Strong Colocation Growth Boosts Savvis

The colocation market continues its strong performance, but growth in managed hosting is much harder to predict, according to Savvis Inc. The IT infrastructure specialist reported results that met Wall Street's expectations, but sees challenges in 2009 as a key contract draws to a close and prospects in its key managed hosting business remain difficult to predict.

Savvis reported earnings of 6 cents per share this morning, while analysts had been expecting a loss of 5 cents a share. Shares of Savvis (SVVS) rose 8 percent in morning trading, gaining 53 cents to $6.93 a share. But company executives said they were cautious about the coming year.    

"In 2009, we expect to face a difficult economic environment and, as a result, have factored a cautious view into our guidance," said Jeff Von Deylen, chief financial officer of Savvis. "We expect our network business to remain under pressure, modest hosting growth, industry-wide IT spending to be down for the year, and that the sales cycle will remain elongated."

Savvis' contract with the American Stock Exchange, which generated $27 million in revenue in 20087, is expected to end when the AMEX consolidates its IT operations with NYSE Euronext this year. On the upside, Savvis sees opportunities in cloud computing, and will launch a cloud platform in the first quarter of 2009.

The company is also assessing the impact of the economic crisis, particularly for customers in the financial industry, which account for 20 percent of Savvis' revenue. CEO Phil Koen said Savvis has seen increased inquiries for managed hosting services during the past 30 days, suggesting that enterprise customers are weighing new approaches to their data center infrastructure.

Colocation revenue grew to $83.2 million in the fourth quarter, up 6 percent from the previous quarter and a 34 percent improvement from the same period in 2007. "The colo market continues to be good," said Koen, who said Savis had benefited from strong leasing in new data centers it opened in 2008, which boosed colocation revenue from $41 a square foot to $45.      

But the company's sales cycle for managed hosting remains lengthy, and the current environment makes it difficult to project how many of these leads will turn into contracts. "The (sales) process today is very different than it was two quarters ago, which means we don't have great clarity on the commitments," said Koen.

While gains are uncertain, Koen said the customer focus on cost-cutting was clear. "I'm seeing an increasing drive from the C-suite toward benchmarking costs against best-of-breed," said Koen. "Some CEOs realize they can't match that internally, so they go out and have conversations with us. The common denominator is that this is happening in companies where IT spending as a percentage of revenue is high."