carrier neutral data centers

8/13/2019 Carrier Neutral Data Centers

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North America Equity Research26 November 2008

U.S. Telecom Services

EQIX, EQIX USOverweight$40.93

Price Target: $54.00

Initiating Coverage of Carrier-Neutral Data Centers SDXC, SDXC USNeutral$5.29

Price Target: $6.50

Telecom Services

Mike McCormack, CFA AC

(1-212) 622-1442

[email protected]

Scott Goldman(1-212) 622-2664

[email protected]

Manish Jain(1-212) 622-8692

[email protected]

J.P. Morgan Securities Inc.

See page 42 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making thinvestment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or compancovered in this report, at no cost to them, where such research is available. Customers can access this independent research www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.

We are initiating coverage of Equinix and Switch and Data, the two largest

participants in the U.S. carrier-neutral data center market. As carrier-neutral

providers, both companies provide the space, power, cooling, and security for

customers of all types to house equipment and interconnect with business partners

and bandwidth providers.

• Ecosystem attracts customers, limits alternatives. The availability of the

world’s largest network providers creates an incentive for customers to choose

carrier neutral facilities. As more companies enter the facility, their business

partners are enticed to use the same facilities to reduce the costs and time of

conducting business, essentially creating an ecosystem or network effect.

• Geography and size are primary differentiators. Within the U.S., Switch and

Data and Equinix largely overlap in six major geographic areas. Switch and

Data also operates facilities in 17 other markets while Equinix operates data

centers internationally, including 5 in Asia-Pacific and 15 in Europe. Equinix’s

average facility size is nearly three times larger than that of Switch and Data,

making it the premier provider for large network carriers to exchange Internet

traffic. However, Switch and Data has had more success selling cross connects,

and its revenue contribution from the high margin interconnection business is

more than 2x that of Equinix.

• Attractive supply and demand characteristics. Demand for network neutral

data center services is driven by the growing availability of broadband Internet

services and Internet traffic usage; increasing power requirements, which lead to

greater outsourcing; and more concentrated supply following industry

consolidation. Pricing has risen in recent years and should continue to improvein the near term. Average revenue per cabinet is growing in the mid- to high

single digit range, supported by price escalators, larger deal sizes, and increasing

interconnection.

• Investing for growth. Building data centers is a capital-intensive activity,

creating a barrier to entry. Both companies are currently investing heavily to

expand existing facilities and build new ones where capacity may be limited.

Capital intensity should peak in 2008, though it will likely remain elevated in

the near term. Maintenance capital is relatively low (5%-10% of revenue),

providing meaningful cash generation once major expansion is complete.

• Both stocks offer attractive entry points; stronger capital base favors

Equinix. While we are attracted by the top-line growth and potential margin

expansion of each, we favor shares of Equinix given the company’s global

presence, more attractive assets, and, importantly, its stronger capital base. We

assign ratings of Overweight to Equinix and Neutral to Switch and Data, with

December 2009 price targets of $54 and $6.50, respectively, based on

discounted cash flow analysis.



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Mike McCormack, CFA(1-212) [email protected]

Company DataPrice ($) 40.93

Date Of Price 25 Nov 0852-week Range ($) 110.97 -

32.72Mkt Cap ($ mn) 1,552.56Fiscal Year End DecShares O/S (mn) 38Price Target ($) 54.00Price Target EndDate

31 Dec 09

Equinix, Inc. (EQIX;EQIX US)

2007A 2008E 2009E 2010EEPS ($)

Q1 (Mar) (0.04) 0.15A 0.27 Q2 (Jun) 0.05 0.06A 0.35 Q3 (Sep) 0.12 0.22A 0.44 Q4 (Dec) (0.21) 0.26 A 0.44 FY (0.08) 0.68 A 1.51 2.75 CYSource: Company data, Reuters, J.P. Morgan estimates.

Company DataPrice ($) 5.29Date Of Price 25 Nov 0852-week Range ($) 19.84 - 3.92

Mkt Cap ($ mn) 182.62Fiscal Year End DecShares O/S (mn) 35Price Target ($) 6.50Price Target End Date 31 Dec 09

Switch and Data Facilities Company (SDXC;SDXC US)

2007A 2008E 2009E 2010EEPS ($)

Q1 (Mar) (3.61) 0.05A 0.05 Q2 (Jun) 0.08 0.06A 0.07

Q3 (Sep) 0.06 0.02A 0.08 Q4 (Dec) 0.09 0.04 A 0.09 FY 0.17 0.16 A 0.28 0.37 CYSource: Company data, Reuters, J.P. Morgan estimates.



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Table of ContentsInvestment Thesis ....................................................................4

Equinix.........................................................................................................................4 Switch and Data...........................................................................................................4

Industry Overview ....................................................................4

Key Industry Issues................................................................13

Valuation .................................................................................13

Equinix ....................................................................................15

Key Investment Points...............................................................................................15 Investment Risks........................................................................................................15

Earnings and Cash Flow Outlook ..............................................................................21 Valuation and Rating Analysis ..................................................................................22 Management...............................................................................................................22 Risks to Our Rating....................................................................................................23 Company Models.......................................................................................................24

Switch and Data......................................................................28

Key Investment Points...............................................................................................28 Investment Risks........................................................................................................28 Earnings and Cash Flow Outlook ..............................................................................34 Valuation and Rating Analysis ..................................................................................35 Management...............................................................................................................35

Risks to Our Rating....................................................................................................36 Company Models.......................................................................................................38



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Investment ThesisEquinix

We believe Equinix operates the premier carrier neutral data center assets. The

company’s scale and brand enable it to attract a strong client base, including the

world’s largest bandwidth providers and many of the largest and fastest growing

content providers and enterprises. We believe Equinix’s strong balance sheet should

enable it to grow faster than the overall colocation market as it invests for growth

both domestically and internationally. In addition, we are attracted to the defensive

nature of Equinix’s recurring revenue business, which should help mitigate the

impact of broader economic weakness. We assign an Overweight rating to shares of

Equinix and expect the stock to outperform the broader sector.

Switch and Data

Like Equinix, we believe Switch and Data is one of just a few attractive players in

the carrier neutral data center market. While the company does not have the scale of

its larger peer, it has successfully attracted an impressive client base, leveraging the

network effect to sell high-margin interconnection services. We also expect Switch

and Data to grow faster than the overall market given moderate expansion and its

network neutral approach. However, the company’s access to liquidity tempers our

enthusiasm and could limit its growth potential. Debt covenants restrict capital

outlays in the near- to mid-term, preventing more meaningful growth. In addition, a

more limited float makes Switch and Data less attractive to larger investors, in our

view. We assign a Neutral rating to shares of Switch and Data, but believe a looser

credit market and better liquidity in the shares would be an incremental positive forthe company.

Industry Overview

Initiating Coverage of Equinix and Switch and Data. We are initiating coverage

of Equinix and Switch and Data, the two largest participants in the U.S. carrier-

neutral data center market. The two companies operate facilities that have been

specifically designed to house network equipment (client-owned or leased) used by a

variety of businesses, including content providers, Internet service providers, and

network carriers, to maintain data vital to their operations and interconnect with one

another. The facilities provide solid construction, access to single or multiple

network providers, site monitoring, security, and redundant power and cooling,which many enterprises are unable to replicate in-house in a cost-effective manner.

Carrier Neutral Is One of Three Data Center Flavors. Services provided by data

center operators vary. While there is overlap between the different providers, there

are three primary types of colocation centers: carrier neutral, network specific, and

real estate investment trusts (REITs).

• Carrier neutral facilities, or carrier hotels, allow customers to locate their

equipment in a facility which offers interconnection to multiple

telecommunications service providers. As a result, customers can select the



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service provider that best meets their needs based on the range of services,

network reliability, and budget requirements. Customers oftentimes benefit from

the competitive pricing environment created by having multiple service providersin a single location. In addition to sharing power and cooling systems, customers

also benefit from shared Internet backbone connectivity, reducing operating

costs.

examples: Equinix, Switch and Data, Terremark

• Network specific colocation centers refer to facilities that limit network access

to a single service provider. These centers are operated by the service provider

and typically appeal to customers looking for a more complete set of managed

services not offered by carrier neutral facilities, such as web hosting. Customers

may also choose a network specific data center due to its location or established

relationship with the service provider. Traditional telecom companies seek to

differentiate their services through the breadth of their product portfolio and

networks, service reliability, and experience providing both managed and professional services.

examples: AT&T, Cogent, Level 3, Qwest, Savvis, and Verizon

• Real estate investment trusts (REITs) have begun building facilities for

enterprises looking to operate their own data center or to wholesale to other

providers of data center services.

examples: Digital Realty Trust and DuPont Fabros Technology

Table 1: Key Data Center Service Prov iders

Data Centers Geographic AffiliationCarrier NeutralEquinix 39 US, Europe, Asia-PacificSwitch and Data 34 US, CanadaTerremark 16 US, Europe, South America

Network Operators AT&T 38 US, Europe, Asia-PacificCincinnati Bell 5 USCogent 36 US, Canada, EuropeLevel 3 78E US, EuropeQwest 13 USSAVVIS 29 US, Europe, AsiaVerizon 17E US, UK, Asia

Real Estate Investment TrustsDigital Realty Trust 74 US, EuropeDuPont Fabros 6 US

Source: Company reports and J.P. Morgan estimates.

Inside a Data Center. Data centers, which can occupy a single room or an entire

building, are strategically located in secure surroundings, with close proximity to

both clients and network access. The design of the structure itself is carefully

planned, with features such as air sampling/control mechanisms, advanced fire

detection systems and high-powered diesel generators all incorporated into the

building plans to provide a high level of security and stability. Within the facility

itself, cabinets housing networking and computing equipment are arranged in rows,

often secured to the ceiling and raised off the floor to help prevent against possible

earthquake or flood-related damage. Within the floor-to-ceiling cabinets, network



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equipment such as switches, storage devices, and routers are stored, and enclosed

behind a secured entrance. Though specifics arrangements may vary, clients are

provided with physical access to their respective areas 24 hours a day, 7 days a week.

Equinix and Switch and Data Utilize Similar Business Models. Each company

operates carrier-neutral facilities, opting not to operate their own networks, but

preferring to serve as a meeting place for customers of all types to house equipment

and interconnect with business partners and bandwidth providers. Given the size of

their facilities, each can house multiple customers, allowing them to better leverage

their assets. Further, the availability of the world’s largest network providers creates

an incentive for customers to choose carrier-neutral facilities. As more companies

enter the facility, their business partners are enticed to use the same facilities to

reduce costs and time of doing business, essentially creating an ecosystem or

network effect. Each company derives a significant portion of revenue from recurring

fees charged for colocation and interconnection services.

Geography and Size Are Primary Differentiators. The primary differences

between the two firms are the geographic focus and data center capacities. Within the

U.S., Equinix is located in six major geographic areas, including Chicago, Dallas,

Los Angeles, New York, San Francisco, and Washington D.C. Switch and Data

largely overlaps in each of these markets and counts all within its top 10 as measured

in square footage. However, Switch and Data also operates facilities in 17 additional

markets, including a larger presence in Atlanta, Philadelphia, and Seattle, among

others. Equinix operates data centers internationally, including 5 in Asia-Pacific and

15 in Europe, with the majority of the latter coming from two recent acquisitions.

Conversely, Switch and Data only operates one facility outside the U.S., located in

Toronto. Facility sizes are also an area of differentiation. At year end 2007, the

average Switch and Data facility was roughly 27,000 square feet, whereas we

estimate the average Equinix facility was nearly 3x as large, or 79,000 square feet,with many facilities easily surpassing 100,000 square feet. Given the differences, it is

logical to conclude that Switch and Data would cater to smaller, more geographically

diverse customers while Equinix may be better at serving the needs of customers

seeking a lot of capacity. However, given that the majority of Internet traffic is likely

confined to a handful of markets, we do not believe this to be the case. Equinix’s size

affords it the ability to opportunistically pursue anchor tenants, and the company is

willing to sell up to 15% of its capacity in a data center to a single tenant.



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Table 2: 3Q08 Key Metric Compari sons

$ in millions, except ARPU

Equinix Switch and DataData centers 39 34Markets 18 23Geographies US, Europe, Asia-Pacific US, Canada

Customers 2,228 935Total Cabinets (1) 33,800 11,680

Utilization Rate (2) 77% 63%Cross Connects 21,522 20,879

Recurring revenue $173.5 $41.6

EBITDA $77.0 $14.0EBITDA margin 41.9% 31.7% ARPU (3) $2,216 $1,917


(1) Excludes Europe.

(2) Of average billed cabinets.

(3) Consolidated recurring revenue divided by weighted average billable cabinets (simple average for SDXC).

Colocation Is Primary Service. Colocation services account for the majority of

revenue at carrier-neutral facilities. Providers offer the promise of a secure and

reliable facility where customers can locate IT equipment necessary to conduct

business. Colocation typically entails securing space, which can range from a single

rack unit (commonly referred to as “1U”) in a shared equipment cabinet to private

customized cages capable of housing many cabinets. Customers are charged an

installation fee as well as a monthly recurring fee for the desired amount of space.

Recurring charges can range from just a few hundred dollars for a single rack to

multiple thousands for cages and multiple cabinets. Customer equipment housed in

the data centers is typically the client’s responsibility, though some data center

providers also resell servers, routers, and other IT equipment. Data center capacity is

obtained in conjunction with either AC or DC power, with various amperages and

phases availability to meet a wide variety of customer needs. Like the capacity itself,

power incurs an installation fee and monthly recurring charge based on power

requirements. Typical contracts vary from one to three years. Discounts are generally

not available for longer-term contracts; in fact, customers typically pay more for a

longer-term contract since they lock-in pricing for a longer period of time. In 3Q08,

colocation accounted for 77% and 63% of revenue at Equinix and Switch and Data,

respectively.

Colocation Market Is Growing Double Digits. Sizing the colocation market can be

challenging given that third-party forecasts can vary widely as definitions of

colocation can differ. In addition, many operators do not break out colocation

revenue separately, but include it in broader revenue buckets. As a result, a bottom-up approach to market sizing can be difficult. In addition, in its most recent

forecast, market research firm IDC forecast a five-year compounded growth rate of

10.1% with U.S. colocation revenue expected to reach $1.1B in 2012. Notably, the

forecast represents an acceleration from the firm’s prior forecast, which called for

6.9% growth on a five-year compounded basis. Though attractive, we believe

Equinix and Switch and Data can grow meaningfully faster than the IDC forecast as

carrier neutral providers should gain market share as more enterprises outsource

space, power, and cooling needs. We currently forecast approximately 19% growth at

Switch and Data over the same time period.



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Interconnection Services Offer Attractive Margins. Interconnection services offer

an attractive opportunity for data center providers to leverage the needs of their large

customer base. The services enable customers and network providers to interconnectwith one another on a one-to-one basis or to peer on a one-to-many basis. For

example, a content provider will connect directly with Internet service providers for

upstream capacity to the Internet. Alternatively, two companies may interconnect to

directly exchange traffic. Large backbone service providers have come to use these

facilities to exchange large amounts of Internet traffic by peering with other

providers; these services were once reserved for a limited number of network access

points (NAP). Connections are offered via CAT5, coaxial cable, or fiber, and carry

an installation fee as well as a monthly recurring charge. Most contracts are on a

month-to-month contract, though use of the cross connect tends to be more long-

term. Customers can typically change connections with a 30 day notice. Outside of

the cabling and connectors, interconnection services require little costs, providing a

high margin opportunity for the data center providers. Not all facilities may offer

interconnection services as they are typically attractive based on the number and typeof customers housed within a facility.

Non-Recurring Managed Services Round Out Revenue Base. In addition to

providing standard colocation services such as floor space, power, network

connectivity, and security, Equinix and Switch and Data also provide a low level of

managed or professional services. The offerings primarily include installations, for

which a one-time fee is received per rack, cabinet or foot of cage space for

colocation, per circuit or port for interconnection, and per amp for power. In general,

installation fees will vary depending on the size and complexity of the job. Both

companies also offer technical support services which offer trained support staff to

meet various customer needs, such as equipment testing and rebooting, among

others. These services are priced per hour and are available as needed or by contract.

Non-recurring revenue can fluctuate in any given quarter, but historically account for4%-5% of total revenue on average.

Who Utilizes Data Centers? Data center clients typically fall into three buckets:

network providers, content providers, and enterprise customers. Network service

providers co-locate in carrier neutral facilities in order to provide direct network

connectivity to both content and enterprise customers. For these services, network

providers typically compete with many other providers, all vying to provide

bandwidth to end-user businesses. This creates a very competitive environment

which provides enterprises and content providers a broad choice of providers,

services, and pricing, adding to the appeal of carrier-neutral facilities. In addition,

carrier-neutral facilities have also developed into the de facto standard for network

providers to exchange, or peer, traffic with each other. The network providers

previously relied upon a limited number of carrier-operated interconnection facilities

known as network access points for this service, however these facilities are largely

obsolete today. Enterprise and content providers not only use the facilities to locate

equipment in a secure and reliable location, but to connect with other enterprises as

well as their desired network provider.



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Table 3: Representative Data Center Customers

Network Providers Content Providers Enterprise

AT&T Akamai Amazon.comBritish Telecom eBay CapgeminiComcast Electronic Arts DirecTV

Deutsche Telekom Google FactSetJapan Telecom Limelight Networks Gap

Level 3 Microsoft GlaxoSmithKlineQwest MSN NASA

Singapore Telecom MySpace NokiaSprint Netflix Salesforce.com

Telecom Italia Yahoo SyniverseVerizon YouTube Verisign

Source: Company reports.

Benefits of Outsourcing Data Center Needs. Growth in user traffic as well as the

increased complexity of network-based services has placed an increased demand on

the network infrastructure of both content providers and enterprise customers. As a

result, businesses must decide how and where to invest to manage this growth.

Understanding that network management is generally not an area of competitive

strength, content providers and enterprise customers are increasingly outsourcing

these services. Key benefits of outsourcing include:

• Cost Savings. By providing a centralized facility for multiple tenants, data

centers provide clients an opportunity to leverage the varied costs associated with

maintaining such a facility, such as power, cooling, and Internet connectivity. In

addition, colocation centers can provide clients with flexible access to resources

that address common IT functions which would likely be uneconomical or under-

utilized at an in-house facility.

• Risk Management. A primary benefit of outsourced colocation is the ability to

mitigate the risk associated with an in-house data center. In addition to being able

to physically de-centralize network operations (particularly beneficial in the event

that a home office or headquarters is located in a region susceptible to natural

disasters), colocation facilities are designed to provide a stable and reliable

environment for key network elements. Along with 24-hour security surveillance,

data centers are equipped with environmental controls such as early-detection

water leak and fire suppression systems, redundant power supplies (battery and

generator support), and sophisticated humidity and cooling systems, all

contributing to a stable and reliable setting for network equipment.

• Maintenance and Support. For situations in which a client utilizes a colocation

facility that is geographically removed from central offices, physical access for

maintenance and resolution purposes can be problematic. However, colocation

facilities are staffed with IT personnel to provide around-the-clock technicalsupport and maintenance. Although particular services vary by operator, common

offerings include circuit testing, memory tape swapping, equipment rebooting,

power-cycling, and emergency equipment replacement.

• Connectivity. Depending on whether a colocation facility is network specific or

carrier neutral, a client’s connectivity options will vary. Generally, clients are

provided with fully scalable, redundant bandwidth supporting connections from

T1 through OCx levels. Additionally, clients are able to interconnect directly with

other companies while service providers commonly use data center to

interexchange traffic.



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Broadband and Power Are Primary Demand Drivers. Demand for network

neutral data center services is driven by a number of industry factors, including the

growing availability of broadband Internet services and Internet traffic usage;increasing power requirements, which lead to greater outsourcing; and more

concentrated supply following industry consolidation.

• Broadband growth. Growth in Internet traffic and broadband availability has

been an important driver of data center demand as these facilities serve as an

essential means for content providers to hand-off traffic to bandwidth providers

and business partners. In addition, maturing business models such as social

networking sites, high-definition video, and the migration of video content from

broadcasters to the Internet are also driving bandwidth consumption. We estimate

consumer broadband penetration to be ~60% and believe this figure could

approach 70% in 2010. Similarly, IDC forecasts consumer Internet-generated

traffic to grow 23% on a compounded basis from 2006 to 2010. As a result, we

continue to expect subscriber and traffic growth to drive near- to mid-termdemand for data centers.

• Power requirements. Improvements in technology have dramatically reduced

the footprint required to process and exchange data, but at the expense of greater

energy consumption. The Uptime Institute recently noted that some companies

have experienced a 40% increase in power consumption in just the last five years,

while the top third of the institute’s 100+ members experienced a 25% annualized

increase. Pre-established and company-operated data centers are not necessarily

equipped to handle the greater power requirements and are not prepared to

allocate the necessary capital to expanding power capacity. As a result,

companies are turning to data center providers, including the carrier neutral

players, to access state-of-the-art facilities that will enable them to grow into their

business models.

• Consolidation benefiting supply. Since the dot.com crash in the early 2000s,

we have witnessed a considerable amount of consolidation within the data center

industry. The consolidation helped narrow the supply of colocation space,

particularly given that both Equinix and Switch and Data were active

consolidators of available assets. Consolidation was driven by oversupply caused

by aggressive buildouts coinciding with the proliferation and promise of

thousands of dot.com start-ups. As the bubble burst, some companies were forced

to sell or simply went bankrupt, while others exited the business in order to focus

on core strengths. Given the current credit and economic environment, we believe

further consolidation is likely, with both Equinix and Switch and Data positioned

to take advantage of distressed assets should they become available.

Table 4: Data Center Consolidatio nDate Acquirer Target Locations

January 2005 Switch and Data LayerOne Chicago, Dallas, MiamiDecember 2004 Equinix Abovenet (only San Jose) San JoseMay 2004 Telx 56 Marietta AtlantaMarch 2004 Switch and Data RACO Buffalo, Chicago, New York, TorontoJanuary 2004 Switch and Data Meridian Telesis PhiladelphiaJanuary 2004 SAVVIS Cable & Wireless (NA assets) 15 data centersOctober 2003 Equinix Sprint (only Santa Clara) Santa ClaraMarch 2003 Switch and Data PAIX Atlanta, Dallas, New York, Palo Alto, Seattle, Vienna (VA)December 2002 Equinix Merger with STT and Pihana Los Angeles, Singapore, Tokyo, Seoul, Sydney, Hong Kong, Honolulu and othersSeptember 2001 Navisite Colo.com Chicago, Dallas, Las Vegas, Los Angeles, Milwaukee, New York, Oak Brook (IL), San

Francisco, Santa Clara, Vienna (VA)




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Measuring the Carrier Neutral Providers. Net usable capacity and the

corresponding number of sellable and billable cabinets are the key drivers of the

carrier-neutral business model. The more space available for customers to locateequipment, the greater the opportunity to generate revenue and maximize return on

investment. Reported utilization levels provide insight into how well each company

is able to fill capacity in its data centers. Utilization rates will vary from quarter to

quarter as new capacity is brought online. We expect this measure to remain volatile

while both Equinix and Switch and Data continue to build new data centers, though

once expansion is completed, we believe utilization rates of 80%-90% can be

expected. As with any recurring revenue model driven by customer contracts,

investors also pay close attention to pricing trends, as measured by changes in the

average revenue per billed cabinet, as well as cabinet churn, a monthly measure of

the rate of cabinets disconnected (i.e. billed cabinets removed from service due to

non-renewal, non-payment, or other reasons).

Lack of Supply Benefiting Pricing. Pricing for data centers and hosting serviceshas risen in recent years, driven by a number of factors. First, the supply of data

centers rationalized following the dot-com bubble as growth forecasts failed to live

up to expectations; second, demand for outsourced solutions is strong driven by

business continuity solutions, disaster recovery and backup needs as well as

Sarbanes-Oxley requirements, and; third, improved server technology has reduced

square footage requirements at the expense of greater power and cooling needs which

extend beyond in-house capabilities. Today, these trends remain favorable for the

carrier-neutral players, as evidenced by mid to high single-digit revenue growth per

cabinet. Long-term contracts with the providers can carry price escalators of 3%-5%

while average deal sizes increase amid higher volumes. Despite new capacity

planned by a number of providers, we expect pricing trends to remain stable for the

carrier neutral players given very strong booking trends and high utilization rates.

Given the rising power requirements of today’s servers and the elevated cost of power, market research firm Gartner expects power to become the primary price

determinant going forward, not square footage.

Build Costs Serve as Barrier to Entry. Building a data center can be a cost

intensive endeavor, from procuring the real estate to building the infrastructure with

adequate power and cooling to satisfy customer needs. In a 2007 presentation,

Equinix indicated that costs to build a data center ranged from $600 to $1,500 per

square foot, implying a 100,000 square foot facility could range from $60M to

$150M. Once constructed, on-going maintenance capital can run 5%-10% of

revenue. We believe this capital intensity, combined with the strong network of

established clients, serves as a barrier to entry for potential service providers looking

to replicate Equinix or Switch and Data’s business model.



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Table 5: Generic Data Center Build Econ omics

$ in thousands, except per cabinet

Data center size (000 sq ft) 100average cost to build ($/sq ft) $1,000Capital costs to build $100,000

Capital spend per cabinet $50

Total sellable cabinets 2,000

On-going capital cost (% ofrevenue) 5.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Utilization rate 55% 75% 85% 90% 90% 90% 90% 90% 90% 90%

Billable cabinets 1,100 1,500 1,700 1,800 1,800 1,800 1,800 1,800 1,800 1,800

ARPU (per bi llab le cab inet ) 1,800 1,854 1,910 1,967 2,026 2,087 2,149 2,214 2,280 2,349y/y growth 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Revenue $23,760 $33,372 $38,956 $42,485 $43,760 $45,073 $46,425 $47,817 $49,252 $50,730

EBITDA $9,504 $15,271 $18,622 $20,739 $21,504 $22,292 $23,103 $23,938 $24,799 $25,686Margin 40% 46% 48% 49% 49% 49% 50% 50% 50% 51%Incremental margin 60% 60% 60% 60% 60% 60% 60% 60% 60%

Capital expendituresBuild $100,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0Expansion 0 1,188 1,669 1,948 2,124 2,188 2,254 2,321 2,391 2,463 2,536Total 100,000 1,188 1,669 1,948 2,124 2,188 2,254 2,321 2,391 2,463 2,536

EBITDA less Capex ($100,000) $8,316 $13,603 $16,674 $18,615 $19,316 $20,038 $20,782 $21,548 $22,337 $23,149

IRR 11.3%Source: J.P. Morgan estimates.

Figure 1: IRR Sensitivity to ARPU Growth and Incremental Margins

ARPU Grow th

11.3% 1.0% 2.0% 3.0% 4.0% 5.0%

40% 5.3% 6.2% 7.0% 7.9% 8.7%

50% 7.3% 8.3% 9.3% 10.2% 11.2%

60% 9.1% 10.2% 11.3% 12.4% 13.4%

70% 10.8% 12.0% 13.2% 14.3% 15.5%

80% 12.4% 13.7% 15.0% 16.2% 17.4% I n c r e m e n t a l M a r g i n

Source: J.P. Morgan estimates.

Figure 2: IRR Sensitivi ty to Maintenanc e Capital and Cost per Cabinet

Maintenance Capex

11.3% 3.0% 4.0% 5.0% 6.0% 7.0%

$30 24.6% 24.0% 23.4% 22.7% 22.1%

$40 17.3% 16.7% 16.2% 15.7% 15.1%

$50 12.3% 11.8% 11.3% 10.8% 10.3%

$60 8.5% 8.1% 7.6% 7.2% 6.7%

$70 5.6% 5.2% 4.7% 4.3% 3.9% S p e n d p e r c a b i n e t

Source: J.P. Morgan estimates.



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Key Industry Issues

What Virtualization Means to Data Center Providers. Virtualization software

partitions hardware servers into two or more independent servers, allowing users to

create virtual environments acting independently of each other. Increased interest in

virtualization could help reduce demand for data center services as companies can

meaningfully reduce their hardware requirements by better utilizing existing servers,

thereby reducing the need for additional capacity. This applies mostly to enterprise

users rather than network providers, since routing and switching equipment cannot be

virtualized. However, virtualization increases power and cooling needs and carries

more burdensome server management requirements. As a result, we expect only a

moderate impact to the carrier neutral data center operators.

The Impact of Rising Power and Cooling Needs. Demand for power and cooling

has increased exponentially as Moore’s Law reflects a 2x-3x increase in computing power every 24 months. New servers carry much smaller footprints, but require

significantly more power than their predecessors. The Uptime Institute, a consultant

to enterprises on data center efficiency, recently noted a 6%-7% compounded annual

growth rate in power consumption for its 100 member companies. As a result, some

companies have experienced a 40% increase in power consumption in just the last

five years, while the top third of the institute’s members experienced a 25%

annualized increase. At the same time, data center operators have been faced with

dramatically higher energy costs due to higher oil and gas prices. The majority of

Equinix and Switch and Data contracts have provisions which allow the data centers

to pass along higher power costs to their customers, though such stipulations are not

often invoked.

Valuation

We believe that Equinix and Switch and Data are both attractively positioned within

the data center provider industry to grow market share given the carrier neutral

model. We anticipate both companies will continue to attract top-notch clients

looking to leverage the large network, or ecosystem, created by both companies,

while continuing to support the IP-driven growth of the existing customer base.

While we are attracted by the top-line growth and potential margin expansion of

each, we favor shares of Equinix given the company’s global presence, more

attractive assets (favored by carriers for majority of peering), and stronger capital

base.

We employ a discounted cash flow analysis to value each company. For Equinix, our

December 2009 price objective of $54 is derived based on a DCF analysis which

employs a 10.0% WACC and a 6.0x terminal EBITDA multiple, justified, in our

view, given the company’s relatively attractive growth and access to liquidity to

support its future growth strategy. Our December 2009 price target for Switch and

Data is $6.50. Our target is based on a DCF analysis which assumes a 14.1% WACC

and a 4.0x terminal EBITDA multiple, which we believe is justified given the

company’s relatively attractive growth, but high level of capital intensity and limited

float.



14



We recognize investors may prefer to use an EV/EBITDA multiple, however, we

believe such multiples do not properly capture the capital intensity of the business,

particularly during this heavy investment phase. We estimate capital intensity atEquinix will approach 65% and 43% in 2008 and 2009, respectively, compared with

approximately 96% and 31% for Switch and Data.

Table 6: Valuation Comparison

$ in millions, except per share data

Rating11/24/08

Price52-weekRange S/O (M)

MarketCap Net Debt

Net Debt /2008E EBITDA

Net Debt /Capital EV

Equinix OW $40.69 $33-$111 38 1,543 899 3.1x 37% 2,442Switch and Data N 5.30 $4-$20 35 183 128 2.3x 41% 311Terremark Not rated 3.23 $3-$8 59 191 284 4.9x 60% 476

DuPont Fabros Not rated 2.40 $2-$21 35 85 498 4.8x 85% 583Digital Realty Not rated 25.37 $18-$51 73 1,861 1,242 4.3x 40% 3,102

EBITDA EBITDA grow th EV/EBITDA2008E 2009E 2010E 09/08E 10/09E 2008E 2009E 2010E

Equinix 288 370 463 28.4% 24.9% 8.5x 6.6x 5.3xSwitch and Data 56 72 82 29.9% 13.7% 5.6x 4.3x 3.8xTerremark 58 82 N/A 41.4% N/A 5.4x 3.8x N/A

DuPont Fabros 105 121 145 15.9% 19.8% 3.0x 2.6x 2.1xDigital Realty 291 348 403 19.6% 16.0% 1.1x 0.9x 0.8x

Source: Company reports and J.P. Morgan estimates for Equinix and Switch and Data; FactSet and First Call consensus estimates for all others.



15



EquinixKey Investment Points

Recurring revenue model. Approximately 95% of Equinix’s revenue is recurring,

generated from customers opting for 2-3 year contracts. Switching data center

providers is costly and challenging, requiring the purchase of new equipment and

redundant networks until a seamless migration can be achieved. Given these potential

high barriers to entry, it is not surprising that monthly revenue churn at Equinix is

only ~2%.

Operating leverage. Equinix operates a predominantly fixed cost structure driven by

labor and rent costs tied to its facilities. Combined, these expenses accounted for

nearly half of the company’s cash costs in 2Q08. Though power may be viewed as avolatile variable cost, a large percentage of contracts allow for rising power costs to

be passed on to customers, though this clause is not often invoked. Management

believes its business model is supportive of a 500 bps to 1,000 bps margin increase

from the current 40% level, implying 60%+ incremental margins.

Low maintenance capital requirements. Equinix is currently investing in growth,

with plans to spend $450M-$460M in 2008, or roughly 68% of its recurring revenue.

However, on-going capital requirements are much lower and run below broader

industry averages. Management anticipates spending approximately $60M in

ongoing capital in 2008, roughly 8.5% of our estimated total revenue. In the long-

term, maintenance capital spending is expected to be approximately 5% of revenue.

With 45%-50% EBITDA margins and relatively low capital requirements, we expect

Equinix to generate meaningful cash flow once aggressive growth plans arecompleted.

Fully funded for growth. We believe Equinix has ample liquidity to pursue its

expansion plans while providing flexibility to be more aggressive should market

conditions warrant acceleration. Equinix had an unrestricted cash balance of $330M

in 3Q08 and the company anticipates drawing on $41M of funds from Asia-Pacific

and European financing. Though free cash flow remains elusive, we expect Equinix

to exit 2009 with a healthy cash balance even after adjusting for an anticipated $50M

debt pay down. In addition, the company has built a $50M cushion into its expansion

capital budget, providing flexibility to cutback on discretionary spending, though we

do not anticipate Equinix to do so given current fundamentals.

Investment Risks

Economy. Equinix is levered to the overall enterprise market. In the current

economic environment, we have seen a lengthening of sales cycle and delays in

decision making. Softer demand trends could pose a challenge as Equinix invests

heavily in expanding its available capacity; lower than anticipated utilization rates

could hamper Equinix’s revenue growth profile.

Competition. Though Equinix is one of a few major players in the carrier neutral

colocation market, there is no shortage of service providers investing in data centers.

Network providers such as AT&T, Cogent, Savvis, and Verizon are all investing in

Equinix (EQIX)

Overweight



16



new data center capacity and leveraging their network capabilities and

managed/professional services offerings to compete for customers. Increased supply

could pressure pricing for Equinix services, which has been a driver of growth inrecent quarters.

Integration Risk. Equinix recently completed two transactions which provide an

entrée into the European market. While lower margins in the European operations

currently provide an opportunity for Equinix, the company must adapt to a different

market environment and may not be able to realize planned operating efficiencies. In

addition, the interconnection service is a much lower portion of revenue in Europe

and Equinix may not be able to achieve expected revenue synergies.

Company Description

Equinix provides colocation and interconnection services to content providers,

Internet service providers, enterprises, and network carriers. Through its 39 datacenter facilities (known as Internet Business Exchanges, or IBXs), Equinix provides

colocation services, including cabinets, power, and storage space. Equinix’s

interconnections services enable its customers to connect directly with one another,

either on a one-to-one basis or through a peering service. Equinix traditionally

offered service in the U.S. and Asia-Pacific regions and recently expanded into

Europe through its acquisitions of IXEurope and Virtu Secure Webservices. The

company generated $419 million in revenue in 2007, with the colocation business

accounting for approximately 73% of revenue, the interconnection portion

approximately 18%, with the balance coming from installation and other non-

recurring revenue. Equinix was founded in 1998 and is headquartered in Foster City,

California. Its stock trades on the Nasdaq under the ticker EQIX.

Hub Strategy Supports Global Presence. Equinix operates 39 data centers locatedthroughout the world, including 19 in the U.S., 5 in the Asia-Pacific region, and 15

acquired through European acquisitions. Combined, the data centers offer roughly

1.8M of net square footage, which measures the sellable space of the footprint.

Cumulative gross square footage is up nearly two-fold since year end 2006 as the

company has expanded existing data centers and grown through acquisition and

greenfield builds. Equinix’s strategy focuses on serving as an Internet hub, providing

customers access to connect to the world’s largest bandwidth providers, including all

tier 1 Internet service providers. By offering such access, Equinix is able to attract an

impressive client base, including the most recognized names in content, large

enterprise companies, and government entities. The approach lends itself to greater

utilization as the large network entices additional companies to colocate in Equinix

centers in order to be closer to business partners and network providers.

Table 7: Equini x Data Center Locati ons

North America Europe Asia-PacificChicago 3 Düsseldorf 1 Hong Kong 1Dallas 1 Frankfurt 2 Singapore 1Los Angeles 4 Geneva 1 Sydney 2New York 4 London 4 Tokyo 2Silicon Valley 4 Munich 2Washington, DC 5 Paris 2

The Netherlands 1Zurich 3


Note: includes non-IBX locations and planned facility openings.



17



Acquisitions Fuel Growth and Entry into Europe. Prior to 2007, Equinix offered

its services only in select markets in the U.S. and Asia-Pacific. In September 2007,

the company completed its acquisition of IXEurope, an operator of 14 data centerswith more than 450 customers, for $555M plus the assumption of debt. IXEurope

supported facilities in major markets, including Dusseldorf, Frankfurt, Geneva,

London, Munich, Paris, and Zurich. In February 2008, Equinix followed the

acquisition by acquiring Virtu Secure Webservices, a Netherlands-based data center

provider. Virtu operated two data centers (Enschede and Zwolle) and was in the

process of building a third, in Amsterdam. The two acquisitions gave Equinix an

immediate entry into the European marketplace where it hopes to leverage the global

reach of its customers. Though a more competitive market, European demand tends

to outpace supply by a near six to one margin, per third party reports.

Expansion Strategy. Equinix continues on an ambitious four-year expansion

strategy which is expected to yield an additional 14,400 sellable cabinets in the U.S.

and Asia-Pacific as well as 9,460 cabinet equivalents in Europe (note: the Europeanmarket does not employ similar metrics to the U.S. and Asian markets). The plans

are expected to cost roughly $1.0B-$1.1B between 2007 and 2010. In 2008, Equinix

plans to spend $390M-$400M on expansion activity, with 54% allocated to the U.S.

markets, 25% to Europe, and the final 21% to Asia-Pacific.

Table 8: North American Data Center Expansion Plans

$ in millions

Data Center Target Open Sellable cabinets Total Capex CommentsWashington DC 4 Opened 1Q07 1,700 $60Chicago 3 phase I Opened 4Q07 2,500 $175 additional capacity for 1,300 sellable

cabinets in additional phaseNew York 4 phase I Opened 4Q07 1,700 $95 additional capacity for 1,250 cabinets,

including 1,100 in phase II already

announcedSilicon Valley 2 phase II Opened 2Q08 1,100 $41 expansion within existing SV2, which

opened in Dec. 2003Washington DC 5 Opened 2Q08 1,650 $78Los Angeles 4 2Q09 800 $90-$95 phase I mechanical and electrical

infrastructure will be built to support 1,700cabinets; 800 will be available 2Q09, 900will be shifted to future phases, along withthe additional 1,300 sellable cabinetspreviously announced

New York 4 phase II 2Q09 1,100 $80-$90 300 cabinets available 1Q09 andremaining 800 cabinets available 2Q09

Total 10,550 $619-$634 capex invested from 2006-2009




18



Table 9: Asia-Pacific Data Center Expansion Plans

$ in millions

Data Center Target Open Sellable cabinets Total Capex CommentsSG1 expansion phase I & II Opened 3Q07 & 1Q08 800 $15 phased opening; Expansionswithin already existing SG1

TY2 phase I, II & III Opened 3Q07 & 2Q08 700 25-30 phased openingHK1 phase II Opened 3Q08 550 $17SG1 Expansion phase III Opened 4Q08 450 $14 expansion of existing SG1,

includes incremental power forphase I & II

SY2 4Q08 650 $34SG2 phase I 3Q09 700 $45 additional capacity for 1,000

cabinets in future phasesTotal 3,850 $150-$155 capex invested from 2007-2009


Table 10: European Data Center Expansion Plans

$ in millions

Data Center Target Open Sellable cabinets equivalents Total Capex Comments

Paris 2 phase II Opened 1Q08 600 $9Frankfurt 2 phase II(a) Opened 1Q08 640 $10 220 cabinets available 1Q08 and

incremental 420 cabinets available2Q08

Zwolle and Enschede Opened 1Q08 600 N/A acquired via purchase of Virtu inFebruary 2008

Paris 2 phase III Opened 2Q08 900 $17 Adjusted from 1,000 to 900 to reflectdesign changes

London 4 phase II Opened 2Q08 1,600 $36 Adjusted from 2,000 to 1,600 toreflect design changes

Amsterdam I Opened 3Q08 1,100 $31 500 cabinets available 3Q09;remaining 600 available 1Q09

Frankfurt 2 phase II(b) Opened 3Q08 1,320 $39 phased opening through 1Q09Paris 3 phase I 2Q09 1,300 $30-$35 additional capacity for 1,300 cabinets

in future phases

London 5 phase I 1Q10 1,400 $80-$90 additional capacity for 4,100-4,600cabinets in future phases

Total 9,460 $252-$267 capex invested from 2007-2010


Revenue diversification. As of 3Q08, Equinix received 62% of its revenue from its

U.S.-based facilities while Europe and Asia-Pacific accounted for 26% and 21% of

revenue, respectively. The contributions are largely in-line with the availability of

colocation space by region. When parsed by customer type, enterprise and

government accounted for 57% of monthly recurring revenue in 3Q08, including

16% from financial services firms, a likely byproduct of the company’s Financial

eXchange service. The service offers direct connectivity between firms and

exchanges to reduce the latency (i.e. speed) of timely financial transactions. Of the

remaining 43% of revenue, 26% is driven from network providers with the final 17%coming from content providers.



19



Figure 3: Revenue by Geography – 3Q08

US

62%

Asia-Pacific

26%

urope

12%


Figure 4: Revenue by Prod uct – 3Q08

Non-Recurring

6%

Managed Service

4%

Colocation

77%

94%

Rental

0%

Interconnection

13%

Recurring


Table 11: Revenue Contrib ution b y Customer Type

Network Content Financial Services Enterprise/Other26% 17% 16% 41%

AT&T eBay Bank of America Amazon.comBritish Telecom Electronic Arts Bloomberg CapGemini

Comcast Google Chicago Mercantile Exch. Deloitte & ToucheDeutsche Telekom MSN Deutsche Brose Group McGraw-Hill

Qwest MySpace HSBC NASASprint Netflix Merrill Lynch salesforce.com

Verizon Sony NasdaqYahoo State Street


Note: percentages are of monthly recurring revenue as of 3Q08.

ARPU discussion and trends. Pricing trends remain favorable in each of Equinix’s

markets. Excluding Europe, the company’s average recurring revenue per weighted

average cabinet continues to rise in the mid single-digit range on a compounded

basis, rising from just under $1,413 in 1Q06 to $1,654 in the current quarter. The rise

has been driven by accelerating booking volumes, larger deal sizes, and increased

penetration of interconnect services. Given the relatively high margins of the

interconnection business, Equinix has made a concerted effort to target customers

with greater interconnect needs and is currently allocated portions of its data centers

specifically for these customers. Equinix targets revenue of $1,800-$2,200 per month

for its higher powered cabinets, though reaching the higher power requirements is

not immediate, but is slowly increased over time.



20



Figure 5: ARPU Trends

$ per weighted average billed cabinet

$1,400

$1,450

$1,500

$1,550

$1,600

$1,650

$1,700

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

US & Asia-Pacific y/y change


Strengthening Dollar Poses Foreign Exchange Risk. Approximately 65% of

Equinix’s revenue in 3Q08 was U.S. dollar denominated, with an additional 13% and

10% coming from the euro and pound sterling, respectively. With more than

one-third of its revenue coming from outside the U.S., the company is exposed to

currency risk and the recent volatility in foreign exchange rates. Since August 1,

2008, the dollar has strengthened considerably against both the euro and the pound

and the company noted that revenue in the quarter was impacted by $2.5M as a

result. In addition, 2009 revenue guidance assumes approximately $50M of currency

pressure experienced since July. Notably, management guidance issued on October

22 assumes $1.28 per euro and $1.63 per pound; however, the dollar has continued to

strengthen against both currencies, more so against the pound, potentially placing

further pressure on nearly a quarter of the company’s revenue stream.

Figure 6: Historical Exchange Rates

0.4000

0.4500

0.5000

0.55000.6000

0.6500

0.7000

0.7500

0.8000

0.8500

1 / 1 / 2 0 0 8

2 / 1 / 2 0 0 8

3 / 1 / 2 0 0 8

4 / 1 / 2 0 0 8

5 / 1 / 2 0 0 8

6 / 1 / 2 0 0 8

7 / 1 / 2 0 0 8

8 / 1 / 2 0 0 8

9 / 1 / 2 0 0 8

1 0 / 1 / 2 0 0 8

1 1 / 1 / 2 0 0 8

Euro/Dollar Pounds/Dollar

guided euro/dollar rate

guided pounds/dollar rate

Source: FactSet and company reports.



21



Fully Funded with Additional Flexibility to Trim Spending. We believe Equinix

is fully funded for its announced expansion plans, a positive given the tight credit

market, challenging economic environment, and 2.8x net leverage at the firm. Weanticipate ample liquidity even after accounting for an anticipated $50M debt/capital

lease payments in 2009 and 2010 and currently forecast a cash cushion of more than

$70M exiting 2009, excluding long-term investments. In addition, given the

relatively low ongoing capital spending requirements, the company has significant

flexibility in its capital budget to cutback on discretionary spending. Within its

planned $265M-$315M of expansion spend, management is including $50M for

capacity increases in existing markets with additional flexibility to moderate

spending should economic conditions warrant such action.

Earnings and Cash Flow Outlook

We forecast 2009 revenue of $870M, a 23.7% increase over our 2008 estimated

revenue of $704M. Our forecast falls at the low end of the company’s guided range

of $870M-$892M, which implies 25.1% growth (based on the midpoint). Despite

being on the low end, we believe upside to our forecast may be limited based on

potentially aggressive cabinet adds and revenue per cabinet assumptions.

We anticipate 4,300 cabinet adds in 2009, in-line with the 4,350 adds forecasted in

2008. Management’s reported expansion plans call for 2,600 cabinet additions in

2009 (1,100 in New York, 800 in Los Angeles, and 700 in Singapore), though capital

spending plans include an additional $50M for expansion. This discretionary spend

could add an additional 1,400 based on our most aggressive estimates, implying

potential downside to our cabinet estimate.

We also forecast accelerating growth in average revenue per billed cabinet. Our

expectations are driven by contract price escalators as well as the benefits or largerdeals and increased cross connects. Our 27.7% estimate for cross connect growth

represents an increase from the estimated 26.7% growth in 2008 as Equinix

continues to target customers requiring greater levels of interconnection. Excluding

Europe, we forecast recurring revenue per weighted average billed cabinet of $1,765,

a 7.2% annual increase, up from the 6.5% increase anticipated for 2008.

Our 2009 EBITDA forecast of $370M is within the company’s guidance of $365M-

$385M. Our forecast implies 49% incremental EBITDA margins, a slight

improvement from the 47% incremental benefit in 2008, but below management’s

long-term expectations for 70% incremental contributions. We believe costs

associated with capacity expansions could keep incremental margins below

anticipated levels in the near-term, but believe operating leverage in the business

should allow the company to reach its EBITDA margin goals in the long-term.

Given the heavy investment in expansion, we continue to expect Equinix to be free

cash negative in 2009, though we believe cash burn should improve significantly

from 2008 levels. We forecast free cash losses of roughly $100M in 2009 and believe

the company could achieve free cash flow positive during 2010 should capital

spending fall more than 3%, which appears reasonable given announced expansion

plans.



22



Valuation and Rating Analysis

We assign an Overweight rating and December 2009 price target of $54 to shares of

Equinix. We are attracted to Equinix’s business model and believe the company is best positioned to cater to large network providers which are likely to create an

increasing amount of IP traffic in the coming years. As a result, the company is

poised to take market share in colocation services, providing highly visible revenue

growth.

Our December price objective of $54 is derived from a discounted cash flow analysis

which employs a 10.0% WACC and a 6.0x terminal EBITDA multiple, which we

believe is justified given the company’s relatively attractive growth and access to

liquidity to support its future growth strategy.

Management

Table 12: Equinix Management TeamKey Executives Age Joined Position at Equinix Previous Experience

Stephen M. Smith 50 Apr-07 CEO, President, Director HP, Lucent Technologies, EDSPeter F. Van Camp 51 May-00 Executive Chairman Frontier GlobalCenter, Genuity, MFS Internet ServicesKeith D. Taylor 45 Feb-99 CFO International Wireless Communications, Inc, Becton Dickinson & CompanyMarjorie Backaus 46 Oct-99 Chief Business Officer Global One ,AT&TSushil K. Kapoor 60 Mar-01 Chief Operations Officer UUNET, Compuserve Network ServicesPeter T. Ferris 49 Jul-99 President of Equinix US Frontier Global Center, Genuity Inc, MFS DataNet IncEric Schwartz 40 Jun-08 President of Equinix Europe BellSouth, Harold A. Dawson, McKinsey & Co.,

Source: Company data.

Stephen M. Smith, CEO, President, Director

Stephen M. Smith has been Chief Executive Officer of Equinix since April 2007.

Prior to joining Equinix, Smith was at Hewlett Packard where he served as Senior

Vice President of HP Services, managing organizations such as Consulting andIntegration, Managed Services and Technology Deployment and Support. Smith also

had an eight-year career in the U.S. Army, which included a role as aide-de-camp to

the office of the commander in chief of the U.S. Armed Forces in the Pacific. Smith

graduated from the U.S. Military Academy at West Point and holds a Bachelor of

Science degree in engineering.

Peter F. Van Camp, Executive Chairman

Peter F. Van Camp has been Executive Chairman of Equinix since March 2007 and

served as Chief Executive Officer since May 2000 and President since March 2006.

Previously, Van Camp served as Chairman of the Board of Equinix., from June 2001

to December 2002. He has been a Director of Equinix since May 2000. He has also

been a Director of Packeteer Inc., since May 2001. Van Camp holds a B.S. in

Accounting with a concentration in Computer Science from Boston College.

Keith D. Taylor, CFO

Keith D. Taylor has been the Chief Financial Officer of Equinix since September

2005 and also serves as its Principal Accounting Officer. Mr. Taylor served as Vice

President of Finance and Chief Accounting Officer of Equinix from February 2001 to

September 2005. Mr. Taylor holds a B.B.A from Bishops University in Quebec,

Canada and is a Member of the Canadian Institute of Chartered Accountants.



23



Marjorie Backaus, Chief Business Officer

Margie Backaus joined Equinix in 1999 and has worked in the telecom industry for

more than 20 years. Prior to joining Equinix, Backaus was Global One's ChiefMarketing Officer, responsible for strategy and execution of Global One products,

worldwide. Prior to that role, Backaus was at AT&T for nine years, holding various

roles in marketing and product management, operations and regulatory affairs.

Sushil Kapoor, Chief Operations Officer

Sushil Kapoor has been Chief Operating Officer of Equinix since January 2008. In

his prior role, Kapoor served as Vice President of Operations of Equinix from March

2001 to December 2006. Before joining Equinix, Mr. Kapoor served as Vice

President of hosting operations at UUNET, the Internet division of MCI from

November 1999 to February 2001.

Peter T. Ferris, President of Equinix US

Peter Ferris has been serving as Equinix’s Vice President of US sales since July1999. During the period from June 1997 to July 1999, Ferris was Vice President of

sales for Frontier GlobalCenter. From June 1996 to June 1997, Mr. Ferris served as

Vice President of Eastern Sales at Genuity. From December 1993 to June 1996, Mr.

Ferris was Vice President of Mid-Atlantic sales at MFS DataNet Inc.

Eric Schwartz, President of Equinix Europe

Eric Schwartz has been President of Equinix's Europe business since June 2008. He

also serves as Chief Development Officer of Equinix and leads its strategy, business

development and network technology development. Prior to joining Equinix,

Schwartz served as Vice President, IP Communications at BellSouth. Schwartz also

used to be a member of McKinsey & Co., where he consulted with

telecommunications and financial services companies in the U.S. and Asia on

strategic issues. Schwartz holds a BS in Electrical Engineering and BA in Economicsfrom Stanford University and an MBA from Harvard University.

Risks to Our Rating

Risks to our Overweight rating include:

• Increasing competition. A number of other data center providers are investing

heavily to expand their data center operations, including some operating in

similar markets as Equinix. Increase supply could lead to less customer growth

and potential pricing pressure, limiting Equinix’s revenue growth opportunity.

• Capital Intensity. Increasing data center supply is a capital intensive business.

Should demand fail to materialize to support ample utilization of newly added

data centers, Equinix’s growth could be lower than anticipated.

• Integration. Equinix recently completed two transactions which provide an

entrée into the European market. While lower margins in the European operations

currently provide an opportunity for Equinix, the company must adapt to a

different market environment and may not be able to realize planned operating

efficiencies. In addition, the interconnection service is a much lower portion of

revenue in Europe and Equinix may not be able to achieve expected revenue

synergies.



26



Figure 9: Equinix – Cash Flow Forecast

$ in millions

1Q07 2Q07 3Q07 4Q07 2007 1Q08 2Q08 3Q08 4Q08E 2008E 1Q09E

Net income (4.5) 1.2 4.1 (6.1) (5.2) 5.4 2.2 7.4 9.8 24.8 10.2

+ Depreciation & amortization 20.2 21.7 23.3 34.9 100.1 35.5 38.3 41.6 43.9 159.2 45.6

+ Stock-based compensation 10.5 10.0 10.5 11.7 42.7 12.3 17.0 12.6 15.2 57.1 15.9

+ Amortization of debt issuance costs 0.4 0.8 0.8 1.2 3.2 1.4 1.2 1.2 1.3 5.1 1.4

+

Accretion of asset retirement obligation and accrued

restructuring charges 0.8 0.8 0.8 0.8 3.1 0.4 0.4 0.4 0.4 1.6 0.4

+ Other items (0.2) 0.2 (2.3) (1.2) (3.4) 0.5 (1.2) 1.8 0.0 1.1 0.0Cash from operations 27.3 34.7 37.2 41.3 140.6 55.5 58.0 65.0 70.5 248.9 73.4

+ Change in working capital/other (7.4) 3.1 11.2 (27.5) (20.5) 7.5 7.0 (1.6) (5.0) 7.8 (5.0)Cash after working capital requirements 19.9 37.9 48.4 13.9 120.0 63.0 65.0 63.3 65.5 256.8 68.4

- Capital expenditures 67.1 139.8 88.9 121.0 416.8 125.6 84.5 95.4 151.5 457.0 51.0

Free Cash Flow (47.2) (102.0) (40.5) (107.1) (296.8) (62.7) (19.5) (32.1) (86.0) (449.2) 17.4

- Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Free Cash Flow After Dividends (47.2) (102.0) (40.5) (107.1) (296.8) (62.7) (19.5) (32.1) (86.0) (449.2) 17.4

+ Change in debt 273.6 43.6 444.4 29.3 791.0 37.8 30.4 19.6 36.0 123.8 0.0

+ Change in equity 0.0 0.0 339.9 (0.0) 339.9 0.0 0.0 0.0 0.0 0.0 0.0

+ Acquisitions/divestitures 0.0 0.0 (541.7) (0.1) (541.8) (23.2) 0.0 0.0 0.0 (23.2) 0.0

+ Other investing 19.0 (42.1) (90.6) 17.5 (96.1) 12.7 (131.8) 13.0 0.0 (106.1) 0.0

+ Other financing (0.4) 6.9 (1.1) 8.7 14.1 6.8 11.6 6.8 12.0 37.2 8.0Net change in cash before foreign exchange 245.0 (93.5) 110.4 (51.6) 210.3 (28.6) (109.3) 7.3 (38.0) (417.6) 25.4

Effect of exchange rate 0.1 0.4 (1.6) (1.2) (2.2) (1.2) (0.4) 2.2 (0.5) 0.2 (0.5)

Net change in cash 245.1 (93.1) 108.9 (52.8) 208.1 (29.8) (109.7) 9.6 (38.5) (417.4) 24.9




27



Figure 10: Equinix – Balance Sheet

$ in millions

9/30/08 12/31/07 9/30/07

Ass ets

Current assets

Cash and cash equivalents $161 $291 $343Short-term Investments 102 93 64 Accounts receivable - net 62 60 49Prepaid expenses & other current assets 18 0 26

Total current assets 343 444 483

Long-term investmentsProperty and equipment, netGoodwill

Debt issuance costs, net 18 21 22Other assets 105 44 27Total assets 2,292 2,145 2,131

Liabilities and shareholders' equity

Current liabilities

Accounts payable and accrued expenses 71 65 94 Accrued PP&E 57 77 60Current portion of accrued restructuring charges 0 12 14

Current portion of debt, credit facilities and CLO 4 1 4Current portion of mortgage payable 41 11 3Other current liabilities 66 36 22

Total current liabilities 239 202 198

Accrued restructuring charges, less current portion 0 20 20Debt facilities and CLO, less current portion 95 96 95Mortgage payable 375 319 279

Convertible subordinated debt and secured notes 646 678 678Deferred rent and other 100 56 47

Total liabilities 1,455 1,371 1,316

Shareholders' equity

Preferred stock 0 0 0Common stock 0 0 0

Additional paid-in capital 1,445 1,377 1,356Deferred stock-based compensation 0 0 0 Accumulated other comprehensive income (65) (4) 11 Accumulated deficit (544) (600) (553)

Total shareholders' equity 837 773 815

Total liabilities and shareholders' equity 2,292 2,145 2,131 Source: Company reports.



28



Switch and Data

Key Investment Points

Recurring revenue model with solid visibility. Slightly more than 94% of Switch

and Data’s revenue is recurring, generated from customers opting for 1-3 year

contracts. Interconnect contracts can run month-to-month, though most customers

tend to use the service for long periods of time. Recurring revenue growth in 3Q08

exceeded 24%. Notably, approximately 85% of the company’s $207M-$210M

revenue plan for 2009 is under contract, providing good visibility into the new year.

“The Network Effect”. Many of the world’s largest bandwidth providers invest to

access Switch and Data facilities, creating an attractive environment for content

provider, service providers, and other network providers. The large number of

prominent customers located in their facilities entices other companies andenterprises to locate and connect in Switch and Data facilities, creating an ecosystem

or network of companies. These customers leverage Switch and Data’s

interconnection capabilities to reduce traffic transit costs and latency while providing

a price competitive environment for network connectivity. As of 3Q08,

interconnection accounted for 31% of total revenue at Switch and Data compared

with 13% at Equinix.

Customer loyalty. Switch and Data’s customer loyalty is critical to the company’s

success. Historically, anywhere from 75% to 90% of incremental sales in a given

quarter are generated from existing customers, reflecting a willingness on the part of

customers to want to grow with the company as well as Switch and Data’s ability to

meet customer needs in multiple locations. Churn on monthly recurring revenue in

the most recent quarter was 1.1%, nearly half that of Equinix.

Liquidity limits growth opportunity. Though Switch and Data currently has nearly

$43M of cash, we anticipate cash burn of $35M in 4Q08. While we believe the

company has meaningful growth opportunities, it is limited by its spending capacity,

particularly in such a challenging credit environment. We believe the company will

need to draw down its delayed term loan of $22.5M in order to maintain a positive

cash balance in 2009. As a result, the company will likely be unable to accelerate

expansion without tapping the credit markets, though we believe financing options

may be limited.

Investment Risks

Economic weakness. Given the company’s exposure to the overall enterprisemarket, the company faces risks of a slowdown in technology spending as the

economy struggles to find its foothold. Lengthening of sales cycle and delays in

decision making could slow anticipated growth in particular.

Increased competition. Though Switch and Data is one of a few major players in

the carrier neutral colocation market, there is no shortage of service providers

investing in data centers. Network providers such as AT&T, Cogent, Savvis, and

Verizon are all investing in new data center capacity and leveraging their network

capabilities and managed/professional services offerings to compete for customers.

Switch and Data(SDXC)

Neutral



29



Increased supply could pressure pricing for Switch and Data services, which has

been a driver of growth in recent quarters.

Data center expansion. We believe Switch and Data’s growth may be limited by

the available funding to support new data center builds. Should the company build

centers at a more aggressive pace than we are modeling, revenue growth and

profitability could drive multiple expansion.

Operating leverage. An acceleration of IP traffic growth or continued price leverage

could drive higher-than-expected revenue growth. With a largely fixed cost structure,

EBITDA and margins could improve beyond our long term forecast.

Company Description

Switch and Data provides colocation and network neutral interconnection services to

telecommunications carriers, Internet service providers, online content providers, andenterprises. Through the colocation business, which consists of 34 data center

facilities, Switch and Data provides space along with power for customers to house

their networking and computing equipment. In addition to space and power, the

company aims to provide other complementary services such as physical security,

fire protection, and other technical and maintenance services. Utilizing these

collocation facilities, Switch and Data helps customers manage network traffic

through direct interconnection and multiple-party interconnection services. The

company generated $138 million in revenues in 2007, with the colocation business

accounting for approximately 62% of revenue, the interconnection portion

approximately 32%, with the balance coming from installation and other non-

recurring revenue. Switch and Data is headquartered in Tampa, Florida. Its stock

trades on the NASDAQ under the ticker SDXC.

Largest number of carrier-neutral data centers in the U.S. Switch and Data

operates 34 data centers across 23 markets located predominantly throughout the

U.S. The company’s only non-U.S. facility, located in Toronto, accounts for less than

7% of total revenue. As of 3Q08, the company supported approximately 970K square

feet of data space, though not all of the space is made available to clients. Square

footage in each market ranges from 6.8K to nearly 253K. Switch and Data’s facilities

are not owned by the company, but are typically leased for a period of fifteen years,

many with renewal options.

Focus on Top 10 Markets. Switch and Data has a presence in 14 of the 15 largest

metropolitan markets, focusing on areas where aggregate Internet traffic is the

highest. The New York metro area is the company’s largest, with four facilities andgross square footage of nearly 253K. Other top markets include Atlanta, Chicago,

Dallas, Los Angeles, Philadelphia, San Francisco, Seattle, Toronto, and Virginia

Though more geographically diverse than its domestic peers, Switch and Data is

reliant upon its top markets for the majority of its revenue. Revenue in the top

markets accounts for roughly 85% of the company’s total revenue and achieves top-

line growth nearly double that of its other markets (26% versus 14% in 3Q08).

Additionally, site cash flow (site revenue less site expenses) in the top 10 markets

rose 21% from a year ago, 200 bps higher than growth in the remaining markets.



30



Table 13: Switch and Data Facilities

Gross Square Footage

# of DataCenter s 2006 2007 2008E

New York Metro 4 87,800 252,700 252,700Northern Virginia 3 63,600 62,600 62,600San Francisco Bay Area 3 65,300 107,200 107,200Seattle 2 49,000 53,700 53,700Dallas 3 43,700 73,800 73,800Philadelphia 2 41,400 41,900 41,900Toronto 1 32,900 54,600 54,600 Atlanta 2 28,000 28,000 107,200Chicago 1 21,700 21,700 21,700Los Angeles 1 17,900 17,900 17,900Top 10 Markets 22 451,300 714,100 793,300

Other Markets 13 241,400 217,400 217,400

All Markets 35 692,700 931,500 1,010,700Source: Company reports and J.P. Morgan estimates.

Note: data center count includes the new lease in Atlanta for which service will begin in 2010.

Broader Coverage Supports Customer Needs. In addition to the top markets, the

company supports 13 additional centers in 10 states, accounting for roughly 22% of

the company’s total gross square footage. Though less strategic in nature than the top

markets, these smaller centers provide valuable facilities to meet the needs of

existing customers in need of capacity in less dense markets. As of year end 2007, 72

of the company’s top 100 customers utilized services in more than one market.

Notably, sales to existing customers accounted for 75% of total incremental sales in

3Q08, and have been as high as 89% as recently as 1Q08, reflecting Switch and

Data’s service quality and customer loyalty.

Asset Base Built With Help of Acquisitions. Since early 2003, Switch and Data

acquired several companies, which accounted for 12 of their current data center

facilities. Notable acquisitions include the March 2003 purchase of PAIX, a part of

Metromedia Fiber Networks, which sold the asset under bankruptcy protection for

$40M; the transaction brought six facilities located in Atlanta, Dallas, New York,

Palo Alto, Seattle, and Vienna (VA). Other key acquisitions were Meridian Telesis,

Remote Access Company (RACO), and LayerOne.

Table 14: Acquisition History

Date Price Target LocationsJanuary 2005 $26.0M LayerOne Chicago, Dallas, MiamiMarch 2004 $14.5M RACO Buffalo, Chicago, New York, Toronto

January 2004 $4.8M Meridian Telesis PhiladelphiaMarch 2003 $42.4M PAIX Atlanta, Dallas, New York, Palo Alto, Seattle, Vienna (VA)


Expanding Organically. Following the most recent acquisition in early 2005,

Switch and Data has focused on growing the company organically. In 2006, the

company increased its billed cabinet equivalents by 15%, expanding or adding

capacity in Chicago, Denver, Palo Alto, and New York. Billable cabinets increased

nearly 17% in 2007 and are on pace for roughly 14% growth in 2008. Expansions in

2008 include additional capacity in the Dallas and Toronto facilities as well as new

capacity in Sunnyvale and phase 1 of the 163K square foot New Jersey facility,

which opened in October 2008. Combined, the expansion in these four markets



31



accounted for more than 50% of new sales in the third quarter. With roughly 3.3K

sellable cabinets coming online in 2008 and an additional 1.0K in announced

expansions planned in 2009, total sellable cabinets will be up an estimated 44%during the two year period. In September 2008, the company secured a lease for a

second facility in Atlanta. The lease provides for more than 79K square feet of

capacity, with service expected to begin in late 2010.

Revenue Reflects Focus on Interconnection. Approximately 94% of Switch and

Data’s revenue was recurring in 3Q08, on par with that of Equinix. However, the

breakdown of recurring revenue differs significantly between the two companies,

With Switch and Data receiving a greater percentage of interconnection revenue than

its peer. Of the recurring revenue, nearly one-third came from cross connect services

with colocation accounting for the remainder. This contrasts with only a 13%

contribution of interconnect at Equinix. The results likely reflect a greater emphasis

on interconnection at Switch and Data as total cross connects are nearly equal at the

two firms, though Switch and Data has fewer than half as many customers androughly one-third the number of cabinets.

Figure 11: Switch and Data Revenue Breakdown

Non-Recurring

6%

Colocation

63%

Interconnection

31%

Recurring

94%


ARPU Growing near Double-Digits. As with Equinix, pricing remains a key driver

of revenue growth for the firm. We estimate recurring revenue per average billed

cabinet rose 10% from a year ago, the sixth consecutive quarter of accelerating

growth. The improvement is largely driven by two factors. First, the company is

benefiting from annual price increases of roughly 3.5% and expects pricing in 2009

to also increase by 3.0%-3.5%. Second, the need for incremental services, including

more cross connects and power, are driving larger deal sizes. As customer demand

for power increases, the company is delivering more power per square foot and its

prices increase accordingly. We expect ARPU to remain in the high single-digit to

low double-digit range for the near-term.



32



Figure 12: Switch and Data ARPU Trends

$1,550

$1,600

$1,650

$1,700

$1,750

$1,800

$1,850

$1,900

$1,950

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q080.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

ARPU y/y change


Operating Leverage Supports Hefty Margin Expansion. Cash EBITDA margins

in the third quarter were 31.7%, up 20 bps from the prior year, but down 210 bps

sequentially due to seasonally higher utility costs and expenses incurred prior to the

opening of the New Jersey facility. However, incremental margins run higher as the

company benefits from increased utilization while operating costs are largely fixed.

Based on management guidance, incremental EBITDA margins are expected to

exceed 43% in 2009, helping elevate margins nearly 200 bps, to 34.5%. In 3Q07,

management issued long-term guidance, anticipating 3-year compounded EBITDA

growth of 35% and 24% revenue growth. Further, we believe management istargeting 40% EBITDA margins, likely in the 2011 timeframe. Though likely to be

lower than that of Equinix, we forecast 5-year compounded EBITDA growth (2009

to 2014) of nearly 21% at Switch and Data versus 16% for Equinix.

Figure 13: Switch and Data Margin Trends

(25)

25

75

125

175

225

275

2006 2007 2008E 2009E 2010E

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Revenue EBITDA EBITDA margin




33



Capital Spending Likely to Drop Significantly in 2009. Approximately 90% of

Switch and Data’s capital expenditures are expansion driven, with the remaining

10% used for maintenance and on-going capital needs. As a result of the heavyexpansion in recent years, capital spending has increased from more than $21M in

2006 to a guided $165M in 2008. With only $40M of incremental New Jersey spend,

capital spending is expected to drop 60% in 2009, to $65M. Included in the spending

plans is approximately $10M for on-going expenditures and up to $15M for capacity

fill-ins in existing markets. Beyond that, the company recently entered into a 15-year

lease agreement for a 79K square foot facility in Atlanta. The company does not

anticipate capacity coming online in this facility until late 2010 and indicated that

capital spending in 2009 for Atlanta would be minimal. As a result, we believe 2010

capital requirements should be relatively comparable with 2009.

Figure 14: Switch and Data Capital Spending Trends

$ in millions

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

2006 2007 2008E 2009E 2010E

-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

350.0%

400.0%

450.0%

US & Asia-Pacific y/y change


Fully Funded, With Help from Undrawn Facilities. In March 2008, the company

restructured its debt profile through an amended and restated credit agreement. Under

the agreement, the company received a $120M term loan, which was partially used to

repay $38.2M outstanding under a prior credit agreement. In addition, the company

has access to a $22.5M delayed draw term loan through March 2009 and a $15M

revolver. Management recently indicated that it plans to draw down the delayed term

loan either in 4Q08 or 1Q09. Based on current LIBOR rates, interest should be less

than $2M per year while principal repayment on both its $120M term loan and theundrawn facility are not expected to begin until 2010. We believe drawing on the

facility will provide a comfortable cash cushion to meet the company’s needs in

2009. Our estimates could prove conservative should management succeed in

improving utilization rates more quickly than anticipated. Current utilization is

approximately 63% and management expects this to stay relatively stable as

customer growth is offset by increased capacity in New Jersey. Should customer

demand support utilization rates of 70% or more (on par with pre-expansion levels),

we believe the investments will drive meaningful cash generation, particularly given

the attractive operating leverage of the business and relatively low level of

maintenance spend required.



34



S-3 Filing Could Provide Additional Liquidity, Increase Float. In July, Switch

and Data filed an S-3, proposing to raise up to $300M in debt and/or equity. The

proceeds would be used to repay existing debt as well as for general purposes,including capital expenditures. We would view the fundraising positively as it should

enable Switch and Data to grow more rapidly beyond its current 2009 expansion

plans. However, we believe the current credit environment may limit the

attractiveness of any debt component, increasing the likelihood that equity may be

raised, which would likely dilute the existing share base. The filing also enables two

private equity holders, representing approximately 36% of the company’s

outstanding stock, to sell their shares. Additional float could also allow broader

ownership of Switch and Data shares.

Earnings and Cash Flow Outlook

We forecast 2009 revenue of $206M, a 20.8% increase over our 2008 estimated

revenue of $171M. Our forecast falls below the low end of the company’s guided

range of $207M-$210M. We anticipate 1,000 cabinet adds in 2009, a sizable step-

down from the roughly 3,300 cabinet adds anticipated in 2008. The decrease is

driven by more measured expansion in 2009, with only incremental New Jersey

capacity planned in addition to fill-ins in more heavily utilized markets. The 70%

decline in cabinet adds is roughly consistent with the anticipated 61% decline in

capital spending.

We forecast recurring revenue per average billed cabinet of $2,049 in 2009, a 10.4%

increase from 2008 levels. Our expectations are driven by contract price escalators of

approximately 3% compounded with larger contract sizes. In 3Q08, management

noted that average new deals were more than 25% larger than in the prior year.

Continued high single-digit growth in total cross connects should also contribute to

the healthy per cabinet trends.

Our 2009 EBITDA forecast of $72M is within the company’s guidance of $71M-

$73M. Our forecast implies 47% incremental EBITDA margins, an 800 bps

improvement from the 39% incremental margins anticipated for 2008. We expect

incremental profits to continue to increase as less expansion activity is accompanied

by greater utilization of sellable space. For the long-term, we conservatively forecast

37% margins in 2011, significantly below management expectations, providing

upside potential to our estimates.

We anticipate Switch and Data can approach free cash break-even in 2009, and

forecast $3.5M of free cash burn. However, we believe the company would be best

served drawing its delayed term loan of $22.5M in 4Q08 as our forecasted $35M

cash burn in 4Q would otherwise pressure liquidity at the firm. Assuming the termload is drawn, consistent with management commentary, we believe Switch and Data

is fully funded for its planned builds through 2010. We believe the company would

have to tap the credit markets should higher-than-expected demand result in

accelerated spending plans. We currently forecast the company to turn free cash flow

positive during 2010.



35



Valuation and Rating Analysis

We assign a Neutral rating and December 2009 price target of $6.50 to shares of

Switch and Data. While we are attracted to the business model and both the top-linegrowth and margin expansion opportunities, we are concerned that the company may

not have adequate funding to support its potential growth. We acknowledge that

Switch and Data trades at a discount to its peers, but believe this can be attributed to

the relatively smaller capital base and the associated difficulty for larger investors to

make a meaningful investment in the firm.

Our December 2009 price objective of $6.50 is derived from a discounted cash flow

analysis which employs a 14.1% WACC and a 4.0x terminal EBITDA multiple

which we believe is justified given the company’s growth, high level of capital

intensity, and limited float.

ManagementTable 15: Switch and Data Management Team

Key Executives Age Joined Since Position at Switch and Data Previous ExperienceKeith Olsen 51 Feb-04 President & CEO AT&T, Graphnet, IncGeorge A. Pollock Jr. 40 Aug-99 Sr. VP & CFO Communications Equity Associates, Inc, Deloitte & ToucheCharles D. Browning 60 Mar-00 VP of Operations UNISYS, NYNEX, and TCSI Corporation Ali Marashi 38 Aug-05 Chief Information Officer Internap, interGlobe NetworksClayton Mynard 43 Jun-03 VP, General Counsel & Secretary Comm Equity Assoc., LLC., Tech Data Corp., Anchor Glass Container Corp.William Roach 62 Nov-03 Sr. VP of Sales SonicWall, Inc,PCTEL, Maxtor Corporation, and Quantum Corporation, IntelErnest Sampera 47 Aug-04 Sr. VP & Chief Marketing Officer AT&T, IBM, UNISYS, and the American Medical Association

Source: Company data.

Keith Olsen, President and CEO

Keith Olsen has been President and CEO of Switch and Data since February 2004.

He has worked in the telecommunications and IT industries for more than 26 years.Prior to joining Switch and Data, Keith served as Vice President of Indirect Sales and

Global Channel Management at AT&T, where he developed new markets and sales

channels. Mr. Olsen holds a bachelor’s degree from the State University of New

York, Geneseo.

George A. Pollock, Jr., Senior Vice President & Chief Financial Officer

George Pollock joined Switch and Data in 1999. He is responsible for all finance

functions at Switch and Data including billing, accounting, and business planning.

He has over 16 years of finance experience, including his last position as Chief

Financial Officer of the Merchant Banking Division of Communications Equity

Associates, Inc. (CEA). George is a Certified Public Accountant and belongs to the

AICPA (American Institute of Certified Public Accountants) and the FICPA (Florida

Institute of Certified Public Accountants. Mr. Pollock holds a bachelor’s degree anda master’s degree in accounting from the University of Florida.

Charles D. Browning, Vice President of Operations

Charles Browning has been with Switch and Data since March of 2000. He oversees

operations and site management for Switch and Data’s colocation and PAIX data

centers located throughout North America. Prior to joining Switch and Data, Charles

held executive telecom positions with UNISYS, NYNEX, and TCSI Corporation.

Mr. Browning holds a bachelor’s degree from the State University of New York.



36



Ali Marashi, Chief Information Officer

Ali Marashi joined Switch and Data in 2005 to direct the IT and engineering

organizations. Prior to joining Switch and Data, Ali served as Internap's ChiefTechnology Officer. From 1997 to 2000, Ali was Lead Network Engineer for

Networks and Distributed Computing at the University of Washington. From 1995 to

1997 Ali was a co-founder and Vice President of Engineering for interGlobe

Networks, Inc., a TCP/IP consulting firm.

Clayton Mynard, Vice President, General Counsel & Secretary

Clayton Mynard has been Vice President, General Counsel and Secretary of Switch

& Data Facilities Co., Inc. since June 2003. Mynard was at private law firm Allen

Dell, P.A. from February 2003 to June 2003. From October 2000 to April 2002, Mr.

Mynard served as Vice President of Business Affairs and General Counsel to

Communications Equity Associates (CEA). Mr. Mynard holds a J.D. from the

University of Florida and a Bachelor's degree from Florida State University.

William Roach, Senior Vice President of Sales

William F. Roach (Bill) has been Senior Vice President of Sales at Switch & Data

Facilities Co., Inc. since November 2003. Roach has over 26 years of experience in

information technology, Internet and communications industries. He served as Vice

President of Business Development of SonicWALL Inc., and prior to that was at

PCTEL Corporation where he served as Chief Operating Officer and Chief Executive

Officer. Mr. Roach received his Bachelor of Science degree from Purdue University.

Ernest Sampera, Senior Vice President & Chief Marketing Officer

Ernest Sampera has been Senior Vice President of Marketing of Switch & Data since

August 2004 and is currently its Chief Marketing Officer. Mr. Sampera has 20 years

of experience in marketing and sales. Prior to joining Switch and Data, Mr. Sampera

served as Vice President of Channel Marketing of AT&T Business Services. Mr.Sampera holds a bachelor's degree in Finance from the University of Akron.

Risks to Our Rating

Upside risks to our rating include:

• Data center expansion. We believe Switch and Data’s growth may be limited

by the available funding to support new data center builds. Should the company

build centers at a more aggressive pace than we are modeling, revenue growth

and profitability could drive multiple expansion.

• Operating leverage. An acceleration of IP traffic growth or continued price

leverage could drive higher-than-expected revenue growth. With a largely fixed

cost structure, EBITDA and margins could improve beyond our long termforecast.

Downside risks to our rating include:

• Increasing competition. A number of other data center providers are investing

heavily to expand their data center operations, including some operating in

similar markets as Switch and Data. Increased supply could lead to less customer

growth and potential pricing pressure, limiting Switch and Data’s revenue growth

opportunity.



37



• Capital Intensity. Increasing data center supply is a capital intensive business.

Should demand fail to materialize to support ample utilization of newly added

data centers, Switch and Data’s growth could be lower than anticipated.



40



Figure 17: Switch and Data – Cash Flow Forecast

$ in millions1Q06 2Q06 3Q06 4Q06 2006 1Q07 2Q07 3Q07 4Q07 2007 1Q08 2Q08 3Q08 4Q08E 2008E

Net income (2.3) (3.5) (4.2) (1.7) (11.7) (6.6) 2.0 1.4 2.5 (0.8) 0.3 1.1 (0.0) 1.3 2.7

+ Depreciation and amortization 6.0 5.9 6.1 6.3 24.3 6.3 6.1 6.5 7.0 26.0 6.6 6.9 7.7 7.3 28.5

+ Loss on debt extinguishment 0.0 0 .0 0.0 0 .0 0.0 2.4 0.0 0.0 0.0 2.4 0.7 0.0 0.0 0.0 0.7

+ stock compensation expense 0.1 0.1 0.1 0.1 0.3 0.9 1.1 1.1 1.0 4.1 1.5 1.7 1.5 1.7 6.4

+ provision for bad debt, net of recoveries 0.2 0.1 0.5 0.2 1.1 0.0 (0.3) 0.1 0.1 (0.1) 0.3 0.1 0.1 0.1 0.6

+ Extraordinary items 0.1 1.7 1.5 0.2 3.5 0.5 0.2 1.3 1.4 3.4 2.2 0.8 1.3 1.6 5.9

Cash from operations 4.1 4.3 3.9 5.1 17.5 3.5 9.1 10.3 12.1 35.0 11.6 10.6 10.6 11.9 44.8

+ Change in working capital/other (0.0) 0.3 (1.3) 0.6 (0.5) 4.2 (1.1) 0.1 0.4 3.7 (0.6) (0.5) 4.4 0.5 3.8

Cash after working capital requirements 4.1 4.6 2.6 5.7 17.0 7.7 8.0 10.5 12.5 38.6 11.0 10.2 15.0 12.4 48.7

- Capital expenditures 7.7 3.8 5.5 4.3 21.4 5.9 7.8 6.4 13.8 33.9 24.9 29.1 63.6 47.5 165.1

Free Cash Flow (3.6) 0.8 (2.8) 1.3 (4.4) 1.8 0.2 4.1 (1.3) 4.7 (13.9) (18.9) (48.6) (35.1) (116.5)

- Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Free Cash Flow After Dividends (3.6) 0.8 (2.8) 1.3 (4.4) 1.8 0.2 4.1 (1.3) 4.7 (13.9) ( 18.9) ( 48.6) ( 35.1) (116.5)

+ Change in total debt (0.1) (0.1) (0.1) (0.6) (0.8) (104.7) (0.2) (0.3) (0.9) (106.0) 81.8 0.0 (0.0) 22.5 104.3

+ Change in equity 0.0 0.0 0.0 0.0 0.0 142.3 0.0 0.0 0.0 142.3 0.0 0.0 0.0 0.0 0.0

+ Business acquisitions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Business sales 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Proceeds from sale of property/eqpt 0.0 0.0 0.2 0.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Other 0.0 (0.2) (0.3) (1.1) (1.6) (1.1) (0.0) 0.0 1.4 0.3 (3.8) 0.6 0.3 (0.3) (3.2)

Net change in cash (3.7) 0.5 (3.2) (0.3) (6.7) 38.3 (0.1) 3.8 (0.7) 41.3 64.1 (18.3) ( 48.4) ( 12.8) ( 15.4)

Effect of exchange rate (0.0) 0.0 (0.0) (0.0) (0.0) 0.0 0.1 0.1 0.5 0.7 (0.2) (0.0) (0.1) 0.0 (0.3)




41



Figure 18: Switch and Data – Balance Sheet

$ in millions

9/30/08 12/31/07

Assets

Current assets

Cash and cash equivalents $43 $46 Accounts receivable, net 10 9Prepaid and other assets 3 1Long-term assets 0 0Prepaid expenses & other current assets 0 0Total current assets 56 56

Property and equipment, net 254 115Derivative asset 0 0

Goodwill 36 36

Other intangible assets, net 20 23Other long-term assets, net 6 2Total assets 371 233

Liabilities and shareholders' equity

Current liabilities

Accounts payable and accrued expenses 44 27Derivative liability 1 0Current portion of unearned revenue 3 4Current portion of deferred rent 0 0Current portion of customer security deposits 1 1Current portion of long-term debt 0 4

Total current liabilities 50 35

Derivative liability 0 1

Unearned revenue, less current portion 2 2Deferred rent, less current portion 16 13Customer security deposits, less current portion 0 0Long-term debt, less current portion 120 34Long-term portion of capital lease obligation 51 22Total liabilities 240 108

Shareholders' equity

Series C Redeemable Preferred stock 0 0Series B Convertible Preferred stock 0 0Common stock 0 0Preferred stock 0 0

Unearned stock-based compensation 0 (0) Additional paid-in capital 346 341 Accumulated deficit (216) (218) Accumulated other comprehensive income 1 2Total shareholders' equity 131 125

Total liabilities and shareholders' equity 371 233 Source: Company reports.



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Analyst Certification:

The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarilyresponsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with

respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this reportaccurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the researchanalyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by theresearch analyst(s) in this report.

Important Disclosures

• Market Maker: JPMSI makes a market in the stock of Equinix, Switch and Data.

• Client of the Firm: Equinix is or was in the past 12 months a client of JPMSI. Switch and Data is or was in the past 12 months aclient of JPMSI.

• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Equinix.

• Gartner: All statements in this report attributable to Gartner represent J.P. Morgan's interpretation of data, research opinion orviewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. EachGartner publication speaks as of its original publication date (and not as of the date of this report. The opinions expressed in Gartner

publications are not representations of fact, and are subject to change without notice.

0

31

62

93

124

155

186

Price($)

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Equinix (EQIX) Price Chart

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.

This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it

over the entire period.

J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.



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0

9

18

27

36

Price($)

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Switch and Data (SDXC) Price Chart

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.

This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it

over the entire period.

J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelvemonths, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return ofthe stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sectorand/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Mike McCormack, CFA: AT&T Inc. (T), CenturyTel, Inc. (CTL), Cincinnati Bell, Inc. (CBB),Clearwire (CLWR), Cogent Communications (CCOI), Embarq Corp (EQ), Frontier Communications Corp (FTR), LeapWireless International (LEAP), Level 3 Communications, Inc. (LVLT), MetroPCS (PCS), NTELOS Holdings Corp.(NTLS), Qwest Communications (Q), Sprint Nextel (S), Verizon Communications (VZ), Windstream Communications(WIN), tw telecom inc. (TWTC)

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2008

Overweight

(buy)Neutral

(hold)Underweight

(sell)

JPM Global Equity Research Coverage 42% 44% 15%IB clients* 53% 51% 43%

JPMSI Equity Research Coverage 40% 48% 12%IB clients* 76% 70% 59%

*Percentage of investment banking clients in each rating category.For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a holdrating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks onany securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named onthe front of this note or your J.P. Morgan representative.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based uponvarious factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, whichinclude revenues from, among other business units, Institutional Equities and Investment Banking.

http://www.morganmarkets.com/





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Other Disclosures

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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorganChase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to anydisclosures relative to JPMSI and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is asof the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of thismaterial and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer orsolicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individualclient circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to

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