Equinix Inc (EQIX) — Q4 2019 Earnings Call Transcript

Thank you. 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'll be 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 22, 2019, and 10-Q filed on November 1, 2019. 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. We will provide non-GAAP measures on today's conference call, and we provide a reconciliation of those measures to the most directly comparable GAAP measures, along with the reasons why the company uses these measures in today's press release on the Equinix 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 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 Charles Meyers, Equinix's CEO and President; and Keith Taylor, Chief Financial Officer. Following our prepared remarks, we'll be taking questions from sell-side analysts, and in the interest of wrapping this call within an hour, we'd like to ask these analysts to limit any follow-on questions to just one. At this time, I'll turn the call over to Charles.

Thanks, Kat. Good afternoon and welcome to our fourth-quarter earnings call. We had a strong finish to 2019, and the momentum within the team and across the business is clearly evident, reflecting solid execution of our strategy and indicative of the tremendous opportunity in front of us. We closed over 17,000 deals in 2019, demonstrating the extraordinary scale of our retail go-to-market engine and the differentiated nature of the Equinix value proposition. The pace of digital transformation continues to accelerate, creating seismic shifts across industries as businesses embrace interconnection as critical to their infrastructure strategy and adopt hybrid and multi-cloud as the clear architecture of choice. The secular forces driving demand for digital infrastructure are as strong as ever, expanding the Equinix addressable market as customers seek to distribute infrastructure globally. Responding to increasingly demanding workloads and the need to locate and interconnect private infrastructure in close proximity to a rapidly expanding universe of cloud-based resources, we continue to focus on four critical vectors to position the business for significant value creation in 2020 and beyond. First, we will invest in our people, our organization, and our culture to attract and inspire market-leading talent. Second, we will continue to evolve and grow our go-to-market engine, targeting the right customers with the right workloads in the right locations. Third, we will continue to invest in Platform Equinix, expanding our global reach and adding new services. Finally, we will focus on simplifying and scaling our business, implementing targeted digital transformation initiatives. Expanding our reach remains a core tenet; we now operate across 55 metros in 26 countries. The benefit of our unparalleled reach is reflected in strong cross-regional activity, which continues to trend positively with multi-metro customer revenues ticking up 87%. We also continue to make significant progress with our hyperscale strategy, with six announced projects underway across all three regions, and a strong pipeline of customer demand. Turning to our results, revenues for the full year were $5.6 billion, up 9% year-over-year, adjusted EBITDA was up 10% year-over-year, and AFFO was meaningfully ahead of our expectations for the year. Interconnection revenues grew 14% year-over-year, driven by strong customer response to the Equinix Cloud Exchange Fabric, good traction in our new Internet exchange markets, and solid interconnection adds. Our interconnection differentiation continues to pay dividends as we expand our product set, driving growth and customer value. Our longer-term vision for Platform Equinix continues to take shape, influenced by direct feedback from our customers and partners. We expect the Packet transaction to close in Q1 and look forward to updating you further on our platform strategy.

Thank you, Charles. Good afternoon to everyone. We delivered $5.6 billion of revenues with a year-over-year growth rate of 9%. AFFO per share scaled to $22.81, better than our expectations as we drive value on both the top line and the per-share level. Our strong fourth-quarter performance sets us up nicely to invest in growing and scaling the business in 2020. We have an active construction pipeline, expanding our global platform with 32 projects currently underway across 23 metros in 15 countries. Our financial strength remains a significant strategic advantage. For the quarter, global Q4 revenues were $1.417 billion, up 8% over the same quarter last year, and we had our second-best gross and net booking quarter. Interconnection revenues were very strong across all three regions, reflecting the benefit of our global platform and diversified product portfolio. Our EMEA region saw continued growth throughout 2019, largely driven by our four largest markets: Amsterdam, Frankfurt, London, and Paris. On the capital structure, our unrestricted cash balance was approximately $1.9 billion. We expect 2020 adjusted EBITDA margins of 48% and that AFFO is expected to grow 11% to 14% compared to the previous year. Our 2020 revenue guidance includes $18 million to $22 million of revenue attributed to Axtel, and we expect MRR churn to remain in the targeted range of 2% to 2.5% per quarter for the year.

In closing, 2019 was a great year for Equinix. We took significant strides and continue to execute effectively on the ambitious agenda we outlined, positioning the business to effectively scale and capture the enormous opportunity ahead. We aggressively worked on the balance sheet side of the business, raising more than $4.5 billion in debt and equity, and achieved an investment-grade credit status. The market is taking notice, as we were recently recognized by IDC MarketScape as the top leader in their inaugural worldwide colocation and interconnection vendor assessment. In 2020, we'll continue our focus on evolving Platform Equinix, adding new capabilities to better meet the digital transformation needs of our customers. I am excited about the future of Equinix and honored to work with our dedicated teams around the world in service to our customers, communities, and shareholders. So let me stop there and open it up for questions.

Thanks very much. I wanted to ask an operational question and then a question about xScale. So on the operational side, I wondered if you could call out any trends that you saw around sales cycles lengthening or shortening closing rates? Any different than what you've seen in book-to-bill that is any different from what you've seen historically?

Sure, Jon, I'll take the first one and maybe the first couple and maybe you can comment on book-to-bill. In terms of win rates in sales cycles, I wouldn't say any meaningful change. I do think we're getting a bit better, particularly in targeting the enterprise space. We're probably seeing some shortening of sales cycles, but once landed, I definitely think we're seeing a shortening in terms of our ability to expand our wallet share with the customers. And then win rates, I think are probably pretty stable if anything going up, as we're doing a really nice job of targeting. Overall, we've been very pleased with the performance of the go-to-market engine.

Jon, I just want to mention that there is no meaningful change in our book-to-bill, and we are seeing that everything is happening exactly as we planned. But there is no meaningful shift in what I call the book-to-bill interval in the business.

And then one more operational question just in terms of churn. And as you look at 2020, are there any influences this coming year different than we saw in 2019 related to customer migrations or really anything else?

No, I would say it's pretty linear extrapolation of what we saw last year. Some of the pressure on stabilized asset growth is coming from the fact that there is some level of cloud substitution. But as we said, we've been comfortably living within the 2% to 2.5% range and we continue to feel comfortable with that going forward.

And then my xScale question is, just any sense around timing, around JV arrangements outside of Europe and how they might differ structurally from what you have in place already? And then for xScale Europe JV that's already in place, how do we think about the impact on AFFO per share?

In terms of timing, we've learned not to draw too bright a line, because the complexities associated with getting these things closed out from a tax and treasury standpoint always seem to be more than we think. But I would say that I think we're making really good progress, and I think you're going to see good momentum in 2020 for us on the xScale side.

As it relates to the impact on the quarter on xScale, the largest impact you really saw was the amount of cash that came into the business, and there are milestone payments to come over the next 12 to 24 months. The momentum Jim and his team see in the marketplace is substantial, so from our perspective, there are no surprises running through the fourth-quarter results.

Can you dig into what gives you the confidence in the 2021 expansion and development after what looks like a robust 2020 plan as well? Thanks.

I think right now we have a better multi-year view of the customer opportunity in the funnel than we've ever had. If you look at fill rates and the trajectory on our fill rates, the secular forces driving overall demand for infrastructure are strong. We're hearing that from our customers and they’re responsive to our long-term vision for the platform. We feel very good about the projects underway right now and about 2021.

The beauty of our plan is that we have 32 projects underway across 23 different markets, giving us visibility. Given the strength of our pipeline and the momentum that we saw in 2019, that's what gives us the confidence to continue to build, particularly where we're among the few that is building.

As it relates to your 2020 guidance, have you turned the corner with the Verizon assets and is this the year you're starting to see growth? What's driving this positive dynamic and what would be the long-term growth rate that you would see in that business or region?

We feel like we're going to be able to see a return to growth and optimistic that we’re going to see that business pick up in growth as we move towards the end of the year.

We've always said that we'll always grow the business faster if we want, but we focus on pricing discipline and going after the right customer and the right opportunities, which gives us confidence on our guidance.

One last comment is that the continued globalization of the selling engine is really important to contributing to growth.

Maybe just as a follow-up. Are you seeing any shifts in the underlying trends in the industry that are giving you increased confidence in your ability to achieve your current long-term growth objectives?

Digital transformation is an absolute priority at the board level in almost every company we are talking to. They are investing behind these trends, and they need to deploy infrastructure globally. Our unique position facilitates this transition better than anyone else.

It looks like EBITDA margins are coming in a bit in 2020. Can you parse through the impacts in more detail? How much from higher utility expense is taxes? And then, can you talk to where those investments are being made?

If you look at 2020, we're seeing some specific items that impacted our ability to drop operating leverage to the bottom line. We chose to invest in the platform evolution, growing the go-to-market engine, and that gives us confidence in sustaining AFFO per share growth.

The EBITDA margins will improve as we progress through the year, so you should see our margins continue to go up as we implement our initiatives.

Does the Packet acquisition reflect a shift in M&A strategy in any way? Should we expect future acquisitions to be more focused on the services front versus new markets?

We will continue to view geographic expansion of the platform as a strategic priority, and we believe that M&A will be a vehicle for us in both geographic and capabilities expansion.

If you look at it on a quarterly basis, Q1 theoretically will be our lowest guide and as each quarter goes by, you would see improving EBITDA margins.

On the greater than 5% Americas growth, should that be thought of as a fourth-quarter 2020 growth number, not a full 2020 over 2019 number, correct? Also, is the 3% to 4% stabilized growth recurring or total?

Yes, we see it growing throughout the year as we're trying to say so, it’s more second half than the first half. And the 3% to 4% is recurring growth.

You had previously guided to greater than 50% EBITDA margins by 2022 at your 2018 Analyst Day. Is that still your expectation?

We believe the 50% is achievable, but we're not willing to trade off long-term value creation for achievement of a near-term margin objective.

Cabinet adds in 2019 were lower in aggregate across all regions compared to 2018. What's your expectation for cabinet adds this year? How should we think about that number year-over-year in '20 versus '19?

You will always see a bit of lumpiness in that, but I do think there is a little bit of downward pressure, but that should be viewed as a reflection of the strength of the core strategy and not a negative.

Can you give us an update on where your customers are from a grooming perspective for interconnection? And how that could play over the course of the year?

I think we're going to see it tapering through 2020, as a lot of our customers are advanced. We guided to 7,000 to 9,000 interconnections this year, and I think we'll see a strong interconnection year.

Are there any other products that you think you need to have in your arsenal there to service the customers? Are you rethinking that to a certain extent, maybe with network or other things?

We continue to embrace a strategy of building ecosystems, where people can bring value, combining with what we do and solve customer problems.

Keith just on the leverage, can you comment on how you're thinking about leverage? Is it more optimal to stay in the upper half of that range? And are you seeing any opportunities to buy in more of your real estate?

We're currently 3.7 times levered, which is well within our guided range of 3 to 4. Given our operating leverage, we're in a deleveraging scenario, which gives us flexibility on capital deployment.

There are specific circumstances that may change timelines, but I wouldn't say anything is significantly extending project timelines. Our construction teams are continuing to work on this.

What is the ramp like in terms of how they add cross connects? Are you expecting one big wave when they launch the product or a steady stream of demand?

They're very thoughtful organizations that we work closely with in terms of capacity planning, and we're excited about the continued tailwinds for the interconnection business.

It looks like the 2020 guidance assumes no equity issuance. What's the thought process around that? Should we expect you guys to dribble out through the ATM or any other method?

We’re going to take a strategic posture on equity issuance, whether it’s through our ATM or other means. We’re in a very good position from a cash and liquidity perspective.

How would you describe the source and durability of the competitive advantage for Packet?

The durable advantage still resides in what core Platform Equinix delivers, and Packet allows us to animate that same value proposition via a different consumption vehicle for our customers.

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