Iron Mountain Incorporated (IRM) Earnings Call Transcript & Summary

Yes. So Jon, and thanks again for having us here. I would say that the pipeline is very robust, as Bill is mentioning. And we have done a lot of repeat business, as you know, with the major cloud hyperscalers and I expect that the vast majority of our business going forward will be continuing with those very high investment-grade type clients that we've become a clear partner to over many years now. As it relates to smaller clients or new upstarts, et cetera, we like all of our customers, of course. But I would say that it comes down to economics. And we really like the long-duration leases with the major high-profile cloud hyperscalers, the 10, 15 years or longer that Bill was just alluding to. And we've been writing deals for the last few years in at cash-on-cash unlevered returns of like 10%, 11%, 12%, something of that nature. And we certainly get inquiries from other customers like neoclouds and others. And to date, our business with those -- that portfolio of clients has been quite small. It's 5% or so of our portfolio. And that's partly because if you look at what we've had available, we've generally been leasing it to the largest players in the industry, Jon. And so it hasn't -- you even mentioned enterprise. Look, a few years ago, 5, 6 years ago, Bill and I had a plan with Mark, our Head of Data Center around, okay, this asset is going to be a colo site for enterprise, that one as well, that one as well. And none of those 3 assets I was just referring to ended up that way because we had the opportunity to fully lease them to single tenants for a much longer duration. So that's kind of the continued plan. And in light of with the pipeline, that's what I expect it to continue to look like, Jon.

So we had a hyperscale on one of the earlier panels talked about their topology and kind of the rigid AZ architecture is morphing into something that can be a bit less stringent, still need to be relatively close to GDP centers, but doesn't have to be quite where it used. And then there's remote locations. So as you think about your growth into new markets, whether it's domestically or internationally, greenfield JVs like with Web Werks or M&A, what does the landscape look like and your appetite to allocate capital there versus, say, ALM or other segments?

Maybe I'll start kind of where we're looking and then maybe Barry can talk about how we think about the capital allocation across the portfolio, which might be a good segue to talk about ALM a little bit. But I think that, to your point, is either lucky or we're clever, is that if you think about we were the first to move to Manassas, where people are saying, "Well, that's not Ashburn." And now Manassas is very much or Prince William County is very much -- considered people thought it was in the U.K., we went to Prince William County, but now they realized that it's is just down the road from Ashburn. And then Richmond, almost the same thing. We built conviction around Richmond, about 3 or 4 years ago, we started looking at maybe 5 years ago. And that's turned out to be a very good asset, where people are starting to embrace some of those areas. And I think given the scarcity of powered and permitted land, I think people are opening the aperture. That being said, is the key markets are the key markets. So we still look when we kind of, I would say, go out of one of those areas where we have line of sight that it can be kind of a Tier 1 or close to Tier 1 data center market because that's where our customers first want to go, especially for cloud and inference build-out, which is where our focus is. And then more broadly internationally, so we like India a lot, right? We like a number of the key -- I would say, the FLAP markets plus Madrid in Europe a lot. I think those will continue to be there. And there is strong demand, both from corporates, from cloud providers as well as the government in the EU on trying to build more data center capacity to catch up on what they feel is they're behind on AI. So I think across the market in terms of joint ventures, as you said, we started off in India with a joint venture, but that was really because we wanted a partner that we felt comfortable with that could help us navigate the Indian market, especially when it was acquiring land. And we actually had a path to take that to majority, which we did quite quickly by just putting in all the capital for the growth. And then eventually, we bought them out. And then in the Middle East, we had a different approach is that the Middle East is more than one country. So we looked for an operator that could really work with us across the region and it's someone that kind of understood foreign capital like ourselves. And so Ooredoo, which is the telecom operator, which is controlled by QIA. I mean, QIA is a very sophisticated global investor. They understand how people like us think and they understand how to have a partnership. And I was speaking to the CEO of Ooredoo just last week, and that partnership is working really well. He's getting a lot of value that we're building a minority, but a footprint across the Middle East, which made a lot of sense for us.

Yes. And Jon, from a capital allocation standpoint, the first thing to note is, other than data center, the vast majority of our business grows with very limited CapEx. And our core physical storage business, which continues to grow both on an organic volume basis as well as dollar value, and we've never stored more physical volume than we're storing right now, Jon, for clients is it just generates a tremendous amount of cash flow. And we are utilizing that cash flow together with what I think is a pretty conservative or prudent level of leverage, which is just under 5 turns currently. To put that in perspective, 7 years ago, we were cresting 6x and we're now at about 4.8. And so with 5 turns of leverage on the incremental EBITDA we've been generating each year together with the cash generation from the business because we have actual retained cash flow from our core business, we can fully fund our build-out. And so generally speaking, we've got a digital business that's growing teens to 20%, and it is not particularly capital intense. We've got our data center business, which obviously is capital intensive, somewhere between, let's say, $9 million to $12 million or $13 million a megawatt to build out, but with very good returns, and very good cash generation with excellent clients. And then we have our ALM business that you mentioned. And in the ALM business, the asset life cycle management, for those people that are not as familiar with that part of our business, this is where we are helping clients with IT gear as it either reaches obsolescence or it's time to refresh or renew it. And so in that business, we are addressing a massive total addressable market. It is a $35 billion annual TAM. And of that, 75% of it is in what we call the enterprise side. So think corporate clients, Fortune 100, Fortune 1000, that sort of thing, whereby they have gear that is consistently going obsolete or time to refresh every year, every quarter, year in, year out. And so what we do in that case is it's largely a fee-for-service, whereby we are building a worldwide capability to serve clients in a way that they haven't historically been served. Today, that market is extraordinarily fragmented with very significant large number of small mom-and-pop kind of founder-led IT asset disposition vendors that service very large corporates and on a regional basis. And the market is -- that's just how the market looks. Today, what we're doing is we're building a worldwide capability to service a client. And when you talk to really large corporates, they are very focused on wanting to have this service provided based on chain of custody, consistent process, trust, privacy, security. They recognize and increasingly so that anything that's been written to can turn into a liability, because you don't want a hard drive with confidential information or personally identifiable information just getting out there. And so having a company of wherewithal of Iron Mountain, I think is an extremely compelling proposition. So that's a business, just to give you a framework of growth. In 2021, we did about $30 million of business in enterprise asset life cycle management. This year, we'll do $600 million. And that business is growing both organically and inorganically at a very high rate, and we think we're just getting started there. The cross-sell is very well off of our core, where we have 245,000 clients. Most of them standardized with us on our records business decades ago literally. And so we're working to cross-sell ALM services to them. The other part of our asset life cycle management business is in hyperscale data center decommissioning. And here, what we're doing is helping the largest cloud hyperscalers, many of whom are tenants of ours in our data center leasing business with the decommissioning of servers inside their and third-party data centers. And so on average, we find that cloud hyperscalers are refreshing that gear about every 5 years, plus or minus a little bit. And they're refreshing for different reasons than on the corporate side. They're doing it because they can get better compute or better power efficiency with new generations of technology that have come along since they installed those old servers. So those servers that come out, they have residual value left in there. And so what we and a few other players do for them is we'll take that gear in, we'll wipe it and give them a clear certification that we've sanitized anything that's been written to. And then we'll physically disassemble the server and sell the gear off in a revenue share model, which we can talk about further. But this part of the business is also growing quite rapidly, because you think about what are we doing, we're working with clients that are refreshing data center infrastructure. And as we all know, data centers have been growing quite rapidly over the last, let's say, decade. And as that continues to refresh, there's more and more gear. To give you a sense, the addressable market for hyperscale data center, we estimate is about $3.5 billion based on last year's number. And just based on the growth of data centers and what will refresh over the next few years, we estimate that the TAM for that piece of the business will double to $7 billion in the next 4 years. So it's a huge growth area. And while we've been acquiring on the enterprise side, we're generally allocating a relatively small amount of capital to that part of the business, Jon, because it's not a particularly capital intense. As we find new deals, we will acquire, but we've been generally buying in between 5 and 7.5x trailing EBITDA, synergizing those down very rapidly. We've done, I think, 7 deals in the last 3 years, and all of them have been very significant successes. And as we find more targets to acquire, we are happy to do that. And in every case, it's been founder-led businesses that we've acquired. We've convinced the founders to come over and work for us part of an earn-out process and all of them are still working for us. So it's just a super interesting part of our business that is growing rapidly alongside a rapidly growing data center and digital business.

I've got one more question, maybe kind of putting it all in the mix here. You've got ALM, data centers, digital solutions, obviously, the core business. And as the mix maybe approaches more 50-50 for your growth businesses, I don't want to say the core business isn't growing, but as that profile emerges, they have different margin profiles. So how would you kind of help us think about the next several years? And what are the puts and takes around margins given that each of your segments has a different profile?

So first, if you take a step back, is Barry and I have been consistent both 5 years ago and today that when we embarked on this -- the growth strategy, we said that we could actually deliver roughly 10% plus AFFO per share growth. And we've done that. And we said that -- and my contacts are pretty good, so I can see pretty far ahead is that we continue to see 10% plus AFFO per share growth. And of course, last quarter, so far this year, we've done a lot better than that. But from an underwriting standpoint, we see that capability. So we start there, right? And because we think we're a total TAM for all our products and services of $175 billion, shame on us if we don't continue approaching $8 billion in sales today, but we will continue to drive growth with that in mind. So when we look at capital allocation across the businesses, and you're right to point out they have different margins. They also have different investment profiles in terms of how much capital it takes or fuel that you need to put in it. So some things you can grow much faster with very little fuel and other things to drive the growth, you have to put more fuel into it. We look at it through the capital allocation because we start with what we've underwritten to the community and what we're going to deliver as a team. So the 10%, so people should take away is that as we do that, that's kind of in the back of our mind. So as we go, it gets easier. So what do I mean by it? It usually, when you have a story as you're compounding on a bigger base, it gets more difficult. In our case, when we started this, we had 15% of our sales in those growth portfolio, ALM, data center and digital. Today, it's 35%. And as you point out, it will be 50%. So at 35%, we're delivering 700 basis points of consolidated growth, and that will just build. So the tailwinds of the business become stronger. So the last thing I would just kind of leave you with is that if you think about the story that we're underwriting, if I said to you, there's a company out there that has consistently driven 10% AFFO per share growth that drives 10% dividend -- annual dividend growth and maintains leverage flat to slightly down, what would you say the dividend yield of that stock should be today? And I think it's probably more like 1% or 2%. And today, we're at 3%. So Barry and I feel that we have a financial model that allows us to do that without using equity, and we're generating the cash and the track record will speak to itself and that we'll continue to drive those kind of shareholder returns.

Thanks very much for your time.

Thanks for having us, Jon.

Thanks.