Equinix: Private Links to Cloud Now Fastest Growing Business Segment

Revenue growth from interconnection services has outpaced the rate of overall revenue growth for Equinix, and providing secure private access to public clouds, such as Amazon Web Services, Microsoft’s Azure or IBM SoftLayer, is the fastest-growing segment of the company’s interconnection business.

While reporting rapid growth in interconnection services revenue and successes in building out a cloud provider ecosystem in its data centers, the company reported a year-over-year drop in earnings per share, missing analyst EPS expectations for the third quarter.

Equinix built its global data center empire by enticing companies to connect to each other’s networks inside its facilities, and its executives now hope that the next stage of growth will come from interconnecting clouds. “The emergence of the cloud ecosystem represents a transformational opportunity,” Equinix CEO Stephen Smith said on the company’s third-quarter earnings call Wednesday afternoon.

Chasing the promise of enterprise cloud

AWS, and later Azure, grew up on individual developers or startup entrepreneurs using their credit cards to stand up cloud compute environments for their applications. Public cloud services gave these developers the ability to deploy big applications without having to buy servers and lease space to house them in data centers like the ones Equinix has built around the world.

Enterprises, however, companies that have the budgets not only to lease colo space but to build and operate their own data centers, have been harder to sell on public cloud services. They like the flexibility and the pay-for-what-you-use billing model, but they’re weary of connecting servers that often hold their crown jewels to Amazon or Microsoft data centers via the public Internet.

Private cloud connection services like AWS Direct Connect or Azure ExpressRoute were designed to address this problem. Through them, colocation providers like Equinix, CoreSite, TelecityGroup, and Datapipe, among others, can link their enterprise customers’ servers to the cloud data centers privately, bypassing the Internet altogether.

In addition to colos, the cloud providers also partner with network carriers, which exponentially increases the amount of data centers around the world that can connect customers to the public clouds privately.

The relationship between colo providers and cloud companies is mutually beneficial. Data centers become more attractive as gateways to the cloud and give cloud providers access to their customer base to sell to. So companies in both camps have been racing to grow the amount of relationships and locations to interconnect in.

Almost immediately after Amazon announced its new data center in the Frankfurt metro, for example, Equinix followed with an announcement that it would offer AWS Direct Connect services to the facility from its data centers in the area.

Microsoft followed its announcement of two new Azure data centers in Australia with an announcement that Equinix and Telstra, the country’s largest telco, would provide the ExpressRoute cloud connection services to the new facilities.

Revenue up, EPS down

The company reported $620.4 million in revenue for the quarter – up 14 percent year over year. Its net income was $42.8 million, and earnings per share were $0.79 – down 4 percent year over year.

Interconnection services contributed 16 percent of the total revenue Equinix reported for the third quarter, although it did not break out how much of that revenue came from private connectivity to cloud providers. Colocation revenue contributed about 80 percent.

Customers in the network services business contributed more than a quarter of the revenue – on par only with revenue contributed by cloud and IT services companies.

Equinix’s third-largest customer segment is financial services (20 percent of revenue in Q3), followed by content and digital media (16 percent), and enterprise customers (11 percent).