H&Q's Suppiger on EXDS today:
Rating: BUY - FOCUS LIST
July 12, 1999
Erik Suppiger
Exodus Tours Demonstrate Management's Vision and Confidence
We recently toured a couple of Exodus' newest data centers in Santa Clara and Chicago. We are
encouraged by several aspects of the tours that demonstrate management's bullish outlook on the
Internet Data Center market and on Exodus' opportunity. The company is aggressively preparing
for long-term growth and we believe that near-term growth is accelerating. We also believe that the
company is well positioned to compete with future market entrants. Therefore we remain bullish
on the company's stock and we reiterate our Focus BUY rating.
FY Ends Dec
Current Price $136
52-Week Range $8-140
Market Cap(M) $5,647
Shares Out(M) 41.5
Book Value ($0.01)
Net Cash/Share $7.99
3-Year EPS Growth 100%
CY98 P/E-to-Growth NM
1998 A 1999 E 2000 E
Q1 EPS $(0.92) $(0.55) $(0.27)
Q2 EPS (0.36) (0.50) (0.19)
Q3 EPS (0.90) (0.46) (0.13)
Q4 EPS (0.50) (0.40) (0.08)
FY EPS (2.68) (1.91) (0.68)
FY REVS(M) 52.7 165 309
CY EPS (2.68) (1.91) (0.68)
CY P/E NM NM NM
Exodus is a leading provider of Internet Data Center solutions which include server hosting, Internet
connectivitiy, colaborative systems management and Internet technology services. It delivers services from
geographically distributed data centers that are connected by a redundant high performance dedicated
network.
Notes: a, b
Internet Data Center Tour Summary
We had the opportunity to tour Exodus' newest data center, the Santa Clara 4 facility, as well as
the recently opened Chicago facility. Santa Clara 4 is Exodus' largest data center with125K gross
square feet and it opened last month. We believe that Exodus has already booked out its Santa
Clara 3 facility, which was ahead of schedule, and the company is rapidly booking Santa Clara 4.
Despite the center's immense size, management is so confident in its ability to fill Santa Clara 4,
that the company is equipping the entire facility, whereas it usually equips centers in multiple
phases. In fact, we believe that Exodus had to adjust its construction process in order to open the
facility ahead of schedule.
The Chicago facility opened two months ago and it will be 50,000 square feet when it is
completed. Initial bookings are growing rapidly and the center is already 15-20% full, excluding
customers from the American Information Systems (AIS) acquisition.
We believe that the data centers provide the most reliable and high performance Internet Data
Center infrastructure in the world. Several aspects of their design demonstrate that the company
has developed a unique expertise in building data centers, a critical competitive advantage for
Exodus. For example, we don't believe that Exodus' competitors have data centers that come
close to Exodus' combination of scalability or redundancy in terms of floor space, power,
environmental control and network connectivity. The company also opened a fully functional
London based facility last month without any delays or interoperability issues. We believe that
the London facility demonstrates the company's ability to transport its expertise into international
markets, which will be critical to Exodus' growth strategy in CY2000.
Preparing For Long-Term Growth
Several aspects of our tours suggest that the company is aggressively preparing for tremendous
growth over the next 12 to 24 months. The company has consistently increased the average size
of its data centers. We believe that each of the remaining 5 data centers planned to roll out later
this year will exceed 100,000 gross square feet. Considering that Exodus only opened its first
100,000 gross square foot center in April, and that it entered 1999 with only 200,000 gross square
feet in total, we believe that this suggests that management is distinctly bullish on the company's
prospects. We also believe that management is evaluating data center sites in Atlanta and Texas
that could be well in excess of 200,000 gross square feet, an unimaginable number just 6 months
ago. As a result, we believe that Exodus could exceed the 1.3 million gross square feet that it
projected that it will manage by the end of the year. We estimate that Exodus currently has close
to 700,000 gross square feet in its data centers.
Management also has agreements for space that is adjacent to the new facilities so that the
company can create campus environments when they outgrow the sites that they are starting to
build. For example, the company has agreements for space that is close to its recently opened
centers in Santa Clara, LA, Chicago, London and Boston. The company is also seeking
additional space for its New York facility. We believe that by the end of 1999, management
intends to have lease agreements completed for most of the facilities that the company's domestic
operations will require in the year 2000. We believe that this will enable management to focus its
attention on international expansion in the year 2000.
We believe that Exodus' extensive network of data centers provides a significant barrier to entry
that new and existing competitors will be challenged to overcome. The company's ability to
penetrate untapped regional markets enables it to rapidly recover the capital costs required to
build new data centers. We believe that competitors will be far more challenged to recover their
capital investments as they compete with Exodus, the entrenched market leader. We are
encouraged by Exodus' success at developing its domestic network of data centers and we believe
that the company will effectively extend its strategy into international markets over the next
couple years. To that end, we would expect the company to build at least another 10 data centers
in 2000.
Current Tone of Business Appears Quite Healthy
While management could not discuss the status of the current quarter, various aspects of the tours
lead us to believe that there is a distinct possibility that the company could exceed expectations
this quarter. Notably, we believe that multiple data centers are tracking ahead of schedule, the
average revenue per customer appears to be increasing, and the company continues to add new
customers at a steady rate. We also believe that Exodus saw strong demand from enterprise
customers during the quarter.
We also feel that several aspects of the tours indicate that future estimates may be conservative
and could be revised upwards. For example, we estimate that the company increased its sales
force by at least 20% this quarter over last quarter. However, our current model does not reflect a
commensurate acceleration in growth for the September quarter. In addition, we believe that
there is a large-scale adoption of the Internet by mainstream enterprise businesses that is
accelerating growth in demand for Internet Data Center services. Not only are more enterprise
customers seeking data center services, but enterprise customers are frequently large users of
managed services, which is a stronghold for Exodus. In fact, in extreme cases at Exodus, more
than 50% of an enterprise customers' total services are managed services, whereas managed
services typically represent 10-15% of total. Managed services also enhance margins, increase the
average revenue per customer and improve customer account control.
Competitive Landscape Appears Manageable
While we believe that the competitive landscape will intensify over the next 12 to 18 months, we
feel that Exodus has a defendable market lead. We expect a number of service providers, such as
UUNet and Qwest, to enter the market, however, Exodus has not yet seen any change in the
competitive landscape as a result of any new competitors. These carriers may have some cost
advantage over Exodus in terms of backbone transport costs because Exodus does not own its
backbone lines. However, management indicated that Exodus' total backbone transport expense
will only represent 3% of the company's total costs once the company reaches its target financial
model. Therefore the real cost advantage of owning backbone lines is almost negligible. We
would note that local network access costs represent the lion's share of Exodus' network
expenses and long distance carriers don't have any local access cost advantages. In fact, Exodus
may have a cost advantage over long-distance carriers because of the large number of local access
lines that Exodus uses. On the other hand, we believe that Exodus has numerous advantages over
carriers entering the market including Exodus' unique managed services, extensive network of
Internet Data Centers, world-class customer base, trained sales force, data center expertise,
dedicated consulting services, technology relationships, and brand name recognition. We also
believe that the company is amassing a portfolio of proprietary tools that optimize off-the-shelf
products that Exodus uses for its services.
Recommendation
We remain bullish on Exodus and we reiterate our Focus BUY rating. While the stock has had a
strong run in recent weeks, we believe that the company's momentum and robust fundamentals
will drive it higher. The company is the entrenched leader in the Internet Data Center services
market, which is growing at a dramatic rate and which we believe will continue growing for an
extended period of time. Exodus has a highly differentiated product offering and a world-class
installed base. The company has demonstrated tremendous agility, market insight and execution
capabilities. We believe that the company's revenue multiple will continue to expand until the
stock trades in-line with other Internet infrastructure leaders. Notably, AOL (AOL/Focus BUY/
$128), Yahoo (YHOO/BUY/$160) and Inktomi (INKT/BUY/$140) all trade at considerable
premiums to Exodus based on CY00 revenues. In addition, we believe that the company has an
opportunity to exceed expectations, which will also contribute to the stock's appreciation.
(I'm still holding on, though partial profit taking on >100% gains is tempting) |
