cnbcs224

Exodus May Be at Crossroads

By Hal Plotkin
CNBC.com Silicon Valley Correspondent
May 4, 2001 01:00 PM


Exodus Communications 52-week stock performance

A handful of optimistic financial analysts are telling investors the worst may now be over for Exodus Communications Inc. {EXDS} shareholders. But several leading industry analysts say they have real doubts about whether the pioneering web-hosting firm will be able to survive, let alone prosper, over the long run as an independent player.

“I don’t see any way that Exodus can remain independent over the long term,” says Joel Yaffe, senior industry analyst at the Giga Information Group, in Cambridge, Mass.

Last week, Exodus posted earnings for its first quarter ended March 31 that were better than the company’s previous warnings had indicated and also shaved forward-looking revenue estimates for the remainder of the year. Exodus posted a net loss of 22 cents a share against the consensus estimate of a 28-cent net loss for the quarter but added that it now expects to generate revenues of $1.5 billion to $1.6 billion in fiscal 2001, well under the $1.85 billion analyst consensus forecast.

The company also announced the departure of its president-chief operating officer, its chief marketing officer and its chief financial officer, the latter of whom will be temporarily replaced by the company’s former CFO, Dick Stoltz.

Several securities firms, including S.G. Cowen, Thomas Weisel Partners, and Friedman, Billings, Ramsey, downgraded the stock on the news. But a handful of others reiterated “buy” recommendations saying investors, particularly those already holding the stock, should stay the course.

“We continue to believe Exodus will maintain its dominance of the web-hosting sector and emerge from the current turbulence with a profitable business model and a solidified market leadership position,” says Thomas W. Watts, a managing director at Merrill Lynch, in a research note published late last week. He reiterated his “buy” recommendation.

Industry analysts at Forrester Research, the Giga Information Group, and Gartner, however, express varying levels of doubt about whether Exodus has a viable business model as an independent firm.

Skeptics say Exodus will have a tough time holding on to market share in the web-hosting arena in the face of stiffer competition in the future, principally from big telecommunication firms such as American Telephone and Telegraph Company {T} and Worldcom Inc. {WCOM}, as well as from data center operators such as International Business Machines Corp. {IBM}, all of which they say can more efficiently bundle web-hosting with a variety of other complimentary products and services.

“The pure play web hosting firms aren’t going to be able to make it past a certain point,” says Melody Posey, an analyst at International Data Corp., based in New York. “They’re competing with companies that already have a lot of feet on the street, and which already have the relationships with the customers that allow cross-selling of web hosting along with other services. You get better economies of scale when web-hosting is part of something larger.”

The industry analysts say that telecom companies, for example, can offer discounted rates to customers while firms such as IBM can offer more inclusive service and support deals. What’s more, they say that current economic uncertainties seem certain to drive more web-hosting customers away from the pure play web-hosting firms.

“It’s a business decision,” says Yaffe, of the Giga Information Group. “The IT [information technology] guys still like Exodus but the Chief Information Officers are stopping them. Every day we hear about another pure play Internet firm going under and the top corporate leaders don’t want to take that risk. The AT&T’s and the WorldCom’s are licking their chops because they know they are not going to have to compete with those guys [the pure plays] for long.”

Although Exodus Communications already has a marketing partnership with telecom firm Global Crossing Ltd. {GBLX}, the industry analysts generally say the arrangement will need to be deepened and augmented to compete with more comprehensive product offerings emerging elsewhere in the industry.

But not everyone thinks the advantage will go to the biggest firms with the most complete set of product offerings.

“I still see room for pure plays, and Exodus is the quality pure play out there,” says Lydia Leong, principal analyst at Gartner, based in San Jose.

Leong says that experience has shown that most of the web-hosting firms that have been acquired by telcos or other larger enterprises have suffered as a result of their having been taken over.

“Every time a web hoster has been bought by a telco they have been adversely affected by that telco,” she says. “They lose part of their culture.”

Leong says she thinks that Exodus will be able to stick it out as an independent player based on its attentiveness to customers.

“The question,” she says, “is whether Exodus will get an [acquisition] offer that looks attractive.”

Jeanne Schaff, senior analyst at Forrester Research, based in Boston, sees the market moving away from Exodus, which she says is “basically a real estate play” because the firm’s main business is the operation of physical sites where customers co-locate high-powered servers in close proximity to major populations of Internet users.

“Co-locating servers is a short-term play,” Schaaf says. “At some point folks will realize they are not getting much for their money and they will migrate to a managed offer.”

Schaff says she remains confident that web-hosting as a business will hit the nearly $20 billion in revenue by 2004 that her firm projects, up from $2.5 billion this year.

But she says most of that future will belong to firms that offer more sophisticated “managed” web-hosting services, which include the automatic provisioning of capacity as needed. While Exodus has moved to offer more managed hosting options, Schaff says other firms such as privately-held Logictier Inc., Digex Inc. {DIGX}, and Loudcloud Inc. {LDCL} have a head start in developing the best software for those purposes.

“Exodus says they’ve got all the pieces,” says Schaff. “But they are really still the Home Depot of web-hosting. The customers have to put those pieces together.”

Exodus executives dispute that characterization.

“Exodus’ business continues to grow, due primarily to its strong business model and customer relationships,” said Ellen M. Hancock, Exodus chairman and CEO, when she released the first quarter earnings report. “We are benefiting from a “flight to quality” as businesses seek to outsource their key operations to experienced, established providers like Exodus.”

Hancock says that Exodus did an excellent job last quarter of winning major corporate customers to make up for slackening demand from dot coms.

But Yaffe, of the Giga Information Group, says he expects to see tougher competition in the web-hosting space moving forward.

“The telcos have offered web-hosting for a long time now,” he says. “But the difference is the level of attention in the last 12 to 18 months. The big telcos have gotten really serious about this.”

Yaffe adds that Exodus is the cream of the crop among the remaining standalone web-hosting firms, which could make the company an attractive acquisition target.

“Exodus is the only major independent web-hosting firm that hasn’t given up yet,” he says. “They have good momentum, a leadership position in the market, and good customers. Nobody I’ve spoken too thinks they are a good enough buy yet, but if the stock goes down any more someone will be making a play for them.”

CC BY 4.0
This work is licensed under a Creative Commons Attribution 4.0 International License.