Equinix Inc (EQIX) 2013 Q4 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 anyone has objections please disconnect at this time. I'd 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 I get started I'd like to remind you everyone that some of the statements that 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 November 12, 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'll turn the call over to Steve.

Thank you, Katrina. Good afternoon and welcome to our fourth quarter earnings call.

Before we walk through the results of the quarter would like to take a minute to reflect on in the milestones we've achieved in 2013. For the first time we delivered over $2 billion of revenue and over $1 billion of adjusted EBITDA demonstrating the strength of our business model.

Second, the scale of platform Equinix with 100 data centers and 32 metros around the world now supports approximately 4,500 customers who are connecting to their customers and partners to accelerate business performance. As part of growing the global platform we completed 18 IBX expansions including moving into new markets in Osaka, Dubai, and Jakarta.

Third, we delivered $175 million of adjusted free cash flow after fully funding our growth capital expenditures. This provides us flexibility with our balance sheet and allows for shareholder friendly actions such as the share repurchase program announced last quarter.

We also continued to progress with our plans to convert to a REIT on January 1, 2015 and are in making investments in our systems and people in preparation for this conversion. And finally interconnection revenue outpaced overall revenue, growing 18% due to the vibrancy of the business ecosystems operating inside our data centers.

We added 14,000 cross connects in 2013 finishing the year with over 128,000 connections among our customers and partners. We continue to benefit from bandwidth demand as evidenced by over 20% growth in traffic in our exchanges which we operate in 19 markets across the globe.

As we enter 2014 we see continued strength in the business and are well-positioned to execute on emerging growth opportunities. While we continue to manage through selective headwinds related to movement of certain applications to multi tiered architectures, targeted price concessions on key renewals to move customers to longer-term contracts, and some uncertainty about the timing and pace of enterprises migrating to hybrid cloud solutions, we remain committed to balancing growth and profitability by putting the right customers with the right applications into the right locations.

We believe our strategy will meaningfully differentiate the performance of Equinix versus the broader market and the success of the strategy is clearly reflected in our quarterly business results which include solid growth, healthy operating margins, and firm yield per cabinet. We continue to put in place the building blocks to position Equinix as the interconnection platform for the world's leading businesses.

Foundationally, we are increasing our network density as a central source of value for our customers across all verticals. In 2013 we added over 75 new carriers globally, including new connectivity options in Eastern Europe, and the Middle East driven by our Ancotel acquisition and Dubai investment.

Platform Equinix now provides access to more than 975 network service providers making us the clear choice for exchanging traffic cost effectively, securely, and with superior performance. This breadth of choice in networks allows us to attract magnet customers that in turn draw their customers to create dynamic ecosystems which generate increasing returns for both Equinix and our customers. This ecosystem effect allows us to deliver solid results even through times of volatility and uncertainty. For example despite a challenging year for the global financial services sector in 2013 our business in this vertical grew steadily.

Today we announced that BATS, one of the world's most advanced trading platforms and one of the largest operators of US equity markets, has elected to consolidate its US markets to better serve its customers and has chosen Equinix as the primary data center provider for all existing BATS exchanges. With the completion of the BATS merger with Direct Edge, BATS selected Equinix based on a variety of factors, including the quality of our facilities and the strength of our financial ecosystem. This is a critical addition to their over 150 exchange and execution platform deployments that currently reside within Equinix and as the only data center provider with a presence across top global financial markets, we expect to realize outsized benefits as these markets return to growth.

Similarly in our content and digital media business, despite large content providers moving to multi tiered architectures, we remain confident about our market position and we are optimistic about the potential in untapped market segments in this vertical. For example, there is growth in a number of customers implementing do-it-yourself CDMs and in digital advertising, both of which are sweet spot applications characterized by small to midsized footprints with high power density, rich interconnection, and correspondingly high yield per cabinet. Our recent successes include global deployments with RadiumOne, MediaMath, Casale Media, and are indicative of our continued momentum in this segment and growth of the Ad-IX ecosystem.

For 2014 the significant part of our strategy and the primary emphasis of our innovation investment is aimed at capturing the longer-term opportunity associated with cloud computing. Cloud is creating massive disruptions in the IT supply chain and will continue to do so at an accelerated pace creating opportunities across all of our verticals.

CIOs and leading influencers like Gartner continue to point to hybrid cloud as the long-term architecture of choice, and highlight carrier neutral data center selection as critical to unlocking the potential of the cloud. We have achieved significant momentum with cloud service providers who see our network density, global reach, and mission-critical reliability as fundamental to their success. Cloud and IT services grew 16% year-over-year and led all segments in multi-region deployments. We ended 2013 with over 1,200 cloud and IT service customers with 42% of this revenue from the infrastructure as a service and software as a service segments.

Often the early adopters of hybrid cloud solutions are cloud related businesses themselves. For example, social networking company FourSquare has built a private and hybrid cloud deployment inside Equinix to reduce costs and improve performance for its big data analytics platform. As slide 4 shows, by moving from public to hybrid cloud FourSquare has been able to double the number of transactions processed while keeping its costs flat. By leveraging direct connection to AWS inside Equinix FourSquare also substantially increased performance transferring data five times faster than public network connections could support.

Networks are also expanding their ability to connect their customers privately to cloud services inside Equinix. Recently Verizon extend its private IP service with Equinix and AT&T deployed its net bond cloud access product across select Equinix data centers to address the security and performance challenges faced by enterprises. Private access to cloud services will emerge as a business priority for enterprise CIOs and represents a major revenue opportunity for carriers.

In addition to service providers we are seeing the front edge of enterprise deployments where companies such as McGraw Hill come to Equinix to deploy hybrid cloud in order to leverage the ability to directly connect to key cloud service providers such as AWS, Microsoft Azure, and SoftLayer which is now part of IBM. The enterprise market continued to represent a significant opportunity for Equinix, and while growth in this segment fell short of our aspirations in 2013 we won important deployments from leading enterprises. And these case studies will equip our sales teams for broader penetration going forward.

Indicative of our momentum 18 of the top 25 information technology outsourcing firms and 4 of the top 10 global pharmaceutical companies are now deployed with Equinix. To ensure continued growth we are targeting specific industries which we feel are a match with the value of our global interconnected platform, including business and professional services, healthcare, and energy oil and gas, and these efforts are resulting in early traction.

We are also developing enterprise ready solutions that leverage our core products and services. For example our performance hub solution which is an enterprise private network node deployed at Equinix in order to flexibly extend the enterprise WAN to optimize network costs, securely access the cloud, and improve the performance of key applications. Through partners we offer consulting services, hardware procurement, and carrier selection to help an enterprise design and implement a network architecture that includes performance hubs. Wins for this solution include Chevron, eBay, Nvidia, and also a large information technology outsourcer who has elected to deploy performance hubs across three markets and two regions initially but plans for a significant global expansion.

We are confident that 2014 will represent another year of solid growth and attractive profitability and will position us to exploit key opportunities. So now let me turn the call over to Keith to cover some of the results for the quarter.

Thanks, Steve and good afternoon to everyone. For this call what I'd like to do first is provide you some highlights for the full year of 2013 and then I'll provide you some additional detail on the fourth quarter.

So starting with 2013, we delivered $2.153 billion of revenue, representing a 14% year-over-year growth and up 13% when normalized for acquisitions and constant currency. On a regional basis both our EMEA and Asia Pacific regions delivered strong year-over-year growth at 21% and 20% respectively while the Americas region produced solid growth of 10% on its meaningfully larger base.

Our operating margins continue to improve, particularly after adjusting for REIT related cash costs. We see a clear path to targeted adjusted EBITDA margin of 50%, which will be achieved through increasing cash flows margins, operational efficiencies derived from our systems work, and our underlying expectation that we will leverage our investments in the SG&A base.

Also similar to the comment made by Steve I want to highlight the fact that we've eclipsed the $1 billion adjusted EBITDA mark for 2013. A great accomplishment for our Company.

Our key metrics across-the-board remain healthy this year including new customer additions, attractive average deal sizes, multi-metro deployments, yield per cabinet, and a number of interconnections, both cross connect and at the port level. In fact, interconnection revenues increased by 18% over the prior year, primarily due to growth in each of our regions with particular strength in the Americas and EMEA region.

Turning to slide 5 I'd like to highlight how we invested in the business in 2013. We generated approximately $632 million in cash from operations for the year and reinvested $572 million with consistently high levels of return.

We also acquired two strategic assets, Kleyer 90 in Frankfurt where our Ancotel business resides and our New York 2 IBX which is a critical part of our financial services ecosystem. We now have over 10 million gross square feet of space which is the largest retail data center footprint in the world.

Ongoing CapEx was higher than expected at $183 million for the year. Which included success based installations, maintenance, and value enhancing initiatives such as the global IT initiative. Finally, we repurchased $49 million of Equinix stock in 2013 and through the date of this call we've increased this investment to greater than $92 million.

Now turning to slide 6, I'll review our fourth quarter results. We delivered a very solid fourth quarter against our revenue and adjusted EBITDA objectives. Global Q4 revenues increased to $564.7 million, a 4% increase over the prior quarter and up 12% over the same quarter last year. Both on a normalized and constant currency basis. Our Q4 revenue performance reflects a $5.4 million positive currency benefit when compared to the average rates used in Q3 and a $500,000 negative headwind when compared to our guidance rates.

Global cash gross profit for the quarter was $390.4 million, up 6% over the prior quarter and up 12% over the same quarter last year. Largely due to lower than expected rent and utilities expense. Cash gross margins were 69% of revenues.

Global cash SG&A expenses increased to $126.9 million for the quarter including approximately $7 million of REIT related cash costs. Global adjusted EBITDA increased to $263.5 million, above the top end of our guidance range, an 11% increase over the same quarter last year on a constant currency basis. Our adjusted EBITDA margin was 47%. Our Q4 adjusted EBITDA performance reflects a positive $2.3 million currency benefit when compared to the average rates used in Q3 and a $200,000 negative impact when compared to our FX guidance range.

Global net income attributable to Equinix was $45.2 million, up 6% quarter-over-quarter. Our fully diluted earnings per share was $0.88.

For the year our reported net income attributable to Equinix was $94.7 million or $1.87(sic-see press release "$1.89") per diluted share. But absent the loss in the debt extinguishment primarily attributed to the early prepayment of our 2018 high-yield notes, our pro forma net income would have been $159.2 million or $3.10 per diluted share, effectively a 20% increase over the prior year.

MRR churn was consistent with our expectations at 2.3%. For the full year of 2014, we expect MRR churn to average approximately 2.5% per quarter with the exception of Q2 whereby we expect to experience slightly elevated churn related to LinkedIn as they bifurcate a portion of their infrastructure. This MRR churn has been fully contemplated in our 2014 guidance.

We continue to expect steady MRR per cabinet yields across each of our regions this year, foreign currency aside. As a reminder, MRR per cabinet metric is a constant calculation of our space, our power, interconnection, and other recurring revenues divided by the average billing cabinets in the quarter.

We remain focused on increasing the level of interconnection activity, densing up the amount of power consumed by our customers, and realizing price escalators in our contract as this gives us the flexibility to absorb price adjustments with certain of our customers as we respond to market conditions and as we seek to extend the term of their contracts. We've accomplished this value creating objective while increasing the overall profitability of our business which we believe is good for our shareholders.

Now moving onto comments on REIT, we continue to move forward with our plans to convert to a REIT starting on January 1, 2015, and while we're still awaiting a response from the IRS on our PLR request we currently do not expect a delay to this timeframe. On slide 7 we summarize the various expected REIT related cash costs and taxes, similar to our discussion last quarter. Of note as we continue to progress with our REIT conversion effort we are updating our one-time implementation costs to now range between $75 million and $85 million through 2014.

For the full year of 2014 we expect to incur approximately $37 million of cash costs and $16 million of capital expenditures for the REIT conversion. In the first quarter we expect to incur approximately $11 million in REIT related cash costs. With respect to income taxes we've paid approximately $124 million in cash taxes, lower than our prior range primarily due to some incremental tax planning efforts over the past few quarters.

Looking at 2014 our estimated cash tax liability is expected to range between $145 million and $180 million, including approximately $35 million in non-REIT related cash tax costs. Our US tax liabilities related to D&A recapture continue to range between $360 million and $380 million, of which $193 million has either been settled through the use of 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. The Americas region delivered a strong quarter on both the revenue and adjusted EBITDA lines. Meeting or beating expectations across many of their key metrics as well as exporting a significant amount of activity to the other two regions.

Americas revenues were $326.1 million, a 2% increase over the prior quarter and up 10% over the same quarter last year. Cash gross margins increased nicely to 73%, the result of lower rent, utilities, and salaries and benefits expense. Adjusted EBITDA was $159.6 million, up 6% over the prior quarter. Americas adjusted EBITDA margin was 49% for the quarter which includes the absorption of corporate functions.

Americas net billing cabinets increased by approximately 800 in the quarter, while MRR per cabinet remained steady at very attractive levels. Americas added 1,500 net cross connects in the quarter and interconnection revenues as a percent of the region's recurring revenues remained at 20%. Finally we'll commence work on the second phase of our Philadelphia 1 IBX, a carrier dense asset with over 50 networks and a strong yield per cabinet in order to support the supply constrained market.

Now looking at EMEA, please turn to slide 9. EMEA revenues were $144.8 million, up 9% sequentially and reflect strong performance across a number of the markets with particular emphasis on the UK and Netherlands. Additionally, the ability for the global organization to sell Platform Equinix into the key EMEA markets continue to be a vector of above market growth in this region.

Revenues on a normalized and constant currency basis were up 4% quarter-over-quarter and up 18% year-over-year. Making Equinix Europe the market leader in the region.

Adjusted EBITDA was $59.6 million, up 4% over the prior quarter and up 31% over the same quarter last year. Adjusted EBITDA margin decreased to 41% largely due to higher rent, salaries and benefits, and bad debt expenses. Normalized and on a constant currency basis EMEA adjusted EBITDA increased by 1% over the prior quarter and 26% compared to the same quarter last year.

EMEA interconnection revenues increased 13% over the prior quarter and up 31% over the same quarter last year. In the quarter 1,400 net cross connects were added. Interconnection revenues as a percent of the region's recurring revenues increased to 8% demonstrating continued progress of growing the interconnection line in our European assets.

MRR per cabinet remains firm across the EMEA market and net cabinets billing increased by approximately 500. Additionally, we completed the London 4 and 5 transaction for $37 million and entered into long-term ground leases on London 4 and 5 and the future London 6 property effectively giving us -- giving Equinix 50 years of control of our Slough campus.

And now looking at Asia Pacific, please refer to slide 10. Asia-Pacific again had record bookings this quarter with particular strength in our Singaporean market. Asia-Pacific revenues were $93.8 million, a 4% increase over the prior quarter.

Similar to the EMEA region Asia-Pacific is a beneficiary of Platform Equinix. Revenues on a normalized and a constant currency basis were up 3% quarter-over-quarter and up 12% year-over-year. Adjusted EBITDA was $44.3 million, up 8% over the last quarter and down 2% compared to the same quarter last year due to expansion activities in Osaka and Melbourne.

MRR per cabinet remained strong despite the FX headwinds from both the Australian dollar and Japanese yen over the past few quarters. Cabinets billing increased by 600 compared to the prior quarter and we added 1,300 net cross connects. Interconnection revenue is now 12% of the region's recurring revenues.

In Asia-Pacific we continue to target multinational customers for this region. As previously announced we intend to expand into Melbourne market and have opened our first Osaka IBX in Q4 bringing the total markets served in region to seven. This will allow these those customers that have specific interests in the network, financial services, and cloud and verticals to expand with us in these new markets. The Melbourne IBX will be our fourth IBX in the Australian market providing us a dual market presence across Australia's two biggest cities.

And now looking at the balance sheet, please refer to slide 11. We ended the quarter with $1.03 billion of unrestricted cash and investments on our balance sheet and our current liquidity position continues to remain healthy. Our net debt leverage ratio remains at three times our Q4 annualized adjusted EBITDA.

Over the past few quarters we've increased the number of leases that are now treated as either capital leases or build to suit arrangements, in both cases increasing the level of leverage on our balance sheet. In the quarter we increased our capital lease and other financing obligations by $52 million, increased the amount of debt outstanding in ALOG to $68 million, and assumed a $43 million mortgage related to the Frankfurt 5 building acquisition.

Now switching to slide 12. Our Q4 operating cash flow decreased over the prior quarter to $166.7 million, primarily due to an increase in cash interest paid on our outstanding debt and large cash tax payments in Q4. Our DSOs decreased to 29 days.

Our 2013 adjusted discretionary free cash flow was $558 million, lower than expected largely due to higher than expected ongoing capital spending and increased working capital requirements. For 2014 we expect our adjusted discretionary free cash flow, excluding any REIT related cash costs or taxes, to range between $620 million and $650 million, and adjusted free cash flow to be greater than $200 million.

Now looking at capital expenditures, please refer to slide 13. For the quarter capital expenditures were $203 million including ongoing capital expenditures of $68 million. We opened five new phases in the quarter including the first phase attributed to our new build in Osaka, the third phase of our Ashburn business suites product, and the final phase of our London 5 asset.

We now currently have 11 announced expansion projects underway across the globe of which 10 are campus builds or incremental phase builds. And as you know this helps to de-risk the investment given the current customer pipeline and typically results in reduced investment on these incremental phases over the initial phase. So at this point let me turn it back to Steve.

Okay. Thanks, Keith. Let me now shift gears and cover 2014 strategy and outlook on slide 14.

Our corporate initiatives are aligned at three strategic priorities designed to further differentiate our global data center services. First we will continue to drive differentiated growth by deepening our existing ecosystems and seizing new ones with a focus on cloud.

We are making significant investments in innovation to prepare Platform Equinix to become the home for enterprises connecting to public, private, and hybrid cloud deployments. Cloud adoption is ramping up at a rate that is exceeding any other industry vertical and delivered record bookings every quarter in 2013. While we're in the early innings of this paradigm shift to cloud computing we believe that latency in interconnection will become increasingly important as critical applications move to the cloud.

Our investment is squarely aimed at winning network access and service aggregation nodes and leveraging the next generation of interconnection that help solve key issues for the enterprise, including security, performance, and reliability bottlenecks. Additionally, we continue to focus on increasing organizational effectiveness by driving global consistency, alignment, and focus. We have several initiatives targeted at improving our ability to design, build, operate, market, sell, and support our global platform.

Throughout 2013 we have added leadership to our sales, technology, and HR teams, as well as a new President of our Americas business. This will allow Charles Meyers to now fully focus on the chief operating role to drive global alignment and consistency with sales, marketing, and IBX operations. This additional leadership will become an integral part of how we execute our growth and cost productivity initiatives in 2014 and beyond.

A key part of improving organizational effectiveness is our Equinix customer one program that will simplify, standardize, and automate our quote to cash processes on a worldwide basis. This will significantly improve our customer experience, particularly the base of customers operating in multiple regions around the world and accelerate acquisition of new customers.

And finally, we will continue to refine our capital allocation strategy by balancing growth with return on invested capital and free cash flow. Our priorities for deployment of capital remain focused on driving top line profitable growth through organic and inorganic investments. In addition, we are executing against our commitment to become a REIT, ensuring that we have sufficient funding to meet our requirements under the REIT structure, including distributions to shareholders and the REIT conversion costs.

Lastly I'll cover our outlook for 2014 on slides 15 and 16. For the first quarter of 2014 we expect revenues to be in the range of $572 million to $576 million. Cash gross margins are expected to approximate 68% to 69%. Cash SG&A expenses are expected to range between $133 million and $137 million.

Adjusted EBITDA is expected to be between $256 million and $260 million, which includes $11 million in costs related to the REIT conversion. Capital expenditures are expected to be $130 million to $140 million including $60 million of ongoing capital expenditures.

For the full year of 2014 we expect revenue to be greater than $2.38 billion or 11% year-over-year growth. Which absorbs $12 million of negative foreign currency headwinds compared to our Q4 guidance range. Total year cash gross margins are expected to be approximately 69%.

Cash SG&A expenses are expected to range between $530 million and $550 million. Adjusted EBITDA is expected to be greater than $1.1 billion which absorbs $5 million of negative foreign currency headwinds compared to our Q4 guidance rates and also includes $37 million in costs related to our REIT conversion efforts. We expect 2014 capital expenditures to range between $550 million and $650 million including approximately $200 million of ongoing capital expenditures.

For 2014 we expect 90% of expansion capital expenditures will be for campus and existing market builds and 10% for new market development. For all IBX builds Equinix's existing customer fill rate analysis gives us strong visibility into a market's demand, pricing, and returns.

So in closing, this is a time of significant opportunity for our company. The infrastructure underlying the global digital economy continues to undergo a significant transformation. And our market leadership give us a unique perspective and a critical role in this transformation.

We continue to build a world-class organization and are committed to delivering distinctive value and a consistently superior global experience for our customers. Our highly differentiated platform and the strength of the digital ecosystems that reside in our facilities allow us to deliver strong current levels of performance and fund meaningful investments in transformational opportunities like cloud that will fuel our continued growth and profitability. We are proud of what we've achieved to date and look forward to an exciting go ahead. So let me stop here and open it up for questions, so over to you, Jerry.

(Operator Instructions)

Jonathan Schildkraut, Evercore Partners.

I guess my first question really is about the competitive environment. And I was wondering if you could give us an update on the landscape, particularly in the US, of the competitors, and really maybe compare it to where we were a year ago and let us know if anything's really evolved? And then I also have a question on guidance, as I look at the guidance for the year it looks like the incremental margins as we go from the first quarter to the second, third, and fourth look pretty high, better than we've seen I guess over the last several quarters and I'm wondering if there's something to understand behind that. Thank you.

Why don't I take the second question first. And then I'll let Charles take the question. I think first of all when you look at guidance certainly if you go to Q1, we've given you -- we're giving you a sense of a little bit of a bridge of what's going on. Clearly there's incremental REIT costs that are taking place in Q1. In fact of the $37 million that we're highlighting as incremental invest in REIT, for 2014, $11 million we believe will occur in the first quarter.

In addition, as you know, if I take the FICA costs -- if I take FICA plus all the other costs that happened in Q1 relative to Q4, there's roughly an $8 million uplift although I'm showing $4 million in the slide, that says if I average it out over the year it's roughly -- you should expect FICA to be relatively stable. But because of how it gets weighted there's roughly an $8 million uplift versus Q4.

And then the other thing is there's always a lot of front loading of costs. We have our annual sales kickoff in the first quarter of the year. So by the time we get to the back end of the year, you start to see some of those costs come out.

And the other thing I would add is when you get to Europe, we have a higher seasonal utility rates in Europe in the winter months where for us in America, we pay higher utility rates in the summer months. And so it's a little bit skewed there. And for all those reasons, sometimes it doesn't quite correlize as you might expect but we've thought through all of these things and we feel this is the level of EBITDA we can deliver this year.

And so let me just knock on it, one last thing I want to say, when you look at our EBITDA growth and we say look, we think we can do greater than $1.1 billion in EBITDA this year, if you take out the $37 million of REIT costs this year, $21 million of REIT costs last year, basically what we're seeing is we're going to add roughly 30 basis points of margin despite all of the other investments that we're going to make. And we'll certainly be talking about that through this call, including cloud, go to market, and in the sales organization. So hopefully that answers your second question. Let me push it to the first one.

Jonathan, this is Charles, I'm happy to take that. So specifically as it relates to the US I wouldn't say that the competitive environment has changed dramatically over the last 12 months. As we've probably seen some moderation of excess supply concerns and some markets, I think we continue to gain market share in the retail game. And I think we continue to be very disciplined about our execution.

I would say that I think that the level of price competition on less differentiated application sets, whether those be large footprints that are well served -- potentially well served by wholesalers, or whether those be smaller footprints, but less differentiated application types, the price competition there I think does continue to be out there. And I think that just makes it more -- even more critical for us to maintain our disciplined execution and to really hone our sales and marketing focus and investments around application types where we really deliver unique value. And that's our focus and I think what we're really doing in the market and I think that's paying dividends I think as the results show.

Thanks, Charles. You, in the past, have talked about sales force productivity and having moved away from the large footprint space it really puts more pressure to get deal executions up. Is there any update there on the sales side?

Yes. Again that definitely is true. I think that without some of the lift that maybe in prior years existed from some of the larger footprints, we are still seeing by the way some success, as we talked about there are certain large footprint deal types that we continue to be very well-positioned for and interestingly in Q4 we actually had a strong quarter relative to some very attractive, well priced, large footprint ecosystem type deals. But it is harder in terms of just delivering more unit volume and more transactions in the sweet spot in mid -- small to midsize deals. That does -- that is a harder sales execution problem. So it depends, productivity varies across our verticals to some degree.

We are -- we see strength -- continued good solid performance in network financial, we're actually excited about the prospects for some fresh momentum created by the BATS announcement which you saw today. Cloud continues to grow nicely as we talked about in the script.

And then enterprise sales cycles to continue to be a bit protracted and that's going to take us some time to really hone our marketing skill set in that arena. And get the offers to a point where they are really gaining traction more rapidly in the market. So overall I think that the situation is in line with what we had expected, but making good progress.

Thank you for taking the questions.

Michael Rollins, Citi Investment Research.

I was wondering if you could talk a little bit more on pricing -- when you mentioned that you're looking for a steady yield, can you just talk a little bit more -- I know you mentioned a little bit how you're trying to differentiate between an MRR or ARPU type calculation versus the pricing on a per unit of whether it's space, or power, or interconnection, and maybe if you could give us a little bit more feel not just in the totality for the company but maybe by region would be very helpful. Thanks.

Sure. Let me take that part and maybe if Keith or Steve wants to add in on some of the other regional dynamics, they can do that but there are a variety of price related factors that we look at. Certainly, what are new deal pricing, what are we seeing on a sort of per cabinet or per kilowatt basis? What is the pricing on key renewals?

And then -- but again, the most important one because it's the underlying driver of our economics is really yield, and that is what kind of MRR per cabinet are we getting. And so that's really the focus. As I said, I think there are some pockets of pressure on new deal pricing relative to certainly that is the case on the larger deal sizes which we've talked about. And again if we see price points that we just are -- that we don't believe generate adequate returns, we're just foregoing that business and remaining focused on sweet spot applications.

But even in the broader market, even in small to midsize deals, there are pockets of pressure and there's really a continuum of application types in terms of which ones really value the network density, application performance, latency, global reach, mission-critical reliability, the things that we really differentiate ourselves on. And if we're finding the right application sets, we're able to preserve a very firm price umbrella. If there are deals that maybe only have one or two of those key factors in play, there is a little more pricing pressure in the raw in the market.

Our focus really is on identifying the right applications, bringing the right mix of business into the facilities, and then really focusing on interconnection, adding interconnection revenue, densing up power over time, and driving the yield. So the yield is really the one that we're most focused on. And I think as you see across the three regions we actually see firmness across all three. I think there's more currency impact in APAC on that metric, but as you can see we're at very healthy levels in the Americas and continue to be very encouraged by the fact that the strategy is playing out the way it is in those metrics.

And so Michael, I would just add on a couple things. Number one, as Charles alluded to, not only what he is seeing in Americas but across the world that the level of interconnection activity is starting to increase. And so when we think about how we drive value in this business, clearly we focus on MRR per cabinet. That's the yield that we get.

But probably even more important as you start to think about power densing and things like that, it's really important as you think about an IBX and the horizontal plane being the physical space and the vertical plane being effectively the infrastructure, we're trying to dense up to consume more of our infrastructure. Because we tend to sell out more space before we do the infrastructure and we get a better unit performance, better return on invested capital as we dense up that environment. And that plays also into our desire and our quest to drive up the MRR per cabinet and dense up these facilities. It also gives us more flexibility as we negotiate with customers.

The other thing I certainly want to say is whether we deal with the Americas or whether it is Europe or for that matter it's Asia Pacific, across-the-board we deploy these same strategies. But we also look at tiering of our IBXs. In different markets you can have different tiered IBXs that come at different price points and so we take all of that into consideration when we actually go through our pricing discussions, not only internally, but also with our customers.

And just one follow-up, how many sales people did you end the quarter with?

205 I think is the number today, Michael and it will probably increase 6% to 9% on a full-year basis. So we might add another 15 to 20 throughout the calendar year.

Thank you.

Brett Feldman, Deutsche Bank.

Maybe just to extend on this discussion here, as we think about the outlook you provided for the year, you've talked about a focus on increasing the volume of cabinet additions. You've obviously increased the sales force, you're looking to increase it more. What's the right framework for thinking about the extent to which MRR trends factor into your outlook for the year versus say potentially improved cabinet addition trends? And is there meaningful differences in terms of how we think about that regionally?

Brett, it's Charles. I'll start and these guys can add in where appropriate. Obviously we're going to continue to work both of those vectors simultaneously so I think we're putting the -- we're honing our go to market and our -- as I said our overall sales and marketing focus to continue to capture new cabinet additions as well as new logo customers in the application types where we are going to be able to garner value. And in doing so, and in continuing to optimize our current footprint which means that occasionally churning out lower -- less interconnected business or lower quality business for higher quality business, we're going to continue to work those simultaneously.

So as you can see in our yields, what we're seeing is that as we do that and as we continue to focus on the right types of business we're seeing good results on the MRR per cab line. So I think it's clearly an answer of both. I do think we want to continue to pick up the pace on our ability to capture new logos and new cabinets. But in the background, if we put the right business in we're going to get the back end effect of really improving our yield over time as well.

So, and I think that's probably uniform across the footprint. Obviously the levels of interconnection in the US are slightly higher. But boy, I think we're very pleased with the progress in the other two regions relative to implementing and acting on and executing the interconnection strategy.

So interconnection was really healthy in both of the other regions in EMEA and APAC and are really coming up to a level in terms of percentage of revenue that's very attractive. And that's obviously positively impacting margins.

And just a quick follow-up since you gave the sales force number, to Mike's question, the force has obviously increased significantly over the last few years. You've talked about a period of time for reps to ramp up to full quota. How do you feel about the sales generation of the sales force right now relative to its size and tenure?

Well, it matures as Charles said earlier by vertical. It is -- the ramp to productivity is, it varies by vertical, but in generally overall we're very happy. If you consider the significant upgrading and the size of sales force a couple years ago either most of those reps have either reached full productivity or they've been washed out of the company. And we've replaced.

So it's a constant measurement. It's a constant tracking. And overall, we're very happy and as alluded to in the scripts here, the toughest sales today is the elongated sales cycles with the enterprises, but I think if cloud -- as cloud develops and we get more proficient in our offer development and our value propositioning and you get these use cases developed we're going to start to see acceleration of enterprises coming at Equinix.

Brett, one more quick follow-on comment and that is that we believe there's absolutely room to continue to improve the productivity of the force. One is as I said we are being more aggressive about performance management, taking some underperformers out, swapping them out and as they mature we expect that will create additional productivity. But also there's a bunch of other levers that we have to continue to pull to make the sales teams really productive in the field.

One, improving our targeting, as I talked about we have to have them point at the right application sets where we're really unique the differentiated. Secondly, we've got to deliver the right offers that are directly responsive to the customers' business needs. Third, we need to use the right channels and that won't always be direct. It will be I think over time an augment of indirect to support our direct effort as well.

And then reducing sales drag which we're focused on in a number of ways. And then improving sales execution. We've added a couple top-notch executives in our CSO and our President of the Americas, both of whom have deep backgrounds in driving productivity from the sales teams. So we believe that there's more room there and if we can stay focused on the right portions of the market, we can generate good results.

Great. Thanks for taking the questions.

Jonathan Atkin, RBC Capital Markets.

Maybe both questions for Keith actually, you mentioned 50% EBITDA margins and I wondered over what time frame you think you can reach those levels. And then on CapEx, if I add up all the items in your tracking sheet, for IBXs that haven't yet opened, I get above the high-end of your guidance for discretionary CapEx, and obviously some of those items are for first half 2015 openings, but I just wanted to get a sense of the timing of the CapEx added in for a new expansion. Is that heavily backend weighted or evenly weighted? And why would the CapEx exceed your guidance?

I think both things. First and foremost from an EBITDA perspective, again, if you adjust for the REIT costs we're almost at 48% EBITDA margins this year. By the time you get to the backend of 2014, there's going to be a much higher EBITDA profile than that of the front half.

And so as we move into 2015 and some of these costs come, not only from the REIT conversion but also some of the costs related to our system conversion, certainly we're going to get near or about that mark so we're going to get a lot closer than as we step one more year out into the future. Don't want to commit to 2015 but certainly things are going to start to look better in 2015 if we continue to execute as we have been.

And then as it relates to CapEx, clearly it's a matter of timing. They do tend to be backend loaded. There's a number of very large projects that certainly we have a big investment in the first quarter but as they move through the year there's a number of projects where, although we've announced them, you're going to see the spend will actually get paid for in 2015.

Again, as a reminder, Jonathan, we always report our CapEx on a cash basis. Right? So to the extent that there's cash movements moving around, it's going to influence the outcome of that and we're going to continue to pay attention to that through this year but I would just tell you that some of the spend will take place in 2015 for 2014 projects.

And then perhaps for Charles or Steve on the interconnect side, there was a higher sequential increase in exchange ports in the US and wondered if that was related to demand or pricing or maybe a combination. And then that might provide a segue to talk about Open IX which is based on a similar technology and what you're seeing on that front and expecting.

Sure, yes. I think we're encouraged by the momentum that we see on the exchange not only in terms of traffic growth but in terms of port additions. And I think is a good segue to talk about Open IX, we covered that in some depth on the last call but I'm happy to comment further.

Bottom line is, we've been -- we face competition for IX in the form of transit and alternative exchanges for 10 plus years. We welcome the competition. We believe it's good for customers.

That said, anytime there is a new entrant in your market, I think it's important to assess whether that new entrant is created by the existence of an unmet need or simply because the new entrant believes there's room for additional players in an already attractive market, and in this case I think it's clearly the latter. So are there alternative exchange operators who would like to find a subsidized way to enter the attractive North American market? Absolutely.

Are there data center operators who currently competing primarily on price that would like to add internet exchange as a way to differentiate and are willing to therefore directly and indirectly subsidize an exchange operator so that they don't have to invest the OpEx to support that service? Yes. There are.

And will certain large participants be willing to champion those efforts and make modest investments to support continued competitiveness in the market? You bet there are.

So all the ingredients are in place for the exchanges to surface and lo and behold they have. But the question really remains, will they get traction or will they simply serve as a mechanism to ensure market discipline? And the answer to that question depends entirely on their ability to deliver value to customers and to networks.

As we talked about on the call last time, the real value that customers derive from being on exchange is driven by the location and number of participants on the exchange, the ability to cost-effectively access transit and private peering options to augment being on the exchange, the ease of use and responsiveness associated with using the exchange, the quality and reliability of the platform, and importantly, the value that a customer can get from being in the data center beyond peering. And of course the price that they pay to capture all of those elements of value.

And our focus, and I think you're seeing it reflected in our results as you just described, is on ensuring that we're delivering superior value along those dimensions. We're investing heavily in the platform, we're consistently evaluating our price point and its competitiveness in the markets, and I think our market share and the momentum that you're seeing is reflectiveness of our competitiveness and the value we deliver.

So we're excited about the continued momentum. We see a lot of customers come in and saying we want to continue to grow with you. And we feel good about that progress.

Thank you.

David Barden, Bank of America.

Maybe Keith, a couple for you. Just first on the buyback timing, how you're thinking about being proactive on that front. Obviously, the lower the price you're able to buy the stock at, not just the bigger benefit for you, but the bigger benefit for immunizing against the dilutive impacts of the converts coming up. If you could help us think about the timetable or whether it's being impacted by some of the considerations around the REIT conversion?

And then the second question is just supposing the IRS guys can shovel out their driveways and show up to work and get this PLR done sometime in the next quarter, can you walk us through what the next steps are, the timetable for the next steps, when would you think about having a shareholder vote presumably to do some of the reorganization issues? When would we have an E&P distribution, when we have a dividend kind of policy announcement? Those sorts of things would be helpful. Thanks.

Sure. Well, I think David, first and foremost as I mentioned, through the end of last year, through the end of 2013 we've spent roughly $49 million on the stock repurchase to the end of this call -- today we're roughly up that $92.5 million of stock repurchase. The commitment that we made is it's a $500 million stock repurchase program. It would take place throughout, from the point that we authorized it through the end of 2014. And we'll continue to look for opportunities to buy our stock where we think it's at an attractive level.

And clearly the announcement we made in December was indicative of a point from the management team and our Board that we felt that this was not only going to be a good investment for us but it also -- it was going to be counter to the dilution that we would see from our convertible debt. So we'll continue to look at the opportunities as they present themselves, and we'll announce it on a quarterly basis.

As it relates to the REIT, we continue to remain optimistic that we're going to get a favorable response from the IRS. Using your scenario, to the extent that that's something as forthcoming, whether it's this quarter or whether it's next quarter, we think quickly thereafter we're -- we will start to worry about some of the other things, not to suggest that we are not worrying about it today. We're making sure that we deal with the shareholder votes and some of the amendments that we need dealing with the E&P purge for the period up to the end of 2014 and then as we look to something in 2015.

I would suspect though, the purge itself is probably going to be in the latter part of the year, although there's a number of very technical things that we're undertaking to review and so until we hear back from the IRS, I hate saying this. It's premature for me to tell you exactly when, because we are such an international oriented business and part of the structure will deal with the international assets. The E&P distribution on a foreign basis is something where we'll continue to think through, but we are highly dependent on that PLR coming back. So clearly the latter half of the year is where you're going to see a lot of activity under the assumption that we hear back from the IRS over the near term.

Got it. And maybe one last one if I could quickly. Maybe Charles, for you, just obviously, Germany was a challenge last year. You've got some new leadership in there. What's been baked into the expectations for this year for the largest market in Europe right now?

Well, we do have new leadership. We're excited about that. Spent some time with them just recently and I think very high-quality executive that is getting their arms around the business very quickly.

We continue to make the appropriate changes there that need to be made to make sure that the team is performing well. And I think that we've been prudent about saying okay, what is -- I think in our prior calls we said the recovery won't be instantaneous. We've got to get things in order and I think that our expectations for the year, and therefore our guidance, really contemplate an appropriate righting of the ship there as we go into and through 2014. So Keith or Steve, any other comments?

The only thing I'd add, David is that as Charles alluded to we did see improvement in the second half of 2013 and we have high expectations that we'll put this business back on track in 2014. The new leader that Charles referred to is, he is in place. He has been onboarded. He's an outstanding executive.

He has already hired a new sales leader who starts momentarily. And that team has been reinvigorated. So I think as Charles just alluded to we have high expeditions that you'll start to see the German market start to produce for us as it has in the past.

Thanks, Steve. Appreciate it, guys.

Mike McCormick, Jefferies.

Just a quick ramp question regarding the net neutrality issue to see how you guys weigh in on that, whether it affects your business in any way from a peering standpoint, maybe further content distribution. And then lastly just the thoughts on any expansion of offerings? Thanks.

Yes. The net neutrality, Mike, as you guys probably saw today the FCC took a position again remains committed to the concept of the open internet order. So I think we're supportive of that.

We don't -- with our neutral position we don't really have a horse in this race so we'll take -- we'll sit on the sidelines on this. We're mot on either side of this debate because all of these customers on both sides of this debate are important to us. So there's not really a strong opinion or position that we take on this issue now, but we'll watch it closely.

I think on the second one, with regard to offerings, that is an area where we are putting some significant focus as I talked about our -- with our sales and marketing energies they need to be applied given who we are in the market and how we position we need to really be targeted and be delivering offers that are responsive to the customers' business requirements. And so if you look at our performance hub offering which we spoke to in the script, that is really beginning to gain some traction, some key lighthouse account wins that we've had in the enterprise over the last couple of quarters. And our focus is really now translating those into quantifiable case studies that we could put in the hands of our sales team to get out there and really drive broader traction.

So we'll continue to focus I think on enterprise relevant offers. We will continue to package our core offers into some specific growth opportunities around mobility and digital advertising and then I think in a very exciting way we're really focused on investments in the cloud area and looking at what offers that we can provide that will really drive hybrid cloud implementation and facilitate hybrid cloud implementations for enterprise customers. And so I'd say keep your eyes out for announcements throughout the course of 2014 in that area.

Charles, just thinking about the enterprise customer group, I've had a lot of questions regarding the importance of low latency. Is that something you hear a lot from those customers, that they do care about that?

Well, it really depends on the application set that they're talking about. But I would say more generally application performance matters a lot to them. And they have end customers, they being enterprise CIOs, have end customers in terms of their employees that require application performance.

Sometimes that is a matter of latency, sometimes there are other issues involved. But I would say broadly in the enterprise segment, latency, that's not true of every application set. And that's why we really need to stay focused on areas where application performance and latency do matter.

So we do hear that. Our performance hub is one way to drive both improved cost efficiencies as well as better application performance.

And then same thing on the cloud in terms of what we're offering on hybrid cloud, as we talked about in the FourSquare implementation allows massive throughput improvements and improvements in cost efficiencies. Again, that's not particularly an -- that's not really an enterprise implementation but we are seeing those types of dynamics in the enterprise market as well. So our areas of focus in the enterprise and where we are really going to be successful is where you need the network density, you need the access to the cloud ecosystem, you need application performance, you need global reach, and that's how we're really focusing our sales and marketing investments.

Great. Thanks, guys.

Thank you.

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

That does conclude today's conference. Thank you for participating. You may disconnect your lines at this time.