Weisel puts $155 target and BUY on ISLD:
08:34am EST 25-Feb-00 Thomas Weisel Partners LLC (Jim Linnehan 212-271-3751) ISLD:(TWP) Funding Flurry Post-Follow On (Pt 1/2)February 25, 2000 Thomas Weisel Partners LLCTelecommunication Services DIGITAL ISLAND INC.(1,2)-BUYJim Linnehan212.271.3751 FUNDING FLURRY POST-FOLLOW ON jlinnehan@tweisel.com NASDAQ: ISLD-$108-5/16Kevin Monroe212.271.3767 kmonroe@tweisel.com
INVESTMENT THESISWith the end of a quiet period related to Digital Island's recent financing,we are reiterating our BUY recommendation and calendar year-end 2000 pricetarget of $155. Our $155 price target is based on a 35x multiple to our $363million calendar year 2002 revenue estimate discounted back to year-end 2000using a 15% discount rate. As highlighted above, we believe Digital Islandhas put the strategic pieces in place to provide a compelling solution tobusinesses that seek to deploy an e*business strategy. We believe there is avast market potential for companies such as Digital Island that are enablinge*business. We believe shares of Digital Island are currently trading at attractivelevels based on our revenue multiple analysis and a multiple comparison to itsclosest competitor, Akamai Technologies. The following table highlightsDigital Island and some of its competitors' current market capitalization torevenue multiples based on current prices. Importantly, at our $155 year-end2000 price target, Digital Island would be trading at roughly 62x our calendaryear 2001 revenue estimate versus Akamai's current 163x multiple.Digital Island Multiple Comparison: Calendar Year Estimates
Company Description: Digital Island designed and operates the first globalInternet protocol applications network dedicated to deploying mission-criticalbusiness applications and Internet content worldwide. Clients typically aremultinational corporations who rely on the Internet to conduct business, butare constrained by the unreliability, slow performance and lack of scalabilityof the public Internet.INFRASTRUCTURE FOR E*BUSINESSWith the recent completion of its acquisition of Live-On-Line and SandpiperNetworks, we believe Digital Island is extremely well positioned in the fastgrowing Internet infrastructure market. Additionally, we look favorably onDigital Island's strategic alliances with both Sun Microsystems and Inktomi to deploy 5,000 Sun servers equipped with Inktomi caching technology across 350 major metropolitan markets. We also look favorably on the Company's Internet routing technology purchase from SRI International. We believe the Digital Island shares are attractive at current levels asthe Company is poised to benefit from its unique offering to businesses thatseek to capitalize on the fast growing e*commerce opportunity. This belief isbased on several factors. * A Compelling e*Business Solution. The combination of Digital Island and Sandpiper creates a compelling offering for companies that seek to execute e*commerce on a global basis. Furthermore, we believe the addition of Live-On-Line's streaming capability rounds out Digital Island's serviceoffering. ** Sandpiper greatly expands Digital Island's reach and extends its capabilities closer to the end-user or the edge of the network. WithSandpiper, Digital Island will have greater control over traffic once itleaves its network. Additionally, Sandpiper will increase the speed ofinformation on a customer's website, thereby improving the end user's webexperience. ** Digital Island, coupled with the recently purchased SRI routingtechnology, greatly enhances Sandpipers e*commerce capabilities as it adds asecure global private network with the ability to bring an end-user's purchaserequest back to the Digital Island/Sandpipers customers originating serverover the fastest and most reliable route possible. ** Live-On-Line provides to Digital Island critical streaming capabilitieswhich can leverage the technology to enhance Sandpiper's content deliveryservice with emerging applications such as ad insertion to live streamingevents. We believe Live-On-Line offers another compelling service for contentproviders that will drive increased traffic across Digital Island's network. * Strong Strategic Partners. As part of their respective strategic alliances with Digital Island, Sun and Inktomi took $20 million and $6 million equity stakes, respectively. These investments represent Sun's first equity stake in a web hosting company, which we believe, validates the strength of Digital Island's position in the marketplace. Importantly, Digital Island willbe able to leverage the Sun 10,000 member salesforce through a jointmarketing agreement. * A Burgeoning Opportunity. Digital Island is positioned at the sweet spotof the explosion in e*business by providing the infrastructure to enablee*commerce applications. Jupiter Communications estimates that website commerce transaction volume will grow an average of 62% per year from 1998 to 2003-an eleven-fold increase in transaction volume with large sitesexperiencing 120,000 transactions per day. Underlying this estimate, Jupiterexpects the percentage of online individuals to increase to over 150 millionby 2003, up from 81 million in 1998. Additionally, roughly 54% will purchasegoods online, up from 23% in 1998. In dollar terms, Jupiter expects goodspurchased online to grow from $7.8 billion in 1998 to over $75 billion in2003.RECENT FINANCINGDigital Island recently completed a follow-on equity offering of 5 millionshares comprising 3.85 million primary and 1.15 million secondary shares. Theoffering priced at $107 per share and generated net proceeds to DigitalIsland of roughly $385 million. Along with the follow-on equity offering,Digital Island offered $300 million in convertible subordinated debt. Theterms of the convertible debt are five-year duration with a three-yearnon-call provision and 6% coupon rate. With roughly $700 million from its recent financing, we estimate DigitalIsland is financed through 2002. With a strong cash position, we believeDigital Island is well positioned to execute its planned deployment of 5,000servers across 350 metropolitan areas by 2002 and to fund its global expansioninto additional countries from its current 21 country presence. |
