美国电信行业研究报告2009年1月

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2009 Enhanced Data
Services Outlook
SUMMARY
Against a backdrop of extreme market volatility and global macroeconomic
weakness, we see the 2009 fundamental outlook for the ED Services as a mixed
bag. On the one hand, strong secular trends of NC Computing and rollout/adoption
of IP-based services should continue to support volumes for the group. On the
other, manifest macro weakness, weak IT spending, widening HY spreads and FX
volatility pose risks. Our favored names remain EQIX and SDXC as we believe
these operators have the best visibility and relatively resilient fundamentals. We
remain wary of incumbent CDNs and the web services providers, where intensifying
competition and a weak consumer spell trouble. Please see also our accompanying
reports on AKAM and DRIV.
KEY POINTS
n See resilience and opportunity in neutral data centers: We believe the
neutral data centers boast the best fundamentals within our coverage universe.
We believe the tight credit environment and enterprises' efforts to cut down on
internal IT spending will help to support the ongoing demand/supply imbalance
in the sector (positive pricing implications) and view this as a positive for fully
funded incumbents. Our top picks are EQIX and SDXC.
n See low visibility as a risk to managed services; expect volatility: We
remain cautious on managed services providers as weak IT spending will curtail
uptake of new services. We also see a risk for pricing to come under pressure at
the low-end of the market. Positively, we believe most risks are priced into the
names at current valuations. Top pick is PGI.
n Anticipate continued deterioration in CDN fundamentals: We believe an
increasingly fierce competitive environment will drive relentless price erosion
(est. 35%+ declines on large deals) and remain wary of incumbents. A tough
economy and lower funding could also lead to some moderation in traffic
volume growth. We remain cautious on AKAM.
n Weak consumer poses a clear risk to web services operators: With the
consumer showing evident weakness and trends in e-commerce following suit,
we believe '09 will be a challenging year for web services providers. We believe
GSIC and DRIV will see limited top-line growth and do not believe the
companies' cost structures are in line with slower growth. Please see our
accompanying report on DRIV.

Enhanced Data Services 2009 Outlook
Against a backdrop of extreme market volatility and global macroeconomic weakness, we
see the 2009 fundamental outlook for the Enhanced Data Services sector as a mixed bag.
On the one hand, strong secular trends of Network Centric Computing, rollout/adoption of
IP-based services and IT outsourcing should continue to support volumes for the group.
On the other, manifest macroeconomic weakness, our expectation for IT spending to
decline in 2009, widening high-yield spreads and foreign exchange volatility pose clear
risks. A summary of our outlook by segment is as follows:
• See resilience and opportunity in neutral data centers: We believe the
neutral data center operators boast the best fundamentals within our coverage
universe and highlight that this group did not fundamentally disappoint in ’08. We
believe the tight credit environment and enterprises’ efforts to cut down on
internal IT spending will help to support the ongoing demand/supply imbalance in
the sector (positive pricing implications) and view this as a positive for fully
funded incumbents. Our top picks are EQIX and SDXC.
• See low visibility as a risk to managed services and expect further share
price volatility: We remain cautious on managed services providers as we
expect upside will be limited by a decline in IT spending in ’09 vs. ’08. Managed
services deals represent a greater overall portion of a customer’s total IT spend
and as a result we expect enterprises will push out the deployment of new
applications and narrow the scope of existing implementations. We also see a
risk for pricing to come under pressure at the low-end of the market (SMB
focused operators) and note that there is little visibility into uptake of services.
Positively, we believe the majority of these risks are priced into the names at
current valuations. Our top pick within the group is PGI.
• Expect continued deterioration in CDN fundamentals: We believe that an
increasingly fierce competitive environment will continue to drive relentless price
erosion in the CDN marketplace (estimate declines of 35%+ on large deals) and
remain wary of incumbent operators. We also note that a tough economy and
lower funding could lead to some moderation in rich media traffic volume growth
(rationalization of emerging online video businesses) and believe this presents
an additional risk. We are most cautious on incumbent CDN AKAM.
• Weak consumer poses a clear risk to web services operators: With the
consumer showing evident weakness and trends in e-commerce following suit,
we believe ’09 will be a challenging year for web services providers. Although
LQDT could benefit from some counter-cyclicality in the reverse supply chain, we
believe both GSIC and DRIV will see limited top-line growth and do not believe
the companies’ cost structures are in line with slower growth. We are most
cautious on DRIV and are downgrading the shares to Underperform from
Perform in conjunction with this report.
When assessing the sector, we highlight that pricing power is likely a more telling sign of a
company’s fundamental position than its balance sheet, especially amid today’s persistent
concerns of deflation. Although the sector as a whole is generally in a solid position from a
balance sheet perspective, we note that investors may be inclined to hide out in names
with large stores of cash (such as AKAM) as businesses across the economy clearly face
challenging near-term debt refinancing conditions. Nonetheless, when the credit markets
do heal, we expect moderately leveraged names will see the greatest benefit from a
valuation standpoint. With moderately leveraged balance sheets, no significant near-term
debt expirations and excellent pricing power, we believe the neutral data centers are best
positioned for upside in ’09.

In summary, we remain selective on the group, particularly in content delivery services,
where increased competition and a weakening consumer (lower e-commerce contribution)
pose clear risks to the industry. Instead, we continue to favor (1) neutral data center
names, as this group continues to experience solid demand and minimal supply growth;
(2) select managed services names (top pick is PGI), where compelling valuation offers an
attractive entry point into a defensive space that should benefit from the “webification” of
business processes and increased IT outsourcing; and (3) emerging content delivery
providers, as we view these “challengers” as the share gainers.
We also remind investors that we do not believe the sector meltdown following the dotcom
bubble is a good proxy for today’s market environment. In the years following the bubble,
restructuring has included a number of mergers and bankruptcies and massive
divestitures. Importantly, these events have helped to stabilize prices, control new supply
and improve the overall efficiency of the industry. The two segments of the market that
have restructured the most, data centers and managed service providers, represent ~54%
of Enhanced Data Services sector revenues and have the potential to grow EBITDA in the
20% range combined for the next three years. In contrast, the CDN space remains under
pricing pressure and we expect trends to worsen over the next couple of years.
In the aggregate, we look for the ED Services group to grow revenues by 5% in ’09 (from
$7.0 billion to $7.4 billion), distributed as follows: 21% growth in neutral data centers, 7%
growth in managed services, 4% growth in CDN and (5%) growth in web services. We
expect profitability trends (adj. EBITDA) will highlight the positive operating leverage in the
businesses with strong fundamentals and negative operating leverage in the businesses
exposed to decelerating volume growth, estimating 6% growth for the sector as a whole,
distributed as follows: 23% growth in neutral data centers, 11% growth in managed
services, (2%) growth in CDN and (14%) growth in web services. We also expect capital
intensity to come down markedly across the sector in ’09 and believe investors will
welcome the industry’s transition toward positive FCF generation. See Exhibit 5.
Our long-term thesis on the sector remains intact. We continue to prefer business models
that are more horizontally focused and that, at least initially, create win-win environments
for companies at other segments of the market. In this segment, we prefer neutral data
centers, platform neutral managed services providers and emerging content distribution
providers. Our top picks are EQIX, SDXC, and PGI, which are trading at a discount to their
historical valuation levels and projected growth rates. We remain particularly wary of
AKAM and DRIV, as our work suggests that these names are more susceptible to
negative estimate revisions and disappointing 2009 performance.

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