Thursday, July 23, 2009

Equinix (EQIX): Hostess with the Mostest?

Yes - before you ask, that headline took me over 10 minutes to come up with...

As we watch shorts taken off the field in ambulances, I find the exercise of due diligence (i.e. fundamental analysis) almost moot. Our correlations are extreme [Jun 30, 2009: Bloomberg - Correlations Among Asset Classes Highest Ever] and as I've been repeating for a year now - this is not a stock pickers market. Market direction is most of the battle; today is a great example. That said, I like to practice the dark arts that were popular in the 40s, 50s, 60s, 70s, 80s, 90s, and even some of the 00s - before HAL9000 and crew took over. Call me part of the underground movement....

So as we continue to look for names that are actually growing, rather than slashing and burning, their way to profits - I want to make the first post in our 2 years here about a sector I was once heavily into: "hosting services". I've been watching this group for a while, but all this talk of high frequency trading, program trading and HAL9000s made me think of all the computing power necessary to execute said strategies. I will have a guest blogger ready with a piece shortly to do a post more devoted to the sector and its players, but first a trip down memory lane. This was an area I traded in 1999... in fact we're seeing a lot of retro stocks / sectors from 1999 coming back en vogue all the sudden. And why not, a Fed chief intent on blowing bubbles usually will get his way sooner or later - 1990s or 2000s, it's all the same printing press technology. Flip a Greenspan with a Bernanke and it still ends the same.

In 1998-1999 one of my go to names was a "hosting" company: Exodus Communications (EXDS) - which used to be the king in "the day". In fact I was wondering whatever happened to it, and lo and behold Wikipedia has an entry. Come sit on grandpa's lap as he tells you about the days when Uncle Greenspan had to walk uphill, both ways, in snow - to provide us with all the tinder in the world to make beautiful bubbles - as we didn't want to have an actual recession post 1998 Asian currency crisis. Ah the late 90s NASDAQ years....
  • Exodus Communications was a Global Web Hosting Company in Santa Clara, California. They completed an IPO on the NASDAQ in March 1998, their stock symbol was (NASDAQ: EXDS).
  • It had four stock splits in approximately 18 months
  • Two of every three to four Internet crossing packets traversed the Exodus network, at its peak.
  • Hosted most major websites such as Google, eBay, Yahoo!, PayPal, BestBuy, Weather Channel, Merrill Lynch, American Airlines, Microsoft, Hotmail,, Virgin Mobile, O2 Plc, Geocities, Nextcard, etc.
  • Exodus Market Cap Peaked ~32 Billion USD
  • Exodus still holds a NASDAQ record for 13 consecutive quarters of >40% growth.
  • At the height of the company, there were approximately 4500 employees and 46 data centers. The headquarters was expanded to build two 8 story towers in addition to the 4 story building. At headquarters, facilities included on-site gym, massage therapists (for a fee), and cafe.
It was the best of times! (IPO March 98! 4 stock splits! Market cap over $30B!)

And it was the worst of time... (3 years later)
  • On September 26, 2001 Exodus Communications, Inc. announced that it filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
  • A major element of their failure was due to "Dot-com" customers who failed to pay their bills, resulting in severe cash shortages. Poor financial control of customer credit worthiness, collections and investment justification contributed to the cash crunch as much as declining demand from customers.
*clear throat* after being a young genius buying "every dip" in 1999 (to great benefit) I continued that practice past March 2000. That was not an enjoyable period. Needless to say, by the time Exodus filed for bankruptcy my affinity with the "stock markets" was extremely low since all I knew was how to (a) "be long" (b) "be all in" (c) "cash is trash" and (d) "buy every dip".

While those strategies would qualify me as an excellent mutual fund manager ready for his cover shot on Money Magazine ("Look! He's up 23% in 2009! Ignore the fact he lost 48% in 2008!" "Leader of the Pack in 2009!"), or even better ... get me major face time as a CNBC pundit (or host!) it was destructive for my personal account. As it has been for almost anyone who invested like that over the past decade. As they say, the market extracts its own tuition. A hefty one indeed. (but they leave that part out on CNBC)

Hence, this is why I had to look up what happened to Exodus since I lost track of it.
  • November 2001Cable and Wireless (USA)- division purchased the bankrupt web hosting/co-location provider Exodus Communications for $800 million dollars.
  • In March 2004 Cable and Wireless America, including the Exodus assets, were acquired by SAVVIS.
SAVVIS (SVVS) is still around so I am heartened to know, a decade later I could still buy Exodus via proxy! But enough about my sordid history - I want to show you today's Exodus Communications - Equinix (EQIX).

Equinix, Inc. (Nasdaq: EQIX - News) provides global data center services that ensure the vitality of the information-driven world. Global enterprises, content and financial companies, and network service providers rely upon Equinix’s insight and expertise to protect and connect their most valued information assets. Equinix operates 43 International Business Exchange™ (IBX®) data centers across 18 markets in North America, Europe and Asia-Pacific.

Here is their latest investors presenation - the customer list is a whose who of Americana "capitalism". But its an easy to understand discussion of what they do. Well truth be told its a bit wonky but techie folk will enjoy it.

Now unlike it's forefather Exodus, EQIX actually has customers who pay their bills. It is the largest of its peer group in the public world with a $3B market cap, and has a nice exposure to international markets. And (going with the theme we've been stressing today) we're moving to a data heavy world. Much like mobile consumer electronics area - there is an entire ecosystem. The guest post will talk about the "hosting / co-location" subsector in detail, but since Equinix is the leader of the current generation and just reported last night I thought we'd take some time to look at its report separately. Not, mind you, that fundamentals matter in a market that almost every stock, commodity, and currency moves in the same direction without regard to individual metrics.

The chart has been solid as well - it helps to be in the rising tide lifts all boat NASDAQ and technology sector specifically.

Before we go forward let me say much like (AMZN) and (CRM) [and at times (BIDU)] I've mostly watched this name over the years since its P/E ratio was almost always in the stratosphere. But all of the above names - and Equinix - have provided many gains in that time frame; so let's not get too hung up on minor details such as PE. But to repeat, we want to find secular growth and any company growing revenues at a good rate (especially at 20%+ year over year) purely organically (without acquisition) is something that stands out in this type of recessionary (excuse me, green shootery) environment. Here we have nearly 25% year over year growth in the top line.

Yesterday's report found here.
  • Revenues were $213.2 million for the quarter, a 7% increase over the previous quarter, and a 24% increase over the same quarter last year. Recurring revenues, consisting primarily of colocation, interconnection and managed services, were $205.3 million for the second quarter, a 7% increase over the previous quarter, and a 26% increase over the same quarter last year.
  • Non-recurring revenues were $7.9 million in the quarter, consisting primarily of professional services and installation fees.
  • Cash gross margins, (we call that term "art" in accounting) defined as gross profit less depreciation, amortization, accretion and stock-based compensation expense, divided by revenues, for the quarter were 65%, up from 64% the previous quarter and up from 62% the same quarter last year.
  • Net income for the second quarter was $17.4 million as compared to net income of $15.5 million in the previous quarter and net income of $0.7 million in the same quarter last year.
  • This represents a basic net income per share of $0.46 and diluted net income per share of $0.44 based on a weighted average share count of 38.2 million and 39.3 million, respectively, for the second quarter of 2009.
This type of business is actually capital intensive (buildings, equipment) so cash (and flow) is more important than usual
  • As of June 30, 2009, the Company’s cash, cash equivalents and investments were $603.4 million, as compared to $307.9 million as of December 31, 2008.
  • Capital expenditures in the second quarter were $76.8 million, of which $13.4 million was attributed to ongoing capital expenditures and $63.4 million was attributed to expansion capital expenditures.
Of coures what a company does on its own 2 feet means little in the casino, all that matters is beating analysts. Analysts were in for a 33 cent quarter, and Equinix did 44 cents. Sales (I see different 'consensus' at different sources so not sure if they "beat" or not) were at $213M.

They also raised guidance marginally on the revenue line - while they don't do an EPS figure guidance you can more or less work backwards into it.

Guidance Q3
  • For the third quarter of 2009, the Company expects revenues to be in the range of $221.0 to $225.0 million. Cash gross margins are expected to range between 63% and 64% and include incremental costs from expansion IBX centers opening in the quarter.
  • Capital expenditures for the third quarter of 2009 are expected to be $140.0 to $150.0 million, comprised of approximately $15.0 million of ongoing capital expenditures and $125.0 to $135.0 million of expansion capital expenditures.
Guidance Full Year
  • For the full year of 2009, total revenues are expected to be in the range of $860.0 to $875.0 million. Total year cash gross margins are expected to range between 63% and 64% and include incremental costs from our expansion IBX centers opening throughout the remainder of the year.
  • Capital expenditures for 2009 are expected to be approximately $375.0 million, comprised of approximately $60.0 million of ongoing capital expenditures and $315.0 million of expansion capital expenditures.
  • Expansion capital expenditures are for the announced expansions in the Amsterdam, Chicago, Frankfurt, Hong Kong, London, Los Angeles, New York, Paris, Singapore, Sydney and Zurich markets.
They also did a purchase in Frankfurt. Along with expansion in NJ. Who is driving this demand? Whom else - financial firms ;) HAL9000 needs more horsepower. It's *all* connected folks. (pun intended)
  • Equinix, Inc. (Nasdaq: EQIX - News), a provider of global data center services, today announced the purchase and acquisition of a 130,000 square foot (12,000 square meter) data center in Frankfurt, Germany, and the build out of the third phase of the company’s New York-4 (NY4) International Business Exchange (IBX®) data center in Secaucus, N.J. The announcements come as Equinix continues its measured global expansion plan where the company is currently expanding in 10 of the 18 markets in which it currently operates.
  • The expansions will add capacity within two markets where the demand for quality network-neutral colocation space and network interconnection services continues to outpace supply. In both markets, Equinix has experienced strong demand from financial services companies in the region.

And let me leave you with an EXCELLENT overview of this earnings report (and the future prospects for EQIX) from this blogger, who has a multitude of stories on this stock. He delves into the conference call as well - I like reading analysis from people who specialize in one niche and know it inside and out; I myself and more of a generalist who swoops around at 40,000 feet before diving towards the ground plucking dollar bills, then dropping them in my nest.

More on this sector in the days to come... but another for our watch list to perhaps purchase on the next scheduled drop of the NASDAQ (which ironically the computers in Equinix's facilities probably have a bead on as we speak)

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