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Equinix - Greener but Too In Debt

April 10, 2014 | About:

Equinix Inc. (EQIX) is a global provider of network-neutral data centers and Internet exchange services. The company has been providing its services to enterprises, content companies, systems integrators and network service providers since 1998. With three headquarters, one in Foster City, Calif., one in London, and other in Singapore, Equinix has a direct sales force and a channel marketing program. Indeed as Internet usage expands, so does the need for an organized approach to network interconnection to accommodate higher traffic volume. Equinix connects more than 4,500 companies directly to their customers and partners inside the world's most networked data centers.

The company’s business has a revenue model which includes three segments: Co-location, Interconnection and Managed IT Infrastructure Services. Customers see fixed rates through contracts lasting for one to three years, and approximately half of Equinix existing customers re-new services. The co-location services segment represented 80% of revenues in 2012 and includes cabinets, power and IBXflex service which allows customers to deploy disaster recovery and mission-critical operations, personnel and equipment on-site at the company's IBX centers. The interconnection services segment, 15% recurring revenues for fiscal 2012, includes physical interconnections, Internet Core Exchange, Equinix Exchange, Equinix IBXLink and Internet connectivity services. Managed IT Infrastructure services segment, contributing with 5% of total revenue, offers different telecom services, such as Professional Services, Smart Hands Services, Equinix Direct, Equinix Mail Service and Equinix Command Center.

Last results for fourth-quarter 2013 were above-estimations, with revenue growth on a year over year basis, driven by a geographical expansion and increased demand for Equinix’s data centers. The recent announcement of a Real Estate Investment Trust (REIT) conversion is likely to benefit the company in terms of tax savings and enhancing shareholders’ wealth. Still, debt is high in comparison to related peers. Furthermore, some analysts think that the European exposure and industry consolidation might represent some setbacks for the company’s future performance.

Increased Demand, Further Expansion

For some time, government and non-profit organizations established network access points (NAPs) where networks carrying similar traffic volumes could peer, agreeing to trade traffic at no extra cost to the other party. But due to the rapid growth of Internet usage, NAPs were unable to handle the increased volume of data and network owners tried to use the situation to their advantage, resulting in the loss of neutrality at these NAPs. Therefore supply is still constrained, and the already increased demand for network-neutral access points continues to rise.

In this order of things, Equinix is trying to meet global need expanding its IBX data center footprint globally. High network density was achieved within its IBX centers, with worldwide presence. Connecting most Internet routes, it has come to enable customers to increase the efficiency of their IT infrastructure while removing complexities associated with infrastructure administration and management. Moreover, the reduction of costs related with critical transit, peering and traffic exchange operations have led to a loyal and blue-chip customer base of over 4000 firms.

Acquiring and Growing

Indeed acquisitions contribute to growth and reflex as well determination in their expansion capacity. Since 2003, Equinix has made various moves growing its data center capacity. In 2011, the firm completed the purchase of a majority stake in ALOG Data Centers of Brazil S.A., which allowed Equinix to gain a leading position within the Latin American market. During 2012 the company acquired six data centers and Hong Kong-based data center and colocation service provider Asia Tone, expanding through the Asia-Pacific area. Furthermore, it acquired ancotel GmbH, a Frankfurt-based data center operator, which added 400 European customers. With these three acquisitions, Equinix achieved a growth of total revenue by 2012.

The importance of acquisitions for Equinix is related to the fact that its business generates a substantial portion of recurring revenues, and most of the cost structures are fixed. But this affects revenues, as fixed cost portion remains unchanged while the variable cost portion increases along with the revenue growth, thus every unit growth in revenues results in lower expenses as a percentage of total revenue. With time, an increased revenue base supported by the expansion of data exchange around the world is likely to make higher revenues carry fewer costs and increase both margins and profitability. In addition, the conversion to (REIT) will benefit the company and allow Equinix to enhance shareholders through dividends while managing taxes more efficiently.

Innovations

Equinix is determined to develop Green Data Center Initiatives and in a recent work entitled “Clicking Green: How Companies Are Creating the Green Internet,” Greenpeace published some results regarding the way in which Internet companies are developing green initiatives and renewable energy to counterweight the potential environmental impact of running the global Internet. Equinix is among these companies, and as the largest data center collocation provider, is considered to be one of the few firms which can make a positive change in designing and running green facilities. The report states, "Equinix has recently taken a big stride in its energy transparency. With plans for a new green web portal, Equinix will provide a snapshot of its energy demand and related greenhouse gas footprint, as well as electricity supply mix at a regional level. That makes Equinix by far the most transparent of the colocation providers." As it continues to expand and build data centers around the world, Equinix has developed sustainability best practices which are increasingly being adopted in new builds.

The company recently announced that company’s CIO Brian Lillie will be taking part in a panel discussion “Content & the Cloud, Transport,” debating how content will travel in the future the way we connect to tomorrow and moreover, that Equinix is venturing into the digital economy.

Bottom Line

It is true that Internet services demand increases every year, but this global expansion implies that competition is likely to grow as well. This strong competition might lead companies to develop more aggressive pricing policies and therefore add considerable pressures to companies such as Equinix. In addition, the consolidation of the telecommunications industry is leading customers to a combination of businesses, which might eventually mean they may require less co-location space, and fewer networks available to choose from.

Indeed Equinix is a growing company with positive scenario ahead, new acquisitions increasing revenue and more customers each year requesting its services. Nevertheless, the combination of an uncertain macroeconomic environment stretching the sales cycle, and instability regarding customers’ future business plans Equinix faces some risks. Its balance sheet is highly leveraged, and the company expects more cash outlays for the REIT conversion. This puts some obstacles regarding the company’s margins, as growing debt burden will affect operating results as interest expense would go up.

Disclosure: Damian Illia holds no position in any of the stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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