SAVVIS Communications Corporation (SVVS)
Interview with:
Rob McCormick, CEO
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secure, reliable, and scalable hosting, network, and application services that uses virtualization technology, a utility services model, and automated software management and provisioning systems.


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SAVVIS Communications is on the edge of a revolutionary change in the way IP infrastructure is operated worldwide

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Computer Services

SAVVIS Communications Corporation

1 Savvis Parkway
St. Louis, MO 53017
Phone: 703-667-6000

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Rob McCormick
Chief Executive Officer

Interview conducted by:
Walter Banks, Publisher
December 30, 2004

Company Profile:
SAVVIS Communications (NASDAQ: SVVS) is a global IT utility that leads the industry in delivering secure, reliable, and scalable hosting, network, and application services. SAVVIS’ strategic approach combines the use of virtualization technology, a utility services model, and automated software management and provisioning systems. This allows customers to focus on their core business while SAVVIS ensures the quality of their IT infrastructure. With its recent acquisition of the assets of Cable & Wireless America, SAVVIS becomes one of the world’s largest providers of managed IP network and hosting services.

CEOCFOinterviews: Mr. McCormick, you have been with SAVVIS since 1999. How have you have changed the company since you have been there?
Mr. McCormick: “SAVVIS was founded to solve the problems that a lot of people were struggling with back in 1999, which was - how do we operate all of this client/server, internet protocol (IP)-based infrastructure that had been developed in the previous few years?. One difference between now and then is that then, there were hundreds of companies trying to do what SAVVIS does, funded by the upsurge in the market and the ability to raise capital.  Obviously, most of those companies did not make it and have since gone out of business. SAVVIS today, quite frankly, is the sole surviving example of a pure IT infrastructure company, as opposed to an IBM (NYSE: IBM) or AT&T (NYSE: T), where managed hosting and network services are a small part of a much bigger business.  So we have gone from trying to distinguish ourselves from among many different ideas to now competing with a few large, old-fashioned companies.”

CEOCFOinterviews: It sounds like SAVVIS is more than just a survivor.
Mr. McCormick: “I think that there is a lot to be said for ideas, but if ideas don’t come with execution, you won’t get anywhere. It turns out that it is very difficult to build the capabilities that SAVVIS has developed; the enterprise infrastructure. There are a lot of interesting ideas out there, but it is very difficult to start from scratch and build a big enough client base, execute on servicing your customers, build up and grow your revenues fast enough to cover 36 operating classes. SAVVIS was a spin-off from a company where that technology had already been developed, so we had a pretty good start on the rest, which proved to be the deciding factor.”

CEOCFOinterviews: What did you have to go through to build such a massive infrastructure?
Mr. McCormick: “In order to provide the type of services we do you need three physical components: first, you need a lot of heavy physical infrastructure, so you need to build or lease data centers and network capacities. Second, you need to build a service model that works; that provides a process for handling customers’ needs, and that requires software systems to allow you to pull all of that together. The third piece is the hardest: automation. But we’ve had 15 years of developing proprietary software that is built into our management systems that allow us to automate in the delivery of very complex infrastructure. What that lets you do is add lots of customers without adding staff, so that as your business scales your margins scale rapidly. As it turns out, that is really the thing that we have that nobody else does, and it reflects hundreds of millions of dollars and 15 years spent on building that system.”

CEOCFOinterviews: What would you say caused the other companies trying to do what you do to falter; was it not being financially ready for this or just the management not knowing what needed to be done?
Mr. McCormick: “I think both; many companies that ended up in bankruptcy court underestimated the complexity of what had to be done and therefore underestimated the cost of what had to be done. So it’s one thing to say that you are going to be the managed services business, but another thing to actually do it. So a lot of people started out in the full sale type of services in order to move into managed services, but they were not able to execute that change, both for technical and financial reasons.”

CEOCFOinterviews: I know that there are several sectors that you sell to; can you tell us where the majority of your revenues are coming from?
Mr. McCormick: “To take a step back; what SAVVIS does is to help CIOs (Chief Information Officers) solve the infrastructure problem. What the infrastructure problem is; is that ten years ago enterprises were mostly still on mainframe-oriented systems, centralized on a big computer somewhere. They had bought into this IP-based client server environment with distributed servers; now you’ve got email and SAP (Systems, Applications and Products in Data Processing). If you think about the complexity of what they used to have versus where they are today, most of them have gotten themselves into the place where they just can’t manage that big systems infrastructure anymore. In a very simplified manner, what SAVVIS does is run that infrastructure for these guys and by doing it differently from the way they would have done it, we are able to provide them dramatic cost savings. So the majority of our revenue today comes from providing infrastructure and then operating that infrastructure.”

CEOCFOinterviews: Who are some of your customers?
Mr. McCormick: “We have a very broad range of customers, about half of the Fortune 500 are customers, but the really nice thing about our system, unlike some of our larger competitors. is that it works very well for smaller enterprises as well. That means that just because you only have a couple of offices doesn’t mean that you can’t benefit from us helping with your email application and firewalls. Our more recognizable customers tend to be in three verticals: we have a very heavy presence in the financial vertical, companies like State Street (State Street Corporation - STT), Morgan Stanley, and the London Metals Exchange in the United Kingdom. We have a long list of customers in the financial space. The second and fastest growing area is media. As media companies are struggling to move from paper to digital, they are really expanding their infrastructure as well. We have a long list of customers in media, ranging from Discovery Communications, Inc. to Deluxe Media Services, Inc. to Universal Music Group. You can basically find SAVVIS in pretty much every major media name. The latest, and also a fast growing sector, is retail: as retail chains move from doing dial-up to do their inventory, etc., they are putting in IP networks now, they want to do wireless and multimedia in stores, IP credit card transactions, so we are quickly becoming the main choice for providing that infrastructure in the retail space. Many of the large retail chains use SAVVIS.”

CEOCFOinterviews: What would you say is the main reason for customers choosing SAVVIS; is it being able to reduce cost or get more out of their system?
Mr. McCormick: “It’s actually both and their problem is ubiquitous. Even though we do have a very broad base of customers, they tell us the same story. The existing way that they do things, like buying IT toolboxes, firewalls, a server or some storage and then trying to put it all together and run email or inventory systems, whatever the application is, and it just isn’t working for them. The availability is very low, meaning that they have lots of problems and outages because they don’t have the talent base to operate it and the cost is very high. So they are not getting out of it what they thought they were going to get out of it. Our solutions solve both of those problems. We’ve reduced the cost for our typical customer about 50% over what it was costing them to do it in-house. We’ve also increased the availability, and the net outcome of that is that they can reallocate the dollars and the people to work on the things that are core to their business strategy. It is no longer strategically important to operate your email system; ten years ago if you were the only one that had one it may have been, but today everybody runs the same email systems – so why are you dedicating important intellectual property just to   keep that running smoothly?”

CEOCFOinterviews: So, with your infrastructure and services your customers are then able to run a whole lot more than just emails.
Mr. McCormick: “That’s correct. And new business ideas don’t result from the heavy up-front costs. You have to hire the people and put in place the capital infrastructure. Because our services are all monthly-fee and usage based, you literally can have a new business idea, have us set up the infrastructure for you, and try it out. Then if it doesn’t work, you’re capital costs are minimal. Therefore, we also see our way of running infrastructure as a way of enabling businesses to try out new business ideas in a much more cost effective way, especially in areas where you have emerging technologies. Hence, SAVVIS is also a very good provider for the kind of young businesses that have new ideas and some venture backing; so they don’t have to go out and spend a lot of their venture cash on heavy hardware.”

CEOCFOinterviews: Can you give us a close look at your revenue model?
Mr. McCormick: “SAVVIS will exit the year as a company, at about $650 million, or a bit higher, of annualized revenue. That revenue is recurring revenue; meaning that customers sign contracts that pay us monthly for service, but they don’t have the big upfront costs. Our typical customer stays with us for between four and five years today, so our churn is very low because the services are of such high value. Our revenues are broken out into different types of infrastructure services; the two main categories are network and hosting.  I prefer to call the hosting segment compute, since it is encompasses much more than web hosting. Roughly half of our business is providing the networking components that people need and the other half is providing the compute.”

CEOCFOinterviews: You’ve recently added your virtualized services; can you tell us about that and how it has affected your business?
Mr. McCormick: “Most of the time people build their infrastructure out of dedicated equipment for each application. For a simple example, if you have three different applications, you would then have three different firewalls or three different servers. We are very effective at operating that type of infrastructure, but new technology has allowed us to virtualize that infrastructure. What that means is that on our virtualized products, what you are buying is a software slice of a bigger system, and what that does is change the operating capital cost model. So now instead of buying a physical firewall that we would run for you, we are running a virtual firewall, which is a software process on a big switch. The potential for that type of product we believe is huge. SAVVIS is the first to the market with this product, which people believe will change their cost dynamics by as much as 80%, because there is no dedicated capital on a per-customer basis. You see virtualization coming out, with Intel Corporation (Nasdaq: INTC) putting in chips and all of the major hardware vendors starting to provide support for it in their systems. The real key is that you don’t have to buy boxes on a per-function basis. It really changes the game in IT. It is hard to believe, but it will enable dramatic changes in the way IT is purchased; it will become more service oriented model instead of a hardware model.”

CEOCFOinterviews: Do you need a large number of partners to do this?
Mr. McCormick: “We actually don’t. We obviously buy bandwidth from lots of carriers around the world since we are in 47 countries, so that we can take that problem off the hands of our customers. We do have hardware partners and we use their hardware to deliver some of our services, but when you buy a service from SAVVIS, it is SAVVIS providing the service and it is the same no matter which of the 47 countries that you are in. So whether you buy a service that is connecting from Moscow to LA, or you want to host your SAP system in our New York data center, what you are looking at is SAVVIS employees running and operating it and using SAVVIS developed technology.”

CEOCFOinterviews: Do you have facilities and personnel in each of the 47 countries that you are in?
Mr. McCormick: “We have facilities, and today we have about 24 data centers around the world and we have 165 or so network points of presence in 47 countries.”

CEOCFOinterviews: Where do you see future growth coming from; will it be through your current customer base or expanding your reach?
Mr. McCormick: “It’s interesting -- I think there are three drivers of growth for us. The first is infrastructure outsouring. Today the vast majority of companies are doing their own infrastructure, but that’s becoming something of a commodity – they started out as experimenters, then it was productionized, and now all of your competitors are probably doing the same thing you are.   If you look at any model of technology history, it is time for people to start to outsource their infrastructures.  So we believe that the primary driver for us is that people are going to start saying, ‘you know what, I don’t want to do this anymore’. We can then come in with a very effective cost-effective model; one that is much cheaper than anyone else is offering them.

The second driver for SAVVIS is that we have a large base of clients today, acquired through acquisition, who typically have been sold a single product.  So there is a very large opportunity to cross sell the rest of our products into the companies that we already have in our data centers or on our network. Most of our customers have not bought more than one or two services out of the large portfolio that we have. About 70% of our sales comes from our base, because customers like the SAVVIS service, and that opens it up for a big opportunity. The third driver is that we have a lot of large competitors that are struggling to develop the type of technology that we have, so we have initiatives under way to create sales and distribution agreements with a few of these companies that look like competitors.  We can be a wholesale provider to them and they can use some of our technology in their services.  The reason for doing that is because SAVVIS, at our current size, does not have the size sales force that some of these guys do and we think that there is a pretty good partnership that can be done with a few of the larger integrator types of companies.”

CEOCFOinterviews: How big is the industry and where is SAVVIS positioned?
Mr. McCormick: “In the two main revenue components analysts have placed us at number two in market share in both the hosting and the network component; number two to IBM in hosting and number two to AT&T in network, so we’ve been taking quite a bit of market share. That said, nobody has a dominant market in either one of those spaces and both of them are growing rapidly. A lot of people hear bad things about network, but the part of network that’s bad is phone cards and cell phones and voice minutes. What SAVVIS offers are highly managed private networks where you don’t have the same price pressures that those other segments do. Customers are still moving off of the legacy networks and as long as they keep doing that, that market is still growing and we expect to have our share. The same could be true in the hosting space, where you’ve seen a real renaissance in hosting last year, as customers are moving more and more towards focusing on their internal infrastructure, instead of thinking that focusing only has to be about the internet. We’ve built a strong position in both of those sectors, but we have plenty of room for growth.”

CEOCFOinterviews: Do you feel that you are sound financially to achieve that growth?
Mr. McCormick: “We expect to be operating cash flow positive in Q4, before integration expenses, reflecting the cost synergies we’ve achieved through the Cable & Wireless America acquisition, which we just did. We have plenty of cash on the balance sheet, we don’t have big debt service to worry about, so we feel like we are in pretty good shape. The other thing that is really exciting about SAVVIS is our fully-built and paid-for global private network. Earlier I mentioned big fixed startup costs to be in these businesses; you have to have the systems and the data centers and the network and we’ve already paid that money. So going forward, every dollar we sell adds a lot of margin because there is not a lot of incremental cost. We don’t have big capital that needs to be spent, because the infrastructure is already built.”

CEOCFOinterviews: Are you still spending a lot of money on R&D?
Mr. McCormick: “It would not be “a lot of money” compared to some of these software firms; on our total expense base is a small percent. That said, it’s the most strategic thing for us, because we do differentiate ourselves from our competitors with our proprietary software systems. So, because we don’t build our own core technology – the servers and the software to run the servers – our R&D budget will not look like a Sun or IBM or someone like that.  Our focus is on optimizing the systems that automate the delivery of the infrastructure and that is something that is very differentiating for us.”

CEOCFOinterviews: How many acquisitions have you completed recently?
Mr. McCormick: “We’ve actually had three acquisitions in the last year and a half.  We are a little bit different than people might be used to on acquisitions; when we buy companies we actually integrate them and do get the savings. We’ll achieve more than $120 million in annual savings out of our latest acquisition, which is a pretty large number. We do acquisitions for the same reasons that I talked about earlier: revenue on the fixed cost platform generates good margins. If you see the right type of customer base, where as they can get moved onto our systems and our platforms and eliminate the cost of delivery, it’s a very smart thing to do to supplement the direct sales approach that I talked about before.”

CEOCFOinterviews: In closing, what would you like investors to remember about SAVVIS?
Mr. McCormick: “I would summarize by saying that I think SAVVIS is on the edge of a revolutionary change in the way IP infrastructure is operated. The CIOs are very frustrated where they are today, people should recognize that the current business model of selling boxes and software and maintenance from all the major Internet vendors is not working. So CIOs are looking for a utility-based infrastructure where they can buy as they need it, and not have the all the problems associated with managing the capital expense. We think that SAVVIS is in the unique position of being able to offer that service today, where as a lot of others are just talking about it.”


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