Digital Island: Yet Another Castaway?

Like Tom Hanks character in the movie “Cast Away,” many investors have left Digital Island for dead. Sure, sales are on the rise. But quarterly losses are mounting, the companys stock is sinking faster than the Titanic, and Wall Street doesnt expect profits to surface anytime soon.

Despite the red flags, you might be wise to green light a partnership with Digital Island. After all, the companys Internet data centers host hundreds of prominent Web sites—from CNBC to Sega. And Digital Island is more than a data-center provider; the company also specializes in content streaming and Internet professional services.

To be sure, Digital Islands quarterly sales are on the rise, growing to $24.1 million in Q4 2000 from $4.9 million in Q4 1999. But quarterly losses are mounting just as rapidly.

Eager to push into the black, Digital Island hopes to generate profits through six types of partners (see www.digitalisland. net/partners/types.shtml). The bulk of Digital Islands allies currently fall into one of two categories: Strategic Referral Partners (for instance, Agency.com, iXL, Lante and Viant) or Referral Partners (Key Information Systems, MarchFirst and Mercator).

MIA Mercenaries Now, for the troubling catch: Many of Digital Islands key allies—most notably iXL and MarchFirst—are struggling with layoffs, management changes and financial losses of their own. As one manager at MarchFirst puts it: “Were sometimes too distracted with our own problems to recommend Digital Islands services.”

Still, analysts think Digital Islands partners are selling the company short. Digital Island offers a “unique suite of Internet infrastructure services,” according to a recent report from Mark Langer, a senior research analyst at Epoch Partners. “And the companys unique intelligent routing technology provides Digital Island with a defendable market niche.”

Compaq Computer apparently agrees. The PC giant recently began using Digital Islands network services and Footprint content-delivery services on its own Web site.

Even though Digital Island is winning new business like its recent deal to deliver streaming content for NaviSite, Epochs Langer sees some trouble ahead until Digital fixes its future funding concerns.

Lofty Goals Nevertheless, Digital Island remains bullish about its business prospects. In its Q4 financial results, the company predicted that it had enough cash to survive for at least six quarters. Moreover, Digital Island said it expects 2001 revenue to reach $190 million to $195 million—up from $59.1 million in 2000. And while quarterly losses will continue for the foreseeable future, Digital Island predicts it will reach EBITDA (earnings before interest, taxes, depreciation and amortization) breakeven no later than the quarter ending Dec. 31, 2002.

In the Q4 release, chairman and CEO Ruann F. Ernst said Digital Island showed “better than expected growth on both the top line and bottom line, and positive traction in our business model.”

Bigger Fish to Fry For Digital Island to succeed, it ultimately will compete with much larger rivals like Exodus Communications, IBM and Qwest Communications. Exodus, for one, already has achieved EBITDA profits and is on track to generate positive net income late this year or in early 2002. And Qwest recently told Wall Street that business looks strong heading into 2001.

In order for Digital Island to keep pace, the company will surely rely on partners to generate revenue. But in recent months, some partners were too busy trying to stay afloat on their own.