Exodus haunted by churn, cash worries

There's good news and bad news for the Internet services company: Its dot-com customers are continuing to go under, and it could run out of cash--but the stock is up in early trading.

Margaret Kane Former Staff writer, CNET News
Margaret is a former news editor for CNET News, based in the Boston bureau.
Margaret Kane
3 min read
There's good news and bad news for Exodus Communications, the Web hosting and Internet services company, and one-time highflier.

Bad news first: Its dot-com customers are continuing to go under. Revenue dropped almost 9 percent from the first quarter to the second. And analysts are fretting that the company could run out of cash after the end of the year.

So what's the good news? Well, the stock hasn't fallen below $1; it closed up 10 cents to $1.18 on Friday.

On Thursday, the company said it lost $583.4 million, or $1.05 per share, in the second quarter, compared with the $51.8 million, or 13 cents per share, loss it posted in the year-ago quarter. Excluding the restructuring and other charges, the company lost $138.5 million or 25 cents per share. That was slightly better than the 26 cent per-share loss analysts were looking for, according to First Call.

Exodus warned investors last month that it would miss estimates for the second quarter and for all of fiscal 2001. The company sent a chill through its investment community when it revealed it was spending money faster than previously thought.

Exodus has suffered along with other infrastructure companies as analysts questioned their ability to survive in a difficult economic climates.

The company's stock has sunk along with its dot-com clients. Shares reached a peak on March 23, 2000 at a split-adjusted $86.65. But since then they've plunged, dipping to $16.56 on Jan. 2, 2001, and closing Thursday at $1.08. According to recent Nasdaq data, the company was a favorite among short sellers, investors who bet on sinking stocks, in July.

Of particular concern to analysts was the company's cash position. Exodus said it expects to end the year with around $200 million in cash and equivalents, but analysts questioned whether that would be enough to keep the business going.

"Exodus shares are trading as the company appears to be going bankrupt, which is an increasing possibility, as we believe that the longer fundamentals remain under pressure, Exodus will have difficulty in hitting its targets," wrote Thomas Weisel Partners analyst James Linnehan in a research note.

Analysts also worried about high customer turnover rates, known as churn. Lehman Brothers analyst Harry Blount estimated that 23 percent to 30 percent of bookings were canceled before they were installed, a level he called "troubling."

"Until Exodus can give both prospective and existing customers comfort in its financial health, churn is likely to remain an issue," he said.

But not all is gloom and doom. If the company can manage to scrape through the rest of the year and dig up some financing, at least one analyst sees a brighter future.

Gartner analyst Ted Chamberlin says Exodus' ability to pull out of its slide without outside help is doubtful.

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"Frankly they still seem to be winning new customers despite where the stock is, which is a testament to the strength of their product," said John Hodulik, analyst at UBS Warburg.

Exodus' problem was the same as many in the tech industry, he said: They built their business to handle tremendous growth and were hit hard when that growth came screeching to a halt late last year.

"We saw this everywhere, Cisco, JDS Uniphase. All these companies couldn't predict how quickly demand would fall off," he said. "You got a double whammy for hosting providers: Dot-coms, which were the bulk of their business, (died off), and IT spending at traditional firms has tailed off as well."