Savvis: Safe for Now
It seems that by concentrating on a niche market, small providers can find success in the midst of the telecom slump. One example may be Savvis Communications (Nasdaq: SVVS), a provider of managed IP VPN (virtual private network) solutions. The company, which now supports about 1,500 customers on its network, has focused almost exclusively on providing service to financial institutions.
This week the company announced that it has secured a $20 million investment from Constellation Ventures, a Bear Stearns Asset Management Fund, in return for preferred stock (see Savvis Grabs $20M). Constellation Ventures is a media, communications, and technology venture capital fund that manages $450 million. This relationship is designed to help Savvis expand beyond its stronghold in financial services and into media services companies.
“Focusing on a niche is the best way for a competitive carrier to survive through a downturn,” says Frank Dzubeck, president of Communications Network Architects Inc. “Savvis has always been very focused. They wouldn’t know how to do business any other way.”
This is the second round of private funding that Savvis, a publicly held company, has received from private investors in the past six months. It scored $158 million from private investment firm Welsh Carson Anderson & Stowe and Reuters PLC back in March 2002 (see Is Savvis Saved? ).
Tina Mayland, vice president of marketing says the company is now fully funded and its debt has been reduced to about $90 million. The additional money from Constellation will be used to expand the customer base.
Of course, the company isn't out of the woods yet. Its stock is trading around $0.50 per share, although its financials look better than most CLECs. The company is actually cash-flow positive, and in the first quarter of 2002, which ended March 31, revenues increased 4 percent to $62.2 million from $59.7 million in the first quarter one year ago. Sequentially, revenues decreased 7 percent from $67.0 million in the fourth quarter of 2001. The increase in revenues for the first quarter 2002 over the comparable quarter of the prior year is due to strong performance in Savvis’s managed IP VPN business, where revenues rose 195 percent, and its managed hosting business, where revenues were higher by 151 percent.
But success and staying out of bankruptcy has come at a price to shareholders. Welsh Carson took 51 percent and Reuters took 16 percent ownership in the company as part of the deal they made to provide funding and forgive debt. Constellation also took a chunk of the company for its investment. The firm now owns 8 percent of itself. At the end of the day, only 15 percent of the company is owned by common shareholders.
Many in the industry believe that the potential for the managed IP VPN market is just now coming to fruition. According to Infonetics Research Inc., worldwide end-user expenditures for managed and unmanaged VPN services are expected to grow 353 percent, from $10.7 billion today to $41 billion in 2005. Managed VPN services are expected to account for a growing percentage of that figure.
But the road to Savvis’s success is still paved with many obstacles. The small provider currently counts interexchange carriers like AT&T Corp. (NYSE: T), Sprint Corp. (NYSE: FON), and WorldCom Inc. (Nasdaq: WCOME) as competitors, and it could soon find itself competing against the deep-pocketed Baby Bells as well (see Service Providers Jump on VPNs).
SBC Communications Inc. (NYSE: SBC) and BellSouth Corp. (NYSE: BLS) have already announced plans to offer managed IP VPN services (see VPNs Branch Out ). Savvis says it isn’t worried about the RBOCs, since their reach is mostly regional. But as RBOCs petition for the right to build long-distance networks, the threat against smaller niche providers like Savvis could escalate (see BellSouth Seeks Long-Distance Approval). Still, Savvis is optimistic.
“Time will tell when it comes to the RBOCs,” says Mayland. "They typically move very slowly, so we’re not too worried right now.”
Dzubeck says there will be enough room in the industry for both large and small providers of VPN services. He theorizes that small and medium-sized enterprises, which he claims are moving more toward outsourced networks, will enlist RBOCs to manage their entire networks, soup to nuts. These are already customers leasing T1 circuits from the RBOCs and will likely sign on for IP VPNs in a bundled service. But larger companies, such as those in financial services, will likely continue to manage their own networks. Instead of bundled managed services, they will look for specific services offered by best-of-breed providers, he says.
Savvis currently uses the Shasta product from Nortel Networks Corp. (NYSE/Toronto: NT) to provide network-based VPN services. In fact, Mayland says the company has the largest deployment of Shastas in the world. For customers that request end-to-end VPN tunneling and encryption, the provider uses software from Check Point Software Technologies Ltd. (Nasdaq: CHKP).
— Marguerite Reardon, Senior Editor, Light Reading