Press Releases
SOURCE: ISP-Planet.com

ISPCON (2008): The Cash Keynote

By Alex Goldman
ISP-Planet Managing Editor
June 2, 2008

Banker Paul Stapleton, partner at DH Capital, is unusual in the ISP business because he has also written newsletters. For years, he published the I$P Report (later called the I$P HOSTING Report).

He opened his ISPCON keynote by explaining the title of the speech, "Service Stack Evolution."

"It's my job to decide where to deploy capital and get a good return. Over 15 years, I've done lots of deals."

He admitted getting some things wrong, such as "we didn't think that the value of a dialup subscriber would ever go down." Others included the emergence of mass market hosting as a sector delivering real value on the stock market.

But for many years, Stapleton has been touting the insight that formed the core of the keynote: ISPs need to move up the service stack, from delivering connectivity to hosting applications.

"We like hosting. It's a valuable network because it stores and handles valuable information."

It delivers good ROI, has lower subscriber acqisition costs than access, and has a high margin and low churn.

"You're in the airline business. You have a load factor, and you need to fill it up."

An audience member asked, "aren't they always bankrupt?"

Stapleton replied, "they have the pricing right, but other aspects of their business are bad."

He said that the lumpy but growing revenues of webhosting are superior to the predictable but declining revenues of dialup service.

He said that owning facilities isn't bad if you are covering your costs and preserving your customer base.

Opportunity: MSP

Stapleton said that some businesses are so new that they have spend recent years educating their customers. Perhaps this is a perpetual problem in the internet business: every new business needs to explain itself.

But the Managed Service Provider (MSP) is now accepted by customers. Businesses are willing to outsource important IT components to outsiders who can manage them better.

While the telcos are building fiber to the curb or home, Stapleton said he's not interested in lending to such companies. "We don't bank the last mile business."

Instead, he looks at the opportunities that are created. "We bank businesses that can take advantage of declining bandwidth costs."

Look at public companies

Take a look at Website Pros, Inc. (WSPI). Stapleton said that the company's ARPU is $39 per month. Its market cap per customer is $1,146. That's about 2.5 times annual revenue of $468 per user.

The stock is not doing well since its IPO two years ago.

Compare that with the internet real estate builder Equinix (EQIX). The company went public during the boom and its stock has never returned to the highs of 2000, but has done well during the past five years. It earns, Stapleton said, $26,449 per customer per month, with very low churn (less than one percent per year). Equnix, at press time, had a market cap of $3.3 billion, and a stratospheric P/E ratio of 663 (the historic average across all companies is between 15 and 20, veering up towards 25 during a boom/bubble). Price per customer? The company has 1,994 customers and is worth over 3 billion dollars! Roughly $1.5 million per customer.

When webhosts get extremely successful, they become unique, Stapleton said. They're no longer webhosts. Case in point: Digital River (DRIV). P/E ratio? 25 at press time. Market cap rising over the most recent five years. Revenue per customer: not meaningful.

Stapleton said he likes the business of CBeyond (CBEY) but is worried about the business' dependence on telco T-1 lines. "They're more beholden to the ILEC than they should be. VoIP is a good product, but they still have to deliver it over ILEC lines."

CBeyond's strong point, Stapleton said, is its sales team, which is one of the best.

Stapleton pointed to one public fixed wireless company, KeyOn Communications (KEYO) but noted that the company has huge debt and little value. It's losing money as it acquires WISPs. It has 16,500 customers, and high churn.

Perhaps the star of this list is Rackspace (RAX), which has yet to IPO. Stapleton said it has 29,193 customers and an ARPU of $1,033. It's one company that Elliot Noss, in ISPCON's other keynote, also mentioned. Noss noted that Rackspace has moved far beyond competing on price—so far, in fact, that it's difficult to find a price on the Rackspace website.

Stapleton said that the IPO is even more interesting because the company will use the auction model to determine the price (as Google did). "Bankers prefer to pass the IPO pop on to buyers," he noted. Bankers prefer to avoid auctions.

Questions

In the question and answer session, most of the questions were about the fixed wireless business, and why the banking sector is not lending to it.

"Bankers prefer a company with mediocre management in a great sector over a company with great management in a mediocre sector," Stapleton said.

The public wireless companies are not doing well. The most famous, Clearwire (CLWR) is losing hundreds of millions of dollars every quarter. "If Clearwire goes bankrupt and you want to buy their assets for $600,000, we'll take that call," Stapleton joked.

Data centers, on the other hand, look more like real estate. An AboveNet data center was purchased by a Real Estate Investment Trust (REIT) four years ago. One reason Equnix has such high asset values, Stapleton said, is that they own their facilities "down to the dirt."

The banker's point of view is, in all likelihood, different than yours. But it pays to pay attention to the money. Most attendees were enthusiastic about the keynote, but some disagreed vehemently with Stapleton's views on the fixed wireless business.

Perhaps, in a few years, they'll have proved him wrong. Or maybe they'll be building data centers, and will prove him right.