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

Admit it: when you and your neighbor are running to Electronics in hope of getting the last Wii from the shelf, sometimes the only thing stopping you from dumping a bag of Skittles in front of him or knocking over a Lego display is the constant barrage of Rudolph and Frosty and other Christmas cheer over the PA.

Unfortunately, unless you are content to give everyone a copy of Dryping for Dummies (By Steve Kinman, SoftLayer Press), you will have to wade into the shopping rush to eek out your Santa sized bag ‘o goodies.

Never fear, however! The Retail Industry is there to help! For those who don’t want to dive head first into the excitement of Christmas Shopping (which can make even a foray to pick up some toilet paper from Wal*Mart into an exciting 2 hour adventure), nearly every retail outlet is willing to give you a 2″ x 3″ credit card like piece of plastic stamped with their brand. Yes, the Gift Card.

It’s been said that over 60% of American adults have either bought or received a Gift Card, this year. It’s a very convenient device. For example, if I figure out that Lance really likes Outback Steakhouse, I can buy a $10 gift card from Outback Steakhouse, wrap it in a $1 Hallmark card (although, sometimes the retail outlets already have such cards (stamped with their logo) available), and give it to Lance. “Merry Christmas!” Sometimes you can even get the card gift wrapped.A gift-wrapped credit card!

We’re to the point, now, that simply handing somebody a plastic card is actually considered a thoughtful gift. On the way to work, I heard that any fishing lover would prefer to receive a Bass Pro Shop Gift Card over, say, that Bassomatic ‘76 they’ve been talking about.

But, lets be honest… it doesn’t take much to choose a gift card. I overhear Lance say he likes steak, I see a Outback Steakhouse card, and bam! Before you can say “Impulse Purchase” I now have an instant gift! Sure, it’s not as fulfilling as, say, a box of prime steaks… but this way you can give him more gift cards! And more is better, right?

But the comedy doesn’t end there. Have you ever seen a gift card in a usable denomination? Usually I find cards with a value between $10-50. Can you even get a steak meal for $10 at Outback Steakhouse? (Don’t forget to include the State and Federal Wallet Excise Tax.) And I’m not talking about that free bread, either. No, what happens is you end up either leaving a trifling amount of money on the card (Your balance is … twenty five cents), or you end up wrapping your card in a sizable amount of cash. See how neat this is? I bought a $10 card, and Lance will pay the balance of the meal… AND STILL THANK ME FOR IT!

Retailers make MILLIONS of dollars off the trifling amounts that just sit, unused, on gift cards. And gift cards aren’t usable at another store, so if I want to buy a $20 book, but I only have a $10 Half Priced Books gift card (and a $10 Outback Card Lance gave me as a Thank You), I’ll use the card + $10. You can almost never just spend what’s on the card.

Here’s some friendly holiday advice: If you know what your friend wants, buy it for him. If you don’t, ask people close to him. Even Aunt Myrtle’s sweater contains more holiday cheer value than the sweater’s monetary value in McDonalds Gift Cards.

Is there a way out of this trap of value-locked slivers of plastic? Indeed there is! If you wish to transfer value to another person without locking them into one choice, give them… CASH! Yes, greenbacks, bucks, dead presidential portraits, green… whatever you call it, United States Federal Notes are accepted by all retailers, in any denomination. Value not used by one retailer can then be spent at another. This value can also be stored up where it may earn interest and combine with more legal tender until a large item can be bought. The best solution for any gift giving problem where “Gift Cards” are suggested as a solution is CASH, such as when you absolutely can’t think up something to buy. And it makes a great stocking stuffer. In Bulk. Hint, hint.

Yes, you in the back? What does this mean for SoftLayer? Just because this is a SoftLayer Blog doesn’t mean it has to have a SoftLayer moral! But lucky you… I’ve got one right here: (this weekend only, special holiday financing available!)

Like Gift Cards, each SoftLayer server comes with a bloc of value attached: bandwidth. This valuable commodity makes the servers work. You can have all the processing power in the world, a RAID 75 array with 100 petabytes of space, 40 terabytes of onboard memory, and if you don’t have any bandwidth… it’s all moot.

Unlike gift cards, however, SoftLayer attaches some real value you can actually use. For many users, even touching the top of the 2 Terabyte bandwidth pipe is a real exercise.

However, sometimes, like gift cards, a customer buys a server with value attached… but simply cannot use it all. Or they put the server 100% on the private network and never use the bandwidth at all (Like that $20 gift card from Sludge Emporium your Granddad gave you last year). Is there any way to salvage this value?

Indeed! The SoftLayer Secret Labs rolled out a new feature a while back: Virtual Dedicated Racks. These VDR’s (as we cool SoftLayer Secret Lab Technicians like to call them, because TLAs are cool) allow you to virtually rack a group of servers behind a virtual bandwidth meter. All the attached bandwidth value of those servers are lumped together, like a good ‘ol pile o’ cash, and the aggregate amount attached to the rack. An example:

Each server comes with 2T bandwidth (generally).

Without VDRs, if server bassomatic.76.example.com only uses 1T of bandwidth, and server auntmyrtle.sweaters.example.com uses up 3T, you end up with a full 1T overage on Aunt Myrtle’s site, even though you have a full 1T worth of value on the other server not being used!

With VDRs, the two servers pile their value together, making a 4T rack. Bassomatic.76.example.com uses 3T this month, while Aunt Myrtle’s site only uses 1T. Combined, their “rack” uses 4T of 4T, so 4-4 = 0!

Like cash, but unlike gift cards, with VDRs you are able to pool your value to allow the usage of more value at one time. Now how awesome is that?

If you would like to experience the excitement of pooling your bandwidth, talk to your SPS (as we cool SoftLayer Secret Lab Technicians like to call our SoftLayer Professional SLalespersons, because an acronym is still a cool TLA as long as only three letters are capitalized), and get yourself a Virtual Dedicated Rack (make sure to call it a “VDR” when you order it to sound cool).

And let ‘em know this post by Shawn got you interested. If I get enough referrals, I’ll get the December SoftLayer Referral Outback Steakhouse Gift Card!