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

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Good afternoon, everyone. I'm Eric Luebchow at Wells Fargo. Thanks for joining us at our Wells Fargo TMT Summit. We're going to continue today. We have a couple of representatives from Equinix. We have Steve Madden, who is the Vice President of Digital Transformation and Global Segment Marketing; and we have Chip Newcom, who is the Director of Investor Relations. So gentlemen, thank you for joining us.

Thanks for having us.

Thanks for having us here, Eric. And quickly, before we dive in, just to cover things off, some of what we will talk about today contains forward-looking statements. Please read our SEC filings for more information on the factors that could impact these statements.

Great. So Steve, I wanted to ask you some questions on the current demand environment, particularly given what you do on the digital transformation side. So you've had several quarters in a row of really impressive bookings performance. It seems like the Americas has been the -- a reasonably hot region for you. What do you attribute some of this demand strength to? Do you think it's a resumption of buying behavior from perhaps enterprises that were more impacted by the pandemic last year? Is there just a broader consensus today around hybrid cloud and outsourcing away from on-premise data centers? What do you think is driving this uptick in demand?

Yes. I'd say it's both of those and then a few other things. I think a lot of people learned through the pandemic that having digital infrastructure deployed and being available to use and pivot, have that agility is no longer visionary, right? It's kind of mandatory. And so certain industries were impacted very heavily, education, health care, et cetera, food, logistics services required a lot of support and a lot of help to sort of adjust for what that meant in terms of locations of traffic and business models. But also access to equipment grew. The demand went up really fast really quickly. So some of our providers and customers had headroom. They had some built-out capacity they thought was going to last them a while, got eaten up very quickly. And so what you're starting to see now is a combination of we've got to move faster. And so growing in digital infrastructure is getting bigger, but also backfilling and replenishing capacity that was eaten earlier is also moving faster. And the third point [ of that, those ] other things is you'll notice a lot of the big tech companies are now offering their services or their technology as a service like as consumption-based models. So that's easier for customers to buy and adopt than ordering equipment and having it shipped. So it's also accelerating for those reasons as well.

Interesting. And it seems like -- I know Wells Fargo is a good example of a large corporation that's announced a plan to migrate away from all of our own data centers. It seems like there's some momentum towards that in the industry. I know it's been talked about for years, but it seems like there's -- a lot of that's actually happening. Maybe you could talk about your enterprise vertical today. Has demand really broadened? And are you seeing perhaps large Fortune 1000 companies that didn't grow up in the cloud start to really rethink on-premise versus outsourced? And do you see that becoming a real tailwind in the next few years?

Yes. It's -- when we talk about digital and shifting to digital, a lot of it -- a lot of times, people talk about using technologies or improving the new technologies or upgrading technologies when actually what people are doing is resetting how they consume and leverage technology in their core. So how are they using technology as part of their business to build new services or engineer or digitize things in the physical world like the products? And that is where we see the shift to hybrid cloud and cloud architectures and large networking backbones, et cetera, to build that capacity for data, data transfer and services. So they're redesigning their core infrastructure that way. But once you kind of have those companies be mature and that they build out that infrastructure, they then want to participate with those new services in more new markets. So where do they connect to ecosystems? And where do you shop and sell those services electronically with other businesses? Or how are you interacting with the edge, right? So the last mile is where your security perimeter is, where your customers, employees and partners are located, where business happens and in some cases, where smart industry occurs. I mean, in the case of Wells Fargo, each of the metro locations that you're residing, there are 200 to 300 branches in that area. What is that branch strategy going to look like over time? And so we're working with different industries, health care for telemedicine. Like I said, logistics services and logistics has been crazy busy because they've had to rewire how they deliver things. Now all these things happening either building up their core infrastructure, which was most of what we saw in the last 5 years and now shifting to reengaging markets differently and distributing services to the edge differently.

Interesting, interesting. Well, and it ties well into my next question, which is, as you mentioned, a lot of technology companies adding as-a-service capabilities, and that's something that Equinix yourself has added within your digital infrastructure services business. So maybe you can talk about -- the common pushback we get from investors, of course, is that you're effectively competing with large hyperscale customers that offer the same solution at greater scale, like, for instance, some of the large CSPs. Maybe how would you respond to that? And what type of use cases? What type of customer demand have you seen for your bare metal and Network Edge type of services?

Yes, absolutely. I think in a lot of cases, we've been hearing that kind of -- it might seem a bit counterintuitive, but it's actually -- we're trying not to fight gravity. Our customers all want to consume with flexible compute models or flexible consumption models. They don't want to own long-term depreciations of assets over time, which is like you said earlier, it's why they're getting out of data centers. That's why they're getting out of fixed dedicated costs that can't be reapplied or reused in their business easily is a model that's not popular anymore. And so that's been true in that they've been trained by clouds to buy that way and consume that way. They're looking for the same kind of purchasing model outside of cloud. And so we have been trying to stay ahead of the market and offer so we can say yes to customers who just want to subscribe, like, yes, we have that. It's available to you. But it's not just from us. It's available to you from all of our partners as well. So there's still this idea of having choice located at the end of the market, so it's optional. And we are looking at working with those partners not as -- yes, you could argue that our metal service might compete with Dell or compete with HP. But what's really happening is those services, we didn't build the hardware. We bought it from Dell. So it's kind of a compounding business model where each of these companies that are delivering these services in Equinix are also subscribing to each other's services, and it's sort of all being consumed on top of the platform and it's all very healthy. And actually, the key providers like Dell, HP, Cisco, et cetera, same as our network providers, end up becoming the biggest consumers of this platform as well. So in effect, it's accelerating growth, making more revenue available and increasing choice and ecosystem health. So we find that, in every case we've done this, the opposite has happened. It's actually made it richer for everybody in that space to do that.

And I mean are there any -- I know you don't want to go too far up the stack because that would get away from being a kind of core infrastructure provider. But are there other services -- security services, for instance, that might be interesting to add over time? Or does it just kind of depend on what customer demand dictates?

Yes. Well, so if you think about it, the way we've looked at it is not necessarily in discrete technologies or use cases but more like our Network Edge is a whole plethora of services you can spin up at the edge. And they're like Cisco gear. You can -- you've got Palo Alto. You've got all these different technologies that are the same technologies they use today or in the cloud but are available -- are made available in a different location at the edge. Same with metal. It's providing different hardware types and even storage types now from different providers, making them available. We're not trying to create or enter a space that makes no sense for Equinix to be in. We're trying to create a way to make that space more available and democratize access to the economy for everybody, so they can deliver their services that way. So we don't want to fight or compete with the ecosystem because the ecosystem is always going to win, and that's what we like. That's what makes Equinix so valuable is the choice. So what we do is we provide technologies and capabilities that accelerate and amplify our ecosystem value first. And so if we're first in that market, we're teaching the market that they can deliver it this way and have them come and join alongside, or we're solving a key requirement that the customer has that no one else seems to be filling, all right? So we need to step in to do something there. And there are some certain services that make sense. Like a lot of our customers ask us to do more in the lower networking level layers, like protocols and things. Can you manage DNS? Can you manage time? So we make those available. But we also make sure there's 2 or 3 or 4 or even more providers who can also do the [indiscernible] as well in the same place because, essentially, we want to make sure that the ecosystem richness and density is growing and amplifying and it's healthy for everyone, which is, we think, is what's differentiating us from the other markets like clouds, et cetera, where it's very monopolistic that you can buy it from the [indiscernible], but you can't necessarily choose alternatives in that location that are offered there. In our locations, we were completely agnostic, so we're able to position services differently.

That's a helpful response. One other announcement recently was a partnership that you announced with DISH to provide infrastructure services for their 5G network rollout. And I know that they've also made some headlines on virtualizing their radio access network and putting it in AWS. Maybe you could help us understand exactly what services you'll be providing to DISH. And then do you see the opportunity to potentially expand your relationship with other wireless service providers as 5G network really starts to scale in the next few years?

Yes. No, additionally [indiscernible] but you're right, it does come back to that whole big 5G IoT kind of rollout space. And we are working with numerous numbers of our -- obviously, we have a lot of network service providers in our facilities. And we built labs and things like the Dallas Informart has a 5G lab, so we're trying to get standards and like edge-to-cloud automation working and in place at scale because in order to roll out things like 5G, the providers are going to need a lot of infrastructure to be turned up quickly and expand very quickly in multiple locations simultaneously. Not very many people can help them do that. And so they're looking to us to help them establish their transmitters and last-mile connectivity in that metro, plug it back into the core networking backbones, get it back up to the cloud and do that whole transaction and spin-up of capacity in an automated way in order for them to grow at scale. And so we see that as being a big part of what we do. We're not trying to go beyond the metro edge. We are kind of that metro aggregation point. But all the technologies connecting all these devices together, 5G devices, IoT devices, people's phones and end points, they're all aggregating back in, and then we're wiring them back up to clouds to deliver the layered services on top of that. So we see that as the future because, essentially, the Internet has to grow at the same scale as data is growing. Interconnection bandwidth has been growing exceptionally fast. But we need 5G and we need these technologies to keep up, right, in order for capacity to be able [ to build at ] end users. So we're perfectly positioned to help them enable those services. I'll add one thing. It's not just the provider side. Because we also have such a large density of enterprise and industries, we're talking to them about demand as well. So for example, rental car companies are working with our partners in our labs to test certain ways they can use tablets and things to do in-field device management. So we're also helping them find customers who want to use their services and get them going, get them started.

Interesting. Are you also kind of serving as like a cloud on-ramp for them to bring some of their workloads into AWS, which I know is part of their strategy, infra strategy specifically?

Completely. Yes. We were the shortest distance of all the major clouds everywhere in the world. So yes, we're the logical choice for that. I think it's a combination of not only do we have the on-ramps, but we have the automation through our APIs and things for them to program -- programmatically set up their infrastructure dynamically. That's hugely important to them. If you don't have APIs, you can't do it in an automated way. That's table stakes today.

Sure, sure. Understood. So a big hot topic of debate in the last few weeks has been around infrastructure convergence, specifically among data centers and towers. Obviously, American Tower made a large acquisition announcement recently of CoreSite. What is your opinion on what type of synergy benefit exists either today or potentially in the future between owning wireless cell towers and data centers? And I guess is there any future scenario in which you may be interested in partnering further with other tower companies to go after some of the far edge, the mobile edge, whether that resides underneath the tower side, a C-RAN hub, wherever that goes?

Yes. No, it's an exciting space. Clearly, we've been looking at it for a long time. We even have our own internal track around what we call next-generation data centers just to understand where and why would other kinds of offerings be needed and what are they servicing. What we're seeing so far, though, is our standpoint is where the ecosystem sort of aggregation point. So when it goes beyond that metro edge location into a tower or the foot of a tower or into a factory, it starts to become very specific or very unique or niche use case where there's fewer companies involved and it's more infrastructure. And they tend to aggregate back into us anyway because as soon as they want to connect to somebody else or connect it to a cloud or run it through a different ecosystem, they're going to cross one of the Equinix facilities there. So we think it's still part of that. We see the demand and the need and the growth, so how is that going to be fulfilled. We can see more compute moving out to the edge. We see it in our own index we publish, the Global Interconnection Index, GXI. If you search on GXI and Equinix, it'll come up. Shows how growth at the edge is actually growing twice as fast as infrastructure growth in the core granted it's more of a smaller base, that's why. But it's inevitable. So we have -- we've already got a great relationship with the towers. But we are trying to understand how much of that stuff will sit with us, how much of that stuff do we need to support to connect because if that edge compute doesn't get back to the cloud, then it's sort of not -- it's not as symbiotic as it would be otherwise. So we're watching that space. We haven't seen a need to build our own infrastructure out further into buildings with 5G and like the last thing we just talked about, when that infrastructure is fully deployed, the latency or demand for pushing things further out will actually go down a little bit because if it's, say, 20 milliseconds now to the end points but after 5G, it goes down to 5, then the use cases that could be supported from the metro edge where we already are, will go up, right, not go down.

Right.

And so the need for that's going to get smaller over time. But there will still be a niche need for that, and there's still a market for it. It's just not a market that we're actively in.

And the thing that I'd add there, too, is we're thinking about the edge. There's not going to be just one edge. It's going to vary from customer to customer, from use case to use case. And in many cases, what we're seeing in terms of customers pushing from that core to the edge is not going at the metro level further out into sort of the capillary networks. It's more expanding across multiple metros. So if you're thinking about Europe, it's a customer that started out with a deployment in Amsterdam and London, now saying "Oh, hey, actually, we need to get up to Scandinavia. So why don't we go to Stockholm? And let's put a footprint in Warsaw in Eastern Europe or go down to Barcelona." So a lot of the edge is now customers that are recognizing, for their applications and use cases, that traditional core in major metros needs to proliferate out to other major metros around the world so that they can localize a lot of that traffic. So it's not necessarily the edge shifting out at the metro level. It's now a need for more metros and who better to help with that type of opportunity than a company that's already in 65, soon to be 66 metros around the world.

Right. That's a good point. And I think you put out the statistic before that you cover north of 80% of the U.S. within 10 milliseconds or something to that range, right? So you're already at the edge in the United States at least. And it sounds like you would agree that these are really complementary technologies because even if there are edge use cases that do move deeper into the metro edge or out further, a lot of them will be backhaul to your data centers where they'll run advanced analytics or transport through your data center, so you'll benefit tangentially anyway, right?

Yes, agreed. And the bottleneck is, again, is at the last mile. It's not us. We can expand the infrastructure at scale, but the Internet and the last mile is where we need to put the most effort. And that's why it's more symbiotic than anything else. It'll help growth for everybody if we can adopt those [ technologies ].

That's great. I wanted to touch on Equinix Fabric. You have over 2,800 customers now on that service. Maybe you could talk about just at a high level from a customer use case perspective and how much bandwidth they're consuming. Does it make sense for you to potentially bring that Fabric service to broaden the addressable market outside of your core data center footprint to expand its reach? Is that something that might be interesting to you?

Yes. So we see the Fabric as something that's evolving and for 2 reasons. I mean it started off as a service that provided network services, right, so you can buy bandwidth or you can buy connection, et cetera. But it's evolving because now it can connect services. So if you think about that, now you can subscribe to storage services from Seagate. You can spin up connections to storage appliances in our data center connected over to Fabric. It's becoming more of a fulfillment vehicle than a traditional networking tool. And it's being used by more companies in more ways for that than traditional networking. It's still used primarily from service providers as well to connect to clouds and things, but we see its use case expanding dramatically, which is why we renamed it to Fabric and not made it specific about clouds. And we have, in some cases, put -- extended the Fabric into data centers that were in-house and testing that market and that makes the ability for that particular location to have access to some of the services we can provide out of the Fabric more effectively. And I think that, that's going to become a part where, as this fulfillment vehicle gets bigger and more services on it, we're going to see demand for access to it in more locations over time. Right now, it's predominantly inside Equinix facilities, and we have branched out in one location. I think, Chip, you can speak more to that, where we brought it closer to cable landing stations and enabled efficient solutions to be made. But we haven't made it like a generic offering in like competitive facilities and things like that.

Chip, do you have anything to add or...

Yes. So in terms of -- as Steve mentioned, we have in one location in Belgium, specifically with LCL, offered Fabric. But to Steve's point, it's much more about understanding market use cases. It's Belgium. We're not currently in that market. So it allows us to understand what the opportunity is, what kind of ecosystems are developing there. And so over time, you might see us use that as sort of an entry vehicle to understand and see what opportunities there are in a marketplace. But at least as of right now, there's not plans for sort of creating a ubiquitous open Equinix Fabric. The goal is still to be focused on our platform because, really, as we're thinking about driving the value, we want to be driving the value for the ecosystem and the -- as you noted, Eric, while we've got 2,800 customers that are already on Fabric, we've actually turned up a service now where all 10,000 customers can be accessed via Fabric. So if you're connecting to a partner that doesn't have a port on Fabric, we'll actually give that customer a port for free so that you can connect with them over Fabric until they then start procuring their own ports if they decide to do that. So what we're trying to do is make it more ubiquitous across the entire platform over time.

Okay. That's helpful color. I wanted to touch on the channel program, and this might be for Steve or Chip, just whoever can jump in. It seems like that's been a real success for you recently, especially on new logos and enterprise. So maybe you could talk about the partners you're seeing the most success with whether they're strategic partners, system integrators, brokers, resellers and then if you're having any success with the channel helping you attack some of the newer digital infrastructure service products that you now sell as well.

Sure. Yes. So the good news is it's all of the above. Let's break them up a little bit. So we know with our large-scale network service partners who are on the platform, we've given them a marketplace where they can now sell services to customers that weren't traditionally on their network, right? So that's democratized access to a whole big market there. And in a lot of cases, selling services like SAP migrations and handler integrations, which are not traditional telco, what you would think traditional telcos would do, but they're actually branching out into a whole bunch of services and managed services outside of that. And then you think of the hardware providers like Dell, HP, Cisco, et cetera. As I said before, if they're not selling into traditional data centers anymore because people are closing those down and they're not necessarily selling into hyperscalers either, there's a whole marketplace within Equinix for them to offer their equipment on flexible consumption models to our customer base who are already wanting to buy it because that's why they're there. So that's been going very well, and we're doing very well with that. But technology manufacturers are also shifting to as-a-service models. So Seagate, for example, largest manufacturer of disk drives, is now offering hyperscale storage as a service inside Equinix and changing to a recurring revenue model and not just a depreciation model, which you'll see a lot of shifts in that space going that way. So that's opened up a whole new market where alternatives can be made available from the people that invented the technology in the first place. And so that's a new market for us. We have MSPs, so Accenture, et cetera, who help customers. It's not easy to get out of your own data center and move all your applications to cloud. It's not simple. It takes years. In a lot of cases, they're accelerators because they can show up with repeatable plans on how to do it and effectively accelerate how they move and how they shift and how they get to where they want to go faster. And we're finding more often than not, we complement each other perfectly because we don't do that. And so our customers are frustrated that they can't move fast enough, like, well, let me introduce you to a few people who can help you. So we're seeing a lot of that. And in terms of channel, in terms of resellers and brokers, that's also a very healthy business. We always are looking for ways to reach out and get more awareness and more demand and more access communication. In a lot of cases, these brokers have really good relationships, and we've seen some big names come back to us from that relationship. So it's very healthy. It's already about 30% of our revenue. We expect it to grow. And it's going to -- I think it wouldn't be illogical to think it's going to surpass direct revenue -- direct sales at some point because they're just exponentially bigger than us. Accenture has got 600,000 people.

Yes, exactly. Good point. Good point. I had one question come in the queue and, Chip, this one's probably for you. And it's around M&A. So obviously, we've had a couple of large M&A transactions announced in the space recently, some other assets reportedly for sale. I know you won't comment on anything specific, but perhaps you can just help remind us what your underwriting criteria is for data center M&A specifically. And then secondly, should we expect any M&A that you would consider seriously in the data center space will be more focused on new geographies versus adding capacity in existing markets?

And it's a good question given the amount of activity we've seen in the space. Historically, we've done, what, 26, 27 M&A deals over our 22-year history now. And pretty consistently, it's followed the same map of, first and foremost, it's adding new metros and geographies. So something like Bell Canada that took us overnight from having just a presence in Toronto to now having a pan-Canadian footprint that we can sell non-Canadian customers into but also created an opportunity to sell Canadian customers on the broader footprint or getting into India through the GPX acquisition. So you'll see us continue to look at those kind of opportunities. And it's going to be about where are there holes on the map right now. So we're nowhere in Africa currently. Would we want to get deeper into India, deeper into Latin America or Southeast Asia. You'll see those sort of being our primary focus areas as we're thinking about M&A, less so in metros or markets where we already have fairly good coverage. So that would be element #1. Element 2 is any time there's an attractive interconnection asset that comes up for sale, certainly, we'll take a look at that. Not all of those are we going to buy or necessarily want to buy, but we'd take a look if we think it would add to the broader ecosystem in the platform. And then last but not least, it's going to be on the services side, anything that we think is going to augment our digital infrastructure services, something like a packet where it then enables our customers to move faster with what they're trying to do with digital infrastructure. So we'll continue to look at all of those as really the primary building blocks of our M&A strategy. And certainly, there's going to be opportunities out there. But we've tried to stay fairly focused on that sort of core approach for M&A.

Okay. That's helpful for -- as a reminder for us [ you've gone through that ] many times recently. And one last one, and this is probably for Chip as well while we have you. Obviously, a ton of questions have come up around rising utility prices around the globe and particularly in Europe. So you made it pretty clear that, particularly as some of your hedges roll off, that you'll pass through some utility surcharges in markets where prices have really risen rapidly. So do you expect any customer friction as you kind of move to perhaps raise costs through a surcharge? Or do you have any kind of early indications of your ability to successfully do that?

Yes. Look, customers never want their pricing to go up. So it's a commercial conversation that you have. And the customer recognizes the value of being within our facilities. And the reality of it is it's not just power prices going up for us. It's power prices going up for all of our competitors in the marketplace as well. So across the entire industry, the higher utilities prices are going to end up getting partially passed on. But what we've tried to do is we try to be very thoughtful in terms of our approach. First and foremost, what we're trying to do at the very base level is go out and hedge and try to smooth out any volatility in utilities pricing. So no different than our foreign exchange program, we proactively manage our utilities costs in unregulated markets to try to smooth out those peaks and valleys so that, for the customer, they're not seeing that same level of utility -- utilities volatility in their billing. So we're very thoughtful and focused on that approach. We've been successful in the past when we've needed to raise prices and pass those higher costs on to customers. So we expect to continue to see good momentum, and we'll have those conversations with customers. But when it comes down to it, they do recognize the value of needing to be in our facilities.

Okay. Great. Well, gentlemen, I think we are out of time. So thank you both, Chip and Steve, for your time today. Really appreciate it.

Thank you, Eric.

Great. Thanks, Eric. Have a great day.

Thank you.