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Iron Mountain Incorporated (NYSE:IRM) Q3 2023 Earnings Call Transcript

Iron Mountain Incorporated (NYSE:IRM) Q3 2023 Earnings Call Transcript November 2, 2023

Iron Mountain Incorporated misses on earnings expectations. Reported EPS is $0.45 EPS, expectations were $1.

Operator: Good morning, and welcome to the Iron Mountain Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Gillian Tiltman, Senior Vice President and Head of Investor Relations. Please go ahead.

Gillian Tiltman: Thank you, Andrea. Good morning, and welcome to our third quarter 2023 earnings conference call. On today's call, we will refer to materials available on our Investor Relations website. We are joined here today by Bill Meaney, President and Chief Executive Officer; and Barry Hytinen, our Executive Vice President and Chief Financial Officer. After prepared remarks, we'll open up the lines for Q&A. Today's earnings materials contain forward-looking statements, including statements regarding our expectations. All forward-looking statements are subject to risks and uncertainties. Please refer to today's earnings materials, the safe harbor language on Slide 2 of our presentation and our quarterly report on Form 10-Q for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements.

In addition, we use several non-GAAP measures when presenting our financial results, and we've included the reconciliations to these measures in our supplemental financial information. With that, I'll turn the call over to Bill.

A close-up of a computer monitor, displaying complex information management software.

William Meaney: Thank you, Gillian, and thank you all for taking the time to join us today to discuss another record quarterly results. Once again, our Mountaineers have gone above and beyond in their efforts to serve our customers with innovative solutions that support their businesses, putting our customers first runs deep in all we do and sits at the core of Iron Mountain. This legacy, combined with our dedication to not only protect but to elevate the power of our customers' assets and work continues to drive our execution and growth. Turning to our results. We delivered record third quarter performance once again achieving our highest ever quarterly revenue of $1.4 billion which to put that in context, is an increase of over $100 million year-over-year and record EBITDA of $500 million.

The strength in these results is a direct result of the positive momentum we are building from Project Matterhorn. We are more than a year into our growth journey and are pleased with our enhanced operating model, which is empowering our commercial organization to cross-sell our products and services. In the third quarter, we delivered organic storage rental revenue growth of 10% as a result of continued revenue management success and improved volume trends and drove over 20% organic growth in our data center business. Let's begin by turning to some of our customer wins, which played a significant role in our ability to achieve these record results. In our records management business, we had a public sector win this quarter in the U.K. with a new contract worth nearly $2 million.

This new project is with an important government agency and has been an Iron Mountain customer for 18 years. In that time, our relationship has expanded from an off-site records management provider to an integral partner at our customers highly secure site, which indicates the trust and confidence our customers have in us. By relocating and digitizing important records securely, our customer can make faster and more informed decisions that are critical due to the sensitive nature of its work, whilst also freeing up on-site space. As a public sector organization, the value for each dollar they spend is a key concern for this customer, and we continue to demonstrate that Iron Mountain is the partner of choice for their digital transformation journey.

In Digital Solutions, this business continues to gain momentum, especially with our ability to provide higher value, technology-enabled solutions to new and existing Iron Mountain customers. Customer wins for our digital solutions are underpinned by three key differentiators. First, our unique ability to provide a unified end-to-end solution for our customers across their physical and digital assets. Second, our proven capabilities to operate at scale in complex regulated environments and industries. Last, but importantly, our ability to drive business outcomes for our customers, leveraging our artificial intelligence platform, which translates unstructured data into actionable insights. For example, we have been awarded a contract by the TV and film production distribution division of a major technology company, with a story history dating back almost 100 years, we are leveraging our InSight platform to digitize, archive and preserve over 200,000 legal records containing the media rights for distribution and licensing of thousands of film in titles and TV episodes.

With all this data available through one cloud-based digital platform, we can help our customers identify and develop new business opportunities by leveraging its rich intellectual property. This latest deal builds on a growing portfolio of solutions we are providing for this global customers' different business units, including records management and IT asset disposition. The multifaceted long-standing relationship we have with this customer truly highlights the success of Project Matterhorn and our cross-selling efforts. Now let's turn to our continued success in winning government business around the world. We are supporting government agencies in Europe to digitize public services as part of an initiative to make their economies and societies more sustainable and resilient following the COVID-19 pandemic.

This quarter, we won a two-year deal to digitize around 10 million files to accelerate a backlog of pension payments for one national government Social Security Administration agency. In awarding Iron Mountain this contract, the customer recognized the specialist nature of our solution, including our AI and human in the loop capabilities and our ability to quickly scale operationally to deliver this project within the required time frame. Also in the public sector, we are pleased to be working with the U.S. citizen and Immigration Services to help drive efficiency and reduce the backlog of applicants awaiting adjudication decisions to become U.S. citizens. Over the last 10 years, we have been a proud partner with this important government agency.

Having been entrusted with over 500,000 cubic feet of files in high-density tapes, our digitization solutions will enable remote adjudicators to have faster access to vital data, helping them make overall immigration decisions. Turning to our asset life cycle management business. Consistent with the projections we shared last quarter, pricing has been stable, having hit a low level last February. Whilst industry projections are for significant price improvements in late 2023 and throughout 2024, we have continued to take a prudent perspective and are only assuming marginal incremental pricing improvement for the remainder of the year. Our pipeline is robust, and we have delivered solid results this quarter that were in line with our expectations.

Also, we are excited to share that we have signed an agreement to acquire Regency Technologies subject to customary closing conditions as we continue our roll-up of the ALM market. Regency is a little over $100 million annual revenue business in the ALM space based in Ohio. The long-term customer relationships that Regency brings to Iron Mountain are an excellent strategic fit to our ALM business. Regency will add operational scale as we continue our growth journey in this fast-growing sector. As the world's need for both secure and more circular solutions for end-of-life IT assets becomes more vital, we are pleased to add to our capability in this category. With that, let us turn our discussion to some individual wins within the ALM space this quarter.

I am pleased to share a particularly exciting win for our ALM business with a large global technology company. The deep relationship and trust we have built with this customer over many years was instrumental in Iron Mountain securing the significant deal serving multiple business lines and geographies for the customer. These geographies include India, where our presence and ability to service the customer was a decisive differentiator alongside our global footprint, the expertise and responsiveness of our ALM team and our reputation for data security and chain of custody. Also in ALM, we have signed a long-term contract with a private U.S. insurance company that has been a long-time customer of our U.S. Secure Shredding and Destruction services.

Last year, we began supporting this customer with one-off IT asset destruction projects, which demonstrated the value of remarketing thousands of these assets. The agreement we have now reached positions us as our customers strategic partner for its future end-to-end IT asset management needs. By supporting the requirements of an organization with over 37,000 leased IT assets that need returning from remote employees, we are extending the value of the solutions we bring and have changed our customers' perception of what Iron Mountain can offer. Finally, we have a particularly exciting win to share. We have secured a significant five-year ALM contract to support a leading pharmaceutical retailer in the U.S. to advance its commitment to zero waste by 2030.

Iron Mountain will provide a circular economy solution by removing and recycling thousands of tons of pharmaceutical stock bottles and pill bottles from thousands of its retail outlets across the U.S. We are providing this leading retailer with an advanced recycling solution turning plastic into raw materials. This will enable the creation of new virgin plastic, helping this retailer meet their environmental goals. This is made possible by the scale of our physical presence, our highly experienced ALM team and a reporting platform for all of the confidential weights that we have managed for this customer since 2014. We are pleased to be able to extend the value of our partnership with this new contract. Moving on to our data center business.

Our pipeline continues to expand with positive pricing trends. The continuing strong demand for data center capacity, continues to be driven by digital transformation and most recently, the explosive demand for AI. Supporting the growth and expansion needs of our customers is paramount to our collaborative partnerships, and we are pleased to provide this required capacity to our customers in the markets in which they are keen to operate. From a leasing perspective, in the third quarter, we signed 65 megawatts. This means that through the end of the third quarter, we have already signed 120 megawatts far beyond our original projection, for the year of 80 megawatts. In the quarter, 60 megawatts were signed across two leases to a single Fortune 500 technology company at our campus in Northern Virginia.

The deal provides this hyperscale customer with capacity across two buildings on our 142-acre, 276-megawatt campus and represents, the largest revenue deal in Iron Mountain data center's history. We have also won a deal to provide nearly three megawatts of capacity at our Frankfurt data center for an existing North American cloud services customer looking to expand their European footprint. Our sales teams work closely with the customers' technical team to agree on a strategic solution that meets the customers' unique infrastructure needs. Given the strong customer demand in our data center business, we are continuing to expand the reach of our platform. To that end, I am pleased to announce a couple of capacity additions. First, we are repurposing a previous records management facility in Miami to data center use.

Miami is a key market, where a number of our customers, are looking for edge deployments and this newly repurposed facility will add 16 megawatts to our data center portfolio. Furthermore, we have acquired additional land and power this quarter, growing our total data center capacity to 860 megawatts, up 80 megawatts from last quarter. In summary, the hard work dedication and execution of our Mountaineers continues to deliver strong results for our loyal customers and ultimately, our company shareholders. Through our Matterhorn initiative fueled by our enhanced operating model, our team continues to achieve record sales growth by selling our entire mountain range of products and services to our long-standing 225,000 customers. Even in a tumultuous geopolitical climate, the resilience and strength of our business model, combined with the dedication and customer-first passion of our mountaineers continues to drive us ever higher.

I would also like to express my deepest gratitude to our team for their hard work and continued focus as we continue our growth journey. With that, I'll turn the call over to Barry.

Barry Hytinen: Thanks, Bill, and thank you all for joining us to discuss our results today. In the third quarter, our team achieved strong performance across all metrics, including another record for revenue and EBITDA. Revenue grew to $1.4 billion, up 8% year-on-year on a reported basis and 7% on a constant currency basis, in line with our projection. Our key highlight in the quarter is our organic storage rental revenue, which grew 10%. This reflects continued strong contributions from revenue management, data center commencements and positive volume trends. Total service revenue was $530 million, consistent year-over-year on a constant currency basis and slightly improved on a sequential basis. As we discussed last quarter, service revenue includes the impact of component price declines versus the prior year.

Excluding our ALM business, total company constant currency revenue growth would have been 9%. Our team delivered a new record for adjusted EBITDA at $500 million, up 7% year-on-year. This was modestly ahead of our guidance for the quarter despite the U.S. dollar strengthening significantly. On the same foreign exchange rates we used in August, we would have achieved $504 million of adjusted EBITDA in the third quarter ahead of our projection. EBITDA growth was driven by continued strength in revenue management and strong data center commencements. Adjusted EBITDA margin was 36%, up 100 basis points sequentially and ahead of our projections by 50 basis points. Upside was driven by productivity across our operations, including improving trends in our ALM business.

AFFO was $290 million or $0.99 on a per share basis, up $2 million and $0.01 on a per share basis from the third quarter of last year. Both of these were in line with the projections we shared on our last call. On the same foreign exchange rates, we were using in August, AFFO would have been $294 million, or $1 on a per share basis, both ahead of our projections. And now turning to segment performance. In the third quarter, our global RIM business achieved revenue of $1.18 billion, an increase of $92 million year-on-year or 8%. Revenue management and positive volume trends, contribute to strong organic storage rental revenue growth of 8%. Global RIM adjusted EBITDA, was $517 million, an increase of $33 million year-on-year. Turning to our global data center business.

The team delivered revenue of $128 million, an increase of over $27 million year-on-year. Organic storage rental revenue growth was strong at 22%, driven by commencements and improved pricing. Data center adjusted EBITDA was $53 million, up over $10 million or 25% year-on-year. Turning to new and expansion leasing. We signed 65 megawatts in the quarter, bringing total bookings year-to-date to 120 megawatts. As Bill mentioned, we signed two leases with a client for a total of 60 megawatts. The leases are expected to commence in phases from late 2024 through mid-2025 and have a 15-year term. With the strength of our leasing, I'll note that our weighted average lease expiration is now 8.1 years, which is up a full three years from the third quarter of 2022.

As we've talked about before, one of the key elements of our Matterhorn growth plan is to expand cross-selling. Our team is doing a great job in this regard. For example, 95% of the megawatts booked in the quarter, were a result of cross-selling activity. Market-to-market was up over 11% in the quarter, reflecting the continuing trend of strong and improving pricing, while churn was only 1%. Turning to asset life cycle management. In the third quarter, revenue was consistent on a sequential basis, in line with the projections we gave on our last call. We are seeing positive momentum across all three verticals of our ALM business, hyperscale, enterprise and OEM. ALM bookings have been running ahead of our projections. And similar to data center, our commercial teams are doing a great job with our cross-selling initiative.

For example, of the new ALM deals we signed in the quarter, nearly all of them were cross-sell wins. I think this is an early validation of our strategy and supports our long-term view that we can gain considerable market share by leveraging our deep customer relationships and expanding ALM capabilities. Now, I would like to spend a moment addressing component pricing. As expected, pricing was consistent with the second quarter on a sequential basis. At this point, in the fourth quarter, there are indications that component pricing is beginning to recover. For example, since the end of the third quarter, we have seen the pricing for memory rising week over week with it now up nearly 15% on a sequential basis. As we've mentioned on our last call, industry analysts have been forecasting rising prices by late this year, with continued recovery in 2024.

Turning to our pending acquisition of Regency Technologies. As Bill mentioned, we are very pleased to have signed this deal. We've known Regency for years and have always been impressed with the strength of their team, range of capabilities and focus on sustainability, productivity and customer service. We see this acquisition as an excellent strategic fit furthering our ability to serve our expanding ALM customer base. The purchase price is $200 million with $125 million to be paid at close and the remainder due in 2025. Subject to performance, there is also an earn-out, which could be payable in 2027. On a trailing four-quarter basis, Regency has revenue in excess of $100 million. We are acquiring the business at an approximate 7.5 times EBITDA multiple.

We expect the deal to close late this year or early in 2024. We expect this will be immediately accretive to AFFO and have no impact on our leverage calculation. Turning to capital. In the third quarter, we invested $322 million, of which $287 million was growth and $35 million was recurring. Turning to the balance sheet. With strong EBITDA performance, we ended the quarter with net lease adjusted leverage of 5.1 times. We expect to exit 2023 at this level. I think it is worth noting that this marks our lowest leverage level in a decade. Our Board of Directors declared our quarterly dividend of $0.65 per share, to be paid in early January. We remain dedicated to our disciplined approach to capital allocation as we are funding our growth objectives while continuing to drive meaningful shareholder returns.

And now turning to our projections. For the full year, reflecting our year-to-date performance and strong outlook, we are pleased to reiterate our full year guidance. For the fourth quarter, we expect revenue of approximately $1.44 billion, which represents 12.5% growth year-over-year as revenue management actions and improving trends in ALM accelerate our growth. I would like to call out using the same foreign exchange rates we had in August, fourth quarter revenue would have been $25 million higher in this projection. Adjusted EBITDA of approximately $520 million or 10% growth. AFFO of approximately $310 million, which is 8% growth and AFFO per share of approximately $1.05, which is 7% growth from the prior year. With the same FX rates we were using in August, this projection would be approximately adjusted EBITDA of $528 million, AFFO of $318 million and AFFO per share of $1.07.

In conclusion, we are pleased to report another record quarter of results. Our team is executing well, driving considerable growth of revenue and EBITDA aligned with our Matterhorn plans. I would like to take the opportunity to thank our entire team for their efforts to support our customers and drive our growth. And with that, operator, will you please open the line for Q&A.

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