Equinix, Inc. (EQIX) Earnings Call Transcript & Summary

Okay. Great. Good afternoon, everybody. It's my great pleasure to welcome Keith Taylor, Chief Financial Officer of Equinix. Welcome, Keith. Thanks for being here.

Thanks, Simon. Thanks for having me.

Before we get started, please note that all important disclosures, including personal holdings disclosures and the Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com\researchdisclosures or at the registration desk.

So just coming off another strong year. And you put out some solid guidance for 2020, you put -- raised your dividend over 8%, had one of the best bookings quarters ever. So that's a nice way to start the year, but perhaps give us a little bit of a sense of what the priorities are and what's really driving all of that.

Great. Well, again, thanks for having me. I will make some forward-looking statements. So please do refer to our SEC documents. We filed our 10-K last week. So there's a lot of details in there. But that all said, to your question, I think there's 4 key priorities for us. No surprise, we want to continue to invest in our go-to-market engine, and part of that is to address the size of the opportunity that's in front of us. It also includes -- the average deal size is a lot smaller today than historically. It's been -- hence our disclosure last week on the earnings call, 10 days ago in the earnings call, where we had 17,000 transactions, which is substantially more than anybody would ever probably imagine. And so you think about the number of transactions, our go-to-market engine has to be adjusted accordingly to support that.

Transaction being defined as somebody leasing?

Yes. An activity, something -- selling something to a customer. And we have almost 10,000 customers. That's at the parent level. We have a very large channel program. So go-to-market is highly important for us. And that's one of the key ways that we differentiate ourselves from many over others. Not only, I mean, clearly, our data centers, our global reach, our scale, our brand, the services that we pride -- provide are certainly points of differentiation, but how we go-to-market and where we invest sort of strategic alliances, our global account management team, solution architects, all of that is one of the core priorities for us as well as inside sales, corporate sales and other go-to-market initiatives. The second thing important to us is really our new products and services. You've heard us talk about the acquisition of Packet Host, which will close imminently if it hasn't already closed. That's how imminent it is. The -- so that's a bare-metal service offering and you attach to that Network Function Virtualization, our Equinix Exchange or Cloud Fabric, SmartKey and all the other ancillary services that we add. And so when you look at the continuum of our offering, from retail to the hyperscale to all these new products and services, it really gives you a sense of where our energy is. The third part is really about our people. It's about sustainability. It's about our culture. Charles, really, he would normally lead with that, and I should lead with it. Because truly that without our people, we wouldn't be where we are today as an organization. And then lastly, of course, is about operational efficiency and an organizational structure. And we've done a good job of making the investment under Charles' leadership. He's really got us to focus on sort of key principles, and these are the 4 things that are highly important for the organization and arguably what will continue to differentiate us from anybody in our space for an extended period of time.

And one thing that I think was particularly important about the guidance was you calling on an acceleration in certain parts of your business through the course of the year. I think the U.S. business in North America -- the Americas and then on your sort of stabilized assets as well. So perhaps give us a little bit of flavor of that.

Sure. So we had great growth last year, as you know. And so we felt really comfortable in the momentum in the business. But that's not to say that we didn't have pockets of weakness or we're less sort of impressed by some of the business that we had in the Americas. And it's not that the Americas business is a bad business, but offsetting a lot of that good growth is the dilution associated with the rise in assets and the churn. And as you probably know, Verizon sold its cloud business to IBM. It had a number of assets that are customer relationships that we're churning out that we knew about. And that was very dilutive to our overall growth in the Americas business. So I would say that was the disappointing part. But there's also recognition that the core business, absent that, has continued to grow quite nicely. In fact, I would argue, we're taking share from our peers. And as we look into 2020, a lot of that churn will have dissipated. As we come through the year, you're going to see, I think, an uptick in the Americas business. Business in the sense of the business P&L, in the Americas. The Americas region does more of the bookings than any of the other regions when you look at the volume of global activity around the world. So that was one aspect. And then the second piece is just the stabilized assets, it was 3% on a recurring basis. Then adjusted for nonrecurring, because nonrecurring goes up and down, as you can appreciate, was roughly a 2% year-over-year growth, which is lower than we've seen. But part of that is, at least on a recurring basis, is the recognition there are certain assets that are what we call stabilized, it's our definition of stabilized. Remember, we're sort of a little bit of a hybrid business, and stabilized includes any of those assets that have been fully operational for a year, and all the phases have been built out. But the reality is there are certain stabilized assets that we don't own or control. And we're working hard to take some of the activity in those assets and move it into Equinix-owned assets. And so we are knowingly adjusting ourselves accordingly. So there's a number of things related to that. Of course, there are some assets, as you know, we've turned down and we've moved -- migrated the customers over to our assets in addition to what I -- my first comment. And so whether stabilized assets or the Americas' growth, in both cases, we see -- based on our models, that we will see an acceleration of that this year, being 2020. So we're excited about the opportunity. A part of that goes -- stems in amount of customers that we're adding, the amount of new activity coming through the channel. 27% last quarter, 30% the quarter before, is coming through the channel through effectively the reseller function. And that's putting a lot of wind at our back. And so we talked about the best -- sorry, the second best-ever net and gross bookings. But in fact, it was the best [ PEG ] bookings we've ever seen. And that's when you adjust for price as well. And so Q4 was a really strong quarter for us. And it sort of resembles a lot of what we saw a year back in Q4 of 2018. So it's positioned us, I think, exceedingly well for this year, notwithstanding some of the issues we've had to deal with over the last week.

And then you've got a sizable Asia Pac business. What's the latest?

Asia Pac continue to -- again, there's been a lot of challenges in that part of the world as of late. And even before that in Hong Kong with the social unrest. But overall, the Hong Kong business continues to perform well. It seems to be very resilient. And that tells you a lot of the business that we sell across the region happens to come from other parts of the world, for sure. China is a small piece of our business, as you and I have spoken about previously, less than 0.5% of our revenues. And we're managing our investment into the China market for obvious reasons. But also, the reality is it's easier for us to deploy capital in other markets where the opportunity is ever more present. I think of Sydney, Melbourne, Singapore, Hong Kong, Tokyo. These are all great Asian markets for us. And it's not to suggest that Shanghai isn't, but the opportunity set is just larger in these other markets for us as a company.

Well, it feels like the increase in doing work-from-home and telecommuting and gaming stuff, it's going to put a lot of strain on the data center ecosystem.

It is also the opportunities that we see in front of us. Zoom is -- I think many of you know, operate a good part of their business out of Equinix. And Zoom had a nice -- had nice momentum last week, in what was otherwise a pretty ugly week. But just gives you a sense that there are going to be more collaboration tools that get used. There are going to be more gamers sitting at home, doing things. Gaming at home, not perhaps being in the office all the time. And there's a number of different, I think, opportunities that we see as an organization that it will benefit during these times. But the reality is no matter what posture you take all -- no matter what sector you look at, the digital world is here, it's here to stay. And we happen to be, we believe, at the crossroads of all of those opportunities, whether it's analytics, whether it's autonomous driving, ending this cloud based. It just is an opportunity for us that's, I think, unparalleled compared to anyone else. And that's probably because of the number of networks we have, 1,800 networks. It's hard to -- when we talk to new investors or people who don't know the story as well as maybe many of you in this room, just having that foundational -- that being foundational to who we are and then having the majority of or a substantial number of the cloud on-ramps to the major hyperscalers really effectively means you are not only the on and off ramp to the Internet, but you're the on and off ramp to the cloud. And we're doing a real good job of positioning ourselves. So no matter what opportunity you see, we want to be in the middle of all of that. And subsea cable is another example of an opportunity that relies on our network foundation to basically locate those subsea cable landing stations inside data centers. And we're winning the substantial majority of them.

We had Microsoft here earlier and they were talking about people dividing workflows in the hybrid between Azure and the Edge.

Yes.

And then how do you see yourself as being positioned to be that Edge provider?

The Edge is -- I mean one man's edge is another man's core, as they say. I mean the reality is having those -- if you believe in a multi-cloud -- sort of hybrid multi-cloud environment and diversity is relevant to your underlying business, Equinix is as good positioned as anybody else in the space, if not better positioned than anybody else in the space. And having the on and off ramps to many of the large hyperscalers including Microsoft's core nodes or regional network gateways, that's very valuable to us. And so we think we're extremely well positioned. And again, I refer to the hyperscalers. And if you look at the big 3, Amazon, Microsoft and Google, we have a fairly sizable piece of business with all of them, as I think everybody knows.

And the architectures are changing, and you've recognized that with your partnership with GIC in Europe and perhaps you just update us on how that's going. And what about the next one, partnerships in Japan and elsewhere?

Well, again, recognizing there's a spectrum of opportunity there, and there's a piece of that business that we chose not to partake in for an extended period of time. But the reality was that there's -- as the hyperscalers change their architecture. It became more and more apparent to us that we needed to play partly in that game, not wholly, but partly. And partly being selective in the markets in which we choose, work with those service providers to make sure that we have a strategic -- their strategic purpose to them locating in a data center adjacent to it or at least proximate to it and using our partners' capital alongside our capital, build out those facilities that make sense. And that's what we've done. And so the EMEA JV, which was the first one with GIC, started off exceedingly well. We have 2 assets. For all intents and purposes, they're sold out. We have 4 more assets coming. We've announced some new assets on the last earnings call. We see the hyperscale opportunity across all 3 regions of the world. And we see GIC and potentially other partners coming with us to invest because they're getting a nice-size return relative basis unlevered. We get, of course, that same with our economics, but we also get the fee structure attached to it. And so we get all the strategic value attached to the core business. And yet, we allow our partner to work alongside us and get more than their fair share of the total investment. 80%, at least in the first JV. The Japan JV will probably look something like that. That will be announced in the not-too-distant future, I would anticipate something like a Q3 close for the Japan JV. Clearly, as an organization, we're continuing to marshal down the road, build and develop those assets. We just haven't put them into the JV structure yet. Part of the challenge that we -- that I'm sure you would ask and many of -- people in this room would ask is why does it take so long? And part of it is it's the structure, it's the tax complexity, the treasury complexity and making sure that you are aligned in the way that makes sense for the investor and ourselves. And -- but we're optimistic that we're -- this is one of many JVs. And let me flip it and say, the demand profile for Equinix playing this space, I think, is substantial. I think it's putting pressure on others as well. There is a recognition. I'm sure if you've talked to some of the others in the space or the hyperscalers, they're going to be more selective on a go-forward basis in who they're going to work with. So you need scale, you need size, you need structure. That's what we offer as our organization, you need consistency. You have to live in the new world of GDPR, data sovereignty, operating in a more intense cyber environment. All of these lay fruit at sort of the doorstep of Equinix because of who we are and what we're doing. And so I think we can -- we have to be more selective in what we take because the opportunity is immense. And Charles, he sized it for everybody on the last -- on the June 2018 Analyst Day. We'll certainly give you an update in the forthcoming Analyst Day, but it's a $5 billion opportunity that could be substantially larger. $5 billion of capital investment.

By Equinix? Yes. Or by the venture together?

No, by the venture. And it can be a lot larger. You can do as much as you want, but the reality is when -- you have to be, I think, very selective in what the strategic purpose of those decisions are. And we're -- one of the reasons, I think, Equinix has done exceedingly well over the last many years is we're -- we are disciplined about our decisions. And we're prudent in how we go to market, we're prudent on what our growth should be. On the earnings call, somebody say, well, why can't you grow faster? And we keep saying, yes, of course, we can grow faster. And I'm not going to mention them by name or them by name. But you can see what happens when others grow faster, it destroys the business model. And there's others out there in our space who you know are struggling to try and figure out what to do next because they've taken all that peer -- capital, all that balance sheet and they've moved it into these hyperscale initiatives and wholly, wholly made that investment themselves. And it puts undue pressure on the balance sheet, particularly if it's not of size. And so we've been very disciplined. We're doing smaller deal sizes. We're working hard with our hyperscaler partners and GIC, who is just a phenomenal partner to have. They've got depth, they've got scale, they've got reach and they have patience. And they've got -- ideologically, they're lined up with Equinix. And so that's a great partner to have. So we got that full spectrum. And we're managing ourselves well in hands. I don't -- I think we're in a really good position as we enter 2020.

Great. So I think is that we could see one in the Americas? And the...

You'd see one in São Paulo. It's the first place.

Okay.

It's hard for us to imagine. It does not mean that we won't, but hard to imagine that we do something like in Northern Virginia or Phoenix or Northern California. I think you might see a -- maybe more of a hybrid structure. But the reality is a lot of the competitors, the private equity, the infrastructure funds, they're all moving to the same place, right? And as a result, the competitive dynamics in Northern Virginia is substantial. And all you have to do is look at the amount of construction that's taking place there. We -- what you'll see from Equinix is we just meet our end capacity. We're very deliberate in what we do. We don't need to go put up a 50-megawatt site in that market. We think, obviously, everybody is connecting in that environment because of Equinix. And we create an environment that allows them to do that. But I'm not sure we need to compete for hyperscale in that market, not to mention the hyperscalers have their own capital. But there are certainly other partners that they would use in those markets as well. And it's going to be, for many of them, it will be a race to the bottom.

You have an unrivaled footprint already, but do you see many more new markets over the next year or 2?

We absolutely see new markets as -- I mean, just talking a little bit about Mexico. Axtel was a great initial acquisition for us to get into that country. 2 markets, but it really is a stepping stone to something more substantial in Mexico. So you could see us continue to make broader investment in other markets there. Certainly going into Central America and down into South America, there's appetite. We've already announced we're going to go into Hamburg and Muscat, Oman. So those will be 2 markets that just by passage of time, we'll add to our portfolio. And certainly, India remains a very intriguing market for us, and we'd love to find a way to get in there that makes sense for the investors.

Great. Can you talk a little bit about interconnect? I think you've been going through this migration to 100-gig. It feels like we're kind of through most of that.

Yes. I mean there's certainly going to be some -- there's almost a little bit of attrition or cannibalization as whatever, going from the 10-gig to 100-gig or 1-gig to 100-gig and wherever that may go. But the reality is it's not -- yes, that matters because it sometimes obscures, if you will, the underlying performance of our business, the interconnect side of the business. But when you start to look at the gross additions that we have as a business, that really is how you measure the healthiness and how vibrant that type of space is. And for us, you saw we had a meaningful step-up in our interconnection revenue as a percent of recurring revenues to 18% this past quarter. It's growing faster, it's outpacing that of our core business. And the number of cross-connects, both virtual and physical, are very, very strong on a net basis, but certainly on a gross basis. And so interconnect for us is really, it's a reason for being in many ways. Part of the reason we are also getting into Network Function Virtualization or in bare metal is to increase the sort of the magnetic pull to our ecosystem, which only enhances the amount of cross-connect. And if we do our job right, you're going to see more services coming from these ancillary services, new products and service introduction. You'll see a higher attach rate, you'll see more stickiness, you should see less churn, you see our MRR per cabinet go up. All of this is, again, nobody -- we recognize nobody else is thinking about the business the way we're thinking about it. And so, in many cases, others are going to places where we were, and we're now focusing elsewhere because we think that's where the opportunity is. Just building undifferentiated large-footprinted space is a perfect substitute for the cloud, unless you're working with the cloud. Cloud represents roughly 30% of our business. Predominantly SaaS-based, concerning the large hyperscaler, but if you're just catering these large footprint deals to the enterprise, I think that's not going to be around and that's going to go -- it's going to go into a hybrid multi-cloud environment. Some of it right to the cloud. The rest is going to sit in a multi-tenanted data center like Equinix. And that's what gives us the confidence, build bare metal, have Network Function Virtualization, create an environment where customers will want to come to your ecosystem because they'll thrive in that environment. And that's why interconnection to us is, I know Charles has made it pretty clear, these are investments that we really -- we need to make, but we want to make because it's going to create that opportunity in the future that many probably didn't see.

You made an interesting comment there about you're basically -- you've already been there and others are trying to catch you up. Take us inside Equinix. And just -- what is it that has that culture of innovation, and that kind of looking towards the next thing? Because it's easy to sort of, in a way, sit on one's laurels and just enjoy what you have, but you're always investing in people and in products, that feels like every quarter or 2, we've got something new that you're rolling out. So what's that secret sauce inside the organization?

In many ways, it is the people, right? It's how we hire, how we lead, how we communicate. But we're very clear in what we want to invest in, in our culture. And we're doing some work on organizational health, which I'm sure many companies don't do it, but it's a lot of work. It starts at the top. Certainly, Charles is an absolute great leader when it comes to focusing on the team. And when you get the right team in place, you reward them the right way, and you guide them to a place that we think is highly attractive, and notwithstanding the fact that stock's performed exceedingly well over many years, that people want to come and work at this company. We feel we're at, I guess, the crossroads of all of these opportunities, and it brings in interesting fellow employees. And we believe in our culture, we believe in diversity, inclusion, belonging, that's a big initiative for us today. I talked about our organizational health. We're a top decile company. We want our workplace to be a great place to work. We're changing how people come to work, how they work and the environment in which they work. And all that sits on top of our corporate social responsibility, our ES&G. And that -- people care about that, Simon. People want to know that their communities are safe, their families are safe, they're safe. And we're operating in an environment where the supply chain is going to force us, whether we do it or not, to be a different type of company. And that's where people want to work today. And so that creates an environment where we are always looking around the corner. We are looking at what are our customers telling us we need to do. Whether if you're talking to the Microsoft people or Amazon or Netflix or Salesforce, you pick the customer. There's many of them out there that are so forward-leaning in their initiatives that just bleeds on to us. And it feels good because we're part of their supply chain. And we know that we will differentiate ourselves versus anybody else by making these investments.

But it puts you in a difficult position because there's a lot of us in this room who would love that extra 50 basis points of margin today or next quarter. But you're telling us we have to be patient. So how do you kind of have those conversations?

Yes. Some people probably went to believe that we could deliver $25 of AFFO per share. And the reality is we get -- we're doing it all. We're trying to be that company that's not a $600 a share company. We're $1,000 a share company. That we're $10 billion in revenue. That we're creating long-term sustainable value. If we listen to everybody over the years, we would have levered up our business too much. And we would have priced our customers out of the business. And our view is it's long-term sustainable value creation for the shareholder. And yes, we can give you more margin. And I don't mean you. I mean the shareholder -- but we're very mindful and Charles is good about the discipline, investing in the future because we have this opportunity. Yet, at the same time, giving something back to the shareholder. And what we did was made sure that you've got great AFFO per share growth at 9% to 11%. And that doesn't even include the refinancing. So we're doing -- we're investing in the future. We're growing the business in a disciplined way. And we think we're setting ourselves up to be that long-term historically significant company that we want to be part of. And at the same time, create immense value for our shareholders. But we don't live in the short term, we live in the long term, sort of medium to longer term because we think that's where investors want us to be, certainly our largest investors.

All right. Time for a couple of questions. All right. So we're seeing some industry M&A right now. Do you think of some opportunities for you in -- with that?

We're acquisitive. We've recently announced 2 acquisitions. We're going to do a third, in effect, acquisition, which is the joint venture in Japan. And we're always aware of what's going on in the marketplace. And probably no surprise to you, we get to look at every book that comes by, and we just have to be selective where we can make a difference and where we should make a difference. In some cases, it will be a small building, like we bought our Toronto 2 asset, to something more substantial like Axtel to the JV, but then there's others out there. And again, we're not shy. And so we'll look at all and everything that makes sense for the business, but we're also -- we don't need to -- we don't need to acquire to show growth. We don't -- where -- our organic business is very healthy. Going back to my comment in AFFO, we threw up an AFFO per share, so it sort of levels the playing field with all the different capital structures. And we had -- we deliver more AFFO per share than the next 6 combined, public companies combined. And so we know that we can grow, and we can create value, and we're getting the returns that we want to. And so we don't necessarily have to change that -- chase that opportunity if it's not going to add value. And truthfully, the prices have really been traded up. And so it makes it harder and harder to make sense of a transaction when you're paying 30x or 40x EBITDA.

And how do you see your competition set right now, is that...

There are so many people in the periphery, but there's very few that do what we do.

They're trying to get more into your business.

They are. You can't change the stripes of a tiger, right? In the end, you've got -- has got to be, it's going to be foundational. You have to have the networks inside your environment to make a difference. You have to have the cloud, the core nodes of the cloud inside your asset. And the reality is many will just use other means to actually access that via Equinix. And so you can pick whomever. And they might use, say, a Megaport, but that Megaport is just taking all of that data, all of that value and bring it to Equinix' environment. And we think of them as just another very strong provider in the marketplace that is enhancing our ecosystem. So it really has to happen around -- where are you investing and what are you doing inside the environment that you operate in. For us, we want to stay ahead of the game. The analogy is go to where the puck will be, not where it was. And we're doing that. And I'm glad that you sort of recognize that a little bit in your comments. But truthfully, that's how we feel in it. It starts at the top. And again, I think we have a really good team. We've realigned ourselves differently, and we're sort of more globally aligned and functionally aligned now than ever before, and I think we're well positioned. And I've been here 21 years, that's why I love it still. So...

Great. Well, that's a great place to end it, Keith. Thanks so much.

Good. Thank you. Thanks, everybody.