Equinix Inc (EQIX) — Q4 2017 Earnings Call Transcript

Good afternoon, and welcome to today's conference call. Before we get started, I'd like to remind everyone that some of the statements we're making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed on February 27, 2017, and 10-Q filed on November 3, 2017. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on Equinix's IR page at www.equinix.com. We have made available on the IR page of our website a presentation designed to accompany this discussion, along with certain supplemental financial information and other data. We'd also like to remind you that we post important information about Equinix on the IR page from time to time and encourage you to check our website regularly for the most current available information. With us today are Peter Van Camp, Equinix's Interim CEO and President; Keith Taylor, Chief Financial Officer; and Charles Meyers, President of Strategy, Services and Innovation. Following our prepared remarks, we'll be taking questions from sell-side analysts.

Thank you, Katrina. Good afternoon, and welcome to our fourth quarter earnings call. It's good to be joining all of you as we share our strong results for both the quarter and the full year. As I believe everyone is aware, I have assumed the role of CEO for an interim period. I'm fortunate to have held both the roles of CEO and Executive Chairman over my 17 years here at Equinix. I've had the privilege of working alongside our leadership team, playing an active role in their efforts, our strategy and every major decision the company has made in this timeframe. As we look forward, it's our opportunity to accelerate digital transformation, and our position as the underlying platform and stewards of our customers' digital infrastructure has me so excited about our future. I'm thankful that I can play a meaningful role in assuring our momentum continues as we outpace our industry. Turning to our performance, we just delivered our 60th consecutive quarter of revenue growth, a longer track record than any current S&P 500 company, and we're well on our way to deliver over $5 billion of revenues in 2018. We are investing more than ever before in our organic business, growing our strategy, services and innovation team to support new products and services, adding more quota-bearing sales heads as our business grows and supporting a broader initiative around customer experience. We continue to grow our global platform, adding 19,000 cabinets across 23 projects in 2017 and have a very active construction pipeline going forward. With more than 9,800 customers, we now serve 46% of the Fortune 500 and one-third of the Forbes Global 2000, with more to come as we continue to attract and add customers, transforming their digital businesses. Interconnection and ecosystems remain the core of our offerings, and with the Verizon assets, we now have over 277,000 cross-connects and record traffic volumes across our industry-leading exchanges. We have the most complete interconnection portfolio in the industry, and interconnection revenues continue to outpace colocation, growing 14% year-over-year on a normalized and constant currency basis. Our differentiated platform continues to drive our financial performance, and we delivered another year of record bookings activity. As shown on Slide 3, we generated $4.4 billion of revenue in 2017, up $756 million over the prior year, a 21% increase or up 11% year-over-year on a normalized and constant currency basis. We delivered over $2 billion of adjusted EBITDA, continuing to achieve healthy margins while investing significantly in the business and expanding our addressable market. This translated into AFFO growth of 14% year-over-year on a normalized and constant currency basis, further demonstrating our strong operating performance. Next, I'd like to provide more detail on the growth of Platform Equinix. Our unmatched global reach continues to be strengthened by our acquisitions, and we remain committed to pressing our advantage globally. In 2017, we completed 5 acquisitions, including the addition of 29 data centers from Verizon. And today, we announced our acquisition of the Infomart Dallas, one of the most connected assets in the U.S., for $800 million. The Infomart, a marquee interconnection hub for the Americas region, will enhance our global platform and secure our ability to further expand in the Dallas market, one of the largest enterprise and colocation markets in the Americas. The Infomart is home to four of our Dallas IBXs and will increase our percentage of revenues from owned assets to over 45% when it closes. We also signed an agreement in December to acquire Metronode, an Australian data center provider, for $791 million, which is expected to close in the first half of 2018. Australia is one of the fastest-growing cloud markets in the world, and this transaction provides us with an impressive national footprint, adding 10 more data centers in 6 metros. It strengthens our existing presence in Sydney and Melbourne and brings us to 4 new metros in Perth, Canberra, Adelaide and Brisbane. This acquisition also provides the opportunity to build additional capacity on these majority-owned assets. With the expected close of this acquisition, our platform will expand to 200 IBXs, 52 markets and 24 countries, providing customers with even more ways to securely deploy, connect and scale their digital infrastructure with Platform Equinix. We also saw great progress with the Verizon assets, which had dramatically boosted our scale and interconnection density in the Americas and outperformed expectations for the year. We are seeing healthy bookings in the Verizon assets from Equinix customers and continue to make progress to stem the previous level of churn. This year, we're expanding these highly utilized assets in select metros, investing over $160 million across Culpeper, Denver, Houston, Miami and São Paulo. We now have completed the majority of the Verizon integration efforts and expect to fully conclude this by midyear. Shifting to our interconnection portfolio. In December, we announced an important investment in the evolution of our global platform. We are connecting our IBXs physically and virtually around the world through the Equinix Cloud Exchange Fabric, enabling customers to discover and dynamically connect to any other customer across any Equinix location. With over 1,000 participants on the ECX Fabric, we will continue to invest in this platform as it evolves beyond pure cloud connectivity to a multipurpose interconnection exchange. We are also investing to ensure that our interconnection services are consistent, accessible and available on demand across our entire footprint. As part of this commitment, we've announced the expansion of our Internet exchange services to 9 new markets, which will bring our total IX platform count to 31. Now I'll make a few comments on our organic development activity. As we look across the business, we see a significant uptick in capital expenditures in response to strong underlying demand. With our high level of inventory utilization and a strong sales funnel, we have a very active pipeline for 2018 with 30 expansion projects currently underway across our platform, half of which are in EMEA, our most utilized region. Greater than 75% of this expansion CapEx is allocated to mature metros that generate over $100 million in revenue, where we leverage established ecosystems densities and our large installed base, allowing us to deliver market-leading financial returns. As previously announced, we're also building an organization that we refer to as HIT or the Hyperscale Infrastructure Team that will focus on developing facilities that are tuned to hyperscale requirements. Today, the majority of private interconnection nodes for the major cloud players are located in Equinix facilities, and we continue to invest heavily in future development and API integration. Our integration efforts with the major cloud players have provided us with deep insight into the evolving architecture of the cloud. In response to their request for Equinix to be a more full-range infrastructure provider, we have committed to accelerate our efforts to serve the large footprint needs of a targeted set of hyperscale customers. We will remain selective in pursuit of these opportunities but believe that participating in this space is important in maintaining and extending our leadership position in the overall cloud ecosystem.

Great. Thanks, PVC. Good afternoon to everyone. We had a great finish to the year delivering on our best-ever bookings quarter with particular strength in our cloud and network verticals. Also, as PVC mentioned, we had record bookings in both our EMEA and APAC regions, highlighting the value of our global platform. With 2017 now behind us, I also want to take this opportunity to highlight that we continue to track against our 2016 Analyst Day financial objectives to deliver healthy organic compounded revenue growth with strong flow-through to AFFO and AFFO per share. Additionally, our M&A activities, including the Verizon asset acquisition, have been accretive to our core financial metric being AFFO per share. At the same time, we've built strength into our balance sheet, raising both debt and equity to maximize long-term value for our shareholders. We're putting more capital to work than ever before, building capacity across our markets while enhancing our products and services. This will drive future profitable growth while accentuating the key points of differentiation between our business and that of our peers. I'll now review the full year 2017 results and offer some high-level commentary on 2018. Then I'll toggle to the fourth quarter highlights. Note that our 2018 guidance does not yet include the results of either Metronode or the Infomart acquisition, both of which are expected to close by mid-2018. Also, do note that we've adopted the new revenue standard, ASC 606, the impact of which is highlighted on Slide 12. And just one final note. All growth rates in this section are normalized and constant currency. So starting with revenues. We recorded revenues just under $4.4 billion for 2017, an 11% year-over-year growth rate, reflecting strong demand and an expanding market opportunity. In 2018, we'll deliver meaningful step-ups in bookings and revenues, fueling a 10% growth rate, excluding Verizon, and allowing us to surpass the $5 billion mark in annual revenue, an exciting milestone for the company. Our revenue guidance and corresponding growth rate absorbs a $54 million negative impact from our FX hedging program and the dilutive impact of the slower-growing but highly accretive Verizon assets. It's important to note that the Verizon sites are highly utilized, and as highlighted on our expansion tracking schedule, will receive much-needed incremental capacity, predominantly in the second half of the year. The revenue attached to the incremental capacity will be partially offset by the anticipated Verizon churn in 2018, resulting in low single-digit revenue growth on the Verizon assets in 2018. In 2017, we improved our adjusted EBITDA margin, excluding integration costs, to 48.2%, a 70 basis point improvement over the prior year as we continued to make progress towards our long-term 50% adjusted EBITDA margin target. In 2018, we're leveraging our business scale to maintain these healthy margins while absorbing the impact of the new acquisitions and investing in key growth initiatives, including strategy, services and innovation, quota-bearing sales reps and customer experience initiatives. For 2018, we expect our adjusted EBITDA margins to remain at 48.2%, excluding integration costs, or 47.6% on an as-reported basis. We expect to incur $35 million of integration cost for 2018 related to the Verizon, Itconic and Istanbul 2 acquisitions. 2017 AFFO was over $1.4 billion, higher than expected for the year. Looking forward, 2018 AFFO is expected to grow 7% over the prior year, including the incremental debt service cost in support of our future growth. AFFO for 2018 includes a step-up in the income taxes to a more normalized level as we incur some discrete tax losses in 2017 related to our foreign debt refinancing activities.

I have two questions, if that's alright. First, it seems that 2018 is set to be a more significant investment year than the market anticipated. Could you elaborate on the opportunities this presents and how it will position you as we approach the end of 2018? We're noticing some pressure on margins, but do you expect this to support growth that could exceed 10% as we look further ahead? Also, do you have any insights on when we might return to a 50% EBITDA margin?

Regarding the investment, it consists of two main components. First, the capital investment we are making, which reflects that we currently have 30 projects in progress and, following the completion of two transactions, we will operate in 52 markets. Consequently, our utilization levels are increasing, prompting further investments. Several of these will be initial phase sites from a capital standpoint. Additionally, it's important to highlight that we will be investing in the HIT program mentioned by PVC, and part of our capital expenditures will be allocated to that. On the operational expense side, we anticipate organic growth exceeding 10%, excluding Verizon. I want to emphasize that point. Furthermore, in terms of the core business, we expect to maintain a stable margin at 48.2% when accounting for integration costs. Importantly, this 48.2% margin includes the impact of Itconic, which is expected to reduce our margins by 30 basis points.

Tim, it's Charles. I would describe the overall pricing environment as disciplined with firm pricing. Our main focus is on yield. Even spot pricing, especially in the retail sector, remains stable. Globally, supply and demand appear imbalanced across all our markets, and we don't foresee significant instability in spot pricing. As a result, we can secure targeted deals and gradually increase yield from these deals through interconnection and power, which are crucial for our business. Regarding the hyperscale market, it is indeed more competitive and less differentiated, making it significantly more price-driven. This is why we have indicated that we will be selective in how we engage with that market.

So a little bit more of a follow-up regarding the dedicated hyperscale. So what is the estimated number of deals specific to hyperscale deals do you think you'll be doing each of these years? Is this going to be a 10 a year? Are you looking to only do 1 or 2 here and there? Is it going to be specifically targeted to Europe or Asia? Maybe can you just give us a little more color on the strategy for specifically dedicated hyperscale?

As I mentioned, we haven't fully assessed the size of the opportunity yet. However, we expect it to be a global enterprise. Currently, we see significant potential, especially in Europe, which has shown to be a strong market. We're leveraging our leadership position post-Telecity to accelerate growth in Europe, where we believe the best short-term prospects lie. Following that, we also recognize opportunities in Asia to meet hyperscale demands, which continue to present robust growth potential for hyperscalers, with the Americas coming in after those markets.

Just a quick question going back to the investments that have been made this year. You've obviously taken down quite a few acquisitions in the recent past. Just curious, maybe tying in with Steve's departure as well, I mean, should we expect that pace to continue? Or should we be in more of a digestion mode from an acquisition perspective?

I think as we talked about the strategy, we're going to continue to press our advantage. But I know we've done a lot of acquisitions, but we've been very selective about their strategic value and what they've meant to us. Clearly, broadening our footprint in EMEA was a meaningful one, and also Metronode in Australia giving us such a strong position in that market. Those made a lot of sense. And we'll continue to see those and look at them going forward. The operating plan, the strategy and everything we're pursuing this year has been set and in place. So ultimately, I think it's a business-as-usual year with the leadership team being very focused on carrying out the plan that's in place.

Great. Thank you. That concludes our Q4 call. Thank you for joining us.