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

Kick it off now it's 12:45. So I'm Mike Funk, I head up the telecom, comm infrastructure, comm software research here at the bank. So great to see you all again. Really happy to have Equinix with us once again for our Global REIT conference. So thank you, Stu. Thank you, Katie. So Stu is SVP of Global Real Estate at Equinix. Is that right?

Yes, that's correct.

And Katie is from Investor Relations. Katie does have disclaimers. She wanted to read quickly. Just to cover the basis, then we'll get right into the Q&A. So thank you, Katie.

Thanks, Michael, for having us. Some of what we may talk about today is forward-looking in nature, so please check out our SEC filings for all of our risk disclosures. Thank you.

Great. Thank you for that, Katie. Maybe to set the stage, Stu. What do you do on a day-to-day basis in Equinix? What is the Global Head of Real Estate do at Equinix?

Yes. Thanks, Mike. Just -- I've been with the company for almost 14 years now, largely with corporate development and real estate for the whole time. My previous role, just as a way to set it up to answer your question. My previous role was running all corporate development for our EMEA region and before that for the Americas region. And real estate was embedded inside those corporate development teams. What our leadership team has done is carve out real estate specifically from corporate development, make it its own global organization and then asked me to run that globally. So day-to-day, we're looking at how we execute our Build Bolder strategy, which is really how do we locate land and power in the markets we need our customers want to be. And just given that's the building blocks of our product offering, it's really, really critical. So I manage the real estate teams. We're looking at these transactions from, I guess, Tokyo to Montreal and everywhere in between.

And I do want to come to the Build Bolder strategy later because there are a lot of questions about the strategy but also kind of the market and where the market is going today. So I'm going to put a pin in that for a minute and maybe start higher level. A key theme right now for data centers is obviously the demand environment, power availability and what operators like yourself are seeing in the current state of the market, whether it's on the demand side, the ability to access power to meet that demand. So maybe to set the stage with your broader views on demand, power availability and how you're meeting that?

Yes. Look, demand signals are good. We just -- at our Q2 announcement, Katie can give you sort of the data specifically around that. But we closed over 4,100 deals over 3,300 individual customers, $345 billion of bookings. And so just from those numbers, I mean, you can tell the demand side has been really strong. We continue to get really strong demand signals from our customer base. We have 10,000-plus customers across all of our 3 regions. And so yes, we are still seeing very, very strong customer demand. And then, Mike, you're asking how does that translate into the pursuit of land and power. Look, it's definitely a challenging environment, but we've been looking at a power first strategy for our land strategy for about 3 or 4 years now. And so really, we're looking at acquiring land and we're acquiring power and solutioning the land around the power, power being the key ingredient. And look, I think the good thing is, we've been in business for a long time. We've been in these markets for a long time. We've got good relationships with individual municipalities, the individual power companies, they know us really well. And so we've been able to leverage those relationships and make sure that we're doing the right land deals in the right spots for our customers' growth.

And then another important piece recently been pricing and re-leasing. And at least in the hyperscale side, the wholesale side, we've seen very strong re-leasing spreads. Some carriers we're talking about, 10%-plus re-leasing, [ active ] is like about 5%. What are you seeing for pricing dynamics and colocation in the U.S. international?

Katie, do you want to take this one?

Yes, happy to. I'd say we continue to see a healthy and firm pricing environment as measured by our MRR per cabinet yield. So we're able to generate across the portfolio. I think when we take a lens of pricing, we're always very thoughtful in terms of approaching pricing with customers, just recognizing that we are the premium price provider in the marketplace, but feel like we have market permission to do so based on the superior value that we delivered to our customers. But also recognizing it's not, for -- as Stu was just talking about, it's not getting easier to bring that capacity online. So we want to make sure we're earning an appropriate return on our capital in terms of how we're approaching pricing with customers.

And our xScale portfolio, those are generally longer leases, right? So we don't have as much re-leasing risk given our xScale program is not that old.

Okay. That makes a lot of sense. I think in recent probably 12 or 6 months, there's some question about where demand is flowing specifically on the hyperscale would be xScale for you. We're seeing builds from AI companies out in place like Lubbock, Texas and Kettering, Ohio or places like that, nontraditional data center market. So can you just talk a bit about why or if location is still important in data centers. That was really the hallmark of the Equinix business going back a long time.

Yes, for sure. Look, we continue to believe that Equinix is playing the best hand in the industry. We've been focused on location for a long time. We've been focused on interconnection-rich locations and really curating a broad portfolio of customers so that we can build an ecosystem that's got durable value, not just for our shareholders but also for the customers, right? They want to be close to other parts of the ecosystem, other customers want to interconnect with them. And so that's still going to be a focus of ours. We've looked at our xScale business as additional to our retail business. And we don't see us getting out too far out of these core markets, so that we can still take advantage of our interconnection and really create that durable franchise going forward. So we might not be in Lubbock, Texas, for example, but we still want to be close to core markets where we can connect back easily to our ecosystems.

Foundation model training is the first step for AI and then there's been expectations that inference is going to pick up the slack or at least be additive, right, in terms of data center demand, I don't think we've seen that shift yet, but part of the investment thesis for Equinix was that given the quality and location of your data centers that you would capture a large portion of that inference demand. I think it's a more robust debate today, if that's true or where the inference is actually going to sit. Can you give us your current view on why Equinix is well positioned to capture inference? And then what indications that you might be seeing that would support that?

Yes, we'll give Katie chance as well after I'll say a couple of words. Look, it's early days in this adoption. We liken it to the cloud adoption, that happened a decade plus ago. Again, early days, but certainly, inference is what we're focused on. That largely is latency sensitive. Those applications need to be relatively close to the eyeballs. You saw a similar thing when it came to some of these connectivity nodes and cloud on-ramps with the cloud deployments. Just as an example, we have over 35% of the cloud on-ramps in the markets that we're in, and we're clearly the #1 provider there. And we intend to do that same model, repeat that same model for AI inference. And the inference is going to be latency sensitive, no question about it. You've got to have these models perform for the end customer and for the end user. And so we think we're incredibly well positioned with our current portfolio and the portfolio we continue to develop to be successful.

Yes. I'd just add on Stu, when you think about the enterprise, particularly in terms of inferencing like every enterprise today, like if I ask all you guys in the room here to like raise your hand like everyone is using some form of like agenetic AI, but really, enterprises are still trying to figure out how to incorporate AI into their broader just operations overall. And so our customers and if you ask anyone on your sales team like they will tell you it's part of every sales conversation they're having today, like enterprise is trying to figure out okay, like what data do I need for AI? Is the data structured, properly cleaned, is it in the right form? And then like how can I incorporate that in my operations? And the key question everyone is trying to answer is how I'm going to monetize or generate a return on this investment over the longer term. So feel like we can help customers with that and the attributes that we've built over the 27-year history of our ecosystems of the cloud on-ramps, the networks that reside inside of Equinix feels like that gives us the opportunity to pursue that -- to pursue.

Yes. The last thing I'll say on this, Mike, is that our global reach is a real differentiator for us, right? We're in 70-plus markets. If you look at the last place that I was in, was EMEA, we've got 30-plus markets there. GDPR is really important. Where the data resides is important. And a company like Equinix, we have a natural advantage because we've really invested in our global reach, right, and global sales team, and we can operate in all of the markets that our customers want us to be in. And we continue to push out that global reach. So we continue to think location is really important. Our customers are still going to drive where we end up being. We've announced new locations in Manila recently as well. So we'll continue to push that global reach out. It's been a real differentiator for us.

Can you translate all of that for me into the income statement. So how demand from inference is going to drive accelerating top line growth or even accelerating AFFO growth in your existing facilities, your same-store growth, for example, your occupancy is relatively high, right? I don't think you've seen a lot of increase in price in those. So is it primarily through taking more price from inference customers. So that requires some churning of legacy customers. What is your capacity to add capacity to legacy facilities that are bringing in more power or space. So how do you, I guess, translate the inference demand that you're talking about into greater top line growth, AFFO growth in the existing facilities.

Yes. I'll let Katie jump on that first question. I'll come back to your how do we look at existing facilities?

Yes. I would say to start, thanks Stu. I would say, overall, when you think about the inferencing opportunities, it continue to add to the ecosystem overall. And so in many respects, like we see AI as another ecosystem to cultivate inside of the Equinix platform and making sure we're cultivating those highly magnetic customers in terms of their networking nodes or things of that nature inside of our facilities. And part of -- and you heard from this -- from us at Analyst Day back in June is as you think about our Build Bolder strategy that we've talked about, really is in response to customer needs. And as Stu mentioned at the top, like we have such strong customer diversity that we're not beholden to just one technology trend. So, yes, AI is very top of mind and very exciting, but there's also broader digital transformation. There's hybrid and multi-cloud happening inside of our facilities. And so it's just a continuation of building out those ecosystems and customer deployments to making sure we have the capacity available across the portfolio when and where we need it.

Yes. And just on existing data centers, we spend 3-ish-percent of revenue on our existing data centers to improve them to replace aging equipment, about 1% of our CapEx goes to that. But really, we're focused on developing the next generation of data centers to further our AI strategy. It's going to require a lot of capacity. And certainly, you've seen us announce quite a big expansion into our CapEx program, about $3 billion to $5 billion, right, annually is what we've announced.

[ Annually ] correct?

No, in terms of the CapEx that we outlined at Analyst Day back in June, the $4 billion to $5 billion, it's roughly $3 billion to $4 billion per year of CapEx to support our retail business with about 80% of that going towards expanding and bringing on new capacity and then roughly about $1 billion per year of land purchases and pro rata share of contributions to the xScale joint ventures.

Which is about 20% only, right? So a lot of this is we are still seeing -- and I think the message you should take away here, Mike, is that we are still very bullish on our core value prop, which is retail colocation, right? A lot of that capital is going to our retail business. The primary share of that capital is going to our retail business, which we still see a ton of growth there.

Does this shift probably more to your primary role. How do you evaluate for site selection, procurement? How do you manage these different pieces of your role and then selecting a slight negotiation. How do you manage to make sure that you have enough equipment on the procurement side that your build times are on time? And how do you manage all that?

That's a great question. Look, let me highlight a couple of teams that don't report to me, but I work very closely with. One is the public policy team. They're great. They work hand-in-hand with the real estate team to create -- as well as the local leadership on the ground. We have great managing directors in every one of the countries that we're in. And we all work hand-in-hand to work with local authorities, to work with the local power providers to make sure we've got those really good relationships so that we can continue to grow in those markets. And the other team I'd like to highlight is our procurement team. I think we've got 1.4 gigawatts under control of forward equipment, right? We're pre-buying cooling and power equipment so that we can continue to deliver these sites on time in a predictable way for our customers, which is really, really critical. So I mean, look, it's never been more complex than right now. But I think Equinix has great talent that we've grown up in the business as well as folks coming in that really know how to operate in a complex environment, really scale the business. And things like our prebuy program have been great for us. Again, like having control over 1.4 gigawatts of capacity just in the kit you're going to deploy, I think, is a really powerful message. Anything to add Katie?

I would just add on to, we also have a pretty holistic power team. So thinking just about power availability to make sure we have the power needed across the portfolio. We also have a dedicated team thinking about our sustainability efforts and renewable energy coverage, recognizing is very important to our customers and the communities in which we operate. And we also have a team that's focused just solely on like our power purchasing as well. And so having just that in-house expertise that we've built out over the course of our 27-year history continues to be a differentiator for us.

It actually blends on to my next question, which was how far before you break ground, you have to actually secure power? I don't know if either one of you have a sense of the sequencing of the timing around securing power versus breaking ground of the facility?

That's a good question. I don't know if we'd look at it exactly that way, Mike, but let me go back to what I said earlier, which is we're securing power first. In some markets, you can secure power. Independent land, a lot of loan markets you cannot, right? So we're locating where the power is and then solutioning the land around that so that when we come out of the ground with a project, we have the power solutions already. And that's really, really critical for us before we start breaking ground for a foundation. We know where that power is coming from. We've got it secured and that we're coming out of the ground with a project that can be powered.

And can you just remind me how much power you've actually secured today? How much you have contracted?

I don't know if I've got that.

In terms of what we shared at Analyst Day is through from a utility procurement perspective, there's roughly 1 gigawatt secured and then another 2 gigawatts either applications in progress that we've submitted. And then the team is continuing to pursue other additional opportunities behind that.

Okay. And then Katie, you mentioned it earlier, and Equinix has always been at the forefront of alternative energy and trying to go down that path. Can you just remind me how much of your power you're currently getting from alternative sources? And then what your target is and how much of that you've actually contracted?

Yes. It's a good question, Mike. So in terms of power, typically, we are tied into the utility grids across the markets in which we operate. And as Stu mentioned, we operate in 70-plus markets around the world. So power availability and the availability of renewable energy is going to vary quite differently across each and every one of those markets. And so from a renewable energy perspective, we talked about in terms of coverage, just given that at the size and the scale in which we operate, if we put solar on our facilities, that's not going to cover the entire load of the building. And so we typically look for -- our preference is for virtual power purchase or power purchase agreements with either like solar or wind farms, we're adding additional green electrons to the grid. Recognizing that, that might not be available in all the markets in which we operate, so we'll use a variety of other different mechanisms such as energy attribute certificates or RECs to meet that need. And then from a holistic just power availability standpoint, we do continue to take a long-term lens on like all different types of power across the portfolio in terms of what we're able to support. And so there have been a couple of instances that we've actually done self-generation across our portfolio to meet the needs of our customers. So it's kind of a tool in our toolkit in the event that we need it, whether that be natural gas turbines or fuel cells. So we have a variety of different options and continue to take a long-term lens in terms of looking at other power options as well.

And I'll say again, we stay very close to our national partners as well as local partners when it comes to this sort of thing. I mean, the governments around the world are looking at what are the alternatives to their current mix of power sources, including SMR and other things to help fuel the digital economy. Governments around the world don't want the grid or any capacity conscious to be the limitation, right, on their own digital transformation because look, it's not just competitive inside the country, but they are competing with other pool markets, right? And so even at the national level, there's multiple countries that we're working with that are looking at how do we change the narrative?

Do you think SMR is a viable short term solution? Most estimate probably 5 to 7 years before the cost analysis makes sense for SMR.

Yes. Look, I think there's some challenges with SMR for sure. I mean you've probably seen Katie talk about some of our announcements that we've made. It's just one of the technologies that we're following and are looking at. I think there's challenges around SMR. But I think it's really going to be a mix of those technologies, right, that are going to be the solution.

Well said, Stu.

There's been a perception in the market that Equinix being the leader by far for years in terms of quality of location and your customers would effectively accept whatever price was out there because they had to be an Equinix facility, right? And the perception is that maybe the customer service relationship management wasn't maintained the way that it could have been during that period of time and that you've lost some deals recently or maybe the customers didn't come to you because of that historic relationship and the perception, right or wrong. I think there was a recent management addition, right? I think Chief Revenue Officer, added. But I think in part was to help rebuild the customer relationships and management. And if I'm right, can you just kind of tell me what you are doing maybe to change that interaction, the go-to-market with your customer and change that perception.

Do you want to start, Katie, I have some comments.

Perfect. I'll start. I will say we did have a recent new addition. So Shane Paladin joined us over December as our new Chief Revenue Officer, backfilling a role that our CEO, Adaire was actually wearing the interim hat, as interim CCRO. I would say, at Equinix, like we've always put the customer at the center of everything that we do and want to be long-term partners to our customers, and that continues to be like our guiding light as an organization. I would say, as you think about our strategy that we outlined at Analyst Day, when we're talking about serve better to our customers, that's really making sure that we are delivering exactly what the customers are looking for and how we can be long-term partners and solution providers to our customers and having that holistic conversation with them of not just about their infrastructure needs today, but the infrastructure needs over the next 3, 5, 10 years plus and having that long-term customer relationship with them. Stum do you want to add on?

Yes. I'll just say like all of the execs on our leadership team, our C-level execs, the next row down like myself, SVPs, VPs in our company. we all meet with customers. I'm going to fly back home tonight to meet with the customer tomorrow morning. And I think that's really, really critical. So not just like our C-level execs, but guys like myself who are on the front end of the business who are candidly kind of far away from the sales motion, right, procuring land and working with the power team, et cetera. But it's really important for all of us to hear what our customer needs are, where do they want to be? What value are they accreting out of Equinix? And so I would say like at least from my lens, Mike, like the customer is the most important thing. I go to customer meetings even in my job, you would think I'd just be kind of kicking dirt all day. But no, like I do customer meetings quite a bit to make sure that the whole company is really customer-focused and customer sensing. That's what I'd say about that.

And those conversations that you sit in, what's the common thread for what customers want from Equinix and where they're going?

Yes. Look, I think a big topic is new markets, like what new markets. Our customers want that global reach. They love the fact that we're global and they can have a conversation to us about Manila, right, or Joburg or wherever in some of the new markets that we've been in. The reason why we are going to those new markets because we're customer-led for those markets. And so a lot of the conversations I have is, hey, look, Equinix, this is where we need to be. Here's the application we want to put there. How can you help us, right? And then it's really about like, okay, what does our entry into that market look like? Are we going to do greenfield there? Will we acquire a business in that market, et cetera? And then the other part of the customer conversation is around like what kind of deployments do they have? Who do they need to connect to? Where do they need to be relative to their existing data? How many milliseconds away? What is their latency requirement? And how does that interact with their existing deployments and their existing requirements?

And a little of a tangent here, but you touched on latency requirements. And in these conversations, do you see latency requirements increasing or decreasing? And then how does AI and then inference of the foundation models? How does it affect the latency needs of your customers?

Well, I'll say like more and more of the customers that we're seeing are saying, look, we need 3 or 4 locations. Let's just take Europe, that's where I last moved from. We need 3 or 4, 5-megawatt locations, and they need to be x milliseconds apart, right? That's a different conversation that we used to have, which was like, I need to be in Paris and Frankfurt with 250 kW. So that's really how the conversation has changed. They're seeing application level performance as the most important ingredient and how Equinix can really impact that.

And what are the applications and use cases? I don't know if it's about 10, 20 milliseconds of latency you're talking about, but what are the applications or use cases that are driving latency requirements to a lower number? Because historically, we thought silicon requires 10 milliseconds or less with things like autonomous driving, right? And maybe real-time 3D, things like that. Most of the applications, they could handle higher latency, right? So what are the applications that are driving your customers?

I think sometimes we can get lost in the AI over a little bit and what that means to Equinix. But look, we still handle billions and our customers still have millions and millions of digital payments, for example, right? Trading for New York City today. Trading is a huge part of our ecosystem here in the New York City metro area, right? So those kind of things are all very latency sensitive, right? I don't know, Katie, if any other examples come to mind.

No.

And then I wanted to shift to xScale for a second and what you think that the legacy Equinix portfolio or brand adds to the xScale portfolio, how bringing those 2 together maybe is greater than the sum of the parts.

Yes, for sure. I think that's really true. I think when we look at our Build Bolder program, we want to be doing things at a much larger scale. And part of that is co-developing. In my part of the business, there's no difference between xScale and retail, for example, right? My team is out there solutioning real estate and power for the entire portfolio. And so for us, it's really the ability to get some real scale out there, develop bold products for Equinix and be able to just become just a lot more efficient. But certainly, we've got our capital partners, right? So it doesn't sit on our balance sheet. And like Katie said, there's contributions that we make when we develop that into the JVs, et cetera.

And I think the market dynamic today, there's a view that the private operators, the builders operate at much higher leverage. Now it's off balance sheet for you, but some are operating at 10 or 15x net debt to EBITDA, right? And also maybe take more risk on where they're placing assets or just winning a higher percentage of these larger deals. So how does Equinix compete with that private company able to operate at higher leverage and maybe wanting to chase deals in the second and third tier markets, how do you compete with that? Maybe you don't. Maybe you feel your sweet spot isn't chasing the next big AI deal, maybe it's more leveraging your existing portfolio of customers.

So we're not out there like from that side of our business, trying to grab a bunch of market share and grow from an xScale perspective, right? We know that's not our core business. Our core business is what we're putting all of our capital in, which is kind of amazing if you think about it, like the capital numbers that Katie was talking about earlier that's going to our retail business, right? And so that still has a ton of growth to it. And so we're not relying to hit our growth targets merely on xScale and chasing those deals.

Yes. And I would just add, when you think about our xScale initiative, and we are certainly really excited about the xScale opportunity. When you look at our plans for xScale 1.0 and xScale 2.0 at full build-out. But as Stu noted, that when we think about xScale, it's really being able to have that full product continuum conversation with the various strategic subset of our customers and being able to service their needs on the retail side. So if they need a cloud on-ramp or a networking node, we can service that in the retail business. And then if they want to do something on a larger scale side when they say, hey, Equinix, we need 10, 15, 20-plus megawatts we can service them on the xScale side, but it really is very strategic subset of our customers and having that full product continuum to be able to give them with the right application in the right data center.

The reason we're in the xScale business is because it was a customer-led thing right? They want us to be there.

So there was command for it. Maybe they were asking you for...

Exactly right.

I'm going to open to the audience here in 1 minute, although Spector's team always has these Spector 3 questions that we ask each company, so I make sure I get those in for them. So first, either one of you, when the Fed starts to cut, do you expect borrowing rates for long-term debt to, and there's a multiple choice here, decline, stay flat or rise.

Give that one to Katie.

Put your macro hat on and...

I'll go with Option A, decline.

Decline, okay. The second question, Last year, the majority of companies stated they're ramping up spending on AI initiatives. How would you characterize your plans over this next year, higher, flat or lower.

I would say higher. We're absolutely incorporating AI into I know this is like multiple choice, sorry, into like our operations and just how we can become more efficient as an organization. So like a great example would be, we are leveraging AI to treat like digital twins of our data centers to help us [ manage ] the energy efficiency and just how we're deploying and looking at hotspots across the data center. So obviously, we are looking at ways to just continue to incorporate AI into our business overall. So I'd say higher.

Do you know who you're using for that? Is it Bentley Systems or Autodesk or I'm just curious from putting on software hat back on...

[indiscernible] Back to on it...

Exactly.

You're not the first person to ask us that.

Yes. It's full technology. Last one and then -- sorry, guys, you can jump in. Do you believe same-store NOI for your sector will be higher, lower or the same next year?

I think overall, we continue to see a healthy and firm pricing environment. So I would say -- I'll say higher.

Okay. So number one, thank you for entertaining me with that. And we have a few more minutes if there are any questions from the audience. I'll have to repeat them if you have any, please. No takers? Okay. Perfect. So let me just go ahead and just wrap it up with one more. Going back to Analyst Day, I think there was a little confusion just around some of the messaging and the impact from the higher interest expense, right? I think last quarter, there was some clarification offered around that. Can you give us the latest on that, Katie?

Yes, I would say -- thanks, Michael, for that. Yes, coming out of Analyst Day, I wanted to be responsive to the feedback that we heard from the Street. And so the Q2 earnings call in July was our opportunity to really update and provide you guys a little bit of clarity in terms of just the key questions that we've been getting. And so one of those was just our assumptions around interest expense. And as we noted on the Q2 call in July, embedded within the long-term outlook that we gave at Analyst Day, both for the refinancings and the incremental debt issuances, we're assuming that those are done at 4.9%. And that is a blended composite of continuing to access lower cost currency markets before returning to the U.S. capital markets.

Great. Thank you guys very much, and thank you all for attending once again.

Happy to be here.

Yes. Thank you, Stu. Thank you, Katie.

Thank you.