Opsware Inc.

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Opsware Inc.

599 N. Mathilda Avenue
Sunnyvale, California 94085
Telephone: (408) 744-7300
Fax: (408) 744-7379
Web site: http://www.opsware.com

Public Company
1999 as Loudcloud, Inc.
Employees: 368
Sales: $56.0 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: LDCL
NAIC: 511210 Software Publishers

For approximately two and one-half years, from early 2000 through mid-2002, Opsware Inc., formerly Loudcloud, provided a hosted software solution to companies engaged in electronic commerce. The companys hosted software service featured its proprietary technology, Opsware, which was unavailable as a separate software product. Opswares most notable feature is its ability to automate many of the manual tasks associated with web site maintenance and management. In June 2002 the company announced that it was selling its hosting and managed services business to EDS for $63.5 million in cash. The sale provided the company, which officially changed its name to Opsware, Inc. in late summer 2002, with much needed cash and enables the company to focus on developing and selling enterprise-level software for electronic commerce.

Providing Web Hosting and Managed Services for Electronic Commerce: 19992000

The formation of Loudcloud, Inc. was announced in September 1999. The companys founders included some of the Internets best-known innovators, including Netscape Communications Corporation cofounder Marc Andreessen and former Netscape and America Online (AOL) executive Ben Horowitz. At AOL Horowitz was the executive in charge of the companys e-commerce platform division and oversaw the development of [email protected], the Internets largest shopping destination.

Loudclouds other cofounders were Tim Howes, co-inventor of the Lightweight Directory Access Protocol (LDAP), which became the Internet standard for directories, and Sik Rhee, designer of the Kiva application server. All four cofounders worked together at Netscape and then at AOL after Netscape was acquired by AOL and Sun Microsystems.

Details about Loudclouds products and services were not made public until February 2000. At the industry conference Demo 2000, the company announced that it would offer a packaged solution to help companies put up speedy and reliable Internet sites primarily for business-to-business e-commerce. Loudclouds service combined hosting, storage, hardware, and software development into a single package. It utilized the companys proprietary software, known as Opsware, to automate the configuration, bandwidth provisioning, and other tasks required to configure and manage a web site. Loudcloud claimed that Opsware provided unprecedented levels of scalability and reliability. The companys service was offered as a package, and its software was not sold separately.

Loudcloud began business with seven customers and $68 million in venture capital funding from Benchmark Capital and Morgan Stanley Dean Witter. Its initial group of customers included HomeGain, Skills Village, Acteva Inc., Wish.com, CFOWeb, Dreamlot, and Catapulse. At first, the companys target market consisted of dot-com companies that had already received venture capital funding, but Loudcloud soon added more substantial enterprises to its customer list.

Loudclouds management team consisted of Marc Andreessen as chairman, Ben Horowitz as CEO, Tim Howes as chief technology officer (CTO), and Sik Rhee as vice-president of research. Under a strategic partnership with Hewlett-Packard (HP), the two companies would work together to develop systems and processes to deliver portals and web sites for dot-com companies, with HP providing Intel-based NT and Linux servers. Similar partnerships were announced with Sun Microsystems, EMC, Oracle, and iPlanet. Loudclouds initial hosting partners were GlobalCenter Inc. and Exodus Communications Inc.

In May 2000 the company launched myLoudcloud, a portal that offered customized services for Loudcloud customers. The site made it easy for client companies to obtain performance statistics about their sites, including number of impressions and unique visitors to their sites. After moving into a 75,000-plus-square-foot buildingmore than five times its previous spacein June, Loudcloud announced in July that it had received an additional $120 million in venture capital financing from a group of investors led by Capital Research and Management. Loudclouds staff had grown to 250 employees, and the company had more than 20 customers. That same month, when Microsoft announced its new Microsoft. Net strategy, it was noted that Loudcloud was included on the team that would help Microsoft pursue its Internet strategy.

Loudcloud added an Internet services portal to its home page in August 2000. The eServices Directory, as it was called, was open to the public and provided a guide to the various Internet services offered by Loudcloud as well as a directory of the companys strategic partners. It also included a list of companies that Loudcloud endorsed, either because they used Loudcloud products and services or they warranted a best practices rating.

Toward the end of 2000 Loudcloud introduced two new services aimed at growing customer segments. Instant ASP, aimed at Loudclouds growing base of ASP (application service provider) customers, was a package of billing, scheduling, and failover services. For customers whose e-commerce business was rapidly expanding, Loudcloud offered the Global Connect service, which included load balancing and disaster recovery. As Loudcloud celebrated its first anniversary in September 2000, its list of customers had grown to about 30 and included Nike Corp., Britannica.com Inc., and Interelate Inc. The companys staff had grown to 370 employees. The company also announced that it was expanding internationally, opening offices in London, Paris, and Munich, Germany. Perhaps more significant, Loudcloud filed papers with the Securities and Exchange Commission (SEC) for its initial public offering (IPO).

Going Public in an Unfavorable Business Climate: 2001

Loudcloud introduced some software and service upgrades at the beginning of 2001. They included Global Response Smart Cloud, a service enhancement that allowed customers to measure and compare the real-time response rates of their sites with their competition. In February the company introduced Opsware 2.0, an upgrade that included new tools for content deployment, disaster recovery, and operations auditing. Loudcloud also announced a partnership with America Online to host and manage AOLs merchant e-commerce services, including its QuickCheckout wallet technology.

Loudcloud held its IPO on March 9, 2001. The unfavorable investment climate for Internet companies caused the company to reduce its proposed offering. Initially, the company planned to offer ten million shares, then 10 percent of the company, at $10 to $12 a share, giving Loudcloud a market value of about $1.1 billion. By February the company said it would offer 20 million shares, or 30 percent of the company, at $8 to $10 a share, giving Loudcloud a market value of only $600 million. Then, just before the IPO, Loudcloud priced its shares at $6 and offered 25 million shares, raising $150 million for the company. Investors were wary of Internet companies that had yet to turn a profit, and Loudcloud posted an operating loss of $164.8 million on revenue of $15.5 million for its fiscal year ending January 31, 2001. As a result of the IPO, Andreessens stake in Loudcloud was reduced from 18 percent to 12 percent.

As part of an effort to attract larger enterprises, especially those with in-house corporate data centers that were operated without the help of a third-party co-location facility, Loudcloud introduced Opsware 2i, a subscription-based service that would plug customers and their web site operations into Loudclouds Network Operations Center. Opsware 2i marked the first time that Loudcloud offered its services to a corporate in-house data center. To better serve enterprise customers, Loudcloud later in the year unbundled its managed service offerings to allow customers the option of purchasing only one of its application-management services or to mix and match them.

Loudclouds financial problems continued to mount during the rest of 2001. In May the company laid off 19 percent of its staff, or 133 workers. It was an attempt to cut costs in the face of declining demand. By June Loudclouds stock was trading around $2.50 a share, less than half of its offering price. Its stock fell another 25 percent to below $2 a share, when the company reported a wider-than-expected net loss of $60.3 million on revenue of $11.7 million for the quarter ending April 30, 2001. During the quarter Loudcloud gained $42 million in contracts from Ford Motor Co., Network Appliance, and USA Today. The company said its $205 million in cash was enough to fund its business plan. Losses for the next quarter, however, reached $76 million on revenue of $14.1 million, including a $30.2 million restructuring charge.

A five-year partnership with Qwest Communications International that was announced in September 2001 helped validate Loudcloud and boost its stock price 42 percent in one day. The partnership gave Loudcloud access to Qwests sales force as well as to its infrastructure and data center space. Under the partnership Qwest would leverage its existing data center and bandwidth assets and use Loudclouds managed services expertise to offer enterprise customers a managed solution. In addition, Loudcloud would manage Qwest.com, the companys corporate Internet site.

Loudcloud gained another important customer in November 2001 when it won the contract to design, host, and manage the British governments public portal UK Online (www.ukonline.gov.uk). Loudcloud won the contract when British Telecom, the sites former manager, was forced to re-bid for the contract after the original one expired.

Company Perspectives

Opsware, Inc., formerly Loudcloud, is the leading provider of IT Automation Software, offering a complete solution for enterprises, government agencies and service providers looking to reduce costs and increase IT efficiencies.

New and existing customers provided Loudcloud with enough orders during the quarter ending October 31, 2001, for the company to post a significant gain in revenue while reducing its losses.

For the quarter Loudcloud reported revenue of $14.3 million and a loss of $40.7 million, compared with revenue of $4.6 million and a loss of $58.2 million for the same quarter in 2000.

Selling Hosting Business to Focus on Software Development: 2002

During the first half of 2002 Loudcloud introduced new services to improve customer relations, upgraded its customer management portal, and released Managed Services 3.0. An upgraded version of its Code Deployment System made it easier for customers to manage web site changes and included stronger security and on-demand backup features. Among the new features added to its customer management portalwhere customers could manage, report on, and change their web infrastructurewas the ability to break out costs by business units. The company also reduced the base price of Managed Services 3.0, which included deployment and launch services, application and infrastructure services, and client services, to $10,000 per month. Among the new features found in Managed Services 3.0, which automated manual functions associated with web site maintenance, was a Patch Management System that automatically detected and deployed security patches. The software also automated a 40-point security inspection.

In June 2002 Loudcloud announced that it would sell its core managed services and hosting business to EDS for $63.5 million in cash. In addition, EDS agreed to pay Loudcloud $52 million over the next three years to license the companys software for its own managed hosting operations. The sale also included Loudclouds customer base of about 50 web hosting clients.

The sale of its hosting business marked a significant change in Loudclouds business model. Instead of providing and hosting electronic commerce software solutions, the company would focus exclusively on developing and selling software to corporate customers. As part of the change, the company adopted the name Opsware, Inc. later in the year, in order to more closely identify itself with the name of its flagship software product. The company announced that it would immediately launch an enterprise version of Opsware 3.0, which was previously available only as a hosted service.

Principal Competitors

International Business Machines Corporation; NOCpulse Inc.; Changepoint Corporation; Evolve Software, Inc.; Niku Corporation.

Key Dates

The formation of Loudcloud, Inc. is announced.
Loudclouds mission as a software infrastructure service provider for an enterprises Internet operations is clarified.
Loudcloud goes public in a business climate unfavorable to Internet companies.
Loudcloud sells its managed services and hosting business to EDS for $63.5 million; the company is renamed Opsware, Inc.

Further Reading

Andreessen Is Ready to Host, PC Week, February 28, 2000, p. 39.

Andreessen Launches Loudcloud, Business Journal, February 11, 2000, p. 30.

Braunschweig, Carolina, VCs Rain $120M Down on Loudcloud, Private Equity Week, July 3, 2000, p. 3.

Burt, Jeffrey, Service Gauges Response Rates, eWeek, January 15, 2001, p. 39.

The Cabinet Office, Marketing, November 22, 2001, p. 11.

Cloudy Day at Loudcloud, San Francisco Business Times, May 4, 2001, p. 58.

Cohen, David, Andreessen Plays Host to New Era in Web Site Management, New Media Age, May 31, 2001, p. 44.

Corcoran, Elizabeth, Growing Up Is Hard to Do, Forbes, April 29, 2002, p. 36.

Darrow, Barbara, and Amy Rogers, LoudcloudThe Secret Is OutGoal: Become Infrastructure Provider to B2B Stars, Computer Reseller News, February 7, 2000, p. 7.

Doyle, Eric, Loudcloud Adds Automatic Protection for E-Business, Computer Weekly, June 6, 2002, p. 34.

Fonseca, Brian, Loudcloud Makes MSP Bid for Enterprise-Class Customers, InfoWorld, April 23, 2001, p. 24.

, MSPs Forge Software Trail, InfoWorld, June 24, 2002, p. 41.

, MSPs Stress Customer Needs, InfoWorld, January 21, 2002, p. 24.

Gilbert, Alorie, Loudcloud Sees Better Days Ahead, InformationWeek, September 3, 2001, p. 26.

Gillmor, Dan, Foe? Partner? No Big Deal; Its Just Business, Computerworld, July 10, 2000, p. 26.

Graebner, Lynn, Loudcloud Increases Space by Factor of Five with Move, Business Journal, June 9, 2000, p. 4.

Greenemeier, Larry, Loudcloud Has a Stormy Quarter, InformationWeek, June 18, 2001, p. 36.

Holland, Roberta, Loudcloud Portal Clears Up Site Stats, PC Week, May 8, 2000, p. 56.

HP and Loudcloud Partner to Provide Software Services to Internet Businesses, EDP Weeklys IT Monitor, February 14, 2000, p. 7.

Koblentz, Evan, Host with the Most, eWeek, September 18, 2000, p. 18.

, Loudcloud Portal Opens Up Expertise, eWeek, August 14, 2000, p. 38.

, Opsware 2.0 Speeds Code Deployment, eWeek, February 19, 2001, p. 44.

Loudcloud, AOL Partner, eWeek, March 5, 2001, p. 3.

Loudcloud Issues IPO, InfoWorld, March 12, 2001, p. 5.

Loudcloud Makes Stand-Alone Opsware Tools Available, In- ternetWeek, June 26, 2002.

Loudcloud Stock Drops Under $2 Marker, IPO Reporter, June 25, 2001.

Loudcloud Updates Customer Management Portal, InternetWe ek, April 3, 2002.

Marc Andreessens New Company, Content Factory, October 27, 1999.

Mardesich, Jodi, Andreessen Starts It Up, Fortune, November 22, 1999, p. 51.

Moozakis, Chuck, Platforms Centralize Mgmt of Hosted Apps, InternetW eek, February 14, 2000, p. 10.

Musero, Frank, The Unlucky Seven: New Issue Busts of 2001, IPO Reporter, June 18, 2001.

Nelson, Matthew G., Loudcloud Looks to IPO for Sunnier Skies, InformationWeek, October 9, 2000, p. 18.

OConnor, Colleen, IPOs Show Signs of Life, But Still Weak, IPO Reporter, March 12, 2001.

, Loudcloud Rains on Late-Stage Buyers, But IPO Shines on Initial VC Supporters, Private Equity Week, March 19, 2001, p. 11.

Opsware, Inc., Founders Story, July 3, 2002, http://www.opsware.com.

A Pioneer Once More, Business Week, February 28, 2000, p. 41.

The Poster-Child Who Grew Up, Economist (U.S.), March 9, 2002.

Qwest Validates Loudclouds Viability, Telephony, September 3, 2001, p. 14.

Regan, Keith, Loudcloud Sells Hosting Biz to EDS for $63.5M, E-Commerce Times, June 17, 2002, http://www.ecommercetimes.com.

Roberts-Witt, Sarah L., Loudcloud, Internet World, July 1, 2000, p. 54.

Rogers, Amy, Loudclouds New Services Target ASPs, E-Business, TechWeb, September 15, 2000.

Rogers, Amy, and Barbara Darrow, Start-Ups Have Heads in Loudcloud, Computer Reseller News, February 21, 2000, p. 41.

Rogers, James, Loudcloud to Host UK Online, Computer Weekly, November 22, 2001, p. 6.

Sliwa, Carol, Andreessen Targets Web Outsource Model, Computerworld, September 25, 2000, p. 32.

Smetannikov, Max, Loudcloud: Coming Out with a Whimper, Interactive Week, March 12, 2001, p. 20.

Smith, Tom, EDS Buys Loudcloud Hosting Business for $63.5 Million, InternetWeek, June 17, 2002.

, Latest Loudcloud Service Starts at $10,000 Per Month, InternetWeek, May 8, 2002.

These Days, Even Stars Can Fizzle on the Launchpad, Business Week, March 5, 2001, p. 40.

Torode, Christina, Loudcloud Gets a Lift, Computer Reseller News, November 26, 2001, p. 22.

, Loudcloud Unbundles Managed Services Offerings, Computer Reseller News, August 13, 2001, p. 10.

Vijayan, Jaikumar, Loudcloud Expands Outsourcing Services, Computerworld, April 23, 2001, p. 25.

David P. Bianco