Equinix, Inc. (EQIX)
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Equinix, Inc. - offering managed co-location services with a unique network
neutral business model, is driving successful growth, with revenues up 58% over last year
Mr. Van Camp graduated from Boston College with
Bachelor of Science degrees in Accounting and Computer Science.
CEOCFOinterviews: Mr. Van Camp, what attracted you to Equinix and what changes did you orchestrate?
Mr. Van Camp: What attracted me originally was the companys opportunity and a unique approach into the outsourced Internet hosting and infrastructure opportunity. Historically, it had always been served by large networking companies, and this was a company that was flying in the face of that, by not having a network and seeing a chance to create a place where its customers could benefit from connecting to multiple networks; was the attractive thing. I was at UUNET at the time, which was Worldcoms Internet services arm, and I understood this space well, so I could see the opportunity. What has largely changed and what really wasnt in the brochure when I signed up, was the market downturn that we all have experienced, and the mistaken belief that the opportunity, whether it was for the Internet co-location and hosting, or the broad Internet opportunity; would materialize at the level everybody thought it would. That was the biggest change that we have been managing effectively through the last three years, and I wont say that it has been easy.
CEOCFOinterviews: Will you give us an overview and explain what Equinix does?
Mr. Van Camp: Equinix provides carrier neutral co-location facilities. We provide a place to safely and securely house web and network infrastructures for companies focused on that opportunity. The value that we bring is that the IBXs as major Internet exchange points house the largest networks that make up the routes of the Internet are installed in our facilities and to exchange network traffic, or peering. This aggregation of networks, and the services they provide, also makes it more cost-effective, and improves network performance, for our content and enterprise customers who also have a presence in the same facility. With 8 of the top 10 content sites now, customers like Electronic Arts, are putting their content of Online Gaming onto the Internet from our co-location facilities. IBM houses a lot of e-business customers in our facilities. Other customers, such as Washington Post or Google, are housing their web infrastructure in our facilities. We manage those infrastructures in an outsourced fashion for them.
CEOCFOinterviews: Is outsourcing increasing?
Mr. Van Camp: Yes, I think outsourcing has been a healthy answer for quite sometime in many areas, particularly in technology. In fact, we just had a significant win with Amazon.com as this is the first time theyve ever outsourced. We continue to see that as being a strong answer. The reality is its more effective to leverage our capital and infrastructure, and expertise, vs. having to create your own in the way you manage your website or your network architecture.
CEOCFOinterviews: Where are your facilities located around the world and why have you chosen those particular areas?
Mr. Van Camp: We are in seven major markets in the United States, and in Asia, we are in Hong Kong, Sydney, Tokyo and Singapore. These markets are nexus points for the interconnection of the networks that make up the Internet. Our centers are often described as key hubs for Internet connectivity. For example, the Electronic Arts website, was originally housed in their own facility and connecting it to the networks via local loops to reach the end-users. Today they are doing it in two of our facilities in the U.S. and connect to these networks directly via cross connects. There are two markets in Asia that will be important to getting their content closer to the gaming users. With our recent acquisitions in Asia, we have provided them a trusted solution there so they can house more of their infrastructure, and by putting closer to their end-users, it will perform in a better fashion..
CEOCFOinterviews: Is Asia a primary focus for you?
Mr. Van Camp: It has become a new focus for us over the past six months. We acquired two companies that were neutral service providers similar to ourselves in Asia at the end of last year; one of them was called PIHANA PACIFIC and the other was i-STT, Singapore Technology Telemedias Hosting Division, in Singapore.. These acquisitions provided us with an Asia Pacific solution..
CEOCFOinterviews: I see that today you have a release out about Telekom Malaysia, is that typical of what you are doing?
Mr. Van Camp: Yes, I think you will see regular releases of new customers that we win. Because we have created these points where these networks aggregate, there is an excellent opportunity for someone like Telekom Malaysia to put their networking infrastructure into our facilities to allow them to better connect to both the network backbones that exist in our facilities, and some of the key content providers that are installed in our facilities. Telekom Malaysia can take its network, bring it into a couple of Equinix facilities, and then inter-connect to major U.S. backbones, such as the AT&Ts, and other major networks, of the world. They can directly connect their end-users to the content providers that are also installed in these facilities such as Yahoo, Google, and MSN."
CEOCFOinterviews: Is linking to content a big factor in the decision to use your services?
Mr. Van Camp: That is a big reason for our business growth. We have seen our interconnection revenues grow over 140% since the same quarter last year.
CEOCFOinterviews: Sprint and Cable and Wireless are exiting the hosting and co-location market; how does that help you?
Mr. Van Camp: The first thing is the statement about what the neutral co-location market opportunity is. We are seeing more of our customers coming to us because they want the opportunity to have a choice of networks and the flexibility to move to additional one, should their existing provider be challenged at a business level. The business assurance of having multiple providers is very important to an Electronic Arts, or any of the customers that we have. That is in strong statement about what is the right answers for the co-location and outsource model; it is not a model that the networks themselves can provide. The reason these guys are exiting the market is that they have been unsuccessful in creating a critical mass of customers to justify them maintaining these facilities on an ongoing basis. There is very much a fixed cost level or nature to the business that they have to maintain enough of a revenue stream in a given building to make it worthwhile and they arent doing that. I think they are also retreating to their core business of providing networking and telecom services and being very much focused on ensuring that is successful in these challenging times. Our opportunity from all of this is that now more than ever these customers realize they need to find a good service provider who is focused on providing managed colocation services and who will be with them for the long run. Sprint and Cable and Wireless networks specifically are available in our facilities, along with 120 other networks, which is an added benefit for these customers that may be displaced. That is great news from a share shift standpoint, and we are winning our fair portion of that.
CEOCFOinterviews: How do you prevent other companies from emulating what you do?
Mr. Van Camp: It is a capital intensive model. To start cold would require a great deal of capital to enter a market that is consolidating as seen by Cable and Wirelesss and Sprints departure. Someone could try to enter the market and try to acquire some distressed assets and shop to approach this market. Without a critical mass of customers already, the time it would take to build up a customer base to cover the fixed cost of maintaining and managing these centers, there is a high execution risk against that, that would scare people away from being a new entrance into this market. Lastly, the interesting thing about where Equinix sits today is that most of the major providers are not just Internet service providers, but also the fiber that carries those networks into our facilities, have already made the bet; and installed in facilities. It would be very difficult proposition for a new entrant to be able to get these networks to come to anew facility, and at their own expense, given the CapEx constraints these providers have today.
CEOCFOinterviews: Please give us a sense of the revenue model and tell us if your contracts are long-term.
Mr. Van Camp: It is a recurring revenue model, which is great to just have the visibility of the business and to be able to plan for it going forward. A typical agreement is one to three years, if you look at our customer base today, it would probably be an average of two-year time line, that our revenue is in-place and they pay it monthly for the services that they acquire from us. Over Ninety percent of our Q-2 revenue stream of twenty-eight point four million we did in Q-2 of this year is of a recurring revenue nature. That will recur on second quarter, and the sales and bookings we made in first quarter, will layer in on top of that number. That is the nice thing about the business model and it gives us great visibility into the future.
CEOCFOinterviews: You had 87 new customers in second quarter of this year and that seems like a lot!
Mr. Van Camp: Yes, that is a global number and about 56 of those took place in the U.S. We are up to just over 600 different customers and it is a good solid customer base. In first quarter, 55% of our installed U.S. customer base actually ordered more services with us. On top of this recurring stream, the current customers also bring future orders. We have seen growth in our four years of operating revenue here, of thirteen million in 2000 to sixty-three million in 2001, to seventy-seven million in 2002, and the midpoint of our range for this year is one hundred and sixteen million. This has been one of the most difficult economic times in history, at least that I can recall. I think this improved performance in the face of this is a good statement about the company and its business model.
CEOCFOinterviews: When companies are taking additional services, what are they adding?
Mr. Van Camp:
Customers may add to their existing deployment or expand to another geographic
area for backup or redundancy purposes. Another thing they are doing is acquiring more
interconnections to other customers of ours and other business partners of theirs. This
gets back to this network-neutral model; after someone has become a customer, and
lets say they were connected to AT&T, as a supplier of their bandwidth, but
Level (3) has some interesting reach and economics; they will then create another
connection over the Level (3) network. That connection is also part of our recurring
revenue stream. They may have a need to connect another connection to a business partner,
or maybe connect to a content company over our GigE Exchange peering fabric.
CEOCFOinterviews: How do you reach your customers and why are they choosing you?
Mr. Van Camp: One way we reach our customers is with a direct sales force; both in the U.S. and Asia, we have a team on the ground that understands the space extremely well and the key players, so we are very much a direct sales business. Many of these service partners of ours that are also our customers, will often bring their key customers to us because their customer had a need to be close to some of these other services that we provide, so we see the network effect also as an important channel for us. Additionally, some of the largest systems integrators sell our space as part of a larger solution. Our largest customer is IBM. IBM is doing their e-business hosting platform in seven of our U.S. markets. IBMs sales force is out acquiring new business, that is then brought to Equinix. IBM manages it inside of our facility, but has access to all of the network activity that exists there. That is how we approach these customers. They are there because of the quality and the availability of all the network choice.
CEOCFOinterviews: Please tell us about the ten million dollars from Crosslink Capital, and how that has affected the financial condition of the company.
Mr. Van Camp:
Crosslink was an interesting one; at the end of the year we acquired these Asian
companies that I mentioned and we also gained a strategic investment from Singapore
Technologies Telemedia. They had a business in Singapore that strategically, they were
looking for a better answer for, something that could connect that business to a global
proposition. They were interested in seeing the value for that by selling it to us and
allowing us to manage that for them. In doing so, they also put thirty million dollars
into Equinix at that point in time. That money was valuable to us to allow us to buy down
a large portion of our long-term debt to reposition the company with a much healthier
looking balance sheet at the time.
CEOCFOinterviews: Do you see additional acquisitions going forward, and from where do you see the most growth coming?
Mr. Van Camp: Going forward, I wouldnt comment on future acquisitions, although we will see some consolidation and interesting things occur over time, that we may have interest in. We are experiencing some great growth; last year we did seventy-seven million and we have set our mid-point guidance atone hundred and fifteen million for this year. We are seeing growing acceptance of the business model for what it is today and how valuable it is for our customers. We are going to continue to be a nice and solid growth story in the face of an environment where companies like Sprint, Cable and Wireless are pulling out."
CEOCFOinterviews: How are you prepared for your challenges?
Mr. Van Camp: We
are prepared from the standpoint that we have restructured the balance sheet, we have
capital, we are in a solid position to compete and a position of trust for our customers
as they get to know us. If you were to package up what an outsourced service provider
should be doing for their customers, it should be trust. You can trust to place your
critical infrastructure in our facilities because we provide exceptional service, are here
to stay, and should any of the networks that you are acquiring services from or service
partners change, it doesnt mean that you have to back out of an Equinix facility,
you just need to connect to someone else. I think that proposition and our position
strategically, gives us the opportunity to win over time.
Mr. Van Camp: The
first thing I would offer to potential investors is to come in and do your homework, and
take a good look at the underlying position of the company today. The interesting thing
that is presented to you is that Equinix will be operating cash flow positive in the third
quarter of this year. We have a high visibility in our revenue line because of the
recurring revenue that we see. What we have is a fixed-cost business that is at an
inflection point, just beginning to generate cash. Incrementally, each new dollar of
revenue has a flow-through affect to our cash balance or the EBITDA line, of approximately
80%, and that is a very strong number.
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