As we had forecasted (see the previous Seeking Alpha article), numbers were pretty solid, the Company exceeded revenue expectations for the quarter and lifted the outlook for the full year 2008, both for revenues and EBIDTA (as a reminder, Equinix had increased expectations the previous quarter, too).
Let's go through some of the metrics we usually follow for this Company, which all look very healthy:
- net cabinets addition in the USA and Asia, for the 2Q 2008, was 1,600, compared to 1,500 cabinets for both the 1Q 2008 and the 4Q 2007 and 1,300 cabinets for the 3Q 2007;
- cash gross margins were 62%, ahead of expectations, and a very healthy 69% in the USA, the market where Equinix is benefiting the most from its strong interconnection business (as a reminder, Asia and Europe are now following the same trend of stronger cross connection adoption, but these two region are historically behind the USA a few quarters as to this aspect of the business);
- Churn is in line with the forecasted 8% for the year, and there has also been, in the quarter, some proactive churn by the Company aimed at maximizing the utilization of space available;
- the number of multi region, multisite deployment from multinational customer increased, showing strong signs of synergy since the European acquisition of IX Europe;
- a record 114 10 gigabyts per second Ethernet ports, compared with 102 in the 1Q 2008 and 87 in the 4Q 2008 (with half of the increase coming from Asia this quarter, a strong sign of the increase of the interconnection business there);
- MMR per salable cabinet increased to $1,650 from $1,603 in the 1Q 2008 (as a reminder this datum is for USA and Asia only);
- significant demand for the financial exchange service, in spite of a weakening economy, as proved also by two new wins in the quarter (NASDAQ and Chicago Board of Options Exchange) and the announcement of a phase 2 expansion in New York;
- 144 new customers in the quarter, compared with 160 in the 1Q 2008 and 123 in the 4Q 2007 (this number excludes about 450 smaller customers coming on board from the Virtu acquisition in Holland);
- Secaucus phase 2 officially announced, due to the strong performance in the New York metro area;
- both Chicago and New York expansions, opened in the Q4 of 2007, cash flow positive by the end of 2Q 2008, well ahead of expectations, and the two data centers together doubled revenues to $ 6.3 million in the quarter reaching approximately $ 29 million when annualized at the June '08 exit rate;
- record bookings in the quarter in the USA, and strong bookings across the other regions (quote: "just over two times the level of new customer bookings in the previous quarter").
As a short summary, these are the expansions foreseen for the remaining of 2008 and the first part of 2009:
- Frankfurt 2 (phase 2b) expansion due to open beginning 3Q 2008 + 840 cabinets
- HK1 (phase 2) expansion due to open 3Q 2008 + 550 cabinets
- SG1 (phase 3) expansion due to open 4Q 2008 + 300 cabinets
- SY2 expansion due to open 4Q 2008 + 650 cabinets
- L.A.4 expansion due to open 2Q 2009 + 1,700 cabinets
- NY4 expansion due to open 2Q 2009 + 1,100 cabinets
Going back to the new USA openings, Equinix has added cabinets both in the Silicon Valley and in the Washington DC metro area, two of its strongest markets (a total of 2,750 high power cabinets in these regions combined, with a potential, at a mid point of $ 2,000 per cabinet/month, in eccess of $ 65 million in revenues at full occupancy), with the new Chicago and New York IBXs showing signs of acceleration in revenues in the 3Q, due to a strong pipeline, and good capacity still available in L.A..
Right now, it looks like the Company has put in place expansions capable of sustaining their strong growth in all their major markets, with the only exception of Dallas, where Equinix is at full occupancy, as it is considered a secondary market.
It is still a little bit more difficult to do a proper modeling of the potential developments in Europe, as the Company hasn't disclosed the same amount of data/details for this market, but bookings are confirmed to be strong and a lot of room has been/is being deployed. Margie Backaus confirmed there is no slowdown in London for Equinix, in spite of recent comments by some analysts, as reported here by Data Center Knowledge.
Generally speaking, Equinix disclosed that they "expect to see a significant ramp in revenue and EBITDA in these markets by year-end which would translate into strong contribution to our 2009 results in Europe", with strong pricing experienced in most markets.
It is very interesting that Equinix announced, during the quarter, the expansion of its Equinix Exchange™ service to the company’s Zurich Internet Business Exchange™ (IBX®) center. The service does incorporate what was previously branded as The Internet Exchange (TIX), the largest exchange in Switzerland with over 60 members.
The Company also disclosed that the same service was launched in the Paris market with several initial customers.
As to the London Market, LINX will be expanding to the new London 4 IBX.
With this strategy in place, Equinix can offer interconnection and peering services to customers in all five of the countries in the Europe where the Company operates. It is very important as the
interconnection service, which enjoys margins as high as 90%, can certainly push profits positively. (Europe cash gross margins are now 47% compared with 57% in Asia and 69% in the USA).
As a related example, it was a great sign that half of the new customers signed for the 10 gigabyts per second Ethernet ports were in Asia, where this service seems to follow the path of the USA. Customers requiring these services are, for example, Google and Akamai or Limelight Networks in Tokyo (info available on www.peeringdb.com).
Given the high margins and the cost of a port (we speculate around $ 180.000 per year in the USA), 114 ports do represent an interesting number contributing strongly to revenues and especially to the bottom line.
Quite a lot of the analysts' attention was devoted to questions linked to the Equinix financial Exchange, and its performance given the general market conditions.
Equinix Europe has just published its Summer Equinix EF-eXchange Newsletter which adds color to the discussion - among the additional news you can find, a description of Equinix unique financial market service offering, and information about the new customers joining the service recently, like Merrill Lynch launching a proximity hosting solution at the Equinix Frankfurt datacentre, or CJC and QuantHouse.
A few quotes from the call:
Stephen M. Smith -
- "with outstanding bookings and an increasing share of our growth coming out of the financial sector especially with important new wins such as the NASDAQ and the CBOE"
- "we made a decision to move forward with New York 4 Phase 2 to support the significant demand we continue to experience with our financial exchange service"
- "from our perspective no let up in demand in that segment, no signals really at all"
As Rob Powell summarized in his Telecom Ramblings blog post after the results, Equinix 2, Economy 0.
Now, some less positive considerations.
Earnings per share were impacted by a $3.1 million adjustment just for the two founders of IX Europe that recently left the Company. This amount was supposed to be spent over a 15 month period, so we might expect stock option costs to go back to the forecasted numbers. From the Seeking Alpha 4Q 2007 conference call transcript:Keith Taylor - Chief Financial Officer
"Looking forward, we expect stock-based compensation expense to approximate $55 million in 2008.
In 2008, we'll continue to shift our compensation plans to be more cash based for the majority of our employees, as it is our intention to continue to reduce the level of dilution attributed to our equity compensation plans. Our net dilution rate has steadily declined over the past years, with our 2007 dilution rate net of forfeitures approximating 5%, which reflects the equity issue related to our IXEurope acquisition, while we target our 2008 net dilution rate to be less than 2%."
A negative 3 million quarter-over-quarter swing attributed to currency fluctuation as Equinix remeasures foreign denominated assets and liabilities also impacted the quarter, although we still believe that at this stage Equinix has to be evaluated for its EBIDTA and cash flow potential, rather than earning per share.U.S. interconnection service revenues were 19% of U.S. recurring revenues for the quarter, which is a slight decrease from the previous level (20% in the 1Q 2008 and 4Q 2007 and 21% for the full 2007). It is a datum that might suffer from some large deployments (anchor tenants) or even by the consolidation in the sector, but a number we like to monitor in the future to see if it is a trend or just a result of the fast growth experienced by the Company (customers tend to add additional cross connects at a later stage after deployment). We believe management is also checking this aspect and probably fine tuning the deployment of new customers.
Equinix Chief Business Officer, Margie Backaus, will be leaving the Company at the end of the year. Like all the members of the original management team, she has led the Company through the very difficult post-bubble times and gave a great contribution to establishing Equinix as the leader in its sector. In particular, she also built a very successful communications and investor relations program, which we believe had an important role in the success of the Company. We think that, as happened in similar occasions recently, Equinix will be able to find a proper replacement for her role and the Company will continue to execute well in the future.
Paolo Gorgo' - Nortia Research
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