Iron Mountain Incorporated (NYSE:IRM) J.P. Morgan Ultimate Services Investor Conference November 16, 2023 9:10 AM ET
Company Participants
Barry Hytinen – Executive Vice President and Chief Financial Officer
Conference Call Participants
Alexander Hess – JPMorgan
Alexander Hess
Hi. Good morning, everybody. My name is Alex Hess. I’m an associate on the business and information equity research — services equity research team here at JPMorgan. We’re led by Andrew Steinerman. We’re pleased to kick off our Ultimate Services Investor Conference, welcome, with Iron Mountain, Executive Vice President and CFO, Barry Hytinen. Barry has been the firm’s CFO since January 2020. Welcome, Barry.
Barry Hytinen
Thanks, Alex. Great to be here. Thank you for having us.
Question-and-Answer Session
Q – Alexander Hess
Excellent. Barry, so Iron Mountain are increasingly focused on cross-selling, sometimes you just call it selling the entire mountain range. How do you benchmark success in cross-selling? Can you disaggregate maybe how you think about firm-wide organic revenue growth between upsell and cross-sell, new clients, less attrition and then pricing?
Barry Hytinen
Sure. So a little bit of context about the company. We have over 225,000 client relationships around the world. So it’s a large installed client base. And as you and Andrew know since you’ve been covering us for so long, the vast majority of those clients started with us in the record management space, where we are the, I think, the undisputed market leader and many of our clients standardize with us around their global operations or within the given markets that they play in.
And so over the last several years, really the last decade, the company has been investing intentionally into new products and services and broadening our solutions capability to offer and develop products that our clients can make use of that are easy, cross-sell or natural adjacencies. So things such as initially starting with scanning and then moving into more substantial digital solutions, beginning data center, particularly on the colo side and then ultimately now a pretty significant player in hyperscale.
Several years ago, the company in 2017, began making forays into the IT asset disposition space. One thing that’s common about all these offerings, Alex, is they are generally services and solutions that our B2B clients are in need of. And in many cases, especially for our larger clients, they’re looking for partners that can work with them on these sorts of services across their footprint. And so you know that we started introducing our Project Matterhorn internally at the company a couple of years ago now and cross-selling portion of that. And that’s how we measure one of the major KPIs that we measure. And we track it literally week-to-week in terms of when we’re signing new deals. You would have heard me on the most recent call mention that I believe 95% of the megawatts we booked in data center this last quarter were a direct cross-sell of the enterprise.
In our asset life cycle management, essentially 100% of the deals we booked in the quarter were cross-sells. And we’re very intentional on that because, as everyone always says, selling more into your installed client base is a lot easier relatively speaking, than developing new client relationships. You did ask about new client relationships in your e-mail in your question as well. And the thought there is we continue to win some level of new clients principally, it’s in the data center space, where we have technology companies that may be kind of upstarts or relatively new entrants that haven’t historically had a presence with us in some of the other lines of business, and that’s where we have the opportunity to cross-sell to that client base some of the other offerings.
And then you asked about retention or churn. Our retention rates, as you know, because we’ve made this data public for a better part of 15 years now, maybe 20, has been very consistent over time. And that’s, I think, a testament to the fact that our teams are very focused on delivering a consistent service and meeting customer satisfaction as a major KPI.
Alexander Hess
Excellent. Excellent. So just to refresh investors on Project Matterhorn. I believe you guys have called this sort of a change to the operating model. But sort of in plain English, what are you spending the money on? It’s $125 million a year…
Barry Hytinen
$150 million.
Alexander Hess
Excuse me, $150 million a year. And where is it going to work? What sort of the input where is the money going? And then what’s the output?
Barry Hytinen
Sure. So when you look at our business, Alex, and I’ll give a little bit of historical framework, we are a company that prior to Matterhorn was really general manager. So think about it in the sense of in a given market, we would have had a general manager over a, let’s say, a country that would have responsibility for sales, services, customer care, functional support, et cetera. As we’ve matured and grown significantly, it’s not that long ago that the business was just $1 billion or $2 billion of revenue. And this year, we’re in the — as you know, on track to do a $5.5-plus billion we’ve grown a lot, and that has given us the opportunity to be more focused in the way we present ourselves to clients as well as we have a much larger set of products and solutions than we did not that many years ago, as I was mentioning in your prior question.
And so we — through testing over the last couple of years, decided that dramatically changing the operating model made sense to become that much more focused on commercial. So we have historically not had a dedicated commercial organization. And so today, through Matterhorn, we changed our operating model, so we have a global commercial operation. Within that, it’s segmented off of verticals kind which is our top 300, 400 largest accounts worldwide and then regional or geographic dispersion for the remainder of the commercial organization.
Those — that team is solely focused on making sure that we’re offering our products and services to clients day in and day out, helping navigate through our client relationships such that we can put our best foot forward as it relates to cross-selling and broadening our share of wallet. With that, naturally, we conduct a lot of services every day on behalf of clients. So we created for the first time a global operations function, which is, within it, there is the services team that is very, very focused on on-time, complete delivery and fulfillment services, delivering very high customer sat. And then we’ve also constructed business units. So you think about the commercial organization goes out and represents our products and services to our clients. The operations team delivers all of the services there, too. And then our business units think like storage, asset life cycle management, data center, et cetera, they are focused on bringing together products and services and solutions that really go to our clients in a way that represent what the mountain can do. So developing asset life cycle management capability, developing our data center capability. And that gives the commercial engine something if you will, sell.
And together with that, we are also very, very much focused on driving productivity across the organization in Matterhorn. So that’s a — we’ve made tremendous strides over the last decade in terms of improving the profitability. And while we are continuing to focus on productivity, we are doing that with the intent to be able to invest further in the business and kind of keep the flywheel going sales engine, developing more products that we can then thereby sell more. And of course, we’ve been ramping our investment because we have been winning a lot of business, particularly on the data center side.
Alexander Hess
Right. Absolutely. So within that sort of framework of — you’ve got this focus on cross-sell, you’ve reorganized — you’ve reengineered the whole organization to sell not just a point solution or storage versus data center versus ALM, but really figure out how to solve the clients’ problems and meet their needs. But your — maybe to sort of as a more pointed question. You had a Net Promoter Score of 14.1 in 2022. It’s disclosed in your proxy every year. How important is raising that figure to your cross-sell efforts and will a higher NPS drive cross-selling? Or will stronger cross-selling drive the NPS higher? How — should we sort of see it as a leading sort of lagging indicator?
Barry Hytinen
Yes. I mean I think, clearly, NPS is an important metric. There’s plenty of academic studies that show that higher NPS is a positive. When it comes right down to it, though, I think it’s happy customers that buy more, Alex, when you think about it. And when you look at our cross-selling efforts that have been significantly ramping up and the trajectory we’re seeing both within new bookings as well as pipeline, I think it’s pretty clear that we’ve got a very — and we put that together with retention, et cetera. I think it’s very clear that we have a very happy client base. And so I measure our success with our clients based on a whole variety of KPIs, customer satisfaction surveys that we do on a routine basis throughout the year, our NPS score, of course, and our — how we do and on cross-sell. So it’s an important metric. It’s — I would say it’s a little bit lagging.
Alexander Hess
Got it. That’s very helpful. So maybe we’ll dig into some of the specific businesses. Global records and information management also called global RIM is the firm’s largest segment. And it’s an area where Iron Mountain have taken pricing actions, you call revenue management on both the storage and services side of the portfolio. Can you discuss the firm’s general approach to pricing? And then maybe to tie it into the cross-sell discussion, how does a broadening portfolio of solutions help you guys maintain healthy price value gaps?
Barry Hytinen
Sure. So it’s — you don’t have to go back too many years and 5, 6, 7 years ago, the company really didn’t have a revenue management program whatsoever else or had a very early stage one. And when I look at — and when we look at and talk to our clients about the value we bring them in records, I think fundamentally, what we’re focused on is delivering high value and appropriately getting revenue management in place to capture the relative value that would bring our clients. And when I look at the trajectory we’ve been on there, obviously, with what’s going on in the broader economy over the last couple of years, we’ve seen a little bit more revenue management action than my long-term target range, which I talked about at our last Investor Day last year. But I think the global RIM business can grow at least at the mid-single digit range that we were talking about last year at the Investor Day. In fact, I believe I remember saying that, that was probably the most conservative number on the page when we thought about our CAGR from ’21 to ’26 because we’ve obviously been running ahead of that number for some time. I think revenue management will continue to be year in and year out, a significant driver of growth and profitability for that business. Like I said, for the foreseeable future.
I do think we’re doing a little bit of — we’re a little bit beyond the norm of what we expect over the last couple of years. And that’s a function of somewhat catching up and where the broader market has been, but there is a very significant opportunity. And I think it’s just another call out related to our retention rates have been very strong, just even with revenue management kind of speaks to the fact that we’re delivering a lot of value. In terms of the opportunity to cross-sell, what sometimes people ask me, well, if you don’t see much elasticity, why don’t you push price that much further. And we don’t do that calculation that straight way. And we look at it from a more balanced perspective because we have a much larger set of solutions that we can offer clients. And while we are the standard for many of them as it relates to records, we’re in the early stage of building on our asset life cycle management capability, for example. And we think that there is a massive opportunity for growth in that category. There’s also a massive opportunity for growth in digital solutions. Both are those markets are — both of those businesses are businesses that have been growing quite quickly for us over the last several years, but they’re — we’re playing in very large markets that are growing fast. So we, again, want to be balanced about the way we a place so that we get a larger share of wallet.
Alexander Hess
Got it. Yes. So raising price and extra point in the slower growth areas like records management, maybe not as helpful as getting that same dollar in the faster growth area where that same client might come back next year and say, hey, we actually need even more of that service, whereas the records management say, they have a pretty good grasp on.
Barry Hytinen
You got it.
Alexander Hess
Got it. So shifting gears, you do have a lot of businesses, a lot you’re selling the economics of all these revenue streams can be quite different. And you added — you recently acquired a business called Clutter. Now we quite like that sort of B2C consumer concierge storage business. This is not like your sort of typical publicly traded storage companies, it’s a bit different. But Clutter has been valued at $600 million back in 2019. Your net purchase price was, let’s say, a fraction of that figure. What does actually owning Clutter bring to Iron Mountain? And are there any synergies between that B2C business and the B2B business, you guys are in more generally?
Barry Hytinen
Okay. So you summarized the business quite well in that is a portion that is a business that addresses the consumer directly in the form of valet or concierge type service in terms of storage. This is not like self-storage lockers. And so we have an app and consumers can go on that and tell us, generally speaking, what they want to have stored, et cetera, and they can have it return to them when they need it out of storage. We have been playing in this market for several years now. And we were — with respect to Clutter, we were essentially doing the back-end services and storage for them. they were doing the front-end elements, if you will. And the challenge that Clutter got into was one of so many venture-backed firms have had earlier this year, given what went on in the venture markets is they were in need of additional funding rounds, and it became kind of challenging. They weren’t losing a tremendous amount of money, I think, a couple of million of EBITDA loss. But it was a situation where we had the opportunity through a relatively complex transaction to get 100% ownership through a couple of transactions we’re at 85% that will maintain up from 25%.
What it enables us to do, Alex, is, yes, get some synergies. So it’s a business that was losing a small amount of EBITDA. I think by the end of the year, here in this quarter, we’re likely to get to breakeven from an EBITDA standpoint while still expanding the branding and building out the client base. It is we were already getting a level of synergies with our existing business as you alluded to, because we generally store the consumer stuff in with the business services just in different pallets, et cetera, different racking. There’s an opportunity to get continued synergies there as well as in the ongoing SG&A of the business. So it’s not a massive portion of the growth in light of the relative size of the company as is today, but it is one where secularly, we think consumers are going to want this concierge storage service in a larger and larger way going forward, and we’re happy to be the majority of it.
Alexander Hess
Got it. So it definitely helps from an absorbing capacity perspective. With — even though it’s a modest part of volumes help so — on the margin with volumes. Thinking about this, you guys have disclosed for a number of years, a couple of utilization metrics, building utilization, racking utilization. I don’t know quite how informative those are for the actual unit economics of the business for records management. But the format of call out on the last earnings call that about 15% to 20% of the operating portfolio that is sort of your footprint is under evaluation on any given day and that was in the context of converting a records management facility to data center. Is the right way to think about it that either you’re building utilization in the low 80s, you’re racking utilization in the high 80s, that 100 minus that figure is the amount of space you have that you can use for data centers?
Barry Hytinen
That’s an interesting way of framing it. The way we’re thinking about Alex is fairly targeted in the sense of what generally metropolitan areas where there is relatively less real estate, close to telecommunication hubs and things of that nature where we can get power, which of those sites that we have could be good targets for conversion. Because as you know, we have about 1,400 facilities around the world. And in a given major metropolitan market, we have typically quite a few warehouses. And so over time, we have been doing a systematic review of which of those could we convert. And in — on the most recent earnings call, we mentioned in Miami, we’re in the process of doing that. And we had, in that case, a site that we felt would be very attractive to clients on the data center side, and we have been systematically, if you will, decanting storage out of it for the last few quarters. By the end of this year, we’ll be completely out and we’ve been diverting new incoming volume into some of our other warehouses in the broader Miami area that actually improves by the way, economics at those warehouses as the utilization goes up, and it prepares the site for conversion.
And so we do see, as Bill mentioned on the last call, quite a few distinct opportunities. But I want to note that the vast majority of our data center infrastructure over the next few years in terms of build-out will be the sites that we’ve highlighted for some time now, and we’ve been actually aggregating more in places like Phoenix, Northern Virginia and Madrid, London, et cetera, where we’ve had very healthy success, see a lot of client demand. But I think it’s a nice opportunity for us to augment our data center platform by converting on a selected basis, warehouses from the record side, yes. And it’s something that I think we’re naturally uniquely qualified to do in the data center space in light of the fact that we have all these historic warehouse locations around the world, particularly in some markets where there’s a fairly substantial constraint on data center capacity.
Alexander Hess
Right. That’s well framed. Let’s pivot to data center. Let’s talk about sort of the CapEx here. You have guided to around $1.3 billion in CapEx this year. You have, by my math, about $1.1 billion and change of construction in progress in the portfolio. A lot of that is scheduled for delivery in 2024. Not all, but a lot. Data center has, of course, been the biggest driver of your CapEx. Should we see total CapEx normalize towards that $1 billion growth capital call out that you had at the ’22 investor event? And is growth capital the same as CapEx?
Barry Hytinen
Well, total CapEx includes things like maintenance CapEx and the small amount of capital that we’ve deployed into the other parts of the business. But other than data center, frankly, the rest of our business is pretty capital light at this point. So vast majority of the growth capital is, as you say, going into data center. When we gave the guidance last year as it relates to growth capital to support data center, I mentioned we will continue to play this out as we see how demand develops and facts and circumstances year-to-year. It’s pretty obvious that we’re running ahead of our plans. We’re continuing to win more business, larger deals and broaden our relationships, particularly on the hyperscale side, but inclusive of the retail side.
If we — when we were here last year at this conference, Alex, I think we would have been talking about a data center platform at Iron Mountain, which fully built out could have supported something in the vicinity of, like, let’s say, 700 megawatts. Today, as we here if we didn’t acquire any additional land and power, we’d support 860 megawatts of capacity because we’ve added more land, and we’ve gotten more power. We’re operating a data center platform that is 225 megawatts, of which we’re about 95% leased. So we don’t have a lot of capacity to sell. And then on the — what we’re under construction, as you referenced, that’s about 260 megawatts, but we’re pre-leased on nearly all of it. So we’re not building to spec. And I will say you should anticipate that we’ll continue to build out because with every deal we sell on the hyperscale side, it’s — as you say, as you allude to, is essentially for future delivery. And that is a, I think, a very compelling model because we can then be very intentional about what we’re building and know what our returns are going to be in light of the pre-leasing activity we’ve seen.
Alexander Hess
Right. And just to maybe benchmarking for investors, math is 94.6% pre-leased, let’s round up to 95% — sorry, 94.6% leased in the operating portfolio right now. 91.8% pre-leased in the development portfolio. So that is revenue that is in the future it’s got to build the box to put it in. So look, the cash-on-cash returns here for the hyperscale business have come up, as you guys alluded to. Had been 6% to 7% in went to 8% to 9% and you guys have been calling it out at 9-plus percent cash-on-cash returns as sort of what you’re underwriting when you’re leasing — when you’re signing leases. Is there any risk in your view as far as data centers go, that we’re approaching peak demand that you won’t see the next leg of leases being underwritten at that 9-plus percent that the next leasing wave is a little bit slower? And how would you alter capital allocation if, in fact, if we do go into a world where data set end demand is sort of levels off.
Barry Hytinen
Okay. So I’ll take the second part first. I mean I see us as stewards of capital. And so we are it’s our job to manage what is a relatively complex business and allocate capital the most efficient way we can. And I’m biased, but we’ve got a very bullish outlook for data center growth, Alex, over the next several years. I mean just to kind of frame the prior numbers you were referring to, right? We’re operating 225 megawatts. We’re under construction and largely leased on 260. So the business over the next couple of years from a megawatt standpoint, is going to more than double. And that’s without any additional leasing activity. So we’ve got a fairly high amount of visibility on revenue growth going forward.
As it relates to demand trends, as Bill and I have mentioned in the last few calls, our pipeline is getting larger, and our demand signals are increasing. And we are getting invited into many more hyperscale-oriented transactions and even having some of our clients talk to us about geographies where they need a level of third-party data center where we don’t have capacity today or we don’t even have a presence. So I think that speaks to the fact that we are getting into a very relationship-oriented position with some of our key clients on the hyperscale side.
As it relates to where returns are going to go, Alex, I would say we never got down and we as a business never got down into like the 6s and 7s that you were referencing. We certainly believe that there were other data center providers in some markets, maybe not ones that we were operating and that got that low, we probably troughed out in the low 7s. And we’re essentially writing on the hyperscale side in the 9s at this point, that’s moved up pretty consistently over the last 1.5 years with pricing. And it should, of course, because where debt has gone and where costs have gone. I don’t see a situation where in the near term, that’s going to change. In fact, if anything, it seems to be pretty steady to continuing to move up I think that speaks mostly to the fact that there’s a lot of demand and there’s not a lot of capacity to sell out there.
Alexander Hess
So let’s pivot with that to ALM, asset life cycle management. This is a smaller business for you guys. But it’s one where you guys are pretty bold up and it’s a business that sort of matches nicely with the data center business. You recently announced the intended acquisition of Regency Technologies for $200 million. That expands your presence into new verticals, into new selling channels. But I wanted to sort of take a step back and — your latest guidance points to, call it, $176 million to $178 million about in ALM revenues this year, pro forma for Regency, which is north of $100 million in revenues, we’re talking something like $285 million, $300 million, let’s call it, probably closer to $285 million. How do we get from less than $300 million this year in pro forma to the $900 million-plus outlook you have for 2026, which is 3 years out?
Barry Hytinen
Yes. So there’s a couple of things I’d point to. One is the market for asset life cycle management is very large. Think $30 billion total addressable market, it’s about a $15 billion a year served market. We are one of the largest players, which is in that space, which is to say it’s very fragmented. There’s a lot of demand that’s being serviced even for major global 500 and Fortune 1000 kind of companies where they’re dealing with a patchwork quilt of small vendors in asset life cycle management. We see the opportunity to organically grow quite appreciably on the enterprise side.
The second vertical that we have in asset life cycle management is OEM, where we’ve recently signed two of the largest — two of the three largest PC manufacturers in the world, and we’re also in setting up OEM deals with leasing companies and the like to broaden our reach and serve clients through that sort of OEM model.
Lastly, and perhaps most importantly, in our business is our hyperscale decommissioning business. That is a business that has a tremendous amount of incremental growth over the next few years in light of what I would describe as very high visibility demand. Because when you think about what we do on the behalf of hyperscale data centers is we’re essentially decommissioning the gear or the kid, if you will, that’s in those sites. And most of the cloud players refresh their data center assets inside them about every 5 years, plus or minus a year. And so the year that we’re decommissioning this year, Alex, was put in service 5 years ago, and when you think about how massive the infrastructure build has been over the last 5 years and likely to continue to grow over the next 5 years, there’s a lot of visibility to data center gear that needs to be decommissioned.
We, as you know, do a revenue share model on that part of the business. And we have very strong and broad relationships with the hyperscalers. And so as we continue to decommission going forward, we’re going to be decommissioning much larger books of business. And together with that, last point would be the revenue that you cited this year has obviously been considerably impacted by component pricing. That started to improve, as I mentioned on the last call, it was up kind of teens on a sequential basis as of the last call. But you don’t have to take my word for it. There are industry analysts that cover this space for years and years who have suggested that they expect component pricing to be up 50% to 75% in 2024 as compared to ’23. So there’s — so how are we going to grow in asset life cycle management. One, we’re going to organically capture more market share as we build out and offer more solutions on the enterprise side and cross sell. Two, we’re broadening our OEM relationships. And on the hyperscale side, we’ve got an opportunity to both grow significantly on the volume side as well as likely see nice pricing.
Last point, I guess, I should add is part of the data center boom that’s going on right now is AI-driven. And that gear is generally much more expensive than non-AI gear. So when you think about what we’ll be decommissioning in 3, 4, 5 years from now, it’s at a much higher ticket price than what we decommission today. And since we got a revenue share, it’s sort of like another leg up in asset life cycle management. We like the category.
Alexander Hess
Great. That’s awesome. And I think we’ll end it there for the day. Thank you, everybody, for joining us, and have a lovely day.
Barry Hytinen
Thanks, Alex.
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