Equinix, Inc. (NASDAQ:EQIX) Q4 2023 Earnings Call Transcript

Equinix, Inc. (NASDAQ:EQIX) Q4 2023 Earnings Call Transcript February 14, 2024

Equinix, Inc. misses on earnings expectations. Reported EPS is $2.4 EPS, expectations were $7.25. Equinix, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the Equinix Fourth Quarter Earnings Conference Call. [Operator Instructions] Also, today’s conference is being recorded. If anyone has objections, please disconnect at this time. I’d 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 that we will be making today are forward-looking in nature 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 and 10-Q filed October 27, 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.

In addition, we will provide non-GAAP measures on today’s conference call. We provide a reconciliation of these 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 1 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: Good afternoon and welcome to our fourth quarter earnings call. We had a solid close to 2023 as digital transformation and accelerating AI demand drove a record quarter for xScale leasing, robust pricing dynamics and continued momentum across our data center and digital services portfolios. For the full year, we delivered more than $8 billion of revenues, eclipsing 21 years of consecutive quarterly growth, all while driving AFFO per share performance above the top end of our long-term expectations. As we look ahead, we see our overall relevance to customers continue to rise with our global reach, highly differentiated ecosystems and full-range portfolio of services, positioning us as a key long-term partner to fuel digital transformation and unlock the enormous potential of AI.

See also 30 Highest-Grossing Media Franchises of All Time and 13 Countries with Easy Citizenship for Retirement.

Q&A Session

At the same time, many customers remain cautious in the face of macro uncertainty and are driving optimization across their broader IT infrastructure. Freeing up dollars for AI-related investments while still managing within tighter overall budgets. These dynamics, combined with capacity constrained in certain key markets continue to create cross currents in our business with solid gross demand and strong pricing dynamics being offset by more deliberate buying decisions and slightly higher levels of churn. Meanwhile, we continue to realize the benefits of efficiency investments over the past few years and are showing strong operating leverage in the business, allowing us to maintain our differentiated return on invested capital, expand margins and deliver outsized performance on AFFO per share which we continue to see as our lighthouse metric and the bedrock of long-term value creation.

As work to make digital infrastructure more powerful, accessible and sustainable, we are building relationships as trusted advisers to our customers, innovating across our product portfolio, deepening our technology partnerships to solve customer challenges and maintaining our discipline to put the right customers with the right workloads into the right assets. This approach reinforces the kind of advantages of Platform Equinix as we focus our efforts in 2024 on 4 key areas: First, we plan to continue to expand our unmatched global reach, extending the 76 metros in 35 countries by year-end, including opening new markets in India, Indonesia, Malaysia and South Africa. We also intend to add much needed capacity in high-demand existing markets across all 3 regions, including significant retail phases in New York, Paris and Tokyo and accelerated investment in our xScale portfolio.

Second, we intend to extend our interconnection leadership by combining the scalability and performance of physical interconnection and the agility of Equinix Fabric with a commitment to lead the way in the massive market of multi-cloud networking, with new innovations and products like our recently announced Equinix Fabric Cloud Router. Third, we’ll continue to prioritize our future first sustainability strategy, making Equinix a clear partner of choice to help our customers track and see their sustainability goals and manage an increasingly complex global power landscape. And finally, we intend to unlock the power of platform clinics, embracing key partners and making it easier than ever to combine our value with theirs. So we can solve our customers’ problems together.

In particular, we focus on Gen AI as we join forces with incredible partners such as NVIDIA, to ensure that Platform Equinix is the place where private AI happens. Turning to our results, as depicted on Slide 3, revenues for the full year were $8.2 billion, up $925 million, a 15% increase year-over-year or a 9% increase, excluding the impact of power price increases. Adjusted EBITDA was $3.7 billion, up 11% year-over-year. AFFO was more than $3 billion for the first time, resulting in AFFO per share growth of 11% year-over-year. These growth rates are all on a normalized and constant currency basis. On the AI front, we saw strong momentum across the value chain in Q4 as we cultivated key partnerships and one significant opportunities. While still early, Gen AI has the capacity to transform every industry and is poised to accelerate rapidly.

By 2026, Gartner predicts over 80% of enterprises have used Gen AI APIs and models or deployed Gen AI-enabled applications in production environments, up from just 5% in early 2023. We’re leaning into this opportunity and recently announced our expanded partnership for IBX private cloud at Equinix. This new service provides customers a fast and cost-effective way to adopt advanced AI infrastructure that’s operated and managed by experts globally. So enterprises can move quickly, while balancing performance requirements, a need for cloud adjacency and a rapidly increasing desire to maintain control of critical enterprise data. We’re seeing strong interest in this service across all 3 regions with early adoption from digital leaders in biopharma, financial services, software, automotive and retail subsegments.

Early wins in this partnership include a Fortune 100 global biopharma company who will create an AI of excellence to accelerate its research and development process and shorten time to market for new medications. Our data center services portfolio continues to scale with 9 new data center openings since our last earnings call. Given the strong underlying demand for digital infrastructure and the long duration in delivering new capacity, we continue to invest broadly across our global footprint. We currently have 49 major projects underway in 35 markets across 21 countries including 11 xScale builds representing nearly 20,000 cabinets of retail and more than 50 megawatts of xScale capacity through 2024. Wins this quarter included a European biotechnology company, exiting their traditional data centers in favor of a global network dense, hybrid and multi-cloud environment, including liquid cooling requirements.

Andorin Holding [ph], a Turkish conglomerate, mainly serving as a strong global automotive supply company, expanding with Equinix to support their operations across 15 countries. Shifting to our xScale initiative, the wave of hyperscale demand to support AI and cloud is translating into robust demand in pre-leasing activity. Since our last earnings call, we leased 90 megawatts of capacity across 6 assets in EMEA and APAC, including approximately 32 megawatts leased at the start of the year. This brings total xScale leasing to 300 megaport [ph] globally. Wins this quarter included supporting strategic Gen AI workloads as well as the hyperscalers first-scale liquid cooling deployment at Equinix. Looking ahead, we have a meaningful pipeline of opportunities to drive continued xScale momentum in the quarters to come.

Turning to our industry-leading global interconnection franchise, we now have more than 462,000 total interconnections deployed on our platform. In Q4, interconnection revenue stepped up 8% year-over-year on a normalized and constant currency basis and we added an incremental 4,300 organic interconnections for the quarter. We, again, had healthy gross adds activity, offset somewhat by continued grooming and consolidations into higher bandwidth connections. Internet exchange saw peak traffic up 3% quarter-over-quarter and 22% year-over-year, to nearly 36 terabits per second, led by expansion from existing customers. Additionally, during the quarter, we added 4 new native cloud on-ramps in Bogota, Calgary and Zurich. Equinix customers can now enjoy low latency access to multiple native cloud on-ramps in 37 metros, including 8 out of the 10 world’s largest metros by GDP.

Wins this quarter included a leading European quantum computing company, offering its technology through Equinix Metal and Equinix Fabric, enabling different industries to explore potential use cases in quantum computing. And on insurance, a South African insurance company expanding in EMEA, leveraging Equinix Fabric and a managed service solution to be ready to begin trading. In our digital services portfolio, we saw continued momentum as Equinix Metal and Network Edge drove attractive pull-through to Equinix Fabric. In January, we announced the general availability of Equinix Fabric Cloud Router, a new virtual routing service to simplify enterprises complex cloud-to-cloud and hybrid cloud networking challenges by providing an easy-to-configure enterprise-grade multi-cloud routing service that can be deployed in under a minute.

Customers can deploy Equinix Fabric Cloud Router in all 58 Equinix fabric-enabled metros globally, with low latency connectivity to all the major cloud providers as well as hundreds of other service providers. Key digital wins included NetApp, who expanded their partnership with Equinix to deliver a Bare Metal service solution, a comprehensive compute, network and storage infrastructure stack with low latency connections to major public clouds. And a leading semiconductor company, establishing a cloud adjacent storage presence using Equinix Metal and Pure Storage with integration into AWS. Our channel program delivered another good quarter, accounting for 35% of bookings and over 50% of new logos. We saw continued growth from partners like HPE, HCL, NVIDIA and WWT, with wins across a wide range of industry verticals and digital first use cases.

Wins this quarter included supporting a consumer health care company’s business unit spin-off with Dell, setting up a hybrid IT environment by leveraging colocation and cloud for their SAP environment in London and Singapore. Now let me turn the call over to Keith to cover the results for the quarter.

Keith Taylor: Great. Thanks, Charles and good afternoon to everyone. As highlighted by Charles, we had a solid end to 2023. The Equinix team continued to execute across all levels of the organization to ensure our strategy as the world’s digital infrastructure company continue to separate us from our peers. For the full year, our healthy gross bookings allowed the team to close almost 17,000 deals across more than 5,900 customers. Highlighting the diversity and strength of our unrivaled go-to-market engine. Then pricing activity, both in the quarter and throughout the year, created strong pricing dine resulting in normalized and constant currency MRR per cap yield stepping up $38 for the quarter and $127 for the year to $2,227 per cap [ph].

And we had record exceled leasing over the year while generating approximately $49 of nonrecurring xScale fee revenue in the quarter, primarily related to the EMEA region. On the sustainability front, we’re pleased to again be listed on CDP’s prestigious 2023 Climate Change A-List and again, to be recognized in JUST Capital’s 2024 rankings as number one in real estate. As we look forward into 2024, our customers remain committed to all things digital and we believe we’re the best manifestation of this opportunity as customers digitally transform their form, both in the cloud and through AI. Hence our enthusiasm about our position in the broader market and the opportunities that lay out for us. That said, we remain highly vigilant to the current market conditions and the impact on our customers.

As mentioned last quarter, capacity constraints exist across a few of our markets, driving continued firm pricing power, albeit with some moderation to short-term growth. But as highlighted, on our expansion tracking slide, we have several new markets and additional capacity coming online later this year, with many other projects currently being contemplated as we look to extend our platform and drive growth. Also, we’re very pleased with the operating leverage the business is delivering, benefiting from prior investments while being highly present future spend, resulting in improving adjusted EBITDA margins for the year. Importantly, our forward guide on our core metric being AFFO per share reflects our confidence in the long-term opportunity of our business, a preferential position, I believe, relative to any others in our space given the foundational differences of our platform.

Additionally, our as reported guidance includes positive FX tailwinds due to the weaker U.S. dollar relative to ’23 rates and net power price decreases as utility rates moderate across both our regulated and unregulated markets. Now let me cover the highlights from the quarter. Do note that all comments in this section are on a normalized and constant currency basis. As depicted on Slide 4, global Q4 revenues were $2.11 billion, up 15% over the same quarter last year due to strong recurring revenue growth, power price increases and record xScale nonrecurring fees. As you would expect, we’re very pleased with the continued success of our xScale portfolio and the MRR and other fees generated, while also expecting a strong year in 2024. As noted previously, xScale MRR is inherently lumpy.