Equinix 2Q results: exceeding 2008 record booking levels

Equinix (EQIX) reported 2Q 2009 results Wednesday night (see Company’s P/R and Seeking Alpha conference call transcripts).

Expectations were exceeded on all fronts: revenues came in at $ 213.2 Million (consensus $ 208.8 Million), EBITDA was $ 99.5 Million, exceeding Company’s forecast ($ 92/94 Million), and EPS were $0.46 ($0.44 diluted), well beyond analysts’ expectations ($0.33).

The Company narrowed its 2009 revenue forecast, increasing the lower end of expectations from $ 855 to $860 Million (and the bracket is now $860 to $ 875 Million), upped adjusted EBIDTA from between $370.0 and $385.0 Million to between $ 380 and 390 Million (a great sign of the leverage of the business model), and announced two further expansion plans (more on this later).

As usual, we’ll go through some of the metrics we check to dig deeper into Equinix results:

• Net cabinets additions were 900 in the USA (in spite of a large pro-active churn in the Silicon Valley market), 300 in Asia and about 1,100 cabinets equivalents in Europe (that contributed the most to this quarter’s revenue increase);
• Cash gross margins came in at 65%, ahead of expectations, with Europe reaching 55% (up from 51% last quarter), while USA enjoys a steady 69% rate;
• A record 255 10 Gig ports on the Equinix Exchange (31 additional ones in the quarter), while traffic on the same service in the USA reached a peak of 340 gigabit per second, a 13.3% increase over last quarter;
• MRR per cabinets increased in all markets, with US reaching $ 1,893 per cabinet (a 1.9% Q/Q increase). Asia and Europe exceeded this Q/Q growth rate (2.9% and 6.9% respectively), although in the case of Europe the exchange rate and seasonal factors impacted the number, and pricing was described as stable during the call;
• new Frankfurt (Germany) expansion plan – an interesting acquisition of a distressed, former Exodus data center that will be “Equinized” and available for customers from 4Q 2009 and will see a Blue Chip anchor tenant from the opening;
• demand from the financial vertical remained very strong , leading to the announcement of the Secaucus phase 3 expansion project, adding another 1,250 sellable cabinets in this key market for the Financial eXchange – NY4 to become Equinix largest data center;
• new record booking results in the U.S. and a solid booking performance in both Europe and Asia;
• Improved EBITDA as a percentage of revenues in all markets, with US now at 50.8% (up from 50.4% last quarter), Asia at 45.5% (up from 45.4%), and Europe at 37.4% (up from 34.2%);
• pricing remains strong in all markets, in spite of the economy.

As a reminder, the Company has a very interesting “non financial Metrics” spreadsheet available for download on its Investor Relations web page where you can find more information.

In order to give a very balanced view of the Company’s performance, we’ve also looked for some negatives, although this probably requires some more effort:

• a couple of expansion plans were slightly delayed - the LA1 expansion downtown has been moved from 4Q 2009 to 1Q 2010 (while the new LA4 El Segundo opening remains on schedule for later this quarter) and the new Paris 3 phase 1 has been shifted from last quarter to this quarter;
• churn is expected to be slightly higher than anticipated in the second half of 2009, as a result of some customers going bankruptcy in this difficult economic landscape. While Equinix expects this event to obviously impact in the short term the growth rate, in the long term it does expect to be able to re-sell the available space at the same or even at a higher rate;
• interconnection business continues to slide in term of percentage on revenues (down to 13% of total revenues from 15% in the Q 2008), although the Company reinforces that it is still very focused on this aspect of the business model, that is just being introduced in Europe and through the creation of new services and products that will leverage the interconnection strength of its centers;
• a longer “book to bill” time frame, mainly due to the complexity of some deployments, that will impact 2009 and not allow to convert some high booking levels achieved in a few centers into immediate revenues.

Let’s now have a look at two important metrics: growth rate and expansion capacity.

This spreadsheet (click to enlarge) clearly shows that Equinix has apparently reversed the percentage Q/Q growth rate trend, that reached a bottom in 4Q 2008 and is now back at 3Q 208 levels. Worth noting that we are still talking about a Company growing revenues each and every quarter in spite of the surrounding economic climate…

Our forecast is for the Company to achieve the high end of the revenue expectations for 2009, i.e $ 875 Million, which might make reaching total revenues of $ 1 billion in 2010 a target requiring less than 15% Y/Y growth, a number that might, right now, sound conservative given some comments made during the conference call (emphasis added):

• Steve Smith
• As we begin to think about 2010 and beyond we still believe our strong market and financial position will enable us to emerge and even accelerate our market leadership when we get to the other side of these financially challenging times. The $ 314 million in capital raised in early June was an important step to provide us the added flexibility to pursue this opportunity while staying ahead of the future capacity constraints we expect to face from accelerating fill rates in key markets.
• I would like to now provide you some color from our original operations. In the U.S. market, we experienced a record bookings performance in the quarter, which eclipsed our previous record from Q2 2008.
• Additionally our outbound multinational bookings to both Europe and Asia came it at an all time high with particular strength in our Amsterdam, London, Paris and Singapore markets. In fact we now have over 175 customers that are deployed in multiple regions with Equinix, an increase of over 100 customers since the end of Q3 2008, which is a solid proof point of the value of our global scale and reach.
• The sales team in the U.S. did a terrific job this quarter in bringing us back inline with our 2008 booking rates while maintaining our pricing objectives despite the recessionary environment we are operating in.

Here is an updated spredsheet showing the additional capacity Equinix will bring to its markets – please note that you may find an expansion tracking sheet on the Equinix web site:

Europe, as we said, was the largest contributor to revenue growth in the quarter (about 52%), with an increase of $7.3 Million. As underlined over the call, there are a few factors (seasonality in power costs and positive effect of the exchange rate) that effected this great result (quotes from the conference call):

• Keith Taylor
• Europe revenues increased to $55.1 million in the quarter at 15% sequential improvement. The result of continued strong bookings higher than expected power revenues and stronger currencies compared to the US dollar.
• With respect to Europe, our weighted average price per sellable Cab-E increased to $1,009 compared to $994 adjusted last quarter. This improvement reflects two key factors, a higher than expected increase in power revenues in the quarter and a weakening US dollar. Absent these two factors EU pricing has remained firm over the quarter.
• Certainly we know we have got the benefit of the tailwinds from currency and that we see that as a positive, because relative to last year we were getting a fairly substantial headwind with currency.
• Absent currency, you can take out roughly five bullet points, so you would be roughly 10% quarter-over-quarter. The benefit of that was really coming from power and then to increase volume.

A few comments on the call were made about the financial vertical. As we wrote in the past, we believe this eco system has been a great growth driver for the Company, which is strengthening its leadership position in the colo sector (see our previous articles - Insatiable Demand for Colocation Services and Colocation and the Financial Industry):

• [Kolby Nezo - Koffin Brothers]
• My next question has to deal with, just trying to quantify how big the market opportunity is? So financial services to their financial exchange obviously, have been a huge growth for you guys. When you try to figure out how long this is going to last? How many more customers are out that actually go after, maybe you can give us some parameters on that, so could you help get a better understanding of how long this significant growth is going to last? Thanks.
• Steve Smith
• Yes, I’ll take the last question first. We think at this point now, [Kolby], we’re in the lower single digits of market share at a pretty rapid growth rate in the CFX ecosystem. So, there are literally thousands of these companies buy side, sell side technology companies in the space. We are very focused on large pops. We are very focused on matching engines. We are very focused on the magnets that will attract other members that want to come in and connect with them.
• So, there are plenty of companies around the world, many of these companies are looking for multi-region deployment. So one of the advantages we have over most or all of our competitors is the fact that we can deploy them in the top ten financial cities around the world. I mean all top ten financial cities on the charts were deployed in. So that is a huge advantage and we’re very, very early in the stages we believe on enabling these companies.
• With the push into electronic trading, our pipeline is just very, very solid with opportunities across probably today’s five or six markets, we think that will go to seven or eight and up to ten markets as the things starts to evolve

And also:

• The financial vertical continues to be our primary ecosystem driver in this region (Europe) with several strategic wins booked in the quarter in Amsterdam, Frankfurt and London.

To end our comments, another solid quarter, as the Company keeps executing its business plan. An improved economy, and the lack of building activity, due to the recent credit crunch, from competitors might really push Equinix toward a much higher target, in the next few years, than anticipated. The Company has the cash on hand and enjoys a great free cash flow from operations to support further expansion.

As we wrote a few times, an interesting investment opportunity for a 2010 and beyond time frame.