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

Good afternoon, everybody, on the East Coast, and good morning on the West Coast. This is Jon Atkin. I lead the communications infrastructure investment research team at RBC, along with my colleagues, Bora Lee, and Rashim Jain. Pleased to welcome you to our 30-minute fireside chat with Equinix. And from Equinix, we have CEO, Charles Meyers; and the SVP of IR and Sustainability, Katrina Rymill. I'm going to go through a number of top-level and even more detailed questions. And for those of you listening in that would like to ask a question, you can do so by typing in through the web portal. And I will have a chance to throw in questions, time permitting, towards the end of the 30 minutes. So with that, Charles, welcome.

Thank you.

I'd like to kick off with just kind of an operational question and big picture in terms of efforts underway. It could be automation, workflows, local tax assessments, energy efficiency, or whatnot. But anything underway that you can kind of point to that helps optimize your cost structure and can benefit margins going forward?

Sure. Yes. So I don't get sideways with Kat. I'll read our riveting disclosure first and say someone of what I'll talk about today contains forward-looking statements. Please read our SEC filings for more information about factors that could affect these statements. Again, thanks for having us, Jon. It sounds like you had great attendance today. So it's always nice to be, of course, I think we'd all prefer to be with each other, but these things seem to be working out just fine and getting great attendance, so we're glad to be here. Relative to your question, as we laid out right at the beginning of the year when we talked about our priorities for the year, one of them was what we refer to as business simplification and scaling. And there's a number of things in there with -- I think the core business objectives that underlie that priority are twofold: one, enhancing operating leverage, as you outlined; and two, improving customer experience. So there's probably a few things I would point to in that. One is sort of this effort that we've been undertaking, frankly, for the last couple of years on global design or global consistency, and really pushing to improve the consistency of our offerings and of our delivery across the world. That's both from an ops perspective, from a design and construction perspective, in terms of standardizing our designs around the world as well as from a commercial standpoint in terms of enhancing and improving and streamlining our commercial deal-making process around the world. And so we've really made great strides in that. And I think that includes levels of automation where we can in terms of driving operating leverage. Second area is energy efficiency. And this is -- we've actually, interestingly, since 2011, have invested about $129 million into energy efficiency projects. And typically, those have returns that are well above our sort of hurdle of -- our target of 30%. And those also have a meaningful positive impact on operating costs and, therefore, margins. So in fact, from a demand reduction standpoint, those projects since 2011 have resulted in us reducing demand by about 25 megawatts annually, which, from a sustainability perspective, translates to over 430,000 metric tons of carbon emission [ avoided ]. And so really positive thing from a sustainability standpoint, but also one of the ways that we're driving operating leverage. And then the last category, I guess, is just a broader digital transformation initiative of our own in terms of applying automation and process improvements to improve customer experience and reduce operating costs. And we're -- again, we're making a number of very positive progressions there within the business. And all of that, I think, is going to continue to show up in our operating results and in our ability to drive margin expansion and reinvest in the business.

That's a great overview. Maybe turning into kind of what's been happening since March with COVID. And you have a very interesting perspective, I think, given that you operate in countries that are on the other side that are maybe still heading into the depths and you've seen different practices on a global basis. But at a very broad level, have you seen customer behavior and operations reach kind of a relative state of stability now that we're several months in? And could this already be the new normal? Or are we still seeing kind of bootstraps initiatives on the part of customers to react, and we really haven't really experienced what new normal looks like.

Yes. I would say it varies definitely. As you noted, we're obviously, given our geographic reach across the world in 55 markets, we're sort of in everything from the things that markets that are significantly advanced from a COVID perspective to those that are still at peak levels or hopefully coming off of that. So I think it varies. But I would say -- the broad statement I would make is that I'm not sure we're totally at a new normal. I think we're seeing positive trends on all fronts, both from a standpoint of kind of a return of the vibrancy of the selling cycle, and of course, we've undertaken a lot of efforts to ensure that's the case even in a more virtualized sales environment. And on the operations side, I think some relaxing of restrictions around the world from local authorities and others, that have allowed us to adapt and begin to move back towards normal. But I think there's still a bit of ways to go in terms of whether we get to a fully new normal stabilized state. What I would say is, broadly speaking, COVID has represented a series of puts and takes for us specifically. I think some of the things -- some of the positives have been we did see sort of this acute spike of demand associated with the surge and work from home. I think that we've largely kind of come through, and we continue to see service providers who are delivering those kinds of services have strong demand, but less spiky than it was. Number two, digital overall, I would say, is continuing to increasing prominence in the eyes of companies and decision-makers within companies, and I think that's a net positive for us. And interestingly, what we're hearing from our sales team is sort of enhanced access to decision-makers. And whether that's just because their schedules are different or their ability to not traveling as much or whatever it is, that actually has been a net positive. I think on the other side of the coin there, as I said, I think we're adapting our sales process to be more virtualized, and I think we're seeing good success with that in terms of being able to convert funnel. And we're seeing -- we continue to see the occasional delay in implementation caused by either people not having people ready to return to work can complete those implementations or whatever. But I would say that's fairly isolated and modest in terms of overall volume. So I think we're demonstrating that we can actually build and convert funnel, which I think is very good news for us. And I think we actually started Q2 off really nicely and continue to have a strong funneling, strong conversion of that funnel. So I think we're at ways from being fully back to any kind of equilibrium and new normal but I think we're trending positively, and the business is performing well.

So related to funnel conversion, would be new logo conversion, which often is associated with a tour, but not always, and it depends on the channel in which that new logo is generated. But any -- it's so diverse to talk about new logos and the different channels. But any overall trend line to call out as it pertains to new logo conversion during COVID? Has it compressed? Has it elongated? Or are they offsetting? And there's really nothing particularly different than pre-COVID?

Yes. I would say that I think where there has been more impact is on our ability to capture new logos for some of the reasons you described, including tours as a potential constraint. Although I will say that we've now reopened that and so are selectively being able to do those on an appointment basis when that is needed. We are finding that we're able to convert new logos without that, but at least -- but not all the time. And so I think if there is a more concentrated impact from COVID it would be in the new logo area. But recognize -- and I think you're all aware that our bookings are heavily weighted towards existing customers, right, sort of 80% to 90% plus of our bookings in a quarter are with -- are from existing customers. And so although there might be, I think, a slight compression of our new logo capture rate until we kind of normalize a bit further, I think it's relatively modest in terms of the overall impact. And I think we're still tracking well from a bookings perspective despite that.

And then I think you may have just answered this, but I was going to ask it in maybe a slightly different way. So late-stage sales funnel as we sit here today, how did that compare to what you've seen recently?

Yes. Very favorably. Actually, we -- as we said, Q1 bookings were solid. We did see -- undoubtedly, March was slower than -- normally, you have a big spike, and we still had a strong March, but not quite as spiky as it normally is because we were kind of right in the throes of COVID, but then we sort of rolled into April and saw a strong April, good conversion. And when we did our earnings call, we kind of mentioned that we were actually kind of ahead of the game and seeing a strong late-stage funnel. But I would chalk that, frankly, more up to just continued enhancements in our selling discipline versus any kind of structural shift in demand. But right now, late-stage funnel is actually stronger -- as strong as ever, and we're seeing good conversion of that.

Okay. So you had Q1. You did, I think, really out of conservatism, adjusted the low end of your guidance, and who knows at that that discounted maybe a second wave. But I -- the way I interpreted at least is that there was nothing in your business that warranted that move, but you would did it out of just precautionary steps and not knowing what the future brings, so to speak. So as you look at current trends affecting your business now, are there any indications that could lead you to think you might come in towards the midpoint or even lower end of your current outlook?

Yes. I mean the one adjustment I made to your statement was, I do think that there were sort of identifiable elements of our adjustment that weren't just precautionary. So one was payments that we had made that on the -- that we're going to -- 2 employees as part of COVID in terms of addressing some of the requirements from work from home and some of the strains that's put on our employee base, et cetera, and payments we made to the team in that regard. And then secondly, some of the decisions we made around providing credits for Smart Hands under various circumstances and in various locations. And those things really, we believe, sort of annualized over the course of the year would have a $20-plus million revenue impact. And so there were direct things. And then there were things that we are seeing in anecdotally and in some volume, but it's very hard to predict what the steady-state volume or would be and that didn't really account for a second wave if you will. And those are things like delays in implementation, which we're seeing occasionally, delays in payment terms in terms of people asking for sort of adjusted payment terms and those things. And we just took our -- what we thought was our best guess of saying, "Hey, this is kind of the downside range that we think is appropriate and reasonable, and that was the $50 million on the revenue line". But because of a variety of leverage available to us, we actually kept our AFFO per share, which we kind of view as our lighthouse metric at the midpoint the same. We've just opened up the top end a little bit and opened up the bottom end a little bit. So I think right now, we wouldn't -- obviously, we just sort of gave that guide on May 6. And so not any particular meaningful update since that time, and we wouldn't provide any kind of updated guide in the quarter other than to say, I think we remain comfortable with how the business is performing. And if anything, I think there's -- as I said, there are some tapering of some of those factors, things like payment terms and delayed implementations and those kind of things seem to be tapering off as things improve.

So you did do a $1.5 billion common stock offering since the earnings call. So what would be the right way to think about the impact that has on AFFO per share given the share count implications of that?

Yes. Well, one of the things we did in the -- anticipating that that might be something we would consider. We tried to guide with an expectation of that, and we sort of gave a 2-part guide on AFFO per share in the last earnings call. And we said that for 2020, we expected 8% to 12% excluding capital market activities, but then we contemplating that said that including any capital market activities that we would expect to be greater than 8%. And so given what we -- where we landed on the equity offering, we continue to feel comfortable with that in terms of that guide of greater than 8%, including that capital market activity.

So operational question that that actually kind of relates to this, which is maintenance, right? So I see -- maybe this has come upon a number of our panels and a couple of the other firesides, which is that during COVID, one naturally has to make trade-offs about what to do operationally with respect to maintenance CapEx, maintenance OpEx. And maybe there are some areas that see less emphasis than others. Has there been any of that kind of give and take at Equinix? And might we revert to kind of higher more normalized levels of maintenance CapEx once they come out the other side of the pandemic?

Yes. Generally, I wouldn't say that that was really a factor for us in terms of affecting our maintenance costs and maintenance CapEx. Because, again, all of our sites remain fully staffed and operational. We actually were seeing lower customer volumes and traffics in those to some degree in some sites. So we continue towards an appropriate maintenance schedule. I'm sure there were examples of maintenances that were pushed out or -- but not in any meaningful way. And Q1 was low for us, but I think it was more an artifact of one pull forward into Q4, which is a common thing for us to do at the end of the year is to try to get those things pulled in if we can get them done in Q4 and then probably a little bit of things pushing out into Q2. But I think we're, for the most part, going to trend towards our more common levels of recurring CapEx, which 3% to 5% annually. But Q1 is a seasonally low. It was 1.2%. I think that's probably at very low end. We'd expect a more normal level in Q2, which is more at the 3% level.

Great. I want to remind listeners that if you have any questions, you can type them into the portal to which we're listening to this podcast, and I will try to fit them in as time permits. Maybe a somatic question and then we can drill down into maybe regional trends. But the term Edge Cloud, and so the idea that you might start to see multimegawatt deployments for instance, in Europe, in nonflat markets or in the states in Tier 2, Tier 3 markets. AWS local zones, Microsoft has introduced Edge Cloud. There's -- whether they're named or not, this is a trend that that has been happening, for instance, in the Nordics and Europe and so forth. But I wondered, is that something you're seeing in on balance sheet Equinix as opposed to xScale Equinix?

Yes, is the answer. We're seeing in both, I would argue. And our decision as to which it would be would depend on a lot of factors, including what we saw as the depth of the demand pool for sort of large footprint deployments and other factors. But I would say that you're looking at probably these more slightly smaller-sized deployments in this next sort of ring of markets beyond what we call the flat markets, right? A lot of the demand is still focused in Frankfurt, London, Amsterdam, Paris, in Europe. But this -- that -- I think there is a set of markets, say, a Madrid, a Warsaw, a Malan, a Stockholm et cetera, that are seeing that sort of wave of Cloud demand, and it starts with something that looks like perhaps more like what they're referring to as local zones or those kinds of implementations. And so I think it would depend on whether or not we have a dedicated hyper-scale facility that we would run through the JV or whether we might do some of that activity on book depends a little bit on the size of those as well as kind of what we think the long-term demand pool or the -- maybe the midterm demand pool would look like. But it is a trend we're seeing. We're actively active in it. We're not in all the markets that maybe we're seeing some activity, but we're in a lot of them. And so we think we're well positioned to play a meaningful role in that.

And then as you think about kind of that next tier downs from hyper-scale, so this could be large to medium-sized SaaS platforms, as systems integrators. Anything in the nature of their requirements, whether it's scale or geographic scope or size of the requirements that you are seeing in your business that's at all surprising?

No. I wouldn't say necessarily anything particularly surprising. I would say that we are generally seeing that SaaS providers and integrators and those kind of folks that are -- they typically have very global demand profiles. And so I think that that tends to -- they tend to lean towards Equinix as a likely provider because they would rather not have to deal with a huge range of providers to meet their needs. And so we seem to be well positioned for them for the -- as a provider for them for that reason. Then secondly, I would say that we're seeing a trend towards those SaaS-type providers using hybrid cloud as their architecture of choice. Sometimes starting there and sometimes starting with public cloud and then moving to more of a hybrid environment and sometimes moving eventually much towards a more private cloud architecture at really large scale. But we see a range of things. And because they may not know where along that continuum they will eventually land, I actually think Equinix turns out to be a good choice for them in many cases because they may start with public cloud, but then want to integrate public cloud with private cloud. And again, Equinix turns out to be a good spot for that. And in terms of whether we would do that via xScale or on balance sheet, again, is really more -- xScale, we're targeting at the top 12 or so hyper-scalers and really more 3, 4, 5 year, or more megawatts probably oftentimes well north of 5 in terms of the things that we would put through xScale. So -- but SaaS, broadly speaking, in cloud, when we say cloud, we include SaaS in there. And I would say that's a robust market for us because people are generally wanting to implement some form of hybrid cloud.

So connectivity through both all sorts of interconnect products that you offer, cross connects, ECX Fabric, and so forth. As we think about regional growth rates, we're obviously in the U.S., you're the most penetrated. But by region, prospectively, for the ECX products, in particular, where do you see the most volume growth potential?

I think both -- again, both EMEA and APAC for us are strong to kind of double-digit plus growth markets. And we're seeing continued demand there, and that that flows through in the interconnection as well. Obviously, in EMEA, we've also continued to more normalize our pricing, which has given us some lift in the EMEA interconnection business, seeing strong growth rates there. But just the raw unit demand in both of those markets tend to be very strong, both for cross connects as well as for our virtual -- more virtualized interconnection offerings via the ECX Fabric in terms of ports and VC counts. So you've seen that we're seeing strong VC counts on the ECX Fabric. And I think that's -- they're following alongside the broader volume trends in both EMEA and APAC. And so we certainly expect that to continue and see strong demand for interconnection in those markets.

So turning to Asia Pac, in particular for -- excluding xScale for the time being, what are the types of growth trajectories that you would see different in Japan versus Singapore versus Hong Kong versus Australia?

Well, we feel really good about the markets we're in there. And I think they tend to be both potential landing points for global multinational serving, serving where ever -- various economies within Asia, and then at least in some cases, strong domestic economies as well. Singapore, I think, is more continues to be a regional APAC hub to serve as a entry point into Asia and a point for servicing populations in Asia quite effectively. I believe it's a pretty small domestic economy there. So it really acts as a regional hub and obviously an incredibly strong data center market overall, and certainly, we are no exception to that. Our interconnection position there is exceptional and our overall business in Singapore continues to thrive. So that's a tremendous market for us. The Mainland China market is still quite small for us, but we are one of the few western providers that has the ability to bring our customers on-demand into the Mainland China in our own assets via our JV there. And so that's -- I think that's a small business, but we actually saw a really strong Q1 in Shanghai. Hong Kong continues to be a great market for particularly for some verticals, financial, and others. And even though, even with, I think, some level of kind of uncertainty around it, the Hong Kong business has continued to sort of respond very, very well. And then you have Japan and Australia, which are a combination of both global multinational markets as well as really strong domestic markets. Japan is one of the largest markets in the world from a color perspective. And Australia happens to be really a much more advanced cloud market and cloud adoption market than many around the world. So they both perform very, very well. So I think we're hugely satisfied with our Asia-Pac business. It's growing great guns. I think it continues to sort of go neck and neck with Europe. And at some point, I think it's likely that APAC is the strongest growing market, just underlying -- just underlying growth trends in the regions. But the Asia-Pac business is performing really, really well.

You have -- there's Korea kind of in process. You've got, I guess, sort of a JV franchise remain in Indonesia that's been kind of in place for quite some time. And then on various calls, you've talked about the puts and takes around India. So any kind of a progress report on each of those 3.

Sure. Yes, Korea, you're right. We entered the market there. We've already talked about the fact that we will use a variety of potential entry strategies. M&A, obviously we've done that very effectively in a number of places around the world. In Korea, we determined that organic entry was -- is really our best path. We've seen good response, but in an organic entry, you're kind of building your ecosystem a bit more from scratch, but we've seen great traction, have won a couple of really nice anchor tenants there, building network density in the markets. We think that will take 1 year to 2 to really build a critical mass of the ecosystem, but we're already looking at our next build in South Korea and very happy with how that business is performing. India, you're right. Absolutely, a place that we have -- are hearing from our customers that they would like us to extend the reach of the footprint into that market. And -- but we need to do that with assets and people that we really feel comfortable with. And so we've been actively evaluating opportunities, and some have gone, some just haven't met our needs, and we're continuing to work on that because I do think it's something we need to solve for our customers over time. And then in markets beyond that, obviously, Jakarta. The Jakarta business, the JV there is doing well. I do think it's a little bit of a different market. It's a large population center that people want to serve it less of a robust enterprise market. And so I think right now we feel like the JV is serving our interests well there. But we do think there's other markets in the Southeast Asia market, in particular, that may -- that we have our eye on for potential entry down the road, markets like Vietnam, et cetera, I think are places that we would be potentially interested in expanding to as things continue to mature.

So we have a couple of questions from the audience. One is, has there been a dramatic increase in data peering revenues in line with heightened work from home, would that show up in higher interconnection sales? And might you expect to step-up in interconnection top line trends post-COVID?

We have seen traffic volumes on the Internet exchange have sort of spiked pretty meaningfully. We talked about that in terms of the growth in peak traffic. That's not a huge revenue driver for the business. It's really -- it's part of sort of the overall ecosystem value proposition and tends to, I think, show up in other ways in terms of just attracting players into the ecosystem. I think there will be a nice uptick there, but I don't think it's going to be particularly meaningful to the business overall. But interconnection, as you've seen, has continued to have a great growth profile for us over the last several quarters. And I think that's a reflection of targeting the right customers with the right use cases that are kind of interconnection centric. And we think that that will continue. I do think that the work from home dynamic has helped us win business and in the interconnection arena. And so it will be interesting to see how that translates in terms of unit counts and revenues. But overall, I would say that the interconnection business remains extremely vital. And strong performance in it overall. So we'll see whether -- I don't -- I view it as a -- I don't see COVID as a particularly significant long-term impact. I think we'll see -- we saw some spikes in demand and those kind of things, I think we'll normalize a bit. I do think the work from home phenomena is going to be more durable. And so I think that people will think differently about how they're architecting their networks overall. And I think that works to our advantage in terms of winning business from those customers. So I do think that it will be one of many contributors to what I think it can be continued healthy interconnection performance.

So last one from my side. I got a minute left, you can spill over into a second minute if you need to. But as you kind of underwrite the business case for your various xScale activities, is there a portion that is predicated on the idea that that certain retail customers of yours get so big that they just kind of graduate from the retail product over to the xScale product. In other words, is xScale growth entirely net new, or is some of that [ site didn't offer ] legacy Equinix as you kind of look at your crystal ball as to how that business evolves?

The way we are currently pursuing it, Jonathan, I would say it's almost entirely net new. And the reason is that the -- we have a pretty small -- we talked about the top dozen or so hyper-scalers. And when you look at their architectures, they buy from us across the full range of products ranging from, for example, their network nodes, which are sort of deep -- sort of retail, heavily interconnected, widely distributed nodes across world, then on-ramps, which are -- whether those be Direct Connect or Azure Express route, et cetera. And then in the realm of availability zones, for example, that's where I think we're more -- that our desire is to shunt those into the JV and have the balance sheet of the JV be able to give us that extended firepower. And so -- but I think it's largely additive. And so occasionally, you find where we had served in need, and it might migrate, but I think it's -- for the most part, it is really additive because they're buying across that full portfolio from us.

That's great. We are out of time. I want to thank you very much for participating and hope you have a good rest of the day.

Thanks, Jonathan. Take care. Bye.

Bye.