Stephens Inc. Senior Vice President Guides Investors Through Data Storage Sector And Reveals 2010 Top Stock Winners

April 16, 2010 - The Wall Street Transcript has just published Data Hosting & Data Storage Report offering a timely review of the Data Storage sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.

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TWST: Let's talk a little bit more about Rackspace and Equinix, since you cover them. What's your outlook for these particular companies?

Mr. McCarver: In general, the outlook for top-line revenue growth for both companies is very good. Right now expansion is a fairly capital-intensive project, but the outlook for growth is very strong. I believe the better operators are growing as fast as they can without overreaching their ability to effectively manage the business. So while there is an abundance of demand, companies are only going to grow at a level that guarantees the wheels don't come off. I think one of the strategies at Equinix that can be seen is the desire to run at a certain capacity utilization level that is conducive to attracting new clients. Somewhere between 78% to 82% of capacity is where they've run in the last several quarters, and that is strategic in nature in that they are able to capture larger customers with that available capacity.

If EQIX was running at, say, 90% of capacity and the available space was already spoken for by existing customers, it would be difficult to convince new customers that they will have additional space available. At 80%, you are able to go out to large potential customers and say, "I can meet your demands for growth this year and next year." I think the fact that EQIX is spending well beyond its enormous free cash flow potential to maintain 20% excess capacity illustrates just how much demand the company expects to see in the coming year. Clearly, if they weren't seeing the demand, they would not risk the capital. For Rackspace, it's a little bit easier.

TWST: What are your thoughts on the Switch And Data and Equinix deal? Is that a smart move for Equinix?

Mr. McCarver: I think so. Strategically, it opens up some new markets. There is a good argument to be made that EQIX can benefit from more exposure in Tier II markets. Also Switch And Data (SDXC) has some very good operations, a strong management team and lots of excess capacity. Certainly, Equinix is looking forward to filling that capacity. I think Switch And Data also has an attractive customer base in new industries where EQIX has less expertise. If Equinix had not acquired Switch And Data, I think there is a good chance a foreign competitor would have done so and as a result, would be out in the U.S. marketplace. So I think there are some very good strategic reasons for this deal. My model does indicate that the acquisition will be significantly accretive over time.