Equinix (EQIX) reported 1Q 2009 results last Wednesday night (see its Press Release and Seeking Alpha conference call transcripts). The Company matched guidance and analysts expectations as far as revenues, and exceeded its own EBITDA target and analysts' EPS estimates.
An interesting comment, during the conference call, was made about “a significant pickup in the month of March” as far as bookings. While this was not described as a trend, yet, it is noteworthy that some confidence is showing up in the business, which is still growing, anyway.
Some highlights on a few metrics we usually follow to better understand the Company's performance:
Revenues came at $ $199.2 million. Exchange rate negatively impacted the Company's 1Q revenues by $1.1 million, compared to the rates assumed in the guidance, and on a same 4Q 2008 constant rate, the negative impact has been about $ $1.8 million. Bottom line, guidance was not exceeded because of the negative effect of the exchange rate.
Europe revenues showed a 6% sequential improvement, while Asia-Pacific had a 10% increase over the prior quarter, in spite of the negative effect of the exchange rate just noted. In other words, on a same currency basis, the foreign subsidiaries showed terrific results, especially given the current economic climate.
Cash gross margins were 64%, slightly above the Company's own expectations for the quarter, positively impacted by continued fiscal discipline related to discretionary costs.
Churn rate was 1.5%. Later on we'll discuss in depth the forecasted increase for the next quarters.
161 new customers in the quarter, a number very similar to last year (160), and a reversal of 4Q 2008, when this number (110, lowest for the year) was giving analysts some concern.
MRR per cabinets continued trending up, with a 2,3% Q/Q increase in the USA and a 4,6% Q/Q increase in Asia
a record 224 10 Gig ports (+22% Q/Q), and a peak bandwidth traffic on US GigE Exchange of 300 gigabits per second, a 17,6% increase over the previous quarter.
650 cabinets added on a quarter end calculation in the USA and Asia (more about this metric later on)
For the first time, the Company disclosed several metrics concerning the European subsidiary, which we will probably fully analyze in a separate article.
More Equinix non financial metrics are available for download on their web site at this link:
View Equinix's Non-Financial Metrics
A solid quarter
In our opinion, 1Q results were solid, and operating metrics mostly healthy.
The market seemed to like the numbers, and the last part of the week saw a good share price appreciation.
New coverage was started by Piper Jaffray & Co with a buy, and some positive comments:
Piper Jaffray & Co. initiates coverage on Equinix Inc. (Nasdaq: EQIX) with a Buy. Price target $75.
Piper analyst says, "Equinix is the clear leader in its peer group. It is carrier neutral, meaning customers can choose from over 200 telecom providers, it is the only truly global provider, and it has created a network effect in its data centers that customers pay a premium for...Equinix has enough capital to expand its portfolio in '09 and gain further share, but it also has the discipline to pull back quickly in response to demand trends. Equinix could be a consolidator of attractively priced assets. The current management team has consistently met and beat expectations. Acquisitions have been prudent, and very well timed."
On the other hand, Oppenheimer raised its price target to $ 67, but moved the Company to Perform as the risk/reward dynamics seemed well balanced to the analyst, Srinivas Anatha. This summary is taken from TheStreet.com:
Positive comments also came from the major web sites following the sector, like Data Center Knowledge and Telecom Rumblings:
Telecom Rumblings
Equinix Strides Easily Into Q2
Colocation specialist Equinix (EQIX: chart, news) shrugged off the effects of the economy and posted some nice results.
Overall, a solid quarter and a great lead in for the rest of the datacenter space.
Data Center Knowledge
Equinix: ‘Significant Pickup’ in March
Colocation and interconnection specialist Equinix (EQIX) saw a “significant pickup” in customer activity in the month of March, as customers that had deferred decisions made commitments.
Equinix said it was continuing to see strength in bookings from network companies and financial services firms with electronic trading operations. The company added 161 new customers in the quarter, and now has 2,384 customers leasing 44,500 cabinets. Smith said the company would continue to invest in expanding its facilities in key markets, and will be able to self-fund the construction.
Expansion projects and cabinets addition in the quarter
A few words on two very important aspects emerged during the call.
Given the recent economic downturn, Equinix had very well explained, during the previous 4Q 2008 call, that the Company had a plan B in case it was necessary to reduce investments. This is not foreseen as necessary, right now.
As we heard during the call:
Stephen M. Smith - Equinix CEO
We also mentioned that in our plan we had the flexibility of built-in circuit breakers that we could trigger on our spending should our results from the first quarter and visibility into the second quarter not develop as anticipated. With our first quarter results behind us and continued strong pipeline, we're on our way to hitting the objectives of our plan and see no need to trigger any of these circuit breakers at this time.
We consider this one of the most important informations emerged during the call, as we believe that Equinix will enjoy a strategic advantage from the fully funded expansion projects that will, most probably, give the Company available inventory once the economy (and demand for colocation space) will increase, with very few new data center builds available (2010 and beyond time frame).
Equinix will hold an Analyst meeting next May, 5th, and will probably announce future projects:
Stephen M. Smith
First, as you know, we have a number of expansions that are scheduled to come online in the later half of the year. As in prior years, the planned delivery of this capacity plays a role in our second half revenues. In addition, the back end nature of our first quarter bookings will have an impact on the timing of recognized revenue. A full quarter's value of this revenue will not be seen until the third quarter.
Our 2009 CapEx guidance is also unchanged at $325 to $375 million, of which approximately $60 million is expected for ongoing CapEx. This range includes up to $90 million in unannounced expansion CapEx. We'll provide more color on this at our analyst day in a few weeks.
We still believe Ashburn (Washinghton DC metro) and Silicon Valley may be good candidates for future expansion, and that it will make sense for the Company to acquire the ownership of the NY4 New York metro data center.
Cabinets added in the quarter, in the US and Asia, were 650. This is a “controversial” number. It is probably the lowest one experienced by the Company in the last few years (with numbers normally over 1,000 new cabinets per quarter, ranging from 1,000 to 1,600). We have to go back to 2Q 2007 for a quarter with “only” 800 cabinets added. On the positive side, the Company did succeed in growing revenues nicely in spite of this negative number. We'll see how this datum will be trending in the next few quarters, especially as the expected targets should see Equinix increasing its Q/Q growth in the second half of the year of one or two percentage points, which would probably need going back to the previous, strong average number of cabinets added each quarter.
Churn forecasted for 2Q 2009
One aspect that was widely discussed during the conference call was the forecasted churn of a large customer in one of the Silicon Valley data centers, in the next quarter.
Those of you who have been following Equinix closely in the last few years have probably gone back in time with their memory to the 1Q 2007, when the Company experienced a very high churn (in the range of 4% plus), mainly due to some large “wholesale” positions exiting their contracts.
Let's have a closer look at what happened (from the 1Q 2007 transcripts):
Keith Taylor - Equinix – CFO
Moving to churn and as mentioned above our Q1 cabinet and MRR churn was higher than expected at 4.2% and 4.4% respectively, an increase over the prior quarter and higher than our ongoing guidance level. This churn reflected the impact of proactive churn as we continue our IBX in customer optimization efforts. This also included the decision by two customers to in-source their infrastructure. One of these customers will continue to maintain their peering relationship with us while the other customer we had expected their churn for some time.
One of the customers involved at that time was Google, who had a very large footprint in Ashburn (Washington DC metro).
Of course, this news was quite some shock, at the time, but when we analyze the situation, we do find a few very good reasons why this was a good move for both Companies, and did have a positive impact on Equinix in the long term.
Google had negotiated a very good contract with Equinix, and was a prestigious and necessary anchor tenant for the data center, when signed. As Google grew up, it made perfect sense for them to build their own data center and exit their colocation contracts. As to Equinix, they are not in the wholesale data center business, the space was sold below market cost (and because of their server architecture Google was probably using 4 times the power used on average in that specific data center...), and they could very well sell the same space space to other (smaller) customers at higher prices and increasing the number of cross connects requested (higher margin business).
Google did continue as a customer, as they need Equinix for their peering, and even expanded to other locations worldwide, which was also better balance of risk for Equinix, too, and attractive for the new centers (Google is the kind of customers that generates a positive domino effect).
In the meantime, Equinix was also building a new data center in the same location, whose success was not really impacted by this event. The location had established itself as “the peering point to be at” on the East Coast, with most European Networks landing there, and customers did need to consider it for their mission critical infrastructure.
We honestly believe we are facing a very similar situation. Even if we do not know the name of the customer, this legacy contract will free space that the Company can sell at twice the price, and the customer will probably remain linked to Equinix for what the Company does better, hosting their peering staff.
As underlined during the conference call:
Richard Fetyko - Merriman Curhan Ford & Co.
I guess that just kind of prompted a couple other questions in terms of so you're saying the customer's in multiple sites and they're consolidating those multiple sites into their own location, so they're leaving from [inaudible] Silicon Valley data center from other sites as well?
Keith D. Taylor
No. I don't know what they're doing in other sites. I can't speak of what they might be doing with some of our competitors. What I can tell you is they're going to maintain a number of locations with us and in fact this same customer is going to build a new facility, new deployment with us, in one of our non-U.S. markets. So these things happen all the time. It's just of a size that we want to make sure that we telegraph it and it's going to cause us to be around the 2 percentage range on the quarterly churn in Q2 and Q3.
But this is, again, a very good customer. It's very similar to the discussion point we had a number of years ago about our Google churn. They still are a very good customer of ours, Google, and the customer I'm referring to today is going to continue to be a very good customer with us and grow in multiple markets, just not in this particular market, with us. They're going to stay in our Silicon Valley 1 property, but they're going to relocate out of another Silicon Valley property.
Stephen M. Smith
Said differently, it's like Keith said, it's a server farm. It's a big deployment that was deployed here years ago that probably today we wouldn't even entertain taking. It's actually a good thing for us.
We do expect that Equinix will probably have to work around the space left available, and, similar again to what happened in 2007, need some time before the space will be fully available and occupied by new customers (from the 2Q 2007 transcripts, available at Seeking Alpha):
Keith D. Taylor - Chief Financial Officer
Now, looking at sellable cabinet capacity and utilization levels, our net sellable cabinet capacity decreased slightly to 24,900 as we modified some of our large cage configuration that churned in Q1 to better meet change in customer needs, including increasing our DC prior distribution capabilities.
Long term, a better and more profitable use of one of their Silicon Valley data center. Short term, this availability of cabinets will alleviate the problems in a constrained market and give the Company some more time before a new center is needed in that location, as we still expect that Equinix will consider a new built (or acquisition) before year end, with an obvious lead time before the new space is built/Equinized.
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