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

All right. I guess we'll go ahead and get started here. Welcome, everybody. This is the Equinix presentation. My name is David Guarino. I'm a senior analyst at Green Street. I cover the digital real estate sectors. And with me today is John Knuff from Equinix. I'm going to read your title here. John is the VP of Global Ecosystems and General Manager, Global Financial Services. That sounds right?

You got it right.

All right. For a real estate crowd, that's a mouthful, let's be honest. So I'm going to say that you are the guy responsible for building and overseeing one of Equinix's largest and most successful data center clusters right here in the New York, New Jersey Metro area. Is that a fine title to give you?

Yes. I participated in it, but I wasn't really...

Fair enough. Okay. And then we also have Katie Morgan over here, who runs the IR department at Equinix.

Not quite. I'm the IR manager. They have a great team, but thank you and thank you for having us today. And just a fun housekeeping item, some of what we may talk about today may include forward-looking statements, so please check our SEC filings for those.

Excellent. Well, welcome, guys. Yes, it's good to be back at Nareit in person. It's nice, we got a full crowd here. Although I will say one of the things I do not miss about Nareit is the elevator rides. Just getting up to the fifth floor just a minute ago from a meeting took me longer than I thought, so unfortunately...

I want to transport us, John, back into one of those elevators. So let's pretend we've got 2 minutes to get one floor, I think that's the average time at the Hilton here. Give me the pitch in 2 minutes of who Equinix is, what they do and if there's only one REIT I want to own, why should it be Equinix?

So I think what's unique to Equinix is not only do we run high-quality facilities with very high levels of uptime in the data center space, but my team specifically, we try to build a community in those data centers. So we're really at the intersection of new technology trends and real estate. So to the effect of diversifying your REIT portfolio, if you're betting on digital trends, you're betting on maybe people -- more people working from home, the kind of increase in electronic trading in the capital markets in my area, we're a very safe bet in that regard. And I think with the communities that we build, we continue to build value in our sites and it makes it more and more important to be there if you're a market participant.

Fair enough. And then why we should own your stock? Is it because there's unlimited upside? Is that what you said? Did I guess it right?

Not quite. I'll kick John and the table.

Not quite. That's not part of the SEC requirement, all right. Let's go back to the start of Equinix. I think when I'm trying to explain the company to investors, sometimes it's hard for people to wrap their mind around just data centers in general and Equinix and what they've kind of built to understand the portfolio. So could you maybe take us back in time, give us just a brief history of the company, how did Equinix start? And what role do they play in helping to grow the global Internet?

Yes. I think back in 1998, Internet service providers and content providers had a difficult time finding a neutral meeting place to interconnect. And a lot of the data centers were operated by telcos or by the content companies. And so you could essentially wall off some of the competitive telco providers. Some of the content providers wouldn't go out and attract some of their competition. So one of the most important things about Equinix is our neutrality and the fact that we can go out and attract many, many networks. And there's a high level of interdependence. Networks have to connect to other networks and also content providers need to use many, many networks. And there's actually kind of a chain of information that flows from content providers. And to make that information and data richer, there has to be more and more of those providers. So building a broad ecosystem was always in Equinix' DNA. So it started with Internet service providers and content, then more of the classic telco providers came in. We've really started to focus on electronic trading and capital markets in 2007, and they rely heavily on network and telco providers in the data center. Next came cloud. And a lot of the enterprise growth -- enterprise data centers don't really have the presence of cloud service providers and cloud service gateways inside their data centers nor do they have a mix of telcos so you can get diversity and redundancy in the telco space. So what we find is this ecosystem development is additive. You start with Internet service providers, go to telcos, go to clouds, then we start to bring industries together in communities, and it just becomes richer and richer and the story becomes more and more compelling over time for customers.

That's interesting. So you don't really mention real estate at all in kind of the history lesson. It's more we're trying to bring together customers and it started off with network. So would it be fair to say that Equinix never really started off to become a real estate company? You really started to become a more of a networking company, but over time you turned what were once office and industrial buildings into what's now become an asset class people can invest in.

Sounds good. I'd say we really view ourselves as the intersection of technology and real estate. So absolutely across our global portfolio, our real estate underpins our data center portfolio, which is really the bedrock of Platform Equinix. And then on top of that real estate portfolio is the platform and the interconnections and the ecosystem that John was just talking about that add on to the overall platform for our customers.

Okay. So are you guys a real estate company or a technology company then?

It's at the intersection of technology and real estate.

A tech company and a REIT [ rafter ], is that a fair way to put it? Fair enough. All right. So one of the things I think makes your portfolio unique and unlike a lot of traditional property types is in addition to charging rent for space, right, like any commercial property type, you also have other services you can add on. So power you charge for, that's part of your profit story. But there are also all these other services that you can add on to boost NOI over time. So maybe talk us through what does a typical tenant lease look like? And what are some of those additional services they can add on outside of just leasing a small portion of data center space?

Want to take that one?

Yes, I can start and then feel free to add on.

Okay. Okay.

So traditionally, over our 20-year history, our customers have really consumed our value proposition on a physical basis. They've called up Equinix and say, hey, I'd like some space and power in XYZ metro. They shift their gear to their facilities. Our facilities, they rack and stack and then they're off to the races. But now with some of our newer offerings within digital infrastructure services, we're giving the customers the ability to do what they've traditionally done with us on a physical basis but on a virtual basis. So customers can really kind of create a virtualized deployment. So starting with Equinix Fabric, we virtualized our interconnection offerings, so customers now have the ability to directly connect with a physical cross-connect or can also leverage Equinix Fabric to connect across our portfolio. Next came Network Edge, which is virtualizing that networking function for customers. And then lastly would be Equinix Metal, which really, for those who are not as quite tech-savvy in the room, it's really like automated colocation where we have servers predeployed in 19 metros around the world and customers can spin them up quickly for themselves and have an instance and a virtualized appointment without having to shift gear to a metro that may not be part of their current deployment. So leveraging Equinix Metal, Fabric and Network Edge customers can really kind of create a virtualized deployment for themselves. And as the world's digital infrastructure provider, we're really focused on giving our customers those building blocks to architect the infrastructure, the way they would like to.

Yes. If you think about barriers to entry in entering a new market, if you're a financial services firm, it's typically 3 to 6 months to negotiate a contract with a telco provider and you usually need 2 and you need specialists in that new region. And then it takes 12 weeks to turn up the circuits. With our Fabric offering, you can literally go on to a portal and turn up a connection in a few minutes. And so we've tried to eliminate that barrier to entry in some of the new markets, and we're seeing a pretty high uptake in those products offering. So Katie mentioned Equinix Metal, which is essentially a server that we've already installed in a site. You can spin those up at will in 54 different markets around the world. We have Fabric for connectivity. In financial services, we have offerings like Precision Time. So if you need to get time services to those systems, we have Edge with virtual network offerings. If you need a firewall or a router, those can be turned up virtually as well. So the goal is that you start to eliminate all of those barriers to entry and make it very easy to go into a new market or a new city.

And these aren't one-time costs, right? These are ongoing monthly parts of the bill. Is that correct?

Right. Without the capital outlay. And if you don't have technical staff -- I just worked with a European market maker. They turned up circuits, and they're using some of our virtual services to get to Singapore. They don't have technical staff in Singapore. And so we do all that management for them, so we make it very turnkey for a firm to do business in a market like that.

Okay. So if I'm just trying to think through, I'm going to simplify this the best I can and help me out here. I'm going to a restaurant, right, and I've got the whole menu of options. My rent and my power, that's kind of like my main entree, right? That's the most expensive part of my lease contract. I'm paying on a monthly basis. But then I can add on all these different components, Fabric, Network Edge, bare metal services. And that's kind of like, I wanted a drink or I wanted a dessert or an appetizer, right? I mean I get to pick and choose these. I guess, does -- first, is that a fair way to think about it?

I think that's a fair way to think about it. Really, when you think about the value proposition that we deliver to customers, it really starts to multiply for customers when they have increased interconnection needs. So maybe they'll start on the platform, maybe have 1 -- connecting to 1 partner provider, but then over time, have the ability to discover more partners and providers that they would like to connect to and have the ability to really kind of discover and expand within the platform.

Okay. And I know all these additional services, a lot of your competitors also offer these, but they typically utilize third-party providers to do it, whereas Equinix tends to build all these offerings out in-house or acquire companies and bring them in-house. What's the rationale for that and not relying on a third party to do this for you?

Good question. I can start, then John can add.

Go ahead, yes.

I'll just say it really gives us the flexibility to design in the way that we would like to. So with Fabric, that was one that we built in-house and gives us flexibility in adding new feature sets for customers and gives us a good perspective as well as something like Equinix Metal where that's we actually parlay. We acquired a company called Packet back in 2020, and we merged that with our own organic efforts on bare metal to launch Equinix Metal, so giving us the flexibility to build that in-house.

Yes. Companies that have use, as an example, Fabric, we had a trading firm that trades currencies in Singapore and Tokyo and they were using Fabric as a tertiary connection. There was an undersea issue, seismic issue where their cables got cut, their undersea cables. And since Fabric was diverse, we're able to procure that through the telco companies, but we use diversity. And typically, we're using brand-new infrastructure that may not be used by the legacy telco providers. So I think the time we take and the diligence we put into sourcing that has payback companies. And like I said, it's very easy to turn that up via the portal.

Got it. And you talked about fabric a lot, so just sort of clear, so the simple interconnection, I think most people understand that, right? It's you're connecting 2 computers in a data center through just a fiber optic cable. But Fabric is more you're connecting data centers across different markets, different continents through -- is it fiber arrangements that Equinix has secured and now you're selling that as a product offering to your point?

Correct. Yes, and we make it easier to procure.

Okay. Makes sense. So one of the things I want to touch on, you've got over 10,000 customers. I think that's correct. And we always get this question of, well, why does someone choose Equinix versus another competitor? And I know you can give me the easy answer of, "Well, we're just better," but I'm not going to let you give me that answer. So help me understand why does someone pick Equinix versus all the other colocation providers that are out there?

Yes. I think there's different priorities in firms, but typically the top priorities are they have to be well connected. So there has to be density of telco provider, especially the area where I focus in the global capital markets. You have to connect Tokyo to London to Frankfurt and they need to triangulate across all these markets, so telco is very important. We have very high uptake in cloud connectivity right now. And I think the financial markets are adopting cloud infrastructure and hybrid multi-cloud faster than any other industry. It was slow to start, but now the uptake is very strong. So the presence of cloud is the next thing that you can't really replicate in your own data center or a lot of our competitors can't replicate that. Third is the industry ecosystems. I'm one of 39 people that are focused in the business development area trying to build industry density. And so the fact that a brand-new exchange can move into our Secaucus campus and immediately be surrounded by hundreds of trading firms is a big game-changer. And it really accelerates time to revenue for a brand new upstart exchange. We've seen that in the past. So ecosystem is third. And then I think another big element that we add is sustainability. We have an entire team that sources renewable power. We're constantly engineering and improving our data centers. And if you're a large financial enterprise and you're looking at syncing $50 million in your own data center and you're trying to be green, that's really, really difficult without a big team, especially in a remote market. So I think those kind of all add up to our differential. And I'm seeing each of those elements be stronger in the decision matrix of a lot of these firms. So as I said, the value of our sites tends to go up.

That makes sense. And you mentioned this word, it might be new for some people. So you give us an elementary answer here. Hybrid multi-cloud, right? So if I have data center needs, I could build the data center myself. She said it's very capital-intensive. I could use a cloud provider, which I'm just going to pay rent to. So is hybrid and multi-cloud, is that in the middle? And help -- walk me through how someone would actually utilize that structure.

Yes. So a good story. I had -- I did a tour with an analyst 6 months ago. And a major American bank just announced that they were going all in, in the cloud. And they asked, and I won't say the name of this financial firm, but they said, "Did you know this company just announced they're going all in, in the cloud?" And literally downstairs was the deployment for that company. And so what happens is companies don't use a cloud, they use multiple clouds. And typically, a financial firm is using Google and they're using Amazon, they're using Microsoft, they're using Oracle. So multi-cloud just means you can have access to all the major cloud providers. Some of the infrastructures needs to be private, it needs to be in-house. Especially in financial services, the security officers won't allow certain types of data to be in the public cloud. And so hybrid multi-cloud means you can have private cloud infrastructure that you own and control as well as connect to multiple cloud providers in a site. So I don't know if that helps or made it worse, David.

No, I think that's helpful. I think the challenging part is there's no one-size-fits-all answer for a typical tenant you have. Everyone has different needs, and it sounds like you guys are trying to cater to all those. So maybe talking about the portfolio a bit. So you've got 250 data centers, 30 countries, 6 continents. Why haven't you added the seventh continent? All right, you don't have to answer that one. There might not be any fiber running to it. When we go to one of your data centers across anywhere in the world, do they all look and feel the same? And maybe talk to me, what's the benefit of having a global portfolio?

Do you want to start and I'll...

Sure. Happy to start. So yes, when you go into any of our facilities around the world, in our we're in 248 facilities around the world in 70 metros, the look, the brand, the feel, feels exactly the same. And that gives great familiarity for like the technology teams on the ground. So if you are a customer and your teams are moving between, like, New York and London, they're going to be familiar with the setup of our data centers and can expect a similar level of service around the globe. And we are increasingly seeing customers looking to work with that one trusted provider around the world. As a customer, if you can pick up the phone and have that one provider that you can work with across many different markets, that makes their life easier because digital transformation, by no means, is easy. So it gives customers really great flexibility in working with that one trusted partner provider.

Definitely. Would you think it's fair to say that data centers are the one commercial property type where it actually makes sense to have a global scale?

Yes. I think uniformity is very important to our customers. So they know that the sites are going to be high quality. Sometimes when we do an acquisition, we put a lot of capital into upgrading the site. And then operationally, we take our global experience in operating the data centers and we share that in some of the new sites as well. So I think financial services, especially they need very high levels of uptime and they need to know that you have the same operating procedures in a new market that you do in one of the 20-year-old markets.

Okay.

And I would just add on, even when you look at our revenue profile, we see that our global footprint is important to our customers. So 63% of our recurring revenue comes from customers deployed with us across all 3 regions and about 89% of our revenue comes from customers that are multi-metro with us.

Okay. So if I do my math right, that 6,000 of your customers are across all 3 regions. So that's multiple continents is what you're saying essentially.

On a revenue basis.

On a revenue basis, yes. Yes, definitely a pretty compelling case. So we talked a little bit about what makes the data centers valuable. And you talked about -- you keep talking about ecosystem and platform and the global platform is worth value. But if we separated one data center, let's say Equinix sold a data center to myself and now I own it and Equinix vacates that property, is that real estate worth less because Equinix is no longer present? Or can I go in and replicate that same value that Equinix did?

I would say it's a combination of both. The real estate is -- underpinning our portfolio is absolutely valuable, but it's also being part of the broader ecosystem, and that gives comfort to our customers that knowing that we're going to be the long-term operator of those facilities. So when they see us at renewal, they're going to see Equinix again at renewal. And we really view our portfolio with some of the services that we've talked about like Fabric and such, that gives us the ability to connect really across our portfolio. To your second question, someone could come stay at a facility up next to us, but you have to migrate the entire ecosystem of 10,000-plus customers out of Platform Equinix.

So you're telling me I should keep my day job? All right. But before people get too excited about your business, we talked about a lot of the positive things. Let's talk about some of the harder parts. So lease terms are pretty short in the colocation business, right? A few years. You've got this kind of revolving door of constant turnover just by nature of many tenants and smaller contracts. You also have a pretty high G&A load relative to a lot of other commercial property types because you've got a big sales team to sell this, what's an operating intense business. We'll call it what it is. So given the high cost to acquire tenants, can you about how sticky they are? Once you get them in the door, is it -- you got to go back and find somebody new? Or do they tend to stay around for a while?

We really see -- take a long-term lens in our customer relationships and have that long-term viewpoint. We'll occasionally lose customers to -- it's part of our churn metric of when there's M&A or they had talked about synergies as well as and sometimes in cases of financial distress. But really, the bigger part of our churn is what we call frictional churn, which is moves, adds, changes or deletes, so customers are always re-architecting what they're doing. So maybe they're pulling something at one metro but deploying with us in another metro. And that just reflects how our ecosystems are constantly evolving. But really taking that long-term lens on our customer relationships.

Yes. My team, imagine someone signs a 1-year contract and they're a trading firm and they're connecting to 5 upstream vendors and they've got 10 counterparties that they're connecting with. They have a 1-year contract, but it's very unlikely that they're going to pull that infrastructure out of our data center after 1 year, because I've got 15 critical connections and they've started to see the benefit of a deployment within a community or within an ecosystem.

Got it. And you guys, in a way, you have a direct lens in terms of how sticky that tenant might be based on what they've deployed and that kind of helps you, I guess, when it comes to the renewal discussions as well.

Right.

Absolutely. And you've seen that within our churn metric. You probably heard us talk about putting the right customer with the right application into the right footprint. And it really starts at the beginning of that conversation with the customer, making sure that they understand the full value proposition that we're delivering to them.

Makes sense. Let's switch gears a little bit. Let's talk about your role specifically, John, in Equinix. So you're right here in the New York, New Jersey area. And you played a key role in building one of the most valuable parts of Equinix' business so -- which we call a campus. So maybe first off, why do we call it a campus? And then tell us a little bit about what makes the New York, New Jersey campus so valuable?

Yes. So New York is in Secaucus, New Jersey. And I think the interesting thing about Equinix is we use this campus approach. So our first data center in Secaucus, New Jersey was New York 2. That quickly filled and it was pretty heavily in the FX and currency trading room, that community. And what I do and most of the team that I work with, we focus on the interplay or the interdependence of firms within an industry. So we look at firms that are trading currencies are probably trading cash equities and they're probably trading futures and they're trading options. So the next site we built was New York 4, which was a massive facility that came online in 2007. That became home to a lot of the cash equities, trading firms and some of the futures trading firms. New York 2 and New York 4 are a stone's throw. So if you're connecting to cash equities venues in New York 4, you can also directly connect, it's a cross-connect, just like within the building over to New York 2, a separate building. The same happened in New York 5 and then in New York 6. And as we start to expand this campus, it's essentially over 1 million gross square feet of space that we treat as one physical location even though it's separate buildings. So you'll see that in markets like Silicon Valley and Ashburn. You're not penalized because you came 10 years late and you're in a brand-new facility. You can still connect with the companies that have been there for 10 years.

Got it. So it's multiple buildings, very close to each other that you're connecting via fiber underground and you get the same experience essentially being in any building on the campus. And the reason why this specific campus grew the way it did was from financial firms. And that's not the case if you would go to other markets in your portfolio, but just specific to this area. Is that correct?

Yes. There's affinity in certain markets like London. We have a pretty high percentage of customers that are in the capital markets, and it's the densest interconnecting point for trading firms in Europe is in our Slough campus. I think the same can be said of New York. But there are several industries, like I mentioned, cloud, media, telco. If you look at Bloomberg, they're actually in our media industry, but they provide services to a lot of the financial service firms. So I'd say each of the campuses has a diverse installed base. It's not dependent on a single industry, but there tends to be affinity by location. Tokyo has a pretty high install rate, of course, in financial services, so does Frankfurt. But it's not the only industry present in the campus.

Got it. So talk maybe then, how long does it take to build that appropriate mix of density within the campus? So you talked about New York, New Jersey as mainly financial firms. Is that overnight? You just made a bunch of phone calls and everybody came? Or did it take decades? Was it -- what's the timeframe?

Well, there's -- the bedrock or foundational level is telco. And so you need a lot of networks. In my industry, in financial services, all the metros have to be well connected and that can take 5 years. And then you have kind of the first entrants into the market and then they tell a friend. Those firms move in. So I think from the time we built New York 4, as an example, to really, really hit critical mass was about 3 years in financial services in New York.

Okay. Interesting. We've got a few minutes left. Maybe we can open up the floor to some questions if anyone has any. You can either raise your hand or there's a mic in the center, it looks like. Sure, in the front.

Just on the duration of your lease? What's your average lease term? And you were talking about customers renewing. What's the average renewal rate? What percentage of those renew?

Good question. So on our initial customer contracts, they're about 1 to 3 years in length and they typically tend to be about, on average, 3 to 5 years in length. I'd say our -- the duration of our lease contracts reflect the technology that's within our facilities and aligns much more with the technology refresh cycle of our customers. Admittedly, we don't specifically break out our re-leasing spreads. We look at it on a net positive pricing action basis. So in any given quarter, we enjoy net positive pricing actions where the price escalators within our contracts more than offset any price adjustments we may be seeing.

And then on retention, so what percentage of your customers renew their business here?

We see high customer retention. We very rarely lose a customer completely off the platform across our 10,000-plus customers. Admittedly, well, sometimes due to consolidation or customer distress but very rarely we lose a customer off the platform.

Something like in the 90s?

Just -- we just very rarely lose a customer.

Any other hands? Yes.

One of the big topics that's been emerging in communications infrastructure has been where the Edge is going to live. John, I know you've written about Edge markets in general, Mexico City, Toronto, Montreal. But I think people talk about -- they think about that between the data center today and the customer and where they might live, do you have any thoughts on that and how you can execute and play that?

Yes, there's -- do you want me to start?

Go for it.

There are kind of 3 categories and it's progressive. So the edge is kind of where you put your toe in the water to try a new market, like I talked about the European firm going into Singapore. The next category, we call ecosystem, where we start to hit this critical mass of customers or vendors specific to an industry. And then the third category is core. So when I view Edge, I look at it as kind of the starting point. And a good public use case of that is Direct Edge, which was a stock exchange. They put a market data point of presence in our Secaucus site. And they started to send market data to trading firms at the edge, which was, I think, in -- I think it was New York 4. As more and more firms, the ecosystem started to grow. There was higher demand for services. So it really became an ecosystem play and they move more and more services. Lo and behold, a couple of years later, they move their matching engines and their ticker plan, all of their market data infrastructure into that data center and it became core for that facility. They were acquired by CBOE, and CBOE actually made a bigger investment in that site. So I think of Edge as kind of the start of the progression. And when you hit that critical density of ecosystem or community members, then it starts to move more towards the core category.

And I would also add, on more broadly across the portfolio, we really view our portfolio as the best manifestation of the edge for the customers today. So in our global footprint in the markets that we operate across North America, Western Europe and some of the markets in APAC, we can deliver about -- to about 80% of the population less than 10 milliseconds of round-trip latency. And so for the vast majority of workloads, that is more than enough latency to suffice for the applications that exist today.

Excellent. Well, we are out of time. John, thank you. Katie, thank you.

Thank you for having us.

Thanks for coming to town, everybody.

Thank you.