Different Q4 Results, Same Ticker Direction

In a Dec. 26 column on the outlook for ‘Net companies in 2001, I called VeriSign and Exodus Communications the most dominant players in the Internet Services sector, the two to watch as consolidation and cash burn thin out the weak.

Investors saw – and heard – plenty from both of these services giants on Wednesday, as each released their respective quarterly results and announced forecasts for coming months.

Exodus said its already deep losses had widened in Q4 to $65.2 million, or 15 cents per share, from $52.9 million in the year-ago quarter. While Exodus’ net loss after costs of 13 cents per share beat Wall Street loss estimates by three pennies, that silver lining was immediately obscured by the company’s warning that first-quarter sales will be soft as Web customers cut back on expenditures. Exodus’ prediction of a Q1 loss of 26 cents or 27 cents per share is well above street forecasts calling for a Q1 net loss of 17 cents per share. EXDS shares dropped 12.2% to $24.75 in Thursday’s trading.

Meanwhile, VeriSign posted dazzling Q4 results, smashing analysts’ estimates of an 11 cents per share profit with net income of $45.5 million, or 21 cents per share. VRSN also upped its forecasts for revenue and earnings per share in 2001 and said it would increase its workforce by as much as 30%, at a time when layoffs in the dot.com world are almost an hourly occurrence. Yet VRSN shares also suffered on Thursday, tumbling 9.7% to $73.63.

What went right for VeriSign and wrong for Exodus in the fourth quarter? Why is VRSN more bullish about Q1 than Exodus? How come VeriSign shares lost ground Thursday despite the company’s outstanding Q4 performance? And who will win the game Sunday between the NFC champion New York Giants and AFC champs the Baltimore Ravens?

Hey, one question at a time.

The answer to the first question is that nothing went particularly right or wrong for either company. Rather, their respective Q4 numbers were in line with previous trends.

Exodus, which hosts Web sites and performs other Internet-related services, has never been profitable. It has logged net losses of between 12 cents and 17 cents per share for five consecutive quarters now, despite racking up healthy sales ($280.4 million in Q4 alone).

VeriSign, at least on a pro forma basis, has been solidly profitable. For fiscal year 2000, pro forma net income was $129.1 million, or 72 cents per share. Its huge acquisition last summer of Internet domain registrar cash cow Network Solutions put VRSN into the red for the year, but barely ($3.1 million net loss).

The answer to Question No. 2 is that Exodus is already having trouble collecting payment from its many smaller customers (that is, Internet companies running out of money) and anticipates more of the same in Q1.

VeriSign, on the other hand, rightly sees itself benefiting from the constant demand among dot.coms and not.coms for more and better security – the company sells digital certificate software – and the continued expansion of the Internet (more domains registered).

Strong earnings, a bullish forecast – yet VRSN shares took a hit Thursday. That’s because the market thinks the stock is overvalued. Which it is, though less so in the wake of Q4 results.

And the winner of Super Bowl XXXV? New York, 13-10.

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