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

Yes. So we -- even at Analyst Day in June, we put up a map with some pins on it that steer where we're looking. So they are clear -- first of all, the acquisition we're making in India takes us to Mumbai. India is a much bigger market than just Mumbai. And so we'll be looking at those opportunities. After that, I would say there are opportunities for us in Africa. We have presence in the Middle East, but none in Africa today. Southeast Asia, outside of Singapore, Hong Kong, lot of opportunities arising there. And then we're very well established in Brazil, Colombia, Mexico. There are probably a few more opportunities for us in Latin America as well.

Equinix is expanding into Africa and has appointed a managing director to oversee expansion into the Middle East and North Africa. How do you envision Equinix going about establishing a footprint in these markets when there really isn't a business that, at least in my knowledge, looks and feels much like you're [indiscernible] but beyond that?

Yes. I think the -- yes, whether it's Africa, other countries in Latin America, Southeast Asia, we've developed our playbook of acquiring, in most cases, a company that we can use as a platform and then using our capital might and our global positioning to grow and expand off that. So that's certainly an opportunity here. We've also -- when we haven't been able to find the right opportunity, we've also been willing and able to enter a market on a greenfield basis. And we have the staying power and the wherewithal to be able to do that and build up a position over time to enter us in the market. The key element is that, yes, we're a global platform with a global proposition, but particularly entering a market with data center capacity has to be done in a way that's effective to that local market. And so whether we're acquiring or whether we're entering greenfield and bringing the talent together to do that, we're going to try and be as savvy as we can about extending into new geographies in the same way that we've done that for 15 years now.

Two things. So one is my thought has always been, I guess, correct me if I'm wrong, that assets like yours don't exist in every market. But what you do is you do and try to identify the one that looks probably the most like you or has the most potential. You make that acquisition, maybe GPX is an example of that. And then once it has the Equinix brand around it, you're able to enhance that, you're getting more network providers to come in there, more cloud providers that aren't your customers in other places. You get the SLAs to start to look and feel like other places that you guys operate in. And that creates this inherent value that only you can create for GPX that they wouldn't have been able to create on their own.

Well, that's generally the playbook, although I would add to it that we do the due diligence on the assets and the business and all the financials and whatnot. But we're also heavily driven by is the team and the business a fit with our culture and our platform. And so there have been times -- and it's without going in specifics, there have been times where we had alternatives between several different options. And while there may have been a business that looked like it looked more like Equinix, there was another business that had better culture, better team and then we have more confidence in extending. And that's a soft factor, but it makes all the difference in our track record of success with acquisitions because when we do the acquisition, we need and want that team to stay. We need them to integrate and be enthusiastic about driving the growth because the acquisition by itself is just beginning, and the value creation comes from the growth in the model and the extension that we can make.

The second part I had to that is I actually can't recall right now a market where you've entered greenfield. So can you give me an example of one?

Yes. So we entered Hamburg in Germany greenfield. We entered Muscat in Oman greenfield. There are probably a couple of others, but the one that gets us the most attention and interest is we just opened in Bordeaux, and everybody is excited to visit Bordeaux. And that's a market where we went and found a site. We brought our team from Paris and built the site, secured a set of customers, some carriers, some enterprises, some content companies. And we're progressing in Bordeaux and considering how fast do we look to expand. That's purely greenfield.

I'm happy to do a tour there myself.

Yes.

Given the size of Equinix and the incremental one turn of leverage flexibility that the credit rating agencies have provided to the company, are you looking at bigger deals than you may have otherwise?

So the answer is yes and no. The answer is that we're -- because of our scale, we can consider most any opportunity that's out there in the market. And so the increasing flexibility we have on leverage doesn't open up an opportunity set that we didn't already have that potentially makes it easier. But also that extra turn gives us excellent financial flexibility, whether it's investing in the business as it stands, whether it's doing M&A or some combination of it. So the -- we've always managed the balance sheet to maximize our flexibility. So when the large opportunity comes along, we're in a position to pounce. And obviously, our balance sheet is public, and people have an idea of what our capacity is. And we're fortunate to be in the position that it's not about capacity. It's about what's attractive and what's worth pursuing.

Are there any strategic needs, which you believe can really only be addressed with large-scale M&A?

No. I have -- we purposely set out in June that we had a plan that we would execute on an organic basis that we have confidence in and that M&A would be additive to that and opportunistic to it. But I have -- I and the rest of the management team all have confidence in our ability to execute what we've set out to do.

Pivoting again, I want to talk a bit more about xScale. So is xScale more about the direct financial benefit it provides to Equinix to your 20% ownership stake or the indirect benefit it provides to your core business?

So I'd rather just answer that as yes. It's the combination of the 2. But the opportunity is, as we've extended our relationships with our hyperscale customers, and even before xScale, we had broad relationships with them that were generating for us hundreds of millions of dollars of revenue even without xScale. And so with xScale, that extends our discussion and dialogue in those relationships. And just by nature of having a broader relationship, the -- more opportunities surface. And so we're comfortable and confident in the returns that we're making on the incremental investment in xScale as it accretes to Equinix shareholders, ourselves included. But the strategic element of deepening those relationships to the hyperscalers, just given how integral they are to the digital economy, is going to pay dividends above and beyond the actual returns that we see from xScale.

Yes. I mean I personally think that the market was moving in that direction. And to the extent you didn't do that, it would have become a negative for you where that -- those customers want to put their cloud on-ramps close to where they're putting their bigger compute engines and storage and so forth. And if you chose not to participate, I think it's very possible that some of those cloud onramps you've been winning may have gone to competitors who are more willing to do those bigger deals.

Well, certainly possible. What I would say is in our dialogue with our hyperscale customers, this wasn't something that came up in 2018. And we said, okay, it's -- goes back quite a ways where they were saying, "Can you help us execute on a broader scale at larger volume for some time?"

And you brought Jim Smith then and others?

Right, and even before that. And historically, we've done -- we did some of that. But in general, we said, "No, we're not set up to do that. We're set up to do what we're already doing for you." And so by expanding that, just the very active not being in a position of having to say no to important customers, it releases tension in the organization, tension relationships and as a step forward.

Management's has also highlighted its desire to add additional JV partners to the xScale program as well as expand into additional markets. Why need for a new partner and where next geographically?

So the rationale for new partners has to do with -- we talk about xScale as a unified program, but xScale is actually a collection of development projects and investments that have -- they're all xScale builds, but they each have their own characteristics. And the reality of it is a number of them, and in fact, all the ones we've announced so far, have fit well with our current partner, GIC out of Singapore, who's worked with us through the first JV and the subsequent JVs to really help us accelerate. But there's a set of opportunities that we see that don't fit their criteria. And so the opportunity is then to work with another partner and access that other set of opportunity, which for us, as Equinix, broadens the xScale program and matches that set of opportunities with investment criteria for other partners. And so it's very much about matching the projects with the criteria of the investor and recognizing that one investor may not fit all projects and not all projects will fit one investor. The -- in terms of where we go next, the quick answer is where we already are because we've launched in London and as we've said, are fully sold out and so need to figure that out. Similar challenges in some of the other markets where we've launched and are fully sold out. And then beyond that, I think we're largely looking in the markets where we already operate our existing business, but there's also demand and opportunity that might take us to a new market. So more to come on that, but certainly, step 1 will be to ensure that we extend the platform, the xScale platform that we've already launched in the markets where we've announced.

You mentioned potential for criteria to change in terms of why GIC may not be interested. Does that imply then that the criteria for the next set of xScale facilities will have a different criteria than what the original ones did?

Well, the product and the proposition will be the same. So it's large-scale capacity operated by the best data center operations team in the world at competitive prices in major markets. So that will stay the same. The premise, though, will -- which investor gets involved will depend on which market, which country, what the risk profile of the project is, what the financial profile of the project is, those types of factors. But the xScale program will remain consistent.

I've scratched my head on this one a little bit, which is why aren't you doing this in the U.S.? And I think the answer I've heard from you guys is the U.S. is more mature. There's a lot more competition, there's bigger opportunities abroad, but there's still obviously a lot of -- I'm sorry, hyperscale demand in the U.S. And I would feel like it's just money you're leaving on the table. And again, going back to the comment I made earlier, by not doing it, does at some point become a risk?

So I'll answer the last part first. I don't think it puts us at risk whether we do it or not. What I would say is we've been pretty busy. And we've announced $7 billion of development activity since we launched in 2018, and we're working on more. So there's an element of we need to make sure that what we do, we do well rather than letting our appetite get ahead of ourselves. So we're clearly well aware of the market in the U.S. and the opportunities. But so far, we've had very good opportunities that are keeping us quite busy across -- we're in Europe, we're in Asia, we're in Latin America, including Mexico. And so whether we get there and when will just depend on where the most attractive opportunities are. And right now, for us, we've got a lot of good stuff going on as it is without being in the U.S. market, which, as you said, has a different character of competition, may be stronger, but also plenty of other players out there running around.

So you're not fundamentally against it? It's really just prioritization and a lot of other opportunities?

We run an excellent business in the U.S. that generates strong cash flow and margins. We have the capabilities to do it. It's a matter of where do we devote our resources and the way the xScale program is unfolded, particularly with GIC as a partner, starting in Europe, extending to Asia and the addition to Latin America was the right thing to do.

Currently, the company has been focused on growing its xScale footprint organically. Would it ever make sense for xScale to acquire a hyperscale-oriented data center provider?

It's theoretical question. So I'd say it's possible, but the focus and the energy is about the organic development because we are -- one, we're having a lot of success. But secondly, the returns on being a developer versus operating stabilized assets are better for Equinix.

Yes. And I would think, and correct me if I'm wrong, that there's also value in that where you physically deploy those assets are very close, I believe, to where your traditional facilities are. And if you were to buy a portfolio, even add capacity, but wasn't as close, if you will, to where you're building or where your interconnect facilities are, that value proposition kind of dilutes itself.

I mean you're right. Generally, the sites are close to each other, and we get operating economies of scale out of that. And so we're not going to dilute the proposition just for the sake of it. So a theoretical question -- theoretical answer is it's possible that the focus is very much on the organic development.

I work in the theoretical. How is xScale organized from a personnel perspective? You mentioned Krupal? And does it make sense at some point to give it more autonomy?

So we have a dedicated xScale team. They're spread around the world. So we've got xScale people in Asia. We've got some in Europe. We've got some in the U.S. It's a focused and lean team, which has really contributed to our ability to drive execution and the success in a way that I think would have been a lot harder if we had tried to integrate it across all the rest of Equinix with competing priorities. So we're going to continue to invest in that team so that they can keep up with the growth because it's substantial. Whether they need more autonomy or not, the model right now has evolved from where we started, and we've learned along the way. I think we're at a reasonable point of balance. But as the market is not holding still, customers aren't holding still and we'll adapt and evolve. I do think the -- on the one hand, everybody wants autonomy. On the other hand, everybody wants the benefit of the scale and reach and capability that Equinix brings. And we're at a point where we've got that balance pretty well, and more autonomy would inherently separate from all those advantages. And so I'd say the smart thing to do is to continue to take advantage of all the capability and leverage that Equinix -- both financial and operational that Equinix can provide to go faster. And the team is delivering, and you can see the success in what we reported.

Yes. I'm just wondering if at some point it makes sense to had their own Board to have their own -- I'm sure right now, everybody is getting an Equinix paycheck. Do they get an xScale paycheck with various structure around that?

Equinix paychecks are part of our overall compensation plan, which includes equity for a lot of people. It's a pretty good package.

There was a Bloomberg report that Digital Realty is considering IPO-ing a subsegment of a stabilized portfolio that would allow to monetize some of its assets but still maintain control and collect various management fees. As you as a company continue to evolve and use different levers, if you will, of the financial markets, have more focus on how rating agencies and so forth think of you, would you ever considering doing something like that with xScale?

Again, a bit of a theoretical question. It's early for us that we're still building the portfolio, and we have a lot more projects that are in the development phase, that are in the stabilized phase. What the right capital structure is for the program in the long term is something we're constantly thinking about. But for right now, the key is really to ensure that we're executing and delivering the commercial proposition we've got. And over some period of time, we'll think about whether to evolve the capital structure. But right now, it's working extremely well, both the GIC from Singapore as a partner, but also the ability to source leverage for the debt for these assets in a way that's separate from the rest of Equinix and helps us drive returns.

Okay. Pivoting to our last topic, which is churn. So management during our NAREIT meeting in June highlighted steps that it is taking to reduce structural churn within the business. Can you give us an update on what your current churn mitigation and revenue retention strategy looks like? And how it differs from your prior approach?

So we report the churn metrics for the business. There's a component of it that's frictional with customers installing, deinstalling and the like. And there's a component that we refer to as structural, which is where a deployment will actually be deinstalled. I think it's important to highlight that most of the churn is for individual deployments. It's actually rare for us to have a customer leave Equinix. So customer #1 may take a cage out of Silicon Valley, but they're deploying a cage in D.C. or in Tokyo. But a number of customers who actually leave Equinix altogether is quite low and well below the metrics that we show. In terms of churn management, what we've done over the past, I don't know, approaching almost a year now is really take -- there's an element of data science to it where we've gone back to customers and look for data models that would help us predict churn. We've married that with a lot more engagement with customers to understand what's causing the churn on their side. And our customers are in dynamic businesses where they're moving and deploying and undeploying. And so we've tried to learn how we can support that motion for them in a way that supports their growth. What we've also done is help the sales team to understand where there is churn risk, and then we've given them the incentives to help mitigate that. And I think the combination of better customer engagement with being more responsive to what the customer requirements are for any particular deployment will help us bring down that structural element, recognizing that there will always be the frictional element because that's just inherent to technology.

Churn is -- you guys guide to like, I think, 2% to 2.5% a quarter, so 8% to 10% a year. Do you think you can get to a point where it's closer to that lower end on a more sustainable basis?

Well, I've got confidence in the team that we're going to bring it down. How far we can bring it down will depend on when our success, but also just the level that frictional churn occupies in there. And we've just been through a period of where the totally unpredictable has happened. And our operations teams have mobilized in just superhuman ways to be able to respond to that and support customers. On the hope and the theory that we're getting back towards something that's more normal, we'll have to see how that flows through into the churn behavior as well. But I'm very confident we're doing the right things.

With that, Eric, we're out of time. Thank you so much for being here. I really appreciate it.

Thanks. Thanks for having me, Colby.

Thanks.