Posted on: Friday, May 11, 2001
Digital Island shares jump with news of MSN deal
Advertiser News Services
Shares of Digital Island Inc., a seller of Internet and networking services founded in Hawai'i, soared yesterday after Microsoft's Web portal MSN chose the company to deliver all of its online advertising.
The pact — which shows a deal with Microsoft Corp. can work wonders — pushed the stock to $3.69 yesterday on the Nasdaq Stock Market. That was a massive gain of $1.69, or 84.5 percent, on heavy turnover.
Digital Island shares have tumbled from a record $140.63 in December 1999 to $30 or less since mid-2000.
"This is definitely a vote of confidence for Digital," said Manuel J. Recarey, an analyst with Fahnestock & Co. "The question is, how much revenue they are going to get from this deal and how much did they have to do to get it?"
Recarey worried Digital Island might have had to cut its prices aggressively to get the contract, and said he is not changing his "hold" rating on the stock.
Digital Island said it will deliver more than 860 million ads per day worldwide to MSN's portal, including ads on MSN eShop, Search and Hotmail, as well as on the MSNBC.com Web site and MSN's Instant Messenger service.
Financial terms were not disclosed, and Digital Island officials weren't available for comment.
Analysts urged caution.
Merrill Lynch & Co. analyst Thomas W. Watts said he was skeptical because of the lack of a revenue figure. He said Digital Island still has a long way to go until it makes a profit. Earlier this month, the San Francisco-based company reported a second-quarter loss of $1.2 billion, or $15.11 a share, on $32.8 million in revenue. Shortly after the report, the company's chief financial officer resigned.
"We are projecting positive EBITDA, or earnings before interest, taxes, depreciation and amortization, in the June quarter of 2002," Watts said, adding that it will take much longer for the company to have a positive net income.
"Of course, the deal with MSN could speed up that process. We still don't know," Watts said.
The company has cut costs and jobs because it did not win expected orders, and Internet traffic slowed on Web sites it manages.
