Mr. Weller: We continue to be positive in our outlook. The thing that attracted us to this sector was the growth that we were seeing. You can look at third- party research houses and their market forecasts, look at the performance of the companies in the sector - Equinix (EQIX) being one of the biggest, companies like Switch & Data (SDXC) and then Rackspace (RAX) on the managed side - and I think across the board we've seen very, very attractive growth rates. You hear people talk about secular growth of the Internet, that's kind of the high-level driver, and it's simple and it's true. It's just more stuff going to the Web; it's software-as-a-service. All these newer software companies that are using that delivery model, they're not building and operating their own data centers. It's video over the Web, it's financial exchanges doing more over the Web or electronic trading over IP networks. So that's what we see. And this is in a little bit of an earlier stage, but I think behind that you're seeing bigger companies start to realize that owning and operating data centers isn't necessarily a core competency, so there's a bit of a data center outsourcing trend out there as well.
TWST: When did you add coverage? Do you still see plenty of growth potential
looking ahead?
Mr. Weller: We launched initially with Equinix and Switch & Data back after they
reported their 3Q08 results, so that would have been late October/early November
time frame. And then we launched on Rackspace and Terremark (TMRK) after they
reported their December quarter results. We have a little bit of history with
this space. I used to cover this sector back in the Internet boom-bust days, so
I went through some highs and some real lows covering names like Exodus and
Digex and USinternetworking. We went away from it for a while, and then over the
last few years, we were watching it from the sidelines. But we are attracted to
the growth. I don't think between when we launched and now that anything
significantly has changed. I do think we have seen some moderate pressure on the
growth rates for these companies. Equinix was growing at a 30% rate last year,
and growth this year is going to be more in the mid-20% area. And there was a
lot of controversy coming out of their fourth quarter earnings call, when they
reduced their revenue guidance by a bit for 2009. There was concern that that
was the first crack, and that was going to turn into a big break. You saw some
other pressure on their bookings late last year, but things have firmed up and I
think generally they are in good shape. They just reported a very solid quarter.
We were very fortunate on the timing when we rolled out because obviously, there
was a lot of pressure on the broader stock market; there was no appetite for
risk, no appetite for capital-intensive models or high leverage or negative free
cash flow generation. And the same thing was true in February, too, when the
market conditions weren't much better. I think we got in at a great time, and
you have seen big moves in these stocks from those periods to now, which is also
something we've seen with a lot of other stocks.
Tickers included in this excerpt: DFT, EQIX, RAX, SOXC, TMRK
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