Archive for July, 2010

The Data Center Market is looking strong; recent quarter results

Thursday, July 29th, 2010

It is quarterly reporting season for data center companies right now, and many recently released their quarterly reports and all are looking very good. For example, Akami Technologies hit at the top end of their revenue guidance and added 88 net customers, well ahead of most analyst estimates. They added 7,500 servers in the quarter, one of the largest quarterly server adds yet, preparing for future growth. They also added to their sales force, again preparing for future growth. They also reported a gross margin of 71%…wow! (Even though a bit lower than forecasts.)

Savvis also beat quarterly revenue forecasts, seemingly helped by their acquisition of Fusepoint, which closed in June. This acquisition opened up the Canadian market for Savvis, which the Canadian market has been economically very strong and with data centers over the last few years. Over half of the new, greenfield data center site selections I have completed over the last 12 months and almost as much of the new data center designs I have worked on over the last 12-months were for data center projects in Canada. I’ve been saying for a few years now that Canada is a fantastic place to locate data centers with low-cost energy and cooler climates. However, network connectivity and more importantly, taxes, can be a challenge for some corporate customers. All of the data center projects in Canada I worked in the last 12-months were either Canadian-based companies or quasi-government or educational organizations. I’m now quite versed in great locations for data centers across Canada and working with their utilities and government entities. Back to Savvis. I expect we’ll see higher growth in Canada now from Savvis and likely future expansions there as well, not just for Savvis, but also others. Churn was lower than expected at 1.3% and Savvis added growth from the financial services sector, probably mostly driven by the partnership with Thomson Reuters and also new capacity additions in some key markets, which should position them to grow well over the next couple of years in what I believe will be a supply-constrained data center market. Cloud services, which Savvis is going after hard, also grew by 25% for the quarter. I believe that new growth in the financial services sector can be an indicator of a returning/growing economy, as when financial services ramp up, people are investing, and investment fuels economic growth. Secondly, I believe the growth of cloud services, being apparent in Savvis’ quarterly results, is an indicator of growth in this industry segment that we’ll see across the data center industry: cloud will grow. As more people realize the benefits, convert applications and systems and processes to cloud, cloud offerings, services and products will grow to support it. It seems that internal and external cloud will continue to grow and become a standard data center household tool for all data center users. Rackspace’s quarterly results will be released shortly. I believe their results will be telling of the cloud computing space as well, since I see them as the number two provider of cloud to Amazon.

On to the big fish in data center co-location, Equinix. Similar results: revenue was ahead of guidance and consensus. Switch & Data acquisition finalized, ahead of schedule, adding much needed capacity especially in key markets but more importantly, securing a network-neutral co-location company, of which Equinix now has very limited large, network-neutral competitors, reducing network-neutral competition and helping Equinix secure top position as the place to peer and connect to multiple networks. This “eco-system” of networking peering allows for Equinix to continue being the place to connect to various networks and peering partners. When I was with Google and Yahoo, we co-located with Equinix for peering and network connectivity (this is well known so I’m not divulging any secrets here), so Equinix gets to boast big brand marquee names as customers even though in most cases they are small revenue customers (we’d only locate a few racks for peering, network and caching servers). Many enterprises do the same, but often choose to locate large groups of racks (backend functionality) at their own data centers or lower cost wholesale data centers. I contracted this mixed-portfolio approach while with my past employers and also recommend it for many large enterprises, although each solution is unique to the company needs. Another interesting point about Equinix is that they saw significant growth in Europe. It appears that my office neighbor when I was consulting to Equinix, recently moved to Europe to run operations there and is doing a great job. Another interesting point is that Equinix is reporting 78% cabinet utilization in the US, 70% in Europe and 65% of Switch & Data’s; that indicates that Equinix will need to begin adding more capacity again, as they have been recently in the US.

This is only a sampling of data center quarterly reports. I’ll try to add more over time. These are only my opinions and market outlook and not investment advice. All figures reported are from publically available earnings reports.