Monday, February 5, 2001
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Posted on: Monday, February 5, 2001

Digital Island slows growth to focus on profitability

Bloomberg News Service

SAN FRANCISCO — Digital Island Inc., whose shares have plunged 95 percent from their high, says it now will focus on spending less on expansion to become profitable sooner.

The company, which was founded in Honolulu, said it has enough cash to last six more quarters — the same amount of time it said will take for earnings before interest, taxes, depreciation and amortization to break even.

Digital Island, whose software speeds Internet transmission of audio and video, is paring smaller customers from its network and trimming capacity and expansion plans to cut costs. It’s cutting capital spending to $225 million this fiscal year from $300 million, said spokesman David Radoff.

"They moved up their target for profitability because that’s what the capital markets demanded," said Manuel Recarey, an analyst at Fahnestock & Co. who has a "strong buy" recommendation on Digital Island’s shares. "They don’t have unlimited resources and they will have to raise money."

Digital Island in 1999 moved its headquarters from Honolulu to San Francisco, where it maintains a private computer network for corporate clients that need to deliver multimedia information on line at high speeds. Among its clients are J.P. Morgan Chase & Co., Compaq Computer Corp. and News Corp.’s British Sky Broadcasting network.

Digital Island’s fiscal first-quarter loss for the period ended Dec. 31 widened to $142.5 million, or $1.82 a share, from $24 million, or 65 cents, a year earlier, the company said in a statement. Sales rose fourfold to $31.6 million from $7.6 million. The number of shares outstanding more than doubled to 78.1 million from 36.7 million.

The company’s shares are trading in the $4 to $5 range. They traded at $129.50 on March 1.

The state Strategic Development Corp., which paid $450,000 for 315,000 shares of the company in 1997, has been able to reap some of the gains in the stock price before it sank. Among its sales, the state received $2 million from the sale of 24,400 shares in January last year at a price of about $100 a share. In September, it got an additional $150,000 through a stock sale at $30 a share. The remaining approximately 228,000 shares are worth about $1.1 million, based on Friday’s closing price of $4.84 on the Nasdaq composite index.

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