All right. Good morning, everybody. Let's start. My name's Calvin Lam. I'm a Managing Director in the investment banking division at Morgan Stanley. Amongst one of my responsibilities is running the digital infrastructure banking practice. I'm joined this morning by Barry Hytinen, the CFO of Iron Mountain. Welcome back to San Francisco, Barry.
Thanks, Calvin. It's always good to be here.
Great. Let me read this very quickly first. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.comresearchdisclosures. If you have any questions, please reach out to your sales rep. All right, maybe to begin, I'd like to start with an observation. I think, you know, Iron Mountain has definitely evolved past being a physical storage company into a technology-enabled infrastructure company. I wanna help investors better understand that evolution because I think a lot of the trends and demand drivers that you're capitalizing on should be very familiar to investors at this conference, namely AI, data center infrastructure. Barry, for investors who still think of Iron Mountain as a, you know, a boxes and paper storage company, maybe you could describe what is Iron Mountain today?
Yeah. Thanks for that. That certainly is still our heritage and our core, the box storage, and that represents about 70% of the revenue of the company. To put that in perspective, about five years ago, it was 90% of the revenue, and it's a lot bigger than it was at that time. That part of the business continues to grow at a mid to high single digit growth rate. What we are today is, as you said, a technology-enabled infrastructure company that enables massive amounts of data and information to be analyzed and used by our clients. We do that through three distinct growth businesses.
We have a Asset Lifecycle Management business, which helps clients, both enterprise and hyperscale, data center clients to deal with their end of life of IT year, which is a secularly growing portion of the economy. It's a massive TAM, and it's very fragmented. It's a market that we think we can grow very, very significantly in, and I'm sure we'll talk about it more. We're operating in data center, where we are a operator and developer of third-party data centers. The vast majority of our leasing is to very large hyperscale clients, so very synergistic with that ALM business I was just mentioning, and very good return business. To put it in perspective, last year, we did a little over $800 million of revenue with a low 50s EBITDA margin.
This year, without even any additional leasing, just what we've already signed, we'll be well over $1 billion. If we didn't sign any more leases, and we just ran out what we've already sold in our backlog, we'd be well over $1.3 billion of revenue in, probably mid-50s EBITDA, and we've got a lot of leasing opportunity, which we'll probably talk about. On our digital business unit, is continuing to grow strength to strength. A few years ago, it was like a $150 million business. Last year, it exited the year on a run rate of $600 million annually, and it's got some very distinct growth areas.
What we're doing there is helping clients be able to unlock the power of a lot of dark data, information that they haven't historically been able to get access to. Through the benefit of AI, as well as a variety of other technologies that we built into our DXP platform, I think we're really meeting customers where they need a lot of help with respect to that sort of analysis process improvement. We're not the Iron Mountain that a lot of people used to think about, and we've guided this year to be $7.7 billion of revenue, nearly, you know, $3 billion rounded off of EBITDA, and we've been growing at a double-digit rate for several years now.
In light of the growth businesses that I just mentioned, we expect to continue to be growing at a double-digit rate, top and bottom line, for a very long time.
Great. Maybe we can talk about then you've got a ALM business, a data center business, and this digital solutions business. What's the kind of a unifying theme that ties together this collection of very unique assets?
Yeah. The company, I've been with the company about six and a half years now. You know, about 10 years ago, Bill, our CEO, and the team, I think they were really prescient, and they were intentional about looking for opportunities where we could invest in additional markets that we could cross-sell off of our core. One of the huge strengths of our business is that we have a very large B2B client base, 245,000 clients, the vast majority of whom have been working with us literally for decades.
They standardize with us on records, and we have the ability now with those three distinct offerings I just mentioned to cross-sell into those enterprise to essentially get more share of wallet and introduce a broader and broader set of services to those clients who already have been working with us, trust us, and we've got a great rapport with, and thereby expand our opportunity set meaningfully.
That's great. That makes sense. Let's drill down into each of those businesses. I'd actually like to start with the ALM or Asset Lifecycle Management business first, not only because I think the growth and the scope has surprised investors, but I think you've mentioned that you think it could actually be one of the largest business, if not the largest business at Iron Mountain in the future. Maybe just start, what is the ALM opportunity? You know, what are you doing for these enterprise customers? I think it would be helpful also to talk about what you're doing for the enterprises and what you're doing for the hyperscalers 'cause they're such a big part of this AI infrastructure ecosystem.
It's an immense opportunity, we've been talking about it for some time, now we're really starting, I think, to demonstrate the how significant the growth trajectory is in that business. Couple of market-oriented points first. ALM as a category is about a $35 billion TAM, it is a massive market. Interestingly, it's very fragmented. We're the largest player already in that marketplace. It's got two distinct portions of the businesses Calvin just talked about. There's the enterprise component of the business, and then there's hyperscale decommissioning. I'll talk about both of them. From a TAM perspective, the enterprise business is about, let's call it 70% of the TAM, and the hyperscale is about 30% round numbers.
The market itself is growing at kind of a mid to upper single-digit growth rate and expected to do that for a long time. Think about it like this. Like IT gear, it continues to become obsoleted and, or it continues to be refreshed. Clients have a distinct need because if you think about all of the IT gear that a corporate client would use, laptops, iPads, screens, printers, servers, what have you, the commonality is they all go obsolete eventually.
Right.
The vast majority of them have confidential information that is stored on them. Even printers have confidential information at this point. Clients are increasingly understanding that there is inherent risk in all of that old IT gear that they need to be very responsible about as it relates to the end-of-life cycle and/or recycle reuse. That's where we think we can really bring massive value to our corporate clients, and this is a huge cross-sell opportunity. All of the clients in our, you know, we deal with 95% of the Fortune 1000. We've been working with them literally for decades. All of them have the same use case that they need this. Today, those clients are using a network of many, think like dozens of small little IT Asset Disposition vendors. On average, they might be $50 million-$60 million of revenue.
It's like literally a mom-and-pop industry.
Yeah.
It's very spread out. Why is that? It's because there is no partner that is available to clients to do the same service for them all around the world, and that's what we're building. If you look at our business, Bill and the team started investing in Asset Lifecycle Management in 2017. By 2021, we had $38 million of revenue in this business. Only $38 million. Last year, we did $633 million, and this year we guided to doing $850 million. The business has got inherent considerable amount of growth because as we continue to cross-sell into clients, it's sort of a land and expand strategy.
Right.
It is a sticky business, and one of the challenges is that if you were working with 50 different partners in this kind of area, you know, kind of getting all that business back in one fell swoop is very hard. Landing, winning a specific market or a function or a portion of a business is what we're trying to do, and then expanding. To give you a sense, last year, we ended the year with about 350 of the Fortune 1000 as ALM clients. That was up 90 from the prior year. In every single one of those cases, our presence is very small. There's a huge opportunity just with the existing clients already to expand, as well as obviously getting all of the Fortune 1000 over time.
That business is a service-oriented model because most clients take the gear close to end of life, and so we make a decent margin on it, think like 20%-30% margins on the enterprise side. I expect that business is going to continue to grow on a secular basis for a long time, and we are tucking in selectively small acquisitions, think like $50 million revenue companies, that give us additional presence, give us capability in some markets. We're buying these on average between 5x and 7.5x trailing EBITDA, and they synergize down well below 5x rapidly. It's a very good incremental means to grow the business. On the hyperscale side, and this is 40% of our business. Last year, we were 60% enterprise, 40% hyperscale. On the hyperscale side, it's much more concentrated.
Think about like the top 10 cloud hyperscalers. They have very large fleets of data centers, as you all know. One of the commonalities is while the infrastructure they've built, the physical is going to be there for decades, they change out the gear inside there on average about every five years. Generally speaking, those servers still have considerable value left in them because they're retrofitting the gear for reasons of wanting to get better compute or better power efficiency. There's still inherent value in there. That's where we come in, and what we do is we take the servers from them, we wipe anything that's been written to. As you would imagine, with these sorts of clients, privacy, security is extremely important.
They want to work with a relatively few vendors because they are very, very interested in ensuring that anything that's been written to is completely dealt with. We physically disassemble the servers, and then resell the components. CPUs, drives, memory, et cetera. That is a revenue share model whereby if the client gives us a certain number of servers and let's say we harvest out the CPUs, and maybe we're selling those for, making the number up, $100, it's a revenue share model where we might get $20 of those dollars and the client gets $80. We're selling that into the used channel.
That part of the business does have some level of, as I mentioned earlier, concentration, as well as there's inherently a little bit more volatility in terms of it's like site by site in terms of data center decoms or what you're decommissioning relative to what's in the market from a pricing standpoint. Pricing on memory, as we've talked about, has been up appreciably for used memory. I expect in light of the supply-demand economics going on in that market, it'll probably continue to be up, you know, for the foreseeable future. That's a nice, you know, kinda incremental tailwind. The ALM opportunity, Calvin, is a huge one.
Yeah.
If... While the margins are thinner, I should note this, on the hyperscale side, 'cause it's a revenue share model, the total opportunity for us in ALM is really large, and I expect it will be our largest revenue business relatively soon, let's say the next few years. We're on a trajectory here whereby we can grow that business for a very long time at a very high rate.
Yeah. Actually, just to unpack that a bit, on the hyperscale decommissioning side, when you hear about all these hyperscalers spending record amounts of CapEx and putting all the gear into their data centers, are you benefiting from that current market dynamic now? Is it something in the future we should watch for?
That inherently is one of the reasons why we love the hyperscale decommission part of the business, is because it's got a very clear horizon for incremental growth going forward. While they're continuing to build their fleets out and putting in training and doing more cloud and developing inference locations, all that gear is gonna be recycled and reused in maybe, you know, five years. In some cases, it might be even shorter than that based on life cycles. So that is inherent, if you will, forward volume that's going to be coming out and coming to folks like us. In addition, you know, you think about what we're decommissioning this year, it was generally gear that was put into service in new data centers five years ago, and anything that was retrofitted five years ago.
Inherently, the fleets are getting much, much larger and a bigger opportunity. Furthermore, as IT gear gets relatively more expensive, this is on the new side, it generally probably bodes quite well for the price of used in the future, because, you know, the best indicator of what a used gear is that comes out is what did it go in for originally. We think there's a tremendous amount of volume and relative mix benefit going forward and, yeah, so it's good business.
That's on the organic side, and you touched on this a little bit in your comments. On the inorganic side for ALM, I know you've done a couple of deals in terms of acquisitions. Maybe talk about how those have tracked, what gives you confidence that there's more targets out there, and how the M&A playbook will factor in here.
Yeah. Generally where we've been acquisitive over the last few years has been on the enterprise side. We have pretty much all the capacity we need on the hyperscale side, we can move that up internally pretty well as we... You know, we've got a really good process there. We made an acquisition in that business several years ago. On the enterprise side, there's immense amount of targets. Our corporate development team that works for me is probably literally has a pipeline of, like, 300 deals, we're constantly talking because we're very choosy.
Right.
Also, you know, as you know, it takes a willing buyer and seller-
Right.
... and everything. We're, no offense, we're kinda cheap in terms of what we're willing to pay and because our alternative is to just build it ourself. We're paying between 5x and 7.5 x EBITDA, as I mentioned earlier. I'll tell you, we have been lucky. Our teams have found some incredibly great small businesses to acquire over the last few years. That has brought us incremental capability, it has brought us excellent management and very dedicated teams. You know, it's funny, this industry is made up of lots of small companies that have been around for, like, 10, 20, 30 years, and generally they're owner-operators.
Right.
In most of the deals we've done, in fact, as I think about it, every single one, it's been an owner-operator where we've acquired from, and we've been able to work on the economics of the transaction to incentivize the team to stay, work with us, and build what is a really big and fast-growing business. The synergies and the relative profitability we've been getting from the acquired businesses has outpaced our models in every single case on the enterprise side. I think you should expect that we will continue to tuck in, but again, these are relatively small deals.
Right.
Think, you know, $50 million revenue, 25% EBITDA margin. It's not a huge capital call, but it definitely helps supplement our growth. Importantly, almost all of these small players have got, like, one or two, I'll call them anchor clients, that might be 40% or 50% of the business, where they've got a large corporate client or two. What that helps us with is we can go in with that client and expand because we've got a better relationship at a C-level with those types of clients, and it helps us that much more on the organic side. A lot of organic growth, a lot of inorganic opportunity.
Yeah. That's really exciting. Maybe we can pivot then to another business of yours that's probably the most direct beneficiary of all the AI infrastructure spending, your data center business.
Yeah.
We've had some other operators come in at this conference and share their thoughts on, you know, what's going on. Would love to hear from your perspective, you know, how does your data center business look in 2026? Maybe you can comment on your pipeline, how you see, you know, demand trends being impacted by whether it's AI training or inference or... any other sort of geographies or sites that you're particularly focused on.
First I'll give a little bit of a thumbnail on our data center business in total. As I mentioned earlier, last year we did about $800 million in revenue, low 50s EBITDA margin. This year we're gonna do well over $1 billion of revenue, low 50s EBITDA margin, and we expect our margins will be up year-on-year in every quarter this year. The margin continues to enhance because the deals we've been writing over the last few years, which will commence going forward are high return opportunities. As it relates to what we're operating today, we operate 488 MW across the globe, and we're about 98% leased on that. We have almost no vacancy.
We are under construction on 190 MW, of which we're like 70% pre-leased.
Mm-hmm.
The pre-leasing is to the major cloud hyperscalers, you know, investment grade type companies with 10-15-year leases on average, and at, you know, 10%-11% cash on cash on levered returns are what those deals are written to. We don't consider ourselves like a speculative builder. We are looking to pre-lease the asset before generally we put the shovel in the ground. We have an addition to the 490 or so that we're operating, the 190 that's under construction. We have a held for development land portfolio that's about another 660 MW. We got a lot of track record here in terms of what we've been able to do, as well as a big trajectory for growth.
If you look at our pipeline that you asked about, the first thing I usually emphasize to folks is that over the next two years, we have 400 MW that will energize that we have not yet leased. Of that, about 200 MW of that will be energizing in the next 18 months. These are all in what I would describe are great locations for cloud inference, and that's what we generally are selling and leasing to our cloud hyperscale clients. Think about we've got 175 MW or so that will energize over the next few years in Northern Virginia and Manassas on our campus there. We've got 200 MW in Richmond. We've got 100+ MW in India, 80 MW in Madrid.
We've got access to power coming available and for megawatts to sell in London, in Amsterdam. Highly attractive markets for cloud players. Last year, we leased a little over 60 MW. Over the last four years, we've averaged leasing over 100 MW a year. One of the challenges we had last year was we just didn't have a lot that was energizing soon.
Right. Right.
Over the last 12 months or so, we've gotten that much closer to that energization. Generally, we're finding that hyperscale clients are interested in leasing somewhere between, let's say, 12 and 18, 20 months in advance of the energization. That's a really good timeframe for us because we can build the data center in that timeframe and even in 11 months, 10 months, that sort of thing. It enables us to be, I think, very efficient with our capital deployment, build the sites that clients need. On average, we're doing like a 30-40 MW single tenant lease-
Right.
... at that kinda 10-15-year duration, very good returns. I think, Calvin, as we said on our earnings call recently, our pipeline has grown considerably. It is robust in we have a lot of, you know, kind of 30, 40-ish MW deals. We have clients talking to us about much larger opportunities as well. Look, we guided to doing 100 MW of leasing this year, I think the opportunity is over the next, let's say, 24 months is very big because we have so much power energizing, and frankly, power is in limited supply out there.
Sure.
We feel quite good about the opportunity we have and the conversations we're having. It's a lumpy business, as you know, 'cause we're taking down, you know, good-sized deals, one at a time. Yeah, I feel very good about our data center business.
We definitely heard the theme on power being scarce, and, you know, the fact that you have so many megawatts energizing, I think is helpful. Maybe how does that impact or translate into pricing or returns or yields on these investments that you're making?
You know, we're very pleased with where our target return is as we're writing these deals of the 10%-11% cash on cash on levered kind of, you know, sort. Occasionally see a deal that might be a little bit beyond that. Generally, we're not doing anything below like a 10%, because as you point out, the power is quite constrained out there. We have power coming available in, what I would say, are tier one locations for cloud inference.
Right.
There's just more activity, and frankly, all those large language models that they've been training in very big gigawatt locations, they monetize them through inference going forward.
Right. Right.
There's just I think there's a really big market opportunity there, and yeah.
Okay. Maybe we can pivot to the third business that you have, and I'll bucket this as the records records business. Maybe I'll ask two questions, and then you can answer them in the order you see fit. The first is, you talked about your digital solutions business. Would love to understand how that is impacting your records business. What's the growth curve there, and what's driving it? Second, on the records business itself, despite all these trends that we've been talking about, that business has been super steady, durable, cash flow generative. Why is that business so resilient? What drives that? And maybe you can talk about some of the drivers there.
Yeah. I'll start with the digital based on your questions. The digital business for us is one that has grown immensely over the last few years. It wasn't that many years ago, it was a $150 million business. We exited last year on that level on a quarterly basis. We exited last year at $600 million of revenue run rate. That business is all about helping clients with digitization, monetizing information that they didn't previously have access to, meta tagging, and being able to do analysis on what has essentially been dark data for them. There are immense use cases, and frankly, AI is just a tailwind here because it's enabling us to do things for clients that historically wasn't cost-effective to do. That creates many additional use cases.
Our guidance for that business is to grow, you know, 20%+, frankly, we've won some really large deals. The IRS is one that we talked about publicly. The United States Government spends an immense amount, hundreds of millions, processing paper tax returns.
Right.
Most people think, how could there be a paper tax return? There are still a whole lot of them. We and three other tiny vendors won a large contract. It's five years in nature. If we got all of the business, we revenue about $150 million, let's call it, $150 million of annual revenue. Now, we probably won't get a 100% share, but we expect to get the vast majority of the business over time. This year, we guided to that business being $45 million of revenue. Last year was only $6 million. We looked out to 2027 on our most recent call and said that business will probably be north of $100 million, potentially much more than $100 million.
Right.
You know, when you think about the inherent growth that we already have in our core business for digital, those businesses, those client relationships that we've already won, and that business, by the way, is increasingly recurring. It's a much more durable and stable business as we get more recurring business into it. It will just inherently grow faster over the next couple of years because we've got the IRS tailwind. Importantly, I'll tell you, things like DOGE and government efficiencies, those are a tailwind to our business because they are creating incremental opportunities for us to help clients like the Internal Revenue Service with that sort of digitization, and meta tagging type of work that's inherent in our proprietary software system that we've developed, which we call DXP. There's tremendous numbers of use cases-
Right.
... for that across our corporate clients as well as across government. We're in the process of talking to governments in the U.K. and throughout Europe about similar types of deployments, as well as on the corporate side. We already do a tremendous amount of like back office mortgage processing in the United States and in India, among other markets, do auto loans. Anything that has a physical and digital component with manual, generally, we can help simplify, significantly drive a considerable value for the client and build our business, which is very sticky. On the records business, you know, we don't have a lot of time, but I'm very passionate about this business because it's, you know, the investment community has historically not, I'd say, given it much respect, but it is an incredibly strong business, very durable.
The company has grown organic storage records-
Right.
... revenue for like four years in a row, Calvin, organically.
Right.
Our volume, the paper records that we store, we have never stored more than we are storing today. We store over 740 million cu ft, which is a number that's kind of very hard to get your mind around. It's a massive amount. Our clients send us new boxes on a routine basis. In some cases, it's every week. In other cases, it's every month. Why do they send us these things? It's because they need them in the future. They may need them, and they want chain of custody is important to them, security, privacy, and they standardized with us in most cases decades ago.
Right.
Inherently, we are offering them a very significant value. While we have the ability to generate revenue management actions year by year, we're not looking to find elasticity in the model because the records business leads to all the cross-sell that we've just been talking about. All of our records business, or at least let's say the top half of all those client relationships, could easily be ALM clients or digital solutions clients. In some cases, they're already colo clients in our data center business. It's a business that inherently, we think can continue to grow at kind of that mid-single digit plus rate. It generates tremendous cash flow. It requires almost no capital to continue to grow. Our team is executing quite well. Our operations team did a phenomenal job last year continuing to improve margins.
We expect to continue to improve margins in that business again this year. It is kind of the secret to the success because unlike other data center companies, we have retained cash flow-
Mm-hmm.
... coming out of our core businesses. Our core businesses, and I would add ALM and digital to this, they don't require a lot of capital to grow. While data center is a very capital-intense business, we start each year with like, now going forward, probably $400 million-$500 million-
Right. Right.
...of retained cash flow. We're gonna generate $1.5 billion- $2 billion of operating cash flow this year. Our maintenance CapEx is about $150 million. You got our dividend. Right there, you've got like $400 million or $500 million that we can then put into growth, which is principally data center. We have, I'd say, a balanced view on capital allocation. We target leverage at 4.5x-5.5 x. We just achieved 4.9 x on that at the end of the year. That's the lowest we've been in like, I don't know, 20 years.
Wow.
We aim to be kind of right here at the 5 x level. With growth of EBITDA, with that target leverage, together with the retained cash flow, we can more than fund our data center build-out.
Right.
It's a very virtuous cycle in our businesses.
That makes a lot of sense. You touched on the capital allocation and capital return policy. I mean, you've-
...increased your dividend now, you know, four times in the last four years. How do you think about that portion of it versus investing?
Yeah. For years now, we've been saying as a company that we're targeting like low 60s% of AFFO for the dividend. There were some years ago when I first joined the company, we were much higher on that percentage. We didn't raise the dividend for several years because we said we're going to get it down into that target ratio. That ratio, by this way, kind of approximates our REIT minimum, generally speaking. Our AFFO is growing double-digit, therefore our dividend grows double-digit because we're gonna stay in that target range. It's not a huge like incremental capital use when we think about deployment. What investors should be expecting is, as we continue to grow AFFO at a double-digit rate, the dividend will as well.
That makes sense. That makes sense. Maybe I'll ask one last question then as relates to capital strategy and financial solution. As you continue to invest, what are the metrics or milestones that you're focused on in ensuring that the growth is profitable and sustainable?
Yeah. It's situational business by business, of course. On the data center side, we're just very returns focused in terms of what we're writing. We're trying to be very disciplined that it needs to be 10% or better cash on cash on delivered return. There's no reason to go lower than that because, you know, there's supply-demand balance. Frankly, you know, that's we feel like the right return level 'cause it's very capital intense. From on the digital solutions business, it's about continued drive, operating scale, efficiency, and right contracts that are recurring where we can continue to do what we've done on our records business for years, which is drive incremental profitability in those businesses, hone the processes we're doing for clients and generate incremental profit as we move forward.
On the ALM side, I talked a lot about the hyperscale side, but on the enterprise side, that business has inherently margin opportunity as we drive incremental operating scale and we become a larger and larger player in that market. I mean, we're dealing with a business last year that was a little over $600 million. It's gonna be, I think, in the billions in the next few years. There's a lot of inherent margin opportunity in there. Then in the core business, I mean, that's kind of that's what we've been doing for years here.
Right. Right.
The team has driven over the last decade, like in excess of 1,000 basis points of margin improvement in that part of the business, and we're not done.
Okay. Well, that's great. Maybe we'll end there. Thank you for your thoughts today. Have a good rest of the conference.
Thank you, Calvin. Appreciate it.