Good afternoon, everybody. Let's get started. It's my great pleasure to welcome Keith Taylor from Equinix. Keith, welcome to the conference.
Simon.
Thanks for coming.
Thank you for having me.
For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. It's been a good year for Equinix in 2022, and, you know, I think a lot of people were concerned about some of the kind of macro and political global headwinds and you put out pretty constructive guidance for 2023 as well. Perhaps you could start just by talking about the priorities and, reminding us your expectations and why you're confident.
Sure. Let me first say, like you did, I will make some forward-looking statements, so please refer to our SEC documents. Yeah, look, number one, 2022 was a fantastic year for the business. We performed, you know, openly better than we anticipated. You can't help but step back and try and understand what is going on and why is that. One of my great beliefs is that we've positioned ourselves very differently than others in the marketplace. We're getting to see an outsized level of opportunity compared to anybody else. We're also not chasing the big deals. The big deals sit in our JV structure with our partners. That feels really good. It tells you that the fundamental business is there. For us, it's really about how do we continue to prosecute against that demand opportunity.
Priority one is really about our go-to-market, and I feel very, very good about that. Priority number two is really about our team. Team health really matters. Our culture matters and the investment, you know, where we locate our staff, both current and going forward. That's an important part. Digital Services, I'd be remiss if I just didn't say, and some of the people I've already spoken to who are in this room are in the room with us today. I can't help but believe that this could be one of those tailwinds that feels good as we continue to see this momentum. As you consume, sort of, if you will, physical infrastructure you know, with a software structure, it feels good, and that's what Metal's all about.
That connective tissue that brings it all together, which is Fabric. Those three things, then sitting on top of like, our sustainability initiatives feels like the right priorities for this year.
Right. You know, I think one of the things that's made Equinix stand out has been your long-term guidance. You know, every couple of years you have the Analyst Day, you've got another one coming up in New York. Look forward to one in person, this year. You know, help us understand how you're able to have that confidence not just about 2023, but about that, you know, three, four, five-year view, and then hit most of those goals and or exceed them.
Well, it's probably. You and I have been connected together for a long time. One of the things you've probably noticed about Equinix is we, a lot of times we, the vast majority of times we do what we say we're going to do. I think we have great predictive oversight in the business. The model itself gives you that comfort. One, because 95% of our revenues recur. We have, you know, a deep pipeline. We're very, very disciplined about our build structures and how we deploy our capital. Knowing that the market isn't moving. I mean, I go back to my earlier comment. There's something that's going on in the market that just feels different.
Obviously, there's the economic environment, but it feels like everybody wants to just go and win that big deal. I remember, I don't think anybody in this room, but I was at a different event and people were saying, "Why aren't you going after those big deals?" I go, "Wait till you see what happens when what it's going to do to some of their balance sheets." I go, "We can't go after that big deal. We don't want to because it'll destroy the balance sheet, and you won't feel it today or next quarter or this year, maybe not even next year. Boy, when things turn, boy, you're going to feel that." That's. So we as a company, we, you know, we always talk about the number of deals that we do.
It's to give the market an indication that we're not relying on any given deal or any given customer to execute against our plan. It's the 4,000 deals with 3,000 customers every single quarter. I think the number that we put up for the year was 17,000 deals. I mean, it's mammoth. Also tells you that we go across the entire spectrum of companies 'cause all things digital have a home in Equinix. All things digital, including AI. Again, I know that's a word of... I don't want to use it because use it today in a sense that it's going to be an accelerant 'cause it won't be an accelerant. It's just, it's additive to what we already do. Companies already do AI, ML inside our environment. We, you know, with.
Suffice it, there's stuff goes on already. Where the heavy compute's gonna be done, it won't be inside Equinix, 'cause that's not what we sell. That will be done somewhere else. Overall, all things digital have a home in Equinix, and that's what makes me feel good. Therefore, it gives us the predictive analytics to guide what we think we can do as a business. Then we fund behind that. We fund behind our go-to-market engine, all our quarter-bearing heads and all the other, you know, sort of vectors of customer targeting. Then you tie that back into our operational scale. It just feels like we have the visibility.
We also have the visibility because not a lot of people are doing what we do. They might be doing what we do, but they don't do it because they don't invest like we do.
We heard from some of the cloud players about customers optimizing, and there's been concern about tech layoffs and spending reductions. I think coming into earnings season, there was this concern that that might show up in bookings or in churn or something like that. How do you see the state of your customers, the state of demand right now? Obviously, you feel good about this year, but, you know, you're global. You've got a big presence in Europe where the energy prices have been higher.
Well, there's a lot to unpack there. I think we'd be naive if we didn't think that the economic environment doesn't impact some customers, because I'm sure it does, and so we're not gonna ignore that. One of the comments we made, in fact, I made it, was that we're gonna live comfortably within the range of what we guide you to normally, which suggests that it's gonna be on the lower half of the range, not the top half of the range, comfortably. There's nothing that seems to indicate that we're gonna lose a substantial number of customers. Therefore, I don't worry about the churn. I also don't see any big things happening that could impact that. That's one aspect of it. The, the fact that there is some sense of layoffs on...o f slowdown, pardon me, and that's manifested itself in layoffs, that's more about a cost.
People just, they overinvested. There's still great growth in the hyperscale business. Just not as great as it was. Relative to companies like us, there's still substantial opportunity for us, and we see that in the xScale side of the house, and we also see it in the, in the retail side of the house. I made a comment on, I think it was in the Q&A coming off the last call, that I'm optimistic about what we see in xScale, and hopefully we can talk more about it on the next call, but by no later than the Analyst Day in June. Just about all the activity we're seeing. It tells me that the big guys are still out there buying.
They need companies like Equinix to help them fulfill their needs, particularly in markets that are more difficult. That's generally non-U.S. We're going to do very little xScale in the U.S. or North America. Overall, I would just say that, you know, we see the demand profiles. We, we're comfortable in churn. We feel good about pricing. As I said in the last meeting I just had with some of the people in this room here, I don't think we're inelastic. Obviously, there's some price point that we got to be careful of, but I think we have some ability to flex because the market understands that we're carrying a lot of costs.
We carry a lot of physical costs and then the variable costs that come along with our business, which is power, and we can talk more about that. They're willing to tolerate some level of inflation despite the challenges that they have, you know, in trying to make their ends meet. All companies are feeling it. We're just feeling it at different levels.
A lot of your customers, they have mission-critical applications in your facilities.
Well, yeah. I think.
It wouldn't be the first time that it got-
I think it's very, it's a very important aspect of their infrastructure I think is really important that sits inside our environment. To the extent that the macro conditions cause uncertainty, I'm sure there's companies out there that are gonna come across financial difficulties, and it's unfortunate, but it is what it is. We deal with that every single quarter in different sectors at different times.
We were talking about energy companies a couple of years ago.
Some energy counterparty, you know, our counterparties fail in the energy business. There's all sorts of stuff that goes on there. We have a vision of what that will be, and that's baked into our guidance. I was gonna say something else, but I've lost my train of thought, so.
You brought up the energy. You obviously made the pricing actions. I think you made the point that the new energy prices are still at a hedge level below where spot is, so you're saving companies money. You know, two months in, how is that landing with your customers, mostly in Europe?
Well, I don't think price increases land well. Putting that aside, I think as a customer, when you're on the receiving end, understanding that we have a very mature and risk mitigating strategy to keep costs down as low as we can, simultaneously with trying to run the business as efficiently as we can. That means the PUE is dropping, and we're really working hard on that as well. I think it's acceptable. There's very few disputes, but I would not say there's no disputes. Of course, there's disputes. We anticipate that, and we protect ourselves financially about what we message to the street because we understand that some people might not pay when they say they're gonna pay and might even put some of them in financial jeopardy.
We're doing what I think is the best for them because we've had a well-known discipline strategy of keeping their power costs below the prevailing market rates. We see it that a customer couldn't procure anything close to what we could. Our competitors certainly didn't. You look at the spot or the forward pricing is higher than where we are. The other thing I'm not sure everybody fully appreciates, 60% of what we take is we're regulated. We can't do anything about it. We're a taker, price taker. Everybody feels the same thing. Because of that, we pass that on. If we can run the business more efficiently or if costs move around or even in some cases go down, we certainly can be the beneficiary of that.
I think it's Anyway, bottom line is I think we've put the customer in the best position possible. We are giving them the predictability. Prices move around. I know where I was going to go, but 90% of our power is on a per circuit basis. We're going to sell you that circuit, and you've got to decide how you want to use it. It's use it or lose it. In the sense, we're going to still bill you for it, but I shouldn't have said lose it because You're going to pay whether you use it or not. That's what it really means. It's like buying a hotel room. Whether you show up and-
Yeah.
-and sleep in the bed or not, you're still going to pay for it if you signed up. The other part, so 60% of our business is regulated, 40% is unregulated. Once you start to look at the subcomponents of power, there's the commodity piece, which we all manage, we all worry about. Just go to your own personal power bill, you look at all the adders, the taxes, the structures, all the commissions and concessions and transmission. All of a sudden, when you look at power, the component that we're protecting ourselves against, and the variability is not as big as people think. All those other costs are going up.
As a consumer, once you see that, you go, I mean, it's not like the price of energy went up. It's all the taxes and the concessionary fees and all the other things that are going on. Again, we're managing both regulated and unregulated and all the components of it and trying to create that predictability. 97% of our position's hedged this year globally. We're already putting hedges in place for 2024 and 2025. We will lock in our 2024 position as we come through the back end of the year. We're always nibbling. Again, all we're trying to do is provide predictability to the customer. Again, as prices move up, we're nibbling. As prices go down, we're nibbling, and we're taking chunks based on time and market conditions.
We stay within the an upper and lower tolerable range. Anyway, we've probably talked enough about it. You get a sense, I think we've got a very sophisticated and dedicated team that works hard at mitigating exposures for our customers.
Great. You brought up Digital Services earlier, and you've provided certainly some milestones, some data points for us. I do think investors would love to just get a little bit more granularity on the, you know, the size of it, how fast it's ramping, et cetera. What, you know, what color can you give us, or will we get more at the Analyst Day?
Pardon me. I think it's fine. It's just I keep on brushing against the mic. I'm sorry about that. Yeah.
You need your button.
Yeah, how about I just hold it? I can do that. Okay. Sorry, could you ask the question again?
Digital Services. Yeah.
Um-
Help us understand, you know, I think you talked about the importance of it. You know, what, how do we get more granularity around the size, the scaling of it, and the...
Well-
where it's going from here.
It's only 7% of our business today. I think as part of Analyst Day, you're going to get a better visibility. You know, Charles, again, has been very disciplined about how we invest in the business, how we're communicating it. I'm at a point where I'm starting to feel that we're seeing that momentum. I was telling some of the people in this room earlier today, I said I was in the New York office last week, and I was asking the guys that we're targeting the financial services business segment. I said, "What are you leading with these days?" They go, "Metal." They go, "Metal." They go, "Look, people love it.
They love the story. You know, obviously, we have some momentum, but it's such a small piece of our business. It's one, just over 1%, 1.5% of our business this year, likely. If you start to see that flywheel spinning.
Yeah.
That's what Charles has really been referring to that momentum, I think, is going to pick up. It's an alternative source of revenue for us, but it's an alternative source of infrastructure for our customers, for our partners. You tie that together with a fabric, 'cause again, we sell on a global platform. We're one platform. You can sell Equinix out of any market you want in the world, anywhere. That's the benefit of Equinix. We tie it all together. Digital Services is just another vehicle to create flexibility for the customer. Again, consuming physical infrastructure effectively at software speed. That feels like the right thing to do. The investment that we've made both in capital dollars and operating dollars has been healthy.
I think we're going to start to see the momentum pick up in our Digital Services. Again, it's not insignificant to our P&L. It's 7% today. When you look for 2023, it's going to be somewhere between 7%-8%. It's not an insignificant part of our business.
It probably helps with lead generation and retention and...
Lead generation, retention, expansion, you know-
Yeah.
More value on a per unit basis.
Right.
Again, it's an alternative use for our customers, our source of expansion, of globalization, and it's all digitally oriented. Again, Scott Crenshaw, who's our lead in charge of Digital Services, new to the business. He's been with us 6, 7, 8 months. I think he's making a huge difference. We have Jon Lin on the data center site, and we're very much measuring how do we bring all the businesses together. You've got xScale sitting over there. It's the combination of all three that make a huge difference for the customer. Again, I can actually see I can envision a future where Digital Services is resident in xScale, not in core, but enhancing the overall value of our platform. So you're doing great things for xScale. You're providing a digital solution.
You're not wasting your capital or consuming your capital at the core level. You're getting all the strategic value of digital and xScale coming into the core.
That's the medium term kind of?
I think it's much faster than the medium term.
Okay.
I think it's over the near term.
As the CFO, you've got to say no to a lot of things. How do you get comfortable that, you know, the team can, you know, get the money to develop some new products? Because you obviously go through this J-curve of investing and margin negative and hopefully for a long-term return. What's the calculus? Because it seems like, you know, you could have higher margins today if you wanted to, but that would be at the cost of, you know, the longer term.
Yeah. Look, I think as you can appreciate, I'm sure everybody appreciates in this room, you've got to make selective decisions. We have to do a better job of prioritizing. The problem we have at Equinix, there are so many good things we can work on simultaneously. There's never a transaction or deal that we don't want to work on. I'm not talking about M&A deals, just projects. We, we know what we can spend, and we have targets, both on an expense basis and a capital basis. We know the dollars that are coming into the business. The model in itself, sort of, it, it, self-solves. The team understands what our limits are, and we know what we're communicating to the street, and we want to live within that.
Now, if we can accelerate faster, which we have been, we're doing more business than people anticipated. We're above the levels of growth that we anticipated coming into the last Analyst Day. That gives you more firepower. I like to at least, if not just leave you with one thought. I think that there's enough momentum in the business, there's enough strand that we can do just about anything we want. I don't have a real challenge in trying to allocate dollars. We, as a company, as a leadership team, want to make sure we focus well on our priorities because there's just too many darn good things to do.
The thing that I know most people know this, it is such a comforting position to be in, knowing that we didn't over-rotate on our balance sheet, knowing that we were very disciplined about our growth. We're very moderate in how we're spending, and therefore, we have the cash in our balance sheet. We have the debt capacity. We generate the cash that people are expecting, both in dollar terms and as a % of EBITDA. FFO is a % of EBITDA. We get to retain the majority of the cash that we generate at roughly, you know, 58% of all cash that we generate, that we don't have to dividend it out. You've got, you know, as I said, leverage capacity. We're not over-levered.
From all the different aspects, we have more flexibility than others, and we're investing in things that others can't because now they're trying to think, "Well, how am I gonna fund the capital with cost of debt capital and equity capital going up?" It's a very different position for us. I love talking to our board about it because I talk about the advantages we have, and I do it, you know, contrast and compare. Again, you sort of understand our position.
Sure. You know, it's interesting. I was gonna come on to capital allocation, but, you know, there hasn't been a ton of M&A, you know, relative to what it was a couple of years ago. Obviously, we had, you know, private equity buying some of the smaller data center operators. You know, presumably, you get a lot of things shown to you all the time. How are you thinking about the M&A market today? You know, have prices reset appropriately? Or are you interested or is it more tuck-in stuff and focusing on what the organic growth?
Yeah. It's hard to imagine that the private market multiples are gonna stay where they were. People can't afford it. They can't... It just Most of those deals are DOA. They really are. If somebody wants to stretch so far, then I think that's gonna be a problem for them. In fact, one could even argue all these deals that have already been done, I'm not sure what, you know, when you look at the cost that was paid or the price paid and the cost of refinancing them, it's gonna chew up a lot of that value. We're gonna look for tuck-ins where we can.
It wouldn't surprise me if, you know, there's a number of deals out in the marketplace today if assets sort of shook their way free. We're not gonna chase anything. Because the best dollar invested for us on an allocated basis is a dollar back into our business. That's the highest return we can get. We have 49 projects currently underway, 35 markets, 23 countries, and we're further expanding. We're going into Malaysia, we're going into Indonesia, we're going to South Africa. Believe me, we're gonna go into other markets. If we can do it either through partnership or through partnerships, joint ventures or just organically, we will do that.
M&A I don't wanna say we won't do M&A 'cause, again, we're always gonna be wise to what's going on in the market. It's gotta be under Equinix's terms. We're not gonna risk the business right now.
Talked about the development pipeline. Where are we on supply chain? Where are we on construction costs?
Yeah. Supply chain continues to be constrained, just not as constrained. Construction costs have gone up, no surprise. Labor, depending on the market you're in. I mean, we all hear sort of the headline news about what's going on in tech space, but labor is still tight in a lot of markets around the world. You know, you have challenges with labor, you have challenges with cost, you have an elongation of the supply chain, cycle, although better than it was. You have a host of other things that cause you to go, "Wow, this is a tougher business to be in." Thank goodness we have the staff dedicated to all the areas that we need to focus on. Power delivery, power procurement, currency management, supply chain. Our procurement team is solid. Just it feels good.
We build our own substations now. People have no. They think we're a data center provider. We have to go deal with utilities and think of alternate fuel sources. We did that in Ireland. There's no. You can't build a data center in Ireland today. But we did. We've got two. One that just opened up, another one that's under construction is. They're both being pre-sold. We're using alternate sources of energy, and most people can't do that. Again, it's the level of expertise I think we're bringing to the table. I said in many of the meetings, thank goodness, I mean, in an odd way, so take it for what it's worth. Rates of capital have come up because anybody could have come into the space before and made money. Those who are disciplined and/or...
It is a hard business to be in. I think it, in this more disruptive environment, it's gonna benefit those that really know what they're doing. I would just say it's a harder business, so now it's gonna bring discipline and structure. I just think we're the best served because we've been at it for 25 years, and we've gone through a number of cycles that have been very unsavory. We thrive during that time because others are going, "Whoa." You can imagine as just some of the companies are going, "I'm not sure how we can invest in our future." Right?
Presumably that's important to prospective customers as well.
Absolutely.
They wanna go with somebody.
I think that the digital demand is gonna continue to be there. I think the flip side of the equation is I think supply could get constrained, and it certainly is in some markets. Anybody can put up a big box data center, but think about retail and how you have to operate efficiently with renewability and oversight and regulatory. I just think we're in a much better position that it is gonna be more constrained. Capital is gonna flow slower than it did previously. Yet we're gonna continue to push ahead 'cause we know what's going to happen down the road. We know where we wanna invest our capital. I think being there with dollars to spend, assets in the ground is gonna benefit the business.
Right. you talked about AI a little bit. I think one of the things that investors are focused on is what does this mean for the data center? We've seen Facebook take a pause as they reconsider data center design that may be more applicable to xScale. you've talked a lot about the green initiative. how is that evolving? You know, are your new data centers, are you making big changes to, you know, how you put them together?
Well, we're always looking at the data center for the future and what it means, how, you know, the, you know, how efficient it runs, how sustainable it is, how it consumes water or not. It's market dependent, it's circumstance dependent. The Facebook, you know, that to me is a Facebook issue, not an industry issue. It was them, I think, managing their capital. I think AI just creates another alternative source of revenue for us. Again, we're excited about. There's a lot of noise in the system, but it's not gonna be a sea change for us. It's already factored into what we think is gonna be a really good growth story for the coming years.
Great. Well, Keith, thank you so much for your time.
Good. Thank you very much. Thank you.