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Equinix, Inc. (EQIX): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:

Equinix's second-quarter 2014 results were encouraging as both the top and bottom line increased on a year-over-year basis. Growth across geographies and business segments had a positive impact on revenues. Moreover, the company provided an encouraging guidance. The data center business is thriving across geographies and Equinix is uniquely positioned to capitalize on this opportunity. Consequently, it is planning to further expand its Solution Validation Center at multiple locations in 2014. In addition, the company's proposed REIT conversion is on track. On the other hand, European exposure, industry consolidation and the company's highly leveraged balance sheet is a concern. Thus, we reiterate our Neutral recommendation on the stock.

Overview:

Equinix, Inc. (EQIX) is a global provider of network-neutral data centers and Internet exchange services for enterprises, content companies, systems integrators and network service providers. Incorporated on Jun 22, 1998, Equinix has its U.S. headquarters in Redwood City, CA. The company has two more regional headquarters in London and Singapore. Equinix has a direct sales force and a channel marketing program.

The increased demand for network-neutral access points is an offshoot of exponential growth in Internet usage. As Internet usage rises, the need for an organized approach to network inter-connection to accommodate higher traffic volume also increases. In the past, networks carrying similar traffic volumes would mutually agree to trade traffic at no extra cost to the other party (peering). Government and non-profit organizations have established network access points (NAPs) where these networks could peer. However, the NAPs were unable to handle the surge of data caused by the rapid growth in Internet usage and network owners tried to use the situation to their advantage, which resulted in the loss of neutrality at these NAPs. Some of the larger users attempted to create NAPs of their own, which proved to be too expensive. While the supply side remains constrained, the increasing use of the Internet for commercial and consumer purposes ensures that demand for network-neutral access points continues to increase.

Through its 95+ International Business Exchanges or IBX data centers across 32 strategic markets in the U.S., Europe, Middle East and Africa (EMEA) and the Asia-Pacific, customers can directly inter-connect critical traffic exchange requirements. While some Equinix customers, such as AOL, Google and MSN, build and operate their own data centers for their large infrastructure deployments, these customers rely on Equinix IBX centers for their critical inter-connection relationships. AOL, AT&T, British Telecom, Cable & Wireless, Comcast, Level 3, NTT, Qwest, SingTel, Sprint and Verizon Business are the other big customers.

Equinix's business is based on a recurring revenue model comprising Co-location , Interconnection and Managed IT Infrastructure Services. These services are considered to be recurring, as customers are billed at fixed rates on a recurring basis through the life of the respective contracts, which generally run for one to three years. Approximately half of Equinix's existing customers order new services in any given quarter. Recurring revenues accounted for 95.0% of total 2013 revenue.

Co-location Services This segment (approximately 79.0% of recurring revenues in 2013) includes cabinets, power and IBXflex. Equinix customers can place their equipment in one of the company's shared or private cages (cabinets) or customize their space. It also provides power circuits customized for the power requirements of customers. The IBXflex service allows customers to deploy disaster recovery and mission-critical operations, personnel and equipment on-site at the company's IBX centers. The IBX centers include multiple layers of physical security, scalable cabinet space availability, trained staff on-site round the clock, dedicated areas for customer care and equipment staging.

Interconnection Services This segment (approximately 15.0%) includes physical cross-connect/direct interconnections, Equinix Internet Exchange, Equinix Exchange, Equinix Metro Connect, Internet connectivity services and Ethernet Exchange Services. These services provide scalable, reliable and cost-effective connectivity that allows customers to exchange data with the service provider of their choice or directly with each other. The one-to-one interconnections use direct cross-connects, while the one-to-many interconnections use the company's peering services. In peering, Equinix acts as the relationship broker between parties interconnecting through its IBX centers. The Equinix Internet Exchange is a pre-provisioned interconnection package enabling direct peering between Internet Protocol (IP) backbone networks. Equinix Metro Connect allows customers to seamlessly interconnect between IBXs at capacities up to 10 gigabits per second level. Customers installing equipment in IBX centers generally require IP connectivity or bandwidth services.

Managed IT Infrastructure Services This segment (approximately 6%) offers telecom services including its Professional Services and Smart Hands Services. Telecom specialists trained in equipment installation and cabling are available onsite round the clock. The Smart Hands Service gives customers access to its IBX center staff to perform a variety of tasks, when the customers do not have their own staff on-site. These tasks include equipment rebooting, power cycling, card swiping and emergency equipment replacement. Professional services include on-site services such as installations of customer equipment and cabling as per customer needs.

Equinix generates a nominal amount of recurring rental income from tenants located on its Ashburn campus property, purchased in Oct 2005.

Non-Recurring Revenues comprise professional services, installation services related to initial deployment and customer settlements (fees paid for terminating contracts before expiry). These services are typically billed only upon completion of the installation or performance of services. Non-recurring revenues accounted for 5% of Equinix's total revenue in 2013.

Some of the potential competitors include AT&T, COLT, Level 3, NTT, Qwest, SAVVIS, SingTel, Verizon, Switch and Data, TelecityGroup, AOL, Google and Microsoft, as well as Real Estate Investment Trusts (REITs).

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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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