Meet SAVVIS in St. Louis

Picking a service provider partner is never an easy proposition and it's particularly difficult during a time of economic turmoil. Don't judge every balance sheet by its cover. Sometimes, you have to look beyond assets and liabilities.

by Patricia Fusco ISP-Planet Managing Editor [May 17, 2002]

As bad as the current market for carrier-class data services is, some companies are only working on changing the perception of their financial condition, while others are working hard to recover from the economic downturn over the long-term.

Herndon, Virginia-based SAVVIS Communications Corp. is one of the companies working hard to make sure its recovery from its fiscal malaise is permanent. With Rob McCormick at the helm of the firm, the global carrier is working hard to add working capital to its coffers.

Down, debt, down
SAVVIS incurred losses of losses of approximately $46.7 million, $164.9 million, and $288.9 million in 1999, 2000, and 2001 respectively. At the start of the year it had barely more than $30 million in cash and investment partnerships sponsored by Welsh, Carson, Anderson & Stowe owned approximately 56 percent of SAVVIS' outstanding voting stock.

Things changed quickly in March, when the global network services provider picked up $158 million in equity funding that was slated to reduce the company's debt and other liabilities by about $214 million and improve the cash position by $18.3 million.

SAVVIS hoped to reduce its debt by 64 percent to approximately $93 million and be able to report an extraordinary gain of $65 million in the first quarter of this year. But the company reported in May that the transaction allowed it to report consolidated net income for the quarter ending March 31, 2002 of $32.2 million.

Keep in mind that SAVVIS reported a $56.5 million consolidated loss for the same quarter last year and a $27.8 million loss in the fourth quarter of 2001. Certainly, the increase in SAVVIS' net income in the first quarter was primarily due to the cash infusion of equity funding. Excluding some accounting items, the consolidated loss for the first quarter was $22.7 million.

McCormick said that the company's recent funding has allowed SAVVIS to produce one of the strongest balance sheets in the industry. But another reason why the company is turning the corner when others are not is because SAVVIS is a non-facilities-based global carrier.

"The difference between us and PSINet or Global Crossing is that we're not facilities based. Our business model provides a virtual infrastructure without required fixed assets," McCormick explained. "Our customers buy a slice of this physical infrastructure to get a share of the benefits of global networking."

The company still needs to cut costs fast, and is forecasting profitability to occur in 2003. Analysts and customers alike will be keeping a keen eye on the cost cutting.

Let the telcos' best customer negotiate for you
SAVVIS buys from hundreds of carries around the world. Generally speaking, the company is one of the best customers any incumbent carrier could ask for. But it also competes with incumbents to deliver global IP services. McCormick explains how best customer status parleys into best customer practices—at least when it comes to providing managed IP and virtual private network (VPN) services.

"We're in the backbone business, the IP VPN business, and the colocation business. We spend a lot of time and money securing local loop access as a result of our business model," he said. "With our multiple supplier approach we're able to get great pricing."

To give you an idea of just how good local loop prices are at the moment, MCCormick said that the company's expenses have dropped by about $40 million this year alone, down from $220 million in local loop fees last year. This is why SAVVIS is treading water when less fiscally frugal global data carriers are drowning in debt.

"What is trouble for them [facility-based global carriers] is good news for us," McCormick said. "This is why we're in a great position now, at this point, we're self-funding and we can run the business forever."

Closer to home
McCormick contends that SAVVIS will be around for the long haul because its balance sheet is healthy, the company is a global non-facility-based carrier, and it has significant revenue coming from its managed IP and VPN service line-up—particularly popular among the financial services sector.

As a matter of fact, SAVVIS just picked up the Chicago Board Options Exchangeas a client this week. The world's largest options exchange now operates over a SAVVIS-deployed VPN, supporting its online solution for extended hours trading.

So what? It's great that the company picked up a marquee financial services account this week, but what can SAVVIS do for me—what can the global carrier do for your ISP?

SAVVIS also has a very aggressive wholesale program for ISPs and CLECs interested in reselling its firewall or VPN products. To a certain extent, SAVVIS is counting on ISPs to help bring new customers, and recurring new revenues, its way.

McCormick said that the company's ability to serve global businesses is one of its greatest selling points, but its ability to guarantee transport for secured business transactions is the essential to selling its all-IP VPN services.

"We sell the service—not the box," McCormick said. "Our ability to serve large multi-national corporations, specifically financial businesses requiring secure transactions, is essential to our success in the VPN space."

Andy Lobred, NETtelcos vice president of sales and marketing agrees with McCormick that providing safe transport of business data is a profitable venture. From its network operations center in Richmond, Va., NETtelcos offers Fortune 100 companies and small- to medium-sized business network access, collocation, and managed hosting services. NETtelcos is an established ISP that partnered with SAVVIS to resell into its leased line and IP VPN services.

Andy Lobred, NETtelcos vice-president of sales and marketing, said partnering with SAVVIS made a lot of sense for the business-minded ISP.

"We operate own data center in Richmond. We've linked up multiple DS3 lines for Internet access and multiple OC-12 feeds, so we have a lot of experience in providing mission critical services," Lobred explained. "Partnering with SAVVIS allowed us to broaden our service area for reselling leased line high-demand business services and carve out a niche in the VPN service market."

Lobred said it's been a good partnership with SAVVIS. Part of the deal includes co-marketing campaigns promoting SAVVIS services. "We can't complain," Lobred said. "We've launched a couple of direct mail campaigns and we're both pleased so far. "

"Traditionally frame relay services get really expensive when you start crossing LATAs [local access and transport areas]. SAVVIS allows us to deliver dedicated Internet access in a very cost-efficient manner. Since we really want to provide 512k and up access, the IP VPN program allows us to provide broader business services to high-demand clients anywhere in the world."

If your ISP is looking for a unique relationship with a global data carrier like SAVVIS, you'll find that it's a partnership of equals crafted to care for the client, at least according to Lobred. Although NETelco's relationship with SAVVIS includes elements of financial commitments that he is not able to wholly divulge, Lobred said that the joint venture has worked out well for both service providers.

"When we signup a VPN client, SAVVIS and our tech teams spec out the network to do what the clients wants it to do," Lobred explained. "Next, our team of Cisco- and Microsoft-certified engineers finalizes the solution. We're the point of contact for the customers. We provide a certain level of service and then lean on SAVVIS post-sales engineers for additional support."

This means SAVVIS is willing to work a little closer to home than other global data carriers. If your home happens to be an ISP focused on serving small- to mid-sized businesses, odds are your VPN services could benefit from renting a room from SAVVIS.

—End