I understand Mondays Wall Street Journal will have a feature on ASP's. I don't know if INIT is mentioned or not, but I sure hope so.
even if INIT is not directly mentioned, it should help give us a little push.
Interliant [INIT] is a leading provider of web site hosting, application hosting and Internet services. Companies pay INIT to store their home pages, software applications and data on its computer servers. Interliant also provides consulting services to specifically tailor applications to suit a customer's needs. The company went public in early July, with seven million shares of common stock priced at $10 per share. INIT closed August 11 at $12.75.
The competitive field of hosting is bound to become a lot more crowded as the industry matures. Interliant believes it has a unique combination of services that will make it a leader in the turbulent market.
StockHouse spoke with James Lidestri, president of Interliant, about the company's potential for profit, its growth strategy, and the future of web and application hosting..
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StockHouse: Let's start with the recent results. Revenues for the second quarter were solid, but earnings were in the negative realm. That's a standard financial portrait for companies such as Interliant right now. How do you plan to achieve profitability in the future?
James Lidestri: Certainly part of it is going to come from the integration efforts that we're doing right now to get more scalability. On the operation side, we're spending a lot of money on sales and marketing and the GNA lines. That's what most companies in our space our doing because top line growth is really what's being rewarded right now.
In order to get profitability you've really got to dial down the sales and marketing spend and dial down the GNA spend, which can easily be done. But really, we're waiting for the time the markets, the investors say OK, you don't have to grow at ungodly rates, you don't have to show that kind of growth, and we can get back to what I would call more normal, mature market operations.
Our gross margins look good, so it shouldn't be hard to kick it to those numbers. Given the growth rates we're on, we're forecasting that to happen out a few years, but it can certainly happen sooner if the market says it wants it to happen sooner. It's discretionary spending which is taking it down. It's not like the operations are taking up more than their fair share.
StockHouse: Interliant has grown very rapidly, with 17 acquisitions to date. Last week, when Merrill Lynch initiated coverage, one of the concerns it voiced was whether Interliant has the ability to integrate, manage, and grow acquired businesses. How do you respond to that?
James Lidestri: It's absolutely a fair concern. There's the good and the bad of any strategy. The good of the acquisition strategy is you save time to market, and quickly get the skills, and wrap up. The potential downside is if you don't pay attention to the integration side you'll end up with all these companies doing all sorts of different things.
We've actually taken advantage of the quiet period, to really get our thoughts around how should we do the integration, how do you pull everything together into common platforms, and really put a team in place to go do that. We're quite a ways ahead in our integration plans, and we're moving quite rapidly. It's a fair concern, and the only way we can get around it is to say we're going to do the best we can.
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StockHouse: Have all the acquisitions been integrated yet?
James Lidestri: At varying levels. Out of the 17 acquired companies, 14 have been integrated into a common HR system, 15 have been integrated in the financial systems, 11 of the 14 web hosting have been integrated into a common billing system. We're moving quite rapidly on that front, and we will continue to really look into the integration side before we do an acquisition.
Now we can be very selective. We can look at a potential company and if it looks like the integration is going to be messy, we can pass it. We're not as young and immature as we were a year ago, so we don't have to make an acquisition.
StockHouse: What other plans are there to accelerate growth?
James Lidestri: Quite a bit on the sales and marketing side. We're going to increase our advertising spend and our promotional spend in Q3 and Q4. We've been in the quiet period since February, so it's been a long time. Now's a great time - we're going to start that next week.
We'll kick it off so there will be a lot happening on the sales and marketing side. In terms of advertising, we're going to hire more salespeople, increasing that 100% over the next year, roughly 25% a quarter. We'll be growing the sales force, and continuing to grow strategic partnerships. So - acquisitions, sales, marketing, strategic partnerships. The four keys to growth.
StockHouse: More than 40% of your revenue is presently generated from the application hosting service, which is the most profitable portion of the business. What are you doing to build it?
James Lidestri: We're going to continue to grow the core of that business, which is the Lotus Notes and Domino hosting business. We're going to very aggressively add support for Microsoft platforms. We've been working with them for the past few months, and you're going to see some announcements in the coming months that support our efforts with Microsoft [MSFT].Obviously, if we have those two platforms, those are the biggest two; Sun's [SUNW] Solaris would be a third we're going to support.
We're really going to grow the platform horizontally, and then we have the chance to pick up some more verticals right now. We're focussed on e-commerce, sales automation, distributive learning. We're looking at ERP (enterprise resource planning). But there are some other verticals we can look into. We add application support on top of the platforms that we support.
StockHouse: Will Interliant be able to compete when Microsoft starts hosting its own applications?
James Lidestri: We think so. IBM [IBM] is in essence doing the same thing with Lotus Notes and we're a leader in that market, so we've fared very well, and have a lot of skills. Our skills are different than that of the big vendors. Not to say you shouldn't be worried about a big vendor in your space, but given our experience, we think we can hold our own. Plus, right now the market is huge and growing very rapidly and everybody's taking a little bit different tack.
StockHouse: How many application hosting customers do you have right now?
James Lidestri: We have over 700 associations. A customer is a billing entity. An association is a related billing entity. So, we have 700 associations, but that may represent thousands of customers that are paying money for service.
StockHouse: How is Interliant different from leading competitors such as AboveNet Communications [ABOV] and Exodus Communications [EXDS]?
James Lidestri: Exodus and AboveNet really play in a co-location space where we really don't play at all. That co-location segment I call Internet warehousing, you're really selling data-center space and bandwidth. What we're selling is managed application services, whether those applications are simple web sites or whether they're more sophisticated group-ware applications, or sales and marketing applications. It's really a different market; we're almost in adjoining market spaces.
StockHouse: Who are your direct competitors?
James Lidestri: There's no one competitor that has the breadth of services we have. In the web hosting space we see Verio [VRIO] as competitors, but they're also ISPs, which is not competitive to what we do. On the application hosting front, USInternetworking [USIX] is getting a lot of press, but they don't have any web hosting business. We're trying to take the entirety of what's called hosting, and be the number one hosting provider.
StockHouse: So Interliant doesn't have plans to become a pure play focussing on one type of hosting?
James Lidestri: We consider it a pure play. The pure play is that we're focussed on management hosting services, which includes web sites.
Some customers come to us and say, this is an application that uses Lotus Notes, or Domino, or Microsoft NT Sequel, but it's going to be delivered over the web. Is that an application hosting solution, or a web hosting solution? We find that the delineation between web hosting and application hosting is going to go and they're going to merge into one market. We're going to be perfectly positioned because we do both. And we're the only player that does both.
StockHouse: Some of the main issues surrounding the future of web and application hosting are the speed of uptime and whether the heavy demand can be met. How is the company planning to handle a growing user and customer base?
James Lidestri: We've got quite a bit of capacity already built up in our data centers, with the three centers we have in Houston, Washington, DC and Atlanta. We can support a revenue base over seven times what we've got today. We have the hardware infrastructure there, and then it's a matter of the customer support aspect, and we always make sure we have at least 25% more capacity in place at any one time.
StockHouse: You recently mentioned that Softbank Technology Ventures' investment in the company will provide access to many of the Softbank portfolio companies. What potential gains do you foresee?
James Lidestri: It could come on a number of different fronts. It could be simple customer relationships, where they need our services, because not all those companies have hosting capabilities. It could be where some of them are technology providers, software or hardware companies, where they're providing services that might be bundled with our hosting services that we can provide to customers. It could be distribution relationships where they want to sell our hosting services with some other things that they're selling. Or you can access new markets, like we did with Asia On-Line. That's a Softbank company that we're invested in, that gives us access to the Asian marketplace.
StockHouse: What's the potential for Interliant through the deal with Asia On-Line?
James Lidestri: The relationship gives us a couple of different things. One, it gives us the ability to distribute our services through their sales and marketing efforts. It gives us the ability to get a local data center in the Asian marketplace immediately. We think with this strategy we'll have the facilities and the centers in place, and have broader reach, faster than anyone else.
StockHouse: How will new growth and investments be funded?
James Lidestri: Right now, the money we raised through the IPO will take us through to year 2000. Any growth beyond that we'll obviously have to look at alternate financing mechanisms, and we're looking at them all.
StockHouse: Last week, Merrill Lynch's rating of near-term accumulate with a $20 price target seemed unfairly low to many shareholders. What do you think would be an accurate projection?
James Lidestri: They would shoot me if I answered that question.
StockHouse: I thought I'd give it a shot.
James Lidestri: I applaud you for it.
StockHouse: Thank you for taking the time to talk with us today. |
