How Equinix Decides When to Build

How do fast-growing service providers decide when they need to build new data centers? This is one of the most critical questions facing data centers companies. Building a new data center requires extensive capital - often $100 million or more - and getting the timing right is crucial. In a recent earnings call, Equinix CEO Steve Smith described the process the colocation provider employs to evaluate new builds.

"Each quarter, we compile a fill rate analysis of all of our IBXs, reviewing inventory, bookings and projected demand for that particular region," Smith told securities analysts. "The decision to proceed with an expansion has to pass three internal gates, which include a regional review, a corporate-level review that includes both the CEO and CFO and then finally, a Board of Directors Real Estate committee approval. Considerations include the analysis of the economic returns, competitive landscape, high clients, bookings, pricing, current and projected fill rates, as well as customer demand. Our goal is to bring on additional capacity just in time before we run out of inventory in an IBX upon market, assuming it meets our returns target."

How have those investments worked out? Equinix has spent $1.6 billion to build 21 data centers in the United States. Those facilities generate about $670 million a year in revenue, Smith said, with an average of 75 percent cash gross profit margin, with ongoing maintenance costs of less than 3 percent of revenue. "This means we are generating $500 million in annual cash gross profit from these assets, generating an unlevered cash on cash return on investment of 32 percent," said Smith. "We are very pleased our investments continue to track with our targeted returns range."