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7/9/2004
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ASP Corio Still Standing Despite Continued Losses

The ASP had its share of casualties, but Corio is still kicking, despite losing almost $13 million last year.

Application service provider Corio Inc. continues to operate at a loss and may never be profitable, according to documents the company filed Friday with the Securities and Exchange Commission.

As of March 31, Corio's accumulated deficit stood at $262 million. Last year, the company lost $12.9 million. "Corio is not profitable and may never be profitable," according to the documents.

Although such dire language in SEC filings is often de rigueur given the risk of shareholder lawsuits if business sours, the documents indicate just how volatile the ASP market remains and fuels lingering questions about the market's long-term future.

The information is contained in a prospectus Corio filed in connection with its disbursement of just under 3 million shares to former stockholders of Nexus Technology Inc., an SAP software specialist acquired by Corio in October. Much of the data included in the prospectus reiterates information contained in Corio's most recent quarterly report, when it reported a loss of $2.2 million on revenue of $17.6 million for the fiscal first quarter ended March 31.

In the filing, Corio says many of its customers in the small to midsize enterprise market continue to face financial difficulty. About 100 customers have terminated their contracts early over the past four years, Corio says. One customer, Expanets, which accounted for 12% of Corio's revenue last year, was acquired by Avaya Inc. and will not renew its hosting contract, Corio says.

But Corio is replacing some of those smaller customers with much bigger ones, a senior Corio executive says in an interview. In the past 90 days the company has won unannounced contracts with companies such as ABM Amro, American Express, General Motors, and Nissan, says John Ottman, executive VP at Corio. "The strength and stability of our customer base is dramatically improving," Ottman says. He also notes that Corio has posted year-over-year revenue gains in recent quarters. "We've manage to grow through a period of dramatic industry contraction," he says. In 2003, Corio posted revenue of $68.7 million--a 22% increase over the previous year.

Indeed, Corio has secured a number of customer wins in recent months. In June, United Components, an industrial parts supplier, tapped Corio for a range of hosted ERP services. Also in June, Corio won a contract extension from Yaskawa Electric America Inc., a supplier of industrial automation systems. In May, Corio said it signed a contract to provide hosted financial applications to Santa Fe Natural Tobacco Co. Corio also continues to provide hosting services to the U.S. Coast Guard. The company has slightly more than 150 customers, Ottman says.

Some analysts believe Corio will be profitable within a year. John Torrey, who follows the company for Adams, Harkness & Hill, believes Corio will break even by year's end and post a profit in early 2005. "We're seeing stronger demand for the kind of on-demand delivery model that Corio provides," he says, adding that he has no concerns about Corio's long-term viability. He notes that the company has about $45 million in cash.

Still, Corio faces some big challenges. The number of customers from which Corio demands cash payment because of bad credit edged up again after leveling off following the dot-com crash. As of March 31, 14% of Corio's customers fell into that category, compared with 12% at the end of last year. "For these customers, we are at risk of not receiving payment for services already performed," Corio says in its prospectus.

Corio may be looking to squeeze more revenue from customers to stem its losses. The prospectus notes that the company formerly offered a broad range of services under a fixed monthly fee but now bills customers for services in excess of limits specified in their contracts. It also notes that the fixed monthly fees previously covered rental charges for software licenses, but now Corio requires most of its customers to buy a license for the software it's hosting for them.

Changes in technology also threaten the ASP market, Corio notes. The company thrives on hosting business applications that weren't designed to be hosted--software from vendors such as PeopleSoft, SAP, and Siebel Systems. However, the company notes that new market entrants are developing software that's designed to work on a hosted basis from scratch and are providing the hosting services themselves. Though not mentioned specifically in the prospectus, CRM vendor Salesforce.com Inc. has adopted such a business model.

Corio says it's less able to counter such changes in the market because its losses have forced it to cut back on research and development. However, the company notes it would have had to further reduce R&D spending had it not moved some of that function to India, where costs are considerably lower.

The ASP market's difficulties have taken an even heavier toll on Corio's competitors. Numerous ASPs closed shop following the dot-com collapse. Industry pioneer USinternetworking Inc. filed for Chapter 11 bankruptcy protection in 2002 and has since restructured. Other pure ASPs left standing include Appshop and Surebridge. Corio is slated to release its second-quarter results July 26.

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