Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

All right. Good morning, everybody. Let's start. My name is Calvin Lam. I'm a Managing Director in the Investment Banking division at Morgan Stanley, amongst 1 of my responsibilities is running the digital infrastructure banking practice. I'm joined this morning by Barry Hytinen, the CFO of Iron Mountain. Welcome back to San Francisco, Barry.

Thanks, Calvin. It's always good to be here.

Great. So let me read this very quickly. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com research disclosures. If you have any questions, please reach out to your sales rep.

All right. So maybe to begin, I'd like to start with an observation. I think Iron Mountain has definitely evolved past being a physical storage company into a technology-enabled infrastructure company. And I want to help investors better understand that evolution because I think a lot of the trends and demand drivers that you're capitalizing on should be very familiar to investors at this conference, namely AI, data center infrastructure. And so Barry, for investors who still think of Iron Mountain as a boxes and paper storage company. Maybe you could describe what is Iron Mountain today?

Yes. Thanks for that. That certainly is still our heritage in our core, the box storage, and that represents about 70% of the revenue of the company. But to put that in perspective, about 5 years ago, it was 90% of the revenue, and it's a lot bigger than it was at that time. So that part of the business continues to grow at a mid- to high single digit growth rate. But what we are today is, as you said, a technology-enabled infrastructure company that enables massive amounts of data and information to be analyzed and used by our clients. And so we do that through 3 distinct growth businesses. We have a Asset Lifecycle Management business, which helps clients both enterprise and hyperscale data center clients to deal with their end of life of IT gear, which is a secularly growing portion of the economy. It's a massive TAM, and it's very fragmented. It's a market that we think we can grow very, very significantly in, and I'm sure we'll talk about it more. We are operating in data center, where we are an operator and developer of third-party data centers the vast majority of our leasing is to very large hyper CL clients. So very synergistic with that ALM business I was just mentioning, and a very good return business. To put it in perspective, that business -- last year, we did a little over $800 million of revenue with a low 50s EBITDA margin. This year, without even any additional leasing, just what we've already signed, will be well over $1 billion. And if we didn't sign any more leases and we just ran out what we've already sold in our backlog, we'd be well over $1.3 billion of revenue and a probably mid-50s EBITDA, and we've got a lot of leasing opportunity, which we'll probably talk about. And then on our digital business unit is continue to grow strength to strength, a few years ago, it was like $150 million business. Last year, it exited the year on a run rate of $600 million annually, and it's got some very distinct growth areas. And what we're doing there is helping clients be able to unlock the power of a lot of dark data, information that they have historically been able to get access to and through the benefit of AI as well as a variety of other technologies that we built into our DXP platform, I think we're really needing customers where they need a lot of help with respect to that sort of analysis process improvement. So we're not the Iron Mountain that a lot of people used to think about. And we're now -- we've guided this year to be $7.7 billion of revenue, nearly $3 billion round-off of EBITDA, and we've been growing at a double-digit rate for several years now. And in light of the growth businesses that I just mentioned, we expect to continue to be growing at a double-digit rate, top and bottom line for a very long time.

Great. So maybe we can talk about that. You've got an ALM business a data center business in this digital solutions business, what's the kind of the unifying theme that ties together this collection of very unique assets?

Yes. So the company, I think -- so I've been with the company about 6.5 years now. But about 10 years ago, Bill, our CEO and the team, I think they were really prescient, and they were intentional about looking for opportunities where we could invest in additional markets that we could cross-sell off of our core. One of the huge strengths of our business is we have a very large B2B client base, 245,000 clients, the vast majority of whom who have been working with us literally for decades. They standardized with us on records. And we have the ability now with those 3 distinct offerings I just mentioned to cross-sell into those enterprise to essentially get more share of wallet and introduce a broader and broader set of services to those clients who already have been working with us, trust us, and we've got a great rapport with and thereby expand our opportunity set meaningfully.

That's great. That makes sense. So let's then drill down into each of those businesses. And I'd actually like to start with the ALM or Asset Lifecycle Management business first, not only because I think the growth and the scope has surprised investors. But I think you mentioned that you think it could actually be 1 of the largest business, if not the largest business at Iron Mountain in the future. So maybe just start what is the ALM opportunity what are you doing for these enterprise customers? And I think it would be helpful also to talk about what you're doing for the enterprises and then what you're doing for the hyperscalers because they're such a big part of this AI infrastructure ecosystem.

Yes. It's an immense opportunity. And we've been talking about it for some time, but now we're really starting, I think, to demonstrate how significant the growth trajectory is in that business. A couple of market-oriented points first. ALM as a category is about a $35 billion TAM. So it is a massive, massive market. And interestingly, it's very fragmented. We're the largest player already in that marketplace. It's got 2 distinct portions of the business, as Calvin just talked about there, is the enterprise component of the business, and then there's hyperscale decommissioning. I'll talk about both of them. But from a TAM perspective, the enterprise business is about, let's call it, 70% of the TAM, and the hyperscale is about 30% round numbers. And the market itself is growing at kind of a mid- to upper single digit growth rate and expected to do that for a long time. Think about it like this, like IT gear it continues to become obsoleted, or it continues to be refreshed. And clients have a distinct need because if you think about all of the IT gear that a corporate client would use, laptops, iPads, screens, printers, servers, what have you, the commonality is, they all go obsolete eventually. And the vast majority of them have confidential information that is stored on them. Even printers have confidential information at this point. So clients are increasingly understanding that there is inherent risk in all of that old IT gear that they need to be very responsible about as it relates to the end of life cycle and/or recycle reuse. That's where we think we can really bring a massive value to our corporate clients, and this is a huge cross-sell opportunity. All of the clients in our -- we deal with 95% of the Fortune 1000, we've been working with them literally for decades, all of them have the same use case that they need this. And today, those clients are using a network of many think like dozens of small little IT asset disposition vendors. On average, they might be $50 million or $60 million of revenue, literally a mom-and-pop industry. And there -- it's very spread out. Why is that? It's because there is no partner that is available to clients to do the same service for them all around the world, and that's what we're building. And so if you look at our business, Bill and the team started investing in Asset Lifecycle Management in 2017, by 2021, we had $38 million of revenue in this business, only $38 million. Last year, we did $633 million. And this year, we guided to doing $850 million. And the business has got inherent considerable amount of growth because as we continue to cross-sell into clients, it's sort of a land-and-expand strategy. It's a little -- it is a sticky business. And 1 of the challenges is, that if you were working with 50 different partners in this kind of area, kind of getting all that business back in one fell swoop is very hard. But landing, winning a specific market or a function or a portion of a business is what we're trying to do and then expanding. And to give you a sense, last year, we ended the year with about 350 of the Fortune 1000 as ALM clients, that was up 90% from the prior year. But in every single 1 of those cases, our presence is very small. So there's a huge opportunity just with the existing clients already to expand as well as obviously getting all of the Fortune 1000 over time. That business is a service-oriented model because most clients take the gear close to end of life. And so we make a decent margin on it, like 20s to 30s percent margins on the enterprise side. I expect that business is going to continue to grow on a secular basis for a long time, and we are tucking in selectively small acquisitions, think like, $50 million revenue companies that give us additional presence, give us capability in some markets. We're buying these on average between 5 and 7.5x trailing EBITDA and they synergize down well below 5 rapidly. So it's a very good incremental means to grow the business. On the hyperscale side, and this is 40% of our business. Last year, we were 60% enterprise, 40% hyperscale. On the hyperscale side, it's much more concentrated. It's -- think about like the top 10 cloud hyperscalers. They have very large fleets of data centers, as you all know. And 1 of the commonalities is while the infrastructure they built, the physical is going to be there for decades, they change out the gear inside there on average about every 5 years. And generally speaking, those servers still have considerable value left in them because they're retrofitting the gear for reasons of wanting to get better compute or better power efficiency. There's still inherent value in there. That's where we come in. And what we do is we take the servers from them, we wipe anything that's been written to. And as you would imagine, with these sorts of clients, privacy, security is extremely important. So they want to work with a relatively few vendors because they are very, very interested in ensuring that anything that's been written to is completely dealt with. And then we physically disassemble the servers and then resell the component. So CPUs, drives, memory, et cetera. And that is a revenue share model, whereby if the client gives us a certain number of servers and let's say, we harvest out the CPUs and maybe we're selling those for, I'm making the number up, $100 it's a revenue share model where we might get $20 of those dollars and the client gets $80. And we're selling that into the used channel. That part of the business does have some level of, as I mentioned earlier, concentration as well as there's inherently a little bit more volatility in terms of it's like site-by-site in terms of data center decomms or what you're decommissioning relative to what's in the market from a pricing standpoint, pricing on memory, as we've talked about, has been up appreciably for used memory. And I expect in light of the supply/demand economics going on in that market will probably continue to be up for the foreseeable future. And so that's a nice kind of incremental tailwind, the ALM opportunity Calvin is a huge one. And if -- while the margins are thinner, I should note this on the hyperscale side because it's a revenue share model, the total opportunity for us in ALM is really large. And I expect it will be our largest revenue business relatively soon, let's say, in the next few years because we're on a trajectory here whereby we can grow that business for a very long time at a very high rate.

Yes. So actually, just to unpack that a bit. On the hyperscale decommissioning side, when you hear about all these hyperscalers spending record amounts of CapEx and putting all the gear into their data centers. Are you benefiting from that current market dynamic now? Is it something in the future we should watch for?

That inherently is 1 of the reasons why we love the hyperscale decommissioning part of the business is because it's got a very clear horizon for incremental growth going forward because while they're continuing to build their fleets out and putting in training and doing more cloud and developing inference locations, all that gear is going to be recycled and reused in maybe 5 years, in some cases, it might be even shorter than that based on life cycles. And so that is inherent, if you will, forward volume that's going to be coming out in -- coming to folks like us. In addition, if you think about what we're decommissioning this year. It was generally gear that was put into service in new data centers 5 years ago and anything that was retrofitted 5 years ago. So inherently, the fleets are getting much, much larger and a bigger opportunity. Furthermore, as IT gear gets relatively more expensive, this on the new side, it generally probably bodes quite well for the price of used in the future because the best indicator of what a used gear is that comes out is what it go in for originally. And so we think there's a tremendous amount of volume and relative mix benefit going forward. And yes, so it's a good business.

And then that's on the organic side, and you touched on this a little bit in your comments on the inorganic side for ALM. I know you've done a couple of deals in terms of acquisitions. Maybe talk about how those have tracked? What gives you confidence that there's more targets out there? And how the M&A playbook will factor in here?

Yes. So generally, where we've been acquisitive over the last few years has been on the enterprise side. We have pretty much all the capacity we need on the hyperscale side, and we can move that up internally pretty well as we -- we've got a really good process there. We made an acquisition in that business several years ago. On the enterprise side, there's immense amount of targets. Our corporate development team that works for me is probably literally has a pipeline of like 300 deals. And we're constantly talking because we're very choosy. And also, as you know, it takes a willing buyer and seller and everything. And we are, no offense, we're kind of cheap in terms of what we're willing to pay. And because our alternative is to just build it ourselves. So we're paying between 5 and 7.5x EBITDA, as I mentioned earlier. And I'll tell you, we have been lucky. Our teams have found some incredibly great small businesses to acquire over the last few years. That has brought us incremental capability. It has brought us excellent management and very dedicated teams. It's funny, this industry is made up of lots of small companies that have been around for like 10, 20, 30 years. And generally, they're owner operators. And so in most of the deals we've done, in fact, as I think about every single 1, it's been an owner operator where we've acquired from. And we've been able to work on the economics of the transaction to incentivize the team to stay, work with us and build what is a really big and fast-growing business. So the synergies and the relative profitability we've been getting from the acquired businesses has outpaced our models in every single case on the enterprise side. And I think you should expect that we will continue to tuck in. But again, these are relatively small deals. I think $50 million revenue, 25% EBITDA margin. It's not a huge capital call, but it definitely helps supplement our growth. And importantly, Almost all of these small players have got like 1 or 2, I'll call them anchor clients that might be 40% or 50% of the business, where they've got a large corporate client or 2. And what that helps us with is, we can go in with that client and expand because we've got a better relationship at a C level with those types of clients, and it helps us that much more on the organic side. So lot of organic growth, a lot of inorganic opportunity.

Yes. That's really exciting. So maybe we can pivot then to another business of yours, that's probably the most direct beneficiary of all the AI infrastructure spending, your data center business. We've had some other operators come in at this conference and share their thoughts on what's going on, I would love to hear from your perspective, how does your data center business look in 2026, maybe you can comment on your pipeline, how you see demand trends being impacted by whether it's AI training or inferencing or -- and any other sort of geographies or sites that you're particularly focused on?

Yes. So first, I'll give a little bit of a thumbnail on our data center business in total. So as I mentioned earlier, last year, we did about $800 million in revenue, low 50s EBITDA margin. This year, we're going to do well over $1 billion of revenue, low 50s EBITDA margin. We expect our margins will be up year-on-year in every quarter this year. And I expect the margin continues to enhance because the deals we've been writing over the last few years, which will commence going forward are high-return opportunities. As it relates to what we're operating, today, we operate 488 megawatts across the globe, and we're about 98% leased on that. So we have almost no vacancy. And we are under construction on 190 megawatts of which we're like 70% pre-leased. And the pre-leasing is to the major cloud hyperscalers, investment-grade type companies with 10- to 15-year leases on average, and at 10% to 11% cash-on-cash unlevered returns or what those deals are written to. So we are not -- we don't consider ourselves like a speculative builder we are looking to pre-lease the asset before generally, we put the shovel in the ground. And then we have in addition to the 490 or so that we're operating the 190 that's under construction, we have a held-for-development land portfolio, that's about another 660 megawatts. And so we've got a lot of track record here in terms of what we've been able to do as well as a big trajectory for growth. If you look at our pipeline that you asked about, the first thing I usually emphasize to folks is that, over the next 2 years, we have 400 megawatts that will energize that we have not yet leased. And of that, about 200 megawatts of that will be energizing in the next 18 months. And these are all in what I would describe are great locations for cloud inference. And that's what we generally are selling and leasing to our cloud hyperscale clients. And so think about we've got 175 megawatts or so that will energize over the next few years in Northern Virginia and Manassas on our campus there. We've got 200 megawatts in Richmond. We've got 100-plus megawatts in India, 80 megawatts in Madrid. We've got access to power coming available for -- megawatts to sell in London, in Amsterdam, highly attractive markets for cloud players. Last year, we leased a little over 60 megawatts. Over the last 4 years, we've averaged leasing over 100 megawatts a year. And so one of the challenges we had last year was we just didn't have a lot that was energizing soon. But over the last 12 months or so, we've gotten that much closer to that energization. And generally, we are finding that hyperscale clients are interested in leasing somewhere between, let's say, 12 and 18, 20 months in advance of the energization. That's a really good time frame for us because we can build the data center in that time frame and even in 11 months, 10 months, that sort of thing. And so it enables us to be, I think, very efficient with our capital deployment build the sites that clients need. On average, we're doing like a 30 to 40 megawatt single-tenant lease at that kind of 10- to 15-year duration, very good returns. And I think, Calvin, as we said on our earnings call recently, our pipeline has grown considerably. It is robust and we have a lot of kind of 30-, 40-ish megawatt deals. We have clients talking to us about much larger opportunities as well. Look, we guided to doing 100 megawatts of leasing this year, but I think the opportunity is over the next, let's say, 24 months is very big because we have so much power energizing and frankly, power is in limited supply out there. So we feel quite good about the opportunity we have and the conversations we're having. It's a lumpy business, as you know, because we're taking down good-sized deals one at a time. But yes, I feel very good about our data center business.

And we definitely heard the theme on power being scarce and the fact that you have so much -- so many megawatts energizing, I think, is helpful. So maybe how does that impact or translate into pricing or returns or yields on these investments that you're making?

Yes. So we're very pleased with where our target return is as we're writing these deals of the 10% to 11% cash-on-cash unlevered kind of sort, occasionally see a deal that might be a little bit beyond that. Generally, we're not doing anything below like a 10% because as you point out, the power is quite constrained out there. And we have power coming available in, what I would say, our Tier 1 locations for cloud inference and there's just more activity. And frankly, all those large language models that they've been training in very big gigawatt locations, they monetize them through inference going forward. So there's just a -- I think there's a really big market opportunity there, and yes.

So maybe we can pivot to the third business that you have, and I'll bucket this as the records business. And maybe I'll ask 2 questions and then you can answer them in the order you see fit. The first is you talked about your digital solutions business. I would love to understand how that is impacting your records business, what's the growth curve there and what's driving it? And then second, on the records business itself, despite all these trends that we've been talking about, that business has been super steady, durable cash flow generative, why is that business so resilient? What drives that? And maybe you can talk about some of the drivers there.

Yes. So I'll start with the digital based on your questions. The digital business for us is one that has grown immensely over the last few years. It wasn't that many years ago, it was a $150 million business. We exited last year on that level on a quarterly basis. So we exited last year at $600 million of revenue run rate. And so that business is all about helping clients with digitization, monetizing information that they didn't previously have access to metatagging and being able to do analysis on what has essentially been dark data for them. And there are immense use cases and frankly, AI is just a tailwind here because it's enabling us to do things for clients that historically wasn't cost effective to do. And that creates many additional use cases. Our guidance for that business is to grow 20-plus percent, but frankly, we won some really large deals. The IRS is one that we talked about publicly. And so the United States government spends an immense amount, hundreds of millions processing paper tax returns. Most people think, how could there be a paper tax return, there are still a whole lot of them. And so we and 3 other tiny vendors on a large contract. It's 5 years in nature. And if we got all of the business, we -- revenue about $150 million, let's call it, $150 million of annual revenue. Now we probably won't get 100% share, but we expect to get the vast majority of the business over time. This year, we guided to that business being $45 million of revenue, last year, it was only $6 million. And then we looked out to 2027 on our most recent call and said that business will probably be north of $100 million, potentially much more than $100 million. And so when you think about the inherent growth that we already have in our core business for digital, those businesses, those client relationships that we've already won. And that business, by the way, is increasingly recurring. So it's a much more durable and stable business as we get more recurring business into it. It will just inherently grow faster over the next couple of years because we've got the IRS tailwind. Importantly, I'll tell you, things like DOGE and government efficiencies, those are a tailwind to our business because they are creating incremental opportunities for us to help clients like the internal revenue service with that sort of digitization and metatagging type of work that's inherent in our proprietary software system that we've developed, which we call DXP. There's tremendous numbers of use cases for that across our corporate clients as well as across government. So we're in the process of talking to governments in the U.K. and throughout Europe, about similar types of deployments as well as on the corporate side. We already do a tremendous amount of like back-office mortgage processing in the United States and in India, among other markets, do auto loans, anything that has a physical and digital component with manual, generally, we can help simplify significantly drive a considerable value for the client and build our business, which is very sticky. And then on the records business, we don't have a lot of time, but I'm very passionate about this business because it's -- the investment community has historically not, I'd say, given it much respect but it is an incredibly strong business, very durable. We have grown -- the company has grown organic storage records revenue for like 4 years in a row, Calvin, organically. And our volume, the paper records that we store, we have never stored more than we are storing today. We said, we're over 740 million cubic feet, which is a number that's kind of very hard to get your mind around. It's a massive amount. And our clients send us new boxes on a routine basis. In some cases, it's every week in other cases, it's every month. And why do they send us these things? It's because they need them in the future. They may need them and they want -- chain of custody is important to them, security, privacy, and they standardize with us in most cases, decades ago. And it has -- inherently, we are offering them a very significant value. And while we have the ability to generate revenue management actions year-by-year, we're not looking to find elasticity in the model because the record business leads to all the cross-sell that we've just been talking about. All of our records business or at least, let's say, the top half of all those client relationships could easily be ALM clients or digital solutions clients. In some cases, they're already colo clients in our data center business. So it's a business that inherently we think can continue to grow at kind of that mid-single-digit plus rate, it generates tremendous cash flow. It requires almost no capital to continue to grow. Our team is executing quite well. Our operations team did a phenomenal job last year, continuing to improve margins. We expect to continue to move margins in that business again this year. And it is kind of the secret to the success because unlike other data center companies, we have retained cash flow coming out of our core businesses. Our core businesses -- and I would add ALM and digital to this, they don't require a lot of capital to grow. And while data center is a very capital-intense business, we start each year with like now going forward, probably $400 million or $500 million of retained cash flow. We're going to generate $1.5 billion to $2 billion of operating cash flow this year. Our maintenance CapEx is about $150 million, and you got our dividend. So right there, you've got like $400 million, $500 million that we can then put into growth, which is principally data center. And then we have, I'd say, a balanced view on capital allocation. We target leverage at 4.5 -- 5.5x. We just achieved 4.9x on that -- at the end of the year. That's the lowest we've been in like, I don't know, 20 years, and we aim to be kind of right here at the 5x level. And with growth of EBITDA, with that target leverage together with the retained cash flow, we can more than fund our data center build out. So it's a very virtuous cycle in our businesses.

That makes a lot of sense. You touched on the capital allocation and capital return policy. I mean you've increased your dividend now 4x in the last 4 years. How do you think about that portion of it versus investing?

Yes. For years now, we've been saying as a company that we're targeting like low 60s percent of AFFO for the dividend. And there were some years ago, when I first joined the company, we were much higher on that percentage. We didn't raise the dividend for several years because we said we're going to get it down into that target ratio. That ratio, by the way, kind of approximates our REIT minimum, generally speaking. And so our AFFO is growing double digit. Therefore, our dividend grows double digits because we're going to stay in that target range. And it's not a huge like incremental capital use when we think about deployment. And so what investors should be expecting is as we continue to grow AFFO at a double-digit rate, the dividend will as well.

That makes sense. That makes sense. So maybe I'll ask 1 last question then as it relates to capital strategy and financial solutions, as you continue to invest, what are the metrics or milestones that you're focused on ensuring that the growth profitable and sustainable.

Yes. So it's situational business by business, of course. And on the data center side, we're just very returns focused in terms of what we're writing. So we're trying to be very disciplined that it needs to be 10% or better cash-on-cash unlevered return. There's no reason to go lower than that because it's -- there's a supply/demand imbalance. And frankly, that's the right -- we feel like the right return level because it's very capital intensive. And then from -- on the digital solutions business, it's about continuing to drive operating scale, efficiency and write contracts that are recurring, where we can continue to do what we've done on our record business for years, which is drive incremental profitability in those businesses, hone the processes we're doing for clients and generate incremental profit as we move forward. On the ALM side, I talked a lot about the hyperscale side. But on the enterprise side, that business has inherently margin opportunity as we drive incremental operating scale and we become a larger and larger player in that market. I mean we're dealing with the business last year that was a little over $600 million. It's going to be I think, in the billions in the next few years. And so there's a lot of inherent margin opportunity in there. And then in the core business, I mean, that's kind of what we've -- that's what we've been doing for years -- the team has driven over the last decade in excess of 1,000 basis points of margin improvement in that part of the business. And we're not done.

Okay. Well, that's great. Maybe we'll end there. Thank you for your thoughts today, and have a good rest of the conference.

Thank you, Calvin. Appreciate it.