Shares of Equinix plunged nearly 25 percent today after the colocation provider reported that its third quarter revenue would be lower than expected. The company attributed the revenue dip to higher churn, discounted pricing on some large deals, and lower-than-expected income from the operations it acquired earlier this year from Switch and Data.
Equinix is trading at about $79 a share Wednesday morning, down more than $26 a sahre from Tuesday's closing price of $106. Analysts from Citigroup, Wells Fargo and Oppenheimer downgraded the stock this morning.
The sharp selloff in shares of Equinix showed that Wall Street is unforgiving with companies that miss their revenue projections. Shortly after the close of trading Tuesday, Equinix said it now expects third quarter revenues to be in the range of $328.0 to $330.0 million, about 2.2 percent lower than its previous outlook, and total revenues for the full year to be approximately $1.215 billion, about 1.2 percent lower.
"This updated guidance is due to underestimated churn assumptions in Equinix’s forecast models in North America, greater than expected discounting to secure longer term contract renewals and lower than expected revenues attributable to the Switch and Data business acquired in April 2010," Equinix said in a statement.
The announcement raised questions about the competitiveness of the colocation market and the assumptions driving the deal to acquire Switch and Data. In a conference Tuesday afternoon, Equinix said the fundamentals of its business remained sound.
"Our pipeline remains healthy and our pricing remains firm across all our markets," said CEO Steve Smith. "We remain confident we will continue to deliver strong, profitable growth."
Smith said discounts for two "strategic" customers accounted for half the revenue shortfall. A strategic customer is one whose presence in an Equinix facility has the potential to attract additional business. Equinix has said in the past that it will compete aggressively to win and retain these customers.
Smith said the customers offered discounts were in the digital media sector rather than financial services, which has been closely watched as new colocation trading centers open in the key northern New Jersey market. Smith said these deals involved large customers that had been with Equinix for years and were shifting parts of their operations that didn't require interconnectivity to in-house data centers. "The network-dense parts of their deployment are still with us," said Smith, who said that discounts are only offered to high-volume strategic customers who commit to long-term contracts.
The revenue shortfall in the Switch and Data business prompted a number of questions from analysts. Equinix said revenue from the Switch and Data colocation centers was about 4 percent lower than anticipated in the third quarter.
"We still feel it’s a great acquisition for us," said Equinix chief financial officer Keith Taylor. "The conversion of the pipeline is taking longer than we originally anticipated. But we feel we have a lot of good opportunities. It isn’t because we have a lack of visibility (into the business). There are a number of deals that haven’t converted yet."