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

Good afternoon, everyone. Welcome back to the TMT Summit. I'm Eric Luebchow, senior analyst of communications, infrastructure and telecom services at Wells Fargo. Very pleased to have Equinix with us today. We have Steve Madden, who's the VP of Segment Marketing; and Katrina Rymill, who's the VP of Investor Relations. Thank you both for being with us. I'll turn it over quickly to Katrina, who will read some disclosures.

Great. Thank you, Eric, and thank you to Wells Fargo for hosting us here. Before we get started, as a reminder, some of what we will talk about today contain forward-looking statements. Please read our SEC filings for more information about factors that could affect these statements. Back to you, Eric. Thank you.

Great. Thanks, Katrina. So Steve, Some questions for you. Just to kick it off, VP of Segment Marketing, you probably have really unique insights into what kind of customer spending activity has been like across your portfolio, especially in such a unique year this year with the COVID-19 pandemic. So maybe you can talk about what you're seeing from customer demand trends, perhaps certain verticals that are leaning in a little more aggressively with the kind of digital transformation, multi-cloud theme, some others that have pulled back a little bit, given a lot of the economic uncertainty that we're seeing more broadly, that would be a great place to start.

Sure. Thank you. Yes. No, I've been with Equinix 6 years, and we've been following along this journey around digital transformation and what that's meant. And we've seen a lot of companies and a lot of uptick and you've seen the growth. But with COVID, I think where we shifted from digital infrastructure was a project on the to-do list that was more visionary to, no, this is absolutely mandatory and there's a certain level of infrastructure that people need right now today. And so some industries were further along. Obviously, the digital service providers, clouds, network service providers, streaming media, and unified communications like Zoom and Webex and others, were already in place and saw a tremendous growth, right, with the shift to everybody working from home, distance education, et cetera. We also spent a lot of time in Q2 rallying around health care and education, some government functions, food and supply logistics, who just weren't ready for COVID and weren't really prepared and needed new services turned on quickly in multiple locations around the world. And then there's the leaders who were kind of already ahead of that part of their infrastructure and shifted gears to start building more complex business models and newer business models, even with new offerings on top of what they were doing today also as a response to COVID. So you think about it like a cycling race. There's always a pack that's out the front, and there's a larger group in the middle and a few stragglers on the end. We've seen a mixed bag there as well. And the providers picked up a lot of the slack. Our leaders are building whole new complex business models and solving much bigger problems and we're still attaching and finishing up, connecting people who just didn't have those capabilities before.

Sure. Sure. And I guess as you kind of look into the future, there's some positive news about a COVID vaccine, some hope for maybe a stimulus bill and an economic recovery. So perhaps some of the enterprises that aren't as far along, not some of the leaders, do you see any movement on their parts in terms of trying to adopt more of an outsourced model, whether that's hybrid colocation, whether that's multi-cloud? Because we've always thought that there's still a lot of on-premise IT workloads out there that haven't shifted yet, and this could be perhaps an event or a reckoning event for them to make those moves at some point. So just wondering how you see that shaping out.

No. You're absolutely right. I think we've got some feedback there. You're absolutely right. A lot of them realized that they didn't have a lot of flexibility in their infrastructure. Owning and running your own data centers and all the equipment that goes with that brings a large sort of IT debt that's not very flexible to move or shift when things change as dramatically as COVID changed. So there is a need to exit that being heavy in owning all of the infrastructure yourself and providing that shift from CapEx to OpEx. So you could actually turn off some things because demand is down and you don't need them. And that's definitely been accelerated because it was always an idea, but it's actually very difficult to do. It takes about 2 to 3 years to do a full migration from a traditional infrastructure and your own data centers out towards a distributed hybrid architecture. But we're seeing the need obviously outweigh that. And where they might have had trouble getting Board or other senior leaders to approve those projects, that's not happening anymore. They're sort of demanding it. So we are seeing that shift much faster now. Again, solving for the new normal of where their employees and workplaces and business is going to be has been the first sort of step in Q2. Q3 was more sizing that for more permanent infrastructure, what that looks like, but still progressing towards a model where they can shift and adapt as quickly as their business needs to.

Okay, that's helpful. So I wanted to shift over to your interconnection business, obviously, kind of a very unique ecosystem that you have. So I'd say everything we can see from the investment -- investor community has been a really strong year in terms of cross-connects. So maybe are there any trends to point out this year, in particular, and any kind of permanent changes you've seen in adoption of either physical or virtual cross-connects? Are people upgrading to higher bandwidth ports? Or have you seen one or the other particular demand for this year and kind of looking forward as well?

Yes. Across the board, there was a huge growth in interconnection bandwidth and mostly in terms of bandwidth in general. The last mile connectivity to the Internet struggled in certain locations where there was, obviously, a much greater demand. And so we've helped service providers scale that capacity, which brought up our own Internet exchange and exchange infrastructure bandwidth growth as well. But also as more of these companies are connecting to clouds, connecting to more networks, starting to connect to different supply chain partners, we're seeing growth in general interconnection between companies as well. And that is a mix. There's -- in a lot of cases, if it's large bandwidth and it's very consistent, then they will still use more cross-connect driven physical cables between the 2 to do that. Others have moved to more of a flex model, whereas they don't really know how much this is going to grow how quickly. So it's much easier and lower risk to use virtual services like our fabric to spin up those connections and then see where it's going to decide later whether or not you're going to need to put more permanent infrastructure in place. So we have seen a dramatic increase. And that is scale -- because the platform scales that well, that's been absorbed pretty easily by our infrastructure. It's not like the Internet is broken or anything like that. And we continue to see that grow, and I guess the maturity then is as more businesses stop doing traditional methods of interaction, and because of COVID, shift to more digital or traffic exchange, we expect to see that density increase as more and more companies do business with each other that way.

Sure. Sure.

Yes. I would just add on, Eric, I mean, we're definitely benefiting from, as Steve is saying, not only the diversity of our products but the diversity of use cases and how they're using it. And we, for the first time on Q3 earnings sized our Equinix Fabric product, which is in the grand scheme of things, is a newer product. It's running at over $100 million run rate from a revenue perspective. And what we've seen is the interconnection revenue category has been diversifying. Today, about 70% of our revenue comes from cross-connects and about 30% comes from these newer products around Equinix Fabrics, Equinix Connect and then our more traditional Internet exchange. But a lot of times, investors focus on the cross-connects, but for us, it's really about which customer use cases fits which connectivity needs the best.

Yes. That's good color, Kat. And I guess, in some cases, too, has the launch of this virtual, the ECX Fabric, as you used to call it, really broadly addressable market because in some cases, it's really how much bandwidth you're using at some point if you scale up to a certain degree, it's much more cost-efficient and scalable to use a physical cross-connect, right? Is that correct, Steve? And then -- but for maybe smaller customers or where their infrastructure needs are a little more volatile, the virtual cross-connects can be really an appropriate solution. Is that kind of a good way to summarize it?

Yes. I think that's where it started out is it was an alternative way of splicing and segmenting and having more flexibility in how you connect, usually to cloud or something else. But I think that what we've seen recently and why we've rebranded now as the Equinix Fabric is it's not specifically about cloud anymore. And it's not even specifically about just bandwidth and connectivity between locations. We have a lot of partners, and even our own offerings, where now the Fabric is kind of this software-defined glue that allows you to access anyone you want in anywhere of our locations anywhere in the world, and even access their services that are offering. So if you're a customer or on the platform and you want to offer digital services, if you place it and make it available on the Fabric, then anyone of our customers anywhere can connect to that and start using it right away. So it's becoming more of a digital services sort of Fabric and less thought of as just a pure transport, which is underlying, you still have to have a way to exchange package. Sure. But it's taking on a much more business and ecosystem role than traditional networking data.

Okay. That's helpful. I guess just kind of related to that, in your EMEA, primarily your European region, you've been kind of undergoing some pricing initiatives to kind of help raise cross-connect pricing in that region. And then we've seen some pretty nice growth in European interconnection revenues. So wondering how far along you are in that process, what the customer reception has been. And I know that's a region where, at least on a relative basis, your interconnection revenues are more -- a little more underpenetrated relative to the more mature markets, kind of how high -- how much further you could go in kind of bringing that cross-connect portfolio up to market in Europe.

Yes. Maybe I'll start and then have Steve add in on the customer viewpoint. So from an interconnection perspective for EMEA, we looked at repricing our Telecity cross-connects that we had acquired through our acquisition of them several years back. So we've been repricing that or normalizing it more towards an Equinix standard. And the other thing we've done is the markets across Europe were at different pricing for cross-connects. So again, we -- even on the Equinix space, we normalized that up. We're at the majority of the way through that repricing effort. It's an effort that you roll out by country and on the contract renewal. So it's not just all at once you switch to increasing pricing there. Overall, it's been great to be able to kind of recognize the value that we're providing to customers more consistently. It has -- you've seen the benefit in terms of our penetration rates. So interconnection as a percentage of revenue at 9%, it's now to 12%. And it's hard to push that upward in its very slow trajectory, but you're definitely seeing the benefits of rather toggling just the volume button, but toggling the volume and the price at the same time. So again, I think it's one of those efforts. We will keep it stable once we're through that effort. So we probably have a couple more quarters to go there. It has caused the growth to significantly overindex on European interconnection revenue. It's -- it will come back down a bit as we lap through that. But overall, we've been pleased with the effort.

Yes. And I would only add that the reasons why our customers are using that interconnection is also something that's governing how much they use and when. If they're not ready to exchange data or interact with other business partners, they don't have a means or set of standards or maybe a regulation that they require in place, then it's difficult to sort of spin that up. But once those things fall into place, we see the opposite. It's -- then everybody connects really quickly and they start exchanging going much faster. So we pay attention not just to what people are doing with interconnections and how many they're connecting to, et cetera. We watch that. But we're also -- we got a lot of business development activities going on in health care records exchange and other data and market exchange information to make sure that we're enabling those people to find a way to use the platform for what it's intended for, and that helps growth as well.

Okay. That's helpful color. I wanted to flip to a newer offering that you have, the Equinix Metal offering. So following the acquisition of Packet. So what does customer reception look like so far? And I guess, what would you say to the investor community in terms of a fear that offering a bare metal service could potentially compete with some of the managed service providers that are in your data centers. Just wondering how you kind of address all of those topics.

Yes. No, absolutely. Well, going back to the overall mission was how do we remove the friction and make it really easy for people to build out their digital infrastructure quickly knowing that they want more of an OpEx model and don't want to follow a long-term debt kind of structure. And the fact that we can offer that in a reusable way in a data center that's multi-tenant is a lot more cost-effective in low cases than owning. But it's also because we've seen this distribution to the edge, that it's an edge to cloud kind of model. And there is a gap, and then who's providing that capacity and capability at the edge. And we're already there and the customers have been asking us to help them provide more and more ways to spin up those infrastructure. So Equinix Metal has been a goal of ours before the Packet acquisition to how can we make capacity available dedicated to our customers to solve for that portion of the problem so that instead of them having to ship their own infrastructure. And so we don't feel like we're competing with cloud or anything else because we're not offering those services that cloud offers. And also cloud isn't necessarily in those locations anyway. We're offering a way for them to get capacity really quickly, right, and make things grow faster. In terms of revenue, yes, for consuming colocation space, but in all cases, through our network virtualization services and our edge metal or Equinix Metal services, we're getting a lot more revenue per cabinet or revenue per watt, because there's a lot more efficient use of the infrastructure when you do it that way. And also, a lot of people when they want to shift or change things typically want to expand in some locations and other locations or the demand moves and they want to get out of one location, but they want to go into another one, it allows us to also allow capacity to shift around the platform a lot more -- a lot more easily and a lot more quickly and put that capacity back on the market almost immediately. So someone says, "I've got to get out of this location, but I want to go into that location." Great. We'll turn you up over there. But we put this back into practice and be used right away 2 minutes later. So it actually gives us several advantages, a lot of advantages. It's how our customers want to consume and it provides a much easier way for us to provide the platform as it says.

And I guess related to that, Steve, and this might be for Katrina too, if you can get better utilization of some of your infrastructure when you're doing the -- sorry, the Equinix Metal offering, presumably, the returns are probably better as well. I would assume the same kind of returns on your incremental investment. Is that fair?

Yes. I think it's -- for metal, it is effectively a more efficient way to use your colocation space. So it is a little bit of a different model. Now again, you still need to invest around the data center and the infrastructure. So that is essentially a cost that will continue to be there. But I think how you use metal to help fill up that space, we've said it could be -- once you hit scale, it absolutely can be attractive from a return from a margin perspective.

And if you think about the fact that we have the largest service providers, the largest digital-leading companies in our facilities building our infrastructure worldwide, we can also provide that service in a way that's more customized for business value for what they need, fit for purpose. And such -- a company like Zoom, for example, could say, "Well, I need this kit, but I need it in 19 locations." That's a very foreseeable future for what we do with Equinix Metal. We could tailor it towards the common use cases we see at the edge.

Sure. Okay. That's helpful. Yes, I wanted to switch to the edge discussion because that's a good way to lead into it. How I've always characterized it is Equinix is kind of already at the edge today. I believe that you cover, at least in the U.S., something like north of 80% of the country's GDP within 10 milliseconds. I might be quoting that incorrectly, but it's something in that range, I believe. And could you talk about ways you're monetizing that? I know you have a network edge product, obviously, you have Equinix Metal. So that's the first question. The second question, what about the edge of tomorrow? And I think there's been a lot of discussion over whether the edge moves even closer to the consumer, whether you need less than 10 milliseconds of latency, whether you need data centers at the base of towers or at CRM hubs. So it's kind of a multipart question, but just how you think it maybe evolves from here.

Yes. No, exactly. It's not that I don't get that question often. So yes, but you're right, we're in the middle of it. And so if you pay attention to what we've seen, the network providers coming together at Equinix told us that you need to be able to exchange traffic efficiently. And then content digital media, being digitally advanced that I need to get as close to my consumers as possible to differentiate myself and to keep up with demand. And then financial services towards electronic trading that I need to be in proximity with all my participants in order to handle what I need to do. We're just seeing now that almost every vertical and industry is following the same path, and they're all becoming more digital, and they're all requiring to be closer in proximity because they have to deliver real-time experiences and be able to be easy to do business with at scale, right? And so that's now driving health care with telemedicine and hospital automation and IoT devices, medical devices, they're going to need proximity to hospitals. We've got digital payments pretty much going everywhere because it needs to be in proximity to where the payment is occurring. We've got a lot of use cases now, even security services like real-time facial recognition at airports. They all have to be in the location where the activity is happening. So you're right. The metro edge typically, more often than not, is good enough or close enough. And if you had a bandwidth or a low latency requirement that required you to go further, yes, we've been exploring that. We have great relationships with all the tower companies. We thought about should we do micro data centers and things there. And data is growing and then we're seeing that there is a niche market where it makes sense to put more compute closer to the edge. But we're also watching bandwidth increase. 5G is going to increase the bandwidth and lower the latency even further. So if the latency goes down, you move more data, then the reason why you're moving beyond that metro edge out further into like a smart factory or a wholesale shopping center goes down because there's less need. We've also paid attention that more you distributed out even further to like branches increases your maintenance and your overhead and what you have to look after in all of those branches. It becomes complicated. So we see a lot of companies that have 200 or 300 branches in a city consolidate the management of those from the hub from Equinix and not push that technology out further because it becomes cost prohibitive. So we do see that the growth there, that 30% of workloads are going to end up resulting at an edge location back-ended by cloud or other wholesale infrastructure. And data processing and data access is growing rapidly, and about 50% of data is going to be managed and processed and interacted with at the edge. And so the infrastructure to do that is where we're kind of already in position. But likewise, exchanging with multiple parties across multiple networks requires an interconnection point. And so that's why we see we're kind of at the heart of where the edge is going to be. But everyone's edge can be different. It can be endpoints. It can be cars, it can be factories. There will always be a definition of something that goes further out. But where it comes back to being interacted and exchanged, that's typically going to be Equinix.

Sure. And I guess I should ask since we also cover the telecom providers, whether you've seen -- they've started to build out 5G networks. I'd say it's an evolution. It will take some time before they kind of retail the goals that they've set out to. But have you done any work or partnerships with any of the wireless providers to help with the 5G transition, if you're already, in many cases the metro edge, to help them kind of reach some of the multi-gigabit type speeds that they're really hoping to achieve on a wider basis over the coming years?

Absolutely. We have a very fundamental relationship with our network service providers, our customers and partners. And we're helping them build out not just the plans of upgrading and adding capacity to different locations to get ready for 5G, but we run out of our Dallas facility, a 5G lab, with multiple participants where they can work out some of the logistical ecosystem standards and things that have to be solved for this to work. But going beyond that, because we're a platform and it's an ecosystem play, we're not only helping the network service providers figure out CloudRAN and how they're going to run 5G and how they're going to offer network slicing, which is what we do on the fabric, but doing that at the edge in the last mile, giving people their own dedicated network to your house is pretty cool, and then the edge computing required around that. We also have gone after the enterprise market or the consumer market to talk up how you're handling health care, how are you handling gaming. Can we put you in touch with some of our providers who can really amplify and help you by solving these problems at the edge at scale? So it's a more holistic symbiotic relationship we have is that not only we're helping them get ready for that, and we believe 5G is necessary, the capacity and growth of data, but the capabilities they're bringing up for whole new use cases to our customers as well. And if we can get the demand side ready and have the provider side ready, then it helps amplify everybody.

Okay. That's a very good color. So I have about 5 minutes left, so I'm going to ask Katrina a couple of questions. So Katrina, as I look at Equinix and your balance sheet, you're kind of moving towards the lower end of your leverage range, you're well below that of all of your data center peers now. So I guess, what's your appetite to potentially look at strategic acquisitions? You've done a few recently tuck-in type acquisitions, whether it's geographic expansion, investing in additional CapEx in your existing markets. Or are there opportunities to add other products in the portfolio, like you did with Packet that led into the Equinix Metal offering. Just wondering what kind of investment opportunities we should think to kind of keep you in that 3 to 4x leverage range.

Yes. And let me separate those 2 conversations. So from a leverage perspective, as you said, we're about 3.3 turns net debt to EBITDA. We've had a very, very consistent range of 3 to 4 turns. I would expect us to remain in that range. We have historically, with the exception of perhaps a larger acquisition has bumped us above. I think there are some constraints now being investment grade. IG is absolutely important to us. We have 3 of the IG ratings today at BBB-. We have had a significant benefit to our AFFO line as we've refinanced our debt, and you've seen over $125 million of interest rate savings from all the activity that our treasury teams are doing. From an M&A perspective, continue to see an access period. The last 3 years, we've done more acquisitions than we historically have by quite a bit. And we kind of talk about 3 categories to think about M&A. The most common is expansion into new metros. So we're going to be in 65 metros once we close India. We said there's no burning holes in our portfolio we need to necessarily go fill. But certainly, over time, we've said we're looking at having a point of presence on the African continent over the next several years, looking at Latin America and other various opportunities as they come to market. The second is scale. And I think there's a little bit less of that. You've really seen us purchase the #2 player in all the markets. So whether it's Telecity -- essentially you have Telecity, IX in Europe, you have the Verizon, Bell and Switch & Data in the Americas. And then APAC, a variety of kind of smaller acquisitions there from Metronode to Bit-isle. But that concept of scale in looking at, particularly if it moves us from a smaller market share to really being the clear leader, will continue to be of interest there. And then the third factor, which you saw kind of our first one around, is product. So we acquired Packet, the bare metal offering, and then put our own software and development teams on creating an enhanced offer targeting a broader customer base But we do continue to look at it, is there a select products that would be a good fit for our portfolio and would make sense in terms of what we'll offer. I would say that our goal is to be the world's digital infrastructure provider. And we'll continue to make acquisitions that fits that goal. You won't see us necessarily going into areas that are too far afield. We'll continue to be focused on that.

Okay. That's a helpful summary. So I guess one more question before we wrap for you, Katrina. Equinix has talked about trying to get to a kind of a 50% margin target. And admittedly, there have been a lot of moving parts. You've had integration costs from acquisitions. You've had some higher power and utility costs. You've had new investments in certain areas. But maybe you could just kind of frame up if that remains the target and then the many moving parts that you'll have to navigate in the coming years to kind of achieve it. That would be helpful.

Yes, absolutely. And you've seen the progress over time. Inherently, there is scale to data center businesses. It's a tough model to get in to start with, but you benefit as we do when we're at the 2020 year mark, and you see significant scale, particularly on the SG&A line. I mean if you look at what's happened on SG&A, it used to be about 23%, 24% of our revenue. It's come down to roughly 18%, 19%. And that's really where we're pushing hard to continue to get more scale off of. As we said on the last Q3 earnings call, Charles reiterated our commitment to a long-term margin target of 50% from an EBITDA perspective. And as we always say, it absolutely is a balance. We're going through budget now. Inherently, you have some scale coming off the business and then you decide what investments do you want to do off of that. We have tried to have a balanced model every year as we go through it. But inherently, we will continue to invest in the business in the way that maximizes shareholder value.

Okay. Great. Well, I think we are out of time. So Steve and Katrina, thank you so much for joining us today. Excited to keep following the Equinix story. And stay safe and healthy.

Thank you.

Thank you, Eric. Thank you for hosting.

Take care.