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Exodus downgraded on cash concerns

Investors stage their own exodus from the stock as analysts predict it may not have enough money to survive through to cash-flow positive.

Exodus Communications investors staged their own exodus from the stock Thursday as analysts questioned the company's ability to survive on dwindling cash reserves.

Shares in the Web-hosting and Internet services company were down 72 cents, or 32 percent, to $1.53.

Exodus Communications warned Wednesday that it will fall short of estimates for the second quarter and all of fiscal 2001. Management told investors to expect second-quarter sales of $315 million, about $40 million short of First Call's consensus estimate of $355 million. They also said Exodus will post a second-quarter loss of $140 million, wider than the first-quarter loss of $118.3 million.

For 2001, Exodus is now forecasting sales of about $1.35 billion, down from its previous estimates for sales between $1.5 billion and $1.6 billion. It will post a loss of roughly $500 million for the fiscal year, and gross profit margins are expected to check in at 23 percent.

But the lowered forecasts were the least of analysts' worries. Management revealed that the company has been burning through cash at a faster rate than expected.

With $1.1 billion in cash on hand, the company believes it is fully funded to free cash-flow breakeven in the third quarter of 2002. But Goldman Sachs analyst Matthew J. Janiga noted that more conservative estimates for the economic environment yield "a funding gap in 2002 of approximately $300 million."

Janiga downgraded the stock to "market outperform" Thursday, taking it off Goldman's "recommended list" based on "increased concern with the company's liquidity," as well as its significant revisions to estimates.

Raymond James analyst Jonathan Ruykhaver, who reduced his rating from "buy" to "market perform," also predicted the company would be short of cash before it reached profitability. According to his calculations, the company won't reach breakeven until the first quarter of 2003, leaving it about $125 million short.

Lehman Brothers analyst Harry Blount also downgraded the stock--to "market perform" from "buy"--citing the company's "faster than anticipated cash burn."

"Exodus' position is being further challenged by some of the company's larger competitors, which have not been shy about pointing out Exodus' weakened financial position to the company's existing and potential customers," Blount added.