February 11, 2010
Equinix Inc.
Trajectory to Sustained FCF
Elongated
Investment conclusion: Equinix should continue to
see robust demand for space, power, and connectivity,
with avg revenue per cabinet continuing to see low sin-
gle digit Y/Y growth, and cloud computing providers
beginning to show strong demand for infrastructure and
connectivity. Nevertheless, we are concerned that
higher capex for 2010 decreases the likelihood of near
to medium term FCF, while the stronger dollar likely
limits revenue growth to the high end of management’s
guidance in 2010. Margins should also see compression
Y/Y on sales force and systems investment. In our view,
the stock is fairly valued at 9.7x and 7.7x our 2010 and
2011 EBITDA estimates, respectively.
What's new: Equinix reported EBITDA of $111.7M,
representing a Q/Q increase of 5.3%, and beating our
$102.2M estimate and consensus of $102.3M. Although
colocation revenues showed strength, the interconnec-
tion segment saw Q/Q growth decelerate while
non-recurring revenue was up 20.2% Q/Q. Guidance for
2010 revenue and EBITDA implies EBITDA margin
compression of 207 bps as expansion activity coincides
with the ramping sales force and investment in IT plat-
forms. We also note that 1Q10 guidance was below our
and Street expectations. We are cutting our 2010
EBITDA to $474.3M (from $481.5M).
Where we differ: The mission critical storage, security,
and carrier redundancy in Equinix facilities should limit
the impact from constrained IT budgets. New opportu-
nities such as cloud computing and growth of
low-latency trading represent significant secular tail-
winds. However, we are considerably higher than con-
sensus on capex for 2010 ($477.9M versus the Street at
$383.3M), as we believe the company is focused on
capitalizing on the favorable supply / demand dynamic in
the near term, which is consistent with recent guidance
for capex to increase to $450M at the mid-point in 2010.