Exodus closes data centers, plans next step

Exodus Communications Inc. is closing some of its 44 data centers as it continues to trim costs and prepares to present its plan to emerge from Chapter 11 bankruptcy protection to its board of directors next week.

CEO Bill Krause held a conference call with customers on Wednesday to discuss the status of the restructuring efforts, his second call with customers since Exodus filed for Chapter 11 on Sept. 26. During the call, Krause indicated that Exodus is closing some of its data centers as it continues to cut operating costs.

During his first call with customers in September, Krause said Exodus would close 10 nonoperational data centers. During Wednesday's call, however, he indicated that some of the firm's 44 operational facilities will also be shuttered.

"After careful evaluation and consideration, we've determined in each case it makes good business sense to close them. This is either due to low utilization or inefficient operations," he said.

Exodus would not say exactly where those facilities are located, but Krause said they are in metropolitan areas where multiple data centers exist, meaning affected customers would be migrated to a nearby facility. He said that in most cases migration costs would be covered by Exodus. He added that the data center closures will be completed by the first quarter of next year.

"If you've not heard of a migration plan, than you can trust that one is unlikely to happen," he said. "Those [customers] affected should know."

Krause's comments came in response to customer concerns about data center transitions. He also responded to a question about whether Exodus would be acquired or emerge from Chapter 11 as an independent company.

"Frankly, the answer that I've been giving continues to be, I just don't know yet," Krause said. "And the reason is because we haven't completed the process, and until we we've completed the process, we won't know which path will maximize value for Exodus."

While Exodus will lay out its ultimate decision to the board next week, and its creditors thereafter, it does not expect to release details to its customers until January, Krause said. "Whatever path we ultimately decide to take, though, you can be assured that our goal will be to continue to provide the same high quality uninterrupted service to you, our customers," he said.

Analysts seem convinced an acquisition is the best bet for the firm, which is burning through about US$4.5 million a day. Jay Slattery, an analyst with Technology Business Research Inc., said Exodus has about $300 million in available capital, which would keep it running until the middle of next year.

"I don't see them being able to continue independently," he said. "They need a large influx of cash. Small equity investments here and there aren't going to give them the kind of cash they need to restructure themselves."

Cable & Wireless and EDS, both of which are seeking to expand their hosting presence in the U.S., lead the list of firms possibly courting the hosting provider, analysts said. C&W declined to comment, saying it does not respond to "rumor and speculation." EDS did not immediately return calls seeking comment.

In the meantime, Exodus is continuing its efforts to slim down the company and reduce operating expenses. Data center closures, along with unloading unneeded office space will result in about $50 million in savings per quarter, Krause said. In addition, the company is saving $75 million in interest payments per quarter due to the Chapter 11 filing, which eliminates its pre-filing interest obligations; and it has slashed its operating expenses by $50 million a quarter by reducing its employee headcount from 4,500 earlier this year to 2,600. Krause said employee cuts have not affected direct operations or customer service activities.

Nevertheless, Exodus' total number of customers has dropped from 4,500 at the end of June to 3,700 as of Sept. 30, due in large part to the dot-com bust and the slowing economy. Krause said Exodus is weeding out nonpaying customers, which accounts for much of the decline, and is focusing on its enterprise customers, which accounted for 69 percent of company revenue in the third quarter, compared to 63 percent the quarter before.

Most enterprise customers say they are staying put, albeit with contingency plans in place. "Most are hedging their bets by signing up with secondary players," said Joel Yaffe, an analyst with Giga Information Group Inc.

Exodus continues to post restructuring information on a special page on its company Web site and specific questions can be sent to Customercomm@exodus.net.

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