On Wednesday, July 30, SAVVIS Communications Corporation (NASDAQ: SVVS) announced the purchase of certain assets and the customers of WAM!NET's commercial business. Since WAM!NET is a well-known service provider in the graphic arts industry - and SAVVIS is not - WhatTheyThink.com asked correspondent Gail Nickel-Kailing to find out more.

In this report, Gail goes below the press release and PR driven comments to understand SAVVIS and the challenges WAM!NET may face as customers are asked to switch to the new network. Could it provide an opportunity for competitors like VIO? (More on VIO tomorrow.)

Who is SAVVIS?

SAVVIS Communications Corporation is a global managed service provider, delivering IP applications for a diverse mix of industries. The company operates a single global IP network that delivers IP VPN, managed hosting and managed Internet solutions to key verticals such as the financial services market, professional services firms, media and entertainment, print and publishing, retail, and healthcare. SAVVIS' services include:

MANAGED IP VPNs - private networks constructed across shared Internet networks.

MANAGED HOSTING services that allow enterprises to outsource content storage and management in a highly secure, fault tolerant data center environment delivered as an "a la carte service" or through pre-packaged solutions for web, enterprise and database applications.

INTERNET ACCESS services based on SAVVIS' PrivateNAPSM architecture, provided as managed and unmanaged offerings, and bundled with the company's IP VPN service.

Business and Financial Overview

SAVVIS began commercial operations in 1996, providing Internet access services to local and regional Internet service providers. The customer base grew from 15 customers at the end of 1996 to 2,042 at March 31, 2003.

The company's revenue is derived primarily from the sale of managed IP, managed hosting, and Internet access services. Each customer is charged an initial installation fee that typically equals one month's revenue and a fixed monthly fee that varies depending on the services provided, the bandwidth used, and the quality of service level chosen. Customer agreements are typically 12 to 36 months long.

SAVVIS' operations are organized into three geographic segments: Americas, Europe and Asia; where 58% of the revenue is generated in the Americas, 19% in Europe, and 23% in Asia. The Asian operation is by far the most profitable, posting an income to revenue ratio of 61%; and Europe produced 28% income to revenue, while operations in the Americas had a loss of 103% against revenue.

For the quarters ending March 31, 2002, and 2003, revenue from two customers represented approximately 45% and 38%, respectively, of the total revenue. SAVVIS expects the revenue from these two customers to decrease as a percentage of the total revenues as they expand their managed IP, Internet access, and hosting customer base. Prices for telecommunication services, including the services SAVVIS offers, have decreased significantly over the past several years and the company expects this trend to continue for the foreseeable future. Managed services (IP VPN and Hosting) accounted for over 94% of new contract values in the quarter.

Customer installations at the end of the second quarter increased 344% year over year and 75% sequentially. The company added 210 net new customer in the second quarter and added the following media and entertainment companies: NBC News, CinemaNow, A&E Television Networks, Lions Gate Entertainment, and Lifetime Entertainment Services.

The WAM!NET Deal

On July 30, 2003, SAVVIS announced that it had agreed to purchase WAM!NET's commercial business. Details of the deal:

Where Did the Money Come From?

On May 14, 2003, SAVVIS agreed to sell its data center located in Hazelwood, MO to Reuters America for gross proceeds of $35.0 million. Out of these funds the company used $12.9 million to reduce its outstanding debt and $3.1 million for transaction related deposits and expenses. $19 million net proceeds were added to existing cash balance. It was with this cash that the company acquired WAM!NET.

Details of the deal: