EXODUS COMMUNICATIONS
The Story
The U.S. and secondarily, the world, is shifting away from a PC-centric economy towards a Bandwidth/Internet economy. The number of users on the internet is doubling every 3 months. E-commerce is expected to grow from $80 billion in '99 to $1.4 trillion in '03. Of this $1.4 trillion, $1.3 trillion is thought to represent B2B e-commerce. This represents 1700% growth over the next 4 years.
The Company
The best way to think of Exodus is as a pure-play on Web-hosting and co-location, Internet access and connectivity, and Managed and Professional Services to large enterprises and .Com companies whose Web sites are mission-critical to their business. Sounds good, but what does this mean?
Web-hosting refers to the outsourcing and management of a customer's Web server, which runs the company's Internet, intranet, extranet, or e-commerce website. Collocation means customers physically move their Web servers from their corporate locations to the Exodus Internet Data Center (IDC). IDCs are physical facilities specifically designed to hold customers' Web equipment and house the customers' data. Those IDCs provide a secure platform for server-hosting, with uninterruptable power supply and backup generators; fire suppression; raised floors; air conditioning with separate cooling zones; seismically braced racks; network operations 24 hours a day, seven days a week; and high levels of physical security. Exodus began offering server-hosting in late 1995 and opened its first IDC in August 1996. It currently operates 18 IDCs in the United States and one in London. We expect the company to have 22 IDCs by the end of 1999.
Internet Data Centers
exodus.net
The IDC's have been the bread and butter for Exodus. Exodus is rapidly expanding the number and sq. footage of its IDC's. It should have 22 IDC's with 1.5 million sq. feet of data center space by end of 1999; and 37 IDCs with 3.5 million sq. footage by the end of 2000, with international expansion in London, Amsterdam, Frankfurt, Paris and Tokyo. Exodus now has peer relationships with approximately 200 network service providers; its 55 private peering agreements handle 86-87% of its outbound traffic. Thanks to continued investment in its worldwide Internet backbone (and its recent partnership with Global Crossing), Exodus now has a peak network exchange
capacity of 6.5 gigabits per second, vs. 5.6 Gbps last quarter. Exodus has far and away the greatest number of IDC's, which are expensive to erect, with estimated costs of ~ $40 million/IDC.
Management estimates that Exodus currently handles one-fourth of all Internet traffic.
Managed Services
Managed (value-added) services are a critical part of the business model as they differentiate the company from the competition, and provide higher margins. Chief among these are Caching and Content Distribution. This seems to be the sweetspot, right now, with other caching companies (Akamai, Cacheflow) coming public recently.
Content distribution is essentially a fancy name for utilizing caching technology to push content (Web site graphics, audio, and video files, etc.) closer to end users. The benefits of caching are primarily twofold. First, it enhances the end-user experience as content is located closer to the end-user. Second, it reduces bandwidth costs for content providers since the length of the network through which the content data must travel is significantly reduced. Exodus is well positioned to participate in this market. The company has multiple data centers in disparate geographies, which is a requirement for caching. The company also has a solid caching product, named ReadyCache, which is being marketed aggressively. The
ReadyCache product is based on leading technology from Inktomi with 32,000 lines of Exodus's proprietary software code. The benefits of caching are compelling. The
ReadyCache offering is simple to use and can essentially be turned on like a switch. This differs from other caching products, which require technology architecture changes and/or changes to the content publishing process. Exodus recently acquired Service Metrics, whch enhances Exodus's caching offering by giving the company 120 points of presence on major Internet backbone
providers' networks in which Exodus can locate its caching offering.
Professional Services
Professional services include systems and network design, management and maintenance. These are thought to be in increasing demand because customers are under pressure to quickly implement their Web strategy, and because it is less expensive to outsource this resource-intensive endeavor.
Market Share/Revenue streams
Exodus currently hosts 40% of the most widely viewed websites on the internet, and 6 of the top 10 websites on the World Wide Web. Of the remaining fractional share of the top websites, 30% are managed in-house by enterprises and the final 30% are split amongs a wide array of Exodus competitiors. Exodus wins 75-85% of all jobs on which it bids. It presently has 28% of the entire market, 1700 customers, and generates ~ $180,000 per year, per customer. It added more than 400 new customers in the last quarter alone. The number of new customers per quarter is increasing and annual revenue per customer per year is increasing.
Revenue streams are evenly split into thirds from Web Hosting, Managed Services and Professional Services. Approximately 85% of all customers opt for value added Managed Services, which provide higher margins. Over time, it is expected that revenues from Professional Services will increase as the complexity of connectivity increases, accelerating the desire to outsource these needs. Higher revenues are expected from Managed Services, with layered on, value added services increasing revenue per customer.
Revenues/Earnings
Market Cap about $14+ billion. Tremendous run of earnings surprises, with 11 consecutive quarters of 40% revenue growth (59% this past quarter). Annual revenue for 1999, 2000, 2001 should be $300 million, $600 million, and > $1billion. For the Web-hosting segment overall, annual growth of 105% is expected, increasing from $800 million in 1999 to $7 billion in 2002 (9x growth in 3 years).
Analysts value Exodus Communications at about a P/S ratio = 20-25.
Exodus is presently shovelling about 80% of its income back into growing the business. It is expanding, more than doubling its IDC sq. footage, and increasing its sales staff by 1/3. It has no earnings, but is expected to be earnings positive by 1st half, 2000. Exodus has more than $1 billion of convertible and senior debt.
Location in the Technology Adoption Life Cycle
Across the Chasm with widespread adoption, thru the Bowling Alley, and into the Tornado, with a quarterly revenue run rate of ~ 40%. Annual revenues quadrupled this past year.
Type of Royalty Candidate
King. No IPR; no architectural advantage or control. Its advantage is that of 'first mover', biggest in category, greatest breadth and depth of services, excellent execution to the present time. Exodus has built a strong Brand name. It will continue to aggressively expand, internally and by acquisitions. The most recent acquisition is that of the Japanese ISP, Go Online, in advance of the installation of an IDC in Tokyo. It is estimated that Exodus Communications has about a 12 month lead on the closest competitor in terms of infrastructure capabilities.
Degree of Complexity that could hinder Adoption
None. Actually the reverse; establishing connectivity, maintaining an in-house operation to manage enterprise data, and sustaining scarce, knowledgeable IT personnel are all obstacles that should propel companies towards outsourcing of data needs with Exodus Communications.
Switching Costs
Low. Low barriers to entry and to exit. As customers come to depend more heavily on Managed Services, it is assumed switching costs will increase. For the time being, switching costs are minimal.
Customers
Merrill Lynch, Sun Microsystems, The Gap, Applied Materials to name a few. Dot com companies include: Lycos, ebay, Hotmail, Yahoo, Inktomi. Applications Service Provider relationships are in place with Oracle, SAP, and Siebel.
The Competition
Akamai, Digital Island for caching; Qwest, Intel, Level 3 for new entries in the server farm business; Global Crossing, GTE, ATT, MCI Worldcom continue to fall behind Exodus Communications. Exodus Communications has 22 IDCs; the next closest competitor has about 5.
Management
Ellen Hancock, in her 50s, a veteran of IBM and Apple, is CEO. Apparently gifted in organization skills and in managing Wall Street expectations. This company is followed by no fewer than 11 analysts. The run-up in the stock price this past week is occurred after Exodus hosting its first Analyst meeting. This company has a very high profile.
Ms. Hancock: "In the third quarter, we added four and a half customers a day to our system. And the average price that the customer is paying went up. It's $176,000, annualized. And our sales people are saying, 'Look, we're leaving some deals behind because we just don't have enough people to work on the RFPs [requests for proposal].' So we just keep adding revenue."
Summary
As long as the internet and E-commerce are growing, Exodus would seem to have a very bright future. It is volatile, but trends to the upside. On December 14th, Exodus will split 2 for 1, for a third time this year. According to a Yahoo thread poster, the average run to the upside by Exodus is 129%; to the downside, it declines ~ 35%, with an average of consolidation period of ~ 39 days.
Revenue growth is a key metric, as is the number of new customers added each quarter. As a royalty play, one would have to very closely watch the competitive landscape for discontinuous innovations, or a commoditization of services.
Because it is in the tornado, and is a King, I think EXDS is a short to mid-term buy. Investment gains are best secured with early entry into the tornado; and are protected with rapid exit when revenue growth declines.
Apollo |
