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TMF Interview With
Verio CEO Justin Jaschke


With Dave Marino-Nachison (TMF Braden)
October 11, 1999

Englewood, Colorado-based Verio (Nasdaq: VRIO) is a leading provider of Web hosting and e-business services. We spoke with CEO Justin Jaschke about servicing a broad spectrum of customers, his company's deal with America Online, and the outlook for the Web registration business.

TMF: Maybe the best thing to do would be to start by having you lay out how you describe your company and where your revenues come from.

Jaschke: We think of ourselves as being the company that is enabling businesses to put their operations on the Internet. In order to do that, we've built what we believe to be the two fundamental service platforms behind the Internet, first of which is connectivity.

"I think the mix has certainly shifted toward internal growth and at this point we are a large enough entity that we can't do the smaller acquisitions that we did to get here."
Companies need to be able to connect their local area networks to the Internet and then send and receive information worldwide. And so we have a platform that allows them to do that that really starts with a regional network which can aggregate traffic, connecting them to our Tier One backbone with which we can officially carry their traffic and deliver information back to them.

The other fundamental service platform is the hosting platform, which to date has been largely around hosting content -- and, we believe, is moving toward hosting applications -- and these are the data centers, server farms, and software around that that allow companies to put up everything from a simple website to e-commerce sites and, in the future, customer service operations online: accounting, finance, back office tools and operations, and so forth.

TMF: You won't really be providing those services directly, I suppose, when you're talking about hosting service as far as the software and some of the applications; you'll just be providing the space?

Jaschke: No, we expect to be providing the services directly. Today, for instance, we host probably as many e-commerce sites as anybody in the country. We see our core value-add as being the integration of various applications necessary to make that happen.

Basically we see, particularly in the middle-market space, that a lot of medium-sized businesses don't have the capability or wherewithal to go out and piece together everything they need to make an e-commerce solution. They're going to go find a shopping cart and integrate that shopping cart with a transaction processing gateway and engine. You've got to put a merchant account in place. You've got to put a digital certificate in place. You've got to figure out how to draw traffic to your site. You've got to have analysis tools to evaluate how that site is doing and then down the road you're going to want to integrate it more with billing accounting, inventory, and fulfillment systems.

So for a small business to go out there and steer through that landscape is a daunting task. What we've done is strike deals with best-of-breed providers in each of those areas. We work with a number of third-party providers of shopping carts [and] integrate those shopping carts onto our hosting platforms and our data centers. We then connect those shopping carts to transaction gateways where we can automatically do online credit card transactions. We've got a gateway out to First Data where we can set up a merchant account automatically. We've got gateways to people for digital certificates. We've then struck deals with third parties where we can post customers' products and services in online shopping portals, which allow them to drive traffic to their site and then we've integrated in analysis tools. And so we offer today what's called Verio Store which integrates all of that into a turnkey solution business.

TMF: Do most of the companies that use Verio -- are their businesses consumer-focused or business-to-business?

Jaschke: There's a mix. What we are selling today is primary business-to-consumer e-commerce and that is clearly what has taken off and what is easiest to provide. We are also working on business-to-business applications where it would replace the legacy EDI (electronic data interchange) systems with Internet online trading.

TMF: From what I've read, most of the businesses that use Verio are -- I guess you'd describe them as small- to medium-sized. Can you give us a description of what that means where you're concerned?

Jaschke: We break that market down into three segments. At the very low end you have your home office up to a small professional office, typically in the one to ten employee range. Up from that is really small business -- what we would call the "e-business lite" segment, which is everything from a small 10-person office up to a 200-person kind of company and typically they're taking more complex e-commerce and websites than toward the low end. And the high end of the market is what we call the "e-business heavy" customers, which are from a 200-person company up to short of a Fortune 2000.

"We're working on relationships in other countries that will further extend our reach and align us with very strong partners."
It's a pretty broad range of businesses and so when you ask the question about application service hosting for some of those typically toward the lower end we will be directly providing the online [services] hosted in our data centers allowing customers to access them over a browser interface, bring up an application and run it. When you get to the very high end of that market you're talking ERP systems -- you know, PeopleSoft (Nasdaq: PSFT), BAAN (Nasdaq: BAANF), and so forth -- and there is a much more customized need there. In that space we're looking at partnering with players who can do the up-front consulting required to customize the "ap" for the business.

TMF: Could you talk a little bit about your competition? Do you feel there's somebody that addresses the same breadth of services that you do?

Jaschke: No. I think we really find that you have to look at the specific product, the specific market to figure out who your competitor is. There are different competitors we run into in different spaces. We see all of the major players in one place or other. Typically the UUNets, the MCIs (Nasdaq: WCOM), folks of that ilk, we see toward the higher end of the middle market and the big bandwidth sales.

On the hosting side we see the EarthLinks (Nasdaq: ELNK), MindSprings (Nasdaq: MSPG), Concentrics (Nasdaq: CNCX), the smaller players that operate on a regional basis, but really seeing nobody that really spans that breadth of the product lines from hosting to connectivity and end services that we provide nor that has as clean a focus across that middle market.

TMF: Do you find that a lot of your customers, when they come to you for one of these services, use you for the entire span of services that they need, or are they picking and choosing from Verio?

Jaschke: We think that's one of our advantages -- that we can provide them with the full range of services and we are finding more and more that we are selling bundled packages, DSL line with hosting and e-commerce, say. Co-location with access products and so forth. That's an opportunity that we certainly have not fully tapped at this point, but that's one of the big potentials.

We've built this company through acquisition. Most of the companies we acquired were offering single products and so it's been over the last couple of years that we really integrated those, put those on the common platforms. That allows us to offer national bundled kinds of services and we're starting to go back and mine that base and do more cross-selling and up-selling, but we're finding, for instance, 30% of our e-commerce customers are existing customers upgrading to e-commerce -- 20% to 30% of our DSL customers are taking the hosting or e-commerce solutions. That's one of the real optimum sides of our business model.

TMF: What role do you think acquisitions, as opposed to internal growth, will play in Verio in the next five years?

Jaschke: I think the mix has certainly shifted toward internal growth and at this point we are a large enough entity that we can't do the smaller acquisitions that we did to get here. That being said, acquisitions will play a very important role and we think there are lots of potential acquisitions still out there. We would tend to look at ones that are more strategic in nature either at distribution and products and add market presence.

I think the one we did a few months ago with DigitalNation is a good example. There was a company that had really focused on the dedicated server space and done a great job of both packaging those products, providing the technology behind them so that it's a portable, scalable model, and building the kind of mindshare within that market that sends them a lot of business and so that was a product line that while we offered a few products, we did not have the focus nor the reputation in that area.

At that time we were selling 10 to 15 dedicated servers a month. We acquired those guys and ramped up to well over 100 servers a month. So that's the kind of acquisition we love to do, where we can plug in a product line and then leverage our other distribution channels.

TMF: Can you talk a little bit about the deal with America Online (NYSE: AOL) and how that's affected your company?

Jaschke: The deal with AOL was targeted at distribution. We spent money up front to acquire an existing base of hosting customers that they had and then become their partner for Web hosting e-commerce solutions offered over their portals. And so when you go onto the AOL or CompuServe site from the U.S., we have banner ad placements throughout as well as static button placements, and we're now the only e-commerce Web hosting company that you'll find on those and that gives us an enormous potential audience.

I think they have something like 37 million unique visitors a month to those sites, so when a visitor to their sites or one of their customers click on one of those banner ads or click on a static button placement for instance, go into the business channels and click on hosting services, it will take you to a co-branded site and then you can pick from our products and services off of that website... and we can bring you up on either a hosting solution or e-commerce solution.

TMF: What about your impressions for the growth potential in the registrar and register businesses?

Jaschke: I think that's an enormous opportunity for us from a couple of aspects. One, we think it's a profitable business. As you probably know, Network Solutions (Nasdaq: NSOL) charges $70 for a two-year subscription today. The registry fee for that is somewhere around $18 for that same two-year fee so the opportunity for us is the difference between that $70 and $18 and actually I think that $18 may have been further reduced recently. So that's a profit opportunity today.

This year we've done over 30,000 domain names so there's a huge revenue potential for that. More importantly for us, it's been a tremendous lead source. That's one of the ways that we capture potential leads that we can then convert into recurring monthly revenue or Web hosting e-commerce access products. That's a business that we're working through our business plan on and expect to be able to launch sometime in the next couple of months.

TMF: Can you talk about how the investment community understands or doesn't understand your company in terms of what are the important media metrics that people should really be looking out for?

Jaschke: I think the investment community understands our company fairly well at this stage. It's obviously been a long process and a lot of my time, as well as others here, getting around to analysts and investors, but we have been in the market enough through numerous financings and fund raisings and now we have a very broad base of coverage among the analyst community.

I think the drivers that people are looking at are the internal growth rates, breaking that out between the access and the Web hosting side. I think the people are looking at adoption rates of enhanced services, how fast are we able to sell into the e-commerce markets, how fast are we able to sell in the DSL markets, how fast we're able to sell into the managed security and BPM kind of markets. So that is really fundamental to our business strategy, which says that as we establish these two fundamental service spaces in access and hosting that we can up-sell people into the more enhanced services, which drives our margins and drives our profitability.

I think people are tracking us at an EBITDA profitability level to [question] is this market working, are we getting the efficiencies out of the integration of our acquisitions that drive profitability, and we've been tracking very well quarter-over-quarter toward that EBITDA profitability number.

TMF: Where do you see the international opportunity for Verio?

Jaschke: We're very focused on expanding our base in Europe. We have equity stakes in four companies over there. We own 100% of our hosting operations in Germany, 60% of our hosting operations in the U.K., and 25% in France and Spain. We also have about 1,200 resellers throughout Europe. We host over 50,000 websites for European companies, and we think the whole European market is on the verge of exploding as you have regulatory barriers coming down, you've got the common currency with the Euro coming online, and cross-border boundary issues lessening. That's created, I think, a very rich opportunity.

We have also extended the relationship that we cut with AOL here in the U.S. over to the U.K. and struck a deal with the AOL CompuServe business in the U.K. and the Netscape portal in the U.K. We're hopeful we can find other relationships or extend that one to other areas of Europe as well.

We provide the technology behind the Web hosting solution that SwissCom offers today in Switzerland. We've just recently signed a contract with Nippon Telephone & Telegraph (NYSE: NTT) in Japan that does the same thing. They'll leverage our hosting solutions and offer an NTT hosting powered by Verio offerings throughout Japan.

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