Interland Reports Second-Quarter 2004 Results; Company Reports Continued Progress Toward Its Organic Growth Objectives
14 April 2004
ATLANTA--(BUSINESS WIRE)--April 14, 2004--Interland, Inc. (Nasdaq: INLD), a leading provider of business-class Web hosting and online services to small and medium businesses (SMBs), today announced financial results for its second fiscal quarter of 2004, ended on February 29, 2004.
"In our second quarter of focus on organic growth, we are pleased with the further progress made on each of the two priorities of the company. We have again reduced net MRC churn(1) in our hosting business, and we have increased our knowledge and experience in the mainstream business," said Joel J. Kocher, Interland's chairman and chief executive officer. "Our recently announced resource realignment should enable us to continue down the path to organic growth while enhancing our financial performance."
The company reported revenues of $26.0 million for the quarter, a decrease of 2.4 percent from the prior quarter. Net loss from continuing operations was $9.4 million for the quarter equating to a loss of $0.58 per share on 16.2 million shares outstanding. Including discontinued operations, net loss for the quarter was $10.1 million, or $0.62 per share. EBITDA(2) loss from continuing operations was $0.95 million for the period.
Allen L. Shulman, Interland's chief financial officer, said, "As a result of our ongoing efforts and investments aimed at improving reliability and customer satisfaction, we reduced total net churn this quarter by nearly 25 percent from the November quarter. So far this year, our churn reduction and sales growth efforts have resulted in a nearly two-third decrease in net churn when comparing this quarter to the fourth quarter of last fiscal year. Last quarter we reported that we had reduced net churn to $55,000 in November 2003, the last month of our first fiscal quarter. By then, the three-month trailing average net churn was $62,000. By February 2004, the last month of the second quarter, net churn had decreased to $19,800, or just one-quarter of one percent of monthly MRC, with a three-month trailing average of $47,000. In the month of March, this positive trend continued, ending with a three-month trailing average net churn of just $26,000. We are glad to see that the trend continues and that our hosting business revenue is stabilizing."
Organic Growth Initiatives
Interland continues to believe there is an attractive opportunity to grow its business by making it easy, affordable, and profitable for the country's more than 20 million mainstream small businesses to have an effective Web presence at a reasonable cost. The company had announced that to achieve this goal it would increase its efforts and its investment in developing an array of attractive products, services, and distribution channels. Consequently, during the second quarter the company devoted a net expenditure of about $2.2 million to this initiative and increased the number of direct field sales representatives and markets covered, launched specific industry vertical versions of its proprietary Web site development software, implemented telemarketing initiatives, pursued strategic distribution partnerships, and grew the marketing, Web design and support organizations commensurately.
Reflecting the level of interest in such services in the marketplace, as of quarter end, the company was delivering integrated Web design, hosting and online promotion services to more than 2,000 small business customers and generating from them more than $1.0 million of annualized recurring revenues.
Although the company has been gratified by this confirmation of its strategy and the performance at production levels of its proprietary software tools, aspects of the business model were shown to require further improvement and testing before increased scale could be justified. As a result, in early March, the company announced its intention to place more emphasis on further developing indirect channel distribution and improving the efficiency of its delivery. Because of this decision the company substantially reduced the size of its staff, and will be concentrating the Web site and software development teams in Atlanta. This will ensure greater interaction with the rest of the team and foster synergies with our large core hosting customer base. These changes will also substantially lower expenses.
At the same time the company is continuing to develop the mainstream market and to stabilize its core hosting revenues, it is also substantially upgrading its data centers, its network environment and its products. The company has recently reorganized its management structure to achieve greater interaction and cooperation among lines of business and departments to ensure that these upgrades are managed optimally.
Cash Position
Interland ended the period with a healthy cash position and balance sheet. As of February 29, 2004, Interland's cash and investments position, which includes cash and equivalents of $36.9 million, short-term investments of $2.0 million and restricted investments of $11.4 million, was $50.3 million. The change in cash balances from last quarter consists of: cash used in operating activities of $4.7 million (including payments of previously recorded liabilities of $4.4 million); repayments of debt and capital lease obligations of $2.6 million; capital expenditures of $2.9 million (including $0.8 million related to customer satisfaction initiatives); capital lease buyouts of $0.2 million; and cash used in discontinued operations of $0.8 million.
Future Guidance
The company expects the combination of the continued stabilization of core hosting revenues, the recently announced refocus on mainstream market testing, and the increased cost control resulting from line of business management to lead to a return to positive EBITDA, starting in the fourth quarter, once the costs of implementing these changes have been absorbed in the third quarter.
The company anticipates about $8 million in depreciation and amortization expenses each quarter, and, consequently, a net loss in each quarter.
In the third quarter, the company expects to devote about $4 million in capital expenditures to its customer satisfaction initiatives. About $0.9 million will be devoted to capital lease buyouts over the second half of the fiscal year. The company's other capital expenditures, primarily for new servers and related equipment, are expected to remain at about $2.0 million each quarter.
Conference Call
Interland will conduct a conference call today at 4:30 p.m. EST, accessible by calling 312-461-0943, no pass code necessary, or via the Internet at www.interland.com under the Investor Relations section. A replay of the conference call will also be available at 402-220-2306, passcode: 6217746, and at the Web site. The audio archive of the conference call on the Web site will be available for a period of at least one year.
About Interland
Interland, Inc. (Nasdaq: INLD) is a leading Web hosting and online services company dedicated to helping small and medium businesses achieve success by providing the knowledge, services and tools to build, manage and promote businesses online. Interland offers a wide selection of online services, including standardized Web hosting, e-commerce, application hosting, and Web site development, marketing and optimization tools. For more information about Interland, please visit www.interland.com.
