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More Demand for Equinix’s IBX Data Centers

Equinix (EQIX) is company which provides network-neutral data centers and internet exchange services for enterprises, content companies, systems integrators and network service providers. Headquartered in Foster City, Calif., it also works with two regional headquarters in London and Singapore. Equinix connects more than 4,500 companies to customers and partners inside de world’s most networked data centers. Customers can directly interconnect critical traffic exchange requirements through the company’s 90+ International Business Exchanges (IBX), which are data centers spread across 31 strategic markets across the world. Some Equinix big customers such as AT&T (T), Verizone Communications, Inc. (VZ), Spring Corporation (S), Comcast Corporation (CCV), AOL Inc. (AOL) or Google, Corp. (GOOG), have their own data centers but still rely on Equinix’ IBX centers for their critical inter-connection relationships. Recently, the company has decided to register itself as a Real Estate Investment Trust (REIT), providing important tax benefit which will allow Equinix to distribute a significant portion of profit as dividends, enhancing shareholders.

Its business model is a recurring revenue model comprising three segments: Co-Location, Interconnection and Managed IT Infrastructure services. Co-location services segment is the largest revenue generator, and provides customers a place for their equipment in Equinix’s shared or private cabinets, as well as power circuits customized for the power requirements of customers. Through this segment it also provides IBXflex, a service which allows customers to install disaster recovery and mission-critical operations, personnel and equipment on-site at IBX centers. Interconnection services segment comprises physical crossconnect/ direct interconnections, Equinix Internet Core Exchange, Equinix Exchange, Equinix IBXLink and Internet connectivity services, allowing customers to exchange data both with the service provider and directly with each other. One-to-one interconnections use direct cross-connects, while the one-to-many interconnections use the company's peering services through Equinix Internet Core Exchange. Through Managed IT infrastructure Services the company offers telecom services, Smart Hands services –which gives customers access to its IBX center staff-, Equinix direct –allowing customers to manage multiple network connections over a single interface-, as well as Mail Services and Command centers. Equinix also reports revenues from non-recurring services, such as professional services and installation services.

Results for fourth-quarter 2013 were in line with analysts’ estimations, with earnings of $1.13 per share and total revenue of $564.7 million, up 11.6% year over year. Equinix witnessed decent revenue growth across all three geographic regions, increasing year over year 9.8%, for the Americas, 23.4% for EMEA and 2.3% for Asia-Pacific.

The Company and the expansive demand

Indeed over the past few years the demand for Network-Neutral access points has increased, offering companies such as Equinix important growth opportunities. Peering through NAPs is less used these days; as the traffic volume increases, NAPs are unable to handle the surge of data, resulting in the loss of neutrality. To meet this global need, Equinix is expanding its IBX data center footprint. It has created a high network density with a vertically focused approach, which will continue to support demand.

This critical mass of customers and network effect within its IBX centers has boosted the company’s revenues. Some of its services such as Equinix Exchange and Equinix Internet Core Exchange significantly reduce the cost of critical transit, peering and traffic exchange operations by eliminating the costs of private peering or local loops. This has allowed the company to build a loyal and blue-chip customer base of over 4000 firms. To cope with increased demand Equinix has made several acquisitions to expand its data center capacity. Equinix acquired during 2012 six data centers and a disaster recovery center from Asia Tone, expanding its footprint across the Asia-Pacific area. It also acquired ancotel GmbH, Frankfurt-based data center operator, and a majority stake in ALOG Data Centers of Brazil S.A.

Recently, Equinix announced a partnership to bring Microsoft Corp. (MSFT) Azure ExpressRout to 16 global markets inside Equinix IBX data centers, enabling customers to directly connect to Azure in Equinix IBX data centers across five continents. “Businesses require low-latency and highly reliable connectivity for distributed applications that are increasingly being delivered via the hybrid cloud model,” Melanie Posey, research vice president at IDC, said; “With Microsoft Azure ExpressRoute, Equinix and Microsoft are enabling high-performance hybrid cloud on a global basis.”

Competitors

The competition is presented mainly through internet data centers operated by established communications carriers such as Verizon Communications Inc. (VZ), Level 3 Communications Inc. (LVLT), Qwest Corp. (CTQ), Nippon Telegraph and Telephone Corporation (NTT) and SAVVIS among others, as well as from traditional co-location providers, including local phone companies, long distance phone companies, Internet services providers and Web-hosting facilities. This competition is intense, and existing players are developing new products to cope with the increased demand for data exchange services and resorting to aggressive pricing policies, introducing pricing pressure for Equinix. Moreover, the fact that Equinix has long sales cycles might have a negative impact on the business, as customer’s decision to license cabinet space and purchase additional services involves a significant commitment of resources. Customers are every day more unable to accurately forecast their future business plans and delaying their purchase decision, stretching the sales cycle.

Still Equinix is in a good position within the market and is moreover starting to develop a network effect, accelerating the development of real time infrastructure in new industries, becoming a hub for finance and advertising, providing companies the ability to host their computers, connect with each other, and take advantage of other services. Equinix is trying to productize a new architecture, with proximity co-location to support an innovation like flash trading or advertising exchanges.

Final Thoughts

The company has been performing in order with estimations, with revenues and earnings relatively in line. The surge on revenues on a year over year basis was driven by the increased demand for Equinix’s data centers, across all geographies and segments. The REIT conversion is expected to provide a more efficient handling of taxation, and allow the company to distribute dividends, enhancing shareholders. However, despite its growing revenue, it underperformed as compared with the industry average of 16.1%. Another thing that calls analysts attention is the company’s debt level. Its current debt-to-equity ratio of 1.69 is high compared to its industry peers, suggesting Equinix should work on reducing it. Nevertheless, the strong demand and the new alliances are expected to be growth catalysts.

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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