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

Okay. Good afternoon, everybody. My great pleasure to welcome back Equinix, and Keith Taylor, the CFO. Thank you for joining us today.

Thank you. Thank you for having me, and it's great to be back live, see you and see everybody in the room here.

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Keith, maybe we talk about, to start with, your 2022 priorities. And you had put the long-term guidance out there, you refresh that last year, but give us a sense of how '22 fits into the longer-term picture and what you're really focused on?

Well, just like you, let me just say, some of the comments I might make today are forward-looking in nature and please refer to our SEC documents for any risks or uncertainties. And yes, so thank you for that question. I think the priorities for '22 are probably not that dissimilar to what we were doing in 2021 as a company. I'm immensely proud of the results that we put up in '21, and it's really playing itself out into '22, but the focus on our go-to-market engine and how that's going to affect a strong top line outcome. When you tie that into investment in digital services, again, very, very important. xScale driving efficiency in the human -- sort of the human side of it, sustainability, diversity, inclusion and belonging. And those priorities still remain today. And as a company, it just feels like we're making the right decisions. And part of the dialogue I had today with some of the people in the room that over in the session, is that I don't think there was an underlying appreciation that we were -- where we were in this J-curve of investment, not only with our metal business, our xScale business, but also all the efficiency initiatives. And so I would say, when I give you that list, it's been underway for a period of time. I think we're going to start to see us come out of that through '22, and '22, although that is our focus, it is a great opportunity for us to continue to grow and scale our business.

On that efficiency point, we'll come back to margins, but I think you just appointed a new Chief Transformation Officer. So help us understand what that entails for the company? And what are the -- how does that impact the story?

Sure. Look, sometimes when I talk to my analyst friends, everybody assumes that lines are just straight up, right? There's nothing that goes on in between just an upward line. And the reality is, look, we want to continue to do more as an organization and deliver improving margins. We want to drive -- continue to drive AFFO per share, not only on an absolute basis, but certainly on a growing basis but on an absolute basis. And like anything, the company is big, is complex, we're in multiple markets. We have multiple focus areas, whether it's our core business, it's xScale, it's our digital services and the like. And we needed to bring in a leader as you think about transformation and how we want to run the business more efficiently over a period of time. The interdependencies on decisions we make are very far reaching in our business today, just because of the scale and size of our business. We needed somebody who we felt was really going to be really strong, that could look at those 3, 4, 5 projects and say, I'm going to take that, and I'm going to make sure I tie all the knots together. And ultimately, that's what Nicole is going to do. She is relatively new to the company. She is not new to the space. And I think she's going to be just an absolute asset to our organization and to the e-Staff as a whole, helping us think through the full transformation of these corporate-wide initiatives. And some of them will be our go-to-market. Some could be as we think about how to -- our product organization.

So a lot of these are underway already, but she would manage them.

But you got to think about all the different touch points and make sure that we just tie it off. And there's a number of initiatives I'd love to say, but I can't tell you all of them right now. But suffice it to say, there's 3 to 5 that I think are going to be really important and she will take on that responsibility, yet working with the different functional groups inside the company. It's not like she just does in isolation, she has to just to do the work to make sure the knots are tied.

Great. Maybe we can pull back to the demand side of the environment. You had a great bookings year and finished strong on your backlog stronger. Your guidance for the top line is very healthy. So help us understand the -- what you see for '22 on the demand side and where were the big strong regions? Who are the strong customers and verticals, et cetera?

Sure. well, let me start off by '21, talk about that and say, I don't think '22 is going to be any different than '21. The pipeline remains strong. But what was very special about 2021 was it wasn't -- it was across the Board. You first have to look at sort of the growth opportunity that was there. And that opportunity exists in all 3 regions. So our gross booking activity was an all-time record. And when we were at Analyst Day in June of last year, we didn't see all the stuff that we ultimately saw. And so seeing that momentum was just phenomenal. But it also came from net pricing actions. I always said that -- at least in Analyst Day, I said net pricing actions as a percentage of our gross bookings will be about 6%. It was about 8%. So that's a positive. And then churn. So you have activity, good pricing, lower churn and then you have this digital services offering that we're delivering to our customers that differentiates us from everybody else. It's the combination of all those things, I think, brings it into 2022. And when we look across all 3 regions and all the verticals in which we service, it's more about a broader statement that the digital transformation is here, it exists today in front of us. And yes, there's going to be some potential challenges coming out of the geopolitics that we see today, the challenges of inflation in supply chain and all those things. But I think if you step back and just look at fundamentally what's driving our business is enterprise is moving at a speed that -- at a speed faster than we probably would have anticipated and that we're the net recipient of a lot of that opportunity. And that's what's exciting about what we see in '22 and the depth of the pipeline. And it positions us very well because growing the top line 9% to 10%, people say, well, did you get that through price? The answer is no, we actually got it through volume. Volume because you just have to look at the Americas business that grew 10%, which is effectively double of what we grew the year before. And it's the U.S. business. The price increases took place in Singapore and a bit in Europe. But it was really the fundamental just growth activity in the Americas region that made a big difference. And as we look into '22, Asia will grow the fastest, and then Europe and Americas will grow roughly at the same rate, so high single digits.

Great. And how much of that is coming from your existing customers versus new customers? I mean, you mentioned the churn. It seems like you've got a very loyal customer base and your global scale is unmatched.

Well, 90% plus of all of our incremental activity comes from the installed base and probably not a surprise to many. We're doing a real good job in our channel. That represents about 40% of our bookings and about 60% of our new logos if my memory serves. And so when you get that new logo, they have a higher propensity to buy. So you win that deal plus all the other the momentum coming from our base, it's 90% or greater. And that's what, again, is one of the real values of our model. Once you win a customer, they generally grow with you not only in the environment that they're in, but they buy new services, they go to new markets, go to different regions of the world, and it becomes a very global opportunity for us. And I also say, we're just different. We're different than the most. And that's why even in the Americas where is the most competitive market and maybe the most -- and the most mature market, we're winning more than our fair share of the business because we've positioned ourselves. We not only have the assets available, we have the interconnection, that footprint and the ability to connect all the assets together, we're offering services that others aren't. And it's the combination of all of those things have made a difference. And I would also say we have really good leadership in Jon Lin and Arquelle Shaw and many others who are running the Americas business. They've just done a phenomenal job, and hence why Jon is taking over the global mandate.

Great. You've seen a lot of industry consolidation certainly over the years, but it seems like '21 was bringing it to a new level, and a lot of that went to private equity, American Tower buying CoreSite. Have you seen any change in the competitive landscape? Are they using the more capital coming in? Or is it all fairly [ the same ]?

Yes. I wouldn't say -- look, I haven't seen any meaningful shift. I still think it has to -- deals have to close and the like, and they have to be fully funded. I think it presents an interesting set of circumstances for us. And as I said to our global sales team in January at a global sales kickoff, albeit it was virtual, it wasn't live like this one. And although we had wished that was live, I think is very unique when you look at the sponsors of those acquisitions and you look at the price that they pay for those assets, and when you think about how we're investing in things that they don't invest in today, our whole investment in the digital side of the equation and the growth into emerging markets and the like. So you've got these acquisitions that paid full value, you got a rising interest rate environment. I think it presents a scenario where you've got theoretical competitors that will not be able to invest as heavily as we will. And I think competitively, we're going to have to keep prices high, if not higher. They won't be able to invest in the cost side of the equation like we have. And I think that puts us in a better position. And I've said it and I've said it to many of the people in this room over the last few hours. Our balance sheet is going to make a difference as well. We have, as of last night, over $1.7 billion of cash. We have -- we're on a run rate to do $2.6 billion, $2.7 billion of AFFO. We have $4 billion of liquidity. We've a leverage capacity of 1 churn at least. So all of a sudden, you look at our liquidity and our strategic position, I think we're going to be in a really good spot this year. And as others start to think a bit what does it mean to fund these deals and my cost is going up, and I'm hard for charging over my cost of capital, we don't do that. And so I think we're in a really good spot, Simon.

You had mentioned the supply chain. Any big changes in bookings to billings that the kind of the cash conversion cycle, either from equipment not being available or permitting or zoning or other?

Let me start off, there's 2 sides. On the input side, we -- our DSOs dropped 5 days in the fourth quarter, which was phenomenal. We think the number -- our revenues grew about $600 million last year, and our AR grew $5 million or thereabout. And so there's a lot of cash in the system right now. So that's a positive. When I think about the supply side and the cost going out, we have -- we've invested heavily in professional procurement team run by a lady called [indiscernible]. And she and her team have done a phenomenal job of taking us to the next level. And so the commitments we're making to our suppliers and our vendors and our partners and the like, we are getting ahead of a lot of the issues in the supply chain. I want to maybe park a little bit this whole issue and the geopolitical issue with Russia and Ukraine because I'm not sure how that will present itself. But as it relates to current market conditions, I think we don't see any significant delays. We've got 41 projects underway, 9 of them are xScale. We're very, very active in our growth. And the delays in our projects are generally minimal. And if anything, it's not because of supply, it's because of human labor. Some markets were closed down last year because of the Omicron variant of the virus. But it wasn't that we couldn't get supply, we couldn't get human capital. And so I think we've really put ourselves in a good position. And not only do we have the cash in the ready position to invest but we think we've developed really strong relationships across a number of our partner basis.

Great. I mean you mentioned xScale. And I think it's a really interesting structure the way you've designed it and you signed a lot of these partnerships over time. We heard downstairs, Microsoft, Alphabet, talking about the huge cloud opportunity they still see ahead of them. But I think for investors, we want to understand how it flows through to your income statement. And it sounds like over the kind of longer-term period, there's some pretty nice growth at the back end. But how do we -- how does that express itself in '22?

Yes. Well, first and foremost, I think it will express itself in more fees and more revenues. And so that will -- that number will continue to move up. Think of it as representing somewhere between 1% and 2% of our revenues. Last year, it was roughly 1% of our revenues for rough math. We're starting to see it accelerate. The core business, we've sold a substantial amount of the inventory that we've built, probably to a surprise to many of our theoretical competitors in that space. We've got a great leadership team with Krupal running it and his team. We're active. We've got 9 projects, as I said. We've sold over 130 megawatts. We're building in all 3 regions of the world and it's proving itself out. So as we fast forward -- at Analyst Day, I said, look, I think we can do $1 billion of revenue in the JV by 2025. Now we'll get our fair share of that, our pro rata share. So #1, you'll see, I think, revenues continue to grow and then flatten out because the nonrecurring will be replaced by the recurring. And then what you'll see is that we will find ways to drive value. And one of the other ways that will drive value is there's development fees, there's asset fees, as you know, there's sales and marketing ops fees. But eventually, we'll find ways to monetize that probably for our partner. And if we do it right, there'll be promotes on the backside of that. And so I think it creates a real opportunity. I said 3% to 5% accretion to our AFFO per share, I still believe that. And if not, it could potentially be larger than that because we're at $8 billion already, well ahead of what we said 2 analyst days ago, and there's still great momentum in the business. So I think it's going to represent, again, roughly 2 -- I think it could be 2 -- roughly 2% of our revenues, maybe a little bit higher than that, 3% to 5% accretion though to the AFFO on a per share basis. But I think that the real value is, it's a tighter relationship with many of these customers, these large hyperscalers. And so whether it's the Alphabets or the Microsofts or Amazons and others, they are looking for third party -- they're looking for partners, and we're one of those partners. And we can be -- we are deemed a very important component of -- we can help them with their needs and some of the others as well. There's 12 hyperscalers. And presumably, over some period of time, those 12 hyperscalers will be displaced or not even -- will be added to them would be probably another 5 to 10 other customers that we would sell basically this solution set to. So I think the opportunity in front of us is pretty substantial.

If we look at 5 or 10 years, do you think the structure is the same? Or is there some longer-term...

Yes. I think, look, you've recently heard us announce a deal with PGIM in Australia, a new deal with GIC in Korea. They're not going to be in the -- they will not hold that position forever, I assume. They're awesome partners to have. But as we think about it, we want to be in a position of still managing the property, enjoying the fee structure. I guess there's a scenario that one day, we could buy it ourselves. But you just have to play it out and see does it make sense. And right now, it feels like it's the right structure for us, use our balance sheet to its fullest potential, invest in the things that really will drive value. And this is really important. But I think the real thing is to keep the powder dry in the balance sheet, so you can invest in all the things that are retail and digitally focused.

That's a great segue. You talked about the J-curve and digital services. So just to expand, you've got bare metal, you've got a number of other initiatives. And I think sometimes the R&D that you're doing, the innovation investment is something that it's -- your -- you could have -- I think you've said before, your margins could be much higher today if you wanted to, but then you'd be taking it from the future. But how do you think about '22 as a sort of a transition year on some of that stuff?

I actually do think about it as a transition year. Charles said yesterday at another event, and I certainly would say today that we still feel very confident of 50% EBITDA margins by 2025. And I think it comes from recognizing the investments we've been making and where we are in the J-curve, we're going to start to see the benefits attached to the metal investment. I think xScale will continue to grow and scale as well. But you'll also get the -- we've been making these efficiency investments for 2, 3 years now. And we have other things in mind as we look into '23, '24 and '25 that will allow us, we have a plan that will get us to that target. But we also have wind at our back coming from revenues growing faster than we anticipated, at least from relative to the Analyst Day guide. So there's a number of things knowing that we are at the -- we're coming out of the J-curve. I think we're going to get the growth we want in the products and the digital services in the xScale. And we're also going to start to reap the benefits of the investments in the SG&A line. And it's the combination of those 2 and put aside revenue just for a moment because that's just added a benefit to this. I just think it puts us in a great position to drive more efficiency into the business.

Great. You talked about the margin guide. I think you'd called out Singapore power cost has been one of the headwinds. But EMEA is about 32% of your revenues, I think, and we've had another spike in energy prices. So just remind us of your hedging status here and what the impact of what we've seen so far might be?

Yes, sure. I'll come back to Singapore, if I may. As I think about Europe, we're predominantly hedged regulated markets, unregulated markets. We made our commitments, no meaningful -- again, there's no meaningful shift in our thinking relative to the guide that we gave you in February. Now having said that, as hedges could roll off and if costs go up, then we and everybody else will deal with the consequences of that. That's part of the inflationary pressures that we're going to see as an organization and as a society. So we'll deal with that. In a regulated market, everybody is going to feel it. And so pricing will be -- will reflect that. And again, we will therefore exacerbate inflation because we will churn around and charge that to our customers. So I'm not overly concerned on a prospective basis at Europe at this point. And so -- and I don't know where prices will ultimately go or settle, but suffice it to say we're positioned well enough that I think that we'll address any price increases in that market. As it relates to Singapore, I think it's aberrational. It's a transitory issue. We hated having to talk about on the earnings call. The one thing that we had more momentum on the top line and the business is performing well, and we had to come out and say, we have a net $55 million impact coming from Singapore. $90 million of incremental costs offset by $35 million of revenue. You say, wow, that's a pretty big impact. 130 basis points to our margin. And so when you look at that is a -- one, how do we get there? And is it going to abate? Well, #1, we got there because we made a decision not to transact, you had one option to transact, and we delayed that decision because the markets were showing -- they weren't showing signs of what we would expect to transact at. And then the market broke, and so that was unfortunate. So what's going to happen is that $55 million, either the costs are going to rise and everybody is going to feel that. And then we're going to pass that incremental $55 million on or the costs are going to come back down, and we're going to enjoy the margin by taking that cost out of our P&L. But suffice it to say, in either case, the Singapore matter, it is transitory. One way or another, our margin -- we will recover the margin that we lost over the first half of this year and maybe for the entire year from Singapore because we'll sort that out. And the market is shifting. We're making some other decisions in Singapore. The market is broken, 25%...

The power market.

The power market. Historically, Power runs around 11% of our revenues. Singapore is 25% right now. It's the highest market that we have, multiples are higher than in a number of markets. And it tells you that it's fundamentally broken because how can their price points be so different than all these other developed markets. So that's one. The second thing I would tell you is that we're going to transact and try and smoothen out over an extended period of time. We don't want to strike right now because the market is 400% to 500% what we're paying last year. It's just -- and I just -- I don't want to transact at that level. And so yes, we've got to take some short-term pain. Some of it will be passed on to our customers because others are feeling it. But we're at a competitive disadvantage. We are at a price point where others have already transacted and so they can sell that capacity to their customers. We don't want to burn our customers with things with that price point relative to what our peers were doing. And so we said -- we felt that it was something that we needed to eat in 2022, unfortunately.

Can we talk about CapEx for a minute? You talked about the strong revenue trends, the strong booking trends, the outlook. And yet, the CapEx guidance is towards the lower end of your longer-term range. So what's the kind of bridge there?

CapEx, we have 41 projects underway right now over, I think, it's roughly 28 markets in 18, 19 countries. So we're active. But a lot of it is timing and size of builds and some of it we've got off balance sheet. I can't remember the number, but it was probably I think looking -- roughly $400 million on balance sheet for Mexico last year, $400 million, $500 million. This year, it's going to be about $100 million. So that's part of it. And the rest is just timing. Fundamentally, the business is performing well. We're creating inventory capacity. Some markets are constrained. I think you're aware, there've been a moratorium in Singapore for some period of time. So that limited our ability to build in Singapore, and it's a very attractive market for us. That moratorium has since been lifted partially not wholly, I think partially, and so we'll continue to build in that market. So there's nothing fundamental.

So the long-term range is still intact?

No, it's fully intact.

You talked about your strong liquidity balance sheet. How do you see the M&A market for Equinix?

Well, we got one deal that we're closing, which we're really excited about, which is MainOne. And that will close in first half of the second quarter, I believe. That's what I think we're planning on anyway. And we remain active. We're looking at things.

New markets?

New markets. Charles and I and others who have been speaking about it, it's no surprise that we want to be in South Africa. We're going to get to South Africa. We're going to invest more in India. We want to be in South America, bigger or deeper into South America. We want to get into Southeast Asia. And Karl, who -- he's our Chief Revenue Officer, along with Jon Lin, who's got the global lead for data centers now, those guys are looking at where do we continue to grow in scale. And I think part of our growth is going to come from a geographical distribution and investment in different markets. Some of it will be organic, but certainly some of it will be inorganic. And I think it's the combination of the 2 that will make that difference. And that's growth that we haven't baked into our plan.

There's not that many sort of pan regional kind of plays out there anymore, so it's probably going to be more singles and doubles. Is that fair?

Yes, that's right. That's a fair statement.

Great. And I think one of the -- 5G has been very topical here, the edge has come up a lot. What are your latest thoughts on where the edge is and how Equinix fits into that?

Well, the aggregated edge is inside Equinix, right? It's the far edge that isn't, and that's something I've said for a couple of years anyway that I'm not sure that's a place where we want to go break or pick. I think that's an area that doesn't feel yet that there is a viable and scalable opportunity at the far edge. And anything that does eventually create or find itself to exist, then of course, we'll look at it. But right now, we want to invest at the core. The core edge, aggregated edge is inside Equinix. And I can't think of a better example right now is Ashburn. The most mature data center-centric market in the world, and we continue to invest -- we just keep on adding a new building. We're in DC21 right, yes, DC21. And yes, we have all this competition around us. And we just meter in our retail business. We're not in the business of competing against all those other players. But what we can do is meter in our retail and all of that aggregates into us. And that's really about what our business is. We feel we're the aggregated edge. Everybody who builds out there is going to aggregate into us anyway, generally yes. I mean there's other players who have some good assets as well. And so that's the game that we'll play. So it's not a big investment. I just don't think you'll see us play in far edge anytime soon.

You will see the demand from the edge use cases coming to edge.

Yes, I just don't think there's that many viable use cases. So certainly, yes.

So to that, we've seen a rise in the kind of converged communications infrastructure platforms. We've got Crown Castle here next with the fiber and the small cells and the towers. DigitalBridge has been doing a lot and American Tower now. So how does Equinix think about either working with those companies in partnerships or expanding outside of the core data center business?

I think you said it well, and I think there's opportunities potentially for partnerships. It's just finding the right partner to continue to allow our business to perform the way it should perform and certainly add value to whatever partnership would exist. But right now, look, we're very comfortable continuing to do what we do and we have -- there's a long road of opportunity ahead of us. And personally, I don't think that we need to be overly aggressive in that area at this stage.

Great. Thank you so much for your time today.

Thank you very much. Thank you so much.