Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for coming to the Stifel Annual Cross Sector Insight Conference. I'm Shlomo Rosenbaum, the business services analyst for Stifel, and welcome, everybody, here for the -- it is the first meeting slot of the conference. I want to welcome Barry Hytinen, who is the CFO of Iron Mountain. There is just a small delay that Bill Meaney, who's the CEO, is probably going to walk in a couple of minutes, and he'll join us up here on the stage as well. So I thank you all for coming. This is a fireside chat, so we're going to start off. I'm going to ask a number of questions to Barry. And I highly encourage people from the audience to go ahead and chime in. I'll kind of poll for questions. And with that, I'll just kind of start out with a couple of questions of my own.

First, I just want to start out a little bit with what tends to be one of the first questions I get from investors just about Iron Mountain. I've been covering Iron Mountain, just as a little background, I think it's certainly over a decade. And the story has significantly changed from over that time period. And I would say, over the last several years, it's been a significant difference. And one of the things that's different is that the company has been able to get much more pricing than it has ever gotten in the past. And I want to kind of focus on that a little bit. How have you gotten the pricing even before the inflationary environment? What's driving the pricing right now? And when inflation comes back down, which hopefully will be in the not-too-distant future, but what kind of pricing should we expect from Iron Mountain?

Okay. Thank you, Shlomo, for having us here, and appreciate everyone being both in person and online. And clearly, traffic out there on the Street, Shlomo, indicates that we're getting back to the normal economy here, it's very busy. From a standpoint of our revenue management program that you were asking about, I would say a few things. One, a little bit of historical context. If you go back 5, 6, 7 years ago, Shlomo, the company was not really even keeping up much with inflation as it relates to revenue management. In particular, the amount of revenue management activities we would have been generating at that time was in the very low single digit, like 1%, 2%. And part of that is, I think, born out of the fact that the company had been growing for such a long time on an organic volume basis, that revenue management was less of a driver. And when we have, over the last several years, taken a kind of a test and learn approach to revenue management as we have worked with our sales force to ensure that we're educating our clients on the significant value that we're bringing to them. So I think systematically, we were generally underpricing the business and the value we drive for clients. We are the undisputed leader in records management, but we provide services that clients really would have a hard time getting anywhere else. In terms of our global reach, we operate in over 60 countries around the world. We have very consistent processes. We have extremely high security and clients have come to realize that they can very much count on us. And so from a standpoint of the value equation, it's a very positive one. And as we've adapted that test and learn approach first starting in the U.S. in some of our more mature markets and then over the last few years, expanding that into all of our global markets, we -- and across as well from beyond records to also into services, we have seen revenue management become a more meaningful driver. And in fact, over the last 7 or 8 quarters, you've seen our revenue management be accelerating pretty consistently. In fact, in the last quarter, it was very high single digit year-on-year. Together with that, I'll just point out that our volume has been very steady, in fact, very positive trends. We were up 2.5 million cube on a trailing 12-month basis in the last quarter. That's on a base of 730 million cubic feet. So we have a very large book of business that we store on behalf of clients and it continues to rise. I don't think we've ever actually stored more than we're storing today physically. And so from a standpoint of where we see revenue management, I agree with you that in light of the inflationary backdrop, that has probably increased our revenue management, some over the last couple of years. But as we've tested and we've looked at what are the drivers of our revenue management as well as what happens both before and after a revenue management action, as we discussed at the Investor Day last fall, we expect over the long term to be achieving something like mid-single digit kind of consistently. Obviously, we're a little bit ahead of that. We'll continue to drive for as much as we can. But I think from a standpoint of that level, it more than achieves our long-term targets. And frankly, I think that's probably a fairly conservative posture in light of what we see. I'll just give you one example of some of the things we do to test like how the reception is to revenue management actions and the relatively lack of elasticity we see. We look at it -- we have -- with that much volume and incoming volume from clients consistently, we have clients, in some cases, send us volume every day or every week or every month. We have the ability to see what's happening with new boxes inbounded immediately prior to revenue management actions as well as immediately after. So we'll look at what was the volume coming in from a given client or cohort, geographic vertical, et cetera, lots of ways to cut it a week before the revenue management action, a month, a year, et cetera, and what happens post, and with that sort of data analysis, we can see the relatively limited impact, in fact, de minimis. And if you look at our customer retention and the durability of the volume we've been seeing, I think you would conclude that we still have a lot of room as it relates to revenue management. Now that said, sometimes people ask me, well, if that's the case, why aren't you even taking it up further? Because I do think we are continuing to, if you will, relatively undersell the value. And the reason being is we have a much larger set of products and services and solutions at this point that we can cross-sell. And with our Matterhorn agenda, which I'm sure we'll talk about in today's presentation, we have got our commercial organization singularly focused on selling, in particular, exposing our very large client base, 225,000 clients that are generally measured in decades of tenure on selling more of our product solutions. So we want to both achieve our revenue management expectations on storage, but also broaden our reach with the clients, deliver more value to them through things like Secure IT Asset Disposition, digital solutions, data center. And we're seeing really good uptake on that cross-selling activity. Thanks, Shlomo.

Great. Thank you. I just want to welcome Bill Meaney, who's come in. Bill, I'm sorry, but if you come late, you get the least comfortable chair. So actually, since you're here, I'm going to pose the next one to you, Bill. Maybe you could talk a little bit to us about Project Matterhorn. What are really the goals of Project Matterhorn? How is this different than some of the other kind of restructuring or repositioning type of projects the company has taken on? And is there some early indicators of success that you're really on the right track with that program?

Thank you. And apologies for being late. I came to work in a rut that I've never come before. I guess the beauty of an accident, but again, apologies. So no, thanks for the question. So I think you remember that we started off with Summit, which was really, I would say, getting the company in shape, really bringing it to the gym to get ready for a different growth trajectory. And it wasn't just about cost takeout, but it was also about making sure that we had an agile organizational structure. So if you remember right, it is we actually thinned out a very large percentage of our -- over 30% of our senior ranks as part of that, which was really about preparing ourselves to run much faster. And Matterhorn itself is all focused about starting with customer centricity and then really accelerating the revenue growth, and I heard Barry talking about the cross-selling that we're getting as part of that. And it's really -- even if you notice our new logo, it's not a single mountain anymore, it's a mountain range, right? So it's really getting our sales folks. And I think most senior executives always talk about getting their sales folks attuned to selling solutions rather than transactions. And it's kind of like the holy grail. And I'm sure a lot of the companies you invest in, you hear senior executives speak to the same thing. And that really was what the Matterhorn journey is about or is about. I think the part that also helped is going back now, I guess, over 6 years ago, we started retooling the products that we had as a company to sell, some through acquisitions like data center, others through -- and ALM for that matter, and others through just investment in R&D and listening to our customers and developing partnerships with the likes of Google and AWS and others that we could actually deliver digital solutions that actually really help elevate the power of the information that our customers have. And that combination of centricity, agility, now having a much leaner organizational structure, products that took us from a total addressable market of $10 billion as a company to first $80 billion, then $130 billion, now $140 billion in terms of opportunity for us. And really kind of thinking about the customer relationships that we have around the globe with 950 of the Fortune 1000, it's really that's what's igniting a lot of the growth. In terms of are we seeing progress on that growth journey, I mean, Shlomo, you've followed the company for a very long time, at least when I joined, it was kind of a 2% to 4% growth story. And the last couple of years, we've been growing double digit, low teens, right? And that's really the -- showing the results of some of the retooling. So it's not just aspirational. We're actually delivering on that. And we still have a lot of work to do. We have a lot of opportunity in front of us, but I think we're relatively pleased with some of the results we're seeing.

Great. And maybe you referred to some of the digital solutions. Can you talk about -- just give us some examples of what some of those digital solutions are? What's been taking off? What are people interested in? And kind of the hot topic of the day, where companies might be using AI or machine learning, maybe you could talk about where some of that might be incorporated into some of your solutions.

Okay. No. Thanks. And you're right to mention AI even before the -- now AI is a really hot topic. You can't pick up a newspaper without seeing it with pomp, and AI, I think, has really put it on the map. But if you go back about 4 or 5 years ago, we were the AI/ML partner of the year for Google. And it was one of these things where Google was looking for us, we were looking for Google, is coming back as part of that journey is how do we help our customers get more power out of the information that we had stored for them. Historically, we had been really the company that protected their assets. And now we're the company that only protects it but helps them unlock more value and power of those assets. So some of the examples that we've built with the likes of Google and others on behalf of our customers are things like auto lending. So I think I've mentioned this previously on an earnings call, but we had actually a European bank that had an auto lending business in the United States, and they were looking at a way to actually accelerate that growth. So we actually brought in our InSight platform, which is an AI-powered platform. And we were able to actually accelerate their adjudication process from 10 days to 1.5 days with better credit outcomes. And for them, what that drove was obviously, customer satisfaction and market share, right? Because for consumer lending is generally consumers signed for the first person who says yes. So that's one example. Another area where we did for the United States government, again, we've spoken about this before, but it really shows that embedded in that InSight platform is what we call intelligent document processing. And with that intelligent document processing is we're able to automatically create metadata, and by automatically creating that metadata, we're able to actually either put governance around it or in this case, find ownership. So they were trying to track the rightful owners of bonds that went back until the 1930s. And this was -- we had to process 2 billion microfiche images. And you imagine trying to both digitize those images, but you can imagine the condition they were in, even where the information was placed, how it was actually placed, et cetera. And with over 96% accuracy, we were able to process that in an automated way. So those are just kind of a couple of examples. But more recently, I was with a customer in New York, where they're not only looking at using that same platform, say, in terms of digital mailroom and it's not just about labor arbitrage, but again, to automate and improve the accuracy of that automation of directing mail that either comes in physically or electronically but also as a way of having a single pane of glass that helps manage both their digital and physical assets in the company. When you put all that together, I would say we're still in the early days of the digital journey as is everybody in terms of -- but we're in that sweet spot of digital transformation for our customers is that we see strong double-digit growth pretty much year-over-year every quarter in that business.

Can you talk a little bit about the pipeline on those digital offerings and just in terms of the services business because historically, that's been the more volatile part of the business than the legacy business. And that's something that I would say is a significant change that I've seen over the last few years versus what I saw from, frankly, the decade beforehand in terms of we were seeing a lot of just moving the boxes back and forth, which was more in a kind of a secular decline at that point. And now we're seeing a lot more. Is there enough business? And can you keep that growth going? Do we have to worry about gapping the pipeline because it's more project-oriented?

No, it's actually a good call out. You're right because, Shlomo, it's a really good point. Historically, our digital business was the name for our scanning business. It was effectively it, and scanning is a very -- the way we did it historically was a very project-oriented part of the business because you were relying on a customer that said, oh, I want to scan a bunch of documents, right? And the economics of that were not great, as you and I have talked about before, if you were just -- just so that you could see it on your desktop, if you're just going to have a PDF of a document that was in a box. The thing that's changed -- to be fair, a big chunk of our revenue today is still that scanning process. But the thing that's driving that more and more is with those transformational digital services that I'm talking about that sit on top. And so now what we're seeing is a lot more consistency of the projects. And in fact, we kind of are turning down a lot of what I would call just scanning for scanning sake. So the scanning that we do, which is still a big chunk of the revenue is more often than not driven by a project that's linked to digital transformation of the companies. And so what we're finding is we're now in a project flow, if you will, right, that is more driven to either revenue growth for our customers or cost takeout for customers, which has a more consistent pattern in terms of demand around it. So we don't see that kind of lumpiness that we did before. And then some of it actually, when it's actually on the platform, while it's still a relatively small portion of it, it looks much more like a SaaS business. There's a recurring revenue because they're on the platform. But what we see overall in terms of the demand, the demand is driven by a different use case now, which has more consistency around it.

The only other thing I would add to that, Shlomo, are that we are consistently seeing the flow of larger deals in that pipeline. And Bill has talked on some of our conference calls recently, like some of the ones that we've done for the United States federal government, Veterans Affairs, et cetera, which are very long duration work and have a continuous flow about them. I was in business reviews in Asia recently, seeing examples of digital solutions that we're doing for clients, major financial institutions in India that are multiyear in nature and likely to be continuing for the foreseeable future. And then second point is, and this goes again to your point about historical context is linking to your first question, we have clearly been looking at revenue management as being another driver on services. That's something we've done, we've broadened from just the storage side to the services to ensure that we are driving the value for the client and getting the right amount of revenue for it.

Great. I just want to jump to the asset life cycle management business. So the company bought ITRenew probably 15 months ago or something like that. Given what's going on in China that it hasn't kind of grown the same -- the way that you guys have expected, would you say that the outlook for that business is significantly different from when you purchased it? Or do you think that there's kind of a speed bump in the road right now? And maybe you could talk a little bit about that.

So maybe I start and then Barry -- Barry and I worked very closely on the -- together on this business, the acquisition together. So the -- so first, I would say the takeaway is, we remain and are -- is excited about getting into this segment or really growing our footprint in this segment as we were when we started more excited. So we haven't seen anything. If we look at -- we went into it for the overall kind of medium- and long-term growth trends in that segment. We don't see any slowdown in terms of when we speak to our customers. Barry and I were together in New York with a number of our financial service customers last week. Their interest and need for actually tapping into the circular economy in electronic components and equipment, both from a security standpoint and chain of custody because the information that those things have remaining on those devices when they end of life and they need to be actually cleansed and managed in a secure way. But also in terms of the pressure that they're under both from their employees as well as the regulator to make sure these things are actually disposed in a sustainable way, which means reuse the components that you can and then the things that you can't to make sure that those are recycled in a way that it actually is consistent with the best standards. So all the macro trends around that, it's only going to get stronger. So we continue to see this as a double-digit growth business. Now if you kind of look at the current situation, to your point, is it's kind of a perfect storm. I mean, we bought the business, the leading platform on the business that handles hyperscale and data center decommissioning, which is the leading platform, just has a combination of China shutdown, which has been traditionally the place where a lot of the recycled memory and CPUs were actually resold to the system builders in China. And China effectively historically has been kind of what Amsterdam is to the flower market, China has been to the electronics component market. Even for electronic components, they don't -- that are not made in China. It's been kind of the logistics hub of the world for all those electronics. So that was kind of one thing. And then the second thing is we went from a shortage of chips to an excess of chips overnight. And we saw price declines from OEMs for new memory, new CPU going down by some 70%, right? So if you put those 2 things combined is, as we said on the Q1 call is components were up year-over-year with strong growth, but with a 70% headwind in terms of pricing, obviously, the financial results were what we expected or what we would like. That being said, if we look at it right now as we see a firming in the pricing, the OEMs of the new equipment have actually restrained their supply. They've taken down their supply. So that's kind of put a firming because that's -- our pricing is linked, obviously, to that. In parallel with that, not just because of the COVID shutdowns, but what we've -- when you speak to electronic -- people who are making equipment, different types of electronic equipment, and I was in Asia in March, speaking to some of those folks. When COVID shutdown in China, it really shut the industry because what happened was China went to being the only country that was open at the beginning of COVID and was continuing to manufacture and supplying the world and actually gaining market share in that area, to they shut the country down and so their flower market for electronics shut down. So there were companies that couldn't get components that were made in India because they were being transshipped to China and the China ports were shut down. So there's been a big diversification not just from us but from others. And so we made the decision actually when we bought the ITRenew business, partly for the thing that you're putting your finger on is we made a decision to headquarter that business in Singapore. Why? Because it's -- for us, even before the COVID shutdown happened in China, we knew that we had to diversify where the end user customers for the memory and the CPUs were. So we actually have a team that's in China now, I mean, in Singapore now that's diversifying where we're selling the components. That takes time, but we're starting to make some progress. And it's the usual suspects. It's places like Malaysia, the Philippines, India, that we start seeing a gaining market share on China in terms of buying components from us. So it's going to be -- it's not going to happen like this, but we remain extremely bullish on the segment. We're very happy that we got in. I mean, maybe it would have been better if we got in when the world didn't kind of fall apart. But if you look at the macro trends in the segment, it continues to be very strong.

Shlomo, I'll just add a couple of points. First off is, as we discussed on our last call, from a first quarter to second quarter standpoint, we assume the business would be essentially flat. For the remainder of the year, we assume component pricing would stay at those record-level lows that we talked about on the last call. As Bill mentioned, we've seen some indications that pricing is starting to firm, but it's too early to clear victory on that point. But I'd say having it be at a firming level and seeing some green shoots is certainly well received. And I feel good about where we're trending as it relates to the second quarter on that business. And then in the third quarter, in the fourth quarter, we had assumed it would step up some, again, not due to component pricing. And I want to talk a little just a bit about why we saw that. When we look at asset life cycle management, we really think about it in terms of simply 3 verticals. There's the data center decommissioning business that Bill spoke about. That's the legacy ITRenew. Importantly, in that business, we are winning new business with major hyperscale clients. We are broadening our relationships with existing hyperscale, and we have a very well positioned. And as you know, hyperscale data centers, generally, what we're doing is we're decommissioning servers that are in those data centers that have been in for, let's say, on average, 5 years. If you go back 5 years ago, that's what we're decommissioning this year. And importantly, the hyperscale fleets have been getting much bigger as they've been adding to those fleets every year. So there's a lot of latent demand coming at us over the next few years. So that vertical, when the component pricing starts to improve, there's a lot of volume there going forward. Secondly is on the enterprise IT asset disposition. And this is an area that Bill and the team started investing in 6, 7 years ago, and we've seen strength to strength in that business continues to grow really nicely as we cross-sell to our legacy records business clients that need the sorts of solutions that Bill was talking about, and they have chain of custody, privacy, all those sorts of concerns from a regulatory standpoint. That's a business that we expect to secularly grow for a long period. And then third vertical that I want to touch on is our OEM channel, which we talked about a little bit on the last call, we had recently signed an OEM relationship with one of the largest PC manufacturers in the world. Our team is very focused on this, this being OEM, as being another major channel for us, in IT asset disposition, I think we see a considerable amount of opportunity there. So it's a really big market, asset life cycle management. I think like $30 billion total addressable market. A vast majority of that is on the enterprise side, where we have the opportunity to serve clients with a comprehensive solution, and it's growing, and it's very fragmented as a market. So you're going to see us be very focused on growing that business. And as Bill said, I'll just echo it. We feel very, very good about the long-term business model.

And we have a couple of minutes left. I want to see if anyone in the investor audience has any questions. If not, I will just pose what will probably be the final question over here. Just to talk to us a little bit about the data center business, the growth seems to be accelerating over there. If you could talk about how much of the acceleration in growth is from the significant signings that you guys have had over the -- success over there? And how much of it is actually power pass-through? So if we kind of strip out the power, how would we look at the actual underlying demand that's going on and how your business is performing?

Yes. I think the power is a relatively small portion of it. I mean, you're right that because of the power increases, that adds a little bit to the growth rate, but not very much at all. And if you kind of focus on year-over-year growth in terms of the megawatts that we're signing that -- you see that the organic growth, I mean, this year, we guided to around 80 megawatts for the year. In the first quarter, we did something over 60% of that in the first quarter. Now that -- there is a certain lumpiness that if you ask me, some of the things that we -- as we said on the call, some of what we were expecting in Q2 came into Q1. But we think we're really off to a very good start, and that was after a very strong year last year. So the growth in -- what I would point to the growth in that business is look at the leasing activity. So we're extremely pleased by how quickly that business is ramping. So yes, it's -- I don't know, Barry?

I think I'd add a couple of things, Shlomo. Our data center business is another example of where our cross-selling activity is winning for us. We mentioned on the last call, we signed 22 new logos in our data center business last quarter. 75% of the megawatts in those new logos were cross-sell out of our enterprise business. So that's an example of winning. Secondly, pricing has been lifting across data center and across all markets that we do business in. Partly, of course, construction costs are up, but I'm seeing returns actually start to move higher. So that's important. And then thirdly is our pipeline is firming. We have seen -- you mentioned AI earlier about digital solutions, but we're seeing AI, we're away to play AI and other data growth in multiple ways, not only our digital solutions business that Bill spoke about but in our data center, we're having much more significant conversations with hyperscale clients but over the next 12, 24, 36 months, the sorts of deployments they need to support the infrastructure that they are needing. So those deals tend to take some time because they're large. But we have a large data center business today. It's growing. We operate 200 megawatts, but our platform can be 750 megawatts. And if I was talking to you a year ago, that would have been 600 megawatts. We've been adding land. We've been adding power. And importantly, we're about 95% leased in what we have. And where what we're under construction on, which is another 200 megawatts, we're 92%, 93% leased. So we've -- that speaks to Bill's point about the very significant leasing activity. And we're seeing a lot of activity to lease up the remainder. So we feel really good about where the data center business is positioned, Shlomo.

Great. I want to thank everyone for joining and thank the management of Iron Mountain from being here.