August 13, 2001 6:45 AM PDT

Loudcloud makes a push for new business

Loudcloud is once again tweaking its business model as it attempts to attract large customers, but it's far from certain that the move will be a rainmaker.

On Monday, the Web infrastructure company released a new set of services that give customers a kind of a la carte approach to Loudcloud's Web site management offerings, as opposed to the previous one-size-fits-all approach.

As earlier reported, the switch is intended to appeal to the big corporations that have been wary of handing over all their Net management requirements to a start-up company, but which might want to sample some of Loudcloud's individual services.

In addition, the company is pressing to prove its long-term financial viability, following recent pointed questions from analysts about its finances. After some painful staffing and budget cuts, the company seems to have settled those short-term concerns, even if its long-term prospects remain cloudy.

"I don't have concerns about solvency," said Alex Arnold, a financial analyst with brokerage house Adams, Harkness & Hill. "But I do think that in order to make investors happy they'll have to keep cutting costs."

The Net infrastructure services company, which was founded by Netscape Communications founder Marc Andreessen and colleague Ben Horowitz two years ago next month, is struggling to regain the momentum it inherited from its founders' pedigrees. After launching as one of the most promising new companies in Silicon Valley, it ran headlong into market conditions that it hadn't expected and that threaten to turn its original business model on its head.

Loudcloud has been one of the most prominent of a new generation of companies aimed at providing a broad range of Net communications and software infrastructure services. Its basic service offerings take a company's Web site completely under its wing, arranging for hosting, monitoring its performance, and serving as consultants and technical support on servers and software components such as databases.

Originally appealing to Internet-only companies, it has switched its focus to large corporations as the Net sector has crumbled. The shift wasn't enough to erase Wall Street's concerns about a business model built in sunnier days.

Loudcloud's initial public offering earlier this year was seen by some as possibly opening the door to additional tech IPOs. But the sale was stormy from the start.

For one, the IPO was delayed because of an East Coast snowstorm. Later, the company was forced to unfavorably revise the terms of its stock offer, by increasing the number of shares offered and reducing the per-share price. The revisions reduced Loudcloud's proceeds to $150 million from an earlier estimate of about $180 million. Some analysts said the company forged ahead with the IPO because it was desperate for cash.

When Loudcloud finally began trading, the shares rose just 3 percent the first day, giving the company a market value of about $450 million, rather than the more than $1 billion valuation executives had previously anticipated.

Loudcloud shares have slid steadily since the IPO. Shares in the company closed Friday at $1.63 and have traded as high as $7 and as low as $1.28 in the past year. The company has a market valuation of about $120 million.

To be sure, Loudcloud is not alone in its woes. Others in related Web hosting businesses, for example, also have suffered. Exodus Communications and Digex, both of which compete with Loudcloud in some ways by offering so-called managed hosting services, have seen their stocks plunge or have recently laid off workers.

Since going public, Loudcloud has trimmed its staff, cut sharply back on some of its infrastructure costs, and says it has more than enough cash to last through 2003, when it sees its business beginning to break even.

In June, it posted a first-quarter net loss of $60.3 million, or $1.25 per share, on revenue of $11.7 million, compared with a net loss of $14.6 million on revenue of $86,000 during the same quarter last year. The company expects to report financial results for its second quarter, which ended July 31, on Aug. 28.

"For us, in my opinion, we've seen the bottom of the downturn," said Horowitz, the company's CEO. Loudcloud's least stable customers have mostly left, and larger businesses such as Ford Motor and USA Today are deciding to spend again, making it easier for outsourcing companies to predict the market, he said. "It's pretty clear that (our potential customers) know what their budgets are now, and what they want to spend it on."

A chaotic market
For all the changes, the company still faces a difficult market, even if analysts say the new flexibility in its product line is a step forward.

According to recent research by Forrester Research, about half of all large companies keep their critical Internet operations in-house, as opposed to farming them out to a Web hosting facility or managed service provider such as Loudcloud. Even more daunting are reports that 30 percent of companies that do use outside facilities are thinking about bringing them back in-house, and that another 30 percent plan to switch their outside providers.

At the core of these statistics, said Forrester analyst Jeanne Schaaf, is widespread discontent and confusion in the corporate world about the value of Internet infrastructure and services. Moreover, in the explosion of hosting facilities, managed service providers, application service providers and other various fill-in-the-blank providers, companies aren't clear who does what, or why.

"There is a lot of confusion in the market," Schaaf said, noting that Loudcloud and its competitors are subject to the skepticism resulting from this confusion. "A lot of people are comparing apples and oranges."

Loudcloud is nevertheless making the right moves by breaking up its services into separate a la carte menu items for these companies, Schaaf said. By allowing customers to keep their Internet gear in-house, while still taking advantage of Loudcloud's security and disaster-recovery features, they stand a good chance of enticing skeptical corporations to sample just a piece of the outsourcing model at first.

While Loudcloud tweaks its own businesses, competitors are not standing still.

Last week, for example, Sprint's Web services division announced that it would use software from start-up NOCPulse to allow expanded monitoring of a customer's site's performance and infrastructure.

Although it does not replicate the entire technology built by Loudcloud, NOCPulse's software allows the big telephone companies and other hosting operations to begin offering some of the advanced management features that Andreessen and Horowitz have built for themselves.

In the course of its corporate research, Forrester says it found that big corporations are leery of outsourcing advanced Net software functions to telephone companies. But because they are large and stable--a critical measure in days of economic uncertainty--they could provide growing competition for Loudcloud and other smaller companies.

"They need to be concerned about that," Schaaf said. The telecom companies "have deep pockets, and they're going to be there at the end of the day."

 

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