On the Tightrope: Balancing Growth and Risk in Asia

You can forgive Ong Wee Gee some measure of pride as he contemplates the robust Asia Pacific finances of Equinix, one of the world’s leading providers of data-center spaces. In the first quarter of 2013, Asia revenues shot up 44% to US$62.8 million while EBITDA increased 57% to US$30.5 million – continuing the double-digit revenue and profit growth in 2012 and the two years before that.
 
But Ong, who is Asia-Pacific Vice-President, Finance, at Equinix, and a panellist at the 4th Annual CFO Innovation Asia Forum in Singapore, is wary of complacency. While recurring revenues from two- and three-year customer contracts comprise the bulk of earnings, he is aware of the uncertainties within and outside Asia, including regulatory risk and macro-economic risk.
 
The key is to strike the right balance. “That’s why we adopt a phased approach,” says Ong, referring to Equinix’s practice of building data centers in stages. “It provides a cushion to what might happen in the future. It’s also a good disciplined approach for us to manage our cash.”
 
He spoke to CFO Innovation’s Cesar Bacani about Equinix’s strategy in Asia, how the finance function is walking the tightrope between aggressive expansion and prudent cost management, and other issues. Excerpts:
 
Revenues for Asia were up 40% last year and 44% in the first quarter of 2013. How did you manage this and will growth continue in 2013?
If you look at it from a demand perspective, the trend is of more Internet users using more devices in the near future. Everyone now is carrying two or three. In three to five years’ time, people are going to carry five, which means that there will be a lot more data, a lot more traffic – obviously that’s going to help us from a data center space perspective.
 
Cloud computing is another big trend that we see. That’s one of our biggest verticals . . . and one of the fastest growing. Research is telling us that right now cloud computing is 2% of IT spend, but growing to 20% by 2015.
 
A combination of our differentiation and our values together with these technology trends has gotten us to where we are now. In 2013, we [in Asia Pacific] should continue with that kind of [double-digit] growth . . .  The second quarter result is going to happen in next couple of weeks [Editor’s Note: The conference call is scheduled for 24 July].
 
You believe that cloud computing will account for 20% of IT spend by 2015. How do you decide whether a forecast like this is likely to be true? How do you make sure that the data you accept and the analysis and forecasts you make based on these predictions are solid and accurate?
We [in finance] work very closely with the management team, which includes the president, the head of sales, myself [as CFO], other regional executives and the country managers, who have p&l to run.
 
The country managers have the experience and the exposure to the territory that they are managing. They are very close to the ground from the demand perspective – where the trends are going, all the suppliers in the market, what the competitors are doing, relationships with government agencies.
 
Obviously we will assess together what the risks are, what the opportunities are in the markets; what is the market share we want, what kind of budgets we should set for ourselves. 
 
How does this information from the ground filter up to finance? Do you have monthly meetings?
I have a monthly forecast review meetings with [finance teams in] all the countries. Sometimes I will have the country managers in these forecasting calls as well.
 
On the budgeting process, it’s only once a year, typically in the fall – August, September, October – where we look at the next year’s numbers as well as a three- to five-year strategic plan.
 
When it comes to near the quarter end, I will do a fortnightly review, so I know that things are not falling out or if there are certain opportunities, I know what they are and how to take action on these recent opportunities.
 
On top of that, the region also has what we call an AP management meeting, where everyone including all the country managers get an update on what is happening, on what is hot on our plates. For those who own p&l, obviously they have to update – what they are looking at from a sales-order perspective and revenue perspective for the quarter, what is the EBITDA, what is the capex.
 
Every two weeks, the whole management team will get together in a call. Obviously we don’t get down to the very details because it’s a management meeting. But we update everyone in terms of the risks and the opportunities that we see for the quarter and in the next quarter.
 
We’re now in July. Are you under budget or over budget or just right?
What I can say is only the first quarter performance. Based on that, we’re meeting expectations. From a company perspective, we guided externally that we’ll make US$2.2 billion in revenue and US$1.01 billion in EBITDA. We guided the same in the first quarter earnings call.   
 
We don’t have a regional breakdown, at least not externally. What I can say is that the US$2.2 billion and US$1.01 billion still represent Asia Pac as having similar growth that we see in the past.
 
How would you describe the alignment between what is forecast and the actuals in Asia? In general, are you on target?
Being able to deliver accurate forecasts is pretty common [for us] . . . You’ve got to understand that the model Equinix is in is a recurring business model. We sign orders for two to three years. We know what the recurring revenue is. We have a predictable cost structure. Most of our costs would be rental, power and labor, which are very predictable.  
 
But the economic and business environment is getting more volatile in China, for one, while the US is tapering off on quantitative easing. Abenomics is untested in Japan, and Greece and other crisis-hit economies in Europe are looking like they may get undone. Won’t these developments affect your forecasting and planning here in Asia?
There will always be volatility. [The question is] how do we make sure, No. 1, that we get close to the ground, get close to the market? You say there is a credit crunch in China. That’s not going to affect us a lot.
 
The reason is because as I said earlier it’s a very recurring business model. We have a huge base of customers where they lock in contracts with us and we have good customer names within our data centers.
 
The European financial crisis, that might affect certain sectors like financial services, but we have other verticals that we are very good at.
 
At the end of the day, it’s about knowing all these developments, the risks and opportunities, early. How we do that is to make sure that we are close to the ground, we get to know all these things very fast and then communicate among the management team to make sure that we take action.
 
So what are the risks to your business in Asia?
Sometimes the risk is that we may not be expanding fast enough. If we are not expanding fast enough in a certain market, the customer may not go with us. The thing is that we cannot expand in every market that the customer wants.
 
Another risk that we see is regulations. Many of the markets we are in are Tier-1 – Hong Kong, Singapore, Australia, Japan – with a stable government structure, political stability, bureaucrats that make sure the economy still runs despite changes in government, as in Japan.
 
But we are also in China and Indonesia. I think China is getting from worse to bad to good. At least we now understand where they’re coming from; we get a heads-up from them before things move to very bad, that kind of thing. 
 
We’re still looking at India, but because it’s a very complex market, with complex government regulations, we want to be careful. If we want to go into new markets, we just have to be cautious.
 
When you refer to regulations, do you mean places where you may face onerous and changing rules in putting up data centers or places where your customers have to go through hoops to be able to put their servers into your data centers?
Both. It could be where we want to put up our data center and then we have to consider the license issue, whether that jurisdiction requires a data center license. And then at the same time knowing that the customer is able to put their serves or data in a third-party center or they have to put it in-house.
 
How do you mitigate the regulatory risks, then?
We need to make sure that all the six markets we are in now – Hong Kong, Singapore, Australia, Japan, China and Indonesia – we actually know what is happening, not just from a trend perspective but in terms of regulations and accounting, demand from Internet users and so on.
 
At the same time we obviously have a pipeline of new markets that we are exploring. Those again require us to do our own research to make sure we don’t get surprises after going to the new market.
 
Are there data centers located in all six markets?
We have multiple data centers in all these markets with the exception of Indonesia, which is a partnership with a local company. The reason why we have multiple centers is that we don’t want the risk of going dark.  
 
We need around 12 to 18 months to build a data center. Certain data centers that we build, we need to have groundbreaking, build the shell – that may take 18-24 months. Others where we fit up an existing building, it could be 12 to 15 months.
 
So by that time you’re ready to host the servers of customers, demand would perhaps have waned?
That’s why we adopt a phased approach. We’re going to build a huge data center in Singapore called SG3, which is next to [the already built] SG1. This is going to be a massive data center build; it’s almost triple the size of many other data centers in Asia Pac.
 
We find that building a data center next to one we already have, which is very network-dense, will give us even more value proposition to our customers.
 
We’re going to do it by phases. In a multi-level data center build, we can do it by level. Sometimes even within a level, we can still do it by phases, where we can cut it into different halls. So there’s a lot of ways that we can do it.
 
It provides a cushion to what might happen in the future. It’s also a good disciplined approach for us to manage our cash, our capex, our expenditures.
 
Partnering with another company such as in Indonesia would seem to be another risk mitigation approach.
Yes, that’s another approach for us. It enables us to explore the market first before we start putting capex. A partnership allows us not to make a huge investment on capex, so again a good way to balance expansion and a disciplined approach in expanding to new markets.
 
Seven years ago I started working in Equinix and one of the objectives that was given to me was to go to China. After exploring the market and understanding the government regulations and at the same time building relationships with some local players, we found a good player that we could trust.
 
A lot of our customers said they wanted to go to China. But we told them that based on regulations [at that time], based on the new markets we were already in, we wanted to be cautious. , so we don’t really own the data center. But you know what, you will have the same quality, share the same languages that we have in Equinix.
 
So we did a lot of co-marketing with the partner, we did a lot of work with then, and slowly we got to know the partner in China and also the market from the regulations perspective, from the demand and supply perspective.
 
And then last year, when we saw an opportunity for us to acquire a data center, we were ready. We told ourselves that after partnering with someone, we understand the market and regulations, we understand the dos and don’ts, demand and supply, we are ready to go for an acquisition. That’s when we put in [US$230.5 million] for the acquisition.
 
Did you buy the data centers of your partner in China?
No, we managed to find another player. The owners [of Asia Tone Ltd.] decided that they wanted to sell. We now compete in certain segment with our partner, but we complement them in other markets.
 
So in certain places that are not our sweet spots, we ask them: Why don’t you continue as our partner?
 
They still do. There’s enough demand in the market. The relationship has been established and strengthened that we continue to complement each other.
 
How much does the finance function spend on value-added tasks, including risk management? When we spoke last year, you estimated that it’s 50% accounting, transaction and compliance and 50% business partnering. Don’t you need more time for value-added tasks?
We as a company are putting a lot of money into our internal processes and systems. There’s a big ERP project the company is undergoing right now. We’re looking at around 80 processes and multiple systems that we have to see how we can streamline and update the processes and the systems so we can serve our customers better at the same time to make sure our employees are doing well.
 
I’m also setting up a Shared Services Centre in Singapore. We are going to centralize our accounting, finance, transactional functions in Singapore before the end of the year. Again, we want to make sure to streamline our process and have a better governance structure, at the same time scalability. We’re going from US$2.2 billion in revenues for the company to US$3 billion in 2015 or so. We need scalability in the back office functions – accounting function, billing function, accounts payable, GL, all these will be centralized in Singapore by this year.
 

I really hope that by next year, when the Shared Services structure has been stabilized, that hopefully we can spend 60% of our time on business partnering and 40% on the rest of finance.   

 

Photo credit: Shutterstock

 

Suggested Articles

Some of you might have already been aware of the news that Questex—with the aim to focus on event business—will shut down permanently all media brands in Asia…

Some advice for transitioning into an advisory role

Global risks are intensifying but the collective will to tackle them appears to be lacking. Check out this report for areas of concern