Terremark: 2007 Moves Are Paying Off

Few of the data center developers that predate the dot-com crash built bigger or have fought harder than Terremark Worldwide (TMRK). The company built a 750,000 square foot data fortress in downtown Miami, and then hunkered down through a brutal industry downturn when the dot-com bubble burst.

Terremark officials believe their endurance and focus have paid off, and that strategic moves in 2007 have positioned the company to benefit from strong demand for utility computing and secure government hosting. Key milestones from last year included the acquisition of Data Return and a $250 million financing agreement that allowed the company to restructure its debt and fund new data centers in Culpeper, Va. and Santa Clara, Calif.

"We believe we're unique," said Terremark Chairman and CEO Manuel Medina, citing Terremark's combination of carrier-neutral hosting and a full menu of managed services. "We now have the team, the services, the technology infrastructure and the financing in place to implement our strategy."

For many customers, Terremark's key selling point is the connectivity available at its NAP of the Americas in Miami, which has 160 carriers in the building. "You cannot duplicate the massive amount of connectivity we have in this facility," said Medina.

The 750,000 square foot NAP serves as the flagship for Terremark's growing portfolio of facilities. The company is building a 30-acre data center campus in Culpeper, Virginia, with a 50,000 square foot first phase due in June. Terremark has acquired land in Santa Clara, Calif. for a similar West Coast expansion, and has also built NAP facilities in Madrid, Spain and Sao Paulo, Brazil. Terremark is under contract to build the $40 million NAP of the Caribbean in Santo Domingo in the Dominican Republic.

The company says its expansion plan is fully funded after arranging $250 million in debt financing from Credit Suisse Securities and Tennenbaum Capital Partners. Debt service and capital investment continue to impact the company's earnings, as Terremark reported a loss of $15.5 million in the second quarter of fiscal 2008, which ended Sept. 30.

But Terremark had improved revenue of $45 million in the quarter, and expects that to grow to $49 to $50 million this quarter (results are due on Feb. 5) with total fiscal 2008 revenues of between $185 million to $190 million. Shares of Terremark, which were priced at less than $1 in early 2003, traded in a range between $5 and $9 a share in 2007.

Managed Services Growing

Terremark President and COO Marvin Wheeler says the company's active pipeline of enterprise customers will be seen in the bottom line in coming quarters. Terremark added 32 new customers in 2Q08, when it reported a total of 914 customers. Managed services now represent 62 percent of Terremark's revenue, compared to 31 percent for colocation and 7 percent for exchange point services.

Much of that growth in managed services is coming on the Infinistructure utility computing platform, a key component of Terremark's $85 million acquisition of Data Return last May. Wheeler said Infinistructure is responsible for the bulk of the company's recent enterprise deals, as more companies forego operating their own hardware and build on Terremark's utility computing model.

With grids gaining traction, the Data Return deal was driven by the shift to virtualized infrastructure. "We believe that virtualization will be one of those watershed moments in our industry," said Medina. "We acquired Data Return because it is the best platform, and a fantastic value proposition for our customers. There is an insatiable appetite for computing capacity, and I believe virtualization is the best way to add computing capacity."

Federal Colo Contracts

One floor of the Miami NAP is reserved for secure hosting suites for government customers, which represent 14 percent of Terremark's revenue. The company expects its government colocation business to be boosted by its recent approval as a GSA schedule contract provider. Ben Stewart, the senior vice president of Terremark's Federal Group, said government deals typically have a long sales cycle, driven by departmental budgets. But government agencies also tend to be among the stickiest of customers, Stewart said, and are expected to be a major constituency for the Culpeper facility when it opens.

Medina says the pieces of Terremark's long-term plan are in place, and it now needs to execute on its strategy. But he also notes that the company has come a long way since the lean years of 2002 and 2003.

"The industry was in crisis, but we were seeing the demand," Medina recalled. "It was very difficult. Our philosophy was that if we fight for it long enough and survive, Wall Street would pay attention. We really believed the explosion of the Internet would catch up. It's been an extremely gratifying turn of events."