Exodus: From Riding High to Running Scared

The giant Web host is fighting for its life

When Exodus Communications Inc. (EXDS ) wrapped up its $1.9 billion purchase of rival GlobalCenter Inc. in January, it stood firmly atop the blossoming $5 billion industry that handles Web operations for other businesses. With 43 hosting centers nationwide and 4,500 customers, including the likes of Yahoo! Inc. (YHOO ), it was primed to own an industry expected to grow to $20 billion by 2003. Better yet, even as prospects plummeted for most dot-coms, many analysts figured this as one sector that would do O.K. After all, Web operations would be the last thing customers shut down.

Turns out such optimism was short-lived. On June 25, the company's board of directors, led by Chairman and CEO Ellen M. Hancock, who was unavailable for comment, held a gut-wrenching conference to deal with radically different prospects: Spending by dot-com and Old Economy customers alike has rapidly dried up, prices have declined sharply, and capacity is now estimated by industry observers to be 50% above demand. As a result, the company is burning through cash, customers are getting leery, and like its Web-hosting rivals before it, its days as a stand-alone company may be numbered.

RAPID DESCENT. Indeed, Exodus has been forced to take a machete to its overhead as it scrambles to find ways to boost sales. But the moves could be too little, too late. "It's surprising how quickly their business has deteriorated," says Jeff Camp, an analyst with Morgan Stanley Dean Witter & Co. who recently took the rare step of apologizing to clients for not downgrading Exodus earlier. Its stock has slid from a high of 69 last September to $2.13 today.

No surprise there. After 18 quarters of supercharged revenue growth, on June 20 Exodus announced it will miss second-quarter revenue estimates of $355 million by some $40 million and will post a loss of $140 million.

More alarming is the company's weakening cash position. In the past three months, Exodus burned through nearly half of its $1 billion in cash reserves. In part, that's because Exodus was forced to pay back a $150 million loan to avoid covenants that would have required it to maintain $100 million in cash. The company also pays $75 million in quarterly interest on its remaining $3 billion debt, accrued while it built up huge capacity in data centers.

Now the difficult job of saving Exodus falls squarely on Hancock, a three-year veteran. One of high tech's most powerful women, she has developed a reputation for brass-tacks organizational management during a career that included 29 years at IBM (IBM ) and a stint at Apple Computer Inc. (AAPL ) That's a big selling point for customers wary of inexperienced dot-commers. "Hancock is the key to future corporate sales," says Exodus board member Dan Lynch.

Her first goal, though, is slashing spending. Exodus has begun a second round of job cuts, on top of the 675 jobs--15% of the workforce--it already cut in May. But even more may be needed. Analysts say the company's burn rate will drop to only $80 million per quarter, from an anticipated $180 million. That would only delay an empty till until the third quarter of 2002.

Hancock's efforts to build sales could also prove daunting. Although big customers such as eBay Inc. say they aren't worried about Exodus' financial weakness, others who use it to outsource critical Web operations are getting antsy. GFInet, a maker of online marketplaces, is moving to another Web host. "We needed to go to a [financially] secure firm," says Russ Lewis, GFInet's chief information officer. If financial hemorrhaging doesn't stop, losing customers may be the least of Hancock's concerns; she's likely to lose her independence.

By Ben Elgin in San Mateo, Calif.

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