In the eye of the storm

The 57-year-old chief executive of Exodus Communications has previously worked with the likes of Lou Gerstner at IBM and Steve Jobs at Apple Computer. But nothing in her resume--which also includes a brief stint with National Semiconductor--prepared her for the swiftness of the downturn in the technology sector, a downturn that has left her company reeling.

Along with other Web hosting companies, such as Digex, AboveNet and Intel Online Services, Exodus has been hard hit. The company maintains and installs the computers and other Internet infrastructure required to run complex Web sites. And when the dot-coms died, business fizzled.

Now these hosting companies are offering professional services and other so-called managed services in an effort to attract more stable big business customers.

Hancock, in a recent interview with CNET News.com, discusses what she's learned from the latest tech slump, what Exodus could have done differently and assesses the overall health of the industry.

How would you assess the current high-tech industry and what do you project for the next year or so?
The industry has seen an impact on the funding issues as it relates to both dot-coms, but also the early-stage technology companies...and certainly that has had an impact on the industry. Another impact that is widely discussed is on the bandwidth and the amount of fiber that many of these telcos and CLECs (competitive local exchange carriers) have in fact made available, particularly in the United States.

Why did you trim your annual salary to $1?
That was last year. Last year we put me on a dollar salary, but this year we had me on a more standard salary. It was our view going into that year that we were a high-growth company and there was a lot of focus on our stock, and that I was allowed to choose between an increase or taking most of it in stock. And so I chose to bet on the company and bet on its stock. The view this year was that we're a more mature company, that we should be running our business similar to companies much larger in size, and that we should go back to a more conventional salary structure.

Given the change in climate, was the acquisition of GlobalCenter and the expanded number of data centers that came with it a smart move?
I still am very supportive of that acquisition in many ways. It did give us data centers in some locations that we'd had problems getting in to. But also, a large part of the value of that deal to me is that we have this arrangement with Global Crossing where we essentially buy bandwidth as if we were a subsidiary of theirs. So we get the best prices available in the industry.

What should you have done differently to prepare your company for the downturn?
Oh sure. With hindsight, you could do a lot of really good things. With hindsight, we would not have hired a whole lot of people in the fourth quarter. That is where we significantly added to our employee base, because we honestly thought we were headed for a $2 billion business. We also brought in all the GlobalCenter people in the first quarter of this year, and then we did more staffing ourselves. So, we overstaffed against our current view of the business. So I'd have done that differently.

We also did have a fair amount of faith and trust in many of these start-up businesses, and I have to say that we've implemented much tighter controls relative to funding. We won't go into some deals now if we're not sure that the other company has essentially the funding that it needs. We do much more in the way of credit checks now and talking with people who have invested, so we're doing a much more thorough job of reviewing the customers than we had in the earlier days.

You talked about the additional hiring, and you had to lay off many of those people. Have the layoffs at Exodus improved the company's bottom line? When will they?
Some of them have as we're going into this quarter. We announced on the (quarterly financial results) call that we're currently at 3,500 people. It's our intent to be at 3,000 by the end of this quarter. And so the savings relative to payroll will take effect most of it in the fourth quarter and certainly into the first quarter.

Is that reduced headcount the same as was previously announced, or are these new layoffs?
This is the first time we've announced the exact number. So it was this earnings call last week that we indicated that we think the right number for this company is at 3,000. In the earlier call we'd just indicated that we were assessing it and that we were going to make further reductions and this time is the first time that we've quantified those reductions.

Do you think your story is resonating with Wall Street?
I would say it doesn't feel like it's fully resonating. I would say I believe we've made some movement. There were some concerns on Wall Street that we had no new bookings in April and May. I think we were real clear that that was incorrect and that we had $200 million of new bookings in the quarter. I think that resonated a little bit. We also had 264 new customers. I think people saw that as a bright spot. So I would say that we're beginning to get some cautious, optimistic sentences in some of the reports. So we'll just have to keep proving where we are with our own execution.

Why do you think Exodus stock has been popular with short sellers? I believe that we had a series of disconnects about our business with some analysts. One was whether there's a glut of data centers. Absolutely not true. We opened up four new data centers in the quarter. We expect to open a new data center on the East Coast this quarter and it looks like we'll need to open another data center on the West Coast this year. So we don't believe the glut theory. Second, the theory goes, is that because of a glut, we're doing massive discounting. And we say, 'Sorry, we're not doing that.' And then there was the comment that 'They're not going to have enough cash, because if they spent this much in the first half, they must be going to spend that much in the second half.' And the answer is, we're not. So we did have some disconnects with the analysts, and I believe that did have an impact on how people feel about the stock.

Certainly Exodus is not alone in having a depressed stock price, but considering the performance of the company and the low stock price, do you feel that you've let down your shareholders?
Well I think that if you look at Exodus, the company is very popular. Exodus has a great brand. And when there's a concern about a whole market, often it's the leader in a market that takes the brunt. And I think that's what happened in this case...I think that we're all disappointed in the share price. We're all shareholders. We all have options. So we're all disappointed in where the stock is. If you ask whether you think it should have been at $89, that's one question. But do you think it should be at $1.20? And the answer is 'No we don't think it should be.'

Exodus is the one of the few remaining independent Web hosting firms. Others are affiliated with communications carriers. How much longer can the company stand alone?
Well, we think there are advantages to being independent. This is all we Do; we focus on outsourcing and Web hosting. We do have the advantage of having access to Global Crossing where we have access to a great network. If you look at some cases where there was a combination of a carrier and a hosting company, it didn't always work out to the advantage of the hosting company. We have sufficient cash and we can stand alone for a long, long time.

People keep talking about a glut of bandwidth. Is there not a glut?
No, I believe there is. Each time that we go to acquire more bandwidth, we're finding that this year's prices are less than last year's prices--and that they're very competitive with one another. And I restrict (that statement) to the United States just because there still is a concern about having enough fiber over in Europe and Asia and some countries that require more fiber, which is why we have to be careful about where we put data centers.

So how will the last 18 months be looked back upon--particularly for those with shorter memories who think this is the end of the world?
We've seen this almost every single decade--whether it's the semiconductor industry, where there are concerns about PCs, or it is the servers and the software industries, where we have seen downturns. What often does come out of that is stronger companies--companies that have revisited their own business models, that have revisited for themselves what it is that's core to them. They've looked at their own organizations, their use of technology. And so we pull out of that. But we have seen this before.

What was different about this one?
In the past, there were more warnings. I think the impact was better appreciated. This one appeared to come very quickly and stunned many people in the industry by its volatility and by its extent. However, the actions we've taken are the same: We're downsizing, we're focusing on costs, we're taking another look at those travel budgets. But we have quite a few companies where, as you implied, the management has not been through this before.

How do you feel about the health of the overall hosting industry?
I think the hosting business is a very good business. I think there has been some shake-up in the business. I think that there are companies such as Pilot Networks or PSINet that had problems with their business. I also think you're seeing a general concern relative to regional players that this business is consolidating, that it's now focusing on managed services, and we're also focusing on being global. But the business is still a very good business.

Why do you feel that outsourced services such as Web hosting do well in an economic downturn?
If you look at the expenses of running a Web site--in almost every single case--you spend less money if you do it with an outsourcer than if you do it yourself. That case was made many years ago with Perot and EDS and the like. And I would say it's even a stronger case today.

The dot-com demise severely impacted your company and other Web hosting firms. But Exodus and others quickly turned their attention to the Fortune 1000 and big business customers instead. What are these big businesses doing differently today than they were doing two years ago?
As the enterprise began to more effectively use the Internet and then outsource into companies such as Exodus, the learning that we had from the dot-coms could be applied to the enterprise. I would often have CIOs say to me, 'Well tell me what's going on in the data center. Whose servers are you seeing, what is the software you're seeing? How many servers do some of these companies have?' So they could get a sense themselves if they were to build up on the Internet that they would have a sense of what they were looking at going forward. They were different in that they wanted professional services, they wanted consulting, they wanted service-level agreements. Many of the dot-coms had not asked for that. And so they started to ask for many of the services that they expected in their legacy systems, their mainframes and the like. And they wanted those same services in the Internet.

What do the struggles of Loudcloud say about the managed services business?
We would say that the managed services business is a good business. But we do have an advantage over Loudcloud and that is that we do own the data centers, we do run the network, and we do help manage the customers' site. Managed services essentially sit on top of the rest of our portfolio. So if a customer asks us to completely manage their site, which we do for quite a few customers, then we can let them know if it's the Internet that's the issue. If there's a system that's failed in Chicago, let's say, we know if there's a fiber cut or if some ISPs are having issues. We can provide them with guidance on their site versus the Internet. Essentially the Loudcloud customer is dependent upon the hosting company. So that may be complicating the issue for some of these MSPs (managed service providers). But I think the MSP is a natural part of a hosting company's portfolio.