Analyst Report by George Nichols

Thesis: After gaining around 12,000% in 1999, Xcelera.com is an extreme exercise in speculation.

Gaze into the night sky and you'll see starlight from millions and billions of light years away, originating from stars that may have exploded eons ago and are merely faint balls of gas today. Similarly, if investors expect Xcelera.com's old financial statements to shed light on the current business, then they're in for an optical illusion. The lack of timely information from the company is among the reasons we would advise prospective investors to steer clear of the shares.

As a foreign company, Xcelera.com releases financial statements only once a year, and a full six months after the fact, relegating them to little more than a historical curiosity. The latest income statement mainly reflects discontinued operations, while Internet revenue accounted for only 0.4% of total sales.

Xcelera.com's most valuable holding is Mirror Image, a company that develops technology for caching, content distribution, and streaming. An investment from, and partnership with, Web hoster Exodus Communications makes it clear that Mirror Image's technology isn't just smoke and mirrors. But although this technology holds promise, competitors have already proved themselves in the marketplace with long customer lists and robust sales.

Internet sales of $37,135 in 1999 turned out to be much less than the $1 million that management cited earlier, according to March reports by Marketwatch.com and Bloomberg. With that in mind, we believe management's expectations for a profitable 2001 for Mirror Image should be taken with a healthy dose of skepticism. A 2001 in the black would be quite a feat--competitors such as Akamai AKAM and Digital Island ISLD are losing buckets of money and will actually increase losses next year.

What Mirror Image has delivered so far doesn't validate the $1-$10 billion valuation that Xcelera.com has enjoyed throughout the year. Although Mirror Image had been expected to file for an IPO by year-end, management's contention that Mirror Image could garner a valuation exceeding $20 billion should be taken with a grain of salt.

Mirror Image can't be the one-trick pony; Xcelera.com must show future successes among the 10 portfolio companies in which it has invested at least $100 million in during 2000.

Lacking hard numbers, one of few things investors have to go on is management's track record. Although Xcelera.com is often compared with Internet Capital Group ICGE, this is misguided. Xcelera.com's executives lack the extensive technology experience of ICG's management.

Sure, Xcelera.com stock looks much better now at $7.50 per share compared with its high of $112, or even when it was $37 on June 21 (when we first panned the stock). However, Xcelera.com continues to trade on speculative hopes.

---

Feb. 7, 2001 Update [Excerpt]:

For the sake of argument, let's assume Mirror Image, Xcelera's crown jewel, should be valued at 25% of rival Akamai's market cap--even though Mirror Image has only 5% of Akamai's customer base and isn't publicly traded. Using that figure, Xcelera's stake in the firm amounts to only about 50% of Xcelera's market cap, limiting the room for any upside potential in the stock, in our view.

Furthermore, our calculations show that Xcelera's value is equivalent to about 400% of its total cash and securities balance. (This is a rough estimate, since the firm hasn't released a financial statement since July.) In contrast, another Internet incubator we've panned often, Divine DVIN, recently fell to attractive levels--a 50% discount to its cash value.

Also, the comatose IPO market has delayed plans to debut two of Xcelera's holdings: Corechange and Mirror Image (which management earlier suggested could garner a valuation exceeding $20 billion). With all the concerns surrounding Xcelera, we can find no justification for owning the stock.

---

"Bird's Eye View" (Overview)

Strategy

Xcelera.com is an Internet holding company that invests in European dot-coms, with most of its value derived from its caching company, Mirror Image. Rival Akamai geographically disperses its 6,000 servers to keep information close to users, in stark contrast to Mirror Image's approach of using fewer servers (currently in 14 cities) that store a larger amount of Internet data.

Management

Xcelera.com is a family affair, led by Alexander Vik, a financier and Harvard University grad. His brother Gustav is the company's number-two executive. They have experience in Europe and with financing, but no background in technology.

Growth

The grade here is meaningless because the company is just starting its foray into a new industry. Sales for its Internet operations were only $37,135 for the year ending January 2000, up from $0 the previous year.

Profitability

This grade is skewed because it's based on Xcelera.com's former business, which boasted very high profit margins and positive cash flow. The new business will show an entirely different story as expenses are likely to skyrocket.

Financial Health

The company has fairly strong liquid assets. As of April 30, 2000, Xcelera and Mirror Image had $439.7 million in cash and securities. The $22 million increase in receivables fails to improve cash flow.

Valuation

If valued similarly to Akamai's annualized prices/sales ratio of 35, Xcelera.com would be racking up $23 million in sales per quarter. But it generates sales amounting to only a fraction of that.

Bulls Say

• The technology behind the company's main subsidiary, Mirror Image, has received many endorsements. Web hoster Exodus EXDS acquired a 15% stake in the caching company, and Hewlett-Packard HWP bought a 3% stake. Also, technology guru George Gilder opined that Mirror Image's technology is superior to the approach taken by rivals like Akamai AKAM.
• Mirror Image is targeting a great market. With Internet data traffic nearly doubling every 100 days, the demand for caching services is insatiable.
• Xcelera hired someone with extensive experience to run Mirror Image: Cosmo Santullo, formerly an executive with IBM and EMC.
• Despite investing at least $100 million in cash-burning startups in 2000, Xcelera.com has enjoyed a fairly strong balance sheet (based on its latest financial statements). As of April 30, 2000, Xcelera and Mirror Image had $439.7 million in cash and securities.

Bears Say

• Because it is a foreign firm, Xcelera.com files with the Securities and Exchange Commission (SEC) only once a year, offering little information for investors.
• There has been significant insider selling. According to SEC filings, approximately 3 million shares were sold for roughly $250 million in proceeds between February 22 and June 22. In mid-October, insiders filed to sell another 4 million shares.
• While firms such as Akamai have hundreds of customers, Mirror Image appears to have a tiny fraction of that amount.
• XLA shareholders may be subject to an onerous tax burden. Management expects gains may result in taxes of $2.85 per share, so the company may issue a dividend to address this issue.
• The number of publicly traded shares has increased sharply in the past year. Xcelera.com has been boosted by short squeezes, in which a lack of supply forces the stock price upward. With more shares on the market, the stock is less likely to ride that phenomenon.