Once red hot, the business of hosting Web sites and other applications for businesses has been tepid lately.
George Kerns, the new CEO of Web-hoster Digex Inc., recently discussed how the firm plans to survive in that market with WorldCom Inc., its majority owner, bankrupt.
Digex is majority-owned by WorldCom. How have you been affected by their bankruptcy?
In the strict sense, there hasn?t been any change. We are a separate company. They own 61 percent of us. We do have some commercial agreements with them. But all of those things are unchanged by the fact that they are now in Chapter 11.
With that said, there are a couple of clarifications. Prior to them going into Chapter 11, we met with a couple of the executives at WorldCom that are on our board to go through our business plan.
[This was] to make sure they understood what our cash requirements are. They understood exactly what we needed over the next 18 months. [The WorldCom executives] were able to use that information when they negotiated with their banks to make sure Digex was taken care of.
If you go to page 66 on their [bankruptcy] filing, there?s a paragraph that spells out specifically what WorldCom is allowed to do with Digex from a funding standpoint while they?re in Chapter 11.
What it says in paraphrase is they can fund us up to $10 million a month. To put that in perspective, over the first quarter, we borrowed $13 million from WorldCom. In the second quarter, we borrowed $9 million. So the $10 million-a-month cap is certainly sufficient for our needs.
Our new business plan that we?re executing calls for us to be financially independent in 12 months. Every quarter, that amount that we?re asking them for should be going down.
Is it tougher to sign up clients because of your exposure to WorldCom?
I would say that we go through a little more scrutiny. I actually prefer those that do a deep due diligence, even though they consume a lot more time because they really see the difference between Digex and our competitors.
The question I get asked most often now is will WorldCom continue to want you? One of the things that [WorldCom] has told us time and again is that Digex is a vital component that they must have going forward.
Then, [the questioners] say what if they change their mind? My response is the current people don?t seem to think that that?s going to happen — but if for some reason that changes, I?m not losing sleep at night. We have a valuable business here, and it?s my belief that no one is going to let Digex die on the vine.
You recently cut 200 jobs. Are more on the way? Do you foresee having to cut costs further?
No. That was a component of that business plan I was talking about before. We don?t have any current planned head-count reductions, given our revenue stream.
Now, if something unforeseen happens that had a major impact on our revenue stream, we?d have to go back and reassess our expenses. That was a big slice, but it was what we needed to do to right-size our expenses.
Most of our cash needs today are really for the acquisition of equipment to support new-customer revenue.
Think about it like this, we sign up a new customer that?s going to generate $100,000 worth of monthly revenue for us. They sign a two-year contract. That?s $2.4 million over the 24-month period. We probably have to go out and buy close to $500,000 worth of equipment to put into the data center where they are going to be hosted. We have a big upfront [cost], which takes cash.
That?s where most of the cash that we?re borrowing from WorldCom [goes]. Part of our new plan is focused on how to eliminate the need to always go out and get cash every time you acquire a customer.
You are down to about 850 employees overall. How many of those are in Maryland?
I would say roughly 650. Of those 200 people that we released, less than half were in Maryland.
Is a bankruptcy filing a possibility?
It?s not something that we?re discussing. Most of the companies that have filed for bankruptcy typically had a lot of debt on their balance sheet. The only debt that we have is money that has been loaned to us by WorldCom. That is not what they call a “callable” debt; the people there cannot say they want to call the loans they?ve made to Digex.
Have you gone over your books since WorldCom?s filing? They had to massively restate their earnings.
That?s a good question. We are a separate company. We are not a subsidiary, so we do our own accounting. The issues that they have with their financial reporting do not have anything to do with Digex. We are very comfortable that all of our filings are correct and accurate.
WorldCom used Arthur Andersen as its accountant. Did you also use them?
Our auditors are Ernst & Young. There was a little blip there. We used Ernst & Young for several years, and then late last year, there was a decision to change to Arthur Andersen. Then, there was a decision to change back within a few months — after all the Andersen stuff started hitting the press.
A year ago, your stock was at $6; now it?s at 17 cents. Where do you stand with the Nasdaq in terms of delisting?
We got a letter from Nasdaq, and we have responded to it. It?s pretty straightforward how that works. If your stock trades below a dollar for 30 consecutive trading days, then you get this warning letter. Then you have to take action.
Some companies have done things like reverse stock splits. If we did a 20-to-1 stock split, for instance, our stock would then be $3.20. We’ve decided that that doesn?t really make sense for us. We don?t go to the capital markets for funds. We basically just get loans from WorldCom; that?s our funding source.
We?ve decided to apply for the small-cap market. We?re in the middle of that process. We will drop off of the national exchange.
You were made CEO in June. What are some of your long-term goals for Digex?
Our most immediate one is obviously financial independence, but we really have three [things] that I have everyone focused on right now: We have been customer-focused, and we?re going to stay customer-focused. Digex has a very loyal customer base. I like to say you need to hug a customer every day. That?s one thing. We?re going to continue to look at our value proposition that we put out there and make sure that we always have a refined idea of what the marketplace needs. Then, the third thing is the financial independence. It makes sense in any time, but it?s more acute now when the marketplace is not growing.
From a strategy standpoint, the way to grow this business in a significant way is through enterprise IT offerings. When people outsource their enterprise IT applications, like to the PeopleSofts or the SAPs, those are typically longer-term contracts than the ones we?ve seen in the past. They typically have five-, six-, 10-year contracts. So, we?d like to get into that steady work. When you outsource your enterprise IT you can?t de-emphasize it next year. In the commerce area, sometimes people say their site isn?t generating enough sales, so they?re going to de-emphasize online selling. With enterprise IT, that?s vital to running their business. It?s not going to go away.
