A post on another thread concerning PSIX web hosting triggered some digging on my part, and I thought I'd share what I found in PSINet's 10-Q quarterly SEC filing dated Nov. 14, FWIW.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR ACCOMPANYING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, AND OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS, NOTES THERETO AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 INCLUDED IN OUR ANNUAL REPORT ON FORM
10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE RESULTS SHOWN HEREIN ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED IN ANY FUTURE PERIODS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND THE TIMING OF EVENTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS. FOR A DISCUSSION OF THE RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, YOU SHOULD READ "RISK FACTORS" INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-Q AND INCLUDED IN OUR OTHER PERIODIC REPORTS AND DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
As an Internet Super Carrier (ISC), we offer integrated global e-commerce infrastructure, end-to-end IT solutions and a full suite of retail and wholesale Internet services primarily to business customers. We operate one of the largest global commercial data communications networks that is capable of transmission speeds in excess of three terabits per second. We serve approximately 90 of the 100 largest metropolitan statistical areas in the U.S., have a presence in the 20 largest telecommunications markets globally and operate in 28 countries. We conduct our business through operations organized into four geographic operating segments - U.S./Canada, Latin America, Europe and Asia/Pacific - and two vertical product lines - Transaction Solutions and Inter.net.
Our Internet-optimized network is the foundation upon which we offer a robust suite of value-added products and solutions that are designed to enable our customers, through their use of the Internet, to more efficiently transact and conduct eCommerce with their customers, suppliers, business partners and remote office locations. Our network reach allows our customers to access their corporate network and systems resources through local calls in over 150 countries. We expand the reach of our network by connecting with other large ISPs through contractual arrangements, called peering agreements, that permit the exchange of information between our network and the networks of our peering partners. We offer free peering to ISPs in more than 100 cities in the continental U.S., which provides each party with the opportunity to bypass the often congested and unreliable public exchange points, thereby improving overall network performance and customer satisfaction.
Our solutions and products include dedicated and global dial up access, managed services, collocation and shared hosting, point-of-sale services, financial services, enterprise resource planning system implementation, application development, application service provider services and managed applications. We provide access solutions and hosting solutions to approximately 100,000 corporate customers, which together with our ISP, carrier, small office/home office (SOHO) and consumer businesses around the world serve over 2.4 million end users. We also provide wholesale and private label network connectivity and related solutions to other ISPs and telecommunications carriers to maximize efficient use of our network capacity.
We have embarked on an initiative to expand our hosting solutions business. We have spent approximately $500 million during the nine months ended September 30, 2000, and we expect to spend approximately $150 million on the construction of hosting centers through the end of 2001, subject to the availability of capital resources. We currently have twelve hosting centers in service with approximately 800,000 square feet and by the end of 2000 plan to have 14 hosting centers in service with approximately one million square feet. We also have eight network operating centers that monitor and manage network traffic 24-hours per day, seven-days per week.
With the fiber and hosting center assets we have put in place, we believe we are well positioned to deliver on our customers' needs for consulting and managed web hosting services together with reliable high speed Internet access all from one source.
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THREE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 RESULTS OF OPERATIONS
(all charts below are in millions of U.S. dollars)
REVENUE
THREE MONTHS ENDED: NINE MONTHS ENDED:
---------------------------------- -----------------------------------------
9/30/00 9/30/99 % INC/(DEC) 9/30/00 9/30/99 % INC/(DEC)
------ ------- ----------- ------- ------- -----------
Access $165.3 $ 130.9 26% $ 492.8 $ 341.9 44%
% of total 47% 93% -- 58% 93% --
Hosting $ 38.8 $ 9.7 300% $ 90.0 $ 27.4 228%
% of total 11% 7% -- 11% 7% --
--------- ----------- ---------- ------------ ------------------ ------------
Access & Hosting $ 204.1 $ 140.6 45% $ 582.8 $ 369.3 58%
% of total 58% 100% -- 69% 100% --
Transaction $ 48.2 * * $ 140.0 * *
% of total 14% * * 17% * *
Consulting $ 100.2 * * $ 120.4 * *
% of total 28% * * 14% * *
Total $ 352.5 $ 140.6 132% $ 843.2 $ 369.3 128%
* Transaction and consulting revenues are the results of acquisitions that occurred after September 30, 1999.
Our access solutions revenue for the third quarter of 2000 grew 26% over the third quarter of 1999 and revenue for the nine months ended September 30, 2000 grew 44% over the nine months ended September 30, 1999. Our access solutions revenue continues to be favorably impacted by the acquisitions that contributed to the third quarter 2000, but not to the third quarter 1999. Current market conditions indicate that our future revenue growth in this product line may be modest compared to our historical revenue growth, as we plan to continue to exit high-volume, low-value products in order to strengthen our focus on larger, higher margin bandwidth sales. We will also continue to closely monitor the strategic value of being a wholesale provider in a market of declining prices and unproven customer business models.
Our hosting solutions revenue continued to provide impressive growth, although on a small base. Hosting solutions revenue for the third quarter of 2000 grew 300% over the third quarter of 1999 and revenue for the nine months ended September 30, 2000 grew 228% over the nine months ended September 30, 1999. Our average annual new contract value during the quarter for managed web accounts in the United States was over $350,000, an increase of approximately 45% over the average annual new contract value in the second quarter of 2000. We presently anticipate double digit growth rates in hosting solutions revenue to the extent we continue with the hosting center build-out, which is subject to available capital resources.
Our transaction solutions revenue posted a sequential growth rate of 2%. As this business enters its busy season for transaction processing, we expect to see stronger results in our transaction solutions business in the fourth quarter of 2000.
Our consulting solutions revenue for the third quarter of 2000 decreased 17% from the second quarter of 2000, after adjusting the second quarter results to a comparable basis. This decrease resulted from a combination of softness in the e-services consulting industry and the impact of transitional management issues experienced post acquisition. We are taking actions to integrate and stabilize the organization. Included in the revenues for the three months ended September 30, 2000 is approximately $60 million relating to the assets we have identified for sale. Our consulting solutions revenues for the three and nine months ended September 30, 2000 would have been approximately $153 million and $183 million, respectively, had Xpedior not been classified as a discontinued operation during the quarter.
GROSS PROFIT
THREE MONTHS ENDED: NINE MONTHS ENDED:
------------------- ------------------
9/30/00 9/30/99 % INC/(DEC) 9/30/00 9/30/99 % INC/(DEC)
------- ------- ----------- ------- ------- -----------
Access & hosting $ 62.0 $ 42.1 47% $ 163.7 $ 108.0 52%
% of revenue 30% 30% -- 28% 29% --
Transaction $ 20.8 * * $ 59.1 * *
% of revenue 43% * * 42% * *
Consulting $ 27.8 * * $ 34.7 * *
% of revenue 28% * * 29% * *
Total $ 110.6 $ 42.1 163% $ 257.5 $ 108.0 138%
% of revenue 31% 30% 31% 29%
* Transaction and consulting gross profits are the results of acquisitions that occurred after September 30, 1999.
Our overall gross margin improved from 30% to 31% and 29% to 31% for the three and nine months ended September 30, 2000, respectively, compared to the same periods in 1999. The improvement is largely due to the acquisition of the higher margin transaction solutions business, partially offset by the lower margin consulting solutions business. Both access and hosting solutions share the costs of operating our network. The margins for the combined business are relatively flat compared to last year for the periods presented. While our hosting solutions are anticipated to carry higher margins, we have experienced more customization costs than expected in the early stages of filling the recently opened hosting centers. Efforts are underway to reduce the level of customization associated with our hosting solutions.
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