Analyst Downgrades Savvis, Citing Expenses
An industry analyst at Jefferies & Co. has downgraded Savvis Inc. (SVVS), citing increased expenses and “limited evidence of improving operations” for the managed hosting provider. Jonathan Schildkraut lowered his rating to “Hold” from “Buy” and cut his target price to $17 from $20. Shares of Savvis closed Tuesday at $14.
The financial sector is a key business focus for Savvis, making the company a target for analyst scrutiny in the wake of the current turbulence on Wall Street. In the wake of the collapses of Lehman Brothers and AIG and the sale of Merrill Lynch, analysts are bound to be re-assessing “buy” ratings on companies that might feel the ripples from the momentous shifts in the financial sector, including data center service providers. Less than two months ago Schildkraut raised his rating of Savvis from Hold to Buy, citing “increased confidence in management’s ‘08 outlook.”
In a note to investors, Schildkraut said Savvis’ third-quarter results “may not see a meaningfully negative impact” from the slowdown in IT investment, but said he is more cautious about 2009 expectations and increased his capital expenses estimates for the company for 2009 and beyond, according to an AP summary.
He also said the market for large-scale managed hosting projects remains “lukewarm” as customers “continue to drag out the sales cycle.” Savvis has cited a lengthy customer sales cycle as a challenge in several of its recent earnings calls. Other public companies in the sector have reported different experiences, making it more difficult to sort out whether Savvis’ experience applies to the broader managed hosting market. Terremark (TMRK) has reported robust demand for managed hosting on its Infinistructure utility computing platform, while Rackspace (RAX) said slower demand from existing customers prompted it to boost its marketing and acquire new customers to support continued earnings growth.
The analysts views are rightfully cautious. However, a $700 Billion bailout plan doesn’t necessarily signal a cutback in IT spending. The impact of the bailout on the IT budgets of financial services companies will be very interesting to watch. The result could be more IT projects moving to managed services at a faster rate. One thing is certain, there will be pressure in the financial community to do things more efficiently.