Equinix Inc (EQIX) 2012 Q4 法說會逐字稿

Good afternoon, and welcome to Equinix conference call. All lines will be able to listen-only until we open for questions.

Also today's conference is being recorded. If everyone has any objections, please disconnect at this point. I would like to turn the call over to Katrina Rymill, VP of IR. You may begin.

Good afternoon, and welcome to today's conference call.

Before we get started, I would like to remind everyone that some of the statements that 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 identified in today's press release. And those identified in our filings with the SEC, including our most recent Form 10-K filed on February 24, 2012, and in Form 10-Q filed on November 6, 2012. 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 the financial guidance, during the quarter unless it is done during explicit public disclosure. In addition, we will 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 would also like to remind you that we post important information about Equinix on the Investor Relations page of our website. We encourage you to check our website regularly for the most current available information.

With us today are Steve Smith, Equinix's CEO and President; Keith Taylor, Chief Financial Officer; and Charles Meyers, President of the Americas. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of wrapping this call up in an hour, we would like to ask these analysts to limit any follow-on questions to just one.

At this time, I will turn the call over to Steve.

Thank you, Katrina, and good afternoon, and welcome to our fourth quarter earnings call. I am pleased to report Equinix delivered strong business and financial results in the fourth quarter, and another year of solid revenue and adjusted EBITDA growth for 2012.

As depicted on slide 3, revenue grew 21% to $1.896 billion for the year, and adjusted EBITDA increased 24% to $896 million. The overall health of our business remains strong with solid performance across all industry verticals. Deal size and pricing remained positive, as we are winning the right mix of applications and customers in our IBXs. Despite uncertain economic conditions around the globe, we continue to experience strong sales momentum in bookings.

Turning to slide 4, I would like to highlight how we invested in the business in 2012. We generated approximately $705 million in cash from operations for the year, and reinvested $608 million in 21 global IBX expansions with consistently high levels of returns. We now have over 7 million gross square feet of space, which is the largest retail data center footprint in the world.

Ongoing CapEx was $157 million for the year, which included success-based installations, maintenance and value-enhancing initiatives such as our IBX optimization efforts and global IT initiatives. Other successes for the year include record bookings achievement, increasing interconnection revenue by 21%, and expanding the platform into three new markets including mainland China, Dubai and Jakarta.

We won important new customers and expansions in 2012 including business from Amazon web services, batch trading, cable and wireless, Chicago Board of Options Exchange, Deutsche Telekom, Netflix, Pena Verse and Excell Communications. Finally, we announced that we plan to pursue conversion to a Real Estate Investment Trust to enhance shareholder value while delivering profitable strategic growth. We finished the year having been added to the NASDAQ 100 Index, and we are honored to be included alongside many of the world's most successful and dynamic technology companies.

Equinix remains at the heart of multiple industry trends including the growth of mobility, IP traffic, big data, consumer-driven content and electronic trading, all driving demand for data center services. Integrating cloud services remains a priority for CIOs. Customers are shifting from monolithic infrastructure deployments to application-specific deployments that combine the benefits of traditional co-location with hybrid cloud capabilities.

Turning to slide 5, we are winning hybrid cloud deployments as companies capture the benefits of building private clouds, alongside direct connectivity to public cloud infrastructure inside of Equinix. Let me highlight two customer examples. First, Badgeville, a company that provides technology to improve user engagement on websites delivers a platform-as-a-service that was initially built entirely on the public cloud. Over time the growth of their user base drove a need for better performance and more control over their critical assets while managing their costs. Using Equinix, Badgeville deployed a hybrid cloud infrastructure building their database at Equinix, and then leveraging Equinix's direct connect offering to access the Amazon Web services. This change resulted in a 40% reduction in Badgeville's monthly operational costs for cloud services, while increasing their application performance by 15% due to millisecond latency between the company database and the public cloud nodes.

A second customer, Box, which is one of the leading content-sharing platforms, was looking to expand their data center footprint. Leveraging our sophisticated network performance tools, the Equinix sales team demonstrated that Box could significantly reduce latency for their service by deploying into multiple specific locations across our global platform. As a result, Box deployed infrastructure inside Equinix closer to their customers, and improved customer application response times by 60%. Given the competitive differentiation that this type of application performance created for Box, their deployment with Equinix has grown from 2 cages in Silicon Valley to 7 IBXs across three regions.

Another focus in 2012 was expanding Platform Equinix into new markets. Our ability to expand into new markets is a critical differentiator as we help our customers deploy their IT infrastructure to meet their global needs. Our expansion strategy starts with our customers. We survey them biannually for which markets they are targeting, and then identify and structure the right entry into those locations.

In 2012, we became the first global data center operator with a presence in Shanghai. Our pipeline in Asia remains strong, and next month we plan to open the second phase of Shanghai 5. We also secured a strategic partnership with China Telecom, the largest carrier operating in Shanghai to expand their service to our data centers. This partnership guarantees the availability of network resources and enables both companies to explore opportunities with multinational corporations.

Dubai is also a strategic market for Equinix in the Middle East and is an important cable landing point between Europe and Asia. Currently, a majority of the IP traffic in the Middle East is backhauled to Europe or Asia to be exchanged, leading to high latency and excessive bandwidth costs. We entered Dubai in November by acquiring a new data center that is now operational.

We also partnered with Du, one of the two local carriers in the United Arab Emirates to create the first pairing hub in the Middle East region. Du will offer reduced rate transit for customers who use the data center as a regional hub. Equinix is creating a unique offering and opening up opportunities for global businesses operating in Middle East. We are already experiencing interest from carriers, TDM's and content providers looking to reduce IP transit costs by pairing regional traffic in Dubai.

And finally, I will give a quick update on our planned conversion to a Real Estate Investment Trust. Consistent with what we said previously, we filed a request for a Private Letter Ruling with the IRS at the end of last year. Assuming we are successful in the conversion process, we plan to elect REIT status beginning January 1, 2015.

As a reminder, the timing of the REIT conversion is primarily driven by the operational complexities and risk trade-offs of our global system and process work, and the associated dependencies to report as a REIT. As appropriate, we will continue to update the market on our earnings calls regarding our progress.

So let me stop here, and turn it over to Keith to review the financials for the quarter.

Thanks, Steve, and good afternoon to everyone on the call. I am pleased to provide you with additional detail on the fourth quarter and the full-year of 2012.

With the exception of the consolidated financial results, the majority of the other key nonfinancial metrics will exclude the impact of ALOG, ancotel and Asia Tone as we continue to integrate these acquisitions and their service offerings into our systems and our metrics. Starting with slide 6 today from the presentation posted. Global Q4 revenues from continuing operations was $507 million, a 4% quarter-over-quarter increase, and up 20% over the same quarter last year, including a $2.3 million nonrecurring benefit in the quarter. This is the first quarter we delivered $0.5 billion of revenue or more, underscoring the scale and reach of our business.

Asia Tone and ancotel contributed $18.4 million to the quarter, a 14% quarter-over-quarter increase. Also ALOG continues to perform well, contributing $19.4 million revenue in the quarter or a 7% quarter-over-quarter increase after adjusting for the weakening Brazilian real. Q4 revenue performance reflects a $3 million positive currency benefit when compared to the average rates used in Q3, and a $900,000 negative impact when compared to the FX guidance rates.

For the year our revenues from continuing operations were $1.896 billion, a 21% increase over the prior year. Global cash flows profit for the quarter was $348 million, a 5% increase over the prior quarter, and up 23% over the same quarter last year. Cash flows margins were 69%, higher than originally anticipated due to stronger than planned revenues, and lower than expected utility expenses and other variable costs.

Global cash SG&A expenses were $108 million for the quarter, a 6% increase over the prior quarter, yet below our expectations due to lower professional and consulting fees, and a smaller than expected advertising and promotion spend. Cash SG&A expenses increased by 21% over the same quarter last year.

Global adjusted EBITDA was $239 million for the quarter, a 5% increase over the prior quarter, and a 24% increase over the same quarter last year, including $3.5 million of nonrecurring benefits primarily attributed to revenues and utility costs. Our adjusted EBITDA margin was 47%. Our Q4 adjusted EBITDA performance reflects a $1 million positive currency effect when compared to the average rates used in Q3, and a $500,000 negative impact when compared to our guidance rates. Adjusted EBITDA growth reflects our increased revenue performance, better than expected cash gross margin, and lower than planned SG&A spending.

Global income from continuing operations increased $102 million, a 6% increase over the prior quarter, and up 24% over the same quarter last year, despite the recognition of Q4 impairment charges related to the write-down of assets in Los Angeles and Sydney. And acquisition costs related to the purchase of the Dubai IBX and our venture into the Indonesian market.

Global net income attributable to Equinix was $45 million for the quarter, a meaningful increase over the prior quarter largely due to strong operating performance and the after-tax gain on the sale of the 16 IBX assets. Our fully diluted earnings per share was $0.88 or $0.66 from continuing operations, a significant increase over the same quarter last year.

Now let me turn to global MRR churn. Our MRR churn was 3% for the quarter consistent with our expectations. We expect churn to remain at or near these levels for the next few quarters, reflecting our efforts to optimize our business mix and migrate key customers with sustainable multi tier architectures. Our 2013 guidance fully contemplates the MRR churn dynamics.

Our operating discipline in managing IBX assets is critical to our long-term success, and enables us to deliver stronger operating results in the form of pricing per cabinet, better operating margins, and increased utilization of our IBX asset base. Over time, we expect our MRR churn to moderate downwards, as we execute our strategy and focus on high-value applications.

Now I would like to give you a brief update on REIT conversion costs. Please refer to slide 7. Slide 7 summarizes the various expected REIT cash costs and tax liabilities, similar to our discussion last quarter. We continue to expect to incur $50 million to $80 million in cash costs to support the REIT conversion process over the next two years, which includes upgrading our global financial system and processes.

For 2012, we incurred approximately $3 million of REIT-related cash costs. For 2013, we estimate that we will incur $20 million in incremental SG&A cash spend, and $5 million of additional capital expenditures for REIT conversion. In the first quarter, we expect to pay approximately $3 million in incremental cash costs related to the REIT program, which is reflected in our Q1 2013 guidance. Separately, we have modified downwards our 2013 (technical difficulties) tax liability and now range between $175 million and $250 million.

Turning to slide 8, I would like to start reviewing our regional results, beginning with the Americas. Overall health of the Americas business remains strong. Americas revenues was $299 million, a 2% increase over the prior quarter, and up 12% over the same quarter last year. Cash gross margins increased slightly to 72%, largely driven by strong disciplined growth and optimization initiatives across our asset base.

Cross-border bookings across all regions continued to be strong, and validate our global platform strategy. Adjusted EBITDA was $150 million, up 6% quarter-over-quarter and 17% over the same quarter last year, primarily due to lower utilities expense.

Americas adjusted EBITDA margin was 50% for the quarter, a healthy improvement over the prior year despite the region absorbing the majority of the corporate overhead costs. America net billings -- our net cabinet billing increased by approximately 1,400 in the quarter, and reflects in part the conversion of our backlog to billable cabinets. America pricing remains firm, which supports our continued commitment to disciplined growth and an optimization strategy. Americas interconnection revenues represent 20% of the region's recurring revenues. In Q4, we added over 800 net cross-connects, more than prior quarters primarily the result of grooming due to consolidation activity among select network service customers.

From an inventory perspective, in Q4 we opened the second phase of our DC-10 asset, adding capacity for our Business Suites offering which targets customers with a multi tier architecture requirement. Also, we opened 2 new IBXs in January, DC11 our 11th IBX on our flagship Ashburn campus, and Seattle-3 which will help us build out the Northwest market, a critical distribution point for IP traffic to Asia. And finally today, we are announcing a new build in Toronto, a critical market for our customers in the financial services vertical, providing an inventory in this high demand location.

Now looking at EMEA, please turn to slide 9. EMEA had a solid quarter against a negative economic backdrop across much of Europe. The UK continues to gain momentum particularly in the financial services and network verticals. In Germany, we have now linked our ancotel asset to our other existing site for IBXs, and this will allow our customers to leverage the network density of this enhanced footprint. In Paris, we saw gross strong bookings activity with our newly opened Paris 4 IBX.

Among our recent bookings were two new enterprise customers. The first phase of our Paris 4 IBX is now approximately 50% sold.

Turning to the quarter, revenues in EMEA was $117.5 million, up 5% sequentially, and 19% year-over-year on a normalized and constant currency basis. Adjusted EBITDA decreased to $45.5 million on adjusted EBITDA margin of 39%, largely due to the expansion drag attributed to the number of IBXs opening in the latter half of 2012, higher seasonal utility costs, and increased salary and benefit costs.

Normalized and on a constant currency basis, our adjusted EBITDA increased 13%, compared to the same quarter last year. EMEA interconnection revenues remained at 7%, adding approximately 400 net cross-connects for the quarter. Net cabinets billing increased by approximately 1,100, the result of strong booking activity over the past quarter.

And now looking at Asia-Pacific, please refer to slide 10. Asia-Pacific had a strong sales growth momentum this quarter driven by wins in cloud, digital media and content, and financial verticals. Asia-Pacific revenues were slightly under $90 million, up 8% sequentially including $2.1 million attributed to the nonrecurring revenue benefit, or up 30% year-over-year on a normalized and constant currency basis. Overall pricing remains firm across our entire Asia-Pacific footprint.

Adjusted EBITDA was $43 million, up 7% quarter-over-quarter or 43% on a normalized and constant currency basis over the same quarter last year. Consistent with our expectations adjusted EBITDA margin was down slightly due to increased leasing costs, and higher sales and marketing expenses in the quarter. Cabinet billing increased by approximately 200 over the prior quarter, less than initially expected due to the timing of customer installations. Interconnection revenues were 11% of the regions recurring revenues, slightly down from the prior quarter primarily due to customer installations in the quarter.

During the quarter, we added approximately 600 net cross-connects with a positive shift towards fiber cross-connect as customers migrate to higher bandwidth consuming business practices. Our financial services vertical continues to grow rapidly across Asia-Pacific, with particular strength in our Tokyo market. In Q4, we announced the build of our fourth IBX in this market, strategically located in the heart of the business district to support the momentum of this developing financial ecosystem.

And now looking at some balance sheet data, please refer to slide 11. Our current liquidity position remains healthy, and we ended the year with $547 million of unrestricted cash and investments. An increase over the prior quarter primarily due to our strong operating performance, and $77 million in proceeds from the sale of 16 IBXs to 365 Main and their partners.

Consistent with the scale and growth of our business, our total assets have increased to greater than $6 billion this quarter. Looking at the liability side of the balance sheet, we ended the quarter with gross debt of $3 billion or net debt of $2.5 billion, about 2.6 times our Q4 annualized adjusted EBITDA. In the short-term, we will continue to review our balance sheet and debt structure to assess opportunities to refinance, with a clear objective of lowering our cost of borrowings while creating an improved and more flexible covenant structure as we move towards the REIT conversion.

And now looking at slide 12. Our Q4 operating cash flow increased to $209 million due to our strong operating performance, lower quarterly interest payment, and improved working capital management over the quarter. 105% increase over the prior quarter and up 11% over the same quarter last year.

Our adjusted discretionary free cash flow was $185 million in Q4, and $548 million for the year, after excluding the tax impact of equity awards on operating cash flows that was triggered by the REIT conversion. This equates to greater than $11 per basic share outstanding at year-end. For 2013 we now expect our adjusted discretionary free cash flow excluding REIT-related costs or taxes to range between $620 million and $640 million.

Now looking at capital expenditures, please refer to slide 13. For the quarter capital expenditures were $210 million, consistent with our guidance. Ongoing capital expenditures were $43.5 million, which included less than $10 million in maintenance, efficiency enhancement, or single points of failure capital. For the year, ongoing capital expenditures totaled $157 million. Additionally, we invested $25 million in real estate assets, and $23 million for the acquisition of our Dubai IBX.

Now turning to slide 14, the operating performance of our 24 North America IBX and expansion projects that have been opened for more than one year, continued to perform well. Currently, these projects are 85% utilized and generate a 35% cash on cash return on the gross PP&E invested. Our 8 oldest IBXs grew 7% year-over-year as customers continue to purchase additional power and cross-connect, as well as space as it becomes available through our optimization initiatives.

So let me turn the call back to Steve.

Thanks, Keith. Let me now shift gears, and cover our go-forward strategy and outlook for 2013 on slide 15.

We will continue to execute on our five strategic priorities designed to further differentiate our global offering of network IBXs. And we do have the unique ability to help inefficient markets become more productive with Platform Equinix.

First, we will continue to proactively develop our ecosystems to drive customer value and improve business performance through more interconnection in our IBXs. We will further solidify our leadership in the network and financial ecosystems, and accelerate momentum in our emerging ecosystems. Customers find unique value in connecting to their customers and partners in our IBXs, as evidenced by cross-connects between customers growing at 2 times the rate of connections to network service providers. For example, financial-to-financial cross-connects grew 35% year-over-year, showing the scale of this ecosystem.

We are also targeting new ecosystems where Equinix can uniquely differentiate its offerings such as e-commerce or over-the-counter trading exchanges, digital advertising exchanges, network performance hubs for enterprise WANs, as well as cloud access nodes and direct-connect capability to enable the hybrid cloud. Second element of our strategy is to expand the global reach and scale of Platform Equinix, both organically and through acquisitions.

In the Americas, we will leverage our market leadership to drive more interconnection in core markets. In Europe, our focus will be to deepen our penetration of critical ecosystems. And in Asia, we will expand our footprint into emerging and adjacent markets in order to gain market share.

Our global platform is a unique differentiator for Equinix. We offer services in 31 cities across five continents, more than any other data center provider. Customers value our ability to make global expansion easy, by managing deployments with a single supplier.

Today over 60% of recurring revenues comes from customers deployed across multiple regions, up from 55% just three years ago. The number of customers deployed with Equinix in all three regions grew 32% year-over-year. Going forward, we will continue to expand with a disciplined approach as we evaluate new markets and opportunities.

Third, we will continue to execute on our vertical industry go-to-market strategy, which has been a key factor in expanding our customer base and maintaining stability and market pricing. Equinix is investing and deepening the industry expertise of our sales teams, organizing teams around targeted verticals, and adding solution architects who can help customers solve for complex requirements. These enhancements help customers reduce time-to-market and significantly improve their return on capital.

Equinix is also expanding its partnerships to help provide more holistic solutions that leverage the unique value of Platform Equinix to optimize application performance, deploy cloud services, and leverage network density and global reach. Our vertically aligned go-to-market strategy continues to pay off as we extend our market leadership in our more mature verticals, and see strong signs of momentum in the emerging areas.

The fourth element is refining our capital allocation strategy. This year we expect to generate approximately $175 million of adjusted free cash flow, excluding REIT-related cash costs and tax liabilities. This is a significant inflection point for the Company, generating a meaningful level of adjusted free cash flow while funding our growth.

We will continue to assess our funding needs going forward, and we will consider the issuance of debt and/or equity to support business growth and capital needs. Our priorities for the deployment of capital will remain focused on driving top line growth, through both organic and inorganic investments with a balanced view towards profitability. Equally, we will remain focused on generating free cash flow thereby ensuring that we have sufficient funding to meet our requirements under the REIT structure including distributions to shareholders.

The fifth priority is to improve our global customer's experience through investments in products, processes and systems. Operating as a global Company requires global product offerings, simplified and streamlined business processes including quoting, fulfillment, and billing and consistency in all of our customer interactions. These investments will help us delight our customers, and will enable us to scale our business, drive operational efficiencies, and hit our long-term operating targets. We firmly believe that solid execution on these strategic priorities is creating a business that is uniquely positioned and highly valuable to customers and shareholders.

And finally, I would like to provide an update on 2013 guidance summarized on slide 16. For the first quarter of 2013, we expect revenues to be in the range of $518 million to $522 million. Cash gross margins are expected to range between 68% and 69%. Cash SG&A expenses are expected to range between $116 million and $120 million.

Adjusted EBITDA is expected to be between $236 million and $240 million. Capital expenditures are expected to range between $140 million and $160 million, including approximately $40 million of ongoing capital expenditures.

For the full-year of 2013, we are maintaining total revenue expectations at greater than $2.2 billion, or greater than 16% growth on a year-over-year basis, which absorbs roughly $2 million of currency headwinds relative to guidance rates provided on our last call. Total year cash gross margins are expected to be between 68% and 69%. Cash SG&A expenses are expected to range between $490 million and $510 million.

We are maintaining expected adjusted EBITDA for the year to be with greater than $1.01 billion, which absorbs approximately $3 million in net costs attributed to our Dubai acquisition. This also includes $20 million in REIT conversion costs, effectively an adjusted EBITDA margin of 47% before REIT costs. We are maintaining our total CapEx guidance for 2013 at a range of $550 million to $650 million, which includes $165 million of ongoing capital expenditures. We are investing in our business at a very attractive risk return profile, and we continue to achieve our targeted returns.

So in closing, the health of our business remains strong as we continue to execute on our five strategic priorities. We remain keenly focused on delivering compelling value to our customers which supports the right mix of business in our IBX locations, and in turn delivers superior returns on invested capital. We are also enhancing our operational discipline, and refining our go-to-market model to maintain momentum in sales productivity across all of our operating regions. Equinix is benefiting from highly attractive secular trends, and remains a central figure in the growth and evolution of key digital ecosystems. This ecosystem strategy combined with our scale, network density, mission-critical reliability and global footprint continue to stimulate interconnection and drive solid business results.

So at this time, I would like to open it up for questions. And I will turn it back over to you, Mitch.

Thank you.

(Operator Instructions)

Our first question comes from Mr. Jonathan Schildkraut. Sir, you may proceed.

Great. Thank you for taking the question. Actually, I am going to try to sneak two in here.

Keith, in your prepared remarks you mentioned a $2.3 million nonrecurring benefit. I was wondering if -- just if you could tell us what market that came in?

And then separately, you gave us some nice color commentary about bookings. And I was wondering if you could kind of sum up the bookings activity for the quarter, versus maybe what you had seen over the rest of the year, or if it makes sense to talk about it seasonally versus other years? And as you drive bookings, a big part of that has been your scaling of the sales force, and I would love an update on the productivity that you are seeing in terms of the folks that you hired. And I wonder if there are any additional plans to add to the headcount? Thank you.

Great, John. So I will take the first one, and Steve and Charles will take the second. The $2.3 million -- $2.1 million of it relates to Asia-Pacific and $200,000 is Europe, specifically Singapore and Switzerland. And so those are one-off benefits -- it is a one-off benefit that will not theoretically repeat itself. So we wanted to make sure we called that out.

And that was a revenue benefit or just a cost-benefit?

That is actually a revenue benefit, a top line benefit associated with certain customer contracts.

Thank you.

And on the second part of your question, Jonathan, let me give you some color and Charles can probably add some points here. But first of all, I think for everybody on the call, it is probably good context to know that Q4, from a gross booking standpoint was our second-best quarter historically. So a very good performance by the team by any measurement. And as we have told you in past calls, we are closely tracking new rep productivity, as well as tenured rep productivity. And I would tell you that it is continuing to move, as we have described in the past, up and to the right.

We had meaningful improvement actually in Q4 with our new rep productivity, and Charles can probably give a little bit more color on that. And I would say, the vertical orientation that I described is really starting to pay dividends for us, because we are speaking in the customer's language. We understand their application needs. It is helping us to really determine the right mix of applications into the right assets.

And just very quickly, in the quarter from a bookings standpoint, pretty similar history by vertical. We had roughly 23% of our bookings come in the networking cloud verticals on a global basis, about 21% of the bookings fell into the content digital media, roughly 20% in financial, and then enterprise was the remainder, about 13%. So from a bookings in the quarter standpoint, pretty good spread.

And I would tell you that there is no big trends, Jonathan, on a regional basis by those verticals. We are seeing, because of the global platform focus, a pretty good mix across all industries. I don't know if you would add anything there, Charles.

Yes, I would give a little more color, Jonathan, relative to the -- specifically on the Americas. As Steve indicated, we had record bookings performance across many of our verticals and geos, and really continue to see very strong demand for platform deals that are leveraging our presence in multiple regions.

Q4 was a particularly strong contribution from our new rep cohort, which some of them that have been on for as much of the year now, some shorter than that. But the overall contribution from that cohort has more than doubled in the past several quarters, and continues to trend up and to the right. So Q4 was definitely a strong bookings quarter, good solid continued momentum in the mature verticals, and really some real signs of momentum in some of the more emerging areas.

As Steve said, we are seeing some significant benefits from the vertical alignment of the teams. And in terms of our plans going forward, we probably will make some modest additions and some modest force redeployment actions. In terms of just trying to put the forces where we can believe we will get the most return from them in 2013. But we will probably make a few modest additions. I think the additions in the other regions will be slightly higher.

Just to put a point on that, Jonathan, it is -- we are running at call it, 207, 208, 209 quota-bearing heads around the quarter around the world today. By the end of the year based on pace and performance, it might creep up to 235, 240, somewhere in that range.

Call it, the quota-bearing heads on a global basis.

Thank you for taking the questions.

Thanks, Jonathan.

Our next question comes from Mr. Sterling Auty. Sir, you may proceed.

Yes, thanks, hi. Wanted to talk about the Asia-Pacific region. You mentioned the relationship with China Telecom. Is the focus still on companies looking for co-location where the data traffic is going in and out of China? Or does this relationship open up the opportunity to expand in mainland China for companies where a lot of their data traffic going in and out of the data centers stays within mainland China?

Well, the primary -- the business in Shanghai gets started, is going to be a little different than in markets where you have multiple network, density type of situations. So China Telecom is the predominant provider in southern China, versus China Unicom in northern -- in the Beijing area. And then of course, you have China Mobile that is in the mix. So there is three big carriers in that market.

And then the other international carriers obviously, leverage on a wholesale basis, those relationships. But our intent is to work with multinational companies that have either customers or employees in the Shanghai region, and they just need a high quality data center provider to provide space. And we can do interconnections within that facility. But it is a little bit different mix than say, what a 21 Vinet or some of the other local providers are doing from a licensed standpoint. So we will be primarily focused on high-quality data center space, and interconnection within the four walls of that facility.

Okay. Great. And maybe one follow-up.

We saw the rack space results last night and what they are doing in dedicated hosting and in cloud. I am wondering on the new customers coming in for co-location, is there any change in kind of the use case, what they are looking to do? As well, as maybe cage size and power requirements right off the bat, because as we also talked about increased density a lot through 2012?

Yes. Sterling, this is Charles. I will respond a little bit on that.

The -- I think that we are seeing a pretty significant uptick in terms of CIOs looking at hybrid cloud architectures as sort of their future. And so I think what that is resulting in, is really our ability to act as that sort of cloud hub for them, both to meet their traditional colocation requirements for things where they need the security and control. And so that we still see an appetite for colo.

But that is augmented by then using our interconnection to the public cloud players in a direct-connect format and using our network density to essentially to stitch together hybrid clouds. I think what that means is that we are seeing -- we are seeing actually some use of, what I would consider cloud nodes, that are sort of relatively smaller implementations but that are more interconnection dense. And -- but we see -- we definitely see an appetite for them, for people accessing public cloud providers and using cloud-based SaaS applications to meet their needs, and really leaning on Equinix as a place to do that from.

Okay. Great. Thank you.

Our next question comes from Mr. Frank Louthan. Sir, you may proceed.

Great, thank you. Can you talk to us a little bit -- I think you mentioned earlier, and I apologize if I missed the details -- some of the -- some larger wholesalers may be moving down market. Any thoughts there? What sort of -- what sort of steps have you taken there?

And it seems like the enterprise side is picking up a bit as a percentage of the bookings, it sounds like. How is that trending, and any thoughts on trying to drive higher penetration out of the enterprise area?

Sure, Frank. This is Charles. I will pick up, and then if Steve or Keith wants to add anything.

Again, I tend to view the competitive overlap with the wholesalers as very modest. There are as we have said on a number of occasions, occasionally we will look at larger footprint opportunities that may in fact have wholesale as viable alternative. But that tends to be the exception rather than the rule. And so, we still continue to see ourselves on a relatively different supply curve, meeting a different set of customer needs generally vis-a-vis the wholesale market.

As it relates to the enterprise, I would say that I think we are relevant to a portion of the enterprise need, where application performance, network density and global reach really matter. Again, that is the sweet spot for Equinix. We are not going to chase large footprint razor-thin margin deals for back office applications, et cetera. That is not what we are about.

But what we are seeing, is people who want for example, use our network density to optimize the performance of their WAN. Or if they are implementing SaaS-based applications that need performance, have certain performance requirements. Or want to interconnect to use public cloud via direct-connect or SaaS-based applications with higher performance, they are looking at putting in relatively small, but distributed application implementations across the Equinix footprint. And that is the sweet spot for us, and really provides them with compelling value.

The only thing I would add, Frank, this is Steve, is that the other dynamic you have going on in the market is the big global telcos are all trying to service the enterprise also. And so the way they are doing that, is cloud-enabled activity. So our conversations with the telcos today are spreading their footprints deeper and wider inside of Equinix with access nodes and primary nodes, et cetera, to help get to the enterprise.

And so that will have a pull-through effect to enterprise, understanding they can get to the networks inside of Equinix's data centers. So there is a lot of dynamics going on here in the enterprise.

All right, great. Thank you.

Our next question comes from Mr. Brett Feldman. Sir, your line is now open.

Great, thanks for taking the question. Just maybe clarify on some of the one-timers. I think you also mentioned some one-time benefits at the EBITDA level. Did I hear that correctly?

Yes, Brett. So there is two -- there is $3.5 million in total this quarter that we wanted to pull out. Specifically, $2.3 million sitting on the top line, and then $1.2 million sitting in the cost of revenue line, and that is specific to the Americas region.

So the $2.3 million as I said earlier on, $2.1 million it relates to Singapore, and $200,000 relates to Switzerland. And so that is the $3.5 million in one-off benefits that we think is appropriate for you to pull out this quarter.

Okay. So even if I make that adjustment, you still came in well ahead of the EBITDA guidance you had provided for the fourth quarter. It looks like SG&A in the Americas was a contributor there. I was hoping I could just get a better understanding of what the spending pattern has been?

And then what is going to happen in the first quarter? Because you are kind of guiding towards more of a flattish EBITDA result.

Yes. As you know our model pretty well, our costs are predominately fixed, and are the same bucket of costs that we see quarter in, quarter out. And certainly when you look at the trend lines, we did a little better on certainly, on the revenue line, partly due to this one-off benefit. But we also did better on the cost of revenue line.

When you look at the SG&A line, it is the standard -- the standard discussion, it was salaries and benefits, less advertising promotion, and lower than anticipated professional and consulting fees. We originally thought we would spend a little more on the REIT work out coming through the quarter, and some of that is getting pushed into the Q1 timeframe. So that sort of addresses, sort of the Q4, sort of really across the board, there is really nothing substantive that I have pulled out.

And the only other thing I would say, is a little bit more in the salary line. We didn't hire as quite as many people as we planned, and that seems to be a trend that holds true.

If you look then forward into Q1, there is a couple things that I wanted to make sure I highlighted. And so, when you look at this quarter, we did just roughly $239 million of EBITDA. If you take out the $3.5 million of benefit, you are roughly at $235 million of EBITDA.

Next quarter, so being Q1, we are going to guide you -- we are guiding you -- we take you to the midpoint which is $520 million. That adds roughly $60 million. So your modified EBITDA should be in the range of $250 million. That would be the standard expectation for the Street.

So the question then is, what is causing it to be relatively flat? Well, consistent with all the prior years, given the employee benefits and sort of the employer costs associated with FICA and all the other added costs that are coming into the equation this quarter, we are going to actually increase our employee benefits, and the employer portion of it, in or around $5 million this quarter. In total, employee benefits are going up $9 million, but embedded in that $9 million is $5 million.

Salaries are going up $4 million, and utilities are going up $5 million. And that is offset by roughly $5 million in net savings quarter-over-quarter. So overall, a lot of numbers there. But it really sort of tells you that quarter-over-quarter, it is the seasonal aspect primarily of employee benefits that are affecting the flow-through that you are going to experience.

And your full-year guidance incorporates all that as well?

Absolutely. Absolutely.

All right. Thank you for clarifying that.

Our next question comes from Mr. David Barden. Sir, your line is now open.

Thanks for taking the questions. Hi, Keith. So maybe just following up on that. If I went back to last quarter, you were giving a midpoint of fourth quarter guidance that was below what you produced for 4Q. If I had annualized that old guidance, your $1.01 billion EBITDA number implied about a $100 million of year-over-year growth. If I annualize what you actually produced in the fourth quarter, it suggests that the [1010] target is actually only about $60 million higher.

So I guess based on what I heard Steve saying about sales force productivity and second best bookings of -- ever in the fourth quarter, it seems to me like the 1010 is increasingly in the rear view mirror from a 2013 outlook standpoint. Could you address more specifically why you didn't feel like you wanted to move that floor up? Because it seems to be getting less and less realistic.

And then if I could, just one more question. There seems to be in the last couple months, with your choice to become a REIT in 2015, we are using REIT valuations, we are using AFFO valuations. And there seems to be a debate about how the right way to calculate AFFO is for Equinix? Could you weigh in, and just tell us what Keith thinks about that? Thank you very much.

(Laughter). Okay, David. So look, in the end, we did modify our guidance. We fully understand that.

I think, first and foremost, I would like to talk a little bit about the revenue side. When you think about revenues and basic, what we offered to midpoint of guidance. So it was $18 million net uplift quarter-over-quarter. So Q1 versus Q4, a net uplift of roughly $18 million, because I have got to take out that $2.3 million one-off benefit. And so if you just take that, and assume every quarter throughout this year we are going to add roughly $18 million, it gets you really to what we call our floor, of roughly $2.2 billion or greater.

Certainly expected inside the performance of the business is, that we will continue to produce more from a sales productivity perspective. Clearly there is -- we are being muted today, sort of last quarter, this quarter by the churn that we are absorbing. But all that said, we certainly expect to -- given the guidance we are delivering to you today, we expect that we will continue to produce better. And in fact, we think that we will deliver higher growth through the back end of the year, versus the first half of the year.

So that just sort of just talks a little bit about the revenue line. If I take you to the cost line, there is a couple of things.

Certainly, when we look at our annualization of our Q4 EBITDA. You have got to take out the $3.5 million benefit, which again it doesn't explain the whole difference. But you also have to recognize there is $20 million of REIT costs, the REIT costs that are coming into the equation.

Not to mention the massive investment this Company is making to move towards a REIT. Not just from the discrete costs we are talking about, for the investment in people, in more in our systems, in our platforms, some of the other tax work that we are doing around the world. And again, we are going to add more sales people more -- we are going to open up more IBXs. We have -- obviously with these IBXs that we opened up last year is the greatest amount of expansion the Company has ever done. We are now going to have to staff them, and do all the things that you would expect. And because of that, it is sort of muting our overall performance.

So in fact, when you -- if you look at the first half of the year you say, okay, I can understand where we are going, because of all that. The reason behind the guidance that we are delivering today is an acceleration through the second half of the year. And that is where you get the benefit of all the things that we are doing as an organization.

And hopefully recognizing, we are going to give you updated guidance in roughly eight weeks from now, when we do our Q1 guidance. At that point in time, we certainly are going to take the opportunity to refine the guidance, similar to what we did last year. But I would just tell you right now, we feel it is appropriate to stick to what we give you, off the Q3 earnings call.

Recognizing that we have been running a little better than we anticipated. But there is this expectation that we will invest more in marketing, more in sales, and certainly more in the back office to scale the business towards the $3 billion number or greater or there about in 2015. And then looking into 2016 and beyond.

And the AFFO question?

AFFO?

Yes, I was hoping you would forget that one, David. (Laughter). But Charles reminded me of it. AFFO, again, what we did this quarter, very much like we have done in the past. Adjusted discretionary free cash flow is a very good surrogate we believe for the AFFO.

And as you saw, what I said in my prepared remarks and as you see in the chart, it is north of $11 of AFFO per share. But the thing that we are working on, is doing a much better job of trying to break down all of the CapEx. Because I think some of the confusion is not so much around, how we get to the operating metrics, it is more of about how do we allocate what capital into the theoretical AFFO calculation?

To us, it is still a little bit early to do that. But we are -- 11.4 of -- $11.41 sort of at a basic share count of $48 million of AFFO. The thing that we haven't really fully burdened is really where we are going to take it. But what I did give you this quarter was $10 million in what I consider to be true maintenance spend in our CapEx lines -- and what our maintenance CapEx.

And that is the thing sort of that -- we want to make sure we get it all right. And so we will be updating that, probably as we come through 2013, we will start to give you not only discretionary free cash flow number, but we will start to think about the AFFO.

Having said all of that, the AFFO, our discretionary free cash flow, we saw roughly a 19% increase this year over last year. The guidance we have given you would suggest that it would grow another 15%, 2013 over 2012. And right now, I would ask you to continue to use discretionary free cash flow -- or we will call it, adjusted discretionary free cash flow as the metric that will be a good surrogate for AFFO.

All right. Thanks, Keith.

Thanks, David.

Our next question comes from Mr. Colby Synesael. Sir, your line is now open.

Great. Two, if I may. First one, just wanted to talk about optimization projects in Europe and Asia. I know you initially focused on Americas, but it seems like you are talking more about transitioning that to Europe and Asia. I was wondering if you just talk about that, in terms of how far along you are in the process when you compare that to where you are in America?

And then also, kind of tying back into that, I just wanted to get an update on churn. It seems like in some of your more recent public forums, you have actually talked about churn coming down in the back half of 2013. Curious if you are still expecting that?

And then just briefly, was hoping you could talk about how the sales cycle has changed, if at all in the European market over the last few months? Thanks.

Colby, Let me start, and then Charles can pick up the churn conversation in the Americas.

On a global basis, the work that Charles and his team started late -- well, I guess late the year before, early last year, we did -- he did take learning and port it over to Asia and Europe. We have started to apply the same methodology if you will, frameworks if you will, as we are renewing contracts. So we are putting same lens on optimization around the world. It is just more -- it is a larger activity in the Americas.

But as we renew and we look at multi-tiered architectures, and how customers are bifurcating their deployments, we are applying the same discipline around the world. And I would tell you it is, early days in Europe and Asia for that. And I don't know, Charles, how you describe it in the Americas, but we are well into it in the Americas.

Yes, we are certainly well advanced in our overall optimization efforts, which have a number of dimensions to it. And through the overall IBX optimization project, we have now got a -- sort of bridging to churn. We have got a very good handle on our book of business, and we evaluate our renewals with a very disciplined approach that considers a number of factors.

And therefore, in any given quarter, churn can be volatile depending on where we land with certain renewals. But I can tell you, I am very confident that decisions we are taking will allow us to moderate churn downward over time, as we ensure that we are matching the right assets to the right applications. And on -- certainly, some of those churn decisions create some headwinds. But our view is, if managing through those headwinds is required to protect our long-term returns, then that is absolutely what we are going to do.

So in terms of precise outlook, very hard to be exact about churn level quarter-by-quarter. But we feel very confident that we have addressed many of the customers that we think moved -- need to move to multi-tiered architectures. As I have said, quarter-over-quarter as we look at key renewals, the -- it can be a bit more volatile. But I do expect that it will moderate over time, and allow us to expand our net bookings performance.

And then Colby, I think you had a question -- what was the question on?

Sales cycle in Europe?

Sales cycle in Europe I would describe as, like every other company in Europe, there has been some delayed decisions which with -- probably some enterprises. But generally speaking, we have performed very well in Europe. Our team has exceeded expectations in top and bottom line. We get the advantage, as we talked about in terms of porting inbound bookings this year.

Actually, this last quarter Europe exported as much as they have been importing from the US in a quarter. So the global sales team has started to really kick in and push bookings around the globe. So doing very well in UK, doing very well in Paris with the new assets as Keith described, it is 50% sold -- or pre-assigned. And so in general, I would tell you -- probably because fortunate -- we are in the good markets, we are performing quite well, and they have the benefit of the global sales team pushing business into Europe.

I guess what I was getting at, Steve, was I think you had made comments at an investor conference that you are seeing weakness in Frankfurt and Switzerland a few weeks ago. And I was curious if that was still the situation?

Well, I don't -- I think the question was posed to me, which markets are the hottest markets and which markets are at the other end of that? And the German market is a little bit tougher market from a competitive standpoint. There's a lot deeper competition, which obviously puts pressure on price. But this past year, our German market actually grew, including the ancotel acquisition, almost 30% -- just under 30%, and without ancotel, it was in the high teens.

So the growth of our German business is still doing fine. It is just a little bit more acute in terms of the competitive nature, much deeper in Germany than in almost any other market in the world. And that is what I was referring to.

Okay. Thank you very much.

Our next question comes from Mr. John Atkin. Sir, your line is now open.

Yes, I was interested about the adjusted discretionary free cash flow for 2013. You increased your guidance by $20 million at the midpoint, and what drove that given that you kept the revenue in the EBITDA guidance the same and the CapEx guidance?

And then secondly, operationally I was wondering if you have seen any impacts from the property divestiture to 365 Main?

Okay. Well, I will take the first one. So John -- so what I -- when we adjusted the adjusted discretionary free cash flow, when we gave the initial guidance, it had some conservatism built into it. We wanted to see how we are going to perform in Q4. And then, also how that was going to lead it into the 2013 time period.

But also as we looked more at our internal budgets, Steve and I just came off December roadshow, where we met all the regions and reviewed the budget, we had a much better sense of the timing of when we were actually going to spend money and not spend money. And so, we took all of that into consideration, and recognizing if you will, the size of the range that we originally had, we felt that we could give a little bit on this call. And so we have modified the range up, to the $620 million to $640 million.

Yes, and relative to the divestiture of the assets to the 365 Main, I would say we have been extremely pleased with how that has gone. Really, no substantive adverse impacts. I think kudos to the internal team here who had put a ton of effort into making sure that we had the planning effort up front, so that we could not impact customers. 365 has been a great partner in that.

And we have had a couple of situations, relative to splitting contracts and various other things that customers need us to help them work through, et cetera. And the inevitable bumps and irritations that, that may cause customers. But we took great pains to preplan that -- and put money aside to invest to make sure that the transition went smoothly. And overall, I would say it has.

Thank you.

All right. Our final question comes from Mr. Gray Powell. Sir, your line is now open.

Hi, thanks for taking the question. Yes, I just had one quick one. So net leverage looks like it is about 2.6 times today versus your 3 to 4 times target, and other data center REIT's at over 5 times.

Just how should we think about leverage and your use of cash, given that EBITDA is growing about 20% per year which gives you capital to reinvest? And the fact that you are now free cash flow positive?

Yes, so Gray, a couple things. Certainly, as we have said in the past, left unchecked the Company would go through a fairly meaningful deleveraging through 2015, 2016 time period.

Recognizing that there is a number of things that are taking place. And certainly, as we are in the middle of our PLR submission to the IRS, not understanding exactly where that is all going to come out, the Company has obligations that it will have to meet from a cash perspective, including the E&P purge, including incremental taxes. Of course, we are going to continue to invest in the business organically, through capital allocation towards construction projects.

But that all said, I think what is important to note is the Company has great flexibility as we look forward. Part of what we look to want to look at is optimizing the balance sheet, making sure that we have the appropriate level of leverage on the books. It is going to be a little bit different than others, perhaps some of the other data center REIT's, primarily because we have targeted a 3 to 4 times net leverage target.

Our contracts tends to be shorter than theirs. And so when you look at sort of the relative exposure to balance sheet, you want to make sure you marry up that exposure with basically your leverage. That would be one thing.

But the other thing I think is important, as Steve noted, we are also going to continue to grow the business organically. But we will also look at inorganic opportunity, and we also have to look at what distributions do we have to do, and do we do to our shareholders within the REIT structure, and outside of the REIT structure? So all of that has to be contemplated.

So if I can take all that together and summarize it, right now we have a tremendous amount of flexibility, and we are going to continue to look at our capital allocation strategy. And we will update you over the next few calls, as we hear back from the IRS, and we start to move and more towards that REIT conversion.

Got it. That's helpful. Thank you very much.

That concludes our Q4 call. Thank you for joining us.