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SAVVIS
Communications is on the edge of a revolutionary change in the way IP infrastructure is
operated worldwide
Technology
Computer Services
(SVVS-NASDAQ)
SAVVIS Communications Corporation
1 Savvis Parkway
St. Louis, MO 53017
Phone: 703-667-6000
Rob McCormick
Chief Executive Officer
Interview conducted by:
Walter Banks, Publisher
CEOCFOinterviews.com
December 30, 2004
Company Profile:
SAVVIS Communications (NASDAQ: SVVS) is a global IT utility that leads the industry in
delivering secure, reliable, and scalable hosting, network, and application services.
SAVVIS’ strategic approach combines the use of virtualization technology, a utility
services model, and automated software management and provisioning systems. This allows
customers to focus on their core business while SAVVIS ensures the quality of their IT
infrastructure. With its recent acquisition of the assets of Cable & Wireless America,
SAVVIS becomes one of the world’s largest providers of managed IP network and hosting
services.
CEOCFOinterviews: Mr. McCormick, you have been with SAVVIS
since 1999. How have you have changed the company since you have been there?
Mr. McCormick: “SAVVIS was founded to solve the problems
that a lot of people were struggling with back in 1999, which was - how do we operate all
of this client/server, internet protocol (IP)-based infrastructure that had been developed
in the previous few years?. One difference between now and then is that then, there were
hundreds of companies trying to do what SAVVIS does, funded by the upsurge in the market
and the ability to raise capital. Obviously, most of those companies did not make it
and have since gone out of business. SAVVIS today, quite frankly, is the sole surviving
example of a pure IT infrastructure company, as opposed to an IBM (NYSE: IBM) or AT&T
(NYSE: T), where managed hosting and network services are a small part of a much bigger
business. So we have gone from trying to distinguish ourselves from among many
different ideas to now competing with a few large, old-fashioned companies.”
CEOCFOinterviews: It sounds like SAVVIS is more than just a
survivor.
Mr. McCormick: “I think that there is a lot to be said
for ideas, but if ideas don’t come with execution, you won’t get anywhere. It
turns out that it is very difficult to build the capabilities that SAVVIS has developed;
the enterprise infrastructure. There are a lot of interesting ideas out there, but it is
very difficult to start from scratch and build a big enough client base, execute on
servicing your customers, build up and grow your revenues fast enough to cover 36
operating classes. SAVVIS was a spin-off from a company where that technology had already
been developed, so we had a pretty good start on the rest, which proved to be the deciding
factor.”
CEOCFOinterviews: What did you have to go through to build
such a massive infrastructure?
Mr. McCormick: “In order to provide the type of services
we do you need three physical components: first, you need a lot of heavy physical
infrastructure, so you need to build or lease data centers and network capacities. Second,
you need to build a service model that works; that provides a process for handling
customers’ needs, and that requires software systems to allow you to pull all of that
together. The third piece is the hardest: automation. But we’ve had 15 years of
developing proprietary software that is built into our management systems that allow us to
automate in the delivery of very complex infrastructure. What that lets you do is add lots
of customers without adding staff, so that as your business scales your margins scale
rapidly. As it turns out, that is really the thing that we have that nobody else does, and
it reflects hundreds of millions of dollars and 15 years spent on building that system.”
CEOCFOinterviews: What would you say caused the other
companies trying to do what you do to falter; was it not being financially ready for this
or just the management not knowing what needed to be done?
Mr. McCormick: “I think both; many companies that ended
up in bankruptcy court underestimated the complexity of what had to be done and therefore
underestimated the cost of what had to be done. So it’s one thing to say that you are
going to be the managed services business, but another thing to actually do it. So a lot
of people started out in the full sale type of services in order to move into managed
services, but they were not able to execute that change, both for technical and financial
reasons.”
CEOCFOinterviews: I know that there are several sectors that
you sell to; can you tell us where the majority of your revenues are coming from?
Mr. McCormick: “To take a step back; what SAVVIS does is
to help CIOs (Chief Information Officers) solve the infrastructure problem. What the
infrastructure problem is; is that ten years ago enterprises were mostly still on
mainframe-oriented systems, centralized on a big computer somewhere. They had bought into
this IP-based client server environment with distributed servers; now you’ve got
email and SAP (Systems, Applications and Products in Data Processing). If you think about
the complexity of what they used to have versus where they are today, most of them have
gotten themselves into the place where they just can’t manage that big systems
infrastructure anymore. In a very simplified manner, what SAVVIS does is run that
infrastructure for these guys and by doing it differently from the way they would have
done it, we are able to provide them dramatic cost savings. So the majority of our revenue
today comes from providing infrastructure and then operating that infrastructure.”
CEOCFOinterviews: Who are some of your customers?
Mr. McCormick: “We have a very broad range of customers,
about half of the Fortune 500 are customers, but the really nice thing about our system,
unlike some of our larger competitors. is that it works very well for smaller enterprises
as well. That means that just because you only have a couple of offices doesn’t mean
that you can’t benefit from us helping with your email application and firewalls. Our
more recognizable customers tend to be in three verticals: we have a very heavy presence
in the financial vertical, companies like State Street (State Street Corporation - STT),
Morgan Stanley, and the London Metals Exchange in the United Kingdom. We have a long list
of customers in the financial space. The second and fastest growing area is media. As
media companies are struggling to move from paper to digital, they are really expanding
their infrastructure as well. We have a long list of customers in media, ranging from
Discovery Communications, Inc. to Deluxe Media Services, Inc. to Universal Music Group.
You can basically find SAVVIS in pretty much every major media name. The latest, and also
a fast growing sector, is retail: as retail chains move from doing dial-up to do their
inventory, etc., they are putting in IP networks now, they want to do wireless and
multimedia in stores, IP credit card transactions, so we are quickly becoming the main
choice for providing that infrastructure in the retail space. Many of the large retail
chains use SAVVIS.”
CEOCFOinterviews: What would you say is the main reason for
customers choosing SAVVIS; is it being able to reduce cost or get more out of their
system?
Mr. McCormick: “It’s actually both and their
problem is ubiquitous. Even though we do have a very broad base of customers, they tell us
the same story. The existing way that they do things, like buying IT toolboxes, firewalls,
a server or some storage and then trying to put it all together and run email or inventory
systems, whatever the application is, and it just isn’t working for them. The
availability is very low, meaning that they have lots of problems and outages because they
don’t have the talent base to operate it and the cost is very high. So they are not
getting out of it what they thought they were going to get out of it. Our solutions solve
both of those problems. We’ve reduced the cost for our typical customer about 50%
over what it was costing them to do it in-house. We’ve also increased the
availability, and the net outcome of that is that they can reallocate the dollars and the
people to work on the things that are core to their business strategy. It is no longer
strategically important to operate your email system; ten years ago if you were the only
one that had one it may have been, but today everybody runs the same email systems –
so why are you dedicating important intellectual property just to keep that
running smoothly?”
CEOCFOinterviews: So, with your infrastructure and services
your customers are then able to run a whole lot more than just emails.
Mr. McCormick: “That’s correct. And new business
ideas don’t result from the heavy up-front costs. You have to hire the people and put
in place the capital infrastructure. Because our services are all monthly-fee and usage
based, you literally can have a new business idea, have us set up the infrastructure for
you, and try it out. Then if it doesn’t work, you’re capital costs are minimal.
Therefore, we also see our way of running infrastructure as a way of enabling businesses
to try out new business ideas in a much more cost effective way, especially in areas where
you have emerging technologies. Hence, SAVVIS is also a very good provider for the kind of
young businesses that have new ideas and some venture backing; so they don’t have to
go out and spend a lot of their venture cash on heavy hardware.”
CEOCFOinterviews: Can you give us a close look at your
revenue model?
Mr. McCormick: “SAVVIS will exit the year as a company,
at about $650 million, or a bit higher, of annualized revenue. That revenue is recurring
revenue; meaning that customers sign contracts that pay us monthly for service, but they
don’t have the big upfront costs. Our typical customer stays with us for between four
and five years today, so our churn is very low because the services are of such high
value. Our revenues are broken out into different types of infrastructure services; the
two main categories are network and hosting. I prefer to call the hosting segment
compute, since it is encompasses much more than web hosting. Roughly half of our business
is providing the networking components that people need and the other half is providing
the compute.”
CEOCFOinterviews: You’ve recently added your virtualized
services; can you tell us about that and how it has affected your business?
Mr. McCormick: “Most of the time people build their
infrastructure out of dedicated equipment for each application. For a simple example, if
you have three different applications, you would then have three different firewalls or
three different servers. We are very effective at operating that type of infrastructure,
but new technology has allowed us to virtualize that infrastructure. What that means is
that on our virtualized products, what you are buying is a software slice of a bigger
system, and what that does is change the operating capital cost model. So now instead of
buying a physical firewall that we would run for you, we are running a virtual firewall,
which is a software process on a big switch. The potential for that type of product we
believe is huge. SAVVIS is the first to the market with this product, which people believe
will change their cost dynamics by as much as 80%, because there is no dedicated capital
on a per-customer basis. You see virtualization coming out, with Intel Corporation
(Nasdaq: INTC) putting in chips and all of the major hardware vendors starting to provide
support for it in their systems. The real key is that you don’t have to buy boxes on
a per-function basis. It really changes the game in IT. It is hard to believe, but it will
enable dramatic changes in the way IT is purchased; it will become more service oriented
model instead of a hardware model.”
CEOCFOinterviews: Do you need a large number of partners to
do this?
Mr. McCormick: “We actually don’t. We obviously buy
bandwidth from lots of carriers around the world since we are in 47 countries, so that we
can take that problem off the hands of our customers. We do have hardware partners and we
use their hardware to deliver some of our services, but when you buy a service from
SAVVIS, it is SAVVIS providing the service and it is the same no matter which of the 47
countries that you are in. So whether you buy a service that is connecting from Moscow to
LA, or you want to host your SAP system in our New York data center, what you are looking
at is SAVVIS employees running and operating it and using SAVVIS developed technology.”
CEOCFOinterviews: Do you have facilities and personnel in
each of the 47 countries that you are in?
Mr. McCormick: “We have facilities, and today we have
about 24 data centers around the world and we have 165 or so network points of presence in
47 countries.”
CEOCFOinterviews: Where do you see future growth coming from;
will it be through your current customer base or expanding your reach?
Mr. McCormick: “It’s interesting -- I think there
are three drivers of growth for us. The first is infrastructure outsouring. Today the vast
majority of companies are doing their own infrastructure, but that’s becoming
something of a commodity – they started out as experimenters, then it was
productionized, and now all of your competitors are probably doing the same thing you are.
If you look at any model of technology history, it is time for people to start to
outsource their infrastructures. So we believe that the primary driver for us is
that people are going to start saying, ‘you know what, I don’t want to do this
anymore’. We can then come in with a very effective cost-effective model; one that is
much cheaper than anyone else is offering them.
The second driver for SAVVIS is that we have a large
base of clients today, acquired through acquisition, who typically have been sold a single
product. So there is a very large opportunity to cross sell the rest of our products
into the companies that we already have in our data centers or on our network. Most of our
customers have not bought more than one or two services out of the large portfolio that we
have. About 70% of our sales comes from our base, because customers like the SAVVIS
service, and that opens it up for a big opportunity. The third driver is that we have a
lot of large competitors that are struggling to develop the type of technology that we
have, so we have initiatives under way to create sales and distribution agreements with a
few of these companies that look like competitors. We can be a wholesale provider to
them and they can use some of our technology in their services. The reason for doing
that is because SAVVIS, at our current size, does not have the size sales force that some
of these guys do and we think that there is a pretty good partnership that can be done
with a few of the larger integrator types of companies.”
CEOCFOinterviews: How big is the industry and where is SAVVIS
positioned?
Mr. McCormick: “In the two main revenue components
analysts have placed us at number two in market share in both the hosting and the network
component; number two to IBM in hosting and number two to AT&T in network, so we’ve
been taking quite a bit of market share. That said, nobody has a dominant market in either
one of those spaces and both of them are growing rapidly. A lot of people hear bad things
about network, but the part of network that’s bad is phone cards and cell phones and
voice minutes. What SAVVIS offers are highly managed private networks where you don’t
have the same price pressures that those other segments do. Customers are still moving off
of the legacy networks and as long as they keep doing that, that market is still growing
and we expect to have our share. The same could be true in the hosting space, where you’ve
seen a real renaissance in hosting last year, as customers are moving more and more
towards focusing on their internal infrastructure, instead of thinking that focusing only
has to be about the internet. We’ve built a strong position in both of those sectors,
but we have plenty of room for growth.”
CEOCFOinterviews: Do you feel that you are sound financially
to achieve that growth?
Mr. McCormick: “We expect to be operating cash flow
positive in Q4, before integration expenses, reflecting the cost synergies we’ve
achieved through the Cable & Wireless America acquisition, which we just did. We have
plenty of cash on the balance sheet, we don’t have big debt service to worry about,
so we feel like we are in pretty good shape. The other thing that is really exciting about
SAVVIS is our fully-built and paid-for global private network. Earlier I mentioned big
fixed startup costs to be in these businesses; you have to have the systems and the data
centers and the network and we’ve already paid that money. So going forward, every
dollar we sell adds a lot of margin because there is not a lot of incremental cost. We don’t
have big capital that needs to be spent, because the infrastructure is already built.”
CEOCFOinterviews: Are you still spending a lot of money on
R&D?
Mr. McCormick: “It would not be “a lot of money”
compared to some of these software firms; on our total expense base is a small percent.
That said, it’s the most strategic thing for us, because we do differentiate
ourselves from our competitors with our proprietary software systems. So, because we don’t
build our own core technology – the servers and the software to run the servers
– our R&D budget will not look like a Sun or IBM or someone like that. Our
focus is on optimizing the systems that automate the delivery of the infrastructure and
that is something that is very differentiating for us.”
CEOCFOinterviews: How many acquisitions have you completed
recently?
Mr. McCormick: “We’ve actually had three
acquisitions in the last year and a half. We are a little bit different than people
might be used to on acquisitions; when we buy companies we actually integrate them and do
get the savings. We’ll achieve more than $120 million in annual savings out of our
latest acquisition, which is a pretty large number. We do acquisitions for the same
reasons that I talked about earlier: revenue on the fixed cost platform generates good
margins. If you see the right type of customer base, where as they can get moved onto our
systems and our platforms and eliminate the cost of delivery, it’s a very smart thing
to do to supplement the direct sales approach that I talked about before.”
CEOCFOinterviews: In closing, what would you like investors
to remember about SAVVIS?
Mr. McCormick: “I would summarize by saying that I think
SAVVIS is on the edge of a revolutionary change in the way IP infrastructure is operated.
The CIOs are very frustrated where they are today, people should recognize that the
current business model of selling boxes and software and maintenance from all the major
Internet vendors is not working. So CIOs are looking for a utility-based infrastructure
where they can buy as they need it, and not have the all the problems associated with
managing the capital expense. We think that SAVVIS is in the unique position of being able
to offer that service today, where as a lot of others are just talking about it.”
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