Equinix Earnings: Bullish for the Sector

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CEO Steve Smith said Equinix has a full sales pipeline and is running out of data center space in key markets. To address this looming imbalance, the company has acquired a large data center in Frankfurt and will add additional space at its huge New Jersey data center.

Perhaps more importantly, there was a shift in tone in the comments from Equinix executives. "We've begun to think about being more opportunistic in the second half of 2009 and into 2010," said Equinix President and CEO Steve Smith, who noted that Equinix recently raised $314 million and the "future capacity constraints we expect to face from accelerating fill rates in key markets."

Translation: Equinix is flush with cash and ready to build again. It will likely take its time to unveil new projects in its key business hubs, announcing new projects gradually to avoid spooking investors who may be concerned about capital expenditures. Equinix said it may even enter new geographic markets. But the company's leadership clearly believes that the current supply-demand imbalance works strongly in their favor. "We see a great opportunity to extend our market leadership," said Smith.

Here are the highlights from the Equinix conference call:

Frankfurt Expansion: The former Exodus data center facility was described as a "partially-distressed" acquisition, with Equinix paying $30 million for a 130,000 square foot data center, with plans to invest another $10 million for "Equinzation" upgrades. The company has already lined up an anchor tenant for the space, which was described as a "blue chip, big brand name customer."

More Expansion in the Pipeline: Equinix is "actively reviewing expansion decisions to keep pace with the customer demand given the lead time to build new data centers," said chief financial officer Keith Taylor said. "It's fair to say that we think we’re going to be constrained in some of the big U.S. markets. Silicon Valley is the one that comes to mind right away and then there’s of course the success that we’re having in DC. We’re out of capacity in Dallas, we’re building of course in LA right now and, we’re going to build in New York and Chicago. So I feel pretty good about what we are doing, but there’s a number of unannounced projects."

Financial Services is Investing in Colo: After the meltdown in the financial services sector, it was unclear whether Wall Street firms would continue to invest in data center infrastructure and services. "The financial services vertical has had the highest growth for us," Smith said yesterday. That growth is driven by continued investment in low-latency trading operations, which require high-speed interconnectivity and are accounting for a growing percentage of trading on Wall Street. The demand from the financial sector is clearly seen in Equinix' expansion map, where it has announced expansions in three key financial trading hubs - Chicago, New York and Frankfurt - in the last week. Of particular note is the fill rate in the Phase II expansion space at the Equinix NY4 facility in Secaucus, which opened in May and is 60 percent booked.

There are Fewer Distressed Properties Than Expected: If the experience at Equinix is any reflection, there's no huge fire sale of data center projects that have been stalled by the credit crunch. "Late last year, we thought we might see more partially distressed or fully distressed properties," Smith told analysts. "To be very honest with you, we’ve seen very few. We haven’t looked at as many as we thought, and it's certainly nowhere near like it was seven years ago. We don’t expect to see a lot more distressed properties in the second half of the year."

This suggests that companies with unfinished data center properties are hunkering down and trying to ride out the downturn in hopes of resurrecting the projects once their access to capital improves. The tightening supply/demand situation provides plenty of motivation for players with projects in high-demand markets to persevere - which could mean a data center building boom once the credit crunch eases.