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

Great. Well, Welcome to our 2:00 p.m. session at Citi's 2022 Global Property CEO Conference. For those of you I haven't had an opportunity to meet in person, I'm Mike Rollins with Citi Research. And it's a pleasure to welcome back to the conference, Equinix. And joining us today is CEO, Charles Meyers; and also from Investor Relations, Chip Newcom. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast at the AV desk. [Operator Instructions] And with that, Charles, I'm going to turn it over to you to introduce Equinix to our group.

All right. Mike, thanks. Wonderful to see everybody. I will tell you, it's so great to actually be back in-person again. And so we're a little social distance to here, Mike, but we didn't know what the rules were going to be, right? So we're a little bit further apart. But I will start by reading our disclosure. Some of what I will talk about today contains forward-looking statements. Please read our SEC filings for more information about factors that could affect these statements. So Chip and I am happy to be here, again, really excited to be back on the road and telling the Equinix story and we can jump in wherever you want, Mike.

Great. Well, it's great to be able to do this in-person and great to see you. So the opening question that we're asking are companies participating at the conference is what are the top 3 reasons an investor should buy your stock instead of any other listed property company?

Well, I guess I'd point to 3 things, Mike. One, overall opportunity. I think the demand profile for digital infrastructure right now is extremely compelling and represents a massive opportunity over time and one that is incredibly resistant -- and has proven to be incredibly resistant to a variety of other macro factors. And so one is opportunity. Two is our pursuit of that opportunity comes in a very differentiated way. And we've demonstrated that over time. And with that level of differentiation and a set of advantages that are very, very difficult to duplicate, we have a level of pricing power that others simply don't enjoy, which is critically important in the current market. And then the third one is execution. We've got a great track record of execution, and we have confidence that we're going to be able to continue to do that in the marketplace. So those would be the 3. And all of those things together sort of create the holy grail of yield and growth simultaneously, which people are after. And Equinix is a great story in that regard.

And to level set the focus for this year, what are the strategic and operating priorities for Equinix?

Well, our sort of strategic priorities have been fairly stable over the last few years. It's probably not surprising in a business like ours. But we continue to focus, one, on continuing to really scale our core business. That means both building out and optimizing our go-to-market engine to respond to what is an incredibly robust demand environment that we're operating today. We continue to see quarter-over-quarter record gross bookings and have been, therefore, investing in the sales teams to support that and continuing to optimize into sort of more of a multichannel player to continue to capture the broader enterprise addressable market as well. So scaling the core includes both driving the revenue growth and ramping the go-to-market as well as driving operating leverage. And even though there were some factors -- sort of one-off factors in our guide for 2022 that were -- that created a little bit of challenge on the -- in terms of the margin side, I think underpinning or underneath that, when you unpack it and you look at the normalized performance of the business. There's actually meaningful operating leverage, and we continue to see efficiencies in the business that we're unlocking. And so those are sort of the 2 pieces underneath scaling the core. Second is continuing to ramp our xScale opportunity. We've now got about $8 billion of committed capital on the xScale JVs. Obviously, we are a fraction of that in that we get about 10:1 gearing on our capital in the xScale JV because of our equity position and because of the leverage that goes on to that. But we've seen great demand, and we've seen a nice sort of strategic benefits from the underlying -- to the underlying retail business. So ramping xScale continues to be a priority as well. Then third, really accelerating digital services. So the digital services portfolio is really a way for us to package our underlying value proposition of global reach, advantaged access to our global ecosystems and the world's most advanced interconnection platform into services -- into new ways of delivering those services, which we think are going to dramatically expand our market opportunity. And so that's the third piece. And then underneath all of that, continuing to drive a very healthy foundation as a company and as a culture, investing in a variety of our kind of ESG-oriented initiatives both on the sustainability side as well as our commitment to building a culture where every person every day can say, "I'm safe, I belong, and I matter." and that's been something that's been incredibly well received internally.

So when thinking about the growth opportunities for Equinix on the top line that in the past, you've talked about the digitalization of the economy, the outsourcing that companies are doing. But can you unpack some of the specific factors that are really driving the stabilized organic growth that the company has been targeting. I believe it's in the 3% to 5% range on an annual basis.

That's correct.

And then the multiyear revenue guidance range of about 7% to 9% that was established at the past analyst meeting in 2021.

Yes. I mean there's a variety of factors. I think that the resoundingly sort of overwhelming one is just the movement to -- or the investment that people are making in the digital transformation of their businesses. Virtually, every industry around the globe is seeing massive amounts of change. And I think digital transformation hasn't become -- isn't an option. It's a fundamental sort of requirement and significantly a source of competitive advantage going forward. And we've seen that demand for digital transformation to be very durable. And you marry that with how people are thinking about the -- what the needs of their digital infrastructure are. And they're very -- we're seeing a very strong movement towards hybrid and multicloud as the architecture of choice. And Equinix plays a really unique role in that in terms of being able to place private infrastructure proximate to the public cloud and distribute that globally with relative ease. And so that's been a major fuel behind the business. And there's a bunch of sort of more detailed use cases in terms of particularly how people are thinking about their own data. Increasingly, we're seeing that people want to maintain their data within their own infrastructure rather than placing in cloud, and that's both a privacy, security, a strategic advantage, compliance and a cost issue. And so a lot of what we're seeing is people placing their data and strategic pieces of their private infrastructure within Platform Equinix and then intersecting it with the public cloud workloads that they're actively embracing. And so -- and we represent a very unique place to do that.

Charles, you mentioned that there is some onetime impacts to the margin this year and it kind of gets us into the conversation on energy and inflation. Is there a multiyear risk related to rising energy costs as well as potential cost inflation, whether it's for the labor or the materials and just the raw goods that go into a data center?

Yes. I would expect that anybody that says there isn't a multiyear sort of potential, if not likelihood that we would see rising input costs in various ways, particularly energy and probably labor. I think than people might not have been paying attention. So that is real. I think as to whether that translates into sort of margin risk is different because it all depends on whether or not you're able to adapt pricing to that underlying input costs. And I do think that, that's something I talked about earlier in terms of our ability to pass that pricing through both the contractual ability to do so and an ability to do so in terms of a distinctive enough value proposition that, that is going to be received by customers without increased churn or customer loss. And we feel a high degree of confidence in that. And so that while we may see some ongoing levels of inflation, we believe that we can adapt pricing accordingly in the market. And therefore, preserve margin and even expand it because we are, at the same time, driving operating leverage in the business. And so we'd see -- again, we continue to sort of stand by our commitment of getting the 50% operating margin within the multiyear guide that we put out there.

And so maybe drilling down a little bit more on the energy side for a moment, and we'll come back to the margin conversation. So Europe was a question going into the earnings call, where are you now on Europe? And what is the risk? What's happening in the European community specifically there?

Sure. Yes. I mean Europe was already a topic of discussion. And obviously, a lot has happened since then in terms of activities in the Ukraine. And obviously, we're very tuned into that and working hard to ensure both humanitarian efforts in the Ukraine and support those as well as try to increase pressure in whatever we can to resolve this matter, but it is clearly causing inherently an increased level of volatility in energy in Europe. I guess the good side of that is that we are almost entirely hedged in Europe relative to our energy pricing -- I'm sorry, our energy costs. And so we aren't seeing that effect today. We do recognize that as those hedge -- as we move into next year and those hedges begin to feather down that we would inevitably see some level of rising input costs on the energy side. But because we have sort of multiyear hedges feathered in over '22, '23 and even '24, we believe that we're going to really dampen the volatility associated with this. And we're going to have really strong advanced visibility to when those hedges will roll off and when we would see underlying increases. And our contracts allow us in the form of a power protection clause that allows us to pass those through to customers as we see them. And so we're going to be able to manage through that from a margin perspective. And so feeling good about the European situation. Singapore is a little bit of a different matter. And we'll be -- that one is more transitory, and we feel like we'll be back on track in that market in 2023.

So let's touch on Singapore for a moment there since you referenced it. What is -- we're getting a number of questions over the last few weeks about what's kind of built in, in terms of your expectations for what's not hedged or not prepurchased in Singapore for 2022 in terms of the risk. And then the other side of that is in the last couple of weeks, with just the global developments, are you seeing any change or spikes in those power costs because of what's happening in Russia and the Ukraine?

Yes, we are -- I mean, we definitely are in Europe, but I kind of just went through that, right? So we have definitely seen more volatility in Europe. In Singapore, we've seen sort of relatively stable situation, although obviously, significantly elevated from where it was previously. And the Singaporean government has sort of stepped in to provide stability and continuity there. And we've taken advantage of that in terms of being able to get a greater level of certainty around a significant portion of our load. And so not a lot has changed in terms of the underlying assumptions that we use to inform our guide. And we continue to feel pretty good about where we're at on that and what -- how the year is progressing. In fact, I would say the willingness of the Singaporean government to provide some of that downside stability and protection probably gives us greater confidence, and we're feeling good about that.

And is there any material revenue or profit exposure to Russia or the Ukraine that investors should be mindful of?

There's not. We have very few either Russian-based or Ukrainian-based customers. They're de minimis amount of our overall revenue. And in fact, if you -- and we don't have any operations in either Russia or the Ukraine. Our closest market would be Warsaw. And we actually have a fair number of employees in Warsaw because it's a significant technology development center for us. But in terms of exposure to the business, the combination of Warsaw, Sofia and Istanbul, which would be the closest proximity operations we have is meaningfully less than 1% of our total revenue. And so not a lot of exposure there.

And just one last question on this power situation. So Singapore was just an individual market that ended up having a meaningful effect on the '22 outlook. Are there any other markets that investors should just be watching over that could create some kind of maybe outsized costs? Or even on the other side, is there any markets that just as there's fluctuations in volatility you might get some outsized benefit from that we should just be thinking through?

Yes. I would say that, again, our reality is that we are -- in regulated markets, things are going to move as they will move. In deregulated markets, our hedging program has been exceptionally effective over the last 20 years. And so -- and that really is what I described earlier, which is -- so the position we find ourselves in, in Europe is generally our posture in deregulated markets. And so it gives us a lot of dampening power -- opportunity to dampen volatility and then sort of modify pricing at a more measured pace as appropriate. And so that's generally the situation we find ourselves in. Again, Singapore was a very unique situation. One, that market didn't really have the same kind of opportunity for multiyear bettered hedges. And it's actually one of the things that led to it is that we were trying to sort of encourage our counterparties to do multiyear sort of hedging. And then that market just kind of dislocated. So I think we're we feel good about our ability to sort of navigate that disappointing that would have the kind of transitory effect that it did on in 2022. But again, I think the normalized performance of the business and where we'll be as we go into 2023, we'll be really demonstrate the underlying health of the business there.

So do these activities, the hedging and all the focus and the large-scale purchasing of power that you do, does that differentiate your platform where in a time where energy costs are volatile, it could actually bring more demand to the platform? And have you seen any evidence of that over the last month?

Yes. It's interesting. We -- I will say that I don't think that we necessarily have done as good a job of articulating the customers how our hedging benefits them. And so I think that's something that we really need to maybe think more about in terms of how we think about. Because there are some of these more softer elements of our position, the strength of our balance sheet, our investment in terms of hedging and those kind of things that just provide a softer set of benefits to the customer that I think are part of why it's easy to choose Equinix, right? And so I think we can do a better job of that. I think that it's obviously more top of mind for people. And so we've had the opportunity to articulate that to customers. Sometimes, unfortunately, in the context of a price increase that comes and they say, wait a second, why is this? And then we were able to actually provide them with some demonstration of how the hedging over the years has kind of benefited all parties. And so it has created that ability to have some of that, but I think we can do a better job of articulating that maybe going forward.

Over the last couple of months, the management team has talked about some of the opportunities on the pricing front that maybe are different in the past, given the inflationary environment that we all find ourselves in. Is that -- how is that going in terms of the customer receptivity to the price changes? And how does that influence your ability to grow revenues over time?

Yes. Well, as I've said probably in every session today thus far and probably will in every investor session for a while, we generally don't get any thanking notes from our customers on the price increases. But we do -- they are -- it boils down to a couple of things. One, I think there is a broader dynamic right now across every industry and every input that they might have that there is an inflationary environment. And so there is an expectation that their costs are going to rise and they have to determine how they're going to be able to position that in terms of their forward price to their customers. And so I do think it is -- there is an enhanced level of understanding of that. And then -- but we are -- beyond just cost recovery, if you will, and particularly as it relates to energy, we're raising our list prices in certain markets around the world. And so that will roll into new business as we go through this year and beyond. And then I think on renewals, we're also going to be bringing that in. And so again, it's not something that's celebrated by any means by our customers. But as people know, we kind of had a good dry run on this with our interconnection pricing in Europe, where we believe that we needed to normalize that with our rates in other regions. And we -- so we did a pretty significant increase on interconnection. As you might imagine, high consumer -- customers of ours that are large consumers of interconnection sort of bucket that. And -- but I will say that we saw very little fallout from it. And in the end, we're able to execute that price increase quite effectively.

So we were talking earlier about the multiyear target of 7% to 9% for organic constant currency revenue growth for Equinix. But this year, the guidance is for 9% to 10%. Why the strength in guidance so early in the year? What gave the management team the confidence to go with that range?

Yes. I mean it was -- it's interesting because obviously, we just had -- it was probably June, I guess, when we did the Analyst Day, and we gave that guide. And so to come out in our full year call and our Q1 or our full year fourth quarter call and give that enhanced sort of guidance -- revenue guidance on the top end of the range was a pleasant surprise for many, including us. And so I think it boiled down to, obviously, at the time that you're giving that Analyst Day. Basically, all you've seen is maybe the early results from Q2, we had a very strong year. I mean, Q3 and Q4 continue to be extremely robust from an overall booking's standpoint. We saw really the Americas business, in particular, accelerate meaningfully over the second half of the year last year. We've literally in the last year, gone from the Americas business as a 5% grower to the Americas, our largest region as a 10% grower. We've had record bookings in that, I think, several quarters in a row. The Americas team is really hitting on all cylinders from a sales execution standpoint and churn moderated meaningfully. And we talked about the fact that part of that is probably sort of lapping the underwriting differences between how kind of Verizon might have been thinking about that in the assets that we're part of the Verizon portfolio and how we think about it. And -- but now having been through that and continuing to drive strong disciplined execution on the selling front in terms of sticking to our sweet spot about where we have a distinctive value proposition. I think that's been what -- it's really kept our churn at the low end of the range. And the combination of those 2 things just has given us great trajectory going into 2022 and resulted in the guide that we gave.

So a question that we received from our audience is at least 1 tower REIT has gotten into the data center category, does Equinix have any interest in being in the tower business, and it also raises the broader question of how you're looking at the edge, whether it's the metro hubs or data centers that could be placed under towers. Your perspectives would be great on this subject.

Towers are a great business. And candidly, I wish I would have had more of my personal wealth in them over the last 20 years. But it's a phenomenal business, not one that I think we see as something that is where there's significant strategic synergies with our business. We do think that the towers represent an interesting and likely partner for us as over time, more distributed sort of edge use cases begin to materialize. Although I would tell you that at this point, we are not seeing that as a meaningful demand signal from the market. And in fact, I've talked to a lot of people. One of the most common questions I get and obviously, we know the AMT team and Tom very well. And the most -- one of the more common questions I get is, does AMT know something you don't, to which my answer has been, I don't think so. And -- but I've been asking around to make sure that other people aren't of a different view. And generally, I would say that I am not seeing other than, again, some particular use cases around how mobile architectures are changing and how people are actually building out 5G infrastructure, which I do think is -- has some relevance, and we're playing in some of those spaces. But enterprise edge use cases, far edge use cases are just simply not materializing, I think the way some people expect that they might. In a fully 5G densified world, which is probably 4 to 5 years out, maybe you start to see some of that, but we aren't seeing a lot of that. And so our view is that we don't see a ton of strategic synergy by having those under common ownership. But we do believe that over time, we would likely work with a variety of distributed real estate owners and look to interconnect their fire edge with our aggregated edge. And -- but we think that the action for the foreseeable future is really at the aggregated edge. And while we're not the only representation or manifestation of the aggregated edge, we think we're the best one. And so we feel very good about that, and we'll continue to watch that space as we go in terms of how we'll adapt to the far edge.

And on the xScale front, you described $8 billion of capital commitment for that business. What are you seeing in terms of the demand side? And is there a way that you're measuring the contribution to the ongoing revenue growth for the retail-centric platform at Equinix?

Sure. Yes. So on the demand side, we're definitely seeing a very strong demand signal from the market in terms of overall hyper-scale demand. And that's as evidenced by the fact that we've presold almost all of the capacity that we've built for xScale, we're about 80% sold for the EMEA 1 JV, which is where the bulk of that capacity is. So really strong uptake from the customer community. And so -- and by the way, there seems to be no end in sight to that. And so we continue to believe that there's a huge opportunity. We're not going to chase all of it. We're going to focus on markets and sites and facilities that we think are strategically accretive and that gives us an opportunity to extend our relationships with the players that we think are shaping the future of the cloud ecosystem. And so definitely more opportunity to grow there. And I think over a longer period of time, multiples of that $8 billion will probably be eventually invested, but again, only a fraction of that coming from us. And that was a second question on...

So are you able to measure -- you mentioned that there are some benefits of doing the xScale for the retail business. Are you able to measure or quantify the impact it's having on the retail revenue growth?

Yes. I think it's hard to really -- and you asked about the fee structure and what -- how it also contributes to the retail business. So there's the more direct benefits, which is the fee structure that is flowing from that side of the business is definitely accretive to AFFO per share. It's still modest in the overall revenue, less than 1% of the total revenue in 2022.

About 1%.

We said about 1%. And so not really material in the grand scheme of things from a revenue perspective, but does provide probably some accretion on the FFO per share front. And I think that the -- in terms of measuring the benefits, it's more about -- it's more qualitative in terms of -- our relationship with the hyperscalers, our ability to be responsive to their needs, our ability to build sites proximate to our retail that we think sort of adds to the ecosystem value proposition of those facilities. And I think we've seen good success in that, but a little harder to really pin down exactly what the quantitative benefits are.

So in our last few minutes, we're going to ask a question on growth on ESG and our rapid fires. If there's any other topics that are really important to you send them into the chat box or you're welcome to use the microphone in the room. So on growth, what is the biggest growth opportunity that you believe the market is not giving you credit for?

I think as to whether or not it's giving us full credit for, I'm not sure of all of that, but I would say that there's significantly more opportunity for us from a growth perspective on a number of dimensions. Geo growth continues to be one that we've obviously had great success with, and there are still meaningful parts of the world that we can extend the aggregated edge to. And so and that's through both organic and inorganic means. So there's some opportunity there for us. I also think that our digital services portfolio and our ability to expand the addressable market by making our traditional value proposition accessible to a much broader set of customers is maybe being underappreciated. And so -- and we're starting to see the funnel build. And we're going to have some both -- some public reference use cases and those kind of things that will start to open people's eyes about that opportunity. And so those are probably the 2 that I would point to.

The second question on ESG. What's your #1 ESG priority in 2022?

Well, in classic fashion, I'll give you more than one. But I'd give you one on the E and one on the S. On the E, it's really -- we have to do our part to respond to the urgency of the climate change sort of challenge. We have committed to being climate neutral by 2030. And so the core activities that we need to undertake to get there and hit our science-based targets are very top of mind for us. That probably the biggest ones there are really renewable energy strategy in terms of continuing to offset and get the renewables up to that full 100%. And so that's a key area. And then also energy efficiency and continued PoE improvements in our existing facilities is a priority there. And then on the social side, this commitment, I'm safe, I belong, I matter and the diversity objectives and inclusion sort of efforts that underpin that continue to be a real priority and against which we're making real progress and which we baked into our comp plan.

So if you think about the financial model for Equinix, and you mentioned earlier the 50% margin target. If revenue growth over the next few years to 2025 is at the higher end or better than the high end of the range of 7% to 9% versus the low end. So at the higher end, does it make you more likely to hit the margin target because you get the operating leverage on just a larger quantum of revenue? Or does it make it a little harder because you might have to incrementally invest to get there.

That's a great question, Mike. I don't know, because I've always said -- you guys have heard me say this many times on earnings call, right, our job, I think, as a leadership team, is to drive long-term value creation. And we've always said that we're going to make those judgments that we feel like that's our job, and then we -- and our job is to articulate them effectively to you all as to why we think that's the right thing to do and why that -- why the value creation is best under that scenario. And so it would depend. Because I could see if we're operating at or above that top end and seeing uptake in certain elements of our digital services portfolio and said, we need to double down on that. I could potentially envision that, but I also what I've told our team, just to be very clear, as I said, we have to continue to drive operating leverage in the business. And so absent investment that would be quantifiably and readily justifiable, I guess I'd go with, it's better that we're at the top end because we get more operating leverage in the business, and we can scale better and deliver those margin improvements. And so I would love for us to have that dilemma, if you will, it would certainly be a very first world problem. And -- but I mean, I am super energized by the fact that we already came out of the gate being able to do that in year 1 of our guide periods. And I hope that we'll have the opportunity to sort of position ourselves to think about those trade-offs.

And as there's a lot of interest just appreciating the cost structure for Equinix, are there just some pockets of, what I might call, a hidden opportunity that's just not appreciated because of the financial disclosures, whether it's the cost that you're bearing for xScale that are still on the income statement, even though that's like a minority venture or you're investing in new systems, refreshing the quote to cash and the sales systems that we just don't get to see from the outside where you see opportunity for those costs to go away or deconsolidate and hence, opportunity?

Yes. I mean you kind of stole a couple of ones that I would point to there, and we have talked about those in the past because they don't really show up in our nonfinancial metrics or other things, right, which is the number of accountants and attorneys and various other folks that we've had sort of helping us scale -- the xScale -- get the xScale business to where it is now that we're on balance sheet and on our income statement, is certainly meaningful, right? And so there are some of those things and then Horizon, which we've talked about is both capital and OpEx that we're investing in trying to streamline and optimize and scale are more kind of or systems that need to adapt to a changing world. And I think the adaptation of our operating model that we're undertaking with -- going to the data center services BU, which Jon Lin is going to lead. And the digital services BU, which we're going to recruit from the outside to go lead that business. I think that's really going to help us unlock those opportunities and really deliver the value that we think is latent there.

Ready for the rapid fire?

Ready?

Okay. First, what will same-store NOI growth be for your property sector overall, not your company in 2023?

Probably not an expert across all these segments. But I'd say sort of low to mid-single digits.

Okay. What will the 10-year treasury yield be a year from today?

2.25-ish.

Okay. What will your property -- well, sorry, will your property sector have more or fewer public companies a year from now?

I'd probably say roughly the same with a slight bias to fewer because there is more opportunities for consolidation than there is for new public entrants.

Charles, Chip, great to see you both. Thank you for being here.

Thanks.

Thanks.