry to offer such a connection. We are confirming that independence is possible."
One year ago, most analysts who followed the company doubted PSINet Inc. could thrive on its own. The Internet services company should let itself be acquired by a telephone company like nearly all of its competitors, the critics argued.
Competitors UUNet Technologies, Digex Inc. and BBN Corp. were all sold to large telecommunications providers for top dollar in 1996 and early 1997. Industry executives then thought they could offer cheaper and better service if large telecommunications companies that already had infrastructure supplied the networks. Prices of Internet services would come down, and independent ISPs would not be able to stay competitive, touted the experts.
At the beginning of this year, PSINet's stock sank as low as $4.25 on the Nasdaq National Market. But the tides have turned, and in the past month, the stock price has peaked at $21.94 and closed at $16.88 Aug. 7.
Several other factors besides the latest network advances have contributed to PSINet's turnaround on Wall Street:
While PSINet's stock price has not risen as dramatically, investors have a more favorable opinion of ISPs as a whole. And William Schrader, PSINet's unyielding founder and chief executive, is beginning to look smarter to some of the naysayers.
- In the last eight months, the company has purchased eight companies with combined revenues of $50 million. One is based in the United States; the rest are in Europe, Canada and Hong Kong. Additionally, the company announced plans late in July to buy Interlog Internet Services Inc., another Canadian ISP. When that deal closes, PSINet will have more Canadian customers than any other Internet company, according to company officials.
- In April, the company raised $600 million through a debt offering - only slightly less than PSINet's equity market capitalization. The money is earmarked for acquisitions, facility upgrades and network expansion.
- Last month, PSINet launched a telephony service over its Internet network that undercuts long-distance prices offered by more traditional telephone companies. Customers, primarily businesses, will be able to pool the new telephone service with their existing Internet service, with the only additional cost being the installation of a couple of pieces of equipment, Wills said.
- Internet stocks have come into much greater favor in recent months, according to Ulric Weil, an analyst with Friedman, Billings, Ramsey & Co., Arlington, Va., and PSINet has enjoyed the ride. Companies like Mindspring Enterprises Inc. of Atlanta and Earthlink Network Inc. of Pasadena, Calif., have seen their stock prices ratchet up eightfold in the last year.
"After talking with management, we are increasingly confident that [PSINet] has found a strong and forward-looking business model that maximizes both organic and acquisitive growth," Miles Russ, an analyst with Wheat First Union in Richmond, Va., wrote late last month in a report.
Ten months ago, Russ' image of PSINet was considerably different.
"They are getting beaten on sales and marketing," Russ said at the time. "It's going to be a struggle to get the stock price up."
Weil echoed Russ last year: "It's not easy to re-acquire credibility once it is lost. One can only say good luck on getting the price up."
But Weil's story is different today.
"PSINet has crafted a strategy people can understand," he said this week. "They are building global infrastructure. They have added new services. And they've bought some strong [Internet service providers] in foreign markets."
Weil now has a "speculative buy" rating on PSINet's stock.
Looking forward, Wills said the company continues to seek acquisitions in Europe and Asia.
Once PSINet acquires a company, there is usually a one- to three-quarter transition period for upgrading networks and retraining employees. The company buys other ISPs for employees and customers, seldom for infrastructure, he said.
As for the new telephony service, Wills does not expect large telecommunications companies to follow suit in offering low-priced voice service over Internet systems. "They would be cannibalizing their own revenue base," he said.
But Weil does not think PSINet will stand alone with such an offering.
"I think it's pretty clear to the other players there are two choices," he said. "You can stick with what you have and milk it for all its worth. Or you can fight fire with fire. The smart ones will fight fire."