Sept. 12, 2002 -- Sales of data center services improved in the first half of 2002, according to industry executives, but many providers are finding those gains are largely offset by the continuing financial fallout from telecom bankruptcies.
The executives welcomed the uptick in sales of advanced hosting and network services as an important milestone on the industry's transition from consolidation to an eventual recovery, but said business conditions are likely to remain difficult for some time to come.
After many months of sales declines and disconnects, the reports provide hope that at least some parts of the business model are moving in the right direction. Executives said the improvement has been modest, but broad-based.
"We're seeing a reasonable amount of activity, and I think other providers are seeing the same thing, said Mark Lambourne, president of ClearBlue Technologies, a managed services provider which operates more than 20 data centers.
"There is a growing confidence that the companies that are still in this business are here for the long haul," Lambourne said. "Customers are now more willing to make commitments."
Lambourne said ClearBlue, which bought many of its assets through bankruptcy sales, is profitable. For those providers still seeking to reach profitability, the current outlook is mixed.
"The underlying tone of the business has improved in the last three months," said Michael Liss, president and CEO of FiberNet Telecom, a metro connectivity provider in New York. "Notwithstanding the traction we're seeing, we're continuing to struggle with the larger business.
"We're gaining new customers and getting additional business from existing customers," said Liss. "But at the same time we're losing customers due to bankruptcies and the underlying disconnects by their customers."
Network services provider Internap added 172 new customers in the second quarter, the company's best quarterly total ever. Equinix, which operates Internet exchanges, reported 100 new orders in the same period, with 37 new customers and 63 orders for additional services from exisiting customers.
"We had a great quarter," said Equinix CEO Peter Van Camp. Significantly, Equinix saw a net gain in active rack space - with new orders exceeding disconnects - for the first time in six quarters.
"Some of the downward trends in this sector, particularly with respect to new bookings, are reversing," said Equinix chief financial officer Renee Lanam.
"We are seeing a higher level of sales proposals and request for proposal activity than we've seen for several quarters," reported James Crowe, chief executive officer of Level 3, which also saw a slight drop in customer disconnects in the second quarter.
But Crowe was quick to note that the market presents a "mixed picture" that makes it difficult for companies to project near-term revenues.
"The events of the past quarter, including the highly publicized turmoil in the communications industry, have contributed to customer uncertainty and longer sales cycles," said Crowe.
Andrew Filipowski, chairman and chief executive officer of Chicago-area service provider Divine Inc., agreed.
"There is a very large backlog of deferred business, and we don't necessarily see any improvement yet in 3Q," said Filipowski. "In the 30-some years I have been in the technology business, I don't think I ever recall seeing a market more difficult than the one we are currently experiencing."
That sentiment was echoed by Chairman and CEO Dick Brown of EDS, which yesterday announced that earnings would be lower than expected. EDS is a large provider of data center services.
"I am deeply disappointed with our results for the quarter," said Brown. "The unexpected severity of the global slowdown in corporate spending, especially in the past two months, far exceeded our expectations."
FiberNet's Liss said business conditions aren't likely to change significantly in the near term. But he views the market as having reached a Darwinian phase in which the risk-reward ratio is improving for the providers that remain.
"I believe there are going to be fewer competitors in our space, and those of us who survive will ultimately profit, big-time," said Liss. "If you believe in the last man standing thesis, we're well-positioned to participate in this rebound."