Terremark Turns Profitable

Terremark Worldwide Inc. (TMRK - Snapshot Report), a leading global player in the managed IT infrastructure solutions market, reached profitability in the fourth quarter of fiscal 2009, while reported revenue came in below our expectation. Additionally, strong demand for the company’s services, notably from the federal customers, is reflected by record contract bookings in the last quarter.

On May 25, 2009, Terremark announced a $20 million equity investment from VMware, Inc. (VMW - Snapshot Report), a leading provider of managed IT services. Under the agreement terms, VMware will acquire 4 million shares of newly issued common stock of Terremark at $5 per share. This equates to approximately a 5% stake in Terremark’s common stock on a fully diluted basis.

Terremark continues to incur heavy capital expenditure as the company has spent $90 million in fiscal 2009. The company’s ongoing expansion programs are funded by $250 million of debt financing from Credit Suisse Securities and Tennenbaum Capital Partners. Terremark also plans to raise $400 million through private placement of senior secured notes.

We believe that Terremark’s industry-leading product/service portfolio, coupled with a differentiated execution strategy, uniquely positions it to leverage attractive market trends for managed hosting and colocation services. While the company is focused on expanding opportunities for top-tier colocation data center infrastructure, we are concerned with high debt exposure as most of the expansion initiatives are being funded by debt financing.