March 27, 2000

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Solution Series: USi
USinternetworking Rides The Wave
It still isn't profitable, but the company is building momentum and its business

By David Warn

bout three years ago, before anyone ever heard of ASPs or USinternetworking Inc., Chris McCleary was CEO of Web-site management company Digex Inc. Over and over again, he saw clients struggling to integrate communication networks and Web applications with no single source of assistance.

Many of Digex's clients faced similar dilemmas when it came time to update or scale complex applications on their Web-based network. Often, the consulting team that did the initial implementation had long since departed, and the application software company was unfamiliar with the system on which their software was running. "So they looked at Digex for help, and Digex didn't really have the application support," McCleary says.

After Digex was acquired by Intermedia Communications in 1997, McCleary decided to fill the support gap he had so often seen by providing new services based on Internet delivery. "As we looked at case studies in the Web-hosting and Web-site management business, it became apparent that there was this split between responsibility for the communication layer and the application layer," he says. Increasingly, application software was getting its utility from the networking component, yet it was managed separately. As a result, when problems with either the application or the network occurred, there was no one person or group within the organization with knowledge of both sides.

McCleary recruited former Silicon Graphics Inc. executive Steve McManus and Chris Poelma of Sun Microsystems and began to formulate USinternetworking's strategy. Their mission was simple: to build a company whose sole purpose was to take over installing, upgrading, maintaining, and hosting complex software applications. "It wasn't until we had been formed for several months that we first heard the term 'ASP,' " notes McCleary.

USinternetworking was formally launched with McCleary as chairman and CEO in 1998. Since that time, the company has been on a growth binge, adding more than 1,000 employees and building a solid infrastructure based on Cisco networking hardware. The Global Enterprise Management Center is located at company headquarters in Annapolis, Md., and USinternetworking has additional data centers in California, the Netherlands, and Japan. It has formed partnerships with seven leading application vendors, and the company's 109 clients--including Hershey Foods, The Baltimore Sun newspaper, Hewlett-Pack- ard's Hpshopping.com Web site, and the Cystic Fibrosis Foundation--represent a wide range of industries.

USinternetworking is riding a wave. Although the company is still unprofitable, its revenue reached $33.5 million for fiscal year 1999. It ended 1999 with $103 million in losses, most incurred by building the data centers, as well as in sales and marketing expenses. None of that has prevented the company from becoming something of a Wall Street darling. USinternetworking went public early last year at $21 per share and reached a high of $107 recently before dropping back to about $72. The company has a market capitalization of about $5 billion.

Part of USinternetworking's appeal to investors is its financial model. Because revenue is based on recurring flat monthly fees, USinternetworking can provide an annual revenue stream that grows with each new client. And since many initial investments, such as building data centers, are fixed, one-time costs, the company can add new clients without adding too much additional overhead.

Finances aside, the real bottom line of customer satisfaction is where USinternetworking wants a solid edge. When Liberty Financial Companies VP of E-commerce Jeremy Jaffe was looking to update the Boston company's BroadVision financial application and incorporate it on four Web sites last year, he faced a problem that is becoming widespread among IT departments. "We had a heck of a time maintaining staff," he says. "We knew that it was maintenance-intensive, and we wanted somebody who was growing their experience base within this specific application."

The $65 billion asset-management company turned to USinternetworking as an early leader in the ASP market. "Clearly, their track record and commitment to BroadVision was a major factor," he says, adding that the cost structure USinternetworking offered also played a role in his decision.

So far, Jaffe says, the relationship with USinternetworking has worked well. Initial problems with the application were eventually traced to a middleware provider, and USinternetworking helped implement the solution. "There are always going to be rough spots," he says. "These applications aren't perfect, but this is the meat of what they're doing. So they've got to make it work."

continued...page 2, 3

Photo by Danuta Otfinowski

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