Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Mike Buckley who wrote (3622)	7/10/1999 1:38:00 PM
From: Tom Ardnij	Respond to of 54805

Mike, IMO you are right on target about Web Hosting. Keep an eye out for the movement in Exodus(EXDS). I suspect we'll see rapid consolidation in this industry as large companies move data and Web centric e-business to offsite hosts. We should witness exponential growth in some of these small players whom probably will stand as takeover targets for larger fish. Regards, Tom

To: Mike Buckley who wrote (3622)	7/12/1999 10:11:00 AM
From: MulhollandDrive	Respond to of 54805

>>Wouldn't webhosting be a good vehicle to take advantage of e-business to e-business? I recently picked up EXDS, and I don't think it fits the gorilla designation << Yep, that's what I said. But I disagree with your point about the "low barrier to entry." bp

To: Mike Buckley who wrote (3622)	7/14/1999 10:51:00 AM
From: MulhollandDrive	Read Replies (1) \| Respond to of 54805

This is from the EXDS thread, as I previously stated, I see them as more a "king" instead of gorilla, apparently the analyst agrees. BTW, I had to look up "oligopoly". A nice definition for a "king". "State of market controlled by a few producers, sellers, or stock holders in relation to many buyers." bp See highlighted: 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 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. 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.