Cash slump in the Web hosting sector

By Rawlson O'Neil King, theWHIR.com

July 23, 2001 -- (WEB HOST INDUSTRY REVIEW) -- While Web hosting outfits are slated to experience tremendous growth within the next few years, they must ride out a telecom slump in the interim.

Investors have generally envisioned a bleak picture of the market, due to the failure of many of the dot-com companies and telecom equipment manufacturers. With thousands of dot-com companies going belly up, many of the complex Web hosts have lost many profitable customers.

Concurrently, with the largest telecom equipment makers such as Cisco Systems and Nortel Networks posting mind-boggling losses, and with telecommunication carriers now entering the hosting sector to boost dwindling long distance revenues, complex Web hosters have lost the assurance of the investment community.

Due to a lack of investor confidence, many hosting service providers backed by market capitalization are experiencing a cash crunch. Indeed, Exodus Communications, a leading complex Web host, lowered its revenue projection for 2001 and even signalled that it may be open to an acquisition due to the precipitous drop of their stock. Trading as high as $69 per share over the current 52-week period, the company's stock has now slumped to $1.20, leaving the company with little capital.

Indeed, a recent report from Jeffries & Co. also anticipates that Exodus will run out of cash. The company has stated for the record that the company's cash burn rate will remain considerable, at more than $200 million US per quarter, despite scaled-back capital spending. While the company may presently have $1 billion in cash, this figure is largely offset by $427 million in payables, making the true value of the working capital only $538 million. According to calculations made by Fred Moran, managing director at Jeffries & Co., this depleted working capital will cause a cash crunch, and will result in Exodus running out of cash by early 2002.

While its acquisition would be desirable to inject some cash into the outfit, most M&A analysts feel that such a situation is not feasible since Exodus does not specialize in managed hosting solutions. With data center assets not worth a considerable amount on the present market, the company has been trying to reposition itself as a managed host rather than a collocation provider.

Whether Exodus can reposition itself as primarily a managed provider rather than as a provider of rack space is up for vigorous debate. For over half a year, the company's management has been trying to strategically grow the percentage of its managed service customers. Presently, 44 per cent of the company's revenue flow is derived from barebones server hosting, while 34 per cent of revenue flow comes from managed service. Since Yankee Group has predicted the virtual elimination of collocated services within the corporate market; it makes sense that Exodus wants to reposition.

Many investors however aren't interested in participating. As the Web Host Industry Review recently reported, Exodus has been subjected to a slate of class action complaints due to the rapid decline it is stock price. The advent of such a series of actions indicates that Exodus will be in a rough ride.

In Canada, market capitalization is also a factor for hosting providers, but of course on a smaller scale. ACEnetx (acenetx.com), an Internet outsourcing company, which also offers managed hosting solutions to application service providers (ASPs), saw its stock price drop from a $1.20 to 13 cents on Canada's junior stock exchange. NetNation Communications (netnation.com), a leading Canadian hosting provider and ASP, has also seen its stock tumble from the six-dollar range to current trading at $1.50 US.

These steep drops in market value indicate that despite the booming growth anticipated within the next couple years, many participants within the complex Web host industry in the here and now are experiencing a precarious cash slump.