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

Hi. My name is Richard Choe, and I cover data centers for JPMorgan as part of the communications infrastructure team. I'd like to welcome Charles Meyers, President and CEO of Equinix. Thank you for being here.

Good to see you.

Good to see you in person.

Always good to see you.

Just wanted to start off. Equinix is seeing some strong secular trends from colocation and interconnection on a global basis. Can you provide us with a quick update of what you're seeing from customers?

Sure. You bet. Before I do that, I will stay on Katrina's good side and read this 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 yes, I think the demand backdrop for our business is as strong as I've ever seen it. The commitment of customers to digital transformation and the sort of frenzy of digital service providers looking to support them in that transformation, I think, is as strong as it has ever been. And I think that runs the gamut of people thinking about how to distribute their infrastructure, adopting -- cloud adoption, both public and private and hybrid, I think application modernization, WAN rearchitecture, big data, AI, all those factors affecting how people are thinking about running their business in an increasingly digitally centric world is just a really compelling backdrop. I think we talked about that on our Q1 call. And I think the results of the business and the strong performance really reflect that.

Great. And something we talked about last night at dinner was how companies are both creating, storing and, more importantly, analyzing data now. What are they doing? And how does Equinix benefit in helping them do this?

Yes. I mean they're doing a range of things, but I think how people -- the mindset that people have about data and its importance to their ability to compete effectively and not only drive sort of how they manage their business and -- but how they drive top line revenue and all those things is clearly changing. And I think, therefore, how they think about where they want to place data, how they want to act on that data, how they want to distribute data, how they want to ingress data that they need to develop insights and how they egress insights once they have them is clearly shaping how people are thinking about their infrastructure, how they use clouds, when they want to use clouds, when they don't. And all that is something that we are very deeply involved with them day to day. And our solution architects are on the ground, helping them think through that every day.

Great. And it seems like there are different drivers of this, both with the big cloud providers, but it seems like there's a lot of new innovating cloud providers. Kind of where do you see that shifts kind of going forward? And how much our company is quick to adopt these new companies?

Well, I think both of those things are going to continue to be strong vectors of growth, right? In other words, the cloud providers, and clearly, the people think about the sort of the shortlist of AWS, Microsoft, Google, IBM, Oracle, Alibaba, et cetera, I think that those cloud providers are going to continue to see -- and their results indicate they're going to continue to see tremendous momentum in their business. But there is also this really broad range of service providers delivering their services in an as-a-service sort of realm and motion that I think is continuing to be an increasing part of how people think about digital infrastructure. And so -- and we -- so you really almost have sort of one big cloud, which is the public cloud, if you will, and how people think about that in IaaS and PaaS and all that. You have the as-a-service cloud, which is exploding with new players; and the large existing players, whether that be sales force or Workday. But now companies who, in a short period of time, have now become equally sort of large and compelling companies like ServiceNow and then a very rapidly growing set of players, whether that be Zscaler or Cloudflare, all of this just a huge amount of energy and investment going into delivering as-a-service value propositions. And then the enterprise, intersecting that with their own private cloud requirements and ambitions. And all of those things coming together and then the space in between those clouds, the inter-cloud, if you will, the interstitial space is a unique spot that Equinix can help people navigate.

Great. And it seems like these implementations are long-term plans, but I guess what we've seen more recently in the economic and, I guess, energy environment, some volatility and pressures. One, can you go through -- are you seeing pressure from customers given the increased power costs? Are they changing where they might deploy? And how are you managing this both for yourself and for customers?

Sure. Well, let me touch first on the sort of broader macro backdrop and how it impacts -- how it is or isn't impacting customer thinking. We actually had a partner forum last week and did those regionally, and I was on all of them, and we had an industry analyst there talking about current mindset of their sort of surveyed CIOs and infrastructure buyers and said that -- some huge percentage of them said that they had anxiety about the macro environment in various ways. And yet 75% or 80% of them said that they expected to increase their IT expenditures and their spending on digital infrastructure. And so I think that they -- that's just a reflection of people saying, we -- this is something we have to be doing. And that is showing up in not only how our customers are talking to us but, more importantly, in our pipeline. And you saw the Q1 results, we talked about the pipeline, the health of the pipeline. And so I think the macro environment is, although something very top of mind for people, not influencing their underlying buying. So cutting to the more specific question you had, which is energy and is that impacting how people think about it. I think the reality is, not really. I think it is clearly something people are aware of. They are seeing increased energy costs in all aspects of the business, whether that's energy associated with digital infrastructure or energy more broadly, I guess, depending on what segment or vertical they might be in. But -- so it's an area of conversation, but I think that we actually, in most markets around the world, are in a position where, because of the effectiveness of our hedging program, we've been able to probably deliver a realized rate to our customers that is below the spot rate. And I think we'll continue to be in that position. And so while they might not like the fact that they're seeing that rise, it's actually not out of sync at all, maybe even better than what they're seeing from a spot rate perspective. And so I think they see it as a part of a broader inflationary trend and something that is on their mind. But as you've seen in our earnings calls across the world and across every vertical and sector, people are just adjusting to that with pricing where they have the power to do so.

Got it. I'd like to come back to the pipeline and bookings in a second, but just to finish off the, I guess, energy portion, you've continued to improve your PUEs at your data center. Something we talked about last night is the innovation that you've kind of led and some of the newer data centers. Can you talk a little bit about your focus on improving the energy efficiency of your data centers?

Well, that's always been a focus in part because it's -- the economics are incredibly compelling. So we actually have a certain slice of our capital every year that goes towards energy efficiency projects, and they have amongst the strongest cash-on-cash returns of any projects we do. And so there's just a basic self-motivation, self-interest in doing those things. And we've actually meaningfully improved our PUEs across our platform as a result of those projects. There's also a sustainability lens on that. And so -- and that is even further fueling that sort of focus on that. And I would say the sustainability is very top of mind for customers right now. And so they want to understand what you're doing, what PUE you're going to deliver at and then also how you're -- because, in many cases, we are that customer's sort of supply chain when it comes to energy and sustainability. And so they are really turning to us saying, "You've got this covered, right?" And so our investments in sustainability, which Katrina for the -- and I know many of you interact with her on a regular basis, is really a driving force for that inside of our business and how we're thinking about renewable energy and achieving the pretty aggressive climate-neutral goals that we put out there is definitely a continued area of focus for us.

And you talked about the signings last quarter, 4,200 deals, 3,100 customers. And it seems like as part of this digital transformation, you're seeing both bigger deals in more markets. Can you talk a little bit about how long do you think this will last and how the pipeline has changed maybe over the past few years?

Yes, I don't think we're seeing bigger deals necessarily. We're seeing a really nice spectrum of deal sizes. We've actually probably reduced our level of large footprint activity in our retail business because we've shunted some of that off to xScale. I think people are well aware that we -- in terms of these very large hyperscale-type deals that are -- hyperscale type but specifically for hyperscalers that used to candidly be a strain in terms of how to figure out how to accommodate those requirements, we've been, at least from the AZs, sort of large-scale AZ deployments have really shifted that to xScale. So as a result, in our retail business -- and one of the reasons, Rich, that we talk about those numbers in our earnings, is just to give people -- give them a reflection or some insight into the scope and scale and distribution of our revenue streams and our bookings. And so 3,100 different customers, we have the luxury, if you will, of a really widely distributed revenue base and not a lot of concentration, either revenue -- concentration either from a geography or a customer standpoint. And so I think it just speaks to the health of the business. We've seen really good momentum in terms of the sweet spot of our business, which are those sort of small to midsize, heavily interconnected ecosystem-centric deals, and the pipeline is super strong in that. Not that we -- and we do some larger deals, but those larger deals stay in that sweet spot in terms of more -- because we're just not really -- we're not focusing on these more commodity-type nondifferentiated footprints because, candidly, we see those as the likelihood that those kinds of workloads go to the public cloud over time anyway is very high. And so it's never been a -- it's not a particular area of focus for us.

And I think you've talked about how a lot of your growth has been driven by the expansion of cabinets and footprints. But I guess with power costs and more scarcity of your -- and value you provide, you might see more of a pricing lever than just the quantity lever. Can you talk a little bit about the 2 different, I guess, buckets, maybe, one, the price increases because of energy but then also maybe the rack rate?

Sure. yes. We talked a little bit about this after the Q1 call, which was I think some level of concern that the strength in our revenue -- in our top line growth, which obviously, we guided up again on revenue and actually over the top end of the guidance range that we had provided at our Analyst Day just last summer and which I think is a kind of a reflection of the health of the business. But there was a concern of, oh, is that driven by more sort of trends around price increases and pass-throughs associated with power, it was actually very little of that. It really is a reflection of the very strong unit growth in the business and the bookings performance of the business. And so I think that's definitely what we're seeing. And that said, I think we are going to be facing an environment -- or are facing it now where the good news is that our -- because of our hedging, we have a lot of runway to start to adjust into the increasing rates on energy, and we will see some of that level. So I think there's going to be some pricing elevation associated with that. But we're also looking at, I think, which is the more important part of the pricing equation, which is just a continued strong, differentiated compelling value proposition that we believe we can price at a premium. And if you look at our success in passing through our interconnection pricing increases in Europe, that's a real strong reflection. We did that over the last couple of years well before sort of the market started to inflate on a broader basis, and we saw great success with that. So I think you will see some level of a pricing lever for us. But I think you'll see it matched up with strong unit growth. And as a result, the PxQ, I think, will continue to be very compelling for us.

Great. And in the Americas business, it's continued to remain strong. And after kind of having a little bit of a slower period, what markets are doing well in the Americas? I think you called out both Northern Virginia a little bit, and Canada is going a little bit better. Where are you seeing strength in the Americas?

Well, I will -- we are delighted with the performance of the Americas business over the last several years, right? I mean for those of you that have followed the story for a long time, I think there was a period of time post the Verizon acquisition, where we said we needed to kind of work through assimilating those resources, Equinizing them, sort of focusing on probably a slightly different mix of commercial business that went into that. As a result, we knew and expected that we would see some level of churn, which was elevated. But as we're now through the back end of that, I think we're seeing not just the Verizon assets, which are performing well, but the broader portfolio in the Americas just continuing to deliver exceptional results. Double-digit growth from our largest market in the world is, obviously, a very compelling sort of contributor to our business. And I think the sales execution has been extraordinary there. And in terms of markets, it operates a little bit like many other markets around the world. And I would say, even in the U.S. in particular, I realized that the Americas also includes our Brazilian business, our Canadian business, Mexico, et cetera. But the U.S., which is the big chunk of it, has very distinct traffic patterns. And they are -- and therefore, a lot of our business and a lot of our capital flowing into the business has come from these major markets, whether that be Northern Virginia, New York, New Jersey, Chicago, Dallas, Silicon Valley. And we still see great strength there. And so we have very highly predictable fill rates. A lot of our capital continues to go into those markets, yet we're also seeing good performance from slightly smaller markets like Denver, Seattle, Atlanta, and so really good -- and this has been the story of it, Rich. We talked about the fact that we saw such uniform health in the business geographically -- in all 3 of our regions. In fact, Europe, we might be talking about this next, but strong performance there. But Americas definitely has delivered exceptional results over the last year.

Great. And move to Europe in a second, but something that I think you get asked often is, is there a second tier emerging in data centers in North America? And you mentioned Denver. But it seems like that market hasn't developed as quickly or as broadly as some might think. What are your current thoughts on that?

Yes, I think that's right. We had a little bit of a discussion about that at dinner last night. And that was that I do think that there is some momentum in terms of secondary markets, if you will, playing a role. I think it's driven -- to some degree, that's influenced by how cloud providers are also thinking about their infrastructure. And so I think there's -- we're seeing some of that, but it's not taking shape in a way that, that becomes, I think, a critical step for us to be in a bunch more markets because we found that, generally, the footprint that we currently enjoy really meets the needs from an application, modernization, latency performance, economics for our customers. And so we're going to be really in tune with their thinking. I think there are certain markets that are starting to emerge for a variety of reasons that we'll keep our eyes on. We talked a little bit about Columbus yesterday, which is the hyperscalers have made investments there. And I think that starts to -- I think you sort of look at traffic patterns and flows and make sure that you're on top of that. But I think, right now, our footprint seems to really deliver for our customers what they need. And as a result, we've seen pretty uniform performance across it.

You have a pretty broad footprint in Europe, and there's a lot of geopolitical and economic turmoil going on there. So it seems like you're well positioned to adjust demand. Can you talk a little bit about how your footprint and your scale globally has helped the company kind of manage through a very difficult probably operating environment?

Sure. Yes. I mean I think the strength of our pan-European footprint has really allowed us to capture meaningful share. Obviously, from the time when we bought Telecity a number of years ago to now, we've actually continued to gain share in that market. We've also continued to add new markets in Europe and so feel incredibly good about our overall competitive position in Europe. And that business has continued to grow nicely, really strong Q1 from that business. And it is still heavily oriented still towards what we refer to as the flat markets, Frankfurt, London, Amsterdam and Paris. And they are major contributors and similar to what I just described in the U.S. probably the primary place that we're allocating capital. But our GEMs markets, our global -- our growth and emerging markets, opportunities outside of those flat markets, actually are overindexing from a growth perspective, admittedly on a smaller base. But we've seen -- we've added more talent into that mix in terms of sales leadership, and those markets continue to perform well, too. So I think we're seeing good strength. We really -- and you do have a few dynamics in Europe. Data sovereignty is increasingly important there, and so people want to place infrastructure in country in many cases. And so I think our broader footprint has served us very well there.

And given your kind of global scale, there's probably been some operational issues in terms of supply chain and cost to build. How are -- how is Equinix managing those costs and you're still able to let you execute whereas I think a lot of smaller companies might run into difficulty, especially on a global or even local basis? Like how have you, I guess, shifted or reacted to changes?

Yes. One, I mean, I think a lot of credit goes to the team. I think they've navigated the situation exceptionally well, and I think we will continue to put real energy and effort into making sure that we can do so going forward. I would say that I think we were fortunate in that we were -- at least had the foresight of investing in our supply chain and procurement teams pretty significantly over the last few years, well in advance of a more sort of acute disruption of supply chains around the world. And so luckily, we had the resources in place, but we have not seen a lot of impact from it. We have -- and what we have done, as you described, is we've leveraged our scale. We're putting our -- we're leveraging the strength of our balance sheet. We tend to be -- particularly as it relates to procurement of goods that are inherent or that are required for us to put data centers in service, we tend to be at the high end of the market there in terms of one of the larger buyers. And so that, combined with our willingness to go to those suppliers and say, "We'll forward commit, we'll use the strength of our balance sheet to ensure -- to get surety of supply," that has worked well. We've actually increased the number of financial commitments we've made there to ensure supply. We've been inventorying more goods where that's necessary. And then, lastly, the scope of our build program also allows us a level of flexibility to move things around and adapt that I think is quite differentiated. So we're 43 projects across the world, and we can literally -- most of our projects are done with common infrastructure components. And so if we need to move them around to adapt, we can. And it all comes back -- if you look at it and you say, "Okay, well, that's great," then what are you -- what results are you seeing? And I think the really incredibly good news for us is on our build programs, we are less than a couple of weeks on average behind in any kind of delivery dates and so -- which is fairly immaterial in the grand scheme of things. And so we've been able to deliver on time and generally on budget. And they're -- and so as a result, we haven't seen impacts, but that doesn't mean that it's sort of in the same way as the duck floating on the water, there's a lot of paddling going on underneath the surface.

Makes sense. And then it feels like this reliability and consistency to deliver has kind of helped you win business but also maintained it. Churn came in at 1.8% last quarter, kind of lower than your 2 to 5 -- 2.5% guide. Where do you see that going forward? And what has helped you lower that churn from the higher end?

Yes. And again, I think for those who have followed the story for a long time, this is not something that is -- this is literally -- I think these are results that come from a very disciplined and dedicated commitment to our strategy over time. So we've really worked hard over the last decade to say we play a particular role. We think we're differentiated in delivering certain value proposition to our customers. We have to focus on workloads where we maintain that differentiation. And we believe if we do that well, we will: one, continue to have pricing power; and two, we will reduce churn. And both of those things have come to bear. And so if you look at a 10-quarter trend on our churn, even though it always is a little bit up and down in any given quarter, that trend line is down. And that is because we've just been able to execute on the strategy and be disciplined about right customers, right workloads and the right assets. And I think that strategy has worked exceptionally well. So I think that we need to -- one of the questions I get is, "Well, you're now actually below the bottom end of your guided range, is that the right guided range?" Fair question. I think we have to come back and sort of think about what that range might look like over time. As we've said, there can be a little bit of volatility in any given quarter but we certainly feel very good about where the trajectory of churn.

Earlier, we talked about the traffic between data centers and metros that is indicative of also, I guess, amount of data and traffic flowing across data centers. But also within your data center, you see a lot of traffic, and I think you're seeing more of it. I think when you introduce virtual cross-connects, people are worried about that business model versus your traditional one. Can you talk a little bit about how that has evolved and the incremental service that you're providing customers?

Sure. I think one thing we provide -- every year, we do this global interconnection index. And one of the things that talks about in that is current trends on interconnection in terms of how much traffic exchange is happening inside the data center versus between, whether ours or across the broader ecosystem of data centers. And it is in-data center exchange of traffic is growing at a dramatically accelerated rate relative to inter-data center traffic. And the reason is both performance and economics. And so people are distributing infrastructure and they get better performance and they get better economics by exchanging traffic inside the data center. And whether that's on a layer 1 cross-connect or on -- or at layers 2 and 3 on exchanges or on fabric, that same dynamic applies. And so as a result, we've really seen strong uptake. Equinix Fabric is now 30%-plus penetrated across our customer base. They are continuing to actually add higher speed ports because they're seeing the benefit of that. And so I expect that to continue to be a strong trend. And the discussion we had a lot was, "Hey, our virtual cross-connects substitute or will they cannibalize the physical cross-connect business?" That's really not the way it works. Actually, we're very familiar with how this business works. If you look at our Internet Exchange, for example, people join the exchange. They then have free ability to exchange traffic with everybody else on the exchange then they watch traffic patterns and the volume and the predictability of that. And when they see highly -- high levels of traffic between 2 parties, they strip that off and they provision a cross-connect between those 2, and they dramatically reduce their unit cost. It works generally the same way with fabric. They open a fabric port. They then provision capacity between themselves and the other members of the ecosystem they want to exchange traffic with or move workloads or data. And then as it becomes predictable, they strip that off onto physical cross-connects. So both our physical cross-connect business and our virtual cross-connect business or virtual interconnection, both exchange ports and fabric VCs have been -- it's been a rising tide lifting all boats for sure, and it's working exactly as we would have expected.

And I think another, I guess, incremental service that you're looking forward to deploying more broadly is Metal, and that's become more important. And it seems like customers, maybe because of the supply chain constraints or their architectures, are looking to kind of leverage your ability to secure this processing and storage power, how much of a commitment have you made to Metal? And then what does that offer customers?

Well, we made a meaningful commitment. Obviously, the acquisition of Packet a number of years ago was a pretty substantial investment for us. And so we -- and that business has done well. I think we really believe we were getting a number of things there: one, a set of talent that we could use towards really accelerating our digital services, and we've been -- had great success in retaining that talent. Two, a business and sort of a hardware automation and bare metal business that we think really serves a particular need for the customer that wants private infrastructure with proximity to the cloud and wants to purchase that in a more real-time on-demand way. And so I definitely think we're seeing strong demand for that. We've deployed capacity around the world and are seeing good uptake on that. And I think that's going to continue to be -- in that business -- in fact, the broader set of digital services is growing at a multiple of the rate of the more traditional colo business, and I expect that to persist for an extended period of time.

Last 2 quick questions and cover. One, your M&A has been mostly expanding in new geographies recently, both in Africa and Latin America. Have those markets developed faster than you expected or kind of on pace? And are there more markets that you're looking at?

Yes. Those are -- all of the acquisitions that we've done over the last, I'll call it, 12 to 18 months have all outperformed their underwriting, in some cases, quite dramatically. And so we feel very good about the trajectory of those things. You're right, I think our M&A has been a bit more focused on geographic extension of the platform into markets that we feel are strategically important and in demand by our customers. And so we did GPX a while back in India, a very critical market for us. We rapidly sold what the capacity they had in Mumbai available and immediately started building another facility and now have bought land in Chennai. And so we believe there's a significant growth opportunity there. Then we did the Axtel deal in Mexico. We did the Canadian deal and then now -- and then MainOne in Nigeria and then also -- and so -- which is really a key entry point in Africa and then the recent deals in Latin America, in Chile and Peru in Intel. And so I think they've all performed very well. We've -- a number of these -- we really know how to do that well now. We integrate them on to the platform, bring that -- quickly bring demand to them from our broader sales force. And so I think that's going to continue to be an area of opportunity for us. And we'll be disciplined and appropriate. But I think the extension through M&A will continue to be a lever that we pull.

In the underwriting, are you looking for that to reach a 1-year outlook or 2-year outlook? Or how far...

Yes. I mean I think we're well ahead of our underwriting in terms of what we had thought. And you've seen this in the past, actually, our ability -- and we've been fortunate even in markets where we're in -- transactions where we paid a bit of a premium from a multiple perspective, we've quickly kind of bought that down -- earned that down, I guess, is a better -- to very attractive levels. And so -- and then on the ones where you both got a great entry point and earned it down, Verizon, Bell Canada, those -- I think those have been just home run transactions for us. So I think we're -- I think we're really comfortable with how we're underwriting those businesses, really comfortable with how we're executing on them. And I do think that it's going to continue -- it's a volatile market right now and multiples haven't necessarily recalibrated significantly. So we're going to keep our eye on that, but -- and be disciplined. But I expect we'll continue to be active.

And final question. In terms of margins, it seems like you're investing a lot for growth and supporting growth but there's been some -- between cost pressures, some issues on the margins. But you focus more on the AFFO per share growth. Can you talk a little bit about how you manage the revenue versus the margin versus the AFFO?

Yes. I mean, look, we continue to have a real focus on margin expansion as a priority for the business. And I think that we still believe that, as I said on the call, that margin expansion and the eventual achievement of the 50% is still a target that we are committed to and driving towards. We're adding a lot of revenue on the top line every year, so call it $600 million or $700 million of revenue on to the top line. And so we should be achieving operating leverage, and we have a focus on ensuring we're bending the cost curve in that. But then there's other areas of reinvestment in the business. And as we've always said, our focus is on long-term value creation, and that primarily is in the form of AFFO per share growth. And so that's really our lighthouse metric. I do think that we're going to continue to focus on operating leverage but we're always going to balance that with reinvestment in the business. So I think as we get through this year and go into '23, we'll be able to provide a greater reflection on what that looks like. But operating leverage and top line growth translating to AFFO per share is what we're really focused on.

Great. I think we're out of time. Thank you.

All right. Thanks, everybody.