Equinix Inc (EQIX) 2003 Q1 法說會逐字稿

Good afternoon, and welcome to the Equinix First Quarter Earnings Conference Call. All lines will be able to listen only until the question and answer session of the call. Today’s call is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce your host for today’s call, Mr. John Starr, director of investor relations. Mr. Starr, you may begin.

Good afternoon, and welcome to Equinix’s quarter ended March 31, 2003 earnings call. This earnings call contains forward-looking statements including statements relating to Equinix’s business outlook, revenues, cash, cash flow, capital expenditures, our planned financing with Crosslink Capital and our completed business combination with i-STT 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 developing, deploying and delivering Equinix’s services; the failure of the Crosslink financing to close, competition from existing and new competitors, the risk that customers who have placed orders may not resolve or may delay installations; the ability to deliver services when requested by our customers; the risk that the respective business 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 involve 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 can be obtained off the web at www.freeedgar.com or www.sec.gov. Equinix does not assume any obligation to update the forward-looking information contained in this call.

A press release was issued after the market closed this afternoon. If you did not receive a copy of this release please contact Julie Brown at 650-513-7093. Our press releases are also available on our website at www.equinix.com and through our investor voice response service at 888-409-EQIX.

With us today are Peter Van Camp, Equinix’s CEO; Renee Lanam, Equinix’s CFO; and Keith Taylor, Equinix’s VP of Finance and principal accounting officer. At this time, I will turn the call over to Peter.

Thanks, and just a little correction to the operator, that is Jason Starr. Let me begin today by reporting that I couldn’t be more pleased with the progress I have seen in the business since the close of our merger and the restructuring of our balance sheet. Let me recap some of the highlights.

Total revenue for the combined companies was $25.4m. This represents a 26 percent increase over Q1 of 2002. This includes first quarter revenues from the acquired Pihana Pacific and i-STT operations. Now, to provide an apples-to-apples comparison to Equinix before the acquisition, we grew revenue by 8 percent over fourth quarter to $20.3m with recurring revenue up more than 10 percent to $19.3m.

Including Asia, Equinix closed 59 new customers in the first quarter. Again, for prior question comparison purposes, pre-acquisition Equinix closed 41 new customers, a solid number in line with our expectation. These include key enterprise accounts such as Adobe, Euronext.liffe, Fidelity and Rogers Cable. Significantly, we saw over 165 of our current U.S. customers, or just over half order additional services in the quarter including IBM, Google, Electronic Arts, PayPal and Sony. We ended the quarter with over 550 customers for the combined company, with 326 of these representing the pre-acquisition Equinix. As a note, we will only be reporting combined results in future calls.

We announced definitive agreements for an additional $10m investment from Crosslink Capital which, when the transaction closes, will further solidify our financial position. As we’ve heard from investors since the agreement was announced, a firm with the reputation of Crosslink signifies a strong vote of confidence about the future prospects for the company. In addition, as potential new customers are carefully evaluating the balance sheet of any new supplier, we certainly enhance the optics on ours, which is often a competitive advantage in this environment.

As announced recently, we’ve also accelerated our timeline for an operating cash flow positive position to third quarter of this year. We attribute this to several factors. First, our solid bookings in Q1 from new and existing customers and the continued gains in market share we are achieving. This was the strongest number we have seen in some time, and it was clear that we benefited from the completion of our debt restructuring at year end.

Second, the momentum of the business model itself, as we drive more revenue from our Interconnection Services, including Cross Connect and the gigE Exchange. These are margin-rich revenues that complement the growing margin we are seeing from our traditional co-location revenue streams. This, and our progress in achieving the cost synergies of our new business combination have created the visibility to bring forward our projection of a net operating cash flow positive position.

By all measures, the first quarter has been a strong start to 2003. To get to the specifics underlying these results, I’d like to turn it over now to Renee Lanam. She’ll provide more detail on the quarter, and then I will come back to discuss the business momentum we are seeing and the progress of our new Asian business before providing financial guidance for the second quarter and outlook for the remainder of the year. Renee.

Thanks, Peter. Because of the timing of the acquisition of Pihana and i-STT, that being that it closed on December 31, 2002, this is the first full quarter we are reporting results for the combined company. Now we have a number of investors who were involved with the company prior to this acquisition. In order to help these investors understand how the pre-acquisition Equinix is doing, I will provide not only company-wide results, but results that are from pre-acquisition Equinix only. These results will then be compared on an apples-to-apples basis to previous periods. This will allow investors to see how the underlying business is performing. As Peter mentioned, going forward we will compare results on a company-wide basis only.

I will also provide detail on our cash spending. This means I will pull out non-cash charges for depreciation, amortization and stock-based comp from our results to give you a better sense of our true cash spending levels. These levels will be critical as we drive towards generating cash from our operations.

Our financial statements attached to our press release contain similar detail on these non-cash charges. With that said, let me start with revenues. Q1 revenue for the entire company, U.S. and Asia, was $25.4m. This is a 26 percent increase over Q1 2002. Ninety-five percent of this revenue was derived from recurring revenue, charges for cabinets, power and interconnection services. Five percent came from non-recurring sources, primarily installation charges.

Breaking out our revenues by region, 84 percent of our revenues came from our U.S. centers, while the remaining 16 percent were derived from our Asia Pacific centers. One customer, IBM, accounted for more than 10 percent of our revenues in the quarter.

On an apples-to-apples comparison as against previous periods, total revenues for the quarter from pre-acquisition Equinix were $20.3m. This is an 8 percent increase over Q4 and relatively flat as against the same quarter last year. To remind you, the same quarter last year we booked $1.6m of low margin equipment sales. Excluding the revenue from these sales, we increased our revenues over the same quarter last year by 10 percent.

Recurring revenues for the quarter from pre-acquisition Equinix were $19.3m. This is a 17 percent increase over the same quarter last year and a 10 percent increase over Q4. In non-recurring revenues, we had just under $1m in the quarter. This is down from previous quarters, where non-recurring revenues included equipment and one-time settlements from customers rightsizing their commitments with us.

Consistent with our expectation that we do not anticipate significant equipment sales in the future, and that customers have completed the majority of their rightsizing, we had less than $100,000 in one-time settlements from customers in Q1. We had no equipment sales in the question.

With respect to churn, we lost 85 cabinets in the quarter. As a percentage of cabinets billing at the beginning of the quarter this represents approximately 1.5 percent churn. Going forward, absent the loss of a large customer, we expect to see churn average around 3 percent per quarter, which is still well below industry norms.

Our DSO has increased to 39 days, from 28 days in Q4, primarily as a result of the increased DSO of our Asia Pacific IBX centers. While 39 days is still higher than we typically see, we are still very pleased to be one of the few companies that can boast a DSO of under 40 days. Going forward, we expect to continue to see our DSO stay below 40.

Cost of revenues for the quarter excluding non-cash depreciation, amortization and stock-based comp were $17m. Cash cost of revenues consist primarily of salaries for IBX personnel, power, rent and security. Total cost of revenues for the quarter, including non-cash costs, were $30.6m.

Again, comparing these results against previous periods for pre-acquisition Equinix we have decreased our cash cost of revenues from the same quarter last year by 15 percent and quarter over quarter by approximately 4 percent.

Important to the momentum of the business, our growth in revenues, combined with our reduction in cash cost of revenues means that we were able to, once again, increase our cash gross profit margins. For the quarter, our cash gross profit margins for the combined company were 33 percent. For pre-acquisition Equinix, they were 40 percent. Up from 29 percent the same quarter last year and 33 percent from the previous quarter.

This shows just how much leverage there is in our model. Almost all of our cost of revenues, such as rent and salaries for people running the centers are fixed. Unlike other businesses, we just don’t have a lot of incremental costs associated with incremental revenue. As a result, once we have enough revenues in the center to cover our overhead, the flow through rate on incremental sales is very high.

The other trend we were seeing that is having a positive impact on our gross profit margins is an increasing percentage of our revenue coming from margin-rich services such as cross connects and other interconnection services. A major benefit of these types of revenues is that they are sticky revenues, because they tie our customers to other customers in our centers.

Separately, we continue to see pricing pressure on pure [COLO] deals. These incremental margin-rich services are a positive offset to this pricing pressure and help preserve strong margins in the business.

To put these trends into perspective as to what they mean to Equinix going forward, today we have approximately 21,000 cabinets across all of our IBX centers. I say approximately, because depending on how customers configure their installations, this number may move up or down slightly. As of March 31, 31 percent of our cabinets were billing. This positions the company with significant headroom for growth.

As we continue to leverage this business and focus on interconnection services, we expect to see this growth continue to increase our profit margin percentages, or actual cash gross profits. These trends are what makes this business very exciting.

Moving back to the expense line, SG&A expenses for the quarter, excluding non-cash depreciation, amortization and stock-based comp were $11.5m. As we complete our integration efforts with Pihana and i-STT we expect this number to decrease slightly. Comparing our cash SG&A expenses for the pre-acquisition Equinix we have reduced these expenses by nearly 10 percent over the prior quarter and a slight improvement over the same quarter last year.

Our net loss for the quarter, including all non-cash charges was $25.6m, or a net loss of $3 per share. Our net loss for the quarter, excluding non-cash charges for depreciation, amortization, stock-based comp and non-cash interest was $7.8m, or 92 cents per share.

Turning to the balance sheet, capital expenditures for the quarter were under $500,000. Cash as of March 31, 2003 was $21m. This does not reflect the planned $10m investment from Crosslink.

Next, let me turn to our statement of cash flows. Our press release includes, for the first time, a condensed statement of cash flows. This is a reflection of our focus on cash spending and our drive to get the company profitable on a cash basis as quickly as possible.

As Peter noted, we are pleased that we have accelerated our target date to reach cash flow positive from operations to Q3 of this year. This target, as was the case with our previous guidance, means that we will reach cash flow positive from operations within the quarter and at this point do not expect to be positive for the full quarter. To reach this milestone by the end of Q3, we will need to hit our revenue target and continue to keep highly focused on costs. While we have always over-performed on controlling costs, the revenue line is less in our control and therefore the biggest risk in hitting this milestone.

However, the continued growth of recurring revenues from both new and existing customers gave us the comfort we needed to move this guidance forward by a quarter. For Q1, our net cash used in operating activities was $19.6m. This includes approximately $12m of cash used for one-time merger financing and closing costs in the quarter.

For the quarter, our net cash generated from investing activities was $1.6m, which was comprised of $2m in restricted cash released to fund our bond interest payment in early January, partially offset by our capital expenditures. Our net cash used in financing activities in the quarter was $2.4m, which consisted primarily of repayments of debt facilities including our Wells Fargo loan facility in the quarter as we continue to look for ways to reduce our debt, and more specifically, our debt that requires cash interest payment.

Before closing, let me spend a few minutes on the pending Crosslink investment. As we have previously disclosed, this investment is subject to stockholder approval and is scheduled to close in early June. Earlier today, we filed our definitive proxy which seeks approval of this investment at a stockholder meeting scheduled for June 3rd. This proxy will be mailed out to our stockholders later this week.

Under the terms of the financing, we will be issuing to Crosslink convertible promissory notes very similar to those issued to STT in December. The $10m of notes being issued completes the financing round. The convertible notes issued to Crosslink are convertible into 2.5m shares of common stock. We will also issue to Crosslink a warrant for 500,000 shares, again of our common stock.

Assuming these notes are converted and the warrants exercised, and assuming STT converts their promissory notes, preferred stock and warrant, we would have 21.1m shares outstanding, made up as follows. Current stockholders, other than STT, 7.4m shares; i-STT, 7.2m shares; Crosslink, 3m shares; non -STT, non-Crosslink, outstanding options and warrants, 3.5m shares.

This gives us, on a fully diluted basis, again assuming the conversion of notes issued to i-STT and Crosslink, and the exercise of all outstanding options and warrants, 21.1m shares. Broken down into percentages on a fully diluted basis, our stockholder base, post-Crosslink would be; current stockholders, again, other than STT, 35 percent; STT, 34 percent; Crosslink, 14 percent; Non-STT, Non-Crosslink option holders and warrant holders, 17 percent.

As Peter mentioned, we are very excited about having Crosslink become an Equinix investor. We view their investment as an endorsement of the company’s prospects and business model and look forward to announcing the closing of that transaction in early June. This concludes my prepared remarks. Let me now turn the call back over to Peter.

Thanks, Renee. Now I’d like to take a few minutes to provide you with some color of the momentum of the business model and some of our recent customer wins. First, let me say that I’m very pleased with the quality of these new customers who are joining Equinix, as well as the value they bring to our IBX. As we stated before, there’s a true network effect taking place within the IBX. A new customer for Equinix often provides great additional value to our already installed customer base, where often they come to us, because of the customers already there. A network services, enterprise, or content company, can benefit significantly from having their customers and service providers located beside them within the IBX. We often see evidence of this in our direct sales channels, who receive numerous referrals from our current customers. Our customers have the ability or freedom to interconnect, Peer, or do business directly with each other, or any network that makes sense, for performance for cost gains.

This is clearly a unique proposition, relative to traditional carrier based co-location models, particularly when customers are buying bandwidth from multiple network providers of their choice. Here is a proof-point for this network effect. I only have to look at our cross-connect count. A cross-connect is an Equinix provided, inter-connection, between one customer to another within the IBX. Currently, we have more than 3,500 cross-connects taking place in our US centers. This number is up 16 percent sequentially, over last quarter. In addition, another statement of the network effect, and an important revenue source for the company, is our GigE Exchange service. By connecting to our Gigabit Ethernet switch, a customer obtains multiple inter-connections from a single Ethernet port. We are approaching 100 unique customers on this service, most using it in multiple locations to reach other participants on the exchange.

Let me reiterate two important points on this network effect. One, the high level of interconnection between our various customers, creates a very sticky or defensible position for our installed revenues. Two, as Renee noted, both cross-connect and the exchange are very margin rich and incremental to our traditional colocation revenue stream. In Q1, revenues from our set of interconnection services, which include cross-connect, GigE exchange, and internet core exchange, comprised 18 percent of US revenues for the quarter. Now let me hit the specifics of two new customers. First, Adobe has chosen Equinix as their sole distribution point for their downloadable software program, such as Acrobat. The quality of our IBXs and our neutral model was important for Adobe, as they sought increased flexibility to directly connect to multiple bandwidth service providers, broadening their network reach for these downloads.

Second, the EuroNet’s Life win was significant, as it represents a growing position for Equinix in the financial trading sector. EuroNet, who is the second largest futures and options exchange in the world, came to Equinix to build-out redundant points of presence, to connect their trading floors in Chicago and New York, to their [Lite] [phonetic] connect trading system. In addition to exceeding their strict requirements for security and infrastructure quality, EuroNet’s customers, including the Chicago Board of Trade, have the ability to directly connect back into EuroNet’s POP in two of our IBXs, by a dedicated lease line from multiple network providers. In many instances, these connections will be considered on [Met] [phonetic], by metro providers that are also installed in the IBX, which will only mean more customer choice and further cost reduction.

Again, both of these case studies point to the fact that it takes more than just a world class data center to meet the needs of a customer. Customers require flexibility to succeed in today’s changing telecom environment. The differentiation in Equinix’s model of providing direct access to a choice of 100 networks, has been a defining factor in our customer wins. Going forward, our strategy is to continue to leverage the strength of our business model and create services to assist our customers in taking advantage of our network choice. This quarter, we launched a new service, Equinix Direct, a proprietary service developed by Equinix, that allows us to track, settle, and bill bandwidth usage of a given customer across multiple network service providers on a GigE switch. This enables an Equinix customer to purchase and manage bandwidth, from multiple service providers at market competitive rates, without significant, long-term contractual commitments. We’ve also just announced that our Equinix GigE Exchange service has been expanded into the markets of Sidney and Tokyo. And that we will be expanding our managed services sets in Asia as well. Our interconnection services and this network effect form a solid ongoing revenue stream and growth beyond our traditional, colocation-oriented services.

Shifting our focus, let me now update you a bit on our integration and progress in Asia. We’re very pleased with the improvements to the operations of the business, as well as the early realization of several cost synergies. Phil Koen, our President and COO, is now in Asia full time, and brings the experience he’s gained in running our US operations for four years, and has translated this into a disciplined plan for the region. Major initiatives accomplished thus far, include making the necessary adjustments to the employee base in Asia, includes the successful migration of key personnel to Asia, after the closing of our Honolulu office. On the service and operational integration of the business, we spent the last four months in a rigorous effort to ensure that customers experience a high level of service during the transition phase, in their ordering, provisioning, and billing of our offerings there. In addition, we’re continuing to work aggressively to identify opportunities and leverage cost efficiencies with leases, equipment, and contracts that will further enhance the financial performance of the region.

Importantly, to achieve our revenue targets, each of the respective sales organizations has been fully trained on our global services, and all the necessary tools and processes are in place, to ensure that we can fulfill on our promise to our customers, to make Asia easy. Taking early advantage of this, one of our largest US customers, Electronic Arts, will be expanding their gaming operations into two of our Asian IBXs. This is evidence of the value of the single-source benefit Equinix brings to its key global enterprises, as we help them manage deployment into the Asia region. We look for this to be one of our important drivers of our success there. At the same time, we see this win as a direct result of the quality of services provided to Electronic Arts in the US, and proof of their confidence in our ability to provide the same level of service in Asia.

Now, let me offer our view on the outlook for the total company, both in the next quarter and the rest of the year. For the second quarter, we expect to see revenues in the range of 27-28 million. Cash used in operations will be less than 5 million. CapEx is projected to be between 1 and 2 million. And cash will be in excess of 22 million as of June 30th, which includes the planned 10 million investment in Crosslink. For the full year, revenues are expected to be between 112-118 million, and total cash used in operations is expected to be less than 23 million for the full year. This number reflects the positive contribution to operating cash flow in the latter part of this year. CapEx is not expected to exceed 6 million, while cash at year end is expected to be in the range of $18-$20 million.

In closing, and evident in the outlook provided, I would like to say that our business and opportunity are strong. We’re seeing increasing recognition of the value of our network neutral business model as the right one for co-locations and management of internet infrastructure. While competitors are struggling with where their primary focus should lie, there’s much left to happen in ’03, but our proven execution, customer momentum, and solidified financial position, promise to make it a strong year for Equinix. Thanks for listening to the comments. Operator, I’ll now turn it over to 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 *1. You will be announced prior to asking your question. If you would like to withdraw your question, press *2. Once again, to ask a question, please press *1. One moment please. Our first question comes from Mr. Andy Schroepfer, with Tier 1 Research. Sir, you may ask your question.

Excellent. Hello, everybody. I just wanted to say congratulations and almost more importantly, thank you for all the information. We’ve been banging our heads for a long time to give out a lot of this stuff you did for the first time, and the data points was awesome. So, congrats. On the cross-connect data, that’s always been one of the secret points of how much traction is there, actually, in the cross-connect side. You gave a sequential growth number. Can you give us, maybe, one other data point in history, to just kind of give us a relative growth of when – has growth been awesome for a long time, or has it started to pick up gradually? Just some context around that number, if you could.

Yes, I’ll give you some color and context. It certainly has picked-up of late. I haven’t got a very specific number for the past, but clearly, that 16 percent number in growth is a wonderful number in terms of trend.

Absolutely. So, you take it we’re not going to get another number?

Let me look at that and I’ll try. I apologize for not being prepared to accurately answer that.

No problem. We’re more thankful that you gave out the number at all. So, separately, how about on the growth that you’re looking for, for either in next quarter more specifically, but in general, you’re obviously getting customers to upgrade, just because growth in the sector is returning across a number of your clients. Maybe just talk about where you’re looking for the bigger portion of your revenue growth to come from – existing clients, versus pipeline of potential business.

Well, I think it’s still a combination of both. Certainly another trend we’re seeing though, is an up-tick in the number of orders from current customers, as was clear last quarter. But, frankly, the pipeline shows solid promise across both. Obviously, new customers, as we said in the past, a lot of this has been share shift, and I’m not feeling a return to a market expansion at any level. Maybe there’s some going on out there, but clearly, we’re still gaining customers from competition.

Fantastic. And then, on the Equinix Direct platform, I mean, we were definitely favorable on your launch of that. Any anecdotal evidence of traction there, in terms of just general reception from either the carrier side and/or customer side thus far?

Well, it’s been a good start. We aren’t quoting any actual numbers on the service yet. It was really just launched. So, we have it actually available in two centers right now. And so, perhaps by next quarter we’ll have a little more information for you.

Fantastic. Well, congrats again. This looks great.

Once again, if you would like to ask a question, please press *1. Our next question comes from Mr. Brian Black, [Woodliam] [phonetic] Partners. Sir, you may ask your question.

Hi, everybody. A couple of quick questions. One is, can you talk about the capacity utilization or your number of cabinets generating sales in the US, by center? So, we’ll talk about maybe the range that exists? Obviously, some centers are doing better than others. So, I’m just trying to get a sense of where the trouble spots are.

Well, I think perhaps from a US perspective, what we said in the past was largely we’re break-even everywhere, with the exception of Secaucus.

What is the capacity utilization of Secaucus now?

I don’t have a current number in front of us.

Brian, I don’t think what we’re going to try to do is, the utilization has been a number people have asked a lot of questions about. This is the first time, I think, in a while, we’ve given it. It’s just to give some people some idea on head room. But I don’t think we want to get in a position of having to go center by center on them. We just look at them as an aggregate basis.

Qualitatively then, at Secaucus, have you seen any improvement or is it still running at the same rate its been?

Oh, we have closed customers into Secaucus. Yes, I think the other thing about it, Brian, is you look at our overall utilization and where the company’s position is – if you’re just taking in a US focus from your question, the next dollar of revenue anywhere has a great flow-through effect to the gross margins of the business.

Sure. When we look at the guidance you’ve given for the different components of statement of cash flows, for the full year, can you give me a sense of – you know, obviously we’ve got some moving parts now, with the Crosslink notes coming in, of sort of cash interest expense, either next quarter or for the full year, so I can get a sense of sort of the operating, versus financing uses of cash? So, cash flow from operations, for example, you said 23 million or better than 23 million of the use for the full year. What portion of that is cash interest expense?

Just a second, Brian. We’re looking up the number.

Brian, this is Keith here. What I would say is, overall, I’ll give you the non-cash interest component, which I think is a little bit easier, and then you can back-out the cash component. But we expect the non-cash interest expense at roughly $9 million for this year, and that’s in the form of [PIC] [phonetic] notes and amortization of some other debt issuance costs.

Nine million is the non-cash component?

Yes. And then so roughly 11 million will be in cash interest.

Okay. And then lastly, churn, you went kind of fast and I might have missed that. But you said churn in the quarter was only like 1.5 percent. And I remember from last quarter it was even lower. It was like 1.1. But yet you’re still expecting 3 percent in your, kind of, run-rate churn going forward. Can you explain the expected up-tick or why we’ve been lower than the average?

Well, we’re selling out an average there. The thing that’s still unforeseen, you know, certainly in the past we’ve seen some surprises in customers that have hit the wall and that kind of thing. So, I think it’s a fair thing to leave a number of 3 percent out there, just so it provides some cushion – comfort.

So, it’s more conservative than any expected near-term up-tick?

Well, I can’t point to the 3 percent right now. But I just – understanding the relativity of a market, it’s pretty [indecipherable]. Now clearly, those numbers were better than that these last two quarters.

Okay, thanks. And you can definitely add our name to the roster of people who appreciate the additional disclosure.

Great. I’m very glad it’s helpful.

At this time there are not further questions.

Thanks, operator.

This concludes our conference call for today. Again, thank you for joining us.