Equinix Inc (EQIX) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to the Equinix conference call.

(Operator Instructions)

Also, today's conference is being recorded. If anyone has objections, please disconnect at this time.

I'd now like to turn the call over to Katrina Rymill, Vice President of Investor Relations. You may begin.

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

Before we get started, I'd like to remind you that some of the statements that we will be making today are forward-looking in nature, and involve risks and uncertainties. Actual results may vary significantly from those statements, and may be affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our most recent form 10-K filed on March 2, 2015. Equinix assumes no obligation, and does not intend to update or comment on forward-looking statements made on this call.

In addition, in light of regulation fair disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter, unless it is done through an explicit public disclosure. In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures, and a list of the reasons why the Company uses these measures, in today's press release on the Equinix Investor Relations page at www.equinix.com.

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

With us today are Steve Smith, Equinix's CEO and President; Keith Taylor, Chief Financial Officer; and Charles Meyers, Chief Operating Officer, who is dialed in remotely. 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 these analysts to limit any follow-up 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 first-quarter earnings call. This marked the 49th quarter of consecutive revenue growth. Delivering both revenue and adjusted EBITDA significantly above the top end of our guidance ranges, as demand for interconnection continues to drive strong performance in all three regions.

As depicted on slide 3 of our presentation, despite strong currency headwinds, revenues were $643.2 million, up 1% quarter over quarter, and up 11% over the same quarter last year. Adjusted EBITDA was $305.7 million for the quarter, up 4% over the prior quarter, and up 17% year-over-year, delivering a 48% margin. AFFO grew 28% year over year to $221.8 million.

We continue to experience strong momentum, delivering solid gross and net bookings and healthy fundamentals, including firm MRR per cabinet on a currency neutral basis, low churn, and strong margins. I'm also extremely proud that we added to both the S&P 500 and FTSE NAREIT indices, reflecting our scale, REIT structure, and the important role that we play in the technology infrastructure industry. We're also working closely with the other REIT indices, as we begin our journey in this new category.

This is our first quarter reporting as a REIT, and we are evolving our methods to the market as we diversify our shareholder base. We believe that many of the characteristics our traditional investor base find attractive about Equinix will translate well into the REIT domain, including our unique portfolio of assets, solid stabilized asset growth, and a long history of success with new development.

We continue to roll out incremental financial data to enable our investors to track and analyze our business, including adding discloses around NOI, NAV, and owned assets. These new segments of revenue, categorized by stabilized expansion and new, and by owned versus leased, highlight the diversity and strength of our offers. They also demonstrate how our ecosystems and interconnection translate into strong NOI, stable pricing, and recurring and predictable bookings and returns.

We now have over 6,300 customers around the globe, which includes 1,400 customers from our ALOG acquisition, which we now have integrated into our metrics. Today, 68% of recurring revenues come from customers deployed in more than one region, up from 65% last year, and 82% of recurring revenues come from customers deployed across multiple metros, up from 80% last year. Demonstrating the extraordinary strength of our global platform.

Revenue from interconnection grew 17% year over year, and we added 5,500 cross-connects this quarter, which takes us up to over 155,000 cross-connects across platform Equinix. Customers in our network, content, and cloud verticals are strong drivers of interconnection growth, and we're also seeing growth in interconnection from the enterprise. Cross-connects from enterprise companies to all other verticals has ramped to over 30% year-over-year growth.

Also, our Internet exchange traffic grew over 65% year over year, and in response to the robust demand for high-bandwidth connectivity, we are now offering 100-gigabit port speeds to complement the 10-gigabit increments that customers have historically purchased, and continue to deliver the industry's most complete interconnection portfolio.

This quarter, we opened five new flagship data centers, boosting data center and interconnection capacity in the financial and network hubs of London, New York, Singapore, and Toronto, as well is in New Metro in Melbourne, Australia. We now have 105 data centers across 33 markets, the largest global retail data center footprint, offering more than 11 million gross square feet of capacity.

Given strong fill rates, particularly from cloud providers expanding in tier 1 metros, we're moving forward with expansions in critical markets. The majority of our development pipeline for the year is focused on campus expansions and augmenting existing data centers, which helps drive operating scale and improves predictability of returns. The stability of our business model continues to deliver attractive growth on our new developments and our stabilized assets, which are tracking to over 33% yields on our gross PP&E investments.

We continue to increase the number of owned data centers, including the addition of London-6 this quarter, and owned properties now generate 37% of our recurring revenue and 39% of our NOI. Many of our owned facilities are in high-demand metros, including Amsterdam, Ashburn, Frankford, London, and Silicon Valley, and we expect NOI contribution from these assets to continue to grow as we expand in these markets and selectively pursue asset purchases in other key markets.

This quarter, we invested $38 million to acquire [34] acres of land next our Silicon Valley campus, which provides important expansion opportunities for this highly interconnected metro. And Ashburn, with the final expansions of DC10 and DC11 under way, we expect to start developing Ashburn North, a 44-acre plat purchased in 2012 that we intend to build out over the next seven years. Over time, we expect more of our organic growth to come from owned properties as we build out these core campuses.

For the newer REIT investors, business ecosystems inside our data centers are at the heart of our strategic operating model and a significant differentiator for Equinix. Ecosystems are simply communities of customers who derive value from locating in the same data center to connect to each other to achieve greater application performance and simplify network architectures. The interconnection created as an ecosystem, gross generates higher returns for our sites and increases in value to our customers.

For example, some of our more mature campuses, where ecosystems are especially vibrant are the most profitable and differentiated, and we typically built new assets adjacent to these sites to capitalize on this value, while derisking our returns. Strong interconnection exists in each of our major metros sites, including those in Singapore, Frankfort, London, Chicago, New York, Ashburn, and Silicon Valley having over 10,000 cross-connects. About 94% of our co-location square footage is in a metro with at least 1,000 cross-connects or more.

Now, let me shift to the quarterly highlights of our top ecosystems. Our high network density continues to create significant interconnection opportunities for a myriad of industries, and is driving strong network-to-network cross-connect demand, as service providers use Platform Equinix to extend their networks and generate new revenue. Our new IBX in Melbourne is a testament to this opportunity, with more than 17 global network providers already committed to deploying in this data center.

We are also enabling network service providers to deliver new cloud services by leveraging both the Equinix Cloud Exchange, as well as traditional fiber cross-connects. Mobility remains a fast-growing sub-segment in the network verticals, with mobile providers including LycaMobile, T-Mobile, and Truphone joining this emerging ecosystem.

For the content and digital media industry vertical, we continue to attract top content from [Magnex center] expanding across multiple regions. Our advertising sub-segment is thriving, propelled by the shift away from traditional advertising towards digital and mobile advertising, placed by transacting on digital exchanges, resulting in a rich and fast-growing ecosystem. Content and digital media companies are also contributing significantly to the parent traffic on exchanges, as well as driving growth in interconnection.

Turning to our financial services vertical, we are expanding our electronic trading business across new geographies and asset classes. Wins include Oanda, a leading Canadian foreign exchange broker that is an ecosystem anchor in our Toronto 2 data center, and BATS, one of the largest equities operators in the US, is expanding in London in addition to consolidating its US matching engines at our Secaucus campus.

Further, we continue to see progress as we diversify our financial services business to insurance, retail banking, and digital payment sectors. We have won several anchors for the emerging electronic payments ecosystem, including a key win with the largest pan-European credit card payment processor.

Turning to cloud and IT services, this vertical delivered strong bookings, driven by new wins and expansions with the AWS, Cisco, Datapipe, Oracle, and T-Systems. We're excited about how the cloud opportunity is playing out, and we have another quarter of significant progress, as cloud service providers choose Platform Equinix to support rapid global deployment.

The Equinix Cloud Exchange, our interconnection switching platform that enables companies to connect directly, securely, and dynamically to multiple cloud and network providers, continues to scale, and now has over 120 participants and is live in 20 markets, globally. Turning to the enterprise vertical, we are seeing strong momentum, as enterprises move beyond the exploratory phases of cloud and are beginning to rearchitect their IT infrastructure to capture the significant cost, flexibility, and security benefits of Hybrid Cloud deployments.

We're seeing strong response from both customers and channel partners to our performance hub offer, a solution that distributes an enterprise's data center infrastructure across multiple locations to accelerate application delivery and enable efficient, secure access to key network and cloud services. Over 130 customers have deployed the Equinix performance hub solution, and this quarter we saw strong growth in existing deployments as well as critical new logo wins.

Notably, this quarter marked one of our largest channel deals to date, as we were able to secure a key infrastructure deployment with one of the world's largest providers of athletic apparel, the result of a highly successful joint sales engagement with Datapipe, one of our leading global partners. Other enterprise wins this quarter include BRB, a sporting goods retailer; Pella, an automotive component manufacturer; [Net-health UK], a healthcare company; Red Lobster, an American restaurant chain; Rider, a transportation and supply-chain management provider; and Valnet, a supplier of services for paper and energy industries.

Expanding our global channel program is a top strategic initiative for Equinix, and we are investing significant resources to ensure our partners are well-equipped to deploying compelling IT and cloud solutions for their end customers via Platform Equinix. Along with technology partners AWS, Cisco, Google, and Microsoft, other companies that have recently joined the channel partner program include Avant, Datalink, and Unitas Global.

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

Thanks, Steve, and good afternoon to everyone.

Well, as they say, the only thing better than a strong Q4 in a recurring revenue model is following it up with a strong Q1, and our Q1 results represent a great start to 2015. Our global interconnection platform continues to deliver strong gross and net bookings, and this drives leverage across each of our regions. Our key operating metrics remain solid, such as net cabinets billing, MRR per cabinet, and the MRR churn rate, and our interconnection trends remain very positive, too, both nominally, but more importantly, the value that they bring to the health of our ecosystems.

Interconnection revenues now represent 17% of our global recurring revenues, a 17% year-over-year increase, with strength across each of our regions. Also, our key operating margins continue to improve. Each of our gross profit, cash gross profit, adjusted EBITDA, and operating profit experienced a nice step up this quarter. The result of strong revenue pull through, and lower than planned costs.

We remain pleased with our performance, although consistent with our comments in the last earnings call, we do plan to continue to invest in our go-to-market strategy and other key initiatives through the end of this year. Yet, given the success of the first quarter, as Steve will discuss shortly, we are now able to increase our adjusted EBITDA guidance on a currency neutral basis by $17 million for the year.

One additional comment before I get into the earnings [slides]. We're very pleased to have completed our first quarter operating and reporting as a REIT, and of course, this includes the issuance of our first quarterly recurring cash dividend. We continue to expect to receive our favorable PLR in 2015; I look forward to sharing the news with you when received.

Now, moving to the slides, as depicted on slide 4, global Q1 revenues were $643.2 million, up 1% quarter over quarter, and up 11% over the same quarter last year. We are now at our 13th year of consecutive quarterly revenue growth. Our revenues overperformance was due to a number of factors, including favorable net pricing actions, and higher-than-expected custom installation activities.

Q1 revenues, net of our FX hedges, absorbed a $9.5 million negative currency impact when compared to the average FX rate last quarter, and a $1.5 million negative currency impact when compared to our FX guidance rates. Although currency volatility across all of our operating currencies continues to cause significant FX headwinds, we've put in place net cash flow hedges covering greater than 80% of the value at risk related to our EMEA operating currencies. This provides for a smooth flight path into 2016.

Total cash SG&A expenses decreased to $145.3 million for the quarter, primarily due to lower-than-planned advertising and promotion expenses, as well as the one-off sales commission expense incurred in Q4 due to the change in our internal policy. We expect our cash SG&A expenses on a quarterly basis to remain roughly flat for the rest of the year.

Total adjusted EBITDA was $305.7 million, up above the top end of our guidance range, and up 17% year over year. This was driven by stronger-than-anticipated cash gross margins, the result of lower-than-expected utility rates, and favorable FX hedges in EMEA. Our adjusted EBITDA margin was 48%. Our Q1 adjusted EBITDA performance, net of our FX hedges, reflects a negative $800,000 currency impact when compared to our average rates used last quarter, and a $3 million positive benefit when compared to our FX guidance rates.

Global net income was $76.5 million, or a diluted earnings per share of $1.34, a strong step up from last quarter, which was impacted by the write-off of our deferred tax assets due to the REIT conversion, and the loss in debt extinguishment related to our Q4 financings. Our Q1 operating cash flow increased over the prior quarter to $232.8 million, largely due to lower cash interest and taxes, and a reduction in our net working capital position.

Our Q1 MRR churn was below our expectations of 1.9%, although including ALOG, we're reporting 2%. We continue to expect our quarterly MRR churn rate to be at the lower end of our 2% to 2.5% guidance range over the remainder of the year.

One final note before I discuss the regional performance. Our non-financial metric sheet is now fully consolidated, including ALOG, with one exception. We do not include ALOG revenues in our MRR per cabinet metric given the level of managed services in the revenue line.

Also, as part of the Equinix customer one initiative, we've upgraded and automated our inventory tracking systems. Also, we've globally standardized the cabinet equivalent definition, and as a result, we have updated our cabinets billing, our utilization, and our MRR per cabinet metrics, including the comparable periods to incorporate this change. As you can see, this change left our operating trends intact.

Turning to slide 5, I'd like to start reviewing our regional results, beginning with the Americas. The Americas had a strong revenues quarter, the result of favorable net pricing actions, lower-than-planned MRR churn, and an 8% quarter-over-quarter increase in their non-recurring revenues, largely a result of increased custom installation activity.

Americas adjusted EBITDA was up 4% over the prior quarter, and 17% year over year on a normalizing constant currency basis, largely due to strong cash gross margins, offset in part by the higher seasonal FICA charges. Americas interconnection revenues now represent 22% of region's recurring revenues, and we added 1,800 net cross-connects. Americas net cabinets billing increased by 1,200 in the quarter, and we added 85 exchange ports in Q1, which included the sale of our first 6 100-gig ports.

Now, looking at EMEA, please turn to slide 6. EMEA delivered another strong quarter, with particular strength coming from our Dutch and German businesses, although FX continued to impact our as-reported results. Revenues were up 5% quarter over quarter, and 19% year over year, on a normalizing constant currency basis.

Adjusted EBITDA, on a normalizing constant currency basis, was up 13% over the prior quarter, and 28% over the same quarter last year, largely due to a 17% quarter-over-quarter decrease in SG&A, the result of a strong US dollar, and the $3 million hedge benefit. Adjusted EBITDA margin increased to 46%, although normalized for the FX benefit, adjusted EBITDA margin would have been 44%. Due to strong traction in our cloud vertical, including momentum from our support of large cloud providers like Azure and AWS, we had another solid quarter of cross-connects, adding 1,500 net cross-connects in the quarter.

EMEA interconnection revenues represent 9% of the region's recurring revenues. EMEA MRR per cabinet was up 2% on a constant currency basis, net cabinets billing increased by 900.

Now, looking at Asia-Pacific, please refer to slide 7. In Asia-Pacific, we had record gross and net bookings this quarter. Revenues were up 4% over the prior quarter and up 25% over the same quarter last year on a normalizing constant currency basis. Driven by strong sales momentum in cloud and IP services, enterprise, and network verticals.

Adjusted EBITDA, on a normalized and a constant currency basis, was up 6% over the prior quarter and 30% over the same quarter last year, largely due to a 4% decrease in Q1 SG&A, the result of a strong US dollar, and lower-than-expected discretionary spending. Adjusted EBITDA margin increased to 50%. MRR per cabinet, on constant currency basis, was up 2% quarter over quarter, and cabinets billing increased by 900 over the prior quarter. We added a record 2,200 net cross-connects. Interconnection revenues remain at 12% of the region's recurring revenues.

Now, as we continue to scale our APAC business, we have eight expansions currently under way across six metros, including new phases of our newly opened IBX's in Melbourne and Singapore. Also, given the success in the Sydney market, we're now proceeding with the building of our Sydney 4 asset to capture this opportunity.

I'll now look at the balance sheet, please refer to slide 8. We ended the quarter with $1.1 billion of cash, and our net debt remains consistent with the prior quarter. Our net debt leverage ratio decreased slightly to 2.9 times our Q1 analyzed adjusted EBITDA, the result of stronger operating performance and higher-than-expected cash balance at the end of the quarter.

A significant portion of this cash will be consumed throughout the remainder of the year, largely from the payment of our quarterly dividends and special distribution, the funding of our capital expenditures, and the payment of liabilities on our balance sheet. We continue to have a tremendous strategic and operational flexibility built into our balance sheet and capital structure. This allows us to continue to plan for growth and meet the funding needs for our shareholder distributions.

Now, switching to AFFO and dividends on slide 9. For 2015, we now expect AFFO to be greater than $830 million, or growing 15% on a constant currency basis, the benefit of a strong operating performance, and a decrease in our planned net interest expense. Our AFFO payout ratio decreased slightly to 46%.

Also, as noted previously, we paid our first regular cash dividend and expect to announce our Q2 dividend shortly. It's important to note that the taxable income from the QRS part of the business ultimately drives the dividend payout requirements.

As you may appreciate, there isn't always a direct correlation between AFFO and our REIT taxable income. As an example, AFFO represents a global consolidated metric, whereas the REIT taxable income solely relates to our QRS entities. We continue to expect to distribute 100% of our QRS's taxable income.

Now, looking at capital expenditures, please refer to slide 10. For the quarter, CapEx was $150.1 million, including recurring capital expenditures of $22 million, lower than our guidance range, primarily due to timing of cash payments.

As presented on the expansion tracking slide, we currently have 19 announced expansion projects under way across the globe, of which 18 are campus builds or incremental phase builds on over 15 markets. We continue to believe that spreading our capital expenditures across multiple regions and phases is the best way to invest in our growth. These 19 projects will increase our current inventory by 10%. We expect our recurring CapEx to remain consistent with our prior expectations of $115 million.

Turning to slide 11, the operating performance of our stabilized 76 global IBX and expansion projects that have been open for more than one year continue to perform well. Revenues were up 6% year over year, and we continued to enjoy a healthy yield on the stabilized assets, reflecting the premium value that is placed on these assets. Currently, these projects generate a 33% cash-on-cash return on the gross PP&E invested, and are at 84% utilized on our recalibrated available inventory capacity.

Before handing the call back to Steve, I would like to remind you that we've appended our supplemental financial and operating data deck to the earnings presentation, starting on slide 16. There are a number of incremental disclosures including details related to how we segment our business between expansion and stabilized assets over our owned and leased portfolio.

Of note, you'll see that our cash gross profit grew 14% over the prior year, our adjusted cash NOI increased 15% over the prior year to 61%, and our corporate cash SG&A, as a percent of total revenues, decreased to 9%. Finally, we provided you with the key components to our NAV on slide 30.

Now, I'll turn back the call to Steve.

Thanks, Keith.

Let me now cover our 2015 outlook on slide 15. For the second quarter of 2015, we expect revenues to be in the range of $654 million to $658 million, which includes $6 million of negative foreign currency impact compared to average Q1 2015 rates, and normalized and constant currency growth of 3% quarter over quarter.

Cash gross margins are expected to approximate 68% to 69%. Cash SG&A expenses are expected to approximate $144 million to $148 million.

Adjusted EBITDA is expected to be between $304 million and $308 million, which includes $5 million of negative foreign currency impact compared to average Q1 2015 rates. Capital expenditures are expected to be $210 million to $220 million, which includes approximately $30 million of recurring capital expenditures.

For the full year of 2015, we are raising revenues to be greater than $2.635 billion, or a 13% year-over-year growth rate on a normalized and constant currency basis. This guidance includes $25 million of negative foreign currency impact compared to prior guidance rates. Excluding this negative impact, the revised revenues is a $30 million increase compared to our prior guidance.

Total-year cash gross margins are expected to approximate 69%. Cash SG&A expenses are expected to approximate $580 million to $600 million.

We are raising our adjusted EBITDA guidance to be greater than $1.23 billion, or a 47% adjusted EBITDA margin. This guidance includes $7 million of negative foreign currency impact compared to prior guidance rates. Excluding this negative impact, the revised adjusted EBITDA is a $17 million increase compared to prior guidance.

We expect adjusted funds from operations to be greater than $830 million, a 15% constant currency growth year over year, effectively a $26 million raise, adjusting for currencies. We expect 2015 capital expenditures to range between $740 million and $800 million, which includes $115 million of recurring capital expenditures.

In closing, our strong results this quarter reflect the continued strength and momentum in our business. The global reach of platform Equinix, along with unparalleled network and cloud density and thriving business ecosystems, positions us to solve the many challenges faced by today's CIOs.

The strength and uniqueness of our global platform is translating into solid operating performance, and the importance our reach is evident by the rapid growth of customers deployed across multiple metros and regions. Our disciplined execution of our strategy continues to drive momentum as we strike a balance between revenue growth, margin expansion, yield, and attractive returns on our invested capital.

Let me stop here, and open it up for questions. I will turn it over to you, Alexis.

(Operator Instructions)

Amir Rozwadowski from Barclays.

I was wondering if we could talk a bit about margin progression, here? Obviously, there been a lot of puts and takes, the conversion to the REIT, investment in supporting channel expansion, obviously, if we look at particularly on an adjusted basis with your EBITDA guidance, there is a pickup in expectation?

Just trying to think about how the longer-term progress for margins are? Particularly when we look at where your longer-term targets were, and how we should think about their trajectory and the ability to get to that level?

I think that's a great question, Amir. We're very much committed, as a company, to driving towards our 50% EBITDA margin target or better. Clearly, we showed a little bit of momentum when we issued our guidance at the first part of this year.

Certainly, when you adjust it for currency, and then coming out of the first quarter, we are able to moderate that out slightly, as well. So, very pleased with the direction of which it's going. I'll tell you, though, as you step back, Q2, in my comments I said, look, SG&A, you should expect it to be relatively flat quarter over quarter.

As a result, what I think you're going to get, as you progress through the year absent some of the timing issues that we're going to see in Q2, is a bias towards an upward trend through the latter part of FY15, and that positions us very well as we go into 2016. My only comment would then be, as you continue to look at and asses where we need to make investments and to the extent that we can create value and further the business opportunity we have in front of us, we'll continue to make those investments.

But, I don't want to pre-commit to where as for 2016 will be, but suffice it to say, the direction is very, very positive as we exit 2015.

Perhaps a quick follow-up, there. If we think about 2016, then, from a directional perspective, given some of the moving factors that have impacted you folks or expect to impact you folks in 2015, should we expect that sort of directional upward bias?

We believe there is an upward bias. But again, we want to reserve the right, similar to what we did this year. We took some of the money that we were effectively saving from the REIT project, and we decided to put it back into the business because it made infinite sense to invest in our go-to-market strategy and all the components around that.

Again, as we look into 2016, we'll make that decision as we get closer to the time. My message to you would be, right now, there is an upward bias as we exit the year.

Thank you very much for the color.

Jonathan [Schildkraut].

Two, if I may. First, in terms of the revenue outlook for the year, given the 1Q report and the midpoint of the 2Q guide implies a fairly slow ramp in the third and fourth quarter. I don't know, $11 million or $12 million sequential net revenue growth. Wondering if there's any sort of churn or other things in that number, as we look out the remainder of the year that we should be aware of?

As a second question, you've had another strong quarter of bookings, here. I'm wondering if you might update us on your visibility, level of confidence, into looking into the future, commencement lag, things like that, that allow you to raise the guide for the remainder of the year? Thanks.

Great question, Jonathan. Let me take the first one, and then I'll perhaps pass it to Steve or Charles for the second.

First and foremost, when you look at our guide for Q2 on a revenue basis and you adjust for currency, so take out the benefit of the hedge that's sitting in revenues in Q1 and you adjust for the foreign exchange rate, you're looking at roughly a 3% quarter over quarter increase. So, we are happy where we sit with Q2.

As we look into Q3 and Q4, similar to -- sort of as we came out of last year, we are less comfortable in protecting the amount of non-recurring activity that we have in the latter half of the year, and that's what we experienced this quarter. Part of the reason for the overperformance is we did more nonrecurring activities then originally anticipated. And I'd tell you, we're holding that path forward, that path true for the latter part of the year, as well.

That, coupled with the fact that there is some seasonality in our booking activity. There is a little bit of churn that we know is forthcoming, and again, I very comfortable with the 2% to 2.5% range and probably biased more towards the lower end of the range. But relative to where we've come from, we will have slightly more elevated churn in the latter part of the year, based on what we've seen.

Then, the last part is just timing. Timing of when we install, and there's a recognition as we roll out our global systems. Like anything, that creates some level of drag, and we're just being a little bit conservative right now until we actually roll those out and start operating it, if you will, with those new systems. Americas is May; Europe is going to be in the July timeframe.

We're going to go through that implementation cycle.

Let me start, and Charles might have some comments here to add on to this. But on the bookings questions, visibility -- as you heard from the comments today and from the previous quarter, we've had a very good start, strong start to 2015.

You see the results in increasing topline guidance for 13% year on year, constant currency growth. Across all the industry verticals, we're seeing very good activity. We've got good coverage ratios, the pipeline is strong. We're holding yield across all three regions.

The impact of the investments that we've been talking about with channel professional services, the innovation that our marketing team is doing with our products, the enterprise awareness activity, the sales enablement stuff, so all the investments that were bundled into that $20 million message we gave you last quarter are all taking hold, and you can see the results showing up across all industry verticals.

So Charles, you may have a comment or two to add to that?

No. I think you hit most of the key ones from my perspective. I would say that one of the things that is not evident, we did make some adjustments to our sales structure and territory alignment and account allocations in the first quarter, which inevitably creates a little bit of drag. Yet, I think we powered through that and delivered strong results.

The objective of that alignment was really to insure that we continue to capture the momentum that we're seeing in the cloud ecosystem overall, both on the supply side, with cloud service providers, and on the demand side, if you will, or the buy-side with enterprises. Those two verticals are generating about 60% of our new logos, continued strong momentum in bookings and new wins, there.

As Steve said, the key metrics like funnel size, conversion, rep productivity, book-to-bill interval, all looking solid.

Thanks for taking the questions, guys.

Simon Flannery from Morgan Stanley.

Thanks a lot for the new disclosure, it's very helpful. I'm looking at page 25, the same-store operating performance and you've broken out the stabilized and expansion. As you mentioned earlier, the stabilized return on gross PP&E was 33%. The expansion is 19%, up from 15%, a nice year-over-year improvement.

Perhaps you could just talk us through how the 19% evolves over time? Is that tied to utilization? And is it reasonable to think that that becomes 33% or something, four or five years in? Gets up to that sort of stabilized level? Any color around that would be great.

Just so I'm making sure that you and I are looking at the same thing, you're looking at the percent growth year-over-year when you talk about the 19% in the expansion? Is that what you want us to refer to?

It's the cash return on gross PP&E, the last column on that page.

Okay. Generally, from our perspective, I think there's a couple of things. Clearly, as you think about our stabilized assets, again, those are assets that all phases have been open for more than 1 year, and effectively that one year for us is January 1 -- starting January 1, 2014, looking at that relative to the expansion activity.

Our sense is, when you think about expansion, because an expansion could be two, three, and in some cases four more phases, you can appreciate the net -- sort of the drag, if you will, perhaps, taking on that full obligation, whether it was a lease, whether it's the land, and other related costs. Until you get more to fully utilized, you're not going to get that economic return that you are looking for relative to a stabilized asset.

So as a result, this is a path, if you will, that is very consistent with our expectation, recognizing there is a relatively large portfolio of assets, there's 31 assets in the expansion bucket. They're going to be at all different levels of delivery, if you will.

So, probably leaving it with you, I think you are going to see that number move up and towards the 33% as we continue to pass time and then fully utilize those assets. The other thing I'll leave you with is the team has done a very good job over the years recognizing stabilized assets are only 85%, 84% utilized. The team does a very good job of optimizing the assets. So not only do I continue to expect the expansion to move up, but quite openly, we also expect the stabilized to move up and to the right, as well.

Great. That's helpful. Thank you.

Yes, the only color I might add to it, Simon, is that I think there's -- if you look at the mix of the stabilized asset group there and the expansion asset group there, there would certainly be no meaningful -- no reason to believe that the long-term performance would be meaningfully different, since they are likely to have similar mixes.

So, it's just a matter, in some cases, if they are very large-scale projects, it may take a longer period because they are multi-phases of investment. But, would trend towards that end point.

Thanks.

David Barden from Bank of America.

Good quarter. Thanks for taking the questions. I guess, two, if I could.

Keith, number one on the dividends. Obviously, we don't see the QRS or have a picture where the growth trajectory for the QRS, which is going to fuel the dividend growth, is. Could you address what we should be expecting on that front, and whether you have an appetite to reflect the QRS growth in a quarterly or annual fashion in the dividend?

Then the second question on the balance sheet. With DPS now below the long-term leverage target, if you went back to the midpoint, we could buyback 5% of the stock. You've been very cautious about using the balance sheet as you went into the REIT process, because obviously there were reasons to be cautious and keep dry powder.

But what can we expect Equinix is going to do for shareholders in terms of using that balance sheet on a go-forward basis? Thanks.

Two very good questions, David.

Let me start with the dividend. First and foremost, when we issued our dividend at roughly $1.69 per share on a quarterly basis, and we said annualize that at $6.76 per share, or roughly a 3% yield where the stock trading at the time, and we were very, very comfortable with that. Recognizing this is the transitional year for us as a company. Transition in the sense that we are being very mindful of the assets that should be inside the Q and the assets that sit outside in the T, primarily to limit the amount of taxes we pay and certainly at the same time meet the REIT requirements.

What I would like to leave you with, at least for 2015, is right now make the assumption at least for next quarter that we are going to hold things stable. As we look forward, as you think a little bit about the assets that outside of the Q, so you have Canada, Australia, Singapore, and Hong Kong, which are the big four, that's going to give us the flexibility to change, if you will, the dynamics of what that dividend will be. In addition, though, to effectively the growth.

It's fair to say that a lot of the assets, particularly Europe, which most of Europe sits inside the Q, that's going to continue to grow. And as we said, on the currency adjusted basis, it grew 19% this quarter over the same quarter last year. And all of last year grew at 21% over the prior year.

So, we are very confident and comfortable that we think that there's going to be good, if you will, growth in the Q. So that allows us to continue to manage, if you will, the dividend on a go-forward basis.

As it relates to balance sheet, you're absolutely right. We sort of anticipated that this question might be forthcoming. Part of the reason I put in the disclosure that a good portion of the cash that sits on the balance sheet, the $1.1 billion, just of what we see today, a good portion of that is going to get fully consumed. And that's effectively -- we consume, for all intents and purposes, that reflects one turn, if you will, of net leverage.

From our perspective, if we consume that capital, which -- or cash, which we intend to, our leverage is going to get into a much more -- it will get within the guidance range that we have shared with you. Last piece I would tell you, to the extent we always -- it's fair to say, we always think of highest and best use of our capital, and right now, given the success that we are seeing in the business, if anything, you're going to see more of a bias towards continuing to invest in our future, which means investing more on the capital expenditure side of the equation, and less about maybe some of the other alternatives we could use with the cash.

Great. Thanks, Keith.

Michael Rollins from Citi.

Just two, if I could. One follow-up and an additional question. When you're talking about, I think, the utilization of the stabilized assets and the opportunity to increase utilization on the expansion asset, where do you see the long-term utilization for stabilized assets? What's the mature level that you think, on average, each asset could get to?

Secondly, if you could talk a little bit more, at the beginning of the call, I think, Steve, you mentioned that part of the revenue growth in the quarter was based on some favorable pricing. I'm curious if you could go into a little bit more depth as to where you saw the pricing, and maybe what was different about this quarter, relative to the last few quarters, in terms of the pricing commentary? Thank you.

Let me take the first one, and then I will pass it to Steve and Charles for the second one. As it relates to stabilized assets, right now, as I said we're at 84% utilized.

I think for all intents and purposes, we would target between -- we think 90% or greater, and realistically somewhere between 90% and 95% is a realistic assumption that we should be able to drive our utilization level to. I think that's an area of comfort, Michael, that over a period of time, recognizing some of these assets were very selective in how we fill them up.

And what I mean by that, if it's a network dense asset and we don't have a lot of incremental capacity, we are willing to let that asset sit there for a period of time looking for the right customer with the right application to go into that asset. Once we get there, it's reasonable to assume your 90% plus utilized.

On the revenue growth and favorable pricing, Mike, I would just give you a little color and maybe Keith and Charles might have something to add. I mentioned in my comments in the beginning that yield across all regions continues to be strong.

Our global yield was up $40, or 2% quarter on quarter on a constant currency basis. So that was roughly 0.5% in the Americas, 2% in Asia and Europe. Pretty strong pricing in the regions, primarily because of the focus that our sales and marketing teams have on targeting specific workloads, and focusing our value propositions around that type of application workload.

Historically, as we've always mentioned, blended in with that, where appropriate, we are pursuing larger magnetic footprints that are helping the overall ecosystem value, and you should expect us to continue to compete for those. That will advance our cloud agenda. Generally speaking, we are doing a very good job of qualifying and bringing the right types of workloads into the right locations, and that's served us very well from a churn perspective, and that's served us very well from an MRR per cab, and we expect it to remain firm, going forward.

Thanks.

Jonathan Atkin from RBC.

I wondered if you could comment on M&A? Just give us some (inaudible) views around [status, what sort of] outlook can [you tell us] (inaudible) and then, thinking about the European [tele-city interaction] situation, any reaction [facing] your customers, any commercial changes that you've seen? -- (Technical Difficulties)

Jonathan, we did not hear all of that. I think I have the gist of your question, which was to a comment on M&A and the commentary we see around the world. Is that the gist of it?

Yes, M&A, and then specifically whether your European business has seeing any impact from the pending deal going on in Europe between Interaction and Telecity.

Sure. I'll start, and maybe Charles, if you have anything to add, please jump in here.

Fair to say, guys, that we have our eyes on the same consolidation activity that you are all reading about in our industry. We're still focused, as I mentioned last quarter, on our inorganic strategy to extend our current leadership position around fiber network density. Secondly, around scaling our platform, and then third around enhancing our interconnection position.

So, we are always evaluating options to accomplish those three objectives, and we will continue to do that. If there was a transaction that might compliment that strategy, and create significant shareholder value, you should feel confident that we'll consider it.

In terms of our Europe business, we continue to be very pleased with what's going on over there, and our results off last quarter and certainly this quarter. As we mentioned in previous calls, our business in Europe grew 21% last year, and on a first quarter year on year basis, grew 19% in this first quarter. So, our European business, because it's connected to a global platform is growing faster than the broader EU market.

As you also heard, we have significant momentum on interconnection in Europe. All in all, yes, we're watching this stuff, and our business in Europe, we are very happy with.

On the cloud growth, I'm interested, is that becoming more indexed toward broad mobile platforms? Or is that more diversified or becoming more diversified to smaller cloud operations?

I'll take that, Steve. I think it's a combination of those things. We certainly see strong momentum with, I would say, the top six to eight cloud providers that I think you would immediately think of. They are -- most of them are deploying now with us in anywhere from 8 to 16 plus markets around the world. And, we're seeing significant activity, not only in their deployments, but more excitingly, cross-connect activity and cloud exchange activity driving interconnection back to those clouds from within our facilities, which is really the essence of the sort of -- building the cloud ecosystem.

Then we also are really seeing good new logo capture and growth with existing new logos, and a bit more of the longer tail around cloud service providers in a variety of forms. I think it's both, and I think both are really critically important. Because, I think that what we're seeing is that those big magnets, like an Azure or an AWS, are often the catalyst for somebody to say, yes, I need high-bandwidth secure connectivity into these cloud providers as I begin to move workloads into the cloud.

But then, as they evolve their hybrid cloud, they really want access to a much broader range of cloud services, as quickly and cost-effectively as possible, and the ability to seamlessly and efficiently move workloads across various cloud providers. Both seeing good momentum and both critical to the long-term health of the ecosystem.

Thank you very much.

We have our last question from the line of Tim Horan, Oppenheimer.

Do you expect the average size of the customer to keep getting -- start getting smaller at this point, as you move more to the enterprise market? It seems like you've kind of focused on the major cloud providers the last couple of years, building up the cloud exchanges.

Correct me if I'm wrong, but I'm assuming enterprises are now starting to use you guys to connect to these exchanges. Have we hit the tipping point with enterprises? Thanks.

I'll start, Steve, if you or Keith want to jump in. I would say, yes, I think that the business will trend that way over time.

I wouldn't say we've reached a tipping point, per se, in that I think we are in the very early innings of enterprise adoption of hybrid cloud. Again, we are seeing good momentum. Our lighthouse accounts are showing very strong land-and-expand type performance, with some of our key customers starting with two to three locations and rapidly expanding in their performance hub implementations to 6, 10, even 20 sites.

What I think we will see, is an extremely favorable trend for us, which is average deal size for -- or average implementation size perhaps trending somewhat down, although balanced in part by the fact that we are going to continue to selectively pursue strategic large footprint type activity where it's really accretive to the strategy. But, I think we will see average implementation size trend down as we really gain some traction in the enterprise, both through our direct force and our channel.

Interestingly, I think that we'll be able to grow those customers over time, and so see the average billing volume per customer continue to be strong. I do think we'll see that trend. I think it's a very favorable trend for -- potentially for our yield, over time.

But, I think it's still very early days.

Thank you.

We still have a next question coming from Mike McCormack from Jefferies.

Keith, just a clarification on some of the cost being brought into Q2, which I'm assuming are in the guide. But, the utilities, the discretionary spend and the merit increases, I assume that's all part of the guidance? The [four three and eight] million?

Secondly on the interest expense decrease on revised capital interest, can you give us some more clarity on that?

Mike, you are dead on. Just as we look to Q2, not only do we have the merit increases that took effect in March, we see the cost associated with that moving into Q2 and beyond, we have all the new headcount, all of the new hires. Then, we have a higher utility line coming in Q2, as well.

As you know, typically from a seasonal perspective, our highest cost of utility comes in the second and the third quarter in the Americas region, and so we are absorbing roughly another -- if my memory serves, another $6 million to $8 million of utilities in the second quarter, relative to what we were going to spend in Q1.

Then, we are continuing to progress with our integration of the ALOG investment. We spent about $1 million in Q1 on the ALOG integration, and so we expect to spend more in Q2 also with the rollout of our eco-initiative.

All that to say is, there's some timing. Therefore, that's why you see, despite that, we see some step downs of costs that we had in Q1, will be replaced with costs that I just talked about in Q2. Then, we think that we can hold our SG&A relatively flat for the rest of the year.

As it relates, then, just to the net interest expense, my reference to the fact that there's a certain amount of interest that gets capitalized into our assets, and it was roughly a $12 million change from what we previously disclosed. Because of that, although you see an improving AFFO, the real value of the AFFO increase at this stage of the game was the improved operating performance.

$10 million was really to capitalization, and that, of course, has no meaningful -- even though our AFFO payout ratio goes down, there is no fundamental shift that really took place. Because that capitalized interest, it gets treated differently for tax purposes. So, that's the primary reason for the interest step down.

Thanks, guys.

Thank you. Are very last question coming from the line of Colby Synesael, Cowen and Company.

I just want to talk about the competitive landscape for a moment.

Seems like there's a lot going on, whether it's some of the wholesale guys trying to offer more retail products, everybody trying to offer some form of interconnection, whether it's with [Open-IX] or their own exchanges, increasing demand, it seems like, for co-location facilities in tier two markets. Even metered power to some degree, seeming to squeeze into the sub-500KW type deals. I was wondering if you could comment what, if any, impact you are seeing from some of these trends that I just mentioned?

The second thing is, as customers do start to ask for more flexibility in what they want from you, whether it's in terms of what we'd refer to as wholesale X-space, or bigger space, or perhaps even different power requirements? Is it going to require that you start to be more flexible in how you build your facilities? Could that, over time, change the cost, on a per megawatt basis, that you're investing when you new build out a facility? Thanks.

We're seeing all those things, Colby. Charles, do you want to take a crack?

I'll jump in. You guys can add color. You're right. Steve is absolutely right.

We are seeing all those things at some level, although what I would argue is that -- we've said over and over again, we're focused on getting the right applications, the right customers with the right applications into the right assets, and that really centers around this sort of ecosystem centric strategy. So, I think if we're disciplined in that strategy, I think that we see that the dynamics of some of the competitive things that you referenced have a much lesser or more marginal impact on our business.

I think that, you're right, certainly wholesalers -- some of the wholesalers are indicating a desire to offer smaller footprints and begin to dabble in the retail space, as I've said on a number of calls before. The requirements to operate a world-class at-scale retail business and the investments necessary to do that are substantial, and I think what we're finding is that customers who really need the application performance, the global reach, the mission-critical reliability for these retail type applications, are typically choosing Equinix based on the superior value delivered.

So, while I think there is probably some, as I've said, minor overlap between our businesses, in terms of workloads that could be pursued by those types of players, if we're consistent and disciplined in our strategy, I think we're seeing relatively limited impact.

You mentioned Open-IX and broader desire for people to talk about and try to offer interconnection. I think that's also true. But I think the substance that we see in the market, as compared to the hype and the PR, we see a big difference between those things, and I think we feel very confident that we have the interconnection portfolio in terms of both offers and reach that really is delivering the value to customers.

So, again, we see very limited impact, there. In fact, the momentum continues in our IX, our Internet exchange offering. We've sold more ports in the last four quarters than we did in the last several years, and really continuing to see incredible strength in that market. So, customers are kind of voting with their wallets.

To the last question about our need to, and our desire to at least be able to, in a targeted way, pursue large footprint opportunities, that we think are strategic control points, does that modify the way we think about our facilities? I would say yes, to some degree, but that a number of other factors have us constantly revisiting whether or not the design of our facilities and our ability to implement a flexible architecture in one where we can match capital spend as quickly and as closely to demand as possible, that's always an objective of the business.

So, we definitely have resources and, in fact, have increased the number of resources we've spent looking at that opportunity, and I think we will continue to evolve the offer to be as just-in-time as possible, and as flexible as possible, to meet the range of requirements that our customers are asking for.

Thanks, Charles. Colby, that was very thorough. The only thing I'd add to that -- and it's a great question, because there's a lot of activity going on. As I said in the comments in the beginning today, our strategy is working.

You see the results from the firm yield and the other metrics. Interconnection continues to grow. We feel like we're executing on all the right items. So, you should expect us to continue with more of the same.

Great. Thank you.

Thank you. That concludes our Q1 call. Thank you for joining us today.

That concludes today's conference. Thank you for participating.

You may now disconnect.