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

One of the elements that's kind of newer to your ecosystem is the xScale offering. How should we think about the value proposition of your xScale assets relative to maybe some of the single-tenant assets that might be available through other developers?

Yes. So we don't build gigawatt data centers to perform training. That's not what we do, and that's not what hyperscale -- or that's not what our xScale product is. But what we do know is that the clouds want to be close to where those ecosystems live. And those ecosystems sit in large densely populated communities. So you're not going to build a gigawatt data center in a large densely populated community, but you want to get closer to it. And that's what xScale's purpose is, is to bring those clouds closer in so that they can connect into those ecosystems and the customers that are there and so that our customers have a way to connect into the cloud.

I believe you have about half of the Hamptons campus still available. You also got the Minooka site. Maybe you could talk about those 2 assets or 2 locations and perhaps where else in the Americas, you're considering expanding xScale next?

Sure. Well, those are the 2 right now that we're looking at in terms of -- and they're on track. We're excited about them. And we're -- I don't know if there's a whole lot else that we've shared publicly other than that they're on track and progressing well on plan.

That's good xScale growth for '28, '29 for those investment-grade hyperscale customers. Excellent. Maybe I'll open it up to the room if there's any questions here. Happy to relay them. I can keep going. Maybe on the topic of development, how is Equinix adapting facilities and your design to meet the operating standards of some of these higher power density workloads that you're seeing through AI?

Yes, I'd be glad to do that. So we do this, and we've got probably a real estate guy in the room as well, who does this every day as part of his job and livelihood. So we're always thinking about this. And I think let me back up for a moment and talk a little bit about the metros that we exist in kind of the campuses that we build. We have assets that have been there for many years. And then we have new assets we're continually growing. And so as we think about what we're building and we think about what's needed in those metros, we're constantly assessing existing workloads, the new workloads that are coming in. We have a degree of churn that happens in those metros as well and where we're placing customers to best meet their needs. And so when we think about what we're building to in -- with AI workloads, it's absolutely creating a need for us to build at a larger scale with higher density. And we -- and so when we think about, for example, I think it's DA12 that we've announced that we're building, we're going to be delivering, I think, about 67 megawatts, and it's going to have a density of about 18 kVA per cabinet. That's outside of -- not outside, but it's -- that's denser than we've ever gone, and we're very comfortable with that, but that's what's required. And so we'll continue to think about that. And as we think about our designs, how we're evolving that to address the needs of AI and how we can do that. I think what's also really important because it's come up in lots of other conversations we've had today, how do we do that in a responsible way as well because we have environmental impacts that we have to be conscious of in terms of how we cool things, the amount of water that we use, et cetera. And so keeping a lens on that while also making sure that what we're building accommodates the needs of what AI is driving. I don't think that we sometimes I get the question of, well, what is that going to look like? And do you have a lens on that? I don't think that we're -- that we are building to say this is what AI is going to demand. I don't think anybody can say that right now. I think it's too unknown. But I think we're comfortable with the fact that we have a history of evolving how we build, how we're thoughtful and in the -- we're responsibly looking at what's happening and changing and how we change our builds to accommodate that for our customers. And so I think we're -- we feel well positioned for what AI is going to bring forward and what we're going to have to build to support the AI in the future over the next, say, 5 years.

I think it's an interesting dynamic for Equinix in that you're basically planning on doubling the size of the company over the next 5 years, which would be all the most modern assets. So even as AI requirements evolve, your starting point of where you might need to alter a facility is much more progressive than having to retrofit an asset from 20-plus years ago. And even some of your assets from 20-plus years ago are the most valuable ones in the portfolio because of the ecosystem density that you discussed earlier.

Exactly. Exactly. It's -- and it's -- I think it's an important differentiator for us, and it's also important in terms of how that ties into how we think about those metros and how we continue to build them. And also, the conversations that we have with our customers are probably different. They're not coming to us saying, I just need space and power. They're coming to us and they're talking about this is what we're doing in our business. This is the next initiative that we might be rolling out or we're -- we're having much more business-led conversations with our customers in terms of what they're trying to accomplish and then working with them on how we design where they end up being placed and what they're going to utilize.

How should we think about either the requirement or the option to retrofit older assets for liquid cooling and any other next-generation AI type deployments?

In terms of retrofitting them, I think -- so to your point, we have existing assets that are -- that we utilize with the cooling that we've had in place. When we think about new builds, we think about liquid cooling. So we're less prone to retrofitting a building for liquid cooling, and we're anticipating where we need liquid cooling in the portfolio and building to that. And so that's -- I would say that's how we're handling it. We're not going back and retrofitting a bunch of buildings for liquid cooling.

We've got liquid cooling in 100-plus properties right now, and Adaire, our CEO, likens it to like a NASCAR pit crew in the sense that customer wants liquid cooling, they'll pay for it. They can come in, put it into what they need in terms of the cage, they'll use it, they'll pay for it. They no longer need it. We can pull it out of that cage and deploy it elsewhere. So it's surprisingly nimble relative to what some people think the retrofit need might be. But it all goes back to the idea that when you take the new properties that we're building and the old properties that we have in place, we think what we have is a portfolio that's well set to serve enterprise need for the future. There are many products or real estate types where what you built 25 years ago is still very relevant today, but that's very much the case for us. So we're building to what we believe is core enterprise demand just leg in the way, but also AI oriented.

Yes. And I think what's also really important is building in that optionality in our new builds is really important because what we saw when we started looking and the industry was looking at liquid cooling is that I think there was an anticipation that customers, they're going to buy AI and they're going to need liquid cooling. We did not see that uptick on AI in the enterprise space. And so you had AI companies that were very excited and growth was incredible. But over the last year, you didn't see -- or I would say, 3 years, you saw a lot of customers looking at AI, the enterprise customer looking at AI from afar, but not actually leaning into it. And so what we've seen over the last year is this acceleration in enterprises stepping into AI and needing to really grapple with what's our AI strategy and how are we using AI. And so when we -- originally, you would see a build happen with liquid cooling and it would sit there with nobody -- the customer and say, it's really expensive, too, right? Because it is more expensive. And they say, okay, maybe I don't need liquid cooling. Now it's a requirement. And so I think we've been really thoughtful in creating that optionality and flexibility in our build so that we're not stuck with liquid cooling that we're not utilizing, and we've paid for the infrastructure to build it. Instead, it's there now and available as needed.

A journey for base AI analytics [indiscernible]. One of the things that you mentioned was kind of building responsibly. Maybe you could talk a little bit about the impact of growing community opposition to development and how that is affecting your pipeline?

Yes, absolutely. So community sentiment and backlash is a real thing. And so let me back up a little bit. We've actually -- as I mentioned probably 10 times up here, sorry, but we've been in the industry almost 30 years. And our -- where we're located, we've been in those communities for 15, 20-plus years, 30 years in some cases. And so we have a reputation within the industry and within the communities of -- that people can point out and say, "Oh, you've been a good operator. We understand who you are." That said, the issues -- the growth in the data center industry is real and it has happened. There have been bad actors in the industry. And what the communities are pushing back on are, in some cases, very real issues. Now some of what they're pushing back on are things that they're hearing in social media or on the news and not all of it is back and not all of it is real, but it certainly has picked up steam. Our position on it is that, first of all, we always listen to the community, and we get that they're concerned about rate increases. They're concerned about what it's going to do to their community, does it really bring jobs in. And so we're actually able to point at the fact that we've always paid for our usage. We've always invested and we invest heavily in work in partnership with the power companies to build out the grid that's needed for us. We've done a lot with workplace development, workforce development as well as community development. Before we even acquire a piece of land or think about expanding, we'll sit with the community leaders and talk to them about what we're thinking about doing because we need to have an understanding agreement, right, that we can serve what their needs are and we can build what we need to build. Our sustainability projects are always like how we build a data center directly correlates to regulations that the communities have or what they're asking for. So I think for us, it's -- we need to get that story out more. I just did a probably 4 or 5 months ago now, but issued a document around our community principles, which we've been doing for almost 30 years, but we haven't really had a need to talk about it. It's just in the values of how we are as a company. It's part of our principles as a company. And so we've done some advertising on that and putting it out there and are trying to get that message out. I think it is from a -- is it holding up our development? I would say that our data centers are smaller than the big -- we're not building big gigawatt data centers. And we have worked extensively with communities that we're in right now where we do have specific builds happening. And so we see less -- we see an ask of work with us and help us to get that message out so that the elected officials that actually said yes and the community leaders will say, we want you to come out and meet with the community and do town halls with us, which we're happy to do. We just did an extensive one in Minooka that was really well received, talking about what the project is and working with the community. But we do a lot of that. And I think that's very important. And that -- and so therefore, we have not seen some of the delays or issues that have come up. But I think it's something that we're very sensitive. It is a real thing going on. And I think continuing to get out what's fact and what's fiction is going to be important. And I think also using fact about what specifically data centers have done is an important message for people to hear.

Sure. As interesting just in the industry, how we've gone from ribbon-cutting ceremonies at data centers a few years ago to a pretty strong opposition. But to your point, a lot of it is based on misinformation and just having a communication apparatus to kind of spread the word.

Yes. One of the things that a lot of people don't realize is what actually lives in a data center, in an Equinix data center. And so when we start to talk to them about the fact that 911 runs through the data center, that the local hospital and all of the things that a doctor might be looking at to transmit your X-rays to another doctor across town, the emergency services, the information that's going from an ambulance who's got a patient who's coding to the hospital so that when they arrive at the hospital, that patient -- the vital statistics are there, how it runs through a data center. So when you start to talk about that, it brings to life what happens in an Equinix data center.

Maybe when we think about development, you guys are clearly undertaking a very large development program now. How should we think about the outlook for development yields given the rising costs and constraints on supply?

Sure. Well, we think that we are a very responsible, thoughtful builder with our strategy. And so while we -- you see costs going up, first of all, we think that we -- the way that we build and how we build always has a lens to doing it so that we maintain strong returns on that investment. We also are seeing continued growth in customer demand and what's happening there. And so we feel that our build is keeping pace with as demand accelerates and our builds accelerate, we feel that we're managing that well. And it's still have no problem in the returns that we expect from what we're building.

We think we'll continue to achieve the mid-20% cash on cash yields that we have historically. That's driven by competitive advantages sort of across everything involved with delivering and operating properties. But at the core of it is just the individual mosaic in each data center, right? So like if you just pretend and you had a bird's eye view of each data center, you're looking down on it and think about a bunch of colored tiles. And those colored tiles represent different workloads and customer types. It's really curating that ecosystem, curating that mosaic that drives our ability to achieve the outsized yield. So we'll continue to be very focused on that. And therein lies the lease-up period that we do have, it takes 2 to 3 years to lease our properties up to Equinix level of stabilization, but Equinix level of stabilization is at that higher mid-20% return.

Yes. If I might take a minute also to elaborate on the Mosaic. When we build a data center, before we build, when we anticipate the size and scope of it, we think about who are the customers that are going to be in there. And we think about it in terms of retail customers, so small and medium-sized deals, customers and large customers. We think about large footprint that goes in there. And that all plays out in terms of the returns on that asset. And so we build accordingly and then we sell accordingly. So you'll never have an asset where we say we should have 60% should be retail customers who have a higher yield. And all of a sudden, we've got 2 big customers come in and they want to buy out the data center. We'll never do that because that would so dramatically change the returns on that asset. And so that's a really, really important aspect of how we drive those returns is how we fill that asset. And that's all correlated then to market opportunity.

Maybe we'll do one more topic here on guidance. When we think about your guidance through 2029, which is now for 9% to 12% annual AFFO per share growth, how should we think about the contribution from the various components, be it cabinet volume growth, cabinet pricing, interconnection momentum or anything else that you want to throw in the mix? How should we think about that growth algorithm?

Why don't I take the first part and then you can add all the little details that you want to around that one. So I mean, the growth is -- we're very confident about what we're seeing. I think what we also are seeing is when we think about the growth that we've seen over even the last 3 to 4 years, which has been significant for our company. And then you see what's happened in the last year just in terms of kind of when I spoke about the enterprise maybe now coming into that AI period and we start to see even greater growth happening, I think we're quite bullish on what we're seeing in terms of the future, and that's how we're thinking about what we're building and how do we keep pace with that in a responsible way. Do you want to add in on here?

Yes. And just hopefully, what you're all hearing from us is just that there's broad strength across our business, whether it's customer type, whether it's workload type, whether it's each individual product and service. So that's number one. Number two is we updated our long-term outlook, which is through 2029 after having just given one about 1.5 years ago. And what was our old high end is now our new low end, and that's because of a mix of demand strength, which frankly came on faster than the company anticipated, but also the team's execution as well. But as you think about it just from a simplistic perspective, you can see our same-store pool sort of migrating from mid-single into high-digit revenue growth. And then so you can expect the capacity expansion will do the rest. We're mindful that we're a very differentiated company within the sector -- data center space. We're core -- focused on core workloads, core metros, colocation. We have a good feel of supply and demand conditions in our core addressable market. So we feel good about the execution over the next few years.

I think the last piece is we're very diversified across the customer base. So there's no single customer that has over about 2.5% of the portfolio, and that's significant. So when you see shifts happening, and we've seen this over the years in the history of our company, when you see shifts happening, it has -- it does not have the impact on us that it might have on another company that's heavily invested in one customer type or one particular product.

Diversification is always important.

Yes.

Let's leave it there. Thank you very much.

Thank you. We appreciate that we're here. Thank you.

Thank you everyone.