We met with Charles Meyers (CEO) and Keith Taylor (CFO) at EQIX’s headquarters following Q3 earnings last week. We gained a ton of insight into the drivers of higher organic growth, the impact the DLR/INXN deal may have on EQIX, the path to margin expansion, and future M&A. We came away thinking EQIX is poised to accelerate growth and outperform expectations in 2020.
Organic growth likely modestly improve in 2020: Management spoke to modestly improving organic growth across all three regions. In the US, growth should accelerate for the same reasons it was supposed to accelerate in 2019 – improving growth at VZ and a waning 10-100G impact. In EMEA, the DLR/INXN deal may give EQIX the opportunity to accelerate share gains in Europe next year (see below). In APAC, bringing more capacity online (Singapore) should drive robust growth. While EQIX continues to hit record levels of bookings, they are fighting the law of large numbers, so they essentially need to keep hitting records to sustain growth rates. We suspect management is likely to guide to organic growth of 9% in 2020 (flat with 2019), but we see room for upside during the course of the year.
DLR / INXN deal presents near-term opportunity…: Mgmt. said they have been gaining share against INXN, and they see an opportunity to accelerate those share gains next year as INXN will be distracted by the merger and a difficult integration. Mgmt. also alluded to INXN raising price very quickly, whereas EQIX has taken a more measure approach, which may make EQIX’s products relatively more attractive in the near-term. Charles made an off-hand comment that INXN shareholders weren’t happy with the deal (given the stock performance since the announcement), but EQIX couldn’t come over the top for regulatory reasons.
…with modest long-term impact: The DLR/INXN deal could impact Equinix in three markets: 1) the European retail colo market; 2) the market for INXN’s customers to expand into DLR data centers in other regions; and 3) the hyperscale market in Europe. In the first market, the deal doesn’t really change the competitive dynamics for EQIX. In the second market, this will impact EQIX on the margin, but DLR only has $0.5BN of retail colo assets outside of Europe, ~10% of the size of EQIX. In the third market, the combination of DLR / INXN will increase competition, but they see so much demand that they view their guidance for deploying 500MW of capacity as still achievable. On balance, we think this deal will be a modest long-term negative for EQIX, but too small to materially impact our thesis.
Further margin expansion likely: Equinix is constantly weighting investing in additional data centers and new products with their desire for margin expansion. On balance, Keith said they are biased towards margin expansion going forward, so we expect them to inch closer to their target of 50% margins by 2022. In 2019, margins were pressured by 160bps from factors that should ease in 2020 – utility costs have stabilized (80bps), the accounting change won’t repeat (30bps), and the drag from data center expansion should wane (50bps). We don’t expect EQIX to capture all 160bps of expansion potential in 2020, but they have a lot of headroom to work with.
Expect further M&A over next few years: Mgmt. highlighted India, South America, and Southeast Asia as key markets where they want to build additional scale. They continue to shy away from M&A in China and Russia due to the geopolitical risks.
AFFO growth should accelerate: After a relatively lackluster year for AFFO per share growth of 8% in 2019, we think the modest improvement in organic growth and margin expansion put the company on solid ground to accelerate growth AFFO per share. Our assumptions for a ~50bps of organic growth improvement and ~100bps of margin expansion should drive hat least 150bps of higher AFFO per share growth; M&A may drive additional upside beyond that.