Equinix, Inc. (NASDAQ:EQIX) Q3 2023 Earnings Call Transcript

Equinix, Inc. (NASDAQ:EQIX) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good afternoon and welcome to the Equinix’s Third Quarter Earnings Conference Call. All lines will be able to listen until we open for question. Also, today’s conference is being recorded. If anyone has any objection, please disconnect at this time. I would now like to turn the call over to Chip Newcom, Senior Director of Investor Relations. Sir, you may begin.

Chip Newcom: Good afternoon, and welcome to today’s conference call. Before we get started, I would like to remind everyone that some of the statements 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 17th, 2023, and 10-Q filed August 4th, 2023. 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’ policy not to comment on its financial guidance during the quarter unless it’s done through an explicit public disclosure.

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In addition, we’ll 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’ 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’d like to turn the call over to Charles.

Charles Meyers: Thank you, Chip. Good afternoon and welcome to our third quarter earnings call. Despite an increasingly complex macro environment, we delivered another solid quarter of results and continue to drive strong value creation, raising both our dividend and our AFFO per share outlook for the full year. While we continue to operate in an environment characterized by customer caution, this caution is balanced by a clear commitment to digital transformation and accelerating interest in AI and a growing reliance on Equinix as a critical partner in designing and implementing hybrid, multi-cloud, and data-centric architectures. Customers continue to see digital as a critical priority, and they remain focused on optimizing existing infrastructure spend and capabilities across cloud, network and other categories.

Demand remains strong. New logo growth is accelerating, and we see a highly favorable pricing environment, allowing us to deliver higher MRR per cabinet yields driven by price, power density, and strong interconnection demand. The net result is solid revenue growth, a strong forward pipeline and continued optimism about our differentiated ability to deliver compelling value to our customers and in turn, to our shareholders. In Q3, our go-to-market engine continued to execute well with more than 4,200 deals in the quarter across more than 3,100 customers, including record new logos from high-value targeted customers. We saw solid performance across all aspects of our platform strategy with data center services, digital services, and our xScale, all coming together to address the evolving demands of our customers and strong cross-regional bookings highlighting the power of our unmatched global reach.

On the AI front, we continue to cultivate and win significant opportunities across our existing customer base and with AI-specific prospects. A recent Gartner poll found 55% of organizations are in pilot or production mode with generative AI. We are seeing this manifest in accelerated interest from both enterprise customers and from emerging service providers looking to service this demand. We see strong similarities between the evolving AI demand and the multi-tiered architectures that have characterized the cloud build-out for the past eight years. And believe that our broad portfolio of offerings in tandem with our key technology partners will allow us to capture high-value opportunities across the AI value chain along three key vectors.

First, in our retail business, we will aggressively pursue magnetic AI service provider deployments to support on-ramps, inference nodes and smaller scale training needs. We are well-positioned here with nearly 40% market share of the on-ramps to the major cloud service providers, key players in the AI ecosystem. And in Q3, we’re proud to have been recognized at a 2023 Google Cloud Customer Awards winner for our work supporting Google AI technology. Key wins in this area for Q3 included Core Wheat, a specialized GPU cloud provider, deploying networking nodes at Equinix leveraging our unique multi-cloud on-ramps and network connectivity across multiple metros. And Lambda, selecting Platform Equinix to offer customers expanded regional connectivity, higher networking performance, security and scale for an enterprise-grade GPU cloud, dedicated to large language models and generative AI workloads.

Second, we intend to meaningfully augment our xScale portfolio, including in North America to pursue strategic large-scale AI training deployments with the top hyperscalers and other key AI ecosystem players, including the potential to serve highly targeted enterprise demand. We expect some builds will be tightly coupled with our retail campuses like our newly announced Silicon Valley 12x asset, while other builds will be larger-scale campuses in locations with access to significant power capacity. And finally, in response to burgeoning enterprise AI demand, we will leverage our unique advantages to position Platform Equinix as the place where private AI happens, allowing customers to place compute resources in proximity to data and seamlessly leverage public cloud capabilities, all while maintaining control of high-value proprietary data.

We also anticipate a dramatic acceleration in inference workloads and see Equinix as well-positioned to deliver performance and economic benefits derived from our reach, network density and cloud adjacency. While still early, we’re seeing broad-based demand for private AI from digital leaders with specific wins in the transportation, education, public sector and healthcare verticals, including Harrison.ai, a clinician-led healthcare artificial intelligence company that is dedicated to addressing the inequality and capacity limitations in our health care system, by developing AI-powered tools in radiology and pathology. An exciting opportunity that not only drives our business, but clearly aligns with Equinix values. As AI demand accelerates, we are adapting our product portfolio and our physical platform in response to evolving customer requirements.

In terms of data center design, we’re using our co-innovation facility in Ashburn to evaluate technologies to support escalating power requirements and have already commercialized our early work in this area with liquid cooling solutions that are supportable in all markets, including support for direct-to-chip liquid cooling in 45 markets across all three regions. We are already supporting significant liquid cool deployments across our range of deployment sizes and densities and we look forward to sharing more with you on our progress in this space. Turning to our results, as depicted on Slide 3, revenues for Q3 were $2.06 billion, up 14% year-over-year driven by strong recurring revenue growth and power price increases. Adjusted EBITDA was up 9% year-over-year, and AFFO per share was better than our expectations due to strong operating performance and timing of recurring CapEx spend.

Interconnection revenues grew 9% year-over-year with continued strength from Equinix Fabric. These growth rates are all on a normalized and constant currency basis. Our data center services portfolio continues to perform well. Given the strong underlying demand for digital infrastructure and the long duration in delivering new capacity, a factor that continues to drive positive pricing trends, we’re investing broadly across our global footprint. We currently have 56 major projects underway in 39 markets across 23 countries, including 14 xScale builds that will deliver more than 100 megawatts of capacity once opened. More than 50% of our expansion capital is supporting capacity in our major metros where we have strong visibility to fill rates.

Recurring revenues from customers deployed in more than one region stepped up 1% quarter-over-quarter to 77% as customers continue to move to more distributed architectures. On interconnection, we now have over 460,000 total interconnections with 4,200 net interconnections added in Q3 thanks to healthy gross adds, offset somewhat by continued grooming activity and consolidations into higher bandwidth connections. Equinix Fabric saw continued momentum with record port orders and significant growth in provision bandwidth, up 8% quarter-over-quarter to more than 200 terabits per second. Internet Exchange had another strong quarter in APAC with peak traffic in the region, surpassing the Americas for the first time. Globally, peak traffic was up 9% quarter-over-quarter and 27% year-over-year to nearly 35 terabits per second.

Recent interconnection and ecosystem wins include Southern Cross, expanding their relationship with Equinix by deploying their SX NEXT subsea cable into our LA4 IBX to boost aggregate capacity on their US to Australia and New Zealand network by 50%. And the Warsaw Stock Exchange, migrating their primary matching engine and trading system to Equinix’ Warsaw 3 IBX to offer more capabilities and enhanced trading performance. We continue to invest behind our platform strategy with revenue growth from our digital services portfolio significantly over-indexing relative to the broader business, including strong adoption of our network edge offering by enterprise customers. We’re also seeing momentum in expanding our partnerships with leading technology companies, including the recent announcement of NetApp storage on Equinix Metal, which is an integrated full stack solution that provides enterprise customers low latency access to all clouds while keeping control of their data, a critical consideration for AI workloads.

Key digital services wins this quarter included McGraw Hill, a leading educational publishing company, deploying virtual hubs using Network Edge across multiple markets to connect to key cloud providers via Equinix Fabric. And a significant win with a global gaming company using Equinix Metal to support a major new product launch. Our channel program delivered another strong quarter, amplifying the reach of our sales team and accounting for over 65% of new logos with wins across a wide range of industry segments focusing on digital transformation initiatives. We continue to see growth from partners like AT&T, Cisco, Dell, and HPE. Key wins included a top five US public school district seeking to modernize aging IT infrastructure while improving systems uptime and enhancing cybersecurity.

This win executed with partners, Dell Technology Managed Services, Carasoft, and ImpEx Technologies, will deliver low latency, multi-cloud connectivity and secure network access to key ecosystem resources while lowering operational expenses. Now, let me turn the call over to Keith and cover the results from the quarter.

Keith Taylor: Great. Thanks Charles and good afternoon to everyone. Let me start by saying I hope you and your families are doing well. Now, notwithstanding these complex and difficult times, we continue to remain bullish about our business and the opportunities ahead as we work hard to expand our strategic and preferential position in the marketplace. As you all know, one of the core tenets of our strategy revolves around long-term shareholder value creation. With that in mind, we continue to build capacity in markets that will enhance our platform positioning and differentiate our offerings into the future. Also, we continue to work diligently to maintain rigor with our pricing strategies while closely overseeing our spending decisions.

As it relates to our capital structure, we’ve been able to maintain a highly advantaged balance sheet with ample liquidity and lower leverage. This gives us the flexibility to opportunistically access the capital markets under terms and conditions that are beneficial to us. In addition, we’re actively working to support other strategic operating goals, including how and where we source our supply chain, including energy costs, while increasing our investments in and around our future first sustainability initiatives, both highly important matters for our customers. Lastly, we remain pleased with our efforts to manage our derivative risks, including our exposure to foreign currencies and interest rates. Moving on to the business, we continue to perform well.

In Q3, we had solid gross and net bookings with strong customer demand. Our pricing dynamics are very positive. MRR churn is well within our targeted range. Also, given the tight supply environment across many of our metros, we and our customers continue to look for ways to optimize deployment, including increasing the power density of the cabinets sold. This drives improved bottom line profitability and higher return on invested capital. Global MRR per cabinet was up $57 quarter-over-quarter to $2,214 per cabinet, a 12% increase on our yield year-on-year on a constant currency basis. With respect to our net cabinets billing metric, it remains flat compared to Q2, largely due to the meaningful increase in density of cabinet and the timing of bookings and churn at the end of the quarter.

We have a solid backlog of booked but not yet installed cabinets and the depth of our pipeline and the related coverage ratios support an expected strong bookings performance to close out our year. Now, let me cover the highlights from the quarter. Know that all comments in this section are on a normalized and constant currency basis. As depicted on Slide 4, global Q3 revenues were $2.061 billion, up 14% over the same quarter last year due to strong recurring revenue growth and power price increases. Non-recurring revenues remained flat compared to the prior quarter. Although it was not before non-recurring revenues, particularly those attributable to our xScale business are inherently lumpy, for Q4, our guide implies a meaningful step-up on non-recurring revenues attributed to a number of deals expected to close across different markets this quarter.

Q3 revenues net of our FX hedges included a $1 million headwind when compared to our prior guidance rates. Global Q3 adjusted EBITDA was $936 million or 45% of revenues, up 9% over the same quarter last year due to strong operating performance. Looking forward, our Q4 adjusted EBITDA is expected to remain roughly flat due to the timing of our spend and specific one-time costs attributed to corporate real estate activities. Q3 adjusted EBITDA, net of our FX hedges, includes a $1 million FX headwind when compared to our prior guidance rates and $2 million of integration costs. Global Q3 AFFO was $772 million, above our expectations due to strong business performance and timing of recurring CapEx spend. Q3 AFFO included minimal FX impact when compared to our prior guidance rates.

Global Q3 MR turned step down to 2.2%, and we expect Q4 MR churn to remain consistent with our Q3 levels in the lower half of our 2% to 2.5% quarterly guidance range. Turning to our regional highlights, whose full results are covered on Slides 5 through 7. On a year-over-year normalized and constant currency basis, EMEA and APAC were our fastest-growing regions at 26% and 10%, respectively, followed by our Americas region at 7% year-over-year growth. The Americas region had a solid quarter across many of our key metros, and we experienced strong public sector activity. As it relates to AI, sales activity discussed in Charles’ remarks, the vast majority of the demand is destined for Americas footprint. And as highlighted by Charles, this quarter, we won a mix of AI training, inference and networking deployments with the pipeline of anticipated deals to follow.

Our EMEA business had a strong quarter led by our UK and Dutch markets and record digital services bookings. In EMEA, as highlighted previously, we continue to lean into our future-first sustainability strategy, including implementing heat export initiatives into Frankfurt, Helsinki, and Paris communities while supporting other innovative environmental initiatives to support many other communities and where we operate. And finally, the Asia-Pacific region saw a solid performance led by our Hong Kong, India, and Singapore markets. Capacity constraints exist across a number of our markets, particularly Singapore. These supply constraints will help drive strong deal discipline and pricing power in these markets. During 2024, we’ll be opening new markets in India, Indonesia, and Malaysia, expanding our APAC platform and ecosystems in pursuit of larger opportunities given the demand for digital infrastructure.

And now looking at our capital structure. Please refer to Slide 8. Our net leverage remains low relative to our peers at 3.5 times our annualized adjusted EBITDA. Our balance sheet increased slightly to approximately $31.7 billion including an unrestricted cash balance of over $2.3 billion. Our cash balance remained flat quarter-over-quarter as our strong operating cash flow and financing activity was offset by our investment in growth CapEx and the quarterly cash dividend. As I’ve previously noted, we’ve been opportunistically looking to raise additional debt capital in reduced rate environments. To that end, in September, we raised $337 million of Swiss Franc denominated five-year paper at an attractive 2.875% rate. Additionally, during the quarter, we executed an incremental $230 million of ATM forward equity sales, which we expect to settle alongside our Q2 ATM forward contract in late 2023.

These financing transactions will help fund our 2024 growth initiatives, alongside other sources of capital while allowing us to maintain our strategic flexibility. Also in September, we published our 2023 green bond allocation report. As highlighted in the report, we have now fully allocated the net proceeds from our green bonds aligning our financing efforts with our commitment to create a more environmentally friendly data center footprint. Turning to Slide 9, for the quarter, capital expenditures were $618 million, including recurring CapEx of $52 million. Since our last earnings call, we opened six new retail projects, including two new data centers in Dubai and Montreal. We also purchased our Dublin 1 and Montreal 1 IBX assets and land for development in Manchester in Washington, D.C. Revenue from owned assets were 64% of recurring revenues for the quarter.

Our capital investments delivered strong returns as shown on Slide 10. Our 174 stabilized assets increased revenues by 9% year-over-year on a constant currency basis. Our stabilized assets are collectively 85% utilized and generated 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 2023, we’re maintaining our underlying revenue outlook with expected top line growth of 14% to 15% or approximately 9% growth, excluding the impact of power costs passed through to our customers, a reflection of our continued strong execution. We are raising our underlying 2023 adjusted EBITDA guidance by $17 million due to favorable operating costs and lower integration spend and we’re raising our underlying AFFO guidance by $27 million to now grow between 12% and 14% compared to the previous year.

AFFO per share is now expected to grow between 10% and 11%. CapEx is expected to remain in the $2.7 billion to $2.9 billion range, including approximately $215 million of on-balance sheet xScale spend, which we expect to be reimbursed for when these assets are transferred to JVs early next year and about $225 million of recurring CapEx spend, an increase over the prior quarter as we accelerate costs into Q4. Lastly, given our strong operating performance and our historically low AFFO payout ratio, we’ve accelerated the timing of our cash dividend increase into Q4 of this year from Q1 of next year. As a result, the quarterly cash dividend will increase by 25% to $4.26 per share this quarter. Looking forward, we expect our annual cash dividend growth rate will track at or above our AFFO per share growth rate for a number of years.

So, let me stop here and turn the call back to Charles.

Charles Meyers: Thanks Keith. In closing, we continue to see strong demand as customers embrace AI and advance their digital transformation agendas with infrastructure that is more distributed, more cloud connected and more ecosystem enabled than ever before. Despite a variety of cross currents in the business, we are translating healthy bookings growth, a favorable pricing environment, and increasing power densities into strong increases in cabinet yield. These dynamics, combined with the continued focus on driving operating leverage and expense discipline through the business, are allowing us to deliver compelling value on a per share basis. As we close out 2023 and look towards 2024, our forward-looking strategy and vision for our platform will enable us to amplify our unique strengths, leveraging them to expand our market opportunity, and drive sustainable growth in a rapidly evolving landscape.

We remain optimistic about the road ahead and steadfast in our commitment to show up every day in service too, starting with the resolve to align, inspire, and empower our teams around our strategy and our mission, enabling them to deliver durable value and meaningful impact to our customers, our shareholders and the communities in which we operate. So, let me stop there and open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Matt Niknam with Deutsche Bank. You may go ahead.

Matt Niknam: Hey guys. Thank you for taking the questions. Just two if I could. First, on the cabs billing metric. I appreciate you, Charles, given some of that color around the increased power density. I’m just wondering if there’s any additional color you can share with some of the softness in the cabs billing adds, some of the actions you may be taking to release some of that available capacity at higher mark-to-market rates and any sort of color you can share in terms of expectations for 4Q. And then second question, again, we appreciate all the color on AI. Just wondering if you can give us any more color on the conversations you’re having with customers on their AI strategy, what role Equinix can play in helping them meet their goals and any sort of timing in terms of when this can become a little bit more material? Thanks.

Charles Meyers: Yes, you bet, Matt. Yes, we absolutely figured that we would have a question there on the cabs, as you might imagine, key topic in the discussion. I want to start by just reinforcing that the flat cabinet growth is really not driven by a lack of demand, as you heard in the script. We had another really solid bookings quarter with overall deal counts in line with what we’ve been seeing. And so I think it’s not a demand problem, per se. As I said last quarter, look, we recognize billing cab adds have to be part of the growth story over time, but the pressure on the metric is really linked to some other positive dynamics in the business as you sort of alluded to there. So, let me unpack that a little bit for you and give you a little more detail.

I think the force that I think maybe we didn’t fully appreciate the past couple of quarters or didn’t highlight as much as the extent and the pace of the evolution on the power density. And so we really dug into that this quarter and looked at that for the last several quarters. And what we found is really an expanding delta between the power density of our churn cabinets and that of our newly sold cabinet. So, we look back over these first three quarters of 2023, where we’ve had a flatter profile on the build cabs or billing cabs, and we’ve turned cabinets over that period an average density of 4 kilowatts per cab, but we’ve added new billable cabs at an average of 5.7. So, that’s really a major factor that our cab equivalent metric is not density adjusted.

So, the reality is we’ve been paddling hard against that increase in density when it comes to cabinet growth. Additionally, and we talked about this in prior calls as well, we do have some capacity constraints, somewhat — ones in certain markets. And those are driving some proactive churn on our part, and we see a level of customer optimization at the cabinet level similar to what we’ve been talking about on interconnection, but we’re seeing very little customer churn or full customer churn. And so I’m not — I’m definitely not saying that all of our churn activity is necessarily desirable or wanted. But as you can see in our churn metric, we’re managing the overall churn really well within our guided range. So, as I said — I talked about last quarter, these 37 deployments with really positive mark-to-market when you look at both price and power density and when we look at Q3, we actually saw that general range of 60% to 70% uplift as broadly applicable.

So, in other words, our average of our churn cabinets or new cabinets were about 60% to 70% above what we had churned. And so obviously, that dynamic is super attractive in terms of in really explaining why we’re driving healthy revenue growth even with the limited growth in billable cabs. So, I mean, we’ve always said we’re not ones to chase volume as a business objective, because I think that often results in a loss of discipline in the process. We’re very much playing the long game when it comes to our commercial decision-making. And although cabinet growth is going to have to be a part of the story over time, we’re really seeing that the current dynamics are allowing us to drive, as we said, strong MRR per cab, solid stabilized asset growth and really, I think, the return on capital is going to continue to be very favorable.

So, I think all of that translates into what we see as the really most critical bottom line, and that’s AFFO per share and dividend growth. And I think sort of the results are really strong in that area. So, that’s context on the first question and on billable cabs. Second one on AI, definitely seeing it show up. We talked about in the script about a number of deals that we won in the quarter. AI and ML are not new things for us. We kind of talked about that. We’ve been working, I think, through AI opportunities with digital leaders for several years now. There’s a lot happening across the platform. In fact, people don’t maybe remember it, but we announced our NVIDIA Launchpad offering with them over two years ago. And really, that’s been a unique opportunity for us to get in early with customers as they’re piloting AI initiatives in their business and really monitor AI demand in the marketplace.

And so we’ve closed a number of deals with service providers this quarter. There’s definitely an emergent set of service providers, Core Wheat and Lambda we talked about that I think are really sources of incremental demand for us. We closed those deals really in the retail footprint focused on networking and inference-type nodes. And I think that what we’re seeing most of with customers is working with them on three big questions when they’re thinking about AI. Where do I put my data? And I think we’re seeing a lot of people looking at sort of cloud adjacent data as the answer. And I think that plays right to our advantages. Secondly, how they bring compute and other data sources in other words, data that’s not their own to their own data.

And then finally, how do they deliver AI generated business insights to the users of those insights economically and with high performance. And so those really are the areas that we’ve been deeply engaged with our customers. I think that it’s a contributing factor to our probably our best forward-looking pipeline, multi-quarter pipeline that we’ve seen in a long time. And so I do think AI is a very positive force in the business overall.

Matt Niknam:

Operator: Our next question comes from Frank Louthan with Raymond James. You m ay go ahead.

Frank Louthan: Great. Thank you. Just a quick question on — so on the channel, you mentioned 65% of new logos coming from the channel. What percentage of overall sales are there? And then how do the logos in the channel tend to perform longer term versus those from the existing sales force, they produce the same amount of repeat business?

Charles Meyers: Yes, I would — I think our bookings percentage is probably in the 40%-ish range from our channel. You do have to recognize, Frank, and we’ve been very transparent about this. Our channel is not really a sell-through channel as much. It’s really more of a sell with sort of meeting the market. But what we’re using is the extensive relationships that our channel partners have, particularly in the broad enterprise to identify and then bring our unique value to the table. And so that often results in essentially a joint selling proposition between ourselves and our partners. And over time, I would say that I think we need to be moving towards a bit more of a sell-through model that would provide even more economic leverage to the model.