Equinix, Inc.
Q3 2015 Earnings Call Transcript

Published: 1 Dec 2015

[Unidentified Company Representative:]

Okay good afternoon, thanks for hanging in with us. We are welcoming Equinix to the stand. Equinix connects over 6,300 companies directly to their customers and partners inside the world's most networked data centers. With over 1,100 networks accessible, Equinix facilitates more than a 162,000 connections inside its data centers making it the leading global interconnections platform. Today we are joined by the CEO Steve Smith as well as the CFO; please welcome Mr. Smith.

[Steve Smith:]

Thank you Maryann and thanks for joining us here today. Keith and I will split this up, we’ll spend about 15 minutes to 20 minutes giving you just kind of a level set of what's going on inside the company and all the activity that you -- for those of you who are following us, know we’re pretty busy right now with a couple of acquisitions and quite a bit of activities. So let me try to do a little bit background here, I’ll give you a little bit of background of the company and what's going on and Keith will put a little bit of financial color to that and then we’ll take some Q&A. So the discussion we want to take you through quickly is answering these topics on the slide here. Generally speaking the way we approach the markets and set ourselves up as a platform company and we have been making that platform bigger and bigger as we continue to do these acquisitions. Secular trends are very strong, I’m going to show you that. We spend a lot time trying to make sure and be clear with our investor base the differentiation that we think is clearly creating a big mote around this business and for making it difficult for our competitors to catch up. We spend a lot of time, we don’t talk about it a lot but we spend a lot of time on running these data centers very efficiently, still the number one reason why we get chosen around the world is operation excellence, and the ecosystems that we’re accumulating in these data centers and we’ll color that out for you here as we walk through this. So the platform messages is set up today with 105 data centers in the biggest markets in the world, I’ll give you some data points on the acquisition what that will do for as we go forward. But there is three reasons on this slide that create the biggest competitive differentiation. And one is, over the 17 years that we have been doing this with accumulated, we refer to them as ecosystems, communities of customers that are in these data centers connecting to each other to run their companies, to run public internet activity, now more increasingly private connectivity via the cloud providers and we are very unique in that we’ve accumulated five or six of these ecosystems that range from the networks moving traffic around the world to today more recently the cloud providers creating interconnection in these data centers. We are the largest on the global basis, so our reach in scale is a huge differentiator in the infrastructure business. We have been doing this for a while, we find ourselves present in five continents, so if you are global customer and you have employees, revenue or customers anywhere in the world, you’re typically going to have to move server infrastructure out around the world close to those communities of customers, your revenue and your employees for the performance required to run your IT today. That days are gone that companies can run their IT from a consolidated centralized bunch of data centers in one market. Today almost every company on the planet might have back office in a market where they have their back office compute and their servers firms and then they have sever infrastructure all over the world next to those things to make their companies go. We always get credited as a high quality data center provider in this business having six or seven, nines almost a 100% uptime is a must to be in this business. We still get credit for being the most reliable data center company on the planet and we invest a lot of money in this and Keith will give you some color of that. The fortunate thing we play [ph] at the intersection of some of the greatest trends, there's a lot of data on this slide. I look at a couple of bubbles at the bottom whether it's petabytes of monthly IP traffic or terabytes of -- or zetabytes of data created and stored. All of these big trends are enabling the mobile cloud world. And today in order to run companies anywhere in the world you have to have as I said server infrastructure, storage arrays and networking gear all connected to each other sitting in data centers somewhere on the planet. And so all of these things create traffic. Where we win is, the more traffic that's being generated around the world sitting on top of all the networks that we house in these data centers. The better we -- the faster we grow and the more rich interconnection that we do. One of the factoids I look at a lot here is the blue bubble on the bottom, the IT centers. There is about $3.5 trillion of IT spend in the world. That's on data centers and all the stuff that goes in data centers. Only about 20% of that has been outsourced. Meaning sourced out to the big outsourcing companies like HPDS, IBM Global Services, T-Systems I mean they're all over the -- Accenture. Then there is a portion of that that went to the managed services hosting companies which today call themselves cloud companies and then there is a portion of that that went to the Colo providers like Equinix. So there's four choices, you do it yourself, you collocate some of your application workload with companies like Equinix, you can host it with companies like Rack Space and T-Systems and NTT and local providers in countries or you can outsource some form of your IT. 20% of that over the last 50-60-70 years has been outsourced. That means 80% of the world's IT is done on premise in house and the belief is over the coming decade that more and more of that 80% is done on premise in house is going to come out to the market and get sourced in one way or another. We think Colo providers are going to win in this space. We believe we'll win a major portion of this because of our global nature. So the trends are -- the greatest technology trends that we've seen in several years and most of this stuff creates an opportunity for data centers to do very-very well. This might be a little tough to see in the back, but across the top are the characteristics of where we are today. When you layer in the two acquisitions that I'll talk about in a second. We move into a situation where we will be in 21 countries, 40 metros around the world and a 145 data centers in these markets. These are the largest markets in the world. Equinix doesn’t build in the middle of Finland or in the middle of North Carolina, we build in the biggest cities where the interconnection and the density and the GDP and the internet transacts. And we typically build in and around where the cable landing stations that connect continents together, many of those terminate at Equinix facilities and we're all about networked density and now cloud density over the last few years. But this is a profile to show you where these data centers sit. The red dots are where we've been historically the -- I think it's blue or dots are some of the new markets that we'll pick up with the Telecity acquisition. But the way to think about this picture is, if you're a customer and you're a global 2000 client, you most likely have revenue customers and people all over the world, and typically you're going to have to have servers in those cities to make this stuff work. And when a customer looks at Equinix they see us in the biggest markets in the world where most business is transacting today. So global scale and reach is an enormous advantage we have, we're continuing to make that platform get bigger and reach further. There are a few places left in the world that we're not in today. Most notably India, we're going to go deeper into China, we're in Shanghai today, we are going to go deeper into the Chinese market, we're not in South Korea, we're not in South Africa. So there are plenty of markets left that aren't dotted here. As customer maturity and as this market matures we will find ourselves in, as you think about us over the next decade. I threw this in today just so that, we get a lot of questions -- Keith and I do about the difference between retail Colo which is what we're in and the wholesale data center Colo providers. And when you look at the amount of activities that happen in a retail provider and I threw a bunch of numbers up here for you to get context of this. It's just a whole different business model than the wholesale data center providers. It typically are going to house back office applications for a longer term that don't need to be touched or worked on very much. And our environment there's a whole bunch of activities that happen every day, every week, we have 100s of customers coming into our facilities. We typically signed two to three year contracts that is very close to the lifecycle of the hardware refresh because it's mission critical workload, application workload that we tend to do. We have all kinds of application workload that we do in these centers but generally speaking we are servicing revenue producing, globally distributed, high performance, low latency, critical application workload for customers. And they come to Equinix because they have to be there to connect to the networks and more increasingly, more recently they're connecting to multiple clouds and we'll talk a little more about that as we go through this. Ecosystems is a concept that people and this is the -- this Slide 2, with the three blocks from left to right, this gain started when the networks came to us in the U.S. back in ’98 when this company started, about the same time interaction in Telecity started in this part of the world. And the networks were having a hard time scaling the internet and they came to Equinix and they connected together in six big cities in the U.S. that’s what started the company. Once all of those networks were in place in our very first datacenter in those six markets, the next couple of years the big digital media companies came in, they needed to get to the eyeballs [ph]. The eyeballs were in the networks and that created a second ecosystem that formed two to four years after we formed the company. And then the third block here where it shows multiple other people coming like financial services and then more recently cloud providers. It's really been in those four areas in the 17 year history of this company that we have focused. Now along the way we've collected about 1,000 enterprises, other companies that weren’t Telcos, weren’t digital media and weren’t financial services. Pharmaceutical companies, healthcare companies, travel and transportation, oil and gas so on and so on. There's a whole bunch of these companies that historically these Colo providers did not support. The reason we’re spending so much time now and investing in the cloud is the belief is that 80% of that IT that sits in on-premise datacenters today is going to have -- major pieces of that is going to have to come out to the market to get access to the multi cloud. It's highly unlikely that all of these companies are going to have AWS and Microsoft and Google and IBM Software, and all these companies come into their datacenters and provide a multiple cloud environment. So most of the enterprises today realized that the market is being populated with cloud nodes, access nodes, network nodes, cash nodes all over the world, a lot of its at Equinix, a lot of it is at a lot of datacenter providers, but because we're global we have a major share of this. And so if you're a customer, CIO or CTO and you have 8,000 applications to run your global company, you're probably moving to 1,000 to 2,000 those applications into an environment with access to multiple cloud. And you can find that at Equinix today and we make it very easy for a customer to come in, put server infrastructure in there, buy a port on a technology switch fabric that we've build in 20 markets and on the other side of that switch fabric you can see AWS, you combine Microsoft to Azure, you combine Microsoft Office 365, all of it as a service. And so all of those big cloud guys are setting these nodes up in these datacenters because they believe that more and more of these enterprises are going to come to the market and want to access the multi cloud and so we’re going to have these network dense, cloud dense datacenters that we believe is going to be a very attractive place as the next decade unfolds and cloud becomes a paradigm shift that everybody adopts and enterprises use these kind of facilities more and more. That's the thesis that we're investing behind. This gives you a snapshot of where that revenue sits today as I mentioned for these industries we've been in for 17 years we've been around, the real fortunate part of our business model and Keith will give you a little bit of color on the recurring nature of it, 80% to 85% of our bookings every quarter, even this last quarter come from the installed base, from the existing customers. So even though we are going after the cloud and enterprise to create that ecosystem in the future, most of our business today in the bookings is still coming out of the core verticals. Now the two highest growth verticals are cloud which is 27% of our revenue and the bottom right one, which is enterprises which is 11%. Just to give you context, I told you we have 1,000 enterprises in the company. There are 350,000 enterprises around the world that are over $10 million in U.S. sales, 350,000. We have about 1,100 as customers over 17 years as you heard me mention. So the opportunity to move our company from a 6,300 customer environment to 20,000, 30,000, 40,000, 50,000 customers over the next decade we believe is very high, if we can attract them to come in and connect to the networks in the clouds. That's the thesis that we're investing behind. So you can see where the numbers exists, the fortunate thing for us is everybody is increasing their footprint with us to adopt to the cloud paradigm shift which is the next decade of computing shift and I equate the cloud a lot of people that aren’t that familiar with the cloud, this is no different 30 years ago when the IT world went for mainframe for mini-computing, 20 years ago the IT environment went to client server, 10 years ago it went to the desktop. The next paradigm shift is most computing is moving to the cloud. And you can either believe it or not but the market is huge, it's happening just probably three years ago three or four years ago that top bucket called cloud might have been high single digit and then that's how fast it's grown. So when you see these big providers coming in at the pace they’re coming in, you really see the data points that make you believe that it's happening. Telecity, so when the merger was announced between Interxion and Telecity, it was the activity that caused us to act. We knew at some point we were going to consolidate in Europe as we did in the U.S. market six to seven years ago. At the time when the Telecity-Interxion merger was announced we knew we have to act, we knew that Telecity was the partner that made most sense for us culturally, location wise, new market wise and so this is a snapshot for you to show you that we'll go from -- in Europe from a 30 datacenter business here in Europe today to a 64 datacenter business when this deal is completed, and most of you that have been following us know that the European Commission, we went back and forth over the last several months and we have to divest eight of these assets. When we're done with the combination of Telecity and Equinix, Europe will have 64 datacenters in 17 markets around Europe. This puts us in a very strong position to service almost any requirement that a global company would have in the European continent. It's very similar to the U.S. market where we have 54 datacenters and today we haven’t seen a requirement in the last five to six years that we couldn’t satisfy for a global company that was deploying infrastructure in the U.S. market. I'm sure there is questions about this, Keith will give you little more color in a second, but we're happy to take a little more when we get into that. Strategically, we are very focus on doing a couple of things. We have very good visibility 12 to 18 months out, we are unique in that we can sit down with all the cloud providers and all the network service providers, we do that three -- two to three times a year and we talk about where the world of compute is going. And so we are neutral, we can get this folks in the rooms with us, they share with us their plans and so we have very good visibility 12 to 18 months out, we called that Horizon 1 on the left side of this chart. And so we know and we can press our advantage pretty hard in those first 12 to 18 months as we think about building our plans and so for the next 12 to 18 months we are going to be very busy integrating Telecity and we did a deal in Japan with a company called Bit-isle, we are happy to talk a little bit about that, that will close -- is closing now and we are finishing up the shareholder vote on that and as we are doing in the Telecity activity both of those deals are imminent here to close and start integrating very shortly. And then there is other financing, Keith and I were on the road last week and you probably saw that we have a pretty large capital raised to put us in a position to grow for the next two years and he will give you a little bit color on that. As you look to the right side, Horizon 2 and Horizon 3 is language for us to think about to next two to four years. And so one of the biggest things we focus on its creating the next ecosystem, we have five or six today that are spinning inside of these data centers. There is two on the bottom that we think are turning into major ecosystems where companies have to be there and then connect to each other to create this interconnection. One is electronic payments and the second one, it is growing very fast, is cloud. The more connected the cloud providers get with enterprises the more we can create and form an ecosystem. And then as you think out further there is a lot of work we are having to doing as the largest provider globally with systems, people, processes and we invest a lot of money to make sure this company can run consistently on a global basis. The prime reason why customers pick us besides liable is that we run these things very consistently around and you get a similar experience whether you are in Frankfurt, New York or Singapore. Keith will talk a little bit about capital allocation, but I would tell you we are pretty disciplined and view ourselves as one of the best capital allocators in the market. We spend a lot of time in organization health as you gets to the size and scale that Equinix is, scaling the organization and people is probably my largest concern. I am not concerned about integrating the two acquisitions, I am more concerned about scaling the company, people in organization and we are big enough now that we are doing a lot of activity in the markets around social responsibility. We are actually driving our entire data center footprints to 100% renewable energy over the next couple of years, we are making big bets to do that. Most of our customers aren’t really willing to pay for that, but as a big data center provider, doing this when you’re dealing with companies like Google and Facebook and LinkedIn and Microsoft is just the right thing to do. And so we’re well down that part to drive our company's to 100% renewable energy consumer. So with that let me hand it -- turn it over to Keith and cover a little bit of the operating financial highlights.

[Keith Taylor:]

Great thanks Steve. So one of things I am going to try go relatively fast because I know we want to probably get to some Q&A. But in the chart you see hear, gives you a good sense of how the company has performed over its history. One of things I think is most important is with that 51 straight quarters of topline growth. And so from all account we are very excited by our ability to predict where the revenue is going to go. Another thing that’s important 94% of our revenues recur and 18% or greater come from basically the install basis. So from our perspective, love where we’re taking the business, love where the growth has come from and recognizing in the chart we show you here 2007 to 2014 we’ve grown topline and EBITDA 29% and 33%, compounded growth rate on a respective basis. Customer mix and diversity, I want to leave you with the fact that we have a great diverse revenue base, not only when you look at it geographically, so 56% of our revenue comes from the Americas, 26% Europe and remainder from Asia-Pac, but even more so when you start to break it down, as I said 94% of our revenues recur, collocation happens to be about 79% of it that’s broken down in between space and power. You then start to think a little bit about customer and you know the customer mix. Our Top 10 customers hear as you can see represent 16% of our revenues, but even more important Steve alluded to it, 80% to 90% of our growth does come from the install base. But the other thing is when you look at our customers, those customers are in three regions of the world with us, they represent 54% of our revenues. Customers who are in multiple markets, 83% of our revenue. So overall when you look at the diversity across our investor base -- I am sorry our customer base, you get a sense that it's very diverse across multiple markets. And on the bottom right hear you can look at the chart, Top 10 customers picked them out the highest -- the largest customer is 3.2% of our revenues, but as you sort of scale down to the bottom you will see our number eight customer's net worth, they are in 67 of our 105 data centers today. So it tells you across the base the number of regions customers participate in and even more so how diverse they are across the IBX footprint. From an investment perspective, we look at our assets, those assets have been open for over a year so from January 1, 2014 where all phases have been build out on the data center, that’s 67 of our 105 data centers. As Steve alluded to earlier on with Bit-isle and with Bit-isle how the [indiscernible] will ultimately go up to another -- to 245 data centers. But out of our 105 data centers 67% of them are basically stabilized, they’re at 86% utilize and we’ve spent $3.7 billion, you can see that on the black bar here, on those assets. Those assets are generating a 33% cash-on-cash return on the capital invested on an unlevered basis. So when you start to think a little bit about pricing power and the influence that we have in the market place you get some great comfort, we’re getting outside returns for the invested capital that we make. Our team on a regular basis is competing for capital dollars and so you have a pretty good idea of what our expectations are when we think about where they want to deploy the next capital dollar and how we want to increment off of that investment. Property ownership, it matters a lot in the world that we live in today, again Steve alluded to the fact that we are a REIT, today we own 23 of our 105 data centers. It represents roughly 40% of our revenues and 40% of our NOI. The bottomline is on a go forward basis a lot of investment is going to be in assets that we own land, that we own and it would not surprise me over a reasonable period of time that you see 50% of our revenues or greater coming from basically property that we own. Today is not -- although we care about the ownership, I will tell you though from a leasing perspective we're in a great position where we have full economic control of our assets over an extended period of time and the majority of our revenues is going to grow in assets that are basically going to mature in 2029 or later from a lease extension period. So again feel very comfortable that the economic control of our assets and recognizing over a period of time we are going to buy some of our assets. We are going to develop more of the land that we operate on today or that's approximate to our existing data centers. So again I think it’s something that's very important on a long term basis for the company. Dividends again, being a REIT as many of you know it's a US tax position that we've taken, AFFO is a great metric in how we measure ourselves in the REIT world, AFFO, principally think of it as EBITDA less cash taxes, interest in recurring CapEx. It's the amount of capital that can go back into the system to fund the dividend and fund our expansion, our expansion growth. Today our payout ratio and AFFO is 45%, so if I was just to use a simple number as $1 billion, 45% of it basically gets paid out in the form of a dividend, leaving the rest of that to go back into the business to fund our growth. And so the way that we're going to grow AFFO is effectively, pardon me, the way we're going to grow our dividend is effectively growing our AFFO. Again this year we're going to grow on a currency neutral basis, roughly 16% growth on the topline. A lot of that goes down to the bottomline including AFFO, so one of the ways we will scale the dividend will be growing our AFFO. The other thing without getting into the complexities of the REIT structure, we are also going to be able to move assets from what we call the taxable structure into the qualified REIT structure over a period of time. Singapore is a great example of an asset that does not yet reside in the REIT structure and when we move that asset in, we'll ultimately start distributing to you all the profits associated with that asset as well. A requirement by the U.S. tax code is effectively 90% or greater of all taxable income that's generated inside the queue or the qualified structure will get distributed in the form of a dividend. In 2015 that number is $389 million and it represent 45% of our AFFO. Then bottomline is when you step back from the business. Again one of the things that's really important to me is making sure we have balance sheet and the wherewithal to fund and scale the business. Steve talked about the ecosystem, talked about the expansion of the footprint. But ultimately what we want to do is make sure that we can scale the business in a more sufficient manner. Yet at the same time have a balance sheet that has strategic and operational flexibility. And then two weeks ago Steve and I did, we on the -- recognizing that we are going to have to fund the Telecity acquisition post the EU commission approval to move forward we went to the public markets. We'll raise 1.1 billion in high yield net [ph] of five and seven-eights. And we raised just under 863 million of incremental equity. On top of that we're in the middle of doing a term loan B, financing and increasing our revolver by 500 million. So bottomline is on a pro forma basis we're going to bring either liquidity or new capital into balance sheet, just over $3 billion and we think that that will meet all of our cash requirements as we look forward for 2016, 2017 as we continue to invest in growth of the business. And then lastly financial guidance, very excited about where we think we can take the business for Q4 and moreover it sets up a really nice opportunity for 2016. So without getting into the numbers I want to maybe stop here and open up for questions.

[Unidentified Analyst:]

This has nothing to do with Telecity, but maybe a sort of different question. Regarding your cloud platform and will there be a significant investment in technology you’ve acquired for you to enable public activity within your data centers for the cloud, that’s one, and two, is this something you're going to develop further or what I’m trying to say is, are you planning on becoming more of a technology type company in the future?

[Keith Taylor:]

Look, it's fair to say there is a fairly meaty investment as we want to continue to scale our business from a technological perspective. Ihab Tarazi joined as a CTO when prior to him joining our capital investment in the CTO organization -- sorry, our investment in the CTO organization was roughly $6 million to $8 million a year, today we're almost $50 million a year. So we're already making investments, and I think it’s playing dividends, you see the performance in the business not only in the volume that’s getting done, but also they might have Interxion that's taking place in the business and so we’re getting scale and growth and still enjoying the same margin profile. So I think a scenario that you will see is continued investment because it does make a difference, it goes back to Steve's comments that we want to be differentiated and realistically we will get there as we continue to invest in cloud and other technology platforms to make it easier for the enterprise to do business with us and the platform.

[Steve Smith:]

I would add a comment, the one thing that I think people are still trying to understand when we became a REIT and are we shifting away from being a technology company and the answer is no. We are still a technology company with the REIT global tax structure sitting around us. We obviously have to speak both languages and cater to both technology investors and we try to -- we work hard to do that, but the investment in the technology as Keith said is pretty significant, so I believe we probably invest more than any of our competitors and innovating around the Interxion platform and when we do the Telecity acquisition we will connect those assets to our facility, so we will tether them together. They have a cloud exchange like we do, their technologies is probably a little different, but we will combine those and we’ll make them run at -- we’ll lift the functionality up. So we’ll look -- we worked very hard to become generally 80% consistent how we run the company and we generally let ourselves look like 20% localized in Germany and France and Singapore and China. And that's the kind of the model that we run.

[Keith Taylor:]

I think we have time for a very quick question and a very quick response.

[Unidentified Analyst:]

A question on the competitive landscape. If you think about Digital Realty team and what they've done with Telx, let’s hypothesize that they then acquire Interaction. What does that mean over the longer term and also if you could perhaps just quickly touch on where you are with Open-IX and if that's doing anything to your business?

[Keith Taylor:]

Yes. I'll start the Open-IX thing is not having much of an impact in the U.S. market as you see every quarter our cross connects, imports on our switch for our Interxion growth is been the highest it's been in the history of that company over the last three, four, five quarters. So the Open-IX we pay attention to, but it's not getting a lot of traction, really -- hasn’t really affected us and so we watch it because it's a competitor. In terms of your first question, you want to take that or?

[Steve Smith:]

Sure, in the end we -- look we've always had to compete against Telx, so with Digital Realty acquiring Telx it doesn’t change the paradigm. To me when you make a transformational acquisition like we are doing with Telecity, that changes the landscape. So to the extent that somebody comes in behind us now and tried to acquire Interxion, that hasn’t really done anything other than what we've already experienced. That’s not to dismiss it, it’s just we think that we did the transaction that really transformed the market and no different than what we did in the U.S. a number of years back when we acquired Switch and Data, so I feel very good about our strategic and operational position.

[Keith Taylor:]

The size of the investment they would have to make if they did cobble that together to move into the retail Colo business and do at scale like we are would be significant. They would have to change the business model. If you just look at the amount of activities I showed you and the amount of people we've got in the SG&A, they are out doing the retail type business everyday it's night and day from a wholesale to a retail model. So there would be a significant investment and change in the business model to catch up to the ecosystems and the upscale position that we’ve accumulate over 17 years. Not to say that couldn’t happen, but it would be a very long journey and a lot of investment.

[Steve Smith:]

So great. We are out of time. Thank you very much for your time today.