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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Barry McCarver is a Senior Vice President and Research Analyst with Stephens Inc. He joined Stephens in June 1998 as an Associate Analyst covering specialty manufacturing, later moving to financial services technology and insurance brokerage in September 1999. Mr. McCarver was promoted to Research Analyst in January 2003, and he took over the firm's bank and thrifts practice in August. In July 2008, Mr. McCarver was tapped to establish the firm's telecomm services practice. Previously, he worked as a buy-side Analyst for Longer Investments, Inc., of Fayetteville, Ark. He graduated with a B.S.B.A. in finance from the University of Arkansas in 1998.
TWST: The cloud has been the big topic lately, but are there any other new technologies or developments coming down the pike that would impact these companies?
Mr. McCarver: Certainly, there are several developers that are working on the next-generation software for the cloud environment. This goes back to my comments about what applications can run in a cloud environment. Improving the reliability and security of the cloud is paramount in driving broader adoption. Also server virtualization, which is the ability to chop up a server and use it for multiple applications with different computing capacity needs, is still a new technology that few know how to properly implement. This was once thought of as the possible savior to older mainframe systems, while in fact the efficiencies of virtualization are actually spurring the obsolescence of mainframe technology faster than ever before.
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. EQIX certainly paid a full price for Switch And Data. I don't want to suggest they overpaid- I don't think they overpaid - but they did give full price. There is some desire among shareholders to see EQIX only acquire at prices that are much more attractive. In this case, I think it was good for both parties.
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