Equinix Inc (EQIX) 2017 Q2 法說會逐字稿

Good afternoon, and welcome to the Equinix second quarter earnings 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 everyone that some of the statements we'll be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed on February 27, 2017, and 10-Q filed on May 5, 2017. 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' policy not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.

In addition, we'll 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've made available on the IR page of our website a presentation designed to accompany this discussion, along with certain supplemental financial information and other data. We'd also like to remind you that we post important information about Equinix on the IR page from time to time and encourage you to check our website regularly for the most current available information.

Joining us remotely is Steve Smith, Equinix' CEO and President; and with us today are Charles Meyers, President of Strategy, Services and Innovation; and Keith Taylor, Chief Financial Officer. We'll start with prepared recorded remarks by Steve, who is joining remotely for Q&A, and then take questions from sell-side analysts. (Operator Instructions)

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

Thank you, Katrina, and good afternoon, and welcome to our second quarter earnings call. We finished the first half of 2017 with solid momentum, and our success with customers is reflected in our financial performance and ecosystem growth. We continue to grow our market share, expand our global footprint and win new accounts on both sides of our rapidly expanding cloud ecosystem.

Customers are seeing the benefit of highly interconnected IT deployments to optimize for cost, agility and performance, and the robust demand for cloud and telecom services is driving and sustaining the next wave of campus expansions.

We also closed our acquisition of Verizon's Americas data center portfolio, strengthening our global market leadership and giving us additional capacity to meet customer demand. We are seeing strong performance out of the gate for these assets as our sales force works to expand our business with existing customer relationships and are already booking new sales into the Verizon sites.

We delivered healthy bookings in the second quarter, fueled by strong growth in our network and enterprise verticals and in the European region. As depicted on Slide 3, second quarter revenues eclipsed $1 billion for the first time to $1.066 billion, up 11% over the same quarter last year on a normalized and constant currency basis. Adjusted EBITDA was $509 million for the quarter, up 10% over the same quarter last year on a normalized and constant currency basis. AFFO growth was 17% year-over-year on a normalized and constant currency basis, the result of strong operating performance.

With the Verizon acquisition, we now service 42% of the Fortune 500 and 30% of the Global 2000 and are expanding our traction with these critical lighthouse accounts. 3-region deployments continue to rise. This quarter, over 58% of our revenue came from customers deployed across all 3 regions, and 84% came from customers deployed across multiple metros, up from 83% last quarter.

Interconnection revenue grew 17% year-over-year on a normalized and constant currency basis, significantly outpacing colocation revenues and reflecting the movement towards interconnected-oriented architectures and the rapid adoption of hybrid cloud and multi-cloud as the preferred IT deployment model.

We saw a healthy pace of cross-connect adds with over 242,000 cross-connects now deployed excluding the Verizon assets. Traction with Equinix Cloud Exchange and Internet Exchange also continues as we build out Platform Equinix as the most comprehensive platform to access a variety of networks and a rapidly expanding universe of cloud providers.

In the second quarter, AWS, Microsoft Azure and Salesforce all expanded into new metros on Cloud Exchange, and we added key new providers, including Alibaba and Tencent. We now service approximately 900 Cloud Exchange customers. Enterprises of all types increasingly regard private, secure, distributed interconnection as a core design principle of IT and are leveraging our entire product portfolio.

We look forward to making some new announcements in the second half regarding our expansion of our interconnection capabilities, both in terms of enhanced reach and compelling feature functionality for our customers.

Turning now to acquisitions. Our acquisition of Verizon's 29 data centers dramatically boosts our efforts to grow in scale in the Americas, enhancing our interconnection capabilities with core strategic hubs in 15 metros. We plan to integrate and substantially invest in these assets, which will help us reduce their historical churn. In overlap markets, we're in the process of building fiber connections between new Verizon assets and existing campuses as an early step in the integration, and we'll introduce our products and services at these locations over time.

Verizon adds more than 600 net new customers to our global platform, and we allocated those accounts to the existing sales teams to begin building these relationships. We're already seeing early success in cross-selling our platform with significant positive feedback from these customers as we look to drive growth in this portfolio.

The Verizon deal also fueled expansion in 3 new cities: Bogotá, Culpeper and Houston. The new market of Bogotá, Colombia, extends our presence in this growing market, which is now -- has the most undersea cable landings in Latin America. Our entry into Houston positions us to build on our success in the energy ecosystem, a market with deep [global] requirements and a demonstrated appetite for hybrid cloud solutions. And the acquisition of the Culpeper facilities in Virginia gives us meaningful future expansion capability and enables us to accelerate our business in the federal government sector, which doubles with the Verizon acquisition.

Both the Culpeper and Miami's NAP of the Americas campus advances our name recognition, federal team size and ability to access existing federal contracts. As government agencies modernize and migrate to the cloud, Equinix offers compliance, scale and security advantages that we believe will drive continued success in this massive market.

Now let me comment on our development activity. We recently opened 3 new IBXs, expanding Equinix' total global footprint to 182 data centers across 44 markets. These new facilities add owned capacity in some of our most important and interconnection-rich campuses and expand our footprint to support the growing demand for cloud services and interconnection.

In Germany, we opened Frankfurt 6, a new IBX located on owned land next to Frankfurt 4 and tethered to our Frankfurt 5 hub, one of the most carrier-dense locations in Europe. This supports our scaling in one of Europe's leading financial centers and a hub for banking, commerce and manufacturing.

We also opened Silicon Valley 10, adding owned capacity to our network-dense San Jose campus, which serves one of the largest concentrations of high-tech companies and peering hubs in the world. SV10 is next to our SV1 and SV5 facilities, which form the core interconnection hub in South San Jose. It's the first build on 11 acres of land purchased by Equinix in 2016, with room for an additional 2,700-cabinet data center.

And we opened Amsterdam 4 adjacent to our existing AM3 facility in the Amsterdam Science Park. AM4 builds up one of the most cloud-dense locations in Europe, helping us meet the growing demand for interconnection and colocation in the Netherlands as a key launchpad for serving the continent. It also leverages the latest green technology, meeting our rigid standards for energy efficiency and helping customers reduce their carbon footprint.

Revenues from owned assets jumped to 42%, up from 35% last quarter, which includes the predominantly owned Verizon portfolio. And we continue to purchase additional land and buildings. During the quarter, we acquired our Amsterdam 5 facility for $30 million, a former Telecity lease site. We also entered into an agreement to purchase our Zurich 5 facility in 2019, which includes adjacent land for future expansion. In São Paulo, we closed on the acquisition of a 4-acre land parcel adjacent to our recently opened SP3 facility, which could support 2,400 cabinets of future expansion in this critical global market.

Now let me cover quarterly highlights from our industry verticals, and I'll start with the networks. This vertical experienced another record bookings quarter, led by international deployments, the substantial growth coming from telecom operators, wireless service providers and subsea cable operators as firms expand capacity and capabilities for digital services.

We are seeing the global network providers undergo a major refresh of their IP infrastructure to support new capacity levels and applications across their footprints. Bookings growth includes a wide variety of global carriers performing multi-metro expansions, including British Telecom, who extended coverage of their cloud edge nodes into multiple metros, as well as a leading network operator providing air-to-ground broadband services.

We also had our best bookings quarter to date as the interconnection partner for new submarine cable projects, and we see a strong pipeline for the second half. We announced our 15th subsea cable win with Eastern Light, a fiber optic cable route connecting Sweden and Finland. The Eastern Light cable combines the landing station and interconnection hub into a single solution at Equinix' Helsinki and Stockholm data centers, eliminating the need for a traditional beached cable landing station.

The financial services vertical saw multi-region growth across trading, banking and financial service provider segments. Financial services firms are broadening the use of Platform Equinix well beyond electronic trading to accelerate IT transformation across their businesses. Customer wins across insurance, retail banking and FinTech included a leading French health insurance company doing real-time risk pricing and a top 10 retail bank connecting to multiple clouds to support digital banking.

The financial services vertical also continues to innovate and grow with customers such as Cobalt, who is providing secure post-trade processing solutions with Equinix' Performance Hub in global locations.

The content and digital media vertical saw its highest bookings in 2 years, led by e-commerce and content deployments as digital transformation is also reshaping this vertical. Content and digital media companies are broadening their use cases, leveraging Platform Equinix for both service provider and enterprise use cases. Expansions include a Fortune 500 global entertainment provider deploying a next-generation gaming service; a top 10 streaming video service providing OTT delivery to support live TV services; as well as Tencent, who is expanding across Platform Equinix to support multi-cloud consumption.

The cloud and IT services vertical saw continued momentum in bookings, led by software and IT services. Our strategy is to become the home of the interconnected cloud by increasing density and coverage of Software-as-a-Service providers and making it easy for enterprises to find and consume cloud services.

We have over 2,800 cloud and IT service provider customers, which now include over 1,000 software and Software-as-a-Service providers. Expansions in the quarter feature use cases for security-as-a-service risk intelligence and managed services supporting multi-cloud. Customers leveraging these and other hybrid multi-cloud solutions include the top systems integrator Deloitte and the managed services provider T-Systems.

And turning to enterprise. This vertical remained our fastest growing, with a record number of new logos and Fortune 500 wins. We are seeing double-digit growth in many of our subsegments, including manufacturing, travel, health care and government across a variety of use cases.

For example, manufacturers are leveraging Equinix to transform network topology and localize traffic to improve performance, reduce costs and enable digital supply chains. We are currently working with a large number of global automobile manufacturers as they deploy infrastructure to support connected car initiatives. We see this trend developing into an ecosystem of information and content suppliers as new autonomous driving platforms are developed and deployed.

This quarter, manufacturing customer wins included a Fortune 500 manufacturer deploying autonomous vehicle and IoT capabilities at the edge; and Weyerhaeuser, a Fortune 350 manufacturer transforming their supply chain management to digital. We also saw a win in the health care segment with Shire, a leading pharmaceutical company connecting multiple clouds to use distributed analytics and hybrid data storage.

Our channel efforts continue to bear fruit in our pursuit of enterprise business. Partner contributions to bookings grew for the 13th sequential quarter and now account for 17%, with 2/3 of this activity from resellers. Our focused efforts on partner activation and joint offer development are driving more and more productivity. Partners are expanding our distribution and embedding Equinix into larger enterprise solution bundles. Reseller integrated solutions like Performance Hub are delivering more volume and more predictable deal flow. Enterprise new adds jumped up significantly year-over-year, with 44% of these customers coming from our indirect channels.

We are achieving our bookings targets with a growing base of smaller partner deals, building a more predictable and repeatable engine for enterprise pursuit.

So in summary, I am pleased with our business performance this quarter, and we continue to leverage the substantial benefits of our global reach and interconnected ecosystems. We remain highly confident that the Verizon transaction will create significant value for both our customers and our shareholders and create new opportunities as we build on these enterprise-rich assets.

Going forward, we remain focused on our top 3 priorities: pressing our advantage, catching the next wave and scaling our organization, all of which will enable Equinix to continue to capture the shift to the cloud and accelerate new customer wins.

As part of our alignment around these priorities, Charles Meyers has taken a new role as President of Strategy, Services and Innovation, leveraging his deep experience and knowledge of our business to lead the strategic business teams driving the company's next phase of growth. I look forward to continuing to work closely with Charles and the rest of the team to sharpen our focus on meeting the evolving and dynamic customer requirements that we face in the marketplace today.

So now let me turn the call over to Keith to cover the results for the quarter and forward-looking guidance.

Good afternoon to everyone. As Steve highlighted, we had another solid quarter of bookings production across our entire platform. Also, we had great new customer wins with the enterprise vertical being our best-performing segment. Our key operating metrics continued to reflect the health of the business, including firm MRR per cabinet across each of our operating regions, a very healthy increase in our net cabinets billing and a record number of new logos added to our platform.

Also, we're very excited about the closing of the Verizon asset acquisition, further strengthening our differentiated market position. The addition of the Verizon data center assets to our portfolio is and will continue to be accretive to our operating margins, including adjusted EBITDA. And as previously discussed, it's accretive to our AFFO per share metric on day 1, excluding acquisition and integration costs.

The productivity of the Americas sales force exceeded expectations this quarter with higher-than-planned bookings into the Verizon assets. Given this out-of-the-gate performance, we're raising our Verizon acquisition revenues to now range between $490 million and $510 million for the first 12 months post-close, continuing to take into consideration our prudent views on the need for estimated sales reserves and assumptions on forward-looking MRR churn.

Adjusted EBITDA margins are expected to approximate 60% or greater, excluding the initial acquisition and integration costs. We also want to announce our first investment into the Verizon assets with the development of capacity in the NAP of the Americas, or NOTA, in Miami, a key interconnection hub servicing customer deployments directed at Latin America.

NOTA, for those who are not aware, is a very large and highly utilized IBX of 5,500 cabinets, including this initial expansion. But more importantly, there's sufficient incremental space to add an additional 3,000 cabinets of capacity in future phases. This represents a perfect example of how we believe we can unlock incremental value from the Verizon assets.

Also, we want to fully leverage our expanded offering by connecting the Verizon assets on our platform while upselling the 600-plus net new customers on our products and services across our global footprint, all this while also working hard to reduce the level of MRR churn previously experienced in the Verizon assets.

Later this year, we plan to move forward with other expansions, including Culpeper, our largest government-focused market; Denver; Houston; São Paulo; and a larger incremental expansion in NOTA. Finally, I'd like to note that Verizon is now one of our largest customers and has helped to further diversify our revenues across customer, region and industry with this acquisition.

We've also seen good progress with Verizon as a global reseller, enabling us to leverage their substantial reach into the Global 2000 enterprises to build hybrid cloud solutions and gain quick access to our multi-cloud environment.

For integration costs, we're updating our guidance to $52 million for 2017, which includes $22 million of costs related to the Verizon asset acquisition and $30 million related to Telecity and Bit-isle. For Verizon, we're also pursuing an accelerated timeline to fully integrate these assets within a year, and the integration activities are well underway and on schedule.

As it relates to both Telecity and Bit-isle integration efforts, we expect to complete these integrations later this year and continue to be very pleased with the benefits realized over the expanded platform into the European and Japanese markets.

Now turning to the second quarter. Q2 was another strong quarter of operating performance. As depicted on Slide 4, global Q2 revenues were $1.066 billion, up 3% over the prior quarter and 11% over the same quarter last year on a normalized and constant currency basis, our 58th straight quarter of revenue growth. This includes $87 million of revenues attributed to the Verizon assets for the last 2 months of this quarter.

Q2 revenues, net of our FX hedges, included a $5.9 million positive currency benefit when compared to the Q1 average FX rates and a $1.3 million positive currency benefit when compared to our FX guidance rates due to the weakening of the U.S. dollar.

As it relates to the full year 2017 revenue guidance, we are raising our revenues to now range between $4.317 billion and $4.327 billion, a $19 million uplift, including $8 million related to improved operating performance and the remainder attributed to favorable FX rates. This guidance implies our largest-ever organic quarter-over-quarter constant currency step-up over the next 2 quarters, a reflection of our continued momentum in the business.

Our global platform continues to expand, with Asia Pacific and EMEA showing normalized and constant currency growth over the same quarter last year of 15% and 12%, respectively, while the Americas region produced steady growth of 8%. Our MRR-per-cabinet yield remains strong across all 3 regions. We added 29 net build -- 2,900 net billable cabinets and 5,100 net cross-connects in the quarter. Global Q2 adjusted EBITDA was $509 million, up 10% over the same quarter last year on a normalized and constant currency basis. Our adjusted EBITDA margin was 49% excluding integration costs or 48% on an as-reported basis, a step up over the prior quarter, largely due to Verizon and higher seasonal costs last quarter.

Adjusted EBITDA includes $50 million of combined integration costs, consistent with our expectations. As it relates to the full year adjusted EBITDA guidance, we're raising our adjusted EBITDA to now range between $2.038 billion and $2.048 billion, a $17 million increase, including $14 million related to improved operating performance and the remainder attributable to favorable FX rates.

Our Q2 adjusted EBITDA performance net of our FX hedges had a $3.1 million positive benefit when compared to the Q1 average FX rates and an $800,000 negative impact when compared to our guidance rates. Global Q2 AFFO was $360 million, up 4% over the prior quarter and 17% over the same quarter last year on a normalized and constant currency basis.

Now looking at MRR churn. Q2 global MRR churn excluding Verizon was 2.4%, in line with our expectations. Including Verizon, we continue to expect MRR churn to average 2% to 2.5% per quarter for the rest of the year.

Now I'd like to provide a few highlights on regions for the quarter, whose full results are covered on Slides 5 through 7. The Americas region had a solid bookings quarter with ongoing strong outbound production to the other 2 regions as well as solid momentum into the Verizon assets. EMEA delivered record bookings with particular strength in our U.K. and German markets as well as strong cloud bookings as cloud service providers continue to add edge nodes across many of our metros.

EMEA utilization remained the highest of the 3 regions with half of the company's current expansions going into European markets in response to this demand. Asia Pacific revenues outpaced worldwide growth with strong momentum driven by their cloud and content verticals.

Interconnection revenue growth continued to outpace overall growth of the business. The Americas, Asia Pacific and EMEA interconnection revenues were 23%, 13%, and 8%, respectively, of recurring revenues or 16% on a global basis.

Now looking to the balance sheet. Please refer to Slide 8. Unrestricted cash and investments decreased to $1.1 billion, largely due to the $3.6 billion funding for the Verizon transaction in the quarter. Our net debt leverage ratio net of unrestricted cash was 4.1x our Q2 annualized adjusted EBITDA.

With the full benefit of Verizon and the favorable cash flow attributes of our business model, we expect to return to our target leverage ratio of 3x to 4x net debt to adjusted EBITDA in the short term.

Also today, we announced a planned $750 million at-the-market ATM program as part of our broader balance sheet capital strategy. This program will put another efficient and highly discretionary tool into our capital raising arsenal and should help the company progress its efforts towards investment-grade rating, a goal that we believe will be highly valuable to both our debt and our equity investors.

At this time, we currently don't have any plans to sell shares under our approved program, largely due to our current cash balances, yet we felt it was important to initiate this program to create maximum flexibility with our capital sources, given the momentum in our business and the speed at which the market is evolving. Also, we intend to pursue repricing of our term loan B debt over the coming weeks.

Now switching to AFFO and dividends on Slides 9 and 10. For 2017, we expect our as-reported AFFO to be between $1.382 billion and $1.392 billion, a 29% year-over-year increase. The expected 2017 net FFO contribution from the Verizon asset acquisition is $84 million, which includes incremental Verizon adjusted EBITDA less interest expense, recurring CapEx and integration costs. On a normalized and constant currency basis, AFFO is expected to grow greater than 13% year-over-year, demonstrating the continued strength of our operating model.

On an as-reported AFFO per share basis, we now expect to deliver $17.92, which includes $52 million of integration costs. We've assumed a weighted average 77.4 million common shares outstanding on a fully diluted basis. Excluding integration costs, AFFO per share is expected to be $18.59, a 1.4% increase over the prior guidance, continuing to highlight the day 1 accretive impact of the Verizon transaction.

Turning to dividends, today we announced our Q3 dividend of $2 a share. For 2017, we expect to pay out total cash dividends of approximately $612 million, a 24% increase over the prior year and a payout ratio of approximately 44%.

Now looking at capital expenditures. Please refer to Slide 11. For the quarter, capital expenditures were $349 million, including recurring CapEx of $38 million, in line with our expectations. We opened 8 new buildings or phases, adding capacity in core markets including Amsterdam, Frankfurt, Hong Kong, Paris, San Jose and Singapore. We have 18 expansion projects underway as we continue to expand our global platform.

For 2017, capital expenditures are now expected to range between $1.25 billion and $1.3 billion, which includes an incremental $100 million attributed to the Verizon assets. Our capital investments are delivering healthy growth and strong returns, as shown on Slide 12. Revenues from our 99 stabilized IBXs grew 6% year-over-year, largely driven by increasing cross-connects and power density. These stabilized assets are generating a 30% cash-on-cash return on the gross PP&E invested, and the utilization rate increased to 83%.

And finally, please refer to Slides 13 through 17 for our guidance bridges and the updated Q3 and full year 2017 guidance.

In closing, we had a solid performance in the first half of the year. We continued to strengthen our role as the interconnection market leader, adding new cloud and network density, thereby creating an even richer ecosystem for our customers and our partners. Our growth and scale are driving increased adjusted EBITDA and AFFO; hence, cash flow. And we'll continue to focus on creating sustainable shareholder value from our platform.

So I'm going to stop here and we're going to open up for questions. Ash?

(Operator Instructions) And our first question comes from Phil Cusick from JPMorgan

This is Richard for Phil. Wanted to get a little more color on the Verizon data center sales. Are you selling -- or are the sales being made to existing space or the space being developed? And then can you give us a sense, you said you're expanding Culpeper and another NOTA expansion later on. Is that going to impact 2017 CapEx or is that more spending in 2018?

Richard, this is Charles. So yes, the existing sales are into existing capacity not into -- because none of the new capacity expansions have actually been completed yet. So those are into existing capacity that was there at the time of the transaction closing. But to existing -- but that's probably a combination of net new customers as well as existing customers into those facilities. But what really gives us a lot of encouragement is the fact that the sales team so quickly sort of came to grips with the assets and showed the ability to sell into those so quickly. So that's very encouraging.

As to the other expansions that we mentioned in the script, whether that be Denver, Houston, São Paulo, et cetera, any of that, that happens in '17 would be very, very small. Those are typically going to be further out. And we'll give you more updates as those come into focus.

Our next question comes from Jeffrey Kvaal from Nomura Instinet.

I think partially as a result of my newness with the story, I have a question on your debt levels. Would you gentlemen mind helping us understand when you might start thinking about what your next suite of acquisitions might be? That would be helpful. Then as a clarification around that, I would love to know what kind of dilution to the share count you would be willing to tolerate with the ATM program.

So we're going to tag team this. Steve will respond a little bit about the M&A and then I'll double back with the ATM program and then comment on the debt. So Steve, you want to take the first part on M&A?

Sure. Sure, I'm happy to, Keith. Jeffrey, the M&A, since you're new to the story, you may not realize that over the 18-plus years we've actually done about 18 acquisitions in our history, most recently, of course, the Verizon, which you heard some color on today. But our main driver for acquisition activity usually follows a couple of big things. It's extending our networking cloud platform, that's a top priority for us; and secondly, reaching new markets. And normally, big sophisticated customers will provide us opportunity, for example, big cloud providers, to look at emerging markets.

Our strategy historically has been focused on extending this thing we refer to as Platform Equinix. And there's 3 dimensions that normally are filters that we look at very closely: entering new markets, as I just said; enhancing our interconnection is a second filter that we look very closely at. So if we can deepen our interconnection like we did with the Verizon NOTA asset that Keith just talked about, that's a big factor for an acquisition filter for us. And then thirdly, if we can deepen and widen the cloud ecosystem that you heard so much about in the script. That's a big factor.

New markets probably would include deeper into Southeast Asia. South Korea has been and will continue to be attractive for us. India is a big market we're not in today. We're continuing to study that market. And we start -- we're starting to see the big cloud providers going to South Africa and deeper into Latin America. So those are all of interest.

So Jeffrey, let me touch on the second part of your question, which was really about the ATM and how we choose to fund our acquisitions. From our perspective, it's about driving shareholder value, the highest and best use of our capital. And so when we think about that, we're comfortable using debt, but equally at times we've used equity, particularly in the Verizon case, where we bought assets yet did a very highly accretive transaction.

So having said all that, we like to find balance in our capital structure, something we think is incredibly important, particularly now as we drive more and more towards an investment-grade-rated company. We think it can create an immense incremental value to our shareholders if we can get to investment grade, because we have $9 billion in sort of gross debt, if you will, today. And so we're going to continue to find that balance because we think it's important.

But having said that, when we think about the ATM program, it's just another tool that the majority of RMZ -- sorry, REIT companies on the RMZ, it's a tool that they deploy. And as I said in my prepared remarks, there's no intention to draw on it over the short term, but it's a tool that we wanted to get out there because the market is shifting very, very rapidly and we want to be in a position that we have that flexibility.

Having said that, the ATM program, if we drew down all $750 million under sort of today's stock price, it would roughly 2% dilution. But I say that knowing that we have $1 billion, $1.1 billion of cash on our balance sheet and we have an untapped revolving line of credit. And so again, we'll focus our capital, our capital strategies on -- as Charles alluded, to continue to invest across our platform, certainly invest in some of the Verizon assets and the expansions there, buy some of our assets, buy incremental land, then we'll look at M&A. And all of that, when we look at it all together, we're going to continue to sort of maintain that balance in the capital structure and so give ourselves the great flexibility that we've always so highly sought after.

The next question comes from Simon Flannery from Morgan Stanley.

Charles, I know the announcement of your new role is only a couple of weeks old, but driving the company's next phase of growth, can you just elaborate a little bit on how you're thinking about that, and what should we be looking for as you execute on that?

Sure. Yes, I mean, I think, as we've talked about in a couple of the comments here, there's probably never been a more dynamic time in our company and in our industry. And we're seeing this digital transformation take hold and delivering exceptional benefits to customers, and they're really at a rapid pace committing to hybrid cloud and multi-cloud as their preferred IT deployment model. And we're seeing that in terms of the momentum in our core business.

But at the same time, there's a bunch of emerging technologies and commercial trends and customer expectations, technologies like IoT, like SDN and NFV, AI, virtual and augmented reality, blockchain, et cetera, and those things are really, as we're looking at them and talking to our customers on a regular basis, those things are really poised to shift the power structure in a number of industries. And I think that along the way, they're probably going to call into question the survival of certain key incumbents and they're going to give rise to really a flood of new entrants looking to capture a piece of that gold rush.

And so what we're seeing is the dynamics are changing the needs and expectations of what customers want from Equinix. And so we need to be prepared to respond to that, and not only respond to it but anticipate those difference -- those changing needs and have them show up not only in our product roadmap but in the fabric of our business model and the way we serve our customers.

So we decided to make a shift here where we would align our resources to both -- to better simultaneously execute on the core business opportunity in front of us as well as respond to the evolution of the business that we think is going on in a very dynamic world.

So still early days. We -- I just had the team, sort of the new team together in an all-hands for the first time today. We're going to continue to look at sort of what I would refer to as theme-based innovation, looking at some of those technology trends that are impacting our business and looking at how they integrate into our service portfolio.

We're ahead of the game on some of these things. I mean, we talk about things like SDN where we are -- we were a very early adopter of that. It's our -- our ECX platform is based on that. And so we're continuing to incorporate those things into our product portfolio. And now with our fully integrated product team sort of living inside of this new SSI organization we can -- we think we can move with higher velocity and better responsiveness to our customers.

So I'm excited about it. We'll continue to update you as we make further progress on that. But I think it's something that we felt was important as the market continues to evolve.

Our next question comes from Amir Rozwadowski from Barclays.

Two, if I may. Keith, in thinking about sort of the EBITDA expansion capabilities, particularly given as you integrate Verizon, how should we think about sort of the potential trajectory to get to that longer-term target of 50%?

Amir, I mean, as you know, exclusive of the integration costs this quarter, we're at 49%. So we're somewhat in sniffing distance of the 50% target.

Having said that, as you and all the listeners on the phone are aware, the Verizon transaction set of assets will deliver 60%-plus margins, EBITDA margins for us. So as we continue to scale it, it's going to be a highly accretive model.

But also, consistent with what Charles and Steve had talked about, we're also looking for ways to continue to provide greater opportunity and efficiency on our existing model, or the organic business. So between the combination of what we're doing and scaling off of that and having then -- augmenting off of the Verizon acquisition, I think you're going to see us get to that level of EBITDA probably sooner than you expected, without giving you a time frame.

And thinking about that, then, Keith, I mean, is there a new sort of level that we can expect going forward, given a lot of the elements that you had just mentioned, as sort of a longer-term target?

It's probably a little early to give you a new level of -- a new target. But suffice it to say, we alluded to just one asset, which is NAP of the Americas, and said we can add 3,000 incremental cabinets to that site alone. If you just even use simple math and said $2,000 a cabinet over 3,000 cabinets, that's $72 million of incremental revenue a year just on that one asset, driving a tremendous amount of margin to the bottom line. That's just one of our investment decisions, not to mention, as Charles alluded to, Culpeper, and other markets that we're certainly interested in that Verizon had a presence.

So from all -- from our perspective, we're just going to continue to execute. We're going to continue to invest across our platform. In our prepared remarks, we talk a lot about the European theater in addition to not only the Verizon asset to give you a sense of the scale and magnitude of our business and how much we're expanding across our portfolio. And it ties in nicely to what Charles is going to focus on, making sure that we have our portfolio in a position to present to the customers as the demand continues to scale across our global platform. It's not really just about the Americas.

So I'm excited about what we can do. I think we can use a lot of the incremental cash flow not only to continue to deliver margin, but we can also put it back into the business to enhance our scale.

Yes, and Keith, if I could just add, I think that the -- in the context of my new role in answer there to Simon, we're -- we continue to see the emergence of a set of opportunities. And our role continues. As we've said, we're going to make what we think is a prudent decision as to, if there's EBITDA expansion that comes from increased scale and productivity of the business, then our role is to assess which -- how much of that we let drop through and where we can use it to create long-term shareholder value. And we think there are a ton of opportunities in the market to expand our addressable market, capture the -- some of the -- for example, a very large incremental addressable market opportunity in the enterprise.

But that's going to require some evolution of our capabilities and some investments along the way. And we've been making those investments, things like expanding our solution architect portfolio -- our team globally, things like expanding our development capability so we can make ECX the leading cloud connectivity platform, and looking at some of these incremental technology areas that we think represent transformational opportunities.

So that's -- again, that's -- our view is we've got to continue to look at those and make a balanced call there. And I think that's why we probably wouldn't want to anchor you on any particular future target.

Our next question comes from Paul Morgan from Canaccord.

Keith, you just mentioned when you were talking about the ATM that the market is shifting very rapidly and that was kind of one of the considerations when you were putting that in place. Is there any extra kind of color you can probably -- like what types of shifts are leading you to kind of go down this route? I mean, are you talking about different types of acquisition opportunities or a ramp-up in some of your expansions or just different types of investments?

Yes, Paul, it's really a combination of everything that Charles has just alluded to in his prior comments. The market is evolving, and as we think about our opportunities, there's the aspect that is there incremental M&A. As you can appreciate in the marketplace, there's a tremendous amount of activity taking place. And so we always want to be poised to look at those transactions that make sense for us that create incremental shareholder value. And so we absolutely like the deals, certainly the Telecities and the Verizons and many of the others. Those were highly accretive deals. We want to continue to look at those opportunities where we can expand our platform and create incremental value for the shareholder.

But we also want to buy more of our assets. We want to buy more land. We want to develop. We'll probably -- we've got more expansion in the hopper than we historically have. And so when you look at not only what we're doing today but what we think we need to do tomorrow, we want to have that flexibility. And it really is about going to market with knowing that we have debt capacity, we've got untapped cash, we've got an untapped revolver. We can -- we still have debt capacity in our balance sheet. We have now this ATM program. It creates this tremendous flexibility as an organization that we can move with great speed and win on these opportunities that we're striving to gain.

And so from our perspective, it's a tool. And it's just a tool like anybody else. The other part, though, that we spend a lot of energy talking about is the fact that I think over the last 2 large deals, coming to market with a very balanced view on debt versus equity and finding that balance bodes well, I think, for ultimately improving our credit rating. And when you look at what the incremental -- given our debt load that we have today and what we think we can reduce our overall debt cost by as our debt matures is a substantial benefit to our shareholders. And so we didn't lose sight of that as well. We see that as an opportunity, or we see the ATM as an opportunity to help us on that path.

Again, we're going to be working real hard post this call to continue to get in front of our rating agencies and make sure that they know what we're doing so that we can get, hopefully, a leg up towards a positive rating at some point in the not-too-distant future.

Hey, Keith, let me add -- or Charles, let me add here, I'm sorry I'm remote, guys, but I think to Keith's point and Charles' comments earlier guys, Paul and team, we shouldn't underestimate just the concept of catching the next wave. And as Charles -- I mean, this decision to move our Chief Operating Officer to lead, creating more options for our future is at the heart of the question you're asking here, Paul, about where is the market shifting. And so driving the next generation of interconnection. The next wave of cloud architecture is shifting. This concept of edge computing is moving. All these things getting connected to the Internet are going to cause more opportunity for Equinix. Everything is getting redefined by software: storage, security, networking.

So all of these activities, Charles is going to have teams of people focused on these, already has people, and we're going to call -- we're going to combine them into one organization now to make sure that we're just looking further out and faster to create opportunity for our customers. The #1 thing our customers are asking us for is to help them with this digital transformation that's taking place around the world. It's at the top of the list. And so that's at the heart of the market shift.

Our next question comes from Robert Gutman from Guggenheim Securities.

So I was hoping you could tell us a little bit more about the balance of cloud versus enterprise demand in the U.S. versus the other regions of the world, similarities and differences. And specifically, if there are differences in how that -- in terms of how the demand is coming in, through which channels.

And secondly, you talked a little bit about the submarine cable landings, and I was wondering if you can tell us a little bit about how one of those cable landing wins could impact traffic in a specific facility.

Sure. Robert, this is Charles. Let me take a crack at that and then Steve or Keith can add on as they wish. I would say that, as we've seen for the last couple of years, cloud and enterprise have been the 2 segments that have overindexed most consistently relative to their installed base. So they're growing in terms of share of our overall business. Cloud is fueled in part by buildout from the cloud service providers, from the hyperscalers on down. We're seeing a lot of success with the really large cloud players in terms of building out both their network nodes as well as their direct access nodes inside of Equinix facilities. We continue to lead in terms of overall share of those positions with the cloud players.

EMEA, in particular, has seen some strength over the last 1.5 years or so as sort of the wave of expansion has happened across EMEA in cloud. And so that's probably been -- cloud has really led the pace there in EMEA. But also good strong performance as the cloud providers move from maybe their initial entry points in Asia, which would be typically either Singapore, Hong Kong or Tokyo, into perhaps secondary markets like Sydney or Melbourne or Osaka, et cetera.

So we're seeing strength in both those markets, a little less -- the cloud demand in the U.S. is probably -- we had saw an initial thrust a few years ago as the cloud built out in the U.S. We're probably seeing more -- while we still see success with the larger players, are seeing a longer tail of cloud service providers, SaaS providers sort of build out with us.

And then I would say, from an enterprise perspective, U.S. is probably leading there in terms of more earlier adoption. There are a couple other markets around the world where we see really strong enterprise adoption of multi-cloud. Australia jumps to mind. And so it's -- it varies across the businesses. But -- and the regions. But we are seeing, definitely seeing strength in this really rapid uptick of hybrid cloud and multi-cloud as the preferred IT deployment model.

In terms of channel, definitely seeing an increased prominence of our indirect channel and partner channel as a way to capture those customers. They have a lot of those existing relationships. We've seen real strength in that in Asia, and EMEA is sort of catching up there and seeing good performance. And we, of course, have a pretty well-developed channel in the U.S. already. So that's a little bit of color on sort of the cloud and enterprise opportunity across the regions.

As for the submarine cables, yes, I don't know that I could quantify it precisely for you. But absolutely one of the key drivers of those -- of bringing those submarine cables in is the fact that they have a ton of traffic that's going to come in that needs to be efficiently distributed from those points. And so as an aggregation point, traffic tends to fuel our business. And so the ability to get these really big traffic aggregator points into our facilities and then drop them off into the 1,500 carriers that are used as well as the cloud providers, which are actually an increasingly prominent player in the submarine market, is something we think is important and will absolutely drive continued ecosystem development in the markets where those are landing.

Our next question comes from Jonathan Atkin from RBC Capital Markets.

So I guess kind of following up with Steve and perhaps Charles, as you kind of think about helping customers navigate the digital transformation roadmap and your own product roadmap, to what extent might it make sense to increase your ability to offer wholesale or larger-footprint retail? That's my first question.

And then secondly, a little bit more specific on Verizon. You talked about some ways to optimize the return of the 3,000 additional cabinets in Miami and in the Culpeper expansion. I'm interested in whether that Culpeper demand that you see is coming potentially from new customers at that site or existing customers that are looking to expand.

And then as you look at the rest of that Verizon portfolio, is there any significant opportunity in the case of below-market contracts or larger contracts where you could look to optimize your returns?

Why don't I take the first crack, and Steve, jump in here anywhere you want.

Sure. You bet.

Absolutely the wholesale -- I wouldn't even call it wholesale. What I would tell you is that we have a set of customers that have larger footprint requirements. So they -- I guess they do fit more into the traditional wholesale umbrella, but they really are -- they have requirements that really go beyond that. They're looking for something that is very responsive to their need to scale their cloud services and to reach the customers in the markets they want with flexibility and with predictability. And so they -- we have definitely seen a larger pipeline of those types of customers that are saying, "Hey, we would like you to entertain working with us on those types of opportunities."

And as you know, we've been extremely selective about that in the past and have been very protective of the return profile of our assets. And so we have tended not to play. We certainly look at some that are strategic and have had good success and good win rates on those. But as we're seeing them -- what the cloud providers need changed, as the footprints, even of their Direct Connect nodes, et cetera, are evolving and as the architecture -- their overall architectures evolve, we feel an increased need to work more aggressively with them.

So it is something that we are actively looking at within the context of the new SSI organization, is to say, hey, are there a very select set of customers and requirements on the sort of hyperscale side that we view as strategic that we would like to increase our appetite for. And then what are the ways that we can do that, both from a design and engineering and deployment methodology as well as how we would finance those transactions.

So that is something that we are going to be looking at. We've got not a lot more to report than that right now, other than that is something that we think is important. And we'll update you guys as we get further along in that process.

Relative to Culpeper and other things, I think it's probably a mix of both new customers as well as existing that we think we could -- that could sop up the additional capacity when we build that out. But definitely we think there's a lot of new customers, just because we bring our whole incremental customer base to the table now who may be able to benefit from that capacity. And not necessarily just in Culpeper, but of course, in all of the other incremental Verizon markets that -- where we would have capacity.

And then the last question relative to pricing. I don't think there was a substantive gap at the pricing level, be it either at interconnection or in the broader space in power pricing, that would indicate some meaningful opportunity for normalization there. But we'll continue to look at whether those deals are priced in line with what we think is appropriate for the market and we'd make those adjustments. But we haven't seen a meaningful gap.

And then if you could give a little bit of a preview on the new cross-connect products that I think you alluded to in the script, perhaps just a bit more detail.

I'm not sure that we did. I think we made reference to the fact that we were going to be introducing -- we would be announcing sort of additional benefits in terms of reach and feature function on ECX. And so that's something that we are -- that we're looking at in terms of how you would expand the reach, your ability to access ECX destinations, if you will, more easily across the Equinix footprint. So that's what we're referring to. And you'll hear more about that in a more formal launch coming up in the coming weeks.

Jonathan, this is Steve. Let me add 1 or 2 more things to Charles' points I think are important. Verizon, in particular the federal business, which I think most people on the call realize we're still in the process of clearing all the federal classified business, which is currently managed through TSA by Verizon. Once we get our clearances completed and all the appropriate novations, then we'll move forward with that. We are going to invest in a deeper, bigger federal team. So Karl Strohmeyer, who leads our Americas businesses, is full speed ahead with that today. We pick up, obviously, this Verizon federal business, which will be -- would basically double our business. And so it will give us a substantial footprint into the government segment that we haven't had in the past. And we're pretty excited about that. And we're moving as fast as we can with the clearances and the positioning for that.

And then as -- just one other piece. On the wholesale question that you had, which is not a phrase that we use a lot around Equinix, but Charles is going to have accountability for really watching that next wave of cloud with this new team. And as he stated, we will start to play in a different way as we move to the next several quarters and years as the next wave of cloud unfolds and we look at where these aggregation points and the edge goes, et cetera, et cetera.

So you'll probably see Equinix take a more active role in positioning ourselves for extending the interconnection footprint to these -- where these aggregation points matter and how they evolve, how the edge moves and how these hyperscalers deploy this next wave of computing. So I would tell you to stay tuned. We're going to be very active.

Our next question comes from Colby Synesael from Cowen and Company.

I guess I have 2 boring questions on guidance based on all the other questions that have been out here. So the first one is on the Verizon portfolio. If I take the second quarter, $87 million, and just make that a full quarter, it's about $130 million. And if I assume that you do $130 million in both the third and fourth quarter, that would imply that you'd be about $347 million for 2017, yet you're guiding to $330 million to $340 million. So I'm wondering why you're assuming the Verizon business slows in the third and fourth quarter, particularly after you mentioned comments that the bookings have been strong out of the gate.

And then on AFFO, if I again look at your guidance, it implies you're assuming you'll do about $360 million, $361 million, if I assume it's flat in both the third and fourth quarter, which is in line with what you did in the second quarter. So again, wondering why that's not expected to grow or even potentially go down in the third quarter before coming back up in the fourth quarter?

Colby, so let me take the first one. As I said in my prepared remarks, we've taken a very prudent view as it relates to the Verizon assets, having only owned -- or billed the customers for the first 2 months of -- since the transaction closed. We're taking a prudent view to make sure that we continue to have appropriate sales reserves, even more so, continue to make an assumption, and it is an underlying assumption, that we will continue to see churn in the Verizon business, notwithstanding the fact that we had some nice momentum in our bookings in the second quarter.

And so one, it's just about being prudent. Again, we don't have the history. The customers are receiving invoices from Equinix for the very first time, broken out in our format. And we're taking a point of view this is a range and we're going to guide you to that.

And what I would just say is, as it relates to -- look, if we don't need the reserves, then we're going to be moving towards the top end of the range. To the extent that we need the reserves, then we're going to keep you inside the range. But it just gives us great comfort that we've got a prudent view on what we think the numbers could be. Again, our focus is not going to -- is going to be to not let that happen, but as you know, again, we don't have a history with the Verizon customers.

As it relates to AFFO, again, it's just a lot of -- it's timing, timing of expenses, not only as it relates to the organic business, but more specifically the Verizon business. And if you recall, when we bought the asset, the asset, it was an asset purchase and, for all intents and purposes, we have some transition services agreement with Verizon, but there is an underlying assumption that we make a heavy investment in our -- in the cost model through Q3 and Q4. And that's having an impact on the AFFO and, hence, EBITDA.

Again, there's an assumption that we're going to hire a lot more heads and we're going to do a lot more R&M, 2 things that were not particularly prevalent inside the Verizon sort of asset portfolio prior to our acquisition.

So those are the reasons. So again, it's -- stay tuned to third quarter. We're excited about what we're doing. And again, if we can get our hands around it, I'm optimistic that it's just a prudent reserve that's in place.

Our final question comes from Mike McCormack from Jefferies.

Steve, maybe just to elaborate a bit on Keith mentioning sort of the next wave and what might be down the road, the various things that you're seeing there, and whether or not there might be, and we talked about SDN, but potentially like an IoT type opportunity or maybe something in the wireless side with the 5G rollouts. Is there anything that you guys can benefit from with those things?

Well, as Charles said, all those areas, we are customer and market sensing, have been for a couple -- well, a few years now, and we're going to collect those organizations under this new organization with Charles. And yes, all those things you mentioned are happening. And so we've lived with 6 or 7 years of a wave, we call it, kind of the first wave of cloud, and we think there's another wave coming. Obviously, the big hyperscalers and the cloud providers have learned from their first wave of deployments. And so how that architecture is going to look, the next wave is going to be different. They're going to start going to emerging countries. They've learned from the first several years of deployment on how to install their availability zones and their network nodes and their access points and their private connections. And so there's a shift in the architecture, and the edge of their deployments are shifting.

And so we're watching all that. We're very -- we're working very closely with all of them, as you guys know. And yes, we want to position to move quickly as they continue to deploy. And we think we're still very, very early. And I think the other side of that will be these IoT edge control points, if you will. They're going to start to form, all these things that are going to be connected to the cloud and are going to require storage, networking and server infrastructure all over the world, to drive connected cars, connected tractors, sensors, cameras, all these things that are going to get connected to the cloud and to the Internet.

So all of those things. Charles has all the teams that are watching all that. And we're market and customer sensing those as fast as we can to make sure that we can provide products and services for the next generation of all that stuff. And at the heart of that is interconnection and ecosystems.

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

That concludes today's conference. Thank you for your participation. You may disconnect at this time.