Corio Mirrors ASP Market WoesCorio Mirrors ASP Market Woes

Corio Inc. has been something of a proxy for the independent ASP market since both rose to prominence in the Internet boom. The contrast between the dire language in recent company disclosures and the high hopes from its recent customer wins offers a fitting symbol for the mixed feelings still surrounding the market.

Corio's accumulated deficit stood at $262 million as of March, and last year, the company lost $12.9 million. "Corio is not profitable and may never be profitable," according to a recent Securities and Exchange Commission filing for share distribution related to the vendor's acquisition of Nexus Technology Inc.

Such gloomy wording in SEC filings is often de rigueur given the risk of shareholder lawsuits, but the documents indicate just how uncertain the ASP market remains.

Corio's filing says many customers in the small to midsize market face financial difficulty, and about 100 have terminated contracts early during the past four years. Expanets Inc., which accounted for 12% of Corio's revenue last year, was acquired by Avaya Inc. and will not renew its hosting contract.

But in the past 90 days, Corio has won contracts with companies including ABM Amro, American Express, and General Motors, says John Ottman, a Corio executive VP. "The strength and stability of our customer base is dramatically improving," Ottman says. Corio posted 2003 revenue of $68.7 million--a 22% increase over the previous year--but its first-quarter revenue dipped 7% from a year ago.

Corio also has landed recent contracts from industrial-parts supplier United Components Inc. for a range of hosted enterprise-resource-planning services, and industrial automation systems maker Yaskawa Electric America Inc., which extended a contract. The company has slightly more than 150 customers, Ottman says.

Corio probably will break even by year's end and post a profit in early 2005, says John Torrey, who follows the company for investment and research firm Adams, Harkness & Hill. "We're seeing stronger demand for the kind of on-demand delivery model that Corio provides," he says, adding that he has no concerns about Corio's long-term viability. The company has about $45 million in cash and other short-term assets.

Corio still faces some big challenges. The number of customers from which it demands cash payment because of bad credit edged up again after leveling off following the dot-com crash. As of March 31, 14% of Corio's customers fell into that category, compared with 12% at the end of last year.

Corio is tightening up its operations to stem losses. The prospectus notes that the company formerly offered a broad range of services under a fixed monthly fee but now bills customers for services in excess of limits specified in their contracts. The fixed monthly fees also previously covered rental charges for software licenses, but now Corio requires most customers to buy a license for the software it hosts for them.

Changes in technology also threaten the ASP market, Corio notes. The company thrives on hosting business applications that weren't designed to be hosted--soft-ware from vendors such as PeopleSoft, SAP, and Siebel Systems. The company notes that new market entrants are developing software designed from scratch as hosted services. Though not mentioned specifically in the prospectus, customer-relationship-management software vendor Salesforce.com Inc. has adopted such a business model, and Siebel now offers hosted services.

Corio says it's less able to counter such changes in the market because its losses have forced it to cut back on research and development. However, the company notes it would have had to further reduce R&D spending had it not moved some of that function to India, where costs are considerably lower.

The ASP market's difficulties have already forced many of Corio's competitors out of business. Industry pioneer USinternetworking Inc. filed for Chapter 11 bankruptcy protection in 2002 and has restructured. Other pure ASPs left standing include Appshop Inc. and Surebridge Inc. Corio is slated to release its second-quarter results next week.