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

Well, good afternoon, and for those of you streaming in, welcome back to Citi's 2023 Communications, Media and Entertainment Conference. And for those of you I haven't met, I'm Mike Rollins, and I cover the communication services and infrastructure categories at Citi. Before we get started, I'd like to mention that we do have disclosures available at the registration desk and on the Citi Velocity page from which you're streaming the audio. We're also going to work to incorporate your questions in today's discussion. We'll have a microphone for our audience here, here live. And then if you're streaming this connection, there will be a question box on the page that you're on for you to ask questions. And we're going to continue the tradition of live surveys. And so if you're here, with us live, you can use the QR codes and the placards to get the information to queue into the survey. And if you're online streaming, it should come up in one of those boxes for you, for you to input your choices. So with that, out of the way, I'd like to welcome back Charles Meyers, President and CEO of Equinix. Charles, thanks for joining us.

Thank you, Mike. Really glad to be here and I'm glad to be in the 03:30 slot in the sunshine here rather than the 40 degrees at 8:00 a.m. this morning.

It's a bit of a difference. So as usual, we'll start with the question about your thoughts heading into 2023 now in terms of strategic operating priorities and maybe how they're different than they would have been a year ago at this time?

Sure. Before we start, I guess, I'll keep my IR team on my good side and tell you that some way I say it will be forward-looking. And so if you want to look at our disclosures there on our IR website. So I would say, Mike, they're not dramatically different. I would say that I think what we're focused on is continuing to -- I think, press the advantage that I think we have in our core retail interconnected colo business around the world, where I think we're the market leader and I think have the opportunity to really build on some substantial momentum in the business. Obviously, we had a great first 3 quarters of the year, and we look forward to giving you our Q4 results and talking about the year ahead in the next 60 days or whatever it is. And so really pressing the advantage in that business around the globe. I think that means building on the sales momentum that we have, really helping customers understand the distinctive role that we can play in helping them in their digital transformation agenda and implementing hybrid and multi-cloud as the architecture of choice. And then on the -- in sort of inside the 4 walls, I think continuing to drive operating leverage, which I think is a key component over time for us to continue to deliver on the AFFO per share growth commitments, which we really think about as our lighthouse metric. And so that's going to be a key priority. And then another one is really advancing our pursuit of becoming a more comprehensive sort of infrastructure platform, as we extend our digital services portfolio and really make the collection of both our traditional colocation services and digital services work effectively as a platform for our customer and deliver that with a seamless experience. And then the final area I'd speak to is just continuing to build on, I think the culture that has allowed us to continue to attract and develop and inspire the best talent in the world. And I think that they are the ones who are making the difference for our customers every day, and I think continuing that commitment on the culture side is critically important to us.

So as you think about the way 2022 unfolded. And you're ahead of the annual revenue growth target that you had constant currency organic of 7% to 9%. What went incrementally right in 2022 to help you produce these results? And do any of those things that helped in '22 carry over in 2023?

Yes. I think they definitely do carry over. And I'll -- I think the most fundamental thing that went incrementally right is, I think, the demand environment for digital transformation continue to gain momentum. And I think the commitment to distributed infrastructure and the reality and the requirement that people have for distributed infrastructure has been really, I think, very clear. And then finally, I think the role that we can play as people architect their way into hybrid and multi-cloud. People, I think, despite people's concerns about some of a slight slowing in the growth rate of the cloud providers, for example, there is still a very heavy movement to the cloud and to hybrid and multi-cloud as the architecture of choice. And so I think that's been the most final. We also had a little bit of tailwind in that growth rate associated with the power price increases in Singapore last year, we're going to see a repeat of that on a much larger scale in '23. But I think that's -- I view that as sort of a, not a fundamental, but more of a near term or what might be a little bit longer term, but something that's separate from the underlying trajectory of the business. And -- but I think that -- the things that really went incrementally right, I think, are really around the strength of the demand profile. And also, I just think incredibly strong execution on the sales go-to-market side.

So you mentioned the power pricing aspect of it. So we're going to tease out the survey question, but come back to this topic in a few minutes after we get people to submit their responses. So we're going to put the question up there, which is how much will power price increases add to total revenue in 2023. And the choices are 0% to 4%, 4% to 8%, 8% to 12%, 12% to 16% or over 16%. So we'll see what our audience thinks. Of course, we're going to welcome to see what you think about this. But while those results are brewing, let's talk a little bit more about the demand and the digital transformation that you're seeing. So what are you seeing right now from the sales funnel and the sales cycle after having the success you've had for the first 9 months of 2022?

Yes. I think the overall demand signal in the market continues to be robust. I think pipeline looks good. We've worked really hard over the last few years to build a more extended multiyear pipeline. And I think the sales team has done a great job on that. And I think we've got really good visibility we're very deeply entrenched with our customers as they think about the movement to cloud and to hybrid cloud and multi-cloud and so I think we've got good line of sight, really feel good about the pipeline and bookings have continued to be tremendously strong.

And the top 50 customers as a revenue mix has been coming down as the revenue growth accelerated. So who are the incremental contributors to this revenue growth.

Yes. I think that's -- it's not the fact that -- it's not that I think our business with those larger players are slowing down. It's that I think that the broader market we've seen sort of outsized growth there. And so that has the effect of kind of reducing concentration, which I think is a beautiful part of our business. we have no single customer that's more than right around 3% of our revenue. And so I think that part of that is that the service provider world is very different than we might have seen it. If you roll the time, roll back, and I know you've been following the story for a very long time, let's say, 10 years, the service provider world, a lot of business with the networks themselves, the cloud providers were sort of beginning to be exceptionally relevant. But now you face a world where the range of service providers who are delivering as a service value propositions to the broader enterprise community as a supplement to the IT architectures or as a fundamental part of the IT architectures and how people get things done is enormous. And so you look at it and you can take customers that were small emerging customers of ours at that time 10 years ago, now our massive company. ServiceNow is a great example, right? ServiceNow is a company who had a really great idea and was really focused on IT service management and their early implementation. They're now a massive company that is doing playing a very significant role in helping people run their businesses more efficiently. And so the growth of this broader range of as-a-service providers, I think, is one key factor. And then the enterprise business has dramatically outperformed the broader portfolio, right? So it's just growing at a very rapid clip. As people go from IT, the way it was done before and now to more cloud-centric cloud-enabled architectures.

Coming back to the power discussion. Where is Equinix on the process of passing through power price increases to the customers?

I think we're very well advanced. So we now are largely fully hedged in terms of -- and therefore, deterministic and understanding what our underlying power costs are going to look like in the year ahead. We've been very communicative with our customers through that process, very transparent with them. Letting them know that those price increases would come through and we tried to give them an early read on how they will be sized. We've now given them more precise clarity on what those increases will be. And those will roll through -- those will begin rolling through in the set of bills that go out in January. And so I feel really good about this. I bet this piece of it. Look, it's -- nobody is loving the fact that energy prices are increasing the way they are. But I think that what has happened is that customers have really come to understand the approach that we take to hedging the amount of energy that we invest in dampening the volatility in this underlying cost element. And I think really can appreciate that we're going to be able to give them greater predictability. And the reality is because we've hedged into our position in a significantly rising rate environment, where we're landing customers, for the most part, is meaningfully below where the spot rate is. And so I think they're understanding the value that we can deliver in that area. And while they're not thrilled about the costs. I'm very confident that we're going to deliver on our objective to fully recover 100% of that.

And as you think about the risk of leakage, have you experienced any significant pushback or is there the potential that after they sit with these bills for a couple of months. They may be more aggressively try to optimize what's in Equinix versus where they place their workloads.

Yes. I mean I think that -- I certainly think that people will -- a couple of things. One, on that latter question, we're not the only ones providing that. So these power prices increases are a broad phenomenon. And so everybody is feeling them and generally, everybody is passing them through. And so -- and in fact, I think based on our intelligence, I think we're in an actually better position. And so I don't think that differentially people are always, I think, looking to be as cost-conscious as they can be and get the most out of what they're doing. But what the things that they place at Equinix, they place there for very unique reasons and because they get significant value out of them. And so -- and workloads that don't require that we don't say, "Hey, you should put other workloads here." We say these are the things that we are going to be distinctively well positioned at Equinix, and they're willing to pay more for that. And so I think that's been the dynamic that we've had. And we've -- our business has really proven over time to be very -- from a demand standpoint, very inelastic. And we had -- as you well know, we raised interconnection pricing very meaningfully in Europe over the last couple of years. And we got these very same questions. People said, well, what's going to happen? Are people going to go away? Or are you going to see churn and we saw none of that. And so I think we've got a lot of experience in seeing that at the end of the value proposition is very durable, very compelling. And I think we're going to see that demand is going to continue to be very inelastic.

Ready for the survey result?

Ready.

All right. Let's do it. So in terms of the power price increase and what it will add to total revenue in '23, 20%, 0% to 4%. 40%, 4% to 8% and another 40%, 8% to 12%. So this is one of the questions. And we realize you're hoping to 100% recovery, which means zero calorie revenue. But based on what you're seeing, is there a way that you can help us logically understand what this potential benefit might look like for 2023?

Yes. Obviously, I won't quantify it for you. We'll do that in whatever it is 30, 45 days when we do our full year call on our Q4 call and give you guidance for the year ahead. And so we'll give people -- and what we're going to do on that, by the way, is we're going to have a great degree of transparency much like we've had with the customer. We're going to have with the investor community which says, here's our projected growth with the power price increases in here, here's what we're projecting that to be or what that is going to be. And therefore, here is the underlying growth rate. And so I think we'll be able to separate days out. And I think we're going to -- I think we feel very good about, one, our ability to recover the cost increases we're going to experience on the energy side; and two, about the organic underlying growth rate of the business.

Outside of power price increases. What are you seeing in terms of pricing opportunities that can translate into profit opportunities for Equinix?

That's definitely happening. And there will be profit -- there'll be partially cost offsetting opportunities because we are seeing inflationary elements in the business in various places. And so everybody around the world, I think, across every sector you can imagine, is seeing this dynamic, which is underlying cost increases, leading to price increases. And so I think that is going to be a dynamic. But I think that we're -- we have we're in a very good position from a pricing standpoint in terms of being -- we've already -- and we started rolling those things in, honestly, towards the latter part of 2022. And we've done increased -- list price increases across space and power as well as interconnection. And so I do think those are going to have positive impacts on the business. Because I think that the cost increases are metabolizing into the business at a little bit of a slower rate. And so I do think there will be some opportunity for this. But part of it is simply offsetting the realities of the current cost environment.

Is there any way kind of to frame it in terms of how significant pricing is in terms of an opportunity for Equinix?

Yes. I mean I think it's more about sustaining the return profile that we -- the very attractive return profile that we have had and so this isn't about looking to gouge people. It's looking to sustain the what I think is, one, a very compelling value proposition for a customer, but then also a very attractive return profile for our investors. And so we continue to underwrite to our stabilized assets are performing at almost 30% against the gross PP&E invested. And our new underwritings are -- we continue to underwrite those high 20s, low 30s IRRs. And so this is -- pricing for us is about sustaining those levels of returns and allowing us to deliver continued AFFO per share growth.

Let's get to our second survey as we dig into more of this, the revenue opportunities. So we're going to ask our audience. What will organic constant currency revenue growth be for 2023 excluding the power price increases. So take that off the table and you're historic annual target range has been 7% to 9%?

Right. The Analyst Day that we gave was 7% to 9%. Yes.

And the '22 guidance is for last year, recognizing we haven't guided the fourth quarter earnings yet was 10% to 11%?

Right.

Okay. So that frames it. So the choices are less than or equal to 7%, 7% to 8%, 8% to 9%, 9% to 10% or over 10%. And so we'll come back to that in a few moments. So as you're thinking about revenue growth opportunities, help us frame the macro. If the U.S. goes into recession, if global markets go into a recession. How should investors think about the sensitivity of demand for your services relative to some tougher macro conditions?

Yes. I mean, look, I do think that the sort of macro environment continues to sync in, in various ways. But I will tell you that it wasn't -- has not been lost on people that we were entering a phase of sort of more challenging macro for some period of time now. And yet we -- as we continue to talk to our customers and understand their sentiment, and even understand their budgets looking into next year. I would tell you that they are they seem deeply committed to their digital transformation agenda because I think it's fundamental to their ability to differentiate in their markets. It's fundamental to their ability to get -- do more with less. It's fundamentally their ability to retool how they do work and again, drive operating leverage in their own business is all part of their digital is central to that. And so we have seen them be very committed to that. And I think they see that we can play a particular role in helping accelerate that and gain leverage by being able to effectively use all of the cloud resources at their disposal more effectively. And so we just have not seen that. I -- we are continuing to invest behind the bookings momentum that we've seen. We're adding more quota-bearing headcount. We, ourselves, are being very tight in terms of we're tightening down on G&A and saying we're going to do more with less ourselves. But I think that right now, we continue to feel very optimistic about the demand environment, and we're going to continue to track it. But I think the history of us performing well through periods of economic challenge, we hope will continue to present itself.

You mentioned growing the sales force, quota-bearing headcount. What's the objective there? Is it to go deeper in verticals that you're already attacking and targeting? Or are you looking to expand that funnel even wider.

Yes. I mean I think it's more -- the reality right now is when we look at many of our salespeople and we look at their book of accounts. They're meeting or exceeding sometimes meaningfully their targets, and yet they have been left a lot of their patch untouched. And so this is for us about saying, our bookings momentum is so strong. Let's make sure we get more coverage and continue to -- so I think our focus is going to continue to be more on the -- what we call our star targets, which is sort of more those larger global enterprises. But we also will get broader reach through our channel partners. And so I think it's about really tapping into the demand that exists there. And we are -- but the digital services arena is something that is also we have a more valid sort of and relevant value proposition for the developer community. And I think those -- that's a way for us to gain mind share in larger enterprises that will translate to larger enterprise deals over time. So it's a little bit of both of those.

Ready for the survey results?

Yeah.

Okay. So in terms of organic constant currency revenue growth for 2023: 29% at or below 7%; 21%, 7% to 8%; similar percentage of 21, 8% to 9%; also similar, about 21%, 9% to 10%; and then 7%, above 10%.

It's quite the spread. It's interesting.

So as we think about the components of revenue growth, you're positive on volume going into next year?