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

I want to welcome Keith Taylor from Equinix, Chief Financial Officer. I think you've been at our event many times. Maybe just to dispense with the formalities, is there anything about the safe harbor requirements that you'd like to share?

Yes. Maybe some comments I'm going to make are going to be forward-looking. And as a result, I encourage you to look at our SEC filings for the risks and uncertainties contained therein.

Well done. So I want to...

Yes. I love coming to your event. I told Nick last night that I work hard to make sure my calendar adapts to the Royal Bank of Canada event. And you guys outdid yourself again last night.

Well, you've outdone yourself I want to say it because you got the Lifetime Achievement Award at the 2024 Bay Area CFO of the Year Award ceremony last Thursday, I believe, presented by the San Francisco Business Times. So I think that's quite remarkable, and anybody that knows you shouldn't be surprised. So congratulations.

Thanks very much.

So maybe getting to some of the KPIs of the business, and then we'll maybe pull back the lens and talk a little bit more about corporate topics. But I think there's been a lot of interest in what you're seeing around revenue growth. Maybe starting with Cross Connects. The interconnection adds were quite strong in the past quarter. On a net basis, you did have some grooming activity. I believe that might have been in Europe, primarily. But I wonder if you could expand more broadly on the drivers of grooming activity, both by sector, industry vertical, maybe by region. And what can we expect going forward in terms of normalized net interconnection adds?

That was a big one, Jon. It's funny. Jon knows -- he seems to know a lot more about our business than I do at times. I don't know where you get your information from. It's fun, actually, when you ask the question, I go, "I know he's talked to somebody inside the company." So look, let me start off by saying the business continues to perform. It's a very healthy environment right now. As I said, we came off a really good Q2. We have a rich pipeline for the second half of the year. I've got to be very careful because we're near the quarter end, so I don't want to say anything specifically about this quarter. Cross Connects had continued to really look strong, and I think that's a reflection of many things across the region. But overall, the gross activity is strong. What I said in just even my last session today before this meeting that I still think there's cross-currents in the business that the economic environment is still -- if there's anything, it doesn't feel like there's as much of the optimization that we felt in the first half of this year and part of last year, but it does still feel that, economically, things are tough. Market by market, it's different. Some markets are absolutely just -- they're roaring. They're very, very successful. Other markets tend to be a little softer. Sydney's -- as you know, we keep on referring to Sydney as -- Sydney, Melbourne as softer markets as examples. So it's going to be facts and circumstances specific to the market and less about the region. Because overall, we have some really good markets in Europe. We have some really strong markets in Asia. And of course, we have some really strong markets in the Americas. The ones that come to mind, though, just to give you a sense of where we're seeing the momentum, the New York market. Again, we just opened up our New York 3 assets. It will be the biggest build that we've ever had in our history. And so we just opened up that facility. We've presold a good -- a nice portion of that capacity. That's very retail enterprise-oriented. Our average deal sizes are increasing. We're sort of unleashed or removed the constraints from our team. And we really tried to restrict them to smaller deal sizes. We're giving them the flexibility. I think that's part of -- maybe part of the experience of lower cabinet adds, higher densities, good pricing environment. But overall, I'd say just -- I'm not really -- I'm not sort of dealing with it specifically. There's just -- I think the business is in good shape. I would like the environment to be -- economic environment to be better, but I don't think it's going to -- it's not going to prevent us from what, I think, delivering against our expectations. But I just feel like -- and again, I said it to some of the people who are in this room. One of the ways to measure it -- measure sort of health is new logos. So you want to see there are a lot of new logos coming in, some -- and logos can come in all shapes and sizes. But I'm thinking about on the smaller side, that team seems to be a little bit slower than what we historically had seen. Bankruptcies are up. And again, we talked about StackPath in the second quarter. I don't want to talk specifically on what this quarter, but there's a number of bankruptcies that surprised me. And maybe for some of the other providers in this room, this surprised them as well. But StackPath was $800,000 of MRR, many hundreds of cabinets, many hundreds of Cross Connects, and we didn't even see it coming, which is not typical for us. We see stuff coming. And so it just tells you that there's something going on economically that's causing some of these service providers to really hurt.

I think we'll get back to that topic in interconnects a little bit later. But you've talked about an increasing backlog of cabinets sold on the most recent call, sold but not yet installed. And assuming churn stays the same, it seems like cabinets would then improve in the back half of the year. What drives the backlog? Is it different than the historical pacing that you've seen around book-to-bill? You already talked about size of deployments, but talk a little bit about that.

There's 2 elements to the backlog. There's the book-to-bill interval, so from the point that we book a transaction to how quickly will it bill. That interval hasn't changed meaningfully, although, I say that some of the deals that are in that backlog now are of a larger size. So I can see -- I can probably envision some level of extension between the point that we book and when it bills because of the capacity -- we're waiting for that capacity. In some cases, the capacity is under construction. And as I said, in New York, we just opened, and so we're going to release some of that backlog into the New York market. In other cases, like Singapore, we're normally going to churn some of the upsize, and we're going to replace it with somebody that's very significant. But that's -- so there's a little bit of an air gap between the point that they churn out the business to the point that they redeploy. And so that level of business, as Mike Campbell, as many of you know, our Chief Revenue -- sorry, our Chief Sales Officer, that level of, what I call, backlog has increased. And again, it's increasing because it's waiting for something. And then I would just say that there's a number of markets where we're constrained. And it's -- I think it surprised me how fast it came upon us. But like anything, we're building out a lot of capacity. We have a lot on the design table for incremental. We have 54 projects underway, for those that don't know, across something like 37, 38 markets, 23, 24 countries. And then we have another 120 projects in different stages of design. So we're very, very active. We're going to continue to spend the capital. So you'll probably ask me about that. So I might as well just get it -- get to it, that we'll probably spend the capital consistently next year as we did this year.

So the velocity with which you can bring new capacity online relates a lot to energy, and we had Marc Ganzi here yesterday kind of giving us a walkthrough all the regions. But any kind of general comments you would make around Americas versus APAC versus EMEA around speed of delivery?

About speed -- if you -- again, I've shared this with some of you. If you were to start from the get-go and you didn't have land, I think the time that you decide to do something to the time you deliver, you're probably in a 3- to 4-year window. That's what I think, realistically. I think if you've got land and you're starting -- you're entitling the land, you're preparing it, you're probably in a 1.5- to 3-year window, depending on where you are in the supply chain. Thankfully, we warehouse land, we warehouse development. We've negotiated with the different service providers on energy. And so I feel good about where we are about that delivery. I think it's more about what's next. And I don't know if that's what Mark said, again, it's -- when we're going to go -- as we announced on the earnings call, Q2 earnings call, we have a multi-hundred megawatt build that's going to be undertaken in Atlanta. Again, I know others have that capacity being built as well, and we have the power available to us. So it gives you a sense that there's energy, and you just have to go figure out where that is. Gone are the days where you go put up and say, "that's the location I want to build," and then you negotiate sort of the energy. It's -- you got to go to where is the energy available, looking at a concentric circle around the core markets that you want to operate in and decide, "well, that's where the energy is, so I'm going to go put up a data center. Can I go get land now?" And so there's really been an inversion in our thinking. And then I don't want to get into some of the specifics, but suffice it to say, working at the source of that energy. What is the type of energy that we are going to draw and what is the source? And part of the technical aspects of its consumption. And again, we have a very sophisticated sort of engineering and power management team. And I think that they're thinking through all of it as well as all the work that we do around nuclear. We look at nuclear, we look at gas turbines. We've got one of the first gas turbine deployments, I think, anywhere. And these are the things that are very different to our model, and I know others are going to start replicating them. But it gives us capacity into markets where I think others might not, who might be more constrained than we are.

I think we're going to have time for questions. So if there are any, feel free to make yourself visible, and I'll call on you. Maybe turning to macro factors around regulation, just in the EU. As an example, the Artificial Intelligence Act took effect at the beginning of August. Don't know if you would anticipate that that would have any impact on customer behavior, data sovereignty in places like India. But are there anything in your regions where you see regulation or policy affecting commercial progress?

That's sort of an open-ended question, Jon. Look, I think regulation is all around us, whether it's here in the U.S. or otherwise. And we have policy -- we have a full team of policy decision-makers that are working with regulatory bodies and otherwise to make sure we can do what we do. That all said, I think more specific, the question you asked about AI, I think AI is real. It's here. We're seeing the front edge of it. We're certainly winning a lot of what we believe are large deployments inside the xScale business. Some of it would be, I'm sure, targeted towards AI-oriented sort of infrastructure. But we're also seeing the stuff that's on the front edge and how people are going to consume AI to deliver a service. And so that's the exciting part. But I think regulation is absolutely going to come into play in Europe and other markets. You just feel it. And so we have to be knowledgeable and aware of that. And look, it's not like we don't live in, work in restricted environments. We have to deal with that, whether we're in Hong Kong or Shanghai or other markets, Singapore. They all -- every market has its uniqueness and its limitations, but it also has the opportunity for us to excel anywhere there is a need for a diverse set of digital assets accumulating into an ecosystem. I think we're a really good representation of that opportunity. And markets generally want us to be there. So again -- but we have to be aware of what the limitations are. And I think about it at the community level as well, just where can we build. And it's harder in some places to build today than it was before, not to mention whether you've got a source of energy or distribution of energy or transmission of energy or whatever it may be. These are all things that we are considering as we go forward.

Questions?

How do you think about the difference between xScale business, the growth in U.S. versus international?

So the question was about xScale growth in the U.S. versus international.

What we -- xScale for us has historically been international, for those that don't know. We've got an initial sort of commitment to deploy roughly $8 billion of capital with 2 great partners, GIC and PGIM, that is non-U.S. -- sort of typically non-U.S. specific. I say that, and we did do something in Silicon Valley, which wasn't originally in the gameplan. But xScale 2.0, our next sort of, I guess, go at that, that is going to be more U.S.-focused. And so we're going to go big in the U.S. We've announced Atlanta. We did that on our books initially. I would expect that would be dropped into a joint venture at some point in time. On the last earnings call, we're close to totally announcing a new set of relationships and a new deal structure and a lot more capital, and all of that will come in the form of, what we call, xScale 2.0. So both are relevant. xScale will be a big part of our business going forward. I think it's going to require a different type of investment than we've historically made. We need more dedicated workforces, a workforce inside the xScale business. So we'll talk a little bit about that, both from the Equinix side and the xScale side. When we make the announcement, then we get to talk about it. But again, I'm really excited about this opportunity. And what I have historically said, again, for those that don't know, xScale would be 1% to 2% of our revenues and 3% to 5% of our AFFO. Certainly, with this next iteration, you got to move all that stuff up meaningfully. And I think that tells you that we're in this for growth, and I think we can see that growth right in front of us.

Please continue. Question?

I just had a question on the Atlanta [indiscernible] site, what is approximately the size and power of that facility?

We just -- we refer to it as hundreds of megawatts, so we haven't been specific yet.

And target date or year?

Well, we're already working to develop the property. I mean it's a journey. To give you a sense of order of magnitude, it's a $2.5 billion to $3 billion project in and of itself.

Just maybe other revenue drivers, we've alluded to kind of unit growth, pricing trends, whether it's on the Cross Connects side or cabinets, and just kind of updates on steps that Equinix is taking around revenue optimization.

Yes, look, we're doing all things that you would expect. We're trying to be very judicious about where we locate our capacity. And some of you heard me say this, demand shape is going to be important, particularly in some markets where we don't have the capacity or we're not willing to sell the capacity in the market to that type of deployment. Our mantra is right customer, right application, right data center, and that still holds true today. And so if we can demand shape into different markets, we'll certainly do that. Now when you do that, it also comes with price discussions. If that's where the customer wants to be, if we can take you from here over there, it might -- you get a mix issue because Singapore has a different price point than, say, Johor. Size of market. The offering of the data center is going to be different. Jakarta is going to be a very different data center than the Singapore data center. So all of these come into play, I think, looking at the price points, looking at churn, looking at power and power densities. I would just say that we're looking -- we're trying to optimize from all levels to make it make sense, at the same time, deliver the growth. And we can stay at a really high price point, but that, obviously, there is a relationship between price and volume. And so we're trying to manage that. I think the biggest thing that's sort of I worry about, but I just -- the deal sizes are getting bigger. The average deal size is a bigger deal size today than it's ever been for us. Again, everybody is different in our industry, but for us. And so gone are the days where you're just worrying about 5 and 10-kilowatt sort of deployments. It's not that they won't be there. Of course, they'll still be there, some of them. But when you start to work with the enterprise, the deal sizes are reshaping themselves. What we used to think of relatively big at 250 kilowatt, today, that's small. That's a small deal. It's not a non-important deal, it's just a small deal. So that's where I'm starting to think a little bit about what the team, what is the form factor of the data center on a go-forward basis with the higher densities. You need less white space, particularly if you're going to continue to assume a certain size of energy into the IBX. So that's something that we're thinking about. I was going to say one other thing, but I've lost my train of thought. So why don't we just stop there?

Sure, okay. Audience, questions? So the cabinet metric is maybe a little bit less informative, just given the differences that you've talked about around power density of churn versus rebooked cabinets. And then you've got the continuing evolution in chip designs and cabinet configurations. With kind of fresh leadership in place and then looking ahead to future Analyst Days, is there a different calculation to think about when trying to forecast your growth that's not related directly to Cross Connects?

Yes. When you made the reference to different leadership and -- let me start off by saying, I am wholly impressed by their -- she's my fist CEO that I worked for, again, I guess that's what you get -- with lifetime achievement awards you get. You see a lot of CEOs in your life, and I've really enjoyed many of my prior leaders, and I'm really comfortable being at their side. Adaire is a special person. And I'm, again, too early for any of you maybe to appreciate it, but certainly being in the hallways and seeing her dedication to the outcomes is fantastic. I also think to -- maybe to the point that you're trying to make, we're going to focus on growth, we're going to focus on efficiency, and we're going to focus on insight. And that's going to come in many different shapes and sizes. But I would just tell you, overall, that we're going to be, I think, more strategically about the opportunity that is in front of us and where we want to put our resources. And it's not directly answering your question, but there's so many things we can do as a business because we're different than most that are out there. But it comes with the challenges of having a very diverse -- diverse in the sense of complex and multifaceted things that we do inside our 4 walls. I think we just have to hone that down and get a little bit more disciplined and focused where we want to put the energy of the business. There's one point you're going to ask?

That's okay. Well, cabinets and just MRR growth.

And so then -- and so as part of that, because growth is going to be one of those vectors. Put aside density because density is going to be what it is, and we'll try and provide you the clarity -- by giving the team a little bit more flexibility on sizing and shaping and demand profiling, I don't think cabinets is going to be an issue for the future. I think it'll ebb and flow. It's not a perfect metric, but it is a metric that we'll continue to use. I think it's all the other things that we want to share with you simultaneously that we historically had not, but I think we need to on a go-forward basis. So what is the density of cabinet that churns versus one that gets rebooked? And we're seeing some of our cabinet deployments now at 100 kilowatts per cabinet. I mean I never thought -- I remember when people were talking about 6 kilowatts per cabinet and building to that specification that, that was crazy talk because we're only building a 1.75 kilowatts per cabinet when we first started the business. So I think volume is going to come in many shapes and sizes. Cabinets will be part of it. We'll make sure that we can articulate that. I think we have to talk about density. We have to talk about net power. And that was something we sort of spoke of on the last call that the amount of net power that we sold in the core business was substantial to give people a sense of that. Even though the cabinets are negative, the amount of capacity that's coming through the system is substantial now. And then talking a little bit about backlog, book-to-bill, I mean, there's one other thing -- and then, sorry, the gross activity. So it was a combination of all those that hopefully puts the package together for you to give you a sense of, is the business performing? And I would just say that for the second half of the year, I don't want to shift, if you will, our thinking around cabinets. We think that there is an inversion or reversion to -- whatever, to positive cabinets. We still think it's a good metric. We think MRR per cabinet is a good metric, and that's what we'll share.

So you mentioned a new CEO comes from some different industries, obviously, Google and SAP, also a new Chief Customer and Revenue Officer, and maybe some other changes to come. But collectively, what are some of the ways in which those 2 individuals and maybe others are making an impact on go-to-market? And how maybe some of the objectives changing around product mix, channel mix and so forth?

Yes. Well, they are -- I mean, for those that don't know, Adaire ran sales and marketing for Thomas Kurian on a global basis for Google Cloud, a huge workforce. She had a huge workforce at SAP. She was at Oracle before that. I just see her thinking about the business differently. When she meets the customer, she's thinking about value attribution, not sort of the dollar and cents of a cross-connect or cabinet. How much value are we attributing to the customer for them? And how much -- or said differently, how much is the customer benefiting? And do they appreciate that benefit from being inside our environment versus somebody else's? So I think that's one thing. I think just the discipline that we're going to -- what we have and we're going to put around decisioning, prioritization, spend, just one thing after the other. It feels like a really good relationship. And then you've got the likes of Raouf Abdel and Jon Lin and others who are just doing a fantastic job at running the business. So go-to-market is going to be very relevant. I think what you're going to get is greater -- increased discipline, higher prioritization and sort of bent towards more growth orientation that feels right. But that comes as sort of in conflict a little bit about where do we not want to spend our energy. And so we're obviously looking at a number of factors and deciding that there are probably some things we don't want to do. And that's -- I think that's something that's forthcoming.

Any other commentary or updates on management changes, either new joiners or recent exits?

Yes. Look, all 3 of our regional president roles are vacant. One is being replaced on an interim basis -- or 2 have been replaced on an interim basis; 1 retired; 2 are, what I call, regrettable departures. But like anything, the data center space is thriving, and our people are being sought after. And so it's not a surprise that you see some people leaving the business for -- to go into the private side of the house. But I would say very regrettable, but the bench strength is immense. And I mean, there's a reason that people come to Equinix, too, for their employees because they learn a lot at Equinix in the data center space. And so all I can say, it's disappointing, but it is what it is. And then there's other things where we're making changes. We're going to do a shift in -- we're making a shift in strategy, and with that, comes decisions. And part of the pride that I take in working for Adaire is the fact that you got to start at the top. And sometimes, you got to make decisions, and decisions have been made.

Maybe to kind of bring us to the last 2 minutes. If there's no -- okay, we got a question. Please?

Just maybe into the APAC version. And prior to this job, there's commentary about [ the strategy ] in other markets, in Asia [indiscernible]. I guess, is there any commentary or advice in, I guess, upside or downside to demand versus the channel expectation?

Well, so we've got some really restricted markets in Asia, Tokyo, Singapore. We're building out in Jakarta. We just bought a business in Manila that will close in later this year. Thailand, we've taken down land. So we're limited in the markets that are available to us. And we have -- and again, hopefully, we're more restricted in China, just the facts and circumstances are a little bit different, and it's harder to put capital work in China right now just given the environment. So you have a great market like Singapore that's constrained, or Tokyo that's constrained, and then on the flip side, you've got a weaker market in Australia. And part of it is because Australia, where it's located, and just a lot of it's internal growth. And I would just say, it's just -- it's a function of time, and time will heal all wounds. But I feel like we're in a really good spot in the markets that we need to be, and we'll continue to look at other markets as well to see if it makes sense, both in Asia and Europe.

On the AI topic, I think Adaire mentioned recently 12 to 18 months out. You've made comments similar earlier in the year around not expecting immediate impacts. But whether it's Cross Connects or other revenue drivers, any kind of movement to expect? First, does it drive Cross Connects incremental to what you see on a business-as-usual basis?

I think private AI cloud certainly will. I think an AI ecosystem will create Cross Connects for sure. So Cross Connects will be there. I think it's just -- there was this sense of, when you go back over the last 18 months, this euphoric sort of feeling about what AI was going to be with NVIDIA. And I really was trying to calm everybody down a little bit. I knew we could -- we're going to see the benefit, but it wasn't going to be instantaneous. And it was very much akin to what happened in the cloud space. And that represents about 30% of our revenues today. People thought cloud was the killer of all things, data center. And in fact, we thrive in that environment. I think AI is an equally great opportunity. I know it will come with a lot of cross-connect activity. It's going to come with a lot of volume, a lot of price, largely because you're dealing in a restricted environment. And too often, today, if somebody says, "I need 1, 2 or 3 megawatts across 5, 10 or 15 markets," and we go, "yes. No, no, no, no, no." Yes, we can do it there. We don't have the capacity. And so we need to build out that capacity. And that's what's the exciting part, and also, I think it's also the price point as well.

Okay. We are past time. I appreciate you spending time with us.

Thank you very much.