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Filed By Exodus Communications, Inc.
Pursuant to Rule 425 under the
Securities Act of 1933
And deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Commission File No. 000-23795
Subject Company: Exodus Communication
EXODUS COMMUNICATIONS, INC.
TRANSCRIPT OF ANALYST TELECONFERENCE WITH Q & A
EXODUS/GLOBAL CROSSING
Moderator: Ellen Hancock
September 28, 2000
8:30 a.m. MT
Operator: Good morning, everyone, and welcome to the Exodus/Global Crossing
analyst teleconference call. With us today we have Ellen Hancock,
chairman and chief executive officer of Exodus; Marshall Case,
executive vice president and chief financial officer of Exodus; and
Leo Hindery, chief executive officer of Global Crossing and chairman
and chief executive officer of Global Center. After the opening
remarks, we will be taking questions. At that time you will need to
press the 1 followed by the 4 on your telephone. This call is being
recorded and is copyrighted material, therefore, please note that it
cannot be recorded, transcribed, or rebroadcast without the company's
permission. Your participation implies consent to our recording this
call. If you do not agree to these terms, simply drop off the line.
Now I would like to turn the call over to Ms. Jane Underwood.
Please go ahead, ma'am.
Jane Underwood: Thank you. Good morning, ladies and gentlemen. This is Jane
Underwood, director of investor relations for Exodus Communications.
We are very excited that you could join us this morning to hear the
details regarding our acquisition of Global Center. Joining me this
morning are
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Ellen Hancock, chairman and CEO of Exodus Communications; Leo Hindery,
chief executive officer of Global Cross and chairman and chief
executive officer of Global Center; and Marshall Case, CFO of Exodus;
and Dan Cohrs, CFO of Global Crossing.
Before we begin I have the following disclosure I would like to
make. Certain forward-looking statements that will be made by
management during this call are being provided in reliance upon Safe
Harbor provisions of the Private Securities Litigation Reform Act of
1995 and are based on current management expectations. Actual results
may differ materially due to a number of risk factors that have been
disclosed with our filings with the SEC. We do not assume any
obligation to update this forward-looking information. I would now
like to turn the call over to Ellen Hancock. Ellen.
Ellen Hancock: Thank you very much, Jane. I'm delighted to talk to you this
morning about the announcement we've made concerning the acquisition
of Global Center as well as our network agreement with Global Crossing
and our joint venture with Asia Global Crossing. These agreements
offer exciting opportunities for our shareholders, our employees,
customers, and, in fact, I believe the technology industry as a whole.
As announced this morning, the boards of directors of Exodus and
Global Crossing approved a definitive merger agreement under which
Exodus will acquire Global Center, a subsidiary of Global Crossing,
for approximately $6.1 billion in Exodus common stock subject to a
collar, which Marshall will discuss shortly. This transaction is a
major strategic milestone for our company. With this combination
we'll have the additional scale, scope, and international reach to
further enhance our position as the preferred provider of mission-
critical Web-hosting solutions to customers worldwide.
As most of you know, Exodus is a leading provider of complex Web
hosting services to businesses with mission-critical Web operations.
Our company offers sophisticated systems and network management
solutions and managed services along with professional services to
provide optimal performance for customers' Websites. We manage our
network infrastructure via worldwide network of 22 Internet Data
Centers located in North America, Europe, and Asia Pacific.
According to a recent Forester research report, the U.S. Web hosting
market is expected to reach $20 billion in 2004. Through our
combination with Global Center, we will now have the scale and the
scope to capture the full range of opportunities that are being fueled
by the explosive growth of the complex Web hosting market worldwide.
With the combined pro forma annualized recurring revenue rate of
approximately 1
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billion, almost 4,000 customers and 32 Internet Data Centers totaling
approximately 2.6 million gross square feet of space, Exodus will be a
powerhouse in complex Web hosting.
We've seen a tremendous migration of business processes to the
Internet over the last five years, and the development of several
business hosting models. As the customers' requirements for high-end,
value-added Web hosting services become more sophisticated, only a
handful of companies will have what it takes to succeed. By joining
forces with Global Center, Exodus is extending its leadership
position. We will have the opportunity to leverage and expand our
managed and professional services and premier brand and sales force
over a wider geography and increased customer base. Additionally,
Global Center's data center build out plans will be leveraged with our
own, accelerating our global expansion. This presence will greatly
enhance our ability to support our global customers and reach new
multinational customers at an accelerated pace. The depth of skill
sets created by this combination further supports our planned
expansion.
Through the 10-year network agreement with Global Crossing also
announced today, our extensive global network of Internet Data Centers
will now be On-Net with Global Crossing's state-of-the-art
international fiber network. This seamless connectivity and universal
access to information resources represents yet another benefit that
this transaction creates for our customers.
Our joint venture with Asia Global Crossing is complementary to each
of us. Asia Global Crossing has existing relationships with companies
such as SoftBank and Microsoft and will be a strong partner for
Exodus' Asia Pacific expansion.
Looking forward, Global Center's and Exodus' partnerships with key
technology providers including Cisco, Compaq, Dell, Inktomi,
Microsoft, Oracle, SoftBank, and Sun Microsystems will result in
further innovation to enhance the quality and breadth of our services.
To conclude, I want to say again how excited we are about the
strategic benefits that we are going to achieve through this
transaction. This combination clearly raises the bar again for the
complex Web hosting market.
Now I'd like to hand the call over to Leo Hindery, chief executive
officer of Global Crossing and Global Center's chairman and CEO, who
will review in more detail our joint venture and network agreement and
some of the other strategic benefits that they create.
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Leo Hindery: Good morning, everyone, it's Leo Hindery. As Jane commented, I'm
joined on this call by Dan Cohrs, our CFO. All of you, I'm sure, by
now have gotten a copy of a press release. I don't want to be
repetitive to that, nor to Ellen's comments. I thought I would just
share a couple of quick thoughts, and then we'll try to get to
questions and answers and, hopefully, through that effort, really
respond to your issues more precisely.
About a year ago, I met Ellen Hancock. I did it on the weekend that
I joined Global, and she was the first person that reached out to me
and vice versa, and we talked back then about an industry that would
distinguish itself by its scale and its breadth. For the last,
roughly, nine months, we've been trying to build value and,
importantly, to realize that value for the shareholders of Global
Crossing out of the asset Global Center, and we had committed
ourselves to taking it public. Some several weeks ago I concluded
that the right transaction, as Ellen has commented, the right
transaction at the right time on the right terms would be a better
alternative for the shareholders of Crossing than taking the company
public, again going back to that very early conversation about scale
and breadth.
Dan and I, Gary Wettig [sp], Tom Casey, are thrilled with this
transaction because it does for our shareholders what we set out to
do, which was to grow value and realize that we're just honored as
heck to be Ellen's partner soon, her shareholder. There were two
things that motivated us, actually, three -- we were anxious, as I
said, to realize value. I concluded that this transaction did that
more effectively than going public. I was anxious to protect the
prerogatives of Global Crossing, the network side, while building
value for Ellen's company. This network arrangement that we've talked
about, this multibillion-dollar network arrangement over a decade's
time builds enormous value for new Exodus, but, to be frank, it plays
well into the hand of Global Crossing, the network company that we
have tried to build there, and we certainly were anxious on our side
of the aisle, to protect the prerogatives well of our soon-to-be
sister, Asia Global Crossing.
I look at this transaction somewhat now with, really, three hats on --
the Global Crossing hat, the Global Center hat, soon-to-be the Exodus
hat, with Ellen's partnership. I think the revenue multiple was
attractive from our side, but, to be frank, I think it was very
attractive from her side. This company, Global Center, will have a
very, very fulsome year 2001, and as Dan and Marshall share with you
views on that on this call, and later I think you'll be very
comfortable with the revenue multiple we've received and the revenue
multiple that Ellen and her associates paid. We're gratified, all of
us, that it's accretive, day one, substantial synergies to the new
Exodus company, the network arrangement which I've talked about, and
an opportunity to exploit worldwide type and quality of customer that,
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certainly, each of us could have gotten to on our own, but we can get
to, she can get to, more quickly in combination.
Going forward from here, I see this as a partnership. I see it as a
partnership based around the shareholding that we will have in her
company. I see it as a partnership around the network arrangement
that we will have throughout the world in Asia with Asia Global
Crossing, the joint venture that Ellen described, and throughout all
of the Global Crossing empire. Dan and Marshall are capable-- I
certainly will try, with Ellen's help, to walk you through the numbers
here in a minute, but it's a very, very fair transaction, and I know
there is some probable distress at some of the early market reaction
to the security prices. I think it's just because we haven't been
able to tell the story. As you listen to the story, you'll see what
an incredibly capable company Exodus will be with this opportunity to
scale the breadth issues that were a moment in concern to Ellen and me
when we first met, will be manifest in this transaction, I assure you,
and as we go around and chat with you, I hope you'll grow comfortable
with what we've done here, both for Exodus, the primarily beneficiary,
certainly from Global Center and its wonderful employees and Global
Crossing and the shareholders to whom we committed to try to realize,
again, the value of Global Center.
So Jane, with that, I think-- are we going to Q&A or are we going to
Marshall and then Dan?
J. Underwood: Marshall.
L. Hindery: We'll go to Marshall Case, the CFO, and Ellen's partner in Exodus,
will chat here for a minute, and then we'll hear from Dan Cohrs, and
then try to do your Q&A. Thanks, everyone.
Marshall Case: Thanks, Leo. We got some real good perspective and following
that what I'd like to do is touch on some specific terms of the
transaction and discuss, from my perspective, how I believe these are
going to produce some value for our shareholders.
Under the agreement and based on Exodus' closing stock price
yesterday, Exodus will acquire Global Center for approximately $6.1
billion in Exodus common stock and options subject to a collar. The
collar has a range of $56.41 to $65.55. It's outlined in the press
release and will be detailed in our merger agreement that will be
filed shortly. The final ratio will be determined based on the
average closing price of Exodus common stocks for the 10 consecutive
trading days preceding the close of the transaction. Exodus will
issue between approximately 99.5 million and 115.7 million fully
diluted shares to Global Crossing to complete the transaction, which
is expected to close in the first quarter of 2001. As part
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of this transaction, Global Crossing is prohibited from selling any of
the equity they receive for a period of six months, post-closing, and
has limited resale rights six months thereafter. The transaction will
be accounted for in the purchase.
With regards to accretion to our shareholders, as Leo mentioned, the
acquisition will be accretive to EBITDA in 2001. Specifically, the
company expects to realize substantial savings in the area of network
and other operating costs. In this regard, given the significant
growth we have experienced and continue to experience, we expect our
network needs to scale very significantly over the coming years.
Because of the cost savings that are generated from the very
attractive pricing which this deal entails, we expect very significant
hard-dollar savings from this transaction, and, of course, as, or more
importantly, the network partnership is also strategic as it provides
benefits such as superior quality of service, improved response time,
and enhanced troubleshooting capabilities.
In addition, the potential to deliver managed services across a much
broader platform and leverage the combined distribution channels
represents an outstanding revenue growth opportunity.
One thing we're particularly excited about is that while Exodus
currently draws about one-third of its revenues from managed services,
Global Center's corresponding percentage is in the single digits.
This gives us the opportunity to offer Exodus' high-margin managed
services to Global Center's customer base. The synergies from
combining facilities also creates growth opportunity by providing an
earlier presence for Exodus in New York City, Amsterdam, Paris, and
Munich, to name a few.
Global Crossing will continue to fund their capital expenditures of
Global Center to the close. Post-closing, our currently available
resources are sufficient to fund the growth of the combined operation.
The transaction is not expected to result in any workforce reduction
and, finally, the approvals. The transaction is conditioned upon,
among other things, the approval of Exodus stockholders, the
Securities and Exchange Commission, as well as Hart-Scott-Rodino. I
am very excited about the opportunity that this historic combination
creates and look forward to sharing more details soon. I'll now turn
the call back over to Ellen.
E. Hancock: Leo, did you want to add some more?
L. Hindery: I think, rather than Dan Cohrs, who is with me -- I think, Dan, why
don't we just-- with Ellen's permission and Marshall's-- just go to
the questions, Jane, and see if we can start to respond to these.
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J. Underwood: Operator, please go to the questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-
and-answer session. If you have a question, please press the 1
followed by the 4 on your push-button phone. You will hear a three-
tone prompt acknowledging your request. If your question has been
answered, and you would like to withdraw your polling request, you may
do so by pressing the 1 followed by the 3. If you are on a
speakerphone, please pick up your handset before entering your
request. One moment, please, for the first question. The first
question comes from Adam Quinton from Merrill Lynch. Please go ahead
with your question.
Adam Quinton: Hi. Congratulations on a very exciting transaction. I've got a
couple of questions coming from the Global Crossing side, so if you
excuse me, I'll head off in that direction first, and I just wanted a
bit more color from you guys on the network agreement, specifically in
two respects -- firstly, I've seen some comments that have valued the
network contract at Global Crossing at 4 billion, and I wondered if
you could comment on that and how you, Leo and Dan, would assess the
value of the network contract to Global Crossing? Secondly, I guess,
more a question for Ellen and her time, and my understanding is that
the existing network connectivity of Exodus comes from three or four
primarily suppliers and that, typically, Exodus has engaged those
folks on relatively short-term contracts to exploit the falling price
of bandwidth, and I just wonder if that's the case and, going forward,
how quickly some of those existing contracts might be rolled over onto
Global Crossing connectivity?
L. Hindery: Adam, it's Leo. Thanks for the question. The network arrangement
provides that in Asia at least 60 percent and up to 67 percent of the
company's Exodus' needs in Asia will be satisfied through the EGC [sp]
network. Throughout the rest of the world, that figure is at least 50
percent. There was some press speculation, Adam, this morning that
quantified that contract to the value of that contract combined over
the decade of its arrangement at 4 billion and up, and I've been
willing to confirm that.
The thing that I think is important to note-- obviously, that's a
very important piece of business for Global Crossing, and we're
thrilled with it, but we tried to structure it, and I think we were
successful in structuring it in a way that it was an absolute win-win
for Ellen, because it gives her MFN pricing plus a discount. We are,
in our minds, and we think we can validate that we're the lowest cost
provider in this space right now because of the newness and nascency
of our network and its capabilities. Ellen has MFN pricing plus the
discount, she gets dynamic pricing, which means, to your comment, your
question about substituting short-term arrangements for a long-term
arrangement -- she will realize the benefits of improved
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pricing, and we all know, and we're very frank about it, that pricing
in this space declines, over time.
What she gets is dynamic real pricing and brings substantial synergies
to Exodus, and the thing that, as an operator, and she and I are both
of that, that we especially like-- and I certainly envy her having
soon-- is this On-Net capability, which, as I mentioned, opens up a
whole new vista of customer opportunities. Those customers down on the
MNC's, the media and entertainment folks, and financial services types
that come out of the IX-Net world, who really appreciate the On-Net
opportunity, its reliability, its cost opportunities, its fulsomeness,
and that was the agenda with the Exodus hat on, and I've discussed
what we tried to accomplish on Global Crossing, and I think we're
thrilled that I think we've done both pretty well.
E. Hancock: Relative to your question on the Exodus network, we have been
primarily buying bandwidth from WorldCom, from Qwest, more recently
from Global Crossing, as well as AT&T, who will provide us alternate
access into all of our data centers. We are constantly going back out
to the market to get additional bandwidth, and, as you said, we
normally kept those terms short-term life, so that we could, in fact,
always go back and get new prices.
Relative to the 50 percent that we're committed to acquiring from
Global Crossing, we will, effectively, be doing the same thing. We'll
be getting constantly new prices, and, as Leo said, they will have a
discount attached with those prices. We would intend to continue to
go out to other carriers, and we would expect, again, the price of
that bandwidth to come down. We expect that we'll continue to have
very good relationships with our other suppliers. There still is a
lot of bandwidth that we need to acquire over the next 10 years.
A. Quinton: OK. Thank you and good luck.
L. Hindery: Thanks, Adam.
Operator: The next question comes from Harry Blount with DLJ. Please go ahead
with your questions.
Harry Blount: Congratulations to everybody -- a number of quick questions --
some housekeeping, some not. Just in terms of a standstill agreement
-- is there any standstill that prevents Global Crossing from buying
additional shares? Is there a breakup fee associated with it? And
the period of goodwill amortization as well as the amount of goodwill
generated? That's one set of questions. The second set of questions
really relates to the anticipated source of savings that you see --
how much in total? And
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then if you could, maybe, give some rough cuts as to how much,
perhaps, comes from avoided capex, revenue synergies, the network
agreement, the value of the Asian entity, any tax implications?
E. Hancock: Let me discuss the second aspect of the question first. We do
expect to see significant savings on the network. Since we believe
that every time that we acquire from Global Crossing, that price will
be better than any other price we would have received in the market,
and we're able to benchmark that against the market. Second, as you
commented, we believe that between the two companies there will be a
savings in capex. That saving can be significant in the there's
overlap between the two companies in the areas of the market that they
were addressing in terms of cities, in terms of countries -- whether
it's in Europe, or it's in Asia Pacific, and we believe we'll also
have revenue synergies in terms of the fact that we will be the
exclusive hosting supplier to Asia Global Crossing. So we believe
that the number is significant, and that it will have a dramatic
impact. It is that saving that allows us to project that this
transaction will still allow us to be EBITDA-accretive in 2001.
L. Hindery: Harry, it's Leo. It is a five-year standstill on our obligation,
vis-a-vis, the company.
H. Blount: Is there any entity that you guys-- any value that you're attaching
publicly to the Asian entity or to any tax savings?
L. Hindery: There's not. Asia, as you know, is in he process of going public,
Harry, and I wouldn't quantify anything today on its behalf.
H. Blount: OK, and then on the network side of the equation, obviously, you have
some agreements, although recognize that they are short. How quickly
to you anticipate being able to move traffic off of some of these
other networks on to the Global Crossing network?
E. Hancock: Well, I think that we will keep much of that bandwidth in place.
What we will be doing is all new purchases will be 50 percent, at
least, to Global Crossing. So the one reason we would move off some
of the earlier fiber lines would be because of the speed capacity of
the lines and then we can move them over, but I think that, in
general, what you're going to see is that we do not really have to
move off the current network. In fact, Global Crossing was a very
major part of our network expansion last year. So we would not need
to move those, but that a lot of the new capacity, in fact, will go to
Global Crossing.
L. Hindery: Harry, it's Leo again. To Ellen's comment -- we were currently a
very substantial supplier of network to Ellen. So it's really just a
migration to preferable pricing terms. You'll recall, when we picked
up IX-Net, we
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had brought them entirely On-Net by the time we closed with roughly
the same anticipated closing timeframe. So all of the technical
migration issues can pretty comfortably be handled in the period of
time it will take to get the regulatory approvals.
H. Blount: OK, and, Marshall, the goodwill amortization -- is it going to be
five years? I think that's the number you guys have used in the past.
M. Case: Yeah, I think five years is what we're thinking about, Harry.
H. Blount: OK, and just a rough guesstimate on '01 revenue -- it kind of feels
like a 2.2, 2.3, maybe, type of range? Is that the right zip code?
M. Case: For the combined entity?
H. Blount: Yeah.
M. Case: Yeah, yeah, it's probably at the top end of that.
H. Blount: OK, thanks.
Operator: The next question comes from Jim Linnehan with Thomas Weisel
Partners. Please go ahead with your questions.
Jim Linnehan: Thanks and congratulations, guys.
E. Hancock: Thank you.
J. Linnehan: I have three questions -- first of all, at this point are you going
to save any comments on what the proposed management team would look
like?
E. Hancock: I would say that, clearly, I will be head of the company. I think
that's the easiest part.
L. Hindery: I'm a broken man, Jim. She gets to run it.
J. Linnehan: It's not "Pick on Leo" day.
E. Hancock: And that we will be working with the Global Center team, over time,
to answer that very specific question. I think it's fair that team
should participate in those discussions.
J. Linnehan: The second question is-- it's actually for Marshall. Marshall, can
you quantify what the gross margin impact is going to be as a result
of this network arrangement?
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M. Case: Clearly, Jim, as Leo described how we're going to be able to provision
networking on a more dynamic basis is going to give us a lot of wind
at our back in going at the network provisioning, but as far as what
that gross margin impact, it's as we work our way into provisioning
more and more capability from Global Crossing, that will increase. As
to what the magnitude is, I don't care to express that at this point,
but I think it's very obvious the benefits, economically, given the
magnitude of our network purchases and, as Leo indicated, the MFN plus
the discount terms of our purchasing.
J. Linnehan: Part B to that question is does Global Center currently include
depreciation in their gross margin line?
M. Case: No, not as you posed the question, Jim. No, we do not.
L. Hindery: No, we would not include that as a deduction in gross margin.
J. Linnehan: OK, so you're remaining consistent here with access, because access
does actually include some depreciation in their cost of goods sold.
L. Hindery: That's right. All of our depreciation that's related to Cox [sp] is
included up there.
J. Linnehan: So on a going-forward basis, is the combined company going to
continue that practice? Or are they going to diversement [sp]?
L. Hindery: No, we will follow, and we will assume Marshall's accounting
practices and manner of presentation, Jim.
J. Linnehan: OK. Last question is on data centers-- let me make sure I have the
numbers right. Looking at the end of '00 for a combined 55 data
centers. Is that still right?
L. Hindery: We've commented, Jim, that we would have 36 open or under
construction.
J. Linnehan: Right.
L. Hindery: And on top of that, I believe the number is approximately 17 to add
to that.
J. Linnehan: Oh, so it's like 53 then?
L. Hindery: Open or under construction, that's right.
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J. Linnehan: OK, and in Europe this gives you access to Paris, Amsterdam, and
Munich on top of your Frankfurt and London facilities, correct?
E. Hancock: That's right. In addition, they have facilities in London as well.
J. Linnehan: They do. So is there any need for additional buildout in Europe,
or are you pretty much done building in Europe?
E. Hancock: We think there are several more attractive cities in Europe.
J. Linnehan: Are you experiencing any difficulties finding space or getting on
power grids?
E. Hancock: We've been fairly successful, so far, in terms of being able to
enter cities. We focus on two things when we go into a city, and
we've done this with Leo in the past -- we focus on making sure that
we get fiber into where we want to build; and, second of all, we do
focus on power; third, we make sure that we can resolve all the
regulatory aspects of the particular country in Europe, but we're
confident that we'll be able to increase our presence in Europe, and
we've always said that our aspiration is to be the leading Web hosting
company in Europe, and we believe that today's transaction puts us
well on that line.
L. Hindery: Jim, it's Leo. When I shared some comments at the start, I said it
was about scale and breadth. Global Crossing is anxious to be Ellen's
partner in this undertaking, and we intend to be, and we have 40
cities committed to what we call "Pan-European Crossing." We have 200
total cities worldwide. All of those facilities' capabilities are
available to assist Marshall and Ellen and Don and their associates to
get the kind of footprint that they want. What's clever about this
deal is the absence of duplication in the foundation that underpins it
all at once. I think that whatever aspiration Ellen has in Europe,
and it's a lot more cities than you've described, I think we can get
there on her behalf a lot more easily now with this 40-city PEC [sp]
operation that we have and the 200 cities we have throughout the
world. So that's the magic of it -- it's that scale and breadth issue
that she and I talked about when we first met last December.
J. Linnehan: OK, great. Thanks a lot.
Operator: The next question comes from Marloe Burke with WIT Soundview.
Please go ahead, sir.
Marloe Burke: Yes, can you give us an indication of what this might contribute
in revenue next year? What capex might be, necessary to get to that?
And you said that there would be no workforce reductions. I wonder if
you
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could give us some numbers on total employees gained through the
Global Center acquisition? How many in sales? How many, if any, in
professional services?
M. Case: Hi, Marloe, it's Marshall. The way that I would comment is to the
question that came up earlier from a combined revenue stream, for one.
We'd expect it somewhere to be in the $2.3 billion range, and from a
combined capex, we talked previously about somewhere in the billion-
dollar range for access. We think that, given our existing resources
that we're going to be able to absorb what those requirements are, and
where are some efficiencies, and we're banging it out, and in certain
of the same geographies, there are some synergies there, and as part
of the total employees, Leo, do you want to comment?
L. Hindery: It's Leo. We have, today, about 724. We've got about 65, 75 in
direct sales. One of the things I would point out that is sort of a
sleeper in this deal is, as you saw in the press release, Marloe,
there is a marketing and sales agreement between Global Crossing and
Exodus, going forward. All of the nearly-- by the end of the year--
nearly 2,000 women and men in sales in Global Crossing are Ellen's
arms and legs contractually, and so one of the things we loved about
the deal, she and I, was that instant POP [sp]. You can't hire enough
good women and men in this space. We try hard, and it's just such an
extraordinary opportunity, and what we tried to do in the arrangements
that we agreed to last evening was give her not only network but
exclusively Global Crossing-- Global Crossing, the women and men-- the
nearly 2,000 woman and men in sales in Global Crossing are now agents
of Ellen and her associates.
M. Burke: Are there any incentives in place to help motivate those guys?
L. Hindery: Oh, you get. They're comped and commissioned on meeting her
objectives. It's all contractual and lots of incentive. That whole
IX-Net world, Marloe, that David Walsh [sp] built that, as you know,
handles almost 650 financial institutions, that whole workforce will
be in place for Ellen at the closing. It's really an extraordinary up
for Exodus -- part of the reason we're thrilled to be her shareholder,
going forward.
M. Burke: If I could just ask one follow-up question on the Asian opportunity --
where do you see the major sources of demand coming from out there?
L. Hindery: Well, I'll give you my perspective, and Ellen, I'm sure, has one to
complement it. We have seen extraordinary ISP-type demands out there.
It's a lot of the ISP entities throughout Asia, the big Kairetsu [sp]
companies and what we would call MNC's over here. It's a very high-
end-- it's very little retail, low-end. It's very big stuff. You'll
recall, and we put it in the press release, Ellen acquires
automatically by this, Marloe,
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a partnership with SoftBank and with Microsoft and IRI. To give you an
example, SoftBank has 350 companies in Asia today that, by reason of
this transaction, are committing their Web hosting needs to Ellen and
her associates. That, alone, was a homerun for me. When I had the
privilege of contemplating being EGC's partner, IRI, a clear leader in
the space in Japan, Microsoft, great friend technically as well as
relationship-wise, John Ledger [sp] has done a spectacular job as CEO
of EGC building partnerships over there, all of which ascribe to Ellen
here shortly.
E. Hancock: Relative to the hosting aspects of Asia Pacific, we are seeing two
very strong trends. One, a lot of our U.S. customers really want to
have presence in Asia. They would like to have access to hosting in
Asia so that, in fact, they can address the Asian market for their own
product set. Second, we're finding that the enterprises in Asia also
want hosting, and so we are seeing good growth today in Japan. We
expect to be in Australia. We've had discussions relative to
Singapore. We're in discussions today as it relates to China, and, in
general, I believe that we all agree that this market could explode,
and there is evidence of that today.
M. Burke: Terrific, congratulations.
E. Hancock: Thanks.
Operator: The next question comes from David Levy with Chase H&Q. Please go
ahead with your questions.
David Levy: Hi, thanks. A few questions -- first, can you talk about what the
capacity or at what capacity the existing Global Center data centers
are at, and if there's excess capacity with this increase or
accelerate at the rate at which you guys can deploy customers and
recognize revenue, number one. Number two, the additional revenue, I
guess, I think the Street's around 1.8 for access next year, so it
looks like another half a billion in revenue. Can you talk about the
composition of that revenue between Internet service and server sales?
Thanks.
M. Case: Hey, David, this is Marshall. Thanks for the questions. The capacity
that access had online from a gross square footage at the end of June
was 2.2 million gross square feet, and this would add more than
400,000 gross square feet to that, and as we projected earlier, we
said that we would have 3.8 million, 3.9 million gross square feet
online by the end of the year, and this would add-- this transaction
adds a little more than a million to that number, and that's where we
think we'll end up for the year -- somewhere just right around 5
million gross square feet.
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As far as the composition of that revenue stream in '01, that, we've
assumed, rather modestly, the continuation of the Global Center model,
where the proportion that they're currently experiencing, hosting and
bandwidth, and, of course, there's a piece of equipment in there as
well, but we believe that there is a real strong upsell opportunity,
given my comments earlier, that the proportion of managed services was
single-digit percentages versus where we're on the order of four to
five times that.
D. Levy: OK, and just a rehash on a capacity question -- I didn't mean exactly
how many square feet are going to come on, but does this give you-- I
thought, part of an issue with getting customers revenue recognized
was actually having it installed in data centers and getting square
feet up on time. Is there any-- I guess-- maybe-- from your comments
about revenue, is there any acceleration of the ability to deploy
customers because of more space, or is it basically bringing on much
more additive bringing on fully deployed data centers?
M. Case: No, and that's an important clarification, given that I commented from
June 'til the end of the year there are 600,000, roughly, new gross
square feet. Those are hitting us in some of our real important core
markets, such as Silicon Valley, New York City, Boston, D.C., and
Chicago. So it hits us where we need it.
D. Levy: OK, great. Thanks a lot, guys.
M. Case: OK, thanks.
Operator: The next question comes from Frank Governali with Goldman Sachs.
Please go ahead with your questions.
Frank Governali: Thank you. Could you walk through the income statement
impacts on Global Crossing itself, the transaction? When I look at
our model for Global Crossing for next year, we're assuming about a
half a billion dollars of revenue from Global Center, and, I think,
something on the order of 90 million positive EBITDA that,
effectively, gets shifted off the income statement, recaptures some of
that, obviously, minority interest, but on the flip side, you've got
incremental revenue that's going to be captured from higher sales to
Exodus. Can you step through that, not only for next year but on a
growth rate projection, going forward?
L. Hindery: Dan, it's Leo. Can you handle that?
Dan Cohrs: Yeah, Frank, it's Dan Cohrs. I think you're right on point. With
Global Center, I think most expectations would be for about $500
million to $600 million of revenue next year. Assuming we close
January 1st, obviously, we'd take that out of our P&L. The EBITDA
impact should be positive
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on Global Crossing, because Global Center would still be in a negative
EBITDA growth mode during 2001. So it will actually contribute EBITDA
next year to Global Crossing. Over and above that, we have, obviously,
the network agreement with Exodus, which makes us a lot more confident
than ever about making our bandwidth sale numbers for next year. We
also have a significant amount of bandwidth that we sell today to
Global Center, and as Global Center leaves the Global Crossing family
and goes over to Exodus, we will now recognize that revenue and margin
on that revenue. So we sell them to Global Center today in excess of
about $200 million per year of bandwidth products. So we'll put that
into our P&L and recognize margin on that.
Over the longer term, if you just look at the impact of Global
Center, since we, obviously, expected great things from Global Center,
if you take step 1, by just taking Global Center out of our mix, it
would take our growth rates down by about 5 percent over a five-year
timeframe. So at Global Crossing, we've been talking about 30-percent
growth in revenue and about 40 percent growth in EBITDA over five
years. Step 1 would be to reduce those growth rates by about 5
percentage points. Step 2 is that we expect to recover most of that
growth because of, first of all, the bandwidth sales to Global Center
itself, that we will now be able to recognize, and, of course, the
network agreement with Exodus. Leo mentioned earlier that we think
that the value of that deal over 10 years with Exodus could be in the
$4 billion to $5 billion range or possibly even more when these
combined Web hosting operations take off.
F. Governali: So you'll get the net impact over the next five years, is it
higher than 30-percent revenue and 40-percent EBITDA growth? Or
basically the same?
D. Cohrs: No, I think it's probably right in that range. It may be even just a
touch of a reduction because we had very aggressive growth
expectations for Global Center built into our plans. So we have to
see how this network services agreement develops. I think with our
baseline forecast, I think there's not quite enough juice there to
totally make up for the Global Center growth, but we should be very
close to making up for what we take out when we lose Global Center.
F. Governali: OK, and so if you look at '01, the net impact of this is actually
positive on EBITDA, because you'll lose the losses associated with
Global Center?
D. Cohrs: That's right.
L. Hindery: And then, Frank-- it's Leo-- the other advantage is that network
sales to an affiliate get lost in consolidation by selling these
network services to Ellen, who we don't consolidate. As Dan has
commented, we actually get a pickup on the network sales side, and 50-
plus percent of network sales to
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Ellen is a whole lot bigger number for me than 100 percent to Global
Center, which I lost in consolidation.
D. Cohrs: I think the final point there, Frank -- you asked about the P&L, which
we just talked about, but the capex impact here is also important. We
had built into our plans, $500 million to $600 million per year of
spending to expand Global Center because we were expanding Global
Center space very aggressively. So that capex will now come out of
our plans. Marshall talked earlier about the fact that there are some
synergies. So it's not the case that the entire 500 million to 600
million will be picked up by Exodus, but, of course, 500 million to
600 million comes out of our cap spending needs and just makes us that
much more over-funded than we already were.
F. Governali: OK. Can I just go back to what Leo just said? Leo made the-- I
got the impression he's saying that revenue growth-- reported revenue
actually will be higher than it would otherwise have been because
you'll have greater sales to access than would have been the case to a
consolidated Global Center, but what I heard you say was that it
wouldn't have any impact on growth rate of the top line.
D. Cohrs: No, what I'm saying, Frank, is that-- take step 1. If we simply took
Global Center, our projections for Global Center show very, very high
growth in revenue and EBITDA. If you simply remove Global Center from
our plan, you would reduce the growth rate, but Global Center, within
a five-year timeframe, will have-- we expect to have a very, very
large revenue base four to five years from now. If you take that out,
you lose about 5 percentage points off of our projected growth rates.
Now you have to add back the bandwidth sales that we now recognize
that go directly to Global Center, as well as the network agreement
with Exodus. It looks to me like we should make up most of that 5
percentage points, but it will be a little aggressive to say we make
up all of it, just because we had so much growth in our plans for
Global Center, which we think is a fabulous business.
F. Governali: Perfect, great. Thanks a lot.
Operator: The next question comes from Tim Newington from Credit Suisse First
Boston. Please go ahead with your questions.
Tim Newington: Good morning and congratulations. A couple of quick questions -
- just on the networking side, about 95 percent of your traffic last
quarter went through private pairing agreement, and, given your
arrangements now with Global Crossing to route a lot of your traffic,
is there any implications there with respect to how much your traffic
goes to private pairing? Does it go up? Does it go down? And then
just secondly,
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obviously, this increases your platform in mission-critical co-
location at the current time. I was just wondering --what are your
plans with respect to managed hosting? Are there any changes from that
perspective that you could address?
E. Hancock: Let me address the network first. This transaction really does not
have very much impact on our private exchange agreements at all, and
so we will still expect to have 95 percent of our traffic go in and
out of the Internet on these private arrangements that we have with
over 60 companies, and then we publicly exchange with over 200 more.
We would expect to continue to do that. We are a strong advocate of
private exchange. Where we are doing the work with Global Crossing is
on our backbone network, and it is the backbone where, in the past, we
have been acquiring from WorldCom, we have been acquiring from Qwest,
and we have been acquiring from Global Crossing. So, for example,
last year with Global Crossing we acquired two IRU's between New York
and London, two IRU's to Frankfurt, a ring in Europe, and four lines
to Tokyo. What we expect now with this transaction is to buy more
fiber in the United States to connect our data centers. We'd expect
to buy more capacity in Europe, and we'd expect to buy a lot more
capacity in Asia. So it's a separation between the two. This deal
dramatically affects our backbone network. We continue to work with
other companies on the private exchanges, but, in fact, Global
Crossing may be able to facilitate some of the private exchange
agreements, particularly as they relate to Asia.
Relative to the platform, I believe that this particular transaction
puts us in a very good space. It puts us, clearly, in the leadership
position as it relates to our core business. It clearly facilitates
our ability to be able to move some of our managed services from our
platforms to the Global Center platforms, and, finally, it frees up
much of our management and our development teams and our professional
services teams to focus on value-added services and to get more into
the managed services space, to be able to provide more automation,
more configuration support, more security, and more of the elements of
those services. So this frees us up to, essentially, provide more
services, going forward, and those services can be deployed over the
Global Center customers as well as the Exodus customers.
T. Newington: Great. Thanks very much.
Operator: The next question comes from Michael Parekh from Goldman Sachs.
Please go ahead with your questions.
Michael Parekh: Thank you and congratulations to both parties. A couple of
questions, if I may. Number one, could you give us some sense of
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milestones and actions that you're planning ahead of the closing time
for the transaction, i.e., what sort of things can the two companies
do to start to work together along some of these directions before the
closing time? Then related, inasmuch as the combined company is
building a platform opportunity on a global basis, can you give us
some color of how you think about potential opportunities with the
wide range of partners out there from a managed services point of
view?
L. Hindery: Michael, it's Leo. I'm going to defer to Ellen on the partners.
Let me give you a quick sense, if I might, on some of the pre-closing
activities. One of the things that you have to do ethically is be
respectful of the approval process, and it would be rude to front-run
the regulatory oversight of this transaction. We just won't do it.
Ellen and I, nonetheless, can, and I promise you we will certainly
address the employee needs. Later this morning, she and I will begin
to meet with all of the employees -- hers as well as mine -- and the
other thing that we can do, as we did in the case of IX-Net, is we can
be absolutely on the screws on the technical network side, such that
when the approvals come, Marshall and his associates can-- Tom Casey--
can have all of the network underpinnings in place, but you can't do
much more than that, Michael, without being rude to the oversight
process.
In terms of partnerships, nobody's better at it than Ellen. So she
better answer that question.
E. Hancock: First of all, I do think it's important that we do get an ability to
work with Global Crossing immediately on that network, to be able to
transition from the network today to bringing our data centers On-Net,
to have our engineers work with theirs to prepare for that, and, as
Leo mentioned earlier, he has done that already, and his team really
do know how to help us make that transition. So we're excited about
how early we can be in terms of the networking part of the deal.
In terms of the partnerships, we have very strong partners at
Exodus. We've been pleased to have tremendous support from Sun and
Microsoft and Compaq as well as Dell. We do a fair amount of work
with Cisco and Inktomi, and I have to say that, having spoken to
several of them about this transaction, they are pleased with the
support. We believe we will be able to do more effective work and get
some support from SoftBank. So I think as far as our partners are
concerned, they see this as an excellent transaction. They see this
as positive in terms of the hosting industry, and they see it as
positive in terms of really consolidating the management of these
customers and their servers, and it does increase our ability to be a
more effective partner for the companies who have supported us so well
over the past couple of years.
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M. Parekh: Great, thank you.
Operator: That is all the time that we have for the Q&A. Please continue with
your presentation or any closing remarks.
J. Underwood: That will conclude our conference call for this morning. Thank
you very much for joining us, and we look forward to speaking with you
soon.
Operator: Ladies and gentlemen, that does conclude your conference call for
today. You may all disconnect and thank you for participating.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This communication contains forward-looking statements based on current
expectations. Actual results may differ materially from expectations due to a
number of risks and uncertainties, including, but not limited to the following:
the fulfillment of conditions to complete the merger, including regulatory and
Exodus stockholder approval; the costs incurred to complete the merger; the
combined company's competitive performance; potential difficulties in
integrating the two companies, their product and service offerings and
infrastructure; the ability of the combined company to achieve network cost
savings and operating efficiencies; the continued employment of the combined
entity's employees; potential difficulties in maintaining and enhancing
continued working relationships with strategic partners; the risk that customers
that have placed orders may cancel or reduce their orders or delay the
commencement of services; and the continued development of service offerings of
the combined company. Actual results may also vary from expectations as a
result of risks and uncertainties described from time to time in Exodus' and
Global Crossing North America, Inc.'s filings with the Securities and Exchange
Commission ("Commission"). In particular, see "Factors Affecting Future
Results" in Exodus's quarterly and annual reports filed with the SEC and see
"Risk Factors" in Global Crossing's quarterly and annual reports filed with the
SEC. Neither Exodus nor GlobalCenter assumes any obligation to update the
forward-looking information contained in this communication.
For a detailed discussion of these and other important risk factors and
cautionary statements concerning Exodus and GlobalCenter and their respective
operations, you are referred to the proxy statement that will be filed by
Exodus, as described below.
* * * * * * * * * * * * * * * * * * *
Exodus, its directors, executive officers and employees, and certain other
persons, may be deemed to be participants in the solicitation of proxies of
Exodus stockholders to approve the proposed merger. These individuals may have
interests in the merger, including as a result of holding options or shares of
Exodus. Information concerning these individuals and their interests in the
transaction and the participant's in the solicitation will be contained in the
proxy statement to be filed with the Commission in connection with the proposed
merger.
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* * * * * * * * * * * * * * * * * * * *
Exodus plans to send to Exodus stockholders a proxy statement containing
information about the merger and seeking their approval of the proposed
transaction. You are urged to read the proxy statement carefully, when it is
available. The proxy statement will be filed with the Commission and will
contain important information about Exodus, GlobalCenter, the merger and related
transactions and matters. You may obtain a free copy of this document when it
is available, as well as other documents filed by Exodus with the Commission
(including annual, quarterly and special reports), at the Commission's web site
at www.sec.gov.
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