SAVVIS, Inc. (SVVS)

Q2 2010 Earnings Call

July 27, 10:00 am ET

Executives

Peggy Reilly-Tharp - Director of IR

Gregory Freiberg - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

James Ousley - Non-Executive Chairman, Chief Executive Officer and Member of Business Development Committee

William Fathers - Senior Vice President of Global Sales and Marketing

BryanDoerr – Technology Officer

Analysts

Robert Dezego - SunTrust Robinson

Mark Kelleher - Brigantine Advisors

[Thre Anaz] – Oppenheimer & Company

Michael Bowen – Guggenheim Securities

Colby Sneasel – Cohen & Company

Edward Casper – Morgan Stanley

Donna Jaegers – D.A. Davidson & Co.

Frank Louthan – Raymond James & Associates

James Brein – William Blair

Grave Howell – Wells Fargo Securities

Jonathan Atkin - RBC Capital Markets Corporation

Erick [Sethenger] – Sigma Hill.

Chad Bartley – Pacific Crest

Brian Zachery – Deutsche Bank

Presentation

Operator

Good day, Ladies and gentlemen. And welcome to the SAVVIS Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

As a reminder, today’s conference is being recorded. I’d now like to turn the conference over to your host, Ms. Peggy Reilly-Tharp.

Peggy Reilly- Tharp

Thank you. Good morning, and thank you for participating in SAVVIS’s Second Quarter 2010 Earnings Call.

I’m Peggy Reilly-Tharp, Senior Director of Investor and Corporate Communications with SAVVIS.

Earlier this morning we distributed a press release with detailed financial tables, which is available on our website at SAVVIS.net.

In addition, we have corresponding slides available at that site, which will be referenced during this call.

As always, please be aware that today’s discussion can contain forward-looking statements, as defined under Federal Securities Law. Actual results could different materially from the forward-looking statements due to various risk factors, including but not limited to the factors disclosed in the company’s Form 10K, and other filings with the U.S. Securities and Exchange Commission. We encourage you to review those disclosures.

Our presentation today will include references to certain non-GAAP financial measures and provide additional information for investors.

In compliance with the SEC’s Regulation G, our press release distributed today, which is posted on our website and furnished to the SEC on Form 8K, includes both our rational for why we believe non-GAAP information is important in describing our operating performance, and the full reconciliation with the corresponding GAAP members.

Joining us on the call today are Jim Ousley, our Chairman and Chief Executive Officer; Greg Freiberg, Chief Financial Officer; Bill Fathers, Senior Vice President of Global Head of Sales and Marketing; and BryanDoerr, Technology Officer.

Today, we’ll being with a financial review from Greg, followed by an overall update from Jim. Bill will then present a sales summary, followed by a cloud update from Brian, who will then turn the call back over to the moderator for Q&A.

With that, I would now like to turn the call over to Greg.

Gregory Freiberg

Thanks, Peggy. Good morning, everyone. I’d like to start with the Second Quarter Results, which are on Slide 4.

But before I begin, I want to remind everyone of some significant events which occurred last year.

In the second quarter of 2009, we had a 6 ½ million early-termination fee related to the departure of the American Stock Exchange following its acquisition by Nike Neuronax.

In addition, at the end of the fourth quarter of last year, we saw approximately 6 million of churn related to four total location customers. So in total, we lost more than 12 million in quarterly revenue that we needed to grow through.

I think this quarter’s results, which I’m about to share with you, shows that we have successfully replaced that amount.

Turning to the second quarter of this year, total revenue was $220 million, up 2% on a quarterly basis. Year-over-year total revenue was up 1%.

On June 16, we completed the acquisition of Fusepoint for approximately $121 million. Excluding both the second quarter 2010 revenue from Fusepoint, and the second quarter 2009 MXBPF, total revenue for the second quarter was up 3% on a year-over-year basis.

Turning to Overall Hosting, we’ve reported $158 million of revenue for the second quarter, which was up 4% on both an annual and quarterly basis.

Managed Services revenue was $75 million in the second quarter, up 5% on a quarterly basis, and up 10% on an annual basis.

Total Location revenue for the second quarter was $84 million, up 2% on a quarterly basis and down 1% year over year.

Moving on to Network Services where we reported revenue of $64 million for the second quarter, on a quarter-over-quarter basis, overall network revenue was flat, while on a year-over-year basis, it was down 6%.

At 53% of overall network, Core Network is now larger than sustaining network. This is the first quarter where Core revenue has outweighed sustaining, and this shift puts us firmly on the path to reversing the decline in the overall network business. We still expect to see sequential quarterly growth in this business by the end of 2010.

Core Network revenue continued to grow and was up 6% on a quarterly basis, and 24% on an annual basis. This growth is related to clients in our data centers, Thomson Reuters, and the uptake of converged cloud, which includes network connectivity. As expected, sustaining that core revenue has continued to decline and went down 6% quarter over quarter, and 26% year over year.

For the quarter, SAVVIS had gross profit of $102 million. And this amount included nearly $2 million of non-cash equity-based compensation. On a quarterly basis, gross profit was up $4 million, and on an annual basis, it was up $3 million.

Excluding non-cash equity-based compensation, gross margin was flat quarter over quarter and was up 1% year over year.

SG&A for the second quarter was $57 million, or 26% of revenue, and included $5 million of non-cash equity-based compensation, and approximately $3 ½ million of Fusepoint acquisition and integration costs.

SG&A was up approximately $5 million on a quarter-over-quarter basis, and approximately $6 million on a year over year. As expected, we increased SG&A spending as we ramped up sales and marketing efforts.

Adjusted EBITDA for the second quarter, excluding approximately $3 ½ million of Fusepoint acquisition and integration costs, was $55 million, or 25% of revenue.

On a quarter-over-quarter basis, adjusted EBITDA was up 1% while it was flat on a year-over-year basis.

Leveraged free cash flow for the second quarter was negative $13 million and this reflects the investments we have made in our Global Data Center footprint this year. And this was in addition to higher success-based capital expended for new client wins. Leveraged free cash flow was down on a quarterly and an annual basis.

Although I won’t spend too much time on Slide 5, we’ve included it so you can get a true idea of our quarter-over-quarter and year-over-year growth.

In the second column, we’ve shown our consolidated Second Quarter 2000 revenue. In the third column, you can see our quarter-over-quarter growth, excluding Fusepoint. The next column shows year-over-year growth excluding Fusepoint. And the final column shows year-over-year growth excluding the American Stock Exchange ETF.

I’d like to call out just a few numbers that exclude the AmEx ETF. Specifically, total hosting revenue was up 8% year over year, while managed hosting revenue was up 19% year over year.

Adjusted EBITDA was up 13% year over year. And in addition to the AmEx ETF, this growth excluded approximately $3 ½ million of Fusepoint acquisition and integration costs.

Now, if you’ll turn to Slide 6, I’d like to review our guidance for the year. Thanks to our continued strong organic growth, we have decided to provide full-year 2010 revenue guidance of $912 to $927 million, which includes the Fusepoint acquisition.

Read the rest of this transcript for free on seekingalpha.com

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