Telx Adds 12,500 Square Feet Outside of Digital Realty Buildings

By David Gross

Wall Street has been paying close attention to the relationship between GI Partners, Digital Realty (DLR), and Telx.  An investor in both companies, GI Partners has enabled a close relationship between DLR and Telx, including a deal where DLR has granted Telx of exclusive right to operate the Meet Me Rooms in ten of its facilities.  Telx operates in five additional buildings, and today announced it has expanded in two of them - 8435 Stemmons Freeway in Dallas, and 100 Delawanna Avenue in Northern New Jersey.

8435 North Stemmons Freeway is an office building in which Telx already had leased a floor.   It sits just to the west of Love Field, and is four miles north of the massive Infomart building at 1950 North Stemmons Freeway, a major carrier hotel which serves as the Dallas equivalent to 111 8th Avenue or 60 Hudson.

The 100 Delawanna Avenue facility is located in Clifton, NJ,  about three miles west of the Meadlowlands Sports Complex, and a ten mile direct shot down Route 3 to the Lincoln Tunnel.   Adjacent to the New Jersey entrance to the tunnel is the 310,000 square feet 300 Boulevard East facility, owned by DLR and leased by Telx as well as many financial traders.  (300 Boulevard East sits right next to the loop by the NJ entrance to the tunnel, featured in the intro to The Sopranos") 100 Delawanna provides connectivity into that building as well as the popular Manhattan carrier hotels, and in many respects is a backup site and additional POP for customers in Weehawken.    Equinix has a competing site, NY4, in Secaucus, which sits just across the New Jersey Turnpike from 300 Boulevard East.

Telx has been in registration since March, but unfounded concerns about Equinix, as well as the mediocre performance of CoreSite in the aftermarket have kept it from coming out.   The company reported $95 million in revenue for the first nine months of 2010, up over 30% from the prior year, with operating margins rising from -5% to 14%, and EBITDA margins increasing to 33%.

25 New Ethernet Exchange Customers for Telx and Equinix

By David Gross

Things had gotten a little quiet on the Ethernet Exchange front the last couple weeks, but Equinix announced an expansion of its service today, while Telx reported yesterday that it had added nine providers to its exchange.

Aside from giving an interview to Heavy Reading, Equinix had been very quiet the last month as CENX, Telx, and Neutral Tandem announced new customers and new cities for their Ethernet Exchange services.   That changed today, when the colocation provider announced 16 new customers for its exchange, bringing its total to 38. 

Carrier Ethernet Exchanges, based on handing over traffic through the use of the Metro Ethernet Forum's E-NNI standard, first launched just over a year ago, and have largely been limited to major markets like New York, Los Angeles, Washington, Tokyo, and London.   However, they are now moving beyond world capitals and mega-regions and into more foreign locations.   Equinix announced today that it will be expanding its service to Atlanta, Dallas, Denver, Hong Kong, Miami, Seattle, Singapore, Sydney, Toronto and Zurich in the first half of 2011.

Separately, Telx announced yesterday that it has added nine partners to its Ethernet Exchange, including KDDI and Intellifiber.    The company has partnered with Neutral Tandem to reach over 20 sites across the country.    Both Equinix and Telx compete against CENX, which was co-founded by Neutral Tandem co-founder Ron Gavillet.

Telx also reported that it will be presenting on the Ethernet Exchange panel at next month's Light Reading Ethernet Expo, and I'm sure we'll be hearing more from Exchange providers over the next few weeks.

CENX Puts Out Another Ethernet Exchange Press Release, Where's Equinix?

By David Gross

It used to be a month wouldn't go by without a Carrier Ethernet Exchange press release, then a week, and now we're getting close to daily announcements of some kind or another.   This morning, CENX announced its service is now available in London, Hong Kong, Miami, and New Jersey, expanding its interconnection geography beyond New York, LA, and Chicago.   

Neutral Tandem (TNDM) announced last week that it was up to 14 markets,  more or less covering the top 14 U.S. MSAs from New York to Seattle.   And its international presence is being boosted by the "addressable" 85 POPs it acquired when it bought Tinet.   Of course, there is no such thing as an addressable POP outside of a press release, but the race is on, and the Neutral Tandem release was strong enough to get a response from CENX.

Telx has been quiet about its service for four days now, since announcing it had been nominated for an award.   I'd be surprised if we don't hear more from them soon.   Same goes for Equinix (EQIX).   Last week's revenue announcement was no reason to sit on the sidelines here.

Telx Ethernet Exchange Nominated For Award

By David Gross

If you think there have been a lot of press releases about Ethernet Exchanges in the last week, expect a lot more over the next month leading up to LightReading's Ethernet Expo.   Everyone in this market is trying to speak up and let it be known that they're the leader for this rapidly evolving service.

Telx hit the wire yesterday announcing that its service had been nominated, that's right nominated, hasn't won anything yet, for LightReading's "Leading Lights" award for best new telecom service.   While that's good for Telx, it has a very tough competitor in CENX, and will need to continue to work closely with its interconnection partner Neutral Tandem (TNDM) to reach additional POPs in markets where it doesn't have co-lo facilities.    And if they issue a PR for being nominated, can only imagine what they'll do if they win.

Will CENX Beat Equinix in Ethernet Exchanges?

By David Gross

Ethernet exchanges have rapidly become the flavor-of-the-month in telecom services.   Just about every provider offering some kind of data center interconnection, business Ethernet, or corporate VoIP service has announced they are offering an Ethernet Exchange platform, or has built a connection to one.   A remarkably quick development for a service that didn't really launch until late last year. 

Turning Ethernet into Frame Relay
While Ethernet Exchange services are fairly new, the interconnection technology that supports them has been under development for about five years.    The need for Ethernet Exchanges arose out of carrier frustration with the nonstandard connection guidelines for handing off Ethernet traffic to other service providers.   This problem kept growing as many Ethernet customers were using the technology as a private data service to connect buildings, not as an Internet access service as 2001-era Ethernet providers like Yipes and Telseon were advocating.

As businesses started using Ethernet to connect locations beyond metro areas, their traffic had to be sent through multiple carrier networks, which created all kind of custom configuration requests, in addition to QoS and management issues.   Essentially, Ethernet had become a shared network private data service like Frame Relay, except without an NNI (Network-to-Network-Interface) reference to make carrier handoffs simple to configure and reliable to operate.  

The MEF (Metro Ethernet Forum) took up this issue around 2005, and got to work on an NNI standard to allow carriers to hand over Ethernet traffic like they had been doing for years with Frame Relay/ATM traffic.   The President of the MEF, Nan Chen, also saw this as a business opportunity, and started CENX, or Carrier Ethernet Network Exchange, which launched about a year ago.   The benefit of this service is to eliminate the requirement that carriers connect to each other at multiple points throughout their networks, and instead just build a single link (or a handful of links) to the exchange.

CENX vs. Equinix vs. Telx/Neutral Tandem
At the same time that CENX launched, Equinix (EQIX) developed a competing service based on the new MEF NNI specification.   Equinix already had all the major service providers sitting in its IBX centers, a big advantage for establishing this kind of service.    Another co-lo provider, Telx, entered the market in June, through a partnership with Neutral Tandem (TNDM) which already provided a third-party interconnection service for cell phone carriers and VoIP carriers who needed to interconnect voice traffic with long distance networks.  Neutral Tandem co-founder Ron Gavillet is also the co-founder of CENX.

Competitively, the data center co-lo providers are now fighting a startup, one that has been very successful with large carriers, announcing last week that Cox Business would be coming into its exchange, in addition to Verizon (VZ), Level 3 (LVLT), and China Telecom who are already there.   Equinix also has Level 3 as a customer in addition to AboveNet (ABVT), all three of whom are components of our DataCenterStocks.com Services Index.

CENX makes the claim that it's completely neutral, and does not compete with its carrier customers for corporate accounts like Equinix and Telx do.  While this might be technically true, competing with customers has never held back Verizon Wholesale or the wholesale telecom market in general.   Carriers have long given business to their competitors in order to provide greater network reach for their other customers.   Additionally, Nan Chen is also still President of  the MEF, which represents both carriers and vendors, so there are conflicts on all sides - never a surprise in wholesale telecom.   A greater advantage for CENX than its claim to be conflict-free is focus, which has been the key to success for most data center service providers.  Digital Realty (DLR), Equinix, Rackspace (RAX), and Akamai (AKAM) have the highest market caps in this sector, and also the narrowest product lines - they don't mix co-lo with managed services, or CDNs with bandwidth sales.

Interconnection Margins Are Typically Higher than Bandwidth Margins
CENX has an odd "let's keep things quiet" strategy that extends to who has actually financed them.    That said, margins on interconnection services are typically higher than traditional bandwidth services because there is no need to spend capital on laterals to office buildings, and sales costs are reasonably low because there is no need to reach out and get a message out to small or mid-size business.     Additionally, sales cycles are often shorter than they are for long-term bandwidth or IRU contracts. Neutral Tandem's financials reflect this, with net margins around 20%, gross margins in the high 60s, and a Revenue/PP&E ratio over 3 - all much higher than those of its carrier customers.

Wall Street fell out of love with Neutral Tandem when revenue flattened at around $45 million a quarter, which occurred even when VoIP and cell phone minutes were still increasing last year.   Similarly, CENX could face similar revenue constraints as traffic grows, but customer counts level off.   Nonetheless, Equinix and Telx will have to decide how seriously they want to compete in this sector.  While losing out out to CENX wouldn't derail their businesses, the number of larger carriers going with the startup could soon establish CENX as the clear leader in Ethernet Exchanges.

Equinix Revenue Per Cabinet Up 8% Y/Y in North America

Wall Street loved Equinix's (EQIX) earnings report, with the stock closing up 6.5% today, even though it came in at expected revenue and EBITDA levels, and the company only lifted EBITDA guidance by a fraction.

The company's year-over-year revenue growth, excluding Switch & Data, was 21%, down from 25% last quarter. In addition to expansion, this continued revenue growth was helped by monthly recurring revenues per cabinet climbing to $2,053 in North America, up 8% from $1,893 a year ago. Overall revenue growth per cabinet was held back by the Euro falling during the quarter, but this is an important element of what the company claims is a 30-40% 5 year IRR on its investment in the IBX centers.

The company has over $2 billion of debt, but with adjusted EBITDA margins in the low 40s, it is not facing any major liquidity issues. With a debt/equity ratio over 1, the company is essentially borrowing away to build capacity beyond what any competitor will ever likely reach, while keeping its cost of capital down. And with not only revenue growing, but revenue per cabinet increasing, it is hard to argue against this strategy. However, it will be interesting to see what happens with Telx, which does just 1/10th the revenue Equinix does now, but leases its facilities instead of buying them. As a result, it has a Revenue/PP&E ratio of 1.5, compared to .6 for Equinix. The trade-off is that Telx's EBITDA margins are about 20 points lower, but could improve once that provider grows. Either way, the limited space in key markets like Northern New Jersey and Northern Virginia is helping both providers right now.

Will Telx Produce Better Margins than Equinix?

by David Gross

Collocation provider Telx (TELX), which filed an S-1 earlier this year but has yet to issue shares to the public, is often compared to industry leader Equinix (EQIX).   However, there is a major difference financially and operationally in that Telx leases every one of its facilities, except for Atlanta, while Equinix owns or has capital leases on most of its locations.   Of Telx's 15 facilities,

Number of Publicly-Traded Companies Dropping, but Telx and CoreSite on the Way

In the data center industry, we've got two major companies in registration, but for the rest of the market, there are a dwindling number of investment opportunities. In a WSJ story today, Bill Hambrecht notes that the number of companies filing proxies with the SEC has dropped from 9,100 ten years ago, to 6,450 today. And the number of companies tracked by the Dow Jones U.S. Total Market Index is down to 4,136, a drop of nearly 20% over the last five years.

He cites limited interest from i-banks in underwriting smaller IPOs now, and I'd add that Sarbanes-Oxley hasn't helped either. But with Telx and CoreSite on the way, the data center industry is likely to stand out even more among public market investors.