Equinix CEO Unveils Aggressive Plan to Court Enterprises

Equinix CEO Steve Smith is gearing up to hunt the widely coveted enterprise market, while investing in mission critical growth in 2016. The Redwood City, California-based company, already the world’s largest data center provider, wants to at least triple its customer base over the next five to 10 years and expects enterprises to comprise most of that growth.

Smith presented on Equinix’s strategy for 2016 at the Citi Internet, Media and Telecom conference earlier this week. He was interviewed by Citi telecom analyst Mike Rollins. Smith's priorities for this year will be integration of TelecityGroup and Bit-isle, continuing to press the Equinix "advantage in the market,” and growing the list of enterprise logos on its customer roster at an unprecedented rate.

Untapped Enterprise Market Huge

The Equinix enterprise customer initiative will be the big emphasis for 2016, and for the foreseeable future. The addressable market is huge. The data center provider is targeting an estimated 350,000 global enterprises. These companies have at least $10 million in annual sales and 500 or more employees.

Another major difference, which Equinix began to realize five years ago, was that it takes a "substantial investment" to help create enterprise demand. This requires investing in a multipronged approach of marketing, sales, lining up channel partners, and creating service offerings.

Smith believes that Equinix is capable of going to 20,000 and even as high as 60,000 enterprise customers over the next five to 10 years. To put that into perspective, after 17 years in business, Equinix has about 6,800 customers; plus it will gain another 2,000 or so from its Telecity acquisition last year, which hasn’t yet closed, and 300 to 400 from the Bit-isle deal.

Meanwhile, it continues to grow its interconnection business, driven mainly by the cloud and core verticals: networks, electronic trading, and digital content. The networks are also upgrading capacity in order to chase after enterprise customers. Essentially, all segments are growing traffic, including "…a push by digital media to move content around the world," Smith said. The biggest example of the last trend is this week’s announcement by Netflix that it has launched its online streaming services in 130 additional countries simultaneously.

Courting enterprises, however, is more difficult than serving Equinix’s traditional customer base, consisting of financial, network, media, and cloud companies. These customers basically knew what they wanted from Equinix, and all Equinix had to do was deliver.

To attract enterprise customers, Equinix is putting in considerable time and effort to generate success stories across a multiplicity of industries which can be used as case studies. Smith said he agreed with the widely held belief that 80 percent of enterprise IT spend is still in-house, which implies that Equinix is fishing in an extremely large and deep ocean of prospects.

Paying for Growth

Equinix is helping fund these efforts by increasing organic revenue growth from 12 percent to 16 percent during 2015. Smith said the outperformance was driven by: 1) an increase in gross bookings during the past three quarters; 2) cloud/enterprise wins; 3) the fact that 80 percent to 85 percent of growth is from the installed customer base; 4) churn that has been at the low end of the anticipated 2-to-2.5-percent range; 5) net bookings getting stronger; and 6) the sales force’s ability to "preserve price." Notably, the lower churn numbers were helped by signing customers with the "right applications," which are more interconnected, global, and mission critical.

During the past 18 months, Equinix has invested in 21 markets, betting on the Big Three Infrastructure-as-a-Service providers: Amazon, Microsoft, and Google. This big bet "…played out as expected," according to Smith. Equinix investments in development behind the cloud switch help customers connect with better security, lower latency, and higher performance.

“There is not a single enterprise customer who doesn't want to connect to at least one of the Big Three," Smith said. The highest demand by enterprise customers is to access Microsoft Office 365, with Azure, Google Apps, and Amazon Web Services all being major magnets. IBM SoftLayer would be number four, followed by VMware, EMC, and Cisco.

Smith sees Software-as-a-Service as being a large source of growth in 2016. Notably, Oracle will be making multiple deployments, and SAP was mentioned as another growing customer, with "…additional cloud players still coming in the door."

Equinix now has 500 cloud providers as part of its cloud exchange. This cloud density serves as a value-add for customers looking to deploy across the public internet, private cloud exchange, and hybrid cloud. It is also a significant competitive moat.

TelecityGroup and EU Updates

In Europe, Equinix expects to end up with 64 IBX data centers after agreeing with regulators to "quarantine" eight data center assets, which will be sold in order to gain EU approval for acquiring Telecity. Smith shared that RBC bank was now onboard to assist with disposition of the eight assets. The EU will have a say in matters like revenue, capacity, and interconnection density resulting from the dispositions. However, Smith said that there was considerable demand for the facilities, and he felt that "…they could be disposed of in a manner which would avoid creating a competitor."

He also mentioned that last year’s annulment of Safe Harbor laws by the European Court of Justice would result in customers having to deploy more servers and storage in Europe. This would be a tailwind similar to the one Equinix enjoyed when regulations were implemented for financial firms involved with high-frequency trading, he said.

REIT Approval and Allocating Capital

When it comes to allocating capital, having been granted REIT status has bumped dividends up to the top of the list, followed by organic and inorganic growth, debt repayment, and buying real estate assets when feasible. The dividend makes share repurchases less likely.

New ecosystems, such as like electronic payments, cloud services, and Big Data – especially data generated by the Internet of Things –will all require investment in 2016. One of the biggest challenges facing Equinix is that a high growth rate and funding innovation require substantial investment, the CEO said.

Meanwhile, the goal of achieving 50 percent EBITDA margin, which has been on the radar screen for many years, will have to be balanced with the investments required to fund the company growth opportunities.

When it comes to growing the dividend in 2016, potential levers include moving more assets from the Equinix TRS, or taxable REIT subsidiaries – including TelecityGroup, Bit-isle, and Brazil assets – over to the Equinix QRS, or qualified REIT subsidiary.

Market Approves

Rollins final question for Smith was: Has the ship sailed on wholesale and retail under one roof? Smith answered candidly, pointing out that the possibility of the biggest retail data center provider (Equinix) and the biggest wholesale provider (Digital Realty) getting together "…got pushed sideways, with the Digital-Telx deal having put it to bed." He also acknowledged that while Equinix and Digital maintain a good relationship, it had become a bit more complex after Telx.

Financial guidance for 2016, and more color regarding the dividend will wait until Equinix’s fourth-quarter 2015 earnings. However, the audience clearly liked what Smith had to say, as the company’s shares popped up to a new 52-week high of $309.13 per share after the Citi presentation.