Terremark's Guidance Goes Up 1%, Its Stock Rises 13%

By David Gross

Wall Street continued its manic buying and panic selling of data center stocks yesterday, with Terremark rising 13% to just over $11 a share after it lifted FY2011 revenue guidance 1%, from $346 million to a range of $350-$353 million.   This gave the stock an expectations multiple of 13, or 10 if you want to round from the midpoint, not much lower than the wild 17 Equinix got when it guided down 2% and dropped 35%, and guided up .4% and rose 7%.    It's also higher than the expectations multiple of 4 that Riverbed got when it guided up 5%, and rose 20%.

Corporate revenue was up 21% y/y to $163 million, and similar to the growth rates we've seen with Equinix and Rackspace.   And remember all the Wall Street panicking over the colocation market after Equinix's infamous October 5th announcement?  Terremark's colocation revenue was up 32% y/y to $70 million.

The Federal Government accounted for 21% of the company's revenue, and Terremark made a very smart move bringing its government customers way out to Culpeper, rather than trying to compete against DLR, Equinix, and DFT in Ashburn, which is 60 miles closer to DC, but also closer to terrorist targets.   Ashburn is about 30 miles from Washington, and as a Virginia resident, I can tell you the only thing within 30 miles of Culpeper, besides cows and hills, is James Madison's estate at Montpelier, which often gets overlooked with Monticello another 25 miles down the road.   So while Terremark might call its Culpeper data center campus the "NAP of the Capital Region", it would be a bad idea to tell a local in Culpeper County that he's a suburban Washingtonian.

While Terremark also leases space in Santa Clara and internationally, the NAP of the Capital Region and NAP of Americas in Miami represent over 80% of its space, including 100,000 square feet it has yet to develop in Culpeper, which is far larger than the extra 20,000 feet in Santa Clara it said it would lease during the earnings call.  This geographic focus is paying off in its asset utilization, with the company generating $652 of annualized revenue with just $476 million of Property, Plant, and Equipment on its books, or a ratio of 1.37, far higher than the <1 ratios put up by Digital Realty and Equinix, and nearly as high as the 1.6 put up by Rackspace, which doesn't spend a dime on building construction.    This is balanced out though by hits on the income statement for sales and support costs, however Terremark's net margins improved over the year from -16% to -11%. 

While I refer to EBITDA occassionally here, I did too many financial plans for CLECs and ISPs ten years ago to take the metric too seriously, and similarly have a problem using it to measure so many of these capital intensive data center providers.   Depreciation might not be a cash expense, but it gives an indication of how efficiently a company uses its fixed assets, and how well its times its capex relative to revenue, so I can't report on "adjusted EBITDA" with a straight face.   So while Terremark is EBITDA positive, that would be meaningless if it wasn't improving net margins.

Investors looking at this company who don't want to buy and sell with the herd should probably take a little attention off the top line, and instead consider how Terremark has been able to grow with a fairly tight geographic focus.  Dominating Culpeper and downtown Miami is proving to be a better strategy than having a small piece of Northern New Jersey or Chicago.

Verizon Business Wins Part of $76 Million Cloud Computing Contract from GSA, Will Host at Terremark

By David Gross

Verizon Business announced yesterday that it had won a contract award from the U.S. General Services Administration for a portion of a 5 year, $76.5 million cloud computing contract.   The servers and equipment will be hosted at the Terremark NAP of the Capital Region in Culpeper, VA, and NAP of the Americas in Miami.

Verizon Business is based in Ashburn, VA, a mile away from the large cluster of Ashburn data centers on Filigree Court and Beaumeade Circle.   However, since Terremark built its facility out in Culpeper, which is 60 miles further away from Washington than Ashburn, it has become an attractive location for Federal customers who want to be further away from key terrorist targets in the DC area.   Ashburn, as a result, is firming up its position as a hub for commercial websites and technology vendors such as Amazon, Yahoo, Google, Facebook, Rackspace, and Salesforce.com, rather than the government.

Verizon announced in June that it had leased 25,000 square feet from Terremark in Culpeper and Miami.

Savvis Best Performing Data Center Services Stock This Quarter

With two trading days left in the quarter, Savvis (SVVS) leads data center stocks with a 45.07% gain since July 1, outpacing runner up Rackspace (RAX) by nearly three points. Terremark (TMRK), Equinix (EQIX), and Navisite (NAVI) are all up over 25% for the quarter.

Among data center networkers, F5 (FFIV) leads the pack, up 51% for the quarter, well ahead of the 2.58% gain posted by Cisco (CSCO). If you include companies whose products connect data center to data centers, Riverbed (RVBD) leads everyone, up over 66% for the quarter.

Terremark Revenue Up 20% Y/Y

Terremark (TMRK) reported revenue of $79 million yesterday, with its cloud service up to $6.5 million, which represented 19% sequential growth. Still under 10% of revenue though, and cloud does a lot more to create press intrigue than signing up a government agency to a co-lo contract, and carries an excessive press release/revenue ratio.

As a resident of the DC area, I thought it was kind of funny how they described their Culpeper NAP as being "outside" downtown Washington in the 10-Q. It's more than just outside, it's almost 70 miles away! Still, this distance is one reason why the facility is popular with the Federal government. Federal customers accounted for exactly 20% of revenue for the quarter, down from 22% a year earlier.

Colocation is growing slightly faster than managed, with colo revenue now topping 40% of total. While I'm not a big fan of the all-things-to-all people managed + colo + cloud strategy, Terremark pulls it off better than anyone else due to their focus on the Miami-Latin America and Federal markets.