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Internet: Is the Exodus from Exodus Over?
Staff Writer: Carrie Warburton (10/26/00)
In the world of web hosting, Exodus Communications (NASDAQ: EXDS -
Quotes, News, Boards) is Godzilla on steroids.
The third quarter marked the 16th in a row that Exodus exceeded Street
estimates, "a feat not accomplished by any other Nasdaq company," said
Exodus CFO Marshall Case.
This quarter, Exodus beat Street estimates for revenue; earnings per
share; gross margin and earnings before interest, taxes, depreciation and
Exodus' third-quarter revenue grew to $229.6 million, up 28% from
second-quarter revenue and up 238% from the same quarter last year.
Exodus reported a third-quarter net loss of $69.5 million, or $0.14 a share,
beating the consensus estimate, which called for a loss of $0.17 per share.
Exodus, the world's largest business-to-business web hosting carrier,
maintains space for more than 62,000 servers that house Exodus
customers' websites and offers features to increase sites' functionality.
But despite a positive third-quarter earnings report and an optimistic
conference call, shares of Exodus Communications tumbled 12% Friday,
the day after its report and conference call, to close at $33.56. The stock
was recently at about $32.
Why did Exodus' stock drop? It might be because Exodus added 414 new
customers during the third quarter, the lowest number since 1999. Exodus
gained 500 new customers in the second quarter of 2000 and 545, a high,
during the first-quarter.
This is a signal that Exodus is being affected from failing dot-coms, said
Brent Bracelin, an analyst at Pacific Crest Securities.
"Here's a company leader in web hosting that is feeling the pain of the
dot-com shakeout in their business," he said.
But Riyad Said, Managing Director and Senior Analyst for Friedman,
Billings and Ramsey, sees the shakeout as a good thing, because it
means a more reliable "bricks and mortar" patron base for Exodus.
"Even their Internet companies are household names," he said.
Exodus is often referred to as the "web-hoster to the stars." Its clients
include eBay (NASDAQ: EBAY - Quotes, News, Boards), Yahoo!
(NASDAQ" YHOO), Starbucks (NASDAQ: SBUX - Quotes, News,
Boards), and Oracle (NASDAQ: ORCL - Quotes, News, Boards), all of
which increased their business with Exodus during the third quarter.
Exodus added Adidas, France Telecom, and Crane Paper Makers,
among others, during the third quarter.
Exodus is also diversifying its customer base. Enterprise businesses now
make up 53% of Exodus's total revenue compared to 39% a year ago.
Hancock said Exodus is aiming at a 60% enterprise customer base.
Although customer growth may be slowing, Exodus is getting more money
from its clients. Exodus' annualized revenue per customer has grown 50%
per quarter since the fourth quarter of 1999, when it was $196,000. Third
quarter annualized revenue per customer was $299,000.
Exodus may also be able to offset this added net customer decline through
its new managed web hosting division, thereby adding flexibility to its
Managed operations, brought on since Exodus' acquisition of Global
Crossing's Global Center unit, will increase space and allow customers
more choices in Exodus' services.
This is consistent with what we said back in March. In order to survive,
web-hosting companies will need to stick out above the fray by offering
unique services and by utilizing cutting-edge technology.
"I would say that any company that was selling into the Exodus Data Center
feels that we have just moved into a second market and that we are
opening their ability to manage what up to bow must have seemed like
different markets," said Exodus CEO and Chairman Ellen Hancock.
In the past, Exodus offered primarily co-location services, in which a
company owns its servers and puts them in Exodus' data center. Although
this plan allows companies more control over their sites, Exodus found in
its dealings that some customers took their business to rivals who could do
managed hosting, which is quicker for a company to set up, Hancock said.
In managed hosting, the customer doesn't own the server but contracts a
host to manage and maintain the machines.
"We're moving from what is today a customized application market to a
'productized' applications market," Hancock said.
The September acquisition of Global Center, a division of Global Crossing
(NASDAQ: GBLX - Quotes, News, Boards) , is a step to takeover the
managed hosting business, increase "web real estate" and take out one of
Exodus' biggest competitors.
But does Exodus, still a young company incurring net losses, have the
money to expand?
Bracelin thinks so, and sees the acquisition of Global Center, financed with
stock, an "enhancement" and not capitally intensive.
Financially, Exodus is on track and is not changing its guidance estimates,
In less than 19 months, Exodus Communications has been able to turn its
EBITDA positive, a remarkable feat, Bracelin said.
Exodus' financial health is looking so good that Said predicts that fourth
quarter 2001 will be when Exodus finally turns a profit (without factoring in
the integration of the operations of the newly acquired Global Center).
Year 2000 losses so far are smaller than analysts had been expecting. The
consensus estimate for 2000 calls for Exodus to lose $0.69 per share. For
the nine months ending September 30, losses totaled $0.45 per share.
The managed hosting will enable Exodus to cast an even wider net,
"It is our assumption that as service builds up, that we will be moving to
other parts of the United States and it is our intent to move that offering into
Europe and Asia," Hancock said.
Exodus' future customers will come from a relatively unpenetrated
international market, Said said.
"It will expand their footprint and they'll be able to leverage with their
connectivity, networking and infrastructure," he said.
Exodus did not change its guidance even after beating street estimates.
"This is a company that has done a good job in being consistent with their
guidance," Said said.
With Exodus shares 63% below their 52-week high, we think the
stock is very attractive - especially considering that from an
operational perspective things are going fine.