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September 18, 2007

Current Ratio Punishes Hosting

For the third (and final!) installment in this likely sleep-inducing trilogy of hosting and accounting blog posts, we'll cover Current Ratio and how it doesn't treat hosting companies fairly. Bear with me – this rant may run a bit longer than normal.

Current Ratio is easy to compute – simply go to the balance sheet and divide current assets by current liabilities and voila! You have the Current Ratio. OK, so what does it mean?

So why is this unfair to hosting companies? Well, where does most of the cash of a hosting company go? Into servers and networking gear! But guess what? These don't fall under current assets on the balance sheet and thus are excluded from the Current Ratio calculation. As a result, I'd wager that most if not all hosting companies have at some point been in the position of current liabilities being greater than current assets, where conventional wisdom says "the company may have problems meeting its short term obligations."

How does this hurt hosting companies? Suppose the company could use some short term financing for a network upgrade. If they go talk to a banker about this the banker might throw up his hands and say "I can't help you…you're in financial distress according to your Current Ratio."

I would argue with the banker that this is not necessarily so. Traditional GAAP places servers and networking gear in the bucket of long term assets along with things like buildings, bulldozers, cranes, heavy machinery, etc. For a hosting company, this placement just doesn't make sense.

Long-term assets, or capital assets, are things that typically can't be reconfigured, can't be easily converted into cash, and are used for a long period of time. A hosting company's, buildings, generators, HVAC gear, etc., is rightly classified in long term assets. But servers and networking gear are quite different in that they exhibit more traits of current assets than long term assets. Check out this definition. It would take far less than a year for a hosting company to convert its server fleet and networking gear into cash and these assets are the key source of funds for day-to-day operations.

A manufacturing company gets to count its inventory in current assets, whether it is raw materials, work in progress, or finished goods ready for sale. A hosting company uses its servers and networking gear in much the same way – it can reconfigure the processors and drives of servers, arrange the networking gear to offer new services, virtualize a server into several virtual machines or combine several servers into a grid. Then it can change things up next month if desired. This sounds more like current assets than a bulldozer. But according to GAAP and the 800 year old double-entry math system we must use today, servers get placed in the same bucket as bulldozers.

My question is, how do hosting companies as an industry get together and establish some specific accounting standards that will allow our financial statements to truly reflect our business? Simply moving servers and networking gear to current assets would more accurately reflect how we use them in our business.

Am I off base in asking this? Hardly. The real estate investment business has been doing this for years. Traditional GAAP simply made no sense to their business, and they developed accounting standards that fairly represent that business. See this and note this quote from the Real Estate Information Standards, which is published by the National Council of Real Estate Investment Fiduciaries and is widely accepted among the real estate investment management industry and the firms that audit that industry:

"The development of the Market Value Accounting and Reporting Standards resulted primarily from the realization that standardization of meaningful financial reporting was necessary in order to allow real estate to become more acceptable as an institutional investment asset class. Accounting standards promulgated by authoritative accounting bodies exist for various real estate entities, including public real estate investment trusts and other public and private real estate entities that utilize historical cost accounting [i.e. GAAP – my comment]. The reporting requirements and information expectations of the institutional real estate investment community required the development of a market value-based financial reporting model for which no accounting standards published by authoritative accounting bodies presently exist. Accordingly, the lack of adequate authoritative guidance applicable to market value accounting for institutional real estate investment vehicles necessitated the need for these standards to be published."

Translated out of accountant-speak, this simply says that GAAP didn't fit their business and they applied common sense to the situation. I suggest that this young business of web hosting also needs some industry specific accounting standards to fairly report information about the health of its companies to its investors, and that these standards do not presently exist. Finally, if you've made it all the way through to here, you may order a server with free double RAM up to 2 GB by using the promo code "toothpaste&OJ" anytime over the next week. [subject to approval by Lance of course]

-Gary

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September 14, 2007

Blogging while Dryping

I get bored while driving to work so today I decided to Blog on the way to work. There are no corrections to what follows so easy on the spelling and grammar errors, you would make them too!

So I drive about 1 hour to work everyday and I deciced on the way that the other kinman's acct blogs were too hard. Almost like homework and I decided it was time to blog while dryping. Dryping isd driving while typing. Its a very unsafe practice but I like living on the edge. I walk on banana peels too! Back to dryping, we all carry blackberries to make sure we can rapidly respond so that is what is making this possible. I have the 8700c with the full keyboard. There are 2 types of dryping single thumb and dual thumb. So far this has been all single thumb. Update I am 0sabout 1/3 of the way in. Single thumb is self explanatory one hand on the wheel and one on the phone. Dual thumb dryping is best in traffic or at red lights. Amazingly I get more people honking at me when dual thumbing at redlights. I. Must forget I am supposed to go on green. Unfortunatly my phone has no camera or I could be taking pictuires of the trip. Ok halfway and my thumb is tired. A big van behind me would like me to speed up. Btw this is a 41 mile trip so I have a tiny car that gets great mileage. So the van looks really big in the mirror. You' in the white van' if you read this, don't tailgate the echo! 20 minutes left and almost on the freeway for a little dryping while going 80. 80 is interesting because it makes your thumb feel as it should be dryping faster. So I came up with th word dryping a few years back; if I have since been copied I was first; and my goal was to hear them use the word on OC and I never did. Did you? I guess we will never know now. Now I have to think of what show it should appear on now. I would say "Lost" ut they only had one van and one satellite phone and I think they finally broke both. Maybe they can say it in high school musical 3. Ok 7 minutes to go I better wrap it up. If I sideswiped your mirror in the making of this blog my apologies but I do have insurance. Technology is cool. I have left all grammatical, punctuation and spelling errors intact for the full affect. Ok, oi know I can't do much better on a real keyboard with help from spellcheckers or dictionaries and thesauruses but it sounded good. Last exit. Tollbooth. Redlight. Dual thumbs enabled well that was short lived. Have a great day. And no dryping allowed. Professionals only. Key off

We like metrics, here are some stats from the trip above. The trip took 59 Minutes and is 41.8 miles. The blog is 452 words and 2300 characters including the spaces. That works out to 38.98 characters per minutes and 55 character per mile. Out of 452 words I see 12 misspelled or mistyped and 3 punctuation errors that weren’t intended. So I asked the other Kinman (Financial Wizard) what percentage was typed correctly and he gave me 96.68%. So now you know if a customer has an urgent need and I am mobile I can still take care of it at 38.98 characters per minute with almost a 97% accuracy while Dryping!!

-Skinman

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September 13, 2007

Ultrasonic Wave Propagation Through Particulate Composites

That is a heck of a strange title for a hosting company blog post.

It was, however, a great title for a Master's thesis. Bear with me though and I'll put it together.

Once upon a time, I spent many a day (evening, night, whatever) in the basement of the Bright building at Texas A&M blasting ultrasonic waves at samples of composite materials and measuring the energy output on the other side. What we found was that if you hit the right frequency that made the little particles resonate, then a lot more energy was transmitted through the material1. But sending a lot of energy at the wrong frequency didn't do any good at all and most of the energy was absorbed. After a while, using the experimental data, we learned how to predict what frequencies transmitted the most energy.

Developing projects for a hosting company is pretty much the same. You can spend a lot of energy writing code and developing products, but if you don't produce something that resonates with the customer, no matter how much energy you put into it, you aren't going to get the results out of the other side. Having been in software development in the hosting industry for quite a while now, I have worked on projects that resonated with customers and a unfortunately on a few that didn't. The trick is to collect enough data before you start by using a mix of experience and customer interaction to predict what will resonate, and what won't.

See, I brought it all together and I get to tell myself that I still use my master's degree.

-@nday91

1I way oversimplfied this. My apologies to Dr. V. Kinra.

September 10, 2007

You Can’t Judge Health by Net Income Alone

In GAAP, net income is the bottom line. It's supposed to tell you if you're making money or losing money. But the amount on the bottom line is never equal to your bank balance and by itself, it's an inadequate measure of a hosting company's health.

For example, depreciation is subtracted before you arrive at net income. But depreciation is not cash going out the door. It represents the theoretical drop in book-value of something you own, such as servers. Ideally, the timing of depreciation should match the length of time you actually use something, so if you use a server for three years, its value would depreciate to zero over three years.

Problem is, from the years of hosting experience we have in this company, we know that servers bought in the early 2000's are still in use today. Many were depreciated over three years, but they're still generating sales revenue long after they've been depreciated to a value of $0. What this means is that net income from these servers was effectively UNDERSTATED during their first three years of use and that net income is currently OVERSTATED for the periods of use after their value has dropped to $0 on the books.

But since I have to judge a hosting company's health based on Net Income, here's how I do it. If net income is positive and it's greater than depreciation expense, one of two things is going on. Either they're knocking it out of the park in this asset-intensive business or they're not reinvesting enough to remain technologically relevant. If net income is positive but less than depreciation expense, they're likely healthy. If net income is negative and the absolute value of depreciation expense is greater than the absolute value of net income, the company could be fundamentally sound and worthy of receiving credit. Bankers will likely disagree with me, but my opinion here is hosting-business specific. Finally, if net income is negative and the absolute value of net income is greater than the absolute value of depreciation expense, then the company needs to adjust something to get healthy.

If you ask me, cash generation from operations is a much better indicator of the health of a hosting company. It ignores distortions like this mismatched depreciation. It will also tell you if the company generates enough cash to cover its debt service and/or to continue investing to stay technologically relevant.

Got that? If I haven't lost you already, I'll talk about how the normal Current Ratio calculation unfairly penalizes hosting companies next time.

-Gary

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September 6, 2007

Hosting and GAAP Accounting: Like Toothpaste and Orange Juice

Hosting and GAAP accounting go together like toothpaste and orange juice.

If you're confused go brush your teeth and drink a big glass of orange juice. I've held out as long as I can, but I just cannot restrain myself from a post or two about the hosting business and accounting. So if this will make your eyes roll back in your head, please stop reading now and click here before you keel over.

In many ways, good ole GAAP just doesn't treat the hosting business fairly. Relative to accounting, hosting is a new phenomenon with roots dating back only into the 1990s. This is ancient in Internet time but double-entry accounting dates back to the 12th century, and the first accounting textbook describing the double-entry system was penned by Luca Pacioli in 1494. The double-entry system was used because mathematicians denied the reality of negative numbers until the 16th century and the double-entry system was used as a workaround for the lack of negative numbers.

So, why must we account for paradigm-changing Internet businesses with an archaic 800 year old math system? It's a classic example of the old "square peg – round hole" cliché. Toothpaste and orange juice.

Applying this 800 year old system to the hosting business often paints a flawed picture of the financial position of a hosting company. And there are a lot of folks in the financial world that either can't understand this or don't want to understand this by thinking outside the normal accounting paradigm.

I'll blog about two examples of this: 1) Net Income and 2) Current Ratio. My next post will cover Net Income and we'll discuss Current Ratio thereafter.

-Gary

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September 4, 2007

The Customer is Always Right

Yes, even when they aren't. If you think about it, they ARE why companies are in business. Every business has customers no matter how large, small, or what type of business. Without them we could just drop out of college and sit on the couch and ponder the things we could be doing. Without them we would have "No phones, no lights, no motor cars, not a single luxury" and we might as well be stranded on a deserted island. Customers give us reason.

Traditionally large companies had all the money, power, and employees, and could service customers faster and more efficiently. In today's world the playing field has leveled thanks to technology as smaller companies can use services on demand and have the same footprint as the large companies. For instance, when I wanted cookies when I was younger I had to either drive to the store and buy them from the bakery or the shelf, or bake them. With the internet and the technology wrapped around it today you can order them online and then they deliver them right to your door. You can see this trend in many markets. Need a used car? No need to go get harassed by a used car salesperson anymore, just go to eBay Motors and if the car doesn't work out you can always sell it on Auto Trader. That is much better than a classified ad in a newspaper that fewer and fewer people read. Technology is a wonderful thing! It also makes it easier for the customer voice to be heard.

In the past if you didn't like the service you received at a restaurant you could complain to the manager and maybe get a free dessert or appetizer on your next visit. If a mechanic overcharged you for work on your car you really didn't have a leg to stand on you simply paid and grumbled. If someone broke their word and took money for a service, then didn't actually complete the service, you could sue them but in many cases the rule "you can't squeeze blood from a turnip" applied and you were still out of your hard earned money nonetheless. Sure, you could use the word of mouth rule, "they tell two people and so on and so on" but in most cases this was a futile attempt at restitution. Technology is changing that. Today it is corporate and personal blogs, wiki's, social networking sites, and forums that help keep individuals and companies in line with customer expectations. A derogatory blog about your company can really affect your business depending on its viral popularity. Forum posts can get out of hand and prompt unhappy customers from many years past to jump on the band wagon again and tell of your shortcomings. This makes reputation management something that all companies have to consider. Times have changed for the marketplace and the best reputation management is to simply make every customer a happy customer.

I think in reality all customers aren't always right (I will await the beating in the comments!) but as a Service Company it is our job to always say "yes" when asked for something by a customer as long as it is legal and Internet-friendly. The request is usually something we should be doing anyway. In the long run you have to try to create a long-term relationship with every customer and if you can then it becomes a "win-win" for everyone.

Now, go tell two friends!

I wonder if WiFi is available on my deserted island yet.

-Skinman

August 27, 2007

Ditch Klunky, Hot-Running Servers for iPhones

Yes, servers shrink with size over time, but after reading this post about iPhones being web servers, I'm thinking about sending the following to David Letterman:

And now, the Top Ten Reasons Hosting Companies Should Replace Their Servers with iPhones

#10: At $500 a pop, they’re cheaper than new servers
#9: They come with more standard RAM than most servers
#8: They use less power than servers (just think how many you could cram on a rack!)
#7: They’ve got a multi-hour battery backup soldered right inside – so dispo your UPS’s also
#6: There’s no spinning disk drive to wear out
#5: You can ditch your bandwidth providers and leverage AT&T’s blistering fast EDGE network
#4: The operating system (Mac OS X) is pre-loaded – just rack it up and go
#3: Since you can’t crack it open, the expense of delivering custom builds is gone
#2: There’s a YouTube shortcut icon standard on every one
#1: They just look cool!

</sarcasm>

-Gary

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August 24, 2007

Globalization and the Internet

Globalization is now, and forever will be, an ubiquitous topic in most political, economic, and social forums. The term "globalization" is defined by Merriam-Webster as "the development of an increasingly integrated global economy marked especially by free trade, free flow of capital, and the tapping of cheaper foreign labor markets." The latter of the traits has emerged as the strongest point of contention due to outsourcing. Markedly, Fortune Magazine recently published a story on a new "insourcing" trend. It's a trend so new that my spellchecker doesn't even recognize the word.

Though "free trade" and "free flow of capital" are explicitly declared in the definition of globalization, free flow of information is somehow absent. The role that the Internet has played in globalization and the development of the global economy cannot be overstated. Continued advancements in the Internet and Telecommunications have literally connected suppliers, vendors, sellers, and buyers that historically had been segmented by barriers such as geography and time zones. What this phenomenon has come to shape is the global marketplace, where products from across the world compete for the preference of an endless consumer base. With an increase in competition comes an increase in the consumer expectations for quality and performance. As a growing company with a significant international client base, SoftLayer continues to strive towards providing quality solutions and support that exceeds our customers' expectations.

Though the Internet has helped to fuel the soaring growth of the global marketplace in the recent decade, there are still many obstacles that impede its progression. Most of the hazards have a legal connotation surrounding hot-button issues such as Intellectual Property, Copyright Infringement, and most notably in the hosting world, Abuse (bandwidth theft, computer viruses, fraud, etc.). It's certainly enough to keep our abuse department busy as international standards and governing policies are fortified to help combat these areas of concern.

This observation merely skims the surface of globalization and the development of the global economy as there are many arguments both for and against its advancement. At the forefront or behind the scenes (depending on your vantage), you will find the Internet. It has been stated that “the Internet is the backbone of the global economy" with evidence cited in the form of web transactions going from "virtually nothing in 1994 to nearly $657 billion in 2000."1 Care to guess what that number is now? As SoftLayer furthers its commitment to quality, our objective is to continue to strengthen the platform from which our domestic, international, and multinational customers launch into and compete in the global marketplace.

-DJ

1Charles W. L. Hill, International Business: Competing in the Global Marketplace (Irwin/McGraw-Hill; Fifth Edition, 2004), p.13.

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August 22, 2007

SaaS Who?

I'm always on the lookout for drivers of the hosting industry. One of those drivers is "Software as a Service" (SaaS). After seeing this article where Gartner thinks that the SaaS market will basically triple over the next four years, I wondered if the SaaS movement was affecting me yet.

I then realized that the SaaS market had grabbed me in one very important area – personal finance software. I had become disenchanted with my common desktop personal finance package – it had a lot of features that I didn't use and it didn't do some things that I need. So I began searching for options and discovered Mvelopes.

Mvelopes is a SaaS solution. Rather than buy the software, you subscribe to it over the Web. Anywhere you have an Internet connection you can access it, even from a mobile phone. It logs into the web sites of your bank accounts, investment accounts, retirement accounts, credit card accounts, etc., and brings your account info together in a convenient one-screen view. It will download info from accounts that your old desktop software can’t touch. And because it’s a subscription, you never have to worry about keeping up with new versions, patches, etc. Every time you log on you have the latest production software updates at your disposal.

It doesn't do asset allocation, portfolio analysis, technical analysis, stock screens or other fancy things that desktop personal finance software attempts to do. But it does planning and budgeting VERY well. This is what I need my personal financial software to do most of all, and my old software didn’t do this very well.

Probably the biggest hurdle in latching on to a SaaS solution like this is getting comfortable with placing the data security outside of your control since it doesn't reside on your local machine. But when you realize that the vendor hosts the data at a secure data center and has far better data security, physical security, and network security than your spare upstairs bedroom office, it is possible to make the move.

According to Gartner, software consumers will quickly realize the simplicity of subscribing to secure hosted solutions that are accessible from anywhere. Naturally, these rapidly growing SaaS solutions need a home. Consequently, we at SoftLayer would like to ask these SaaS providers such as Mvelopes, "Who does your hosting?"

-Gary

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August 8, 2007

From Packet Exchanges to Application Exchanges

I once ran across an article that said Equinix customers can access over 90% of the world’s internet networks and users due to the number of carriers, content providers and peering located in their IBX facilities. That is a very staggering thought if you really think about it. The Internet is an endless array of fiber spread across the globe and most of it touches an Equinix facility somewhere along the path. There is little doubt about the value in being located inside an Equinix facility. The world’s largest carriers have standardized on using their facilities as global POPs to reach anyone and everyone connected to the net

While reading Mark Cuban’s latest blog, he proposes using an IntraNet vs the InterNet for large scale application deployment. He basically outlines the inability to sustain high bandwidth quality of service across the public internet. He believes that if the hosted application were to reside on the same network as the end user, the probability of success would be greatly enhanced. Although not quite the traditional IntraNet as we know it today, I do agree that having the content and user on the same network will probably lead to a much higher quality of service.

Taking that thought process and merging it into the latest Web2.0 initiative creates interesting possibilities. Isabel Wang has very provoking thoughts on social networking, SaaS, grid technology, EC2, S3, web integration and an endless list of possibilities. SWSoft and VMWare are talking SaaS and virtualization integration. Vlad and his team at 3Tera are deploying grids like there’s no tomorrow and Facebook, Salesforce, and Amazon are now building apps on an open API system designed to cater to developers. The whole world is reaching out to interact, merge, integrate, build, piggyback, and coordinate technology to make the geek world user friendly.

So I come back to SoftLayer and think – where do we fit into this big picture. It seems our network-within-the-network approach appears to fulfill Mark Cuban’s desire for both Intranet and Internet. The ability to rapidly deploy dedicated, virtualized, and grid technologies at the click of button serves the fundamental need of the Web2.0 entries. The ability of these companies to interact/integrate publicly and privately among each other is well served through our customer exchange. It sounds like if we were to strategically drop SoftLayer PODs inside the Equinix’s of the world – we could bring the world a much needed service for the future. On network Application exchanges to your local IntraNet. Now, there’s an idea.

-@lavosby

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