ST. LOUIS, MO. – July 20, 2006 – SAVVIS, Inc. (NASDAQ: SVVS), a global leader in IT infrastructure services for business applications, announced today that its revenue for the second quarter of 2006 totaled $189.6 million, compared to $167.2 million in the second quarter of 2005 and $180.0 million in the first quarter of 2006. SAVVIS achieved income from operations of $6.0 million in the second quarter, and its consolidated net loss narrowed to $11.1 million, compared to a net loss of $21.3 million in the second quarter of 2005 and a net loss of $12.4 million in the first quarter of 2006.
Cost of revenue, which excludes depreciation, amortization, and accretion, was $117.1 million, up 8% from a year ago and 4% from the prior quarter. Gross profit, defined as total revenue less cost of revenue, was $72.5 million, up 24% from a year ago and 8% from the first quarter 2006. Gross profit as a percentage of total revenue was 38% in the current quarter, up from 35% a year earlier and 37% in the prior quarter. Adjusted EBITDA* of $28.5 million increased 47% from $19.4 million a year earlier, and 12% from $25.4 million in the previous quarter. Operating cash flow was $21.3 million and cash capital expenditures were $20.5 million in the quarter.
Chief Executive Officer Phil Koen said, “SAVVIS achieved strong financial performance again in the second quarter, demonstrating the success of our business model. With 13% revenue growth from a year ago, and 41% of that flowing through to the Adjusted EBITDA line, the company is further extending its track record for margin improvement. Given this continued strong performance, we’ve raised our expectations for both revenue and Adjusted EBITDA growth for the full year. We also achieved a substantial improvement in our capital structure with the exchange of Preferred stock for common. Given the accomplishments of this quarter, and our strong outlook, SAVVIS is well-positioned to create value for our stockholders. Our success is driven by our ability to address the pressing needs of enterprises by delivering unique, managed solutions that offer IT infrastructure as a service.”
|Three months ended:||June 30, 2006||March 31, 2006||June 30, 2005|
|Managed IP VPN||$ 34.1||$ 32.4||$ 27.5|
|Digital Content Services||11.2||10.6||11.4|
|Other Network Services||28.3||28.6||30.2|
|Total Diversified Revenue||167.2||157.2||140.8|
|Total Revenue||$ 189.6||$ 180.0||$ 167.2|
|Cost of Revenue(1)||$ 117.1||$ 112.8||$ 108.7|
|Sales, Gen. & Admin. Expenses(1)||$ 46.8||$ 43.6||$ 39.3|
|Income (Loss) from Operations||$ 6.0||$ 3.7||$ (3.5)|
|Net (Loss)||$ (11.1)||$ (12.4)||$ (21.3)|
|Adjusted EBITDA||$ 28.5||$ 25.4||$ 19.4|
(1)Cost of Revenue excludes depreciation, amortization, and accretion. Both Cost of Revenue and Sales, General and Administrative Expenses for 2005 have been revised, in accordance with U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 107, to include the effect of non-cash equity-based compensation, which was previously reported separately.
Total revenue for the second quarter increased 13% from a year ago and 5% from the first quarter, primarily reflecting strong growth in hosting and managed IP VPN revenue. Colocation services contributed 57% of hosting revenue, consistent with the first quarter, with growth of approximately $5.0 million from the first quarter, of which approximately $1.4 million was attributable to renewal of existing contracts at higher prices. Revenue from virtualized utility services, also included in hosting revenue, increased to $6.2 million in the quarter, up 244% from a year ago and 29% from the first quarter. Managed IP VPN revenue increased 24% from the prior year and 6% from the previous quarter.
Cost of revenue was $117.1 million in the current quarter, resulting in gross profit as a percentage of revenue, or gross margin, of 38% in the current quarter, up from 35% in the same quarter last year and 37% in the first quarter. The improvement in gross margin reflects SAVVIS’ scalable business model and ongoing cost-optimization efforts.
Sales, general, and administrative expenses (“SG&A”) for the current quarter were $46.8 million as compared to $39.3 million for the same period last year and $43.6 million in the first quarter of 2006. As a percentage of revenue, SG&A was 25% in the current quarter, up from 24% in both the second quarter 2005 and the first quarter 2006, primarily reflecting increased non-cash equity and other compensation costs.
Income from operations was $6.0 million in the second quarter, compared to a loss from operations of $3.5 million in the same period last year and income from operations of $3.7 million in the first quarter 2006. SAVVIS’ consolidated net loss of $11.1 million was an improvement of $10.2 million from the second quarter 2005 and $1.4 million from the first quarter 2006. The second quarter 2005 loss from operations and net loss included $4.0 million of restructuring charges and integration costs.
On June 30, 2006, SAVVIS completed the exchange of its Series A Preferred stock for 37.4 million shares of common stock. Shares of common stock outstanding at June 30 totaled 50.8 million. Common stock issued in exchange for shares of the Series A Preferred stock in the second quarter totaled 37.4 million shares, including 29.0 million shares representing the as-converted value of the Preferred stock and 8.4 million shares equivalent to 58% of the value of future dividends. The 8.4 million shares recorded at fair value resulted in a $240.1 million charge to net loss attributable to common shareholders in the second quarter.
Net cash provided by operating activities was $21.3 million, compared to $0.2 million in the same period last year and $18.9 million in the first quarter 2006. Operating cash flow for the second quarter 2005 included cash payments of $7.5 million to exit long-term lease obligations and $3.3 million for acquisition and integration costs related to assets acquired in March 2004.
Cash capital expenditures for the second quarter 2006 totaled $20.5 million, including $2.6 million for the completion of an existing data center in Santa Clara, California. Overall, approximately 70% of SAVVIS’ capital expenditures are driven by revenue-generating opportunities.
SAVVIS’ cash position at June 30, 2006, was $86.1 million, including $36.8 million of net cash proceeds resulting from a data-center property transaction on June 30, 2006. On July 3, 2006, the first business day of the third quarter, the company used $32.0 million of cash to pay down its revolving credit facility. On a pro-forma basis as of June 30, 2006, after giving effect for the debt payment, SAVVIS’ cash balance was $54.1 million and the company had no debt outstanding on the revolving credit facility, which provides a total borrowing capacity of $85.0 million.
The data center transaction in the second quarter pertained to an existing leased facility located in Dallas, Texas. On June 29, the company purchased the facility for $13.8 million. On June 30, 2006, SAVVIS relinquished title to the building and certain leasehold improvements in exchange for $50.6 million and entered into a long-term lease of the facility for 15 years. The annual base rent under the new lease is approximately $4.3 million for the first year, increasing 2.5% annually for the term of the lease. The transaction was recorded as a financing-method lease under generally accepted accounting principles, resulting in a long-term lease obligation of $50.6 million. Future payments under the lease will be recorded as interest expense and a reduction in the long-term lease obligation.
Chief Financial Officer Jeff Von Deylen said, “SAVVIS’ industry-leading IT infrastructure solutions are selling well in a strong market, driving revenue growth. Our focus on margin is yielding results in gross profit and Adjusted EBITDA improvements, as well as narrowing net loss. Given the solid results of the first half, we are revising our outlook to reflect higher revenue and Adjusted EBITDA expectations.”
SAVVIS management’s current expectations for 2006 financial results include:
- Total revenue in a range of $750-760 million, for growth of 12-14% (up from previous guidance of $730-750 million, for growth of 9-12%), including:
- Hosting revenue increasing 25-30%
- Managed IP VPN revenue increasing 16-20%, and
- Reuters contributing approximately 12% of total revenue;
- Adjusted EBITDA in a range of $112-118 million (up from previous guidance of $100-110 million, for growth of over 30%), for growth of over 40%;
- Cash capital expenditures of $75-80 million (up from previous guidance of $60-70 million); and
- Continued positive cash flow before loan repayments.
* Adjusted EBITDA
“Adjusted EBITDA” represents income (loss) from operations before depreciation, amortization, accretion, integration costs, restructuring charges and non-cash equity-based compensation. We have included information concerning Adjusted EBITDA because we believe that in our industry such information is a relevant measurement of a company's financial performance and liquidity. The calculation of Adjusted EBITDA is not specified by United States generally accepted accounting principles. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Investor Conference Call
SAVVIS will webcast an investor conference call today, July 20, 2006, at 5:30 pm EDT. Both the webcast and supporting presentation will be available at www.savvis.net on the Investor Relations page. A live conference call will also be available at +1-210-839-8500 and 888-997-8509 (in North America, toll free), with the password “SAVVIS NEWS.” Recorded replays will be available on the website for six months, and by telephone for two weeks, at +1 203-369-1741 and 866-492-3845 (in North America, toll free) beginning at about 8:00 pm EDT that day.
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from SAVVIS’ expectations. Certain factors that could adversely affect actual results are set forth as risk factors described in SAVVIS’ SEC reports and filings, including its annual report on Form 10-K for the year ended December 31, 2005, and all subsequent filings. Those risk factors include, but are not limited to, variability in pricing for SAVVIS’ products, highly competitive markets, rapid evolution of technology, variability in the availability and terms of financing, uncertainties related to merger and acquisition activity, changes in our operating environment, and changes in regulatory environments. The forward-looking statements contained in this document speak only as of the date of publication, July 20, 2006. Subsequent events and developments may cause the company’s forward-looking statements to change, and the company will not undertake efforts to revise those forward-looking statements to reflect events after this date.
SAVVIS, Inc. (NASDAQ: SVVS) is a global leader in IT infrastructure services for business applications. With an IT services platform spanning North America, Europe, and Asia, SAVVIS has over 5,000 enterprise customers and leads the industry in delivering secure, reliable, and scalable hosting, network, and application services. These solutions enable customers to focus on their core business while SAVVIS ensures the quality of their IT systems and operations. SAVVIS’ strategic approach combines virtualization technology, a global network and 25 data centers, and automated management and provisioning systems. For more information about SAVVIS, visit www.savvis.net.