November 15, 2001 — (WEB HOST INDUSTRY REVIEW) — AppliedTheory Corporation (appliedtheory.com), an Internet knowledge, development and managed hosting partner for hundreds of large corporations, organizations and government agencies, announced third quarter 2001 revenue of $20.5 million dollars, an increase of nine per cent compared to second quarter. Gross margins for the third quarter improved sequentially to 38 per cent, up from 35 per cent in the second quarter.
AppliedTheory continues to take assertive steps to contain costs while maintaining a strong recurring revenue base and customer growth, and noted that its success in sustaining operational strength is demonstrated by improved margins despite a weakened economy. In October, the company completed a 16 per cent reduction in force, which results in an annualized savings of $6.7 million that will be fully realized beginning in the first quarter of 2002. The company also continued a strategic focus on shifting its revenue base toward higher-margin outsourced managed hosting and related services. In third quarter, hosting and related services accounted for $6.8 million, or 33 per cent of total revenue, representing a 100 percent increase in managed hosting services compared to third quarter period of the previous year.
“As a company born and based in New York City, AppliedTheory has been extraordinarily challenged by what already was a difficult economic situation made worse by the tragic attacks on September 11,” said AppliedTheory CEO Danny E. Stroud. “The damage to the telecommunications infrastructure in New York City commanded a significant amount of money, time and effort from AppliedTheory to ensure we maintain our operational integrity and world-class customer service. Our hosting operations did not have any downtime. The combination of these events, however, underscore a defining transformation in our industry. We saw our largest competitor file for bankruptcy while at the same time we’re watching demand for outsourced managed hosting services become the epicenter of the Internet’s future. The tough economic times are accelerating the trend toward outsourcing, with enterprise customers demanding the highest levels of security, redundancy, backup and application integration. These mission-critical requirements match AppliedTheory’s historic capabilities, knowledge base and operational depth. Our ability to deliver these services reinforces the foundation of our strong customer loyalty.”
“We have probably not seen the end of the economic downturn,” Stroud said, “but we are confident that the steps we are taking will help us maintain our growing leadership position as the preferred Internet and managed hosting services company for some of the nation’s largest corporations, universities and government agencies.”
Net loss attributable to common shareholders for the quarter ending September 30, 2001, was $11.2 million, or $0.40 per share, versus $14.2 million, or $0.57 per share, in the comparable 2000 period.
The EBITDA loss for the third quarter of 2001 was $2.9 million, which was a $1.4 million improvement from the $4.3 million EBITDA loss in the second quarter of 2001 before non-recurring charges. The EBITDA loss was somewhat higher than expected due primarily to legal fees associated with the Couch litigation, and to an increase in the company’s bad debt reserve reflecting economic hardships being experienced by some AppliedTheory customers.
Angelo Gencarelli, senior vice president and chief financial officer of AppliedTheory, explained that the company may not reach EBITDA positive in fourth quarter as planned, but that the company believes this to be a temporary delay resulting specifically from the unforeseeable combination of economic downturn, litigation costs and lengthened sales cycles that resulted following the terrorist attacks.
“The AppliedTheory management team has effectively managed the company’s path toward profitability while turning our revenue focus toward higher value managed hosting services despite the weakened economy,” said Gencarelli. “The impact of the September 11 attacks created two unexpected issues. One, we had to immediately redirect our focus and resources to take care of customers affected by the resulting structure and network damage. Secondly, prospective enterprise customers have slowed typical sales cycles while cautiously re-evaluating their Internet requirements in light of new concerns for security, network redundancy and disaster recovery, in addition to the requirements they already had. Because we are uniquely qualified to provide any level of mission-critical Internet platform, we believe that this hesitation is temporary and that sales volume will resume as the economic situation stabilizes.”
