USinternetworking: Surviving the Changes

Company bets on a new strategy to jump-start its revenue engine.

Like a poster child for a developmentally disabled industry, USinternetworking is hoping for a cure.

Since reporting a lackluster performance in Q3 of last year, followed by a forecasted loss and revenue drop for its Q4, USinternetworking has taken several steps to ensure its survival. If it succeeds, the company could symbolize the viability of the ASP model, especially among Fortune 1000 clients.

As part of its survival tactics, USinternetworking over the last few months secured a $320 million-plus financing package, laid off 11 percent of its workforce and entered into new strategic partnerships.

Though its too early to tell, the company expects to generate enough cash from operations to break even by Q3 2001.

The company predicted a $12 million loss in operating cash flow for its fourth quarter, down from $18 million in Q3. It expects to release Q4 results Feb. 13.

But the 2001 outlook isnt rosy, after the company last month lowered its 2001 revenue expectations for a second time.

The company warned that revenue for the first quarter will be flat at $35 million, compared with Q4 2000s preliminary $34 million, excluding a $3 million termination fee paid by US West.

Revenue for 2001 will reach $180 million, down from earlier estimates of $210 million and, before that, $250 million.

However, CEO Andrew Stern remains optimistic. "We continue to see good acceptance of our ASP value proposition among enterprise clients and foresee substantial opportunities for future growth," Stern says.

But the second revision for 2001 revenue troubled Thomas Watts, an analyst at Merrill Lynch. He wants to see at least two consecutive quarters of increasing revenue. Watts downgraded USinternetworking from accumulate to neutral.

Like many analysts, Watts sees a market for ASPs, despite the recent demise of many in the sector.

"There is a demand for ASP services, and the ASP economic model can work," says Watts. "The question is, how big can USIX [USinternetworkings stock symbol] get, and how fast can it get there?"

For its part, USinternetworking is pulling out all the stops to achieve profitability. Last fall, it arranged a financing package with aid coming from a roster of companies. Microsoft provided $50 million; Aether Systems and Acqua Wellington North American Equities Fund each pitched in $10 million. And USinternetworking chairman Christopher McCleary, Stern, and other early investors kicked in $60 million.

The package also included a $50 million line of credit led by GE Capital and a potential sale of $140 million worth of stock to Acqua Wellington.

As part of the deal, USinternetworking will host the Microsoft .Net platform, and will work with Microsoft to develop application services for Windows 2000 and .Net. The deal also calls for USinternetworking to develop wireless-enabled application services with Aether.

In addition, USinternetworking is now targeting Fortune 1000 companies contracting for enterprise applications. In Q4, enterprise applications accounted for two-thirds of new contracts, while e-commerce and Web applications comprised the rest.

Finally, USinternetworking is adding consultants and systems integrators to an effort that has focused heavily on software and hardware vendors.

"We need to look to other distribution channels to grow," says Todd Horst, director of business development. "Systems integrators and consulting firms are an important part of that plan because they typically have the ear of the client."

To that end, USinternetworking recently formed an alliance with PricewaterhouseCoopers to host the consulting firms solutions for insurers, while the consulting firm maintains and upgrades the solution. That is the ASPs first joint effort to provide application service for a vertical market.

Looking ahead, Horst says USinternetworking expects to create other pre-integrated products, which may focus on specific vertical markets or specific software applications. More important, the company plans to announce new partnerships with second-tier integrators and consulting firms sometime early in Q2.

Surely, USinternetworking is making some new aggressive moves, but has the time for action passed?