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Exodus Communications
Rough Analysis

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By mcnuprin
June 26, 2001

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I just listened to the conference call after getting back from a quick vacation. Not a great week to be away, but oh well. I think there is a real concern that this company may not make it to cash flow positive.

After all, they're down to about $550 million dollars left. After subtracting the credit facility, that's only $400 million. Plus another $150 million in capital expenditures for the rest of the year. I think they will be EBITDA even from now on, which means another $150 million in interest payments for the rest of the year. That leaves $100 million at the end of the year. Another $200 million in cap ex (mostly front-loaded so in Q1 and Q2) for 2002. And I'm estimating another $100 million at least for interest in the first half of the year. So there's clearly a shortfall until Q3 '02, when they say they should be FCF positive. Management was not very forthcoming as to how they expected to reach FCF positive and they pretty much evaded the question when asked. I know they said they could maybe get $500 million using asset facility although I'm not sure how that works.

Personally, I believe they do have access to more capital although it'll probably come at a steep price, which is why they don't really want to talk about it. My guess is that if everything goes extremely well, they can avoid more financing and until they need it, they'd rather not let people know the kind of terms that they were able to swing.

However, I think they are in a better shape than other data hosters. They are clearly moving away from the dot-coms and toward enterprises, especially Fortune 500. It seems like they're still winning these large contracts since they have little competition at the level of service they can provide. Exodus grew huge because of the dot-commers and those guys are dying. Kinda like AT&T losing revenue in their traditional base but trying to make up for it by moving to more secured revenue. The other guys are like CLEC's, revenue is dying so they need to slash prices just to get some business.

I'm also not that concerned with the economic slowdown in general. They are offering large enterprises a way to cut costs by offloading their hosting needs. It's a better value proposition than software, since that requires some time for installation and a higher propensity for something to go wrong. With hosting, they just gotta move some equipment and cut their own staff. The way I'm thinking of it is: Would you rather cut your energy bill by installing new insulation and windows and tear up your place or switch to a different power company that gives you lower rates?

I know it's not real Foolish to forecast stock prices, but my guess is that the stock will stabilize between $2-$3 for the next couple of months. When Q3 comes out, there will be a better gauge as to whether or not the management can keep its promises about its revenue and cash position. If all goes well, the stock will jump back up to $6-8. Of course, if things do not go well, then we are really talking penny stock. Please give me any comments or critiques. I would especially appreciate more info on Exodus's cash position and financing. Hope this was as useful to you guys as it was to me.