Virtualis Systems (condensed)

VIRTUALIS SYSTEMS (CONDENSED)

1. Case Background

Virtualis Systems founded in mid-1996 by Christopher Lyman and Randy Katz. They appointed marks as consultant of Virtualis System. Marks had been focusing his energy on developing company’s business plan for the fledging firm, clarify company’s strategy and developing financial forecast and financial plan

1. Background : Virtualis Systems and The Web-Hosting Business

At the first time, Lyman set up a successful computer consulting business in LA. Through enterprise he met Katz, a talented Unix programmer and early Internet expert. They decided to revamp Katz’ failing ISP start-up into a web hosting business. Original rationale: Every time someone accesses a page through his or her browser, it “hits’ a web server. The pipes are nice and big between telephony hubs like NY and LA, but links between local telephone offices in each city and individual business are much smaller and expensive. Lyman and Katz lease a very high capacity line and put the traffic for many different companies ' servers over it.

For a small business ‘hosting’ small company could lease a T-1 line the price is 1,500 per month. In addition to the charges for a dedicated, high capacity line, firms had to pay extra charges for usage. In keeping with evolving Internet business models, some web-hosting firms even gave a stripped-down low capacity of this service away for free. Small companies gained the benefit of having an experienced team oversee and maintain the server

In early 1996, Lyman and creating a hosting company. They adding value to their services by developing software tools in 1998 VS grow slowly. Web-hosting firms emerged from this same set of forces larger well-capitalized firms emerged and generate sufficient revenue to go public. a) Verio, founded in March 1996, had already 45 web-hosting firm & Internet service providers. The end of 1998, it generated $202 million run rate revenue and had a market capitalization of $825million. b) ISN had already acquired 16 web-hosting and was preparing to go public in spring 1999. As of December 31, 1998, the firm had 37,000 web-hosting costumers and generated $41.3 million in revenues. At the $30 to $40 per share and was believed to be targeting its IPO, and would have a market capitalization of approximately $475 to $635 million. At the end of year 1998, Virtualis had generated $ 888,543 in revenues and $222,953 in net income. From OCF analysis we found that percentage is decreased from 37% on Q3 1998 to 24% in Q4 1998. It is indicated that a company able to generate sufficients positive cash flow to maintain & growth its operations without require external financing.

1. Background : Josh Marks

Josh Marks, 22 years old, Harvard MBA candidate. When he was in high scool, he had started computer dealership in Washington DC. In 1995, Marks’ firm, TCC authorized value-added reseller in Colombia. In 1996, Marks merged TCC with another local reseller. In 1997, he graduated from Harvard College. In 1998, Marks was interested in helping Chris Lyman to write business plan, find funding for the enterprise and founders took him up on his offer.

From exhibit 3 -Virtualis System’s income statement showed that sales revenues is increasing year by year from Q4 1997 until Q4 1998, it is also because on Q4 1998 Virtualis System add their product; Colocation. In addition, VS also showed the good sign of their profitability ratio. VS increase their Profit margin ratio from 25.92% on Q3 1998, into 34.32% on Q4 1998. Also for ROA (17.40% ) and ROE (25.94%) in Q4 1998.