Posts Tagged 'Finance'

November 22, 2011

Semper Fi + Innovate or Die

How can I emphasize how cool my job is and how much I like it? I can't believe SoftLayer pays me to do what I love. I should really be paying tuition for the experience I'm gaining here (Note to the CFO: Let's forget the "I should be paying to work here" part when we go through my next annual review).

My name is Beau Carpenter and I'm writing my first blog for SoftLayer to introduce myself and share some of my background and experience to give you an idea of what life is like for someone in finance at a hosting company. In a nutshell, my mission with is to understand, organize and report every dollar that comes into and goes out of the company. These financial reports are reviewed internally, shared with our investors and used when we have a trigger event like the merger with The Planet last year.

To give you a little background about who I am, the most notable thing about me is that I'm a third generation Marine. My grandfather served in WWII, my father served in Vietnam, and I joined during the Gulf War, serving from 1991–1995. After completing my tour and receiving an honorable discharge, I returned home to Texas to get my education and start working ... while growing a family of four.

After I earned my bachelor's degree, I went to work at Rice University for Nobel Laureate Richard Smalley, winner of the 1996 Nobel Prize for discovering nanotechnology. Rick was a fantastic mentor, and when he recommend that I join Rice's MBA program, I thought it was a pretty good idea. It didn't hurt that his glowing recommendation gave me a great foot in the door to the program. I earned my MBA from Rice in May of 2005, and headed out into the corporate world ... If you can call SoftLayer, "corporate."

The majority of my coworkers probably have no idea what I do because I spend a lot time tucked away in my office running numbers. As you probably could have guessed, in financial analysis/reporting, strong numbers are a lot easier to report than bad ones, and SoftLayer's numbers have been so good that they keep me up at night. I know that sounds strange, but I'm up every Sunday night and month-end at midnight so I can communicate our company's progress for the past week or month as soon as it is over. Some may not find that late night work appealing, but being numbers jockey, I can't help but be excited about sharing the latest information ... even if it could technically wait until the next morning.

I've been in denial for a few years, but after rereading that last paragraph, I have to admit I'm officially a nerd now.

I've done financial and nonfinancial metrics analysis for a couple of companies before I landed at SoftLayer, and the difference between this company and others I've worked for is night and day. The culture here is healthy and positive, everyone's focused on their work, and the company provides a lot of perks to keep everyone going. Energy drinks, super-cool coffee machines, endless snacks ... but the most important perk is the general sense of camaraderie you get from being around a team of professionals who are passionate about their work.

Kevin asked me how I'd compare my experience at SoftLayer to my experience in the Marines, and I think the most resonating similarities are the shared sense of purpose and the close ties I have with my team.

Semper Fi + Innovate or Die.

-Beau

November 29, 2010

Fun with Lists!

Back when I was doing research for my interview with SoftLayer, one of the things I looked for was financial data. Since SoftLayer isn’t a public company, I couldn’t get financial statements. However, I did find some nice round numbers in a press releases that said they did about $110 million in annual revenue. I thought, hey that’s not bad… Then I kept reading and when I saw that there were 170 employees I became impressed. For those without a calculator handy, at these numbers SoftLayer does about $647,000 in revenue a year per employee.

Because people loves lists, I looked up a few other company’s revenue / employee. These are in no particular industry and have nothing specific in common other than that they were the first to come to my mind.

CompanyRevenue Per Employee
Exxon $3,235,638
Amazon $1,266,667
Google $1,180,832
Toyota $764,216
Microsoft $702,022
SoftLayer $647,059
Nike $563,663
Intel $523,133
AT&T $463,656
American Express $416,295
Dreamworks $335,052
Anheuser-Busch $315,172
New York Times $314,416
Oracle $283,048
IBM $238,541
Rackspace $232,512
Whole Foods $203,256
Walmart $198,410

Does anyone else think gas prices could be lower?

Note: The data for revenue and number of employees was either pulled for public press releases or by looking at the Company Profile (# employees) and Key Statistics (Revenue) on Yahoo! Finance.

-Bradley

Categories: 
October 27, 2010

Oh No CoLo, Go Go Godzilla (Apologies to Blue Oyster Cult)

A traditional Co-location has certain advantages and for some customers it makes a great deal of sense. At least it does at first blush. Take a look:

  • Colo is cheaper than doing it yourself as physical infrastructure costs are shared across a number of customers.
  • The hardware is yours, not the co-location company’s. This means you can scale in the manner you please versus what suits the business model of the co-location company. The potential downside is that this assumes you were smart enough to pre-buy the space to grow into…
  • The software is yours, too. You are not limited to the management suite provided by the co-location company. Use what you wish.
  • Colo centers are usually more robust than a typical business environment. They deploy more physical security in an environment that is designed to properly manage power (multiple generators on-site for example) and the risks associated with fire and other natural disasters.
  • Upgrade paths are determined by you versus the hosting provider.

But what about the cost side of the equation? What does that look like? It goes without saying that it is (usually) cheaper to use a provider like SoftLayer to host your gear, but by how much? We have built a relatively simple model to get at some of these answers.

Assumptions:

  • A mix of 75 small servers (Xeon 5503, 2 GB RAM, 250 GB SATA) and 75 large servers (Xeon 5520, 3 GB RAM, 250 GB SATA)
  • Colo pricing was based on $100 per U per month, or $2,500 per 40U rack per month cost. Colo capex assumed the same base configuration but at current market prices.
  • We assumed a $199 price point for SoftLayer’s small servers and $359 for large servers
  • Bandwidth consumption of 2500 GB per server per month (this is about 50% of what we see in house). A price of $50 per Mbps was used.
  • A refresh schedule of 50% at 36 months, 25% at 48 months and 25% at 60 months

So what do the numbers tell us? Well, I think it paints a pretty compelling picture for SoftLayer. The 60 month Total Cash Outlay (TCO) for Colocation is 131% of the SoftLayer cost.

Total Cash Outlay

  Collocation Softlayer
Initial Capital Expenditure (Cash Outlay) $341,700 $0
Monthly Recurring Charges $64,778 $60,450
60 Month TCO $4,740,917 $3,627,000

In addition to the total cash outlay, we can add in a bunch of additional “hassle costs” – the hassle of driving to the DC in the middle of the night for an emergency, the hassle of doing your own software patching, setting up your own monitoring, waiting on hardware delivery (and you are not going to be first in line given your volumes are likely to be low compared to SoftLayer), the hassle of booking assets to the balance sheet, depreciation entries, salvage accounting entries, actual equipment disposal, downtime while you perform upgrades – ugh, the list is almost endless.

The argument for a SoftLayer solution is pretty strong based on the numbers alone. And I think that they ought to be persuasive enough for most to rethink a colocation decision. That said colocation decisions are not made from a cost perspective alone.

For example:

  • Issues around data integrity and security often drive companies to adopt a corporate philosophy that dictates co-location (or an on premise solution) over an outsourced solution. There is a deemed corporate need to have data / applications running over their own iron. Indeed, for many, colocation represents a significant and progressive decision.
  • Many companies have infrastructure in place and a decision will not be made to veer from the current solution until a technology refresh is in order. Never mind that fact that a transition to an outsourced solution (and this is the case when lots of things are outsourced, not just infrastructure) can generate significant internal anxiety.

Many outsourcing adoption models seem to show a similar trend. To a degree much of this becomes a market evolution consideration.

  1. Adoption is very slow to start. Companies do not understand the new model and as a result do not trust vendor promises of cost savings and service delivery. To be fair to customers, service delivery for many solutions is poor at the beginning and cost savings often disappear as a result.
  2. The vendor population responds to initial concerns regarding service delivery and perceptions around cost savings. Innovation drives significant improvements from a product and service delivery perspective. The solution now seems more viable and adoption picks up.
  3. For some services (payroll is a good example), the cost savings of outsourcing the solution are realized across the marketplace with excellent service delivery and support being commonplace. We are close to mass market adoption, but some companies will opt to keep things in house regardless.

So where are we on the evolutionary curve? That is a difficult question to answer as there are numerous things to consider dependent upon where you want to look.

For most SMBs, outsourcing functions like HR/Payroll or their IT infrastructure is a no brainer – capital is not as readily available and existing staff is likely overburdened making sure everything else works. At the end of the day, the desire is to focus on running their business, not the technology that enables it. The decision is relatively easy to make.

As we go further up the food chain, the decision matrix gets infinitely more complex driven by an increase in geographic reach (local – national – international), an increase in the complexity of requirements, an increase in the number (and complexity) of systems being used and typically large IT organization that can be a terrific driving (or drowning?) force in the organization. The end result is that decisions to outsource anything are not easy to reach. Outsourcing occurs in pockets and SoftLayer certainly sees some of this where enterprise customers use us for a few things versus everything.

At the end of the day, the hosting market will continue to be multifaceted. All businesses are not alike and different needs (real or otherwise) will drive different business decisions. While I believe colocation will remain a viable solution, I believe that it will be less important in the future. The advantages presented by companies like SoftLayer only get more powerful over time, and we are going to be ready.

-Mike

March 12, 2010

The Taxman Is Here

In my role at SoftLayer, I am asked by a number of people for our financial forecasts. Fortunately, we know our business well enough that our expectations for one year ahead have proven to be on target. For example, in December 2008, we told our bankers to expect 2009 net income (profit) to grow 254% over 2008 – and yes, this was at the worst point of the recession. When we closed out the books for 2009, net income actually grew 255%. Our forecasting error was one-third of one percent, and it was an error to the good side.

I can tell you right now that our profit projections will never, ever again be that accurate. Ever. Why is that? Well, after posting such a profitable year, the Taxman has showed up. You see, when you start a business, you usually post losses, not profits, for a while. SoftLayer was no exception here. After posting losses in 2006 and 2007, we turned the corner to profitability in 2008. So why were we not bothered by taxes in 2009? In a nutshell, the tax laws allow you to roll a portion of historic losses forward against profits before you must begin booking tax expenses. We had a meeting yesterday with our corporate tax advisor, and in 2010, we must begin booking tax expenses. Oh boy.

It’s one thing to look at your business model going a year ahead. We can look at macroeconomic indicators that are meaningful to our business and calculate the coefficient of correlation (R-square for you stat geeks) of our growth rate to those indicators and walk things forward. Then based on our anticipated sales growth, we can extrapolate how much datacenter space and power we will need to add, how many routers, switches, and servers to order, and how many people to hire.

Now, if you think that sounds complicated, just wait until you try to forecast how much tax you will have to pay. The biggest problem is the tax laws themselves. They are always moving and changing. In addition, they are sometimes changed retroactively. For example, in 2009, there was an allowance to take bonus depreciation on equipment purchased. (We purchase a lot of it, by the way.) This means that you are allowed to deduct a higher percentage of the dollars spent on equipment from your taxable income and thus lower your tax expense. Well, so far in 2010, there is no bonus depreciation available. BUT, there is a possibility that Congress will extend bonus depreciation into 2010, and make it retroactive to January 1. You tell me – how are we supposed to forecast that?

This is one of but many examples of the craziness of the tax codes that we encounter. As we open more locations in the future, I may blog a bit about some of the other craziness we find.

November 7, 2008

Tax Policy as Pricing Strategy

One of the big items up for “spin” and a little debate in this Presidential election is the tax policy proposed by each candidate. We’ve heard accusations ranging from tax breaks for wealthy CEOs to socialist welfare where money is taken from the rich CEOs and given to the non-taxpaying poor under the guise of a “tax cut”. The word “fairness” gets thrown around a lot and now Joe the Plumber may get a record deal out of all this.

Absent any fiscal discipline by the government (and I have never seen this from either political party), it’s clear that the government needs more money or else it will run deficit spending until we’re all bankrupt. Therefore, tax policy should be nothing more than a pricing strategy to maximize government revenues. Taxes are essentially the government’s pricing structure for their offerings of goods and services (roads, law enforcement, subsidized student loans, etc.)

The problem is, if cutting a particular tax or tax rate will actually bring more revenue to the government, it will be criticized for whatever group “benefits” from the lower rates, regardless of how much better off the government treasury will be.

Yes, it is possible to bring in more revenue and profit by reducing prices. It is a very, very common practice in the business world and we employ this practice at SoftLayer. Consider this scenario:

You sell a product that cost you $50 to build.

At $100, you can sell 1 unit per month. Here is your revenue and profit calculation:

$100 x 1 sale = $100 revenue – $50 costs = $50 profit

Now, if you cut the price 20% to $80, you can sell 2 units per month. In this case, here is your revenue and profit calculation:

$80 x 2 sales = $160 – $100 total costs for 2 units = $60 profit

So, most people would think that $60 in your pocket is better than $50. By cutting the price, you have made more money.

What if you could sell 3 units if you drop the price to $60? Let’s take a look:

$60 x 3 sales = $180 – $150 total costs for 3 units = $30 profit

Because you only keep $30 profit, in this case the BEST price for your product is $80 because at that price you maximize the profit that you keep.

Likewise there are ways to increase government revenue by cutting tax rates. Let’s say we want to tax more dollars from the rich and give to the poor – fine. The paradox is that the way to get more tax dollars from the rich is to cut their tax rates. Really, I’m not crazy – Congress itself has reported this fact.

Business people know that if you raise your prices, people’s behavior will change and they will buy lower volume of what you sell. Even with must have items like gasoline, as the price rises, people find ways to use less of it, even if using less is inconvenient because you have to get up earlier to carpool.

By the same token, if taxes go up, those who are exposed to those taxes will change their behavior and reduce their exposure to those taxes. As a result, the government can actually collect less money by raising taxes.

Every time we set a price or run a special deal here at SoftLayer, we are well aware of this fundamental law of supply and demand. When we need to move units on a particular item, we will reduce the price.

I only wish our government would apply the same principle when pricing its products and services with tax policy – not because I want to pay less in tax but because I want the government to maximize its profit and avoid burdening our children and grandchildren with unmanageable government debt.

-Gary

Categories: 
October 6, 2008

My Take on the Financial Crisis

The Congressional debate over the infamous $700 billion bailout plan this week reminds me of what two guys down the hall in my college dorm once did. They both wanted something that they couldn’t afford – a Domino’s Pizza.

These guys colluded and ordered a large pizza – about $7.50 back in the Dark Ages of my college years. One of them presented the Domino’s driver with a check (tip included) for $8. It was a hot check and both guys knew that they didn’t have enough in both their accounts combined to pay for the pizza.

Back then, banks did not immediately process checks electronically and you could play the “float”. It took 3 or 4 days for your account to have funds disappear after you wrote a check, but when you deposited a check, the bank would immediately allow those funds to be drawn against other checks coming in. Don’t try this today, boys and girls. It’s not the same nowadays.

So, the second guy wrote a check for $8 to the first guy who waited two days and then deposited the check. Consequently, the check to Domino’s got paid to Domino’s. Then, the first guy (who wrote the check to Domino’s) had to write another check for $8 to the second guy so that his hot check to the first guy would be covered. Two days later, the second guy has to write another hot check to the first guy to cover his prior hot check to the second guy.

These guys kept covering each other’s hot checks for a couple of weeks until they got another paycheck from their part time jobs. Then one of them finally convinced the other to cough up $4 cash. At that point an $8 check was allowed to clear successfully and the original cost of the $8 pizza was effectively split between the two.

There are a lot of parallels between this story and the current credit market mess that we face. Let’s say that “Joe Homebuyer” wants a house that he can’t afford. “Bob the Broker” finds the money for Joe to buy the house and signs Joe up to a payment plan where the payments jack up to an unbearable level in three years. Then Bob the Broker sells the loan to “Riskmanager Randy” who hedges his risk and buys credit default swaps from “Issuer #1” to cover himself in case the homeowner can’t handle the unbearable payments that are coming. Then Issuer #1 buys credit default swaps from “Issuer #2“ to cover himself in case he ever has to pay Riskmanager Randy for the credit default swaps that Riskmanager Randy bought. Issuer #2 covers himself by buying credit default swaps from “Issuer #3”. Issuer #3 buys credit default swaps from “Issuer #4”. And the chain continues. And what’s worse is that all these Issuers sell far more credit default swaps than they can pay for should they all come due.

All in all, it’s like a bunch of folks getting together to cover each other’s hot checks. But rather than $8, the credit default swaps amount to something like $62 trillion. And now that Joe Homebuyer can’t make the unbearable payments, Riskmanager Randy has found that Issuer #1 can’t pay out on the credit default swaps. This has started $62 trillion worth of dominos (no pun intended) toppling and now we’re betting that $700 billion taxpayer dollars can work like the paychecks that came to the guys in the pizza scam above and stop the collapse.

I’m really glad that the hosting business model is pretty simple at its core. Provide gear, connectivity and services to customers who pay you monthly to use it. If the customers don’t pay, simply turn them off and sell it to someone who will pay. There is no need for hedging. No credit default swaps. No dominos ready to collapse.

The hosting business is certainly not without risk. We hedge electricity risk with UPS units and generators. We hedge bandwidth risk by using a portfolio of providers. But these hedges are tangible, not some nebulous financial market derivative outlined on a sheet of paper.

Bottom line: don’t stretch to get something that you know you can’t afford. Even if it’s a pizza.

-Gary

Categories: 
May 2, 2008

Outsource IT – The Numbers Back it Up

With Skinman blogging about outsourcing (here, here, and here) along with Michael Miller blogging about the ease of leasing vs. buying, I had to jump in to say that the numbers show that their thinking is right on track.

Using database driving financial modeling software, I modeled a small internet-based business doing their IT infrastructure in-house versus using SoftLayer to handle the infrastructure for them. The benefits of using SoftLayer are eye-popping.

Here are the basic assumptions of the mythical company. There are 8 employees, 2 of which are founders who took out second mortgages on their houses to launch the business. First year sales are about $1.5 million. Business needs require 12 servers in two different geographic locations, housed in climate controlled rooms. Pricing out the servers and networking gear on Dell and eBay worked out to $71,509. This gear was financed with part of the proceeds from the second mortgages, booked to the balance sheet and depreciated. After three years, it was disposed of and upgraded with new gear costing $125,000.

Using SoftLayer changes several of these assumptions. By letting SoftLayer handle infrastructure, one less employee was required. There was no capital outlay for the needed 12 servers and networking gear. SoftLayer got the servers running in a couple of hours with no setup fees for a manageable monthly charge. This allowed less debt to start the business, and there were no long term contracts with SoftLayer if the business idea didn’t work out. There was no need to book the assets to the balance sheet, depreciate them, and upgrading them after three years involved a simple phone call so SoftLayer. No disposing of old gear or balance sheet write offs were necessary.

Consequently, this improved all the most important financial statement measures besides revenue, which remained the same in each scenario. Gross profit, EBITDA, EBIT, and Net Income all improved dramatically from using SoftLayer. Balance sheet credit worthiness, measured by things like equity and the Current Ratio among other things, dramatically improve. Finally, cash balances and cash flow almost double by using SoftLayer. Just compare the highlighted fields in this spreadsheet.

As they say, “your mileage may vary.” But odds are that you can significantly improve your financial performance by using SoftLayer to eliminate operating costs, depreciation, debt financing, and upgrade logistics related to your IT infrastructure needs.

-Gary

November 16, 2007

The Value of a Customer

For the two people who actually read my posts, you know that I blogged about how I look at the value of a server. Basically, it should be valued by the cash flow it produces. Without a customer to use the server, the cash flow it generates is negative, i.e., less than $0 due to the costs of keeping it racked up, powered up, and connected.

So, how do you place a value on a customer? Customers and servers are not a one-to-one connection because many customers have more than one server. They also buy more than just servers, such as additional software and/or backup services.

Like most of us in the industry, I spend a few minutes each day scrolling through the customer forums, both ours and 3rd party sites – you probably know which ones :). I look at the customer comments and sometimes I wonder if the folks in our industry understand the value of these customers judging from the way some customers are treated.

Granted, some customers are abusive and need to be fired, so to speak. Others appear to be high value customers with multiple servers and solid business models where someone has dropped the ball and caused them to seek greener hosting pastures. If companies understood the dollar figure valuation of each customer, they might think twice about their next course of action with a particular customer.

To value a customer, I look at the statistical expectation of how long that customer will stay with the company, how much the customer currently buys with us, the statistical expectation of how much additional business they will place with us, the gross profit generated by the customer, and that old stand-by -- the minimum acceptable rate of return for an investor in the company. From these data points, I do a simple Present Value calculation and arrive at the value of the customer, which is the amount of cash that would have to be invested to yield the economic equivalent of the expected gross profit that the customer will produce. I'd give you a sample calculation, but a) it would make this post even more boring, and 2) some things we like to keep secret :).

This is important because it can make the growth of a hosting company less "slippery" -- sort of like when Eric takes off from a red light in this:

For example, if you sell 100 new servers but customers release 90 back to you during the same period, your growth doesn't have the traction it would have if only 10 servers were released back to you. By retaining valuable customers, you don't spin your wheels as much. Spinning the tires at a hosting company is not nearly as much fun as watching Eric drive.

-Gary

Categories: 
October 12, 2007

The True Value of a Hosted Server

Now that I've ranted on a few accounting shortfalls for the hosting industry I'm going to rant once more. I think that the way hosting companies must book the value of their assets per accounting rules shortchanges hosting companies. Some basic rules of finance clearly show the likelihood that significant value is missing on the financial statements.

Let's consider a mythical server that costs the company $10,000 to buy and the company depreciates it evenly over 3 years. After year one, the value on the financials is $6,667. After year two, its book value is $3,333 and finally $0 after three years. Suppose that the company deploys the server for five years. In reality, after three years, the server's true value is certainly above $0, and the hosting company is shortchanged by not being able to reflect this value on its financial statements. Multiply this effect by thousands of deployed servers and you can see that there is significant value in hosting companies that just isn't found on the financial statements.

So how should we reflect the value of a server? I would propose the use of a "capitalization rate" or "cap rate". This is a common method of appraising real estate and the formula is simple: take the projected net cash flow over the next 12 months and divide by the cap rate, and that's the value. So, what would happen if we applied this to a server?

Looking at our mythical $10,000 server above, for simplicity's sake, let's ignore any allocations of the switches, routers, generators, HVAC, etc., needed to operate it. Let's also assume it produces net cash flow of $100 per month and will do so for 60 months. Its 12 month projected net cash flow is $1,200. We would divide this by the cap rate to find its value.

Naturally, the next question is "what do we use for the cap rate?" For a given investment, the cap rate is the lowest return that an investor will accept for the given risk of that investment. In our server's case, the $10,000 investment produces a return of $1,200 per year. How much would an investor need to invest in lower risk alternatives to get the same return? For a risk-free investment of the same 5 year duration such as a 5 year Treasury Note at 4.25%, you would have to invest $28,235.29 to get $1,200 per year in return. If we use 4.25% as the cap rate in our scenario, the value of the server becomes $28,235.29. However, investors in hosting companies generally look for returns far above 4.25% and these returns are not without risk, so this is not the appropriate cap rate. For simplicity's sake, let's assume that the hosting company investor's minimum acceptable rate for the investment is 10%. In other words, if his investment in the hosting company was expected to return less than 10%, the investor has other lower risk options to invest and get a 10% return and he would not invest in the hosting company.

So if we use 10% for the cap rate in our mythical server scenario, the true value of the server is $12,000 ($1,200 / 10% = $12,000). As long as the 12 month projected net cash flow stays above $1,200 then that value holds constant. Check out the graph below to compare the value of this server from both the cap rate perspective and the accounting rules perspective over the five year life.

From month 36 to month 49, there’s a $12,000 difference in value between the two methods. If a hosting company has a thousand servers like this, that’s $12 million in value that isn’t reflected in the company’s financial statements. That’s huge.

-Gary

Categories: 
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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