How are fastest-growing tech companies staying the course?
Internet companies roared into 2000 sure they were going to conquer the world. For much of the 12 months that followed, it looked like they might.
Financial statements with bulging revenue lines whether they were written in pro forma or standard accounting lent credence to the slogan: "The Internet changes everything."
It was not a dot-com phenomenon. Vendors supplying software, hardware and network services the infrastructure to support e-commerce and multiple forms of e-business grew at breakneck speeds as corporations and consumers rushed to the Internet.
Akamai Technologies, Commerce One, WebEx Communications, FutureLink, Kana Communications and others tripled or even quadrupled their revenue in a year. Not surprisingly, these companies topped the Fast 50, Interactive Weeks ranking of fast-growing, publicly held Internet product and services companies. The rankings are based on financial numbers recently compiled for Interactive Week.
But how the times have changed. The economic slowdown has affected the business of almost every company among the Fast 50. Akamai, No. 1 on the list, has already had to lower its expected revenue for the year. And FutureLink, No. 4, desperately needs cash. Ironically, FutureLink is suffering from a disease that may help Akamai. FutureLink built more data centers than it needed to provide application service provider outsourcing services. Akamai believes that its costs will fall as the cost of colocation space and carrier bandwidth drop precipitously.
Industry pressure and the economic downturn have taken more than a financial toll. Critical Path, No. 6, lost several top managers after it had to restate financial results. Negotiations with the Securities and Exchange Commission over accounting issues helped derail FreeMarkets acquisition of Adexa. Ariba has named a new president after its merger with Agile Software went by the board. Proxicom has been acquired and NetSpeak, a voice-over-Internet Protocol software vendor, is about to be taken over by Adir Technologies, a spin-off of Net2Phone.
Still, many companies on the Fast 50 remain optimistic about the future.
Akamais solution of servers positioned on the edge of the Internet to speed information to customers of online information and e-commerce sites became almost an industry standard. Akamai grew so rapidly that it had servers on 473 networks by the end of 2000, and 650 networks when the first quarter of 2001 ended. The company expects to be profitable for the first time in the first half of 2002.
Public and private exchanges also captured the imaginations of many companies. Many saw the exchanges as a great way to reach their customers or suppliers. Commerce One, No. 2 on the Fast 50, rode that enthusiasm for public exchanges for all of 2000, bypassing Ariba, which bought into the race in March 2000 with the $2.3 billion purchase of Tradex Technologies. Ariba still placed a none-too-shabby No. 9 on the list.
But marketplaces dont run well unless there are communications up and down the line and rules to govern transactions. Supplying the middleware infrastructure to do applications integration, manage business processes or connect legacy and Web systems has been a growth business.
Young companies such as CrossWorlds Software, SilverStream Software, Tibco Software and webMethods are all players in that middleware marketplace, and their growth rates ranging from 161 percent to 279 percent testified to the popularity of the infrastructure middleware and their place among the fast-growing vendor companies.
Applications run on networks, and it seemed the demand for network capacity and switching and routing services was insatiable. Many optical and routing equipment vendors such as Extreme Networks, Foundry Networks, Juniper Networks, Redback Networks, Riverstone Networks and Sycamore Networks are listed on the Fast 50. All ran fast to keep up with carrier and enterprise spending.
Likewise, the push for broadband services to branch offices, multitenant buildings and homes helped drive revenue for DSL and cable modem vendors like Copper Mountain Networks, Terayon Communication Systems and Tut Systems.
But DSL and the broadband revolution proved to be as much a mirage as a miracle. The crunch in carrier spending may be cyclical, but it did not seem that way to most observers until well into 2000. Analysts expected Cisco Systems to grow sales this fiscal year by almost 60 percent. When such a dominant vendor runs into the wall that it did at the end of 2000, smaller companies have little chance of escaping.
Paul Johnson, a securities analyst at Robertson Stephens and, until 2000 was almost over, one of the chief advocates of next-generation networking, recently conceded that carrier spending will decline by 13 percent in 2001, another 12 percent next year and 6 percent in 2003. He noted that other analysts who spotted the downturn sooner have forecast that spending will drop 15 percent to 35 percent.
In a report on carrier spending, Johnson wrote: "The trend of carriers growing their capital expenditures faster than their revenue is clearly unsustainable in this environment," referring to the economic slowdown and the disappearance of many alternative carriers.
The technology downturn has been so dramatic that its easy to overlook the fact that many of the companies on the Fast 50 are likely to continue to post double-digit and perhaps even higher growth this year. No one ever grows 2,000 percent year after year. Its interesting to note that if Akamai hits $175 million, the low end of its 2001 revenue projection, it will be 96 percent bigger than it was when the year began.