Good afternoon, everybody. Hope you're enjoying day one of the conference. We're delighted to have you here. I'm Simon Flannery, and I'm delighted to welcome back Keith Taylor from Equinix. Welcome, Keith.
Thank you very much, Simon.
I believe you have a safe harbor statement.
Oh, I do. Some of the comments I'll make today will be forward-looking, and so please refer to our SEC documents in either Form 10-K or 10-Q for any updates and opportunities.
Great, and for Morgan Stanley, please see morganstanley.com/researchdisclosures for our disclosures, so you had earnings a couple of weeks ago. A lot of exciting trends in the industry broadly will come on to things like AI, but perhaps let's just start with wrapping up 2024 and the outlook for 2025. Just give us some of the highlights and the priorities.
Well, yeah. Again, thanks for having me. I think overall, if I was to categorize the quarter, I came into the fourth quarter and I was delighted with how we ended the year. Notwithstanding, there were a number of adjustments in the fourth quarter that caused us to flip into a net loss position for the fourth quarter. But I recognize all those different, we made those adjustments and those decisions. It really was all about the forward and what it was going to do for the business. So again, overall, I was pleased with the booking activity. I was pleased with, if you will, the operating performance ex adjustments. And I was pleased with the decisions that we made.
How that sort of then translated into sort of the 2025, again, there was a lot of noise in the story, but if you just sort of pull away some of that noise and you explain what happened, you realize how strong the guide was, pardon me, I should have said, and I'm excited about the position we're setting ourselves up for, not only through 2025, but it's really as we look into 2026 and then 2027. Again, I think 2025 is going to be a really solid year, although the wind in our face right now is currencies. Maybe much to my surprise and maybe many of your surprises, the U.S. dollar strength was substantial, particularly in the fourth quarter, where the basket of currencies in which we operate weakened 8%, and 60% of our revenues reside outside the U.S.
You're hedging about half of that?
We hedge about half of it, sterling and euro, and we hedged to 70%, so think of it as roughly on a net basis, about 21% of that 61% is protected.
So you talked about positioning yourself. And I think in the year since you were last sitting here, we've obviously had the leadership change. Adaire has come into the CEO slot. So just give us a little sense of the new priorities, what impact her leadership has had on the organization and where the company's positioned.
Yeah, you have to acknowledge Adaire. I mean, she's just, again, she sat on our board. But it's different sitting on a board versus sitting in the CEO seat. And I'm really impressed. I know you expect me to say that, but I am really impressed just by Adaire and her command of the business, but also knowing where she came from. She had great experience at Google Cloud, SAP before that, Oracle before that. And I just think the lens in which she's looking through and how she's reorienting the business, I think is powerful to me. And again, this is my fifth CEO, and so you adapt to the new environment. But the new environment, I think, is just solid because it really is about we've always wanted to continue to focus and prioritize and invest in the areas we thought were best suited to invest in.
But at some point, you also realize, well, maybe we don't need to invest in everything. And so you make some tough decisions, and Adaire did. And that's part of the reason we had these adjustments in the fourth quarter.
So, Metal, exiting Metal.
So, Metal, we basically ended up writing it off in mid-2026. But because of that, we had to take a balance sheet hit to write down some of the assets. Also took a revenue hit in 2025 relative to 2024 because when you tell customers that you're going to end-of-life it, you don't expect them to stay on that platform too much longer. And so that's part of the decision, but we also made some tough decisions on how to prioritize the business. And there's 10 words that are in a vernacular today that weren't there before Adaire joined, even though the strategy would probably be similar, but just the messaging and how the employees embraced it, I think, is different. And it's Build Bolder. It's Solve S marter, Serve Better. So those are six. But then it's Run Simpler and Grow Together.
And those 10 words are really about the entire strategy of the business as we look forward and then what are the strategic enablers to make that happen. So I'm really excited about that messaging. I think the teams embraced it, as I said. But Build Bolder is really what I was referring to. Build Bolder is not about meaningfully changing the paradigm because even before Adaire joined, we were working on Matrix or sorry, xScale 2.0, which we refer to as the Matrix project. And so we are already doing that. But then we announced it this past October. And that was a tremendous transaction for us with two, I think, excellent partners, GIC and CPPIB. GIC out of Singapore and CPPIB out of Canada. So you're taking basically that franchise and you're tripling it. So I was excited by that.
So we're doing that, but that's part of the Build Bolder initiative. So we're going to invest more in xScale. But the other part is we're going to focus more on growing our core business. And so when you get the noise of Metal out of the way, you sort of collapse the two business units into one business unit under John Lin. So we think about it's really about the delivery of digital infrastructure assets or infrastructure assets. And whether it's physical or digital, it's all under John. So excited about that. And then it's really about how do we serve the customer better? How do we solve smarter in that? What products do we deliver? We're not going to do Metal. That just proved not to be a place that we could win. And I referred to it earlier today. It's like digging a hole with a sledgehammer.
You can do it, but it's going to take a while, and there's going to be a lot of energy that goes into it. And we realized the market was moving on us, and so we made, I think, that tough decision. So that's to solve smarter. And the Serve Better is really about how do we prosecute the opportunity in front of us so it's easier for the customers to consume with us and us to serve the customer. And I think those are very exciting. And so I believe that you should see growth continue to growth accelerate. That's my belief. I think it will be less friction, therefore more margin. And I think it will be a little bit more focused. And so Adaire has done a tremendous job of being our guiding light. And I'm really pleased with what I've seen so far.
I'd like to work for a long time.
Great. Great. So this big boulder, I think, one of the things that was a constraint to you in growth, I think, was capacity in some of the key markets, in Tier 1 markets. Can you just unpack that a little bit? And are you going to start being a little bit more aggressive, dropping down, let's say, 50% more cabinets with each phase or 100% more? Or what's the way to get out further in front of the demand?
It's exactly like that. Simon, it's building in larger phases. So instead of doing smaller increments and more phases and therefore more mobilization and demobilization of construction teams, you're going to start really with a threshold of a minimum of five megawatts. And in the retail space, that feels like a rational place or maybe up to 10 megawatts. So number one, the phases are going to be bigger. The building is going to be larger. And we're going to focus more on the core markets where we really can differentiate ourselves. We're in 74 markets today around the world. And so we like our platform, but I also think you've got to make the investments in the right markets at the right time. And so that will get us a little bit more focus, bigger size and scale. The average deal sizes are larger today.
So it makes sense given where we are in the industry and in its evolution. And then I just think that you're going to see us get instead of just putting that one phase or that one building down. I think you're going to see the average size move up to 30-50 megawatts. Whereas before, we were very comfortable with a building of 10 or 15 megawatts.
Presumably with higher power density as well.
Higher power density. Well, we really think that's. Then you think a little bit about the form factor. Well, how big should that building be? So what is the average density? And clearly, average densities are moving up, as you're aware, Simon. And so with that, I would just say that it depends who we're selling to, what the asset, how it's fit for purpose. But I would assume that density goes up, and our ability to run it as efficiently as possible will give us a really strong cash yield on the investments that we're making. In fact, I think our investment yield should be going up, largely because we're doing such a good job of running the business, running the IBX. We're driving more margins.
If you can build more efficiently and deliver a higher price per unit, it bodes well given how we've structured our balance sheet.
Right. I wanted to come back to the guidance for one minute because I think one of the things that made me sit back a little bit was you were teasing us with almost 50% margins exiting the year, which I know has been at the end of the rainbow for a long, long time. So you're starting off and building through there. And I think there's some of its power, but it's some operating leverage coming through. So I'm sure we'll get more at the investor day, but can you just help unpack that for us a little bit? And can we see more operating leverage as we go through the next few years?
Yeah. No, probably not a surprise to you or anybody in this room that that was one of the most exciting segments of my prepared remarks. Because largely, I know it's what a lot of people have been looking towards. But there's a number of things that created that. And it goes back to, I think, Adaire's leadership. She's allowed us to make some decisions that were really positive to the margin story. But first, power costs are coming down. So that's a good thing. It's good for the customer. It's good for us. Second thing is, in 2024, we did some fit-out work for some of our large hyperscale customers. We really don't want to be in that business. And that's where we're doing it was $80-$90 million of revenue with very low margin.
So, we don't want to. We have $40 million in the first quarter. And then I expect that we're going to stop doing that. So that's obviously a benefit. And then you have. Just, we made some tough decisions around Metal. And Metal was basically negative EBITDA. And so when you make those decisions and you manage the cost appropriately, we won't have to suffer that in 2025. And then we made a tough decision. And maybe some of the people in this room were in the room when somebody asked me. We made some tough decisions around human capital. And why is it that you're strong and you're making those decisions? And largely because you want to make the tough decisions about prioritizing and focus when you are strong, not when you're forced to.
And that allowed us to take that plus the other decisions we made, take the money and put it into investing bolder in our bold strategy. So the combination of all those things, running more efficiently, being very disciplined about what we're going to focus on and not, recognizing that this just gets us to the end of 2025. Because what I said, I was clear that the margin profile that we give you for Q1, that Q2 would be meaningfully better than Q1, and the second half would be at or near 50%. So the whole second, not exit, the whole second half. And that's the plan that we're running to this year. And we haven't even enjoyed the benefits of the system investments that we're making, the operational efficiency around processes, and the full benefit of the human capital decision.
So we've been dancing around AI for a little while, but clearly the hyperscale demand, the use cases continuing to ramp here. But you've been quite cautious with us to say all in good time here. But Equinix is certainly seen as being very well positioned for the inference phase, which seemingly DeepSeek was kind of accelerating that process, perhaps. So what's the right framework to think about the opportunity and the timing for Equinix around for the core business? We'll get onto xScale in a minute.
I think you positioned it absolutely right that we tend not to be chest thumpers. The natural thing when AI came into the forefront, everybody said, well, this is going to be great. Everybody jumped on that bandwagon. I think AI is going to be great. We're already seeing the front edge of the opportunity that's presenting itself. We also are a relatively conservative house, just like we were with the cloud, the onset of cloud, that it takes time for it to, if you will, propagate and how then enterprises will consume. Cloud over the last 10, 12, 13 years proved itself out exactly as we anticipated. We're basically the on and off ramp to the internet, but also to the cloud now. That's foundational. You can't change that because we have 2,000 networks that reside inside our facilities.
And we have roughly 40% of all the cloud on-ramps and all the metros in which we serve, 40% of that are available. And so it positions you really well. And so you then think about this next opportunity. And whether it was data and analytics or autonomous driving or it's gaming or it's electronic or financial trading, this is another ecosystem for us. I think it's a powerful ecosystem. And many would say it's more powerful than that of what the internet has accomplished. And that's yet to be proven, but it certainly feels like it's going to be very significant. And we, I think, would be the best manifestation of that opportunity because we're the aggregator where the networks are. With the clouds, you have the on-ramps, on and off ramps to the clouds.
You have the enterprises that like to consume as well as all the consumers that are sitting on the ends of these networks. And with convergence and inference, convergence towards the enterprise and consumer and the benefit of inference, I just think we're going to be a really strong recipient of that opportunity. But it takes time, right? It takes time because there's still you can see that the large language models are continuing to be trained. They're foundational. And you're starting to see these offshoots be created in different parts of the world. And we like the fact probably freaked everybody out on that day. But DeepSeek, just what was suggested they did for the dollars they did it with was so substantial.
It really gave the market confidence that it's not going to be only the rich that can enjoy the benefits of AI, whether it's the large hyperscalers or some of the other sort of large outfits, that it can democratize AI. And that plays well into Equinix's, I think. And so we believe that AI will continue to be something very, very important. And we hope that we'll be at the end of the road, if you will, helping customers think a little bit about how do they deliver their AI services to other enterprises, how they consume, and also be proximate to the cloud and the other core foundational models that will allow them to run their businesses more effectively.
Do you think about this more as an extension of your kind of high single-digit type growth rates for many more years as cloud reaches maturity? Or do you think you can get an acceleration in your growth rates? I mean, you're obviously low double-digit numbers is a tough one, but.
I know you and I have been sitting side by side here for many years, and I never thought that we'd be at the scale if we look back all those years. It's really unfortunate what currency is doing to our results this year, but truthfully, when we think about how large the business is, there's no reason to suggest that it can't be an accelerant. Because if you believe that all things digital or the world is only becoming more digital and more and more companies are focusing on those large hyperscaler deals, those large very substantial deployments, there's not a lot of retail players in the space anymore, and again, I think we can do xScale, but I think we have to stay pretty true to our core inside the Equinix franchise.
And we can talk about xScale a little bit more if you want, but that is the most important part. And I think that's. I think you can see a nice tailwind for a very extended period of time. And I know if we go back many, many years ago, it'd be 10 or 15, probably even 20 years ago, people say, how long can this last? And then we're sitting here today and you go, I think there's still a lot of runway to go, which is really exciting. And I think that we can have a broader influence over how we shape our opportunity, largely because we have a relatively pristine balance sheet. We have a lot of flexibility. We are strategically focused. And so I'm excited by what we can do. And then maybe that wind at our back from AI, if it really takes root.
I just have my little bit. We'll talk more about it at Analyst Day in June, I suspect. But I'm always a little bit apprehensive about getting too excited about any one trend. But it's more about the timing of that trend. When will it present itself in such a way that we know we'll see the material manifestation of that trend?
Your front-facing sales and marketing folks, are they seeing the conversations change that customers are starting to inquire about putting private training or inference nodes or whatever or seeing how they can design that? Is that kind of starting to manifest itself?
From what we hear from the people that are in the sort of front lines, our team in the front lines, is that every sales conversation has AI in it. The question is, how is it presenting itself? Because I sit as the CFO of the company, I sit around with a lot of the technology CFOs in the Valley. And we meet quarterly. And a lot of times it is about AI. And people want to know, well, what's going on in AI and how are you using it to your benefit? And I think we all agree that it's there. There's something, there's a there there. But it hasn't yet. It's not yet something you can go and grab in a material way. We do a lot with machine learning and with bots and things like that. And so we do these routine processes.
But that's more about machine learning. When you really get into artificial intelligence, how is that presenting itself? And so what I think what I'm hearing or interpreting from the sales teams is everybody's talking about it. They want to understand what it means. And because of the diverse set of customers we have, including, again, the majority of the cloud on-ramps, which gives you access to large language models, I think it's very, very real. It's just it's not so we have a lot of deals that are being done. As we announced on the earnings call, 50% of our top 25 deals were AI or high-performance compute. But that in itself isn't enough of a trend yet. But I would just say that I think we're excited about it. I think we also know our position in the market.
We just have to be mindful that we can have the capacity available to sell and not overcommit ourselves to any one pattern or any one customer.
Makes sense. You talked about your competitive advantages, obviously much larger in your business and greater footprint than anybody else. How do you think about pricing? Obviously, in the hyperscale market, it went down a lot, and now it's coming up a lot. And you've got long-term contracts getting renewed. Yours are quicker cadence here. But what's the mindset of you and the management team just about your ability to take price and balance the needs of the customer and do right by them at the same time as getting a return on your investment?
The nice part is we're not arbitraging over our cost of capital. The market knows that, but it's always about investing in the future, and for those that don't know, on our rough numbers, 170 data centers that are stabilized, our cash yield is 27% on the investment we've made pre-leverage, and so that's really attractive. We get an outsized return for the business we're in, but we're perpetually investing in it, and so the market understands. Number one, we are at sort of the top of the heap from a pricing perspective. 90% of our growth comes from the installed base, but we still push pricing where we think we need to, where customers where markets are disconnected, customers' deployments might be disconnected, or there's outsized value given the work that we're doing in support of that customer.
And so you will continue to hear us talk about we believe net positive pricing actions will be ever present in 2025. And I would suggest into 2026 and 2027, largely because the supply environment is more constrained. And there's just not enough capacity in the core markets. And we've got to go create that capacity. And we should enjoy price premium for that opportunity. And so that's what I would just say overall pricing feels like it's going to be an important component of our business. But we're not going to be predatory about it. I think we just have to be firm that we're creating something that the market wants. They're willing to invest in it.
There is value that's attached to the other side of that decision, whether it's access to networks or performance or revenue or whatever it may be, that the market values what we're delivering and they'll be willing to pay that price. So I feel I would just say overall, I feel very positive about our price points.
Right. xScale 2.0, I think there's a lot of interest in the opportunity there, but you haven't given us too much beyond signing the contract here, and you talked a little bit, I guess, it's at Hampton, Georgia in 2027, but is that something you can flesh out more at the Analyst Day? Are we going to get, here's these markets and here's this timeline across the tripling of that business? Because I think from a modeling perspective, it's hard for us to kind of fill in the blanks.
I think the biggest issue is really timing, and you hear that across this whole industry.
Yeah, sure.
When people are talking about builds in 2030, 2031.
will-serve letters and.
Yeah. So these are all things that we want to provide some clarity on. What is the timing, the exact timing of Hampton as we see it? And all the other opportunities that are in front of us, no surprise, we're working on a number of other different U.S.-based initiatives that are similar to Hampton.
And you're still using this should also feed into the core business as well. Is that?
It should feed into the core business.
Priority. Yeah.
In the right places at the right time, absolutely, to the extent that we don't have access elsewhere. So I think the Analyst Day will flesh that out a little bit more. It'll give you some more clarity. And I think I want to make sure that we articulate as best as we can. And this is obviously coming from Adaire. It's not about an event. It's not a day. It is a program that we want to take you through. Just here's where we are on Analyst Day. And here's the journey that you should expect. And then we'll continue to beat that drum over the coming quarters and years until the next Analyst Day. So you see it in its fullest light. And you see the implications it should have on our financials. And that's our goal, not only for.
It's been quite lumpy up to now, which is.
It's lumpy. And by its very nature, it is meant to be well, not meant. It is lumpy by its very nature. And we guided the market to it will be lumpy. And here's why. Because the way the streams of cash come into the business and how it gets presented creates some lumpiness until you're fully stabilized. And we're not yet at scale because we're building it up. And right now, we have roughly 17, 18 operational sites, Katie, yeah, roughly. And we want to get to the first phase or xScale 1.0 and roughly 7,800 megawatts of capacity. But the next journey is going to be so substantial. And I just think that's I like to think that xScale 1.0 will get us to enough scale. But I think given the fact we're tripling the opportunity, maybe it will still be lumpy for a period of time.
You described that in terms of megawatts. You used megawatts earlier on in terms of the next build. But you're still giving us cabinets billing. So.
So hopefully you wanted to bring that up.
I think it's just a question. People just want to understand what the utilization is. And you've obviously there are numbers because people are consuming more power, your average power per cabinet stuff. But it feels like people want to understand, as you and your team do a little bit more. Can you help us sort of bridge that?
Yeah. No, look, I think xScale is easy when you talk about megawatts because that's how they procure. And you basically give them an asset, whether it's a data hall or a building, and that's theirs. And sometimes you configure it for them. Sometimes you don't. And I'm talking about configuring it for the hyperscaler. I think when you get into the retail space, you've got such diverse assets across our portfolio. In some ways, it doesn't feel appropriate to talk about megawatts because you'll have a network service provider that consumes very little. And you can have an enterprise that consumes a lot. And we've been really struggling with, well, how do we balance it all for those that want to model in a way to understand utilization? A lot of what we think about is we can give you P quite easily.
But the Q is the one that we've really struggled with. So do you make it a cabinet, a sellable cabinet? Or is it a sellable square foot? Or is it a sellable kW? And all of them have flaws, substantial flaws.
You can give us all of them.
Yeah, well, you can give them and we try and give you the color of giving you all of it. But it still is noisy right now because I think we're in a transitionary phase.
Each market has its own characteristic.
And it has its own, and each of the buildings has its own anomalies. And for all those reasons, we're reticent to give you another metric yet because we're worried we exacerbate our problem. And so that's why we're going to try and give you as much data as you can consume. We think we're transparent. At the same time, we just know it's a struggle for us. And so I think we can get to a point where the data can get better and better because we're making a real investment in our data and analytics effort, including working with AI. And we are bringing on a Chief Digital Officer hopefully in the not too distant future. All of that is we want to attach our analytics to the core attributes so that we can give better information.
Because everything we do right now, it's a lot of brute force to give you what we're giving you today.
Yeah, and the portfolio is always changing.
And it's perpetually. And that's the one thing I don't think the market appreciates. And I'm not trying to be critical, but it's an evolving ecosystem perpetually shifting. And it's so dynamic. And things move up and down. And you have a churn, a frictional churn element inside our business that causes numbers to get distorted. Even the net cabinets billing.
Yeah. Lumpy.
We had negative net cabinets billing a few quarters ago. People say, well, what's going on? I said, well, let me tell you. Here's what we believe is going on, but your revenues are growing, and so how can you have a negative number and yet your revenues are continuing to grow, and it's sort of just representative of the difficulty we have with that core metric.
But I think you said on the call, stabilized growth, financial growth should still be that kind of was it 3%-5%, I think you said.
Yeah. That feels about right. Yeah.
Yeah. Okay. And we were at the lower end of that range here.
We're in the lower end, but it's largely because we turned down some assets that were stabilized. There were some one-off adjustments and the like. But overall, I still feel really good about that number.
Great. Well, we're running out of time here. You talked about your pristine balance sheet. So just think about or just help us with what do you think leverage is, how much financial flexibility, and your CapEx, it's going up this year. How are you thinking about that? ATM, you've been active in balance of leverage versus equity. What were the puts and takes there?
Yeah. Look, I think we're going to continue to be very aggressive with our balance sheet, putting cash on the balance sheet, which is in some ways hard because you understand it's not yet a productive asset. But we know that that investment we're making or the debt we're drawing down, it's going in the balance sheet because we know where it's going next, which is either probably first and foremost into builds and then second to a growing dividend. So we have real clarity about what we're doing, but we need more capital. And so despite what you might see is a lot of lower leverage because we measure on a net basis, net of cash, we have capacity from our rating agencies. Relative to how they measure it, we have anywhere from sort of one to two turns of leverage capacity, that order of magnitude anyway.
And so that's good. So we know that as we continue to scale the business, we can put more debt on the business. But we also recognize the cost of capital right now. We believe that we raise money in foreign lands because it gives us a lower blended rate. We really want to be raising some debt capital in the United States. And we foresee that cost of capital will come down in time. And so you'll see us in the debt capital markets in the U.S. But right now, we're touching other markets around the world. And I think ultimately what you should see is our cash balances will go down as we invest more. And our dividend will continue to rise as we've indicated over the last 10 years. It's a really attractive model right now.
You've done a ton of M&A in your history, but it's slowed down a lot. Is that something that is still? Are you seeing properties, maybe tuck-in type things? Or are those days pretty much behind you?
I think there's a few tuck-ins. We're doing an Irish acquisition that will close, we think, first half of the year. A Philippines acquisition should close first half of the year. The challenge that we have as a public company is the trading multiple relative to the expectation in the private world. Some of you might be in these investments where they don't only want to sell their in-place cash flow, but they want to sell what is booked and not yet billing at full value. So it's really dilutive to a public company. It's hard for us to do any meaningful acquisitions. We always will be looking as appropriate. Our highest and best use of our capital is putting it back into the business organically.
Well, that's a great place to end it. Keith, thank you so much for your time.
Thank you, Simon. Thanks.
Have a good evening, everybody.
Thank you.