Some details:
The analysts cited the company's recently announced quarterly guidance, which now matches their estimates from before the pre-announcement. After hours, Equinix traded to $80 per share, representing 8x 2011E EBITDA and 9x 2011 recurring free cash flow.
The analysts said, “Equinix guidance and industry trends indicate that growth could average 20% for the next few years. As such, the stock appears attractive. Our price target rises from $83 to $95 per share, or 9x 2011E EBITDA.”
Mr. Breen: We have a "market perform," although our ratings are relative to the stocks we cover. For me, I think Equinix is a good company, it's just a matter of if I think it will go up as much as something else in my space. I think that they're uniquely positioned in the data center space. They've been building out significantly over the last couple of years, and I think that the demand for their product, pure collocation, will continue to be strong, given what we are looking at right now in terms of bandwidth demand. It's always hard to tell what's going to happen three or four years out, but at some point, the top line will start to slow, either because they'll build out less or they'll see some pricing pressure, at which point they should be able to generate some decent cash flows.
TWST: They added quite a number of facilities in different markets here in the U.S. with the Switch & Data acquisition. Was that a good strategic buy for them?
Mr. Breen: I think there were a couple of things going on. I think they were trying to protect that asset from falling into the hands of someone that maybe had deep pockets in terms of cash, allowing another competitor to come into the market. I think that was part of the motivation there, and I think part of it was they had a good Tier 1 market data center presence, and Switch gave them some additional data centers in areas where they weren't. It becomes a buy-versus-build decision ultimately, but I think they felt as though some of the Switch data centers weren't yielding as much on a revenue basis as they could have, and under their model they can yield more. I think they felt there were some synergies there in terms of the revenue per square foot that they can take advantage of.
In a note to clients, Citi writes, "We maintain our Hold rating given our expectations for an absence of meaningful acceleration in revenue growth during 2H/10, our outlook for slower pro forma revenue growth during ‘11 of 14-15%, & the uncertainty for EQIX to slow the rate of capital reinvestment in the domestic segment to increasingly focus on cash flow generation. We may revisit our thesis on EQIX to the extent: 1) visibility improves for the pace of churn; 2) revenue growth increases from the SDXC assets; & 3) EQIX retains its discipline on price & reduces the rate of capital reinvestment in the U.S. until the sales strategy can show success at accelerating the level of booking activity."
Equinix (EQIX) will be reporting 3Q 2010 results on Tuesday, October 26th.
It is impossible to write an Earnings Preview without mentioning first the recent drop in share price (more than 30%) due to the revenue warning issued by the Company on October 5th.
According to this update, third quarter revenues will be in the range of $328.0 to $330.0 million, and adjusted EBITDA greater than $140.0 million (better than expected).
As we mentioned, most investors quickly took the exit door after Equinix's management seemed to indicate that growth wasn't as strong as expected, and some price concessions were necessary to secure long term contracts with key customers.
Institutional investors seem to have behaved more cautiously, and so far only one institution owning more than 5% of the Company filed a reduction in ownership, with other funds like Goldman Sachs and Bamco apparently still holding their shares.
We still believe that, in spite of a few problems, the fundamental positive trends for the sector and the Company are still in place, as expressed by Equinix in their recent filing “Responses to Questions Pertaining to Business Outlook” that followed the post warning conference call.
Investors confidence will probably take some time to restore, and execution will be closely followed in the next few quarters.
The Company will also address growth expectations as it will release a first forecast for 2011, on the conference call following the earnings release.
For a recent research on colocation trends, you may also refer to TeleGeography’s “Colocation Capacity Struggles to Keep Up with Demand”There will be several metrics under scrutiny by the investing community at this call. Among them, weighted average recurring revenue per cabinet, which has been growing steadily in the last few quarters, and might be an important indication of price stability in the sector.
For those of you interested in tracking the most useful metrics for this sector and this specific Company, we have compiled an interactive spreadsheet which is available, in partnership with Data Center Knowledge, at this link.
We will also be closely monitoring guidance and sales results, for confirmation that the warning was just an unexpected road bump, and we believe that a few data will show a positive trend, as the Company continues to execute its integration of Switch and Data and improves margins in the acquired entity:
According to management’s comments in the last conference calls, Switch and Data’s Adjusted EBITDA performance has already improved, and Equinix is still targeting 50% Adjusted EBITDA margins in the long term for the combined Companies.
While we remain optimistic about the long term prospect for Equinix, it is important to underline that some analysts share several concerns about the Company, as expressed for example by Morgan Stanley's analysts Simon Flannery and Edward Katz, here reported by MySmartTrend:
"Although management sized the potential impact of turnover at 25% of the base in North America, visibility on customer vertical and geographic mix remains lacking. Additionally, integration issues surrounding soft Switch and Data bookings are unresolved. Unlike consensus, we continue to believe that FCF burn is likely through 2011. Despite the stock's valuation (apart from the credit crisis) at historical trough levels of 7.3x our 2011E EBITDA, we view EQIX as a show me story."
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