Revelations About Exodus
The Take
April 24, 1999
by Phil Harvey
Every day it seems a few more investors come around to the fact that Internet companies don't have to have the sex appeal of Amazon.com to sound irresistible. Hearing about Exodus Communications (EXDS), for example, offers the same level of sensory titillation as EDS (EDS).
But, as recent quarterly results show, Exodus stands to make piles of money in the future as it plows ahead in the business of giving Internet companies the tools to be Internet companies.
Exodus takes care of everything from hosting huge e-commerce Web sites to outsourcing business software applications online. It's what EDS did for companies several years ago when it introduced the concept of outsourcing. Or, to paraphrase Intel CEO Craig Barrett's description of the sector, Exodus is a building-block supplier to the Internet economy.
Intel (INTC) has been watching Exodus closely, and Friday it announced it would start offering Internet services to businesses. But Intel is way behind Exodus, according to Exodus CEO Ellen M. Hancock, because her company has added 172 new customers in the first quarter of fiscal 1999, bringing its total customer base to 1002. The company supplies services to household names such as Yahoo, Lycos, Hotmail, MSNBC and USA Today.
For the quarter, Exodus reported a net loss of $22.2 million, or $1.09 per share, on revenues of $30.1 million. BancBoston Robertson Stephens (BBRS) Analyst Richard Juarez mentioned in an April 22 research note that BBRS expects Exodus to be profitable in 2001.
Exodus also announced on April 21 that it will acquire Cohesive Technology Solutions Inc., an Internet solutions provider, for $100 million. Hancock says the acquisition brings Exodus' ranks to over 1,000 people, 40 percent of whom are Internet services consultants.
Exodus' evolution from providing server space and bandwidth to cashing in on consulting is beginning to pay off. "Sometimes, just to have the ability to bid on a job, the customer wants to us to include professional services as part of the bid," Hancock says. She adds that since Exodus has broadened its focus to include services, the company wins about 75 percent of its bids.
"We focus on our customers' systems, not just selling them space and bandwith, which could become commoditized," Hancock says. Even if it was just selling space, Exodus has plenty of it. According to an April 22 research note by PaineWebber analyst John Hodulik, Exodus should have 21 Internet data centers in service with over 1.3 million square feet of usable space by the end of 1999.
PaineWebber's Hodulik puts a $120 price target on Exodus share, while BBRS's Juarez expects Exodus shares to hit $190 in the next 12 months. Further, Juarez's April 2 "Virtual Bricks" report cautiously predicted that the global market for commerce service providers such as Exodus would reach $36 billion by 2001.
Another potential bonus comes from the Y2K problem, which Hancock fully expects to be a contributor to short-term growth. She says as it gets closer to the year's end, corporate technology managers will want to rent applications instead of hosting them internally. This trend, she says, will continue long after the Y2K jitters have subsided.
Analysts say mid-sized companies that can't afford a full-blown enterprise resource planning (ERP) software package, such as the products offered by Oracle and SAP, will also rely on Exodus and similar firms to rent applications.
And, as Internet traffic goes from page views to transactions, it may get too expensive for Interent e-commerce companies to buy, configure and maintain hundreds of their own servers to support their business. (These are the same companies, keep in mind, that are light years away from turning a profit themselves.) These firms, too, will turn to Exodus, or one of its competitors should Exodus' gears slip under all the demand.
So far, though, things look rosy for Hancock and company, even in the face of rivals such as Frontier's (FOR) Global Center, AT&T's (T) CerfNet and MCI WorldCom (WCOM). As BBRS's Juarez writes, "We believe that the more nimble and focused Exodus will outperform and outclass their rivals."
Exodus shares closed at 61 3/8 on April 19 and closed at 100 3/8 on April 23. Indeed, there's more to the Internet than pretty pictures and plentiful page views.
Phil Harvey (pharvey@upside.com) writes for UpsideToday.
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