Posts Tagged 'Value'

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: 
July 20, 2007

Your Hosting Dollar

During some recent weekend R&R, my family and I saw a "human statue" street performer. He looked as if he'd been spray-painted gold – clothes, skin and all. He had a bucket out for "donations" and there was a healthy crowd watching. Parents would give dollar bills for their kids to put in the bucket. For each dollar, he'd do robotic movements and noise for 5 to 10 seconds and then return to statue status. After a few seconds, another dollar would go in the bucket and the cycle would repeat.

My son, a budding numbers-geek, said "Wow Dad, he makes pretty good money. I'll bet it’s $50 an hour." Being a full-fledged numbers geek, I said "By my calculations, it's more like $70 per hour".

This got me to thinking. What do we provide our customers for $1 of hosting fees? So I figured it out for our most popularly sold hosting offering. This is not $1 per line item below; it’s $1 for the whole package below.

  • 272,232,402,234,637 operations performed by the CPU at 50% utilization
  • 12 megabytes of RAM
  • 1.4 gigabytes of hard drive space
  • An Operating System to make it all happen
  • 45 seconds of technical support
  • 5,538,770,949,720,670,000,000,000 electrons (in the form of electricity)
  • 10,909 average sized packets of public transfer
  • Up to 37,973,200 average sized packets of private network transfer
  • All numbers are approximate. Nonetheless, be sure to make use of your hosting dollars here at SoftLayer!

    -Gary

Categories: 
July 18, 2007

There is no "I" in "Sales"

I've been working with Amanda, Daniel, Miller and Laude for a long time in a shared sales team environment. Until recently, it had never occurred to me how bizarre it is that five such independent and competitive sales people are able to drive the SoftLayer Sales Machine almost 24x7x365 as a single seamless entity.

How do we do this?

First and foremost, we get along with each other - The value of this statement only really hits home if you understand how much time we spend with one another. Splitting an almost 24x7 work-week between 5 people means that we all work a *lot* of hours. Overlapping schedules, late nights, the almost constant blackberry messaging back and forth. If I didn't love these guys, this job would be impossible.

Great management - (Clearly, a shameless effort to suck up to the boss ^_^) Lance and Steven both have very hands-off management styles. They both give us "Just enough rope to hang [our]selves", meaning that we get to do a whole lot on our own. This is why SL Sales is the most technically savvy and aware in the dedi server industry. It also means that we trust and lean heavily on one another to make sure we stay that way, and of course, don't hang ourselves.

We share everything, good and bad - Think: commission checks as well as schedules. Sharing EVERYTHING drives us in a couple of different ways. Since our paychecks depend on how well we do as a whole, each of us is sure to give 110% at all times, because what's better than a 110% paycheck if you can get it, right? Along the same lines, none of us wants to be singled out as the weakest link in the chain – competition holds us up and keeps us on our toes.

Finally, we all have different strengths and weaknesses - If you combine us all together, you have the perfect mixture of unfailing politeness & cool (Amanda), masterful jocularity (Daniel), world-renowned strength under pressure (Miller), finely-tuned professionalism (Laude), and my own studied protocol & firmness. So there's not a customer in the world who can't get along with at least one of us.

SL Sales (or “SLales” as Lance likes to call us) really works here – I can't imagine it any other way.

-Mary

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