****OT**** Robbie Stephens Conference: Exodus Builds Digital Fort Knox
By Spencer E. Ante
Staff Reporter
2/24/99 7:00 AM ET
SANTA CLARA, Calif. -- From the outside, the data center of Exodus (EXDS:Nasdaq) in Santa Clara, Calif., resembles a garden-variety Silicon Valley tilt-up. But deep inside the 27,000 square-foot structure, a new industry is being born.
Exodus's data centers, which house hundreds of computer servers, are the Fort Knox of the Internet. And the security at Exodus is nearly as tight as it would be if the company were guarding gold.
One must be on a customer contact list in order to even enter Exodus' foyer. Once inside, a round of security guards stands in front of a door that whooshes visitors into a huge, humming and labyrinthine space filled with tall, black, steel cages. The data vaults here are protected by biometric hand readers, while security cameras survey the entire area and scanners carefully regulate the air temperature.
What is Exodus selling that needs this level of safeguarding and fortification? "We sell space," explains Kyle Barriger, who manages the facility, pointing to a rack of servers that Exodus hosts for Lycos (LCOS:Nasdaq). Customers "can purchase a quarter rack, a half rack, a whole rack or an entire cage."
All told, Exodus manages eight data centers -- three in San Francisco and one each in Los Angeles, New York, Boston, Washington, D.C., and Seattle -- plus a server hosting facility in London. And there are more data centers are on the way. This quarter, the company plans to open a data center in Chicago, and later in the year Exodus will unveil centers in London, Washington, D.C., and the Seattle area.
It's costly to guard the intellectual property that is the golden currency of the new economy. Despite nine consecutive months of more than 40% revenue growth, Exodus lost a mountain of money in 1998. Last year, the company lost $66.4 million, nearly triple 1997's $25 million loss.
However, company executives claim that their "same-store" data center model reaches EBITDA profitability after six quarters, sometimes faster. Right now, Exodus says that five of their eight operating data centers have reached EBITDA profitability.
"We know how much it costs to go in," said Exodus co-founder and chairman K.B. "Chandra" Chandrasekhar to the packed room at the BancBoston Robertson Stephens Technology 99 Conference. "In 14 months our centers become cash-flow-positive."
Beyond the high costs of building centers, Exodus faces heavy-duty competition. The startup is going mano-a-mano with giants such as AT&T (T:NYSE), IBM (IBM:NYSE), Electronic Data Systems (EDS:NYSE) and national and regional ISPs. But Exodus says it wins more than 80% of its bid attempts. "We are not alone in this market," says Chandrasekhar. "We definitely have a lot of competition, but the telcos don't execute best in this space."
Exodus benefits from having first-mover advantage in the Web hosting market. Its customer base is growing rapidly and lays claim to some of the biggest names on the Internet, including Yahoo! (YHOO:Nasdaq), Sony Online and Blockbuster Interactive. This year, Exodus hopes to leverage its cachet with .com firms into new contracts with more established brick-and-mortar enterprises. What's more, CFO Richard Stoltz recently said the average revenue per customer has grown from $47,000 to $133,000 per year, largely based on added service fees the company receives for managing Web sites.
The company is also capitalized to acquire companies. On Monday, Exodus said it plans to raise $200 million in a private offering of seven-year subordinated notes that can be converted into common stock. Proceeds will be used to finance acquisitions, the company said.
Some problems loom in the future. Most prominent is the risk of an attack on Exodus' vaunted security system. Company executives may never admit it, but data centers are an ideal target for hackers. Perhaps that's why the company's most high-profile acquisition to date was Arca Systems, a network security consulting firm authorized by the National Security Agency to certify compliance with federal government security standards for software products.
"If you have a set of people whose job it is to watch over your assets then you're going to be much better off," said security consultant Robert J. Stratton of Security Design International. "However, with respect to outsourcing there are some real, unique problems that we haven't adequately addressed." Highest on that list, says Stratton, is authenticating the identity of customers accessing servers.
"The majority of exposures in data centers will be caused by the customer," said Stratton. "Customers have to get access to that information without exposing it en route."
Investors seem jazzed about Exodus' prospects. The market for Web hosting services is estimated to grow by 200% a year for several years, Chandrasekha said. Recently, BancBoston Robertson Stephens analyst Rick Juarez issued a 12-month $135 price target. The stock closed at 82 7/8 Tuesday, up 2 7/8 on the day, but still off its 12-month high of 115 1/8.
"I think the most interesting thing about them is the e-commerce opportunities," said Paul Sherer, a private investor. "All they've done is create fast Web pages. The next thing is to enable fast commerce pages."
In fact, in the hallway after the presentation Chandrasekha told TSC that the company is already providing e-commerce hosting services to CyberSource and CyberCash (CYCH:Nasdaq).
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