SoftLayer Sales Office = SoftLayer Med Spa & Wellness Center

It takes a lot to be a SoftLayer sales representative. We sit long hours at our desks staring at the computer screen. I should probably attribute this to the reason I cannot stand more than 4 feet away from the microwave at home, if I want to be able to tell what time it is by its digital clock. Sitting at a computer for a miminum of 10 hours per day, and a minimum of 5 days per week can really create stress and tension on your shoulders and back. Well, thank goodness Lance, Steven, and Mike are here to help. Around September 21st, a sales incentive came our way that would change our sales office forever. If we reached a certain goal, we would all receive comfy, cushiony, vibrating massage chairs for each of our desks. And being the *excellent* little sales team that we are, of course we received the prize. The funny thing about it is, they are quite loud. So you know when one of us is “getting our massage on,” as Doug Jackson likes to put it. Respectively, we have to turn them off when answering the phones. No customer wants to hear, “H-h-h-h-h-e-e-e-l-l-l-oooo, S-o-f-t-L-a-y-e-r S-s-s-a-a-l-e-ssss….”

The SoftLayer Med Spa comes with other services as well. We all sit in a very close range to one another. This leads to all sorts of possible problems, in regard to spreading colds, etc. On any given day you might find myself or Michael Miller stealing Daniel’s Airborn or Mary Hall bringing in cough drops for everyone “just because.” Basically, you can always find the cure and remedy you need in one cubicle or another. It has always been a huge mystery as to why Daniel has Febreeze and Lysol at his desk. I like to think he is spreading the love, and expanding our wellness center. “THANKS, DANNY!”

As you can see, we are very well taken care of. The healthier we are, the more time is spent helping our beloved customers!

Our CEO said “so when will our next blog post on GAHAP come out?” By GAHAP he means “generally accepted hosting accounting principles.” He asked for it, so you get it :). If GAHAP bores you, try this on your iPhone. It’s fun!

I could probably squeeze everyone left reading at this point in a Dodge Viper and we could discuss this over lunch. But SL doesn’t provide Vipers to executives so I guess I’ll post it here for you. A balance sheet by definition is a snapshot of the current financial condition of a company. Here’s a formal definition. A GAAP balance sheet simply doesn’t portray an accurate picture of the financial condition of a hosting company.

Probably the most important value that a GAAP balance sheet completely misses is the value produced by monthly recurring revenue. By implementing some sort of fair value accounting as I mentioned before this value gets captured. But on that part of the balance sheet, it still doesn’t help someone looking at the dreaded current ratio. So here’s a way to get a measure of this value that matches up to current liabilities on the balance sheet and get a current ratio that better reflects the company’s true financial position.

Since current liabilities include debt that must be paid at any time over the next 12 months, I would propose using statistics to walk forward 12 months and add “Future EBITDA from Existing Customers” as a current asset on the balance sheet. I can sense the shudders of all accountants who are reading this because you’re thinking that this completely abandons the revered principle of conservatism. In hosting, however, this can be done with conservatism in mind by employing statistics. Public accounting auditors employ statistics every day in their work, so the use of statistics is not a foreign concept to accountants.

Here’s how I’d propose hosting companies do this. First, look at the behavior of the current customer base at the beginning of each month regarding customer churn and the purchase of incremental business by remaining customers. Ignore all new customers acquired during the month and add them to the customer base for next month’s analysis. For each month over the past 12 months, analyze how much revenue is lost from customers who leave and net that from how much revenue is recognized from the existing customers who remain. The results of this analysis can be statistically boiled down to give you an idea of how much revenue will come in over the next 12 months even if you do not gain a single new customer during the next 12 months. That’s the principle of conservatism coming into play here. Let’s call this “statistically stable anticipated revenue.” By the way, at SoftLayer, the incremental business from customers who stay is greater than the business lost from customers who leave us.

Second, take a look at EBITDA margins over the past 12 months and work the statistical mojo to get an idea of EBITDA margins going forward. Multiply this margin against the statistically stable anticipated revenue to arrive at “Future EBITDA from Existing Customers.”

Third, add this category as a new line in the Current Assets portion of the balance sheet as well as adding it as a new line in the Stockholder’s Equity portion of the balance sheet. The resulting balance sheet is much closer to the true financial condition of a hosting company than a traditional GAAP balance sheet.

Why is this view more accurate? 1) A hosting company isn’t like a retail store. Like a hosting company, retail stores have repeat customers but the repeat behavior is more sporadic. The customer may decide that the weather is too bad and they’ll run out and get that new pair of shoes another day. Or the weekend may have been too hectic for a grocery store run so they’ll eat out for the next week. With hosting customers, mission-critical things live on their servers and they are usually set up on automatic monthly billings. Repeat sales are much more predictable than for customers of retail stores. This consistent cash flow has real value, and to not capture it on the balance sheet negatively distorts the financial condition of the company. 2) Putting this statistically solid future EBITDA as a current asset allows a better picture of the current ratio because it is from this EBITDA that the current portion of the company’s debt will be paid. This gives a banker, etc., a clear view of whether the company will struggle over the next year to pay them back.

Here’s how a sample summary balance sheet would look before and after this adjustment.

                                                  GAAP            "GAHAP"
Cash, A/R, Other Current Assets                $33,218,805     $33,218,805
Future EBITDA from Existing Customers                   $0     $26,575,044
Total Current Assets                           $33,218,805     $59,793,849 

Fixed Assets                                   $90,355,150     $90,355,150
Other Assets                                    $9,301,265      $9,301,265
                                             =============================
Total Assets                                  $132,875,221    $159,450,265 

Current Liabilities                            $55,807,593     $55,807,593
Long Term Liabilities                          $67,766,363     $67,766,363 

Stock, Paid in Capital, Retained Earnings       $9,301,265      $9,301,265
Future EBITDA from Existing Customers                   $0     $26,575,044
Total Stockholder's Equity                      $9,301,265     $35,876,310
                                             =============================
Total Liabilities and Stockholder's Equity    $132,875,221    $159,450,265 

Current Ratio                                         0.60            1.07

Over the last two years, SoftLayer has grown from nothing to over 10,000 servers and by the end of this year could surpass 30,000 servers if growth continues on its current track. A key component in managing this growth is finding leaders with the ability to scale as the company grows. More often than not, entrepreneurs are good at starting businesses but not good at growing them. In that vein, if you are the leader of a startup, what traits does your management team needs to have if one is to build the biggest, baddest and most valuable company in an industry?

Battle wounds: We all have read the stories about Bill Gates quitting Harvard to start Microsoft, Michael Dell selling servers out of his dorm room, and Larry and Sergey leaving Stanford to start Google. It is very rare that someone can come out of college and start something that becomes the dominant player in an industry. The majority are an amalgamation of our experiences of years of operating any one of a number of businesses. Look for the managers with some scars. Even the aforementioned entrepreneurs are pretty much battle tested by now.

Visionary: As fast as SoftLayer is growing, we better have a pretty good vision of where we are going so we don’t run this Porsche off a cliff and into an abyss. We have seen many potential customer IT managers come to us in a panic upon their sudden realization that no more servers can be added to their datacenter because of inadequate planning for power and cooling. And I am not just picking on IT; this applies to the finance function as well. As the CFO, I have to have a vision for what my organization is going to look like all along the way, from the startup phase to an IPO, merger or acquisition or whatever other path this journey takes us.

Communication skills: Today’s CFO must be more technically proficient than his predecessors; however, this does not negate for the financial or any other executive to be able to communicate not only with company staff, but customers, vendors, bankers and shareholders as well. As discussed in other blogs, the internet has given all of us the ability to communicate in so many different ways than in the past. The challenge of any manager is to figure out which method of communication is the most effective in a given situation to get the job done and keep the organization moving forward.

Je ne sais quoi: It’s a French phrase we as Americans have used over the years to refer to a certain quality someone has that cannot be explained. A good manager has to have this “Presence”. While the internet and email and all forms electronic communication have made the world smaller, to have an impact a leader still needs to be out communicating, listening and understanding to keep the team on the right track. The leader who sits in his office all day can review a lot of data but needs to get out to find what is really going on inside a company. The “Ivory Tower” manager is doomed to failure in today’s fast paced business environment.

Rock in times of adversity: For all of us who have participated in startups (and I have done four now), there are going to be tough times. You can count on that. How you react in those situations sends a message about your ability to lead to your staff. As a leader, you have to be the go-to person in tough times. Are you prepared to handle the adversity?

The team: Much like a professional hockey team (I would use football but my son plays hockey and this is my blog), you can’t do it all alone. From the general manager on down, the owner/president of a team has to have the ability to attract top notch staff to who he can delegate the work of moving the organization toward the ultimate prize in hockey, The Stanley Cup. If he can’t and tries to keeps all the work for himself, he will find himself on the outside looking in.

Do we have the team to scale? So far it appears that we do. Are we going to have to add additional leadership along the way for us to achieve our goals? Absolutely. We have just added a Chief Strategy Officer to the executive management team.

We continue to be confident our management team can provide the leadership needed to grow SoftLayer into an industry leader.

Are you as confident in your team?

- Mike Jones (Who?)

I remember when I figured out that I wanted to be different. My mother took me to see Elvis in concert a year before he died. I knew at that moment I wanted to be a part of something great.

Because of that concert I spent years learning how to play every musical instrument I could get my hands on.

Fast forward thirty something years later and I find myself working with my best friends to build the most innovative hosting company in the world.

I learned after many of my own concerts that it was “making a difference” and not a hit album that I was truly in love with. To steal a line from my favorite book, “I who knew not that I knew not, now know that I know not…and that’s progress.”

Not unlike the Beatles, SoftLayer is a phenomena that is larger than life. It’s a culture. It’s a way of life. It’s how you do business. It’s a necessity.

It is to be continued…..

I now know why Elvis left the building, it was to make room for SoftLayer.