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

I'm Jon Atkin. I cover the data center sector at RBC. And with us for the next 30 minutes of Q&A and fireside is Keith Taylor, Chief Financial Officer. Welcome, Keith.

Thank you very much. It's nice to be here.

So I guess maybe just a quick 2 -- couple of minute preamble in terms of milestones that you have kind of set forth for this year and trends that you've seen so far in 2022 operationally, financially and then we can kind of get into more detail from there.

Sure. We let me start off as I'm sure it's not lost on you, Jon and many of you in the room coming into the new year that we had a lot of momentum in the business. Then Q1 happened, turned out to be our best quarter in our history and all things important. And so there's real momentum in the business. It's an element of not just -- it's not in any one specific market. It's across our 3 regions. Our xScale business continues to perform well as well. Capital, the capital plan and the business is performing well. We're still going after the same returns. Our appetite for growth is constant. We're still looking for 20% to 30% unlevered returns depending on the markets that we serve. We're building in 43 markets as I speak, around 20 different -- sorry, 43 projects or around 28 markets in 19 countries. So we are investing fairly heavily in the business. Our cash flow continues to -- continue to generate a lot of it. The fundamentals are strong. There're certainly a few aberrations out there that we'll deal with, and we'll talk about I'm sure today. But overall, I would say the business is performing at an all-time high. And I think that's reflective of broader market conditions around all things digital. But I do recognize that there's some volatility out there. So happy to have to spend some time elaborating further. So...

Yes. Maybe just talk about top line trends in terms of just the classic cabinets and cross-connect business, you've been seeing record bookings. What is driving that different than say a year ago? And does it feel sustainable to you over multiple quarters, multiple years or difficult to judge?

I think as you extend further out is obviously, it's more -- it's harder to judge, but it does feel like all things digital intersect with companies like Equinix. And that feels good. I would say, when you look at the top line in and of itself, it -- we're enjoying growth across all 3 regions. Asia is growing 13%, Americas is growing 10% and Europe is growing 9%. And that's a function of a number of things. #1, right, I think we have the right assets in the right markets. I think we're selling the right services. We've got great price points. We have less churn, and then we have digital services that are adding to the equation, which is, I think, going to be a substantial differentiator versus many others in our space. And so we're investing heavily around that. And so it's a combination of diversity across markets, across regions, but certainly across customers. And again, I would just go back to, it feels good that there's a very robust market out there. As I said, we had our best quarter ever by a long shot. Our pipeline is strong. That's our sixth straight quarter in the Americas that we broke our record. But what I really was impressed by was the Americas business and the U.S. specifically growing greater than 10%. And that feels different for a lot of reasons because, one, it's the largest business, it's the most mature business, but it's also suffered through churn for many years with the Verizon acquisition. So we're in a better spot and then just the acquisitions that are adding to our value, the Bell Canada transaction in Canada, Mexico with the Axtel acquisition just feels that we're making the right investment decisions, and therefore, driving the overall growth rate up in the Americas.

So some of the growth is benefiting from pricing. As you pointed out, price increases is sort of the -- something that a lot of companies are driving through at this point for various macro-related reasons. And so how do we think about your ability to push price? Does it look different in Europe versus APAC versus the U.S. Is it a multiyear project? Is it kind of something that you do in more of an episodic basis, give us a little bit of a sense of the cadence there?

Well, I think we all are feeling inflation. We feel that every time we go to the store and buy something or go to the gas pump, just our employees that overall, you feel there's a rising cost environment. We haven't forced much of that thinking into our forward guide yet. But our view is, certainly, again, it will be market specific and let me explain that in a moment. But I think the opportunity for Equinix to continue to push price where we need to, we'll -- is there. I think there's just an opportunity. And why I say it's going to be different by market, think about Brazil, which is a more inflationary environment. There's more structural implications with what you do in Brazil than you wouldn't, say, other markets. And so you get the benefit of a high interest rate, stronger economy, so you got a good currency picture, but you also get price increases. And so you've got an improving currency with price increases that are just formulaic. And that holds true on the cost side as well. So you're getting the benefit on both sides, but certainly on the top line. And then there's other markets where it's just more structural, whether it's an RPI in Europe, whether it's CPI in the U.S., our net pricing actions are just -- they're continuing to perform at or better than we anticipated. And that's before we go in and think about inflation -- like meaningful inflationary adjustments. Because, traditionally, what we would do is we would negotiate with a customer. A lot of times, you'd take a customer to whatever the prevailing price point is. And then you negotiate for the next 3 years that you can put an escalator on top of that. And what you hear me say on a very regular basis, and I think, I've been at this for a long time that, there's probably very few quarters and, certainly over the last 10 years, where I've said that net pricing actions are neutral, they're always positive. And it's a reflection that our price increases are more than offsetting our price decreases, and that's structurally different than so many of the hyperscalers or the sort of the more wholesale-oriented sellers, where they've got these gap downs. And we -- because with smaller deal sizes, shorter contract terms, you've got a much more durable and thriving market. And so our return profiles are different, but the way that we can monetize it through increases is different as well. And so that's about 6% of our gross bookings. So if we -- let's just use a hypothetical number, we booked $100 million of gross activity and that's on an MRR basis, you would get $6 million a year just in net pricing actions. And that adds a $70 million a year of profitability to offset some of the inflationary impact, and yet I'm still not dealing with that inflationary question, which is I think that can be on top of in many markets, no matter what region you're in.

So energy costs kind of top of mind, you hedge this year. Singapore is a topic of consideration, 7% of revenues, but part of the reason why your margins are kind of seeing the trend that you guided towards this year. Update us on power prices in Singapore? How that's been trending since earnings relative to your expectations? How it compares to, say, a year ago?

Well, Singapore is an important market for us. I mean, no surprise, we've been quite open about it. It was a market where we -- it's not like you're going and hedging a position, you're going to go contract at a certain price point and protect your forward view on price. We selectively chose not to contract because spot pricing broke through some thresholds that we were looking at and just didn't make sense to lock in for a year. And Singapore, the uniqueness of that market is you had one shot at contracting your load -- your full load, and we chose not to contract. Our competitors did, through different times in the year. And so we became competitively price disadvantaged in the situation. And so we are absorbing about $55 million of net impact to our margins this year. And the reason that we couldn't pass all of it on was largely because our competitors are [ having ] -- they're at a different price point. And so what you've heard us say, both in -- on the earnings calls and in the investment meetings is that either the market is going to move back to where we are -- we will move back to where the market is or the market will be moving to us. But in both circumstances, we will get $55 million back in the next iteration of our plan. And so there's been no meaningful shift. I would say, for the first quarter alone, we did better than we guided to originally. That was because consumption was lower and pricing on an average basis was lower than we anticipated. As we look to the second quarter, again, there's no meaningful shifts. What I would tell you though is Q2 theoretically is more expensive than Q1, but that was factored into our model. And then for the latter part of the year, part of -- a good portion of it is hedged. But the rest were just going to let float because entering into these longer-term contracts with the existing service providers just doesn't make sense. And we're already picking around the edges for 2023. And I think -- again, I'm speaking specifically of Singapore, I think, we'll be in a much different position by the time we give guidance for 2023 as it relates to the Singapore market. Generally speaking about power costs, though, depending on which market you're in. In some cases, we're in great shape, in other cases, where it's regulated, prices are moving up. We're going to have to figure out how to affect that with our price points with our customers just like all of our peers will. So I'm not particularly concerned about any other markets, but pricing is moving up for sure. And so you've got to adjust accordingly to reflect that.

Just on Singapore, a different topic, but the moratorium have seen a gradual lifting, 60 megawatts is going to be approved for development by year-end. How do you see yourself participating in that? What's a plausible outcome for you and the industry overall in terms of how open Singapore becomes to new developments, either by hyperscalers or like data center companies?

Yes. Well, Jon, it's right and in the end it's one of our best markets, it's 7% of our revenues or thereabout. It happens to be a central point of production out of our Asian business. We really like it, but it's limited, and is limited because they don't have, if you will, the infrastructure to support just unabated load. And so they're being much more discriminate about what they're going to do on a go-forward basis. Again, it's a -- it's sort of a city state as we -- as many or not all of you know, and it's very limited in its land ownership, if you will. And so you've got to be selective in what you do. So I think what the government is going to look at is, where are those providers who is creating value for the broader digital solution? So if you just say I'm coming in, I'm going to use all 60 megawatts. I'm going to fill it up with xScale or a hyperscaler, I'm not sure that's going to -- I don't believe that's going to work out. But if you can deliver digital value to the broader Singaporean economy and you can be sustainably focused, I think you have a better shot at winning part of that allocation. And so there will be the haves and there'll be the have nots. I'm a firm believer that we will be one of the halves for a lot of reasons, largely because we have a very broad sustainability initiative across all of our markets on a global basis, but particularly in Singapore. And then, secondly, we're basically the cross session of all things as digital, and that's exactly what the Singaporean government wants. And it just feels like we're in a better spot. And it doesn't hurt that we're very close -- we work closely with EDB, GIC certainly is our partner in the xScale initiative, and just I feel that we're just well positioned as a company.

So given rising interest rates, any thought about prefunding some of your developments? You've planned things in a lot of markets and maybe getting more active on developing your inventory given what's happening on the financing side.

I want to make sure I understand the question on prefunding though, when you say prefunding?

Getting more -- using available capital now to deploy ahead of -- yes?

Well, look, we've got -- we're deploying a lot of capital. Certainly, outside the hyperscalers, I think more capital than anybody else in the space and beyond. So it feels like we're being appropriately disciplined about allocating the capital across multiple markets. Again, I talked about the diversity of our decision-making is across different countries and different markets, but certainly different customer sets. And I feel, as a company, spending upwards close to $3 billion this year, but the commitment to spend $2 billion to $3 billion over the next 2 to 3 years or at least through 2025, that feels like it's an appropriate use of capital. Particularly with the returns we're getting, and most of what we do is self-funded. Remember, Equinix, we carry a lot more cash than anybody else. We're only levered 3.8x. We generate -- this year, we'll generate $2.7 billion, $2.8 billion of AFFO. We can pull and push on that lever to determine exactly what our capital needs are. So we have a tremendous amount of flexibility. And so when you take the AFFO, the payout ratio is only 42%. And so that means 58% of all the cash that we earn gets to go back into the business on an unabated basis. Now the thing -- I guess the wildcard for everybody is the acquisitions. And so we recently closed on 2 acquisitions, one in Africa, one in Chile and Peru, and that was a fair bit of capital. And we'll continue to look at those type of acquisitions, in those other markets in the world that we're interested in. But if you put that aside, I feel really good about our capital position, the cash that we generate and being able to effectively self-fund our business is when we throw in the acquisitions is that you'll see us go to market, raise debt, raise -- do some ATM activity with our equity, do forward contracts with our equity, and that's something that we'll continue to do quite aggressively. But right now, we've got $2 billion of cash. And, again, this is $2 million of cash on our balance sheet as of this week. We have tremendous amount of flexibility, and that feels like we're in a pretty darn good spot relative to anybody. And if I was going to raise capital, just to give you a sense, I certainly spoke to some investors about it last week. We're going to go to places like Japan or Europe. And we get -- we can enjoy the arbitrage of depending on where we're going to deploy our capital. When you think about value at risk on a currency basis, those are markets that we would absolutely want to raise more debt. And whether we have to cross it back into dollar to fund or leave it in Europe or leave it in Japan, but that's going to be a really cheap source of capital for us relative to what we borrow at in the U.S. And so I feel pretty good about that opportunity. Again -- and we have the flexibility from the rating agencies. They've given us more latitude. They've upgraded us. We're 2 notches into investment grade. I'm not sure we need to, at this point, the differentiation between notching up 1 more time. I'm not sure it adds a lot of value. It actually increases the level of restrictive -- the restrictions that they would place on us, and we like the flexibility of operating in this investment-grade environment and it allows us to access capital -- or to access capital very differently than all other -- many others. And that's good when you're in the investment-grade space.

So that answers my next question. Maybe just talk about sustainable green financing, and how that kind of fits into the capital stack?

Well, all things green are important. Our customers, they care. Our customers care and part of their -- where are their infrastructure, where are their critical partner, so they're going to force green into our thinking. We're already there anyway. We're going to be a leader in the pack. We've committed to climate neutrality by 2030. We're committed to 100% renewability. We're at 94% despite the level of growth you see in the business. So we're continuing to invest in all things green, but it's just so exciting to think about all the things that we're doing as a company to position us better within the competitive landscape to win more of that business. And I think sustainability or the greenification of our offering makes a big difference. So we recently did a bond, as many of you know, in April. We did -- raised another $1.2 billion. We did a number of things that I think are really worth noting. First and foremost, we put in basic treasury locks well before anybody was even thinking about what the next step was. So our T locks were -- in the treasury, we locked in at [ 1.48% ] $800 million of that funding. And so you all know where treasury is wet. And then we also -- we then selected the exact timing on the spreads, the credit spreads relative to where the markets were. And we did that deal at 335 for 10 years. So 335 basis points for 10 years, that felt really good. Number two, we greenified them. So we did a green bond. That took us up to $4.9 billion in green bonds, we get 5 to 7 basis points of betterment on your rate. So it helps. But what really helps is the ability to share that with the public markets because then they know you're going to take all those resources and you're going to put into green-oriented projects. And so that becomes self-perpetuating. And the customers go, oh, look, they've done more green bonds, they're going to find ways to enhance or greenify their infrastructure. So all things green are really important to us. Katrina Rymill, who runs Treasury, IR and sustainability now, she is just highly focused on. And I think we're making -- we're going to make a huge difference. And let me tell you just a couple of anecdotes. I was just in Paris, and we're building substantially in the Paris market, but we're taking our Paris 10 asset and the heat that generates, instead of just letting it dissipate into the air, we're pumping it over to the Olympics site, and we're going to heat the swimming pool for the 2024 Olympics as an example. And that said, we do that to communities as well, where communities are looking for sources of energy, and they don't have to pay for. We generate the energy inside the environment, and then we actually provide it to schools or municipalities and the like. Or if you look at the facades and many of our assets now, they're going -- they'll have green facades that blends into the community. These are just small examples of things that we're doing to make a difference, and it makes a difference when we get permitting or you're looking for that advantage to get support by the local governments to build in that environment. So all things green are really working well for us as a company. And I think that's why our pipeline is so rich right now.

If there's any audience questions, raise your hand, and I'll call on you. I've got a couple more from my end. I'm just interested in EBITDA margins as we look past this year. If you do have a very active development program that entails expansion drag, and then we have some variability around energy costs, which could also have an impact. So what -- how do you kind of think about margins being flattish? Or are you extremely confident for an improvement next year? What's the view?

You're setting me up well there, Jon. Margins, that is the one area that we are focused on. We're still committed to 50% EBITDA margins. I think the power issue is more substantial this year than we anticipated for obvious reasons, and therefore, we adjusted our margin profile, but still committed to delivering the cash on a cash on a per share basis. And in fact, our commitment to deliver 7% to 10% AFFO per share growth through 2025 continues to hold true. If you actually adjust it for something that we didn't see coming on Singapore, basically, you would have been at the high end of our guidance range of closer to 10%. So I feel very good that we can deliver the value and the value on a per share basis, which is really important, is what the investor is looking for. That's coming a little more from growth. So we're getting more growth on the top line. And then you -- unfortunately, you've got these costs that are coming through. And as a result, when we pass on that cost, we're not getting the margins. So we're diluting our margins, but we're getting the cash flow. And that's -- going back to my earlier comment, Singapore in of itself, let's just say it's a $50 million problem for us. When we solve that problem, as I said, that market moves to us or we move to the market at the end of the year, $50 million on $90 million, it's going to give you 2 growth points on your AFFO per share, in and of itself. And that's the kind of thing that I'm just really confident that we can deliver value on a per share basis as a company. But yes, I'm still really focused on margin. So I want to see our margin move up. But within the current confined of where power costs are going, I just -- it's hard to commit to anything right now other than we're committed to the 50%, and we're driving more and more efficiency into our business every single quarter. And I'm excited about the projects that we've launched to drive more efficiency. And I think you're going to see that over the coming quarters, you'll see us continue to message out how we're driving cost down on a per unit basis.

And given what we're -- we've kind of held off on -- or started off with kind of strong demand in terms of unit growth as well as PIs, low double-digit revenue growth. Is that something that you think is sustainable over the medium term?

I didn't answer that question earlier on or did I? I think that, look, we're going to go relative to the Analyst Day guide. We said 7% to 9% topline growth. Obviously, we like to where -- I always think of as middle or better on our guide. That's how I think about the business. I see, for the foreseeable future, that we can continue to enjoy outsized growth relative to your expectations in that 7% to 9%.

Audience questions. Thoughts on the Australian market was the question.

Yes, Gary. Look, we're very excited about the Australian market for obvious reasons. We bought Metronode a few years back, it has been a great sort of adjunct to our business. It brought us to new markets. It brought us to -- access to the Australian government. Access to our customer set is very different. So we're building across a number of different markets, including Perth, Sydney, Melbourne, to mention 3 there, off the top anyway. And let me give you a perspective why I think that I'm still very excited about the Australian market. If I take the most dense market in the world, which is Washington, D.C., we are building our Ashburn 21 asset. We're filling them up. We're not going after hyperscale, and we're being very selective about the customers that go into these assets. That's exactly what we're doing, Gary, in Australia. We have some hyperscale through the xScale initiative. That's a different business unit. But as it relates to the traditional business, which I think most of you are concerned about, we're just going to be very disciplined, right customer, right application and the right asset and with the right price points. And Australia is a great market for that, particularly as you start to worry about what do we do in China? If market -- if you got a market that's sold out for all intents and purposes in Singapore, and yes, we'll get more capacity, but where are you going to put that capacity? And so the natural place is well, we can do in Tokyo, but Tokyo is a tough market to build in. It's restrictive. So you start to think about the Australian market, other markets in Southeast Asia. And so, again, I remain highly optimistic that we can fill up that capacity and continue to invest heavily in Australia.

You mentioned xScale a couple of times. We haven't really addressed it head on, but you do have a fair amount of development underway, clear demand pipeline, but not always with a precommit. What's the velocity of that project, including maybe going into North America? Is CapEx going to be increasing each year or kind of held -- holding it at a steady pace when it comes to hyperscalers?

XScale is doing extremely well. When we first sort of launched xScale in June 2018, we talked about a $5 billion plus initiative. Now we're talking about a $10 billion initiative. We've got 9 projects currently underway across a number of markets in Europe and Asia. And North America will be selectively chosen. There are some things that we are considering. I think if you look at North and South America, I think there's opportunity certainly in Brazil, Mexico and potentially other markets. But again, xScale, we're going to be very disciplined and discrete about our decisions. So we have pipeline. We have inventory that we're selling. It comes in lumps. It generally, in some cases, can be whole building sales, so you're selling the whole building to somebody. So as you're negotiating through that, it's not -- we do 4,000 transactions a quarter with our -- with 3,000 customers in the retail space. In this case, you're dealing with a handful of customers, and we're very, very selective in what we and they do. And so it tends to come in fits and starts, but we have 9 projects currently underway. I'm optimistic that you'll hear in the not-too-distant future about some of the deals that we've signed, or that we're in the process of signing. And I just think we're making great headway with the xScale business. But for a reminder for everybody else that might not be fully aware of xScale. It is our hyperscale initiative. It's our answer to the strategic value that we can create by engaging with the hyperscalers in a way that would be gravitational or strategic to our existing assets. But I've always said, it's only going to be 1% to 2% of our revenues at Equinix. It is only going to be 3% to 5% accretion to our AFFO. And yes, maybe if we hyperextended and move it up a little bit, but it's never going to be a huge piece of our business. That will be a monetization event eventually, whether it's with our partner or whether we choose to do something, and so we'll be wise about that. And so you can get a nice return, but it's not going to move the needle for our business because the core business is just so substantial. What I'm more excited about is they've digital services. That could be a needle mover. That could really be an accelerant to our growth, an accelerant to our cash flow, and also it would be a higher attach rate with our customers and arguably it could drive churn down as an overall further opportunity.

So on that, Fiber Connect, I think, is a relatively new leased dark fiber products. Correct me if I'm wrong, but I think it's fairly new, but what does that solve for? What are you seeing in terms of take-up trends? You're doing that in collaboration with other companies?

Yes. Well, Fiber Connect, in the end, what I really would like you to focus on more is metal, fabric and edge. Because Fiber Connect is, think of it as just an extension of an intercampus cross connect. Yes, it matters. And they're important, but it's not a needle mover. Where we'll move the needles is certainly with fabric, which we're already doing as an organization. We're basically extending the platform through the connection of the Equinix Fabric. It's basically like a mesh, and it allows companies to globalize very, very quickly. So that's important, but this metal opportunity, which is really providing the customer the flexibility to not deploy their own capital and use Equinix as means to deliver their infrastructure around the world. And so that's really -- that's more exciting. And then, of course, there's Network Edge, which really is the diversification of assets or available services on a consumptive basis. All of those things are going to drive up our ARPU, drive up the cash flow on a per unit basis, is going to create more stickiness. And I think it can drive top line meaningfully. We want to double the size of our business. And I think digital services at least has the potential to do that if we get it right.

So the red light is blinking, last question then, just Equinix and kind of advancing structure. You mentioned potential monetization pads for your JV partners on the last earnings call. What forms might that take? And is there any sort of a promoter benefit to Equinix on the tail end of that type of event?

Well, look, the answer is eventually all assets that they already have the capability to be monetized. And for those who don't know, we're a 20% owner inside the xScale venture. And so eventually, our partners are going to want to monetize in some form or fashion. And now the way that can happen is we can buy, why not, if it makes sense. We can sell it to an infrastructure fund or we can take it public in different markets. And so I think there's those opportunities. And there is not only the monetization, so to the extent that we would sell down our assets, which I'm not convinced we would. But if we did, then we would recover some of that cash that we've invested. But alternatively, if our partner sells down at different thresholds, there's a large promote. And so that promote would accrete to the benefit of our shareholders. And so that's what I'm excited about. So we get different fee structures, as you all know, that there's development fees and then there's the promote. And so xScale in and of itself is delivering a really strong return to the company. And I'm really excited about it. But just it's not big enough perhaps to move the needle substantially, but it certainly can move the needle in a very positive way.

Great. Unless there's any burning questions, I think we are out of time. Thanks very much.

Thanks, Jon. And Thanks, everybody.