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

Okay. Good afternoon, everybody. Let's get started. So it's my great pleasure to welcome Keith Taylor from Equinix. Keith, welcome to the conference.

Simon, thanks for coming. Thank you for having me.

For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So it's been a good year for Equinix in 2022. And I think a lot of people are concerned about some of the kind of macro and political global headwinds, and you put out pretty constructive guidance for 2023 as well. So perhaps you could start just by talking about the priorities and reminding us on your expectations and why you're confident.

Let me first say, like you did, I will make some forward-looking statements. So please refer to our SEC documents. Yes, look, number one, '22 was a fantastic year for the business. We performed openly better than we anticipated. And you can't help us step back and try and understand what is going on and why is that. And one of my great beliefs is that we've positioned ourselves very differently than others in the marketplace, so we're getting to see an outsized level of opportunity compared to anybody else. We're also not chasing the big deals, big deals sit in our JV structure with our partners, and that feels really good. So it tells you that the fundamental business is there. So for us, it's really about how do we continue to prosecute against that demand opportunity. And so Priority 1 is really about our go-to-market. And I feel very, very good about that. Priority #2 is really about our team, and team health really matters. Our culture matters and the investment where we locate our staff both current and going forward, and so that's an important part. And then digital services. I'd be remiss if I just didn't say, some of the people I've already spoken to who are in this room with us today, but I can't help but believe that this could be one of those tailwinds that feels good as we continue to see this momentum. And as you consume sort of, if you will, physical infrastructure with a software structure, it feels good. That's what Metal is all about, and then that connective tissue that brings it all together with is Fabric. And so those 3 things that's sitting on top of like our sustainability initiatives feels like the right priorities for this year.

Right. And I think one of the things that's Equinix standout has been your long-term guidance. Every couple of years, you have the Analyst Day. You've got another one coming up in New York. Look forward to one in in-person this year. But help us understand how you're able to have that confidence, not just about 2023, but about that 3-, 4-, 5-year view and then hit most of those goals or exceed them.

Well, it's probably -- you and I have worked together for a long -- being connected together for a long time. And one of the things you probably noticed about Equinix is we -- a lot of times, we -- the vast majority of times, we do what we say we're going to do. I think we have great predictive oversight in the business. But the model itself gives you that comfort, one, because 95% of our revenues recur. We have a deep pipeline. We're very, very disciplined about our build structures and how we deploy our capital. And then knowing that the market isn't moving -- I mean I go back to my earlier comment. There's something that's going on in the market that just feels different. And then obviously, there's the economic environment. But it feels like everybody wants to just go and win that big deal. And I remember, I don't think anybody in this room, but I was at a different event, and people are saying, "Why aren't you going after those big deals?" I go, "Wait until you see what happens," and what it's going to do to some of their balance sheets. We can't go after that big deal. We don't want to because destroy the balance sheet. You won't feel it today or next quarter or this year or maybe not even next year. But boy, when things turn, boy you going to feel that. And that's -- and so we, as a company, we have -- we always talked about the number of deals that we do, is to give the market an indication that we're not relying on any given deal or any given customer to execute against our plan. It's the 4,000 deals with 3,000 customers every single quarter. And I think the number that we put up for the year was 17,000 deals. I mean it's mammoth. It also tells you that we go across the entire spectrum of companies because all things digital have a home in Equinix. All things digital, including AI. And again, I know that's a word of -- and I don't want to use it because use it today in the sense that it's going to be an accelerant because it won't be an accelerant. It's just -- it's additive to what we already do. Companies already do AI, ML inside our environment. With -- suffice it, there's stuff goes on already. But where the heavy compute is going to be done, it won't be inside Equinix because that's not what we sell, and that will be done somewhere else. But overall, all things digital have a home in Equinix and that's what makes me feel good. And therefore, it gives us the predictive analytics to guide for what we think we can do as a business. And then we fund behind that. We fund behind our go-to-market engine, all our quota-bearing heads, and all the other sort of vectors of customer targeting. And then you tie that back into our operational scale, it just feels like we have the visibility, but we also have the visibility because not a lot of people are doing what we do. Like they might be doing what we do, but they don't do it because they don't invest like we do.

We heard from some of the cloud players about customers optimizing, and there's been concern about tech layoffs and spending reductions. And I think coming into earnings season, there was this concern that, that might show up in bookings or in churn or something like that. So how do you see the state of your customers, the state of demand right now? Obviously, you feel good about this year. But you're global. You've got a big presence in Europe, where the energy prices have been higher.

Well, there's a lot to unpack there and I think we'd be naive if we didn't think that the economic environment doesn't impact some customers because I'm sure it does, and so we're not going to ignore that. But one of the comment we made -- in fact, I made it, was that we're going to live comfortably within the range of what we guided you to normally, which suggests that it's going to be on the lower half of the range, not the top half of the range comfortably. So there's nothing that seems to indicate that we're going to lose a substantial number of customers. So therefore, I don't worry about the churn. I also don't see any big things happening that could impact that. So that's one aspect of it. The fact that there is some sense of layoffs -- of slowdown, pardon me, and that's manifested itself in layoffs, that's more about a cost specific. And People just -- they overinvested, and there's still great growth in the hyperscale business, just not as great as it was. But relative to companies like us, it's still substantial opportunity for us. And we see that in the xScale side of the house, and we also see them in the retail side of the house. I made a comment on -- I think it was in the Q&A coming off the last call that I'm optimistic about what we see in xScale. And hopefully, we can talk more about it on the next call, but by no later than the Analyst Day in June, just about all the activity we're seeing. And so it tells me that the big guys are still out there buying. They need companies like Equinix to help them to fill their needs, particularly in markets that are more difficult, and that's generally non-U.S. We're going to do very little xScale on U.S. or North America. So overall, I would just say that we have -- we see the demand profiles. We're comfortable in churn. We feel good about pricing. I just said in the last meeting I just had with some of the people in this room here. I would hit -- I don't think we're inelastic. Obviously, there's some price point that we got to be careful of. But I think we have some ability to flex because the market understands that we're carrying a lot of costs, we carry a lot of physical costs, and then the variable costs that come along with our business, which is power, and we can talk more about that. They're willing to tolerate some level of inflation despite the challenges that they have and trying to make their ends meet. We are all -- all companies are feeling it. We're just feeling it at different levels.

And a lot of your customers, they have mission-critical applications in your facilities [indiscernible]

Well, yes. I think it's a very important aspect of their infrastructure. I think it's really important that sits inside our environment. And so to the extent the macro conditions cause uncertainty, I'm sure there's companies out there that are going to come across financial difficulties. And it's unfortunate, but it is what it is. But we deal with that every single quarter in different sectors at different time.

Are you talking about energy companies? A couple of...

Counterparty -- our counterparties fail in the energy, but there's all sorts of stuff that goes on it. But that's -- we have a vision of what that will be, and that's based -- and that's baked into our guidance. I was going to say something else, but I've lost my train of thought, Simon.

So you brought up the energy. You obviously made the pricing actions. I think you made the point that the new energy prices are still at a hedge level below where spot is. So you're saving the company's money. It's 2 months in, how is that landing with your customers mostly in Europe?

Well, I don't think price increases land well. But putting that aside, I think as a customer, when you're on the receiving end, understanding that we have a very mature and risk-mitigating strategy to keep costs down as low as we can, simultaneously with trying to run the business as efficiently as we can. So that means the PUE is dropping, and we're really working hard on that as well. I think it's acceptable. There's very few disputes, but I would not say there is no disputes. Of course, there's disputes. So we anticipate that, and we protect ourselves financially about what we message to the Street because we understand that some people might not pay when they say they're going to pay and might even put some of them in financial jeopardy. But we're doing what I think is the best for them because we've had a well-known disciplined strategy of keeping their power cost below the prevailing market rates. And we see that our customer couldn't procure anything close to what we could. Our competitors didn't. If you look at the spot or the forward pricing, it's higher than where we are. And -- but the other thing I much or everybody fully appreciate, 60% of what we take is we're regulated. We can't do anything about it. We're a taker, price taker. Everybody feels the same thing. And because of that, we pass that on. And if we can run the business more efficiently or if costs move around or, even in some cases, go down, we certainly can be the beneficiary of that. I think it's -- bottom line is I think we've put the customer in the best position possible. We are giving them the predictability. Prices move around. I know where I was going to go but 90% of our power is on a per circuit basis. We're going to sell you that circuit, and you got to decide how you want to use it and to use or lose it. So in the sense, we're going to still bill you for it. I shouldn't have said lose it because you're going to pay whether you use it or not. That's what it really means. It's like buying a hotel, whether you show up and sleep in bed or not, you're still going to pay for it if you signed up. But other part -- sorry, 60% of our business is regulated. 40% is unregulated. But then once you start to look at the subcomponents of power, there's the commodity piece, which we all manage, we all worry about. But just go to your own personal power building and you look at all the adders, the taxes, the structures, all the commissions and concessions and transmission and distribution. And all of a sudden, when you look at power, the component that we're protecting ourselves against and the variability, it's not as big as people think. But all those other costs are going up. And so as a consumer, once you see that, I mean it's not like the price of energy went up. It's all the taxes and the concessionary fees and all the other things that are going on. And so again, we're managing both regulated and unregulated and all the components of it and trying to create that predictability. 90% -- 97% of our positions hedged this year globally. We're already putting hedges in place for 2024 and 2025. We will lock in our 2024 position as we come through the back end of the year. We're always nibbling. Again, all we're trying to do is provide predictability to the customer. Again, as prices move up, we're nibbling. As prices go down, we're nibbling. And we're taking chunks based on time and market conditions. And then we stay within the -- an upper and lower tolerable range. I mean we're probably talking enough about it, but you get the sense. I think we've got a very sophisticated and dedicated team that works hard at mitigating exposures to our customers -- for our customers.

Great. You brought up digital services earlier. And you provided certainly some milestones, some data points for us. But I do think investors would love to just get a little bit more granularity on the size of it to how fast it's ramping, et cetera. What color can you give us? Or will we get more at the Analyst Day?

I think it's fine. It's just I keep on rushing against the mic. I'm sorry about that. How about I just hold it? We can do that. Okay. If you just repeat the question again?

Digital services, help us understand. I think you talked about the importance of it. How do we get more granularity around the size of the scaling of it and the -- where it's going from here?

First and -- it's only 7% of our business today. I think as part of Analyst Day, you're going to get better visibility. Charles, again, has been very disciplined about how we invest in the business, how we're communicating it. I'm at a point where I'm starting to feel that we're seeing that momentum. And I was telling some of the people in this room earlier today. I said I was in the New York office last week and I was asking the guys that we're targeting the financial services business segment, "What are you leading with these days?" And they go, "Metal." I go like "Metal?" people love it. They love the story. But we're just -- obviously, we have some momentum, but such a small piece of our business, 1 -- just over 1%, 1.5% of our business this year, likely. But if you start to see that flywheel spinning, that's what Charles has really been referring to that. That momentum, I think, is going to pick up. And it's an alternative source of revenue for us, but it's an alternative source of infrastructure for our customers, for our partners. And you tie that together with the Fabric. Because, again, we sell on a global platform, we're one platform. You can sell Equinix out of any market you want in the world, anywhere. And that's the benefit of Equinix. We tie it all together, and digital services is just another vehicle to create flexibility for the customer. Again, consuming physical infrastructure affecting at software speed, and that feels like the right thing to do. So the investment that we've made both in capital dollars and operating dollars has been healthy, and I think we're going to start to see the momentum pick up in our digital services. And again, it's not insignificant to our P&L. It's 7% today. And so when you look for sort of 2023, it's going to be somewhere between 7% and 8%. So it's not an insignificant part of our business.

It probably helps with lead generation and retention.

Lead generation and retention, expansion, more value on a per unit basis. Again, it's an alternative use for our customers, our source of expansion of globalization. And it's all digitally oriented. Again, Scott Crenshaw, who is our -- he's our lead in charge of digital services, new to the business. He's been with us 6, 7, 8 months. And I think he's making a huge difference. Then we have Jon Lin on the data center side. And we're very much measuring how do we bring all the businesses together, and then you've got xScale sitting over there. It's the combination of all 3 that make a huge difference for the customer. Again, I can actually see -- I can envision a future where digital services is resident in xScale, not in core, but enhancing the overall value of our platform. And so you're doing great things for xScale. You're providing a digital solution. You're not wasting your capital or consume your capital at the core level, and you're getting all the strategic value of digital and xScale coming into the core.

And that's the medium term, kind of?

I think it's much faster than the medium term. I think it's over the near term.

So as the CFO, you got to say no to a lot of things. So how do you get comfortable that the team can get the money to develop some new products? Because you obviously go through this J curve of investing and margin negative and hopefully for a long-term return. What's the calculus? Because it seems like you could have higher margins today if you wanted to, but that would be at the cost of the longer term.

Yes. And look, I think as you can appreciate many -- I'm sure everybody appreciates in this room, you've got to make selective decisions, and we have to do a better job of prioritizing. The problem we have at Equinix, there are so many good things we can work on simultaneously. There's never a transaction or a deal that we don't want to work on. And I'm not talking about M&A deals, just projects. And so we know what we can spend. And we have targets, both on an expense basis and on a capital basis. We know the dollars that are coming into the business. And so the model in itself, it self-solves. The team understands what our limits are, and we know what we're communicating to the Street, and we want to live within that. Now if we can accelerate faster, which we have been, we're doing more business than people anticipated. We're above the levels of growth that we anticipated coming to the last Analyst Day. That gives you more firepower. I would just -- I'd like to, at least, if not just leave you with one thought. I think that there's enough momentum in the business. There's enough strength that we can do just about anything we want. So I don't have a real challenge in trying to allocate dollars. But we, as a company, as a leadership team, I want to make sure we focus well on our priorities because there's just too many darn good things to do. And then the thing that -- I know most people know it, it is such a comforting position to be in, knowing that we didn't over-rotate on our balance sheet, knowing that we were very disciplined about our growth, very moderate in how we're spending. And therefore, we have the cash in our balance sheet. We have the debt capacity. We generate the cash that people are expecting, both in dollar terms and as a percent of EBITDA, AFFO as a percent of EBITDA. We get to retain the majority of the cash that we generate at roughly 58% of all cash that we generate. We don't have to dividend it out. And then you've got, as I said, leverage capacity. We're not over levered. So from all the different aspects, we have more flexibility than others. And we're investing in things that others can't because now they're trying to think, well, how are we going to fund the capital with cost of debt capital and equity capital going up. And it's a very different position for us. And I love talking to our Board about it because I talked about the advantages we have, and they do it contrast and compare. And again, you sort of understand our position. .

Sure. And it's interesting. I was going to come on to capital allocation, but there hasn't been a ton of M&A relative to what it was a couple of years ago. And obviously, we had private equity buying some of the smaller data center operators. But presumably, you get a lot of things shown to you all the time. How are you thinking about the M&A market today? Have prices reset appropriately? Or are you interested? Or is it more tuck-in stuff and focusing on what -- the organic growth?

Yes. It would be hard -- it's hard to imagine that the private market multiples are going to stay where they were. People can't afford it. They can't -- they just the -- most of those deals are DOA. They really are. And if somebody wants to stretch so far, then I think that's going to be a problem for them. And in fact, one could even argue all these deals that have already been done, I'm not sure what -- when you look at the cost that was paid or the price paid and the cost of refinancing them, it's going to chew up a lot of that value. So we're going to look for tuck-ins where we can. It wouldn't surprise me. There's a number of deals out in the marketplace today if assets sort of shock -- shook their way free, but we don't -- we're not going to chase anything because the best source of -- the best dollar invested for us on an allocated basis is $1 back into our business. That's the highest return we can get. And we have 49 projects currently underway, 35 markets, 23 countries, and we're further expanding. We're going into Malaysia. We're going into Indonesia. We're going to South Africa. And believe, we were going to go into other markets. And we -- if we can do it either through partnership or through partnerships, joint ventures or just organically, we will do that. And M&A would probably -- I don't want to say we won't do M&A because, again, we're always going to be wise to what's going on in the market, but it's got to be under Equinix' terms. We're not going to risk the business right now.

Talk about the development pipeline. Where are we on supply chain? Where are we on construction costs?

Yes. Supply chain continues to be constrained, just not as constrained. Construction costs have gone up, no surprise. Labor, depending on the market you're in. I mean we all hear sort of the headline news about what's going on in tech space, but labor is still tight in a lot of markets around the world. And so you have challenges with labor. You have challenges with cost. You have an elongation of the supply chain cycle, although better than it was. And then you have a host of other things that cause you to go, wow. This is a tougher business to be in. And thank goodness, we have the staff dedicated to all the areas that we need to focus on, power delivery, power procurement, currency management, supply chain. Procurement team is solid. It feels good. We build our own substations now. People have -- they think we're a data center provider. We have to go deal with utilities and think of alternate fuel sources. We did that in Ireland. There's no -- we can't build the data center in Ireland today. But we did. We've got 2, one that just opened up, another one that's under construction is, and they're both being presold. And we're using ultimate sources of energy, and most people can't do that. So again, it's a level of expertise, I think, we're bringing to the table. I said in many of the meetings, thank goodness, I mean in an odd way. So take it for what it's worth. Rates of capital have come up because anybody could have come into the space before made money. But those who are disciplined and knows it is a hard business to be in, and I think it's in this more disruptive environment it's going to benefit those that really know what they're doing. And it's -- I would just say it's a harder business. And so now it's going to bring discipline and structure, and I just think we're at the best one because we've been at it for 25 years. And we've gone through a number of cycles that have been very unsavory. And that's -- we thrived during that time because others are going, whoa. And you can imagine just some of the companies are going, I'm not sure how we can invest in our future.

And presumably, that's important to prospective customers as well. They have to go with somebody who's...

Look, I think the digital demand is going to continue to be there. I think the flip side of the equation, I think supply could get constrained, and it certainly is in some markets. Anybody can put up a big box data center, but thinking about retail and how you have to operate efficiently with renewability and oversight and regulatory. I just think we're in a much better position that it is going to be more constrained. Capital is going to flow slower than it did previously, and yet we're going to continue to push ahead because we know what's going to -- we know what's happening -- going to happen down the road. We know where we want to invest our capital. I think being there with dollars to spend, assets in the ground is going to benefit the business.

Right. You talked about AI a little bit. I think one of the things that investors are focused on is what does this mean for the data center. And we've seen Facebook take a pause as they reconsider data center design that may be more applicable to xScale, but you've talked a lot about the green initiatives. So how is that evolving? How -- your new data centers, are you making big changes to -- how you put them together?

Well, we're always looking at the data center for the future and what it means, how efficient it runs, how sustainable it is, how it consumes water or not. It's market dependent. It's circumstance dependent. The Facebook, that to me is a Facebook issue, not an industry issue. I know it was them, I think, managing their capital. But I think AI just creates another alternative source of revenue for us. And again, we're excited about -- there's a lot of noise in the system, but it's not going to be a sea change for us. It's already factored into what we think is going to be a really good growth story for the coming years.

Great. Well, Keith, thank you so much for your time.

Good. Thank you very much. Thank you all.

Great. Thank you.