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

Welcome to our 7:55 a.m. session at Citi's 2023 Global Property CEO Conference. For those of you I haven't had an opportunity to meet, I'm Mike Rollins from Citi Research, and we're pleased to have with us Equinix and CEO, Charles Meyers. [Operator Instructions] Disclosures are also available on the webcast at the AV desk. [Operator Instructions] So with all those details out of the way, Charles, great to see you. Welcome back.

Thank you.

I'm going to turn it over to you to introduce your company, any members of the management team that are with you today and provide any opening remarks. And with that, we'll get into the questions.

Sounds good, Mike. Thank you. Mike came down to say hello. I didn't realize, he had a 5-minute walk back. So -- but it's great to be here. Charles Meyers, CEO and President of Equinix, joined by awesome my IR colleague, Katie Morgan and excited to be here with you today. And I will make sure that I don't get in hot water with Katie by saying that some of what I will talk about is forward-looking. So if you're interested then checkout our riveting disclosures on our website.

Great. Well, maybe to get us started, the first question we're asking the companies attending our conference, what are the top 3 reasons an investor should buy your stock today?

Yes, Mike, I think there is a few things. One, I think the secular story on digital infrastructure continues to be tremendous. A bunch of things driving, I think, continued demand in what I think is going to be there for a very long-term picture in terms of how people are thinking about digital transformation. So I think the secular story is one. Second, I think relative to Equinix, in particular, I think it's a very differentiated, very durable story in playing into that demand. And I think we continue to be the best manifestation of the digital edge and how that's playing into how companies are thinking about their digital infrastructure and implementing hybrid and multi-cloud as the architecture of choice, I think gives us a really big opportunity to go after. And then third then I think is, I think it's just strong execution. I think the team has really delivered exceptionally well with a, really a track record of delivering durable growth. I think we're delivering not only a nice dividend yield and growing dividend yield, but also tremendous AFFO per share growth. So very exciting times for the business, and I think a real opportunity.

How would you characterize the demand environment today with respect to a few areas? The first would be the customer verticals that are driving the bookings. The second area would be the pricing environment. And the third area would be the visibility on how long this strength of bookings or revenue growth can continue.

Yes. I think the overall demand environment continues to be quite robust even in the face of, I think, a macro circumstance in conditions that is causing people to say, hey, we've got to really think about what this all means for us, an environment of what I would consider belt tightening more broadly. Yet, I think in face of that, they are still very committed to digital transformation as a driving force in their strategy, and I think very committed to implementing that and investing in that. But they're also making sure that they're doing that as efficiently and effectively as they can. And I think we actually play a important role in that. In terms of verticals, we have seen actually tremendous strength across a range of verticals. Service providers, as a sort of broad segment, continue to generate strong demand in pursuit of the enterprise dollar. And then the enterprise itself, interestingly, if you read -- if you look at and read our earnings or follow our calls, it seems like every quarter, we're talking about strength in a different vertical. And so we're seeing everything ranging from retail, financial services, travel and transportation, all kinds of different use cases because we're seeing a very, I would say, horizontal use cases in terms of what is driving demand, implementation of hybrid and multi-cloud as the architecture of choice, cloud proximate, cloud adjacent data and how people are thinking about that and using AI, a wide area network transformation, network transformation broadly, all things that are very relevant across verticals. So we're seeing real strength across a range of verticals. And in the pricing environment, I think we are perhaps somewhat unique in or certainly advantaged in this regard. I just think the depth of our value proposition, the -- our differentiated position, people can't duplicate what we have. And I think it also is a very important, although interestingly, in terms of their total ticket on their digital transformation, we actually generally represent a relatively smaller portion of that ticket and people are willing to pay sort of appropriate rates in line with the value that we create there. And so I think we've seen very durable pricing. And over time, we have had a lot of history demonstrating that our business is very durable and then the demand is quite inelastic relative to pricing.

And in terms of the visibility, how would you rate the visibility of that forward demand given some of the macro factors that you were referencing a little earlier?

Yes. Visibility looks good. I mean, we talked about in our last earnings call, overall pipeline, we've actually really improved our ability to generate multi-quarter pipeline, and to track it better has been a real priority from us from a sales execution standpoint, and I think the team has done that very well. And so again, we're -- now, as we see people having nailed down '23 budgets and even multiyear budgets, really very committed to digital transformation and again, seeing us as a very relevant piece in that picture. And I think they're even looking at how they're spending in other areas from a digital perspective, public cloud, for example, and saying how can we further optimize what we're doing there, be even more effective in using it. I think they continue to be very committed, by the way, to public cloud as a primary home for workloads. But I think they're also saying, how can we do that even more effectively than we have thus far? And so I think we see good visibility. But I do think, I mentioned this on the call, I had -- we had heard another CEO reference it as customers who are sort of measured twice, cut once and they're thinking about how they're buying and how they're optimizing what they do buy. And we definitely see those types of behaviors as well in terms of people saying, maybe they are not, if they were -- before, they were maybe buying a little more than they needed, now trying to buy right exactly what they need and trying to be as efficient and effective as they can in their buying.

And just back to the pricing point you're making. You're talking about the history of pricing that Equinix has been able to benefit from. Can you give us some examples or some quantifications about how that pricing environment today with the inflationary backdrop is different and affecting the results relative to maybe what it would have been a year or even a few years ago?

Yes. No doubt that it is a more acute environment from a pricing -- from a price change standpoint than people have seen. And that's partially due to, I think, people who watch the story closely know that on the power side, power is having a meaningful impact, particularly in Europe, but it is quite -- it is a bit isolated and we've actually -- we price that differently. We have a power price increase clause in our contracts that allows us to pass that through to our customers. We've been through a very long process over the last several quarters with customers in helping them understand where that is, how we have hedged into the current sort of utility cost environment, what that means for them and what it will mean going forward. But they are seeing an increase. And it can be it more substantial depending on how concentrated their deployment might be in higher rate -- in markets where the rates have increased even more substantially. But then there are other elements -- inflationary elements in the story in terms of -- or in the picture where we have actually increased list pricing as well, both on interconnection as well as space and power. And so they're seeing some level of that. So we can see -- we have seen people with -- again, depending on the range of their deployment and the scope of it and scale of it and et cetera, seeing sort of very smaller single-digit increases, even low single-digit increases in their overall price up to people that in certain areas, if they have a very concentrated deployment. In Europe, in particular, markets may see 20 or more percent. And so it ranges widely. But again, we've gone through this where we raised pricing on interconnection in Europe over the last several years in a very meaningful way and saw very little fallout. And we got the exact same questions that I get in every one of these things, in which I'm sure I'll answer 150x over the course of today that says, hey, what is -- how do people respond to that? And they had the same questions in terms of, are people going to churn, are you going to see? And we simply haven't seen that. Our interconnection business performance in Europe has been as strong as it's ever been, and that's driven more by our increasingly favorable mix of business to the sort of retail sweet spot, partially driven by our xScale decisions and how to generate off-balance sheet capacity to handle the very large workloads and that's worked very well for us. So we just haven't seen that. People are -- they're not -- as I said, they're generally not sending you a thank you note on the price increases but they understand them. They understand the rationale for them and why they're there. They also really appreciate the predictability that they get in terms of power pricing due to our hedging strategy. And so I feel -- we feel -- we said in the call that we feel very confident we're going to recapture fully that increased cost. And again, we continue to maintain that position and feel very good about it.

As you're a few months now into this transition to passing through those energy costs, are you seeing any changes in customer behavior where they're paying the bills but maybe they're inquiring to Equinix or trying to think about how to optimize that footprint a little further and try to save money in a different way?

Sure. Yes, I mentioned -- I talked a little bit about it on the earnings call. We had seen a little lighter quarter from a interconnection add standpoint and a few factors going on there. One, is that this ability to sort of aggregate up to higher port speeds is much easier on the virtualized platform that we currently have. And so you see some of that. But you also just see that people -- when things get tight, they go look for ways to turn down costs. We generally are a -- we're on a recurring revenue, multiyear contract. And so it's not a usage-based service generally. There are a few very small exceptions to that in our business. But what they will look is, say is, are we using everything that we have? What's our utilization? If they have 100 kilowatts of power, what are they drawing? And so whereas they might not have been as focused on that, they might go back and say, hey, it looks like we're only using 70 kilowatts. Can we turn down that 30 kilowatts? The good news is, is that we can say, not yet. And we'll talk about that on renewal or we can say, yes, we can probably sell that 30 kilowatts at a meaningfully higher price than what you're currently having it. So yes, we'll take it back. And so we're doing that kind of thing all the time. And I think actually, our ability to optimize our business and maximize sort of our earnings from the -- both our revenue and profits from the capacity that we have deployed has really improved dramatically over the last decade.

[indiscernible], please.

Charles, how are you approaching renewal pricing?

How are we what?

Approaching renewal pricing.

So renewals are -- again, we're getting -- we're making sure that the renewal pricing is in line with appropriately our new list pricing. And then we also are looking at escalators being higher. Typically, an escalator wouldn't kick in until a second year of renewal. But it really depends a lot on how long that customer has been in place. It's interesting because the way I would answer that question 18 months ago was typically, on a renewal, particularly if it was a 5- or 7-year deal, customer with -- that had a 3% to 5% escalator may have sort of climbed above the market. And then they might sawtooth down to a market rate, and that's what you would see as a typical renewal pattern, not so much the case anymore. In terms of them, they might actually see increases at renewal, depends on how long they've been there and what their prevailing rate is. But we -- so it really depends significantly on what they're overall. And it does, it depends by market as well.

So if you were to quantify that over the next 3 years, are you talking like mid-single-digit, high single-digit renewal pricing increases?

Well, I mean, I think the way to think about that is where we're -- I mean, renewal rates, again, it can vary dramatically. But if you look at our stabilized assets and how they're performing, we're talking about 3% to 5%. Actually, they have been a little higher than that, more like 6% on the recurring revenue side. And so I think that's a bit of a reflection of that. And so that's probably a range that you might see those in. But again, you could easily see higher than that, and you can easily see and learn that.

One comment you just made earlier was on the grooming of interconnection. And a question that we've been getting from some investors, is that temporary? And how should investors think about the growth of interconnection going forward?

Yes, great question there. I think there are elements of it that are more temporary. So for example, true grooming, which is, hey, I got a budget. Somebody gave me a new budget. It's not as -- it's tight, and I got to go figure out where to save money. And so going and saying, hey, if I have a portfolio of 1,000 interconnects with you, I'm going to go look and make sure that every one of them is carrying traffic and anything that's not, I'm going to turn down. That is more of a nonrecurring phenomenon, and it happens when things tighten up. And so I think we saw a little bit of that. I think that the -- there is something that is probably more durable in terms of -- and it's impacting units but not overall traffic, and that is disaggregation to higher port speeds. And so if you look at the demand that cloud providers have had, it's interesting because we -- as you might imagine, we get a lot of questions around, hey, what's the current environment in public cloud? Is sort of a slowing demand there, which is, I would love to have their slowing demand in terms of percentage of revenue growth. But it's very -- is that impacting you? And I think that we -- what we have seen is, it's a little hard to distinguish between the two but you're seeing that the -- most of them have the capability -- they're almost all aggregated up to 100-gig port speeds, right, already. And so their ability to add traffic can be done with fewer units. And so you're seeing a little bit of that dynamic. And so I think it's going to -- but we're still seeing strong revenue growth. We were 13% year-over-year on the interconnection side, continuing to grow meaningfully faster than the overall base of business. And so I think there's a combination of factors maybe that are occurring. Some of those being much more temporal than others.

And you mentioned just the slowdown of cloud and then there are some of the data points that come from the semi supply chain in terms of chips that are in semi material that's heading for the data center vertical. Can you share how that may or may not affect your business, the bookings, the growth that you're experiencing and how investors should take those data points in stride for the Equinix outlook?

Sure. Well, let me take them a little bit separately. As it relates to supply chain, I think the key question has been twofold which is, one is, are we going to be able to deliver capacity on time relative to supply chain constraints, that kind of thing? And secondly, at what cost? And candidly, I think we feel very good on both of those dimensions. I think our -- because of our scale, our scope and some of the investments we've made in our procurement capabilities, I think we have been able to very effectively manage. We've seen very limited demands in terms of customer ready dates for our data center capacity. And so we've seen some hiccups, candidly, more of them related to labor on the -- and sort of COVID-related labor issues and now just tighter labor markets in terms of [ GCs ] and those kind of things. But less issues on the supply chain side, although costs are rising, no doubt about it. And so that is -- that rolls through in the form of raising our list prices because we're still underwriting to the same general return profile that we have and still feel very good about that and our fill rates continue to support that. And so that's sort of the supply chain in terms of our ability to deliver capacity. And then in terms of demand, the broader demand picture and what others are seeing, again, we play a very unique role in terms of how people think about hybrid and multi-cloud as the architecture of choice and how they're thinking about implementing things like cloud adjacent data for AI. And so I think that our -- or we have -- there are some linkages between other demand profiles in adjacent sectors. But I don't think they work sort of in a one-for-one kind of way. And honestly, our business with the cloud providers, with other technology providers continues to grow very, very well. And the enterprise buyer continues to see what we do as quite relevant to how they're going to sort of do more with less and drive long-term advantage.

With respect to the hyperscale opportunity, are there any observations there that are different in terms of what you're seeing in demand and pricing for the hyperscale business?

Yes. Well, I would say a couple of things. One, we have a very multifaceted relationship with the hyperscale customers, ranging from really the provider of choice, I think, for the most part, as it relates to network nodes and key capabilities in terms of how they architect. Still, the market share leader in private cloud on-ramps with over 40%. We talked about it in our earnings call, and this is one I always love to talk about and feature. We have, I believe it's 12 markets around the world with private -- native private cloud on-ramps to the top 5 cloud players. No single provider has more than -- has the -- most that anybody else has is 1. And so your ability to sort of be that geographically distributed native private cloud on-ramp is Equinix, is really the place. So we have those dimensions. Then we serve them also in their large footprint needs through the xScale joint venture with GIC and PGIM. And so we're -- and that business continues -- we continue to see strong demand actually across that full portfolio because I think when you look at hyperscalers, people are sort of saying, oh, that's -- are we in -- I've heard people say things that seem really crazy to me. Like we're in the -- now we're in the latter innings kind of thing and they're like I don't think that's even remotely close to true. They're adding $15 billion annually of incremental recurring revenue this year, something on that order. And so it is still, I think, a tsunami of demand, bringing workloads from the current sort of enterprise data center, IT 1.0 model to a hybrid and multi-cloud future. And I think that demand is going to continue to be -- and they're acting like that demand is going to continue to be there because they're -- we have a very, very robust pipeline across the hyperscale. And then the last element of our relationship with hyperscalers is really as go-to-market partners. And this is a really interesting one because they, of course, would like to convince everybody that every workload should go on the public cloud and in their -- and the reality is, and I just came off of a really nice week with customers, and I will tell you that is not what customers are telling me. And so I think that they see hybrid and multi-cloud very much as the architecture of choice. And so as these hyperscalers are in these large-scale sales cycles, they are often faced with the reality of, well, look, I want to do a big deal with you. How am I going to deal with my private infrastructure, my cloud adjacent data, et cetera? And we're often drawn into those sales cycles there. So they're amongst our largest and most effective channel partners.

On the ESG front, what's the #1 priority for 2023?

Well, the way I'd characterize it, there's a lot going on there, and we're making meaningful investments. And I think our priority has to be -- continue to be the #1 partner that can help our other stakeholders meet their sustainability objectives. And so that means us continuing to lean into a leadership position. And so I think we've got a pretty bold sustainability agenda, and that is true bolt-on environmental. We're obviously really important to our customers and our investors, candidly. But our customers see us as central to them achieving their objectives because so much of the sort of Scope 2 sort of emissions come from us. And so being out in front of that, I think, is going to be critical to our long-term success. And so we've got a lot going on in the environmental front. But I also -- I think on the social sustainability, we announced the Equinix Foundation with a commitment to really tackling the digital divide globally and in the markets that we operate in. And we continue to invest in making Equinix a place culturally where -- that is diverse and inclusive and where every person, every day can say, I'm safe, I belong and I matter. And I will tell you that those things have really mattered in our pursuit of great talent. They want to work in places, one, where they believe in the mission; and two, we're a culture that energizes them every day.

Question that we've gotten from our group is, what is the opportunity with AI? You mentioned that a little earlier. Given the significant level of compute necessary. And is Equinix a way to play ChatGPT?

Yes. I would say that -- look, I actually think there's a much broader range of things going on in AI. I know ChatGPT is sort of the rage relative to a media frenzy standpoint. But there is a -- people have been investing in AI aggressively for the last several years to generate business insights and business value and differentiate their business, vis-à-vis, the competition. And so that's been going on for some time. We've had a multiyear relationship with NVIDIA that sort of -- and Jensen talks about democratizing AI and Equinix being an ideal sort of venue to do that. And cloud adjacent data, people really are realizing that they want their data at the intersection of the cloud. And so we're investing heavily in that area. We continue to see that as a really strong demand. And it's both storage and compute. And if you really dig into AI in terms of how models are trained and then subsequently used, there's a big range of opportunities, some of which really fit our sweet spot and some do not, like, training of models can often be not as much of a sweet spot because it can be done -- it's done more kind of offline. It's not as -- but using models and generating insights from them is very much in our sweet spot. And so that's -- because typically, what you find is that people are taking data from endpoints, whatever those endpoints might be, point-of-sale terminals, mobile phones, actual end customer or either customers or employees that they have, then they need to ingress that data over networks. Then they need to intersect that data with other third-party data because they want their own -- and they want to interact with others. I'll give you a really cool example, right, which is a customer that was in the sort of home improvement area, and they were trying to figure out how to optimize the profits they get from flowers. And so they needed to intersect their data with weather data to figure out where to actually ship flowers to maximize sort of profits. And it's just a really cool example of somebody that says, okay, I need to actually now use third-party data, intersect with my data, ingress it, generate the insight and then egress it back out to the people that can act on it. And Equinix tends to be just very well positioned to sort of act on and support those kinds of use cases.

Equinix has been building financial flexibility on the balance sheet. You and the team have talked about that on the earnings call. Beyond the development goals that have already been guided to for 2023, how does Equinix plan to use this flexibility going forward?

Yes. I mean I'm super proud of the team and they've done exceptional work in terms of -- we had an objective to build a fortress balance sheet and to prepare for whatever circumstances might come our way. I think over the last several years, I think we've learned the importance of being ready for anything. And so I do think that we find ourselves in an incredibly enviable position in terms of both our cash position now, the additional leverage available to us. We're still -- we're really low on the leverage side and have additional firepower there should we need it. And I think our first priority in that is going to be continue to invest in our organic development. We have 49 projects in 35 markets around the world, selling into -- or building into markets with very predictable fill rates. And so I think that's going to continue to be our -- probably our first priority. But also -- I think people can -- you see that we've been active about using M&A to continue to extend our leadership position in the digital edge. And there are definitely markets that we see real opportunities to continue to extend that reach or expand our scale. And so I think it will be a combination of those things. And -- but I think we feel really good about what's out in front of us there.

Could I ask a question on margins? We've got our rapid fires. But in between the margin question, we'll take a question up there, then we'll hit margins in rapid fire. Please.

When you compare owned versus leased real estate. Well, I trust you love your children equally, in a environment of increased constraints on supply, power, et cetera, what's your predilection going forward? What looks better, owned versus lease? And what are some of those constraints you see in terms of new development, please?

Sure. Great question. Undoubtedly owned is better for us, right? We prefer that. And in fact, we've made huge progress now. We're up to 60% of our revenues through owned. And by the way, that's going to sort of naturally trend that direction because our development is biased towards the owned side of things. And that's just because, in many cases, that's where the demand is, right? And so -- and then lastly, I think our balance sheet will also -- actually, that's the third area that I didn't mention, using our balance sheet, both for strategic land banks and for -- where appropriate, buying our leased assets and converting them to owned, those are things that we'll continue to use the balance sheet for as well. So I think that's going to be the bias. I think it's going to continue to rise. It will rise slowly, but that's certainly our preference and how -- and we'll have -- that will be a priority for us.

So in your bailiwick of M&A, it might include an entity that owns a lot of the real estate?

Yes. If we have -- look, sometimes you just can't buy it. There's just -- it's in the hands of people who have absolutely zero interest in selling it. As long as we have long-term strategic control, then we're good with that. But if we can buy properties that we lease today at a price that we feel like is fair, then we will -- we absolutely will look into that.

So on the margin front, and then we'll leave a minute for the rapid fires. If you can share with us how investors should think about the margin progression for your business. You've had long-term margin goals outlined in the past. But what's the right way, given the growth and opportunities for investment that you see, that investors should think about that margin progression over time?

Yes. I'll start with the same statement that I've made sort of many times and that is that we view, our lighthouse metric for us is AFFO per share. That combined with dividend yield is what we think is the value creation engine for investors. And so that's what we're really focused on. And margin is an important metric and one over time that we believe will be central to achieving sustained AFFO per share growth. But I think we, as a management team, believe that our -- that long-term value creation is really that -- what we have to be focused on. And sometimes that means that investing in the business and reinvesting some of the scale benefits that we're seeing or the leverage -- the operating leverage is an appropriate call. So this year, we actually would have seen probably a progression to about [ 48 5], absent the power sort of the hit that we're taking, which takes you to an as reported of about [ 45 ]. But normalized, it would be [ 48 ]. It would have been [ 48 5 ] but we've kind of reinvested part of that back into -- really back into the go-to-market engine for the most part, given the strength that we're seeing. We're on track to add probably more than 100 quota-bearing heads. And again, that's all a result of looking at the pipeline, the conversion rates, the -- our quota achievement, all those kind of things and saying, hey, we can be effective and generate a pretty quick return with more feet on the street. And so that's, that's what we've done. And so we will continue to focus very much on operating leverage and we have a number of projects that are generating that, and then we'll decide how much of that should drop through and how much of that to reinvest. So -- and you'll hear more on that when we come to Analyst Day in June.

Okay. We're going to have rapid fire in true style here. So what will same-store NOI growth be for your property sector, not your company, in 2024?

Yes. I would say 3% to 5% will probably be at the high end of that ourselves.

And what is the best real estate decision for you today, buy, sell, build, redevelop or hold?

Build and hold.

And will your property sector have more, fewer or the same number of public companies a year from now?

There's not many left. So it's hard to get a lot fewer. I think same is probably your best bet at this point.

Charles, anything that we didn't discuss today that you just want to share in our final few moments?

No, I think we hit the highlights. We continue to be excited about the prospects for the business going forward and always enjoy coming and getting our congressional testimony in.

Thanks for being here.

All right. Thanks.

Thank you.