Equinix Adds Capacity in Asia

Data center provider Equinix Inc. (EQIX - Analyst Report) is set to acquire an aggregate of six data centers and a disaster recovery center from Asia Tone for a cash consideration of $230.5 million. Asia Tone is a Hong Kong-based data center and colocation service provider. Its facilities are located in Hong Kong, Shanghai and Singapore, which creates an opportunity for Equinix to expand its footprint across the Asia-Pacific. Those three regions happen to be the fastest-growing data center markets.

Of the six data centers, one is new and located in Shanghai. The facility is expected to be fully operational by the second half of 2012 and will provide 80,000 square feet of data center space. Another one is still under construction.

The cash deal is expected to be completed by the third quarter of 2012. Post completion, Equinix will be operating 104 data centers in 38 markets across the world. We believe that the acquisition will be commensurate with the increasing demand for its data center support.

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.

Equinix has seen an annualized revenue growth rate of 30% from the Asia-Pacific region. In the recently concluded first quarter of 2012, the region generated 13.9% of total revenue, up from 13.3% in the prior-year quarter. The region also witnessed strong bookings growth in the quarter.

We believe that with support from the newly acquired data centers, Equinix will be able to provide colocation, interconnection and managed services to match the growing demand in China.

Equinix has delivered strong first quarter results and provided a decent guidance for the coming quarter and fiscal 2012. We believe that strategic acquisitions and international expansion will help expand its client base, thus enhancing its revenue growth potential.

We are also optimistic about the company’s recurring revenue model and current expansion plans. However, despite all these positives, competitive pressures from the likes of AT&T Inc. (T - Analyst Report) and Verizon Inc. (VZ - Analyst Report) should not be ignored. European exposure and industry consolidation also concern us.

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