Equinix Inc (EQIX) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Equinix first 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 identify in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed on February 26, 2018. 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 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 IR page at www.equinix.com.

We have 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 would 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.

With us today are Peter Van Camp, Equinix' Interim CEO and President; Keith Taylor, Chief Financial Officer; and Charles Meyers, President of Strategy, Services and Innovation. Following our prepared remarks, we'll be taking questions from sell-side analysts. (Operator Instructions)

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

Thank you, Katrina. Good afternoon, and welcome to our first quarter earnings call. It's good to be joining all of you as we share our strong results for the start of 2018.

As we come up on our 20th anniversary, we are excited to post our 61st quarter of consecutive revenue growth as we continue to cultivate powerful digital ecosystems on a global scale. With our recent acquisitions, we are now the market leader in 16 out of the 24 countries in which we operate, reflecting the size, scale and reach that we've built around the world. We serve 47% of the Fortune 500, and our penetration continues to tick up as new customers evolve their digital infrastructures, presenting an expanded opportunity set for us to target.

Turning to the results of the quarter. Our differentiated platform continues to drive financial performance. As depicted on Slide 3, first quarter revenues were $1.216 billion, up 10% over the same quarter last year. Adjusted EBITDA was $580 million for the quarter, up 11% over the same quarter last year, while AFFO growth was 13% year-over-year. These growth rates are on a normalized and constant-currency basis.

Our metrics across MRR per cabinet, cross-connect additions, new customer acquisition and stabilized asset growth were all healthy. And our channel program had another strong quarter, with 19% of our bookings originating from the channel and an outsized contribution to our strong new logo performance. Interconnection revenues continue to outpace colocation, growing 16% year-over-year on a normalized and constant-currency basis, reinforcing the foundational importance of interconnection in today's hybrid and multicloud architectures.

For the full year, we see solid fundamentals as global infrastructure demand continues and we have a strong pipeline. Platform Equinix continues to scale, as we have effectively doubled the size of our business over the last 3 years through both M&A and strong organic growth. We recently closed our 21st and 22nd acquisitions with the Infomart and Metronode, both of which saw good momentum during our closing period. Our footprint now extends across 200 IBXs and 52 markets, providing our customers a global platform to securely deploy and directly connect their digital infrastructures around the world.

Infomart Dallas is one of the most interconnected hubs in North America and home to 4 of our 8 Dallas IBXs. By adding this landmark facility, we're strengthening our interconnection density while also creating new opportunities to grow our business in the banking, technology, energy and health care sectors in one of the largest colocation markets in the U.S. In addition, this sizable building currently houses more than 50 other tenants, which we will manage as a landlord. And in the future, the adjacent land on the property will be developed to provide over 40 megawatts of additional capacity for both retail and hyperscale.

Our Metronode acquisition establishes Equinix as the market leader in Australia, expanding our footprint from 5 to 15 data centers to accelerate interconnection and digital edge deployments nationwide. This acquisition gives us a stronger presence in our existing metros and a wider footprint with 4 new metros in Adelaide, Brisbane, Canberra and Perth. Metronode's site in Perth will become the landing station for the new Vocus Cable between Australia and Singapore and positions Equinix as a leading hub for intercontinental connectivity and builds on our existing subsea traction in Sydney.

Meanwhile, our Verizon integration efforts are progressing well, and we continue to be very pleased with the strategic benefits and the financial value from this transaction. However, I should note, this quarter, we absorbed higher preclose customer terminations than we identified within the installed -- or acquired installed base. We expect to fully conclude our integration efforts by the end of the year, and we continue to see solid demand from both new and existing customers.

So on balance, we expect flat revenue from Verizon this year as we work through the anticipated churn, while we see continued solid gross bookings into the Verizon sites and have a healthy pipeline for our planned expansions in Culpeper, Denver, Houston, Miami and São Paulo. Longer term, we expect the growth rate for the Verizon portfolio to be in line with our other stabilized assets.

Now a few comments on our organic development activity. We are investing capital to build out the platform in response to strong underlying demand. In the first quarter, we completed builds in our Chicago, Osaka and Paris data centers. With our high level of inventory utilization and a growing sales funnel, we have a very active pipeline with 30 expansion projects currently underway across the platform. Half of these projects are in EMEA, our most utilized and fastest-growing region. And greater than 75% of this expansion CapEx is allocated to mature metros that each generate over $100 million in revenue, where established campuses and ecosystem density create strong and predictable fill rates.

We continue to see progress building our Hyperscale Infrastructure Team, also known as HIT, that will focus on developing facilities tuned to hyperscale requirements, as we discussed last quarter. We're in the early stages, and Paris 8, which opens at the end of this year, represents our first dedicated build for this initiative. We are also progressing well with financing structures that will allow us to pursue this important market with limited balance sheet exposure. We expect to add a handful of strategic builds across key markets over the next year, and we have a healthy pipeline of attractive hyperscale opportunities.

Shifting to interconnection. We have the most complete interconnection portfolio in the industry, and our goal is to be the connection route to everything customers require. We now have over 283,000 cross-connects with a healthy net -- with healthy net adds this quarter, despite some continued headwinds from migration to 100 gig. We also saw strong peak traffic volumes across our leading industry exchanges. Our Internet Exchange provisioned capacity stepped up over the last quarter on strong 100-gig port adds and expansion in new EMEA markets. And our Equinix Cloud Exchange Fabric continued to emerge as the foundational tool for customers implementing multicloud architectures. ECX saw record traffic levels and broadened its adoption now to over 1,100 customers. And now we're in the process of connecting our IBXs physically and virtually around the world through the Equinix Cloud Exchange Fabric. We saw good uptake, with over 85 customers taking advantage of this expanded deployment capability.

We're continuing to evolve our global platform with the addition of new products and services, facilitating companies in their shift to digital and multicloud. We announced Equinix SmartKey this quarter, a new security key management service for multicloud and the first of several enabling services we plan to introduce in the coming quarters. We are focused on delivering new customer-inspired product and services that provide increasing value to our customers and connect them across a globally consistent data center and interconnection platform.

Now let me cover some highlights from our verticals. Our network vertical had its second-best bookings quarter, fueled by continued infrastructure buildout by both global and regional telecom providers to support the digital business needs of end customers and strong reseller momentum with our top NSP partners. Expansion this quarter included Orange, which extended its footprint to support a commercial cloud offering; CenturyLink upgrading core infrastructure and leveraging Equinix' dense ecosystems to support digital services; and Verizon expanding its footprint to support SD-WAN and content delivery. Equinix is also seeing continued momentum with the important subsea cable space, where our position is meaningfully strengthened by our Metronode acquisition.

In financial services, we achieved significant bookings growth, led by insurance and capital markets, with strength in EMEA. Customer expansions included a European stock exchange adopting multicloud and expanding its footprint to rearchitect IT as well as a top 3 global asset management firm increasing its footprint to improve business continuity and support multicloud. The content and digital media vertical experienced solid bookings led by the Asia Pacific region and by the e-commerce, gaming and CDN subsegments.

Our cloud and IT vertical produced solid bookings led by SaaS providers as customers diversify towards a multicloud architecture. New customer adds included Dropbox, deploying infrastructure across 17 metros to expand its cloud storage platform; StackPath extending its footprint to provide security services at the edge; and DigitalOcean growing to support its international developer community with a scalable compute platform.

Turning to the enterprise vertical. Our fastest-growing vertical delivered diversified growth across health care, legal and travel with strong new logo adds. New wins in the Fortune 500 included a global beauty company deploying distributed data management for global workforce and regulatory compliance, and a large health insurance provider using Platform Equinix for cloud connectivity and data management. We also saw expansions from a top 3 rental car company implementing hybrid cloud to accelerate global IT transformation, and Intercontinental Hotels Group leveraging Platform Equinix to connect to ecosystem partners in key metros.

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

Thanks, PVC, and good afternoon to everyone. I'd like to start by highlighting that we had yet another solid start to our year. We had strong bookings, with particular strength in both our EMEA and APAC regions, in part due to the level of imports received from the Americas region, a reflection of our global selling capabilities and the benefit of a global platform. Our Q1 metrics included strong interconnection performance, increased provisioned port capacity and firm MRR per cabinet, both by region and on a consolidated basis.

And we continue to accentuate the key points of differentiation between our business and our peers, including in investing in new products and services, scaling our sales force as we -- as our business grows and supporting a broader initiative around customer experience. Our investment decisions allow us to continue to separate ourselves from our competitors as we pursue this differentiated business opportunity that we see in front of us.

For 2018, we're guiding to revenue growth of 9%, including the Verizon assets. This guidance includes a meaningful step up in bookings and revenue on a much larger base while driving more cash flow to the business, as reflected in both our adjusted EBITDA and AFFO.

In April, we closed the Metronode and Infomart Dallas transactions. The Metronode acquisition makes Equinix the market leader in Australia with a national footprint and a customer base that includes strong government traction. Metronode continues to experience strong -- continued to experience strong momentum through the close of the transaction, and our guidance now assumes an annualized revenue run rate of approximately $50 million with adjusted EBITDA margins of greater than 50%.

The 10 IBX assets in the Metronode portfolio, 9 of which are owned, provide incremental land for future expansions. The current Metronode footprint is highly utilized at greater than 90%, and we will move quickly to build out additional capacity, which we expect to be available in 2019. Once this additional inventory is built out, we expect Metronode assets to show healthy revenue growth.

We're also very excited about the Infomart Dallas asset purchase, one of the most connected buildings in North America. Our primary emphasis will be on maximizing our existing $100 million business inside the Infomart while also assessing other opportunities to drive increased shareholder value, including expanded development of the building and the adjacent land. Also, we'll continue to support the current tenant base, which generates annualized revenues of $35 million with accretive adjusted EBITDA margins to our current business. And we'll enjoy approximately [$14 million] of cash rent savings related to the deal as we effectively become our own landlord, the benefit of which will be a reduction in our interest expense and a decrease in our capital lease liability, as our Infomart leases were treated as capital versus operating leases. For integration costs, we're updating our guidance to now approximately $50 million for 2018, including $15 million of costs related to the Infomart and Metronode acquisitions.

Now looking at the first quarter. Q1 was another strong quarter of operating performance. As depicted on Slide 4, global Q1 revenues was $1.216 billion, up 10% over the same quarter last year. As expected, NRR revenues decreased by $12 million compared to Q4, bringing our NRR revenues to 5% of total revenues, consistent with our historical levels. EMEA and APAC were the fastest-growing regions at 12% year-over-year growth each, followed by the Americas at 7%.

The Verizon assets contributed $135 million of revenues, flat quarter-over-quarter as we identified, and absorbed the higher preclose customer terminations and credits, as PVC outlined. As we exit 2018, we expect the Verizon asset revenues to grow nicely with the integration behind us and the investments being made in the core Verizon markets.

Q1 revenues, net of our FX hedges, included a $7 million positive currency benefit when compared to the Q4 average FX rates, and a $6 million positive currency benefit when compared to our FX guidance rates due to the weakening of the U.S. dollar.

Global Q1 adjusted EBITDA was $580 million, up 11% over the same quarter last year and higher than expectations due to improving gross profit, largely due to a lower-than-planned utility expense, and timing of integration costs. Our adjusted EBITDA margin was 48.1%, excluding integration costs. Our Q1 adjusted EBITDA performance, net of our FX hedges, had a $1 million positive benefit when compared to both the Q4 average FX rates and our FX guidance rates.

Global Q1 AFFO was $415 million, up 13% over the same quarter last year, largely due to strong adjusted EBITDA performance and lower-than-planned recurring capital expenditures. AFFO per share was $5.21, the first time we eclipsed the $5 per share threshold in the quarter, and a meaningful 26% uplift over the same quarter last year.

Q1 global MRR churn was 2.4%, and we expect 2018 MRR churn to continue to average between 2% and 2.5% per quarter for the rest of the year.

Now turning to the regional highlights, whose full results are covered on Slides 5 through 7. We continue to benefit from the power of our global selling engine, with over 58% of our revenues coming from customers deployed globally across all 3 regions and 84% across multiple metros. The Americas region had solid revenue and adjusted EBITDA results in the first quarter, while absorbing the expected decrease in nonrecurring revenues, or NRR. As we discussed previously, NRR can be lumpy and vary from quarter to quarter, particularly related to customer installation work provided to customers for their deployments. Cabinets billing were positive but lighter than the 4-quarter average due to timing of customer installations.

Turning to EMEA. We saw record bookings this quarter, led by the strength in our German and Dutch markets with continued growth in our interconnection revenues. Our new EMEA Internet exchange deployments experienced solid early traction, including our Dublin, Frankfurt and London markets.

And Asia Pacific delivered its second-best bookings quarter with particular strength in our Australian and Singaporean markets. We continued to enjoy strong momentum across the platform from leading Chinese service providers, with significant expansion activity coming from Alibaba and Tencent.

Interconnection revenues had a strong quarter, up 4% over last quarter, adding over 5,000 cross-connects as we continue our steady pace of growth. The Americas and Asia Pacific interconnection revenues were 22% and 14% respectively, while EMEA stepped up 10% of recurring revenues. From a total company perspective, interconnection revenues were 17% of total recurring revenues.

I'm now looking at our capital structure. Please refer to Slide 8. We continue to optimize our capital structure and take advantage of the low interest rate environment. In Q1, we completed a EUR 750 million high-yield offering at a very attractive interest rate, adding appropriate liquidity on the balance sheet to fund our various initiatives. Our net debt leverage ratio, pro forma for our 2 recent acquisitions, increased to 4.5x our Q1 annualized adjusted EBITDA. We expect our net debt leverage ratio to revert to our target range of 3 to 4x over the next few quarters.

Turning to Slide 9. For the quarter, capital expenditures were [$315 million], including a recurring CapEx of $35 million. Currently, we have 30 new construction projects underway, 2/3 of which are on owned properties, adding capacity in 20 markets around the world. Our 2018 capital plan is significant, a recognition that there is attractive demand across our now 52-market portfolio, and this step up in investment is required to support the scale of our business. We also recently purchased our Stockholm 2 data center and purchased land parcels for future expansions in Frankfurt, Helsinki and Tokyo. Revenue from owned assets stepped up to over 45% with the close of the Infomart and Metronode acquisitions

Our capital investments are delivering healthy growth and strong returns, as shown on Slide 10. Stabilized IBX revenues grew 6% year-over-year on a same-store basis, largely driven by increasing interconnection revenues and the increased power density. Also consistent with prior years, during Q1, we completed our annual refresh of new expansion in stabilized asset categorizations. Our stabilized asset count increased by net 10 IBXs. These stabilized assets are collectively 84% utilized and generate a 29% cash-on-cash return on the gross PP&E invested.

And finally, please refer to Slides 11 through 16 for our summary of 2018 guidance and bridges. For the full year 2018, we're raising our revenue guidance by $92 million and adjusted EBITDA guidance by $45 million, excluding integration costs, primarily due to favorable FX rates and the acquisitions. This guidance implies a revenue growth rate, including Verizon assets, of 9% year-over-year and a healthy adjusted EBITDA margin of 48% including -- excluding integration costs.

The momentum of our business continues to drive AFFO and AFFO per share. We're maintaining our 2018 AFFO per share guidance of $20.82 per share, excluding integration costs, absorbing the impact of $50 million of incremental debt service costs and the impact of the 2 recent acquisitions for the first 12 months of their operations. We have assumed a weighted average 80 million common shares outstanding on a fully diluted basis. AFFO is expected to grow 12% year-over-year on a reported basis.

We expect 2018 nonrecurring capital expenditures to now range between $1.8 billion and $1.9 billion, which takes into consideration the Infomart Dallas and Metronode transactions.

And finally, turning to dividends. For 2018, we expect to pay out total cash dividends of $725 million, an 18% increase over the prior year and reflects an AFFO payout ratio of approximately 45%. Consistent with the prior quarter, the Q2 cash dividend is $2.28 per share.

So with that, let me stop here and turn it back to PVC.

Thanks, Keith. In closing, we continue to deliver solid results, growing at a healthy pace, investing in future capabilities and showing strong performance as we increase our interconnection penetration, traction with a Global 2000 customer and a firm MRR per cabinet.

The demands of digital transformation continue to be a major force in the market, and we are seeing a meaningful transition as both service provider and enterprise customers adopt hybrid and multicloud as the IT architecture of choice. We are uniquely positioned to help customers navigate this transition and are boosting our competitive edge through investment in go-to-market efforts and the evolution of the reach, scale and capabilities of our highly differentiated global platform. We have targeted and are pursuing this expanding opportunity set and are scaling our global platform to meet the demand, fueled by a strong sales pipeline to drive our regions for the remainder of the year.

So let me stop here, and Cherry, let's open it up for questions.

(Operator Instructions) The first question comes from Frank Louthan from Raymond James.

Great. So walk us through a little bit through the expansion opportunities in Europe. I mean, at the beginning of the year, you updated some CapEx, a lot of which was due to that. Maybe give us an idea there. And then give us an idea of what sort of expansion capabilities are left in Culpeper and Miami specifically as you look to kind of grow those Verizon assets a little more.

Sure, Frank. Let me start, and the others perhaps can jump in. First and foremost, as you can see, we still have 30 projects that are currently underway. The European theater is our fastest-growing region. And so from our perspective, recognizing the majority of the investment's going to go into what we call the flat market, so Frankfurt, London, Amsterdam and Paris. It's a reflection of, basically, the momentum that we're seeing. And so as we exit sort of Q1, I think you're going to really see the majority of that benefit coming through sort of in the middle of the year through the back end of the year as we continue to install our customers. And I'm sorry, I've now forgotten the second part of your question.

Culpeper and Miami.

Oh, and sorry. And as it relates to Culpeper and Miami. Miami, for all intents and purposes, it was a relatively untapped opportunity for -- it was an untapped opportunity that we wanted to realize. There's roughly 3,000 available cabinets coming out of NAP of the Americas, and we've started the first major build. We did a small build to create a little bit more capacity, but we're really looking forward to that incremental build. And one of the things that was really interesting, as we talk about the core markets related to the Verizon assets, the majority of those assets are greater than 90% -- or near 90% utilized. And as a result, we need that capacity to continue to scale. Now we made some minor refinements to the utilization rates of the Verizon assets. It's roughly 82% from the 87% we talked about in the last quarter. That all said though, when you look at the markets that we really want to develop and we're putting capital to work, it's those top 5 markets that PVC alluded to. And so we're eager to get to the Miami market and create more capacity also in the Culpeper market because the pipeline is healthy to service -- sorry, the pipeline is healthy in support of that expansion opportunity.

And is that major expansion in Miami within the same building? Or is it just -- is it near in...

Absolutely, it's the same building. And what's interesting, it's only the first part of a -- there's a multitude of opportunities for us there. As I said, it's roughly a -- think of it as a potential incremental 3,000-plus cabinets in the NAP of the Americas. So it's in our expansion tracking sheet. Frank, you'll also notice that we had a small build, as I said, sort of the last quarter of '17, but we really are looking forward to the buildout. It's roughly just -- Kat was just showing me here, roughly 1,100 cabinets will be available in Q3. And that -- part of the reason that we talked about the Verizon assets again, we're going through, if you will, the -- we refer to it as preclose customer terminations and some churn, and we're making some very prudent assumptions in a go-forward basis on what we should expect. But one of the things that we want you to walk away is the recognition that the majority of our growth is going to come from these core markets and that inventory is not going to be available until the second half of the year. Hence, why we've decided to say let's just hold the -- let's hold the Verizon assets flat through the remainder of the year, pending that, and also recognizing that we'll continue to make some assumptions on churn through the remaining part of the year.

Yes, just a final note, Frank, on Miami. As you may recall, it is a very dense interconnection hub that also is the destination for all the routes down to South America. So it largely had no room to expand, so a great opportunity. And then the Verizon acquisition was to create that room, because this will be certainly a site that will have a strong fill rate against it once we have the capacity in place.

Our next question comes from Phil Cusick from JPMorgan.

Phil?

Sorry. As I look at the pace of CapEx, I expect it will be building through the year. One, is that fair? And two, does that lead to next year being a fairly heavy investment year as well?

Well, as you can see, I mean, the -- what's interesting on the expansion tracking sheet that we shared with you, Phil, is that the majority of -- the vast majority of the build will take -- will have assets opening up through the second half of the year. And again, just sort of eyeballing it, it's roughly 22,000, 23,000 cabinets. But we do anticipate that some of that will also spill into 2019. Again, it will be facts- and circumstances-specific. As you know, we're now servicing a 52-market portfolio. We're going to look at our fill rates. We spend a lot of energy breaking that down, looking at not only the pipeline and the empirical fill rates, but also the competitive dynamics in the market. And we'll update you on our thinking for 2019 in -- probably in the not-too-distant future. I'm not sure we'll be able to do it by Analyst Day, but certainly as we get to the back end of the year, you'll get a good sense of what we're thinking about for 2019. Suffice it to say, though, with the momentum that we see and the pipeline opportunity, you would -- should expect us to continue to invest meaningfully on the CapEx line.

Sure. And is it more challenging to build in Europe? It just seems like the capacity is coming out a little later on that side than in the U.S.

I wouldn't say it's any more difficult. Again, it's market-specific. As you can probably appreciate, it depends on the regulatory environment, the compliance requirements, the ability to get available contractors. The market, like the Tokyo market, could be a bit more difficult than other markets. But Europe in and of itself has not historically been a tough market. And because we're building a lot adjacent to our existing facilities contiguous to our assets or in close proximity, it makes it a lot easier for us to build out in that market. And as you can see, the majority of the assets, again, in the expansion tracking sheet that are going to be built are in the London, Frankfurt, Amsterdam and Paris market. And we've had some pretty strong experience over the not-too-distant future building out in those markets. Where it takes usually a little bit longer is if it's a first phase build because you're building it from the ground up, and that of course takes a lot of work because you're developing the land, you're building the core and shell. But from that point forward, it becomes relatively cookie cutter-ish.

Our next question comes from Jonathan Atkin from RBC.

I wondered, Keith, if you could provide further details around the financing structures that you kind of mentioned in the script around hyperscale. And are they kind of -- are they unique to certain regions or countries? Or might it be kind of global in nature?

Yes, Jonathan. The -- we want to spend a lot of energy on this. Between Charles and I, we probably will take this on in a much more healthy way at the Analyst Day. But suffice to say, we are thinking -- we're probably thinking more specific to our market or region. We don't have a global view. I think it's tough recognizing that we might have different investors investing in different theaters with us, and as a result, the structures can be a little different. What's really important here is we want to take this opportunity. We're going to be very strategic about it. And we're going to try and push as much of that off balance sheet as possible and enjoy the benefits of the investment yet partnering up with others to use capital and put leverage on it, so it makes sense for the business and doesn't -- allows us to continue to focus on our retail business. But give us some time on the Analyst Day, and we'll probably have that a little bit more fleshed out for you.

But to a degree, it sounds like your choice of location -- your next locations could be influenced by financial considerations, then.

Well, I think it's more about -- sorry, Charles and I were deciding who was going to take this one. Let me just say the first part is, look, there's plenty of financing opportunities out there for us. So our constraint is not going to be about our financing.

Yes, I mean, I agree. I think we're going to go to the market opportunity based on what the customer demand is and which investments and projects we think are accretive to our leadership position in the cloud-enabled enterprise ecosystem. And so we're building a very robust funnel of those opportunities. We've got a very positive response from the customer set. Jim now is -- Jim Smith is now onboard as a full-time employee. We're really energized about that. He's bringing exceptional experience and skill set to the table. So we're building funnel quickly and we're not going to let, I think, the financing get in the way of what we're going to -- how we're going to respond to the market opportunity. So -- but I would say, as Keith said, it's likely that it's going to be a number of underlying structures, and those may have slightly different characteristics based on the profile of both our existing and future assets in those markets. And ideally, what we want to get to is a situation where we have a highly responsive, agile capability to respond to these hyperscale requirements, the ones that we think are strategic, but do that without a lot of balance sheet exposure. And I think we're tracking well against that objective. And like Keith said, you'll hear more about that as we get to Analyst Day.

And then just quickly on integration. On Infomart Dallas, is there any kind of implication for the Americas cross-connect trends that we might see now that you own the entire building? And then on Verizon, I appreciate you're giving utilization number there, 82%. Are you marketing the vacated space? Is there demand for it? And might there be a different customer profile for that absorption versus your traditional product?

Well, certainly, there'll be growth as we start to expand in interconnection in Dallas. And so we'll see a lot of value to our density there and bringing that to more customers as they come on board. But we are the interconnection hub in the Infomart already. So you'll see continued growth out of us, and as we expand, more customers will come through it. But it's not a differently acquired set of interconnection services that we've gotten there.

And Jonathan, I think I'd just add on to what PVC said. What's really important here is there's really a separation between what we're doing with the Metronode acquisition, which is -- which really has to be wholly integrated, versus the Dallas -- or the Infomart Dallas, which is more an asset purchase, right? And integration's a lot easier for us on that -- in that asset relative to a 10-building operating business in Australia. And in both cases, we're wholly on top of our integration efforts. We're excited about where we sit, and I think we've given you a little bit of the details around what we think we can accomplish this year. But as we continue to invest around these assets, I think that's going to give us an opportunity for continued growth in that portfolio and that asset.

And what was the second part of your question again, Jonathan?

Yes. The vacant Verizon space, and to what extent that's being marketed or you're seeing interest. And is it a different profile, that -- of customer that might go into that vacated space, versus legacy Equinix IBXs?

Yes. No, I mean, we positioned it, as we've always made clear, we sell as a platform, right? So we want to quickly integrate assets into the portfolio and then position those across the customer base globally and ensure that all the sales teams are selling those. So yes, individual assets appeal to different use cases. That's not a distinction of Verizon, that's true of our assets as well. And so I think we're marketing those very effectively. The team is up to speed on how to position those. We are seeing good gross demand in bookings into those facilities. And in fact, what I would highlight is, is that the flat guide for Verizon revenue through the remainder of the year is an artifact of the -- of sort of what we're finding in terms of churn related to some of the preclose sort of cancellations that were there as we sorted through that. And just a prudent assessment on our part of kind of what we ought to imply about growth. And so -- but not a reflection of, I think, a lack of demand there because we are seeing solid bookings into those facilities.

Our next question comes from Simon Flannery from Morgan Stanley

Great. Just wondering if there was any update on the board's search for a permanent CEO. And also, on the U.S. MRR per cabinet and the interconnect volumes, I think you referenced the move to 100 gig. Can you just talk a little bit more about the puts and takes driving that versus some of the strength you've seen in other regions?

Yes. First, on the new CEO appointment, there's really no update there. Just as a team, we're continuing to pursue our '18 opportunity, and so nothing new to add. I think you can just assume I'll continue in the seat for a few quarters here. And besides that, on interconnection, it has been interesting. We saw a solid interconnection uptick this quarter in revenue, seeing it 16% year-over-year. And of course, that was in the face of 100 gig. 100 gig showing up more in the United States than anywhere else, because certainly, the dense interconnect -- or Internet interconnection that we have here is a reason for it doing as well as it is. And we're seeing good growth in ports of 100 gig, but still nice to see interconnection as a whole growing as strongly as it is in the face of that.

Yes, just a little incremental color there, Simon. We -- there's actually a relatively small number of players who have the sort of traffic profile that warrants the sort of the investment in 100-gig optics. And so what we're seeing is those where there is a strong economic justification to make that investment, they're sort of leading the way, unsurprisingly, and many of those are well through their migration. So I think we still got a little bit to go in terms of seeing some of that headwind. But what we do is, and I'm sure this will not be surprising to you, but we look very closely at the gross adds as well as kind of what the churn profile is. And what we want to make sure is that we're seeing sustained gross demand, and that is, in fact, the case. And so in fact, I would argue that we're seeing a more robust and more diverse use case portfolio for interconnection broadly, both at the physical layer in terms of cross-connects and at the virtual layer now with ECX. And so I think really, all in all, a very good story there relative to the interconnection portfolio and how it's performing. We did a quartile analysis which sort of showed what our concentration of interconnection was and how it was changing over time. And a lot of goodness in that analysis as we looked at really key sort of new, robust long-term use cases we think driving this new demand profile, including private cloud connectivity, and a much longer tail of enterprise customers now finding utility and private interconnection, even at the physical layer. And they often start at a virtual with ECX. And then as they aggregate traffic or have a different performance requirement, then they move to the cross-connect. And there's just nobody that can -- -- and then having the Internet, the IEX as well, there's just nobody that can sort of respond to that full profile the way we can. So very excited about how the interconnection business is performing overall.

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

Great. Two, if I may. First off, on Americas cabinet adds, they're negative in the quarter. And I'm just trying to get a better sense, how much of that came from the Verizon assets and what's going on there? And I think you may have mentioned some delayed installs. Just trying to get a better understanding of the various components that drove that number. And then, secondly, as it relates to the HIT business, in the past quarter, you had mentioned some notable wins. I'm just curious if there's any other bigger -- big wins that occurred in the first quarter, and if so, if you could break out by geography, however detailed you want.

So Colby, just on the America's cabinet adds, so you'll see in our tracking sheets or nonfinancial, we're -- it's actually 400 net adds in the quarter. Where we had made some comment is we made a slight adjustment to the opening balance of the Verizon assets, and so that might be skewing your calculation. And so we took that number down and went from 87% utilization down to the 82% I referred to. But when you look at the core business, non-Verizon, there was really 400 net adds in the quarter. And then the other question was...

Yes, that -- well, and just let me finish on that one. That's -- again, as we've said, that is really a timing artifact. We had a really strong quarter last quarter on cabinet adds. We've had sort of some of this lumpiness in that profile and generally chalk that up to timing. You have to really look at, I think, over -- on cabinet adds over a sort of multi-quarter period and sort of draw a trend line into that. So no alarm from our perspective as to the health of the cabinet adds. So that's that one. The second one was with regard to HIT. We did have a win -- some wins that we had talked about. We are actively engaged in deal discussions for both projects that are hyperscale-oriented into some existing facilities but now really starting to ramp up where we're talking about deals that are going to go into dedicated HIT facilities. And so as we said, there's probably just a couple of projects that we're doing now, Paris 8 being there, and then some other European-centric projects that we're looking at that we'll start to roll out in the near future. And again, we're in active discussions with anchor customers to start to take up some of that demand. So no new net wins to report, but I think I would characterize it as a exceptionally healthy funnel and great progress in terms of winning the kinds of deals that we want to win.

And just to clarify on the Americas cabinet. So is it fair to say then that the Verizon portfolio, those cabinet adds -- those cabinets remain, I guess, flat based on the new accounting? And is the 400 that you added, that was basically, I guess what we'll call traditional Equinix?

Yes. Organic business, that's right.

Yes.

Our next question comes from Amir Rozwadowski from Barclays.

I wanted to touch base on sort of the M&A landscape. If -- we hear commentary from other players in the market, there seems to suggest that some of the private company valuations are a bit high at the moment and may temper some of the M&A activity levels. What are your thoughts on sort of potential for additional inorganic growth from your perspective?

Well, I think that's a very fair point. And certainly, private equities' interest in our recent Infomart acquisition was evident in the end price as well as probably Metronode as well. So some of that is out there. I won't speak to the rest of the M&A activity in the industry, but I think where we'll be focused for a period of time here will be more towards new markets that might be interesting that just complement the reach of the platform or are valuable for customers and that strategic benefit. So ultimately, there may be some of that influence in play. But a place we've wanted to be, and haven't quite found the right answer but will always have an eye on it, is something like India. And maybe South Korea as another market that could be interesting to us. But again, these are more extending the platform versus something that is more transformational like Telecity we did a couple of years ago and Verizon this past year.

That's very helpful. And then a follow-up question perhaps for Keith. If we think about sort of the leverage ratio and where your longer-term targets of 3 to 4x are, I mean, if we adjust for the senior notes, it seems like you're at -- above that target ratio right now. How should we think about sort of your progress to continue to bring you within that target range? And should you pursue additional M&A, how should we think about further financing?

Yes, Amir. That's a great question. Maybe adding on to what PVC said, again, a lot of what we're looking at today as a company, as we think about next M&A, it's going to be a new market opportunity or a tuck-in acquisition. As you can appreciate, with the 2 transactions that we just closed in April, we've got, in different forms and different levels of integration, 8 different integrations that are ongoing now. And so as a company, we're going to continue to focus on integrating the assets and bringing efficiency. As it relates to our capital structure, the -- we're pro forma to the -- pro forma the 2 transactions that closed in April, we're 4.5x levered our Q1 adjusted EBITDA. Clearly, with the continued growth of the business, that number is going to decrease as we continue to scale the business. We've always taken a very prudent view on maximizing shareholder value, using both debt and equity where appropriate. As a company, we want to maintain our goal of appropriate leverage, but not too much leverage, making sure that we have -- or making sure that, at some point in time, we'll get to our aspiration of becoming an investment grade-rated company. Albeit today, I'm not sure, with the 4.5x levered here, that that's within the next 12 months. But we still have a stated objective to become investment grade. And again, we will be using our capital structure as effectively as we can. And in some cases, as Charles alluded to earlier on, we'll partner with others off-balance sheet to continue to grow other elements of the opportunity set without using our balance sheet. So bottom line, I think it's a reasonable expectation over the not-too-distant future that you should see us get more towards our stated target of 4x levered, that's at the top end of the range, as we continue to scale the business over the next 3 to 5 years. I think it's reasonable to assume that leverage will be very much within our target ranges. And with our aspiration of getting to investment grade, I think we'll be -- we've put ourselves in a good position with a very balanced view on capital.

Our next question comes from Vincent Chao from Deutsche Bank.

Just going back to the Verizon performance and some of the reductions in the guidance for that. I was just curious, I mean, you kept your overall churn guidance basically flat, I mean, on a quarterly basis. I mean, should we interpret that as the rest of the business is doing a bit better than previously expected, absent some of the terminations at Verizon?

Well, Vin, part of the Verizon assets, in and of themselves, slightly elevated churn. As you recall -- might recall, when we first acquired the Verizon assets, we started out with a $450 million guide, and then we added in the affiliated revenues. By the time we exited last year, or '17, we were roughly a $540 million revenue business. As part of that, we always said that there's an element of churn that we know that we're going to experience, and we had sales reserves that we'd put in place. What you're experiencing now is the churn that we were guiding to a while back, but we just had not yet experienced. And as a result, that roughly -- that low single-digit growth that we were expecting in fiscal year '18, we're going to now hold it flat. Again, we think that is very prudent. But as Charles and PVC alluded to, we have a very strong bookings pipeline -- sorry, pipeline with the Verizon assets. We've seen strong gross bookings. We feel we've got a handle on what we're looking at as it relates to Verizon. As a result, with our churn being at 2.4% this quarter and holding our average flat, again, recognizing it's within the scope of what we already had anticipated this year. So I would say that if you're seeing that this is going up a little bit, then it's suffice to say then, the organic business is going down a little bit. But overall, there's no meaningful change in the churn that we were modeling for the year. And so I feel comfortable we'll put ourselves in a good position to not only, again, hold the revenue flat. It's roughly a $15 million, $20 million adjustment to our guidance for Verizon this year. And I think as we exit the year, you're going to see us -- not only because we fully integrated I think the assets but because of the investment in the core markets, you're going to see solid growth coming out of 2018 on top of those Verizon assets.

Okay. And then just another question, more on the construction side. We've -- we obviously heard from many REITs that construction costs are going up, sort of on the order of maybe 5% or 6% from an inflationary perspective. And I look at the pipeline that you have outlined and the spending that you have planned for the year. I guess how much of that is fixed in terms of everything else covered by some sort of contract? Or is there a risk of that going higher because of just overall inflation?

As a company we have a pretty good -- we have a very large and deep pipeline of construction activities. We have great relationships with our vendors, our providers. From our perspective, we think we get -- we have an opportunity that's probably broader than most, given the investments that we're making. That all said, there is inflationary pressures and it's going to be market- and material-specific. As a company, we build in contingencies when we give guidance to take into consideration pricing fluctuations. But overall, we're working real hard to drive down our average cost to build. And some of that comes from different construction techniques, part of it different design specifics, and also ways to run the IBXs more efficiently after they've been built. So overall, I'd just say it will be facts- and circumstances-specific. And again we've got a -- I think we have a handle on it. And you should feel that there'd be any meaningful change to our guidance because of what is perceived to be cost increases.

Our next question comes from Robert Gutman from Guggenheim Securities.

Two questions actually. One, given the timing of the cabinet deliveries in Europe and the scale as well and weighted to the second half, should we be assuming an acceleration in recurring revenue growth on a year-over-year basis? Because it's been stable for the past several quarters at about 12%. I just want to know if you expect it, or should we expect it to accelerate? And after that, I just have one more.

I think when it comes to the European, what we call the recurring revenue stream, certainly, you're going to see an opportunity, yes, to fill up that capacity. And as a result, by filling up the capacity in a more timely fashion, you should see some level of acceleration. There are some periodic blips that we experienced this quarter, where we -- the revenues in EMEA was only growing just over 12% year-over-year. So I think there's an opportunity to see that number go up, certainly as you get to the back end of the year.

And the second question regards the 6% growth in stabilized assets. It's been coming from cross-connect and power density. I don't know the proportions of each, but really, on the power density side, is there -- in stabilized assets, is there flexibility to continue to add power density?

Well, absolutely. I mean, no different than adding an incremental cross-connect, as customers put more infrastructure into a given cabinet or cage environment, they'll draw increased power. And so it's managing the relationship of the physical space with the power capacity. And so in both cases, we're -- we have been and historically have worked very hard to optimize our assets. And so you will get more power draw from those stabilized assets as you will get more interconnection.

Yes, and on occasion, we even take on specific projects in assets, particularly assets with a slightly longer vintage to say, "Hey, we -- can we -- as we make upgrades, can we improve the power density of the facility, and therefore accommodate more power in certain cases?" So those are certainly leverages available to us in the business.

Our last question comes from Michael Rollins from Citi Research.

Two, if I could. First, I was wondering if you can maybe give us a little bit of a preview in terms of how the company is thinking about the longer-term revenue growth opportunity, when you take into account the number of acquisitions that you've done since the last update. And secondly, if you look at the growth rate guidance of about 9% including Verizon for 2018 on an organic basis, can you give us a sense of how much stronger some of the regions are versus the others? And maybe just give us a sense of where each region is shaking out within the totality of the guidance.

Sure. I'll just react to the first part. Obviously, with some of the bigger acquisitions we've done, like a Verizon, and different growth rates, that does add to the size of the overall business. And so when you think about go-forward growth, it definitely has an impact. Certainly, we feel very good about our thinking this year, how we relate to even market growth rates and continuing to outpace growth rate for retail colocation, Mike, so continued in a positive track in that direction. We'll give you a better sense of growth as we get to Analyst Day, and we'll outline a CAGR for the coming years that I think will be helpful to you on that regard. And then what was the second half, Keith? Did you get that?

Regional color across the 3...

Yes, the regional color.

Yes, well obviously, as we've said, EMEA has been performing very well and contributing at a higher growth rate. Asia, on a smaller number, continues to hit bookings and do very well, contributing to our overall growth rate as well. And solid in Americas. I don't know, Charles, do you want to add any color to that? Or...

Yes, I think they're -- a little bit of the normal dynamics you're seeing, which is the Americas is a larger and more mature market. It's -- the other markets are tending to follow in terms of some of the activities, in terms of hub penetration and other factors that are both -- driving both demand and potential substitution effects, et cetera. So there's -- I think that we are -- we continue to see exceptional health in EMEA. Our competitive position there is outstanding. Our pipeline of projects is strong, our sales pipeline is strong, so continued strong results in the EMEA market. APAC has good underlying secular forces driving those markets. And again, Americas, a little bit -- starting to see a little bit of a dip in growth rates. We still think we're growing ahead of the market in Americas, but what we're seeing from our -- what we think are the most credible estimates of market growth in the Americas is more in the 5.5% range, and we're growing the business meaningfully above that. And we're doing that with a return profile and a yield profile that is head and shoulders above the rest. And so there's pockets of headwinds probably across all markets in certain cases, but we're staying very disciplined about what deals we're pursuing, continuing to focus on use cases where we are -- we bring distinctive value, and therefore, can preserve returns and pricing over time. But that's our little color on -- across the regions.

And if I could -- just one other follow-up. With all the development that you've laid out in your development schedule, is the goal to increase organic growth in 2019 over 2018?

Mike, why don't you -- thank you for the question, but we'd really like to spend more energy thinking about that, and we'll be updating you on the June 20 Analyst Day on our thinking, both as it relates to the organic basis and certainly the inorganic business. And there's a recognition that, over the last few years, we've been buying assets that have been slower growing than the overall organic business. And so we want to give you color on what that means and how does it look for -- on a go-forward basis, as we take you out 5 years from 2018 through 2022. Okay.

Thanks, everyone,.

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

Bye.

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