Equinix Q2 2024 Earnings Call Transcript

Thanks very much for the question, Simon, and thank you for the kind words. And it's certainly being a whirlwind of 10 weeks, you know, since I formally took the position and a lot that I've heard and understood during the listening and learning sessions. I have to say, I remain exceptionally positive about the opportunity ahead. One of the reasons or one of the main reasons or one of the many reasons actually why I took the role with Equinix is obviously understanding the strategy of the company and its unique position in the ecosystem.

I believe that Equinix is uniquely positioned to offer a range of enabling services for our customers so that they can actually capitalize on the opportunities presented by various different technology platforms. And when I think about our demands and the customer needs, it is actually much broader than the AI portfolio. And many of our customers have made a very significant commitment to hybrid and to multi-cloud. And as customers become more at ease with cloud as a technology paradigm, we can see many more workload-based decisions beginning to occur. So decisions about where particular workloads are best suited. And as I look at this in the context of AI and the AI demand, that initial short-term demand is coming indeed from the service providers. And this is reflected in our xScale business and in the bookings performance that we've seen in the xScale business. And as you heard in our remarks, this is something that we're looking to expand globally.

But many CIOs like during the early days of cloud are looking to ensure that they have an AI strategy. And we are beginning to see the beginnings of enterprise training and enterprise funnel as we look at customers looking to evolve their strategy into proof-of-concepts and beyond that into working production systems. As I said, I think retail will have a much broader demand and a more meaningful long-term upside from AI as these use cases move from -- from proof-of-concepts into production. And there is, of course, a lot that Equinix is offering to our customers here, both in our retail business and of course, on the xScale side of the house. And I think this unique balanced approach to the opportunity represented in the broader demand context, but also in the era of Cloud is something that's extremely exciting and I'm looking forward to leading the company through this journey.

Thank you, Simon.

For sure. Thank you very much again for and congrats, Nick, I appreciate that. And first of all, when I look at the overall approach that I will take, it is about creating value and it will always have a customer lens, an outside in perspective, ensuring that customer success translates and is equal to Equinix success in many regards. When I look at this, this means looking at how we continue to evolve the product portfolio, how we continue to drive critical partnerships so that we're at the center of the digital ecosystem and how we continue to enhance and evolve our go-to-market engine.

Let me specifically pick up on the notion of simplification. When one simplifies, you bring core processes back to their very core. This enables you to be agile in your response and helps you to accelerate the underpinning pace of the business. And whilst this list is not exhaustive, there are definitely a few areas that I see we have some opportunity to continue to involve and simplify. Things like our quote to cash process and elements like our customer lifecycle and ways that we can systematize and process the customers journey with us and throughout their lifecycle. And these type of enterprise-grade processes will help us remove friction within the system and help deliver that pace, agility, and simplicity.

When I look at it from a focus point-of-view, it is about understanding not just the footprint that's in our core, but how we continue to grow and evolve our core business to meet the needs of our customers. And this is both in our xScale business, but also on retail, where we look at how our global footprint enables customers to operate and transact in environments where they may not need to invest in the physical infrastructure themselves to do that. I also think that focus is an important point when we consider our digital services portfolio and look at this through the lens of where we have adjacency and augmenting some of that core functionality that we have that exists in the core footprint of the Equinix data center world. This is points where we have the right to win where customers would expect us to lead. And so for instance, I look at the underpinning growth in our fabric business, how important that can be as we look to continue to evolve our virtual interconnections portfolio. And this enables us to focus in perhaps on certain aspects of our product portfolio in order to ensure that we're investing where we can have the highest-level of returns.

On our go-to-market side, we have new leadership in our go-to-market team. And I think it's a very important aspect of our business to underpin our go-to-market processes with a very clear segmentation strategy that allows us to identify those customers that have the highest revenue perspective for us and to manage those customers in a high-touch environment, but likewise to enable us to extend our reach through channels and distribution effectively to customers who are you in an SME, more general business type space. So I hope that's given you a little bit of amplification on simplicity, focus, and the actual augmentation of our go-to-market. Thank you for the question, Nick.

Yeah. Yeah, I'm happy to comment on that and I can ask any of my colleagues here to add if there's anything that they would need to add to the -- to my commentary. And so first of all, as we noted, we had 3,900 net-adds. We had, as Keith mentioned in his comments, the StackPath liquidation, which impacted us negatively 400. And so without that, we would have had 4,300 adds. Now let me just unpack some of the trends for you, Nick, to build on your question.

First on the positive side. When I look at the gross adds, it's the highest level in two years. And year-to-date, this interconnection demand is actually back to peak pandemic levels. In absolute numbers, our A to Z connections continue to increase and we've seen this quarter-over-quarter. And this is obviously the way that we define unique relationships between companies in a metro. And I think this really truly speaks to the value of Equinix. So those things coupled together, the gross adds, the absolute number of A to Z continuing to increase. The fact that we're out of peak pandemic levels, I think they're very good indicators of future momentum. Pricing is also trending very favorably. We have 11% spread between churned and new additions. And you see revenue up to 9% year-on-year on a normalized and constant currency basis. So a number of positives as we look at the interconnection lens.

On the churn side, we saw the churn elevated in '23 and continued to worsen in early '24, and this was up especially in the EMEA theater of operation. I think networks have had the most toughest operating environment and we're continuing to see pressure in that segment of our industry customers. I would also say that M&A affects this, where we have paid cross-connects, but unpaid intercompany cross-connects and often replacing those in an M&A trajectory and this takes some time for us to work through. But specifically, as it relates to EMEA, we can see that the data indicating some decelerating churn rate from the top 10 who have been churning in the past. So that again gives me the confidence to say that I can believe we'll move forward on a positive trajectory here and this is an area of focus for me as we move forward over the course of this quarter.

Okay. David, thank you very much for the words of welcome. And maybe we'll start with the muted -- the cabinet growth scenario. I'll throw that to Keith and then he can perhaps comment on the investigation status.

Yeah, David. So yeah, first and foremost, look, we continue to see the net cabinet billings is an area of high focus. As I said sort of in the prepared remarks, roughly 300 of those cabinets related to stack -- to StackPath that announced their liquidation at the end of the quarter. Put that aside, there's a number of things that are impacting and one of them -- one of them I'll refer to on why we say unadjusted, but capacity constraints, of course, has continued to have an impact on basically the net cabinet billing and then the timing of churn, which is an obvious statement. The increasing density continues to be a factor. And as we said, there's two -- there's two things I wanted to pull out for you.

And I said in the prepared remarks, but I wanted to make sure that it's understood and it's full of this context. First and foremost, we had record gross bookings. So it gives you a sense that the volume in the businesses is there. And so that gives me great confidence and we had record gross bookings in the Americas Theater more specifically. You add to that, that we had the best net megawatts -- net megawatts billing in the retail space. I'm not talking about xScale in retail and that tells us in the last -- in the last seven quarters. So this is six quarters prior, we had -- we've done meaningfully better than we had done before. So it tells you about the health of the underlying business and really ties into what Adaire was talking about on the sort of gross interconnects.

So there's the volume there. But there's this element of the business both on how it's -- how things are timing out. We knew -- as you knew, we're sort of forecasting Q2 would be probably a negative quarter again. There's the timing of the churn. But when I talk about the unadjusted is -- we do that -- we can do that math for you, which basically says, well, when you churn out a certain number of cabinets at that level of density and you apply different factors to them with a higher-level of density, you're basically dealing with a whole of roughly 2,000 just because of density. And so that's why we say the unadjusted. I think the most important thing is that, look, we've given you a good sense of -- there's great momentum in the business. We're seeing great gross values. Yes, there is an element of churn that's coming through the business.

We've been talking about that for many quarters now, the economic climate in which we operate. But overall, with the depth -- the depth of the pipeline and the momentum we see in our business, that's what gives us confidence that you're going to see that abate. And then the last part I would just say is the backlog has been as high as we've seen in a very long period of time and is substantial. Not a surprise largely because we did more medium to size -- to larger size deals in the quarter. And when you do that, you have some level of extension in the book-to-bill interval and therefore, the backlog does creep up as we work to configure those deployments and get them into implementation.

So hopefully, that answers that question. And let me then just go to the DOJ, which I think Adaire was going to pass to me anyway. No surprise to you, we're continuing to work with the SEC and the DOJ. It's a process where we're working through that process. We continue to feel very confident in that process and how we're responding to it. I would like you to draw a great comfort from the fact that not only did we file our 10-Q last quarter, but today we filed our 10-Q again today. And so when you think about the reinforcement we got from the Audit committee's investigation of our financials, you should draw great comfort from it. But like anything, with the short seller report as it comes out and the following subpoenas that came from the SEC and DOJ, we have to respond to it and therefore, it is a process.

In your question to -- was there anything that came out of what we want to do differently? I think it was very important. When you look at what we announced in May, we were clear that not only did we not have any restatements, but we didn't have any adjustments. Restatements is a fact about materiality. Adjustment is an adjustment. And so the system is working as it should, which is great. We have the controls, the team does the work. And overall, we feel very confident about it. But like anything, you always are going to step back and reflect or there are other things that we could do that are different. And so that's what the teams are looking at all the things that we do and saying, do we do different type of disclosures.

You saw us recently talk about the redevelopment of our cap -- redevelopment capex, which we thought, one was a very important disclosure. We had already been planning for it in advance of the short seller report. But those are the kind of things that we just -- we make sure that there's appropriate augmentation of policy and disclosure. And I think it puts us in a much better position. But relating to it, is there any adjustments? The answer is no, but we always think that there's things we can do better. And I'm drawing from a line of one of my core CFO friends, he always says better, better, never done. So because we're always looking to do better, every single quarter and we're never going to be done. So we'll take -- we'll take the advice and guidance from both the counsel and whether anything comes back from DOJ and SEC and we'll -- and we'll get better. But overall, I feel very comfortable in our financial disclosures.

Yeah. Thanks very much, Jim, and thanks for your question and your words of welcome. So I think in the short-term, the demand that we're seeing is primarily for training based workloads. And this is primarily driven in the short term by cloud and the various different technology partners that we have. And this, as I've mentioned, is how our near-term pipeline is being represented and the beneficiary of this in many instances is our xScale business. In the enterprise, mid-market retail business, we absolutely have AI-ready data centers ready to take customer workloads. We have already closed a number of transactions where we are running smaller AI-based workload scenarios in the training world for enterprise-based customers.

We are working with many of our CIOs in to support their AI strategy as they look to integrate AI into their business and manage their cost, whilst they're doing so. And of course, some of our -- and some of our ecosystem partners have -- have created almost a magnetism around Equinix as it relates to AI. Companies like CoreWeave and Lambda that we announced last year in '23, who have capabilities available today in Equinix data centers and of course, the NVIDIA DGX private cloud offering that we also announced late in '23. All of these have very active work and pipelines, some of them have active users who are making use of this system now. So I'd say that we're seeing early -- early traction in the enterprise-level inferencing type workloads beginning to occur in our data center environment, but that is something that we'll see extrapolate and grow over the medium to longer term.

Yeah. I think, Jim, you're referring to our DC2 redevelopment, if I'm not mistaken...

I just want to make sure. We think the universe of -- the universe of what we call redevelopment projects like that is 5 to 7-ish. They're strategic, they're of scale, they're of size and of great importance. And hence that we're -- we're doing those type of redevelopments because of the value that we get to create, introduce more capacity into that highly connected data center and get a good return, not only a good return on both the element of it, which is redevelopment, but also the enhancement aspect of it. And so overall, the universe isn't -- isn't massive. We have 264 data centers as Adaire alluded to. We think is five to seven strategic assets strewn throughout the world that we'll do that too.

Yeah. I'm 10 weeks in, so this is certainly one of the areas you know that I've done a little bit of a double-click on here. And I can certainly see that there are absolutely some shifting dynamics in the business. And Keith highlighted this increasing power density in the cabs that are churning in versus, as you pointed those that are churning out. And for us, perhaps this is something where we would look to see the billable cabs as a measure, maybe not being as tightly tied to revenue growth as we've seen it in the past. And that's something that I think we're reflecting on.

If I think about our xScale business, kilowatts probably is a cleaner metric. But when I think about it from retail, our MRR per cab and our billable cabs, you know, that perhaps is the right P times Q math that we have now. Even though growth is probably more weighted towards the cabinet yield versus the cabinet count at this point. And I think that we can continue to supplement that with quarterly insights into how we're seeing the density -- the density evolve as our business evolves and as the capabilities within our data centers continue to evolve. So certainly something and that's a toll process for us here. And I think as as Keith mentioned, just to reiterate, I think those very strong gross bookings plus the leading indicator of cabinets sold not yet installed are indicators that we will improve on this number in the second half.

And maybe, Michael, if I can just add on to what Adaire said. I think it's important, as Adaire said, look, we got to keep on looking at it. David asked the question earlier on, we want to be able to respond to it in a way that absolutely makes sense and give you all the statistics at least so you can have the same sort of view that we have. Clearly, the shifting dynamics is more density. So that's a positive. But I think what's really the crux of what is going to come here, if you have more density, your price per unit is going up and you're seeing that in the ARPU or the MR per cabinet. But we're also when we -- when we look to monetize the capital that we invest in the business, no surprise to you, we're looking at a return on that investment, those targeted IRRs are 20% to 30% pre-leverage.

And so you're seeing the cash-on-cash yield still deliver, but that one core metric really feels like it's -- again something that I think makes sense to keep on tracking, but we're really going to have to give you other components so that you get the full value of what's going on in the business. But the underlying bias is more density. And that's how we're retail -- where retail data -- multi-tenant data center player and you need to deal with the changing shifts in customer expectations. And that -- when you go into one of our data centers, you get a real good feel for that the true difference between somebody maybe in one aisle versus somebody in a different aisle. And that tells you like there are shifting dynamics taking place in a really live environment and it is an ecosystem that thrives with a -- with a propensity to increase density.

Yeah, I'll comment on this and then perhaps Keith, feel free to add. And I mean, certainly, we're seeing that. You know our churn in the range of 2% to 2.5%, which is the range that we guided to, is something that we can continue to manage too. And I think that if we normalized for StackPath in this quarter, we would have been slightly better than our expectations in terms of where we landed. And we also have a supply-and-demand situation in the market, which has a very positive trajectory on pricing. So maybe this gives us the opportunity to be thoughtful about managing our overall churn dynamic, so that we could selectively use proactive churn to help us and drive and improve some yields here. And I see that some of the challenges that we had in the first half will still exist at the macro-level.

There's certainly this need for customers across all industry segments to do more with less. And optimization is still something that customers are looking to do because it does give them that outcome on the more with less tangent. And we definitely have a number of our customers who are in a tougher environment in terms of the industry that they're operating in and the dynamics of that industry. That being said, we see that we will be managing within our full year as per the guide to the ranges that we set. And then I guess just from a thought process, you know, incoming to this, in the world of cloud, this is quite a usual process. I think that there is an opportunity for us to look at some of our -- to some enhancements in terms of management and proactive management early on of our customer engagement with us and you know as it relates to their used profile and intention to churn. And so I think there is a potential for us to lean in and support our customers as they optimize and to engage in churn-type discussions much earlier in the process than we've been doing thus far.

Michael, maybe just -- I'll just add-on one thing -- one additional thing given Adaire's comment. Through the second half of the year, the pipeline is deep. We are -- the underlying expectation really is to see, obviously, our gross booking activity continuing to go up. We expect churn is going to be consistent with how we previously guided, which is important. And then in the fourth quarter, we've already sort of telegraphed, we're working with one customer in Singapore that is coming in size that we're asking -- we're asking -- we're working with them to vacate the premises. We will update you on that by the time we get to the back end of the third quarter, so in the -- on the October call. But that's the one area that is a planful churn. It was built into our guide. And as I said, it should happen by the end of the year and that gives us back some very valuable capacity in Singapore that we would like to have to put to our use. And our Singapore 6 asset isn't going to be available till probably sometime in late '26, I would think, by the time it's up and running.

Keith, do you want to take first one?

Yeah, sure. I'll do the first one.

And yeah, I take first or you go first?

Why don't I take it? Let me take the second half of the year first, Michael, if I may. Look, the -- it's not lost on you and I'm sure all the other listeners that the business is performing well. The one thing that has been persistent is the -- although we're comfortable with the range of churn, our ability to guide it has been persistently high and we had a tough fourth quarter in 2023 and that translates into momentum into 2024. That all said, when you look at this particular quarter, $2,159 million, there is an element of quarter-over-quarter currency movement. We've given you all those numbers, I won't repeat them. We're also felt the drag related to energy. As you know, we have -- we're going through power price decreases.

Then we had -- we had this one-off -- one-off large charge to our recurring revenues that we booked in the quarter, that to size it for you is roughly $7 million. And so there's a number of things that sort of have affected the sequential movement quarter-over-quarter and that's on the recurring side of it. There's great variability on the non-recurring. We're all -- we'll do our best to guide you each quarter on what's going on, suffice it to say, the success in the xScale business has created some volatility with non-recurring and we'll reconcile that and normalize it out for next year as well, just so you can truly get the sense of how the underlying business is performing.

So all that said, we said that churn would slow down in the second half of the year and our bookings would accelerate. The pipeline is at the highest level we have ever seen in our business. So that's good. Churn, we have, I think good visibility too. And as a result, that's the momentum you're seeing that you should see in the business. And so we continue to remain confident. And as Adaire said, no, despite the macroeconomic conditions, we know they're tough out there. Companies like StackPath, when they hit the wall basically at full speed and just liquidate, it gives you a sense that some companies aren't doing well out there. But you've got an evolving economic environment.

We know our relevance. We know the digital environment is very friendly to Equinix and we know the supply environment is going to continue -- continue to get more constrained. So the combination of all of that continues to give us the optimism that we have not only in how we exit the year, but also how we position ourselves for 2025. And again, you know what our lighthouse metric is driving value on a per share basis. That is our whole intention, but we believe we can do that with both good fiscal management and top-line growth. So hopefully, that gives you -- gives you the answer that you're looking for.

And perhaps just building on that and to address the first part of the question around the opportunity in our installed base and new market opportunities. This is something that I feel very, very positive about, not only have we undertaken and already commenced a very deep refresh of our segmentation of our customer base, but in the context of that, we have looked at each of those -- those elements and how we can create sales play scenarios that allow us to have almost like a rinse and repeat model from a selling perspective into a cohort of customers. So very excited about the upsell opportunity as a result of some of those programs in our install base, but also about the outcomes of the segmentation exercise and the way that we will define our coverage model to enable us to reach further to prospects and bring them into the Equinix family as customers. And so a piece of work that's underway and I'm very confident about the prognosis and outcome of that work.

Thank you, everyone, for joining our call today. This concludes our Q2 call.