Front-Runner Agilera Slows Down

When a company built for speed hits a protracted slowdown, something has to give.

When a company built for speed hits a protracted slowdown, something has to give. For Agilera, one of the more successful first-wave application service providers, that meant laying off about one-third of its work force — more than 100 people — and focusing on existing customers, instead of pushing for growth in an economy that seems to be going nowhere.

"We have to weather the storm and be responsible to our customers," says new CEO Rob Unger, who replaced the respected Paul Rudolph as part of an early-May shakeup at the Englewood, Colo., company. "I believe that the macroeconomic conditions will continue to be very difficult for at least another quarter or two. Guys that say otherwise are guys that need it to be different."

Early this year, Agilera was growing faster than expected, but now its not growing at all. "Were flat, quarter over quarter," Unger says. "People arent spending money today."

What about the argument that tough economic times drive companies to ASPs? "I do believe that in tough economic times companies look to take direct costs out and replace them with variable costs, but in this environment they are taking a wait-and-see attitude as they try to figure out where the bottom is," Unger says. "Our pipeline is more robust than ever; our win ratio is as good as last year, but the purchase cycle is taking longer."

Agilera is widely perceived as a leader among enterprise-class ASPs, and slow growth is causing retrenchment across the industry.

"Everyone was building to become AT&T in two years, and that was never going to happen with complex applications," says Bill Loftus, who took over as CEO of Breakaway Solutions last month, on the same day the company announced layoffs of about 200 employees. Private investors have put $33 million into the streamlined Breakaway, though shares languish at less than $1 and have been delisted from the Nasdaq.

Even as service providers shrink, overcapacity is likely to remain an issue. "There are a lot of assets out there, and there is going to be a lot of consolidation," Loftus says.

Unger says the ASP model was due for a shakeout that the larger economy has hastened, and privately held Agilera, which acquired rival Applicast late last year, could end up as either a buyer or a buyout target.

According to Unger, Agilera — which announced $80 million in funding from backers, including its founding strategic partners, Ciber and Verio — is positioned to ride out the tough times. "We have enough cash to take us to profitability," he says, adding that profits are several quarters away.

While time to profitability depends on the rate of revenue growth, profits are also likely to spur customer acquisition. "The faster Agilera reaches profitability, the more comfortable future and potentially new customers will become in signing a contract with Agilera," says Bill Dering, an analyst at C.E. Unterberg, Towbin.

Agilera did have good news in mid-May: a contract to provide Lawson Software-based human resources services to the state of South Dakota. Other customers include human resources services firm SCI Companies and MD Helicopters.

As part of its restructuring, Agilera has reduced the number of applications offered from 14 to seven; the survivors are Ariba, J.D. Edwards & Co., Lawson, Oracle, PeopleSoft, SAP and Siebel Systems.

Agilera will continue to focus on manufacturing, its strongest vertical market, as well as retail and financial services. "We are not looking to get out of any of our businesses, and we will look at expanding where it makes sense, but we are not looking aggressively. From an R&D [research and development] perspective, things may get put on the shelf," Unger says.