Equinix Inc (EQIX) 2002 Q3 法說會逐字稿

Good afternoon, welcome to the third quarter earnings conference call. All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded at the request of Equinix. If anyone has any objections please disconnect at this time. I would like to introduce the host for today's conference, Miss Maureen O'Brien. Miss O'Brien, you may begin.

Thank you. Good afternoon and welcome to Equinix's third quarter results conference call. This earnings call includes forward-looking statements including statements relating to Equinix's business outlook, revenue, EBITDA, annual contract value, annual recurring revenue, capital expenditures, bookings and our proposed acquisition of ISTT and Pihana Pacific. Actual results may differ from expectations due to a number of factors, including the challenges of building and operating IBX centers and developingdeplying and delivering Equinix services, competition with existing and new competitors,the risk that customers who have placed orders may not install or may delay installation, the ability to deliver services when requested by our customers, failure of the proposed acquisition to close, costs related to the proposed acquisition, the risk that the respective businesses in the proposed acquisition will not be integrated successfully or that Equinix will incur unanticipated costs in integration. The matters discussed in this conference call also involve risks and uncertainties described from time to time in Equinix's filings with the Securities and Exchange Commission. In particular, quarterly and annual reports and preliminary proxy statement filed with the SEC. These documents can be obtained off the web at freeedgar.com or sec.gov. Equinix does not assume any obligation to update the forward-looking information contained in this call. A press release is issued after the market closed this afternoon. For your reference, our press release is available on our website at Equinix.com and through our investor voice response service at 888-409-EQUIX. With us are Peter Van Camp, Equixix's CEO; Renee Lanam, CFO and Keith Taylor, VP of Finance and Chief Accounting Officer. We will take questions after the prepared portion of the call. At this time, I'll turn the call over to Peter.

Thanks, Maureen. Welcome to the to this afternoon's call. Today, let's get the call started with an overview of financial highlights for the quarter and Renee Lanam will join me in covering specific performance. Following that I would like to take it up a level and talk about what we see as our greater opportunity in what still is a very volatile market space for outsourcing of internet infrastructure and hosting services. Of course, significant, and linked to this opportunity is our recently announced definitive agreements to acquire the assets of ISTT and Pihana Pacific in Asia. These acquisitions and the infusion of 30 million in new capital are instrumental in positioning us for this opportunity. We will update you on the deal as the call progresses.

Now, let me get started with the results, which were in line with guidance for the quarter. Revenues were 20.2 million or 12 percent increase over the prior quarter. This included a 2.8 million, one-time settlement with Qwest. EBITDA was a loss of 1.5 million. As expected we saw healthy improvement in the EBITDAline absent the impact of one-time events we saw last quarter. We also saw positive trends for returns and de-bookings, which Renee will go into detail on in just a moment. There were 33 new customer adds in the quarter, including GE, Japan Telecom and KDDI America. We received additional orders for more than 80 of our existing customers including Electronic Arts, IBM, Google, Microsoft,Ttime Warner Telecom and Yahoo. I would like to add a little color on the quarter from a new booking standpoint. Although 33 new customers is generally consistent with performance over the past year, the committed spend from these new customers was down from the solid bookings in the prior quarter. The reasons for this are really easy to understand. Questions around the resolution of our debt and balance sheet issues became more prevalent as the quarter progressed, slowing customer decisions, which will be reflected somewhat in Q4 guidance. However, I should also note that we have already seen a solid lift of new bookings in the first of Q4, our momentum appears to be back on track as customers have been quite positive about our deal announcement. Let me stop there for a minute and turn the call to Renee for complete detail on these results.

Thanks, Peter. As I have done on our previous earnings call, before walking through the numbers, I would first like to mention some trends we are seeing in the business and then walk through a few events and decisions that had a significant impact on the quarter. First, some continue good news on churn, we saw very positive trend in that our churn number, that is the number of cabinets that we lost as a result of losing a customer was less than 2 percent in the quarter. We expect our churn to remain in the 2 to 4% range per quarter going forward which will be important as we continue our drive towards profitability. With respect to de-bookings, excluding a large one-time settlement with Qwest, that I will explain in detail in a few minutes, our de-bookings, while up from last quarter, continue to the trend down from the de-booking numbers we saw throughout 2001 and the first two quarters of 2002. Again, this is a trend that we are very pleased with and confirms our belief that some of the downward trends of our sector are reversing.

With respect to new booking, as Peter mentioned, we did see a softening of new orders as a result of the ongoing questions about our long-term financial viability. This will have an impact on our revenues next quarter. Fortunately however, as Peter said, following the announcement of the proposed transaction with ST Telemedia, ISTT and Pihana Pacific, we have already seen a strengthening of apipeline and new bookings for this quarter.

Now let me touch on a few events and decisions that had a significant impact on the quarter. First, Qwest, as we mentioned on our last earnings call in July, we finalized an agreement with Qwest where by in exchange for releasing them from a large number of cabinets they had under contract, we paid us a fee of $2.8 million in the quarter. This agreement made sense to Qwest, as they no longer had a need for all at cabinets. For our perspective this made sense for a number of reasons, not the least of which that the cabinets they didn't need were located in our San Jose facility where we have number of existing and prospective customers looking for this amount of contiguous space. As always, our preference is to contract with customers who are occupying the space as these are the customers who will renew their contracts, pay their bills on a timely basis and whose requirements are more like toy grow. By allow Qwest to cash out a large portion of their contract, we believe we are better position to fill up our San Jose facility with these types of customers. Second, our San Jose ground lease. Again, this is the lease for undeveloped land in San Jose adjacent to our existing IBX. In Q3 we exercised our option to terminate one half of this lease. In connection with the exercise of this option, our landlord was permitted to unconditionally draw down on 25 million and letters of credit previously posted for this lease. Of this 25 million, 19 million was recorded as a restructuring charge and the remaining 6 million was record as prepaid rent expense. The company is currently in discussions with the landlord whereby the company would be able to apply this prepaid rent against future lease costs, provided certain conditions are met, including completion of the proposed transaction with ST telemedia, ISTT and Pihana Pacific. In consideration for the above, the landlord will provide other lease concessions with respect to the remaining lease. As a result of the above, we permanently reduced our lease and our expenses related to this property by one half or approximately $6 million a year or $100 million over the remaining term of the lease.

Last, let me touch on the status of our senior credit facility. First and foremost, our banks continue to be very supportive of the company. Under an Amendment approved last August, the company prepaid $5 million of the facility in Q3 and reset covenants through September 30, 2002. Further, the amendment added a new covenant requiring the company to convert a significant percentage of bonds into common stock or convertible debt on terms satisfy lenders by November 8, 2002. In light of the company's recent announcement regarding the proposed transaction with ST telemedia, ISTT and Pihana Pacific, and the company's plan to retire a large percentage of its bonds in connection with that transaction, our banks have further amended the credit agreement in order to afford sufficient time and flexibility in order to effect these transactions. In addition, as part of the proposed transaction, we intend to again amend a credit agreement effective upon closing of the transactions whereby the banks will extend the credit facility amortization schedule and further relax financial covenants for the term of the loan.

With that is a backdrop, let me now provide you with details of the quarter. Starting with revenues. Q3 was 20.2 million. This can be split into three categories recurring revenue, nonrecurring revenue and equipment. 15.9 million or nearly 80% of this revenue was derived from recurring revenue charges such as cabinets, cross connects and power. This is a 4.4% increase over last quarter's recurring revenue. 4.1 million or 20 percent came from nonrecurring sources such as installation, set up charges and one-time settlements. The Qwest settlement accounted for more than half of our nonrecurring revenue in the quarter. As we previously indicated, we do not expect equipment sales to account for a meaningful percentage of our revenues going forward and accordingly our total equipment sales were less than 200,000 dollars or less than one percent of our total revenues.

Two customers, IBM and Qwest, each accounted for two percent of our Q3 revenue. As I mentioned earlierexperienced less than two percent churn in the quarter. We calculate churn based on the number of cabinets returned to the company when we lose a customer, divided by the total number of cabinets booked as of the beginning of the quarter. This is differentiated from de-booking which is where a customer downsizes its commitment, but remains a customer of the company. We calculate de-bookings based on the same calculation as churn, that is how many cabinets were returned to the company divided by the total number of cabinets booked as of the beginning of that quarter. Again the diference between churn and de-booking is churn means we lost the customer., de-booking means the customer reduced the number of cabinets it had under contract but remained a customer. Our de-booking for the quarter excluding the cabinets relating to the Qwest settlement was approximately 4 percent. While this number was up from the previous quarter, it is down from last year and of the first two quarters of this year. We expect to see this number continue to trend downward to less than one percent per quarter going forward.

Cost of revenue for the quarter was 26.2 million down form 27 million last quarter. The cost of revenues consists of primarily of salaries for IBX personnel, power, rent, security and depreciation of our leasehold improvements. As expected, these costs decreased over last quarter as we continue to actively manage our IBX operating costs. Likewise, SG&A expense for the third quarter decreased over last quarter's level. Q3 SG&A was $11 million as compared to 12.9 million in SG&Aexpenses last quarter. The decrease was a result of our continued focus on cost containment and the reduction in bad debt expense from one-time events in Q2. In Q3we recorded an EBITDA loss excluding the onetime restructuring charge relating to the reduction of the San Jose lease of 1.5 million as compared to a 6.9 million EBITDA loss previous quarter. Net loss for Q3 was 44.1 million with a net loss per share of 44 cents based on 100.5 million weighted average shares outstanding. Excluding the restructuring charge, our pro forma net loss per share was 30 cents. This compares to a pro formanet loss per share last quarter, again excluding one-time charges, of 36 cents. Interest expense for Q3 totals 8.2 million. This amount consists primarily of interest expense related to our bonds.

Turning to our balance sheet, as of September 30th, we had 11.6 million of cash and cash equivalents. As we outlined our strategic announcement, upon closing STT will be investing 30 million into Equinix and Pihanawill contribute approximately 25 million. Although approximately 23 million of this 55 million will be used to significantly reduce our debt, the over 30 million remaining portion of this cash will be added to our cash balances. DSOs for Q3 remained at 30 days. This low DSO level again resulted from our continued strong collection efforts and is a strong indicator of the importance our customers place on our services. Capital expenditures for the quarter total 1.1 million. Moving on to guidance, we will limit guidance at this point to Q4, as we move closer to the targeted year end closing for the proposed transaction, we will provide additional guidance for next year. We expect to see revenues in the range of 17 to 19 million for the fourth quarter. While we expect our recurring revenue stream to increase quarter over quarter, we do not expect to see a repeat of a Qwest type settlement. We expect to have a EBITDA loss in the range of 1.5 to 2.5 million for the quarter. This expected increase in EBITDA loss is a result in a decrease of revenues offset by further reduction in expense primarily related to the termination of half of the San Jose ground lease. This concludes my prepared remarks, let me now turn the call back over to Peter.

Thanks, Renee. Good quarter and nice progress over Q2. Stepping back from the detailed results, I would like to take the discussion up a level and talk about where Equinix is now strategically positioned in the face of our changing market space. I would like to think about this through the eyes of a customer. For any customer whose success has a serious reliance on their internet and networking infrastructure this has been to a scary time with significant network descriptions, questions of service providers commitment to this space and or even their service provider's financial viability, evidence of this exists all across the sector. As examples, Qwest is rethinking hosting strategy, significant question mark exists about Genuity's place in today's market. And perhaps most surprising are the recent reports out of London about cable 1 wireless' potential withdrawal from the U.S. market and what that may mean for exodus base of customers here in the states.

All of this presents a very uncertain landscape for the customers. Despite all the uncertainty, let me make one point very clear. Customers continue to buy and demand isn't going away. Internet traffic is doubling annually. The internet infrastructure services market is still a $5 billion marketplace. At a personal level, I use the internet more every day in how I get my job done or how I live my life and I feel comfortable saying that everyone on this call is probably in the same position. Obviously, what has happened here is a consolidation and contraction of a supply level that was just way over built. Frankly, we believe that Equinix has now positioned itself to turn these events into a significant opportunity. What's exciting to us is the unique value of our recent news. The infusion of capital from Singapore Technologies Telemedia and increased reach and capability achieved through our acquisitions in Asia has created a significant differentiation in our position vis-à-vis other service providers. While our large competitors are retreating to focus on their core businesses, we've made a bold commitment to this market and to our customers that we're here for the long-term.

At the end of the day, there will be a greatly consolidated set of service providers of which we are committed to being one. And we will be one with the uniquely differentiated position as a network neutral service provider. This differentiation is also important to our belief that we are in a lasting position. In these uncertain times customers require network choice and diversity more than ever. As I said earlier, this strategic position is made possible by recently announced definitive agreements with ISTT and Pihana Pacific. Let me just quickly recap this deal for you. Equinix will acquire the businesses of two leading Asia/Pacific internet infrastructure companies to form the largest global network neutral internet exchange services company serving more than 400 customers.

With this, we announce a 30 million dollar investment in Equinix by Singapore Technologies Telemedia. Importantly, we are also announcing or we have also announced plans to substantially de-leverage the business by retiring more than 130 million in debt including approximately 80% of our outstanding bonds through a combination of cash and equity and a further reduction of the credit facility. As Renee noted, this will take our annual interest expense down by more than 70%. Pending shareholder approval these events will solidly position us for the opportunity I described. Although there are a number of steps remaining before the deal closes, we feel we are still on track to close by year-end.

Let me just give you an update on the progress we made since announcing the deal. On October 18th we filed a proxy for shareholder approval. As we anticipated the SEC has indicated they will be reviewing the proxy. This will place SEC clearance some time in the early December timeframe at which time voter proxies will be mailed to all shareholders. We expect to be in a position to hold the shareholder meeting and gain approval some time in late December. As we have indicated in our filings with the SEC, we currently have exchange commitments from bondholders totaling 103.7 million of our bonds. We expect to commence the tender offer for the remainder of the bonds later this month while the tender should close on a time line consistent with the shareholder approval of this transaction.

Also, transition planning to integrate the three businesses is under way in a key integration projects have been defined. The teams are very pleased with the progress to date and we feel confident we'll hit the ground running as a global business in January. Feedback from customers and prospects on the proposed transaction has been overwhelmingly positive. As I've mentioned, we've seen a solid uplift in the pipeline due to the elimination of the financial question. In addition, we've already recognized specific opportunities to work with our current customers to meet with their needs in Asia. Similarly, as I've spoken to a number of shareholders since the announcement, they are pleased that their ownership position going forward exceeds that of any other viable options for a balance sheet restructuring of this magnitude. Shareholders also recognize that they now have a stake in an international company with greater assets and potential for much stronger revenue and earnings growth.

Before turning it over to Q&A, I imagine the first one will be related to our status with the NASDAQ so why don't I go ahead and handle that. As we mentioned in our call announcing the deal on October 3rd, I was in Washington, D.C. for the NASDAQ hearing where we requested a continuing position on the NASDAQ national market. This requests contemplated the close of our announced acquisitions and restructuring and included our first stock split to bring our share price in full compliance. We've responded to information request regarding the transaction and the company's position going forward but as yet have received no definitive conclusions. Although we can provide no assurances and NASDAQ may move us to a small cap listing or take other actions while we regain compliance, we are still optimistic they will maintain our status on the national market as we complete this transaction. That said, why don't I turn it open for general Q&A, operator?

thank you. At this time we are ready to begin the question and answer session. If you would like to ask question, please press star one. You will be announced prior to asking your question. To withdraw your question, press star two. Once again, to ask a question, please press star one. One moment please. Once again, to ask a question, please press star one. Our first question comes from Trevor Colby with RBC.

Yeah, Trevor?

I'm sorry, he withdrew his question. Once again, to ask a question, please press star one. One moment, please. From Trent Tillman with Olympic Holdings, you may ask your question. Trent TillmanHi.

Hi, Trent.

I just wanted to know if we could go real quickly through, based on the guidance that you gave for the revenues and so forth for Q4, what are you looking for cash burn for the quarter?

Our actual cash at the end of the quarter is just over $11 million. We would anticipate a close as a stand alone being somewhere in the five to seven million -- excuse me at year end at a 5 to 7 million range, but frankly by the time we report our next results, we clearly will have an entirely different cash position.

Right. Okay. Thank you.

Sure. Operator: Mr. Greg Carland with Lamb Partners. You may ask your questions.

Hi, it's Brian Black. Hello everyone. Could you provide a little more color on your guidance for Q4. If you have recurring revenues in Q3 of about 16 million and the guidance is for 17 to 19, your Q4 guidance for EBITDA is basically flat with Q3 or worse kind of down two-and-a-half million. So how much of that might be due to the integration of the two new businesses or how much of that is based on your current organic business.

It's actually those results reflect entirely Equinix as a stand-alone company. So clearly Q3 did have an uplift by the one-time payment from Qwest as they exited their agreement or downsized actually the size of their agreement. So that's really related to although recurring revenues and business rose in the fourth quarter, clearly just a 100 percent margin payment by Qwest is impacting the results in Q3.

I see. So you're basically, if you back out Q west from EBITDA in Q3 you're expecting continued cost cutting to reflect in a lower EBITDA, kind of recurring EBITDA burn next quarter?

Yes. Yeah, largely that's what's taking place.

At this time we have no further questions. Thank you for participating in today's conference call.

Thank you, operator. Thank you, everyone. Appreciate you being on the call.. --- 0