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Iron Mountain Inc

Exchange: NYSESector: Real EstateIndustry: REIT - Specialty

Iron Mountain Incorporated is trusted by more than 240,000 customers in 61 countries, including approximately 95% of the Fortune 1000, to help unlock value and intelligence from their assets through services that transcend the physical and digital worlds. Our broad range of solutions address their information management, digital transformation, information security, data center and asset lifecycle management needs. Our longstanding commitment to safety, security, sustainability and innovation in support of our customers underpins everything we do.

Did you know?

Carries 118.2x more debt than cash on its balance sheet.

Current Price

$106.97

+2.14%

GoodMoat Value

$69.80

34.7% overvalued
Profile
Valuation (TTM)
Market Cap$31.62B
P/E218.68
EV$48.71B
P/B
Shares Out295.59M
P/Sales4.58
Revenue$6.90B
EV/EBITDA24.02

Iron Mountain Inc (IRM) — Q2 2018 Earnings Call Transcript

Apr 5, 20269 speakers6,131 words44 segments

Operator

Good morning, and welcome to the Iron Mountain Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I now would like to turn the conference over to Melissa Marsden, Senior Vice President of Investor Relations. Please go ahead.

O
MM
Melissa MarsdenSVP of IR

Thank you, Keith. Hello, and welcome to our second quarter 2018 earnings conference call. The user-controlled slides that we’ll be referring to in today's prepared remarks are available on our Investor Relations website along with the link to today's webcast. You can find the presentation at ironmountain.com under About Us/Investors/Events & Presentations. Alternatively, you can access today's financial highlights press release, the presentation, and the full supplemental financial information together as one PDF file by going to investors.ironmountain.com and refer to Financial Information. Additionally, we have filed all of the related documents as one 8-K, which is also available on the IR website. On today's call, we'll first hear from Bill Meaney, Iron Mountain President and CEO, who will discuss highlights and progress toward our strategic plan followed by Stuart Brown, our CFO, who will cover financial results. Referring now to Page 2 of the presentation, today's earnings call, slide presentation, and supplemental financial information will contain forward-looking statements, most notably our outlook for 2018 financial and operating performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, the earnings call presentation, supplemental financial report, and the Safe Harbor language on this slide as well as our Annual Report on Form 10-Q which we expect to file later today for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results and the reconciliations to these measures as required by Reg G are included in the supplemental financial information. With that, Bill, would you please begin?

WM
William MeaneyPresident and CEO

Thank you, Melissa, and hello, everyone. We’re pleased to report another strong quarter of financial and operating results that demonstrate the durability of Iron Mountain’s global storage rental revenue, the relevance of some of our new service offerings, and continued progress against our 2020 strategic plan. Our performance, outlined on Page 3 of the presentation, is on track with our full year expectations as illustrated by total revenue growth of 11% on a constant dollar basis, strong growth in adjusted EBITDA with a 130 basis points increase in EBITDA margins, continued durability of our storage business with internal revenue growth of 2.7% for the quarter and 3.2% for the year-to-date after adjusting for last year’s data center early lease termination fee. Strong internal revenue growth of 7.6% for the quarter and 4.2% year-to-date was driven by solid growth in our digitalization and special projects business, as well as shredding and further expansion of our global data center platform both through internal development and acquisition, including EvoSwitch based in Amsterdam, a top 5 global market. Globally, we continue to see growth in internal storage volume. However, you will see us increasingly emphasize yield management when looking at our developed markets as we continue to maximize yield rather than market share by focusing on net operating income per square foot. In our other international segments, total internal revenue is driven more by volume, where organic volume growth was 3.8% in the quarter. In developed markets, which include our North American Records and Information Management, North American Data Management, and Western European segments, we achieved internal storage revenue growth of 1.3% for the quarter, driven by revenue management, despite a 1% decrease in internal records volume on a trailing 12-month basis due in part to an uptick in destruction related to the release of legal hold. New volume from existing customers globally was stable in the quarter, and we continue to prioritize volume from new customers supported by our focus on penetration of unvended segments such as the midmarket and the U.S. federal government. Turning to Slide 4, we continue to make progress on the execution of our strategic plan. As you will recall, we are extending our durable business model through continued nurturing of our developed markets, expanding into faster growing emerging markets, and investing in storage-related adjacent businesses such as data centers and art and entertainment services. We continue to listen to our customers and identify new opportunities to provide innovative solutions in services to both new and existing customers. The significant growth in internal service revenue in the second quarter was largely driven by growth in shredding, mainly due to higher paper prices, a higher level of destruction of records, and growth in customers. We’re also seeing good growth in our digitization business. An example of this is a project we are undertaking for a major North American bank that is challenged by application form accuracy and turnaround times from their third-party resellers. The bank found its vending process had been taking up to three days, with higher than acceptable error rates representing lost revenue. We proposed a complete solution for tens of thousands of files, ensuring the bank's files are now securely uploaded for ingestion into their systems and applications, which are securely stored electronically for future retrieval. Paper documents are stored according to retention policies and later securely destroyed. As a result, this customer has been able to reduce their SLAs for new accounts down to 24 hours and virtually eliminate errors in keying. We’re excited by the potential for similar projects within our information governance and digital solutions business as our customers increasingly see us as a critical go-to partner for effective management of their hybrid physical and digital information management needs. Our newly announced partnership with Google only reinforces this. Turning now to emerging markets for our records management business, we continue to see solid internal growth as well as attractive acquisition opportunities. During the quarter, we closed on two transactions in EMEA, leveraging our scale and infrastructure in these regions. Our deeper penetration into these faster growing markets supports enhanced market leadership, and we expect to drive margins higher. As I noted earlier during the quarter, we closed on the acquisition of EvoSwitch for approximately €205 million or 14x 2018 adjusted EBITDA, giving us 11 megawatts of existing data center capacity in the Netherlands, which is 100% leased with the expansion capability of an additional 23 megawatts for a total potential capacity of 34 megawatts. EvoSwitch operates one of the largest colocation facilities in the Amsterdam region. Its existing campus supports more than 50 connectivity and telecommunication providers, and it has an attractive diversified base of global customers, including multinational enterprises, cloud service providers, and public sector institutions. The Amsterdam region is the second largest data center market in Europe, enhancing our presence in what I’ll refer to as the FLAP data center markets: Frankfurt, London, Amsterdam, and Paris, following our entry into London earlier this year through the purchase of a data center facility from Credit Suisse. In addition, we broke ground early in the third quarter on a new building at the IO data center campus in Phoenix, one of the fastest growing markets in the U.S. The new building can ultimately accommodate 48 megawatts of capacity, with the first of two phases of construction scheduled for completion in June 2019, delivering 24 megawatts. When combined with current and potential capacity at the Phoenix campus, this will be able to support approximately 100 megawatts in one of the U.S.’s highest absorption markets. You can see from our reported results for the data center segments that we are on track for annualized results of more than $200 million in revenue this year and $115 million to $120 million of adjusted EBITDA after normalizing for the full quarter contribution from the EvoSwitch acquisition. Driven by the acceleration of enterprise data center outsourcing to third parties and the attractive growth characteristics of the business, we have shifted some of our growth capital from acquisitions in the records management business towards development with our existing portfolio of data center opportunities. Stuart will have more on these minor shifts to our capital allocation guidance shortly. I’m sure many of you saw the announcement earlier this week of our partnership with Google that I referenced earlier. Starting in September, we will offer joint solutions that allow customers to unlock their physical and digital data to enhance insights, improve decision making, and uncover new revenue opportunities while ensuring data privacy and security. Our customers increasingly ask us how we can help them create value from their data, so they are not missing opportunities to mine that data to uncover new revenue. We believe the combination of our customer base comprising more than 95% of the Fortune 1000, with deep industry vertical expertise together with Google’s machine learning and artificial intelligence capabilities, can help customers make their physical and digital information more useful and accessible while keeping it safe. Although it is early days, we are excited by the potential represented by this partnership with Google. Our expansion in the data center business and this new partnership with Google are great examples of how we are seeking to enhance investment returns while also supporting customers’ storage and information needs across a broad range of formats and asset types, whether physical documents, hybrid physical digital records, backup tapes, digital data in the cloud, or physical space and power within our data centers. These offerings are all part of the information management ecosystem for which we’re developing offerings such as Iron Cloud and other SaaS solutions. Our fine art, entertainment services, and other adjacent businesses align with our focus on maximizing yield. In fact, if you look at the net operating income we’ve generated on a per square foot basis on Slide 5, we have continued to grow this across our range of storage businesses. As shown on Slide 6, we expect the consistent internal revenue growth in our internal business together with the expansion of our data center platform and recent transactions in other adjacent businesses to drive faster growth with improved margins over time. Before acquisitions, we are well on track to achieve a business mix delivering adjusted EBITDA growth in excess of 5% before acquisitions by 2020. Year-to-date, this is consistent with the progression that’s fueled by 3.6% internal revenue growth. Moreover, given the growth in our data center and adjacent businesses, our growth portfolio which consists of emerging markets, data centers, and adjacent businesses is already approaching 25% of our revenue mix, which is our goal to achieve by the end of 2020. On Slide 7, I want to reiterate that we remain on track with our deleveraging and payout ratio targets that assume a 4% annual increase in dividends per share between now and 2020. Stuart will address the progress we have made on our balance sheet shortly. Before turning the call over to Stuart, I’d like to note that in addition to extending revenue management programs across our portfolio, we also retain the ability to pass through inflation-based price increases on an annual basis. Given the high margin characteristics of our storage business, we achieved significant flow-through on these increases, enhancing our ability to deliver meaningful dividend per share growth, not just nominal but in real terms. We continue to be unique within the S&P 500 in that we are a top-yielding company that is durable and has strong internal growth, expanding margins, a solid balance sheet, and great long-term growth potential supported by acceleration in the contribution from our faster growing portfolio. These factors are driving consistent growth in both the top line and cash flow that ultimately supports our ability to continue to grow dividends per share while deleveraging over time. With that, I’d like to turn the call over to Stuart.

SB
Stuart BrownEVP and CFO

Thank you, Bill, and thank you all for joining us today. I’m excited to discuss our solid results that demonstrate continued progress against our near-term and long-term objectives. Our records management business continues to deliver steady organic revenue growth and strong margin expansion, while at the same time, we’re achieving meaningful scale and faster-growing adjacent businesses. We remain focused on driving increased value for our shareholders through strong current performance combined with investments in our data center and other adjacent businesses. Let me start off by quickly walking you through the highlights before providing a bit more detail. You can see both the quarter and year-to-date performance on slides 8 and 9 of the presentation, which show results trending mostly ahead of our annual outlook. For the quarter, revenue came in at about $1.1 billion, growing 11% on a constant dollar basis, driven by the impact of our data center acquisitions and solid internal storage revenue growth. Our internal storage revenue growth adjusted for last year’s termination fee was 2.7% for the quarter and 3.2% year-to-date, which is in line with our 3% to 3.5% annual guidance. This reflects solid underlying fundamentals, benefits from our revenue management program, and positive net global storage volumes. Our internal revenue growth is calculated to exclude any impact of the new revenue recognition standard; however, the accounting change has had some minor impact on reported storage and service revenue mix. Internal service revenue grew 7.6% in the second quarter and 4.2% in the first half, primarily due to contributions from our shredding business, which Bill discussed, as well as additional digitalization and other projects. Our gross profit margin improved by 70 basis points in the quarter, primarily driven by labor efficiencies and the flow-through of our revenue management program. SG&A as a percentage of revenue also improved, about 60 basis points year-over-year. Our adjusted EBITDA grew almost 15% on a constant dollar basis for the quarter to $369 million, with margins expanding 130 basis points, reflecting the benefits of recall synergies, our transformation initiative, flow-through from revenue management initiatives, contribution from our higher margin data center business, and the impact of the adoption of the new revenue recognition standard. When excluding the approximately $6 million of benefits from data center early lease termination fees and other non-recurring items recorded a year ago, our adjusted EBITDA margins in the quarter expanded 190 basis points. Also, our structural tax rate for the quarter was 21.8%, a bit higher than our annual guidance due to higher rates in the international markets and increased depreciation and amortization in our qualified REIT subsidiary associated with recent data center acquisitions. Adjusted EPS for the quarter was $0.30 per share, flat compared to last year due partly to the increased depreciation and amortization as well as increased shares outstanding following our December offering to fund the acquisition of IO data centers. AFFO was $451 million for the first half, up $63 million or more than 16% over the prior year and is trending towards the upper end of our guidance for 2018. Providing a little more color on our internal growth performance for the year, on Slide 10, you can see the impact of our revenue management efforts reflected in developed markets' internal storage revenue growth of 1.3% for the quarter. This quarter’s growth is slightly lower as we cycle over a strong 3.4% internal growth in the second quarter of 2017. Developed markets' internal volume growth was negative, about 1% on a trailing 12-month basis, on a base of more than 500 million cubic feet in storage. Internal service revenue in developed markets increased 7.6% for the quarter, due mainly to growth in our shredding business, project revenue, and digitization, as mentioned earlier. In other international markets, we continue to see steady storage internal revenue growth of 5.9% for the quarter, with service internal revenue growth of 6%. In other reporting segments, the details of which are in the supplemental, the legacy data center business delivered strong internal revenue growth of almost 35% for the quarter, albeit off a small base after adjusting for last year’s early lease termination fee. Turning to Slide 11, you can see our margin expansion with growth in almost all segments. In the global data center segment, adjusted EBITDA margins, while down slightly on a reported basis, improved nicely after adjusting for last year’s early termination fee, reflecting our scaling of the business. We expect data center margins over time to move closer to the mid to high 50% range as we fully integrate recent acquisitions and add more scale to this business. Year-to-date, we have executed 4.4 megawatts of new leases primarily with enterprise customers and the federal government. Based on our leasing pipeline, we are tracking well relative to our 10 megawatts of expected leasing this year and we are pleased with progress considering that our Phoenix data centers were 100% leased at acquisition. Turning to Slide 12, you can see that our lease-adjusted leverage ratio was 5.6x at the end of the second quarter, consistent with the first quarter and after closing the EvoSwitch transaction. Our current leverage ratio is comfortably in line with other REITs, especially when considering that our business is more durable than many other REIT sectors. Additionally, during the second quarter, we refinanced our line of credit, reducing interest on drawn and undrawn balances by 25 basis points and extending the maturity. As you can see in the supplemental, as of June 30, our borrowings were 74% fixed rate, our weighted average borrowing rate was 4.8%, and our well-laddered maturity is an average of 6.6 years. We believe this is an appropriate structure supported by our real estate portfolio and the long-term nature of our customer relationships. With regard to guidance, we remain comfortable with the constant dollar outlook we laid out on our February call, which is in our supplemental materials for your reference. While exchange rates have had a modestly positive impact on year-to-date results versus a year ago, at current exchange rates, we expect the strengthening dollar to result in a headwind of about $50 million to reported revenue in the back half of the year, which will flow through to EBITDA. Just a reminder that we evaluate the business on a constant dollar basis and that outlook is unchanged. We do, however, anticipate greater capital efficiencies as you have seen through the first half of the year, so expect full year AFFO to be at the higher end of our guidance range. I’d like to draw your attention to our cash sources and uses on Slide 13 of the presentation, which we have updated since our last quarterly call to reflect the acquisition of EvoSwitch, capital recycling proceeds from the sale of three infill properties in London, as well as anticipated additional development to expand our data center capacity in Phoenix and Amsterdam. Our strong operating performance and capital discipline have allowed us to keep leverage flat while borrowing to fund EvoSwitch. In summary, we are pleased with our second quarter business performance and results for the first half. Our revenue management initiative is working well, driving steady growth and strong margin expansion from our records management business. Further, we remain encouraged with the progress in the data center and the prospects for creating meaningful value for shareholders through expanding the platform. We’re building out a well-rounded competitive data center portfolio with strong growth and a healthy outlook. We look forward to updating you on our progress on these elements over the coming quarters. With that, I’ll turn the call over to Bill for closing remarks before we open it up for Q&A.

WM
William MeaneyPresident and CEO

Thank you, Stuart. I just wish to make some quick comments before we open it up to Q&A. First, we’re very pleased by the strong financial and operating performance, which is punctuated by both the strong internal revenue growth in both storage and service, and the continued expansion of EBITDA margins, which when combined with internal revenue growth gave us around 4% internal EBITDA growth in the first half. Our new information governance and digitization services are finding real resonance with our customers as they look to us to help them manage a hybrid physical and digital world. This is visible in both our financial results as well as the partnership announced with Google. Finally, we continue to be a standout as a high-yielding investment that continues to grow AFFO and EBITDA in the mid to upper single digits fueling continuing dividend growth. With that, I’d like the operator to turn it over to questions.

Operator

Thank you. We will now begin the question-and-answer session. This morning’s first question comes from George Tong with Goldman Sachs.

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GT
George TongAnalyst

Hi. Thanks. Good morning. I’d like to dive a little bit deeper into your progress of price volume optimization. Can you elaborate on what extent your increases in pricing have been implemented versus internal plans? How do you expect to migrate the North American price increase strategy over to Europe over the next several years?

WM
William MeaneyPresident and CEO

Okay. Good morning, George. What I would say is it’s fully implemented and probably has been for about 12 months in North America. I’d say we’re more than halfway through the transition in Europe, but you’re just starting to see the results. You can see that when you actually – the internal revenue growth and internal volume growth are done on slightly different basis, but you can get a feel for the difference between, say, Western Europe and North America in terms of how much the internal revenue growth is coming from price and how much is volume. Still in Europe, we’re getting a lot of the internal revenue growth from volume, whereas in North America, we’re getting it all from price. Over time, what we’re driving for is to get more of our internal revenue growth from price in these mature markets as we try to maximize the yield or the net operating income that we’re getting on the assets deployed, rather than having to add racking to drive internal revenue growth. So I would say in North America we’re pretty much there and, in Europe, we’re probably a little more than halfway there. We continue to look at developed markets to deliver somewhere between 3% to 3.5% of internal price improvement going forward as we roll that program out into Western Europe. If we look at the emerging markets, we have just recently established four pricing centers or revenue management centers in those markets because we don’t want to just leave chips on the table. You can expect us to continue to be more cautious in those markets to be too aggressive with price because those are markets that, typically with a few exceptions, there are some locations in Latin America and Eastern Europe where we’re very comfortable with our market penetration but there are other areas where we’re still building market share. We have actually initiated four regional centers of excellence in terms of revenue management even in those emerging markets.

GT
George TongAnalyst

Yes, that makes sense. And as your pricing initiatives continue to get implemented, would you view this as a one-time step up in pricing or do you think it’s going to be a sustained lever over the course of several years? In other words, what’s the timeline of revenue lift or what’s the timeframe of when you expect the benefits to flow through from pricing and when would you expect that to normalize back down to low single digits or inflationary trends?

WM
William MeaneyPresident and CEO

Well, we think that we have a pretty long runway to keep that at 3% to 3.5% if we’re looking just purely at developed markets. There was probably a little bit of catch-up because I think we were trending in the high 3% to 4% at one point, but we think the 3% to 3.5% in the current inflationary environment is something we can continue to do. So we feel pretty comfortable that we can get a little ahead of inflation in terms of pricing and optimizing value for money that we’re providing our customers, especially as they’re coming to see us as a company that can support them on a number of fronts because storage is just one part of the relationship between us and them. They’re seeing more value in what we provide from the storage aspect of the documents because of how we’re assisting them in driving more revenue or insights from those documents going forward. So, we feel pretty comfortable. It’s not a one-and-done type thing; we can continue to drive in developed markets that 3%, 3.5% annual price increase.

GT
George TongAnalyst

Got it. Makes a lot of sense. And then lastly around services, the organic growth this quarter accelerated to 7.6%. Can you talk about whether there were any one-time benefits that occurred in the quarter or reasons why you might not expect that growth to persist going forward?

WM
William MeaneyPresident and CEO

It’s a good point. I think we’ve called out a few times when it was on the other side of the equation that especially as we go into digitization projects, which we’re really excited about. Those can be lumpy. There is a recurring part of that especially the digitization projects that rely on Iron Cloud to do the ongoing storage, so that would look more like a SaaS-type contract where there will be a recurring part of it. But there is many times a lumpy part of those contracts, which is the initial digitization piece. So that contributes to the spike. Also, we had a very strong quarter on shredding fueled partly by paper prices and partly because we’ve had some documents that have come off legal hold that are being destroyed. That would be a one-off destruction volume spike due to these documents that came off legal hold. That’s not a usual occurrence. Additionally, we obviously have won some new customers. So, there are some one-off aspects in the shredding business mainly around these legal hold documents, but you will see some movement up and down as these projects roll, even though there’s a recurring aspect for both of these digitization projects.

Operator

Thank you. The next question comes from Shlomo Rosenbaum with Stifel.

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SR
Shlomo RosenbaumAnalyst

Hi. Good morning. Thank you for taking my questions. Bill, I'm going to go back to my question regarding revenue stepping up from pricing and the volumes going down. How are you ensuring that you’re not killing the goose that laid the golden eggs? We saw the volumes go down. You mentioned legal aspects of a cliff. Maybe you can go into that a little bit more. Are we going to see the volumes come back towards hovering around zero plus or minus or should we really expect in mature geographies to just see the volumes start to decline now?

WM
William MeaneyPresident and CEO

It’s a good question, Shlomo. I wouldn’t expect you to ask any other questions. That’s fine. The one thing I was encouraged this time was that if you look at new volumes from existing customers, that stayed steady from last quarter to this quarter. I don’t think there’s a significant decrease in volume, but I don’t think it’s getting worse either. So that’s encouraging that we can continue to drive the type of price increases that we’ve been implementing. The big difference this quarter was really around these legal holds and you can see that – in terms of the destructions, that’s kicked up. To give you some context, on a trailing 12 months in developed markets, we continue to get about 28 million boxes a year on an internal basis before acquisitions, and that’s staying pretty steady. Since we historically average about 20 million boxes of destruction a year that go out, we’ve seen an uptick which is driven mainly around legal holds, which both before and after the GFC. It’s going to take some time for that to wash through. So if you said to a net-net where that leaves us, we’re still kind of in the same guidance that we’ve provided last time, expecting the developed markets to be flat plus or minus zero. We still see especially with the federal government and the midmarket having a degree of lumpiness. We expect to have some quarters that are on the positive and some on the negative, but currently we don’t see an acceleration in terms of the drop-off.

SR
Shlomo RosenbaumAnalyst

So we should expect that volumes will get closer to zero or even positive a little bit at some point in the next 12 to 24 months?

WM
William MeaneyPresident and CEO

I think over the next 12 to 24 months we will trend slightly negative in terms of volumes. But after that, yes, I think we’ll have some quarters that will be in the positive column.

SR
Shlomo RosenbaumAnalyst

So if you keep the volumes flat, what you're saying is that after you comp in a way that makes the quarters go negative year-over-year, but essentially, you’re not accelerating the decline?

WM
William MeaneyPresident and CEO

That’s correct.

SR
Shlomo RosenbaumAnalyst

Okay. Just looking at the organic revenue growth on storage in each market, except for other international, the organic revenue growth seems to have gone down a little lower than in the last four or five quarters. Is there something going on there or how should we think about that?

WM
William MeaneyPresident and CEO

If you look at developed markets, to your point, it comes out to around 2.3%. If you do the math, you get around 2.3%, 2.4% in terms of price, and we’re normally getting 3%, 3.5% in growth. There were some one-offs from a comparison last year that suppressed that comparison, but we’re still tracking in that 3%, 3.5% price increase in the developed market. We don’t see it trending down. Some one-offs in Q2 last year affected that comparison. If you correct for that, we’re still in the range of 3% to 3.5%. So we expect that to continue to trend.

SB
Stuart BrownEVP and CFO

Just to add on to what Bill said, there was a strong first quarter in NA RIM a year ago, with some one-time benefits impacting the second quarter by about 40 basis points.

SR
Shlomo RosenbaumAnalyst

Okay. The services projects are on one hand encouraging, but they’re also more volatile. Is there a portion of these businesses that are not just going to see a bunch of projects that go up and down? Is there a portion of these businesses or projects that will be recurring multiyear types that will bring the services business strength on a more regular basis?

WM
William MeaneyPresident and CEO

There are two aspects to many of these projects, not always, but more often than not, especially since we launched Iron Cloud. There’s the initial project aspect, which can be lumpy, and there’s the recurring part when utilizing Iron Cloud, which looks more like a SaaS revenue stream. We signed a market research company recently with a five-year contract that will provide recurring revenue year after year. However, it will take time for Iron Cloud to ramp as we just launched it. While we expect some regular aspects to emerge, you will likely continue to see some lumpiness in the next few quarters.

SR
Shlomo RosenbaumAnalyst

It seems like the focus on data centers, the capital is going there versus some reallocation from records management. Typically, records management acquisitions have helped keep the volumes up. Is that going to change the volume outlook as more of the capital is allocated to the data center side?

SB
Stuart BrownEVP and CFO

You’ll see growth on the records management side. Our capital discipline has led us to build less in advance before adding racking two to three years out for the storage side. As a result, we’ve maintained the records management growth. We may not be building out as much, so we’ve been able to take some of that capital and reallocate to the data center business. The returns from data center are substantial and we will continue to allocate capital there as we identify opportunities.

WM
William MeaneyPresident and CEO

It goes back to the pricing and yield management in developed markets. Two years ago, internal revenue growth in North America was driven by volume, whereas now we’re achieving higher growth without needing to add additional racking. We’ve grown not only in absolute terms but also on a per square foot basis in our records management business. This improvement allows us to reallocate capital.

SR
Shlomo RosenbaumAnalyst

Thank you so much.

Operator

Thank you. The next question comes from Sheila McGrath with Evercore.

O
SM
Sheila McGrathAnalyst

Yes. Good morning. You’ve made several larger data center acquisitions with personnel from the different companies. I was wondering if you could touch on how integration in that line of business is going. Any examples of cross-selling the data centers to Iron Mountain storage customers?

WM
William MeaneyPresident and CEO

We’re really pleased with the assets and the people we acquired. The engagement level, expertise, and customer relationships the team has brought from both IO and EvoSwitch have been fantastic. I think we’re making good progress on integration, particularly on the people side, but we still have some operating systems to standardize. In terms of cross-selling, we have relationships with almost all of the large global financial service customers. As a result, some of the data center folks have expanded their footprint using Iron Mountain relationships with those customers. We’ve also seen cases where IO served a bank that needed a Northern Virginia solution, and we’ve managed to cross-sell in that regard. To summarize, we’ve seen revenue synergies and strengthened our sales team through broader offerings.

SM
Sheila McGrathAnalyst

Okay, great. Moving to the venture with Google, just to understand how that came about. Does it require new employee hires for Iron Mountain and who is offering the marketing? Is Iron Mountain marketing it to their customers and Google is just the tech programming part? Just a little bit more detail on how you expect this to unfold.

WM
William MeaneyPresident and CEO

We’re excited about the Google partnership. We were both looking at how we can help customers in their digital transformation. Because we have a lot of their physical content, we were a natural partner for them. We were looking to partner with a company that facilitates machine learning, and Google’s strength gave us that opportunity. We have a number of hires from the tech community to support this initiative. Iron Mountain is selling these services, while Google supplies the tech capabilities to implement our solutions. Our goal is to enable customers to derive insights and value from their data, which is essential as they manage their information. We’ll be launching in September, with substantial positive feedback during our proof-of-concepts with a couple of industry verticals.

SB
Stuart BrownEVP and CFO

To clarify about the corporate and other segment, we’ve brought together art and entertainment services to achieve growth in the mid to upper single digits. Art services experienced a small impact in our most recent acquisition, but integration is proceeding well.

AS
Andrew SteinermanAnalyst

Hi, Stuart. How much cost efficiencies are left in the transformation initiatives and recall synergies? What will drive margins forward past these two areas?

SB
Stuart BrownEVP and CFO

We’ve got about $5 million to $10 million of synergies left from Recall, primarily driven by real estate consolidation. Most of the transformation efficiencies are captured in this year’s guidance. Additionally, we see a higher margin from the growth of the data center business contributing to our margin expansion over time.

EC
Eric ComptonAnalyst

Good morning. I have two quick questions. One, on data centers, I’m seeing trends of revenue per leasable square foot and per leasable megawatt increasing compared to Q1. Wondering if that’s a mix change with the addition of Amsterdam, or is there something to that trend? Also, any insights on supply and demand in the data center market pricing?

WM
William MeaneyPresident and CEO

There is definitely a mix issue at play based on the types of customers we’re serving. We are focused on high absorption markets and continue to see strong demand. The expansion in Phoenix is an example of growth and high demand in the market.

SB
Stuart BrownEVP and CFO

When looking at changes in our supplemental reports, the majority of that change is due to the addition of EvoSwitch during the quarter.

AS
Andrew SteinermanAnalyst

Stuart, how do you see cost efficiencies progressing within your transformation initiatives regarding margins over the next few years?

SB
Stuart BrownEVP and CFO

Our margin outlook indicates ongoing expansion due to transformation initiatives as well as cost management. You can expect 60 to 80 basis point margin increases per year, with continued efforts in efficiency improvements and the growth of the data center business supporting overall margins.

Operator

As there are no more questions at the present time, I would like to turn the call to management for any closing comments.

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William MeaneyPresident and CEO

Thank you very much. Have a good weekend, everyone.

Operator

Thank you. This concludes our question-and-answer session and today’s conference call. The digital replay of the conference will be available approximately one hour after the conclusion of this call. You may access the digital replay by dialing 877-344-7529 in the U.S. and +1 412-317-0088 internationally. You'll be prompted to enter a replay access code, which will be 10121234. Please record your name and company when joining. Thank you for attending today's presentation. You may now disconnect your lines.

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