During its recent analyst day in New York, Equinix's (EQIX) management sounded quite upbeat on the company's long term growth prospects. After a four-fold rise in revenues since 2007, the company is now guiding to reach $3 billion in sales in 2015, almost a double compared to 2011 revenues.
After a quick look at Equinix's past performances, we'll try to break down a few reasons why we believe the company is well positioned to reach this ambitious target.
Solid revenue growth
Over the last few years, revenues at Equinix have grown each quarter at a greater than 20% rate on a Y/Y basis, as resumed in this chart:
Here is a quick look at how a company with just $63 million in sales in 2001 succeeded in exceeding $1.5 billion in revenues in 2011:
Equinix achieved these solid numbers both through organic and inorganic growth, as resumed in this additional chart showing the company's main M&A deals (we decided to exclude from the list the sublease of relatively small distressed data centers in the USA):
As a clarification, we indicated in the latest chart only the cash component which was part of the investment that ST Telemedia made in Equinix back in 2002, as it is quite difficult to estimate the exact value of the assets of both i-STT and Pihana that were merged into Equinix, representing not only a key moment in the company's turnaround, but also the fundaments of Equinix's Asia Pacific presence.
Looking at the company's history in the last few years, it appears that Equinix has made large, strategic acquisitions roughly every two years (IX Europe in 2008, Switch and Data in 2010, ancotel and Asia Tone in 2012), with costs in the $300 million to $700 million range per year, followed by relatively smaller moves targeted at single markets (Virtu to gain access to the Dutch market in Europe in 2009, and ALOG in 2011 to enter the largest South American economy, Brazil).
While history will not necessarily repeat itself, we expect the company to add presence in a few more markets, like India, Korea, Russia or the Middle East in the relatively close future, through acquisitions of existing players that will also contribute to the company's sales.
Why $3 billion in sales in 2015 sounds achievable
Equinix delivered a 25% Y/Y growth in Q1 2012. The company will report earnings today, with the lower end of management's guidance for Q2 2012 targeting an 18% Y/Y revenue increase - assuming the company achieves the lowest level of its own forecast, growth in the first half of 2012 would still exceed 21%.
For the full year of 2012, total revenues are expected to be greater than $1,890.0 million - said in a different way, Equinix expects an 18% Y/Y growth rate for the whole of 2012, in spite of potentially achieving a 21% plus increase in the first half of the year. Add to this the recent acquisitions of ancotel, in Europe, and AsiaTone, which both closed at the beginning of Q3 and will contribute to the company's numbers for almost two full quarters (the companies accomplished combined revenues in excess of $50 million in 2011), and we believe that we can reasonably predict that Equinix will end up delivering a much better than forecasted result for 2012.
This week's earnings will certainly give the company the opportunity to update guidance for 2012 and give more color on its future developments.
As key, large facilities like NY5 in the New York metro area are due to open in a few weeks, we believe that Equinix is very well positioned to keep pace with customer demand and probably even increase its market share in verticals like the financial sector.
Assuming demand for data center services remains decent in the next few years, in order to reach revenues of $3 billion in 2015, and excluding any impact from acquisitions, Equinix should add about 23,000 cabinets to its inventory in the next two years, a number which sounds achievable, especially since the company can count on several phase II or phase III expansions of existing facilities, which are faster and cheaper to bring to market.
[slide from the Equinix analyst meeting 2012]
Nomura Securities recently started Equinix with a $210.00 price target - we believe that the analyst's commentary perfectly describes several reasons why we feel optimistic about Equinix's journey to $3 billion:
Equinix is strongly positioned among peers with what we believe are the most attractive carrier-neutral data center assets. Through acquisitions and organic growth, we believe the company has built the scale and depth to continue taking share in the carrier-neutral data center market. Equinix has some of the world's largest enterprises, carriers and content providers as customers, thus enabling the company to provide connectivity that we believe is unmatched in the industry. Although not fully insulated from broader macro weakness, the defensive nature of the company's revenue model should provide investors an added level of comfort.
As a reminder, most new orders (about 80%) are gained from the installed base, which represents another advantage for companies like Equinix with a strong established customer presence in its facilities.
What could go wrong?
Data center demand remained quite strong throughout the last economic downturns, experiencing double-digit growth rates in most markets. Several studies indicate that the network-neutral segment should remain very healthy for the next few years, in spite of the economic surrounding. Equinix has been able to outperform the competition, and establish itself as the leading data center provider in most of the markets where it has a presence.
The most recent Uptime Institute 2012 survey indicates that data center budgets continue to increase:
When asked to compare 2012 budgets with 2011, 55% of organizations reported a budget increase; versus 52% of respondents who saw 2011 budget increases over 2010. Moreover, 32% of respondents are seeing a budget increase of greater than 10% in 2012. The Uptime Institute survey indicates that compute demands, and the associated rising data center costs and investments, will not be put on hold by economic downturns or market volatility.
Respondents in Asia noted major growth - 55% reported budget increases greater than 10% for the coming year.
Even in the years that followed the 2008 financial industry meltdown, data center construction didn't dramatically slow. According the survey, 80% of respondents have built a new data center or upgraded an existing facility within the past five years.
(slide from the Uptime Institute data center industry survey)
A similar survey from Data Center Dynamics seems to confirm these trends, as well.
In spite of all these positive forecasts, Equinix's results won't be completely insulated from the general economy and sector supply/demand dynamics, and as the company expects to grow the non US$ denominated markets at a higher rate that the USA, exchange rate fluctuations might play a larger role in the company's future.
As underlined at the recent analyst day, just a +/- $0.05 movement in the EUR exchange rate results, today, in a roughly $2 million impact to quarterly revenues. While this might have more of a short term impact on quarterly targets, rather than completely change the company's long term overall targets, we should not rule out the possibility that growth in some markets, in spite of good same currency numbers, gets diluted when reported in US$, making it more difficult to recognize the underlining performance.
While the company described the goal of $3 billion in sales in 2015 as a number achievable on an organic basis only, we remain relatively more conservative and include existing and potential acquisitions into our modeling, to balance any unexpected road bump that might appear on the journey to this ambitious target.