Equinix, Inc. (NASDAQ:EQIX) Q4 2022 Earnings Call Transcript February 15, 2023
Operator: Good afternoon, and welcome to the Equinix Fourth Quarter Earnings Conference Call. All lines will be able to listen only until we open for questions. Also, today’s conference is being recorded. If anyone has objection, please disconnect at this time. I’d now like to turn the call over to Chip Newcom, Director of Investor Relations. You may begin.
Chip Newcom: Good afternoon, and welcome to today’s conference call. Before we get started, I would like to remind everyone that some of the statements we will 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 have identified in today’s press release and those identified in our filings with the SEC, including our most recent Form 10-K filed February 18, 2022, and 10-Q filed November 4, 2022. 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’ll 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 the Equinix Investor Relations page at www.equinix.com. We have made available on the IR page of our website a presentation designed to accompany the 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 Charles Meyers, Equinix’ CEO and President; and Keith Taylor, Chief Financial Officer.
Following our prepared remarks, we’ll be taking questions from sell-side analysts. In the interest of wrapping this call up in an hour, we ask these analysts to limit any follow-on questions to one. At this time, I’ll turn the call over to Charles.
Charles Meyers: Thank you, Chip. Good afternoon, everybody, and welcome to our fourth quarter earnings call. We had a great finish to 2022, delivering one of the best bookings performances in our history, led by the Americas with continued strength in demand and favorable pricing trends across all three regions. For the full year, we delivered more than $7 billion in revenue for the first time and completed our 80th consecutive quarter of revenue growth, an amazing 20 years of continuous growth, all while driving AFFO per share performance above the top end of our long-term expectations. As we look to the year ahead, even amidst a dynamic and complex global landscape, it’s increasingly clear that the secular tailwinds of digital transformation remain strong.
In 2023, IDC estimates spending on digital technology by organizations will grow 8x faster than the broader economy. In the current macroeconomic environment, we believe spending on digital transformation will remain robust for two simple reasons. First, as companies work harder for each incremental revenue dollar, digital is seen as a critical driver of competitive differentiation, accelerating time to market and enabling product set evolution. And second, digital transformation is increasingly a means to do more with less, enabling businesses to reduce costs and drive operating leverage while simultaneously becoming more agile and responsive in serving their customers. In the context of this secular demand environment, we remain confident that Platform Equinix is uniquely positioned to support our customers’ digital infrastructure needs.
Digital leaders are demanding infrastructure that is more distributed, more ecosystem-powered, more flexible and more interconnected because it is fundamental to their ability to differentiate in the marketplace and lower their costs. Our market-leading global reach, vibrant digital ecosystems and comprehensive interconnection platform allow our customers to scale with agility, speed to launch of digital services, deliver world-class experiences and enhance value to all their stakeholders. While we will continue to closely monitor the macro environment and we’ll adapt our execution accordingly, the fundamentals of our business remain strong, and we’re investing behind the momentum we’re seeing, including adding quota-bearing heads, evolving our product set and expanding our industry-leading data center portfolio.
With regards to power, our multiyear hedging efforts continue to create visibility and predictability for Equinix and our customers in the coming year. Effective January 1, we raised pricing, passing on the full impact of these additional power costs to our customers, increasing costs but giving our customers much needed budget certainty and, in most cases, leaving them with rates below the prevailing spot market. Overall, we believe we remain in a good position relative to competitors and the broader market, and I’m pleased with where we landed for our customers and our business. Turning to our results, as depicted on Slide 3, revenues for the full year were $7.3 billion, up 11% year-over-year. Adjusted EBITDA was up 8% year-over-year and AFFO per share grew 11% year-over-year.
These growth rates are all on a normalized and constant currency basis. Our data center services portfolio continues to extend its scale and reach. And given strong demand and high utilization, we see continued opportunity to deliver highly attractive returns on capital, as evidenced by the largest development pipeline in our history. We currently have 49 major projects underway across 35 metros in 23 countries, including nine xScale projects representing over 34,000 cabinets of retail and over 75 megawatts of xScale capacity. New projects this quarter include new data center builds in Istanbul, Seoul and Tokyo, and our first builds in both Johannesburg, South Africa and Johor, Malaysia. Our new IBX in Johannesburg augments our current footprint in Africa, entering the largest and most digitally developed nation on the continent.
And our new IBX in Johor represents our entry into one of the most requested markets in Asia Pacific by our global customers. Equinix remains the best manifestation of the interconnected digital edge. And with these new builds, our unparalleled global footprint will span 75 metros and 35 countries. The strength of our global platform continues to shine, with nearly 90% of our revenue coming from customers operating in multiple metros and nearly 2/3 coming from customers operating in all three regions. Key multi-market wins this quarter included one of the world’s leading hospitality companies, finding performance gains at the edge by deploying in strategic markets across all three regions; and a leading cloud and CDN provider extending coverage and scaling globally to support new services and meet growing demand.
IDC estimates that more than 750 million cloud-native applications will be developed globally by 2025. And as this digital transformation wave continues, customers see Equinix as the logical point of nexus for hybrid and multi-cloud deployments. This quarter, we won four new cloud on-ramps, including one in Mumbai, making it the 12th metro on Platform Equinix enabled with native cloud on-ramps from all five of the leading cloud providers. No other data center operator has more than one metro with all five clouds. In our xScale business, we continue to see strong overall demand, leasing approximately 8 megawatts of capacity across our Tokyo 12 and Osaka two assets with meaningful expansions in our forward pipeline. Enterprise wins leveraging the cloud this quarter include a global technology company in the payments industry, deploying infrastructure to place their corporate and customer networks closer to AWS and Azure; and a leading paints and coatings company choosing Equinix for its cloud on-ramp capabilities and virtualized service offerings.
Our industry-leading interconnection franchise continues to perform well with revenues for the quarter growing 13% year-over-year on a normalized and constant currency basis, outpacing the broader business. We now have over 446,000 total interconnections on our platform. In Q4, we added an incremental 4,500 organic interconnections, slightly lower than our historical run rate due to seasonally slower gross adds, customer consolidations into higher bandwidth BCs on fabric and some elevated grooming activity. Equinix Fabric saw continued growth and is now operating at a $200 million revenue run rate, one of our fastest-growing products. Attach rates for Fabric continue to move higher with 40% of customers realizing the benefits of connecting their digital infrastructure at software speed.
Internet exchange saw peak traffic jump 7% quarter-over-quarter and 28% year-over-year to greater than 29 terabits per second, driven by FIFA World Cup streaming demand and reflecting the continued strategic importance of having the world’s largest Internet exchange footprint on Platform Equinix. Key interconnection wins this quarter included one of Korea’s largest conglomerates, establishing interconnection in Seoul for SJC2, the Southeast Asia-Japan Cable, which will be ready for service this year, and the largest water authority in the Netherlands, implementing Equinix Fabric to directly and securely connect to distributed infrastructure and digital ecosystems to ensure a clean water supply. Turning to our digital services portfolio, we saw continued momentum with Equinix Metal and Network Edge, driving attractive pull-through to Fabric.
Digital services wins this quarter included a leading insurance and financial services company evolving their internal systems from their own data center to a public cloud plus Metal approach at Equinix; and a Belgian advertising service provider using Equinix Metal for fast, efficient, reliable data movement to support localized online advertising. And our channel program delivered its seventh consecutive record quarter, accounting for nearly 40% of bookings and nearly 60% of new logos. Wins were across a wide range of industry verticals and digital first-use cases with hybrid multi-cloud as the clear architecture of choice. We saw continued strength from partners like AT&T, Avant, Cisco, HPE and Microsoft. Key wins included delivering a critical time-sensitive site migration for a multinational banking and financial services client in partnership with Options IT and Dell, leveraging a combination of Equinix Metal, Network Edge and Fabric to overcome supply chain delays and ensure continuity of operations while interconnecting to critical trading platforms.
So let me turn the call over to Keith and cover the results from the quarter.
Photo by Taylor Vick on Unsplash
Keith Taylor: Thank you, Charles, and good afternoon to everyone. To start, we had a great end to the year, finishing Q4 with healthy bookings, strong pricing, which included a nice uplift in MRR per cabinet in each of our regions and a solid forward-looking demand pipeline. We closed over 17,000 deals across more than 6,000 customers in 2022, and no single customer represents more than 3% of our MRR, highlighting the tremendous scale, reach and diversity of our go-to-market engine that continues to produce despite volatile and shifting macro conditions. Given the weaker U.S. dollar relative to our prior guidance rates, FX has shifted from a meaningful headwind to a tailwind, which is positive, although 2023 exchange rates still remain below the average FX rates for 2022.
And while we continue to remain vigilant to the challenges in the broader economy, we do remain optimistic about our business and the key demand drivers and feel we’re very well positioned to grow and scale due to our industry-leading risk management efforts across procurement and strategic sourcing, power and treasury and our future-first sustainability program. Also, the diversity and mix of our customers is benefiting us, with large established businesses constituting a majority of our revenues has greater than 80% of our recurring revenues come from companies generating $100 million or more in annual revenues. And more than 85% of our recurring revenues in the quarter come from customers deployed in three or more data centers, making Equinix a core vendor for our customers’ digital infrastructure needs.
Equinix remains in excellent financial health with strong liquidity positions, low net leverage, allowing us to be both strategically and operationally flexible in this current market environment. Now as part of our larger programmatic approach to managing power costs, we initiated efforts to enhance our customer communications last fall, providing our customers insights into our efforts while continuing to protect our customers and ourselves against the rising costs through our multiyear hedging efforts. At the start of 2023, we raised our power prices primarily in the EMEA region to recover these rising costs. While power markets remain volatile, our hedging approach meaningfully dampened the impact of the inflated energy costs for many of our customers.
We expect these power price increases will generate approximately $350 million of incremental revenues and costs in 2023. And as a result, the cumulative power price increases are expected to increase our revenue growth by approximately 500 basis points. Now despite these increases, our cost management efforts have protected both our adjusted EBITDA and AFFO on a dollar basis, but as expected, have negatively impacted our adjusted EBITDA margins for the year. We expect these higher energy costs to be transitory and should reverse course over our future yet-to-be-determined period, at which time both our gross profit and adjusted EBITDA margins will return to our targeted and expected levels. Now let me cover the highlights for the quarter. Note that all comments in this section are on a normalized and constant currency basis.
As depicted on Slide 4, global Q4 revenues were $1.871 billion, up 11% over the same quarter last year, above the midpoint of our guidance range on an FX-neutral basis, largely due to strong recurring revenues led by the Americas region. We continue to enjoy net positive pricing actions in the quarter. And similar to prior quarter, price increases outpaced price decreases by a ratio of 3:1. Q4 revenues, net of our FX hedges, included an $8 million tailwind when compared to our prior guidance rates due to the weaker U.S. dollar in the quarter. As we look forward, we expect a significant step-up in Q1 recurring revenues, largely due to strong net bookings performance and significant power price increases. Global Q4 adjusted EBITDA was $839 million or 45% of revenues, up 7% over the same quarter last year, at the top end of our guidance range due to strong operating performance.
Q4 adjusted EBITDA, net of our FX hedges included a $1 million FX benefit when compared to our prior guidance rates and $7 million of integration costs. Global Q4 AFFO was $658 million, above our expectations due to strong operating performance, including seasonally higher recurring CapEx and included an $11 million FX benefit when compared to our prior guidance rates. Global Q4 MRR churn was 2.2%, a derivative of disciplined sales execution, whereby we put the right customer with the right application into the right asset. For the year, MRR churn was better than expected with the average quarterly MRR churn at the low end of our guidance range. As we look forward into 2023, we expect MRR churn to remain comfortably within our targeted 2% to 2.5% per quarter range.
Turning to our regional highlights, whose full results are covered on Slides 5 through 7. APAC was the fastest revenue-growing region on a year-over-year normalized basis at 17%, followed by the Americas and EMEA regions at 10% and 9%, respectively. The Americas region had another quarter of strong gross bookings, lower MRR churn and continued favorable pricing trends led by our New York, Toronto and Washington, D.C. metros. The strength in the region remains broad-based, and the acquired Antel assets in Chile and Peru have performed better than we planned. Our EMEA region delivered a strong quarter with continued healthy pricing trends and an attractive retail mix as well as record inter- 40 new logos in 2022, and we’re already seeing customer interest for our Jakarta and Johor sites.
And now looking at the capital structure, please refer to Slide 8. Our balance sheet increased slightly to greater than $30 billion, including an unrestricted cash balance of $1.9 billion. As expected, our quarter-over-quarter cash balance decreased due to the significant planned increase in growth CapEx and real estate purchases and our quarterly cash dividend. I said previously, we plan to take a balanced and opportunistic approach to accessing the capital markets when conditions are favorable. As such, we’re happy to share that we recently priced a Japanese yen private placement, raising the U.S. dollar equivalent of approximately $600 million of debt with an average duration of greater than 14 years and a blended cost to borrow an attractive 2.2%.
This transaction is expected to fund in Q1. We also executed some ATM forward sale transactions in Q4, providing $300 million of incremental equity funding when settled. Pro forma for these transactions, we have nearly $7 billion of readily available liquidity and remain very well funded to meet our ongoing cash needs. Turning to Slide 9 for the quarter, capital expenditures were approximately $828 million, including recurring CapEx of $80 million. In the quarter, we opened six retail projects in Geneva, Los Angeles, Osaka, Singapore, Washington, D.C. and Zurich and three xScale projects in Dublin, Sao Paulo and Osaka. We also purchased our Geneva two and Sao Paulo four IBX assets as well as land for development in London. Revenues from owned assets increased to 63% of our recurring revenues for the quarter.
Our capital investments delivered strong returns, as shown on Slide 10. Our now 158 stabilized assets increased recurring revenues by 6% year-over-year on a constant currency basis. These stabilized assets are collectively 87% utilized and generate a 27% cash-on-cash return on the gross PP&E invested. As a reminder, similar to prior years, we plan to update our stabilized asset summary on the Q1 earnings call. And finally, please refer to Slides 11 through 15 of our summary of 2023 guidance and bridges. Do note, all growth rates are on a normalized and constant currency basis. Starting with revenues, for 2023, we expect top line revenues will step up by nearly $1 billion, representing a year-over-year growth rate of 14% to 15%. Excluding our power price pass-throughs, we expect top line revenue growth to range between 9% and 10%, above the top end of our long-term growth rates, as highlighted at our 2021 Analyst Day, reflecting the continued momentum in the business.
We expect 2023 adjusted EBITDA margins of approximately 45%, excluding integration costs. And excluding the impact of power price increases to revenues and higher utility costs, adjusted EBITDA margins would approximate 48%, the result of strong operating leverage and efficiency initiatives. We expect to incur $35 million of integration costs in 2023. 2023 AFFO is expected to grow between 9% and 12% compared to the previous year, and AFFO per share is expected to grow 8% to 10% at the top end of our long-term range from our 2021 Analyst Day. 2023 CapEx is expected to range between $2.7 billion and $2.9 billion, including approximately $150 million of on-balance sheet xScale spend, which we expect to be reimbursed as we transfer assets into the joint ventures and about $205 million of recurring CapEx spend.
And finally, we’re increasing the annual growth rate of our cash dividend on a per share basis to 10% due to strong operating performance. The cash dividend will approximate $1.3 billion, a 12% year-over-year increase, 100% of which is expected to be attributed to operating performance. So let me stop here and turn the call back to Charles.
Charles Meyers: Thanks, Keith. Our record of strong and consistent operating performance continued in 2022, and I’m proud of how the team delivered value for our customers and our shareholders. In 2023 and beyond, we believe the opportunity for our business remains significant as enterprises and service providers alike look to Platform Equinix as their key digital infrastructure partner to advance their digital transformation agenda. To expand our market leadership, reinforce our competitive advantage and drive sustained value creation, the leadership team and I have outlined a clear set of priorities for the coming year. First, we intend to press our advantage in our interconnected colo franchise, continuing to scale and evolve our best-in-class bookings engine, delivering on key projects to enhance operating leverage, further extending our superior global reach, refining processes and systems to enhance the Equinix experience for our customers and partners, and integrating our sustainability leadership into our services in ways that better help our customers meet their commitments to environmental and social responsibility.
Second, we intend to continue to enrich our platform value proposition by accelerating our digital services growth, delivering a more unified set of platform capabilities and by investing in ecosystem enablement, empowering key partners to bring their value to our platform more quickly and easily and allowing us to leverage their significant go-to-market reach. And we will advance these priorities by continuing to cultivate a culture that remains firmly people-first. We’re committed to making Equinix a place that attracts, inspires and develops the best talent in our industry, cultivating an in-service-to mindset and creating a place where every person every day can say, “I’m safe, I belong and I matter.” In closing, our business remains well positioned.
Despite a challenging macroeconomic and sociopolitical environment, digital transformation remains a clear priority across all industries and digital leaders will continue to harness our trusted platform to bring together and interconnect the foundational infrastructure that powers their success. In that vein, we’re pleased to welcome Tom Olinger to our Board of Directors. As the longtime CFO at Prologis, Tom has extensive international operating experience spanning real estate and technology, which will benefit our business. I’d also like to thank Budd Lyons for his exceptional service and contributions to the growth and success of the Company over the past 15 years as he rotates off the Board. So let me stop there and open it up for questions.
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