By David Gross
Thought it was a strong call for Equinix yesterday. Not because there were no further surprises with revenue, or because Adjusted EBITDA came in three points ahead of expectations, but because it had a very strong quarter in North American with cross connects. It sold over 1,600 for the three month period, excluding Switch & Data, compared to less than 1,200 in the second quarter.
As I mentioned in the earnings preview, few factors tell you more about Equinix's future than how many cross connects it can sell. The heavily connected customer has a lot more invested in its Equinix space than one who is just leasing cabinets. In North America, the company's ratio of cross connects to cabinets grew from 1.06 a year ago to 1.19 in the 3rd quarter of this year. In the quarter, cross connects outsold cabinets by about a 2.7 to 1 ratio, compared to 2 to 1 in the second quarter. Interconnection now accounts for 20% of North American revenue. With cross connects having very few incremental costs, the more that get sold, the better the outlook for future margins.
The company mentioned cross connect activity was particularly strong in New York and Washington, which I would imagine is coming from the many financial traders and market data providers located at its NY4 building in Secaucus, as well as from the credit card companies, consulting firms, and popular websites located at the DC2 building in Ashburn.
In addition to cross connects, which also grew overseas, where traditionally they have sold in much lower numbers, the company mentioned strong activity at its CH3 building in Elk Grove Village, which is located near the DuPont Fabros Chicago data center, and adjacent to O'Hare Airport. The suburban CH3 building is the company's largest in the Chicago area, and opened three years ago just as the economy was starting to weaken. It has taken awhile to fill up, but the company reported that the building is now 85% occupied or sold.
The domestic market to watch will continue to be Los Angeles. The company explicitly mentioned churn issues in the content and media industry on its warning call three weeks ago. Additionally, it faces stiff competition in that market from CoreSite, which operates both the massive 900 North Alameda Street building, as well as the meet me room in the large One Wilshire carrier hotel. Yesterday, Equinix said its LA3 and LA4 centers, its largest in that market, were 67% occupied or sold.
While there are legitimate concerns about some of its overseas expansion, and a few areas of weakness, such as Los Angeles, there was nothing on the call to justify the panic selling we saw three weeks ago. At the same time, there was nothing to justify a manic buying spree either.