Mass Exodus
Bear Argument
By
Rick Aristotle Munarriz (TMF Edible)
Now you'll know the rest of the story.
I'm sure Todd did an amazing job in pointing out the finer points of Exodus. Unfortunately, behind every selling point there is also a reason to sell. Allow me the opportunity to try to make your nodding head shake from side to side. Let's dunk and debunk the perceived strengths of Exodus.
Prized client list
Todd probably pointed out that Exodus is the Web hosting choice of online juggernauts such as Yahoo! and eBay -- and those are just the profitable ones! The shakeout in the dot-com world is real. Believe it. It's just not the kindest of capital-raising climates out there.
The environment is bound to rattle some members of the Exodus base. Over the past five quarters, net receivables have grown from $25 million to $134.4 million. Sure, revenues have soared as well, but it's taking nearly two months for Exodus to collect for services rendered. Cash-strapped customers will continue to be a stingy credit risk. With growth now slowing for Exodus, keep a close eye on the receivables over the next few reporting periods. It might get ugly.
The enterprise solution
Don't worry, says Exodus. The company is signing up corporate heavies. Its success at landing hot Web properties in the past has given Exodus a foot in the door of many Fortune 1000 companies.
This sounds great, until you realize one thing. How much Web traffic do you expect recent signees such as Adidas and L'Oreal <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LORLY)") else Response.Write("(Nasdaq: LORLY)") end if %> will generate? Yes, internally it's a gold mine, but I don't see tableware maker Lenox, or stationery specialist Crane making a bull-rush up the Media Metrix Top 50. Do you?
Exodus is now on pace to make nearly $300,000 a year off its average customer. If the future holds more Fortune 1000 companies that simply want an online presence and produce less high-volume business than the eBays of the online world, won't the average take shrink?
What's that smell? Growth?
Sequential revenue growth in September was just 28%. It was 34% the quarter before that. It was 58% a year before that. See the trend? While the company is still making huge strides on an absolute basis, it's beginning to tire out on a relative basis. There's actually one thing more alarming than this -- the "In" door itself.
New Internet Data Center
Customers for Exodus
March 2000 ��������545
June 2000 ���������500
September 2000 ����414
Uh oh. In the tweaked vocal stylings of David Byrne, this is not my beautiful host.
Seventeen quarters of market-thumpin' red
I've always been drawn to companies that consistently top analyst expectations. On the surface, that's exactly what Exodus has done. The September quarter marked the 16th consecutive period that Exodus beat market projections. It even announced that it would exceed the December consensus, too.
One problem. One big, big problem. Every single quarter has been a loss. Really. "We didn't lose as much as you thought we would" is no way to grow a business. And yes, the company already indicated that it would lose money next year, too. So, keep aiming wide, Wall Street. It makes Exodus' flesh wounds look healed.
Subtraction through addition
Lest I mislead you, let me clear something up. The company keeps giving away less money than analyst guesstimates. Yes. But, that doesn't mean the company keeps giving away less money, period. Check out this timeline.
Operating Losses (in millions)
1995 � ����$1.3
1996 ������$4.1
1997 ������$24.8
1998 ������$57.6
1999 ������$97.2
Through the first nine months of the year, it has already reported $91.6 million in operating losses. This is a pi�ata folks -- the bigger it gets, the more sweetness it gives away.
You don't need to look at past income statements for proof that the company will spare no expense in its pursuit of raw growth. In September, the company announced that it would acquire the business Web-hosting GlobalCenter subsidiary of Global Crossing.
More customers? Good. More Internet data centers? Good, unless we begin to consider unused capacity if weak trends continue. Shareholder dilution? Bad. At current prices, Exodus will have to issue 115.7 million new shares for the purchase. It had no choice, really. The company's debt load has quadrupled to $2.5 billion over the past year. Not only that, but as part of the deal, Exodus will now be shackled into buying the majority of its network provider needs from Global Crossing.
No problem, you say? Global Crossing will be more than fair to Exodus since it's now a significant investor, you say?
Let's look ahead. If the dot-com shakeout continues, you are going to find fewer companies claiming bigger pieces of the Internet pie. More business for Exodus, right? Well, possibly, until these companies grow big enough to where taking the outsourcing services of Exodus in-house makes financial sense.
At that point, when this transparent service becomes even more of a bid-driven commodity, do you want to have a 10-year commitment with any network provider?
There is so much to like about Exodus at first -- its customers, its numbers, its niche. Then you begin to realize that there is so much about Exodus not to like -- its customers, its numbers, its niche.
Now you know the rest of the story.
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