July 24, 2002 -- Managed hosting company Digex Inc. may not have been included in WorldCom's bankruptcy filing, but will feel the effects in its second-quarter earnings statement.
Digex, the managed hosting unit of WorldCom, said today that it will record a provision of $12.6 million to reflect "intercompany" hosting revenue it was to have received from WorldCom.
Digex also expects to take a charge against second-quarter earnings to reflect impairment of unspecified "long-term assets" affected by WorldCom's collapse.
The company has delayed the filing of its official second-quarter results until at least August 5, but released a preview of operating results yesterday when it revealed the loss provision and possible impairment charge.
Digex was not included in WorldCom's Chapter 11 filing. It is organized as a separate public company, but relies upon WorldCom to fund a major part of its operations.
WorldCom has already received court approval to continue funding Digex, and executives of both companies predict the payments will continue.
George Kerns, president and CEO of Digex, said the second quarter marked a sales turnaround for Digex, which recorded a gain in total customer count after seven straight quarters of declines. Digex finished the quarter with 689 customers, up from 599 at the close of the previous quarter.
Revenue continued to trend downward, however, as Digex had $48.7 million in the second quarter, down 6 percent from the previous quarter and 9 percent from the same quarter in 2001.
"Our executive team is very focused on moving Digex forward to a state of financial independence," said Kerns. "This continues to be an eventful period and we have concentrated a good portion of our time to staying in close touch with our customers. I believe we are seeing the results of that effort through the success we have had retaining customers in this challenging business environment."
The $12.6 million provision reflects revenues from hosting services that were sold through WorldCom's sales channel. Digex has billed WorldCom for these accounts, but has yet to receive payment.
Digex said that going forward it plans to recognize revenue from WorldCom using cash basis accounting, recording the revenue only when payment is received. This change "could have a material impact on future revenue," the company said.
Digex also said it is conducting an accelerated review of its long-lived assets, prompted by WorldCom's June 25 announcement that it had uncovered $3.8 billion in apparently fraudulent accounting shifts.
"We believe the ability for Digex to generate cash flows on those assets, in a reasonable period of time, has clearly been impacted by recent events," Digex said in a statement. "Any write-downs are expected to be a one-time event and will have no impact on cash flows."