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

Hi, Karl. Good morning, everyone. Sorry. Good afternoon, everyone. Good morning to those of us on the West Coast. Today, we have Equinix for a fireside chat, their Chief Customer and Revenue Officer, Karl Strohmeyer. Karl and I are going to get into a quick conversation and chat about what's going on in the business a little bit and try and dig in. [Operator Instructions] So don't be shy. We can't see you. I don't have to announce you, if you don't want. And here we go. So Karl, how are you doing?

I'm doing great. Thanks for having me. I wish I was in person with everybody, and I'm sure we're all feeling the same, but it's good to be here.

Yes, this isn't quite Vale, maybe next year. Maybe next year.

So I want to -- I'll jump right in. On the second quarter call, we got an update from you guys and heard that this was really the third best quarter of gross bookings driven by the Americas, your -- the domain over which you were formerly President, if I recall correctly. Can you characterize what you're seeing in the pipeline in terms of demand by verticals?

Yes. Sure. So before I jump in, I'll just do a quick disclosure. Some of what I'm going to talk about today contain forward-looking statements. Please read our SEC filings for more information about factors that could affect these statements. But yes. No, Jordan, thank you again. Thank you for having me here. We did have a strong quarter. And obviously, given the circumstances, we're quite proud of that. And before I just jump into all the various sectors and just give you some trend information or perspective, just -- as you can imagine, we had to shift how we had to sell, how do we had to demand gen, how do we have the market, how we held virtual events. And so very proud of the organization and some of that shifting, and I'm sure we can talk more about it. But just as it goes through each one of the verticals, networks unsurprisingly was incredibly strong. It was a record bookings quarter for the networks. I mean as we all know, they were scrambling in certain parts of the world to make sure that they had the right amount of capacity to support various cloud service providers and other traffic needs, certainly from a work-from-home standpoint. Financial services had its second highest bookings, strength in global financial insurance firms. A lot of projects that we've been working on around digital transformation just continued with momentum across the financial sector, which was good to see. Content and digital media saw solid bookings, particular strength in gaming and video, which, obviously, shouldn't be a surprise to anybody with everybody at home. Cloud and IT services, good strength across the board. We added some network nodes in some new markets. So that certainly helped the trajectory from a booking standpoint. And then enterprise, which was definitely a mixed bag. It was strong on an overall basis, but there's certainly sectors out there that are feeling this more than others. And we're not immune to that dynamic. And so we saw some lengthening sales cycles across some of those sectors. We haven't seen any of the projects that we've been working on go away, just kind of delayed, more people reviewing them, more internal assessment maybe by more of the CFOs and some of these organizations, which make sense. But then counter to that, we saw a number of enterprise sectors accelerate because the one thing that became obvious or is obvious is that digital transformation is arguably more important in a post-COVID world than it was in a pre-COVID world. And if you just think about the drivers, work from home, think about the impact that puts -- the pressure that puts on wide area networks and IT organizations around how to manage the performance of applications and maintain engagement at employee level to ensure that they can do their jobs. Obviously, all those, they're trying to think about cost takeout and how digital transformation can support those efforts. So broadly speaking, we saw -- at the macro level of the enterprise, we saw really strong performance.

Clearly. And what about geographically? And obviously, the Americas were really strong in the highlight, but how have they trended across your 3 regions?

Yes. So yes, we did call that out. Americas did see record bookings, and they continue to be a huge producer of the platform. We call these expert bookings -- export bookings, simply selling to headquartered companies in the U.S., deployments in Asia and EMEA. So that continued to be a really good strong trend, a trend that we're proud of. We're just told that platform's selling. Obviously, the Americas growth rate was muted. That's something that we had to manage through the quarter, and that was primarily driven by, I'd say, 2 primary things. One is we waived Smart Hands, which is our remote hands in the data centers. And we waived the charges for those due to controlling and creating some restricted access to our data centers. And we wanted to make sure that customers had the opportunity to utilize those remote hands as much as possible. And so those -- that and a bit of a churn event that occurred in the region, so it put some pressure on the growth for the Americas. We can talk more about that. And EMEA was very strong bookings, very -- in particular, which I'd like to call out, in smaller markets. So Dublin, Madrid were really strong. And we've had a concerted effort by -- we have a new President in EMEA, Eugene Bergen, and Eugene has really restructured how he's focusing on smaller markets versus what we call the flat markets, the larger markets across EMEA. And it's really paying dividends. So super proud of the traction that we saw there. And then APAC had its third best gross bookings with a record in Japan, solid exports, particular to EMEA, which was great to see. And then APAC interconnection was considerably strong as well.

Okay. You touched on in terms of what you saw in terms of verticals in there. We -- I heard you mention cloud and IT services. On-ramps were also a significant add in the quarter. I believe I saw -- we saw an announcement, I think, from Google subsequent to quarter end. So -- and I know you guys have cited a market share of 40-plus percent of cloud on-ramps in the markets where you guys participate. So 10 new additions in the quarter alone. How important is it to the strategy to secure these on-ramps?

Yes. It's very important. I mean if you think about the largest ecosystem opportunity that's in front of us right now and has been in front of us over the past 2 years is this cloud enterprise ecosystem. And enterprises, as you know, have adopted a hybrid multi-cloud architecture of choice. And there's multiple clouds that they want to interconnect with, and they want to do that in the geographies in which they're creating content and need to distribute content. And so yes, it's very important to the strategy. And so when we open up new markets, whether inorganically, and you've seen some of our announcements, or organically, it's important that we attract those on-ramps into the sites. And obviously, we'd look for inorganic opportunities where those on-ramps are already there as well. But it's very important to the ecosystem. That -- we are -- we're a very big force in helping the enterprise globally transform their IT architectures. And we want to make sure that they have access to as many cloud service providers as possible in each one of the markets we operate.

And in terms of the importance here, is there sort of a market share you want to have? Or I mean, clearly, you'd like to have them all. But in terms of how hard you're pressing, right, in terms of -- to win these on-ramps, how hard are you pressing? I mean how many have you...

Yes. No, I think, look, the relationship we have with the hyperscalers is really strong. And it's also complex because not -- obviously, we sell them services to support their infrastructure requirements. We go to market with them as part of -- very key channel partners of ours, and we activate those channel motions in every market that we operate with, the joint sales teams. We jointly look at product and offerings together and -- so that we can accelerate the adoption of cloud across, obviously, Equinix' platform. And we sell to them access to ecosystems and to enterprises from an interconnectivity standpoint. And so it's a large, strategic relationship. We engage and plan with them thoughtfully across the world. So we're at the table with those discussions. And of course, and then fairly recently, we've increased those discussions to include xScale, which is how can we support their wholesale like deployments proximate to the interconnected campuses that we're operating around the world for both of our benefits. And so yes, it's important to us. The relationships are strong. The dialogue is something that we have all the time, and we are the largest aggregator of enterprise demand. And so we're an obvious place to put those access points for the cloud service providers as well.

And how should we think about future additions of on-ramps from a geography standpoint? Like where do you -- where else do you need to be or want to be?

Yes. No, I think as they expand, we want them to expand with us. As we expand into new markets, we want to expand with them. So it's very symbiotic. We announced obviously, the GPX acquisition yesterday or the day before. They're all running together now but -- into India. And so part of the criteria of the attractiveness of that acquisition was it already had a number of the large cloud service provider on-ramps embedded in the operations. We announced the Bell Canada deal. And hopefully, when we get that to close, we'll -- not only will we leverage our current cloud deployments in Toronto, but we will extend them to some of the other sites that we're picking up in that acquisition. So as we expand into new markets, it's just -- it's an obvious discussion and plan and approach for us to add.

Makes sense. And then maybe moving on to the interconnection business a bit. And so you've got 375,000 plus cross-connects these days, physical and virtual, on the platform as a dominant player globally, and you're targeting 7,000 to 9,000 new adds a quarter. What's happened to the appetite in customers during the pandemic?

Yes, I mean, it probably is an obvious statement, but it has increased. I mean the need to get traffic from one infrastructure to the next is at an all-time high. And in some markets, there were constraints. One of the benefits that, in hindsight, has become a benefit, in the Americas, we saw some pressure over the past couple years from the migration from 10 to 100 gig as you guys have been tracking. And although that didn't help us on a net cross-connect add, it certainly helped companies across the spectrum to support the work-from-home initiative. And so those interconnects are being soaked up. The utilization is increasing, which is all goodness across the ecosystem. But interconnection broadly was really strong. We saw it in the second quarter of '20. I think it was our record quarter, highest annual growth rate since first quarter of '18 from a quarter standpoint. And if you break that down by region, we had 35% year-over-year growth in EMEA, really strong adds. Some of that was, of course, attributed to some of the price increases that we've been managing across the platform. APAC saw 20% year-over-year growth driven really by ECX Fabric, and we'll talk a little bit more about how excited we are about that. And then Americas was about 9% year-over-year, but with Brazil, Canada and Colombia overindexing, which is great to see, not just our traditional markets. But I'd say the thing we're most proud of is ECX Fabric and how that is really becoming the de facto interconnection platform, certainly for the enterprise to cloud connectivity. Today, we've got 2,200 customers on the platform connecting to over 800 destinations. And that attributes to our accounts of about 26 virtual connect -- 26,000 virtual connections. And we've deployed that as part of our product investment. And we have deployed ECX Fabric across 46 of our markets, accessing about 170 of our data centers of the 214 or so that we have on the platform. And in Q2, we added about 1,900 virtual connections in the quarter. So really pleased with that. And if you know anything about Cloud Exchange Fabric, it is very easily consumable by an enterprise buyer. They go to a portal, they configure a port, they have that port turned up, they find destinations they want to interconnect to. They interconnect through virtual connections on the portal, all without us touching it. And so by making it easy, the consumption model is, we think, is going to be -- is going to continue to grow and be a powerful contributor to digital transformations of all sorts across the enterprise.

And how do you think about the pricing on sort of the virtual cross-connect versus the physical?

Yes. I think on average, the ARPU is just slightly higher than the average price of cross-connects today. Because as you think about -- if you look at a port and then you look at the average number of virtual circuits that a customer has, so right now, ARPU is at or above kind of the standard cross-connect revenue rate.

Is it variable based on the number of connections, virtual connections?

Well, it can be variable based on -- sometimes across the fabric between our data centers, it can be usage based. So you can use it temporarily and then turn it down. If you have a workload, you need to move from one location to the next, you can turn it up and turn it down. So there is some volatility associated with it as well.

Okay. Makes sense. And then just coming back to -- you talked a little bit about the growth in EMEA partly as a function of that price adjustment. What's happening in terms of that price adjustment? Where are you in the process in terms of pushing that through to those customers?

Yes. So we're about 2/3 of the way through. We should be done by the end of 2021. There's kind of a long tail. The process is going well. We're trying to be measured in it for sure. And we don't expect interconnect pricing -- just one thing to note, we don't expect the interconnect pricing to be consistent across all the 3 regions because there's different operating environments and different norms. But we're pleased with the progress.

And of that 35% growth, what portion of that was driven by the pricing?

It's a good question. I haven't broken it down, but we can certainly follow up.

Okay. Okay. And then in terms of the trends you're seeing in each region, in terms of growth in interconnection, you talked about the 35%, the 20% and the 9%, is that -- do you feel like -- you mentioned EMEA could be sustainable through 2021 in terms of this pricing rolling through. What about the APAC and Americas? Do you feel like you...

Well, I'd say because we're 2/3 of the way done, we've done the bulk of the big ones. And so I wouldn't put 35% as something to count on for going forward. But certainly, a higher number because we're seeing a nice growth rate. I'd say APAC and the Americas, we should expect that. We're probably seeing more of a mix towards ECX Fabric than we are physical fiber cross-connects depending upon the market and the type of interconnection that's occurring. But I think those are good numbers.

Okay. And then the -- I'd like to move on to product Packet. You guys bought this bare metal SaaS provider, further your offering for Platform Equinix. Can you discuss the integration a little bit, especially as it relates to your sales process during the pandemic and otherwise? I would think integrating a new product would ordinarily be a little bit challenging without a pandemic. But what about, during the pandemic, how's the integration of the packet sales going for you? And how have customers, Equinix customers, really been able to leverage it?

Yes. I mean I think you're pointing about the virtual nature of just running a business, let alone acquiring and integrating the company, obviously, is a challenge. We're working really hard to be world-class at virtually engaging all of our employees to keep them inspired and making sure that there's a sense of well-being and balance there. We're -- I'm really pleased with the Packet acquisition. Sara Baack, who is our Chief Product Officer, is driving that from an overall strategic standpoint. We were very fortunate with the characters and the culture of the individuals we acquired. The culture is always everything. And Zachary Smith and his twin brother, Jacob, have just been a fantastic addition to the Equinix family. And they've been managing their teams virtually. And so without them and their spirit and drive, it would be hard. It would be hard. But we like what we're doing. We like -- we're learning a ton. They -- you kind of feel bad for them because they've come into this big machine that is used to physically deploying product at scale across the globe, and they're trying to teach us how to virtually deploy capability that actually can be bought, not sold. Now I said a lot there. But just the whole sales motion and the go-to-market motion is arguably pretty unique for that type of service offering versus our traditional model. So we've been learning a lot. So we've been refactoring the go-to-market motion with them, adding some talent and so that's going well. And again, we're learning a lot, and we're going to have to make some changes in the go-to-market motions as we go forward, which obviously is keen for me to keep an eye on. But the other part of it is really figuring out the long-term product road map and what is the future functionality that we want to make sure that we offer over time. We're most likely going to phase that in, just like everybody else would. And then the question is, where do you deploy it? How deep do you go across the Equinix platform? What are the use cases you're primarily targeting? So a lot of really good planning and product engineering work going on right now. And so we've got plans to fully roll it out towards the end of Q1 next year. And so between now and then, we'll be communicating more information about how the product is developing and where we plan on deploying it. But we're really excited. It is -- we have what's called a customer advisory board, which most companies would have. And so some of our most -- our larger, more strategic enterprise buyers who are a key target of this capability have been asking for this for a long time. And a typical use case that they've been asking for is, look, Equinix, we love the fact that we're physically deployed with performance hubs across 5 to 7 locations around the world. We've localized our infrastructure. We're interconnecting to the clouds locally. We're addressing data sovereignty issues as a result of those hubs, and we love the performance and benefit we're seeing across our enterprise. But there are 10 or 12 other markets that we would love to trial whether or not this makes sense for us to localize our workloads there. And so we could take Edge Metal plus Network Edge, and we'll talk about that in a second, plus Cloud Exchange Fabric and deploy these capabilities in another market interconnect to cloud locally, interconnect to the telecoms locally for the benefit of our employees. Maybe we can see significant benefit in performance as well, but we're just not -- we're not ready to physically deploy yet. And so we're pretty excited about that upsell proposition that can exist within our larger and multinational enterprise companies, customers. So just somehow that -- just to help positioning in your head how excited our sales force is to get that out there. And so we've been trying to manage some of that excitement, as you can imagine, before we -- so we can get the product rolled out.

As you sort of like query the customer advisory board, they've seen this product, are there other things that are high up on the list, either products or services, that these folks are looking for?

Great question. We are -- there are services that are more managed services in nature that we stop -- we're not going to go that far. And so then it becomes what we call an app versus buy. And so we truly believe the Edge Metal is a core capability of services that we need to develop on the platform to allow other service providers to build capabilities on top of, if that makes sense. We've done that forever, that enabling of our service provider partners. And so there are capabilities above whether they're managed services or container-type services that we think are possible for our partners to help our customers with once they get deployed on our platform. But right now, we're focused on these core sets of operands. We are -- Network Edge is the other one that we've rolled out into 9 markets. We're learning a lot around Network Edge as well. This is probably our first service that can be bought and not sold, where you can go to a portal and spin up a firewall, a router or a load balancer in any one of those 9 markets, interconnect to cloud exchange and interconnect to a cloud, interconnect to a carrier, do remote access for your employees back to your WAN, using it without having to physically deploy a router. And so we're -- it's early days. We announced we had about 50 active customers on that platform at the end of Q2. So we're excited about the possibility of that service, especially combined with Edge Metal and Cloud Exchange Fabric.

Okay. And maybe diving in a little bit further into the sales process. We talked a little bit about how it's really changed. Any sort of initial thoughts in terms of how it's had to change due to COVID?

Yes. Yes, that changed a lot. And again, I'm super proud of -- Mike Campbell is our Chief Sales Officer, and he's just done an incredible job aligning the sales force globally. I mean we just organizationally aligned to a global sales force a little over a year ago before we were regionally based. And Mike has really aligned that team and allows us to find best practices and then rinse and repeat them across the globe in much more efficient ways, thanks to his leadership. But specifically, I'll even start with marketing. 20% to 30% of our MQLs in any 1 quarter, which is marketing qualified leads, which hope to turn into bookings, were done physically. They were a field event, a CIO roundtable, a conference of some sort where we would do awareness and host events and drive some MQL volume. Well, you don't have that in COVID, right? There are none of those events. And so you've got to shift your demand gen model to be 100% virtual. And so our marketing team, Claire Macland, has just done a great job of shifting that capability set to do virtual demand gen and a lot of it with partners, strategic partners, where we're hosting virtual conferences similar to this, but instructing on how to do things, trends in the industry, trends in technology, how to deploy performance hubs effectively, et cetera, how to manage workloads across multiple clouds. And so that's been going incredibly well. And what's brilliant about COVID, you won't hear that too many times, is that the audience is captive. And so we can get access to far more people today than we could in a physical event or even a virtual event before. We're all at our homes. We're all doing 30-minute on-the-bounce meetings. So it's our job as suppliers to make those meaningful. But we can target and contact and reach far more people. So that's on the margin side. We're seeing that on the sales side, too, because we're -- you can't take somebody to dinner and ask for the close anymore, right? You've got to do the entire sales cycle from awareness, opportunity creation and getting contracts and closing in and installing it. The whole process is done virtually today. And so the skills, professionally, you have to learn new skills. You have to engage different persona. You've got to leverage channel partners in a far more effective way. And you saw that in some of our results around the channel, which is we had a really strong channel performance result in Q2. And I think that's no accident because the promise of the channel is that we're leveraging their trusted adviser position with an end customer, and they bring us into that position, reducing the cycle time, reducing us having to prove ourselves and to justify why we're valuable in the equation and together, we're solving a larger, digital transformation needs for that new buyer, but we're getting an accelerated process because we're being introduced as a warm lead or as a trusted adviser already. And so access has been good. Learning about how we demand gen, it's been a journey, but I'm really pleased with the results. Virtual selling, you saw the results in Q2. I'm pleased with how the team is doing. That's got to continue for the next several quarters sadly because of the world we're operating. But a lot had to change. A lot had to change. And then broadly, all of your companies are dealing with this, that are listening, which are -- how do you keep your employees engaged? How do you keep them motivated? How do you keep them inspired? How do you keep their well-being and health in a good place? So how do you virtually engage as an organization? Virtually manage that process is also something that we're learning how to do much better as well.

That makes sense. I'm going to take a question from the field here because I see one in the chat. This one comes back to the interconnection pricing that moved up in Europe. But APAC and EMEA is seeing more of a move towards ECX Fabric. And I guess the question here is, do you think that, that move happens in EMEA reversing some of that growth?

Reversing? Well, it wouldn't reverse anything, right? Yes, I'd say because it's not -- we don't see any cannibalization of ECX taking over fiber cross-connects. Fiber cross-connects are used for high-bandwidth interconnects from one person to the other. So we don't see a cannibalization, or a substitution is probably a better word. We are seeing, and I should have mentioned this, good ECX growth in EMEA as well as they continue to prosecute their enterprise pursuit strategy. So I -- we do plan on seeing additional ECX Fabric growth in EMEA as well.

Okay. I think that's helpful. And I think that rounds out the 30 minutes or so, so I think we'll leave it there.

I keep talking a lot, sorry.

No, that's fine. I think we got through the bulk of our content, what we're trying to get to. So always appreciate your time, and good to see you.

Yes. Thanks, Jordan. Appreciate it. Good luck with the rest of it.

Thank you. Stay safe.

Stay healthy. Bye-bye.

Bye-bye.