USIs Cloudy Future

By eweek  |  Posted 2001-11-15 Print this article Print

Application service provider pioneer US-internetworking Inc. is in a state of transition, teetering on the market ledge between the bankrupt mentors who were its peers and the protégés who've stolen its momentum.

Application service provider pioneer US-internetworking Inc. is in a state of transition, teetering on the market ledge between the bankrupt mentors who were its peers and the protégés whove stolen its momentum. Symptoms of trouble are numerous at the Annapolis, Md., company, which hosts and manages software and Web sites for its clients over a network. Most of USIs sales and marketing staff have been laid off, sources said, and debts from costly data centers and software licenses are accumulating. USI officials have said the $100 million in funding they announced last month from Bain Capital Partners LLC will include certain criteria, but didnt give specifics. Disagreements about those criteria now threaten the whole deal, sources said.
Users, many of whom bought just Web hosting but not any managed applications, are readying contingencies just in case the worst happens. And on the investor side, despite achieving EBITDA profitability in the third quarter, the company lost 27 cents a share, and its price now hovers at about 20 cents after peaking at $40 after an April 2000 stock split.
The companys most successful business has been functioning as a behind-the-scenes hoster for other ASPs, analysts said. Now, industry experts say, USI can fall in two directions -- one toward Chapter 11 and its possible death; the other to the relative luxury of being a private division of Bain, the Boston venture capital firm that also rescued ASP Interpath Inc. in May 2000. "It really wouldnt surprise me" if USI goes bankrupt, said Lew Hollerbach, an analyst with Bostons Aberdeen Group Inc. "From a straightforward business point of view, why does anybody file bankruptcy? Its when you cant pay your debts. Thats the only thing theyve got control over." Hollerbach will release a report next week titled "Why many ASPs will soon be ex-SPs." Bain officials would not comment. USI media officials refused numerous interview requests, but provided a two-paragraph statement from USI CEO Andy Stern that said, "We are excited at the possibility of having Bain Capital as a partner to help build our business and capitalize on opportunities in the growing ASP marketplace." But customers are skeptical. "Were just as concerned as we should be. We are certainly in the process of talking to other hosting companies," said two-year USI customer Bob Stetzel, director of development at Yankee Candle Co. Inc., in South Deerfield, Mass. Yankee Candle hoped that USI would provide forward-looking infrastructure advice, service performance monitoring and customization options, he said. "Thats sort of the hidden cost. Your flexibility is very limited," he said. Despite USIs claim, experts said that any growth is at best sideway, not upward. Many view the companys situation as symbolic of the end of the horizontal pure-play ASP era and the beginning of a new generation led by small, verticalized companies like Inc. and Oracle Corp.s NetLedger Inc. subsidiary, by privately owned ASPs focusing on messaging applications like Mi8 Corp., and by large companies for whom "ASP" is just a minor part or a delivery model, like Electronic Data Systems Corp., IBM and Qwest Communications International Inc. "They just have a lot of misplaced ego," said analyst Kneko Burney, of Cahners In-Stat Group, in Scottsdale, Ariz. Bankruptcy "would put a deep stake in their heart. Its time to be realistic."

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