Equinix Inc (EQIX) 2014 Q3 法說會逐字稿

Good afternoon and welcome to the Equinix conference call.

(Operator Instructions)

Also, today's conference is being recorded. If anyone has objections, please disconnect at this time. I would like to turn the call over to Katrina Rymill, Vice President of Investor Relations.

You may begin.

Good afternoon and welcome to today's conference call.

Before we get started, I would like to remind everyone that some of the statements 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 28, 2014, and Form 10-Q, filed on August 8, 2014. 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 our financial guidance during the quarter, unless it is done during explicit public disclosure.

In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures, and a list of the reasons why the Company uses these measures in today's press release, on the Equinix Investor Relations page at www.Equinix.com.

We would also like to remind you that we post important information about Equinix on the Investor Relations page of our website. We encourage you to check our website regularly for the most current available information.

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

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

Okay, thank you, Katrina.

Good afternoon and welcome to our Third-Quarter Earnings call. In Q3, we delivered both revenue and adjusted EBITDA above the top end of our guidance ranges, despite significant currency headwinds, as the global demand for Platform Equinix continues to drive our business.

As depicted on slide 3, revenues were $620.4 million, up 3% quarter over quarter, and up 14% over the same quarter last year. Adjusted EBITDA was $283.9 million for the quarter, up 3% over the prior quarter and up 14% year over year. We delivered near record bookings, fueled by solid performance in our core verticals, global expansion with key customers, and accelerated momentum in the developed of our cloud ecosystem.

The strength of our ecosystem strategy continues to manifest itself in very healthy fundamentals, including firm MRR per cabinet, lower churn, rapid interconnection growth, and healthy operating margins. Interconnection continues to be a critical differentiator and source of sustaining value for Equinix. Interconnection revenue outpaced overall revenue, growing 17% year over year. And the robust growth of both our established and emerging ecosystems generated a record 5,700 cross connect adds, 36% higher than our previous record.

Importantly, secure private access between cloud consumers and cloud service providers is now the fastest growing category of interconnection at Equinix. Secular trends driving this cost-connect growth are also driving similar momentum in our leading digital exchanges. This quarter, we added 143 ports, three times the net adds we saw in the same period last year. Strong port growth on our Internet exchanges has translated into 27% year-over-year growth in traffic to 2.8 terabits across 2,500 ports, with network content and cloud customers driving this increase.

Our global platform also remains a unique differentiator, and is a key driver of our bookings momentum and revenue growth. Today, 67% of recurring revenues come from customers deployed across multiple regions, up from 60% last year. And 81% of recurring revenues come from customers deployed across multiple metros, up from 78% last year.

Global growth, robust interconnection, and high levels of customer retention are a reflection of the disciplined execution of our ecosystem-centric strategy. From our early days, Equinix has demonstrated the ability to incubate, scale, and extend digital ecosystems. And continued success with this approach is driving solid performance across our industry verticals.

But let me share some highlights from our vertical performance with a particular focus on our progress in capturing the transformational cloud opportunity. Beginning with network, this ecosystem continues to be foundational to our competitive advantage and delivered steady growth in Q3, as wireline carriers actively upgrade infrastructure to deploy 100-gig services, and develop their own cloud offerings.

On the wireless side, as 4G networks begin to scale, mobile operators are now deploying inside Equinix in order to capture new sources of value, and drive a superior customer experience in an increasingly complex mobile value chain. Mobile operators, like Vodafone and China Mobile, continue to expand with Equinix in our advanced peering hubs to access the wireline infrastructure and efficiently interconnect with large content players.

In content and digital media, the advertising sub-segment, anchored by the exchange ecosystem we refer to as Ad-IX, grew 26% year over year, driven by global expansions of ad exchanges, advertising networks, and data aggregators. Such as BrightRoll, MediaMath, and RadiumOne that utilize Platform Equinix to maximize revenue in the latency-sensitive world of digital ad placement. Our advertising segment is now approximately equal in size to our CDN segment and is driving healthy levels of interconnection.

In the financial services vertical, we saw a healthy step up in bookings over last quarter, driven by a diversity of wins across exchanges, payments and insurance. Our win with BATS, who is consolidating infrastructure in our Secaucus campus, is generating pull through as additional clients migrate from competitive facilities in preparation for consolidation of the BATS matching engines inside of Equinix slated to go live in early 2015.

Were also seeing growing traction in the electronic payments and mobile wallet space. Similar to what happened in the development of our electronic trading ecosystem, the business of moving money is facing pressure to process more and more transactions at a lower cost. And business models are beginning to monetize payment-related data. A new ecosystem is quickly taking shape as we bring together financial institutions, technology providers, mobile networks, and retail companies pursuing these opportunities.

Equinix is a trusted provider of top global payment card networks, such as MasterCard, who recently expanded into Dubai with us. We are also building success with emerging technology players in this space, such as iZettle, a mobile point-of-sale business, which is using the AWS direct connect offering.

We are also leveraging our capital markets customer base to cultivate wins in the broader financial services enterprise business. Performance Hub is a core element of IT architecture in a financial enterprise, as these companies seek to enhance interconnection and service delivery to support new business models. This quarter, we won a global Performance Hub deployment from one of the largest banking institutions in the world to support its online banking business. Our ability to nurture, grow, and extend our more mature network, financial services, and content digital media ecosystems continues to generate solid growth and drive superior returns on capital, and remains a central focus.

But the emergence of the cloud ecosystem represents a transformational opportunity, and is our top growth vector as we move towards 2015. Cloud represents a fundamental disruption in how IT services are both delivered and consumed. And building a cloud equivalent of our network density advantage is critical to our ecosystem strategy. Equinix is shaping our customers' targeting, investment profile, and go-to-market model, to ensure that we can meet the needs of both cloud service providers and the broad range of enterprise customers who are rapidly adopting hybrid cloud as the IT architecture of choice.

Our cloud exchange and the performance hub are key innovative offers to facilitate this new marketplace between service providers and enterprises. On the service provider side, we are actively engaged with hundreds of cloud service providers. And we are pleased with our significant progress in building out cloud provider density. We are helping these customers efficiently scale to reach their enterprise customers, through integration with our cloud exchange, along with our secure, private, scalable delivery of cloud services.

We are the only exchange to offer an API capability that automates this provisioning for customers, which helps accelerate the onboarding process. And our product roadmap for the cloud exchange is designed to help cloud providers more easily adopt this interconnection model. These efforts have resulted in very strong cloud and IT service bookings, and an uptick in larger footprint deal activity, driven by strong momentum with critical cloud magnets, such as AWS, IBM SoftLayer, Cisco, Microsoft, Oracle, and Workday.

We continue to grow our connectivity to a broad menu of cloud service providers, and now offer private access to over 70 such providers through both fiber cross connects and the Equinix cloud exchange. The cloud exchange is enabling a new private multi-vendor cloud consumption model. And new customers announcing their commitment to participate in the cloud exchange include Cisco, Datapipe, Bluebox and CloudSigma.

We also recently announced a unique strategic relationship with Cisco to accelerate connections between private and public clouds. And we are pleased to be a preferred Cisco data center provider. Although many cloud services are available in the market, the management and orchestration of workloads across multiple cloud and network providers is a significant barrier to wider adoption. Cisco intends to deploy Intercloud-enabled capabilities in 16 Equinix data centers across Europe, Asia and the Americas. We are rapidly achieving critical mass in our cloud ecosystem. And the combination of robust direct connectivity and a rich future set for cloud exchange are positioning Equinix as the home of the interconnected cloud.

On the enterprise side, we are increasingly engaged with innovative CIOs who are transforming their IT architectures for today's digital world, and who understand the importance of data center selection and interconnection offerings in achieving their goals. The Equinix Performance Hub, in tandem with Cloud Exchange, represents a truly compelling value proposition for enterprise customers to leverage the reach and service provider density within Platform Equinix. As IT architectures migrate to the hybrid cloud and become increasingly distributed in order to deliver high application performance and enhanced user experience, the Equinix Performance Hub serves as a key lever in enabling this transformation.

Performance Hub wins this quarter include a US automotive manufacturer, a global biopharmaceutical company, and CDM Smith, a leading engineering and construction firm. CDM Smith is deploying Performance Hub with Cloud Exchange connections in nine global IBX locations, leveraging a full solution created by Equinix and fulfilled together with managed services partners. This solution will allow CDM Smith to significantly optimize its private data network architecture and cost structure, and enhance the performance of key applications serving their users located across 160 offices worldwide.

This win is representative of the robust solution development that Equinix is bringing to enterprises, working together with key managed services and fulfillment partners. In line with these enhanced solution development efforts, we are also augmenting our go-to-market capabilities through a channel partner program designed to increase our reach and service to the enterprise. We are very pleased with our performance this quarter, and remain encouraged by the strength and vitality of our ecosystem-centric strategy.

Our mature verticals are operating at scale, with attractive customer acquisition costs, low churn, and high levels of interconnection, which combine to drive healthy operating margins. The performance of these flywheel ecosystems allows us to invest in emerging high-growth areas, such as at Ad-IX, electronic payments and, most notably, cloud, through the intentional and disciplined targeting of larger strategic deployments that enable critical magnets to rapidly achieve global reach and in turn attract new participants.

While others may strive to emulate our strategy, we believe that our scale, global footprint, network density, and ecosystem reach give us critical advantages that position us as the long-term winner in an increasingly cloud-enabled world.

So let me stop there and turn it over to Keith to cover the results for the quarter.

Thank you.

Good afternoon to everyone. In the third quarter, we saw strong performance across all regions, with near record gross and net bookings. Our bookings activity produced record billable cabinet adds of approximately 3,400, 70% above the average 4Q trend.

We added a phenomenal 5,700 cross connects and 143 exchange ports in the quarter. This clearly highlights the benefits of our current strategy. Also, as demonstrated by our financial results and the strength of many of our key operating metrics, our ecosystem effect not only increased our revenues, it preserved the attractive yields we enjoy on a per-cabinet basis.

As Steve outlined, capturing the cloud and enterprise opportunity is the next phase of growth for Equinix. And we're in a unique position to lead and benefit from these market changes. But to accomplish this, we need to make some investments. We need to target new and existing customers.

We have to determine how to deploy our capital for new product initiatives, such as Cloud Exchange, and how do we augment our go-to-market efforts. We will be making these investments, alongside our key system initiatives, being Equinix Customer One, which was rolled out in Asia-Pacific earlier this month, and the Americas and EMEA early next year, and our financial systems conversion to support the REIT compliance effort.

So now let me move to slide 4 from the presentation posted today. Global Q2 revenues increased to $620.4 million, a 3% increase over the prior quarter, and up 14% over the same quarter last year. Our overperformance was due to higher gross bookings, continued custom sales order activity, and lower-than planned churn. Our Q3 revenue performance reflects a $2.3 million negative currency impact when compared to the average rates used last quarter, and a $3.7 million negative currency impact when compared to our FX times rates.

Currency volatility, particularly the strengthening of the US dollar against the euro and the Brazilian real, caused increased FX headwinds this quarter. We hedge our exposure where cost and favorable accounting treatment permits. Our cash flow hedges against the British pound, the euro, and the Swiss franc reduced the FX volatility this quarter by $800,000. For Q4, we are approximately 75% hedged against our EMEA operating currency.

As we look to 2015, using the 2014 average FX rates, the strengthened US dollar is expected to create an FX revenue headwind of $40 million and an adjusted EBITDA headwind of $17 million. Compared to our prior guidance rates, with current FX rates, the 2015 revenue impact is $65 million. Global cash cost of revenues were consistent with our expectations.

Cash SG&A expenses increased $140.1 million for the quarter, including approximately $7 million of REIT-related cash costs, Global adjusted EBITDA was $283.9 million, above the top end of our guidance range, and up 14% year over year. Our adjusted EBITDA margin was 46%. The Q3 adjusted EBITDA performance reflects a negative $1.4 million currency impact when compared to Q2 average rates, and a $1.8 million negative impact when compared to our FX guidance range.

Our Q3 net income was $42.8 million, which includes a substantial increase in our income tax expense. The result of a higher annual effective tax rate related to profit levels in certain jurisdictions. This higher tax impact will be mitigated upon conversion to a REIT. Diluted earnings per share was $0.79, up significantly over the prior quarter, due to Q2 loss on debt extinguishment.

For Q4, as part of the process to convert to a REIT, we expect to write off the net deferred tax assets currently on our books. This charge to net income is expected to range between $330 million and $370 million, negatively affecting our earnings per share by approximately $6 per share. MRR churn was better than our expectations, at 1.9%, a clear reflection of our strong deal discipline and our efforts to improve the overall attractiveness of our install base.

During the quarter, we were able to fully rebook the LinkedIn churn with key cloud and content customers, demonstrating our continued ability to manage and optimize our RDX asset. For Q4, we expect our MRR churn rate to be in a range between 2% and 2.5%.

Now, moving to our comments on REIT. We expect to receive a favorable PLR in 2014, and we've begun operating as a REIT from a financial perspective. In October, we declared a special distribution of $416 million to our stockholders, a key requirement prior to converting to a REIT. We expect the November 2014 distribution will pay out the entirety of our estimated pre-REIT earnings and profits.

On slide 5, we summarize the various expected REIT-related cash costs and taxes. For the full year of 2014, we now expect to incur approximately $32 million of cash costs and $21 million of capital expenditures for the REIT conversion. In 2015, we expect our ongoing REIT-related cash costs to be approximately $10 million.

Now turning to slide 6, I would like to start reviewing the regional results, beginning with the Americas. The Americas had a strong quarter, delivering its third-highest gross bookings production of all time, resulting in high fill rates and increased interconnection activity. Americas revenues increased 2% over the prior quarter and 9% over the same quarter last year. Americas adjusted EBITDA was up 1% over the prior quarter and 7% year over year.

As a reminder, the Americas region absorbs higher seasonal utility rates in Q3, consistent with our expectation, as well as continues to be fully burdened by the cost of the corporate functions, including the corporate IT initiatives, such as the REIT conversion and Equinix Customer One. America's adjusted EBITDA margin was 46% for the quarter.

America's net billing cabinets increased by 1,500 in the quarter, one of its highest levels, and added a record 2,600 net cross connects, which is double the prior 4Q average. We also added 101 exchange ports in Q3, a significant uptick. And we continue to see robust demand for our interconnection products, particularly from content, cloud and network providers. To put this demand in perspective, over the last four quarters, we've added more ports than over the prior three years cumulatively, highlighting the strong demand for the Americas digital exchanges.

MRR per cabinet remained firm at very attractive levels; and while up 1% quarter over quarter, we expect this metric to remain stable going forward. As higher power density and increased interconnection activity offset the impact of IBX and product mix, and our pursuit of selective strategic and critical cloud workloads. Interconnection revenues, as a percent of the region's recurring revenues, increased to 21%, a new milestone that we are very pleased with.

With respect to the region's new builds, we're expanding on our Seattle 3 IBX, an important telecommunication hub for the Pacific Northwest, and a distribution point for IP traffic to Asia-Pacific. This build will help satisfy growing demand in the Seattle Metro, both from cloud network and content companies.

In Brazil, we're expanding our Rio de Janeiro 2 IBX to support cloud service providers and other multinational customers. We continue to expand our more strategic and interconnected campuses, with an incremental phase of our DC11 asset in Ashburn.

Now looking at EMEA, please turn to slide 7. EMEA revenues remained very healthy, up 5% quarter over quarter and 18% year over year on a normalized and constant currency basis. This reflects strong performance in our UK, Dutch and German businesses, with particular emphasis on capping new client opportunities.

Adjusted EBITDA on a normalized and constant currency basis was up 10% over the prior quarter, and up 20% over the same quarter last year. Adjusted EBITDA margin increased to 43%, due to higher interconnection revenues and a reduction in one-off costs compared to Q2. EMEA interconnection revenues increased 7% over the prior quarter, and up 43% over the same quarter last year, and now represent 9% of the region's recurring revenues.

We added 1,100 net cross connections in the quarter. And the EMEA MRR per cabinet was up 2% on a constant currency basis. Net cabinets billing increased by approximately 1,000. With respect to expansions, we accelerated the second phase of our Amsterdam 3 asset to respond to the increased demand from our cloud providers looking to store their critical data at this connectivity hub. Opened in October, this phase is already 20% booked from magnet, cloud and content providers expanding into this European digital gateway.

Now looking at Asia-Pacific, please refer to slide 8. In Asia-Pacific, revenues were $111.4 million, a 6% increase over prior quarter and up 24% over the same quarter last year on a normalized and constant currency basis, driven by strong gross bookings in cloud and IT services and network segments.

Adjusted EBITDA on a normalized and constant currency basis was up 4% over last quarter and 32% over the same quarter last year. MRR per cabinet remains firm, slightly up quarter over quarter on a constant currency basis. And cabinets billing increased by 900 over the prior quarter. Net cross connect additions doubled from last quarter to a record 2,000. And interconnection revenues remain at 12% of the region's recurring revenues.

We opened new IBX phases in our Osaka and Singapore markets this quarter. And we continue to expand across all of our major Asian metros. In Japan, we're now moving forward with our new Tokyo 5 IBX located adjacent to our successful Tokyo 3 IBX. This expansion will enable new customers to access our rich financial services ecosystem in Tokyo, as well as support demand for cloud and content providers.

Now looking at the balance sheet, please refer to slide 9. We ended the quarter with approximately $500 million of unrestricted cash and investments on our balance sheet, a decrease over the prior-quarter level, primarily due to the purchase of our non-controlling minority interest in ALOG.

Our net debt leverage ratio increased slightly to 3.1 times our Q3 annualized adjusted EBITDA. Also, we settled the remainder of our 3% 2014 convertible notes in exchange for 1.6 million shares, upon maturity in mid-October. Under the share repurchase program, we repurchased $43 million in Q3. As we finish out the year, we will continue to evaluate additional opportunities to optimize our balance sheet and capital structure.

Now switching to slide 10, our Q3 operating cash flow increased over the prior quarter to $216 million, a significant improvement over the prior quarter due to decreased tax payments related to REIT and non-REIT-related obligation and more cash interest payments. However despite this positive trend, our DSOs increased to 39 days. As the organization continues to gain experience with our new billing system and processes, we expect this trend to reverse over the next few quarters.

For 2014, we are raising our guidance for AFFO to be greater than $745 million due to increased expectations from adjusted EBITDA. And this absorbed a $5 million negative FX headwind, compared to the prior FX rates. As a reminder, AFFO includes approximately $32 million of REIT-related conversion costs in 2014. We expect our 2014 adjusted discretionary free cash flow to now range between $590 million and $620 million, and adjusted free cash flow to be greater than $160 million. Compared to our prior guidance, these cash flow metrics reflect changes in our working capital expectations, as well as an increase in our capital expansion initiatives.

Now looking at capital expenditures, please turn to slide 11. For the quarter, capital expenditures were $156 million, including recurring capital expenditures of $20 million, slightly below our prior guidance. We currently have 13 announced expansion products underway across the globe, of which 11 are campus builds or incremental phase builds.

Finally, turning to slide 12. The operating performance of our stabilized 69 global IBX and expansion products have been open for more than one year and continue to perform well, with revenues up 7% on a year-over-year basis. Currently, these projects generate a 31% cash on cash return on the gross PP&E invested, and are 82% utilized.

I'll turn the call back to Steve now.

Thanks, Keith.

Let me now cover our outlook for 2014 on slide 13. For the fourth quarter of 2014, we expect revenues to be in the range of $627 million to $631 million, which absorbs $11 million of negative foreign currency impact compared to our prior guidance rates. Cash gross margins are expected to approximate 68% to 69%. Cash SG&A expenses are expected to approximate $139 million.

Adjusted EBITDA is expected to be between $291 million and $295 million, which includes $6 million in costs related to the REIT conversion and absorbs a negative foreign currency impact of $5 million compared to prior guidance rates. Capital expenditures are expected to be $210 million to $230 million, which includes approximately $35 million of recurring capital expenditures.

For the full year of 2014, we are raising revenues to now range between $2.433 billion and $2.437 billion. for a 13% year-over-year growth rate. This absorbs $15 million of negative foreign currency impact compared to prior guidance rates. Excluding the negative impact of foreign currency, the revised revenues range reflects a $20 million increase compared to our prior midpoint guidance. Total year cash gross margins are expected to range between 68% and 69%. Cash SG&A expenses are expected to approximate $553 million.

We are raising adjusted EBITDA to now range between $1.110 billion and $1.114 billion. This revised guidance includes $32 million in costs related to our REIT conversion efforts, and absorbs $8 million of negative foreign currency impact compared to prior guidance rates. Excluding the negative impact of foreign currency, the revised adjusted EBITDA range reflects a $10 million increase compared to our prior midpoint guidance. We expect 2014 capital expenditures to range between $630 million and $650 million, which includes approximately $110 million of recurring capital expenditures.

So in closing, we are executing our strategy of driving differentiated growth, reflected in the strong performance of our core ecosystems and record interconnection activity. We believe Equinix is the best location to access the variety of cloud services critical to managing enterprise workloads. And we continue to close strategic deals, driven by the strength of new offers, like Performance Hub and Cloud Exchange.

Going forward, we remain focused on leveraging the advantages of our global footprint, driving both network and cloud services density, and distancing ourselves from the competition through innovative products and investments in Platform Equinix.

Let me stop here and open it up for questions.

I'll turn it back over to you, Rachel.

David Barden, Bank of America.

A couple if I could. First, Keith I think you said you were going to look opportunistically at capital structure and balance sheet opportunities in the fourth quarter. I believe the original intention for the stock buyback program was to complete it in 2014. I was wondering if you could comment on whether that is still the intention?

The second thing was just getting some questions on your assumptions that the Euro and Pound foreign-exchange rates relative to spot rates are going to improve in the fourth quarter. I'm assuming, that it has something to do with your hedging game plan, but that would be good to know.

The last thing, again, maybe for Steve or Keith, I think in Keith's comments, he reference something about investments that need to be made to attack the cloud opportunity; I was wondering if that was trying to foreshadow some kind of CapEx or operational type of expense that might be -- we need to start thinking about for 2015. Thanks.

Let me take the first couple, and then Charles or Steve will take the last one. I think when we look at capital structure, it's clear to me as we continue to move towards conversion to a REIT, and recognizing where we may spend our capital dollars, all else being equal given where the market is, there is some opportune time to raise capital relatively inexpensively.

One of the things we've said before, to the extent that we do raise capital, particularly given that we've taken out the 2014 conversion over hopefully not too long distance, we'll take out 2016 converts; we'll have the capacity to put more debt on the balance sheet, and use it effectively. That would be one thing we would continue to look at. There's no commitments yet other than we are actively looking at the opportunities that are present in the marketplace.

Also, I would tell you that given the size of our revolving line of credit, that is another area that you would expect us to change as we exit the year and start operating as a REIT effect 1/1/2015. That would be one other area that we would ask you to look at.

As it relates to share repurchase program, we have roughly $150 million left on the program and we will use the cash opportunistically, taking into consideration some of the other decisions that we're going to make about how to spend our capital. Clearly, that is, we've roughly $350 million to date, and we'll continue to look at that opportunistically.

As it relates to FX, a couple things, number one, when we look at the FX rates, particularly on the forward guidance relative to spot rate, you are absolutely right, we've had, as I said in my prepared comments, where we can get favorable accounting treatment, that is particularly around the Euro, the Sterling, and Swiss Franc. But the functional currency of our business is effectively the US dollar, and it is in that case. We can put hedges that actually effectively hedge against lines in which we're trying to protect, such as revenue, or whether it's cost, or EBITDA. For that purpose we have put some hedges in place.

As I said we are roughly 75% hedged in Q4. We're less hedged as move into 2015, but we are roughly 50% hedged in, sorry, 80% hedged in Q1 and 60% hedged in Q2 of next year. Again, those rates will vary over a period of time.

The thing David, I want to leave you and certainly the rest of the investors with, clearly when we put our hedging programs in place, what we're trying to do is mitigate of course, the effect and volatility in currency. But over time again, to the extent that the Euro is going to continue to trend down, what we're really doing is giving ourselves a soft landing as that currency continues to weaken, if at all. I think we're well-positioned from a hedging perspective, as we look into Q4 and the beginning of 2015.

David, this is Charles I'll take the last piece relative to some of the investments. [As] the results demonstrate, we continue to see very significant momentum in building the cloud ecosystem, both on the service provider side, as well as significant early traction on the enterprise, or the buy side, of the ecosystem. We intend to continue to invest behind that momentum, given that we see the cloud overall as really a quite transformational opportunity and growth opportunity for the Company.

There are probably several categories in this of investment that we would be looking to incorporate into our 2015 plan, and through the remainder of this year. One, on the product side, really building on momentum of our performance hub and our cloud exchange offers, to continue to add feature function to those, and make sure that those are the leading platforms from a cloud perspective in the industry; which we're very confident is the case.

Secondly, on go-to-market, we're going to continue to invest in our solution architect team, which has really been critical to ensuring customers can leverage those offers to their benefit as they implement their hybrid cloud architectures. As well as our -- we will probably selectively augment the direct force in response to continued strong demand. And then, also continue to invest in our channel programs and our professional services capabilities. Both which are really designed around one, completing whole offers by adding third-party value add to our core offers, and then expanding our reach from a distribution perspective as we -- particularly as we tackle the enterprise market.

And then finally targeted demand generation, and again, probably focused on the enterprise and really building off of our lighthouse wins, several of which we talked about in the script, and in fact, I have talked about a handful of them in every script for the last several quarters. And now what we're beginning to see is a broader - people looking to those lighthouse wins and saying hey, if they're doing it, we ought to be considering it. And people who are implementing hybrid cloud and using performance of the cloud exchange to do that. So we'll will probably be putting money behind increased awareness and demand generation activity to build off of that momentum.

Great, thanks.

Jonathan Schildkraut, Evercore.

I have a question about Open-IX. A lot of the folks that I speak to, including myself, have been a little bit concerned about the development of Open-IX in the US. One of the things that Open-IX talks about is connecting its locations with a fiber ring, and extending its density that way, which is very much, as I understand it, the way that the London Internet Exchange works. You have been very successful across Europe, in London in particular, in terms of winning key customers. If you could give us some insight into how you compete there, and how you differentiate there, while sitting on that ring, to give us a little bit more confidence in how you will defend against any perceived move here in the US? Thanks.

Jonathan, this is Steve, I'll start, and I'm sure Charles can probably supplement here. A couple of data points. First of all, after 16-plus years, we have a critical mass, as you all know, of cross connects and ports in our switch fabrics, and a couple of switch fabrics now that we are deploying; one with the Internet switch product that has been around a long time, and more recently, our cloud switch fabric.

If you purely look at the results that Keith mentioned in this quarter, just in the Americas where the Open-IX, I think the heart of your question is, before we go to Europe. Just to remind you we added 2,600 net cross connects just in Q3, and over 101 ports in the Americas alone. As Keith mentioned, over the last four quarters, we've added more ports in the US than we had the prior three years cumulatively. That tells you something that the value that we are delivering, and the leadership position, and the critical math that we've accumulated is still advantaging us.

So there is no discernible impact to Equinix really at this point. Like any competition, we are attracting it closely in the US, we'll continue to monitor these alternate exchanges. But our real focus is on the next generation of interconnection, advantaging our leadership position, and continue to deliver a superior peering model to our customers. I think the skill and advantage we have there is proving out in the metrics. Charles, do you have anything?

Well, all I'd say is that, although the industry structure is slightly different in Europe than it is in the US, and Open-IX is, I guess, to some degree attempting to shift some of that industry structure and introduce a dynamic that looks more like the European model. I would argue that the fundamental base of competition in the exchange market isn't meaningfully different across the various regions. At the end of the day, the customer is making a fundamental decision about how effectively they can peer their traffic, and they are looking at a range of options that goes from transit to private peering, I'm sorry, to public peering, to private peering.

The reality is the most effective way to do that, typically if you have -- particularly if you have large volumes of traffic, is to ensure that you can peer off traffic to the right counterparties most effectively. We look at the results that Steve's just articulated in terms of our port growth, it's very clear that customers are voting with their wallet, relative to how they can do that most effectively, and they're doing it with equity.

So they can move from one, accessing transit partners; two, then peering their traffic over a public exchange inside the facility; and then quite importantly, when they get traffic between a counterparty to a certain level they want to pull that off and private peer it over cross connect. Them being able to do that inside of an Equinix facility, where we have a very high critical mass of participants is just much more effective for them. In the end, we feel very good about the product, we continue to invest in its future functionality. I think if you look at our momentum, compared to what limited growth that we are -- and trajectory we're seeing from Open-IX participants, I think we feel very good about where we are.

The only thing I'd add, Jonathan, as Charles said, the traction is negligible. But in Europe, if you listen to our team in Europe, those three firms are doing well, and actually they're growing in our facilities and we're benefiting from that. They're getting the port growth, and we're getting the co-location growth. So if you talk to Eric and his team in Europe, he's still growing on the back of the relationship that we have with all three of those in Europe. So the dynamics are the different between the two regions. We're competing in the Americas; we're working together in Europe.

Thank you for taking the question.

Amir Rozwadowski, Barclays.

Just wanted to touch on a bit of a bigger picture question here, around the enterprise arena. I was wondering if you can give us a bit more color in terms of the type of traction you folks are seeing here overall in the enterprise. Clearly, it seems as though cloud-based opportunities seem to be reaching a tipping point for you folks. But I was hoping you could see, or at least get of a little bit more insight on how we should think about when we should start to begin to see similar momentum on the enterprise front? Clearly, you have a number of partnerships, most recently with Cisco, as you mentioned, on the prepared remarks. I would love to hear how these partnerships have been resonating with some of your potential customers?

Why don't I start this, Charles, and let's double-team this again, because I think there's a lot going on here in the enterprise. It's a good question, Amir. First of all, if you talk to any CIO or the head of applications or head of infrastructure in any company any enterprise company today, they're going to tell you that they're faced with a variety of disruptive forces going on. One, they have got congested network issues, they have performance and security limitations that they are challenged with, and then more recently, their user experience is becoming more social and more mobile.

Most of the clients we're dealing with are pushing to rearchitect their IT, to be able to access the hybrid cloud. So they're all studying, some are further ahead than others, and they're doing that in a distributed hub architecture. That's why you hear us, and that's why we developed the network performance hub, which is to address this distributed hub architecture that they're going to want to get to, to get to the -- ultimately get to the hybrid cloud.

So they're reinventing their wide area networks, their local area networks, their workplaces are becoming virtual, the hybrid cloud is the choice of the future; that's been validated. Pretty much anywhere you look or talk to, so there's a lot going on there. We have to get use cases built, we're doing that, you hear about that every quarter.

Our approach to this is, to get the cloud access nodes, the cloud service nodes, get our data centers as populated as possible with these access nodes, so that enterprises can look inside of these data centers and see the cloud density and network density they need to put private workload in there, to enable the hybrid cloud. That can connect private to public cloud access points and create the hybrid cloud. So there's a lot going on in the marketing function of the Company to build these use cases. As you get to an industry vertical, and you get a use case started, then the rest of the vertical will follow suit. We have a lot of that going on today.

I just maybe a couple of things, I think that again, we're seeing very strong momentum on the service provider side of the cloud. We are getting these key lighthouse wins on the enterprise side that are leverage our performance hub offering, and interestingly, actually, the momentum on the enterprise is across a range of enterprise types. We talk about enterprise distinctly from cloud, content and digital media, financial services, et cetera, but in reality, all of those companies are enterprises, and they have very distinct enterprise needs.

What we've been able to do is actually leverage our relationships with them, and leverage the fact that they already use us for many of their revenue pasting applications, to meet their enterprise requirements. That is, their ability to deliver, distribute applications with high-performance, get anything, anywhere, to all of their users in the enterprise. Moving to a more distributed architecture, that allows for the high-performance application delivery. And so, those lighthouse wins are really starting to open the eyes of the broader enterprise community.

I think -- we see that momentum, and I think when we're really going to start to see it at a new level, is as we ramp up our go-to-market capabilities. We have a relatively small direct surprise selling force today. We're selling across all of our enterprise offers across all of our verticals, but as we ramp the professional services in the channel, that's when I really think we're going to begin to see it contribute more meaningfully. We've been prudent about what pace that's going to be in our planning, but we think -- we're excited about the investments we're making in 2015, and believe that we'll begin to see those very positively impact our numbers.

Great. Thank you very much for the incremental color.

Jonathan Atkin, RBC Capital Markets.

I have a question around the interconnect, the networks are very strong, and Keith sounded very optimistic about the outlook going forward, and I just wondered how we can think about that in terms of translating to gross margins starting to ramp, in even margins starting to ramp, they've been fairly flat in most regions, except for Asia PAC? So, that's my financial question. And then I wondered, we have been talking about this in terms of sales headcount and solutions architects, but can you quantify where you are now and what your targets are for sales force and solutions architects? Thanks.

Good question, Jonathan. A couple things, number one, we are quite optimistic about what we're doing with interconnection and how we see that continue to scale, not only within the Americas but across the broader platform. I think the benefit you're going to see is interconnection revenues, there's roughly 50 basis point improvement on a total Company basis in interconnection revenue, as a percent of our total recurring revenue this quarter.

All three regions were up, the Company therefore as a whole was up, and that's obviously a net positive. Equally, from a positive perspective, we are continuing to increase, if you will, the power density in some of our deployments. Both those are driving [a few or] more profitable system.

Offsetting part of that, of course, is our product mix and also some of our IBX mix, and as we alluded to, we're also being very thoughtful about some of these larger cloud-based strategic footprints that we're taking in. What offset some of the success, is of course, some of those decisions we make. As Charles alluded to, I think we're being thoughtful and very prudent about the decisions we make, recognizing overall we believe that cap gross margins -- we're still driving for a 70% better or cap gross margin line, and we're still driving towards a 50% or greater EBITDA line.

All that said, we also want to make investments. Again, we look at the size of the opportunities that we see out there, again, Steve and Charles have alluded to it, in a way, that when you think about trying capture that enterprise and continue to win the cloud business that exists in the marketplace, you got to scale the business. And one of the ways that we are going to scale, is of course, adapting our go-to-market strategy; looking at the channel, looking at the solution architects, looking at how we create more demand gen, investing our technology and our technology platforms behind Ihab and Brian Lillie. For all of those reasons, I would tell you that we're making great headway so we continue to drive leverage in the business, and scale, and profitability. But we're taking some of that value, we're putting it into the future of our business, because we think that's going to be really important, as we look towards us being a much larger company than we are today.

As to headcount, we are right now in the 225-ish range globally for quota-bearing headcount. We had talked about 250 as a range that we could easily see getting to. I think we're doing that quite selectively in terms of where we see the demand there, in markets or verticals that we really want to make additions. I think I could see us getting over a period of few quarters up to that 250 type range.

And then on the solution architect side, we're looking at probably adding another dozen or two of those over the course of the next several quarters, just given the success we've seen in terms of them being able to really help our customers identify how Platform Equinix can fit into, most typically, their hybrid cloud architecture and strategy. Those are a sort of the level of investment we're making in those.

Importantly, I think I also would note that with the way that we're going to get leverage in the long term, is by also spooling partners that can provide some of that professional service, solution architect type capabilities, as well some of the sales reach from a distribution perspective. We're looking at probably investing in the indirect side of our business from a channel program standpoint to the tune of 50 or more people in 2015. Obviously, we'll ramp that up in a disciplined fashion, but that's a big investment, a big focus area for 2015.

Thank you, and just real quick on the channel program as that structure ramps, how do we think about the margin impacts on that? Does it affect it either way if channel parts do account for a bigger portion of your incremental sales?

Not really, the cost of sales won't be meaningfully different, I don't think, for us. In terms of the indirect it might be -- particularly in the early days as we probably look to invest in a level of channel harmony, and making sure that we have a good collaboration between our direct force and the channel out there. You may have a slightly higher cost of sale, but I also think that we're going to be able to, particularly with some of those channels, targeting certain enterprise segments with our performance hub and cloud exchange offers, which we believe have a very strong value proposition. I think we'll be able to sustain price points and margins that we're accustomed to. I don't see that as meaningfully different, I certainly don't see it in terms of having any kind of meaningful negative impact on our overall margin structure.

Colby Synesael, Cowen and Company.

I have two. First off, as it relates to CapEx, when I look at your built out in terms of cabinets the last years, it's been fairly consistent, and also the cost on a per cabinet basis, somewhere around $50,000. Is there any reason to think as we go into 2015 the number of cabinets you tend to build out, and also the cost of those cabinets would change very much? Also, as it relates to the cloud business, you talked about adding some larger cloud deployments, magnet customers, as you refer to them. What do you anticipate the overall impact of those deals being on MRR per cabinet, particularly in the United States or the Americas, as we go into 2015?

Colby, Steve and I can tag-team this a bit. I think in terms of capital expansion, we're looking with some granularity, as to where we need to invest in demand. I don't think there will be a dramatic difference in terms of the pace of build-out. I do think we're looking at whether or not some of the large footprint opportunity that we are exploring and seeing in the cloud space will require us to make some incremental investment there. But that's something I think that we'll probably give you a little more clarity around come our guidance in February.

As to the cost per cabinet, we are constantly striving to drive our cost per cabinet down, while at the same time, ensuring that we're delivering a premium quality service delivery that our customers require, given the premium nature of the application. Again, we're trying to drive it down to some degree from a continuous improvement standpoint, but I think the number that you articulate there, which is on the order of $50,000 a cab is probably a reasonable planning number. And again, we will probably continue to chip away at that, but that's probably not going to -- I wouldn't say, change dramatically.

Lastly, as it relates to these big cloud footprints, honestly, we have been pursuing those as part of this disciplined cloud ecosystem strategy for several quarters, and despite that as you can see in our results, we've continued to maintain very attractive levels of yield. And that is because there are a number of levers available to us in terms of, one, driving interconnection growth, which as you can see was very healthy this quarter and continuing to manage power densities in the facilities, with some rigor and some care.

That allows us to really offset some of, if we are taking on a cloud footprint that may not ramp from an interconnection standpoint immediately, or it will take some time for an ecosystem effect to built up around that, honestly, we continue to have levers that we believe will allow us to maintain stability in the yield. That's where we are, and really results have shown that over the last several quarters.

Colby, I just had one thing. The other thing I think is important to add to what Charles said, we also, when we think about CapEx for 2015 and beyond, we want to continue to be very disciplined about how we deploy that capital. But as you are aware, we also have 13 projects of size and scale today that are underway, such as a Toronto or Singapore 3 or London 6; large deployments. We're going to be very measured about how we deploy our capital on a go-forward basis.

And I think Charles is absolutely right about the comment that it's going to be roughly in and around the same order of magnitude, but we're also going to reserve the right to take the opportunity when it exists. As you can appreciate, it takes a long time to build up some of these assets, so as we continually think about how to deploy capital, our teams are already thinking about 2015, 2016, and 2017. So I feel we're in a very good position to moderate the consumption of our capital on a go-forward basis, and be thoughtful and prudent about how that gets deployed.

Michael Bowen, Pacific Crest.

A couple housekeeping things. I'm not sure I heard on enterprise, I think you gave out the percentage of revs the last couple of quarters. If you could provide that, that would be terrific. Then, with regard to the recurring CapEx definition, as it pertains to AFFO, do you have an update on that? Has that been finalized? And then finally, with regard to performance hub, you announced some wins, how can we think about that as far as revenue impact and margin impact going forward? If you could help us think about that, that would be terrific.

Let me take the middle one if I could, and just as we get -- then Charles and Steve will take the other two. As a relates to AFFO, as I said, this quarter we are raising our guidance to greater than $745 million, includes a $5 million headwind relative to currency. When you add in the $32 million, of what I call, REIT-related operating costs, you get a sense that we're roughly at greater than $780 million.

That's also assumes as you know, $110 million of recurring CapEx. There are still two lines. When you look at, basically the result that we provided on the earnings deck, the PowerPoint presentation, there's a couple of areas where we're still looking at to make sure we look at our peer group, we look at NAREIT, and we look at what makes good sense for us. We're continuing to refine that. I'd ask that you give us patience for at least one more quarter as we continue to work through that. But suffice it to say, when you look at CapEx, the $110 million that we allocated toward recurring, which is about 4.5% of revenues, it has the potential, potentially, to change a little bit, depending on how we allocate that small bucket of cost.

Could you remind us of the initial question?

The other question was with regard to performance hub, with regard to how impactful, with regard to revenue, and how should we think about it from an incremental margin standpoint? The other was the percentage of revenue on enterprise. I think last quarter, if I'm not mistaken, it was 11%, up from 9% the prior quarter? If you have that, that would be great.

I think the deck showed that, again you have to understand that we separate out an enterprise vertical that we distinguish from our other verticals, financial services, content and digital media, cloud, et cetera. That one also is at 11% now, as shown in the deck on page 15 of the deck that we posted today. One thing that is very important to remember is that the momentum of our enterprise class offers, if you will, is not necessarily reflected just in that number, because a number of the buyers of those are customers who live in other verticals, at least in our classification.

In fact, our largest wins to date -- well, some of our largest wins to date, have been with customers that live in other verticals in our categorization. For example, we reference a very large global performance hub for an online banking application that we had this quarter. That would be, that would fall in our financial services revenue line. We also had some with content and digital media for cloud customers that would be in there.

That's what we're seeing in terms of momentum for our enterprise cloud application. Having said that though, we definitely are seeing momentum in what we categorize as the rest of the broader enterprise, or what our CMO likes to refer to as the rest of the enterprise. In fact, that category is our largest source of new logos, and we've been very effective in getting in there, getting admittedly smaller wins and then really being able to land and expand from a geography and a product set standpoint with them.

Great, and where was going with the performance hub, Steve, was maybe to put a finer point on the pencil point on the question, is one of the things that I've been questions on is with regard to performance hub and cloud exchange. Technically, I guess, isn't there an opportunity cost for incremental revenue that might be going directly to the cloud provider, rather than incremental revenue within your data center? But I'm assuming your going to answer that in the way that or in a manner that the overall incremental impact is positive. But can you help us think about the puts and takes there, as far as the opportunity cost, but then offset by an increase in revenue to the -- for the direct connect to the cloud provider?

I think what you are getting at is probably a very common question that we get, which is, if people are taking workloads and moving them directly into the public cloud, doesn't that represent a net reduction in the colo opportunity? The reality is that, in aggregate, that may be true across the broad colocation market, but as it relates to Equinix, who tends to play in a very specific premium application segment, where people are moving workloads that are requiring network density, global reach, ecosystem reach, and mission critical performance; we see it as a very net positive opportunity for us. What we're able to do is, we look at enterprises who may in fact be looking to move certain applications from their basement into a hybrid cloud architecture, and they may take stuff that was living in their data center, and move some of that -- particularly back office applications or other non-performance sensitive applications, into a cloud environment. But the way they are going to do that is, they're go to purchase a performance hub implementation from us, across probably a global reach, global opportunity for us, three or four or five locations, interconnect that to cloud exchange, and then move their workloads through that performance hub. We see it very much as an upside opportunity for us.

Michael, a good way to think about these, these are service offerings, both of them that help customers connect their workloads to public cloud access points. The cloud exchange is trying to accelerate that specifically, the network performance hub, we've been utilizing for several quarters, and it's to help a CIO who's distributing their wide area network in a more optimized, cost-effective, higher performance way, to solve all the challenges that they are all seeing with mobile, social, cloud, et cetera. These are service offerings that are actually helping customers connect to cloud access points, or access nodes.

When you consider that 80%-some of the IT spend in the world today is sitting in house, on premise. A lot of that stuff is being predicted to come out to the market, get coloed or outsourced or managed service. We're going to catch a lot of the workload that is coming out to the market in the future, because they're going to look inside of Equinix and they're going to see all of this network density, they're going to see all this cloud density; and they're going to say, that's how we can grow a solution to multi cloud, multi-network drive that I need to go run my company.

As we've mentioned to you multiple times, even Equinix as a $2.5 billion company, uses 30 to 35 cloud providers just to run our IT. That's exactly what we see happening with enterprises today. They're trying to figure out how to get to the multi-cloud environment, and these are offerings to help them do that.

All right. Thanks for taking the questions.

Mike McCormack, Jefferies.

Maybe just a comment, Keith, on the MMR outlook into 4Q, what are the key drivers around that, and then thinking about cloud installments in particular. Any differences in what you're seeing in churn among those installments?

Mike from an MRR perspective, or what we refer to as yields. There's really no meaningful change that we're expecting in Q4. Again, as you can appreciate, given the size of our install base now, any movement in either direction is going to be relatively dramatic over a short period of time for us, to meaningfully adjust those metrics.

With that all said, we feel confident in the firmness of our metric, on both on a global basis as we calculate globally, we're up roughly 1% quarter over quarter and 3% year over year. We feel very good about the firmness of that metric, and it gets supported by the fact that, as I said earlier, increasing infrastructure density and deployment, increasing interconnection and then just the volume of opportunity we see, all that would lead me to believe that we're going to continue to be playing in this range for the foreseeable future.

Mike, let me take the same one with regard to the cloud footprints and the churn dynamics around those. What I would say is that for the most part, cloud is a relatively newer phenomenon over the last several years, in terms of driving significant deployments, and so we're probably inside of the contract length on many of those. But what I would say, is that we have developed over the last several years a very robust understanding of the churn dynamics in our business, and what represents a deployment that is going to be subject to churn or price compression, versus those that are going to have high, very high levels of retention, and therefore higher customer lifetime value.

What I would tell you is, that the dynamics of churn, of cloud deployment, tend to really favor them being high retention, high lifetime value deployments. The reason is several-fold. One, they tend to be revenue facing. Two, they tend to be very well interconnected. And three, they tend to be global, and so they are deployed cross-region, cross- metros. We actually have a pretty hard handle -- analytical handle on something that we call our -- it's basically an index that we have, where we can calculate the likely retention of deployments based on those dynamics. And I would tell you, that generally cloud deployments stack up very well along those dimensions.

That's great. Thanks.

Thank you, that concludes our Q3 call. Thank you for joining us.

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