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Digital Island meets expectations, tightens belt

The company reports earnings that meet Wall Street expectations and announces it will trim back on its spending.

Digital Island on Thursday reported earnings that met Wall Street expectations and announced it would trim its spending.

The San Francisco-based company reported a fiscal first-quarter net loss of $142.2 million, or $1.82 a share, compared with last year's loss of $24 million, or 65 cents a share. Revenue increased to $31.6 million from $7.6 million during the year-ago quarter and $24.1 million in the previous quarter.

Wall Street expected the company, which hosts and distributes content for Web sites, to lose $1.82 a share, the consensus estimate of 17 analysts surveyed by First Call. Nine analysts predicted the company would generate $30.6 million in revenue.

"During the quarter, Digital Island shifted toward driving profitable growth over gaining a greater number of customers," Ruann Ernst, chief executive of Digital Island, said in a statement.

The company jettisoned smaller and less profitable customers and targeted larger accounts, which resulted in slower customer growth, but also brought higher revenue per customer among the company's top accounts.

Digital Island said EBITDA for the quarter, or earnings excluding charges related to interest, taxes, depreciation and amortization, came in at a loss of $53.8 million, or 69 cents a share, vs. a loss of $20.1 million, or 55 cents, a year ago.

The company said it expects to hit EBITDA breakeven in the June 2002 quarter, two quarters ahead of previous company forecasts.

Digital Island will reach that goal by reducing capital spending in the current fiscal year to $225 million from $300 million and will focus its resources primarily on hosting and content delivery.

The company expects revenue to increase to $36 million in the second quarter on an EBITDA loss of $51 million.

The strategy change could not come too soon. The stock markets have pounded shares of Digital Island, which trade in the $6 dollar range compared with a 52-week high of $129.50.

Similar companies have not fared much better. Akamai Technologies has fallen from a 52-week high of $345.50 to about $30, and Exodus Communications once traded at $89.81 but now sells for about $27 a share.

The shift was caused in part by the recent misfortunes of one of the industry's most well-known customers. Internet-based companies have experienced a drubbing from investors who no longer tolerate losses. The flight of market capital sent Internet shares plummeting and evaporated the dot-coms' chance to raise much-needed money on the public markets through follow-on offerings.

"I think most of the industry would agree that dot-coms as a traditional revenue channel for these companies is a risky proposition," said Matt Janiga, an Internet infrastructure services analyst at Goldman Sachs.

Janiga said that 30 percent of Digital Island's revenue came from Internet companies, a reasonable amount compared with other companies in the industry, which generate as much as 50 percent of their revenues from dot-coms.

Janiga also said Digital Island bases its future guidance on a stronger economy during the second half of this year, which is what many other companies hope will happen. But an improved economy is far from certain, according to Janiga, who takes a more conservative view.

"If the (better) macro economy fails to materialize, the numbers they put out could be too aggressive," he said.