New Client for Equinix

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Data center major Equinix Inc. (EQIX) is on a roll. The company has been winning new deals at regular intervals. One of the most recent wins is a deal from a well known Russian telecommunication operator CJSC TransTeleCom (Company TTK).

As per the terms of the agreement, the company will deploy a new core network node in Tokyo and a series of high-capacity Internet and Ethernet exchange connections in Tokyo, Hong Kong, Silicon Valley, Ashburn, London, Amsterdam and Frankfurt. This new tie up, mainly focused on Layer 2 connectivity, is expected to help expand TTK’s connectivity capabilities across three continents. This is expected to minimize cost and improve efficiency for TTK.

The company has reached an important milestone in its business volume, after setting its strategy for data center expansion in Asia and Europe. Moreover, the company also helped IRESS to seize the opportunity in the financial services sectors, especially in some of the world’s most dynamic economies.

As per recent studies conducted by research firms Frost and Sullivan and Gartner, data center growth in the Asia-Pacific will be the most sought after. Gartner also expects China to grow into the second largest global data center market by 2015.

The company has attained its critical mass of customersand the resultant network effect within its IBX centers. Direct interconnection with its aggregationof networks, which serve more than 90% of the world’s Internet routes, enables customers toincrease the efficiency of their IT infrastructure, remove some complexities of administering andmanaging their infrastructure, while significantly reducing costs.

Service offerings, such as EquinixExchange and Equinix Internet Core Exchange significantly reduces the cost of critical transit, peering and traffic exchange operations by eliminating the costs of private peering or local loops.The difficulty and cost associated with changing infrastructure providers has also worked in favor of the company, helping it to increase its customer base.

However, some industry experts believe that the telecommunications industry is currently facing cut throat competition. Moreover, customers are also combining their businesses, and so they require less co-location space. In addition, increased utilization of existing co-location space could reduce the attractive expansion opportunities available to Equinix.

Equinix has delivered good first quarter 2012 results with EPS exceeding our expectation. Moreover, revenue improved substantially on a year-over-year basis as the company is witnessing improvement in mobility, cloud computing and data management. The company is also experiencing improvement in business fundamentals across all the segments, along with better supply chain process and a firm pricing environment.  

However, while the company has a recurring revenue model and is cash rich, its debt level appears high. Additionally, competitive threat from the likes of AT&T Inc. (T) and Verizon Inc. (VZ) is cause for concern. European exposure and industry consolidation are also concerning. 

Equinix therefore carries a Zacks #3 Rank, implying a short-term Hold rating.

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