EXODUS COMMUNICATIONS INC
Exodus Continues Its Jungle Roar After 2-for-1 Split and Announced
Initiatives – Updating Estimates to Reflect Stock Split
Richard A. Juarez
BancBoston Robertson Stephens
Exodus Communications Inc EXDS $82.75 8/30/99
Industry: Information Services
EPS 1997A: Actual ($0.67) FY: Dec 1998A 1999E 2000E
EPS 1998A: Actual ($0.89) EPS: 1Q ($0.23) ($0.27) A ($0.19)
EPS 1999E: No ($1.09) 2Q ($0.18) ($0.25) A ($0.14)
EPS 2000E: No ($0.47) 3Q ($0.23) ($0.29) ($0.09)
52-Week Range: 89.75 - 3.875 4Q ($0.25) ($0.27) ($0.06)
Shrs Out (MM) 82.3 Year ($0.89) ($1.09) ($0.47)
Mkt Cap. ($MM) $6,813 P/E NM NM NM
Avg Daily Vol (000) 3,566 Revs ($MM): 1998A 1999E 2000E
Bk Val/Shr NM 1Q $7.1 $30.1 A $93.7
Tot. dbt / Tot. cap 7.9% 2Q $10.1 $42.5 A $107.8
C1998 ROE NM 3Q $14.5 $62.2 $122.9
Price/Bk Val: NM 4Q $21.1 $81.2 $138.9
Net Cash/Share NM Year $52.7 $215.9 $463.3
Div/Yld: 0.0% Mkt Cap/Revs: 129.2x 31.5x 14.7x
3-Yr Sec Gwth Rt: 60% EBITDA/YR ($42.3) ($23.0) $81.0
Key Points:
· Updating 1999 and 2000 EPS to reflect 2 for 1 Stock Split effective August 12 –
1999 EPS updated from ($2.19) to ($1.09) and 2000 EPS from ($0.94) to ($0.47).
· Demand for outsourced business to business access, hosting and application services
continues to grow. Demand for these services will grow to $36 billion by FY01.
· Exodus' partnership with Compaq and Sun, called the Rapid Development Initiative,
will enable Exodus to quickly launch hosted web initiatives for its customer base –
deployment timelines will decline enabling further revenue growth.
· Exodus' Cohesive acquisition and alliance with Critical Path moves the company
further into the critically important managed services and messaging markets. We
believe these markets will fundamentally drive the growth of electronic commerce.
· We are maintaining estimates pending discussions with management and have
updated our twelve-month price target to $138 based on 25x FY00 revenues.
Reiterate Buy.
COMPANY UPDATE
Updating 1999 and 2000 EPS to reflect 2 for 1 Stock Split effective August 12 – 1999 EPS updated
from ($2.19) to ($1.09) and 2000 EPS from ($0.94) to ($0.47). Demand for outsourced business to
business access, hosting and application services continues to grow. Demand for these services will
grow to $36 billion by FY01. Revenue growth will be driven by (1) demand for Exodus's industry
leading complex hosting capabilities, (2) growing customer base and respective contract values, and (3)
acceleration in its managed services offerings, e.g. network design, caching. We believe that over 50%
of enterprises will establish a presence on the Internet by 2001. We believe many of these enterprise
will outsource their complex web hosting requirements to companies like Exodus.
The market for CSP services or Virtual Bricksä has begin to quickly evolve around three core area: (1)
Access, (2) Hosting, and (3) Outsourced Business to Business Applications. CSPs are providing the
Virtual Bricks needed to support the emerging Digital economy. Figure 1. presents our view of both
industry structure and the segmentation of various Virtual Brickä offerings. We believe Exodus'
complex hosting capabilities will be in highest demand.
Figure 1. Virtual Brickä Offering Defined
Source: BancBoston Robertson Stephens
Exodus' partnership with Compaq and Sun, called the Rapid Development Initiative, will enable
Exodus to quickly launch hosted web initiatives for its customer base – deployment timelines will
decline enabling further revenue growth. Additionally, the closing of the company's $100 million
acquisition of Cohesive will provide Exodus with critical managed services capabilities including: (1)
IT Security, (2) Disaster Recovery, (3) Storage, (4) Internet and Applications Development, and (5)
Data Network Services. We believe that the market for Commerce Service Provider (CSP) services
will increasingly demand turnkey services. Exodus' preemptive moves position the company to
continue to grow its share of the complex web hosting service market.
Exodus' Cohesive acquisition and alliance with Critical Path moves the company further into the
critically important managed services and messaging markets. We believe that enterprises will
increasingly encounter difficulty with: (1) provisioning and managing service, (2) coping with the
anticipated enormous growth in email volumes, and (3) maintaining service levels. Figure 2. illustrates
the rapid evolution of eCommerce enabling technologies and the many challenges that companies will
increasingly face.
Figure 2. Evolution of eCommerce and Impending Bottlenecks
Source: BancBoston Robertson Stephens
We believe that the growth in eCommerce will be fundamentally driven by the emergence of stable
environments and messaging platforms.
We are updating our estimates to reflect the company's recent 2 for 1 stock split. We are maintaining
our twelve month price target of $138 based on 25x FY00 revenues. Reiterate Buy.
THE COMPANY
Headquartered in Santa Clara, CA, Exodus Communications Inc is one of the leading business centric
providers of Internet systems and network management solutions for companies seeking to outsource
the hosting of their mission critical Internet operations. The company currently has approximately 800
employees. Of the total, approximately 110+ are dedicated to sales and marketing activities. Its core
products include (1) highly reliable and quality bandwidth – a.k.a. “connectivity”, (2) dedicated Internet
hosting and collocation for mission critical Internet applications, and (3) managed services, which
include professional services and valued added applications such as its new Data Vault product line,
which provides customers with superior data back-up and restoration services, enhanced system
administration services including version control and automatic software release updates.
Exodus has invested, built and placed into operation 13 state of the art Internet Data Centers in the US
and International markets. The company has announced that it will accelerate deployment of additional
centers and plans to have 22 data centers in worldwide operation by the end of 1999.
Exodus sells its services primarily through its dedicated, direct sales force. There are currently more
than 130 staff dedicated to sales generating activities. Currently, the company is running at a $217
million annualized inclusive of bookings vs. $156 million in 1Q99. The basic composition of its sales
includes (1) Connectivity Services: – 38% of total revenues: The company provides a robust and
highly scalable network to Internet centric business needing high quality, reliable Internet backbone
access. Its state of the art network is capable of delivering more than 4 GIGs of bandwidth. Its current
peak level usage is a mere 1.5 – 1.9 GIG; (2) Infrastructure and Hosting Services – 42% of total
revenues: This is the basic facility or space that customers lease from Exodus to co-locate their Internet
servers and applications. The company provides customers with access to facilities with redundant
power, redundant communications feeds, fire suppression, and reliable access to the company's Internet
backbone; and (3) Managed Services – 20% of total revenues: The company uses its managed services
to (1) extract additional revenues from its customer base and (2) lock the customer in by raising the real
and perceived exit costs. The company has maintained a low churn of less than 2%. We believe that
there will be announcements in the future concerning the expansion of these services. We expect that
the expansion may come from both internal growth as well as acquisitions.
INVESTMENT THESIS
The market for hosting services is poised to grow rapidly - on average by more than 70% over the next
three years. The market is expected to grow from $0.5 billion in 1997 to more than $7.5 billion in
2000. We believe the demand for these services will be driven by (1) the growth in readily available
Internet Media and Content and more secure payment mechanisms, (2) the shortage of IT professionals
and the need to leverage internal IT staff on Year 2000 issues, (3) complexities in managing Internet
applications, and (4) the hard dollar efficiencies associated with outsourcing Internet applications.
Based solely on the underlying fundamentals – 300% top line growth – we believe the company's
valuation has room for upside via multiple expansion and potential upside from even faster revenue
growth. It does not appear that the market has factored that in to date. The company stands to benefit
from increasing demand for Internet hosting and outsourcing services. It also stands to benefit from the
growing demand for services in a related sector such as Internet Media and Content as well as
Electronic Messaging
INVESTMENT RISKS
Among the risks are the possibility of increased competition from the telco players and from systems
integrators and the likelihood of continued operating losses until mid-2000.
Industry Competition: Exodus may face increasing competition from two sectors. The first includes
telco players such as (1) Global Center – purchased by Frontier, (2) CerfNet – purchased by AT&T (T
$47.5), (3) Level 3 (LVLT $60.81), (4) MCI WorldCom (WCOM $78.5), and (5) Genuity – Purchased
by GTE (GTE $71.12). The second source of competition may come from systems integrators
including EDS (EDS $56.81) and IBM (IBM $124). However, in a recent bake off, Exodus beat out
both IBM and EDS for a major contract. We believe that the more nimble and focused Exodus will
outperform and outclass their rivals. Given the increased demand for outsourced Internet hosting and
network management services and the potential threat from competitors, the company has elected to
accelerate the deployment for its IDCs. Irrespective, we believe that the market is large and will be
able to support multiple players at the high end and even greater numbers of competitors in the middle
market. In addition, we expect increasing competition from non-traditional competitors, such as OEMs
Dell (DELL $47.06), and Gateway (GTW $96.19) , which are bundling value added services such as
access and hosting, as well as Intel, which is developing a large scale hosting capacity. Although we
expect stepped-up competition, we believe that Exodus' differentiates itself skills needed for mission
critical, co-location hosting, which are very different from those new entrants are focused on
predictable production-based industries.
Sustained Losses: We estimate that the company will continue to incur operating losses until mid-2000.
We estimate that profitability will not be achieved until 2001. The company has significant
backing and has recently secured $200 million in high yield debt offering, which will provide it with
sufficient capital. |
