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

Great. Well, I will -- Mike, you know what -- this is what -- too modern. I didn't know if you were doing it or I was doing it? Well, welcome to Citi's 2021 Virtual Global Property CEO Conference. I'm Michael Bilerman. I'm here with Mike Rollins from Citi Research. We're clearly not in the same room together. We're very pleased to have with us Charles Meyers from Equinix. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available up on the webcast. [Operator Instructions]

So Charles, I'm going to turn it over to you to introduce Equinix and any members of the management team that are with you here today and hopefully answer the following question, which is, coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in Equinix?

Sure. Well, first of all, Mike and Mike, great to be here and great to see both of you. And I'm delighted that everybody could join here today. I'll very quickly give our disclosures so that our IR team doesn't get mad at us. But some of what I'll talk about today contains forward-looking statements. Please read our SEC filings for more information about factors that could affect these statements. In response to your question, again, we feel great about the prospects of Equinix and about the long-term value creation opportunity that it represents for investors and for customers. And I think it revolves around several things. One, I think that the demand backdrop for digital transformation as a priority, I think, is exceptional. I think that COVID has represented a catalyst for people seeing that those prepared to live and operate and excel in a digital world are -- they are outstripping those that were less prepared for that. And I think everybody is trying to figure out how to at least stay in the game. And so I think the demand backdrop for -- and that is creating -- that's translating to, I think, a demand backdrop for digital infrastructure that is as strong as we've ever seen it. And so that's sort of one key feature. The second is, I think, the relevance that Equinix has in terms of our role in that. And I think that if you look at it, I think it is very clear that the world is increasingly cloud-centric. I think that customers are embracing a cloud-centric world. And I -- but I think they're trying to figure out how to get from their current state, which is still -- a big chunk of our world is still in enterprise data centers, workloads living there looking to transition and probably at one point, there was a thesis that says, that would all go to colo. Clearly, the majority or super majority of that will go to sort of cloud -- to the cloud, much of which -- it lives in colo, which is creating, I think, explosive demand for hyperscale-related colo. But I think the private -- the demand for private infrastructure will continue to be, I think, very compelling. And the dynamics are that I think that private infrastructure will be several things. One, it will be much more geographically distributed than it is today; and two, it will be more -- much more highly interconnected than it is today. And I think those 2 things really play right down the sort of sweet spot of what Equinix has to offer in the marketplace. And then I think the third piece is just, I think we have the people and the culture and the commitment and the balance sheet to go execute on that strategy. And I think the dynamics of the business are showing up that way, and we believe there's a very bright future ahead.

Great. Charles, just a follow-up. Recently, you gave guidance for full year '21. And just if you can remind us, as you think about executing against the plan for '21, what are the key priorities? And are there any sort of higher level strategic points that investors should just be mindful of in the background as you're executing through the year?

Sure. I mean, I think the strategic backdrop is the one I just described in terms of the environment that we're playing in and I think the opportunity that's in front of us. And -- but the core priorities that underpin that are several fold. One is scaling our core business in terms of -- and that means continuing to drive the success we're having with our traditional interconnected colo offering on a global basis. And I think in order to do that, there are several dimensions underpinning that sort of key priority. One is evolving the go-to-market machine. We've had 2 consecutive quarters of record bookings in the Americas, and Q4 was a record bookings quarter for the company overall. And so you look at that and you say, "Well, the dogs are eating the dog food," so to speak, right? There's real demand for our service offerings. In fact, you look at that -- I think you can't help but look at that as a CEO and say, "Okay, are -- did we leave money on the table because we didn't have enough core bearing heads on the street or didn't have enough channel partners or didn't make it easy enough for our channel partners to sell?" And I think that you would come to the conclusion that says there's probably more demand there to serve. And so I think we have to continue to evolve and expand the go-to-market engine both in terms of our direct selling and in terms of making it easier and easier for our channel partners to deliver our offering in combination with what they do for customers. So that's -- the second piece of scaling the core is really improving the efficiency and scalability of our business. And one of the areas -- as you all know, Mike, we guided to a slightly lower margin profile next year -- or this year. And that wasn't necessarily well received by everybody, but it was one that we believe that we, by investing in process and system enhancements that improve the efficiency of the business in key areas, quoting, ordering, billing, a few examples, we think that we can look to continue to scale the margins in outer years better. And so we still see the opportunity for us to scale to a 50% operating margin over time but really felt like we needed to make investments now to make that possible over time. And then the -- so that's really the scaling, the core piece, both continuing to grow the top line, continuing to execute on our plan to expand our geographic presence and scaling the business from an operating leverage and efficiency standpoint. Second big one is really accelerating our digital services commitment. And I think that if you look at the success of Equinix Fabric and what we think is possible in terms of unlocking network edge and Equinix Metal as ways to better deliver our core value proposition for customers, we think that's really important. And we have to continue to invest in areas like software engineering and UI, UX designers and API developers. That wasn't required to sort of build colo and sort of plug-in and cross connects. But it is required to deliver, I think, in a -- to deliver a hybrid multi-cloud architectures for customers in the current world. And so that's a second piece, is sort of continuing to invest to ramp those revenue streams. And these are not kind of fundamentally new. They're really central to tapping into our value proposition of reach ecosystems, interconnection and trust. And so that's the second key piece, is accelerating the digital services. And then third, we need to continue to scale -- ramp xScale. I think we've got great receptivity to the market. It allows us to continue to expand our presence in the cloud ecosystem. And I think over time, we'll generate both good returns for our minority equity position as well as fee streams that are accretive to our AFFO per share position. So those are the big ones and then one that underlies all of that is continuing to invest in our people organ culture, which I think are really -- have always been central to our success. So a lot there, but those are the areas we're focused on.

That gives us a lot to focus on in our time today. And one thing you talked about was the growth and the bookings. And curious if you can confirm what are the most important verticals to drive revenue growth over the next few years.

Yes. Well, it's interesting because I actually -- what we've seen is that we've had really good success across our verticals. Now we have defined our verticals maybe in ways that are slightly different than some do, but the more service provider centric verticals like cloud and IT and content and digital media is also somewhat service provider centric and then network is pretty obviously service provider centric. We think that continuing to be a core part of the architecture and the infrastructure that our service provider customers are delivering to tap into this big digital transformation demand themselves is a huge opportunity for us. And so we absolutely think the service provider side of the business is continuing to be central. And our position of being there, complementing their -- what they're doing with our infrastructure and giving them access to the value proposition that we have is going to be very, very successful. On the enterprise side, we're seeing a lot of success across financial services, across retail, anywhere where there is particularly focus on data and generating insights from data and also distributed infrastructure that's needed to address the distributed needs of those enterprises. Those are areas where we're seeing success. But I would say that we're seeing that in a really broad basis. More maybe horizontal applications around WAN rearchitecture, around data, hybrid cloud implementation, around data gravity. Those are all areas that we're seeing. And I think they're less dependent on any particular vertical, although, again, we are seeing [ sized ] success in a few of those key verticals. Interestingly, manufacturing is another one where we're seeing a lot of success. And again, they just -- they tend to have very distributed value chains and an increasing reliance on data to drive insights in their business, and those -- that tends to be creating some momentum for us.

What are you seeing from the sales funnel in terms of just the gross interest relative to past years and the underlying decision-making of those customers as their -- I mean, there's just so much more, I would imagine, to process right now as companies are figuring out where their employees are going to be and how they're going to be working over time.

Yes. I would say that the -- I think the levels of demand and the corresponding levels of pipeline that we're seeing are as good as they've ever been. And that's why I referenced at the top that if we think -- continuing to invest in the selling engine to capture that demand is appropriate for us. And in terms of the buying process itself, we are still largely a fully virtualized selling cycle. It is my hope that as we get past that and can engage with customers in person and get on a whiteboard with them, for example, that maybe we can shorten up some of these selling cycles that I think might have been a little bit more protracted. But we'll -- I think that's yet to be determined. But I am very proud of the way the organization has adapted to a virtual selling cycle and even how we run the business in terms of onboarding salespeople and bringing them up to speed and all the things that you have to do to be effective in a virtual environment. I think the company has done well. But I do think that -- and I think that -- as an aside, you talked about the work from home. I think the future state as we -- even as we accelerate the vaccine and hopefully start to see some sort of a return to normal in certain ways, I think work from home is going to continue to be a very real element of where the long-term dynamic of how work is done. And so people have been asking me whether we feared some sort of hysteresis associated with that going back that we benefited from that sort of creates a hole. We really don't see that nor do we hear that from our customers.

Charles, one of the things you mentioned in your opening comments was the globality of the Equinix platform and what that brings to your customer base. Can you spend some time just talking about where sort of you feel the best opportunities are to increase your global presence? And where do you feel like you either have holes that you want to fill? Or were you one that just gets stronger as we start to think about either acquisitions or further development around the world?

Yes, you bet. Yes, we always tell the selling teams that -- particularly new people, is that the world map is still one of your greatest selling tools at Equinix. And so we're now at 220-something data centers in 26 countries, 65 markets around the world. And that's a compelling value for our customers. And we've made a ton of progress. If you look at our success, both organically and inorganically and extending our footprint, it's been pretty amazing over the last many years. We just recently -- or we're about to close on -- we recently announced and are about to close on the GPX transaction in India. That was a long time coming. We were really trying to find the right asset, but we're really excited about that. We feel like it's a great interconnection franchise to build from and very powerful sort of building block for us there. We only have assets in Mumbai to start, but there's a whole lot of India left. And so there's plenty of opportunity for us in that market. And I think there's other markets. If you look at Asia broadly, I think we're starting to see a movement, which is pretty classic in terms of maturing of regions from these core markets that have served the region effectively, Tokyo, Singapore, Hong Kong, Sydney, to now a -- that next click out of maturity, which is clouds and others going to these next sets of markets. And I think that's going to open up real opportunity for us. Southeast Asia is -- we opened up Seoul organically. That's by no means a next [ click out ] market. It's just one of the big ones that we hadn't gotten to. But we now are there. And I -- but I think there's Southeast Asia, some real opportunity there for us and then Lat Am. And then the last one I would mention is Africa. We don't yet have a presence on the continent there. And I think that is something that really, we need to address over a relatively short period of time.

And when you think about funding those investments, how do you think about partnership models, joint venture, fund, equity in terms of just the different levers that you have to pull from as you continue to expand around the world?

Well, that's -- there's a lot in that question for sure, but let me touch on some of the most relevant pieces of it. One is, obviously, as we think about how to fund growth and allocate capital, we always think about that on as expansive a thinking as possible in terms of allocating capital in a way that's best for our shareholders. I would say that I think we've been extremely successful at tapping the debt markets. And as evidenced by our recent green bond issuance, which had just an unbelievable, I think, level of demand for it and incredibly attractive coupons and tenders, and so we -- I think that's a good vehicle for us and one that we would want to use. In fact, I would like to have the ability to do more of it. And that's something that I think we need to continue to work with our rating agencies to find the opportunity to maybe give us a little more flexibility there because we think the dynamics of our business justify that strongly. So equity, obviously, we've had -- there's been some pressure on the equity, which sort of forces you to sort of rethink -- think hard about how you -- how and how much you want to issue equity. But we -- the equity continues to be -- it is a very attractive thing, but we got to think hard about that in terms of how we allocate capital. And then partnership models, I mean xScale is a great example. I do think there are markets where we might consider xScale as an initial entry point, but we would probably want to have a path to a more full range offering in the market. And so I do think that joint venture opportunities are out there in terms of using other sources of capital and maybe even over time beyond xScale.

Just following on xScale. So if I'm listening to just the different observations that Equinix has made on xScale, you've been talking about the growing opportunity for more joint ventures and more geographic expansion from that. But the management team has also been critical about development yields coming down for xScale. And so I'm curious if you could frame strategically what xScale is delivering to Equinix as a value proposition, if you could help update us on those development yields and what you're seeing and then what that means for the investment. Are you happy with 20%? Do you want less? Do you want more? And how do we just -- I realize there's a lot in that question too, but just curious to just unpack more of this opportunity.

Yes. Well, let me see if I can cover all that ground and you can ask any follow-ups you want. But what I would say is that, one, it is important to recognize that everybody's position is -- or outlook is somewhat relative, right? And when we talk about the fact that we are less excited about the development returns and the fact that they're sort of pressing down, in some cases, into the single digits, et cetera, that is with our traditional enzyme, right? And when we -- we have stabilized assets that today, after all these years, are generating 28% cash-on-cash yields and new projects that are -- continue to be IRRs that are in that ballpark, right? And so when you have -- when you look at them on a relative basis, you have this reaction of, "Hey, if I can allocate capital here, I would rather do that." However, look, there is capital out there that looks at these returns on a risk-adjusted basis and says, I absolutely want -- those are attractive to me. And so when you look at them, I think that, again, we're going to continue to be able to deliver development yields on those projects. And when you combine them with the fact that you can put some leverage on them, and we're going to get -- as a provider, we're going to get a fee stream for Equinix. I think the yields there are going to -- or the development returns and the overall yields are going to be attractive for -- and especially in the context of achieving our strategic objectives, Mike, and that's something you've hit on there. And so I think it's important to remind people what those are. And that is continuing to accelerate and increase our leadership in the cloud ecosystem, be a full-service provider for these major sort of participants in the cloud ecosystem who, by the way, really would like us to be that for them. And so we're able to achieve those 2 key strategic objectives, but do it without really burdening our balance sheet. And so if I net it out, we're very happy with xScale. We're delighted with our investment in our partnership with GIC. And we see potentially that extending to other partners in other geographies around the world. I think I feel pretty comfortable with 20%. I don't know that I would want to go either direction on that. It feels about right to me. But we're -- I will tell you that the more and more we look at it, the more satisfied we are with that strategy and really feel like it's meeting our needs, both strategically and financially.

And Australia, that's the next one?

Yes, we will be looking at APAC too, which will be centered in Australia and may encompass some other geographies over time as well.

And does getting more competitive in hyperscale -- U.S. development yields have fallen. Where are international yields? And is the risk with more competition that, that just might fall even from where it is today?

Yes. I mean, I think there is some risk, although I will say that generally, our industry, and I applaud it, I think, has had good discipline. We -- I think a couple of years ago, we probably hit a pocket of oversupply in Ashburn, but I think that's stabilized to a large degree. And for the most part, I don't -- I'm not seeing a lot of that speculative sort of investment leading to oversupply. So I think there's a pretty good level of discipline. And hopefully, that will continue. I do think the international yields are still -- our development yields are still higher. They're likely to be pressured at some level by dollars chasing those. But we're -- and we're not really a share grabber in that market, and we're kind of -- we'll be a meaningful share player, but I think we'll target the right types of customers with the right kind of footprints is what we're looking for in terms of that being accretive to our overall strategy.

Charles, we've been asking every company about ESG. And specifically, what are Equinix's top 3 priorities to improve your overall ESG score over the next 12 months? And maybe weave into that, obviously, your tenants, just given the power consumption, is one element that is part of your control and part not. So maybe just sort of wrap that all together.

Sure. Well, and I would -- I'd take a -- and I'm not sure if you mean it this way in terms of -- but we will definitely look at ESG with the full ESG lens and all of it. Environmental sustainability is a piece, but it's only a piece. It's certainly a very important piece. And we, as one of the largest consumers, as an industry of power, have to be very focused on that, but there's a lot more to it. So I think we're going to continue towards our objective of 100% sustainable energy and renewables. And so I think we're making great progress on that. We're more than 90% there already, and I think we're going to continue to strive for that. We recently signed on to the European Data Centre initiative or group that is really committing to carbon neutral by 2030. And so we have a set of investments in programs that are designed to support that journey. So that one is just in terms of the commitment to sustainability of our energy consumption. Related and a second key priority is continuing to invest to reduce and improve our PUEs and invest in technologies that improve both the resilience and the sustainability of our energy consumption. So we have things like where we invested in -- we have Bloom Energy cells, for example, in several of our markets. And those provide us with both sustainability improvements and resiliency improvements. And so -- and I think that's really important. And if you look at -- like in the context of the most recent Texas events, I think our ability to continue to be a player in adding resilience to the local energy capabilities is important. In Texas, for example, we actually went on to utility -- we went off utility power onto gen pretty early because the utility power is just not stable enough. And that actually provided the opportunity to allocate some of our energy back to the grid, which was really a win-win in a time when it was very needed. And so I think there's a variety of technology-related investments that both the resilience and sustainability will make. And then there's the rest of the ESG, where we talk a lot about the work we're doing relative to diversity, inclusion and belonging and building a culture where every employee every day can say I'm safe, I belong. And I matter. The level of response to both our employee base and our customer base to that -- those efforts has been exceptional. And so we're going to continue to invest behind that and give that the resource and attention it deserves.

The company obviously started as a C corporation and converted to a REIT. And the REIT, the structure has some limitations, right, in terms of the income and the assets, I mean, required to pay a dividend and all these sort of things that come about. There is a push by some of the retail landlords, retail -- I mean, retail real estate to change some of the rules around or loosen some of the rules around a REIT owning a tenant and being a little bit more in an operating measure in terms of the amount that you own and how it's done. Are you involved at all from a data center perspective in trying to relax some of that? And I guess, what -- can you talk a little bit about what that would mean for Equinix overall?

Yes. We're probably a little less impacted than some in that. But I would say the general posture is that we are supportive of that direction and have been -- I know our regulatory and group has been actively involved in working with NAREIT and others to support those efforts. So I think it's a little less acute for us or -- but I think on balance, we are supportive of trying to get some -- get that to move in the way that you described directionally.

And just in terms of owning assets, right, you can lease the asset, own the asset, own the land, own the box, lease the land, there's so many different structures. Do you think -- and I recognize you say to your salespeople, you have the globe. It doesn't matter whether you own the assets or lease the assets or on the ground, go sell the product. I guess, from a corporate finance perspective, how do you think about that mix overall? And should we anticipate any changes over the next 12 to 24 months in terms of that?

Yes. I wouldn't say any significant ones, although our bias, as you know, is that where we can economically own those assets, we would prefer to, right? And so I don't think it's practical in all cases either because the underlying assets are multi-tenant in nature or in certain markets around the world, you're just never going to claw those things out of the owners' hands. So I think that we have to recognize that there are practical limitations or you just can't do it at a price that makes sense, right? And so our bias will remain, which is we're at 55% of our revenue coming from owned assets today. Our development is going in -- is over-indexing heavily into owned assets, and we're more aggressive on our land banking than we have ever been before. The combination of those factors probably means that 55% continues to head north. But I think there will be some natural limitations to where that might end. But it's another reason why we want to continue to go back and talk to our rating agencies about where we are on that and what they ought to be thinking, how they ought to be thinking about us.

Charles, you mentioned earlier in the discussion about the reaction that the company may have received in a margin guidance for 2021. So curious if you could kind of put it in perspective. Like what does these investments provide for Equinix? And how does it set Equinix apart from the competition? And then if you think about the investments that you're making, what does that do in terms of providing a revenue benefit in the future? Does it push the revenue range up from here? Does it sustain it? Like how should investors think about the ultimate payback from these investments?

Yes. And I think it's several fold. By the way, we absolutely understand that's a very fair set of questions, right? And we probably have -- we have the Analyst Day coming up in June, and I think there'll be more perspective provided in this, probably a little bit of the challenge, which is we provided a 1-year guide, which opens up some questions and then opens up a couple of month period before we really have a chance to fully answer those questions. So that's been a bit of a challenging dynamic. But I think that what I would say is, yes, I think the ability to sustain and potentially even improve our revenue growth over time is what we're after, right? Again, we have to give more color on that to give -- to orient people around what that really means and we will do that. But I will say, I absolutely think the investments have continued to differentiate us. If you look at ECX Fabric, for example, we have invested significantly in that, right? We couldn't -- it takes software engineers and it takes UI designers and it takes people like this to actually develop that offering. Well, I think that offering, in many respects, has been a home run for us. It's a $100-whatever million run rate product now and delivered 2,100 incremental interconnections in the last quarter alone. I think it allows us to stitch together our footprint in ways that are very compelling for customers. I think it allows us to, I think, sustain our stabilized asset yields in certain ways that weren't possible before and so -- I absolutely think it has created. And I think when you look at what we've been able to do and the areas that we are focused on, I think the lifetime value of our customers is much higher than others. And I think that's something that isn't always well understood because I think customers who are primarily selling space and power with a less differentiated sort of value proposition, I think, run a substantially higher risk of those workloads being migrated to the cloud. And being -- or being sort of relegated to an underlying sort of infrastructure role that will be less attractive over time. And so I do think that I continue to feel like our business is highly differentiated with very high customer lifetime values. And I think the investments we've made are part and parcel of that. And if you look at it, I think that we're playing into now a very, very large addressable market. And I think that we're -- the investments are part of unlocking that.

Charles, with our last couple of minutes here, we have 4 rapid-fire questions. So the first is when we are sitting physically together in Florida a year from today, what will be the one thing that will have surprised people the most about your business over the prior 12 months?

One, I certainly look forward to that, being together. And two, I think in terms of asking the question, I would say, I think that it is going to be the -- both the diversity and the volume of use cases, digital transformation use cases that people are seeing and the corresponding demand profile that mean -- that implies for private, distributed, cloud-connected infrastructure. I think that people will continue to be compelled by that.

What do you think your corporate travel budget will be next year as a rough percentage of what you spent in 2019 prepandemic?

Yes. It's interesting. It's a little hard to tell, but just in the spirit of rapid-fire, I'll give you an answer anyway. But I think it's less than half because I think you're going to see a pretty light first half of the year and then sort of a bit of a return to normal, but probably not one that really fully makes up the gap. So I think it's probably less than half.

For next year, 2022, or are you talking this year?

Oh, 2022? No. I was talking about 2021, yes.

Yes. No, next year. That's why when you said it, oh, my God, I hope it's going to be more than that.

Yes. That's interesting. I actually think it will be less than 100%, though, despite the growth in the business between those years. And I think that will be a dynamic of people having a greater receptivity to advancing portions of the sales cycle virtually and not needing to be at every single meeting and getting more comfort level with this. But -- so I think it will be -- I think it will be less than 100%, but I -- let's call it, 80% something.

Okay. What will same-store NOI growth be for the data center sector overall for 2022?

It's interesting because I think it's going to be a wide range, but let's call it 3%. I think we're going to be in that 3% to 5%. Obviously, some people that are more dependent on hyperscale in our sector are going to, I think, see more pressure on that because of the negative REIT lease spreads.

Right, last quarter is...

Sorry, is that global or U.S.-only, Charles?

I was referring global.

Okay. Thanks. Sorry, Michael, go ahead.

No worries. And the last one is 10-year treasury a year from today, it's 1.6% right now. So a year from today.

I've had that horribly wrong in past years, and where I said it was going up, I'm going to say it's going up. So -- but let's call it right around that 2% mark.

Great. Well, we really appreciate your time. Thank you for being with us and have a great rest of the conference.

Always a pleasure. Thanks, Mike and Mike.

Thank you, Charles.