The CBOE Stock Exchange Moves Its Operations to Equinix's NY Metro Data Center

Includes: CBOE, EQIX
by: Paolo Gorgo

Last week, the Chicago Board Options Exchange (NASDAQ:CBOE), the largest U.S. options exchange and creator of listed options, announced that it was moving its CBOE Stock Exchange (CBSX) operations to the East Coast of the USA:

On Friday, July 1, CBSX will move its trading operations to the East Coast from Chicago and begin trading from the Equinix (NASDAQ:EQIX) NY4 Internet Business Exchange datacenter in Secaucus, NJ. CBSX's move to the NY4 facility will increase execution speed for the majority of CBSX's customers, which are located on the East Coast.

CBOE's market share of total U.S. options industry volume in June was 25.4 % and its average daily volume achieved 4.5 million contracts, up 10 percent from June 2010. C2 and CBOE Futures Exchange (CFE) had their busiest months ever in June, with monthly average daily volume exceeding 200,000 contracts and 50,000 contracts, respectively, for the first time.

These key customers are obviously very important for Equinix, as they represent “magnets” for the whole ecosystem – see a recent press release made by hardware ticker plant provider Exegy, that also announced last week its presence in NY4 via an Exegy ticker plant installed in Essex Radez’s co-location space at Equinix’s facility. Some solid customer wins are key to the domino effect that's one of the beauties of Equinix's business model and there's no doubt, as shown in the slide hereafter, that the company succeeded in bringing the best names in the industry under its umbrella.

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CBOE was already an Equinix customer, but the move strengthens the importance of NY4 as an infrastructure hub for the financial community on the East Coast and gives us the opportunity to review Equinix's success in this vertical in the last few years.

Equinix's NY4 data center, located in Secaucus, opened in November 2007, with the first phase adding about 1,700 cabinets to the company's footprint in the region. Phase two opened in Q2 2009 (1,100 cabinets) and phase three, opened in Q2 2010, added another 1,200 cabinets to the facility's footprint (now the largest data center operated by Equinix globally). In total, Equinix invested in excess of $250 million for the data center, which was supposed, when opened, to have an annual revenue capacity of between $95 million and $110 million. We believe that these data might now be rounded up in excess of the high range indicated by the company a few years ago.

NY5, a new facility located in the surrounding, is planned to open in Q2 2012, with an initial capacity of 2,200 cabinets, for an investment of about $140 million. It should not be forgotten, however, that the recent Switch and Data acquisition added another data center in the region, in North Bergen, with a total capacity of about 1,300 cabinets.

Equinix is the only co-location provider with a physical presence in all top 15 global financial centers. The financial vertical represented about 22% of Equinix's annual sales, globally, at the end of 2010 and it was ranking third in importance, after the Network and Cloud & IT Services verticals, respectively. It should be noted, however, that growth was an impressive 46% Y/Y in 2009, so we wouldn't be surprised to hear that the gap is closing.

Multi-region deployments (i.e. customers expanding their footprint from the US to Europe or Asia, or vice versa) are also growing nicely, with almost 20% of customers deployed in two or more regions (end 2010 data).

Equinix's financial vertical is growing so fast, that its data are somehow “hiding” the full potential returns for the company.

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This slides shows quite well a few metrics which are of great importance to fully understand the financial of the business model. As the company keeps adding new cabinets (and new large expansions), some metrics like monthly recurring revenues might seem to hit a speed bump, while, in reality, it is more about the fact that a cabinet is first sold “naked” (space and a few cross connects), while it keeps adding higher margins cross connects and additional services at a later stage, when the company finally gets the forecasted full returns for its space.

A new expansion usually opens with good bookings, but needs some time before customers are fully deployed (with a complete set of additional services).

For example, if we take the first 8 data centers that Equinix build, we'll find out that revenues keep growing at an interesting rate (8% year-over-year revenue growth in Q1 2011), in spite of the centers being basically full (90% utilization) – a combination of some price increases and mostly additional services sold to the same tenants.

Here is a different view of the improving financials for NY4, seen from a cash gross profit point of view:

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As you may notice, cash gross margins for that single facility jumped from 46% in Q3 2008, to over 74% just two years later, in line with Equinix's targeted performance.

Disclosure: I am long EQIX.

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