Welcome to Citi's 2024 Global Property CEO Conference. I'm Nick Joseph with Mike Rollins. With Citi Research, we're pleased to have with us Equinix and CEO Charles Meyers. The session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions if you do not wish to raise your hand. Charles, I'm going to hand it over to you to introduce the company and team. Provide any opening remarks. Tell the audience the top reasons an investor should buy your stock today, and then we can get into Q&A.
Great. Thank you. Chip informs me that I need to read this disclosure first. Some of what I will talk about today contains forward-looking statements. Please read our SEC filings, riveting as they are, for more information about factors that could affect these statements. So Chip Newcom from the IR team, Charles Meyers, CEO and President, and delighted to be here. So look, we continue to feel really good about Equinix and our value proposition as the world's digital infrastructure company.
I think the opportunity that we see in front of us in terms of evolving our global platform to be adaptive to helping people build and deploy hybrid infrastructures where they want it, when they want it, and through an ecosystem of partners continues to be exceptionally compelling, particularly in an environment where I think digital transformation and sort of the emergent set of AI requirements are as important as ever to competitive advantage in industries around the world. So excited about what we have in front of us and happy to answer any questions about that.
Great. Thanks. Charles, to get us started, can you just review for us the strategic and operating priorities for Equinix for this year?
Sure. Yeah, I think they fall into several categories. One, just continuing to press our advantage in sort of our business where we maintain a very significant and differentiated leadership position around the globe. Our sort of traditional interconnected colocation business continues to thrive. So I think we're going to continue to invest in that position, both in terms of our global reach. So we now operate or by the end of the year, we'll be operating in 76 metros across 35 countries. So we're going to continue to invest in the reach. Our interconnection portfolio, which I think has always been a bit of our "secret sauce," I think is something we'll continue to invest in. Fabric, Equinix Fabric, has been perhaps our most successful new product offering ever over the last several years.
We just recently announced our Fabric Cloud Router, which I think is particularly relevant to how people are using digital infrastructure in the modern age. And then we think there's a really big opportunity around multi-cloud networking that we can talk further about. So reach, interconnection, sustainability, also sort of a key part of pressing our advantage. We think that that is going to continue to be an important sort of factor in customer buying behavior. And we think investing in a differentiated position to deliver sustainable solutions and sort of grow data center capacity around the world responsibly is something that will continue to differentiate us. And then lastly, on the topic of pressing our advantage is margin expansion. I think you saw in our recent guide a pretty what we think is impressive sort of amount of margin expansion that we're guiding to in the year ahead.
And we think that has to be continued fuel for our lighthouse metric of AFFO per share growth, which we know is so important to all of you. And so those are the really key dimensions around pressing our advantage. Then secondly, I think enabling our platform to move beyond its traditional strengths in the colo business. And I think that means really continuing to invest in the digital ecosystems that drive buyers towards Equinix and delivering in the range of services that enable them to reach that ecosystem and combine Equinix value with the value of our partners to really solve their customer problems. And so I think that enabling the platform and delivering that range of services is critically important. And then finally, I think continuing to invest in ensuring that we can be responsive to the rapidly emerging demands of our customers from an AI perspective.
We talk about Equinix being the place where private AI happens. We are seeing real demand from customers in terms of thinking about Equinix as a point of nexus for hybrid AI architectures in very much the same way they've thought about it for hybrid cloud architectures. We've seen great momentum in our business there. Then our partnership with NVIDIA has announced some really compelling wins in Q4 and are seeing a strong pipeline of opportunities building around that. Those are our key priorities for the year ahead.
So when you think about the demand opportunity for Equinix, can you help just contextualize how the size of this demand opportunity maybe compares to past years? As you look at your customers that are going through some of the optimization, what percent of the customers are spending more, the same, or maybe less with you over the coming year?
Yeah. Look, I think that in terms of the aggregate opportunity, it's as big as it's ever been and I think getting even bigger, right? And I think so the demand for digital transformation and digital investment across the world, and I think that partially being fueled by a wave of AI demand as well, again, creates, I think, an addressable market that's much bigger than what we would have given credit for or thought of even just a few years ago. And so I think the overall addressable market demand, and I think the portion of it where we enjoy distinct advantages, is very large over the long term. It will require untapping it or tapping into that, I think will require adaptation of our capabilities and our go-to-market motion and various other things that I think we need to continue to focus on.
But I think the overall opportunity, the size of that opportunity, is huge. In terms of we talked to the optimization and the sort of what we characterized in the last earnings call as cross-currents in the business. I do think that while that backdrop of, I think, macro or overall level of demand and the long-term opportunity continues to be huge, I do think we are seeing we saw over the course of 2023 and in our Q4 results in particular, a continued level of customer caution around the macro environment and I think a little bit of a delay in terms of people optimizing their footprints in a post-COVID era. And so I think we're seeing some of that. I think we've got good visibility to what that looks like. As we indicated, that probably sort of is somewhat elevated in the first half of this year.
And then I think as that tapers, I think really our guide really shows some inflection in the back half of 2024.
So from a numbers perspective, at the analyst day about eight months ago, I think the annual organic revenue growth target is 8%-10%. Guidance for 2024 is 7%-8%. So as you were describing, does the management team have conviction that in the back half of 2024 and in future years, you get back to that 8%-10%?
Yeah. I mean, again, I think that we will have to see how the dynamics of the market continue to play out from a macro because I think macro was the really contributing factor that led to us being at a guide that was below what the analyst day range was. And I think that customer caution and a bit of elevated churn, if you break it down, you say, "Look, the net bookings is the fuel for any business," right? And for us, that means gross production, how much gross bookings are you putting into the system on a quarterly basis, pricing, which continues to be very firm, and then churn.
And as we said, we saw a Q4 that looked a little more like our prior Q1, which was some deal slippage as people, I think, have sorted through how they're trying to make sense of their budgets and the sort of various demands on those budgets. But gross activity continues to be really solid. But I think some slippage that we saw there, which impacted our 2024, and then on the churn side, I think it just explained that. And so I think it's really the macro environment and a bit of caution there that led to being slightly below on the revenue guide. Having said that, of course, the margin expansion and then the derivative effects of that into our AFFO per share, which is fundamentally what we view as our lighthouse metric. And again, we were $7-$10 on the AFFO per share guide.
We actually reported we guided $8-$10. Actually with a slight bias to the high side on AFFO per share, which we think that combined with dividend yield continues to make us a very attractive overall value story.
You mentioned pricing. Can you share more of the pricing dynamics that you're seeing ex the power pass-throughs and the sustainability of pricing on a go-forward basis?
Sure. Well, I think maybe we touch on both of them because it is useful to look at it outside of the PPI context. But the PPI has, I think, had some effect in terms of the thinking of customers around the overall envelope of budget in which they operate. And I think that's been something that we've had to kind of adapt to. But if you take that out, we've seen meaningful increases in terms of overall new deal pricing over the last, say, 24 months. And as you might imagine, given that environment, which has been fairly steep over that 24-month period, a meaningful portion of our installed base now sits below market. And so I think there's going to continue to be a meaningful sort of mark-to-market opportunity for us that will continue to drive some meaningful opportunity for us.
But I think that if I looked at that and said, "So does that dynamic of what we saw in price increases over the last 24 months repeat itself over the next 24?" which may be the essence of your question, I'm not sure about that because I think you're going to be looking at a broadly different inflationary environment. And so I think that will taper to some degree. But I think that overall, the strength of our value proposition, the scale of our business, and the sort of distributed nature of our business, lack of customer concentration, and those kind of things are all things that contribute to us having a greater degree of pricing power. And I think that will be a driving force in our overall results.
Can you further unpack the ways in which Equinix and the platform can benefit from the broadening of GenAI deployments?
Sure. I think that we're seeing that a lot of the attention revolves primarily around what we would sort of refer to as foundational AI, training of large-scale LLMs, and then the subsequent sort of deployment of inference against those models to generate value. But interestingly, I think what we're seeing right now is more around consumer applications, chatbots, those kind of things as a driving force that's in this sort of public mindset. Again, that's a real opportunity. I think it is right now stimulating demand mostly for large-scale training. I think in our business, that translates to xScale demand. And you saw that, by the way, show up in our results. We had a record leasing quarter for xScale in Q4 of last year.
And we're going to continue to invest through our joint ventures in the xScale business because we do think it's a robust area of demand. And we think it is strategically accretive to our retail story. And so I think we'll invest there and continue to be. But I think we're not going to be, look, it's a different business. It's a less differentiated business. It's a more competitive business. I could reel off for you, and you know who they are, six or seven different competitors that are now mostly in private hands that are shooting at that same target. And it's not that I'm not bullish about that opportunity. It's just that there's going to be a lot more players. And we're not going to be a broad-scale market share capture player. We're going to be a targeted player.
I think if we could get a reasonable level of that demand, I think we'd be happy campers. But I think you'll continue to hear more from us about that on the xScale side. But outside of that, then there are subsequent, I think, opportunities. There's regional AI, AI that I think has demands for training and inference that are more regional and geo-specific in nature due to data sovereignty, compliance, performance, etc. You have edge AI. And I think we're working with people with substantially more distributed both training and inference requirements, people like Continental on the automotive side in Europe, which is a joint customer of ours and NVIDIA's that I think is doing some incredibly interesting things there around their supply chain. And then this bigger hybrid AI opportunity or private AI.
As I said on the call, on the last call, I pointed to a study that was recently done that said about 32% of respondents were doing their AI strategies were currently pivoting around public clouds and hyperscalers. About 32% was on private cloud only. And about 36% was a mix of those two. We think that third slice of that pie is going to rapidly eat up most of the rest, meaning that the vast majority of people are going to find themselves, much as they did in the cloud, in an end state that looks hybrid in nature. And we think our cloud adjacency or, I think more accurately, ecosystem adjacency for the broader AI ecosystem, our global reach and our scale, I think are going to be contributing factors to really making Equinix a preferred partner as people think through their AI strategies.
If you look back to the 2023 results and maybe segment it between xScale and the retail business, is there a way to assess or estimate the percent that you feel was driven by AI workloads in terms of the bookings and then what that might be based on the midpoint of the 2024 guidance?
Yeah. Well, that percentage would look very different for the xScale side, which I think it's a meaningful contributor. It's not the only one. By the way, I mean, sort of traditional cloud AZ deployments are still a major factor driving hyperscaler demand, right? So it's not just AI training, for example. But we're seeing, I would say, a much more meaningful percentage of the xScale demand is AI-related. On the retail business, we've had some really good wins. We talked about a particular biopharma deal, which I hope will become more public as we go towards GTC with NVIDIA in terms of that deal. We talked about Continental. We talked about harrison.ai, a number of sort of AI-related wins that we've had. And so we're seeing not only funnel but real bookings on the AI side.
But look, the larger preponderance of our business by a long shot is still in traditional digital transformation sort of demands from customers like WAN rearchitecture, sort of hybrid cloud migration, hybrid cloud implementations. The piece that is an interesting crossover between those is what we're seeing as it relates to where people place data. The opportunity that we have for cloud-adjacent storage as a service offering, whether that's delivered through our digital services portfolio or through people buying sort of traditional colocation and matching it up with storage, I think that's going to continue to be a significant driver of our demand that is at least AI-related in its overall profile. So I think a lot of runway left, but we're starting to see it. We probably got the largest multi-quarter funnel.
We did see some slippage of our Q4 into Q1, and some of that dribbled out into later quarters. So as we look at it, and we've worked really hard to have a better, longer-term visibility into funnel. And four-quarter funnel, I think, continues to look really healthy as we build demand for some of these key use cases.
You've referenced, as you're approaching the AI opportunity, some of the partnerships that you have. Why are these partnerships important for Equinix to drive the monetization of this? And do you have any exclusivities or uniqueness to these partnerships that may be underappreciated by the market?
Yeah. I mean, I think partners, broadly speaking, are going to be an increasingly relevant part of us executing on the strategy of being the platform that we want to be for our customers because rarely do we entirely solve a customer problem, right? There are probably some very specific use cases like network nodes or perhaps electronic trading, some of those things that are pretty self-contained, if you will. We can do them. They can come to us. We can meet that need. But increasingly, I think when you look at the larger TAM, both service provider and enterprise, it is typically about sort of unlocking value from this gangly ecosystem that is the digital world today. And so partners have to be a critical part of that story.
I think on the AI side, as we look at it, people are saying, "Hey," like the hyperscalers themselves are making such massive investments in their AI tools and capabilities, etc., that people say, "I have to be able to eat from that whole buffet." And so our ability to sort of provide adjacency to all of those tools, I think, is going to be critically important. And of course, NVIDIA is a driving force in the market. They will be for, I think, a very long time. And there are other players certainly that I think want to make sure that they get their share of this over time. But they've got a lead. I think they're going to continue to sort of maintain that for a period of time.
And if you look at Jensen's been pretty active talking about this notion of AI factories, we think we have a very relevant play in this sort of notion of building AI factories. We certainly won't be the only home for them. But I think we can be a really compelling one because if you look at it and you draw a parallel to the factory of the old, well, what allows or why do people place factories where they place them? Proximity to raw materials, proximity to talent, proximity to distribution, proximity to supply chain. All of those things are still relevant in an AI context. And I think if you look at that, I think that's where we're going to be able to bring some really compelling value.
And so I think AI factories that provide proximity to the broader digital ecosystem and to distribution in its current form, which is network, I think makes Equinix very well positioned to be an AI factory sort of landlord of choice.
To take advantage of that, what has to happen to the Equinix portfolio? Do you need to densify it up from a power perspective differently than the way you've managed this in the past?
Yeah. Over time, yes. And I think that pace will be different for xScale than it is for retail, right? I think it'll happen more quickly and in ways that can be uniquely use case specific in xScale because you take, I don't know. You build a 20-25 MW facility. You sell it to one customer or maybe two. And that's relatively easily understood, maybe even still in the design phase about how you adapt the design to that reality. Whereas in the retail world, we're talking about when we build a, let's say we build a 5 MW or 6 MW phase, we are looking at typically thousands, maybe thousands of customers in that phase. And I think with a broad distribution of density requirements. And so we have seen sort of density slowly ratcheting up because of this increased mix of GPU-centric workloads.
And look, and I think that might accelerate to some degree. But I think that our facilities are well positioned, both the ones we have now and the ones we are building, to be responsive to that. I think our ability to apply liquid cooling to solve because cooling is often the constraint. And because we now have a broad-scale liquids cooling capability across the footprint, I think we'll be able to continue to respond well to the densification requirements that our customers are reporting out to us.
What's the risk of certain things standing in the way to capitalize on this opportunity, whether it's constraints in energy supply, sustainability factors, or just even the infrastructure that's needed? Can you unpack how Equinix sees that and how you're approaching that?
Yeah. I think those are things that all of us have to be cognizant of, I think, not only within the industry but outside of it in terms of those relying on the services that we provide. And I think those things might be even more acute as you think about the xScale and hyperscale side of things. And so I think access to power and permitting and sustainability requirements, I think, will continue to be a key area of focus. I do think that's why we, though, as both a global leader and a scaled sort of provider, I think have both the capability to invest in those areas and the commitment to doing so that I think will provide us some level of differentiation there.
And on the retail side, I think so many of our customers are relying heavily on us to sort of be a partner to them that says, "If you're on a trajectory from a sustainability perspective, we can help you get there. And we're willing to make those investments and are making those investments and are making those commitments." I think that's going to position us well. But I think that it's not going to be without its challenges. And I think that we're better positioned from a risk mitigation standpoint too because of just the breadth of our footprint because customers and that's one of the reasons, actually, customers come to us to say, "Look, I can't anticipate everything that's going to happen.
If something goes bump in the night, your ability to help me respond to that by helping me navigate to a different location or the confidence that you're going to be first in line to get something is, I think, are some of the dynamics that are push business more towards Equinix. I think that's both a responsibility of market leadership and also a benefit of it.
Are you seeing the energy constraints in key markets, whether it's Northern Virginia, Silicon Valley, get worse? In other words, it's going to take even longer to get power distributed the same, or is it getting any better?
Yeah. I mean, I think in some places, again, because there's so much demand, it may be getting worse in the near term, right? Now, the good news is that I think that from our retail business perspective, we have, as we've reported out in many forums and many times, our visibility to the power requirements that inform our multi-year plan are pretty much locked and loaded, right? So now, xScale is a bit of a different story. And I think that that's why when I've responded to this question about how are you thinking about the xScale opportunity, for example, in the U.S., and is that going to be adjacent to your existing locations or elsewhere, my answer has been yes.
And so I think it's going to have to be a combination of those things because I think some of the markets are going to be particularly challenged in terms of getting more than what we already have to support our retail trajectory. And as a result, I think we will look at other locations where we might be able to get access to power in a different way. And so I think it'll be a combination of those things. But again, I think the confidence that we have in terms of our retail trajectory and what we've got into we feel very good about the confidence there.
Maybe just shifting a bit to development. How many of the current construction projects are in markets that do have constraints on supply? And then if you can touch on the yields of those projects versus the more stabilized product.
Sure. Yeah. I mean, about 50% of our overall capital, I think, is allocated and going into markets that are 100 million+, sort of our really big high-demand campuses, a few of those being ones where we are seeing constraints. And so I think that for the most part, with the exception of Singapore, which we have talked about publicly well, in Singapore, we feel like we're in a great position in that we've gotten an allocation of capacity. Problem is that it probably isn't going to come online until 2026. And so we're going to continue to navigate a more constrained market there for a period of time.
But I think some of the other markets where I think markets like New York and even Frankfurt and others, I think we've either just delivered or will be delivering capacity into those markets, which I think will relieve some of those constraints. And in terms of development yields, I will say generally, incremental phases in those markets tend to be on the higher side of things. We've always talked to a sort of mid to high-20s or even low 30s as a cash-on-cash yield development. That's sort of consistent with our stabilized asset returns, which are in the 27% range. And so I would say that those large campus environments, incremental phases tend to be towards the high side of that.
And then if you don't mind just touching on the size of the xScale pipeline and where you see regional expansion opportunities there.
Sure. Look, not surprising, there's a lot of demand. So our xScale pipeline has been strong. We delivered a record quarter in Q4 on xScale leasing. I think that we continue to see plenty of uptake there in terms of the projects that we have and plenty of interest in projects that we don't yet have and a desire to sort of help us build and inform a pipeline going forward. So not a lot more to report in terms of because we have how many projects do we have underway now on the xScale side?
11.
11 new projects. So again, feeling very good about the pipeline to fill those. Our pre-leasing sort of track record has been exceptionally good. And so has most people's. And so it's been a really good environment. And I expect that will continue. But again, I think that I do think we'll have a strong demand profile for xScale. I do think we have to think in a very wide-eyed and open way or eyes fully open about the competitive dynamics of that market and how it works. But I think we feel good about the pipeline. And I think we're going to continue to invest. We've noted in several other forums that we're planning to be more aggressive in the U.S. And you'll see more announcements from us in that regard in the not too distant future.
We're going to chime in a second here. Maybe not. All right. How does the future rollout of liquid cooling impact investment and returns?
I think it will just continue to support the investment returns that we have had. There's not significant incremental cost that isn't recovered in that. For the most part, basically, when we deploy liquid cooling for a customer to meet a particular requirement, we'll have certain NRCs, non-recurring costs that we would allocate to the customer to support that need. And we would get recovery on those. But it also generally means that we're going to be able to be responsive to a high-value deployment. And we're going to be able to price that accordingly. And so I would say I don't think any meaningful impact on returns other than supporting the very attractive return profile that we. There's your chime. A little bit of delay, a little late.
Yeah. A minute late.
A little latency there, problem. But yeah.
Moving over to margins, you talked about the significance of the margin improvement for 2024. What's the sustainability of annual margin improvement now for Equinix? And what might be driving it differently this year and over the next few years than maybe over the past couple of years?
Well, I think I'll get to the last part first. I think what we have said sometimes under pressure and with an unpleasant response that we were investing in the business. And people have been like, "Well, when are you going to stop doing that, right?" And I think people were not necessarily thrilled with the margin expansion that we were putting on the table. But I do think we're starting to see the benefits of that, right? And so I think that's why you're seeing some inflection. And if you look at it, we see it at the gross margin line and obviously at the EBITDA margin line, some of that flowing down from the gross but also some of it happening in between. And so let me give you a little more color on both of those things.
At the gross line, I think we have continued opportunity to be more efficient and more effective in how we use power. I think that's both in terms of our PUEs, which we are aggressively tackling across our footprint. As we bring those down, I think that because of our model and because of how it differs maybe from some other models, allows us to drive some margin expansion. Then so power is a key part of it at the gross line. Then labor, our largest labor force is actually at the gross margin line. It's in the operations. It's the frontline personnel that are managing our facilities and taking care of and serving our customers. We've invested significantly from a systems and process standpoint in making that labor more effective and more efficient.
I think we're starting to see the benefits of that. So that's where I think we're seeing it on the gross side. Then in between the gross and the EBITDA, I think we're seeing it really on the G&A side of things and to some degree on the S side of SG&A as well. We have to continue to be more productive in our go-to-market engine. I think we have really seen a flattening of the cost curves from a G&A standpoint, a G&A investment. We've made that very clear to our people. We're going to let's continue to reap the investments that we've made in those functions. Let's let the business scale around them. I think that's going to be a key contributor to our margin expansion. As people know, we're going to face some level of interest expense headwind.
The way we're going to sort of accommodate that and the reason I think we're able to support the AFFO per share guide that we did is by ensuring that we continue to drive a level of margin expansion to offset that.
Any questions from the room before we get to maybe one last question in a rapid fire? So one last question. Can you maybe taking a step back, just describe where Equinix is in continuing to monetize the core workloads from digital transformation from corporate customers? Is there still significant core opportunity to go without even considering what the future benefits from AI will be?
Absolutely. I think that people are still early in digital transformation as a journey, AI and even earlier in AI. But I think that and I think those will be muddled and intermingled over time. But I think the commitment to sort of digital as a means of differentiation in virtually every industry across the world and sort of foundational and fundamental workloads like WAN rearchitecture and cloud migration and hybrid cloud, all still plenty of demand for that with a lot of runway left.
Rapid fire. Same story in NOI growth for the sector overall next year and 2025?
You're going to give me, is it multiple choice?
Only two of you.
We talk about sort of for revenues being in the 2%-5% range.
Revenues 2%-5%. Okay. Will the data center sector have more or fewer of the same number of public companies a year from now?
It's hard to get fewer, isn't it?
Good question. I've heard it. The next question will begin in 10 minutes.
I think I'm going to go with same.
And then, best real estate decision today: buy, sell, build, develop, or buy back shares?
Build.
Thank you.
Thank you.