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

Okay. Good morning and good afternoon, everybody. Simon Flannery here, telecom services and comm infrastructure analyst at Morgan Stanley. It's my great pleasure to welcome the Equinix team here. Before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. And Katrina, I think you had a disclosure as well.

Yes. And thank you to NASDAQ for hosting this event, and Simon, of course, for being our moderator. So some of what we'll be talking about today contain forward-looking statements. Please read our SEC filings for more information about factors that could affect these statements. Thank you, Simon.

Great. Thanks. And I think congratulations are due. I hear from the NASDAQ team that this is your 20th time presenting at the NASDAQ event, so that's tied for first place with Intuit so that's great to see and I think speaks to the sustainability and the performance over many, many years. So congrats on that. That's great to hear.

So Keith, perhaps we could just start with a little bit of an overview of what the key priorities are heading into 2021. You put up a strong third quarter. It sounds like things are going well across all of the regions, across most of the verticals. So what should we be focused on?

Yes. Great. Well, again, as Kat said, first and foremost, thanks to NASDAQ and Morgan Stanley for hosting us. Feels great to be here. I wish we were with all of you in London. And unfortunately, this year, we're not going to be. But it's great to be here, and I'm glad -- I didn't realize we'd hit our 20th anniversary. It does feel good as -- certainly as a company to participate in these events. As it relates to our priorities, we're not -- the nice part is we remain highly focused on a number of areas, and it's continuing to enhance our product portfolio, investing things that we think will be additive to the overall business delivery of our services. You've recently heard and seen us discuss Equinix Metal, Fabric, Edge and many other things we're starting to think about as a business. And so number one, we'll continue to invest in our digital transformation, making sure that Equinix is that digital platform provider to the customer base. And so that's sort of the forefront of one of our main initiatives. Secondly is our go-to-market. How do we continue to invest in our strategies to access the opportunity that's in front of us? And more recently, you've heard us talk about the performance coming through the channel with our resellers and our partners. And that represents over 30% of our quarterly growth today. And candidly, we like to see that continue to go up. It's an extension of our delivery platform, albeit it comes with its -- our challenges in the sense that you're operating through partners or resellers. And we don't necessarily book the customers onto our papers coming through that lead seller or what-have-you. But that seems to be an area of high focus -- not seems. It is an area of high focus for us. And then the third thing is operational efficiency. You've seen us make a tremendous amount of investment in the business over the years. And even this year and as we look into next year, we will continue to invest in the business but we want to operate more efficiently as a business, scale the organization, put us on a very good road to -- we're at a run rate of $6 billion-plus and sort of gives you a sense of where we are, particularly with the business and how we want to scale it and how do we get to that $10 billion or greater mark. And you've got to operate more efficiently, and that's investing in our systems or processes, our people. And then finding ways to deliver on the services that we already do in a more enhanced fashion. And coming out of just one of the breakouts we had this morning, just the focus on sustainability and how do you make that a highly-relevant component of your go-forward story. And Katrina, who's responsible for our corporate sustainability initiative, just the recognition that the more efficiency -- sustainability and ES&G will -- comes in so many different fashions, but the portion around sustainability and [indiscernible] of our assets and how we operate is so critical to us, and it's important to our cost model but it's also important to how the -- to the customer's cost model operates. And so that would be a fourth initiative that I think is highly important, being at the forefront of ES&G and something I hope we'll talk a bit more about today.

Right. So a lot of opportunities there on the growth side. I think the data center model has been truly tested and come through with flying colors during the COVID crisis versus other real estate models versus other infrastructure models. I think there is a question about can we -- how much of the performance this year was sort of some pull forward here? Or certainly, the Zooms that we're doing now, that was definitely incremental demand for interconnect and so forth versus actually just stimulating new digital transformation efforts at enterprises and elsewhere to driving even faster demand going forward. So how do you think about these long-term models about sustaining that sort of high single-digit growth rate that you've seen for a while?

Well, look, first and foremost, I feel very good about the resiliency of the data center space. And I don't -- sorry, pardon me, I don't think of ourselves just as a pure data center company. And again, we think of ourselves as something much more than just creating physical infrastructure. It is creating an environment where you have ecosystems so you can rely on your platform. With the resiliency comes -- I think there are those who have grossly benefited from it and those who have less so, as you pointed out, Simon. But for a company like Equinix, where we're at sort of core of the Internet and the cloud, it just feels that it was a great opportunity for us to continue to validate the journey that we're on as an organization. We recognize that the world will digitize in a way that will be very relevant for the data center space. But it will be particularly relevant for Equinix primarily because we're not just -- we're focused early on hyperscaler but that's going to be more done through the joint venture. We're highly focused on being that digital infrastructure player to a hybrid multiple cloud sort of enterprise who wants to be inside an environment that will grow and scale. And having access to the networks, having access to the cloud on-ramps, having access to the number of cloud providers who are predominantly SaaS-oriented, as customers move, we think, faster to the digital world, it just -- I think it puts us in a better position than, I think, anybody else largely because of how we've built ourselves up over the years. We're not veering dramatically off of what we already were going to do anyway. Certainly, I wanted to respond to one of your points that yes, of course, we've been a beneficiary of what's taken place with the pandemic, the Zooms and the Netflixes and the others who have to build out their infrastructure more rapidly than they probably anticipated, and we're one of the recipients, as some of our competitors are. There's also -- there's the negative part of what's going on in those companies that have really been hurt by this pandemic. And you don't have to look very far between whether it's the real estate providers or the airlines to think they're fighting for -- some of them are fighting for their survival. And without government handouts, they would not be -- they wouldn't be in business today. So overall, I feel that we're really well positioned. The reality is, although I think there was some benefit to the year, I also think there was some cost to the year because there was delays in decisions or concessions that we made to our customers because we wanted to protect the assets from the pandemic from the onset of it. Because we didn't -- nobody really understood what was going to happen. So we -- for all intents and purposes, we're locking our customers out of our data centers to protect our people and to protect their infrastructure. And that then came at a cost because we provided services pro bono to them. So overall, I just think Equinix is really well positioned for the future. And given the strategic initiatives that we have and that focus will, I think, put us in a very preferential position.

Great. Well, given we're virtually in London today, let's sort of take a little bit of a tour around the world, if we could. I just saw some news hitting about Singapore expansion. So could you just take us through some of the regions? The U.S. is obviously a bit more mature but still growing at a healthy rate. You've added Bell Canada into the North America platform. But how should we think about the opportunities in the various regions over the next year or 2?

Yes. No, thanks for asking. The -- overall, if we just start with the U.S., number one, it is our largest market. You saw last quarter that we had nice strong year-over-year growth. Obviously, we're focused on what we want to do in the Americas. It's a more mature market. We're not in it to just do the larger sort of hyperscaler deals. As you know, that's going to go into JVs and there's not a lot of that activity for us, at least in the U.S. Our view is -- we'll not cede it to others, but our view is we can't be as competitive as we want. And if somebody wants to use their balance sheet to do that, then we'll let them do that. We also have a very preferential position in the U.S., as you know. So we'll continue to grow at or above market rates. We're going to be very focused on right customer, right application. And we'll continue to grow appropriately across the market where we can. I think Canada is a subset of the U.S. market in the sense that we bought Bell Canada. Probably no different than, to some degree, to Verizon. There is a difference because I do want to make sure I highlight that, that there was an underserved asset. Not invested in Bell, of course, is more focused on its digital and entertainment assets. And so acquiring those assets and then developing and improving them and operating them differently, we think, is going to give us an opportunity to scale the business in Canada in addition to what we already were doing. But then you go into markets like Brazil or in Colombia. We're now in Mexico, and we've done our first expansion into the -- or announced the first expansion into Mexico. We see those as opportunities that will continue to scale. Notwithstanding, in fact, currency is always a risk for us. It's something we try and manage very well against. But we're going to continue to invest in that part of the world. And so I think that U.S. proper, yes, it's going to grow sort of mid-single digits. Our view is that there's going to be growth elsewhere to go after. Let me just lastly say with Canada. Bell Canada is not -- right now, it's going to -- we're not anticipating -- sorry, you're going to get the benefit of a dog barking in a second. But Canada is not going to grow meaningfully and -- for the first year because basically, we're building out, we're giving them inventory, so we're building out some inventory for them. And once we do that, we think we're going to put ourselves in a very good position in either 2 and 3 with the Bell Canada asset. But that's the similarity, I would say, with Verizon. It didn't -- there wasn't meaningful growth to start and then we absorbed the churn. I think Bell Canada had gone through a lot of the churn and the repricing already. But you start to consider some of the other markets around the world. Asia is very attractive too and will continue to be attractive, particularly where there's constraint, and Singapore is a perfect market that you sort of -- you've highlighted that there's a constraint in the ability to build and we've got a preferential position there. It's also a preferential market, given sort of the political and social dynamics in that part of the world. And Singapore seems to be the recipient of some of that opportunity. Tokyo would be the other place and then you've got the -- you've got, I think, a very strong market condition in Sydney. And so Asia for us will continue to be well positioned, and we're building out a number of assets across those markets. And we think we have a preferential position in a number of those markets for obvious reasons. We've got the land. We've got development. We've also got access to the power. And then you go to Europe. Europe is, for us, it's obviously, it's been an exciting market, it's a couple of years behind where the U.S. was. It's been growing steadily. There's some anomalies in our numbers this year. We've been the beneficiary of price increases through our interconnection. And so you've seen some of that come through the second and third quarter results and will sort of normalize out. We'll have to normalize that out for next year. But overall, you're seeing that the European business continues to grow in scale for us, and we're -- the large majority of our investment today is across multiple markets in the European theater. 50% of all of our growth -- sort of growth investment is going into the European theater. And so the balance that we have is that you've got the mature markets, the flat, and then you've got a lot of the smaller markets that we're building infrastructure not just for next year but for the future. And so we made some relatively heavy investments that will position us, I think, for many years to come, not just next year but we'll spend more time on that on the February call.

Great. And just following up on Europe. Have you seen any major impact on the market from the Digital-Interxion deal? Or has that been just a continuation of the previous trends?

I think for us, [indiscernible] more just a little bit about the same Interxion was the one that we were always focused on in Europe. And not to be dismissive of Digital Realty, but they didn't have much of a presence there. And so your competition is still your competition, and so we got to do our level best. In fact, I think it's very probably distracting for -- to have Digital as the owner, in my personal view. But as a company, we just have to continue to do what we do. Interxion, Digital-Interxion. It's a good company. They've got good position in some of the markets. We're focused on building out in some new markets where -- particularly where there are subsea cable landing stations or preferential negotiations with some large hyperscalers that we've engaged in. So that's what you've seen us move into the [indiscernible] market. There's some other markets we're not yet talking about that we will probably be building in that will be competitive. But we're very focused on continuing to scale. And again, as I think in Europe, Interxion will be the largest sort of pan-European play who we'd compete against. And then you've got a lot of regional players as well and the NTTs and others. But overall, I like our position and the majority of our growth comes from our installed base, and we sell across that platform. We'll continue to do that as best as we can as a company.

Great. I wanted to pick up on one of your priorities on the sustainability and bringing Katrina on that. We recently did an ESG report and Equinix came out very well in terms of many of the metrics and actions that you've taken. Perhaps just take us through what the customers really care about and how you're positioned and where you're headed.

Yes. It's certainly been very, very interesting. And in terms of customer outreach, we've seen at least doubling of customers engaging with us on the sustainability front. So maybe just as a little bit of context, for Equinix, not surprisingly, energy is the majority of our carbon footprint. It's about 98%. So the initial focus for the company was around how do we get clean renewable energy coverage for both the energy we use as well as what our customers are using. And we made a commitment to 100% clean and renewable energy. Last year, we're at 92% so really, really good progress in the last few years. And what we're working on is how do we continue to improve the mix of how you cover with renewables. So we're looking at rolling out new virtual power purchase agreements, particularly internationally to help improve the mix as well as how do you also look at different options. So for example, we have one of the largest deployments of Bloom fuel cells with over 40 megawatts. And there's a whole bunch of interesting things there where, essentially, because you're generating energy directly on site, you don't have transmission loss. It's lower emissions from that. And then if we were able to flip to hydrogen, then you'd also be pure renewable as well. When we're working with customers, so the conversation starts around the renewables. That's gotten a lot broader. So they're asking about weather usage, [ ways ], how do we build our sites, what's called embedded carbon. Are there the materials we can use to help reduce that? That area is still quite young but of high interest. And I think the other area is, it's not just us anywhere, it's not just us sending them the report. It's actually working with customers like Microsoft on how do we actually directly engage with Europe, for example, on policy work? Or how do we think about enabling a hydrogen grid over there? So lots of kind of interesting stuff happening on the customer side.

Okay. Great. Keith, one of the perennial topics every Analyst Day is around margins and your long-term targets. And I think you put out clearly, whilst you're focused on operational efficiency, you're investing a lot in the business and developing new products and rolling out things like Metal, as you suggested. So how do you balance that desire to improve the margin over time with investing in the business? I'm sure there's some interesting discussions every year.

You can only imagine, Simon. But those are the dialogue. That's the dialogue you have with your investors. We do a number of these investor meetings. And albeit today, it's virtual, the dialogue is the same and you've got to make that decision between the growth in the business, the long-term value that we create and the margin that you deliver. The thing that I shared with our -- tried to share with everybody is everybody in our team now is aligned to driving value on a per share basis. We get measured on an AFFO per share basis as a company, and that's how the bonus plan is doled out. So absolutely, it's at the forefront of what we think about as a business. But we also want to invest in our future and recognize that you've got to find balance, and Charles has done a good job of, maybe much to the chagrin of some of our investors, saying that we're going to look not just at the short term. We want to make sure we're investing to create long-term shareholder value creation for our investors. And if that means sometimes trading off, giving money back in the form of margins, therefore, dividends and profit, we're willing to make that sacrifice. But let us tell you where we're taking the business. And that's the balance that we have. So having said all of that, yes, of course, we're going to continue to invest in the business because it makes sense that now that we're a $6 billion-plus business, as you go into 2021, and again, I'm not going to give you guidance today, everybody. Sorry about that. But suffice it to say, you know that we're scaling the business and so we're excited about the opportunity. We want to invest in these new products and services that you're hearing us talk a lot about. We think it makes the difference. We'll continue to grow and scale the business through acquisition, organic development, which are very sort of margin accretive. And eventually, right now, yes, there's an investment in the products. The products though, when they become more mature, are at or better than the margin that we generate for the business today. And so the one thing that I think people will appreciate when we're up and running at full throttle is that these decisions that we're making isn't about going into lower-return, lower-margin or lower-return decisions. They can be very, very accretive to the business plan. And by the way, I think they also can add value to the overall business, the colocation business, interconnection business because if we get it right, there's going to be a higher [ tax ] rate to revenue. There's going to be more pricing on a per cabinet basis and there should be lower churn if we get all of this right, and that's why we're so optimistic. So again, it is a fine balance. We understand what our commitments are and what we'd like to deliver against. And you have to wait until February and so you hear what we say next. But overall, it's not lost on us that we want to deliver more margin for sure. But we're going to balance that within our investment decisions as well.

Great. And picking up on some of that, maybe just talk through the customer verticals a little bit and where you see the most opportunity going forward. And I think one thing you've been talking a lot about is the edge and that in many ways, you've sort of been building out the edge all these years and that there's a lot of opportunity with the infrastructure. You have to take advantage of workloads moving to the edge.

Yes. In our breakout session before this presentation, we did talk a little bit about that with some of our investors because there's certainly noise in the marketplace about what others are doing potentially at the edge and whether it's the edge of a tower or the edge of a logistical center or the edge of the distribution, whatever it may be. For us, we're paying attention to it for sure. We've got biz devs, the strategic teams, technology teams that are looking at it across our opportunity set. But for us, it's probably a little bit early. We're paying attention to it. We're not making any meaningful investment other than we have teams focusing on the full aperture of opportunity. And I just think that it's too early. And when we talk about the edge, I would talk about the core because I think we're as close to the edge as you can be if you're at the core. And that -- the position, the preferential position that we have as a business and why we get outsized returns and why we get a return on our invested capital more than others is because we have positioned ourselves so well for those who want to get access to the cloud or the service providers in the cloud. And I'm sure, Simon, through your work and the many investors that are presumably on this call, a lot of the edge companies, a lot of the tertiary, smaller market service providers, I mean, the word on the street is pretty straightforward. It's not easy. It's not easy out there. They're not making a lot of money and they're certainly not growing because most of the growth is happening at the core. So we're focused in the big markets. We're going to be -- we'll be in 63 markets around the world. We are in 63 markets around the world. Of course, some of them will be smaller markets. But the reality is the majority of our growth and scale comes through the major markets. And that's where we'll continue to invest while still extending our platform out from those majors because we think it will be relevant. But just -- we're not there yet. Our growth is going to come. Somebody asked, I think, it was probably 2 earnings calls ago, maybe 3. I can't remember. Where is our growth going to come from? And part of it will certainly be through organic growth. It will be also through acquisition growth. The Bell Canadas, the GPXs, the Axtels and -- but also be new products and the acquisitions of the packets. And there'll be other services that we will continue to think about how do we offer. But then you're going to get the benefit of currency and currency is moving favorably as you -- at least, said differently, dollar -- U.S. dollar has been weakening over the last few months that you get growth through that. So between acquisition or organic, new product and currency, that's where we're going to get our growth from. And again, I don't think we have to push ourselves into a market situation where I think it's just going to be hard to grow and that's those small edge markets. And time will tell and I'll leave you with one thought that we have a tremendous amount of strategic firepower as a company, not only because of the size of our equity base today, the amount of leverage that we have on the business relative to any of our peers, the cash that we generate and the cash that we have on our balance sheet. That's going to put us in such a good position to strike when we need to or if we have to. And right now, we're going to sit back and watch for a period of time and let somebody else break their pick and we'll see how it goes.

Great. That sounds like we've got to watch this space. Well, thank you all for your time today. We really appreciate it. A great conversation, and good luck to everybody with the rest of the conference.

Great. Thanks a lot, Simon. Thanks for hosting us. Appreciate it.

Thank you, Simon.

Thanks a lot.