Exodus warns will fall short of estimates

Summary:The Web-hosting and Internet services company says it expects second-quarter sales of $315 million, about $40 million shy of the First Call consensus estimate.

Exodus Communications delivered some more bad news to its shareholders Wednesday when it warned that it will fall well short of analysts' estimates in the second quarter and for all of fiscal 2001.

The Web-hosting and Internet services company told investors to expect second-quarter sales of $315 million, about $40 million shy of the First Call consensus estimate of $355 million.

It also said it will post a second-quarter loss of $140 million, wider than the first-quarter loss of $118.3 million.

Exodus executives said the company will likely record sales in the neighborhood of $1.35 billion for fiscal 2001, down from its previous guidance calling 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.

"Exodus finally fessed up to the severe turmoil and transition the company's going through right now," said Brent Bracelin, an analyst at Pacific Crest Securities. "They're still a leader in this space but there's no question they're struggling in a challenging environment for the whole sector."

In its release, Exodus blamed the wider-than-expected losses and weaker-than-expected sales on a drop in the rate of new customer installations, an increase in the rate of cancellations, reductions of orders from existing customers and an increase in reserves related to "dot-com failures."

"About 40 percent of their business is still derived from dot-com customers," Bracelin said. "Saying that, they have some good customers, including eBay, Yahoo, Oracle and Travelocity."

The company added that it continues to restrict capital spending and further reduce operating expenses, including additional staffing reductions.

"While market conditions are certainly more challenging than they were a few months ago, we remain optimistic about the overall market and Exodus' position," Chief Executive Ellen Hancock said in a statement. "The fundamentals underlying managed hosting are solid."

While Hancock remains optimistic, several Wall Street analysts have recently issued negative reports questioning the health of it and other Internet infrastructure companies.

On Monday, Lehman Brothers analyst Harry Blount cut Exodus' fiscal 2002 sales target to $2 billion from $2.5 billion and chopped his 12-month stock price target to $9 from $15.

"We believe the previously announced cost reductions and lower (capital expenditures) will allow (Exodus) to reach cash-flow positive," Blount wrote in the research note. "However, the company must begin demonstrating progress in the second quarter."

Last month, Exodus announced it would cut 15 percent of its work force, or roughly 675 employees, through attrition and by consolidating operations, resulting in a one-time charge of $10 million in the second quarter.

Exodus shares, which traded as high as $69 in August, closed down 59 cents, or 21 percent, at $2.25 Wednesday, after hitting a new 52-week low of $1.95 earlier in the day. After releasing the revised targets, Exodus shares fell another 16 cents to $2.09 in after-hours trading.

Including costs for amortization and acquisition-related expenses, Exodus posted a first-quarter loss of $649.6 million, or $1.21 a share, on sales of $348.7 million.

Nineteen of the 27 analysts tracking the stock maintain either a "buy" or "strong buy" recommendation.

Topics: IT Employment, Oracle

About

Larry Barrett is a freelance journalist and blogger who has covered the information technology and business sectors for more than 15 years. Most recently, he served as the online news editor for 1105 Media's Office Technology Group and as the online managing editor for SourceMedia's Investment Advisory Group publications Financial Pl... Full Bio

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