In the Internet age, server farms and data centers have
sprawled across the globe to serve millions of customers.
However, it's rare to find a global company offering premium
locations and providing accessibility to many carriers all in one
place.
Equinix (
EQIX
) is one of the few.
The Silicon Valley firm supplies the physical space as well as
power, cooling and access to high-speed Internet lines to more
than 4,500 clients worldwide.
"They don't own any IT equipment," said Todd Weller, managing
director of equity research at Stifel Nicolaus. "They don't take
any responsibility for managing or maintaining that IT equipment.
That's all done by the customers who are going in and out of
Equinix's data center. It really is about the
infrastructure."
Primo Real Estate
While many companies build their own server farms, often
located in remote areas, they use Equinix because of the fast and
easy interconnectivity they can have with other providers in
prime locations around the world. Equinix calls it its
ecosystem.
Among its clients areAmazon (
AMZN
),Apple (
AAPL
),AT&T (
T
),Facebook (
FB
) andNokia (NOK).
"The reason customers go with Equinix is because within
Equinix's data centers, there are lots of carriers and network
providers. They go there and they pay a premium because they
value being able to connect with all these different networks and
service providers," Weller said.
Amazon builds most of its own data centers. But Amazon Web
Services, which is Amazon's cloud computing service, uses points
of presence and infrastructure inside Equinix.
"They have on-ramps to their cloud in various Equinix data
centers so that customers within Equinix can get onto Amazon in a
more secure, faster fashion," Weller said.
Another advantage for companies is that the data centers
provide a neutral venue of exchange for various service
providers.
One of the strongest areas of growth for Equinix has been the
financial services sector, amounting to 25% of its revenue in the
last quarter.
"Financial services had a record bookings quarter, driven in
part by electronic trading deployments in key cities around the
globe. Today, over 75 exchanges and trading platforms are part of
this driving ecosystem," said Equinix CEO Stephen Smith during
the third-quarter earnings conference call.
The company won new contracts with the New York Stock Exchange
and the Russian Stock Exchange. It also expanded its footprint in
Shanghai, Hong Kong, Sydney and Singapore.
"Our customers recognize the value gained by being adjacent to
key customers and vendors and a wide choice of networks that
connect them to end points around the globe," Smith said. "New
market participants are also driving growth in this vertical, as
new global regulations will require over-the-counter derivatives
to move onto electronic trading platforms."
Another area of expansion is in the networking space. Network
providers have been pairing traffic and establishing
cross-connects between mobile ecosystem members while expanding
network density internationally. Several major providers added
their main fiber routes directly into Equinix's London data
centers.
Equinix generates about 60% of its revenue from the Americas,
23% from Europe and 17% from Asia-Pacific. The Asian market
experienced the fastest growth, with revenue jumping 25%
year-over-year during the last quarter. The company expanded its
position in China thanks to its acquisition of Asia Tone as well
as opening a new data center in Shanghai.
"They really are the only global provider of carrier-neutral
data-center services," Weller said. "The secular drivers, (such
as the) growth of Internet, cloud computing, mobile Internet, all
that stuff is global in nature.
"If you talk to their competitors, they will tell you that
Equinix has a big advantage when it comes to a company with
global requirements that wants to go to one provider."
The U.S. is a more mature market, while Europe is the
second-fastest-growing zone after Asia.
"It's very important for the company to grow global-scale land
reach," said Smith during a recent industry conference.
"We're working on a global implementation of a process
redesign, streamlining how we do everything in the company," he
said. "We're basically taking all the acquisitions we've done
over the last 13 years and designing an end-to-end process to
make it simple for customers to get quotes from us, get pricing
from us, get contracts from us, so we can collect cash at the end
of the day."
The company has started deploying this project this year and
will do the remainder in 2014.
Going REIT
But while acquisitions allow the company to add new countries
or areas, 60% to 70% of Equinix's growth comes from their
existing customers.
"I would consider acquisitions to be incremental to growth,
but it's definitely more of an organic growth story," Weller
said.
Building out data centers is a very capital-intensive task.
That's also one of the reasons why Equinix hasn't been able to
achieve positive free cash flow in prior periods. However, the
company says it plans to be free-cash-flow positive in 2013.
Equinix also announced late last year that it's pursuing
avenues to convert to a real estate investment trust, or REIT,
status. It expects that to happen in 2015.
Having the REIT status will bring significant tax advantages,
but the company is also required to pay out nearly all of its
income as dividends to shareholders. This prospect is one of the
contributing factors to Equinix's strong share-price run-up in
recent months.