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

Hi. It's Simon Flannery here, and welcome, again, to another session at TMT 2021. It's my great pleasure to welcome Equinix and their CFO, Keith Taylor. Welcome to TMT, Keith.

Simon, thank you for having me. It's always great to be here.

Great. Well, look forward to our discussion. Please note, for important disclosures, see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So you just wrapped up a strong 2020. You put out a strong guidance for 2021. Perhaps just share with us your priorities as we look forward to this year?

Well, first, foremost, thanks for saying that, Simon. I thought we put out very strong guidance ourselves and -- for the first guide of the year. And I will say there will be some forward-looking statements. I have to make that disclosure as well. So please refer to our SEC documents. But yes, 2021, really excited about the year. There are some strategic initiatives that we've embarked upon. Some are -- have been ongoing. But the priority Charles has set for all of us, is really quite clear. It is continuing to invest in our go-to-market engine, particularly around channel and making it easier for the customer to receive a bill. And so that whole initiative about creating efficiency, really, really important for the business. Second thing, of course, is new product and new product services. And we don't have to go too far to think about all the things that we're doing as an organization to differentiate ourselves from so many of the others that are out there. I think about Equinix Fabric, certainly Equinix Edge, which is in its infancy. And then maybe a little bit further down the road, of course, is Equinix Metal. And so we're very excited about that, and all we'll do there. The third one will really be about xScale. And to many of the I've had today, there's been quite a few questions about that, both on the supply and the demand side. And we're ramping up our investment, and I'm eager to talk more about it today. But really eager to talk more about it at the June Analyst Day, the virtual Analyst Day that we'll have. And the fourth thing, of course, is a priority for us is investing in the base. It's about sustainability. It's about ES&G. It's about our people. It's location, strategies and the like. And so we've got a broad initiative that will make it easier for us to instrument the business and make decisions. All of this, I would tell you, theoretically will drive more value, more profit into the share. And I also think it gives us, in many cases, the opportunity to grow the revenue line. So let me start there, and I'll see where we want to go.

Right. Well, I'll come back to a lot of those. You're doing this all in the time of a pandemic. Perhaps just talk about what life after COVID looks like for Equinix and for the industry. What are some of the things that you've been able to adapt in terms of efficiency and some of the things like remote hands and other services you can provide for the customers that maybe more -- give you operating leverage going forward?

I think there's no -- there's a clear realization that the digital world fell upon is much faster than we ever anticipated. And many companies have done extremely well and we readapting their infrastructures to meet today's needs. I think that demand is only going to continue, and if not, accelerate, as more and more companies figure out how to work in the new world. But I don't want to say new normal because I don't like that word or that phrase. But I do think there is going to be a new paradigm in which we all live in. I think it's going to be more flexible, more hybrid. And for us, I think we're just so well positioned as a company to be one of the beneficiaries of it, both on the supply side and on the demand side. I think we -- if I talk just about post pandemic, we think about how do we operate as a business. And the data centers. The data centers, and we've got just world-class individuals who operate our office business. The upside of the equation hasn't changed per se, we've had to adapt some of our thinking and ingress, egress. But overall, I feel really good about that. It's really how do you run the rest of the business in a very global way. And I think we're more -- we're probably going to be -- companies are going to run more efficiently. I think there are going to be more hybrid ways of working. We will return real estate, in some cases, corporate real estate that we probably don't need. And I think others will do the same. And we're already well down the road on our journey to cloudify our business. We probably use 200 cloud as IT services companies to run the Equinix business. So as I think about what others will do, I clearly believe that the digital world is here, it's here to stay. I think there will be an acceleration. We'll work from home more often. We'll be on the Zoom calls more often, but not all the time as we are. And I firmly believe that as you think about security, you think about the communication, think about data analytics and artificial intelligence, all of this is going to come and play a more meaningful role on a go-forward basis. And I think those that are best positioned, both geographically dispersed, I think having the infrastructure to support it, having a diversity of set of networks and then being -- the thing I really like about some of the discussions we've had today, knowing that we want to be with cloud, sort of the cable landing stations terminate or originate and/or terminate. Knowing that we want to be where the cloud on ramps or knowing where the on and off ramps from the networks -- the network knows. That's all relevant to where I think we will have great success as a business. That's where you'll see as invest.

Great. And what are you seeing in terms of the construction permitting zoning issues? Are they kind of easing up now? And new logos, your ability to get new -- to sign up new customers, which I think the industry struggled with last year?

Well, I think the reality of the world which we live last year, and hopefully, we are going to see an improvement as we start to come to the spring and summer, obviously, in this part of the world, when I talk about spring and summer. But the reality is we are -- we were behind. Supply chains are behind. Even I think simple things like I'm going to get down to get the car fixed today and they say, well, the part won't be ready for 2 months, we're out of supply. So I recognize this supply -- the supply chain, in some cases, is challenged. We as a company, we've got a -- we started investing about 2 years ago with a procurement and strategic sourcing team. And we hired somebody from one of the large hyperscalers to lead that organization, and she's doing a fabulous job. And so from our perspective, I think being able to source with the major suppliers appropriately, recognizing everybody's faced with the same sort of set of challenges. But if we can get ourselves in the queues and commit to inventory consumption, I think we're better positioned than many others. And so for those reasons, yes, there have been delays. And as this pandemic moves, ebbs and flows, some markets might be a little bit more difficult than others. But the reality is we've -- I think we're probably 2 to 3 weeks behind on average in our projects. It's not meaningfully affecting our results but it is something that we're mindful of because the longer you extend that project, the more cost that comes into the equation and that, of course, affects your return on capital. And it has been a challenge for the suppliers, and there's no getting around that. And anybody that says differently, then they're not being real. The fact of the matter is we know suppliers are challenged, getting their workforce to the locations where they need to be, particularly if there's a lot of in-sourced labor, particularly -- and I think of Europe. Europe is an example where we've got labor coming from different markets and that's been difficult, or you -- then you go to Singapore. And Singapore has been a really challenged market. It's a lockdown -- it was a lockdown country, and they source a lot of their labor from different parts of the world. And long run, maybe a long way of saying, look, I'm not particularly worried about it. We're on top of it. We're focused on it. And last year, I think I'm glad it's behind us, and we're going to focus more on this year. And you heard us say on the earnings call, Simon, we've got 44 projects underway, 30 markets in 20 countries. And 25 of those projects are Europe, and 18 different markets in here. We know where we're going. And then we've got the hyperscale or the xScale initiative. So I am excited to talk a lot about that because I think it's going to make a difference. And it's still early days, but we're seeing the opportunity in front of us in technicolor lights. And again, I'm optimistic, and we'll talk more about it in June. But suffice it to say, the demand side of the equation feels like it's there. We've struggled through some stuff last year, particularly some elevated churn in the latter half of the year. But I'm quite optimistic that, that's behind us.

Right. And just staying on xScale, I think you shared at the last Analyst Day, what was it 2018? I think you socialized that with us at that point. How is it performing? How is this sort of rolling out compared to the vision that you have back then?

Well, back then it was a vision. Today it's real. And so quite openly, it probably took us longer. And we've said that over the last few earnings calls, it took us probably longer to see it start to kick in, but with the right set of leaders; focus on our xScale initiative; more investment, we're putting more money to work towards tax, treasury, design and construction, specifically; and then doing things with -- one of the prior calls we had today was, what are the things that we're doing to make it easier just for it to move along? And the reality is, I think if you can contract easier with the large providers and get something that's more uniform, it's going to be easier for everybody to do business. And then you've got complexities, of course, of the markets in which you build in. And for us, I would say, largely, it took us longer to get where we needed to be was, one, is a very different product offering than what we offer today. You think, well, a data center is a data center. And the reality is not all supply is created equal. And what our customer wants is very different than what we build in our retail business. And so we have to be mindful of that. The second part is the tax and branch restructure is very, very complex, particularly when you're in the REIT world in which we live in. And you've got to create an environment where -- remember, we're the 20% owner, but the general partner, and it's going to be tax efficient. And all of a sudden you got to live in that world. So all that to say is it probably took us longer to get off the ground, but the momentum that we're seeing under Krupal's leadership is -- and the team that works with Krupal is immense. And so we're excited about the demand side of the equation. We're really excited about the supply side and where we are anticipating building. And we have a broader story to tell, probably to tell you in the June Analyst Day, as I said. But let me leave you with a couple other quick thoughts. #1 is our third JV is under -- is we're close to getting that completed. And that's going to be in Australia. And then we probably have another 2 to 3 to go this year to give you a perspective. We've only shared with you 8 projects. But the reality is, if we see that momentum, and we believe we see it, you're going to hear a lot more in the June time frame.

And these will be in different countries or?

Yes, absolutely. Most of them will not be in the U.S. We've said it's hard to imagine that we're going to spend a lot of time in the U.S. because that's a more challenging market. And the supply side is completely different here than it is in other part of the world.

Great. And you started off talking about the go-to-market and focusing on the channel. And I know enterprise has been a big opportunity. But perhaps just talk a little bit more about what you've talked about ecosystems for years. Where do you see real momentum right now? And where do you think there's sort of untapped potential for you?

We're pretty much just doing what we've already been doing. I mean, there's untapped potential, I think, everywhere, whether it's data analytics, artificial intelligence, autonomous vehicles. You go through a myriad of different things, gaming, security, storage. Everything is sort of -- not only do you look back and say, what were people doing then? What are they doing now to deliver their service offering in the new world -- in the new digital world? And so I think there's a broad opportunity set across all of our verticals, even the one that's the most mature, which is network. Network, many of you know, I mean, it's foundationally where Equinix sits on top of 1,800 networks. And because of that, there's real, real value. But the networks -- the networks have to scale with us as well because they've got their core infrastructure, in many cases, inside Equinix. As we continue to sell more customers, particularly through the channel, more customers, more opportunities. And as they start to use our service offering, including Equinix Fabric, just -- the infrastructure has got to build. And so even that network vertical is -- we're seeing nice growth in it. But you can look at any one of our verticals or the subsegment and we just see an outsized -- we see an outsized opportunity, I think outsized relative to many others. One of the things I did say earlier on today was we did 17,500 transactions last year. And it's hard to imagine that volume of business going through small and medium-sized deals. And then you've got the hyperscaler on top -- hyperscale business on top of that. And so all of a sudden, you see that we do more. So the opportunity set's there and the discipline that we're using to focus on the right customer, right application, right market, right data set, makes sense to us. And so we are, as I said before, we're willing to trade some level of growth off because we're doing the right thing to drive that value and create more stickiness. So the challenge that we have that others see is our contracts are shorter, our 2 to 3-year contract term. Because we're not going out after those large footprinted deals, those large hyperscale deals and trying to put it inside Equinix. That's got to be in the joint venture. And these large footprinted deals, as Charles has said many a time, the best substitute for those deals is cloud. And that's why I think the cloud opportunity presents a really attractive avenue for, not only for us, but for the cloud providers. And so I'm -- again, I'm excited about the demand side. We just have to continue to execute, and we came off our best growth quarter ever. And then we have net positive pricing actions. We've got new products and services. We're investing behind. This feels like it's a good start to the year with -- but most of that churn -- most of the churn, the lumpy churn behind us. I know there's always going to be ebbs and flows, but I think the Verizon churn was annoyingly stubborn during the last few years, and I think it's well behind us now as we enter Q1 of 2021.

Great. And I think some of the use cases you were talking about sort of bring to mind something we've heard a lot about the Edge. But that you're, in many ways, at the Edge already. So do you think there's an opportunity that maybe some of your customers will bring more of their workload maybe towards you. In the past, if they were giving you X share, now they might give you Y share of their business because more of it is latency sensitive?

Well, I mean the answer is, I believe -- that's what we believe we're at the core. We're -- and again, one man's edge is another man's core. However, the customer wants to architect their infrastructure. We think that we have the solution to provide that opportunity to the customer. So it's hard to argue against our plan. We've got primary markets on major metros, as you know. We're going to enter a new major metro this year with the acquisition of GPX from Mumbai. So we're excited about that opportunity. But that's also -- that's a staging ground for the next new markets in the Indian market. And so I just -- I think between the primary markets and your secondary and tertiary markets, I think we're really well positioned as a company. But some of the questions that were asked, well, do you need to build in every market? And the answer is no. No, we don't need to. And some of them, when we bought switching data back in 2010, we knew from the outset that 10 of those markets we didn't want to be in, and we still aren't in them today. Today, when we acquired the assets, it's not like we're returning -- we're not scaling on a market. That's not our objective. We want to make sure we continue to invest where the demand is and then make sure that we can enhance our cash flow. And sometimes you're hearing us, we'll turn down a site in a given market, but we're migrating customers to a new site. So it is a required site. You'll see us maybe move those customers into a new location or if there's other reasons that have compelled us to do that.

Right. You talked about some of the new products. You launched Equinix Metal, I guess, in the fall. Any early indications or feedback from customers or how that's going?

What it's early days, as you can appreciate, and nobody is probably more eager than me to see how that performed. Suffice it to say, though, I think the opportunity is there. And it's really allowing us to get access to customers who want infrastructure on a consumptive basis. And for us, knowing that we have the Fabric, we have Metal and then we got a diverse set of assets around the globe, it just feels like it's the right opportunity. It's still early days. Part of the challenge, quite openly, that we have is we're trying to sell a service that we think the customer wants but you've got to figure out how to make it work the market. And certainly, the Packet team has won a lot of great wins. The pipeline is really strong. Again, I remain optimistic because it's still too early to tell you all the things that they have done. But what I will tell you, when we actually -- when Charles and I are sitting back with the team looking at does this -- what does it make sense? Tell us about the margin. What is the return on capital invested? Because that's just some of the stuff that people don't look at is what's going on in the balance sheet. One, we think you can return high-return on capital, but the value -- the margin profile and the value on a per unit measure inside a data center is multiples and multiples of what we get today on a cabinet basis. But the difference is, and I want to be open, we're investing in all that cabinet infrastructure, and that comes at a much higher cost than their traditional cabinet. And so it's finding that balance with the return profile from an early read and seeing the opportunity set and then the marquee customers that we're winning, it feels like we're barking up the right tree.

Great. And you talked about margins there for a minute. I think it wouldn't be an Equinix earnings call if there wasn't a margin question on there. But I think you still have this goal of expanding the margins over time of getting the operating leverage. But I mean, it sounds like you just have this philosophy that you want to continue to invest in the business. So it's a balancing act. Is that the right way to think about it?

So I mean I think it's always a balancing act. And I know I'm no different than investors on our call here today. The answer, yes, of course, we want to create more margin for the business. But we also want to look down the road and say, well, where do we want to invest our capital? Because we're not going to be a $6 billion business, we're going to be a $10 billion business. And what do we have to invest in today to get there? And how much return can you create for the shareholders by making that investment? And the reality is we are investing in some things, some of that stuff that we're already doing, that we've got to do differently today because we're going to grow and scale the business beyond the systems and processes that we have today. We need to do that. So some of the things we're doing is because some of the more -- is we recognize that we want to be different than others out there. We want to have a Metal offering. We want to have an Edge offering. We want to have a Fabric offering. Others can do that. They can buy it from others, but they can't do what we do. And so that's what's really important, that we recognize that we are going to be different and so you got to invest in that. You have to invest in these new markets. So as I said, the 30 markets we're investing in, the amount of capital we're deploying today, there's a net drag from it. The amount of the xScale business, there's a net drag to it. The new products and services, there's a net drag. And the reality is all of it is going to return, we get it right. And I think we're going to get it right because of all the decisions we're making cross-functionally over the organization. And so yes, I understand what -- I understand the shareholders once more. But I also think they're going to get more. They're going to get more, but they just have to be a little bit more patient. Charles is very disciplined about let's invest for the long-term, create long-term shareholder value. And if we do that, all those others who will be struggling and you don't have to go too far from some of the earnings scripts and you look in and go, "Well, I know why that happened, I know why that happened." We get -- we have more activity than we've ever had before. We have positive net pricing action. MRR per cabinet is going up, and we're building more than anybody else. It tells you a little bit about what we see, what others probably don't see. And that's why you get the enthusiasm from me and the others. And I think we're making the right decisions. And again, I thought some might have been disappointed in margin. Again, I said Q1, you're going to see a nice step up in Q1 and it will improve throughout the year. But I thought we'd give it an AFFO and -- because AFFO, if you take out the integration costs, it's a 10% to 12% growing number. Integration, yes, you've got to spend it because you're buying a company, you got to integrate those costs. That cost won't repeat itself. It's gone. Once you do it, it's behind you. And that's why I thought the AFFO contribution would really make the investor happy.

Sure. And it's not easy to do to grow AFFO in a period of heavy investment either.

No, it's not. And it's not done [ in your part ] and we're pretty deliberate, we say it's not because of capital market activities. If we want to in capital market, we can have another discussion, but that's probably -- we'll have that in another day.

Well, you did -- you talked to us on ESG and you just had a green bond issuance recently. So maybe just talk about what are the kind of the goals that you've set out for the organization? And is this something that is really customer led? Or what's the kind of the overarching kind of drivers here?

I mean, I think we all realize that ES&G really matters. And it matters for us as individuals, but it certainly matters for our families, our communities throughout the company. And I would tell you our investors. I mean you don't have to go very far that a lot of our investors are saying, what are you going to do? And then by the way, the customers are asking us to be -- to leanify, basically, our portfolio. So we have a green -- obviously, a green finance framework that we're going to focus on. It creates an environment where we're going to specify specifically where we're going to deploy our capital, the capital we raise. And we want to make sure that we run the data centers more efficiently. And it's really from cradle to grave on -- it's not just about energy and sustainability and renewability of what we consume. But it goes all the way to electric vehicles, to wastewater, to other waste and you think let's find a way to make sure that we're as efficient as we can as an organization. We can't get away from the fact with our data center, we consume. But when we measure ourselves, the thing that I really want, we measure not only ourselves as a consumer, we measure the customers' consumption inside our environment. And to be carbon neutral at some point in time, again, we don't want to give away all of our secrets for the Analyst Day, but we'll be talking a lot about what it means to be a green data center company. And hold others in our industry to the same level that we will hold ourselves to. And I think it will make a difference. And I can't get away from some of the stuff we built in the past, but we can look forward with a very different light and also invest in new platforms and technologies and software to make our older data centers run more efficiently or consume less. Good for the customer, good for the environment, and certainly, it will be good for the shareholder.

Great. Well...

66 basis points, that's what we [ borrowed ] the money at. And I mean -- and by the way, it was pretty tough. It was a tough market. There's a lot of noise in the market last week. I just feel really good about -- the story that we told and why we're different and why we're going to be more environmentally focused and friendly, it's also about our diversity and inclusion belonging, Simon. This is not just a one-trick pony. We got to care really a lot about our culture and about our people and about the sensitivities in the world in which we live, the societal issues that we deal with. And I think it's making a big difference. I think it'll be a core differentiator for us, just like, I think, our assets are, our people are. If we can care for them in under the ES&G umbrella, I think it will make a difference, a competitive advantage as well.

That's good to hear. Well, we're close on time here. Maybe just one last one, if I can. Just talk about the balance sheet more broadly and leverage targets and financing, growth financing, acquisitions. Are you looking at more partnerships outside of xScale? Are you looking at recycling mature assets? What's the playbook?

Yes. Well, recycling of assets doesn't come to mind now. I've got to be honest with you because that's -- we're not financial engineers, we're operators. And I really do think of ourselves differently than some of the others that might recycle the capital. And I get it. I get why they do it. And -- but for us, we want to build and scale the business in a way we want to be a $10 billion business. We want to take the capital and deploy it in the most advantageous ways for the collective shareholders. And that sometimes means buying things, new businesses, bolt-on acquisitions, maybe more transformative acquisitions like the Bell Canada assets, getting to new markets, like we just did with Mexico and soon to be India. And you can go down that list. I think M&A is going to be part of our future. I do think that geographic dispersion will be part of our future as well. So growing horizontally. But I also believe growing vertically. And so technology plays will come to mind. So the balance sheet in and of itself is very, very important. We have much less leverage than most. Part of it is it's forced upon us. In order for us to be investment-grade and all of us to enjoy the lower cost of capital, we have to get to investment grade, and we have to live within that framework. And suffice it to say, we believe that we can operate at a higher level of leverage. I'm not saying that we need to get all the way to where some companies might be. But our view is, even if you said one turn, a $3 billion, $3.5 billion of capital you could deploy at a very low-cost relative to equity. And so I would say that on a go-forward basis, yes, you'll always hear us talk about bringing balance. We want to use debt and equity. But if we had a latitude, I think you'd see us draw down a little bit more on debt because it is our cheapest source of capital. That means that our treasury team with Mel Mock, who's our Treasurer, working with her team, we've got to work with the rating agencies and maybe get a little bit more latitude, so it gives us that flexibility. I think we have a great balance sheet. We carry more cash than most. We have liquidity. We're not over levered. And we generate a lot of AFFO and our payout ratio is so much lower than everybody else. All of a sudden you go, this is a business that really can invest in the future. But we want to do the right deals. And we're not just going to do it for the sake of doing it. We've got a really good organic business. Let's just keep on doing what we need to do. And then if an opportunity presents itself, then you'll see us strike.

Great. Well, that's a great note to wrap it on. Keith, thanks so much for your time. Great conversation as always. Look forward to talking to you to soon.

Hope to see you sometime soon. Take care, Simon. Bye.

Absolutely. Thank you.