After the close last
night, recent IPO, Switch (SWCH 9.96, +0.65, +6.98%), reported 4Q18 results that can be
characterized as its best performance in several quarters. The owner and
operator of data centers and colocation space has struggled mightily since
going public in October 2017, frequently coming up short versus analysts'
earnings expectations. This time, however, SWCH reported EPS of $0.05, beating
the $0.03 consensus estimate, with revenue up 4% to $103.2 mln, essentially in line
with the $104.2 mln expectation. Click here for press release.
The upside earnings result can mainly be tied to improved gross margin, which ticked higher to 46.5% this quarter, up from 42.4% in 3Q18 and 45.9% in the year ago quarter as corporations are requiring more comprehensive and costly services to house ever-increasing data sets. On that note, the ongoing adoption of hybrid cloud solutions from enterprises has been a catalyst for SWCH, but it has also created a drag on its recent growth and outlook.
The company operates Tier 4 and Tier 5 data centers which are the highest rated and most secure data centers available. Therefore, its "Prime" data centers in Las Vegas, Atlanta, and Grand Rapids are constructed and managed to handle Enterprises' most proprietary and most regulated data, while meeting their highest density computing needs.
This is important because as companies migrate to hybrid cloud platforms through a mix of on-premises, private, public cloud services, SWCH is communicating to existing and prospective customers that it has the capability to house this mission-critical type of data.
Enterprises have been transitioning to cloud-based data centers, but industry estimates indicate that 60-70% of enterprise data centers still reside at that enterprise's physical location. So, there has been some hesitancy in moving a sizable portion over, including their most sensitive data.
With that in mind, SWCH issued downside guidance for FY19, forecasting revenue of $436-$445 mln vs. the $449.9 mln estimate. As noted earlier, SWCH's quarterly earnings performance has been checkered at best. Its soft guidance and under-performance are largely attributable to closing times on sales being pushed out, which is related to companies evaluating how they will use SWCH's hybrid cloud offerings.
SWCH has introduced a holistic cloud offering that will allow large enterprises to move substantial, mission-critical technology to its campuses. The good news is, it has the highest rated data centers, providing it with the attributes and capabilities to house this type of data.
However, it is taking some time to explain and market this to
customers, who are considering expanding their business with SWCH as they look
to fully embrace cloud environments.
In turn, this has pushed out closing cycles and deployment timelines, resulting in the downside guidance we saw last night. From a longer-term perspective, the company is confident its investments to transform it into a leader in hybrid cloud transitions will pay off. In fact, during