*Braverman report on EXDS [See bolded sections relevant to ISLD]
[We should see a similar type report on ISLD in about a week. djane]
Talk : Web/Info : Exodus Communications, Inc. (EXDS)
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To: William F. Wager, Jr. (746 )
From: SteveG
Wednesday, Jul 14 1999 10:17AM ET
Reply # of 759
from BOFA Securities analyst Alan Braverman - EXDS Coverage Initiated
- We are initiating coverage of Exodus Communications with a Buy rating on the shares.
- Exodus is a leading provider of key components of Internet infrastructure, Internet
systems and Network management services. Services include server hosting, Internet
connectivity and managed services.
-Exodus differentiates itself from the competition by being the provider of choice to
most of the Internet's blue chip web sites such as Yahoo and Hotmail (Microsoft). The
company focuses on the Internet business market and on the Fortune 1000 businesses.
Each of these target markets is large and very attractive.
- We believe management has executed flawlessly to date and has the drive and vision
to keep Exodus in the forefront of this booming market.
- Risks include addressing increased competition and handling the 30-40% sequential
revenue growth.
- Our expectation is for revenues of $38.3 million for the June quarter with a loss per
share of $0.52. For 1999 our revenue estimate is $164.5 million with a loss per share of
$1.94. We also expect meaningful growth in FY 2000 with revenues of $306.3 million
with a loss per share of $0.68.
- We have a 12 month price target of $170. This is the mid-point of our range of
165-175 which we derived using a market cap to run rate revenue of 55-60X, the
average for the quality companies on our watch list.
Company description
The company was founded in 1995 [same as ISLD] and is the leading provider of outsourced Internet
infrastructure solutions including mission critical web hosting and server collocation. The
company's target market is leading web companies and Fortune 1000 companies with
mission critical Internet operations.
A few current clients include:
GeoCities Wired Inktomi CBS SportsLine
Macromedia Hotmail MSN Lycos
DoubleClick Sun Microsystems PETsMART Silicon Graphics
The company currently has thirteen Internet data centers (IDC's) with announced
intentions of opening another five IDCs and three server-hosting facilities by year-end
1999. The Exodus solution
includes Internet Data Center services, and network and management services. The
company currently has 1002 customers.
**KEY**
The web access and hosting market is large and growing. Forrester expects that web
hosting will grow from $0.9 billion today to over $14 billion in 2003. If access is added
in, this number increases to a total of over $50 billion in 2003. We believe the company
will expand aggressively both domestically and internationally. We look for the company
to grow along with its existing clients and to expand its customer base. We also expect
the sub-industry structure to remain dominated by a few major providers which should
help solidify the company's position as the leading provider of outsourced Internet
offerings with local service and global reach.
Investment Thesis
We believe there are many areas for upside in the Exodus story. We expect Exodus to
be a key beneficiary of the Internet's future growth. We believe that the Internet's
various sub segments will ultimately take an oligopolistic form and, as the current leader,
Exodus should therefore benefit disproportionately from this growth. We also believe
that the company will grow as its customers' needs grow and that Exodus will benefit
from this increase in demand from existing customers. The overall demand equation
should be driven by:
1) an increasing number of users on the Internet,
2) an increasing number of new uses for the Internet and,
3) increasing usage of the Internet.
Each one of these U's supports a strong demand for the kind of Internet infrastructure
that Exodus supplies. Taken together and with an oligopolistic industry structure, we
believe Exodus is well positioned for long term sustained growth.
Other reasons why we think Investors should own Exodus:
- Outsourcer of choice Exodus provides service for some of the leading, most highly
trafficked web sites.
When a Fortune 1000 company finally enters the Internet market, chances are that
they'll go with an established leader. Exodus has become that leader by providing the
mission critical Internet service and reliability which are key to their customers' success.
- Large and growing market – Exodus is in the web hosting market. This market is
expected to grow at 76% through the year 2003. The company's offerings are
compelling to the end user. Exodus estimates that the cost for a company to run its own
data center is about $900,000/yr versus about $150,000/yr for Exodus to do it. We
know that Exodus' services are mission critical to Internet centric business and we
believe Exodus will benefit from the Internet becoming increasingly mission critical to
non-Internet centric businesses.
- Management is outstanding ¾ the management understands the needs of its target
market and has demonstrated its ability to execute, which is critical to the company's
long-term success.
- Success breeds success. We expect that there will be increasing competition from
many sources including ISPs, telecommunications companies, and IT outsourcers.
Exodus's sustainable competitive advantage comes through its blue chip client list, the
understanding of the current and future needs of its clients and continuing to be the best
supplier of those services. The competition will need get big fast and try to usurp
Exodus as the leader; by pricing, packaging and demonstrating they can serve mission
critical Internet service. We believe this is a non-trivial task.
-Great business model ¾ there are generally two components to the revenue line for
Exodus. There is a one-time set up charge and an on-going service charge. The service
charges are recognized over the
year. We find Exodus' recurring revenue streams very attractive because of its
predictability emanating from the company's high customer retention rates that have
historically been in the 98% range. We believe, as with Amazon, the high percentage of
orders from repeat customers indicates a high level of customer satisfaction. Reasons to
own Exodus. Consistent with our braving the Internet investment criteria, Exodus meets
every one of our key metrics for success. We believe investors should buy stock in
companies which are:
- The leader
- In a fast growing sector or sub sector
- Are well managed
- Have a sustainable competitive advantage and,
- Have a strong business model.
Exodus displays each of these key investment criteria and therefore we believe should
be a core holding for Internet investors.
Financials
Exodus has a very solid business model with greater than 90% of the current quarter's
revenue coming from recurring revenues, and an annual retention rate of 98%. These
characteristics make for a particularly attractive economic model with both stable and
highly visible revenue. Further, evidence from the company shows that many companies
begin the relationship with modest plans for outsourcing their web site needs but over a
short period of time end up migrating to a higher level of services. The company has
over 100 sales people who have a monthly quota of $8000 of new business. The sales
cycle: it generally takes 90 days to install a new customer into a data center. As of
March the company had 1002 customers with an average annual revenue of $148,000
per customer per year. About 8-10% of this revenue is from non-recurring installation
and set up charges.
We expect revenues of $38.4 million for the quarter and $164.5 million for the year.
We look for an 86% increase in revenues for FY2000 to $306 million. We feel very
comfortable with these assumptions and could prove to be conservative.
Until the middle of FY 2000 we expect that the operating costs will exceed revenues.
This is due to the high costs affiliated with opening new data centers. Each data center
generally turns EBITDA positive in the 5th quarter of operations. Currently of the 13
open data centers 7 are EBITDA positive.
While we do not expect the company to be EPS positive until sometime in 2001, the
company should turn EBITDA positive in the first quarter of FY2000. |
