Microsoft Invests $50 Million in USinternetworking in Largest ASP Bet

Microsoft's investment of $50 million in USinternetworking (USi) is the largest ever in a "pure play" application service provider (ASP), as part of a $300 million package of equity and credit financing. The move reflects Microsoft's confidence in the ASP model, despite USi's disappointing sales in the September quarter, which saw the company lose $47.8 million on revenues of just $28.3 million. USi CEO Andrew Stern sees the investment as a validation of the ASP concept, and believes it will allow the company to reach cash flow breakeven, although he did not estimate a timeframe.

Key Takeaways:

• Microsoft invested $50 million in USinternetworking as part of a $300 million package of equity and credit financing.
• USi lost $47.8 million on sales of only $28.3 million in its September quarter, with disappointing sales partly due to the failure of dot.com start-ups.
• USi's 12-month backlog was worth $101.3 million on September 30, with start-ups now representing only 13% of the company's business.
• The investment gives Microsoft 11-13% of USi depending on various options in the $300 million deal.
• USi will displace most of its current Solaris, HP-UX, and Linux offerings with Windows-based software, with half of the company's servers currently running NT.
• USi will still have to run some Unix to meet customer demand or host-specific applications not available on Windows.
• The company will offer wireless-enabled web and e-commerce ASP services in 60 days, following the immediate availability of wireless e-mail and messaging services for Microsoft Exchange.
• Early investor GE Capital committed to a $50 million three-year revolving credit line, and is contributing another $5 million in new capital.