Sunday, July 19, 2009

Equinix 2Q 2009 earnings forecast

Equinix (EQIX) will be reporting 2Q 2009 results on Wednesday, July 22nd.

Company's guidance forecasts revenues in the range of $ 206 to $ 210 million (with analysts' consensus at $ 208,8 million), while EBITDA is expected between $92 and $ 94 million. Cash gross margins should be between 63% and 64%, according to Equinix, while CAPEX should range between $ 110 and $ 120 million, including about $ 20 million of ongoing CAPEX – more about Equinix expansion projects later on.

Analysts are also forecasting EPS of $ 0.33, with a wide range in their estimates (from $ 0.25 to $ 0.53 per share). No guidance has been issued by the Company.

Churn is expected to be at the top of the 2% range (per quarter) forecasted for 2009, as Equinix is expected to lose a large customer who had taken, in the past, a “wholesale” deal in one of its Silicon Valley data centers (about 600 cabinets that will be returned to the Company). In the long term, Equinix will most probably be able to re-price this inventory at about twice the price, but in the short term it might impact the number of net cabinets added in the 2Q and 3Q 2009.

Since the last conference call, the Company issued $373.75 million of convertible subordinated notes due 2016, and announced expansions in Zurich and Chicago downtown, adding, respectively, approximately 500 and 600 cabinet equivalents. The new Chicago CH4 IBX will introduce a new service (shared suite data center offering) that will complete the Equinix Financial eXchange model.

It is interesting to note that most of the P/R issued recently are related to customers' win in the financial vertical (such as Intel in London, the International Securities Exchange (ISE), the Chicago Board Options Exchange (CBOE), and the Boston Options Exchange (BOX) in New York, or Chi-X Europe Ltd in Frankfurt), and we expect some solid growth in this area, going forward.

Unlike recently, the Company should not experience a negative impact from currency fluctuations, but probably a neutral to slightly positive one, especially from its UK and Australian subsidiaries (as a reminder, Equinix gets about 35% of its revenues in foreign currencies).

While we expect another good quarter from the Company, we believe that Equinix will enjoy a better growth rate in the second half of the year, partially due to new inventory coming on-line, and we mainly look, in the 2Q 2009, for a confirmation of some positive trends and metrics:

Interconnection business

After the Company repriced some ports on the common switch (GigE Exchange), we believe that more customers will be inclined to upgrade to 10 Gig port (with also a positive financial impact on this margin-rich part of the business), and that traffic will continue growing on this platform, thus consolidating Equinix leadership in the interconnection business in the USA. This is a chart, taken from the Equinix web site, confirming the positive trend of the traffic being exchanged in the USA on this particular service (but not an indication of overall traffic, as most is still exchanged through private cross connects):

Asia has shown a strong growth trend in this side of the business, which we expect to be confirmed in this quarter and going forward, while we expect that Europe will be slower to show signs of improvement, due to the different business model (also caused by the presence of no-profit regional interconnection centers in this market) and the fact that Equinix will need to postpone, like in Paris, the monthly recurring charge for these services to a later stage, while building a critical mass of participants.

Customers addition

Equinix added in-between 110 and 178 gross customers per quarter, in the last few quarters. While the Company receives most of its additional business (about 80%) from existing customers, and this gross number can not be an indication of the quality and potential of the added customer, it is useful to note that the total number of customers has always been growing steadily, as the business model has been able to attract new participants:

MRR (monthly recurring revenue) per customer

Since last quarter, Equinix started reporting some metrics for Europe, as well, like MRR. It's necessary to remind that the European market is different from the US and Asia for at least a couple of aspects. We mentioned the approach toward interconnection and the presence of no-profit organization, it's useful to underline that the business model is also different in the way power is sold to the customers. For this reason numbers can not really be compared, and Europe shows a lower unit number. Currency fluctuations may also impact results, which are reported in US$, for Asia and Europe.

What is important to notice is that the trend is basically very positive, both on a Q/Q and Y/Y basis, probably even exceeding expectations, a sign that pricing doesn't seem under pressure in thiskind of business (it must be noted, however, that the average new cabinet sold is often more power intensive, and this means more expensive, than the “old” existing one – so we can not assume that this is a rate of Y/Y price increase for the same cabinet configuration).

New openings

We expect the Company to be basically on schedule with the forecasted new openings for 2Q 2009 and 3Q 2009.

While announcing the new CH4 data center in Chicago, Equinix also confirmed the opening of the CH2 expansion (an additional 200 cabinets downtown), that is ahead of schedule (forecasted for 4Q 2009).

Singapore will also see the official opening of the SG2 IBX data center on July 29th-31st, on schedule in the 3Q 2009. Rumors are that Salesforce might be an anchor tenant in this location. This opening will add 700 cabinets, with room for a further capacity of 1,000 cabinets equivalents.

You may find an IBX expansion chart at this link, that will most probably be updated after earnings, with Zurich (ZH4) and Chicago (CH4), and any other expansion to be announced (we still believe that Equinix will need to add more inventory in 2010 to some locations, especially in the USA).

Lastly, the call might be an opportunity to confirm if the Company will acquire the property where the new NY4 data center is located (three year option expiring in September, with price fixed at $ 39,000,000).

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