Equinix, Inc. (NASDAQ:EQIX) Q1 2023 Earnings Call Transcript May 3, 2023

Equinix, Inc. beats earnings expectations. Reported EPS is $2.77, expectations were $2.19.

Operator: Good afternoon, and welcome to today’s conference call. Before we get started, I would like to remind everyone that some of the statements that we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we’ve identified in today’s press release and those identified in our filings with the SEC, including our most recent Form 10-K filed February 17, 2023. The Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it is Equinix’s policy not to comment on its financial guidance during the quarter unless it’s done through an explicit public disclosure.

In addition, we will provide non-GAAP measures on today’s conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today’s press release on the Equinix Investor Relations page at www.equinix.com. We’ve made available on the IR page of our website a presentation designed to accompany this discussion, along with certain supplemental financial information and other data. We would also like to remind you that we post important information about Equinix on the IR page from time to time and encourage you to check our website regularly for the most current available information. With us today are Charles Meyers, Equinix’s CEO and President; and Keith Taylor, Chief Financial Officer.

Following our prepared remarks, we’ll be taking questions from sell-side analysts. In the interest of wrapping this call up in one hour, we’d like to ask these analysts to limit any follow-on questions to one. At this time, I’ll turn the call over to Charles.

Charles Meyers: Thank you, Chip. Good afternoon, and welcome to our first quarter earnings call. We had a strong start to the year, delivering quarterly revenues right at $2 billion with adjusted EBITDA and AFFO above the top end of our expectations. Despite a challenging macro environment, customers remain committed to their digital transformation journeys, driving 4,000 deals in the quarter across more than 3,000 customers, highlighting the scale and diversity of our go-to-market engine and the broad-based demand that continues to propel the business. We continue to see enterprises and service providers build out their IT infrastructure on Platform Equinix. And that infrastructure is more distributed, more cloud connected and more hybrid than ever before.

And while some customers are appropriately cautious about the timing of their investments given macro conditions, Equinix continues to be a critical partner in their efforts to advance hybrid architectures, unlock digital performance gains and optimize cloud and network spend. As a result, our deal win rates remain steady compared to historical trends, and we continue to see a robust pricing environment across all three regions. Turning to power. We’re very pleased with how the organization has navigated a volatile energy market and we remain in a strong position, significantly mitigating the impacts of this volatility for our business and for our customers. As previously discussed, we raised pricing in January to more than 7,000 customers across 16 countries, generating approximately $90 million of incremental revenue in the quarter, fully offsetting the impact of higher power costs.

Thanks to timely and transparent communications, concessions and disputes are low and our days of sales outstanding remain in line with historical trends. On the sustainability front, we are committed to responsible growth and continue to advance our bold future first sustainability agenda. Sustainability is increasingly becoming a board-level issue and Gartner estimates that by 2026, 75% of organizations will seek to increase business with IT vendors that have demonstrable sustainability goals and timelines, and we’ll seek to replace those who don’t. We recently published our eighth annual CSR report. And in 2022, we extended our industry leadership with 96% renewable energy coverage, making our fifth consecutive year with over 90% coverage.

We’re also progressing well on our science-based targets with a 23% reduction in operational emissions across Scope 1 and Scope 2 from our 2019 baseline. Additionally, Equinix continues to evolve its power procurement portfolio to increase the quality of its renewable energy purchases. This year, we signed new long-term power purchase agreements for solar projects in Spain totaling 345 megawatts of capacity, bringing Equinix’s contracted renewable energy PPA portfolio to 715 megawatts globally once fully operational. Looking forward, where feasible, we’ll continue to prioritize projects that create new sources of clean energy directly in the grids where we operate and support a healthy renewable energy coverage mix. Turning to our results. As depicted on Slide 3, revenues for Q1 were $2 billion, up 16% year-over-year, driven by strong recurring revenue growth.

Adjusted EBITDA was up 18% year-over-year, and AFFO was better than our expectations due to strong operating performance. These growth rates are all on a normalized and constant currency basis. Our unmatched scale and reach continues to differentiate our data center services portfolio and the tremendous strength of our balance sheet positions us to sustain our investment in new capacity to support a robust demand environment. We currently have 50 major projects underway across 37 metros in 25 countries, including 10x scale projects that will deliver more than 90 megawatts of capacity once opened. This quarter, we added new data center builds in Lagos, Frankfurt and Rio de Janeiro. Revenues from multi-region and three region customers increased 1% quarter-over-quarter to an impressive 76% and 65%, respectively.

Key multi-region wins in the quarter included a Fortune 500 manufacturing conglomerate, expanding its Performance Hub deployments across all three regions to assist with a business unit divestiture and in Cloud Native Zero Trust cybersecurity company using Equinix Metal to expand its business across all three regions. Our platform remains the logical point of Nexus for hybrid and multi-cloud deployments and hyperscalers continue to look to Equinix as a critical infrastructure provider and a valued go-to-market partner. This quarter, we won five new cloud on-ramps across Milan, Mumbai, Muscat, Tokyo and Warsaw as we continue to enjoy a strong leadership position in multi-cloud connectivity compared to our closest competitors. We’re also seeing the unique breadth of our product portfolio across retail colo, interconnection services, xScale and digital services resonate strongly with customers as they embrace rapidly emerging opportunities in AI.

We’ve closed several key AI wins over the past few quarters and are seeing a growing pipeline of new opportunities directly and with key partners for both training and inference use cases that benefit from the unique performance characteristics and multi-cloud proximity of our platform. In our xScale portfolio, we continue to see strong overall demand. In Q1, we pre-leased our entire Frankfurt 16 asset representing 14 megawatts of capacity taking us to over 75% leased or pre-leased across our nearly 260 megawatts of operational and announced xScale facilities. And we have a strong funnel of additional xScale opportunities in the coming quarters. Enterprise to cloud wins this quarter included a leading consumer products company leveraging Equinix’s robust ecosystems for their private multi-cloud connectivity needs and the Hearst Corporation, a diversified media company deploying on platform Equinix to execute its cloud first strategy, including the deployment of network edge for their network aggregation.

Turning to our industry leading interconnection business, we now have over 452,000 total interconnections on our platform. In Q1, interconnection revenue stepped up 12% year-over-year on a normalized and constant currency basis. And we added an incremental 5,300 interconnections for the quarter. We saw some continued grooming activity and consolidation into higher bandwidth BCs on Fabric, but both moderated from the prior quarter. While gross ads remain strong, pricing is firm and the diversity of our customer interconnection continues to expand. As global data volumes continue to accelerate, internet exchange saw peak traffic up 3% quarter-over-quarter and 26% year-over-year to greater than 30 terabits per second for the first time. And as enterprises continue to embrace hybrid and multi-cloud as their architecture of choice, they’re increasingly seeking the security performance and convenience of Equinix Fabric to connect to their choice of cloud and IT services across the broader digital ecosystem.

One example is Cisco whose multiple edge delivered services now rank among the leading end destinations on Fabric. Customer wins included Caixa, Brazil’s federal financial services company partnering with Equinix to accelerate its business by optimizing and securing its network core via Fabric. We also continue to enhance our platform with our digital services portfolio and saw a strong new user growth for our Equinix Metal offering as we cultivate product like growth. Wins this quarter included a Japanese video game company utilizing Equinix Metal in all three regions to support a new product launch and restack an Australian SaaS integrator and managed services provider utilizing Equinix Fabric and our edge services to optimize their solution offerings.

Our channel program delivered another strong quarter accounting for roughly 35% of bookings and 60% of new logos. Wins were across a wide range of industry verticals and digital first-use cases with strong engagement across the hyperscalers and continued momentum with partners like AT&T, Dell, Cisco, HPE, Orange business and Zenlayer. Key wins included a digital modernization win with Entel, our largest local partner in Chile, on behalf of Empresa Nacional [indiscernible] at Chile and oil and gas company. Entel is delivering a fully managed SDYM [ph] solution based upon Cisco technology while leveraging Equinix data center and interconnection services demonstrating how local partners can help deliver value to clients in new Equinix markets.

Now let me turn the call over to Keith and cover the results for the quarter.

Keith Taylor: Thanks Charles, and good afternoon to everyone. As highlighted by Charles, we had an outstanding start to the year. As you can see from our financial results, the team delivered on multiple fronts in the quarter. We had record net bookings including power price increases. Excluding those prior price increases, our net bookings performance was solid. The result of, again, net positive pricing actions across each of our regions and lower MRR churn. Global MRR per cabinet yield increase by $124 per cabinet on an as reported basis are about $27 per cabinet adjusting per prior price increases another one-offs. And as we highlighted on the last earnings call, we completed our efforts to strengthen our balance sheet raising both debt and equity in the quarter and remain well funded to meet our future growth expectations.

Now, as you would expect, despite the continued strength of our business, we remain highly focused on the broader market dynamics. But as we’ve stated before, during periods of disruption, Equinix thrives given our high quality and diverse set of customers who view Equinix as a mission critical partner to place their ecosystem driven digital infrastructure, whether it be a cloud on-ramp, a networking node, a cable landing station, or a trading platform. I do remember 90% of our quarterly bookings come from those existing customers as they expand their current environment or maybe move to more markets or simply buy more services. Finally, our strong liquidity position, low dividend, AFFO payout ratio and reduce debt leverage allows us to continue to invest to expand our product portfolio and expand our global footprint in both cases driving top line growth.

Simply put, we’re in a strong, fully funded financial position allowing us to meet all of our capital meets while maintaining the strategic and operational flexibility we need to grow and scale the business. Now let me cover the highlights from the quarter. Know that all comments in this section are on an normalizing constant currency basis. As depicted on a Slide 4 , global Q1 revenues were $1.998 billion, up 16% over the same quarter last year, and above the top end of our guidance range due to strong recurring revenues and the timing of xScale non-recurring fees. As we’ve noted before, non-recurring revenues, particularly those revenues attributed to our xScale business and custom installation works are inherently lumpy and given the momentum we’re seeing in our xScale business across all three regions.

Non-recurring revenues could fluctuate meaningfully over the next three quarters of the year. Q1 revenues net of our FX hedges included a $2 million tailwind when compared to our prior guidance range due to our weaker U.S. dollar in the quarter. Global Q1 adjusted EBITDA was $944 million or 47% of our revenues up 18% over the same quarter last year, and again above the top end of our guidance range due to strong operating performance including flat quarter-by-quarter SG&A spent. As expected, Q1 adjusted EBITDA benefited from lower seasonal power consumption and favorable energy hedge rates, which will reset higher starting in Q2 as anticipated, resulting in increased net utility spend over the next three quarters of the year. Q1 adjusted EBITDA, net of our FX hedges included a $2 million FX benefit when compared to our prior guidance rates and $5 million of integration costs.

Global Q1 AFFO was $802 million, above our expectations due to strong business performance, including lower net interest expense and income taxes. As expected, we had seasonally lower recurring CapEx spend consistent with prior years. Q1 AFFO included a $2 million FX benefit when compared to our prior guidance rates. Global Q1 MRR term was 2%, a continued reflection of our disciplined sales strategy. For the full year, we expect MRR churn to average at the low end of 2% to 2.5% of our quarterly range. Turning to our regional highlights, whose full results are covered on Slides 5 through 7. On a year-over-year normalized basis, EMEA was our fastest-growing region at 28% due to our significant power increases. Excluding the benefit attributed to those price increases, EMEA growth was 14%.

Our APAC and Americas region growth rates were 15% and 9%, respectively. The Americas region had another solid quarter with strong performance from our public sector team and continued favorable pricing trends. We saw strong momentum in our Chicago, Culpeper, Seattle metros and a Brazilian business. Our EMEA business delivered a great quarter, successfully executing on our price increase program while also seeing lower-than-expected MRR churn. In the quarter, we saw bookings strength in our Amsterdam, Dublin and Manchester metros. And finally, the Asia Pacific region had a solid quarter led by our Mumbai, Tokyo and Singapore markets with strong new logo additions and firm pricing. Now while Singapore remains capacity constrained as part of our IBX optimization efforts, we continue to proactively negotiate with certain customers with larger deployments to recover capacity which we anticipate to be backfilled at much higher rates, although it could affect our in-quarter MRR churn and net CapEx billing metric.

And now looking at the capital structure, please refer to Slide 8. Our balance sheet increased to approximately $31.3 billion, including an unrestricted cash balance of $2.6 billion. Our cash balance increased quarter-over-quarter due to strong operating cash flow while we also raised approximately $580 million of yen-denominated debt and closed at the prior year’s forward sales from our ATM program. Our net leverage remains low at 3.4 times our adjusted EBITDA with 96% of our outstanding debt being fixed with no near-term maturities. Given the global nature of our business, we continue to look to raise additional debt capital and reduce rate countries where we intend to expand, creating both incremental debt capital to fund our growth and placing natural hedges into these markets.

Turning to Slide 9. For the quarter, capital expenditures were $530 million, including seasonally lower recurring CapEx of $22 million. Since our last earnings call, we opened four retail projects in Frankfurt, Paris, Singapore and Sydney. We also purchased land for development in Calgary and Madrid. Revenues from owned assets were 63% of our recurring revenues for the quarter. Our capital investments delivered strong returns, as shown on Slide 10, are now 171 stabilized assets increased revenues by 11% year-over-year on a constant currency basis. Taking out the benefit attributed to power price increases, stabilized assets increased 7% year-over-year. Consistent with prior years, in Q1, we completed the annual refresh of our IBX categorization exercise.

Our stabilized asset count increased by a net 13 IBXs. Now stabilized assets are collectively 85% utilized and generate a 27% cash-on-cash return on the gross PP&E invested. And finally, please refer to Slides 11 through 15 for our updated summary of 2023 guidance and bridges. Do note, all growth rates are on a normalized and constant currency basis. For the full year, we’re raising our revenue guidance by $30 million and adjusted EBITDA guidance by $20 million, primarily due to favorable FX rates and lower integration costs. This guidance implies a revenue growth rate of 14% to 15%, inclusive of power price increases or 9% to 10%, excluding the power cost pass-through and adjusted EBITDA margins of 45%, excluding integration costs. We now expect to incur $33 million of integration costs in 2023.

And we’re raising 2023 AFFO [ph] guidance by $44 million to now grow between 10% and 13% compared to the previous year, and AFFO per share is now expected to grow 8% to 11%. 2023 CapEx is expected to range between $2.7 billion and $2.9 billion, including approximately $150 million of on-balance sheet xScale spend, which we expect to be reimbursed as we transfer assets into the JVs of about $205 million of recurring CapEx spend. So let me stop here. I’m going to turn the call back to Charles.

Charles Meyers: Thanks, Keith. In closing, we had a solid start to the year. While we remain vigilant to the challenges in the broader macro economy. Our Q1 results were strong and our outlook remains positive with the overall demand for digital transformation, fueling our conviction around the long-term secular drivers of our business. We look forward to our upcoming Analyst Day in June where we will further outline the significant opportunity ahead and discuss our strongly differentiated position in capturing this opportunity as we enable our customers to access all the right places, partners and possibilities. We also look forward to diving more deeply into our evolving platform capabilities, our industry-leading go-to-market engine and sharing expectations of how all of this will translate into durable and differentiated value creation for our investors, our customers and the communities in which we operate. So let me stop there and open it up for questions.

Operator: Thank you. [Operator Instructions] Our first caller is Matt Niknam with Deutsche Bank. You may go ahead.

Q&A Session

Operator: Our next caller is Jon Atkin with RBC. You may go ahead.

Operator: The next caller is Nick Del Deo with MoffettNathanson. You may go ahead.

Operator: Our next caller is Simon Flannery with Morgan Stanley. You may go ahead.

Operator: Our next caller is David Barden with Bank of America. You may go ahead.

Operator: Our next caller is Michael Elias with TD Cowen. You may go ahead.

Operator: And our next caller is Michael Rollins with Citi. You may go ahead.

Operator: And our next caller is Brett Feldman with Goldman Sachs. You may go ahead.

Charles Meyers: Thank you, everyone. This concludes our Q1 earnings call.