Equinix Inc (EQIX) 2014 Q2 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.

And I'd 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'd like to remind everyone that some of the statements they'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 28, 2014, and form 10-Q, filed on May 2, 2014.

Equinix assumes no obligation and does not intend to update our comments on forward-looking statements made on this call. In addition, the [amount of] regulation fair disclosure is Equinix's policy not to comment on 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 reason why the Company uses these measures in today's press release on Equinix Investor Relations page at www.equinix.com. We'd also like to remind you that we post 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 Myers, Chief Operating Officer. Following our prepared remarks, we'll be taking questions from sell-side analysts. In the interest of wrapping this call up in an hour, we'd like to ask the analyst to limit any following questions to just one.

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

Okay. Thank you, Katrina, and good afternoon, and welcome to our second-quarter earnings call.

In Q2, we delivered both revenue and adjusted EBITDA above the top end of our guidance ranges as the disciplined execution of our strategy continues to drive momentum in our business. As depicted on slide 3, revenues were $605 million, up 4% quarter-over-quarter and 14% over the same quarter last year. Adjusted EBITDA was $275 million for the quarter, up 6% over the prior quarter.

We achieved record bookings and delivered positive fundamentals, including firm MRR for cabinet, stabilized churn, and healthy operating margins, reflecting the strength of Platform at Equinix. Interconnection revenue continues to outpace overall revenue, growing 16% year-over-year, with cross connect growth driven across all verticals. With a strong focus on real-time applications, customers are taking advantage of a myriad of interconnection options we offer to achieve higher levels of performance and enhanced end-user experience. In the quarter, we added 3,600 cross connects and 153 ports, and we now have over 135,000 cross connects and 2,400 ports connecting our customers with their customers and their partners.

With over 100 data centers in 15 countries, our geographic footprint is unmatched and remains a unique differentiator as we deliver on increasing demand for consistent global offering. Multi-region deployments continue to outpace single-region deployments and are often associated with lower churn. To-date, 66% of recurring revenues come from customers deployed across multiple regions, up from 62% last year, and 80% of recurring revenues come from customers deployed across multiple metros, up from 78% last year.

Last week, we acquired the remaining minority interest in ALOG Data Centers for approximately $225 million, demonstrating our commitment to Latin America and our optimism about the future growth of this important market. Turning to slide four, Equinix entered Brazil in early 2011 by acquiring a 53% majority stake ALOG. ALOG is the leading carrier neutral provider in Brazil, with approximately 1,500 customers across 4 data centers in Sao Paulo and Rio de Janeiro.

Since the initial investment, the ALOG business has exceeded our expectations and has grown revenue at a 24% CAGR for the past 3 years on a constant-currency basis, while simultaneously expanding adjusted EBITDA margins over 500 basis points. The ALOG Team has done an outstanding job leveraging the Company's strengths in Brazil, specifically in cloud and mobility, and has benefited from many Equinix customers expanding their infrastructure into Brazil, including CenturyLink Technology Solutions, Level 3, Microsoft, Orange Business Services, and Telefonica, to mention a few. Latin America is an important market for us, and we expect a continued investment in this region.

Now, let me shift to an update on industry verticals. Secular and technology trends are making Equinix increasingly relevant to a larger universe of businesses. With over 4,600 customers, we are expanding and developing new ecosystems.

This quarter, we passed a major milestone of having over 1,000 networks accessible on Platform Equinix. This network density, combined with over 1,200 cloud and IT service providers, is at the heart of value creation for our Company. The network vertical continues to deliver consistent growth as we expand the wire-line and wireless carriers who are evolving to deliver cloud services and upgrading their infrastructure to 100 gig to support continued bandwidth demands.

In the financial services vertical, we continue to leverage our strong relationships in this market, establishing our leadership with trading exchanges while also penetrating new sectors, like electronic payments and insurance. This quarter, new wins include a leading global insurance broker as well as Lloyd's of London, the world's specialist insurance market.

In the electronic trading sector, growth continues, particularly in New York, London, and Chicago, and financial-to-financial represents our largest connected ecosystem outside of network. We see continued growth opportunity in this sector as the digital transformation trading moves to other asset classes like foreign currencies and fixed income.

In the content digital media area, the Ad-IX Ecosystem continues to grow, with over 100 customers participating in real-time bid-based digital advertising converging into 8 geographic hubs worldwide. Other areas of the digital media domain are experiencing growth ranging from established broadcasters to new streaming platforms related to the explosion of IT video traffic. And we remain focused on developing ecosystems where Platform Equinix delivers unique value to this industry.

Turning now to cloud. Cloud and IT services delivered record bookings and rapid revenue growth at 19% year-over-year. Cloud wins accounted for one-third of new customers, including wins from Clear Gov, a government-certified cloud infrastructure as a service provider; DigitalOcean, a cloud hosting service; and VeloCloud, a cloud-wide area network provider. In this segment, we see many companies deploying in multiple regions, including both emerging cloud service providers and leading providers, such as Amazon Web Services and Microsoft Azure.

During the quarter, cloud players, including Oracle, Workday, and Marketo, expanded to additional global markets to capture the performance and user experience benefits of customer proximity. This is creating a diverse inventory of providers across all regions, making Equinix even more attractive to these enterprises adopting cloud services.

Private interconnection is an increasingly popular access methodology for connecting to the cloud, as public IT proves insufficient for the performance of security demands of mission-critical applications. There is a growing recognition that cloud application performance and user experience can be enhanced by connecting privately to cloud services and bypassing the public Internet. Today, we offer private access through both fiber cross connect and our ethernet-based cloud exchange to over 50 cloud service providers, including AWS, Blue Box, Datapipe, GoGrid, IBM SoftLayer, Lucera, and Microsoft Azure. The Equinix Cloud Exchange, our advanced interconnection solution that enables on-demand direct access to multiple clouds in multiple networks, is now live in 17 markets globally.

The physical presence of key cloud service provider nodes in these markets offers customers the ability to access their services via single-port interface inside an Equinix IBX with low latency and enhanced security. This is an important differentiator for us as customers begin moving workloads in and out of the cloud. We are seeing rapid adoption of the Cloud Exchange from leading cloud, network, and managed service providers, and recently announced exchange participants, including Carpathia, EMC, Level 3, Netapp, Orange, and tw telecom.

Shifting now to enterprise, this segment is increasingly looking at distributed architectures as a mechanism for improved access to cloud resources, as well as the ability to improve the performance of their own IP infrastructure. As a result, we see enterprises moving certain applications our of private data centers and into co-location facilities on a worldwide basis.

Launched earlier this year, the Equinix Performance Hub is an offering that extends enterprise IT infrastructure to the data center, allowing customers to create a private, wide-area network node inside Equinix where they can host applications closer to end users, optimize their network architectures, and directly connect to multiple cloud and network providers.

Locating performance-sensitive elements of enterprise IT infrastructure inside Equinix creates the ability to accelerate application delivery and network performance and improve the end user's experience. Often incorporated into a performance hub architecture is the cloud exchange, which further simplifies how enterprises manage connections between public cloud services and private cloud infrastructure, allowing on-demand interconnection to multiple cloud providers using one connection.

We are helping customers design and deploy these new architectures through solution architects and are also leveraging our solutions validation centers to run proof-of-content tests for many large enterprise companies. Test results show that enterprises on average save over 25% on network bandwidth cost with a performance hub implementation, with the added benefit of being able to securely transfer data from their backbone network to cloud providers available in our data centers.

We now have over 50 customers with performance hub deployments. And while still very early in the stages of adoption, we continue to land marquee accounts, including recent wins with Cerner, a leading provider for healthcare industry, and Microsystems, a software and hardware solutions provider for the hospitality industry.

Let me stop there and turn the call over to Keith to go through some results in the quarter.

Great. Thanks, Steve. Good afternoon to everyone.

I'd like to start my section of the call by saying how pleased we are with the performance of the business, both for the current quarter and year-to-date. The Equinix platform strategy is clearly flowing through to our operating results, driving strong growth with healthy returns.

In the quarter, we experienced a number of records related to our bookings activity, reflecting momentum in the business, including the highest-ever quarterly gross bookings for the Company, record bookings for both EMEA and Asia-Pacific regions, record bookings in our cloud and IT services vertical. Also, in the Americas region, delivered its second-highest gross bookings production of all time, including strong exports to the other two regions, demonstrating continued importance of our global offering.

Moving on to slide 5 from our presentation posted today, our global Q2 revenues increased to $605.2 million, a 4% increase over the prior quarter and up 14% over the same quarter last year. Our Q2 revenue performance reflects a $2-million positive currency effect when we compare it to the average rates used in Q1, and a $1.1-million positive currency benefit when compared to the FX guidance rates. Our FX hedges offset the benefit of the positive currency rates by $1.8 million. Nonrecurring revenues increased 2% quarter to quarter, higher than our expectations, driven by our continued focus on selling incremental value-added services to our customers, such as custom installation work.

In addition, in the quarter, we received $3 million in early termination fees. These payments are reported as nonrecurring revenues and are typically one time in nature. Interconnection revenues continued to outpace the overall revenue growth, increasing 16% over the prior year, as our comprehensive suite of interconnection solutions continues to drive healthy gross additions for both cross connects and exchange ports.

Separately, given the lengthening of the average life of our customer installations, what we see as a positive trend, we lengthened the period by which amortize our deferred-installation revenue from 4 years to 4.5 years, effective the beginning of the second quarter. This resulted in a $1.8-million negative impact to our Q2 revenues and EBITDA, and a $5.3-million decreased to our expected 2014 guidance.

This reduction is a timing difference, and the offsetting benefit will be recognized in 2015 and beyond. This change is fully absorbed in our revised guidance.

Global cash costs of revenues were consistent with our expectations, and cash SG&A expenses increased $139 million for the quarter, including approximately $9 million of REIT-related cash costs. Global adjusted EBITDA was $275 million, above the top end of our guidance range, and up 6% over the prior quarter. Our adjusted EBITDA margin was 45%. Our Q2 adjusted EBITDA performance reflects a $900,000 positive currency benefit when compared to the average rates used in Q1, and a $600,000 positive benefit when compared to our FX guidance range.

Our Q2 net income was $11.3 million, including the loss on debt extinguishment of $51.2 million related to the convertible debt exchanges this quarter. Excluding this loss, our pro forma net income would have been $49.3 million, or diluted earnings per share of $0.94, a 15% increase over the prior quarter, and up 9% over our pro forma diluted earnings per share last year.

MRR churn was better than our expectations, at 2.7%. This result includes the full impact if the LinkedIn churn that occurred at the end of Q2. As stated in the prior earnings call, LinkedIn MRR churn had no meaningful impact in our Q2 revenues but will reduce Q3 recurring revenues by $4 million. This has been fully contemplated in our guidance. We expect churn to decrease to 2.5% in Q3, and for the full year 2014, we expect MRR churn to average approximately 2.5% per quarter.

Now, moving onto our comments on REIT. We remain in active dialogue with the IRS about our pending PLR request and are pleased with current momentum. Also, we continue to be on track with our plans to convert to a REIT on January 1, 2015, and recently finished a major milestone with the completion of our financial system conversion earlier this month.

On slide 6, we summarize the various expected REIT-related cash costs and taxes. For the full year 2014, we now expect to incur approximately $35 million of cash costs and $18 million of capital expenditures on the REIT conversion. In the third quarter, we expect to incur approximately $8 million REIT-related cash costs. For the year, our estimated cash tax liability is now expected to range between $145 million and $180 million.

Turning to slide 7, I'd like to start reviewing the regional results, beginning with the Americas. The Americas revenues increased 4% over the prior quarter and 10% over the same quarter last year on a normalized and constant currency basis. America's adjusted EBITDA was up 6% over the prior quarter and 4% year-over-year on a normalized and constant currency basis.

As a reminder, the Americas region continues to be fully burdened with the corporate functions, including costs of the corporate projects such as REIT conversion and Equinix customer one. America's adjusted EBITDA margin was 46% for the quarter.

As announced last week, we are acquiring the remaining minority interest in ALOG for approximately $225 million. As a reminder, we already fully consolidate ALOG in our financial results.

Americas net cabinets billing increased by 100 in the quarter, which includes the full impact from the LinkedIn churn. America added 1,400 net cross connects this quarter, 6% above the prior four-quarter trend. We also added 85 exchange ports in the quarter, a significant uptick compared to 2013, driven by demand from content and network providers.

MRR per cabinet remained firm at very attractive levels of 1% quarter-over-quarter. We expect this metric to remain stable going forward.

Interconnection revenues as a percent of the region's recurring revenues remained at over 20%. For new builds, we are proceeding with the third phase of our SE5 IBX build in Silicon Valley. This campus is one of two major peering locations in Silicon Valley and has had strong demand from both network, cloud, and content companies, resulting in attractive returns and firm pricing.

Now, looking at EMEA, please turn to slide 8. EMEA revenues on a normalized and constant currency basis were up 4% quarter-over-quarter, and up 15% year-over-year and reflect strong performance in our Dutch and German businesses, as well as an increase in the level of cross-regional deals for cloud.

Adjusted EBITDA on a normalize and constant currency basis was up 4% over the prior quarter, and up 22% over the same quarter last year. Adjusted EBITDA margin remains at 42% due to a number of one-off adjustments booked in the quarter. Assume these adjustments, EMEA adjusted EBITDA would have been 44%.

EMEA interconnection revenues increased 8% over the prior quarter, and up 39% over the same quarter last year, largely driven by the UK and German markets. We added 1,200 net cross connects for the quarter, and net cabinets billing increased by approximately 900. Interconnection revenues as a percent of the region's recurring revenues increased to over 8%.

In addition to our expansion activity in London and Amsterdam, we're now moving forward with the next phase of our Paris 4 asset. With over 200 networks in Paris, this phased expansion will develop our position with the cloud, network, and enterprise customers.

Now, looking Asia-Pacific, please refer to slide 9. In Asia-Pacific, we passed an important milestone by generating over $100 million of revenues in the quarter. For Q2, revenues were $105.7 million, a 6% increase on a normalized and constant currency basis over the prior quarter, and up 22% over the same quarter last year, driven by strength in our content and cloud segments.

Adjusted EBITDA on a normalized and constant currency basis was up 8% over last quarter, and 24% over the same quarter last year. Asia-Pacific added 67 new customers in Q2, 20% above the rolling-four-quarter average. MRR per cabinet remains strong, and cabinets building increased by 1,000 over the prior quarter. We added 1,000 net cross connects, and interconnect revenues remained at 12% of the region's recurring revenues.

Now looking at the balance sheet, please refer to slide 10. We ended the quarter with $704 million of unrestricted cash and investments on our balance sheet, a decrease over the prior-quarter level, primarily due to our share repurchase program and debt extinguishment activities. Also in July, we funded the $225 million to purchase the minority interest in ALOG, which will further reduce our cash balance. Our net debt leverage ratio decreased slightly, to 2.9 times our Q2 annualized adjusted EBITDA.

Under the share repurchase program, we repurchased 1.8 million shares since last December, including 1.5 million shares in 2014 to-date. Our repurchase investment totals $347 million, leaving $153 million of capacity under our program. In the second half of the year, we plan to continue to evaluate additional opportunities to optimize our capital structure.

Switching to slide 11, our Q2 operating cash flow decreased over the prior quarter to $99 million, primarily due to tax payments of $75 million related to both REIT and non-REIT-related obligations, and $54 million of accelerated tender payments due to our financial system conversion. We expect this offsetting benefit to be realized in Q3. Also, our DSOs increased to 35 days, a trend we expect to reverse over the next few quarters.

For 2014, we are raising our guidance for AFFO to be greater than $740 million, due to increased expectations from adjusted EBITDA and lowering recurring CapEx. As a reminder, AFFO includes $35 million of REIT-related operating costs in 2014 and $9 million of costs related to the Equinix Customer One program. In 2015, we expect our ongoing REIT-related cost to decrease to a range of $5 million to $10 million. We continue to expect our 2014 adjusted discretionary free cash flow to range between $620 million and $650 million, and adjusted free cash flow to be greater than $200 million, both of these metrics excluding any REIT-related cash costs or taxes.

And now, looking at capital expenditures, please refer to slide 12. For the quarter, our capital expenditures were $160 million, including recurring capital expenditures of $27 million, in line with our prior guidance. We opened two new IBX phases in Hong Kong and San Paulo in the quarter. We currently have 12 announced expansion projects underway across the globe, of which 10 are campus builds or incremental phase builds.

As announced at our Analyst Day, we've revised a breakout of our ongoing capital expenditures to align with our AFFO calculation and now refer to this component of AFFO as recurring CapEx. Slide 13 maps out the details of both recurring and expansion CapEx, which we believe more appropriately reflects the true reinvestment and maintenance rate of the business. Since Analyst Day, we've made some minor adjustments to our AFFO, like in reducing recurring CapEx to reflect that certain capital dollars either increase revenue or reduce our costs. We will continue to review the components of AFFO, including recurring CapEx, through our REIT conversion date of January 1, 2015.

Finally, turning to slide 14, the operating performance of our stabilized CC9 global IBX and expansion projects that have been open for more than one year continue to perform well, with revenues increasing 7% on a year-over-year basis. Currently, these projects are 81% utilized and generating a 32% cash-on-cash return on the gross PP&E invested, consistent with our targeted range of 30% to 40%.

Now, let me turn call back to Steve.

Okay. Thanks, Keith. Let me now cover our outlook for 2014 on slide 15.

For the third quarter of 2014, we expect revenues to be in the range of $614 million to $618 million. Cash gross margins are expected to approximate 68% to 69%. Cash SG&A expenses are expected to approximate $140 million.

Adjusted EBITDA is expected to be between $278 million and $282 million, which includes $8 million in costs related to the REIT conversion. Capital expenditures are expected to be $175 million to $185 million, which includes approximately $25 million of recurring capital expenditures.

For the full year of 2014, we are raising revenue to range between $2.425 billion and $2.435 billion for a 13% year-over-year growth rate, which includes $6.5 million of positive foreign currency benefit, compared to our Q2 guidance range. As a reminder, this guidance includes a $5-million decrease to both revenue and adjusted EBITDA due to the change in accounting estimate. This is a non-cash change only and result of a longer estimated life for customer installations.

Total-year cash gross margins are expected to range between 68% and 69%. Cash SG&A expenses are expected to approximate the $550 million. Adjusted EBITDA is expected to range between $1.105 billion and $1.115 billion, which includes $3 million of positive foreign currency benefit compared to our Q2 guidance rates, and also includes $35 million in costs related to our REIT conversion efforts. We expect 2014 capital expenditures to range between $600 million and $650 million, which includes approximately $115 million of recurring capital expenditures.

In closing, I would tell you that disciplined execution of our strategy continues to drive positive results and solid momentum in our business. Innovation, including customer enablement solutions like, Performance Hub and Equinix Cloud Exchange, is further differentiating us from our competitors. Our strategic priorities are focused on preserving and enhancing our competitive strengths, and we have the operating scale and financial strength to capitalize on our unique position to become the home of the interconnected cloud.

So let me stop here and open it up for questions, and Rachel, I'll turn it back over to you.

(Operator Instructions)

Michael Rollins.

Thanks for taking the question. If I could ask one clarification, and more of a business-related question.

On clarification, for the FX for the third quarter, what would be the potential benefit in the guidance, not relative to prior guidance, but relative to the average second-quarter rates? I'll follow up with a business question.

Sure. That's $1.5 million, Michael.

Thanks. And then just taking a step back, if you could talk a little bit more about the cloud initiative and the enterprise focus. Since the analyst day, are you seeing incremental progress, and is that contributing to some of the strength in sales productivity? Thanks.

Yes, sure. Thanks for the question, Mike. This is Charles.

Yes, I think we certainly have seen incremental progress. Obviously, we are on a steep part of the curve in terms of the advancement of our enterprise business as well as the overall dynamics of the cloud business in our industry overall and for us.

And we continue to be very excited about how the cloud opportunity is playing out in a -- and what we seen is, as we talked about at the analyst day, is that really, hybrid cloud has emerged as pretty unequivocally the IT architecture of choice. What we're seeing is that virtually every CIO we speak with, whether that be service provider or enterprise, are saying that they plan to segment their work loads and utilize a blend of public cloud, private cloud, owned infrastructure, et cetera, to really meet a pretty wide range of cost, reliability, security, performance requirements, et cetera. And as they're moving away from tradition homogenous infrastructures in their own data centers, they're really moving towards a more modern cloud-based architecture that is inherently multi-network, multi-cloud in nature.

And the other thing that's happening is that they are increasingly finding that private access to cloud resources are going to be required in order to satisfy the performance and security requirements. And we talked a little bit about that in the script in terms of really the architecting around the public Internet, finding that that doesn't meet their needs. It certainly does for some workloads, but for many, that's not the case.

And so again, we are building off a heritage where, similar to what we did in the evolution of Internet peering where there was no neutral trusted commercially scalable mechanism available, that same dynamic result occurs now in cloud environment, and we think cloud exchange really meets that need. So we are seeing great momentum.

I think that it's still early days. As we said in the script, we've seen a number of big marquee lighthouse wins over the last several quarters.

We're beginning to build both our professional services and our channel capabilities to be more responsive to certain large, complex enterprise needs, and we are seeing those wins. I wouldn't say they are a major contributor from a bookings perspective at this point. But we did see strength across the board in our other verticals and in our more mature ecosystems, which combined into what we, obviously, feel like is a very strong and solid performance for the quarter.

The only thing I think I'd add, Charles, I don't know if you mentioned it, was that I think we pointed to the script, Mike, is that we are live in 17 markets globally today. And we'll push that to probably over 20 markets by the end of the year. So we've got interest coming from several customers to expanded to Sao Paulo to Osaka to Melbourne, two or our new sites, as well as in Zurich, which wasn't considered in the original 16 or 17. So there's -- the demand is good.

The pipeline is very large, and so we are working through all the challenges and requirements from our customers to make sure that we customize as much as possible to get their implementation set up. But it's got a lot of momentum.

Yes, and maybe another data point we mentioned in the script, 50 cloud service providers that are available via private access mechanisms, either direct connect or through the cloud exchange. And we've got a pretty concentrated biz-ap effort underway to stimulate that ecosystem.

In the same way, we have made a pretty good living by differentiating ourselves on network density. We're seeing the same thing repeat itself on the cloud side, so we've got a big backlog of customers that we are trying to bring on to the cloud exchange and scale our interoperability efforts. And we already have enterprise customers that have joined the exchange and already demonstrated the automated provisioning functionality of cloud exchange. So very exciting progress, and we're very pleased with it.

Thanks very much.

David Barden.

Thanks for taking the questions. Two if I could. The first one would be putting a little flesh on the bones around the ALOG purchase.

We are all seen the $225 million go out the investing cash flows. Could you talk about the valuation difference between what you bought it for, what you think it's worth now, and what we're going to see happen on the cash flow statement as a benefit for the $225 million going out the door?

And then second, on the North America cabinets billing, I think that it's been a noisy number. Last quarter, we had the level-three cleanup. We had the switch in data lease expiration in the 111 8th Avenue. This quarter we've got LinkedIn.

Could you talk about an underlying core business momentum in the North American market that we can think about as being the trend line for the second half of the year? That would be super helpful. Thanks.

Great questions, Dave. So let take the first one on ALOG.

As you know, we paid $225 million for the remaining 47%. Put that in perspective, for the first 53%, we paid roughly $60 million. So it gives you a perspective of the value that accreted into the business over the three years since we became involved in the deal.

From a valuation perspective, think of it as we basically bought it for roughly our current trading multiple to date, albeit a much higher growth trajectory. I see that as a positive transaction, not only for ourselves, but certainly for our partners.

And as it then relates to the financials, the thing that you will see is you'll see, of course, the $225 million leave the cash flow statement, but we already fully consolidated this asset. So what you're going to see on a go-forward basis is, basically, as a Company, we'll get the full benefit now, if you will, from cash flow, but it's not going to have any meaningful changes to our financial statement.

Yes, and then, David, this is Charles. I'll take the Americas business, particularly North American business in terms of -- in a nutshell, I'd say we're very pleased with the momentum and progress of the business in North America. I think that, as you said, it is, in fact, the MRR per cabinet earning ability, the billing cabinet is, in fact, a noisy number, and we would continue to caution you in that way. That is -- tends to bounce around a little bit based timing of install and other factors of large deals, and so we will probably continue to see some of that volatility.

But again, I think if we look at it over a longer period of time, we see a solid upward trend, and we believe we'll continue to see that. I think, again, it's based on momentum across a range of portions of the business.

We are seeing lower average deal sizes, as we talked about, in terms of multi-tiered architectures, et cetera. This quarter, we did actually see a number of larger implementations associated with some cloud wins, which was partially fueling some of the bookings strength that we saw.

But across the board, the verticals are performing well, funnel continues to grow, interconnection activity at record levels, and again, I think that's driving strong yield numbers. We are, as we've talked about, at a very, very attractive level of yield in the Americas, and I think we would hope to continue to sustain those levels. Again, I think overall, we are seeing solid momentum and good performance in the Americas business.

All right. Thanks, guys.

Simon Flannery.

Thank you very much. Just touching on CapEx a little bit, you moved towards the higher end of the range. Is that reflecting some spend on Silicon Valley and Paris, the new expansions, or is that mostly 2015 spend? Any color around that?

And then on M&A, anything -- did you do anything on the land or facilities purchases during the quarter? Where does that stand today? Any thoughts about new markets beyond your current footprint? Thanks.

Okay. Why don't I take the first question, Simon, just on CapEx.

Certainly, we have announced some incremental builds that are taking place. Clearly, we start out the year, we look at -- again, CapEx is reported on a cash basis. We look at a range of $550 million to $650 million. That, or we're getting to the latter part of the year. We've been able to tighten that range because we have a much better idea of what cash is going to flow in and flow out of system, if you will, in the fiscal period.

So part of it's just really tightening it, but to suggest, though that we have decided to make some incremental investments, as you alluded to, and Paris is the one that comes to the forefront there where we're going to spend a little bit of incremental capital to build out the next phase of our Paris 4 asset. In the Silicon Valley, again, that asset is going to be built out over a period of time, both 2014 and 2015, so the majority of that investment will be made -- or sorry, the majority of cash outflow will be made in 2015.

On your M&A question, Simon, no real change in the historic representation about where we are looking at expanding the platform. It's predominantly in Asia and Europe. I would tell you, in the US market, domestic US, where we feel like we're in very good shape.

As I alluded to in the script, I think in Latin America, as Karl Strohmeyer and his Team continues to advance our strategy down there, there may be more opportunity in the future in that part of the Americas business. But in Asia, probably it presents the biggest opportunity to go deeper into China, continue to stare at India. Korea continues to be an interesting market to watch. So no real change on the big markets that we are looking at in terms of M&A geographic orientation.

And any opportunities to buy any of your facilities?

Simon, we continue to look at the opportunity, and as I talked about at the Analyst Day, we're going to look at them in -- just based on what represents itself over a period of time. I'd tell you, it doesn't always make sense. Part of it is because we do have the economic control over many of our assets for an extended period of time, but to the extent something does present itself, we will look at it. Clearly, there's a few things that are on the table, but there's nothing that's worthy of announcement at this point.

Thank you.

Colby Synesael.

Great, thank you. Two questions if I may. One on growth.

Just going back to your Analyst Day when you put out the guidance long term for greater than the market's growth of 10%. And then I compared that with the increase that you are doing today to your revenue growth and what that implies. I'm just going back to a conversation I remember having with Steve about how if the cloud actually played out the way you guys expected, you thought that that could actually lead to an acceleration in growth. I'm just curious if you think that you're seeing that and ultimately that 10% guidance that you gave was really meant just to be a floor more than anything else?

And then also, for Keith, just specific to a comment you made in your script where you noted that you're also looking at other ways to optimize the capital structure. I was wondering if you could expand on that and perhaps give a timeframe for what it is you're thinking about? Thanks.

Why don't I start on the cloud question. Colby -- or on the growth question.

I would tell you, yes, the way we represented ourselves at Analyst Day was that grow at or above market growth rate was in that high single-digit, call it low double-digit growth of the industry. We wanted to be at or above that growth rate. I think what you are starting to see now in the raised guidance is the cloud-enabled enterprise starting to play itself out.

So we are -- as Charles alluded to, we are dead in the middle of all the public-private hybrid cloud players in the market, trying to get them to come in and put access nodes, network nodes all over these data centers to attract enterprises to come in. So it's very early days, as Charles said, but there really isn't a deal in our pipeline that's not affiliated with how do I figure out how to start taking advantage of the cloud. And so it's unfolding.

The on ramps are building; the off ramps are building. I would call it guidance predominantly behind our cloud enabled activities to attract enterprises and the big cloud players themselves. I don't know what you'd to add to that, Charles.

No, again, I think the posture that articulated at Analyst Day remains intact, that that is a level that we felt we could be comfortable with without taking any undue assumptions about the magnitude and timing of certain trends that we are seeing begin to take shape, play out. And are we optimistic about that? Do we see early signs of success? Are we getting lighthouse wins? Yes.

For example, reflected in behind that success, we are investing, as Keith articulated, in making accelerated investment in our channels, which is in the second half of the year here to prepare for what we see as continued success in 2015. And we certainly hope and believe that that may have the opportunity to invigorate growth in the business.

But I think that our posture remains the same as it was on Analyst Day. We are being appropriately prudent in terms of what we are committing out there, and -- but again, seeing very signs.

So Colby, the second part of the question was around the capital structure. I think there's a number of levers that the Company will to look at to optimize the capital structure.

Number one, we still have $153 million left in our share repurchase program. We will opportunistically look what and when to buy incremental shares as those opportunities present itself. That would be one.

Number two, we'll continue we'll continue to look at convertible instruments. One of the things we've been trying to do is with our converts is get them into the equity base, partly due to the fact that there's dilutive aspects to what occurs if you don't get it into equity base in a timely fashion. And we're very, very pleased with the historical transaction that we've done because we've offset a meaningful amount of dilution that would otherwise have happened.

We'll continue to look at our convergence and, again, assess whether something makes sense in view of what we're focused on. Is it going to be a net present value positive transaction for us? Is it going to drive more AFFO with the system? And is it -- affect a good economic decision both for ourselves and presumably the people that sitting on the other side of the table from us?

And then the third piece, really, as I said, the cash balance was $704 million, but when you take out the $225 million for the ALOG acquisition, you still have $500 million cash. And then we obviously have some payments to make through the latter part of the year, whether it's the EMP purge or other tax payments, and so we're going to be very mindful of our cash balance. The Team is collectively looking at how to capitalize the business on a go-forward basis, and one of the things that would somewhat communicate the market to already is we'll look for straight debt.

If we see there's a debt transaction that's out there that makes sense, and we need to raise capital, and we'll certainly be active in the market. But there's no urgency. I think by the end of the year, just to give you a sizing, if you will, we'll probably end the year somewhere between, all else being equal, between $300 million and $400 million of cash on our balance sheet. So still in the very comfortable position from a liquidity perspective, particularly if you add in the operating line of credit.

Great. Thanks for the color.

Mike McCormack.

Thanks. I was thinking of the impossible that [Windstrom] got a peel out before you guys did.

A couple of questions, just thinking about pricing and competition. With respect to your various customer segments, can you just make a comment on sensitivity to pricing across those segments? And then secondly, maybe some comments on the wholesale side, what you're seeing from their entry into retail as well as any Open-IX initiatives?

Sure, Mike. This is Charles. I'll take that.

I think pricing is oftentimes -- although there are probably some segments that have certain characteristics relative to their appetite for quality and reliability and service delivery and end-user experience that may be less price sensitive on an overall basis. Really, I think the way that we look at it more typically is around applications and workloads, in that where customers really value the network density, performance benefits, global reach, mission-critical reliability, et cetera, that Equinix delivers, that's where we see a quite rational decision on their part and a willingness to pay for the value that they get.

And so, again, I think that there are probably some segments of the market that have greater levels of price sensitivity, certainly. But what they have typically done in that is look to tier their architectures as a way to meet their needs at lower costs. That's one of the dynamics that we've seen impact the business. I think we're well ahead of that trend now in terms of understanding what application types are really going to work and really extra value or leverage the value that Equinix delivers.

And in terms of -- from a competitive perspective, wholesale, as I've said again and again, for the most part, wholesalers play in a different level, in a different portion of the market. They are -- the wholesale, the large footprint portions of wholesale are really going after that third tier of the architecture. And very often, we are working with customers to combine purchase decisions they make for wholesale footprint with the more mission-critical performance-sensitive elements in the architecture that are housed inside of Equinix.

One of the things our solution architects are doing are helping them develop those multi-tiered architectures and helping them develop them in the way that they can really leverage the benefits of hybrid cloud. And relative to Open-IX, again, I went into some depth in that last couple earnings calls, and we are not seeing any meaningful impact in our business. We continue to feel very good about the value proposition we deliver to our customers on our exchange. And I think that the port adds that we'd had and the acceleration of those additions this year, really are a reflection of our competitiveness of our offering in the market.

Thanks, Charles.

Amir Rozwadowski.

Thank you very much for taking the questions. From my side, I wanted to ask specifically about the churn levels. I think they came in slightly better than expected. Would love to hear your thoughts in terms of how we should expect that trajectory going forward.

And then you folks continue to gain notable traction in some of the international markets. I was wondering, with respect to Europe, do you continue to see some capacity constraint in that market? Would love to hear your thoughts around competitive dynamics within that region. Thanks a lot.

Maybe I'll take the first one, Steve, and you can pick up on Europe.

From churn perspective, again, we did come in slightly better than what we had guided to last quarter, and we did absorb the full LinkedIn into that number, so we saw a slight uptick, but not as much as we had anticipated. Some of that is probably timing, and so there are some -- and is often the case, sometimes the specific timing of a churn isn't really precisely known, and things can slip from one quarter into the next. And then probably some churn that we anticipated could occur that we found a way commercially that we thought was a tractable to maintain that business.

But I think that generally, the 2.5% that we've guided to is an area that we feel comfortable in as we refer to as a level of frictional churn that accommodate some of the realities in the market. Because as we said, there are continued and natural evolutions of people's infrastructure that they make toward multi-tiered sophisticated infrastructures. And that often does result in a level of pruning and migration out of Equinix in some cases.

So 2.5% is a level that we are pretty comfortable with. We are happy with the performance this quarter. Probably did see some deferrals, but again, that's probably the level that we're comfortable with, but always working to improve that. And I think that the important piece is, as we've always said, getting the right business in the door up front is our best defense against elevated churn down the road, and our Teams are doing a great job of disciplined execution in the field.

Thanks, Charles. And on the European question, I would tell you that our Team in Europe continues to signal that the economy remains challenged. But even within that environment, just in this quarter, as Keith alluded to, we have record bookings in EMEA. We exceeded all our internal targets.

Very strong performance in the Netherlands and Germany. And as you know, a differentiator we have versus our competitors is we're inbounding a lot of bookings from our Americas and Asia business into that region. So there is an advantage, obviously, that our Team has from our global bookings.

Interconnection is up to 8% of revenue now, so they're doing a good job on that. I think we're separating ourselves from our competition with the cloud exchange that we've launched in those European markets. Pipeline looks very good, coverage ratios look good, cloud ecosystems unfolding in our footprint in Europe, so -- MRR per cab this quarter up $24.

So there's a lot of positive signals in Europe this quarter versus the competition. I wouldn't tell you there's any big change. We're still -- it's still a very competitive market with the players that you're well aware of. But we're continuing to do scale and build the core of our ecosystem strategy there.

Thanks a lot for the incremental color.

Jonathan Atkin.

Great. So I've got a financial question and then a cloud question. On the guidance, (technical difficulty) in the flow through to EBITDA, the high revenue guide, what would impede some of the margin expansion that you're guiding to? You referenced the REIT conversion costs and one-time projects. Is there anything else that is impeding some of the EBITDA margin growth?

And then in terms of cloud connectivity demand overall as a category, does it manifest itself as (technical difficulty) traction? Does that manifest itself more in exchange port growth or cross connect growth? Thanks.

Jonathan, we're going to do two things here. I can answer the first question, but we're going to have to ask you to repeat the second question because your line had broken up, unfortunately, so we didn't get the full question.

As it relates to the guidance and the flow through from revenue to EBITDA, whether you're looking at Q3 or for the total year, there's a number of things that are going on. Certainly, as I alluded to in my comments, first and foremost, there's $3 million of early termination fee payments. One was a $2-million payment from one customer. Those things don't typically recur on a very regular basis, so we lose the benefit of that in Q3, and certainly, that's one thing that affects the flow through.

The second thing that's impacting us is the deferred installation adjustment that I spoke of and Steve alluded to. Again, when we make those type adjustments, it doesn't do anything to cash flow, but it has a direct drop from the revenue line all the way to the EBITDA line. And as we said, there's $5.3 million of hit to the year with respect to that.

If I could summarize this though, the things that are changing that you should -- if I take out the noise and I normalize everything, the one thing that I'll tell you, there's two incremental costs that are coming to the system that we hadn't previously guided to, and one of them is higher utilities. So not only from a volume perspective, so you see our revenues coming up, and we're consuming more, and as a result, we're going to incur higher utilities than we originally anticipated. And some of that is pricing. Think of that for the year at roughly $4 million.

And the other thing that we've talked about is channel. We expect to spend roughly another $3 million in -- or expect to indebt $3 million in channel in the latter half of the year, roughly $1 million in Q3 and $2 million in Q4. So that's $3 million of costs that we didn't originally anticipate. And then when you adjust for all of that and you look at the flow throughs, basically, the numbers all work out and work out with a consistent flow through based on the revenue flow through.

Great.

I think I caught tail end of your -- your question was on our -- with the interconnection uptick that we've seen at most cross connects or ports or both. Is that the nature of your question?

Well, just cloud in general. If that continues to grow as you anticipate, does that growth manifest itself more in exchange port growth cost connect growth?

Yes, I would -- we're going to see it in both. I'll give you -- and Charles probably has a point or two. I'll give you a couple factoids that will give you a sense of it.

We're -- with the numbers I gave you the script, we added 3,600 cross connects this quarter and 153 ports. So 3,600 cross connects, or roughly 1,400 in the Americas, roughly 1,300 in EMEA, and just under 1,000 in Asia. So you can see we've got good geographic coverage on the cross connect growth. And then there's port growth everywhere.

But we have actually in the vicinity of 3,700 direct access cloud cross connects that have been accumulated here since we've been focused on the cloud. That gives you an order of magnitude of how much cloud density cross connects we are starting to see. But my guess, Charles, we are going to see it coming at us on both channels.

Absolutely. In fact, what I would I say is that one of the reasons why I think customers are finding Platform Equinix such a compelling platform to base their hybrid cloud strategy off of is because of the flexibility that it provides in matching workloads to certain requirements.

And so by implementing our performance hub, for example, and attaching it cloud exchange, people can segment their workloads and say, hey, look, I've got workloads that actually well suited to putting into a public cloud environment over public Internet. And by the way, they can do that very easily from within an Equinix facility, and that would drive exchange ports.

But increasingly over time, what we see is they're saying look, there are certain that from a security or throughput perspective, I need something different. And so that's where private access portfolio comes in. And they can either do that over a fiber cross connect, which we see a lot of uptake on, or they now can begin to do that in an automated fashion over cloud exchange.

And so over time, it will drive cloud exchange ports and virtual circuits that are provisioned over that cloud exchange. So we expect over time that we will see that full portfolio of interconnection continue to grow as people really play out their hybrid cloud strategy.

Thank you very much.

Jonathan Schildkraut.

Thanks for sneaking me in, guys. My first question would be on the book to bill or the commencement lag. I know at last quarter, we saw some unusual extensions. I was wondering if we'd get a little color on what happened in this quarter and what you're expecting for the remainder of the year?

And then I was wondering if we could talk a little bit about the professional services that you guys were delivering. I thought that was a very interesting part of your Analyst Day presentation. Since then, we've been starting to think about how you're rolling that out, whether you're charging for it separately, or has it become part of the sales process and package, and whether there are any longer-term margin implications? Thanks.

I'll take book to bill, Jonathan. Then I will pass the other one on to Charles and/or Steve.

Certainly, when you look at the performance of the booking activity this past quarter, again, very, very healthy bookings across our entire portfolio. The one thing I leave you with is there is a fairly large -- a lot of that happened in the third month of the quarter again, and because of that, again, even though it was maybe a more smoother quarter than was historically seen, we still had a lot of activity taking place in the month of June.

When I look at it from a book-to-bill perspective, that will continue. That will feather into the system in Q3 and Q4. And so I want to give you maybe a higher point of view.

When I think about incremental revenue that we'll see -- and I'm adjusting for the one-off, so the early termination fees. When I think about what's going to happen in Q3 relative to what happened in Q2, we're probably going to see more of an organic revenue flow through in Q3 than we saw in Q2. Likewise, as I look into to Q4 versus what happened in Q2, again, it's going to be of the like level for the Q3 performance.

All that is to say is I think the book-to-bill cycle is starting to -- there were some things that were in our backlog coming out of Q1. We are starting to see that relieve itself, and so I feel very good more about a more consist book-to-bill interval going forward.

On the pro service, Jonathan, I'd say it's still early days for us there. Today, the reality is that we've significantly ramped our solution architect Team, which is a bit filling that void and working with customers who we see as having significant opportunities and filling a bit of that gap in terms of working with them on designing their infrastructure. And in particular, on performance of implementations and helping customers understand the benefits and how to go about implementing a performance hub. And that's pretty typical, I think, of the way you would see in a technology maturity cycle is those types of resources doing -- very highly technical resources doing that early on.

But I think as we evolve, we would begin to envision a billable organization, billable professional services organization delivering packaged professional services-type engagements to customers to very quickly assess and roll out some of those services. And over time, we'll probably evolve from where we're doing a significant number of those with perhaps pro serve resources ourselves until -- and then we'll actually start to engage partners. Because we think we'll get a lot of leverage in the partner channel who will be able deliver those similar types of pro services. And over time, they'll move from performance hub design into hybrid cloud-type implementations and a more -- on a broader scale, network and win optimizations, and also continued services around data center migration.

So those are all areas of focus that we would have. But still pretty early days, but we are starting to see customers really view us as a trusted advisor in looking at how to implement hybrid cloud.

Thanks for taking the questions.

That concludes our Q2 call. Thank you for joining us.

And that concludes today's conference. Thank you for participating. You may now disconnect.