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

Hi. My name is Richard Choe. I cover communications infrastructure here at JPMorgan. I'd like to thank Charles Meyers for being with us here today.

Sure.

I just wanted to start off. I'm used to saying President and CEO, but now you're transitioning to Executive Chair. Can you talk a little bit about the decision to transition from President and CEO to Executive Chair and the hiring of Adaire Fox-Martin to replace you?

Sure. Sure. Before I start, I'll follow through on my commitment to Katie to tell you too that some of what I say will be forward-looking and to check out our riveting disclosures on our website, if you need to. So yes, Rich, actually, this will probably be my last conference as the CEO. We expect Adaire to be on board in early June. So it's been an incredible run. I expect I'll be pulled into service on the occasional pinch hitting, and so probably not my last one overall, but last one at least sitting in the CEO chair. So -- but it's been an amazing run. When I took the job, I think people probably have seen some of the commentary and the video I posted on LinkedIn, et cetera, about this. But it was -- when I took the job in '18, it was -- I had sort of given the Board a 5- to 7-year time frame. As you might imagine, at that time, the Board was like, yes, we'll talk about that later. And so as we came up on the 5-year mark and we were continuing, as all good companies do, to think through succession planning, et cetera, I said, no, I still am kind of on that time frame. And so as we sort of continued down that journey, the opportunity presented itself to look at Adaire as a possible successor. And I think she brings a tremendous set of experiences to the table for us and also happens to be somebody who was deeply sort of involved as we continue to set the strategy and very bought into that and committed to what we're doing, and I think somebody who understands the company and the culture and what has made us tick. And so feel really good about her -- the next chapter under her leadership, and looking forward to supporting her in a time that is as exciting as I think it's ever been in the data center business, and excited for what comes next. It's funny, because people have asked me, well, how can you possibly jump off the train at this point given this, but it's not really kind of how my brain works in terms of this more -- the timing for me is less about Equinix and more about me and kind of my family and 5 grandkids, and I'm already starting to miss things that I really would prefer not to sort of have that cycle. And so looking forward to being able to spend time with them, but also be able to continue with a company that I feel very passionate about and love the people and get to continue to do that. So best of both worlds, from my perspective.

And I'll follow up there is that in the end, you're still Executive Chair and you're still going to be very involved. So as much as I think some people think you're stepping away, you're not really stepping away. As you brought up, like 2018 to now, the world has changed a lot and I assume when you took the role, you saw a very positive outlook for data centers. How do you feel about how the business has developed from when you took over to now? And let's not even talk about AI yet, but just the overall where Equinix was to where it is now?

Yes. I mean I think that -- because again, you could say it's a 14-year plus time frame for me with the company, and I think that over that period of time, I think we have been very consistent about what we think Equinix does distinctively well, the role we play in, sort of cultivating and curating digital ecosystems and the value that delivers for our customers. And so -- and when I took the CEO role, I was -- continued to be extremely convinced of the opportunity in front of us and the ability to invest behind that. I think we've done some really interesting things. Obviously, kind of what we've done in xScale has been, I think, very successful. I think it was something that we looked at that and said, "Hey, we want to continue to play in that space. We don't want to strain our balance sheet. How can we solve this conundrum?" I think we were -- we kind of led the market in terms of that structure, which is now kind of happening all around us. But a lot has been done over that period of time. And I think -- but always leaning on, I think, that the distinctive advantages we have in terms of our global reach, the ecosystems that reside in our platform and being able to continue to deliver that in ways that are consistent with the evolving needs of the customers. And so I think we followed through on that. I think we've been very agile in many respects. And I think the performance of the business has been very compelling over that period.

And something that I get a question a lot, of people kind of see data centers as a commodity and as something that isn't strategic, but Equinix has always kind of built this business on being -- having real strategic value to its customers. Where do you see Equinix today versus 7 years ago or 5 years ago?

Well, I do think it's very important. One of the things that I think is most common, and you certainly see that here depending on -- at investors' conferences and other places depending on how long people have followed the story or that kind of thing, is that the data center business is far from homogenous, right? And so people talk about it as an industry or as a sector, and the reality is, is that there -- it's a variety of sort of different subsectors within that. I think a lot of the energy, for understandable reasons, focuses on sort of the hyperscale opportunity, which has dominated the conversation and probably dominated the capital flows into the market over the last many years. But it is actually a business -- it's a part of the business that is more difficult to differentiate. It is -- it has a different return profile. It's still a very attractive business with a rich and, I think, very enduring demand profile to it, but it's very different than what we do in our kind of traditional retail business. And as I said, our role in that business has been around cultivating these digital ecosystems and playing a very different and more targeted role for customers as they think about hybrid infrastructure and the ability to deploy hybrid infrastructure in an increasingly cloud-centric world, and the role that we play in actually supporting the service providers who are delivering that value to customers, including the hyperscalers. In fact, we talked about that on our last earnings call. I think people don't quite -- or maybe didn't fully appreciate, and that's why we gave the numbers that we did on the last earnings call about in the retail business alone, not even counting xScale, we're well north of $1 billion run rate just with the hyperscalers, hyperscalers in terms of the important role that we play in their underlying architectures. And so I think that I think the demand profile for data centers, broadly, is as rich as they've ever been, and I think the specific demand around our more interconnection-centric, ecosystem-centric value proposition in the retail data center space is also as good as it's ever been.

I think that's one of the things that I run into the most is that people are worried that -- and I feel like we've been talking about this for a long time, that as the cloud gets bigger and now AI comes, that colocation and interconnection are going to be somehow technologically displaced. And because of the amount of dollars going into investment in both the cloud and AI, people think your business isn't going to grow as much. But we haven't seen that. And so kind of what are you seeing in terms of cloud and AI growth for your business?

Well, look, I mean, cloud has been a major catalyst for our growth over the last many years. I think when we saw this, I think, trend early on in terms of cloud adoption and what the -- we had -- we were -- I think we -- one of the things we pride ourselves is always being objective about the risks and opportunities in front of the business, and that has served us very, very well. As we looked at it, we said, okay, it is -- it seemed fairly clear early on that the majority or super majority of workloads were going to be destined for the cloud at some point. And I think rather than resist that or try to convince customers that they should not go to the cloud, I think instead, we have always been -- had a value proposition that says, look, workloads should go where they are best served. And instead, our role with the customer has been to simply help them understand what their needs are, understand if -- when their needs are different than what might be met in the public cloud, how to adapt to that, and then also how to eventually move to an environment where people have a variety of workloads across a variety of infrastructure types. And that sort of hybrid and multi-cloud architecture has, I think, emerged in a very compelling way as the standard for enterprises. And I think we've been very successful in helping them navigate towards that. And I think AI, by the way, I think if you look at it, it has many similarities to what we saw in the cloud over that time frame. And I think in the same way that hybrid and multi-cloud emerged as the architecture of choice, I think some form of hybrid AI is also likely to be the architecture of choice in AI. People, I think, are right now, many of people at least, using cloud-based AI services as their point of entry into AI because it's easy to access. It's agile. It's flexible, it's variable cost in nature. But people that are operating at scale are saying, okay, the unit economics, though, are better if I can do that on private infrastructure, et cetera. And so hybrid AI, I think, represents a really big opportunity for us, and we're already seeing that in our pipeline. And not just in xScale. xScale, we are seeing it in terms of serving the hyperscalers whose demand is kind of voracious, to say the least. But I think we're also seeing it as enterprises think about the AI opportunity in front of them.

And I think one of the things that you have mentioned over time or more recently is your ability to serve, I guess, this AI hybrid architecture, both from your normal, I guess, air-cooled and existing offering, but now you're enabling liquid cooling. Can you talk a little bit about the new services or ability to serve that?

Sure. Well, I mean, I think one of the misconceptions has been, oh, well, we're seeing a rapid increase in the sort of power densities of new technologies, particularly on GPUs. And therefore, can these older data centers accommodate those? And the reality is, is that the answer to that is yes. And while it does represent particular challenges from a cooling perspective, your ability -- our ability to implement liquid cooling, which is now available in 100 of our facilities around the world in almost all the markets in which we operate, that allows you to be able to accommodate those workloads. Now, it does change the mix of business that will exist in those over time, and so you may end up with fewer net customers or net deployments consuming the same underlying IT load. But as long as you can monetize it at the same or better returns on capital, then that's eventually a net gain for your business. And so that's where we are. And we are ahead of the game in terms of having commercialized liquid cooling technology solutions across our footprint. I was just in Paris last week visiting our liquid cooling proof of concept in our Paris 10 facility, and again, I think we're putting customers through that thing on a very regular basis and starting to see meaningful uptake on that.

And something you mentioned on the call, but something that investors have been concerned about, was the number of cabinet growth. And I feel like that's a metric, for better or worse, that has been your main metric, but it seems like now to what you're saying that it might not be the best metric to focus on in terms of where your business is going. How should we think about cabinets versus...

I don't think that it's not the best metric. I just think it needs more complete view and one that is informed by the changing dynamics in the business. So that's why we gave everybody the math required to think about how densities are changing, how there's a delta between sort of the density of cabs that we're churning, because a fair amount of what we would talk about as frictional churn in the business, as that churns out at lower densities and you replace it at higher densities, you essentially create a bit of a hole in your cab count. So it's not that I think that cabs is a bad measure, I just think it's one that we need to moderate in terms of people's expectations. The bulk of our growth has come with more modest cabinet growth because of this dynamic of evolving density, but that is driving our MRR per cabinet yield. And so the combination of those 2 things is what you need to be concerned about, but I think our ability to deliver the revenue growth that underpins our guide and our future plan is very, very healthy. And so -- and I actually think in many respects, cabs are the right underlying metric for us versus kilowatts because we, unlike others, deliver -- 18% of our revenue comes in the form of interconnection. And so you have to really look at it on a per cab basis, because if you sell a kilowatt, if you don't have the additional services to add to it the way we do, it's a very different return on capital, whereas the health of our interconnection business is a major driver of our market-leading returns. And that's why I think cabs work, we just have had to kind of moderate people's views of what that growth would look like because of this density shift that's occurring. And so -- and I think people now, for the most part, on meetings today, as I've talked that through, people are sort of grokking that.

So it seems like people are getting more comfortable with kind of balancing the two, and that your underlying business of interconnection and cabinets are both important, and that seems to be growing at a good pace. You had another healthy quarter of signings. Has that trajectory changed in recent months? Or kind of where are you overall in terms of your demand profile and pipeline?

Yes. I mean as we said on the call, I think we have an extremely strong forward-looking pipeline. We had a record Q1 as it relates to -- it was the best Q1 that we've ever had from a bookings perspective, and I think we're seeing digital transformation as an underlying driver of demand for digital infrastructure at peak levels. People are very, very committed to that, and AI is an additional stimulant. I do think people are trying to weigh the budgets between how do they implement AI without sort of net increases in their budgets, and so I think there's some trade-off between those things. But I think that people continue to see what we offer as a very compelling part of how they want to think about hybrid infrastructure going forward. And increasing the agility that they need and in sort of this multi-cloud -- hybrid multi-cloud world. And so overall, I think demand -- underlying demand is as strong as we've ever seen it. There are a lot of dynamics in the business in terms of -- I still think that we've seen a fair amount of optimization, still people are working through, I think, their cloud strategies in terms of what level of cloud is appropriate for them, how do they implement hybrid cloud and where, when, how. And I think we're working actively with people in that, and I do think we've seen a level of optimization around infrastructure decisions. But I also think we're seeing the front edge of AI demand in a very compelling way. Again, with service providers for sure, but now beginning with enterprises as well. Right now more on the training side, but I think with a wave of inference demand coming over the next couple of years that I think will be an even more compelling area of differentiated demand for Equinix.

Do you feel like that inference demand is -- has started even yet or...

It has started, for sure. I just think it is -- I just still think it's relatively early.

Okay. You did have a delay in reporting in your quarter, even though it was a strong quarter. It's good to hear that, I guess the team was still focused, but there's been, I guess, other press reports out there about some of your accounting and issues. And so can you just walk through us kind of what went on and how you dealt...