Equinix Data Centers Lure Big Clients Like Apple

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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