Equinix Inc (EQIX) 2003 Q2 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. During the question and answer session you may press "*" "1" to ask a question. Today's conference is being recorded. If anyone has any objections, please disconnect at this time. I would like to introduce your host for today's conference Mr. Jason Starr, Director of Investor Relations. Mr. Starr you may begin.

Good afternoon, and welcome to Equinix's Second Quarter Results Conference Call. This earning call contains forward-looking statements including statements related to Equinix's business outlook, revenues, cash flow, cash flow from operations and capital expenditures. Actual results may differ from expectations due to a number of factors including the challenges of building an operating IBX centers and developing, deploying, and delivering Equinix services. Competition from existing and new competitors, the risks that customers who have placed orders may not install or may delay installations, the ability to deliver services when requested by our customers, the risks that the respective businesses in the completed combination will not be integrated successfully, or that Equinix will incur unanticipated cost of integration. The matters discussed in this conference call also involve risks and uncertainties described from time to time in Equinix's filing with the SEC. In particular, see Equinix's quarterly and annual reports filed with the SEC. These documents can be obtained of the web at 3edgar.com or sec.gov. Equinix does not assume any obligation to update the forward-looking statements, 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 release is also available on our website at equinix.com and through our investors' voice response service at 888-409-EQIX. With us today are Peter Van Camp, Equinix's Chief Executive Officer, Renee Lanam, Equinix's Chief Financial Officer and Keith Taylor Equinix's Vice president of Finance and Chief Accounting Officer. At this time I will turn the call over to Peter.

Thanks Jason. Let me to begin today by reporting that we are very pleased with our momentum. I would like to just quickly note two points as takeaway for today's call. First Equinix is at a key inflection point and that this momentum has positioned were -- has us positioned were incremental flow through margins in a revenue growth are significant and will enable us to reach an operating cash flow positive position within third quarter. Second, we believe that our network mutual model is proving itself to be the better one for managed co-location and hosting. The consolidation that we continue to see take place in this market is another validation of this and a driver for our growth. Our Q2 results provide support for these points.

Let me hit the highlights. Total revenue for the combined companies was 28.4m. This represents a 58% increase over same quarter last year and a 12% increase over Q1. Equinix closed 87 new customers in the second quarter with 56 of these coming from the U.S. This is unprecedented number. Key wins include Tramel Crow, Cap Gemini Ernst & Young, Sony Computer Entertainment, NASDAQ like markets, Verizon California and Wal-Mart. These wins combined with our recent announcement with Amazon demonstrate our growing success in the enterprise market. We saw 219 or just over a half again of our U.S. customers ordering additional services in the quarter including IBM, EDS, Google, SBC, Electronic Art, Accentor and Sprint. We ended the quarter with just over 600 customers. As expected, we closed our $10m investment from Crosslink Capital, which further solidifies our cash position. We are also reaffirming our timeline for achieving and operating cash flow positive position in the third quarter of this year specifically for the month of September. By all measures this has been a very strong first half. To get to the specifics underlying these results, I'd like to turn it over to Renee Lanam, then I'll come back to discuss the metrics driving this growth. The network effect that we continue to see in our business and provides further support for this inflexion point that we are approaching. We will then provide financial guidance for third quarter and the rest of the year. Renee.

Great. Thanks Peter. By all accounts this was a great quarter for Equinix. Our sales force delivered another strong quarter of new bookings. Our operations teams, the teams in the field, and the people in our headquarters continue to find ways to take cost out of the business. Though Koen, who is on the ground in Asia has brought the consolidation of the [Bihana] and ISTP operations in ahead of schedule and ahead of budget. In discussing our results, I will quantify cash versus non-cash expenses. The non-cash expenses that I will separate from our results are depreciation, amortization, accretion, stock base comp and non-cash interest expenses. This will give you a better sense of our true cash spending levels. The financial statements attached to today's press release contain similar detail.

So let's start with revenues, Q2 revenue was 28.4m. This is a 58% increase against the same quarter last year and a sequential 12% increase over Q1. Total recurring revenues for the quarter were 26m or 91% of the total and were comprised of cabinets, power, and interconnection services. This is a 70% increase over the same quarter last year and an 8% increase over Q1. Nonrecurring revenues for the quarter were 2.4m or 9% of total revenues. Of our nonrecurring revenues, 1.3m was from installation and professional services fees and the remainder was related to one-time settlement. The one-time settlements included payments from Excite@Home and WorldCom. Excite@Home made a distribution through the bankruptcy court to their unsecured creditors which we were one of. With respect to WorldCom, which we had forecasted in the quarter, they not only made a lump sum payment to us of nearly $500,000 for amount past due since the bankruptcy filing, but they also entered into a new contract with Equinix where they will remain an Equinix customer. As an additional one-time settlement, we expect 95% of our business will continue to come from recurring revenue sources.

Breaking out on revenues by regions, 86% of our revenues came from our U.S. centers, while the remaining 14% were derived from our Asia Pacific centers. One customer, IBM, again accounted for more than 10% of our revenues in the quarter. No other customer accounted for more than 5% of our revenues. Our churn in the quarter was 3%. For Q3, we expect this number to be higher as we are in a process of finalizing an agreement with one of our customers in Asia to significantly reduce the size of their commitments, but extending relationships to an additional IBX.

Although, this will have a meaningful impact to our cabinet showing numbers in Q3, we do not expect this to have an impact on our Q3 or annual guidance. As we have been treating the revenues associated with this customer on a cash basis and did not record any revenues for it in Q2. After Q3 we expect to see churn return to the 3% level. A couple of additional note on churn, first compared to industry averages we believe our churn remains on a very low-end. Second, we don't see churn from customers leaving our centers and going to competitors. This is important as it is a very statement about the value our customers place on our centers and our customer satisfaction.

Moving to our DSOs, our company wide DSOs have decreased to 33 days from 39 days in Q1. Cost of revenues for the quarter, excluding non-cash expenses were 17.5m. Cash cost of revenues consists primarily of salaries and benefits for IBX personnel, power charges, rent, and security expense. Total cost of revenues for the quarter including non-cash cost were 31.6m. Comparing these results to previous periods, our cash cost of revenues increased by 17% from the same quarter last year reflecting the cost associated with their new Asia Pacific centers, an increase by 2% quarter-over-quarter primarily as a result of increased utility cost as our customer base continues to grow. Important to the momentum of the business is the trend of our cash gross profit margins.

For the quarter, our cash gross profit margins were 39% as compared to 17% for the same quarter last year and 33% in Q1. Because of high percentage of our cost are fixed, at this point, we expect to see a 70-90% closer rate on incremental sales. This means our cash gross profit margins should continue to trend upwards. Given that one-time settlements in Q2 had virtually no expenses associated with them, we do not expect to see these margins grow at the same rate as we saw from Q1 to Q2. For Q3, we would expect our cash gross profit margins to be approximately 40%. Also important to the momentum of the business is the trend in our average recurring revenue per cabinet. Of our 21,000 cabinets 33% were billing at the end of Q2 up from 31% at the end of Q1. What this means is that the company has significant headroom for future revenue growth.

Another way to look at this is that we have increased our revenues by 12% quarter-over-quarter, while only using an additional 2% of our cabinets. This means therefore that we are seeing an increase in our average revenue per cabinet. As the revenue per cabinet increases so does the headroom for future revenue growth. This increase in revenue per cabinet is primarily due to the increase in high margin interconnection services associated with each cabinet. As we previously mentioned our interconnection revenues consist of revenues generated from customers within our centers connecting to one another. Peter will provide more color on this trend later on the call. It is wiser to say that this is a data point that shows that our network effect is having a positive impact on both top line and bottom line results.

Moving back to the expense line, SG&A expenses for the quarter excluding non-cash items were $10.7m, a 7% increase for the same quarter in the prior year and a 10% decrease from the prior quarter. As I mentioned earlier we are ahead of schedule on our integration efforts with our new Asia pacific centers and we expect this number to remain fairly constant going forward. Our net loss for the quarter excluding non-cash expenses and non-cash interest was $2.4m a 58% improvement over Q1. Including all non-cash charges, our net loss for the quarter was $21.2m or 2.44 cents per share. Turning to our balance sheet, our unrestricted cash balance on June 30, was $24.3m. Capital expenditures for the quarter were 1.1m.

Next moving to our statement of cash flows; our net cash use in operating activities was 2.7m. As previously noted our current and most focused objective is to drive the company to be cash flow positive from operations within the third quarter. Consistent with GAAP, this is the point where operations generate sufficient cash to fund our operating and interest expenses. What this does not include is cash flow from investing activities, which in our case consist primarily of capital expenditures or cash flow from financing activities, which in our case consist primarily of principal repayments on debt.

As I mentioned earlier, we are very pleased with our integration efforts in Asia. We assigned several enterprise customers both in region and new customers coming from the U.S. to Asia. In addition as we drive cost out of the business we made the decision to move forward with the wind down of a joint venture in Taiwan. We had accrued $650,000 for this wind down in Q1 of this year, and while this will result in a one-time cash payment in Q3, long-term we believe it will accelerate the company's drive towards profitability. We are confirming our guidance to reach cash flow positive from operations within Q3 a full one quarter earlier than originally anticipated and are currently projected to be positive for the month of September. Our net cash use and investing activities was $900,000 primarily related to the funding of 1.1m of capital expenditures offset in part by the recovery of the least deposit from one of our landlords. Our net cash generated from financing activities was 6.9m represented by the net proceeds from across big investments offset by the early retirement of one of our equipment lease facilities and standard monthly payments under our other debt facilities and capital lease obligations.

Moving to our capitalization, as of June 30, we had 9,086,336 shares of common stock outstanding. On a fully diluted basis, as of June 30, assuming conversion of all outstanding convertible notes, preferred stock, warrants, and employee stock options, we had 21.5m shares. This concludes my prepared remarks. Let me now turn the call back over to Peter.

Thanks Renee. One small addition to results, I have received several questions from investors regarding EBITDA. As we have noted on our prior call, our published financials no longer include the EBITDA line as this is not a GAAP number. However, many of you have asked this and I will tell you that the total company was EBITDA positive in the second quarter. Quickly as outlined in the financials attached to today's press release, if you look at the loss from operations and add back the total non-cash expenses in our loss from operations, you will see that we were slightly EBITDA positive for the quarter. Granted we saw some one-time events in this quarter, but this is the statement about the inflexion point I had mentioned, and just in a side this is also recognition of the credit due to Phil Koen and our team in Asia for their rapid integration work.

Now I would like to take a few minutes to provide you with some color on the momentum of our business model. First, we believe the model of carry neutrality is proving to be the superior collocation model. Second, by nature of the model we are able to create a network effect among our customers as they interconnect with each other. Lastly, inter connection services generate high margins and these combine with the high margin flow through from incremental collocation revenue to create increasing cash returns in our business.

First on the carrier neutral model, as we remarked on the last call, we believe many of our traditional telecom competitors have been struggling to understand where there primary business focus should lie. This gave us the expectation of continued consolidation over the course of '03. In fact, following our last call, we saw two major announcements in just a two-week period. First, Cable & Wireless confirmed rumors of their planned exit from the U.S. market, while Sprint followed suit with their plan to exit the hosting and collocation business entirely. As they plan their move to Equinix, customers are telling us that they want a certainty of a stable provider with long-term commitment to this business. They want this to be the last hosting decision they'll ever have to make. Our focus and commitment to this as our core business is driving share shift to Equinix.

The consolidation we have seen this far is likely to continue as legacy providers stay pressures to focus on their core business, Equinix has the place to reach everyone of the largest network, including Cable & Wireless and Sprint is in a prime position to take advantage of this consolidation. Of note, in the second quarter more than 63% of our booked revenue from new customers came to Equinix from legacy providers. This is underscoring the share shift taking place. The differentiation of carrier neutral model is clear. Our customers have the ability or freedom to interconnect peer and do business with each other or any network that makes sense with performance or cost gains. This is clearly a unique proposition relative to traditional carrier base collocation models particularly when customers are buying bandwidth from multiple network providers of their choice. Our recent win with Amazon is a perfect example of the value of this. As outlined above, this network neutral model by its nature creates a network effect among our critical mass of customers as they peer or exchange traffic with each other. We are quite pleased with the fact that 19% of our revenues in Q2 came from interconnection services.

Now in Q1, we reported a cross-connect number in the U.S. just over 3,600. As this has become an important area of measuring the network effect, we want to ensure the most complete picture here. This quarter, we are also adding the associated cross-connects from our internet core exchange or ice service, this is our bundled offering and a major backbone for their peering requirements. With these cross connects added, the Q2 total is 5,291, which is up from 4,404 in Q1 when including the I- connects, and this is up almost 140% over last year at this time. To round up the picture on interconnections, we'd also like to begin reporting ports from the GigE Exchange. In the second quarter, ports on this service have grown over 16% to 214. Now, as a reminder, our GigE Exchange allows for a one-to-many interconnection among customers versus individual private cross connection.

Now, let me reiterate three 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, this is the fastest growing segment of our business, now at 19%. Three, it produces rich margins. What's most interesting about this is that it allows Equinix to produce more revenue from its existing footprint. Unlike many legacy providers, we stay focused on our core business avoiding the cost and execution risk of moving towards a people and capital intensive complex hosting model. Lastly, this network effect and the associated high margins from our interconnection revenues, combined with a high margin flow through from gross and collocation revenue generates 70-90% cash margins for incremental revenues in our business. Of course, this is what has us, at this inflexion point, enabled our guidance of operating cash flow positive position to begin in September.

Now, let me offer in a view on the outlook for the total company for the next quarter and the rest of the year. For the third quarter, we expect to see revenues in the range of 30-31m. Cash used in operations will be less than 1m for the quarter. CAPEX is projected to be approximately 2m while cash will be in excess of 20m as of September 30th. For the full year as a reflection of the visibility from this recurring revenue model, we are tightening guidance to between 115-118m from our previous guidance of 112-118m. Total cash used in operations is expected to be less than 23m for the year. This number reflects the positive contribution to operating cash flow in the latter part of this year. CAPEX is expected to be approximately 6m offset by 2m of cash generated by the release of restricted cash to fund a bond interest payment. As we have noted in the past, CAPEX is the largely success-based and tied to customer-specific opportunities. Our cash balance is expected -- at year-end is expected to be in the range of $18-20m.

In closing; as evidenced in the outlook provided, I would like to say that our business and opportunity remain very strong. Again two main points is the take away from these results; one, we believe the network neutral business model is the right one; two, we believe we have arrived at an important inflexion point which promises increasing cash returns in our business. Again I couldn't be more pleased with the company's current position and our prospects for the remainder of the year. Thank you. With that, we will turn it back to the operator and any questions that any of you may have.

Thank you. At this time, we are ready to begin the question-and-answer. If you would like to ask a question, please press "*" "1". You will be announced prior to asking your question. To withdraw your question press "*" "2". Once again to ask a question, please press "*" "1". Our first question comes from Mr. Tom Watts with SG Cowen. Mr. Watts, you may ask your question.

Operator, should we go to the next one?

Once again to ask a question, please press "*" "1". Mr. Andy Schroepfer with Tier One Research, you may ask your question.

Thanks a lot. Well, send my best to Phil in Asia, too bad he couldn't come back and celebrate with you guys. Great to hear the confidence in your voice. You guys deserve it.

Thank you Andy.

I'll keep it to 3 in case there's others and then I'll circle back if there's no one else there, but your guidance for third quarter is with 95% expected in recurring that means you're looking for $29m in recurring up form $26. Can you give any comments on where your run rates are right now, or comments on just how much of that is already installed or what part of that needs to still get installed to hit that kind of up tick?

Well, I'll just use a number that we've seeing on a pretty recurring basis Andy, as you know, coming into that quarter particularly at where we are right now. We're north of 80% there on third quarter, which give us a good confidence on that so clearly the booking support in that and so fort is all in line.

That's excellent. On the comments around churn, can you say how many customers turned in the quarter to start with?

Yes, we could probably do the math in that. I think, I told we had 86 customers signed. Largely there is a chunk out of Asia. I am looking at Keith right now. As Phil got over there as you might guess, he is working very hard on the DSO numbers over there. And so I think he used the term on our prior call, proactive churn, and largely and cleaning those up, we had a pretty big number in Asia. All totaled, I think our customer actual count turn was approximately 40.

40, perfect, all right. And then in your comments for churn increasing in third quarter, I assume that was the comment relative to revenue churn rather than customer count churn.

Actually, it is relevant to cabinet churn.

Okay.

Andy in the way we count turn as we take the number of cabinets that come out in the given quarter against number of cabinets we had at the beginning of the quarter. That has reflection on the cabinet count not on number of customers.

Right my question though is are you expecting that would be a customer count churn, that's higher in third quarter again?

No, not at all.

Okay, good answer. Let's see. And then finally, I leave it at this one -- any comments on your interest and ability to convert different portions of your debt into equity in the second half of the year?

No comment on that.

That's good. I will circle back if no one else turns then. Thanks guys.

Thanks Andy.

Mr. Tom Watts with SG Cowen you may ask your question.

Can you hear me at this time.

We found you Tom.

Oh good, It must have been a mike problem there, sorry about that. It looks like you are on track to get turn free case for positive in Q4 after CAPEX, could you just confirm is that correct? And what also -- what sort of -- what are the usage you see for free cash once you'll be on that?

We are not giving specific guidance to that point in Q4, but I think you could look at CAPEX and pretty much get there, so.

Okay and then -- once you are free cash flow positive what is the levering one of the things -- one of principal things you are looking at or could we see more aggressive expansion, how would you prioritize the options available to you?

Well, de-leveraging certainly makes sense when you look at our burn debt still out there, we would have the ability to do something after the yearend, but we have not sorted that out yet. We are considering our options there.

Okay, thanks very much and nice quarter.

Thank you Tom.

Mr. Eric Saffiger (ph.) with Pacific Growth Equities you may ask your question.

Hi. First of all you derived 14% of revenues from Asia you had said, how would you expect that percentage to grow as we go forward?

Well, we are not giving any of Asia's specific in the guidance right now.

And I think as a company wise you divide us between U.S. and Asia. I think we expect to see a fairly consistent, which is 85% of our revenues from the U.S. and 15% from Asia.

Okay and then secondly in the guidance that you had given for the June quarter had you factored in the revenues that you got from these settlements was that assumed in your guidance or was that something that evolved during the course of the quarter?

The WorldCom settlement, which was about 500,000 we had assumed in the guidance that it was something that was along the [inaudible] at home was a surprise.

Okay, thank you very much.

Mr. Brian Gonnick (ph.) with Coast Air Capital (ph.), you may ask your question.

Hi, good afternoon.

Hi Brian.

Just a quick question on Amazon, when will you start generating revenue from that contract and how significant in size will this be?

We aren't giving specific details on the contract itself, but we will begin generating revenues from it actually in this quarter, and I guess you could look at it just the size a little bit. I'll be comfortable saying that there will be a top 10 customer for it.

Right, so based on that if your [note] of 80% going into the quarter, in terms of a current revenue and [you put] on Amazon, you know, what kind of percentage can you tell?

Well, some of our confidence level in terms of what that 80% reflects where we are in our pipeline and how we measure our pipeline from a booking standpoint. So, I wouldn't start slicing and dicing at the moment for specific customers, but I still would say that our guidance feels very good right now and so it certainly we feel good about third quarter.

Okay, great. Thanks a lot.

Great.

This is Greg Carlin (ph.) with Liam Partners (ph.). You may ask your question.

Hi. Nice quarter. It is Brian Black (ph.). Just wondering if you can comment about the past utilization in the U.S., you know, the most grandeur overall and then by region if you also have that within U.S.?

No. we aren't breaking it out across the U.S. or Asia or Pacific markets right now. I think we may give a little color on it, but from a specific utilization standpoint we aren't doing it.

What about just overall U.S., you know, utilization of your cabinet capacity?

That's how that relates to the 33% primary gain.

I am sorry I must have missed that. So, if 33% in the U.S. and you are not drilling down within that [inaudible] the sub regions in U.S.

Right and what we were doing and actually we just started this in the last call because quite a number of investors were asking for utilization. So we give the utilization number on a company wide basis and that looks 33% utilized company wide in the quarter at the end of the quarter.

Okay, I must have missed that. Sorry.

That's okay.

Operator.

Andy Schroepfer with Tier One Research.

A couple of quick follows; can you say the specific percentage IBM was in the quarter?

Actually I don't have that in front of me Andy, but I think when we saw the [Q] it will get dropped in. I know its north of 10 and south of 20.

[Q] will be out in a week.

Yes.

[Q] will be out by the end of the week Andy.

And can you confirm -- I know there was a transaction on the [cicacus] side how much do you have facilitized in [cicacus]?

And we are breaking up the utilization in [cicacus] -- I think that's the question?

Capacity there?

We have got plenty of capacity for growth there and actually we did see a number of orders in the quarter. There is a nice order from IBM there as well this quarter. And we also added our GigE Exchange in New York which is linked to [cicacus]. So we expect that to be a big benefit to our pipeline in [cicacus].

Great. Can you say how many cabinets you have out there though?

No, we are not quoting that right now.

Okay. And last question, how many sales reps do you have on board now?

Number is right in the area of 40. On my last check, we have been hiring some new sales rep just with obviously again the amount of consolidation and opportunity to surfacing. We want to make sure we have got an at bat back with everything that is starting to show up and so we are adding a few sales people.

Great, congrats again, thanks.

Thank you very much.

We have time for one last question Mr. Morgan Frank (ph.) with Manchester Funds. You may ask your question.

Hi guys I just want to get a little more granularity on the revenue, what was -- how is that break down between collocation internets managed services per quarter?

Well interconnections was 19%. How much was the managed services number?

71%.

71% was collocation, 19% is the interconnection and roughly 1% is the managing infrastructure.

Okay and then you had a nice reduction here in G&A costs, is it reasonable to extrapolate that forward in to the next couple of quarters and assume that's the sort of run rate yield we had?

Yes that is the run rate. Now some of that obviously still getting through the integration effort in Asia, but I think we blended on a pretty stable run rate for that.

Okay. That's more than enough. Thanks very much.

Thanks.

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