Equinix Inc (EQIX) 2002 Q4 法說會逐字稿

Good afternoon and welcome to the Equinix fourth quarter earnings release conference call. All participants will be able to listen only throughout today's conference. This conference is being recorded. If anyone has any objections, please disconnect at this time.

I would like to introduce the host for today's conference, Miss Margie Backaus (ph). Ms. Backaus, you may begin.

Good afternoon and welcome to Equinix's fourth quarter results conference call. This earnings call contains forward-looking statements including statements related to Equinix's business outlook, revenues, EBITDA, cash flow, capital expenditures and our completed business combination with ISTT and Pihana (ph) Pacific. Actual results may differ from expectations due to a number of factors including the challenges of building and operating IBX centers and developing, deploying and delivering Equinix services; competition from new and existing competitors, the risk that customers who have placed orders may not install or delay installation, the ability to deliver services when requested by our customers; the risk that our respective businesses and the completed combination will not be integrated successfully or that Equinix will incur unanticipated costs of integration.

The matters discussed in this conference call also involves risks and uncertainties described from time to time in Equinix's filings with the SEC. In particular, see Equinix's quarterly and annual report and our preliminary proxy statement filed with the SEC. These documents be obtained off the web at freeedgar.com or sec.gov. Equinix does not assume any obligation to update the forward-looking statements contained in this call.

A press release was issued after market close this afternoon. If you did not receive a copy this release, please contact Jeanette Miller (ph) at 650-316-6245. Our press releases are also available on our website at equinix.com and through our investor voice response service at 888-409-eqix.

With us today are Peter Van Camp, Equinix's chief executive officer, and Renee Lanam, Equinix's chief financial officer.

At this time, I'll turn the call over to Peter.

Thank you, Margie, and good afternoon, everyone.

Let me begin today with a report card on what the company has accomplished this past year. In 2002, this team managed through a historic year of challenge in the telecommunications and hosting sectors to deliver gains in every area of the business. Let me recap. We grew revenue by 22% over 2001. We reduced cash operating costs by more than 30% year over year. Completed our deleveraging efforts by now removing a total of 235 million in debt, reducing our annual cash interest obligation by more than 75%. We expanded into Asia, increasing our footprint by 25% to more than a million square feet, and most important to the health and momentum of the company, we closed 147 new customers in 2002, including 46 adds in the fourth quarter alone.

Key 2002 customer wins included Cablevision, DoubleClick, Edmonds.com. Electronic Art, Gannett, General Electric and Sony Online Entertainment. At 303 total customers, we ended the year at 39% customer growth over 2001.

An important component of our '03 growth will be additional orders from these new 147 customers. In Q4 as in prior quarters we saw strong bookings from the installed base. We saw additional orders in Q4 for more than 130 of existing customers including Accenture (ph), Cox Communications, Google, IBM, Level 3 and Yahoo!.

By any account, even with the economic environment aside, I think this is an impressive report card.

To get to the specifics underlying these results right up front I would like to turn it over to Renee Lanam, she will provide more detail on the quarter and the year as a whole. Then I'll come back to discuss the progress in our new Asian business and to provide a sense of the macrotrends and opportunity we see in 2003.

Thanks, Peter.

Before providing the detailed results for the quarter and year, let me start by saying that I couldn't be more pleased with where we stand today. As Peter mentioned, although last year was a very challenging year in the telecom and hosting sectors, we accomplished a lot. We completed the restructuring of our balance sheets, our restructuring very different than most and that it preserved a significant percentage of the company's equity for existing shareholders. Not only do we now have a very solid balance sheet, but our customer base is healthy and growing as evidenced from the fact that our churn continues to trend downward with last quarter churn and debookings being less than 2 1/2% in the aggregate -- our lowest churn in two years.

In addition, the number of existing customers placing new orders with us continues to trend upwards with 50% of our existing customers placing additional orders in the quarter -- the highest we have seen yet.

With that said, let me walk through our 2002 fourth quarter and year end results. Starting with revenues, Q4 revenue was 18.8 million -- 17 1/2 million or 93% of this revenue was derived from recurring revenue charges for cabinets, cross connect and power -- 1.3 million or 7% came from non-recurring sources such as installation and set-up charges. Comparing this to the same quarter last year, we saw an increase in our revenues of 8%. Year over year, our revenues increased by 22%. One customer, IBM accounted for more than 10% of our revenues in Q4 and for the year. As I stated, our churn and debooking was the lowest we had seen in two years.

Churn for the quarter was 1.1% and debooking was 1.3%. This compares to churn of 2.3% and debooking of 7.1% the previous quarter in 2002. In the aggregate, churn and debooking has decreased from 9.4% in the third quarter of 2002 to less than 2 1/2% in the fourth quarter, a staggering 73% decrease. Previously, we had broken out churn and debooking as we are seeing a significant amount of debooking from customers who had taken on more space than they needed and were right sizing their commitment.

With the right sizing largely behind us, going forward we will report both debookings and churn as one number. Again, we are very pleased with our low level of churn as we think this together with our low DSO, which was 28 days for the quarter, is a very positive reflection of the strong quality of our customer base. Cost of revenues for the quarter and the year ended December 31, 2002 were 25.5 million and 104.1 million respectively. Cost of revenues consists primarily of salaries for IBX personnel, power, rent, security and depreciation of our leasehold improvements.

Cash cost of revenues for the fourth quarter and year ended December 31, 2002 were 12.6 million and 56 million respectively. This compares to 2001's cash cost of revenues of 54.4 million, which means our cash cost of revenues year over year increased by just 3%. Given that we saw our revenues increase by 22%, we are very pleased to have held our cash cost of revenues relatively flat during this same period. Sales and marketing expense for the fourth quarter and the year ended December 31, 2002 were 3.1 million and 15.2 million. General and administrative spending for the fourth quarter and the year was 7.9 million and 30.7 million.

More importantly, SG&A cash expenses for the year were 33.1 million, down 30% from 2001 cash expenses of 47 million. EBITDA loss for the quarter and year ended December 31, 2002 was 1.6 million and 11.6 million. EBITDA loss for the year ended December 31, 2001 was 38 million, which means year over year we decreased our EBITDA loss by nearly 70%. This significant reduction is a result of the 22% increase in revenues for 2002 combined with a 30% decrease in cash operating costs for the same period.

Moving on to net income, net income for the quarter was 60.7 million, with net income per share of $19.14. Now of course it's important to note that this reflects a significant gain we recognized on the retirement of our debt at a discount last year. In the quarter, we recognized 87 million of such gain as a result of the extinguishment of a significant portion of our bonds. Excluding this gain and restructuring charges, we had a pro forma basic net loss per share of $9.92 as compared to a pro forma basic net loss per share of $10.90 the same quarter last year. Net loss for the year was 21.6 million, compared to a net loss of 188.4 million for 2001.

For the year we recognized more than 114 million of gain on the extinguishment of our bonds. Again, excluding this gain and restructuring charges, our pro forma basic net loss for 2002 would have been approximately 41 dollars per share versus $57 per share for 2001, an improvement of nearly 30%. Shares used in computing are pro forma basic net loss per share for 2002 was 2.6 million. This is a weighted average of shares outstanding for the year post split and reflects the fact that the merger and financing transaction did not occur until the last day of the year.

Our actual outstanding shares as of December 31, 2002 post transaction was 8.4 million. This does not include 1.9 million convertible preferred shares issued to SPT (ph) in connection with our purchase of ISTT or 3.8 million shares issuable upon conversion of the convertible secured notes and warrants issued to STT in connection with their 30 million dollar investment in Equinix.

Turning to our balance sheet, capital expenditures for the quarter and year ended December 31, 2002 were 1.4 million and 6.5 million. Cash as of December 31, 2002 post transaction was 41.2 million. This does not include an additional 4.4 million of restricted cash balances primarily held in the form of cash, collateralized letters of credit held by our various landlords and the bond interest payment that has subsequently been paid.

As of December 31, 2002, we had accrued approximately 18 million in shut down and transaction costs associated with the merger and financing. We expect to pay a significant portion of these accrued costs in Q1 of this year. With respect to debt outstanding that requires cash interest, we have 91.5 million of senior debt, just over 30 million of bonds and 9.6 million of other debt facilities for total debt that requires cash interest payments of approximately 132 million.

This concludes my prepared remarks.

Let me now turn the call back over to Peter.

Thanks, Renee.

Let me take a minute to highlight our efforts in Asia-Pacific to date. As we announced on December 31, Phil Koen, our president and COO has assumed responsibility for Asia-Pacific for Equinix and has spent the last two months in Asia intensely focused on the realizing the benefits and synergies of the combined companies. Successful acquisitions are about decisiveness and speed to getting to one go forward company and we're well under way.

Specifically, we expect to realize a 13 million dollar or 40% reduction in overall '03 SG&A expenses in the region. Efforts to realize these integration savings include lease adjustments, staff rationalization, IT savings and leverage with US operations. In addition, a lot of the work is going on to ensure that the proper processes and IT systems are in place to support the financial, sales and customer support areas. We expect to have the overall integration effort complete by the end of third quarter in '03.

On the sales front, we're beginning to see wins in growing activity within the combined sales teams efforts. For example, just this week, we closed a current Equinix customer, IBASIS (ph), for their expansion into Hong Kong. We've also recently closed Fidelity (ph) for a disaster recovery site in Asia. We will provide more comprehensive updates on our integration in Asia on the first quarter call.

Now I would like to take a few minutes to detail the macrotrends that contributed to our results for the year and will influence our success going forward. Specifically, the shakeup in the telecom sector and resulting bankruptcies and data center closings have further consolidated this market and have left customers with an understandable concern regarding the health of their provider. This is resulting in a great opportunity for share shift, which we are aggressively pursuing. Last quarter alone, we saw greater than 70% of new co-location bookings coming from wins away from our competitors. Much of this stems from network operators and hosting companies such as cable and wireless, Qwest, MFN and Worldcom, who are retreating to their core telecom offerings -- this space is significantly contracting.

As a result, our U.S. market position has recently reported by Tier One Research places Equinix now as the fourth largest provider and the market leader of network neutral providers based on data center footprint. This move from seventh position just less than a year ago was not about our construction of new facilities. Significant capacity in this market is being eliminated.

Moving from our position in terms of capacity, let's look at our momentum in actual market share. Currently, the managed co-location market is estimated at just under 2.5 billion dollars and is expected to grow 9% annually over the next three years. As I've already noted, in 2002, Equinix experienced growth that was 2 1/2 times this projected growth rate. We are clearly gaining share.

Another significant driver of this share gain, our network diversity addresses our customer's broader concern regarding the uncertainty in the telecommunications sector as a whole. Now more than ever customers are recognizing the need to have immediate and flexible access to network service providers -- as the clear leader in network neutral co-location this gives us a strong competitive advantage. Feedback from customers such as Hot Wire, Electronic Arts, Gannett and Sony indicates that they are realizing significant savings, in some cases as much as 75% of their overall network costs by operating at Equinix.

At the same time, these customers are also recognizing dramatic improvements in performance by locating their operations within the IBXs, the only public peering hubs for the core networks that make up the Internet.

As an aside, the impact of Equinix on Hot Wire's business in '02 earned us recognition as their partner of the year.

2002 proved to be a pivotal year for Equinix not only in terms of our transition to a global business and the meaningful improvements to our balance sheet, but also in terms of our leadership in key segments of our business. Specifically, Equinix is emerging as the market leader for peering and network interconnection in critical Internet exchange points in the United States. With more than 100 networks in the U.S. alone, Equinix is the fastest growing Internet exchange service provider in the U.S., surpassing Legacy networks and Access in the traditional exchange points. With the critical mass of networks Equinix has assembled, our IBX centers are now the premier peering hubs in the United States.

Importantly, many of the new customer wins in the fourth quarter were due to growing demand for the Equinix exchange peering service - our service that facilitates directs traffic exchange between networks and content companies. In aggregate, customer participation on the exchange grew 235% in '02. This share shift in peering and exchange is significant to our results as it highlights our traction with new revenue streams from services other than the co-location.

Looking forward, we anticipate the interconnection services and other managed services outside of co-location will account for 20% of revenue in 2003.

Now let me offer a few points on outlook and guidance. First, consistent with current guidelines and GAAP, Equinix will no longer provide future guidance or report on EBITDA. For the first quarter in 2003, we expect to see revenues in the range of 24 to 25 million. This includes our Asia acquisition. In 2003, we expect to be cash flow positive from operations by year end and achieve -- excuse me -- operating cash flow positive from operations by year end -- correct -- and achieve cash flow positive by June 2004.

In closing, success in '03 and beyond will be about solid execution. I think '02 was a great testament to this team's ability to execute. Customer decisions will be about trusting the long-term viability of their service providers. Our position and strategic backing from steep resources of Singapore Technologies is significant. And lastly, as challenging as it is to endure the shakeout that's taken place in the telecom and hosting sector, we are very excited about '03 and beyond. The natural course of evolution is occurring at a rapid pace. While it's not over, the momentum towards right size level of supply and demand is well under way. Equinix is seizing this opportunity.

Thank you.

Let me open this call up to your questions.

Thank you. At this time we are ready to begin the question and answer session. If you would like to ask a 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. One moment.

Our first question comes from Mr. Andy Shopver (ph).

Sir, you may ask your question.

Hi, thanks. Congratulations, guys.

Thanks, Andy.

Absolutely. I know you said you were going to give more comments on Asia Pacific on the next quarter, but in terms of your progress to date would you say it's more on the sales integration front or would it be more on the cost integration side?

I guess if I had to choose anything, it's probably more on identifying the key synergies and cost integration. I think we've done a lot to build communication and trust in the sales force, but that will take time just to bear fruit and just all those communications and coordination.

Sounds good.

And can you give a pro forma combined revenue number for fourth quarter of '02 to compare to the guidance for first quarter?

I don't think I can. I don't have that handy.

Andy, the guidance on the Equinix stand alone and that's the 18.8 we reported.

That was the reporting.

Are you looking for just basically, are you looking for growth to 24, 25? Or is that --.

Yeah, that will actually stem from growth in both regions.

So, maybe around 22, 23 million number at fourth quarter something in that range?

Yeah, I think that's fair.

Okay. How about any comments so far on first quarter and progressing towards that and any comments on relative new customer wins compared to fourth quarter which was phenomenal?

The only thing I'll say at this point is I think getting the deal done had a lot to do with this as you might guess. But the health of the pipeline and our business progress in first quarter to date is indicative of getting that deal done and some positive momentum.

Excellent job, guys.

Thank you.

Once again to ask a question, please press star one.

Mr. Brian Black (ph) with Lamm (ph) Partners, you may ask your questions.

Hi. Congratulations a on a nice quarter and getting the restructuring done.

Thanks, Brian.

Two quick questions, one, Renee, you talked about the cash selling marketing and G&A for the full year '02. Could you tell us what the cash figure for SG&A and marketing was for just Q4?

For sales and marketing cash, it would have been about 2.9 million. And G&A, 5 million. So combined about 8 million for the quarter.

Okay. Great. And other question is you know, you gave top line guidance and I understand the interest in not providing kind of EBITDA guidance. But what other, what metric can you give us to help us figure-out sort of you know when throughout the year you expect to reach operational cash flow break even, whether it's an EPS system or some sort of lower down the food chain item?

Brian, this is Peter. Actually, I don't think we're going to provide any more on this call, but I do want to, once we have our hands fully around Asia ant timing of some of those synergies and so forth be able to provide you a better sense. So I think you can expect more on the first quarter's call. Largely, I think the biggest thing we're going to focus on is operating cash flow and the trend towards a true cash flow positive position. I think that's what the company is ultimately going to be measured on and proving that point is the thing that the management team is very focused on and the one that I think will be most important for you track our progress.

Maybe, let me just try asking you one other way.

Okay.

And that is, you know, the cash sales and marketing, cash general, G&A and cash cogs, these levels that we saw in Q4 should we expect flat to trending down or what sort of direction should we expect those three metrics proceed in?

I think it's safe to say flat.

And what about cap-ex?

I think it's safe to say that's flat, too.

Okay. That's very helpful. Thanks a lot.

Our capital expenditures are behind us with the IBX build-out.

Okay. Thank you.

Good.

This concludes today's conference call, thank you for participating.