Q9 Stock Offering Falls Short of Expectations

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Q9 Stock Offering Falls Short of Expectations
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Rawlson O’Neil King, theWHIR.com
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May 25, 2004 — (WEB HOST INDUSTRY REVIEW) — When Q9 Networks Inc. (q9.net)
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recently made its debut on the Toronto Stock Exchange, the Web hosting
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industry’s first IPO in years fell somewhat short of expectations,
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raising a smaller sum than anticipated.
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The Canadian complex hosting provider had
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intended to raise at least $45 million Canadian through the sale of 3.8
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million shares at $12 each. Instead, the firm was only able to sell the
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shares at $8.50 each, raising $32.3 million. Q9′s common shares began
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trading on April 29 under the symbol “Q,” and closed down at $8. This
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week, the stock continued to lose ground and fell to the $7 range.
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Despite the negative momentum, Q9
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Networks remains positive concerning both its prospects and its
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participation in the public equity marketplace. “We are delighted to
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have achieved this significant milestone,” says Osama Arafat, CEO of Q9
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Networks. “Supported by the proceeds from this offering, we look
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forward to embarking on the next stage of our growth. We are committed
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to executing our vision of providing highly reliable infrastructure
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services to Canadian companies with mission-critical Internet
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operations.”
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While Arafat could not comment on the
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depreciating price of his company’s stock, he did note that, “the
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market is the market, so we cannot control the price.”
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He did, however, reveal how the company intended to use the proceeds of its initial public offering.
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“Through this IPO,” says Arafat, “Q9 will
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put more cash into the war chest to allow us to expand geographically
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in Canada, to create new managed services and to put through
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acquisitions to assist in our efforts to consolidate the market.”
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Currently, Q9 operates data centers in
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downtown Calgary and Toronto and offers managed bandwidth and services.
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The firm is currently building a second data center in the Toronto
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area, scheduled to open in late summer 2004, and maintains network
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points of presence in Chicago, Seattle and Vancouver.
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Q9′s managed bandwidth services connect
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customer equipment directly to one of the most extensively connected
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and reliable networks in Canada. The Q9 network is a fully redundant
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network designed to eliminate any single points of failure to provide
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100 percent uptime compliance.
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Managed services such as dedicated
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servers, virtual private networks, remote connect services, firewalls,
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load balancing and backup and restoration services enable customers to
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leverage Q9’s specialized technical knowledge and Internet expertise.
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According to data filed with securities
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regulators, 40 percent of the company’s recurring revenue stems from
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managed services, while 27 percent is from managed bandwidth, and the
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remaining 33 percent is from server colocation.
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This infrastructure was in part funded
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between 2000 and 2001 by $115 million in private equity financing from
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a select group of Canadian investors, including: Scotia Merchant
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Capital, OMERS, TD Capital Canadian Private Equity Partners, J.L.
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Albright Venture Partners, Vengrowth Capital, e-Scotia Acquisition,
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Shaw Ventures and Working Ventures.
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Between those funding rounds and today,
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the firm has experienced strong growth, increasing its revenue from
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half a million dollars in the first quarter of 2001 to $6.1 million in
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the first quarter of 2004. Most of the growth was driven by recurring
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revenue from an exponentially increasing customer base. The firm has
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consistently won and maintained a customer base consisting of banks,
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brokerages, media companies and large international law firms.
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Q9′s long-term debt is negligible, giving
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the company greater leeway towards investments. As with most IPOs, the
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firm will use money raised on the public markets to buy competitors and
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improve services, a risky business since acquisitions have historically
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been known to destroy shareholder value and subject businesses to
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operational volatility.
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A joint study by Business Week and Boston
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Consulting Group of 302 major IT acquisitions of publicly-traded
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companies made between 1995 and 2001 found that 61 percent of buys
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destroyed shareholder value. The average return was 4.3 percent below
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industry peers and 9.2 percent below the S&P 500 the year after the
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deal.
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While “acquire-and-grow” strategies have
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shown questionable effectiveness in achieving equity growth for
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publicly traded hosting companies, the strategy has sometimes proven
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successful for private firms whose shareholder value does not publicly
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change on a day-to-day basis. Private hosting firms seem to have
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successfully increased revenues through such expansion without having
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to sacrifice shareholder value or upset investors.
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The newly-public Q9 Networks will face a
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host of new challenges, including hyper-competition possible
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fluctuating operating results, ensuring proper management of growth,
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accelerating technological change, potential physical and logical
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security breaches, potential disasters such as power outages and a
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highly price-sensitive market.
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To address these challenges, the company
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recently made high profile appointments, experienced in corporate
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governance, to its board of directors, including the appointment of a
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former Canadian prime minister.
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