Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

It's a good point. And the other thing I should just kind of tie with my just -- comments just now is what I was talking about is just general volume trends and that -- what we're talking about specifically what explained the fact that we were slightly negative on a global basis in 2019. And we did do -- and that's virtually totally covered by the downtick in customer acquisition. So customer acquisitions for us is just another form of bringing in customers. So sometimes we're lucky and we get customer volume that's unbended, that they have it in their facilities. Other times, we're actually taking it away from a competitor. And the other time, if somebody decides they don't want to go in the -- they don't want to be in the business anymore, they just want to get out of this part of the business, and we say, could we buy those contracts from you? We just pick it up. So the -- in the last 2, when we're winning it from a competitor or we're buying it from a company that's going out of the business, is the economics are about the same for that. Now the reason why I think it's a temporary trend is we did -- is we have -- still we use the same M&A resources to focus at that customer acquisition piece as we do on M&A. On the -- obviously, the competitive wins, that's not our M&A teams who do that, that's our salespeople. So it's different people that we're using for those. And last year, we were -- we spent quite a bit of time on analyzing and executing, for instance, around the Russia acquisition last year and also a couple of other ones we did in Eastern Europe. And that -- the Russian acquisition was an important acquisition for us from a growth standpoint because that's a very high organic volume growth business, which we owned a minority stake in, and now we own 100% of that business. So we made a purposeful decision to actually analyze and then execute both our -- in using both our financial and human resources around doing that. So next year, we expect it to be more of a normal year where we expect it's kind of the -- roughly the 3 million cubic feet that we would continue to find customer acquisition targets.

Got you. Great. Can we talk about a garden-variety recession here? Obviously, it's been a long time since we've been in recession. I surely remember the organic revenue growth evolution around last recession for Iron Mountain. But how do you feel like -- I imagine storage and service revenues might behave during the garden-variety recession whenever it might come.

Yes. And it is -- I spent a lot of time, as you said, we've had. So if you remember the GFC, the great financial crisis in 2008, which is the last recession we had, is we continue to have organic, positive organic storage revenue growth through that period. And so we -- it was a little bit slower, but we continue to see it through. And we would expect to be -- we don't see anything in terms of our customer behavior that would change that. If anything, it makes the volume a little bit stickier because it costs our customers -- the customers actually have to make an investment to decide to actually remove volume from our facilities because they have to say, do we need those documents anymore? Usually, there's more legal cases that they're trying to defend against and also just the investment it takes for them to do that. So we would expect during a recession, there may be a slight slowdown, but we would continue to see similar trends in the business that we did today. And we don't...

Sorry, I'd just say you think storage will be positive but decelerated from growth rates?

Yes. And I think deceleration, I don't think it's even going to be as marked as we saw in the great financial crisis. So I think it's...

Those were going from high levels to -- organic revenue growth to less high.

Yes. And I don't think we will see that. I mean because we see some recessions now in different parts of the world, like we've experienced it in Brazil. Brazil now is starting to come out. But Brazil, when I first joined 7 years ago, Brazil was booming. Then I think about 5 years ago, it went really into the doldrums, in negative growth -- negative economic growth for a number of quarters, and we continued to see -- the growth came off a little bit in Brazil, but it was still kind of mid-single-digit growth. So we've been through recessions in different parts of the world, not a global recession like the GFC. But we don't see major -- and that's the thing that's great about this business, it's a little bit recession-proof. And if anything, people outsource more during those periods of time or they're more conservative about what they keep. But economic activity, there's fewer mortgages being done, obviously, that does affect our volume a little bit. But overall, we don't see it.

So there was -- I'll remind you about last recession, yes, I surely remember a lot of records management gurus standing around, watched what we do, and they reviewed their boxes and looked for purges. So like, I mean, that is what caused the deceleration last -- during the great recession.

Less purge is more kind of less economic activity. In other words, like, if you take Hong Kong right now, so we've seen a drop-off in mortgage origination in Hong Kong right now. But then Hong Kong is a relatively small market, but -- so you'll see that. The purges, to your point is, as you know, it costs generally people 2 to 3 years of rental income to purge. So actually, we find there's fewer purges especially at the beginning of the recession because people are trying to preserve their budgets for other things. Now the one thing, of course, the GFC has affected was also linked to some financial malfeasance or at least suspicion of that, that led to some legal holds, right, as well. I'm not saying the next recession will be triggered by that. But generally, what you find is that it's hard to motivate for budgets specifically and say, I'm going to spend 2 or 3 years worth of rental to save a year.

So I want to move over to data center business. Bill, you already mentioned a figure, 40%, that caught my ear a few minutes ago. I think you said 40% of the won business from data centers was won because of a reference from the records management business line. My question is -- and just correct me if I'm wrong about how to think about the 40%, I want you to articulate, what do you think is distinctive about Iron Mountain's data center business versus other data center providers? And is it this referral engine that it gets from records management?

Yes. The first thing I should say, the 40% is when we're selling enterprise colo, right, versus hyperscale, right? So just...

Okay, enterprise colo...

And I think fourth quarter was a little bit lower. But quarter 2 and quarter 3, it was dead on, 40% of the leads came from that. So it's a great question, Andrew, because this is the crux of why we kind of -- we're quite -- you've been watching the story for a long time, you know that we are quite conservative in terms of starting our investments in data center because we wanted to prove to ourselves that investing in data center through Iron Mountain made more sense for investors than investing through a pure play. So this is really the crux of us being in it. So the thing that drives this, it's really interesting. First of all, we have very good intel. So we do get business through brokers, but we also get businesses that doesn't come through brokers. So the number of sales leads that we get that are self-generated would surprise me. And the reason why that is, is that in North America alone, for instance, we're doing -- we're visiting 35 -- we're doing 35,000 data center visits per month in North America for our Tape business. And whilst it's a different buyer is -- the intel we get from that is we start seeing when companies are looking to move loads. So why is that important? Is -- what drives enterprise to go for a colocation solution generally is when they're moving parts of their load to the cloud providers, so the hyperscale. And then all of a sudden they're left with a less full or less occupied data center that may be old technology and they're thinking about what do I do with what's left. So we use that intel to figure out how we go knocking on the door. So -- and a very blunt example is that there was an insurance sort of -- a company in the insurance industry and a major global bank that, in the last 3 weeks, we've -- through that, have knocked on their door and said, what do you think you should do with your data center? And both of those have asked for a second conversation on what they'd do with the data center. Now where that will go, I don't know, but we're actually speaking to them before they've even kind of started asking the question. That gives you a huge advantage. And of course, they trust us because of that relationship. The second thing is the trust. So where we find that we get the most traction is around customers that are very sensitive, so that is health care, financial services, government. And that's where -- if you talk to some of the industry analysts is -- I remember I was meeting one when we did our opening in Manassas, and he came in and he said, I can tell an Iron Mountain facility when I walk into it. It's the setbacks that we have. That facility is obviously FedRAMP-compliant. But it's just the way you get checked in, the safety briefing that you get when you come on site. So all those things play well to customers that are very sensitive around security, disclosure of data and information. And those -- I'm not saying that we don't have other industries represented, but those are the ones that we focus on the most and have the biggest brand appeal.

That makes total sense to me. How would you rate the IO acquisition today?

I -- look, because you're asking, so I always give myself an A+ now -- I give it -- I would say it's an A+ acquisition with a B+ implementation to date. And when I say B+ is I think we're just starting to hit our stride on getting the full value with the team. So to me, the great thing about IO, not -- we've got some great assets in the right parts of the country that had capacity to expand, either land or permits to expand or shell to expand. That was all great. The thing that we really got out of it was a platform, when I say platform, a team. So all the key players from IO are still with us. And so the head of data center for North America came from IO. So we've got one of the guys who's focused on financial services, on sales, came from IO. So legal now for data centers globally came from IO. And you say why am I calling out legal is -- the contracts that we have to negotiate on especially in these hyperscale deals are large deals, is the lawyers are -- I wouldn't tell this to the salespeople who are sitting here but the lawyers many times are more important than the salespeople in terms of getting those things across the line. So we've really -- and the other reason why I give us -- so I think we -- not just the assets and the returns and everything -- we're getting very good returns on it because we've been able to grow it organically quite rapidly, but I would say that the team that we got is really good. And the other reason why I give a B+ is I think the team is well integrated. As I said, we've had very good success in terms of retaining them. But I think we can still get more out of the folks. In other words, I think that -- I think we're -- I think there's always more you can do.

But just saying, like, what should we be looking for? Is it more growth? Like when you say they can execute more, they can get more out of it, is more of what?

I think it's more -- it is more growth in terms of how we integrate them with the sales referrals that we -- that I just mentioned the other day. So is 40% the right number? I think we could get more, right? I think that -- I think we -- once we make sure that we're speaking the same language, will we be able to enable our sales force on the legacy side of the business so that they can even see more opportunities and feed those, not just to the IO team, but globally across the team.

Right. So Bill, you talked a lot about in data center, the hyperscale deals. I know you obviously are a big enterprise global player as well. I believe, speaking to the brokers in the space, that you only have a couple of hyperscale clients up and running today. Like why do you speak so much about the hyperscale clients where it's -- I believe it's only a couple of clients for you guys right now?

Yes. No, well, I would say that we -- no, I would say we're probably in -- we probably have around 5. It depends on how -- there is one kind of hedging is some people say there's only 3 hyperscale, and other people say there's 10 because it depends on how you deal with the SaaS guys.

You're saying it's 5, that you call medium hyperscale, okay.

Yes. So -- but if you kind of look at the top hyperscalers and I won't tell you now because then you'll kind of know the logos I'm talking about is we actually do business with all of them, but not necessarily what I'd call a hyperscale deployment, in other words, because they could be in there just for a connection, for connection points. So they -- it might be a megawatt. Megawatt is not what we consider a hyperscale deployment.

Usually, that's how you think about hyperscalers, I mean megawatts, right?

Yes. It gives the pricing changes at those points.

So remind me the number, is it 20?

No. I would say they all grow so fast. So usually, it's like they probably -- it can be as low as 3 megawatts. But it's -- but where -- they're talking about is growth rates that are 40% a year. So it's kind of 3 and then there's plus options for additional growth. And there are some that can be 27, right? So and there's...

I know, yes. There's medium, fast-growing hyperscaler then there's...

Yes, and it could be the same client. In other words, we can have -- we can be talking to the same hyperscaler about a 25-megawatt deployment. And at the same time, talking about 4.5 megawatts with renewal -- with expansion for 9 on top, right? So it's that kind of... So now the reason why it's important -- so -- and it is right to say that I think we punch above our weight on enterprise and we're playing catch-up on hyperscale. And the reason -- some people say, well, why -- and a lot of our competitors are trying to go the other way, right, because, obviously, the returns are higher on the colocation. The reason why we think hyperscale is important is that if you look at large campuses, like Northern Virginia which, depending on the density that we end up, can be anywhere from 80 to 100 megawatts in that campus, it's our expectation about half that campus will be occupied by hyperscaler when it's fully stabilized. And that allows us to do a couple of things. One is it allows us to drive better returns for the colocation customers because we can build at scale the infrastructure that we need and that reduces our build cost, right? And then from a net present value standpoint, we can optimize for returns because we can actually stabilize that site in say, 7 or 8 years, rather than 12 to 14 years, right? So we think that for large campuses -- now if you talk about our Slough facility or our Singapore facility is we may very well have hyperscale logos in there, but it'll be more like a colocation deployment because those are 7, 8 megawatts each. So those are not places where you would really want to sell all 7 megawatts to a hyperscaler. We might do that if we had a 25-megawatt facility, we might sell half of it to a hyperscaler. But you wouldn't do it when you have 7 megawatts in Slough, which is a high connectivity point.

Right. Okay, that makes total sense to me. Okay. So with this last conference call, we got the financial leverage targets, we got the payout targets, but we really don't have growth targets really -- paths this year. Should we be thinking about the 4% EBITDA growth organic path this year? Or do we sort of have to wait to hear from you about a medium-term growth algorithm?

So I think that -- yes, that's a good question. So I think what we've said is, first of all, we would expect 2021 and beyond to be in the 4% plus. In other words, we think that, that will uptick over time. In other words, it's not -- we've been on a gradual climb from flat EBITDA growth, 6 or 7 years ago when you and I first met, to about 4% now. And we continue to see that continuing to tick in that direction, right? So we haven't given you 2021 guidance, but you can expect it's going to be 4% plus, right, for 2021. I think that part of that has been, if you look at the story, it's been basically 1 point, 1.5 points of margin expansion, and the rest is -- be coming from revenue growth. Over time, we expect more and more of that to come from revenue growth, which is coming back again to Project Summit, whereas, to me, the real thing about Project Summit is not just the margin expansion but is, quite frankly, getting out of our own way on behalf of the customer, being able to move faster. And we think that dynamism -- and we haven't guided additional revenue increase this year because we think that would have been getting ahead of ourselves. But our full expectation is that if we really do show up differently a year from now, we'll start seeing that on the top line of the business.

Okay. So maybe, Barry, maybe since you're a newcomer here, fresh set of eyes, how has your experience been so far? And what surprises, any -- define in any way you want, have you found in your initial experience thus far?

Yes. Okay. Thanks, Andrew. I think you know the business well. So the first few points I'll make I think will resonate with you, someone who's been a close observer. I love the business dynamics here, right? The storage business is very durable and generates great cash and great margins. The business is also sound and is investing in really strong growth vector, like data center. So we've got an opportunity to continue to grow that business for a long, long period of time. And that also has fantastic margins, as you know. I think that with Project Summit, which Bill highlighted a lot of the points I would have made, it is an opportunity really to transform the way the business is doing work, but also how we show up with customers and significantly improve our margins over time. Those benefits that we're driving out of Project Summit are very substantial before you even get to the improvement as it relates to some of the customer elements that Bill was just mentioning. I think the team is highly engaged in the work that needs to get done as it relates to process change. And I'm so impressed with the way the team handled that first wave, such that we've got those benefits that are coming into this year and we've got good line of sight on the benefits going forward. And then I would say the capital allocation here is a great portion of the business, right, in terms of the strength of the dividend, the opportunity to fund future growth, we get really nice returns on base acquisitions as we tuck those in to this business. I just see a tremendous amount of opportunity in the business and what we're doing and with this engaged team. And I would say, in terms of -- you asked surprises, I would say, candidly, I did a lot of diligence on it. Bill and I spent a lot of time talking. I talked to several members of the management team as well as members of the Board. I -- the only thing that really has been a surprise is, frankly, how well things are going with respect to Summit, the fact that -- the speed at which the team did it. When Bill was reading me into the situation, before I was here, I thought it was somewhat aspirational to get as much done as the team did in November and December. So as well, the level of engagement around process change and getting on with the technology changes, which will enable us to change the way we work. So I see a tremendous amount of opportunity here to drive shareholder value for our shareholders over the long, long term.

Okay. I think that's great.

Great. Thank you for joining us. This concludes the webcast.

Okay. Thank you.