Equinix Inc (EQIX) 2013 Q3 法說會逐字稿

Good afternoon and welcome to the Equinix conference call.

(Operator Instructions)

Also, today's conference is being recorded. If you have any objections please disconnect at this time. I would now like to turn the call over to Katrina Rymill, Vice President of Investor Relations. 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 we'll 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 26, 2013, and our most recent 10-Q filed on July 26, 2013. 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 its financial guidance during the quarter unless it is done through an 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, Chief Operating Officer. 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, everybody. Welcome to our third-quarter earnings call. This quarter we delivered our 43rd consecutive quarter of revenue and adjusted EBITDA growth, with solid results across all three regions. Before I provide details on the quarter, I would like to provide some context around current market dynamics. First, positive secular trends are driving significant demand in the broader data center market. As capital has flowed into this sector, the market has further segmented, and we are seeing customers continue to embrace more sophisticated infrastructure strategies, such as multi-tiered architectures and hybrid cloud.

Second, these dynamics are creating industry shifts that we believe Equinix is uniquely positioned to exploit. But are also creating a highly competitive landscape in adjacent markets such as cloud services and wholesale co-location. These dynamics are making it increasingly critical for us to maintain our disciplined approach by pursuing customer applications that require high performance, global reach, ecosystem access, and mission-critical reliability. We continue to see solid demand in this sweet spot, as evidenced by our healthy customer mix, strong operating margins and firm MRR per cabinet.

Third, our strong operating model is supported by significant barriers to entry. Equinix celebrated its 15 year anniversary this quarter, and it was a chance to reflect on the significant scope and scale of our business. Today, Platform Equinix comprises 950 carriers, and nearly 100 world class data centers in 31 metros, and over $7 billion of invested capital. We also have 3,400 committed employees serving more than 4,400 customers, who are connecting with their customers and partners through over 124,000 cross connects in the largest digital exchanges in the world.

Equinix is committed to delivering exceptional value to these customers and we remain focused on enlarging the substantial competitive moat around our business as we accelerate our ecosystem strategy, expand our platform, and invest in a seamless global customer experience. Each new ecosystem of interconnected customers creates momentum that helps build the defensibility of our business. Our network density has been foundational to the Company's success, and has given rise to other ecosystems such as electronic trading, content delivery, and, more recently, digital advertising. In addition, we're rapidly building cloud density with a new generation of service providers accessible directly on our sites, and interlocked with the networks in a way that make Platform Equinix the logical home for the hybrid cloud.

Now, turning to the quarter, as depicted on slide 3. Revenues were $540.5 million, at the midpoint of our guidance, and up 3% quarter over quarter, and 11% over the same quarter last year. Revenues on a normalized and constant currency basis increased over 3% sequentially, and 13% over the same quarter last year. Adjusted EBITDA was $245.2 million for the quarter, above the top end of our guidance, a slight increase quarter over quarter, and up 7% over the same quarter last year. Churn remained in line with guidance as we continue our highly disciplined approach to customer renewals. Yield per cabinet remains firm across the regions as our ecosystems mature and deliver a very healthy interconnection growth. This quarter we added over 3,600 cross connects, with particular strength in Europe and in the Americas.

On a global basis our industry verticals are performing well and I would like to provide you with a few highlights. Starting with the cloud. Many of you have asked whether the cloud is an opportunity or a threat. For Equinix cloud is unequivocally a sizable growth opportunity. Cisco projects that cloud traffic will grow at a 35% CAGR over the next four years, and will account for over two-thirds of the global data center IP traffic by 2017. Given our network density, Equinix is the natural place to meet this demand and provide competitive advantage for cloud service providers, as well as enterprises.

Turning to slide 4, this quarter, cloud and IT services again delivered record bookings, and continues to be our highest growth vertical as many cloud players leverage Platform Equinix to deploy their service. With over 1,200 cloud and IT services customers, Equinix is the best location for enterprises to access leading software as a service, infrastructure as a service, and cloud enablers to leverage the cloud. Hyper cloud deployments are a major growth opportunity for Equinix, as enterprises seek to take advantage of bursting into the cloud, while retaining control over critical data and applications.

A major milestone in bringing this capability to our customers is the strategic relationship we recently announced with Microsoft, that enables direct connectivity to Windows Azure in key markets around the world. Equinix customers can connect their infrastructure directly to Azure, establishing a private network connection that reduces latency, lowers network costs, increases their throughput and provides a more consistent network performance and security than Internet-based connections. This service will be available in multiple Equinix data centers in 2014. And we are onboarding a small number of customers for early trials this quarter.

We also continue to innovate and expand our interconnection options to the cloud, such as providing flexible private connectivity to AWS through our ethernet exchange. On slide 5, we will continue to focus on building cloud hubs in 10 major markets around the world for our customers to meet and deploy cloud services. Turning to our network vertical, we continue to deliver solid results and gain market share with key accounts as this customer segment looks to amplify its relevance to the cloud. For some network customers, such as the Japanese multinational firm IIJ, this entails deploying cloud infrastructure within Equinix that supports the delivery of native cloud services. Others such as Verizon and Time Warner Telecom are deploying private data networking services, along their own Internet peering nodes, allowing their customers to connect privately to an array of cloud service providers inside of Equinix.

Now turning to the buyers of networking cloud services in the enterprise vertical, we continue to see longer sales cycles, but also encouraging signs that CIOs view data center and networking decisions as key strategic levers for enabling hybrid cloud adoption. Building multi-tiered architectures and locating private network nodes inside Equinix, a solution we call Network Performance Hub, allows IT organizations to extend their wide area network footprints, which creates value in two important ways. First, customers use our network density and vast collection of carrier services to optimize their wide area network to deliver higher performance at lower cost. Second, these network performance hubs provide exchange points to procure scalable, secure private connections to cloud services, creating a hybrid cloud infrastructure that allows IT organizations to flexibly move workloads between private and public infrastructure.

This quarter we signed several marquee accounts, including a Fortune 50 energy company, who will initially deploy a network performance hub across three markets, including a direct connect to Amazon web services. We believe these types of reference accounts are critical to shortening enterprise sales cycles. And we will continue to scale our go-to-market effort to capture more of these opportunities.

In financial services, the electronic trading ecosystem remains healthy, as key trading platforms and participants expand globally with Equinix, driving cross connects in the financial ecosystem, particularly in our Tokyo, Chicago, London and New York campuses. We are experiencing additional growth in this vertical, as regulation is driving the over-the-counter derivatives market to move to electronic trading venues. This nascent ecosystem is forming as customers deploy critical infrastructure at Equinix because many of their current and potential customers are already located in our IBXs, effectively de-risking the development of this new market. Our proactive sales focus on this opportunity has paid off, as 16 of the 19 US swap execution facilities have located key infrastructure inside of Equinix.

Finally, in the content and digital media vertical, we saw steady demand this quarter as large content providers evolved to multi-tiered architectures in order to meet network costs and improve latency. Equinix is winning network and service node deployments that leverage our global footprint. These nodes are often connected to large-scale computer storage applications typically served by wholesale or customer-built data centers. We are also pleased with the momentum of Equinix's digital advertising ecosystem, referred to as Ad-IX, which has similar dynamics to our financial services electronic trading ecosystem. We now have 90 ad exchanges, advertising networks, data aggregator's, and demand-side platforms operating inside our IBXs, to transact real-time digital advertising placements. The Ad-IX ecosystem now operates in seven regional hubs globally, including Silicon Valley, Los Angeles, Amsterdam and Hong Kong.

Shifting to our global platform, we continue to differentiate ourselves in the market. Today over 60% of recurring revenues come from customers deployed across multiple regions. And the number of customers deployed with Equinix in all three regions grew 23% year over year. We continue to invest in our global platform through campus expansions and growing our presence in core markets. Today we announced two new expansions to meet robust demand in Asia. In Japan, we are proceeding with the next phase of our Tokyo 4 build to support the momentum of our financial ecosystem. In Shanghai, we are moving forward with the next expansion of our Shanghai 5 data center to capture growth from financial services, as well as global cloud and systems integrator's in China.

In the Americas, we opened a new IBX in Rio de Janeiro this quarter, and are proceeding with the next phase of Sao Paulo 2, due to open next year. And just last week we opened the second phase of Silicon Valley 5, one of our highest demand data centers, which is over 30% pre assigned. Further, with the success of our business suite product in Ashburn, we are expanding the same offering to New York. A new build that will be tethered into the robust ecosystems in our Secaucus campus.

And in Europe, we are on track to open the final phase of London 5. This campus has seen strong bookings performance in 2013, with notable growth in the financial services and network ecosystems. In addition, today we are announcing London 6, a new greenfield IBX directly opposite to London 4 that will be an integral part of the Slough campus.

And, finally, we are progressing in an initiative to maintain and bolster control of our strategic assets through robust leasehold contracts and increased ownership over time. We are pleased to have negotiated renewal agreements at market rates for five of our assets with Digital Realty in Chicago, Dallas, LA, Miami and DC. This includes pre-negotiated rates on all renewal options, locking in effectively up to a 35-year period on these assets at rates in line with our expectations. We are also opportunistically expanding ownership of assets as it makes economic and strategic sense. In October we acquired the Kleyer 90 Carrier Hotel in Frankfurt, one of the busiest network nodes in Europe. This comes on the heels of acquiring and integrating Ancotel, which is located inside of Kleyer 90 and exemplifies our commitment to being a leading interconnection hub in Continental Europe.

Additionally, we anticipate to close shortly on the acquisition of the London 4 and London 5 IBX buildings for approximately $35 million. Concurrent with this acquisition, we will enter into long-term ground leases on the London 4, 5 and future London 6 properties, effectively giving Equinix up to 50 years of control of our Slough campus. Upon completion of this transaction, we will own 21 of our 99 IBXs. And owned assets will generate approximately 38% of our revenue.

Before I turn the call over to Keith, I also want to share another exciting development for the Company. As we consider the massive opportunities ahead of us in cloud, enterprise and interconnection, we have added two key executives to our team. First we have hired Ihab Tarazi, as our Chief Technology Officer, who brings 23 years of global Internet and telecommunications experience. Ihab will be an integral part of both our cloud and interconnection initiatives to help fuel our continued growth globally. And, second, we have added Deborah McCowan, as our Chief Human Resource Officer. Deborah is a savvy HR leader with global experience, who is committed to ensuring that we continue to attract, develop and retain the best people in the industry.

With that, let me stop there and turn it over to Keith.

Great, thanks, Steve. Good afternoon to everyone on the call. Before I start my prepared remarks, I want to provide you with some additional comments related to our expanded disclosure in the press release posted today for the nonrecurring deferred installation fees. First, amortization of deferred installation fees is inherently imprecise. And in addition to making an adjustment last quarter, we need to ensure that the prior periods are correct before we filed our Form 10-Q. Second, as noted, any adjustments to our nonrecurring revenues is expected to be less than 1% of total revenues in any given quarter or period, covered by the current Forms 10-K or 10-Q. And has no impact on our cash flows. Lastly, we'll be finalizing our analysis over the next week or so. And once that is complete we will provide the appropriate disclosures on this matter, which will likely include an updated press release and the required SEC filings.

Starting with our third-quarter results, we continue to see steady progress towards our operating goals, both on the top and the bottom line, while other key metrics reflect the momentum we see in the retail data center space. Specifically, interconnection revenues increased quarter over quarter by greater than 4%, growing at a rate faster than the overall growth of the business, the result of net cross connect and exchange port additions. Also, net cabinets billing increased nicely in the quarter, with overall utilization levels growing to almost 77%. Our overall deal volume continues to increase, while the average deal size remains lower than the prior quarter, and the rolling four quarter average in each of our regions as we continue to focus on those deals in our sweet spot.

Separately, given we're at the one-year anniversary of both the Asia Tone and Ancotel acquisitions this quarter, our key financial and non financial metrics now fully reflect these acquisitions. Although as a reminder, ALOG will continue to remain excluded from the non financial metrics, given the nature of this business.

Now turning to slide 6 from the presentation posted today. Global Q3 revenues increased to $540.5 million, a 3% increase over the prior quarter, and up 13% over the same quarter last year on a normalized and constant currency basis. Our Q3 revenue performance reflects a $3.1 million negative currency headwind, when compared to the average rates used in Q2. And a $1.3 million positive impact when compared to the FX guidance rates. Given the volatility of the European currencies, starting this month we initiated a cash flow hedging program to limit our future exposure to exchange rate fluctuations for the British pound, the euro and the Swiss franc. Thereby reducing FX volatility on approximately 40% of EMEA revenues and adjusted EBITDA. The foreign-currency form contract that we'll use to hedge this exposure will be designated as cash flow hedges.

Global cash gross profit for the quarter was $365.8 million, up 3% over the prior quarter and up 11% over the same quarter last year, despite the higher seasonal utility cost, a trend that is consistent with our prior years. Cash gross margins were 68% of revenues, consistent with our guidance. Global cash SG&A expenses increased to $120.5 million for the quarter, slightly below our expectations due to the timing of spend, on our key strategic initiative, although some of these costs will be realized in Q4.

Global adjusted EBITDA increased to $245.2 million, above the top end of our guidance range, an 11% increase over the same quarter last year on a normalizing constant currency basis, including the change in accounting estimate initiated in Q2. Adjusted EBITDA was virtually flat when compared to prior quarter, impacted by an increase in global IT initiatives and REIT costs, higher seasonal utility spend, and expansion costs from new IBX openings. Our adjusted EBITDA margin was 45%. Our Q3 adjusted EBITDA performance reflects a negative $1.8 million currency effect when compared to the average rates used in Q2. And a small $200,000 positive impact compared to our FX guidance rates.

Global net income attributable to Equinix was $36.6 million, up quarter over quarter primarily due to loss in debt extinguishment realized in Q2. Our fully diluted earnings per share is $0.72, a meaningful increase over the prior quarter and the same quarter last year. MRR churn was consistent with our expectations at 2.5%. For the fourth quarter we expect MRR churn to be approximately 2.5%, in line with our prior guidance.

Now, moving on to comments on REIT. We continue to move forward with our plans to convert to REIT starting January 1, 2015. And currently do not expect a delay to this timeframe. On slide 7 we summarize the various expected REIT cash costs and taxes, similar to our discussion last quarter. In the third quarter we incurred approximately $8 million in cash costs for REIT and other tax-saving initiatives, primarily related to professional fees. And expect to incur roughly $11 million in additional REIT-related cash costs in Q4.

With respect to income taxes, similar to the prior quarter, our 2013 estimated cash tax liability is expected to range between $150 million and $180 million. On a year-to-date basis we've paid $58 million in REIT-related cash taxes. We're tightening our range of US tax liabilities related to D&A recaptured to narrow range between $360 million and $380 million, of which $162 million has either been sheltered by our prior NOLs or cash taxes paid to date.

Turning to slide 8, I'd like to start reviewing the regional results beginning with the Americas. Overall health of the Americas business remains strong. Americas revenues were $318.1 million, a 2% increase over the prior quarter, and up 3% on an FX neutral basis, and 9% over the same quarter last year excluding the change in accounting estimate. Cash gross margins remained solid at 71%. Adjusted EBITDA was $148.4 million, a decrease of 3% over the prior quarter after absorbing higher corporate overhead spend on the strategic initiatives, including REIT. America adjusted EBITDA margin was 47% for the quarter. Americas net cabinets billing increased by approximately 800 in the quarter, while MRR per cabinet rose slightly and remains at very attractive levels. Americas added 1,400 net cross connects in the quarter, and interconnection revenues as a percent of the regions recurring revenues increased at a new all-time high of over 20%.

Now looking at EMEA, please turn to slide 9. EMEA revenues were $132.9 million, up 6% sequentially. Revenues on a normalized and constant currency basis were up 5% quarter over quarter, and up 17% year over year. Adjusted EBITDA was $56.8 million, up 15% over the prior quarter, in part due to $2 million of one-off benefits. Adjusted EBITDA margin increased to 43%. Normalized and on a constant currency basis, EMEA adjusted EBITDA increased 14% over the prior quarter and 22% compared to the same quarter last year.

The UK business, our strongest performing operating unit in EMEA, continues to execute well across a number of verticals. And we intend to build our London 6 IBX to ensure the continued momentum we've enjoyed on our profitable Slough campus. Another highlight is our Swiss team is making good progress with our newly opened Zurich 5 IBX, booking both global and local Swiss deals, with particular strength in the cloud and IT services vertical. The German business showed slight improvement over the prior quarter. And although we've taken a number of actions we do not expect them to take hold until mid next year. EMEA interconnection revenues have grown nicely over the past three quarters and added 1,400 net cross connects this quarter. MRR per cabinet remains firm across the EMEA markets. And net cabinets billing increased by approximately 800.

And now looking at Asia Pacific, please refer to slide 10. Asia Pacific had record bookings this quarter driven by wins in financial, cloud and IT services, and digital media and content verticals. Similar to EMEA, Asia Pacific was the beneficiary of a number of large global deals, again reflecting the value of Platform Equinix. Asia Pacific revenues were $89.5 million, a 2% increase over the prior quarter. Revenues on a normalized and constant currency basis were up 4% quarter over quarter and 17% year over year. Annual revenue growth was tempered by the Asia Tone acquisition and by the large Singaporean churn that occurred at the end of Q1, a space that has now been fully re-booked at better average prices.

Adjusted EBITDA was $40.1 million, more than the prior quarter, primarily due to higher seasonal utility costs, higher than planned bad debt provision, and an increased salaries and benefit line attributed to new hires. On a normalizing constant currency basis, Asia Pacific adjusted EBITDA margin increased 8% over the same quarter last year. MRR per cabinet remained strong, although decreased 1% on an FX neutral basis over the prior quarter. New logos added in Asia Pacific this quarter totaled 66, a 35% increase above the rolling four quarter average. And cabinets billing increased by a very healthy 800 compared to prior quarter. We added 800 net cross connect and interconnection revenues, now over 12% of the region's recurring revenue.

And now looking at the balance sheet, please refer to slide 11. We ended the quarter with $1.2 billion of unrestricted cash and investments on our balance sheet. And our current liquidity position remains healthy, including access to our $550 million operating line of credit. Looking at the liability side of the balance sheet, we ended the quarter with net debt of $2.9 billion, including a $318 million increase in capital leases and other financing obligations since year end, the result of recent lease negotiations and build-to-suit accounting on some of our new expansion projects. Our net debt leverage ratio increased 3 times our Q3 annualized adjusted EBITDA.

In the short term, we'll continue to maintain a strong and flexible balance sheet thereby ensuring the maximum operational flexibility to execute against our future funding obligations, including our anticipated REIT-related needs as we await a response from the IRS on our PLR filing. And going forward we will continue to review our sources and uses of capital. And we'll continue to look to maximize shareholder value by allocating our capital to the highest and best use.

Separately, in September we amended our senior secured credit facility to allow for greater flexibility in preparation for REIT conversion. We also amended certain financial covenants to provide greater operational flexibility, as we renegotiate a number of our IBX operating leases, which we anticipate will convert to capital leases. Our cost of borrowing under this credit facility remains unchanged.

Now turning to slide 12, this is a summary of our ownership and lease renewal schedule. Consistent with our broader real estate strategy, we have secured a number of our critical IBX assets through long-term lease extensions. And, where appropriate, selectively acquired some of the strategic assets such as Kleyer 90 Frankfurt. If the Company were to exercise all renewal options available, as of today 83% of our leases by square foot would be secured through at least 2027. Looking forward, we expect our remaining operating leases will ultimately convert to capital leases, in part due to anticipated changes to the lease accounting rules, and in part due to the rules that define current capital lease accounting. This quarter, four of our five leases renewed with Digital Realty converted from an operating lease to a capital lease.

Now, switching to slide 13. Our Q3 operating cash flow increased substantially over the prior quarter to $206.6 million, primarily due to reduced cash tax payments. Our DSOs decreased to 34 days, largely due to strong collection activity at the end of the quarter. For 2013 we expect our adjusted discretionary free cash flow, excluding any REIT-related cash costs and taxes, to remain between $620 million and $640 million. And adjusted free cash flow to be greater than $175 million.

And now looking at capital expenditures, please refer to slide 14. For the quarter, capital expenditures were $171 million, slightly below expectations due to timing of spend, including ongoing capital expenditures of $41 million. We currently have 15 announced expansion projects across the globe, of which 14 are campus builds or incremental phase builds, thereby de-risking investment given current customer momentum and demand from the earlier phases.

And, finally, turning to slide 15, the operating performance of our 24 North America IBX and expansion project that have been opened for more than one year continue to perform well. Currently these projects are 82% utilized and generate a 34% cash-on-cash return on the gross PP&E invested. Our [eight old] IBXs grew 7% year over year as customers continue to purchase additional services.

So with that, let me turn this call back to Steve.

Okay, thanks, Keith. Let me now shift gears and cover our outlook for 2013 on slide 16. For the fourth quarter of 2013, we expect revenues to be in the range of $559 million to $563 million. Cash gross margins are expected to approximate 68%. Cash SG&A expenses are expected to range between $123 million and $128 million. Adjusted EBITDA is expected to be between $255 million and $259 million, which includes $11 million of professional fees related to the REIT conversion. Capital expenditures are expected to be $190 million to $210 million, including $50 million of ongoing capital expenditures. And for the full year of 2013, we expect revenue to range between $2.145 billion to $2.149 billion. Full-year guidance is also adjusted for $9 million of positive foreign currency tailwind's from our prior guidance rates.

Total year cash gross margins are expected to approximate 68%. Cash SG&A expenses are expected to range between $470 million and $475 million. Adjusted EBITDA for the year is expected to range between $988 million and $992 million, which includes $25 million in professional fees related to our REIT conversion, and approximately $4 million of positive currency benefit from prior guidance. We expect 2013 capital expenditures to range between $560 million and $580 million, including $165 million of ongoing capital expenditures.

In closing, Equinix's ecosystem strategy, combined with our scale, network density, mission-critical reliability, and global footprint are stimulating interconnection and driving solid business results. We will continue to make disciplined decisions to generate profitable growth, and win the right deals to drive acceleration of our ecosystem.

So let me stop here and open it up for questions. So, over to you, Heather.

(Operator Instructions)

Jonathan Schildkraut, Evercore.

Thank you for taking the question. I know there's going to be a lot, so maybe if we could just spend a little time on the lease renewals with Digital Realty, and the accounting impacts that that has as you move from operating leases to capital leases. I'm just trying to get a sense as to what that does to the fourth-quarter or full-year guidance on the EBITDA line. Thanks.

Good question, Jonathan. Let me take that one. The leases that went from operating leases to capital leases, they're now going to manifest themselves through basically our cash flow statement. You'll see, obviously, in the P&L, you'll see more depreciation, you'll see interest expense, and then there will be principal repayment on the cash flow statement. So, that all said, obviously there's a net benefit attached to that. That net benefit is going to be wholly offset by basically us entering into a ground lease for, as Steve alluded to, the London 4 and 5 properties. Historically, we had what we called build-to-suit accounting for London 4 and 5. Now that we're entering into ground lease arrangements that is actually a P&L hit. So basically the two offset one another and so there will be no net benefit in the quarter in Q4.

Thanks.

Michael Rollins, Citi Investment Research.

Hi, thanks for taking the question. I was wondering if you could talk a little bit more about the development of the sales force, what you're seeing in terms of productivity. And where do you stand on backlog where, I think, earlier in the year there was a little bit more build of the backlog? And where we are in that today. Thanks.

Mike, this is Charles. I think that we continue to feel good about the overall progress on the sales force. As we've discussed previously, our steady-state productivity and the ramp to that productivity varies significantly by verticals. Our mature verticals network in financial tend to ramp pretty quickly. Cloud, we're seeing some recent acceleration, as evidenced by our results in the last couple quarters. And enterprise continues to be a slower ramp, given the more protracted sales cycles, which we talked about last quarter, in particular. Although I will say there that we're seeing these green shoots, marquee customers seeing the opportunities associated with leveraging Equinix for their hybrid cloud infrastructure. So, I think there is some real reason for optimism there.

Overall, most of the reps that we brought in when we grew the force substantially in 2011 have either reached full ramp or, in some cases, have been managed out and then new players have been brought in. We think there's still upside in the current force as the new reps mature, and as we become more adept in the enterprise market. So, overall, I think we're generally on very -- we feel very positive about the ability for the force to generate bookings in our sweet spot. And we're going to continue to refine our go-to-market approach and actively look at how we can augment that, augment the direct force with key channel partnerships. That's a quick summary on the sales force and sales force productivity.

Relative to backlog and book-to-bill, I think we see that as pretty stable right now. Again, it ebbs and flows a bit with churn activity and new bookings, et cetera. One thing I will say is that we talked last time about fewer large deals, and Keith mentioned lower average deal sizes. That probably has actually a net beneficial effect relative to book to bill interval. That hasn't necessarily flowed through entirely but I think that will allow us to realize revenues, which we typically do in a fairly rapid business anyway given the nature of the business. So we feel good about where we are with that right now.

Thank you

Scott Goldman, Goldman Sachs.

Hi, guys. Thanks for taking the questions. A couple. One, maybe on the pricing side, I think looking at North America MRR per cab, we saw a nice acceleration versus where we had been running in the first half of the year. Just wondering if you could maybe talk a little bit about what's driving that. Obviously interconnect and power but how sustainable do you think that is, or could we see further movement from there? And then just on the lease renewal follow-up, if I could on that, it read from the size as though some of those weren't coming up for another six, seven years. So just curious as to why now go through that. And did you have to give anything up? Or, can you give us any context for what types of increases you had to absorb as you renewed those? Thanks.

Scott, it's Charles. I'll take the first part and hand it over to Keith for the lease items. Obviously we're pleased with the progress on the MRR per cab, particularly in the Americas. As we've told you guys before, there's always some volatility in that metric, so it's dangerous to get caught up on any particular quarter. But I do think that what we're seeing is we're beginning to see the benefits of the IBX optimization effort and some of the discipline we've implemented in terms of bringing the right business, or the right kinds of deals into the business. So, again, I think we're certainly at very healthy levels. It's certainly our aspiration to continue to drive interconnection-rich business, higher power density implementations that are all going to have favorable impacts on MRR per cab. So, certainly we're going to aspire to continue that momentum. And I do think that we've got a very disciplined approach to the business that I think we're beginning to see the benefits of. So, I'll hand it over to Keith on the lease stuff.

As far as the leases, you're absolutely right. We have roughly 14 leases with Digital Realty. 7 of them are long-dated, so they weren't within our purview, or focus, I should say. So, of the remaining 7, 5 have been renegotiated, as we mentioned on this call, and then 2 others are in the process of being renegotiated. Part of the reason that we did it today versus delaying it, some of these leases were coming due 2014, 2015, 2016. And clearly it was important for us, as we shared with the market, and certainly shared with many of our investors, it's important to insure that we have longevity in our contract life relating to these IBXs. And so this was a mutually beneficial time for both ourselves and for Digital Realty to enter into a negotiation. Obviously it's something we've been working on for a while. And I would just say, it was the right time.

Vis-a-vis your request on the specific details, it's still a little bit early to share that with you. But what I will tell you is I think it's a win-win for both organizations. And it's consistent with the market and the expectations that we had set for ourselves, not only in our guidance but also in our cash flow metrics going forward. And, in fact, when it comes to some of the other leases that we're negotiating, in fact, as we thought about the expansion in those buildings three, four, five years ago, we'd already contemplated at that point in time what our anticipated rent increase would be, given the fact that we're in a subletting arrangement with some other parties. And so, from that perspective, I would just tell you we're dead on the mark, and we're happy with the outcome. And I believe Digital Realty is happy with the outcome, as well.

Great, I appreciate the color.

Jonathan Atkin, RBC Capital Markets.

Yes, I am interested in the deal size getting smaller and what implications that has for your business suites offer. And in general what kind of impact you're seeing in the business from the increasing encroachment from the REITs more into the retail and interconnect pairing segment of the market.

Sure. It's Charles. I'll take that one, Jonathan, and Steve or Keith can add any color. But I think that overall it's just the dynamics are such that we're seeing this health in the sweet spot. But, again, larger deals. We talked about last time that it's really deals that previously where the spread between retail and wholesale was smaller, we're seeing more undifferentiated large footprint deals close at market-clearing prices that we simply don't find attractive. And so, that is reducing those deals because we simply won't chase those deals at those price points, given the opportunity costs they represent when we can fill them with deals in the sweet spot. So, as it relates to the business suites, I see it as a fairly distinct issue in that business suites is a targeted offering for us, where we have the opportunity to serve certain key strategic customers who may want to keep a larger portion of their total infrastructure need with a single provider, and with one that they trust deeply. And that's the type of relationship we have with a number of players. And so we very selectively decided to add some large footprint to the mix. But, again, really not a wholesale alternative per se but it does give us an opportunity to serve certain select large footprint requirements.

And on the broader topic of wholesale and the competitive dynamics, it's interesting. Many people have talked about it blurring the lines between wholesale and retail. And, frankly, I'd argue exactly the opposite. As the market segmented, as I said, the spread between retail and wholesale has increased. And the choice for people to move large, nonperformance-sensitive applications into wholesale is becoming an choice for them at the price points that wholesalers are offering. Again, we described in our last call and what marginal implications that has had on our business. There are certainly large sweet spot deals that we're doing -- core nodes for carriers, service nodes for cloud providers, et cetera. But these undifferentiated deals that close at low price points simply are uninteresting to us.

Now, it is true that some wholesale players have retail offerings or are signaling their intention to develop retail offerings. But, in my mind, that's not a blurring of the lines, that's an entirely different matter. And that decision by a wholesaler would come with a very significant investment required to sell, install, build, support, a large number of retail customers. And I would encourage you to get a sense for that, all you have to do is look at our employee count, look at our SG&A investment necessary to support that retail model, and compare that to pure wholesales. And I think you'll pretty quickly conclude that players can't just declare themselves as retailers and expect that they're going to successfully meet customer needs, particularly highly demanding customers who need application performance, global reach, superior support, et cetera. So I really actually think we're seeing a brightening of the lines, a clear segmentation of the market, and a continued development of the sweet spot that Equinix serves tremendously well

The only thing I would add, Jonathan, is you can tell by the comments, as Charles is doing this, out of the North America business, now on a global basis with this new role, it requires focus and complete coordination between sales and marketing. We're going to do more transactions every quarter, we're going to do less large deals every quarter. But we are absolutely convinced the total addressable available market for those types of opportunities is significant. And it's our go-to-market channels. We just have to keep executing, and that's what we're going to continue to do

Are there any markets or regions where you're seeing book to bill, in fact, get a little quicker? Or is it too soon to be seeing that impact, even on a regional or market level basis?

I don't know. Keith?

I would say we're at levels that certainly, in some cases, is extremely fast, and in other cases it takes a little bit longer. It clearly depends on the complexity of installation and what the customer is trying to accomplish. But I would tell you there's no major outliers that we see today that would change our opinion. And so, at this stage, I'd just say that it's relatively consistent with what we've experienced over the last few quarters. And we'll continue to pay attention to it looking forward. But, as I said, it does depend on the customer installation, the complexity of that, and certainly which market it is going to go into

What I would say is if you looked, for example, in the script, we talked about a Fortune 50 energy company with doing a network performance deal, which is really positioned to help them not only with re-architecting their WAN, but moving to a hybrid cloud environment. That type of deal, which is a multi-site two to four, or two to five cabs in multiple sites, those tend to have a pretty attractive book-to-bill interval. And so, again, as I think we see, become more adept in selling that value proposition and landing those types of deals, which in aggregate can look like mid- to large-sized deals but are made up of these smaller implementations, I think we might see favorability on book to bill. But I think it's too early to tell.

Thank you

Brett Feldman, Deutsche Bank.

Thanks for taking the question. Keith, I think you mentioned that on a currency neutral basis MRR in Asia was down slightly in the quarter. I'm wondering if some of that had to do with some of the transition that was going on in Singapore in terms of the churn and rebooking the space. And now that it's been fully rebooked at a higher average rate, should we see a better sequential trend in that metric going into 4Q? And then just one other one. A while back you'd set a goal for 2015 of getting to about $3 billion in revenue. It would see that based on the revenue trajectory you're on right now the timeline for that could be pushed out a little bit. Is that a safe assumption at this point?

Let me take those two questions. First on the Singapore, the slight decrease you see quarter over quarter is wholly attributed to the fact that -- and, again, I'm dealing with on a currency neutral basis because obviously the Australian dollar has weakened dramatically and the yet has fluctuated over the last couple quarters. So, when you look at it, it's wholly attributed to a lot of the global deals that we're doing in Singapore. And they tend to come in size. And we've been pretty clear that sometimes these global deals become at more aggressive price points. And so that has some impact on the average pricing per cab in Singapore. So that would be number one.

And then number two, as it relates to basically the replacement of that capacity, or filling that capacity that was vacated at the end of Q1, it did come at higher average price points, which is good. But because it's only been booked it has not yet necessarily been wholly billed. We haven't seen the full value of that. So, as we look forward, we're going to continue to see some movement. It will depend on the specific IBX that we put the deployments into in Singapore. But we'll see it fluctuate around this level for the foreseeable future, particularly as we continue to scale with the global platform deals

And then on the second question, clearly I think everybody is wholly aware of facing the trajectory that we have as a business, and the implications a recurring model has on the cumulative build, if you will, on this business plan. And so, we have not publicly come out and talked about whether or not we can attain a $3 billion target. But at this stage, given the trajectory that we're on, it's fair to say that that's going to get pushed out over a period of time as we continue to scale the business at the rate that we're scaling it at right now. As you know, this quarter on a currency neutral basis we were up roughly 3.4%. And then when you equate that into what it looks like next quarter, it's roughly another 3.4%, 3.3% quarter-over-quarter growth. And, so, the implications of that, and the implications of currency, does make it more difficult to achieve that target in 2015. But certainly we're going to continue to push to drive the business, accelerate as much as we can the growth, and clearly focused on driving profitable growth into the business, which is a focus on EBIT margin line

Great. Thanks for taking the questions.

David Barden, Bank of America.

Hi, guys. Thanks for taking the questions. Just, first, Keith or Steve, I think we've heard in the past a region-by-region bookings commentary. If you could give us an update as to how these bookings in 3Q tracked relative to history. And cardinal ranking would be helpful. And then just, second, on the guidance change from last quarter, a portion of it was attributed to the lengthening of the decision-making cycle. And I think that obviously we've had the government shut-down and we've got this kick-the-can approach now towards the budget. Is there anything about the enterprise decision-making cycle that you think is incrementally influencing fourth quarter or maybe into 2014 that we should consider? Or have you rightsized the timetable that these sales are entering the funnel and then closing and billing on? Thanks.

David, this is Steve. Let me start out. The (inaudible) problem we get asked are these questions. Let me start in Europe just to give you a sense of bookings, if you're trying to get a sense of where the growth is. In this quarter, quarter on quarter we saw roughly an 8% improvement in bookings in Europe. And I know that's hard to gauge what does that mean, because we don't provide those numbers. But generally, even with a little bit of market or macro uncertainty, the business is performing very well in Europe. Revenues were up 5% quarter on quarter on a constant currency basis, 20% year on year. So, good performance in Europe. Crossconnect has actually jumped up significantly this quarter that underpinned some of the bookings. I think on a year-on-year basis it was close to a 30% step up in crossconnect revenue. So, in Europe, good quarter. Actually in Asia, again, we had another records achievement on bookings in Asia/ So all in, gross bookings was another -- pretty flat with our highest quarter historically but just barely a record bookings quarter in Asia again. So the team has performed well there. Mostly driven by a lot of inbound bookings coming, as Keith just talked about. Cloud also, from a vertical standpoint, had another record bookings quarter. And then, I don't know -- how would you call North America?

Yes, solid performance across the verticals in the Americas, as well. I think, as we mentioned last time, we are seeing some impact from fewer large deals. And that does create a bit of headwind. But as we talked about last time, that's on the margin and fully contemplated in our guidance. And then I think, relative to your other question in terms of enterprise sales cycles being a bit more protracted, I think a couple things. One, yes, we've contemplated that within the remainder of our guidance. And we'll continue to monitor that as we look at what we expect to guide to in 2014.

But I would say a couple things. One, we are seeing these green shoots lighthouse account type wins. I think our ability to take those, package them, document the benefits with those customers, and push them back out to market are really the key to us shrinking those sales cycles, and beginning to accelerate the momentum. So, we would certainly hope to do that as we go into '14. But we'll be realistic and pragmatic about that, and balanced about it as we develop our guidance. And as to the causes there, I don't believe they are really driven per se by macro economic uncertainty or broader enterprise anxiety or anything like that. I think they're, candidly, just driven by the fact that the decisions of CIOs to move to hybrid cloud infrastructures and optimize their WAN using third-party co-lo, particularly given the network density that we as Equinix provide are complex decisions. And they're sales cycles that need substantive technical support. And we're building our solution architect team to provide that. And I think it's just a matter of really getting people comfortable with that value proposition, quantifying it for them, and getting them over the hump. So, I don't really see it as related to broader uncertainty, either with the economy or the crazy government or whatever else is going on out there

All right, thanks, Charles.

Colby Synesael, Cowen & Company

Great, thank you. Charles, at a recent Investor conference you indicated that you'd gone and extended out the contract for 70% of your top 50 customers. And I think that that was a new metric that you guys had provided. And I'm just curious, were you getting that metric to show that you guys are now well through that process and that we should start to see that wind down? Or were you trying to give the signal that you'd seen an acceleration in that focus, of recent, and maybe we'd see potentially an increasing level of pricing pressure, since that's one of the things that you trade off, if you will, for those extended contracts? And then the other part of that question just has to do with the remaining 30%. Is that something you actually expect to achieve? Or those are customers that just, for whatever reason, aren't going to be moving to the longer-term contracts? Just a little bit of color so we can get a sense of what the potential impact of those remaining 30 could be also. Thanks

Sure, great question, Colby. I think the answer to your first question is yes. Meaning that it's probably both of those things, to some degree. I think that the metric was delivered, I think, in part, to give some sense of confidence that a very significant portion of our revenue in these top 50 customers are things that we're locking down under longer-term renewals. And that helps us in a number of ways, in terms of what we actually see is that, once we get renewals done, it reduces some of the buying friction and tends to reaccelerate our bookings with those customers. And so, yes, it was intended to give some confidence about the durability and quality and tenure, if you will, of those revenue streams. At the same time, when you invert the 70% and say there's 30% remaining, it does imply that some of the headwinds that we have been indicating are there in the business associated with those renewals as we move through the 70%, will undoubtedly repeat themselves, to some degree, as we pursue long-term renewals with the remaining 30. That is there, we believe. Again, our guidance contemplates that. We're going to make good, long-term decisions about when the trade-off between perhaps a modest commercial adjustment would make sense in exchange for term. And we feel pretty good about our sophistication in terms of making those decisions in the best long-term interests of the business. But that is something that is out there. I think that we're going to continue to pursue those. I actually think we will get to most of them. I think occasionally there are people who want to remain on shorter-term contracts. But most of our large customers are very interested in the discussion about how we maintain a more strategic, long-term relationship together.

Great, thank you

Frank Louthan, Raymond James

Great, thank you. Looking at some of the trends in interconnect pricing, did any of the new open IX developments, or things like that, concern you? Are you seeing any additional competitive pressures on interconnect? And what are the trends as far as offering interconnection between various data centers? You mentioned the multi-location thing with the large customer. Is that a growing opportunity for you?

Yes, thanks, Frank. It's Charles. Let me cover several of those. One, as you can see in our metrics, obviously the health of the interconnection business overall at Equinix is very vital. Added a lot of cross connects -- 3,600 in the quarter. We continue to see -- I think we've actually seen now the waning of some of the headwinds that were in the Americas business relative to some network consolidations that were causing a bit of headwind there. I think we're back to very healthy levels across connect adds. So, overall, I think we see that interconnection provides enormous value to our customers, and therefore continues to be a very strong offering for us.

No doubt we've heard a lot about or been asked a lot about open IX and other peering initiatives out there, et cetera. On the topic of peering, I think it's important to look at the issue from the customer's perspective. When you back up and consider peering, customers basically have three alternatives. They can buy transit, an option that's always been available to them, and which pricing has been dropping significantly for the past ten years. They can join a public peering exchange like our IX platform, or the other competitive exchanges. Or they can peer privately. When customers consider what mix of those alternatives to use, and where they're going to locate to effect that, they really consider a number of factors. Economics -- what's the most cost-effective way for them to exchange their traffic. Flexibility -- how easy is it for them to evolve their mix between those choices as their traffic patterns change. And then, really, the quality and resiliency of the platform. And the first two, economics and flexibility, and the overall value, really, of any exchange to a customer is really driven by the scale of the platform. And not just the number of participants directly on the exchange, but the number of peers that can be accessed within the facility for private interconnection. And unsurprisingly, when you have a 15-year head start, as Equinix does, that's where we really shine. And so, we think the depth of our exchange is unmatched and feel very good about that.

And then with regard to quality and resiliency, we've got the scale, the commitment, and the balance sheet to continue to invest heavily in the platform. And we're delivering industry-leading performance. So, the reality of peering is that customers, they don't want to be single threaded. So, the dynamics of the market are such that there typically is room for an alternative exchange in most markets. In some cases we are actually the secondary exchange. But we've always maintained the position that competition is good for the customer. And so, if you go specifically to, say, open IX or some of these other ones, there may, in fact, be an opportunity for them to establish presence. But as long as we price our services competitively, and deliver superior value for that price, we believe the impact to our business will be minimal. Especially in light of the fact that peering revenues represent a very small fraction of our total interconnection revenue. So, we're very excited about the overall trend and trajectory on our interconnection business, continue to invest heavily in it, and feel very good about it

Okay, great, thank you

Gray Powell, Wells Fargo.

Great, thanks for taking the question. On North America MRR, how should we think about the factors that are influencing that metric? Obviously there's the competitive dynamics. But if Equinix is doing less large deals and just focusing on smaller latency-sensitive retail customers, how should we think about the balance there and MRR trends going forward?

As I mentioned, I think you're seeing the benefits of the disciplined approach. Our focus on interconnection-rich deals, it's pretty easy to do the math when you look at a relatively small deal. Let's take a five-cabinet implementation and say, if you add 5 or 10 cross connects to that, what does that do to your MRR per kilowatt or MRR per cab. It can be pretty substantial. And so this level of focus is really important. And as we moved through the IBX optimization process, moved some customers, at least the large footprint portions of their infrastructure out of Equinix into more aggressively priced products, and maintained their more network-rich or interconnection-rich implementations, we believe that that would have a positive impact. And that is, in fact, beginning to materialize. So, again, it's something that I think has some volatility in it, so we don't want to get too carried away with a single quarter. But I do think we're beginning to see that. Those deals are very attractive from an economic standpoint on an MRR and EBITDA generated per cab. And, as importantly, they tend to be very sticky in terms of churn risk. So, those are all the dynamics that have led us to manage the business as we have for the last several years, and give us confidence that we're onto the right strategy, and that we have a high ability to execute on it.

Understood. That's very helpful. And then just a bigger picture question, if I may. In our discussions with private companies and industry contacts, we just increasingly heard of cases where customers using Amazon web services, they grow up, they mature, and then they look to move certain workloads into a dedicated environment. I know you've had some interesting case studies on this topic in the past. And I'm just curious what you're seeing there. And if you think that dynamic could be a longer-term driver of demand to you?

Yes, absolutely. Steve or Keith can comment on this, as well. But we definitely see that cloud is actually -- and we've talked about this in the past -- it's actually an interesting entry-level option for most folks. It's a completely variable cost model. It allows them to stand up infrastructure quickly. And as we've said, often we're actually seeing that new entrants may be moving to that model increasingly rather than buying a cab or two from us. But what we then see later is that, as they scale and their requirements become more sophisticated, and their AWS build grows, they very frequently look at how to move to a hybrid model, and move certain workloads into a colocation environment and/or develop a hybrid cloud architecture. So, we have actually had several examples of that. We have several documented case studies of where customers are doing that effectively within Equinix. And, again, we believe that's one of several major vectors within the cloud growth opportunity for us. So, absolutely that is out there and we think it's a win-win. We think public cloud is a major development for enterprise CIOs. And they're going to make significant use of it. But we're going to also be net beneficiaries in that as they balance that with a hybrid cloud architecture for security, performance and cost reasons

There's another element of that, Greg, too, and we discussed it in the script today. We're very focused at bringing these big public cloud players to have access nodes around the world with us. That will also help pull the enterprises, as we discussed, to want to connect private workload with public workload and create this hybrid cloud environment. So we're starting to see that start to happen at a faster pace. And, back to Charles' comments earlier on enterprise, enterprise you'll start to see that happening in 2014 as we get these success stories and we start replicating those use cases. We're going to be able to help enable the hybrid cloud in these data centers. And I think that's going to be an interesting play because, at the same time, small companies can go to the public cloud nodes. All those public cloud node players, platform players, are going to have nodes at Equinix and you get access to those public clouds at Equinix all day long. That's going to be an interesting environment as that starts to scale

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

Sterling Auty, JPMorgan.

Thanks. Hi, guys. I want to go back to the commentary, Charles, that you had around the wholesale versus the retail, and the differentiation. I appreciate the comments. One of the investor concerns is what part of the installed base or the customer base at the moment sits at the fringe of those undifferentiated deals? So, what are the ones that might be at risk if a wholesale provider decides to make that investment?

Sure. I get that question a lot, Sterling. And what I would say is that that was really at least one major factor underlying the essence of the IBX optimization effort, was identifying those and moving them, engaging them in a discussion about what was in their long-term best interest, and moving them, some of them, many of those customers to these multi-tiered architectures. And that was really the underlying dynamic behind the elevated churn that we saw for several quarters. Now, I would say there is still work to be done there. And we certainly have not done that with every customer. And it's often difficult until you sit down with a customer and really engage them at an application level in a discussion with them at the application level that says -- What are you really doing inside of your architecture and what are your long-term plans -- you really don't often know what's in there until you have that discussion. And so I expect that we are going to see that the migration from a more homogenous implementation, or a monolithic implementation, into these multi-tiered architectures is a reality we are going to face. But what I'd say is I think we feel like we can accommodate that within what we feel is the base level of frictional churn. And that's the dynamic we're moving towards. I don't think I can pinpoint exactly how much existing nascent exposure there is. But I think we've made great progress in addressing it and we'll continue to be very focused on working with our customers in that regard

Great, thank you

That concludes our Q3 call. Thank you for joining us.

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