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Digex Lowers Guidance, Remains Confident

Fewer new customers and higher customer churn led managed hosting provider Digex, Inc. to lower its full-year guidance, but Digex execs say the company is poised to meet the needs of today's technology customers.

"We believe we are entering a second generation of computing very quickly. But it is what we have built the company to do, and we have the financial strength of WorldCom behind us to capitalize on it," Digex president and CEO Mark Shull said in a conference call today.

Telecom giant WorldCom on July 1 completed a merger with Intermedia Communications Inc., which held a controlling interest in Laurel, Md.-based Digex. The plan had been announced in September 2000.

Results were in line with analyst estimates, with Digex posted revenue of $53.8 million for the quarter-ended June 30, 2001, a 33-percent increase over the year-ago level. EBITDA losses continued to narrow to $13.6 million with net loss per share of $0.74 in the quarter.

Digex signed 74 new customers in the quarter, while losing 102 for a net loss of 28, ending the quarter with 603 customers. Measuring churn as recurring revenue lost due to lost customers, and partial churn as revenues lost due to non-recurring special events or seasonal activity by clients, Digex reported a 3.7-percent loss in each category.

"Due to low sales booking productivity during the first half of this year, and the increase in churn during the quarter, we feel it only prudent to revise our official full-year guidance at this time," said Tim Adams, chief financial officer.

Full-year revenue is now expected to be $200 million to $215 million, down from the previous estimate of $285 million to $295 million. This reflects a 20-percent gain over last year's $168 million. Full-year gross margin is expected to be at 43- to 47-percent, down from previous forecasts for 49- to 51-percent, and flat over last year's 45.9-percent.

EBITDA losses are expected to be $55 million to $65 million, up considerably from previous estimates of $10 million to $20 million, and slightly lower than last year's $68 million loss. Loss-per-share estimates have been revised to $3.05 to $3.15, up from previous estimates of $2.60 to $2.65.

Shull remained confident that Digex is ideally positioned to take advantage of the market's shift toward enterprise clients. Revenue mix for the second quarter was approximately 73-percent enterprise clients, 23-percent Internet-centric and 4-percent ASP and other channels.

"This second-generation customer is primarily an enterprise, who is bigger, more conservative, and looking for much more sophisticated computing and application support," he said. "The change may be sudden, but this is the future for which Digex is built."

Shull cited Digex's early decisions to put money into automated support functionality, and not into real estate or large networks, as a key to Digex's future success. "With our product set, operational capabilities, and financial stability, we are making a solid transition to this market," he said.