All right. I think we're good to go. Yep, mic's on. Hello, everybody. Good afternoon. Very happy to be joined here on stage by Keith Taylor, CFO of Equinix. Before we get started, I think we're both going to do a quick disclaimer, so I'll go first. So I'm a member of Morgan Stanley Research. That's why I need to disclose that, or I need to tell you. For important disclosures, please go to Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. That's mine.
I'm about to make some forward-looking statements. Anything I say, please, will contain risks and uncertainties. Please review our documents at the SEC.gov website, and with our most recent Q that's been filed.
Excellent.
Thank you.
All right. Maybe first question, not forward-looking, but could you just maybe give a brief description of Equinix as a business, market positioning, value proposition, et cetera?
Sure. And again, thanks to all of you for coming and participating with us today. Equinix is the largest data center company in the world. It is predominantly a retail data center business. Not all assets are created equal, which some of you might not appreciate, and then certainly I'll talk a little bit about why that is the case. But I also believe Equinix is the best manifestation of all things digital, and from my perspective, demand has never been greater, and I think the supply is only gonna get more constrained for a number of reasons. Our business is predominantly a recurring revenue model. For those that don't know, 95% of our revenues recur. And we're operating in 70 markets, 31 countries around the world today.
We've got 56 projects in 39 markets and 23 countries currently underway. We're a well-capitalized business, arguably the best balance sheet in the industry, with over $2.4 billion of cash on our balance sheet and a full $4 billion line of credit available for our use. Our payout ratio, we are a U.S. REIT, and some of you might not know that, but because of that, we have an obligation to pay out 100% of the taxable profits inside the REIT structure. Those dividends represent, just for round numbers, roughly 40% of our AFFO, which is our cash flow. And so that means we get to keep 60%, again, round number, of all the cash that we generate to put back into the business after the dividend.
Our guide for this year is close to AFFO of $3 billion, $3 billion. That means we have roughly $1.8 billion before raising any capital to put back into the business just from internal sources. Again, we're really excited about the opportunity that we have in front of us. I think the future looks really bright, and, again, there's a little bit of uniqueness to our model. Maybe the last thing I would say, for those that don't know, is part of the reason that we are different is we have 2,000 networks inside our environment. We're effectively the on and off-ramp to the internet.
We have significant number of the cloud on-ramps, and therefore we're effectively the on and off-ramp to the cloud, and many subsea cable landing stations, both start and terminate inside our environments around the globe. And so for all things digital and as data traverses the world in which we all live, we're a very great place to colocate your infrastructure.
Great. Next one, two-parter. I think, could you please maybe review the current year, so what you're seeing in terms of trends and performance against expectations, and then maybe tie that into your June Investor Day, the outlook you provided, and how you see it?
Sure. Yeah. No, thanks, Nigel. I think, look, for the year, I'd say it was an interesting year. I think all of us have felt that way for many reasons. The business has continued to perform well. You know, the top line, we're, you know, we'll have 14%-15% growth. That's with power price increases, which is a separate topic, but when you take out, you know, power price increases, it's a 9%-10% growth rate. We basically committed at our June Analyst Day, we give a forward guide of what we think we can accomplish over a five-year forward look, and top line is really an eight to-- we feel roughly 8%-10% is where we live. There's opportunities from, you know, increased momentum from that growth rate.
That would generally come from AI, digital services, currencies, and other things. But overall, feel good about, you know, a long-term guide range of 8%-10% top line. It's not a kicker. It's sort of within that, in that range over those periods. And then, AFFO per share, not AFFO, AFFO per share will grow at 7%-10%. And the reason it's 7%-10%, again, this is over a five-year look forward, is that we've got to refinance a little bit of our debt. And we have roughly $14 billion-$15 billion of debt. Our average cost to borrow is roughly 2.2%, and so there's an element of debt that will be refinanced over the next five years, and we've made that assumption in our guide.
As a result, during some periods, you know, our growth rate on a per share basis might not be quite where, where the market, you know, where the market was pegging our revenue growth, because we're absorbing about almost, almost $250 million in increased interest expense over that time period, all else being equal. Then just, just speaking sort of generally about, you know, about the business, I think we're the best manifestation of all things digital, and the pipeline's never been stronger. My, my greatest caveat to an investor, whether it was at Analyst Day or in front of you today, is we feel really good about what we're doing as a business. We're uniquely positioned because we have 2,000 networks inside our environment. We have 3,000 cloud and IT services companies inside our environment.
So we feel that, again, we're a great representation of what a customer would typically want to see. And because of that, and with our, you know, our diverse footprint, our operational reliability, you know, the latency, the critical infrastructure that comes into this environment, I just think that, you know, we're an awesome business from that perspective, and hence, the depth of our pipeline. What I don't know sometimes is timing. And this year, when I sort of hesitated a little bit about what 2023 looked like, obviously, we're comfortable with, you know, the, you know, we're in a. By the time you get to the third quarter, we're pretty locked and loaded in what we're gonna deliver for the year. But the first quarter was a tough quarter.
It was for many companies, and that's because the macro conditions and the market just sort of seized up for a period of time, and deals got elongated or, you know, deferred. I wouldn't say the deals went away, but they certainly got deferred. And so because of that, you know, you have to think a little bit about the timing. And so that's what I always worry about. In this new world in which we're living in, I don't know what's around the corner, and I don't know what 2024 has in store for us. It feels a little bit better now, certainly over the last week than it did maybe some of the previous weeks. It feels like we're, you know, basically top-ticking as it relates to interest rates.
Because of that, sort of the equity markets are starting to react favorably. But I think there's still a long tail as our customers, our enterprises, deal with the economic environment that we're all living in. And so that's, you know, that's my one hesitancy, is that, you know, I can't predict timing, but I can tell you that demand's never been better. So-
Yeah, I want to get back to that. But first, maybe we could briefly discuss the business model. How much protection do you have in terms of recurring revenues, contract structures, especially in face of these macro headwinds?
Yeah. Again, 95% of our revenues recur. We've been in business for 25 years, and so we've got great visibility. Not because the contracts are long. The contracts are typically two to three years. But we have great visibility because we know the renewal rates are very, very high, and our churn rate is, you know. We have pretty good visibility into what we think that will be, and it's a 2%-2.5% per quarter range. And the reason that even at that, you know, you step back and go, "Well, 2%-2.5%, you know, that's a fair bit of churn activity." But you have to understand that inside our environment, it's a living and breathing organism. It's an ecosystem.
So we sell 4,000 deals to 3,000 customers every single quarter. 90% of our growth comes from the install base, which gives you incredible predictability. 64% of our revenues come from customers who are operate in all three regions of the world. It's probably closer to 80%, they operate in multiple markets, and that could be same market in the U.S., or it could be Singapore and Washington, D.C. But it gives you a, you know, maybe a better sense that we have a great predictable model. Our largest customer is less than 3%, and you can imagine who those top customers are. Our top 10 customers represent 18% of our revenues. Our top 50 customers are about 38% of our revenues.
So there's a really long tail when you sort of take out over 10,000 customers. So great predictability. Again, relatively short contract period, low churn, great diversity, both on a currency basis and on a geographic basis, and certainly on a customer basis. And we cater to all industries that really look to digital as an opportunity, including the most recent discussion we can have around AI.
Oh, you made it 10 minutes in without mentioning it.
Okay.
I think it's good to then now go into AI. I mean, how you're positioned relative to, to the AI data center. Does it have specific implications for you, and also how you design your data center, et cetera?
Well, look, I think we all need to talk about AI in some respects, but remember, it's been around for 60 or 70 years. It's just a lot, little bit more relevant today than it was maybe, maybe, you know, that, that, time ago. But what I would say is, and I, I probably spoke to some of the people in this room earlier on today in our one-on-one meetings, AI, to me, feels a lot like what cloud did. Now, some people say it's gonna be much larger than the cloud, and if it is, it is, that, that's great. There's plenty of opportunity for everybody. And but how I make it analogous to the cloud is that when the cloud first presented itself, there was a fear that it was gonna be a foe to the data centers.
Everything was gonna move to the cloud. What people didn't realize, the cloud actually sits inside a data center. So that was learning number one. Then there was a recognition that there's different deployments within the cloud. And so you had the large compute farms that were done off somewhere in a lower-cost environment. But all the access to those clouds have to occur somewhere where the customer's consumer, and that's in the major city centers. That's where we operate. You need diversity of networking, you need diversity of, diversity of customer, and you certainly have diversity of cloud.
And that's why I think AI is analogous to cloud, is that the large language models will get trained somewhere, but where the customers will consume will be in approximately where to where the traffic flows and where it gets stored. And for us, I think that's, again, we're a great representation of that opportunity. But it's not instantaneous. Like, we all know if you go back and talk to your own firms or you talk to your friends or family members, we all know AI is gonna be relevant. It's gonna be relevant inside Equinix, not as a you know, with a customer relationship, but how do we deploy AI into our environments? And the answer is, we absolutely are going to.
But the flip side of it is, I think about the 400 cloud companies we use as an Equinix comp—you know, as Equinix proper, we use roughly 400 cloud companies, and predominantly SaaS. And think about Oracle or Salesforce or Workday or ServiceNow, or—and you can, you can imagine, you know, the tails are very, very long. But they're trying to think about: How do I embed AI into our technology to sell to Equinix and sell to everybody else? And that's where I think AI is going to represent a, you know, strong interest for us as all those customers start to think about how do they rearchitect their environment to sell to other companies inside our environment. And hence, generative and inference, you know, inference, inference will be a, a large component of, I think, our opportunity.
But it's not going to be about the large language training or the training sort of models. That's going to be done by somebody else, somewhere else, but that consumption will ultimately take place where we are resident.
Great. Just to follow up or maybe to clarify, xScale, which is the JV you do with some of these larger companies. Can you maybe, you know, talk about how you expect demand from this type of customer set to evolve and of what importance it is to the business?
Well, yeah. So we do—we have seven JVs, actually right now, and we're looking to generate some more. And the JVs are with GIC and PGIM. We're looking for incremental capital partners, as I speak. We're also looking at, you know, power producers, land landowners, and others to think about: What is that opportunity beyond, beyond what we do on a retail basis? As I said, we have 56 projects underway, 39 markets, 23 countries, and we have a pipeline of roughly another 120 projects underway. But o r in the pipeline, I should say, you know, ready to be queued up. But that doesn't deal with xScale. xScale is those opportunities where we can access power, land, opportunity, and sell to the large hyperscalers.
You know who they are, whether it's the Googles, the Amazons, the Microsoft, the Oracles, and so on and so forth. And there's 12 of them that we're focused on. There's probably some incremental. ServiceNow, which was not on that list. Zoom was not on that list. So there'll be other potentials who have the magnitude and the scale that might live in the xScale space. So for us, that was really an opportunity to figure out how to grow and scale without using our own balance sheet. Again, I think we have the best balance sheet in the industry. We didn't get into trouble, you know, with building out these large footprint facilities and using our balance sheet.
Because what happens is you've got a lower return on capital, and a huge amount of capital is going through the balance sheet. It was better to use other people's capital to take advantage of that, give them the right returns that they were looking for, partner with them, you know, on a project basis, high single to low teen returns on an unlevered basis. And then Equinix was a 20% owner in that joint venture. And so we had the benefit of, you know, getting a reasonable return over our cost of capital, of course, using somebody else's equity, and then getting a fee structure that was attractive. Two types of non-recurring fees, two types of recurring fees, then a promote in the end if our partner chooses to sell their assets.
So it was a really, it was a very attractive model that left our balance sheet unencumbered. If you look at some of our public peers, they created a lot of problems for themselves because their leverage is twice what ours is. They don't have the liquidity position, and they're selling assets off to fund their future. And that just. That's not who we are. We're creating a platform that wants to extend itself geographically and with more, you know, with more buildings and just generate. You know, you want to continue to build on that platform, and you weren't going to be able to do that if you're just using your balance sheet to fund these large hyperscale deals. xScale is going to be a perfect example of a place that we can continue to do that.
Right now, it's a $10 billion capital investment business, 50% debt, 50% equity, and maybe that will switch a little bit given the current environment. But right now we've got, I think, 19 assets up in 13 markets or something like that. We've got... You know, we're probably going to build up 30-40 under the current sort of course in steam. But there's the potential with AI that it, you could— I don't know why you couldn't double that investment. I don't know why it couldn't be a $20 billion commitment. Again, using debt, it's a different time today to use debt, but I think you can use the debt, the equity, the partnerships, and then independent power producers and landowners to help grab that opportunity.
But I think you got to look at it a little bit more holistically today than you would have had to look maybe a year and a half or two years ago. Times have changed, that is for sure, and money is no longer for free. And the thing that many of you will certainly hear is, it's hard to raise capital. And we don't really have that problem right now, and I don't envision we will because of how we've structured ourselves.
Got it. I want to follow up on that, but maybe I'll open up to the floor. If there's any questions, please raise your hand. There's one there.
Just a quick one. Do you think the REIT structure limits?
I understand. I'll repeat your question if you want.
Yeah. Do you think the REIT structure limits your potential in the sense of you can get these, you know, call it 10-12 IRRs on the xScale projects? Wouldn't it be better if you didn't have to pay the dividend, and instead you could invest in these projects using that capital?
Certainly, when we became a REIT, we decided to become a REIT, probably we started talking about it inside the company in 2011, and so we committed to the market in 2012. We became a REIT in 2015. And the question that's really the gist of the question is, by paying out a dividend, does it inhibit your growth? And I think there's two things. The first was we're going to become a taxpayer. In the U.S., and the markets in which we serve, particularly the bigger markets, our effective tax rate was going to be somewhere between 35%-40%. So you're going to lose, you know, a lot of that value.
The irony is, when I think a little bit about the dividend that we're paying out today, is almost 42% right now, of the profit that is earned inside that REIT structure. And so you're really, really trading one for the other while creating value for your investor. But, to be fair to your question, it was obviously always something that we thought about. Is it going to be an inhibitor? And the answer is, it isn't yet, and I don't foresee it to be anytime soon. To the extent that our digital services business really performs well and accelerates, we're going to see it come. We'll see that performance come a mile away, and we will be taking remedial measures to make sure that the REIT structure stays intact.
But we probably have, just to give you an order of magnitude, $8 billion-$10 billion of flexibility inside our REIT structure today. And so we have an immense amount of flexibility, largely because our payout ratio is low, and then we have the wherewithal to, you know, to take advantage of the current REIT rules and, and use it to our full, you know, to our full opportunity. So right now, it's not an inhibitor, and I don't foresee it anytime soon.
Good. Anybody else? I actually have a follow-up on that one. Maybe more specific, how you think about the balance sheet and leverage target, especially now with, you know, interest rates.
Yeah.
Being what they used to be.
So look, we're an investment-grade company. One would argue, and certainly based on the rates in which we borrow, at least the spreads, we're being traded or treated as a company higher than our current investment-grade rating. So we're triple B flat to triple B plus, and you know, there's certainly a strong argument to be an A-rated company. But that comes with a trade-off, and the trade-off is: How much leverage are you willing to take? I think living in the world in which we want to live today, which has a lot of growth still attached to it, you don't want to get inhibited by the amount of leverage you can put on the books. I think living in the 5-6 times levered world is absolutely appropriate in this business.
We're 3.5x net levered, net levered. But I know all that cash that I talk about is spoken for. We know it's gone. We know between the investments we're making, as I said, the capital investments we're going to make over the next five years, the xScale investment we'll make, maybe some M&A, but certainly the dividend, by the way, which we, we told the market will grow 25%. The dividend that we're going to pay will grow 25% year-on-year. It just gives you a sense that we're seeing the momentum in the business. So all of that will... You know, when I take the cash off the balance sheet, to some degree, we like having cash on our balance sheet for, for obvious reasons.
But, you know, the net leverage or the leverage in the business is actually a little bit higher than it actually looks like today. And one of the reasons that we have a little bit more cash is we're always looking at - we're not worrying about funding for this year. We've already planned, and we're executing against funding for next year and setting ourselves up. By the time I get to the earnings call in February, which is our fourth quarter earnings call, we want to make sure we're very clear on what our capital plan is for the rest of 2024, but as we enter into 2025 with sufficient capital.
And we've come to the conclusion that somewhere between $1.5 billion and $2 billion of cash on balance sheet is 12 months of sort of complete liquidity for our business. And whether that's ultimately where we end up or not, I don't know, but we're going to keep more cash on the balance sheet, but we're already setting our sights on 2025 now.
Right.
That's just a great position to be in because we know what the capital needs of the business are. So we're going to look in markets where we can raise debt capital. We borrowed money in Japan this past year, $600 million equivalent in Japanese Yen. We borrowed that money for 14.6 years at 2.23%. We just did a deal in Switzerland for CHF 300 million, roughly $330 million, at 2.875% for 5 years. And so when I look at, you know, the debt market, where are we likely going to raise debt next? And it'll be Europe, it'll be Euro.
Largely because we have a billion-dollar euro bond coming due in November of next year at 25 basis points. So we're going to have to refinance out of that. But, I want you to draw comfort that we've already planned for that. We've planned for it, not only in the five-year guide, but we've planned for it next year and certainly as we set ourselves up for 2025. So again, I think living—I'd probably say we could live quite comfortably in the five to six. I think you'll see us somewhere in the four to five on how we report it, because we do it on a net basis, and that sort of positions as well.
Got it. I mean, with sort of liquidity constraints and the debt market, well, changing, do you target any particular AFFO per share when deciding on new projects? Is there a hurdle rate internally? Has that shifted?
Oh, that's a great question. It's also on watch AFFO per share. That is our lighthouse metric. That is what we think is the best... You know, when we started out in this business, some of the larger investors really wanted us to focus our value not on EBITDA or AFFO. They wanted to see it on a diluted basis, AFFO per share. So whether we borrow money or you raise equity, what are we going to do to the, you know, value on a per-share basis? And so we've given a commitment of 7%-10% over the next five years per year. The hurdle rates for our incremental investments, we're looking for 20%-30% unlevered cash-on-cash returns. That's what we look for.... I know it sounds, you go, "That's a, that's a big number," but we've been doing this for 25 years.
We're a retail business, which is very different than a wholesale business, which is earning over its cost of capital. So that 20%-30%, if we just sort of stopped, and I think of some of our, our best markets in the world, Washington, D.C., Singapore, London, we don't have to hire more sales reps, we don't have to hire more administrative people. When we put up another asset, the cash-on-cash return we get from that just goes right into the business and is so accretive to the business plan. But what you see us continually doing is investing in the business. We don't think of ourselves as a $10 billion opportunity anymore. We're saying: Why can't we be a $20 billion company? $20 billion revenues.
You've got to invest in systems and processes and people, and do all the things that you need to, to scale the business. You know, so from my perspective, look, when you get a 20 unlevered 20%-30% cash on cash on your commitment, I just told you we're going to spend $3 billion a year, over the next per year, over the next 5 years. It gives you a sense of how much incremental value or dollars of run rate that we're going to generate in the business over that time period. Is that, did I hit your mark? Okay.
Yeah.
Okay.
Definitely. I'm just going to round us off, I think. Last question. We're in Europe, so we have to talk about energy prices, the impact on the business. Well, first off, about escalators into your business model and pricing actions you can take, but also obviously, what your expectations are, especially for the Europe market, London market, as we enter the winter.
Yeah, I mean, look, power's been a—it's a real issue, not just in Europe, in other parts of the world as well. And I think the bias is that energy rates are going to continue to go up. And I'm not talking about next quarter or next year, but overall, there's going to be a bias to increase in power rates. I think next year, in 2024, there'll be some of the larger markets, rates will come down year over year, but the bias will still be an upward trend. And then some rates are going to increase. And as a company, you know, we monetize our invested capitals. We've put about $38 billion into our business thus far. And the way we monetize it is on a recurring revenue basis.
We charge for basically the physical space, which is the price per cabinet, and we charge for the infrastructure, which is the power circuit and all the redundancies in the backup. But we monetize it not as a power pass-through, but as value accretion on a per unit basis. And, you know, I would just say that, you know, we've got power pricing. Because demand is only going to increase and supply is only going to get more constrained, and not everybody's building for the same. You know, they're not selling to our customers, they're selling to the hyperscalers. It's put us in a really good position where there's not a lot of players who want to compete in our field. And so when we play in the sandbox, there's not too many people trying to throw our toys out.
Got it. Maybe last question, because we do have some time left, about M&A. So far it's been small footprint acquisitions. What's the strategy here? What sort of companies are you looking at?
Well, I think we continue to look. M&A is always going to be a portion of our strategy. You know, quite openly, private pricing just got a little bit lofty, and so we sort of stayed out of the M&A field. But we've done some large acquisitions. You know, the two largest, most recent, well, not most recent, but in the not too distant past, one was Telecity in Europe. That was on the heels of the IXEurope acquisition, and so we're happy with where we are in Europe, and we bought Verizon's assets in the U.S., and Bell Canada's assets in Canada. But we're going to continue to be acquisitive where it makes sense, but we want to make sure we create value for our shareholders.
And we're not just going to buy to grow, we want to buy because it makes sense and will drive value on a per-share basis.
Got it. I think it's round up to the hour. Thank you, Keith.
Thank you all very much.
Thank you for joining.
Welcome back. I'm Joe Moore. Very happy to have with us today, the management team from onsemi, Hassane El-Khoury, CEO, and Thad Trent, CFO. Welcome, guys.
Thanks, Joe.
I wonder if you could talk to, you know, the current environment. You guys saw a fairly sudden weakness, kind of evolve over the course of the last quarter or so. Can you just kind of talk to that and where you think we are now from a visibility perspective overall?
Sure. Let me, let me put it, you know, the softness that we, we talked about related to the, a little bit on the automotive with the inventory digestion, specifically starting in the Tier 1, European Tier 1. That's not to say it was specifically limited to, the OEMs in Europe, but thinking about the, the European Tier 1s, it's more of a general broader view of, of, of auto, and that's related to demand. When demand gets a little bit soft, whatever level of inventory you have will seem elevated in, in number of days. You know, the denominator changes. All other markets performed exactly as we expected.
Not that they are better than we expected or they're doing any good, but, for example, you didn't hear us talk a lot of commentary about industrial, although some of our peers have called out on specifically industrial, because we saw industrial coming four quarters ago.
Mm-hmm.
We started adjusting for it, so industrial came exactly where we thought it would come 90 days ago or 180 days ago. So all markets, I would say, are stable, with the small pause in automotive that we're looking at as far as, you know, the main question is how long?
Yeah. Okay, and I mean, since I've known you guys, you've talked about not just improving margins cyclically, but understanding the cycles and trying to drive margins up, you know, through cycles and prepare yourself for these types of events. You know, how do you feel about that now? How do you, you know, look at this environment? Do you see any indications of pricing pressure or any of those things that are different than what you might have thought?
Navigating through kind of this market environment is actually exactly what we've been working on for the last two and a half years.
Mm-hmm.
You know, we've made a lot of structural changes in our business. We're tackling the business with the use of our LTSAs, which give us that predictability on both volume and pricing. Although we can negotiate on volume, given the demand dynamic, but it's not a conversation about pricing. So that gives us a predictable and a stable pricing environment as far as the majority of our products that are under LTSAs. From a margin perspective, it's not a pricing discussion as far as we look at it. It's a structural changes discussion. So over the last few years, we've divested four fabs, and here we are today talking about taking utilization down to the high 60s.
Mm-hmm.
With maintaining a margin floor in the mid-40s. Now, let me just put that in relative to what the company used to be just three years ago. In 2019, the utilization was in the mid-60s, and margins were in the low 30s.
Mm-hmm.
So we're there on utilization, but the margins are called 15% or 1,500 basis points higher. That's a structural change that only happens when you make changes fundamental in the company. Those are the changes we've been doing for the last two years, divesting four fabs, moving these products to existing fabs.