Thursday, October 7, 2010

Equinix, Inc. Responses to Questions Pertaining to Business Outlook

October 7, 2010

Business Overview

The fundamentals of the Equinix business continue to be strong with expected organic growth in excess of 20 percent in 2010, generating $540 million of adjusted EBITDA. Gross bookings in the third quarter, across all three regions, were strong and consistent with our expectations. We achieved notable wins across each of our vertical segments that will continue to enhance the strength of our ecosystems.

We recently completed an analysis of the network neutral colocation and interconnection market. This analysis validated the strength of our opportunity given the needs of both our existing and future customer base, and supports our ability to build a $2 billion revenue business. Equinix is the global market leader and will continue to distinguish itself from its competition. We will provide further details on our broader opportunity as well as initial expectations for 2011 during our third quarter earnings call on October 26, 2010 and Analyst Day on November 11, 2010.

Current Pricing and Booking Trends

In our core business, pricing remains firm and we have seen no fundamental change in customer demand or interactions. Our target customers have high-performance applications and are part of strategic ecosystems residing inside our data centers – these customers include those who have a high demand for bandwidth consumption, those who require close proximity to various financial trading platforms and those who need to interconnect to data, video and cloud service providers. We see increasing demand from customers managing these high value applications – consistent with our strong gross bookings this quarter – and we expect to be able to maintain our price targets for these deployments.

From time to time, we may renegotiate with strategic customers to extend the term of their contract or secure incremental business. As an example, during the third quarter, we had two contract renegotiations with certain magnet customers that allowed us to extend the terms of their agreements to three years in return for pricing discounts. These renewals reduced our MRR by approximately $300,000. This enabled us to retain long-term relationships with these important customers, enhance the value of two key ecosystems and secure total contract value in excess of $75 million. This is a practice that we have done in the past, and may do in the future provided we enhance the value of our ecosystems while increasing our total contract value of the customer relationship.

Additionally, we also have, and always had, customers who are not necessarily part of an ecosystem but who value our operational reliability, quality, security and global scale. They represent approximately 25 percent of our installed base in North America. These customers value the premium level of data center service, and are typically not susceptible to churn, recognizing they tend to be at the lower end of our pricing spectrum. However, there is a subset of these customers, typically with large footprints, who have seen value in bifurcating their deployments between Equinix and a wholesale service provider, which is typically a lower cost alternative. The churn that may be associated with this bifurcation is typically embedded in our guidance ranges. In many cases, when a deployment of this nature churns out, we are typically able to replace the deployment with a higher priced, retail customer who can benefit from our network neutral and ecosystem focus. Consistent with above, during the quarter, we experienced some churn related to a North America customer relocating their environment to a lower cost service provider. This churn was anticipated and consistent with our prior guidance.

Switch & Data Integration

Overall, the Switch & Data integration has gone well. Our initial plan was to focus on cost synergies and to date we are ahead of schedule to achieve our $20 million target, which will contribute to our expected strong adjusted EBITDA performance. However, we have seen some temporary softness in the bookings related to the Switch & Data assets in the third quarter, which we attribute to some of the expected integration challenges post-acquisition including sales force re-alignment, distraction and turnover, as well as the new task of selling into 16 additional markets. We are in the process of putting programs in place to increase the bookings activity and improve the corresponding utilization levels of the Switch & Data facilities as we exit 2010.

Overall, the Switch & Data pipeline is strengthening, and we had several notable wins in the third quarter. We have strong customer interest in the Switch & Data footprint and are in discussions with several national accounts who are looking to expand their deployments into multiple locations.

The sky has not fallen; multi-tenant datacenter fundamentals remain strong

Tier 1 Research Daily Newsletter:

>>After market close on Tuesday, October 5, Equinix, the bellwether firm of the datacenter industry, did the unthinkable – it lowered top-line guidance after 30 straight quarters of top-line growth and meeting or beating guidance.

Lydia Leong on Equinix

Lydia Leong on Equinix:

>>Equinix has differentiators on the retail colo side, but they are differentiators to only part of the market. If you don’t care about dense interconnect, Equinix is just a high-quality colo facility. I have plenty of regular enterprise clients that like Equinix for their facility quality, and reliably solid operations and customer service, and who are willing to pay a premium for it — but of course increasingly, nobody’s paying a premium for much of anything (in the US) because the economy sucks and everyone is in serious belt-tightening mode. And the generally flat-to-down pricing environment for retail colo also depresses the absolute premium Equinix can command, since the premium has to be relative to the rest of the market in a given city.

Those of you who have talked to me in the past about Switch and Data know that I have always felt that the SDXC sales force was vastly inferior to the Equinix sales force, both in terms of its management and, at least as manifested in actual working with prospects, possibly in terms of the quality of the salespeople themselves. Time is needed for sales force integration and upgrade, and it seems like the earning calls indicated an issue there. Equinix has had a good track record of acquisition integration to date, so I wouldn’t worry too much about this.

The underprediction of churn is more interesting, since Equinix has historically been pretty good about forecasting, and customers who are going to be churning tend to look different from customers who will be staying. Moving out of a data center is a big production, and it drives changes in customer behavior that are observable. My guess is that they expected some mid-sized customers to stay who decided to leave instead — possibly clients who are moving to a wholesale or lease model, and who are just leaving their interconnection in Equinix. (Things like that are good from a revenue-per-square-foot standpoint, but they’re obviously an immediate hit to actual revenues.)

Wednesday, October 6, 2010

A Breakout That Didn't Work

Bespoke Investments:

>>In under 24 hours, the stock has gone from a six-month closing high to a 52-week low.

Earnings Season Begins with a Public Execution

Joshua Brown at Forbes.

For the seventh straight quarter, stocks raced higher into earnings season, which for 3rd quarter, officially kicks off tomorrow with the Alcoa (AA) report. Today’s action in the cloud computing names does not bode well for companies with shortfalls to announce.

Equinix (EQIX), a cloud hosting data center company, missed revenue by 2.2% and is currently getting schmeissed to the tune of 30% on the day!

Benchmark Capital Discusses Equinix's Pre-Announcement Miss

from Benzinga:

>>Benchmark Capital discusses Equinix, Inc. earnings pre-announcement miss. It still rates shares at Buy.

In the research report, Benchmark notes, "Our 2011 estimates will likely drop. We are reviewing. We view the Switch & Data disappointment as likely company-specific due to integration challenges. The pricing discount for large customers is not new but is more than previously anticipated. The digital media churn is not new either as Savvis (SVVS, Hold) has reported over the past two years. As such, we do not think this is a negative signal for the entire data center industry. In addition, we believe the fundamental macro drivers remain in place for sustained data center growth. Using the revised guidance, Equinix is growing 20% organically this year."

Goldman Lowers Guidance For Equinix

from Benzinga:

Goldman Sachs is lowering guidance on Equinix, Inc. and maintaining its Neutral rating.

In its report, Goldman Sachs writes "After the market close on Tuesday, Equinix updated revenue and EBITDA guidance for 3Q and 2010. Revenue in 3Q is expected to be $328M-$330M (from $335M-$338M). For the full year, revenue of $1,215M is $10M-$20M below prior guidance. Despite the lower revenue, EBITDA in 3Q10/2010 of $140M/$540M is expected to be at or above prior guidance."

Goldman Sachs has lowered its price target from $96 to $90.

Samsung sells 5 million Galaxy S Android phones in 4 months


>>Samsung issued a press release for the launch of its popular Galaxy S smartphones in Japan today. Toward the end of the release, they do a little bragging:

The GALAXY S has been a phenomenal success in the global smart phone market, recording global sales of over 5 million units including more than 2 million units in the United States and more than 1 million units in Korea.

Samsung expects those numbers to grow exponentially with forecasts for five million sold in the US by the end of the year and 10-15 million globally. With the recent launch of the phone in China and now Japan, those numbers seem plausible.

Citi Cuts Equinix To Hold (EQIX)

from Benzinga:

>>Citi Investment Research downgraded shares of Equinix, Inc. to Hold from Buy, and lowered the price target to $94 from $121.

In the research report, Citi writes, "We are reducing our rating on EQIX from Buy to Hold and reducing our target price from $121 to $94 per share in the absence of a meaningful acceleration in revenue growth during 2H/10, our outlook for slower PF revenue growth during ‘11 of 14-15%, & the possibility for Equinix to slow the rate of capital reinvestment in the domestic segment to increasingly focus on cash flow generation. While gross revenue bookings were cited as favorable across the heritage & Int'l operations, we view results as an early sign-post that revenue growth for its core U.S. target segment may be slowing sooner than we anticipated."


>>Oppenheimer is downgrading EQIX to Perform on competitive concerns after the co last night lowered Q3 and FY10 rev and raised EBITDA guidance. Although the reduction in rev guidance was not materially large, they found the qualitative commentary regarding pricing/competitive issues more concerning. EQIX is beginning to see increased pricing pressure for larger customer accounts, particularly from wholesale providers, as incremental capacity becomes available in some markets. Higher churn/slower SDXC rev growth also raise concerns, though they expect mgmt to fix these issues

Kaufman is lowering their tgt to $81 from $88 as they are lowering 2011 expectations as a result of their increasing concern around co churn, potentially negative pricing in colocation and Equinix's ability to drive better rev synergies from its recent acquisition. Despite mgmt's indication that pricing remains strong, they believe that competition and supply are beginning to erode pricing stability in some of the colocation markets and may not become fully evident until 2011

Merriman lowers their valuation range to $100-120 from $120-140 to reflect the heightened risk of an over-supply situation developing. They believe that some of the reasons for the shortfall are of a transitional nature but others could be a reflection of an increase in the supply of data center space in the market. While this slows the co's growth down a bit, the stock has more than adjusted for that

Wells Fargo Downgrades Equinix (EQIX) to Market Perform

from StreetInsider:

>>Wells Fargo downgrades Equinix, Inc. (Nasdaq: EQIX) from Outperform to Market Perform.

Wells analyst says, "We believe the network-neutral data center space represents a safe derivative play on the continued growth of IP and Internet traffic. However, given the recent Q3 pre-announcement we feel we have limited visibility on revenue growth...Our new 2010 and 2011 EBITDA / share ests are $12.13 and $14.40 (from prior ests of $12.10 and $14.59)."

Equinix trims yearly guidance by $15 Million, or 1,2%, and loses more than $1 Billion in market cap

Equinix Inc. (EQIX) suffered the highest percentage decline in extended trading on Tuesday, October 5th, after the Company trimmed its revenue outlook for the third quarter and full year.

The stock fell 26% to $78.23. Volume of 4.1 million was more than five times the Company's daily average of around 800,000 shares. Equinix ended the regular session at $105.99, up 4%, on very strong volume, too.

With a history of exceeding guidance, and expectations for a strong second half of the year, it is not surprising to see the stock price take a hit because of concerns about growth – but is all this a bit overdone?

Let's try to go through some numbers first.

Equinix now sees revenue of $329 million (midpoint) for Q3, compared to its prior range of $335 million to $338 million (a $7.5 million miss, or 2,2%, at midpoint). Wall Street's current consensus estimate was for revenue of $336.8 million. For the full year, the Company expects revenue of $1.215 billion versus previous guidance of $1.225 billion to $1.235 billion (a $15 million miss, or 1,2%).

There was also a piece of good news, completely ignored by the market, as the Company announced that it expects to exceed its adjusted EBITDA target, in spite of the revenue miss.

Equinix is increasing its adjusted EBITDA outlook for Q3 to greater than $140.0 million (previous midpoint, $137,5 million). For the full year of 2010, the adjusted EBITDA outlook is also being increased to approximately $540.0 million (at the higher range of previous expectations). This increase is due in part to better than expected gross margins and lower than expected cash selling, general and administrative expenses.

There is still good leverage in the business, and the Company has already succeeded in bringing the recently acquired Switch and Data assets closer to the traditional Equinix's higher margin performance.

As a small reminder, adjusted EBITDA is a very close proxy to free cash flow for Equinix, and one of the most important metrics, in our opinion, to evaluate this business model. We'll come back to this later on.

In its post regular session conference call, the Company tried to address the reasons for this revenue miss, and why it was not possible to forecast it.

Equinix's management blamed three main factors for the negative result: underestimated churn assumptions in Equinix’s forecast models in North America, discounts to secure long-term contract renewals and impact from lower than expected revenue in Switch and Data.

As we noticed, we can quantify Equinix's forecasted revenue miss at about $15 million for the year.

Assuming a positive impact from foreign operations of about $3 millions, due to the recent weakness of the US dollar, we might round this number up to almost $ 20 million for 2010.

Half of it - or about $10 million – may be due to lower than expected turn over from Switch and Data.

Equinix now expects this recently acquired side of its business to achieve about $ 240 million in revenue for 2010 (as a reminder, Equinix consolidated Switch and Data results only after its official acquisition of the Company, which closed on May 1, 2010).

Switch and Data achieved revenue of $ 205,4 million in 2009. We believe it may be important to bring this number up, as it gives the opportunity to underline that the acquired assets are still growing at a nice 17% Y/Y rate.

Equinix itself still expects to grow organically at about 20%, in spite of reduced guidance.

Aftermarket trading seemed to suggest two things: a general fear among investors that Equinix may not be considered a strong growth story any more (the Company was priced for perfection, so a hit due to this kind of disappointment was to be expected), and a major concern that the Switch and Data integration has been mismanaged.

Let's try to spend some time on this subject.

Equinix has a long history of successful integrations, mainly of foreign assets (i-STT in Singapore, Pihana Pacific in Asia, IXEurope in Europe). It would be quite surprising to see management fail in assimilating an asset in its very well known domestic market, especially since Switch and Data has always been a very similar business, characterized by very low customer churn (actually lower than Equinix itself), and a very strong interconnection side of the business (better than Equinix, in percentage).

If we look at Equinix's integration efforts from the cost side, it looks like the Company has already achieved, or is in process of achieving, the majority of its costs savings (about 75% of the $20 million forecasted will be accomplished, according to management’s comments, by year's end).

Switch and Data EBITDA has already been improved by about 7 basis points, and is targeted to move from about 35% to the Equinix's standards of roughly 45%.

Full system integration is forecasted for Q1 or Q2 2011, and while these things always provide some road bumps, we do not see it as a major cause of distraction for management.

The bad news from the call is that the Company has probably been slower than expected in integrating the two sales forces, and converting the Switch and Data pipeline into actual revenues. This might partially explain why the former SDXC is now expected to achieve revenues of about 4% lower than expected. A small miss at Switch and Data (in terms of almost stable revenues between Q1 and Q2) had already been noticed, but we hadn't perceived it as a red flag.

More digging will be necessary to separate execution problems from sales reasons (Switch and Data inventory was very interesting in absolute terms, but quite concentrated in a few markets – and Switch and Data admittedly was looking at Equinix's strength in sales to improve its performance).

Bottom line, we believe it is too soon to call the merger a failure. In the long term, Equinix presence in the US market will benefit from being in more markets, and added inventory.

Reviewing the Equinix conference call, we believe there are a couple of items that require even more emphasis than the Switch and Data analysis.

A major concern in this business has always been pricing.

The sector came back from the failures of the past, when several Companies overbuilt inventory and mostly went bankrupt giving it away at or under cost.

The landscape is now completely different. In the past Rome was built in a day, and lacked citizens (customers) to make it a valuable place. Nowadays most data centers are at very high occupancy rate (Equinix is at about 78% in the USA, including the Switch and Data assets, and used to be well over 80%), and customers need regularly to add new cabinets (growth comes mostly from the installed base).

Equinix, in our opinion, probably did a poor job communicating a strategic shift in contract length, thus suggesting that some kind of discounting in the sector is necessary, right now.

Talking about “credit memos” to major customers in order to secure long-term contract renewals sounded a lot, to some analysts, like admitting that there is some price pressure today in the market, and that's exactly what can explain an investors' run away from the sector.

David Gross, at Data Center Stocks, has an interesting analysis of this aspect and tries to explain why a $300,000 per month discount on a $ 75 million multi-year commitment shouldn't knock down a billion dollar Company.

Moving away from the discussion of how it was communicated to the market, we'll try to get to the bottom of this two sized problem: is there price pressure right now in the sector? Why is Equinix trying to move the average length of its contracts from 24 months to probably much more than that, especially with strategic customers?

We do not believe there should be serious concerns about pricing in the market, right now.

Price per cabinet is still strong, as there is more demand than offer in the market. We will obviously check carefully recurring revenues per cabinet equivalent from now on, but we do not expect a free fall, just probably a slower increase each quarter.

However, data center construction is now stronger than before, and this will bring to more inventory available in a few months/years. A few REIT operators are offering turn key solutions that may be appealing for some larger customers, including some Equinix ones.

Equinix's customer base has always included footprints by Companies like IBM (that used to be well over 10% of revenues), or Google, Microsoft, etc.

Going back in time, we remember when Google moved away from its very large footprint in Ashburn, (DC metro). In the longer term, good news for Equinix as it repriced the inventory at more profitable rates. Some Equinix customers might grow in such a way, that an internal solution or building (leasing) an entire data center will make economic sense.

They'll stick to Equinix, anyway, for their mission critical staff (interconnection business) or foreign assets.

This kind of churn is inevitable, and Equinix has probably already dealt with most of it.

We have now been more aware of two aspects of how Equinix is and will be dealing with its clientele, especially in the USA, and mainly in a couple of verticals (digital media and content providers).

First, some strategic customers, whose “magnet” is important to build an ecosystem inside an IBX (and create that domino effect that attracts other partners under the same roof) are being offered incentives, right now, to commit for longer terms contracts to avoid future price pressure (when more inventory will be coming in the market) and having to deal, potentially, with a vertical moving away from an IBX as the major catalyst is being offered an anchor deal somewhere else.

This is not good news for the balance sheet right now, but represents a strategic move for Equinix and part of what was described as moving away from “fulfilling demand” to “creating demand”, which might also mean selecting specific location verticals and taking care they have deep roots. “Paying a price on price” may be part of insuring long term stability (still with yearly price increases in most contracts).

Second, Equinix has clearly indicated to us that about 25% of its current clientele is a bread and butter “need a cabinet for my servers” customer – these are the ones who are not very sticky to the Company, as this kind of service may be easily provided by others (although without the same security, quality of service or network density).

Moving to differentiating the offering and emphasizing the cross connection side of the business will only maximize the results, in the long term, for the Company.

Even in the worst case scenario (all these customers moving away to cheaper offerings, something impossible to happen), we do not have to forget that they are mostly subject to multi-year contracts, and the impact on churn would only add a few percentage points per quarter – not trying to underestimate the impact, but put it in the right perspective.

The challenge is now on the sales force, as it will have not only to increase its efforts, as a performance above targets will be necessary to offset a potentially higher churn, but focus on selecting customers based on their interconnection potential, and “stickiness” to the business model.

There is still a positive imbalance in the demand/offer dynamics of the sector, so we do not have to assume that it's mission impossible.

Equinix is already planning adding new people to the sales team, which is not a major concern in terms of additional costs, as the Company remains relatively “small” in terms of total employees. It might, however, take time to gain productivity on the investment.

We can now read with a different approach into a recent Press Release announcing the creation of a new position, Chief Sales Officer, and appointing Charles Meyers as President of North America.

Peter Ferris has been in charge of Equinix's sales since the very beginning, including the tough times after the bubble burst. In his new role as Chief Sales Officer, he will lead the Equinix go-to-market strategy, and manage global accounts and sales operations.

In summary, we now do expect a lot of volatility, as swing traders will join in, both long and short. Equinix has always had a strong institutional presence, including many hedge funds, and this will also play a role in the short term stock performance.

While we understand that it might take some time before the market recognizes that the business model is not broken, we remain confident that Equinix still represents an interesting investment opportunity for the long term.

Tuesday, October 5, 2010 Signs Agreement With NTT Communications to Establish Data Center in Tokyo (NYSE:CRM - News), the enterprise cloud computing company, and NTT Communications (NTT Com) today announced an agreement to establish a data center in Tokyo to support's cloud computing services. As's newest worldwide data center, the Tokyo facility will help support the company's growing customer base in Japan once it is completed in 2011.

Read more at this link.

Samsung plans to launch tablet globally this year

from Reuters:

>>Samsung Electronics said it plans to sell its Galaxy Tab tablet computer in the United States, Japan, South Korea and Italy this year, taking aim at frontrunner Apple in the new but already congested segment.

Although it will also compete with a bevy of devices from the likes of Dell and HP, the Galaxy Tab, unveiled last month, has been described by some analysts as the most credible rival to Apple's iPad.

It is smaller than the iPad and Samsung has forged partnerships with the top four U.S. mobile carriers and with media companies which are providing programming for its Media Hub service, they say.

The Galaxy Tab will go on sale in Italy in October, in South Korea in October or November, and in the United States and Japan in November. Samsung aims to sell 1 million units this year.

In Japan, NTT DoCoMo Inc will start also selling the Galaxy S smartphone in late October, with Samsung hoping to win over Japanese consumers that have warmed to foreign devices thanks to the iPhone and iPad.

Samsung: to launch Galaxy Tab in Italy in Oct or Nov

from Reuters:

>>Samsung Electronics said on Tuesday it plans to launch its Galaxy Tab tablet computer in Italy from this month or next.

Monday, October 4, 2010

ACTIV Financial Partners with Equinix to Expand Global Reach and Optimize Performance of its Market Data Solutions


ACTIV Financial (ACTIV), a leading global provider of fully managed low-latency market data solutions, and Equinix, Inc. (Nasdaq: EQIX), a provider of global data center services, today announced that ACTIV has extended its presence in Asia-Pacific and North America by adding the Equinix Tokyo 2 (TY2) and Toronto 1 (TR1) International Business Exchange™ (IBX®) data centers to its existing presence in Chicago, Frankfurt, London, New York and Singapore.

“Our work with Equinix represents our commitment to providing fast, cost-effective access to ultra-low latency global market data solutions,” said Frank Piasecki, president of ACTIV Financial. “Equinix’s rich network density and close proximity to our financial partners enables us to optimize our customers’ experience as they leverage ACTIV’s global data sources across the electronic trading ecosystem.”

With data centers across the globe, ACTIV will continue to extend delivery of its high-volume, ultra low-latency market data services to new and existing clients in the Equinix financial services community. The Equinix global platform serves a comprehensive ecosystem of financial market participants, allowing them to directly connect to Equinix partners effectively and efficiently. “As a result of our strong relationship, Equinix has a deep understanding of ACTIV’s business requirements, and we are pleased to continue to serve them in new global markets,” said John Knuff, general manager of Global Financial Services at Equinix. “ACTIV’s services add significant value to our financial ecosystem, which continues to grow in value with the addition of each new partner.”

Accuray's CyberKnife System wins RT Image's MVP award in the Radiation Therapy category!

Accuray's CyberKnife System wins RT Image's MVP award in the Radiation Therapy category!

Will CENX Beat Equinix in Ethernet Exchanges?

Interesting article from DataCenterStocks about the Ethernet Exchanges:

>>CENX vs. Equinix vs. Telx/Neutral Tandem

At the same time that CENX launched, Equinix (EQIX) developed a competing service based on the new MEF NNI specification. Equinix already had all the major service providers sitting in its IBX centers, a big advantage for establishing this kind of service. Another co-lo provider, Telx, entered the market in June, through a partnership with Neutral Tandem (TNDM) which already provided a third-party interconnection service for cell phone carriers and VoIP carriers who needed to interconnect voice traffic with long distance networks. Neutral Tandem co-founder Ron Gavillet is also the co-founder of CENX.

Competitively, the data center co-lo providers are now fighting a startup, one that has been very successful with large carriers, announcing last week that Cox Business would be coming into its exchange, in addition to Verizon (VZ), Level 3 (LVLT), and China Telecom who are already there.

LG Elec says Android 2.2-based tablet plan dropped

from Reuters:

>>LG Electronics Inc said on Monday that it had scrapped a plan to launch a tablet computer based on Google Inc's Android 2.2 operation system known as "Froyo", a decision that may delay the rollout of its first tablet PC slated for next quarter.


"We plan to introduce a tablet that runs on the most reliable Android version ... We are in talks with Google to decide on the most suitable version for our tablet and that is not Froyo 2.2," said an LG official.

The official declined to be named, saying LG had yet to decide on the timing for its tablet launch.