Exodus.....
Tried posting some questions for Exodus DD on the Yahoo, SI and Motley Fool boards, and came away quite disappointed. However, did receive two really good replies, based primarily on gut instinct, but also with some references. EXDS may have higher switching costs than I appreciated.
Below is the one I received from a Motley Fool poster today, preceded by my post with questions:
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Have recently posted my DD on EXDS on Silicon Investor, both overview and revenues expectations.
Message 12230572
Message 12281266
David Levy of H & Q states in his Dec. 1st report that he estimates FY2000 revenues of $630 million; my estimates, using a 40% sequential growth per quarter, have 4th qtr '99 at $94.6 million, and FY2000 revs at $941 million. My questions to this thread are:
1. Why are the analysts underestimating revenues?
2. Would you agree that the barriers to entry in the web hosting industry are low? ie, anyone can build Internet Data Centers, etc?
3. That the switching costs from EXDS to another competitor are low; if I am in error please tell me why?
4. Will EXDS's market share decline with all the competition? If not, why not. They have no intellectual property or special services. As I see them, they are an early mover, and efficient; similar to Dell? Comments from the gallery?
Stan,
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REPLY:
Excellent DD! A definite must read for any EXDS investor. Thank you for spending the time to compile the information. It's great to have a clear and concise picture of EXDS in one place. Thank you again. I will try to answer your questions to the best of my ability, with some opinion thrown in.
1. Why are the analysts underestimating revenues? I cannot find that EXDS is expecting declining growth rates.
I would guess the analysts want to leave substantial room for lots of upgrades in the near-term future. Perhaps they are waiting for guidence from the company? Maybe analysts are trying to guesstimate the effects of competition? I think of GBLX as EXDS's strongest competitior, as they have just hired Leo Hindrey from AT&T. I've heard many good things about him. It could be any number of things...but I doubt it's because of slowing growth rate.
2. Would you agree that the barriers to entry in the web hosting industry are low? ie, anyone can build Internet Data Centers, etc?
3. Would you agree that the switching costs from EXDS to another competitor are low; if I am in error please tell me why?
This, I do not agree with. I believe the barriers to entry are extremely high in fact. This was one reason why I bought EXDS. As you mentioned in your report - it costs about 40M per IDC. Not exactly pocket change if you are a typical internet company nowadays. I don't think too many companies other than EXDS would have gotten the bonds floated, because they don't have the same brand name, or experience or top line growth like EXDS has. I doubt just any internet company can just take on EXDS at the spur of the moment. We already know that of course, because EXDS's competition is big, powerful companies with money to burn like Intel, Global Crossing, MCI Worldcom and Qwest. So getting into the business requires a tremendous outlay of capital. EXDS has a huge lead over the competition in this area.
Square footage:
boards.fool.com
That's one way this company has high switching costs. Another way is customer retention. I wish I had a link for this, but I've heard many times that EXDS has something like a 99% customer retention rate. Once a company has signed a contract with EXDS it's usually for a year or two. EXDS can then push all it's extras at the client easily. Once the customer has settled in, it's very hard to leave. You can't just move from EXDS to Globalcenter at the drop of a hat. Remember you have all your mission-critical data stored at EXDS. It is a huge amount of trouble and time to shift from one hoster to another. These people offer a 99% uptime deal. I think someone calculated that out..basically if your website goes down for more than 10 minutes a month? or a year? The client gets a free month of hosting. The average client pays 180K a year for EXDS to host their web site. In this industy, people can and will pay a premuim if they feel they will get better service. EXDS provides the best customer service on the planet for what they do. If Amazon.com went down for 20 minutes - how much money do you think they would have lost? With EXDS...that doesn't happen, period. If you are trusting EXDS with your most valuable data, information etc. You will choose the best, you will pay whatever the cost, so you don't lose it. And once you've chosen...it's like putting your information in Fort Knox. Why go anywhere else? That's high switching costs.
4. Will EXDS's market share decline with all the competition? If not, why not? They have no intellectual property or special services. As I see them, they are an early mover, and efficient; similar to Dell? Comments from the gallery? Or is EXDS so superior to competition as pure-play web hoster, that market share will grow?
I don't believe EXDS's market share will decline. I've read numbers in various broker reports..it has around 30% of the total market. I'll use that number. They are the earliest mover, they are building the fastest, highly efficent and totally and utterly focused. Their biggest competition is companies that aren't totally and utterly focused on the industry. Intel worries more about it's chips, Worldcom worries about digesting it's latest merger with PCS, AT&T worries about the transition from voice to data and so on. Global Crossing is EXDS strongest competition, because of Leo Hindrey, and he has the drive and skills to make inroads in EXDS's market share. EXDS in contrast, only worries about web hosting. It's pure as the driven snow. They are focused, their competition is certainly not inept, but distracted. EXDS will take advantage of that and continue to reap market share from all comers for a long time to come.
I would recommend looking through EXDS's web site at
exodus.com
Very impressive...gives you a good idea of what EXDS has that the competition does not in terms of managed services, custumer support etc.
Hope this helps,
Steve
Disclosure: Long EXDS,GBLX and others. |
