The early returns on the viability of the application hosting business are in, and while they are somewhat inconclusive, they are decidedly instructive.
Last week, application hosting pioneer Interliant Inc. posted its first quarterly numbers as a public company. The numbers say much about a company in the early stages of an infant market, but less about the possibilities of the application service provider (ASP) market.
Interliant's Web hosting customer accounts grew 24 percent,but only 10 percent in terms of revenue. Its ASP business was mostly flat, but overall revenue for the second quarter was $10.6 million, an increase of $9.8 million for the same period last year. It's easy to misread the company's numbers because it has made 17 recent acquisitions that complicate matters. The numbers are also burdened by high fixed costs because the company has announced, and is building, a new data center in Washington, D.C.
But Interliant reported margins of roughly 44 percent in its ASP business and expects those margins to grow into the 60s. The ASP margins were actually higher than the company's Web hosting business, which posted margins in the mid-30s.
"Over time, the application hosting business will enjoy the highest margins,even in excess of 60 percent. You end up with the very stickiest customers and you provide much more value and less likelihood of commoditization," says Bill Wilson, Interliant's CFO. "Some of our competitors have posted targets that are in excess of ours, and there is no reason why we should not enjoy margins that are equivalent or better."
The company, which is primarily a Lotus Notes/ Domino ASP, expects to add new platforms and skills to support additional growth in its ASP business. Having offered application hosting services for more than four years, it has generated more than 40 percent of its revenue from those services, making it a bellwether in the emerging ASP world.
"Overall, the quarter was good," says James Lidestri, president of Interliant. "We have achieved this through aggressive execution of our acquisition strategy."