Exodus retreats into Chapter 11 protection

Blaming its financial troubles on rapid expansion followed by the dot-com bust, American hosting operation Exodus Communications Inc. has filed for Chapter 11 of the U.S. Bankruptcy Code.

The Santa, Clara, Calif.-based company has obtained a commitment for up to US$200 million in debtor-in-possession financing from GE Capital and in a statement said it will develop “a plan for reorganization to provide a suitable capital structure for long-term growth.”

“They built very, very quickly across the States and into Canada, but spent a ton of money doing so,” observed industry analyst with the Yankee Group in Canada Mark Quigley. “Unfortunately, the markets kind of ran out at the end of the day.”

The Chapter 11 filing is limited only to Exodus’ U.S. operations. “The international operations are not affected by the filing,” said spokesperson Melissa Neumann. “We’re taking a look at all of our operations worldwide as a course of normal business review. It is business as usual.” The company will close down 10 non-operational data centres — meaning they currently have no staff or customers — in undisclosed locations, she added.

Exodus has a 160,000 sq. ft. data centre in Brampton, Ont., which opened last year. Quigley speculates that Exodus’ operations in Canada may be sold to a Canadian company — a similar scenario to the one that played out for PSINet. When PSINet declared bankruptcy in June, its Canadian arm was immediately snapped up by Burnaby, B.C.-based Telus Corp.

Exodus’ struggle for financial solvency doesn’t indicate a decline in the hosting market. On the contrary, said Quigley, “the hosting marketplace is one that remains hot. One that is going to continue to grow. . . . Exodus is a victim of poor financial timing than anything else.”

Q9 Networks, a Toronto-based hosting firm, is on firm ground, according to its CEO Osama Arafat. Rather than borrow large sums for rapid expansion, Q9 financed its data centres on equity. “Our data centres are 20,000 sq. ft. rather than 200,000 sq. ft.,” Arafat said. “We’re taking a much more incremental approach so as not to get ourselves in a situation where we’re overbuilt and over-extended.”

Q9 also had the advantage of entering the market in October of last year, when the dot-com collapse was already entrenched. The bulk of its customers are enterprise as a result, said Arafat.

Vancouver hosting firm Radiant Communications Inc. has also opted for incremental growth over rapid expansion. “I think what happened in a lot of companies is they had invested heavily in infrastructure — building data centres and such, which aren’t cheap,” said Denise Mann, channel manager for Web hosting. “Rather than putting up that capital ourselves and reinventing the wheel, we’ve leveraged the incumbents and their infrastructure.”

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Jim Love, Chief Content Officer, IT World Canada

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