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

All right. Good afternoon, everyone, and welcome to TD Cowen's 11th Annual Communications Infrastructure Summit. For those of you who don't know me, my name is Michael Elias, and I am the commentator analyst here. For this session, we're joined by Equinix. And from Equinix, we have Raouf Abdel, who's our EVP of Global Operations. This is structured as a fireside chat. We have about 40 minutes for it. I have a ton of questions prepared. This one, I will, I promise you. I will open it up for questions. But with that, Raouf, thank you so much for being here today. I really appreciate it.

Thank you, Michael. Thanks for having me. Great to be here.

My understanding is that you have something to say before we get started.

I do. Being a public company, we have to start with -- I'll be making some forward-looking statements, and please be sure to check our SEC filings for any factors that may impact those forward-looking statements.

All right. Perfect.

Get that out of the way.

Done.

These two over here snickering because they weren't part of public and now we're private. We don't have to say that.

All right. Well, let's jump into it. Raouf, you joined Equinix in 2012. But from my perspective, you've had a major impact on the company based on conversations that I've had with both current and prior Equinix executives. So for those who are less familiar with you, could you just give us an overview of your time at Equinix and a bit about your path to your current seat?

Well, thank you for the kind words. So this month, I will reach my 13-year anniversary with Equinix. For nostalgic reasons, I went back and looked a little bit at where was Equinix in 2012. And we were just under $2 billion in revenue. Our market cap was $10 billion. And so in the span of that 13 years, we've expanded and scaled and we're -- revenue is about 5x what we were back then. And our market cap is depending on which day you pick for the stock price and which -- a few months ago was about 9x, and it's more like 7.5x right now, but we'll get it back up to 9x, I think. So it's been an incredible ride. I've got some former colleagues in the crowd, and they're familiar with the journey we've been on. And we've had -- we've scaled a lot. We've expanded our geographic presence. We've expanded our employee base. We've expanded our data center footprint, and it's been a great ride. And I've had the privilege to lead our global operations function for about the last 8 years of that. When I first joined the company, I ran the Americas operations. Some of you in the crowd may remember Charles Myers. He was the President of the Americas at the time, and he's the one that hired me. He and I go back to our Level 3 days together. So we've worked together prior to that. And then I ran that for about 5 years. And when we say operations at Equinix, it's really about the build and operate portion of the data center. So it's design, it's construction. I currently have procurement, energy, which I'm sure we will get to at some point in this conversation. And I also have the team that runs the data centers day-to-day, maintaining the facilities and the sites as well as supporting our customers every day.

All right. Well, you've been -- from what you just said, you've been in the seating your current seat for a while. But I am curious, what are the strategic priorities for you right now and for the business over the near to medium term? And as part of that, I'm just curious, where are you spending most of your time these days?

Yes. I would say there's been a bit of a shift for both the company as well as me personally. I would say I used to spend more of my time on the operate side of things. And I think anybody that's in the data center space knows that you live on the stability of your service and your product and that was not something you ever wanted to have disruption in. Most of our customers have mission-critical deployments inside our data centers. And so maintaining reliability was always paramount and remains paramount for us. But my recent focus has gotten a lot more to be on the build side of things, partly because we're investing at a higher level and partly because that space has become a little bit more challenging, both from an energy -- securing energy standpoint as well as supply chain. So I spend the majority of my time on talent, energy, supply chain, and the strategic mapping and planning of what capacity we're going to build where I think you've heard about the initiative that we call Build Bolder in the company. And so I lead that for the company in terms of the planning, the strategy, the investment profile and probably most importantly, like where are we going to go? Where are we going to build, at what levels, at what pace, and what throughput. And then underpinning all of that is how we're actually going to execute to do that build.

Then we're going to have -- this is going to be fun then. So I want to talk to you about something that we started out today talking about on stage, which is deal sizes, Particularly, we've seen enterprise deal sizes increase. We've also seen, obviously, on the hyperscale side, deal sizes increase. We're going to put aside rack densities for a second. But as we think about your Build Bolder initiative, one of the things that I think underpins it is that, "hey, look, that your typical enterprise deal has gotten larger. And as part of that, the construction motion and the standard capacity that you build needs to grow in size in order to accommodate that larger deal." I'm curious in your time in the seat, how have enterprise deal sizes evolved? And as part of that, what were the changes that you made to your standard design in terms of the number of megawatts per building or per phase? How has that evolved?

Yes, absolutely. So in my time, all of those dimensions have increased over the years. When I first joined Equinix, we were building 10-megawatt buildings. That was at the time, a really big thing.

Those were big, yes.

We wouldn't dream of building a 10-megawatt data center today. We're in the 30 to 60 sort of range for any given building. And then we're clustering them together in campuses to build multi-hundred megawatt campuses. And so we very much historically in the retail space were building just-in-time inventory and being very frugal with the capital that we are investing, and we are also expanding in many, many locations simultaneously, so you couldn't sort of concentrate that investment in fewer locations. And so we were managing that capacity in call it, 4- or 5-megawatt chunks. And what we've been finding over the course of the last few years is by the time we finished the phase, we were selling it out, we were starting the next phase. And so we've changed that model a bit so that it's more capital efficient. It's easier on our supply chain. It's easier on our -- the people that are the projects. And so we're moving away from the notion of it's going to be just in time because it's really hard to manage that way. And in the days of building a 4- or 5-megawatt chunk, selling a 2-megawatt to a customer right out of the gate, you're almost out of capacity the day you finish. And so certainly, in our really high-demand markets, Ashburn, London, Frankfurt, Singapore, we're building 10, 20, 30-megawatt phases, and the buildings are bigger, too. And when we say bigger, this is always a confused point. When we say bigger, we don't mean the building is bigger. In fact, the building is smaller. What's bigger is the power. But what's interesting is you still need roughly the same amount of land because the infrastructure consumes more space now. But the core and shell is actually, if anything, shrinking because the density is going up, and so you pack more power into that particular building.

So if we're starting with the building size, it's a 10 now, we're talking 30 to 60. We'll get to the phases in a second. But to that last point that you made about the footprint shrinking, obviously, the average rack density that you're architecting these data centers to is increasing. So as part of that, how are you thinking about the standard rack density that you design the data center to currently? And I'm more curious, how does that compare to what we saw before the beginning of this AI demand boom? I'd say, let's call it, end of 2022, first quarter of 2023, how has that average rack density that you build to evolved?

I would say 5 years ago, we were thinking about 6 kW a cabinet. I would say even before the AI sort of change and dynamic, we had stepped that up to about maybe 8. And now we're thinking 12-plus on average. And I think the average is a really important point because not every cabinet is going to be 12 or even the big numbers that we hear about, the 100 to 150, those are going to be a portion of those cabinets. And so what we sort of designed for is an average and the capability to increase that average with more infrastructure as needed to future-proof for those data centers. What's also interesting is in today's data center design, the ability to support concentrated heat loads is much better than it used to be. I'll give you a couple of simple examples of how to articulate that. So in the days where we used raised floor, it was much harder to deliver a concentrated amount of cooling capacity to a given cabinet. Well, we don't use raised floors anymore and the industry pretty much is away from it. And I would venture to say we pioneered that. But in addition to that, the way a data center is designed today is the room is one giant plenum, as we would call it. And so what that does is gives you the ability not to have to manage hotspots the same way. In the past, you had to be really careful where you put hotspots. And in the days of raised floor, you literally had to redirect air. Well, if the whole thing is a plenum, it completely changes how you manage cooling and the ability to have 20, 30 kW here and 5 or 10 right next to it and the room can be balanced a lot easier with the type of cooling design and infrastructure that we're putting in data centers these days.

When you say 12 kW per cabinet, the first thing that comes to mind is, well, when I think of the super high densities that you hear NVIDIA talk about, right, obviously, this is much lower. But then the next thing I think about is, well, you're much better off stranding shell than you are having no space in the data center and just like running out of power. So from my perspective, it's -- is the reason why you're building at 12 so that is because you still see there's plenty of opportunity in that, call it, 6 to 10, that's going to be the standard, but you have the ability to flex up and new cooling solutions have made it easier for you to be able to support those loads. Is that the right way to think about it?

Absolutely the right way. And I would say to add to that, we have to have the ability to flex. But as with any business, you don't want to over-deploy capital and you don't want to strand capital. So we don't want to build for 30 today and have that be stranded. The other important dimension to what you're describing is if we get to the point that we're having to support throw out big numbers, 70, 80, 100 kW per cab, you're immediately moving into the liquid cooling space. In which case, you aren't relying on that air distribution that's in that plenum, as I described it, you're moving into liquid cooling. And the beauty of today's design is it still leverages the same chilled water loop. It just it takes it from the central plant into a unit that's going to deliver a liquid versus taking it to an air handler that's going to deliver air. So a lot of the same common infrastructure. It's all about how you manage and flex that central infrastructure. That's really going to be the challenge that we're all going to face in managing increased density.

I want to dig in on that with you, and we'll get to it in a little bit. But I like this. This is fun. But I did want to talk to you about the phases. You made the comment that you're changing the way that you're looking at phases. We talked about the build sizes increasing. We talked about how the densities are evolving. But as I think about the capacity delivery schedule for Equinix, I build my model based on the number of cabinets and those are the phases that you have for your sites. So how are you thinking about changing either the quantum of cabinets or the quantum of megawatts that you deliver in a single phase?

Yes. So I'll start by saying we always think about power. We think less about it's this number of cabinets because a given phase is going to have so much power that it's going to be able to support. And how many cabs you can fit in that is a function of the density of those cabs is just simple math. And so we're going to increase the size of any phase that we do from a power standpoint. And I would say even in medium-sized markets where demand may not be the same, we're going to be 10 or higher. And on the upper end, we're -- in Ashburn, for example, which is one of our highest demand locations, we're building at 50 in the retail space at a time now. There's no -- it wouldn't make any sense to do 10 in Ashburn.

One of the things that I think about it, and I'm going to put this to you because obviously, CapEx has come into focus, right, particularly after the Analyst Day. I want to take what you said and presented to you, and I'd love your thoughts. So the way I think about it is that we've seen enterprise deal sizes increase. And it feels like they've been increasing at an accelerating rate in the last year. So if you're building just-in-time inventory, well, you're going to have to flex up in terms of your builds in the future in order to be able to handle continued increases in deal sizes. But then there's a second, I'd call it a twin engine. There's another dynamic, which is that, look, we're seeing the hyperscalers start to scale inference, right? And I think there's an expectation that there will be a hybrid cloud model or a hybrid model just like we saw with cloud. And you need to be positioned with capacity in order to service that demand when it comes, and those two things are driving your CapEx higher. Do you think that is a correct framework for thinking about the Build Bolder initiative and kind of the increase in CapEx that you're forecasting?

Absolutely. I mean, for us, it's about all of the above. We're not counting and banking on any one trend to be the sole reason that drives our capacity needs. Obviously, AI is going to play a factor. We think inferencing is probably likely to be our sweet spot. But we also see a lot of digital transformation happening across the enterprise broadly, and that's what's been leading up to the demand inflection that we're currently seeing for the larger footprint. I don't think AI is that prevalent in terms of infrastructure deployment today widely across the enterprise. But it's coming. And obviously, we want to be prepared for it, and we want to anticipate it. And so we're going to lean into that. But that's not the only use case or scenario that's driving demand today for sure.

Okay. I do want to -- I want to transition a little bit, talk about xScale, some of the hyperscale trends. My understanding is that you oversee both the retail as well as xScale construction. Is that -- do I have that right?

Correct.

Okay. What I'm curious about is, are there any big differences that you'd call out in terms of the construction management process or the go-to-market in terms of development aside from larger, higher density, right? Any differences that you'd call out in terms of the go-to-market for building that capacity?

I think the biggest -- there's two big differences. One is just the sheer size and scale of that project typically. And the second revolves around whether there's a customer in the equation at the time we're building it or not.

Okay.

And when there is a customer, it's a much more demanding program management challenge. And we're -- I think what you're poking at, and I can sort of read between the lines, it takes a different caliber of program management talent and capability to manage one of those projects versus a retail project, particularly with how we approached it in the past. However, those two lines are going to merge because we're going to build much bigger retail buildings and phases. And so everything is going to be larger scale, which means we have to increase our program management capability. And we're adding lots of talent, lots of people in our design and construction team to prepare and anticipate for that. And we're changing something we call gearing. And gearing for us is the ratio of program management people to the project. We used to run it fairly lightly, and we're realizing that given today's complexity, I think this will resonate with most of the people in the room that are building. It is much harder to build today than, say, 5 years and much harder than 10 years ago. Everything about today is harder, getting equipment on time, failure rates, labor supply, productivity, permitting, regulation, design, everything about how we build today is harder than it used to be. And so for that reason as well as just we want to be on top of the programs in a tighter fashion, we're increasing everything about how we manage projects.

Where I wanted to go with this is, I'm curious, and I appreciate the answer in terms of, hey, on the retail side, the sizes are increasing, more akin to hyperscale, but then we're also seeing hyperscale. We weren't talking about gigawatt deals 2 years ago, right? So the whole continuum has moved up. I'm curious, as that dynamic plays out, do you think it's increasingly appropriate to maybe separate out those two functions and have like a dedicated hyperscale build team versus having a retail team?

Short answer is it depends on what layer of the organization you're talking about. And so what we do today and what we believe is the right answer, and that's not necessarily the answer for the ages, we'll keep evaluating is that the programmed teams are separate and dedicated per project. And we have a group of projects in any given location that have this dedicated team that's more capable as well as experienced with those types of projects on an ongoing basis because we don't build once we continue to build in any given market. But as it comes up the tower of the organization, we think having it unified from a supply chain, from a contractor standpoint, from a planning standpoint, from a tool standpoint, from a sort of leadership and design perspective, we think it all still makes sense to merge at the upper layers of the organization. That doesn't mean you don't need unique capability on the ground, which is really where we're making the changes.

Okay. Perfect. For xScale, we've seen you move bigger scale, go into Atlanta. It seems like there are other markets on the horizon. Now that you're building these large hyperscale campuses, I'm curious how the engagement with the utility changes, right? Because when you're procuring 10 megawatts or 30 megawatts, it's one conversation. When you say 200, all of a sudden, it's a completely different world, right? So how has that go-to-market evolved?

Yes. We used to go plan where we wanted to build a data center, secure that land and then we'd make an application for that power. And when we were talking 10, 15 megawatts, it was a question of time and time was defined in a year or 2. But you could feel confident you get that power. Those days are gone for two reasons. One, we're no longer building in those increments. And two, the amount of power we need isn't sitting around on the grid. And so we are planning, and I think most people in the room that are doing data center development are ensuring you have clear line of sight to that power before you take down any land or plan any data center capacity. And that might mean a longer cycle, a longer planning horizon with the utility, and it may mean a different level of infrastructure. And in the past, if you were taking down 10, 15 megawatts, you literally -- you basically had maybe a step-down transformer inside of your building and you had medium voltage delivered to your front door. It was connected to a transformer that maybe you owned, maybe the utility owned, and it was fairly straightforward. Today, if we go ask a utility for 100, 200, 300, 400, what you name the number, we're having to one plan differently. We're having to put different infrastructure in. We're building our own substations that we either own or we build and then turn over to the utility. And for the most part, we're connecting at the high transmission voltage level. So it's a very different proposition. And even then, we may not get utility grid fast enough. And therefore, we're looking at alternates such as on-site generation, either as a bridge or as the first phase and then wait for the utility for the second phase. I think in today's world, you have to be super flexible, multipronged with your energy approach, and that's what we're trying to do. There's -- somebody asked me earlier in one of our private sessions is do you feel like you have it under control? And do you feel at ease with energy? And I was like, are you kidding? I don't think anyone can do it. There's not going to be a period. The same with supply chain, right? It's going to be hard work, grinding, managing. We've built a very large energy team within the company to do nothing but manage these various dimensions, variables, dynamics, changes is the -- I mean the days of I'm going to order something for utility and I'll wait 2 years and hopefully it arrives, forget it.

Yes, that doesn’t work.

We're structuring a special deal with that utility, and we're going to monitor every milestone along the way to ensure that in 2, 3 years, whatever the time horizon is, it's actually going to arrive. And if there are key milestones missed along the way, we're going to be engaging with the utility. And so it's going to take a whole different level of power planning and engagement and discussion. And public utility regulation is changing around. If you don't use it, you're going to lose it. And we're seeing that model emerge in a number of markets. And so monitoring and keeping in close dialogue with the utility, so you understand what power they've actually allocated to you because there's -- you have to think about power, I guess, in the simplest of terms in two sort of relevant variables. One is the infrastructure that they brought to you has a capability to it, has a capacity to it. But there's power that sits behind that, that has to be managed by the utility. And if they're not planning for the infrastructure or to deliver the amount of power that's in that sort of connection, then you get out of balance really easily. And we've literally seen that. And so you have to be in constant dialogue with the utility, "Hey, I've got a 20-megawatt connection. I'm using whatever, 12. Are you reserving the other 8 for me? Or here's my projection of when I'm going to ramp into that." So capacity planning for the utilities is no easy task these days. For the longest time, the utilities load look like this. And then with electrification coming to fruition, now they're seeing upticks that they have to get on top of from a planning and capacity standpoint.

I want to take what you just said, and let's take a step further. So as you think about the retail buildings that you're building, I appreciate that when you're doing 100, 200, 300-megawatt campuses on the hyperscale side, that's the conversation.