Posts Tagged ‘Equinix’

Is Digital Realty finally fighting to win again?

Friday, May 27th, 2016

Digital Realty scores a huge win by procuring the eight Equinix data centers located throughout Europe that Equinix was required to sell. This is a large cash influx for Equinix to grow into new markets, although I very much doubt that Equinix will grow into new markets and instead expand in markets that have been successful for them, only because this has been the same song they have repeated since they wrote it. Doing so will continue to limit Equinix’s growth and market share. I hope that Equinix has up its sleeve than the same song that is getting less airplay to the new hits getting more radio time than its classic approach.

However, the real surprise here is in this announcement in this Data Center Knowledge article is that Digital Realty may very well be back in the driver’s seat of its growth and acting like the leader it was and certainly can be. After years of Digital Realty standing by, collecting modest incremental revenue gains with decreasing margins, and giving up market share by not expanding into new markets, existing markets or adding new products, Digital Realty has been going thru a transformation and getting back on its feet. It’s like a prized fighter in a match getting knocked down over and over and then, finally getting up and punching back!

Digital Realty became invigorated again after Bill Stein took the helm, and it was at a tough time so it took Bill and team some time to figure out their options and growth paths. One big win was the acquisition of Telx. Another was adding cloud connections and products. And a third has been offering smaller retail colocation with services. This last one came first but took some time to formulate since it was competing with some of its customers and a very new set of services was needed to support this customer class, as well as needing to remove the minimum buy in of about 1 MW of capacity as it had always been for the first 10 years at Digital Realty.

I came along as a industry strategy consultant right after Bill Stein stepped into the CEO seat. He and I spoke my first week on the job for Digital, just a few months after he took the driver’s seat, and he and I had a great conversation about ideas in which the company could grow. As a past customer and industry veteran, I gave him my thoughts and he used my exact ideas and literally verbatim said them on the next quarterly earnings call a few days later. It was at this time that I knew he was serious about changing Digital Realty so that it could grow and expand unlike it had ever done before.

Over the next year or so, I helped to put into place with the great Digital Realty team many changes, from revising the website, focusing on adding different customers and developing new products, acquiring Telx, training and invigorating the sales team, developing cloud platforms and connections, and responding to customers’ unique needs that were different than anything Digital Realty had considered before. Digital Realty made great strides but was still adjusting to changes and a bit uncertain of the best path forward. Nonetheless, during my tenure at Digital Realty we made great advancements in all of these areas that were adding to the bottom and gradually changing the entrenched decade out of date ways of doing their business.

One of the areas in which I had made suggestions and growth changes was a continued expansion of interconnection hubs. We all know that Equinix is the Queen of interconnection hubs–they have the crown jewels of the industry. However, if Equinix is the Queen, Digital Realty is the King of the largest fleet of wholesale data centers with many of the largest growth customers in the world. So by interconnecting this data center fleet, and expanding its reach, Digital Realty is enabling growth with new customer connections and interest, as well as recreating some of the crown jewels that were once almost entirely controlled by Equinix.

It is the value of these European interconnection hubs from this acquisition that will garner the most value over time. Yes, these data centers are good data centers. Yes, they are in markets that Digital Realty wants to get into or can use some additional capacity in, and yes, the revenue from these data centers will be fantastic accretive revenue for Digital Realty and even more importantly, at a higher margin than Digital Realty’s norm. And yet, even more importantly will be the addition of many new logos to the Digital Realty customer roster. Yet, most important than all of these great facets of this acquisition will be the network interconnections that will propel Digital Realty to a much greater market position than it’s ever had in Europe.

And if Digital Realty can parley the lessons learned from these eight seemingly simple data centers about network interconnectivity, the customer value of those, and the global reach that these network connections can expand for Digital Realty, I believe that Digital Realty just might be back in the driver’s seat of the data center industry once again, collecting more crown jewels for itself but even more importantly, creating them, revenue and margin growth and adding not just shareholder value, but most importantly over time, customer value. I look forward to seeing how this will play out over the next several years.

Asia – the Wild, Wild West of Opportunity

Thursday, July 11th, 2013

As I led Global Data Center Strategy and Development for Yahoo!—a position that I immensely enjoyed and would love to do again—I developed, sought out and negotiated data center capacity in over 20 counties. And of all the regions, Asia was by far the most challenging to find large blocks of good quality data center capacity. I spent much time looking for data center capacity to lease in Hong Kong, Taiwan, Singapore, Japan, Korea, and India. (China was a separate entity.) I have taken countless trips to Asia since 2004, and during my tenure at Yahoo!, I traveled to Asia every month (as well as elsewhere).

Due to this limited supply of high-quality data center capacity, I was willing to take down futures on good quality data centers to be built in Asia, especially those with network neutral connectivity, which can be difficult to find in many Asian countries due to limited access to cross-country networks except by incumbent network providers. My counterparts at Google and I were almost always rushing to get into the available data centers in these regions before each other, so I was always so surprised that the US data center providers were not rushing to build strategic capacity in Asia to take advantage of these business opportunities.

Although data center capacity in Asia has been continually added faster than probably any other global region, demand still persists for good-quality, network-neutral data centers throughout Asia. This is evidenced by correlation to network growth mentioned in this statement about Equinix expanding in Osaka: “Osaka is Japan’s second largest economy after Tokyo and saw internet traffic grow a staggering 68 percent and bandwidth increase at a compound annual growth rate (CAGR) of 56 percent from 2008 to 2012 rivaling Tokyo.”

In large, mature and well-developed markets such as Osaka, intrinsic organic market demand doesn’t grow by 56% CAGR, so this indicates to me that there is likely unmeant demand finally being absorbed by new capacity. I believe that the same is true for other recent data center expansions in Asia by Equinix, Digital Realty Trust, and others.

Other locations, particularly Brazil and Mexico, have also been seeing tremendous growth that has been fairly unmeant by high-quality US data center providers. This has also been a challenge for other global locations. So even though US and non-US data center providers have been adding capacity and finally expanding into new global markets, it isn’t enough to have met and continue to meet new demand in these non-US markets.

It’s well beyond time for US data center providers to change their US-centric focus on US locations and take advantages of the many opportunities outside of the US, which can not only provide excellent revenue and margin growth, but also benefits of customer retention and new customer acquisitions, as well as network interconnectivity and market share dominance. All of these being immensely valuable in a much more competitive and global marketplace than it was even just a year ago. It’s time to smartly expand globally to gain many great advantages and cease the ultra-conservative approach that misses market share, revenue and margin growth opportunities for high-quality data center providers.

I hope that I can help guide some of these providers with these new opportunities and also the end-users find the best providers in these growing data center locations. Growth opportunities are nearly boundless in this global market. Now get out there and grow!

Equinix has a Bad Market Day

Friday, October 8th, 2010

Equinix had a bad day Tues, with stock price dropping by about a 25% in one day and not recovering since. This dramatic price drop also affected the stock value of many prominent public data center companies or data center centric companies. The Equinix price drop was created from a revenue warning from Equinix and a lawsuit filing questioning churn and revenue forecasts. The market is clearly jittery about any uncertainty in the revenue filings and forward expectations of margin and revenue for what has been a very robust company and market segment. These questions have hurt all companies in this segment. My analysis, and this is purely my analysis and opinion as an industry person, not a recommendation or investment professional report.

Equinix has always reported churn to be very low and that it’s customers have a certain stickiness due to its collection of network providers at each site and the group of core customers attracted to be in Equinix for peering with each other. And while I have been saying for years that fiber is ubiquitous, adding insignificant dollars to large data center projects to bring fiber to even remote sites, as a past large customer of Equinix, I can attest to the value of these peering relationships and network options. However, while there is great value in these network connections, they can be accomplished with little equipment, a rack or two. Meanwhile, the rest of the customer’s servers are located in a lower cost wholesale or internal data center (I’m referring to large users). And as networking technologies and equipment improve and shrinks in size to accomplish the same number of connections, “network” customers of Equinix need fewer racks for these networking connections. A past 2-4 rack requirement is now 1-2 racks, so churn is not loss of customer but a decrease in the number of racks. Meanwhile, that customer may add more cross-connects to peer with more Equinix customers in the same data center, further entrenching the “network” community that is there to peer with each other. And each of these cross connects is fairly low monthly recurring revenue (MRR) yet pure margin, so Equinix maintains high margin even if total MRR declines slightly over time. Overall, a good business model that retains high margins even if revenue falls slightly.

The challenge for Equinix is to grow MRR as customer equipment shrinks, since Equinix sells mostly space in a power driven world. Also wholesale providers are selling to customers with 20+ racks instead of what was the minimum buy in at about 100 racks. So the wholesale and other data center providers are closing in on the smaller rack customers that are core to Equinix while Equinix has not moved up in size to competitively serve the larger rack customers, those with over 25+ racks, as the wholesale providers serve those customers at significantly lower costs. As large rack customers of Equinix migrate to wholesale providers, they keep up to a few racks to maintain networking connections with high margin but Equinix looses market share and larger revenue customers, essentially driving Equinix to their core business and core high margin customers with a few racks and lots of cross connects, exactly what they want purging the large customers with dozens of racks at a lower MRR per rack. So while rack churn sets in customer stickiness remains. Summary point: Network is ubiquitous; most don’t need 20+ carrier connections; those that do keep a networking rack or two for peering and networking connectivity and maybe caching servers; rest of racks move to lower cost centers

Separately, cloud providers continue to move in to Equinix, an excellent growing customer segment for Equinix. But I predict that as these providers get large in the number of racks, where it becomes lower cost to relocate to a wholesale or other lower cost provider, they will. I used to work for Exodus Communications who started the co-location market and I also ran a data center co-location company several years ago, and as a past large customer of Equinix, DRT, DFT and many others, and also ran data center operations for one very large Internet play and once very large software provider, so I am familiar with the challenges of moving racks from one location to another. This challenge adds to the stickiness of customers and limits churn. But as customers grow and add new servers, customers can add new servers in new locations via cloud and with the help of virtualization and quickly have them virtually replace servers else where, making transitioning from one data center to another a much easier task, whereby primary servers can change from one data center location to another, and then be physically taken offline, making data center transitions much easier than before. This is especially true as more and more folks do not rely on the one data center basket for all servers, and instead, of multiple, geographically diverse data centers that load balance and fail over to each other in real time.

A couple of final points. I like Equinix; I believe they have an excellent product and a very high margin business. While being very focused to retain margins they have missed what I believe are revenue growth opportunities in booming Asia and with larger rack customers albeit at lower margin. Also, the intense focus on networking hubs has forced them to have data centers in high power cost markets, which directly and significantly affects COGS while corporate data centers have been moving out of metro areas to rural areas for cost benefits. This brings better fiber to those areas and “known-ness” to those areas as we see with data center bunching, for better of for worse in places like Central Washington, Utah, Reno, North Carolina, etc. Equinix is limited by their focus on network and high margin to metro areas, again further limited revenue growth and having a higher impact from high power costs and market share loss to those moving to lower power cost centers. This will help them retain margins while likely loosing market share, so I see Equinix’s value in high margin with less revenue growth—a result that should be valued but we’ll see what transpires over time, as many investors have often been more focused on revenue growth. Let’s hope all data center stocks are not devalued and that revenue forecasts are accurate as possible to maintain the proper value of these data center companies.

You can read more via these fine articles here and here:

Also, be sure to register for the SVLG Data Center Efficiency Summit on October 14th in San Jose, as registrations are expected to be sold out soon.

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.