CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Technology/Internet Data Services
BUY
LARGE CAP
$9.03
Exodus Communications Inc. (EXDS)
Exodus reports weaker than expected Q1 results; management lowers guidance.
Summary
Exodus reported weaker than expected first quarter results last night.
Revenues of $349M and EBITDA of $5.5M were 6% and 23% below our estimates of $
370M and $7M respectively, reflecting the difficult market conditions.
The company provided revised guidance for 2000. The company had previously
forecasted a range of revenues of $2.0 to $ 2.3billion and is now forecasting
a range of $1.5 to $1.6 billion. We had previously forecasted revenues of $2.
01 billion and EBITDA of $296 mm. We are adjusting our numbers to $1.5
billion and $177 mm for revenues and EBITDA respectively.
While the hosting sector is being impacted at the current time by the pull
back in corporate IT spending and the ongoing shakeout in the dot-com sector,
the underlying fundamentals of the sector remain intact. We continue to
believe Exodus is and will continue to be the market leader in this sector
and as such we maintain our Buy recommendation with our new target of $15.
Price Target Mkt.Value 52-Week
4/26/011 (12mo.) Div. Yield (Mms) Price Range
USD 9.03 $15 None None $17.8B $69-$6
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
12/02E -0.17 0.96
12/01E -0.70 0.33
12/00A -0.36 -0.10
March June Sept. Dec. FY End
2002E -0.08 -0.05 -0.03 -0.01 Dec 31
2001E -0.22 -0.21 -0.16 -0.11
2000A -0.07 -0.07 -0.10 -0.13
ROIC (12/00) NA
Total Debt (12/00) $2.8B
Book Value/Share (12/00) $1.09
WACC (12/00) NA
Debt/Total Capital (12/00) 16%
Common Shares 631M
EP Trend2 NA
Est. 5-Yr. EPS Growth NA
Est. 5-Yr. Div. Growth NA
1On 4/26/01 DJIA closed at 10692 and Nasdaq at 2035.
2Economic profit trend.
Exodus is a global provider of Internet systems and network management
solutions for businesses with mission-critical Internet operations.
Investment Summary
Exodus reported weaker than expected first quarter results last night,
reflecting the overall difficult market conditions. The company reported
revenues of $349 mm, a 24% sequential increase on a stand-alone basis and 4%
sequential increase on a pro forma basis. This was 6% below our expectations
of $370 mm. EBITDA of $5.5 mm was also below our expectation of $7 mm.
Churn during the quarter increased to 6%, doubling from 3% in the previous
quarter. Annualized revenue per customer decreased during the quarter by 2%
to $323,000. Bookings for the quarter totaled $200 mm, down 27% sequentially
from $270 mm (EXDS stand-alone.)
During last night's conference call the company provided revised guidance for
2001. The company had previously forecasted revenues of $2.0 to $2.3 billion
and is now forecasting a range of $1.5 to $1.6 billion. The revised guidance
is being attributed to sluggish growth from dot-coms, impact of high levels
of churn as well as more difficult general market conditions. We had
previously forecasted revenues of $2.01 billion and EBITDA of $296 mm for 2001
. We are adjusting our numbers to $1.5 billion and $177 mm for revenues and
EBITDA respectively.
While the hosting sector is being impacted at the current time by the pull
back in corporate IT spending and the ongoing shakeout in the dot-com sector,
the underlying fundamentals of the sector remain intact. We continue to
believe Exodus is and will continue to be the market leader in this sector
and as such we maintain our Buy recommendation with our new target of $15.
First Quarter Highlights
Revenues
We note that historically we have been providing sequential growth rates for
investors as a measure to company's current quarter performance, however, we
will be unable to do so with this quarter's results given the lack of
information on GlobalCenters' Q4 actual results. Comparing this quarter's
results to Q4 Exodus' stand-alone results will not provide appropriate
comparatives.
Exodus reported revenues of $349 mm for the first quarter of 2001, a 22%
sequential increase (4% sequential increase on our pro forma estimates) and 6
% below than our estimate of $370 mm. More specifically, managed services
contributed 32% of total revenues in the quarter (38% in Q4 '00) with hosting
services and Internet connectivity contributing 45% (42% in Q4 '00) and 23% (
20% in Q4 '00) respectively. We recognize that the revenue mix was affected
this quarter due to the addition of the GlobalCenter customer base, which has
a higher percentage of space and bandwidth revenues than Exodus. According
to Exodus management, GlobalCenter generated less than 8% of its revenues
from managed services last quarter. Nevertheless, we believe that Exodus
will be aggressively cross-selling its suite of managed services to the
GlobalCenter customer base and drive the revenue mix of the combined company
back to historical levels over time.
Looking more closely at the top line, the average annualized recurring
revenue per customer declined 2% from $329,000 in Q4 to $323,000 in Q1. The
decline in revenue per customer was the result of the acquisition of
GlobalCenter, which had an ARPU of approximately $250,000 in Q4 2000. The
company believes that with the aggressive cross-selling of managed hosting
services to the GlobalCenter customers, continued up-selling of additional
services to existing customers and the signing up of larger corporate accounts,
ARPU is expected to trend upwards going forward.
For the first time the company provided revenues generated from managed
hosting, which came in at $36 mm for the quarter a growth rate of 20% over
the fourth quarter.
Exodus recorded net new customers added in the quarter of 534. However,
since GlobalCenter had approximately 500 customers at the time of the
acquisition, we believe that organic customers growth this quarter was down
substantially from the fourth quarter (245 net adds in Q4 '00) due mainly to
an increase in churn and the slowdown in demand from dot-com customers. It
is difficult to provide an accurate net add number given that when Global
Center was consolidated, the increase to Exodus customer count was less than
500. There were some customer overlap and elimination of redundancy due to
the way GlobalCenter accounted for customers. The bottom line is that net
adds did decline substantially versus previous quarters given the reduced
demand from dot-com customers, caution on behalf of enterprise customers and
much higher churn levels. We note the company stated on the conference call
last night that they have noticed an improvement in both demand and churn in
March and April.
We believe that most of the incremental demand for hosting and managed
services over the near to intermediate term will come from the enterprise
market. Exodus has been targeting the enterprise space for some time and its
efforts are continuing to bear fruit as highlighted by the company's growing
base of signature corporate accounts. In addition, the company's focus on
the enterprise segment is also being reflected in the revenue mix. During
the fourth quarter enterprises contributed 62% of total revenues and bookings
, which is up solidly from 57% last quarter and 44% from the same period last
year. More specifically, 2/3 of new bookings in this quarter was from
enterprise accounts.
The company generated $200 mm in new bookings during the quarter, down 27%
from the prior quarter. This is the first quarter where new bookings growth
declined sequentially. The company's ability to drive bookings is obviously
being affected by the slowdown in dot-com demand. We expect new bookings to
improve somewhat in the later half of the year as Exodus continues to ramp
its enterprise pipeline and as market conditions improve. However we are not
expecting substantial improvements in bookings until 2002.
Expenses
The company reported gross margins of 27% in the quarter or 43% excluding
depreciation and amortization. The company reported EBITDA of $5.5 mm for the
quarter, $1.5 mm less than our estimate of $7mm. While revenues were lower
than expected so were operating costs at which resulted in a slight miss on a
dollar basis.
Given its revised growth expectations the company has undertaken a reflective
cost control program. The company has placed a moratorium on hiring,
eliminated all contractors, consultants and temporary workers. In addition
the company expects to achieve staff reductions through attrition and
actively assessing productivity of its employees. The company has instituted
a company wide program to reduce all discretionary spending and has launched
a mandate to review all of its operating processes to continue to improve
operating efficiencies. We expect this to result in significant improvements
in gross and EBITDA margins throughout the year.
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
Copyright © CREDIT SUISSE FIRST BOSTON, and its subsidiaries and affiliates,
2001. All rights reserved.
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
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= = EXODUS COMMUNICATIONS = = EXDS: BUY |
