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Web Hosting Leader - Interland - Reports First-Quarter 2004 Results

Company Reports Progress Toward Its Organic Growth Objectives

ATLANTA–Dec. 22, 2003–Interland, Inc. (Nasdaq: INLD), a leading provider of business-class Web hosting and online services to small and medium businesses (SMBs), today announced financial results for its first fiscal quarter of 2004, ended on November 30, 2003.

"In our first quarter of focus on organic growth, we are pleased to report that we have made progress on each of the two critical factors we are concentrating on since the successful completion of the integration phase. We have reduced net churn(1) in our hosting business, and we have increased sales in our Mainstream business," said Joel J. Kocher, Interland’s chairman and chief executive officer. "Following our announced strategy, we are taking advantage of the cost efficiencies we created last year by investing in our operations, support, products and distribution and those investments are already paying off."

The company reported revenues of $26.7 million for the quarter, a decrease of 2.4 percent from the prior quarter. Net loss from continuing operations was $8 million for the quarter equating to a loss of $0.49 per share on 16.2 million shares outstanding. Including discontinued operations, net loss for the quarter was $8.6 million, or $0.53 per share. EBITDA(2) from continuing operations was $0.3 million for the period.

Allen L. Shulman, Interland’s chief financial officer, said, "A key objective this quarter was to slow the rate of net churn which had risen during last year’s integration phase. We are delighted to report that as a result of our early efforts and investments aimed at improving reliability and customer satisfaction, we reduced total net churn this quarter by more than 50% from the August quarter, aided by 11.3% growth in sales of recurring revenues and a 10.9% sequential reduction in gross churn. In the month of November, net churn had reduced to $55,100, or just 0.67% of the monthly recurring revenue at the beginning of the month. As further evidence of our progress in reliability, we observed a 14.4% reduction in support calls over the past three months, and a 21.2% drop in the number of service tickets opened."

Organic Growth Progress

Interland’s goal is to make it easy and affordable for the country’s more than 20 million Mainstream small businesses to have an effective and affordable Web presence. The company has announced that to achieve this goal it will increase its efforts and its investment in developing an array of attractive products, services, and distribution channels. During the quarter the company devoted a net expenditure of about $1.7 million to this initiative, tripling the number of direct field sales representatives to 12 at the beginning of December. As of quarter end, the company was delivering integrated web design, hosting and online promotion services to more than a thousand small business customers and generating from them more than $750,000 of annualized recurring revenues, representing sequential quarterly growth of 114%.

The company also successfully tested several online and telemarketing channels for its Mainstream business and is now implementing production. The company also released two additional separate versions of its proprietary website development software, and intends to release an additional seven versions this winter. The first two versions are intended to be used by Interland’s designers developing websites for restaurants and for CPAs and financial advisors.

Cash Position

Interland maintained a strong cash position while further reducing liabilities on its balance sheet. As of November 30, 2003, Interland’s cash and investments position, which includes cash and equivalents of $37.6 million, short-term investments of $6.5 million and restricted investments of $17.3 million, was $61.4 million. The change in cash balances from last quarter consists of: cash used in operating activities of $2.2 million (including payments of previously recorded liabilities of $1.5 million due to integration in fiscal 2003); repayments of debt and capital lease obligations of $3.5 million; capital expenditures of $2.5 million; and cash used in discontinued operations of $0.6 million.

Future Guidance

Although the company made substantial progress in reducing net churn, the reduction did not occur as early in the quarter as planned, nor to the full extent of expectations. The shortfall, although slight, will nonetheless have a meaningful effect on EBITDA for the balance of the year, due to the compounding effects intrinsic to a recurring revenue business, and because of the high percentage contribution to profit derived from incremental sales. Although the company could reduce its investments in its organic growth initiatives commensurately to achieve planned EBITDA levels, the company has decided that the value to be gained by continuing to invest is more important in the long run than maintaining short-term EBITDA. Accordingly, the company now expects that EBITDA for the second quarter may be slightly negative. The actual level of EBITDA for the balance of the year will be dependent upon the rate of improvement in net churn and the rate and timing of investments in Mainstream market channels.

The company anticipates about $10 million in depreciation and amortization expenses each quarter, and, consequently, a net loss in each quarter and for the fiscal year.

Over the remainder of the year, the company expects to devote about $5 million in capital expenditures to its Mainstream and customer satisfaction initiatives. The company’s other capital expenditures, primarily for new servers and related equipment, are expected to remain at about $1.5 million each quarter.

About Interland

Interland, Inc. (Nasdaq: INLD) is a leading Web hosting and online services company dedicated to helping small and medium businesses achieve success by providing the knowledge, services and tools to build, manage and promote businesses online. Interland offers a wide selection of online services, including standardized Web hosting, e-commerce, application hosting, and Web site development, marketing and optimization tools. For more information about Interland, please visit www.interland.com.