Equinix Revenue Shortfall - Blame Credit Memos?

By David Gross

Equinix's revenue warning crushed data center stocks after hours yesterday, with Rackspace (RAX), Savvis (SVVS), and Digital Realty (DLR) down 10%, and Equinix (EQIX) itself down 25% to under $79 a share.   All because Equinix said revenue would be 2% lower than expected.

Now, Wall Street has a bad habit of massively overreacting to marginally bad news, especially when in this case, the company raised EBITDA guidance slightly.   But what made this situation odd were the reasons Equinix was giving - Switch & Data shortfalls, a new & improved sales strategy that has yet to be implemented, bad churn forecasting, and failure to adjust revenue forecasts for two credit memos that add up to $300,000 of monthly recurring revenue.    Really?   A $1 billion+ run rate company knocks guidance down 2%, holds a call, loses over a $1 billion of market value after hours, and blames inaccurate financial modeling of two credit memos?

The credit memos were for $75 million worth of contracts, and the company said they represented just over 10% of those contracts' values.   This means the memos correspond to about $7.5-8 million of revenue, or about 25-26 months of revenue at $300,000 per month.   So they handed out a 10% "credit memo" to keep someone for just two years?

Equinix is still a good company, and I agree with their strategy of focusing on customers who also buy cross-connects, because they're more likely to stick around, and a marketplace of hundreds of cross-connect partners is harder for someone else to copy than cabinets for servers.   But there's no reason to take down the rest of the sector on this news, especially when two data center technology suppliers lifted guidance last week by a greater percentage than Equinix's shortfall.  However, this was an extremely odd call they held with analysts after the press release went out, with executives wavering between blaming business fundamentals and inaccurate financial models.   Now that the credit memo excuse has been used once, let's hope they don't use it again.