Friday, May 11, 2001

Digital Island rockets
on deal with MSN

By Victoria Marcinkowski
Dow Jones News Service

Shares of Honolulu-founded Digital Island Inc. 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 -- left the stock closing at $3.69 yesterday on the Nasdaq. That was a massive gain of $1.69, or 84.5 percent, on heavy turnover. The stock was down 52 cents to $3.17 at midday today.

"This is definitely a vote of confidence for Digital," said Manuel J. Recarey, an analyst with Fahnestock & Co.

Digital Island, which provides Internet hosting, content distribution and network services, 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 Web site and MSN's Instant Messenger service.

Financial terms were not disclosed, and Digital Island officials weren't immediately available for comment.

Analysts urged caution.

"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?" said Recarey. He worried that Digital Island might have had to cut its prices aggressively to get the contract. The analyst said he is not changing his hold rating on the stock.

Merrill Lynch & Co. analyst Thomas W. Watts is also 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.

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