(EQIX) is a global provider of network-neutral data centers and
Internet exchange services for enterprises and network providers.
But a slow-down in the buildout of datacenters, high debt, and the
company's conversion to a REIT structure have taken EPS estimates
down considerably in the past month since its 2nd-quarter report.
Through its 90+ International Business Exchange, or IBX, data
centers across 31 strategic markets in the U.S., Europe, Middle
East and Africa and the Asia-Pacific, Equinix customers can
directly interconnect critical traffic exchange requirements. The
company is integral to global communications and has the billing
addresses to prove it.
The Client List
While some customers, such as AOL, Google (GOOG), AT&T (T), and
MSN, may build and operate their own data centers for their large
infrastructure deployments, these customers still rely on Equinix
IBX centers for their critical inter-connection relationships.
British Telecom, Cable & Wireless, Comcast (CMCSA), Level 3,
NTT, Qwest, SingTel, Sprint and Verizon (VZ) are other large
customers. With this kind of global enterprise business, it's easy
to see how Equinix grew quarterly revenues from $213 million in the
June quarter of 2009 to $525 million recently.
The Earnings Drop
It may not be as easy to see how the company supported a 50X
multiple with the stock was trading above $200 on forward estimates
of $4.65. But you know what happens when those estimates get taken
down. And that's part of what took the stock down since July to
trade in the $170's.
Here's a look at the Zacks EPS tables for EQIX which show the big
hit estimates have taken since the company's late July report.
Notice that this year was chopped in half...
(Click image to enlarge)
Equinix business is based on a recurring revenue model comprising
Co-location, Interconnection and Managed IT Infrastructure
Services. These services are considered to be recurring, as
customers are billed at fixed rates on a regular basis through the
life of the respective contracts, which generally run for one to
Approximately half of Equinix existing customers order new services
in any given quarter. Recurring revenues accounted for 95% of total
2012 revenues. But despite a 2Q earnings and revenue beat, analysts
have been greatly concerned about the rest of the year, especially
with AT&T offering more competition than new business.
The telecommunications industry is currently undergoing
consolidation. As customers integrate businesses, they may require
less co-location space, and there may be fewer networks available
to choose from. In addition, increased utilization of existing
co-location space could reduce the attractive expansion
opportunities available to Equinix.
Equinix offerings have long sales cycles that may have a negative
impact on the business, financial condition and results of
operations. A customer's decision to license cabinet space in one
of its IBX centers and to purchase additional services typically
involves a significant commitment of resources.
Some analysts believe the current imbalances will take 1-2 years to
settle and should eventually lead to a more consolidated industry.
According to Oppenheimer analysts, "We are in the early stages of
mobile data driving cloud computing, whereby lower latency and
improved up-time are critical. Further, bandwidth, storage and
processing are now cheap enough to enable massive big data
analytics. For dynamic and unpredictable workloads that are
end-user facing and thrive in a community environment, retail
facilities will continue to be the best solution. While we think
EQIX faces challenges, given this backdrop, we believe the company
is well positioned long term."
Market dynamics along with rising rates have created uncertainty,
causing datacenters to underperform, especially where there is
European exposure. Analysts expect this will continue for another
1-2 quarters. Additionally, EQIX is being impacted by uncertainty
surrounding its REIT conversion.
When these headwinds are clear, the company's longer-term growth
trajectory should resume. Until then, use the Zacks Rank as your
first guide to tell you when the EPS estimates are reversing their
Kevin Cook is a Senior Stock Strategist for Zacks where he runs
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