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

Let's get started. I'm Jon Atkin with RBC. I'm pleased to welcome Equinix for the next 25 to 30 minutes for a fireside chat with Charles Meyers, President and Chief Executive Officer. Welcome, Charles.

Thanks, Jon. Good to see you.

You might want to make some safe harbor comments.

Yes. Thank you for that opportunity. So I don't get into hot water with my IR team. So some of what we'll say will be forward-looking in nature. And so if you want to check out our riveting safe harbor disclosure statements on our IR website.

Maybe starting with some corporate topics from kind of a staffing standpoint. Adam has recently been brought on, Scott a little bit earlier. Karl has departed. So what's changed overall in digital services, first of all, since Scott is now into his role for, I forget, maybe a year now or -- yes.

Yes. A little over a year. He just turned over his 1-year anniversary. So one, I guess, he has been a fantastic addition to the team, very much brought the things that I think we were looking for. And I think has now said -- set about in terms of building the additional capabilities and team he needs. So he's added a number of critical players to his team. Our -- on the digital services side, we're delivering a lot of more software-enabled products. And so I think that the ability to build at scale, agile software development organization is a key part of that and I think Scott has really brought in some critical talent that help us do that and so that's progressing very well, and I think we continue to feel good about our long-term prospects on the digital services side and how that will contribute to the platform and so we can talk about that as you like. Adam is a relatively -- is a new addition. And he is a boomerang, one of -- he left Equinix about 8 years ago. He had of senior role in the marketing organization inside of Equinix and then went on to spend a number of years at Google Cloud and then Atlassian, and so really brings that blend of sort of being able to understand our traditional direct field selling motion, but also now bringing some of the capabilities around really accelerating our channel go-to-market motion as well as our more product-like growth motion on the digital services side of things. So great addition. And I think we continue to have a great team that's positioned well and to execute on the opportunity ahead. And I think we've got a -- had a history of having great people. This has been a fun week to see a whole bunch of Equinix [indiscernible] has scattered across the industry, and so it's been good.

I was just going to ask there's some folks in the room and maybe they'll be boomerangs over time, and we'll see what the future holds.

So -- but yes, sometimes it's a matter of people getting great opportunities. And sometimes it's people's personal circumstances. And so -- but it is always wonderful to see Equinix people around the industry.

So I want to hit on energy prices, taking into account your hedging pricing -- hedging program, macro conditions, what's your sense of power prices and how they're trending across the portfolio? What are the implications for customers and for your margins over the coming quarters?

Yes. I think price -- power prices have stabilized to some meaningful degree. They're less volatile than they were last year. Although I will say no guarantees that stays that way, right? I mean, I think it's -- especially since there are dynamics in the global -- on the global landscape that I think can disrupt that at any time. And so -- but I would say right now, I think we're seeing a period of sort of more stability. And as a result, we've been sort of hedging into sort of new more stabilized rates exactly where we land in terms of our hedge price across markets is still sort of being determined. But I think we'll -- we may see some markets where we -- contrary to last year, where we saw these big increases, we may actually see decreases in some markets. We may actually see further increases in some markets and sort of some stay more of the same. So overall, I would say one of the things that we made very clear at the Analyst Day was that we felt it was important to just sort of not think about that as an underlying sort of value driver in the business because the PPIs are really kind of pass-through revenue. They're 0-calorie as we talked about it. And so we'll give you a growth rates that are normalized against that and sort of also manage out because I do think if we saw sort of some decreases, for example, go through in certain markets, it could reduce the amount of 0-calorie revenue that's there and therefore, improve the reported margins. But that's not really real value creation. And so we'll normalize the results, so you can see in that. And -- but I do think things are stabilizing a bit, and I think the situation with our customers is in a good spot, and I don't think that will be a major impact on the business.

You've had prior periods where you tweaked or harmonized your cross-connect pricing. On capita pricing, can you just kind of refresh us on your typical enterprise retail relationship, maybe kind of 3-year tenure about what goes on with respect to things like auto renewals month-to-month, year-to-year, what's the step-up that you typically see? And any changes that you might consider tweaking given what's happening with demand in the market.

Yes. Typically -- we contract typically on a 3- to 5-year basis, typically with an auto renew. We do auto renew with a lot of our customers. I will say that, that, in more volatile inflationary environment, becomes a little less common for you to just straight auto renew because oftentimes, there's a discussion about pricing. But -- and then, of course, our contracts almost all include annual escalators. We had traditionally talked about those being in the 3% to 5% range, but I think we're seeing a meaningful uplift on those to larger numbers and some increased level of use of index-based escalators although that typically is reserved more for our typically much larger customers.

So it seems just based on your disclosure around cabinet adds and churn rates, if you gross it up to get to kind of a gross number, that trend does seem to have slowed a bit sequentially over the last 3, even 4 quarters. It's not a steep decline, but appears to be consistent. Is this within normal levels of fluctuation in the business? Or are there fundamental operating factors to think about that might underly that slowdown?

Yes. Cabinet was definitely a topic of discussion on the last call. One of the things we've always told people is that there's volatility and it's based on timing of installs and churn and various other factors. And so we've always encouraged people to really take a rolling 4 quarter and then look at the trend line on that. And I think when you do that, it's reasonably stable. There is some pressures, though, and I think they are a couple fold: One is churn. But much of that, as we've talked about being sort of a proactive or a favorable churn activity where we're recovering capacity in tight markets, where we believe we can sort of remarket that or resell that at a substantial premium. On the last call, we talked about -- and again, we were very careful to not sort of have this extrapolate to the entire portfolio, but we had 37 deployments that were sort of saw -- that were sort of churning out that we were seeing had already experienced and realized or expected to a re-lease uplift of 50% to 70%. And so obviously, there's some really material gains to be had there, and that's real value creation for the business. And so even though you see some vacancy and a little bit of pressure on cabinet additions, we think that's net value creating for the business, and so we've been active in that area. And then the last thing, I would say, is I do think there is a trend line and one that might be accelerated to some meaningful degree by AI for -- around higher densities. And of course, higher densities mean that you can get sort of more kilowatts per cab. And so I think that the cab adds isn't necessarily reflective of the underlying growth there because kilowatts are probably the better, and that's also having a favorable impact on MRR per cab, which, again, continues to trend very, very positively.

Very good point. Customer decision time frames, closing rates, any kind of update or points you want to reiterate?

Yes. I think, generally, we're seeing that the -- our close rates, deal cycle times, et cetera, are kind of pretty much in line with historical norms. I did -- one of the things that I do when I'm at these events or any of my travel around the world, I almost always take time. And in fact, I think I missed the dinner last night because I was with our local sales team because I was trying to plug in to what they're hearing out there. And I would say, generally, it's a people -- a lot of optimism. I think about the sort of commitment to digital, how people are thinking about their digital infrastructure. But I think also a level of caution, I think, in particular, in enterprise decision-makers around sort of macroeconomic concerns, et cetera. And so -- and budgetary constraints and those kind of things. And so I think it's -- overall, I think continue to feel really good. I think the most important thing that I think about is if we had some measure of our relevance to people's sort of long-term sort of digital agenda and their needs on the digital infrastructure side. I feel like we are becoming more and more relevant to what they want to accomplish, and I think that bodes well for our long-term prospects.

Turning to xScale, how are upstream factors such as energy supply, transmission capacity affecting your development pipeline versus what you contemplated back in the early years when it was called hit?

Yes. Wow, that's a blast from the past, Jon, but yes, because I think [indiscernible] I think not even -- not this last Analyst Day and not the one before, but the one before that is probably when we rolled it out. And I think if you go back to that, you look at what we had talked about, about likely aspirations and scale of xScale, which, again, I don't even know yet whether we called it then, but we've actually sort of executed that and it's multiple of that, meaningfully larger than what we had originally anticipated. And so -- and I think that over the next several years, I think we have an opportunity to further accelerate our aspirations in that area based on demand that's out there. And so -- and the exact structure under which we'll do that and how we'll do that, it will almost certainly be in tandem with capital partners because we certainly don't want to expose our balance sheet to all of that or use our balance sheet firepower in that way. But we do think there's a big opportunity. We think it's important for us to continue to be an at-scale player in the supply chain. We think that being that partner for many of our really large and strategic customers is important. And so I think that we are going to see it be a bigger -- a meaningfully larger operation. And overall, again, because we don't consolidate it, it probably will have -- it's not going to have as big an impact on the revenues per se, but I do think we're going to continue to invest there. And back to the sort of your question, I do think power is a very real -- if you -- as I walk around the last couple of days here and hear what people are talking about, it's a topic of significant discussion when you -- and when you just look at particularly on the xScale side, the aggregate amount of demand for power that's out there, there's just going to have to be some -- something's got to give, so to speak. And so I think thinking about where power is available and that influencing location strategies, is going to be a very real thing. And then I also think people are going to -- I think on-site power generation of some sort is going to have to continue to be part of the answer going forward.

But a lot of the constraints are not limited to, but a lot of them are in established Internet gateway-type locations?

Right.

With AI training and arguably being less location sensitive, are those opportunities that you see suitable for xScale? Or do you want to stick with more of a tethering strategy?

Yes, I've answered that question in a few different venues. And I've said I think we are open to the reality or the possibility -- or maybe the possibility or the reality that if we want to continue to target some of these strategic workloads and opportunities that there may be -- that it wouldn't probably all be in the -- immediately adjacent to our existing markets. And so I think we have more work to do on that in terms of exactly what it means, but I think it could include markets that have not been in our traditional sweet spot.

And any inorganic growth opportunities to accelerate your xScale growth path?

Yes. I think -- look, I mean, we've been extremely successful with M&A over the years, we have some people in the room that have helped on that over the years. And so -- and I think M&A will continue to be a very relevant piece of our overall strategy and that -- I don't think that would be necessarily limited to retail. But obviously, there's a little more complexity to it in the xScale side just because of the capital structure. But I do think that could absolutely be an opportunity to accelerate that business in certain locations around the world.

Any kind of update on your thoughts on U.S., Canada as a destination for xScale?

Yes. So I do think as I -- because I mean, when we originally announced this and probably even for the several years after that, I had generally sort of signaled the reluctance on the U.S., in particular. Obviously, we've announced other projects in the Americas, including Brazil and Mexico. And I think there'll be more. But the U.S., I think we had been quite reluctant in that. I didn't feel like -- one, it was, I think, an incredibly competitive market; and two, I think the incremental strategic gains that I think were there available to us were different. I think now as we look at it, I think it is potentially more attractive for us or is more attractive. And I think -- so I think that we will be looking at expansion in the U.S., and I think we're sorting through exactly what those markets are and really have a lot of activity already underway.

So AI, very rapidly evolving segment or segments. What have you learned since the Analyst Day around how Equinix participates in that ecosystem?

Yes. And I definitely think you're right to put the s on the end of that because AI, I think, is a very broad set of things. I do draw some parallels between, I think, cloud and particularly the public cloud sort of momentum that was in the market and that really accelerated into almost a vertical climb 5 years ago and has continued to be a major driving force in the overall macro demand for data centers, particularly on the sort of hyperscale side of things. And AI has a bit of a similar [indiscernible], I think both businesses -- we were talking about this yesterday, actually some folks and I about that it is -- because cloud has this sort of multitiered architecture element to it, right, which is you have the availability zone-type requirements, which are a lot of people shooting at that target, including us on the xScale side. But then you have cloud-on ramps, you have network nodes. And our retail business has really been much more focused on those elements of the architecture. Similarly around AI, I think you have these large-scale service provider-driven training requirements, which tend to dominate the media landscape. But I think over time will actually not be the bigger part of the overall demand profile as inference becomes significantly more prominent. And as enterprise AI, I think, is built on top of large language models and people are building training. And so I think that -- I think we'll be active in all those areas, more on the large-scale training side more with xScale, but then on inference and some of the enterprise AI on the retail side, which by the way, we've been serving those demands for our customers for years. And there's lots of great examples of AI and how it's being used effectively by our customers. But I do think it's a big opportunity for us. And it's interesting because I think the more -- I think that right now, the media frenzy is more around GPU availability and power, which I understand. And we've talked about it some here. I think the bigger and more relevant long-term questions for AI is what data do I need where to create what value for what users and how do I monetize them? And how do I monetize it or gain a -- get a return on it. And those are the conversations that we're having every day with customers, particularly around the data side. Where should my data be? How do I need to distribute it as I look at inference, et cetera? And I think we have a really distinctive value proposition in that regard.

So apart from the AI business as usual because you make a good point, it's not a new thing, but the changes that you even, I think, alluded to on the last earnings call more impacts to think about in terms of cabinet growth or interconnect growth?

Yes, I think it's actually -- I think its biggest -- will be -- impact will be on kilowatts, right? And so because -- but -- and I'd probably see it more -- it's more cabinet growth. I do think AI will be also one of many things that continue to -- look, ecosystems have always been at the center of our strategy, right, and the interconnection amongst those ecosystems. And I think that, that's going to be the case in AI as well. But I do think the AI demand will -- as people look at enterprise AI and private AI combined with sort of what they might do with public cloud and other players, I think, is going to -- will drive some real demand for cabinets and kilowatts and associated interconnection, but I think it might be even more heavy on the kilowatt side.

And then bare metal, any kind of update on recent trends, the growth path you see, customer demand and maybe the relative emphasis you're placing on that unit?

Yes. I think it looks -- I think we continue to be the underlying sort of rationale for the acquisition of Packet a few years ago, I think very much still firmly entrenched and in place. I think if you look at Packet at the time of acquisition, they were really much more focused on digitally native customers. And we continue to service some of those types of customers. But I think that the bigger opportunity for us is the belief that the enterprise is going to see dedicated automated infrastructure as a real opportunity and part of the overall puzzle in terms of how they architect their infrastructure long term. And I think we're in the earlier stages of both service provider and enterprise customers doing that. But I think we're seeing good momentum. As I said, I mean, digital services, broadly speaking, is growing at 3x the rate of our broader portfolio. And we are really thinking about the metal offering as foundational to the platform over time. And so in fact, we're replatforming our network edge offering on to metal. So it will be the underlying compute platform there, which is probably where we should have started. But we were anxious to get to market. And so we're sort of getting -- doing some retooling there. But I think there's a lot of optimism there longer term. But I do think it's something that customers are really starting to get their heads around. And they love the on-demand nature of it. They love the CapEx-light nature of it, and they love the fact that they don't need to deal with the life cycle management of technology.

Maybe hitting on some financial questions. First off, with stabilized organic growth and what are kind of the ranges to think about over the next couple of years?

Yes. I think we -- I mean, obviously, Q2 was sort of a bang up quarter in that regard, it was 10%. But of course, 300 basis points of that was on PPI power price increases. So adjusted for that at 7%, still well above the 3% to 5% that we have traditionally guided to. And I think that's driven by some pricing. Pricing and density are probably the 2 biggest factors in that. And so I would continue to see a level of strength there. We haven't necessarily adjusted that range, but we've sort of been above it for the last several quarters. And I do think that -- I think the stabilized assets will perform well: One, because of rising densities; and two, because of continued strength in pricing; and three, because of interconnection.

And then on AFFO per share growth, you have a very attractive multiyear growth path. But what are some of the operational or macro factors to consider other than some of the obvious ones like FX, but that would drive you towards the lower versus higher end of the range?

Well, I mean, we talked about, obviously, one -- well understood "Headwind" in the business, is the rising rates and what that implies on our maturity towers when those are sort of renegotiated, et cetera. But that's all worked into the guide. And so I think something that we fully understand, and I think that investors sort of have a clear grasp around. And then I think we have to continue to drive operating leverage in the business. And I think that's a priority for us. Obviously, we've got to drive the revenue growth, and I think the opportunity is out there for that. I think the product portfolio is evolving in ways, again, that make us increasingly relevant to what the customer is trying to accomplish. And so revenue growth is going to be a key factor driving operating leverage. And then there are going to be some of those below the lines. We sort of had more of a tailwind on below the line, if you will, on the AFFO per share when we're renegotiating it all on the way down on interest rates. And we're just going to have to fight that wind a little bit on the way up on some of the maturity towers, but I think that's well understood.

So on top line growth and when we think about the sales engine, any particular verticals that you would want to lean further into? Any particular types of salespeople to kind of bring onboard in order to generate new logos or enhance [indiscernible] within existing logos?

I mean I think we've seen broad momentum in our business. I think both our service provider business and our enterprise business continue to be very strong. On the service provider business, I think it's more driven by sort of cloud providers and -- "Cloud providers" when I -- and I mean that by cloud writ large, right? Everything-as-a-service, Software-as-a-service, Security-as-a-service, X-as-a-service, anything that's being consumed in these cloud-based consumption models. I think as those providers think about deploying infrastructure to meet global demand, Equinix is an incredibly logical place to do that. And anybody who needs sort of broad-based multi-cloud connectivity, Equinix is a driving force there. In terms of -- and so service provider continues to be a key part of it. In terms of enterprise verticals, I think we continue to see strength across a range of industries, but anybody where digital seems to be an increasingly relevant means of differentiation in the market is a place of strength for us. So we see financial services continue to be very strong. We see retail actually continue to be very strong despite sort of macro pressures that people were fearing would sort of have the consumer keeping their wallet in their pocket more. But like retail, digital is a matter of survival in retail. And so we've seen a strong degree of commitment to digital transformation to AI, et cetera. And so -- in fact, I talk a lot about an AI use case of a retailer really combining weather data, with inventory data, with logistics data to try to figure out where to ship flowers to maximize demand on any given week -- or maximize revenue on any given weekend. That sounds like a really silly, but it is a lot of money on stake. And it's a great example of kind of how this comes to play. So good strength across our ecosystems and across the -- and we see newer ecosystems like connected vehicle as an area of strength and ecosystems are going to continue to be a major part of the strategy.

Audience questions. Santiago?

So given that xScale is available in more locations now or at least announced. Where would you see that [indiscernible] you're keeping a separate strategy and facilities, where will we see the boundary between the system retail enterprise, even with the NSPs business as every time the deals are coming larger from either in enterprise or the NSPs good for us [indiscernible] or vice versa given that capacity was [indiscernible].

That's a very real dynamic that we are kind of evolving our approach to. But there are definitely deals that we had historically taken in retail that have increased to a size that now feels more appropriate to place an xScale. And so -- and again, it probably depends a little bit on the capacity situation. And I would say that there are some traditional workloads that just are increasing in size. But if they still are heavily dependent on proximity to the ecosystem, they still maybe are best suited in the retail facility, but at more retail price points. And so that's a bit of the dynamic that we're navigating. I do think that the aperture or the lens that we view xScale through in terms of which customers we would be targeting as potential xScale customers needs another click out, right? It was -- the reality was it was mostly the sort of the top 5 or 6 hyperscalers that -- in fact, the ones that actually are driving the -- that we've actually sold to really represent that group. But I think there's another click of sort of at-scale providers. And I think there's even going to be potentially some level of enterprise demand that may be appropriate for xScale, particularly for things like large-scale AI training, et cetera. And so it's going to be a bit of a moving target for us, but I think something that we will need to continue to navigate carefully. Here's what -- here's how I -- what I would say, though, at the end is it's got to be about the customer. And even though, of course, we're a for-profit enterprise, and we're trying to do what's good for us, the way over the long term to do that is say, have a deep understanding of what's truly good for the customer and then be willing to do that, right, and then adapt the business to that reality. And so that's why I always -- because like, for example, it's -- I would say to a seller, it would be really silly for us to go and say, no, you shouldn't put workloads in the public cloud, just put them in [indiscernible], right? And the reality is you just have to say look I always use the phrase Render unto Caesar, what is Caesar? It's -- you got to say, look, if it's really well fit for that, then you should do that. And we'll just provide the continuum of offerings. And so that's why I love being able to have the xScale, scale retail, digital services that full portfolio and then go and say, "Hey, choose from our portfolio as best meets your needs."

[indiscernible] a considerable execution risk in the regular data center, specifically the risk [indiscernible] exactly the [indiscernible]. How are you thinking about that base [indiscernible].

Yes. Well, you're right, there is real risk there. And it's -- I think we are able to manage it more effectively on a relative basis because of our scale, because of entrenched relationships, et cetera, because that often is -- and it was probably a period of time where it was even more complicated because of COVID and the implications of that and labor and those other things, I think we're seeing a little bit of stabilization around that. So -- but it's something we spend a lot of time and attention on. And I think it's -- part of it is, I think, really just making sure that you build a presence in the supply chain, broadly speaking, that gives you higher degrees of confidence. And it's about experience. I mean I think that there is a certain value in accumulated experience, and we have a lot of it. And so I think there is risk there, and we've got to manage it very carefully. But I think kind of in relative terms, I think we're in really good shape there.

You mentioned on-site power generation [indiscernible] going forward. What are you seeing as the best ways to do that [indiscernible] gas turbine or [indiscernible]?

Yes. Both are relevant options. We actually use fuel cells with -- gas fueled fuel cells in several locations now as a -- and even as a primary source of power. So we do that in Dublin because it's -- the power situation in Ireland is pretty acute. And so that's I think -- so I think there's going to be a variety of technologies that are relevant over time. I actually think over -- I think over time, I think nuclear is probably going to be part of the answer as well, SMRs probably in terms of -- so those are technologies that I think we have to continue to track and understand and deploy when appropriate. And -- but I do think -- I think it would be silly for us to believe that the grid is going to -- as it currently exists, is going to really solve for the entire need, right? And so -- but then -- and then you sort of then overlap sort of the need for power with the sustainability challenges, and so I think you have to deal with that. And I think that even there, there's a little bit of a -- because the question is does it need to be renewable? And what's really renewable and because you can do fuel cells with carbon sequestration and be 0 carbon actually. That's not theoretically renewable. But I think that we're going to have to be pragmatic as an industry, I think, and as a globe about how to address some of these issues. And so I think there's going to be a range of things, but it's certainly -- we have -- and we also have the luxury, if you will, as a company. We actually have a number of power experts and -- that are on staff that work at Equinix now. And I think that's an area we'll continue to invest in. And of course, we use outside advisers as well. But I think we've got to continue to be smart on that, and it's definitely going to be an area of continued -- because I think it is going to be a source of probably of -- at a minimum risk mitigation and maybe differentiation over time.

We are out of time. I appreciate your answering all the questions.

Thank you.

Bye.