"We May Have Hit the Bottom"

Exodus Communications has been walloped by losses and customer defections. Chief Executive Ellen Hancock is hoping the worst is over

The second quarter was a rough one for Exodus Communications. The world's largest provider of outsourced data storage, Exodus (EXDS ) just reported a $583 million loss for the period -- more than 10 times the loss for the same quarter in 2000, despite gross revenues having doubled since then.

A brutal shakeout in the Web hosting sector has sunk Exodus' stock from a high of almost $90 in the spring of 2000 to $1.18 at close on Aug. 1. The company is working through its cash fast, announcing on July 27 that it would lay off another 500 employees and bring its workforce to 3,000 people -- a reduction of 33% so far this year.

Still, Chief Executive Ellen Hancock says Exodus will be the "last man standing." Nicknamed the Iron Lady for her decisiveness and strong will, Hancock recently talked to BW Online reporter Olga Kharif about the challenges facing her company and the industry. Edited excerpts of that conversation follow.

Q: Things are pretty bad. How would you characterize the situation?


We believe we have not just a viable business, but a great business. We've given guidance for the year of $1.35 billion of revenue. We reached $818 million in revenues in 2000. So we've seen, in fact, good growth from year to year. And we hope to go cash- and EPS [earnings per share]-positive in the third quarter of 2002.

Q: Is the worst behind you?


Everybody would love to say that we've seen bottom, right? We are seeing some indicators that we may have hit the bottom. We believe that the number of companies completely leaving Exodus peaked in March. Those are primarily dot-coms or early-stage companies that could not get funding.

But we also saw the customers that stay with us pulling back budgets, cutting down on services. It is possible we've seen that peak in the second quarter, but we are not sure. On the positive side, we got $200 million in new bookings in the first quarter, and we matched that in the second quarter.

Q: How will you fend off competition from the likes of AT&T and other big telecom carriers, which offer Web hosting along with other services -- just like you?


We won more than 70% of the bids we competed for in the second quarter, so our win rate is very high. If you look at some of the reasons why we win -- even against a company that is a telco -- it's that we do have an excellent network. The deal that we struck with Global Crossing essentially gives us bandwidth as if we were a subsidiary.

We have a large consulting group, almost 800 consultants. According to Cisco Systems, we are the largest firewall company in the world, so we have a lot of security services. We have a lot of storage services. We have content distribution services. We can compete directly with AT&T and Digex, and we can also compete with MSPs [managed service providers], such as LoudCloud and others.

Q: Many believe Web hosting has become a commodity. Has it?


We have seen pressure on bandwidth pricing ever since we went public in 1998. But in general, we have been increasing our prices. We increased our prices in January for our basic infrastructure. We've also increased the prices for many of our services. We do not believe that we have seen that price pressure.

Now if, in fact, our salespeople compete in a deal primarily for colocation [meaning space and bandwidth], then yes, there's going to be some price pressure on those bids. And in many of those bids, we just walk away and do not take our prices down to that level.

But I would say that we currently have a disconnect with some of the analysts' view of the market. We believe they are just wrong. We are not decreasing the prices. We just did a price increase. That's not a sign of a commodity market.

Q: Managed services, such as caching and site monitoring, are less prone to price pressures than colocation. Do you plan to make managed services a bigger part of your revenue?


We do want to sell more managed services. About 31% of our revenue in the second quarter came, in fact, from managed services. One of the reasons that the managed services line is at 31% today -- it has been higher -- is because we incorporated the [recently acquired] Global Center customers in the first quarter. And Global Center had few managed services. In fact, it was only about 8% of their revenue stream.

Q: What's your long-term strategy?


We want to eliminate the distinction between the customers' data centers and our data centers. We are getting more involved in the customer data center itself in terms of monitoring systems, not just giving them space. That can include security, storage, or content distribution.

Q: You expect to have only $200 million in cash at the end of 2002, and some analysts question whether that's enough to pull through. Do you plan to raise additional funding?


We have sufficient funding to run the business. So we could essentially say, "We are finished, we have enough money." But there is a view that we'll be better off with more of a cushion. So we've retained some advisors.

We are looking at mechanisms to raise funds, such as through accounts receivables, sublease of buildings, and sale of some assets. And we are also decreasing our workforce and decreasing the amount of money that we are going to spend on capital expenditures.

Q: After your recent round of layoffs, do you have enough staff?


Yes, we believe we do. We focused very hard on areas where we think we have redundancies. For example, Global Center has built up an entire staff to run a Munich data center. But we decided that since we are in Frankfurt, we will just have one data center in Germany rather than two. Essentially, we brought the staffing levels to a point where we can effectively run a business that's going to be $1.3 billion in the fourth quarter and not $2 billion as we had planned.

Q: A lot of investors are betting that Exodus's share prices will go down further. How would you reassure your shareholders?


The onus is on us to essentially execute against the plan, grow our revenue slightly, reduce our spending, get our business economics in line, get to profitability in the third quarter of next year, and continue to grow. One would hope that good execution would get reflected in the market price.

Edited by Alex Salkever

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