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

Welcome, everybody. I'm Jon Atkin with RBC, and I'm here to moderate the next 30 minutes of Q&A with Keith Taylor, who's the Chief Financial Officer of Equinix. He's been with the company for quite some time and will address a number of kind of corporate, strategic, financial topics and move down the list as we can. There may be an opportunity to fit in audience Q&A. If you would like to ask a question, feel free to type it into the pane, but we've got plenty of material that I prepared. So Keith, welcome, and we'll get started if you're ready.

Great. Jon, thanks for having me, and I appreciate the time. And for those that are listening, just be aware that I might, I may be giving some forward-looking statements. And to the extent that I do, please refer to the risks associated with those statements in our SEC filings. So thank you.

So to kick off on kind of the corporate expense topic, let's say. You've been investing in process and system enhancements this year. Can you give us an update on that? And any kind of operational or strategic impact that you could even be seeing this year or going forward in terms of benefits?

It's a question, Jon, no surprise, you're asking and many have asked in, certainly, in our one-on-ones and some of our subsequent follow-ups post earning call. All that said is, we are making some heavy investments. It relates to things to make it easier for the business to conduct business. And some of it is how we go to market, which sort of enhances revenues, how to make it more channel-ready for customers given that we see that as a very large opportunity for ourselves. But the other answer at the end of the spectrum is how to take cost out. How do we bill easier? How do we make it more efficient with less disruption to the business? And so these investments that we're making, one is referred to as Project Horizon. Karl Strohmeyer, that's his focus area, under Charles' 4 main focus areas. So it's an investment that we want to make because we think it will pay dividends. It will not only drive revenue, but it will take cost out of the equation. And so you get a magnification of the investment from 2 vectors. The other one, of course, is we're moving our ERP to cloud. Today, we're an Oracle house. And we will be an Oracle house on a go-forward basis. And so the effect of what we'll be doing over the next sort of 1 to 3 years is migrating from an on-prem solution to a cloud-based solution. And that comes with many benefits, including its almost out-of-the-box functionality. So you change your processes, your policies and your procedures to marry up with what you need to do. And that takes cost out of the equation as well. You have less variability. And when you do the updates, the updates were developed and the infrastructure was hosted outside of Equinix. And so we don't have to worry about that. And so Milind Wagle, who's our CIO, he'd still have responsibilities, but there'd be less sort of internal costs and those costs would be borne outside of the organization by Oracle. So those are just 2 of the things that we're focusing on. But fundamentally, we want to invest in making the business more scalable. I think we talked about us this year being a, I'll go for a big round number, $6 billion to $7 billion company. This year, we'll be somewhere in the $6.6 billion plus or thereabout. So it gives you a sense that if we want to get to $10 billion, we got to make investments. And one of the things that we are doing is investing here. So let me just maybe just stop there. I'm sure I created maybe a few other questions for you. If not, we can go into the next topic.

Yes. No, I'll kind of bounce around a little bit. But just from a positioning standpoint, and this is maybe coming more, another investor question. But would the hyperscalers ever have their partners come to their own self-built data centers connect and lessen their usage of the Equinix of the world. One of the panels that we had earlier today kind of talked about AWS Local Zones has been kind of an example of that. Do you perceive that as a threat? Have you seen that at all?

Well, fundamentally, you can say at the highest level, do you see it as a threat? Well, I guess you could. But the reality is, we live in a multi-cloud hybrid environment. And not to say that things couldn't happen in such a fashion, but the reality is, I think we deliver a very high-quality neutral service to all players in the space. And as a result, the structure that we've created and the efficiency that we create from that environment just feels like it's the right place to be. And so if you believe in hybrid and multi-cloud, which we do, both from an infrastructure and from a SaaS perspective, the reality is, we're effectively as close to the edge as you want it to be. And so from our perspective, we're at the right place. And the other part is that we invest to support a hybrid multi-cloud environment. We're not just catering to one specific customer. We look across the portfolio of the 10,000-plus customers and allowing them access to an environment that is heavily invested in. And it's not just invested in what we do today, it's the stuff that we're thinking about tomorrow. How do we move to a more virtual environment? How do we add on incremental products and services to make it easier for that existing customer or that future customer to consume at the edge? And again, I just think that we're a natural place for it to be done. And that's because we have the 1,800-plus networks inside our environment. We have the 2,900-plus cloud and IT service providers. And there feels like no better place to be generally speaking than Equinix. And then there's, of course, other peers in the industry who have equally strong, some very strong interconnection-oriented sites, and I think that bodes well for them as well.

We'll kind of top level by region. Any reasons why Lat Am, APAC, EMEA wouldn't converge to the growth rates and margins of the U.S. over the long run?

Look, all markets are going to converge at some point in time when you, however you want to measure. But the reality is different markets grow at different times based on the maturity of that market. The fact of the matter is, as I mentioned on the earnings call, the U.S. and the Americas business more specifically is going to grow at or near 6%, if not better than that for the rest of the year. So it gives you a sense that even a market of the scale and size of the U.S., we're going to grow at a rate that will outpace that of the broader market. When you look at the other markets or other regions, they're going to grow at a faster rate than that, no surprise. And depending on inventory and supply and demand characteristics, they're all going to grow at different rates. And you can take it down to the asset level or you can look at it at the market level or at the country level or for that matter, the regional level, it's going to be a mix and match of a whole bunch of different inputs. The reality though is that the U.S. or the Americas business will be the slower of the 3 regions for us. It is what it is. And it's really a function of its maturity. It does not mean that we can't grow outsized relative to, I think, the broader market. I think from a profitability perspective, I think most of the investors fully appreciate that the profitability in the Americas business is the best of the 3 regions. We think of the high 60s from a profitability perspective on a comp-to-comp basis. We distort it with the corporate overhead. The Americas absorbs the corporate overhead. And as a result, when you look at our SG&A, that's what we've been investing in, but the region in and of itself is a highly profitable region. And by increasing the price points in Europe on our cross-connects, we're obviously getting more scale in some of the markets. We're investing heavily across the European theater, more so than the other 2 regions. Once you get to scale, you're going to enjoy more margin because that's what you get. You get to leverage off of those investment decisions. But we're in sort of 18, 20 markets. I don't know what the, I can't remember the exact number, 18-plus markets in the European theater and growing. And so you're spreading out that investment decision broad and wide, and we will get to scale over some period of time, and that's what excites us about the business that we have to offer. It's not just about growing the top line. It's actually achieving scale because of our investments and at the same time having the need to run a more efficient business.

In the U.S., you've done some acquisitions, Switch & Data, going back quite a long time. That deal actually took a little longer to get approved by the DOJ than I think was originally thought and then more recently, the Verizon assets. Today, is it possible, in your view, from an antitrust standpoint, for the #1 interconnection player to buy the #2 interconnection player?

That's a good question. Look, in the end, as you know, we really don't comment much on M&A. Look, I do believe that there are antitrust issues. That was front and present more particularly in our European acquisition strategies. But we've been able to adapt to the environment in which we operate, right? And so I don't want to talk about specific companies. But the reality is, we're going to continue to buy assets where we can to the extent there's a bolt-on acquisition that makes sense, whether it's in our core business or is one of our new technology sort of investments. The reality is, I think that we have a wide array of opportunity to do different things. And some are going to be, some companies, again, talking about it from an antitrust perspective, I think, will be maybe harder to do than others. But the reality is, we're sort of wise to what we want. And we want to make sure, bottom line is that we create value than just buying somebody for growth or scale. Not sure it matters to us that much given the portfolio that's out there. We've done a good job of integrating the 27 sort of acquisitions done to date. Well, GPX is yet to come. But when that closes, that's the Indian acquisition. We've done a good job of integrating them. And our view is, look, we want scale. We've got scale in Europe. We've got scale across the U.S. We bought scale in Australia, and we just recently bought scale in Canada. Feel very good about those type of transformative deals. And then there'll be things that we'll do that are more interconnection-oriented when we bought Infomart, as you're aware. We're very deliberate about our desire to get the Verizon asset, but more specifically now for the Americas and some of the other interconnection-rich sites. So again, it's a long-winded way of saying, look, we'll continue to be acquisitive as appropriate, but we're going to make sure that we continue to look and find ways to drive value, either transformational or strategic to extend our footprint.

So you mentioned you bought scale in Australia, and I guess your understanding of how you went through approval for that, the deal went through without conditions, but that wasn't necessarily an interconnection-oriented asset. So I guess the same question in Australia based on your understanding of how the regulator thinks. Are they looking at square footage or cabinets and scale as they think about market definitions or interconnection is an important part of how they think?

Well, I think different government bodies will think differently depending on the set of circumstances. But just going back to Australia and particularly Metronode. I mean, we had to work with FIRB, which is the Foreign Investment Review Board. There are certain things that me as the CFO, I wouldn't necessarily have visibility into certain customers. That has to be done at a local level, and those are part of the conditions that would exist. But again, different jurisdictions will look at different things. Europe was very much focused on interconnection. The U.S. was focused on interconnection. Others is depending on government. So Canada is an example. Australia is an example. There's a fair bit of government business that came along with those decisions. And we knowingly made those decisions in part for those reasons. And so it just depends on the set of circumstances. But overall, we're going with our eyes wide open when we walk into a potential acquisition to make sure we understand the ability to get it done or not. And then secondly, what are the parameters in which we would have to live with on a post-review basis.

So switching topics, you're exiting a number of your sites or not renewing the landlord leases. Some of that may be driven by the landlord selling the property or other factors. But what are the challenges that exist as you sort of migrate away from a leased site? I know you have experienced last year in Zurich in doing that. But particularly thinking about 56 Marietta in Atlanta, seems like that could be a challenging process. What are your thoughts on how to exit there?

Well, I may talk more in general terms but probably I don't want to get it down to the asset level. But the reality is, sometimes we do make decisions that we want to exit and migrate, if you will, that opportunity into our environment. Charles spoke about it a couple of years back saying there's a number of assets. When you look at our stabilized asset base, there are certain decisions that we're making there knowingly reducing the stabilized assets to take, if you will, that value stream and move it into a new or an expansion asset in Equinix. And so we have made some of those decisions. In some cases, it's the right strategic decision to do. In other cases, we really pride ourselves in the investments that we're making in running these facilities. And so as a company, we knowingly are migrating customers to those better opportunities. I can think of 111 8th as a perfect example of where Google bought the building. It's not lost on, I think, a lot of the players in the industry that a lot of those leases will not be renewed by Google because they're going to use it for their own purposes. So we understand that. And so we made conscious and knowing decisions when we had to close down certain pieces of our business there and migrate the customers. And I think it's just coming to the realization, you got to have a plan and you have to have a strategy. And we do as an organization. And in some cases, it takes a period of time to execute against that strategy. And I'd just say, at the end of the day, we're not going to be able to vacate all of the premises. So we will not vacate all the premises that we don't own. But what we want to do is make sure that we can put our customers in a market where we or an asset where we can control as much as we can and influence the outcome. And operational reliability is critically important if you're scaling and growing in another building. And we're certainly going to work hard to try and migrate those customers over.

Switching topics yet again. So joint venture partnerships of the type that you have with GIC, but just at a more abstract level. Apart from financial factors, what are the governance-related considerations that lead you to maybe prefer one set of partnerships versus another for continued xScale expansion, for instance?

So putting financial aside, I think the most important thing that we needed to do as an organization is find a partner who had the same ideology that we had. That they believed in what we had to offer. And ultimately, I don't mean it in a negative sense, but in the end, we're going to be the operator. We're going to bring the customers to bear. And we want a partner who understands the relationship between the 2. And so I think that we've found a great partner in GIC. Number one, they are helping Equinix immensely in some of the structuring stuff that sits behind the curtain. But ultimately, they're going to rely on us to develop the asset to fill it up and to run it. And you want somebody who will entrust you to do that. We're a 20% equity owner, and we're looking to our partner to fund 80% of that. And again, without getting to the financial aspects of it, the reality is, we wanted to have more influence and control over that asset or those set of assets despite our 20% ownership. And that was another consideration. So when we looked at sort of the universe of different potential partners, it became relatively a small subset of people that we wanted to do business with because, one, the ideological view; and two, the influence that we are going to have, albeit being the minority stake.

The expansion tracker that you publish at some level of detail. Interested in just any kind of updates given the relatively recent past increases that we've seen in steel and copper increases, at least that some of the industry are seeing from long lead time items. And then maybe the third portion would be the availability of power and substation capacity in certain jurisdictions. Any way to kind of frame the, in months perhaps or quarters, the impact on delivery time frames at a very general level as well as cost per megawatt and CapEx per cabinet?

Look, I think it's a fair question given what's going on in the world as we see it today. So you got the inflationary pressures. You have supply chain issues coming out of some markets. And so there is a lot of noise in the system. Right now, I'd tell you, probably a little bit similar to when the pandemic hit. There was no, I didn't see any meaningful shift. It's not to say that there are things that we have to worry about and consider. And I would tell you today, there's no meaningful shift. That all said, one of the things that we've done and we've talked about over the last sort of 12 to 15 months, we've hired a new chief procurement officer. It's our, by the way, technically our second, but our first sort of global chief procurement officer that's done just a phenomenal job of getting a good understanding of what we need and how to procure. And so when you look at supply, strategic sourcing and the supply chain and then you look at demand parameters, I think we have a real good handle on it. And the chip shortage is something that certainly comes to mind and we're going to have to pay attention to. But irrespective of, I guess, some concern, global concern about that, we all know it's going to be transitory. At some point, it will, if there is demand or sorry a supply shortage, eventually, it will solve itself. We don't feel any of that today. And so I feel confident that our team is doing a good job, but does not mean that there won't be issues down the road. From a costing perspective, yes, it's certainly, if you start to think about things that are going up, the cost of lumber and steel and all that. But again, we've done a good job of buying forward just similar to our power purchasing arrangements. So we buy forward and we make sure we protect ourselves. That's what we're doing with many of our suppliers. And we've got protection clauses in many of our contracts that allow us to procure at, I think, a very favorable rate. So I wouldn't say anything meaningful there. And then the third thing that you asked was substations. We've hired somebody specifically too who has great experience, again, coming from one large hyperscaler. So Ali Ruckteschler, who is our chief, has done an excellent job, but she's also building a team around her and including in that team is somebody who's wholly focused on just substations. And it's a very, if you will, discrete and unique skill set, but we're just delighted with the performance and the contribution that person has made so far. Again, so I think we're on top of it, whether it's, again, I think about interest, think about our hedging strategy, think our power consumption strategies and all the other things that have future exposure, we're trying to get ahead of that right now. And I guess the last thing I would say is probably for many in the industry, not just ourselves, to some degree, you've got inflationary protection inside your lease arrangements. And as things continue, as inflation, whether it is real or not, it feels a little bit more real than not right now. As costs go up, I think you're going to be able to inflate your way to a favorable margin situation.

The xScale project and kind of the ways in which, so we've kind of talked about JVs and then specifically xScale, you've outlined, I think, even on the most recent call, the various ways in which you earn income from that partnership. Maybe a quick refresh on which of the fees tend to be kind of more front end loaded than others as you go through developing a new project and then turning that into an income-generating asset as it pertains to AFFO. So basically, AFFO contribution from xScale?

No, I mean, there's 4, as I said, there's 4 main fee streams, if you will, and then there's the performance of the JV, which will be below the line. It goes into AFFO, but it's sort of below the line because we don't consolidate. But the 4 fee streams, one, again, the nonrecurring aspect of it is the development fee. We get a fee for developing those assets. We also get a fee for selling those assets. And again, nonrecurring, they go into managed services. The stuff that's recurring is sort of the asset management fee and then the operating fees. And then below line, you basically get based on the performance of the joint ventures. And as we've said, I mean, the margin profile is going to be at or above what our margins are today, number one. The return profile is different, but the margin profile is attractive. And then there's basically, no surprise to you, at the end of the day, if there's a liquidation of an asset, then there's the potential for a promote. And so we really feel good about the deal structure. We feel good about what we're going to be talking about at Analyst Day and beyond. And we've got a dedicated team that we've been investing in. Another area of high investment for us was the xScale initiative. And no surprise to you when we announced the 3 assets that we just opened up, and they're all presold. We're excited to tell you a little bit more about what we're doing and the number of markets and projects that are underway right now and the other JVs that are forthcoming because I think it will give you a sense that our xScale initiative is probably much grander than we might have anticipated. And we sort of said a little bit of that on the earnings call, the last earnings call. But again, we want to spend more time talking about it, and we'll do that on the June 23 Analyst Day.

Just in terms of the product offering, that Metal is something that you now kind of talk about in your slides, and just interested in what kind of impact that can have over time. I think you break it out for the Americas, but not necessarily yet for Europe or APAC. So when do we see more of a global impact from Metal?

Well, number one, we're investing heavily in it. Again, part of the reason you see the SG&A line is going up as we're investing in go to market. We're also investing in product. And for us, it's the right investment decision. It's an extension of what we already do. We want to make sure that we can abstract that opportunity with our customers, not only present but future and allow them to scale. And so when you think of Metal, Metal as a Service and our other service offerings, you're going to see it, I think, continue to accelerate. That all said, when you look at the scale and size of the business and Metal as a subset of that, it's less than 1% of our revenues. So it's an area that's heavy, we're investing heavily in, but I think it will give us future, much higher growth on that future revenue stream as we continue to invest and scale on a global basis, just isn't scaling yet. One of the commitments that we had to ourselves and I think to the broader market is that we will be operating Metal in 18 different markets. And so that's, we're certainly well underway. In some cases, we're already out of capacity. In other cases, we have to continue to deploy that capital in those markets. But again, it's an area of excitement for us. It's not easy. As you can imagine, the new digital world in which we operate, you have to make sure that you create an environment where customers will make it and find it easier to do business with you. And Metal as a Service is going to be one of those services that over time we think will be easier for them to do business with us, but it comes with a host of challenges because we're not, as an organization, that's not how we were originally set up. And so from a billing perspective, we'd probably still rely on how Packet bills versus how Equinix bills because basically their ERP or billing engine is more catered towards that level of service, for that type of service.

And then just lastly on product and then this will be, I guess, the last question given time. But you talked about Metal, there's Fabric, Network Edge services. Does that kind of complete the list of potentially material contributors to the business or are there others that I've missed or others that you maybe haven't announced that you feel like there's a lot of promise in to growth rate that you've achieved?

I still think it's early days. I mean, there's precision time. There's other things that we are thinking about as an enterprise. It is probably a little bit early to talk about. But suffice it to say, we want to continue to invest in digital services, not only as an extension of what we already do, but perhaps attract things that we haven't considered as an organization. And so between our technology office, our product office, our strategy office, they're all working hard to think about what are those services and/or products that we could deliver that are down the road or in some cases, maybe even around the corner. Again, it's an exciting time for us, but it's a period of investment. And I've spoken to many of our investors about the fact that then the margins might not be exactly where they want them to be, but the reality is anything and everything we're doing is either going to take costs out of the equation as we look forward or it's going to enhance our revenue stream. And that's what sort of excites us. And Charles has been pretty clear of that long-term shareholder value creation and let's continue to make these investments while at the same time delivering value on a per share basis to the investor.

Great. I appreciate you taking time with us. We were able to get in a lot of Q&A here. There's never a lack of things to talk about. Time is up. And I want to thank you for spending time. Again, thanks a lot.

Well, thank you for having me and best of luck with the rest of the conference, and I look forward to seeing you and everybody else on the Virtual Analyst Day in June that Katrina, Chip and Katie are putting on. So we'll see you in June and look forward to spending more time talking post-Analyst Day.

Thank you.

Take care. All the best.