The profit connection

It may be tough to make a buck as a dot-com these days, but the companies supplying them are making out like bandits.

We've seen it before: The people who got rich in the California gold rush were not the prospectors, but those who sold the pickaxes and ran the trains.

And so it is with the Internet. Many young Net companies today struggle to generate revenue, but the Internet services companies providing their software or designing their sites can rake in millions for one project. And as dot-coms lay off workers, Internet services companies are doubling in size.

"The Internet services business is the best business going today," said Stan Smith, a spokesman at Fusive.com Corp., a Deerfield Beach company that provides Web design, development and consulting services.

Research firms back up his claim. Companies are expected to spend $3.6 billion this year on software that helps manage customer accounts; that figure should rise to $7.5 billion in 2003, according to the Yankee Group. Data storage is expected to drum up $135 million in sales this year, climbing to $5.3 billion in 2003.

And there is no shortage of Internet services companies in South Florida.

There are advertising companies, Web site designers, people to write business models or provide strategic advice, "fixers" who help dot-coms find capital or prepare to go public, data storage firms or software companies to handle any piece of a Web site's business. There are network engineers who set up the computer servers and those who monitor the servers — and even those who decide what kind of servers are needed.

Explosive growth
Semtor Inc. in Weston just launched its business this year as an "Internet accelerator." It provides many services to young Internet businesses, including site design and development, and strategy consulting, to get the business up and running. Semtor also will provide a young entrepreneur office space in its building.

It's too early to judge the company's track record in growing other businesses, but it's certainly accelerating its own. By the end of its first year of business, Semtor expects to have gone from three employees to about 150. The company expects to make several million dollars in revenue by the end of the year, and it even expects to accomplish something most first-year dot-coms can only dream about: turning a profit.

"Our services have immediate value, and we get paid fees for those services," said Harold Gubnitsky, chief executive at Semtor. "It gives us a more stable and predictive business model, which, in today's market, is a good thing."

Intelogistics Inc., on the other hand, has its hands full with Internet and phone services. The Fort Lauderdale-based company, in its third year of business, saw revenue almost triple to $4.5 million last year. Projected revenue for this fiscal year is $8 million — and the company has only 12 employees.

"We've been growing rather dramatically," said Roy Semplenski, vice president of sales and marketing at Intelogistics.

Then there's Daleen Technologies Inc. of Boca Raton, which has tapped into some of the hottest areas of the Net. The company designs Web software that helps a site's customers manage their accounts on the Net. For example, the customer of an Internet service provider can sign up for an account on a Web site, bypassing the customer service representative.

And it doesn't hurt that phone companies and Internet service providers, Daleen's best customers, are getting loads of venture capital now.

"These markets are growing tremendously," said Michelle Lebowitz, a spokeswoman at Daleen, which expects to add 148 jobs in the second half of this year, for a total payroll of 606 employees. "Because of the projected growth in our industry, we have to hire at an aggressive pace."

Some Internet services companies are not only expanding rapidly, but also branching out. Group Direct Inc. designs Web sites, Web ads and provides other advertising services for clients. In 1997, it also started a unit that designs software and helps in filling retail orders.

Group Direct already has offices in Deerfield Beach, Delray Beach, Boston and Milford, Conn. It plans to open other offices in Atlanta, San Francisco and Reno, Nev., within the next two years.

Avoiding risk
How does someone get into this business? Despite their growing numbers and apparent success, Internet services firms scoff at the idea that just anyone could make money in this industry. A number of these firms were founded or are managed by former consultants of Big Six accounting firms or information technology executives with years of experience.

So what is their secret? And how have they been able to avert being stung by the dot-com layoffs and cash crises?

To be sure, some companies may have been affected. Delray Beach software company Smith-Gardner & Associates Inc., for example, reported a loss of $1.3 million in the second quarter, compared with a profit in the second quarter last year. The company blamed customers' delaying their software plans; greater spending on research, sales and marketing; and steps it took to cover "doubtful accounts."

But Smith-Gardner, whose software helps retailers take and fill orders over the Internet, says the dot-com doldrums have had a limited effect on business because Internet-only companies represent less than a quarter of its business. Smith-Gardner says it's getting plenty of jobs from established retailers who want to sell their wares over the Net — and who won't have any trouble paying the bills.

Internet services companies also protect themselves by demanding cash instead of working in exchange for shares of stock in their clients. They also check out prospective clients to make sure their business model is viable and that they have enough cash to cover the bill.

And by the nature of their services, they get in early on the Internet company's business, while dot-coms usually still have plenty of money. Sometimes they demand payment up front.

"We get our money in advance, so even if a dot-com goes out of business (later), we still are OK," said Semplenski at Intelogistics.

Even if one or two dot-com clients go belly-up, Internet services companies know there are still plenty more fish in the sea.

The price of speed
With thousands of would-be entrepreneurs out there clamoring to be the next Bill Gates, these Internet services don't come cheap.

Speed in getting a business idea to market is key in the Internet world, and many young Internet businesses need a fast turnaround. Internet services companies understand this and are more than happy to dispatch an army of programmers, put in all-nighters or do whatever else it might take.

But that comes at a price.

Semplenski said Intelogistics or its competitors could get millions of dollars just for a month-long project, say, to set up a customer database from sweepstakes entry forms over a month.

TravelYA Networks Co. in Miami, a young dot-com developing travel Web sites for Latin American countries, was able to get its sites up and running within two months of contracting with an Internet services company. The companies bidding for the job wanted $1.3 million to $1.5 million to do it.

No problem. TravelYA had gotten $5.5 million in funding a few months before. "It was critical to the success of the business," said Miguel Mundarain, director of information technology at TravelYA. "In this business, timing is everything."

Mundarain said TravelYA also saved money by letting outside experts handle the technical part of the job, instead of having to hire a dozen people in-house and sweat all those details.

Web businesses will find themselves again writing six-figure checks to the service companies that have mastered the new technology.

"Companies will realize they need to keep moving forward," said Margaret Grisdela, president of Clientize.com Inc., a Boca Raton software and consulting company. "This will continue for quite a while."

Copyright ©, Sun-Sentinel August 14, 2000