Serving the World

The 750,000-square-foot data center that Terremark Worldwide runs in downtown Miami has been likened by many to a fortress. Built of seven-inch-thick, steel-reinforced exterior concrete panels, storm-proof glass and 19 million pounds of roof ballast, it is designed to keep communications and data flowing—even in the face of a Category 5 hurricane. Terremark itself has weathered numerous storms—though few hurricanes—since the squat, six-story building was erected in 2001. The first purpose-built, carrier-neutral Tier-IV Network Access Point (or NAP), the building is considered one of the most significant telecommunications structures in the world, the NAP of the Americas, as it’s called. In English, that means the facility is home to 160 different data carriers— from AT&T to Verizon to British Telecom and Telefonica—serving residential and corporate customers worldwide. The facility makes Miami the only U.S. city where optical, Ethernet, MPLS, voice and Internet traffic is handed off from one carrier to another in a single location. The facility switches traffic from throughout the Americas and the Caribbean to almost 150 countries worldwide. It’s a concept one executive there called “the airport for the Internet.”

[LAUNCHED AT ‘A VERY CHALLENGING TIME]’

From the beginning, executives realized Terremark and its NAP would have significant strategic value. Ideally located to serve the Americas from what has been called one of the single-most connected locations in the world, executives sensed promise. But the tech bubble had just burst, and tech stocks were getting slammed. Other data centers were struggling or failing, says CFO Jose Segrera, who arrived before the company launched operations. These market conditions would continue for several years, with analysts questioning the wisdom of yet another provider. “It was a very challenging time,” Segrera recalls. But the company stayed focused. Beyond the NAP, executives saw a future in collocation— or the service of providing physical space and Internet access for client servers. Today, Terremark Worldwide is a leading provider in a fast-growing Internet market. Its diversification from NAP to server host has helped strengthen its place. September 11 helped change—and accelerate–the market. Terremark’s focus on network connectivity in a highly secure environment lured the U.S. government, and Uncle Sam’s nod provided the assurance private customers needed to overcome their reluctance to colocate or host offsite. One such company is CBS Sportsline, the online sports site of CBS Broadcasting. During any NFL Sunday, the company’s 1,000 servers onsite hum in a cooled server center, even as they draw 300 watts per square foot and burst up to 12 gigabytes of data per second, Segrera says. Terremark’s Infinistructure “virtualized” utility computing systems also host every aspect of BMWUSA’s online presence. “Nobody’s busting us now,” Segrera boasts about the company’s client list and service offerings.

[A FOCUS ON FUNDAMENTALS]

As a result of a spate of new business, Terremark has been topping its expectations. In February, the company reported third quarter fiscal 2008 losses of $3.5 million on revenues of $50 million, versus losses of $15.5 million on revenue of $43.4 million the year prior. The company added 62 new customers, bringing its total to 948. Terremark in 2007 also restructured its debt as part of a $250 million financing deal with Credit Suisse Securities and Tennenbaum Capital Partners, freeing resources to underwrite new facilities in Culpeper, Virginia and Santa Clara, California. In Virginia, a 50,000-square-foot facility rising on a 30-acre campus will be ideally suited for Terremark’s federal government business. The company is also building a similar facility in California to serve its fast-growing Internet companies.

The company also has NAP facilities in Sao Paulo and Madrid, with another $40 million NAP of the Caribbean under contract for Santo Domingo in the Dominican Republic. In the past year, Terremark has made strides into new categories. Last May, it acquired leading industry player Data Return in an $85-million deal that helped Terremark stake its claim in the managed services area. Instead of providing access to users and carriers around the world, Terremark now is hosting networks, servers and websites and applications for users. One such user: ICANN (the Internet Corporation for Assigned Names and Numbers), which in April named Terremark to house functions that help computers connect to each other over the Internet. In fact, of all the news and new deals surrounding Terremark, its move into hosting and managed services could be its most significant. Companies increasingly are seeking “virtualization,” or services and applications hosted by third parties but delivered through the Internet to corporate offices or users anywhere in the world.

In published interviews, Terremark chairman and CEO Manuel D. Medina has called the move to virtualization a “watershed” moment for the Internet services industry. He’s not off target. Businesses increasingly are looking for Web services, Software as a Service (SaaS), open source applications and virtualization to deliver what’s called “online architecture,” says David Tapper, vice president of outsourcing services with research firm IDC. They’re turning to companies like IBM, HP, Accenture and even Google to provide Web-based applications. And many of those same companies will turn to providers like Terremark for secure hosting of the applications. Colocation, or hosting servers for clients seeking the physical and data security of a facility like Terremark, is a rising business for the company. It dedicates an entire floor of its Miami NAP to government services. As a contract provider of the U.S. General Services Administration, the company’s Federal Group Inc. has in April won the contract to host the Library of Congress’ new interactive website, myLOC.gov. In October, it was named the telecom services provider on the Northrop Grumman Corporation (NYSE: NOC) team that was awarded an indefinite delivery/indefinite quantity (IDIQ) contract by the U.S. Department of Defense.

[BUILDING ON THE BROADBAND BOOM]

Terremark is in a good place at a good time, says Colby Synesael, senior vice president with Merriman Curhan Ford, a boutique investment bank. With broadband use proliferating among consumer, corporate and government customers, service providers like Terremark are poised to capitalize on the flood of YouTube videos, online bank statements, corporate enterprise applications and secure defense data streaming across the Web, he says. Add its corporate disaster recovery functions and virtualization— all with network neutrality— and the package of services is ideally suited to an increasingly connected global community, he says. Still, the company has its challenges. Its debt is around $335 million, and expansion plans in markets with high real estate costs, like Silicon Valley and the greater D.C. metro area, could sap resources. Executives realize tough work remains. The company is using only 20 percent of total capacity worldwide, a figure that leaves some analysts to wonder whether Terremark’s building boom is overkill. For his part, Synesael notes that datacenters have become core to how IT is run, which could insulate providers from macroeconomic downturns. With clients spanning the Internet and retail space—from Limelight, Shutterfly and Facebook, to BMW and healthcare company Broadlane—Terremark is well positioned, Segrera says. “Now it’s heads-down execution,” Segrera says. “There’s a lot of momentum in the business.”