Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Okay. Good afternoon, good evening, depending on where you are. My name is Colby Synesael, I'm the Communications Infrastructure Analyst here at Cowen. Welcome to the virtual portion of our Communications Infrastructure Summit. For this presentation, we have Iron Mountain. And from Iron Mountain, we have Mark Kidd, who is the EVP and GM of the company's data center business. We have 40 minutes for this. I've prepared a bunch of questions, which will take us all the way through, and I hope you find it a value. So, Mark, thanks for being here. Appreciate it.

Awesome, Colby. Thank you so much for having us back.

So I want to start out talking just about an overview of the broader Iron Mountain business. So kicking things off, as we know, Iron Mountain's data center business has been performing well throughout the pandemic. That said, how has Iron Mountain's legacy business been performing?

Sure. Yes. So a great question. Iron Mountain's business overall has been beating our own expectations over the last year and really kind of outperforming. You see really strong core growth, but equally really strong service rebounds and our new service lines, digital solutions, secure IT asset construction really strong growth sort of 20%, 30%. So overall, the business has been performing super well against this backdrop and has really nice tailwinds behind it.

Well, that's great. And certainly, the stock seems to be reflecting the success of both that legacy business and the data center business. And it's good to see not one necessarily holding back the other in terms of how the stock itself is performing. Originally, Iron Mountain's entry into the data center business was predicated on leveraging its extensive enterprise customer base, which comprises over 225,000 customers in 95% of the Fortune 1000. That said, the business appears to have shifted toward hyperscale more so in the last few years. What's driven that pivot? And is there a targeted split between enterprise and hyperscale that you guys are looking to achieve?

Yes. So the way we think about it and the way we built the business is you're exactly right. We did enter on the back of the enterprise and the existing customer relationships we have. And so -- that was our day 1 thesis as we came into the market. And I think we've executed well to more of a retail-type business. There's fewer large deployments there. And as we look at the market dynamics, just that percentage of the market has shrunk over the last 3, 4, 5 years. And so you've really seen the market overall drive towards more hyperscale consumption, some markets going 60%, 70%, 80% in that direction. And so what we saw was sort of 2 things: one, an opportunity from a growth perspective to potentially capture that as part of the evolution and growth of our business in addition to what we were already executing on and really bring that same service mindset. But equally, somewhat defensively, we looked at the market and said, the marginal cost of construction operation is going to be set in any given market by hyperscale consumption. So there won't be really a way to just go after enterprise alone. And so thinking about those campus level economics and how it could really drive and create value, it made sense to extend the aperture. And I think we said, hey, what are you targeting for mix? I think we target in any given market, slightly less hyperscale business than it is in the market by itself. But it's obviously getting harder to do because the demand is so high that we find ourselves trying to reserve capacity for folks that aren't the big cloud and content providers sometimes, which can obviously lead to careful customer management.

And so I certainly understand that the market is predominantly hyperscale and natural than if you're going to be in that business, that's where you're going to want to go. But obviously, we haven't given up by any stretch on the enterprise opportunity. But has that enterprise opportunity played out the way that it was anticipated as well? Or do you just see more of that demand effectively going to the cloud and then you're indirectly getting it by serving those hyperscalers?

So if you look at kind of the last few years, we've actually done a nice job ramping up our retail and enterprise sales efforts. And so if you actually look at just sales in that segment, it's been growing every year over the last few quarters of them doing pretty well in terms of revenue. Obviously, revenue will run ahead of bookings in kind of that colo megawatts in that in that colo enterprise segment. And so we definitely have seen good growth there. And so by no means that we shy away from it, it too has been growing. It's just that those larger deals have kind of jumped in there and taken up even more growth.

Okay. And then just talking more about hyperscale. During the second quarter, Iron Mountain leased 3.6 megawatts, bringing its total first half '21 leasing to 12.6 megawatts. That said, you did sign another 6-megawatt deal in Northern Virginia subsequent to the quarter and driving an increase to your 2020 -- which drove an increase to your 2021 leasing target to plus 30 megawatts whereas it was previously, I think, 25 to 30 megawatts. Can you help us unpack the drivers that have contributed to the strong demand? And what gives you the confidence that will continue in terms of increasing that guidance is just based on what you've done even with that new deal it's not obviously enough to get you where you were intending to go for the year.

Yes. No, of course not. And I think we still have 4.5 months left in the year. And so I think even when we made that announcement, we subsequently announced another 2.4 megawatts a couple of days out for the quarter. I think we have good line of sight to what we're committing to and our ability to execute on that increased guidance. And so I'd just say that it's confidence with the pipeline that we've been managing and driving against. And so as I mentioned earlier, we have a good sense of sort of what we can drive on the retail colo side of the business each quarter. Megawatts aren't quite as high, but obviously at a much higher price point. And then the larger deals are a bit more lumpy, especially our size still. We just don't have that much inventory that can take big deals. And so as a result, I think we want to make sure we have pretty good line of sight to what's coming and how we can execute on that growth plan before we make commitments. So that's how we think about it.

Okay. And I guess, what are some of the markets where Iron Mountain has seen strength? I know you've been very successful in Frankfurt, but maybe some other markets as well.

Yes, sure. So the places that we see a lot of demand in the U.S.. We are in really good position, our Manassas campus in Virginia has done well, continues to do well. We've seen good, really strong growth over the past 12 months in our Phoenix campus, a lot of customers continuing to expand and really drive that forward. Frankfurt, as you mentioned, we did well, and then we announced a new asset there. We haven't included that in our release in the guidance yet, but we see a lot of demand in the Frankfurt market. And then Singapore, like everybody else, we wish we had more capacity, another market that we opened and even sold out the entire facility even beyond where we kind of upgraded a bit to get even more in there, but sold out within a year. So I think those are the biggest drivers in terms of where we see momentum. But we haven't seen quite as much this year in London. But even the Boyers facility, obviously, is having a little bit more interest now as well, the underground facility.

And in terms of the customers, does the mix shifted much? I mean, we all think of obviously the top 3 or 5. I'm guessing that they're the ones that are driving the majority of that hyperscale demand. But are you seeing the list augment further? Are you getting some wins that you never would have thought of necessarily somebody you'd be doing business with just 2 years ago, as an example?

Yes. So I don't know if we would say we never thought, we've been doing business with them, but we have been a little more mindful of the fact we've a pretty good global footprint, even though we don't have that many sites. We sort of checked the box into major regions. And so we have been a little more targeted around some of kind of the content-type providers who have more of a global demand and footprint, where we really were in a position to serve them a couple of years ago. So we're not talking top 5. Now we're kind of jumping down that list and saying, okay, maybe top 50 or top 100. And we've been trying to be really thoughtful about supplementing kind of our core enterprise book with those folks that see the value proposition in a global delivery model, kind of global contracting, that service mindset. So there are some new logos without a doubt coming in there.

And you mentioned the global platform as a differentiator. I guess maybe just expand on that in terms of is that something that customers really do care about. They want to see you in multiple markets because they're looking to sign a deal in multiple markets and would prefer to work with 1 vendor. And I guess, what are some of the other differentiators that you guys are trying to make clear to your potential customers when trying to win a deal?

Sure. Yes. So I think when you look at markets, it kind of varies by segment in terms of how useful is the number of markets that you have. I think we've the largest consumers of data center capacity, it's more about building a deeper relationship and credibility to deliver on multiple locations. They're looking for simplicity. They're looking for speed and looking for lowest cost of execution. And so vendor complexity, number of vendors makes it more difficult. So if you can credibly show up to deliver consistently in multiple places, it makes their life easier. I think -- and that's really around kind of consistency. I think operational consistency and kind of service delivery and ticketing and portal and those types of things play much better when you get out of the sort of top 5 or 10. And so when we talk about that next tier, we do see a number of financial services, some of the content providers who really don't have a lot of staff around the world want a little more service type touch. And really being able to deliver that well from a services-oriented company, which was our kind of -- our -- was our bread and butter history. I think that's really where we come across. And both our customers and employees that come over into the business that have been in the industry a long time really acknowledge when they kind of tell me, "Hey, you realize how well you do this?" And I'm like, well, no, we're just kind of doing what Iron Mountain does. And so I think that service angle really does come to play. And that's -- like I said, it's a different kind of service, the really big providers we're looking for. That's more -- it's construction, consistent, is it fast? Like you're getting things done. So a bit of a different angle. And then I think in terms of differentiators, I think for, again, the non-hyperscale customers, our strong lean forward in things like Green Power Pass and being able to deliver green attributes has, I think, been very strong. It was great industry collaboration to get that done. And I think ultimately, between footprint, service level, green power focus, those are things that we usually lean out on in that segment. Green Power, the large providers are doing that themselves. Having said that, the environment of collaboration has significantly increased over the last 12 or 18 months. And so we do see opportunities to kind of work together in new ways that we had even a year ago.

Very helpful. You mentioned earlier that the 2.4 megawatt deal in Boyers, Pennsylvania with a leading hyperscale enterprise software provider. Can you provide a little bit more color on Iron Mountain's unique facility in Boyers? I'm not sure too many investors actually appreciate the uniqueness of what you have going there.

Sure, yes. It's -- in many ways, it's strange because it's our oldest data center facility that we started out as an internal data center and then converted over the years to multi-tenant. And so what it is, is it's a data center in Western Pennsylvania in the U.S., it's 220 feet underground. We have some very interesting attributes where we're using underground like to do the cooling and very high efficiency. But given its remoteness and sort of the underground construction the limestone, what it does is it provides a very high-security location. And so the customers we see that are most interested in that type of deployment would be more like a very specialized financial services customers or potentially government groups that are looking for more protection and security. And so that's site is 200 acres underground just part of it is a data center.

That's amazing.

Yes. It's an astounding location. So what you see is that's not going to be a hyperscale cloud location for sort of any end user. That's more of a collaboration about, okay, who is our customer serving as their customer and what's the right place for that to get set up. So very unique, very, very good location and serves the [ segments ] well.

I was telling Greer. That's on my list of things to do is to tour that facility someday. That sounds really cool.

Everyone want's to go. it's like a Disneyland for adults. So...

I should check it out. She said there's actually a lake down there as well, which is pretty relaxing.

Huge lake, and we use it for underground cooling. We use it for cooling. So we actually use that for heat rejection. That's right.

Awesome. I wanted to shift over and talk more about supply in new markets. So as of the second quarter, Iron Mountain had completely leased its 7-megawatt facility in Singapore. Considering the government moratorium on new data centers, how are you guys looking to address the supply position -- your supply position in the market?

Yes. So Singapore, specifically related to Singapore, the way that we've approached it is the Singapore government is very clear that they're not going to lift restrictions until they have a clear pathway to meet their environmental commitments around the Paris Climate accordance. So the conversations we've had there have been open around what are the different energy solutions that they can work on, not just us working with them, but us working with them and working with many other partners to think about long-term transition type solutions to power. And once that becomes clear, I think many folks will get that opportunity to get more capacity. We, like everyone else, are trying to stay very close to it, we're very constructive in the dialogue and try to be creative in Pass where the country might be able to get energy -- green energy independence faster and sooner. And so that's really the angle we're playing, and we think that's what's going to open up the door sooner. I think as everyone hopes, we get earlier in line, but until it happens, you never know.

And what about the opportunity going to adjacent markets, Malaysia, Indonesia?

Yes. So Indonesia, we view very much as its own market. I mean, I think a huge, huge population quickly coming online. I think behind India, we view that as probably the most interest -- one of the most interesting emerging markets in the world. The pacing development is super fast. And there are a lot of big tech Asian-based tech startups there. And so we don't view that as a substitute market. We definitely view that as its own market and have spent good time looking at it. I've had the opportunity to visit right before the pandemic. And so I think that's a market we'll continue to keep our eye on closely. There have been a number of new entrants over the last 12 months. And so definitely a place that we find strategically interesting and we think is good for our customers and our platform. I think Malaysia is -- I think it's interesting. I don't -- I know there is some hypothesis that, that sort of like an adjacent market to Singapore that might catch the demand. I think our view is a little bit of that, but probably not as much as maybe folks that had a year or 2 ago not to say there isn't some. We do think that there's some early signs that Malaysia has actually started to develop into its own proper data center market. And I think there's a number of interesting conversations going on about new entrants, new developments, new players and looking at kind of what the demand profile could be there. So I think it's a little bit earlier in its development cycle, but it's definitely got some momentum in terms of adjacent market energy over the last, I'd say, 6, 9 months, 12 months.

Okay. And then recently, Iron Mountain agreed to acquire a new facility in Frankfurt off on the 27-megawatt lease that you guys did in Frankfurt, one. That has been since rolled into a JV. When is this transaction expected to close? And how much capacity will the new facility provide?

Sure. Yes. So the transaction is expected to close over the next couple of months as a standard waiting period in Germany with land transfers between parties. And so we're sitting in that waiting period at this point. So very soon, we're absolutely out talking to our customers marketing that facility at this point. But the way we think about it and look at that facility, it's a nice way to get back or get into the retail market in the business in the market in the Frankfurt. I mean, it only goes up sort of 10 to 12 megawatts. So it's good that it will help us catch some. It will help us get some people that are badged on the ground and start to develop some critical mass. But inevitably, it's going to require us to go get another parcel in Frankfurt to continue to go in that direction. We originally intended to have the first building as multi-tenant. An opportunity came along, which kind of changed direction there. And so we do really think Frankfurt is a really important market for us long term, and this will be a great asset. We've got a team, we'll get some customers going and continue to go from there.

I'm going to go off script a little bit, but you made me think of something. I was talking in our international data center panel that we had earlier today, and one of the companies I was speaking to actually right after the call and it's not actually on the webcast. But he mentioned how one of the trends that they're seeing is that the hyperscalers, when they lease out these build-to-suit effectively the entire building, they're actually asking for the opportunity to buy it back. So they're wanting to include in the lease that after that initial period that they have the ability to buy it. And they noted that they're seeing that more in terms of requests. By the way, they're pushing back on it, but they're seeing it more. I'm just curious if that's something that you're seeing and what's been the response of Iron Mountain towards that?

Yes. So it's interesting. We -- We've heard it in the conversations. We actually haven't had it in a live situation yet, but we've absolutely talk to that hyperscalers, multiple ones about the issue. And -- there's 2 things in my mind, as I synthesize it, that are driving that request. One is certainty of long-term control of the parcel in terms of [ the others ] having the site and being able to go back. I think the other thing is when we start talking about fixed priced options, which everybody pushes back. But on the flip side, I think why that's getting pushed is I think they're saying, hey, cap rates are depressing the value of the credit we're bringing with this transactions are very high. And so we're actually effectively giving the market too much value. And so the sophistication around how much value they're bringing to the table is coming into the conversation. And so that's any mechanism to recapture some of that value. I think as the markets continue to develop, those types of requests will become more common. Because in reality, we started to see cap rates on fully stabilized hyperscale assets go even further down than they were last year. So I think that type of question will continue, and it's all about finding the right fair balance of value creation.

Yes, it's interesting. I mean one of my bigger takeaways from this conference so far, including what we did on Tuesday and now today is that demand is not an issue. Demand is very strong. Most of you guys feel very comfortable with leasing strength in terms of what you're expecting and a lot of it looks very similar to what you did in 2020, which was also a strong year. It's more a function of what's the appropriate return? What's the appropriate valuation? How do you expand into a new market, how do you attain land, how do you attain power. It's not demand, which is just a very interesting dynamic when you think about so many other businesses, it's like what's the growth rate going to be, that's not really something that we seem to be focused too much on. It's these other things, which is kind of interesting.