Analysis: How Terremark Helps Verizon

On Friday, Terremark reported its results for the quarter ended December 31, 2010 (fiscal Q3 2011). Following the announcement of its pending acquisition by Verizon, it may be interesting to dig through some of the numbers for a better understanding of the multiples involved in this transaction, as well as the ways the Terremark deal helps position Verizon in key markets.

Terremark reported total revenues of $94.3 million and adjusted EBITDA of $28.5 million for the quarter for year-over-year increases of 27 percent and 44 percent, respectively. Terremark also reported another quarter of strong bookings, with $30.9 million of new annual contract value added to backlog. During Q3, Terremark added 46 new customers, for a total of 1,422 customers at the end of the period.

The company posted a net loss of $15 million, or 23 cents per share, compared with a loss of $8.3 million, or 13 cents per share, in the same period a year earlier. It must be noted, however, that a change in fair value of derivatives had a negative 6.5 million impact in the quarter.

Terremark increased its guidance for fiscal 2011, with revenues now expected to range from $352 million to $355 million and EBITDA, as adjusted, to range from $100.0 million to $102.0 million. The company also issued guidance for fiscal 2012. Terremark expects revenues between $445 million and $455 million and EBITDA, as adjusted, to range from $145 million to $150 million.

Using this forecast to evaluate Verizon's acquisition, it appears that Terremark's total equity was paid more than three times next year's expected revenues, and about 9.5 times adjusted EBITDA.

In December, Terremark was positioned by Gartner, Inc. in the leaders quadrant in its Magic Quadrant for Cloud Infrastructure as a Service and Web Hosting.

A quick look at Gartner's Magic Quadrant is interesting, as it shows that both Verizon, Terremark and Navisite, recently acquired by Time Warner Cable, appear in this research among the best companies. If we further exclude AT&T, the remaining players in the leaders' section are SAVVIS and Rackspace, who are also among the listed companies that mostly benefited from this cloud computing acquisition binge.

Back to Terremark's Q3 performance, it should be noted that colocation was the main growth driver, with a 15% increase on a quarterly base (click to enlarge):

q3-revenue-mix-470

Click for larger image (Source:Terremark)

These numbers obviously bode well as most colocation companies are expected to report their Q4 revenues this coming week.

The Federal side of the business is also growing smoothly at Terremark, having reached about 23 % of revenues in the latest quarter:

tmrk-fed-mix

Source: Terremark

During the conference call held to discuss the Terremark acquisition, Lowell McAdam, Verizon's President & COO, clearly indicated the reasons for this move:

"This transaction will accelerate Verizon's everything-as-a-service cloud strategy by delivering a powerful portfolio of highly-secure, scalable on-demand solutions to business and government customers across the globe," said McAdam. "As we looked at how best to position ourselves for opportunities in this market, it became increasingly clear to us that a purely organic build would not get us into this rapidly evolving market as fast as we wanted. At the same time, it became clear as we worked cooperatively with Terremark on other joint commercial activities, that they would bring as much of what we needed and accelerate us on a path to leadership in cloud services."

Some analysts, however, noted that Terremark's revenues from its cloud offering remain relatively small. In Q3, as shown in the following chart, the company reported revenues of about $9.4 million, or just 10 percent, from this key vertical (the sheet reports numbers in term of annualized run-rate). While these numbers are growing quickly, there is obviously more to the acquisition than just the potential of the cloud offering, with Terremark representing a strategic hub for the South American market, a strategic partner for the U.S. Government, and a data center specialist who can also help Verizon manage its colocation offering around the world.

tmrk-cloud-run-rate