Equinix Inc (EQIX) 2018 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.

Thank you, and 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 26, 2018, and 10-Q filed on August 8, 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, 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'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.

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 second quarter earnings call. It's good to be joining all of you as we share our strong results for the first half of 2018. This was a quarter of many new highs with continued momentum in our key metrics as our go-to-market engine and interconnection strategy continue to drive results. We delivered record bookings in all 3 regions driven by robust growth across our verticals with particular momentum in our cross-regional activity. We now serve 48% of the Fortune 500 and 33% of Global 2000 companies, both up 1% quarter-over-quarter, and we're demonstrating a highly attractive land and expand dynamics with these lighthouse customers.

Channel sales stepped up to over 20% of bookings and accounted for half of our new logos in the quarter driven by solid performance across the regions and across our partner types. And the power of the global platform continues with over 50% of our revenue coming from customers deployed across all 3 regions and 85% from customers deployed across multiple metros, both metrics up 1% quarter-over-quarter.

Turning to the results of the quarter, and as depicted on Slide 3, second quarter revenues were $1.262 billion as reported, up 9% over the same quarter last year and above the top end of our guidance range on an FX-neutral basis. Adjusted EBITDA and AFFO were both over -- up over 6% over the same quarter last year, which includes our planned investments in Verizon to support long-term growth. These growth rates are on a normalized and constant currency basis.

Interconnection revenues continue to outpace colocation, growing 13% year-over-year and now include Verizon. Our metrics across interconnection counts, billable cabinets and MRR per cabinet all demonstrate continued execution of the strategy and reflect the strong health of the business. Our global platform continues to scale, and we're extending our leadership within each region through a combination of targeted M&A and strong organic growth. I'll provide highlights on 3 of our latest acquisitions, Infomart, Metronode and Verizon, each of which significantly enhances our strategic position and all of which are progressing well from an integration perspective.

Starting with the Infomart Dallas. This strategic purchase allowed us to gain full control of the critical set of assets in our IBX portfolio and cement our market leadership position with this important interconnection hub. The Infomart deal is creating new opportunities to grow our business in Dallas, which is one of the largest colocation markets in the Americas. We're starting plans to build out incremental capacity in line with our acquisition plan in support of both retail and hyperscale demand, and we're moving forward with the final phase of our Dallas 6 build. We continue to refine our long-term master plan for the Infomart location and see a stable run rate from over 50 other tenants in this sizable building.

Moving to our Metronode transaction. This acquisition significantly enhanced our national reach in Australia and vaulted us into the market leadership position in one of the most innovative IT markets in the world where hybrid and multicloud has rapidly emerged as the clear architecture of choice. This acquisition is tracking well against our expectations with growing pipeline of multinational opportunities. We also recently announced our Perth expansion where our IBX will house the landing station for the upcoming Vocus subsea cable between Australia and Singapore.

And finally, our Verizon integration efforts are progressing well. Our pipeline and bookings into these assets remain strong, but we are constrained given the very high utilization rates in key facilities. Consistent with our prior comments, we continue to expect flat quarterly revenue for -- from Verizon over the year, but we're adding an incremental capacity in the back half which positions us well for 2019. Also, we continue to work through the churn previously discussed, and we have a healthy pipeline for our planned expansions. And as we progress through next year, we expect the Verizon portfolio to grow in line with our other stabilized assets.

We also completed the integration of Terremark Federal Group into our government solutions business, expanding our federal industry expertise and adding key capabilities for federal agencies and system integrators. This integration added 33 personnel to the Equinix team, bringing a deep understanding of the federal sector and enabling us to act as the trusted advisers for IT transformation initiatives in this key sector. Our diverse portfolio of assets, including former Verizon government campuses in Miami and Culpeper, allows us to direct workloads to the optimal environment based on security, cost and performance. We view government as a sizable expansion of our addressable market and are increasing our engagement from a business development customer and sales perspective to execute on a significant opportunity.

Now let me make a few comments on organic development activity. We continue to invest capital, adding capacity in response to strong underlying demand. In the second quarter, we completed builds in our Amsterdam, Denver and London data centers. Our platform is 82% utilized, and we have a very active pipeline with 32 expansion projects currently underway.

This quarter, we also announced our entry into Oman. We have partnered with Omantel, a global communications company, and in 2019 will open the first carrier-neutral data center in Oman's capital, Muscat, which will curate a regional interconnection hub with low latencies between key global business markets.

On the hyperscale front, we continue to progress in building out our Hyperscale Infrastructure Team, designing and building initial capacity and working on our financing structures which we expect to have in place by early next year. Our initial approach is to leverage capacity in select hybrid facilities, such as London 9 and 10, to capture early wins and maintain momentum in the overall cloud ecosystem. In parallel, our first dedicated facility, Paris 8, is scheduled for delivery in Q1, and we are using our deep existing relationships with the targeted hyperscalers to cultivate a meaningful demand pipeline.

Shifting to interconnection. Interconnection is foundational to our strategy and continues to grow significantly faster than the rest of our business with each new connection translating into additional customer value and a deeper, more durable relationship with Equinix. We now have over 288,000 cross-connects with healthy net adds despite selective churn headwinds associated with migration to 100 Gb. Cross-connect adds remain strong, and virtual connections are growing rapidly as digital transformations fuel ECX Fabric growth. ECX Fabric now has over 1,200 customers, and we expanded availability to Australia and Japan this quarter with the remainder of APAC targeted for Q3 and full interregional connectivity by year-end. Adoption of ECX Fabric inter-metro functionality is ahead of expectations as customers connect to counterparties in different metro locations and between their own deployments across Platform Equinix.

Our Internet exchange platform also continues to grow in both ports and traffic volumes, and we have been expanding our IX presence to make our entire interconnection portfolio available across our global footprint. This quarter, we launched new Internet exchanges in Denver, Houston, Lisbon and Madrid and now operate in 32 markets globally.

Now I'll cover some highlights from our verticals. Our network vertical delivered strong bookings led by APAC, growth in the wireless subsegment and strong sell-through business with our top NSP partners as we -- as end customers expand capabilities for digital business. New wins and expansions included Pivotel Satellite, a leading Australian mobile satellite solution provider, extending network coverage; and China Mobile, also extending its network to support a growing user base.

Our fastest-growing vertical, enterprise, experienced record bookings led by manufacturing, health care and government subsegments. New wins included Lithia Motors, a Fortune 500 auto retailer, optimizing their network topology and localizing traffic to improve performance and reduce costs; a Fortune 100 retail warehouse club connecting to multiple clouds; and a global beverage distributor implementing cloud connectivity.

Our financial services vertical achieved record bookings led by insurance and banking, reflecting solid execution of our strategy to tap new ecosystem opportunities beyond electronic trading. New wins included a top 20 global asset manager re-architecting its network and leveraging our dense ecosystems and a public government-sponsored enterprise in the mortgage market transforming network topology to improve performance.

Our cloud and IT vertical produced strong new logo growth and solid bookings as service providers embrace Equinix as a key partner in delivering the reach, performance and scalability they need in their global infrastructure. We see the cloud-first IT service marketplace diversifying, and we enjoyed new wins with ForeScout Technologies, LINX Technologies, CorpCloud and Secure Agility.

Our content and digital media vertical experienced strong bookings led by gaming and publishing subsegments. Expansions included Tencent deploying edge nodes to support their coverage and scale as well as a global commerce leader deploying their own CDN infrastructure in Australia to improve performance and end user experience.

And now, let me turn the call over to Keith to cover the results for the quarter.

Okay. Thanks, PVC, and good afternoon to everyone. We had a great second quarter of delivering strong results across each of our core operating metrics. Consistent with our expectations and implied in our financial guidance, both our gross and net bookings were all-time records and our booking pipeline continues to be robust.

Our AFFO per share metric trended above our expectations despite the recent M&A and financing activities, both which put the company in a better strategic and financial position. And as you know, currencies fluctuated meaningfully throughout the quarter while our hedges worked effectively to offset a significant portion of the volatility to our reported results. Given our bookings strength, our stable churn, we anticipate substantial quarter-over-quarter recurring revenue step-ups in the second half of the year and therefore anticipate a strong exit into 2019.

Turning to the acquisitions in April. We closed both the Metronode and Infomart Dallas transactions. We're already off to a good start and are working on expansion initiatives related to both these acquisitions, consistent with our internal plans. Our guidance now assumes an annualized revenue run rate of approximately $60 million for Metronode and $35 million from the current Infomart tenant base.

Revenues from the Verizon assets, having closed the transaction over a year ago, are now part of our reported results and have delivered against our internal plans while creating substantial value for our platform as well as being a highly accretive deal to our equity holders. We're seeing strong gross bookings related to the Verizon assets, and the forward pipeline remains active while we expect the MRR churn to abate by the end of the year. We continue to plan for flat quarter-over-quarter revenue growth from these assets over the remainder of the year.

As expected, we continue to invest in the IBXs to bring their operations to Equinix standards, including scaling the operations team, increasing our investment in business support and incurring higher repairs and maintenance expenses to support higher operating protocols. As we exit 2018 with the Verizon asset integration largely behind us, we expect the revenues to grow as we invest in the core Verizon markets, including the soon to be opened NAP of the Americas expansion in Miami. For integration costs, our guidance is essentially flat at $49 million for 2018.

So now turning to the second quarter. As depicted on Slide 4, Q2 was another strong quarter of operating performance and our 62nd quarter of sequential top line revenue growth. Global Q2 revenues were $1.262 billion, up 9% over the same quarter last year -- sorry -- yes, sorry, over the same quarter last year and above the top end of our guidance range on an FX-neutral basis. APAC and EMEA were the fastest-growing regions at 14% and 12%, respectively, on a year-over-year basis followed by the Americas at 6%. The Verizon assets contributed $133 million of revenues, essentially flat quarter-over-quarter as anticipated. Q2 revenues, net of our FX hedges, included a $9 million negative currency impact when compared to the Q1 average FX rates and a $10 million negative currency impact when compared to our FX guidance rates due to the strengthening of the U.S. dollar.

Global Q2 adjusted EBITDA was $604 million, up 6% over the same quarter last year and better than expectations due to lower integration costs and timing of our operating spend. Our adjusted EBITDA margin was 48.7%, excluding integration costs. Our Q2 adjusted EBITDA performance, net of our FX hedges, had a $1 million negative impact when compared to the Q1 average FX rates and a $3 million negative impact when compared to our FX guidance rates.

Global Q2 AFFO was $428 million, up 6% over the same quarter last year largely due to strong operating performance and lower-than-planned recurring capital expenditures. AFFO per share was $5.37, a 17% uplift over the same quarter last year. Q2 global MRR churn was 2.4%. For the year, we continue to expect 2018 MRR quarterly churn to average between 2% and 2.5%.

Billable cabinet additions were very strong this quarter, in part due to hyperscaler activity in our London-based hybrid assets, increasing by 5,900, a record for the business. Our MRR per cabinet metric remained firm, although down slightly on an FX-neutral basis due to the level of billable cabinet additions; strong sales activity into the smaller and lower-priced asset, effectively our mix; and the timing of large footprint deals.

Turning to regional highlights, whose full results are covered on Slides 5 through 7. The Americas region had a great quarter across the board, delivering solid revenue and adjusted EBITDA results. Record bookings in the region were led by the cloud and financial services verticals. EMEA also saw record bookings in the quarter led by the strength in our German and Dutch markets where we saw a sizable pickup in billable cabinets as large hyperscalers deployed across a number of our core markets, including more significant deployments in our London and Frankfurt campuses. And Asia Pacific continued to drive strong bookings, including strength in our Singapore and Japan markets as well as increased outbound bookings to the 2 other regions largely due to ongoing success with the Chinese and Korean multinationals leveraging our global platform.

Interconnection activity saw continued momentum, adding over 5,000 cross-connects and provisioning significant port capacity in the second quarter. In the quarter, interconnection revenues absorbed FX headwinds and some onetime adjustments related to the installed base review from our acquisitions, compressing our normally quarterly dollar step-up. The Americas and Asia Pacific interconnection revenues were 22% and 13%, respectively, while EMEA was 9% of recurring revenues. From a total company perspective, interconnection revenues were 17% of total recurring revenues.

And now looking at the capital structure, please refer to Slide 8. Our balance sheet continues to position us for success as we grow and scale the business globally. Our balance sheet eclipsed the $20 billion mark for the first time this quarter. Our unrestricted cash balance is approximately $1 billion. In July, we refinanced out of our yen-denominated debt in the Japan market, increasing our financial flexibility as well as extending and improving terms. Our net debt leverage ratio increased to 4.3x our Q2 annualized adjusted EBITDA with the close of the 2 recent acquisitions, slightly better than the pro forma target discussed at the Analyst Day on June 20. Also in the quarter, we saw a strong improvement in our working capital position as reflected in our operating cash flows.

Turning to Slide 9. For the quarter, capital expenditures were $520 million, including a recurring CapEx of $42 million. Consistent with our comments at Analyst Day, we're investing across many of our markets to support the scale of the business. We currently have 32 construction projects underway, 2/3 of which are on owned property, adding capacity in 23 markets around the world. The majority of our investment is going into highly utilized, margin-rich metros that each generate over $100 million of revenues. Revenues from owned assets stepped up to 47% with the close of the Infomart and Metronode acquisitions. We also purchased land parcels for future expansions in Dublin, Munich and Sydney.

Our capital investments are delivering healthy growth and strong returns as shown on Slide 10. This quarter we added the Verizon asset to our same-store analysis. We now have 128 stabilized assets that grew revenues 4% year-over-year on a same-store basis, largely driven by increasing colocation and interconnection revenues including increased power density. These stabilized assets are collectively 84% utilized and generate a 30% 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, excluding the impact of FX, we are increasing our revenue guidance by $10 million and our adjusted EBITDA guidance by $5 million largely due to favorability from our recent acquisitions. The strengthening of the U.S. dollar, net of our FX hedges, decreased full year revenues guidance by $55 million and adjusted EBITDA guidance by $21 million. Absent the FX hedges, revenues would have decreased by $97 million. This guidance implies a 9% year-over-year revenue growth rate and a healthy EBITDA margin of 48%, excluding integration costs.

And the momentum of our business is continuing to drive both AFFO and the AFFO per share growth, enabling us to offset the impact attributed to negative FX movements, the recent acquisitions and the higher debt service costs related to our incremental financings. We are maintaining our 2018 as-reported AFFO per share guidance of $20.19 per share at the midpoint or excluding integration costs, $20.82 per share. Over the remainder of the year, we expect quarterly fluctuations in the core components of AFFO generally due to the level of recurring capital spending patterns and discrete tax events related to our acquisitions. We've assumed a weighted average 80 million common shares outstanding on a fully diluted basis. AFFO is expected to grow 12% year-over-year on an as-reported basis. We expect our 2018 nonrecurring capital expenditures to range between $1.8 billion and $1.9 billion. And finally, with respect to our cash dividends, for the third quarter the dividend will be $2.28 per share. For 2018, we expect to pay out total cash dividends of $725 million, reflecting an AFFO payout ratio of approximately 45%.

So with that, I'll turn the call back to PVC.

Thanks, Keith. So in closing, we delivered a great quarter as our go-to-market engine drove record bookings and a strong pace of cabinet adds. Our global platform and ecosystems remain at the heart of the strategy as evidenced by strong cross-regional sales and healthy interconnection growth this quarter. We are looking forward to the second half as we focus on our strategic initiatives, deliver value from our acquisitions and work to convert a healthy pipeline for the remainder of the year.

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

(Operator Instructions) We have our first question from Frank Louthan from Raymond James.

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Stay on the HIT team and what you -- anything you've booked to date there. And then also on the APAC outbound sales that you said increased for the other 2 regions, can you just give a little bit more color on the types of customers that you are getting in multiple regions? I know you mentioned China Mobile. Anything else on the hyperscale side?

Frank, we missed the very first part of your question.

Yes, well, I was saying it's Alex on and then also that I was -- question about the HIT team. I know you gave a little bit of an update at the Analyst Day. But any color on bookings to date for that group?

Sure. So this is Charles, Alex. We did close some key wins that we would -- that were with the hyperscalers and that we would consider HIT-type opportunities. We did close those, however, in more hybrid facilities, particularly in London 9, 10 and as mentioned in the script, in Frankfurt. So we continue to see strong momentum in the pipeline, including closed deals already booking, and you really see that in the really extremely strong cabinet additions, particularly in Europe this past quarter. So very pleased with that. We continue to build out the team. Jim's been successful in bringing in some really key additional members of the team. And so they're off and running. Again, we're building pipeline. We're advancing the financial structure discussions well. We continue to get a lot of interest from financial partners who are eager to have exposure to this sector and do so with Equinix. We're sorting through a lot of the complexities and details of what those JV structures would look like. But all in all, continuing to see strong progress.

And just to -- I think what you were talking about in the other part of your question is more cross-regional bookings. And certainly, as we looked at a really strong bookings quarter, we had highs in the amount that was exported between one region and another. U.S. had a very strong export quarter, but also Asia did and I think you were touching a little bit on it. But China Mobile, Tencent, Baidu, all of those larger service providers have continued to grow with us and spread not just the U.S. but also to Europe.

Got it. Charles, one quick follow-up on the London 9 and 10. Does that change at all the return profiles given they were kind of in your existing facilities versus the purpose-built ones?

No. Generally, I would say that the -- those implementations were consistent with the underwriting of those facilities. Remember that, I believe it's London 10, is an acquired facility, and that was really targeted -- that's a prior IO facility, and that was targeted really with some of these kinds of footprints in mind. So no, we feel like the underwriting is consistent or the returns are going to be consistent with the underwriting that we have there. So again, I do think that those hybrid facilities have a slightly different profile given the mix of business. But in fact, those are consistent with the underwriting that we undertook.

We have our next question from Colby from Cowen and Company.

Two, if I may. First off -- 2 questions, if I may. First question, you guys noted record bookings in at least on the more traditional business book-to-bill cycles typically by maybe 3 or 6 months. So I'm wondering why we aren't seeing the core businesses guidance going up for 2018 unless, I guess, a lot of the hyperscale may have driven that. So a little bit of color there. And then secondly, on the nonrecurring portion of revenues, seems like there's some pretty strong outperformance there in the second quarter particularly in EMEA and even more so in Asia. I think you might have touched on it in your prepared remarks. But can you just explain what drove that and what we should be expecting in the back half of the year?

Colby, as it relates to revenues for the second half of the year, we did increase our guidance slightly, as you know. It was primarily related to the acquisitions and more specifically to Metronode. As it relates to the record bookings, one of the things I would note, it was record bookings both on a gross basis and a net basis. And so part of it -- part of what we anticipated, as I said in my prepared remarks, is that we had planned for this. And so in anticipation of what we needed to do to deliver a strong year, which was 9% growth normalized and on a constant currency basis, we had to have a very strong back of the year. As you'll recall, Q1 was a relatively soft quarter-over-quarter for us for a number of reasons, some of it -- which was nonrecurring. So as we look into Q3 and Q4, ultimately, what you're going to see is the largest step-ups we will ever have had in our recurring revenue lines. And that's why we made that comment in the prepared remarks, but also position ourselves for what we thought would be a good exit of 2018 into 2019. And so again, feel comfortable with the guidance. We'd already made -- we already anticipated the large step-ups. And that is offset in part by some of the churn that we've anticipated in the business, more specifically the Verizon assets, which is, again, continues to be flat for the rest of the year.

Keith, you had mentioned, I think, earlier that we should see sequential growth improve throughout 2018. I think it is 2% in the second quarter, which was up versus the first quarter. Is that still the expectation based on what you just said?

Yes, look, I anticipate it. Like anything, there is a little bit of chunkiness to what we're doing. Charles alluded to some of the large hyperscale deals. There's these what we refer to as HIT-oriented transactions that we booked into the London and Frankfurt campuses. But there's a number of other transactions or bookings that we've done with these large hyperscalers that are below what we refer to as our threshold target, which is less than a megawatt of activity. And so there's a number of circumstances where the complexity of the transaction is such that the time that we recognize the booking to the time that we recognize the revenue is slightly different. And so there's a combination of things that are taking place. But I'd go back to the fact that there's going to be a little bit wait-and-see, but we believe that we'll have the best recurring quarters we've ever had in our history in Q3 and Q4.

And then the nonrecurring?

Nonrecurring, again, I think strong with nonrecurring for Q3, and we made an assumption for Q4 that it would step down slightly. But overall, again, nonrecurring revenue is a component of our overall revenues. We said we're still targeting roughly 5%, and that's what we're going to continue to assume at this point. So again, expect a little bit of a step-down in Q4, and that's embedded in our guidance.

So 3Q looks a lot more like 2Q?

Yes, it does.

Next questions will be coming from Phil Cusick of JPMorgan.

You noted record bookings. How should we think about the timing of when those lead to some acceleration in revenue with some of the high end of that 8% to 10%? And has there been any change in the timing of book-to-bill as your business has expanded globally?

Well, as we noted, certainly, this bookings is resulting in an MRR step-up that we haven't seen before. So that's certainly a direct result of that. So you're seeing an acceleration in MRR as you look at the back half of the year unfold. The other question was...

Book-to-bill. I would say that I think book-to-bill depends a little bit on deal type and mix. So sometimes, you get a more -- slightly more protracted book-to-bill on the larger opportunities because you take a bit of time to sort of ramp in and scale, and there's some complexity to implementing sort of deals of that size. So it all depends. But I think that's all baked into the guidance in terms of how we see the back half playing out. As we said, I think we're looking at record quarters from an MRR step-up standpoint in terms of the history of the company in the last -- in the back half of the year.

And Phil, the one thing I just want to add to what PVC and Charles have said, if you actually look at the implied growth relative to the guidance we delivered, again, you'll recognize we're -- obviously we're offering guidance, but we target mid to -- between mid and the high end of the range. And so when you start to look at the guidance relative to what that implies on an annualized basis, you will see effectively a step-up in our growth rate. And so when you annualize that growth rate, again, if you look at, again, revenues in Q3, Q4, if you took the high end, you'd be above the 10% range on an annualized basis. If you go to midpoint, you're going to be more towards the low end of that range. And so we feel very good about the guidance that we're delivering and the ability to step up. And I'd just go back to the fact that these record bookings are implied -- were implied in our prior guidance. You're going to see them, we believe, come through in Q3 and Q4 in our recurring revenue line. And then a little bit of volatility, as always, is the nonrecurring activity particularly around the larger footprint of deals that we book. And so we anticipate that we'll be strong in Q3, but we're going to take a little bit of a step-down in Q4. And that's how I think you should see the revenues play out and is consistent with the message of having strong record bookings this quarter on both a gross and net basis.

Our next question from Jonathan Atkin of RBC.

So I got a question about cross-connect trends by region. Strong growth in the Americas and then a little bit of a step-down in Asia Pac and EMEA and I wondered what drove that.

Yes, what I would say is that overall, we're very happy with the momentum on the cross-connect side of things. We track pretty closely. You guys are just -- you're looking at sort of net numbers here. One of the things that we obviously watch pretty closely is both the gross and the net, and I think that the general trajectory is good for the business. And as I said, any individual quarter, we've always said that they can be a little bit up and down really depending on things like 100 Gb migrations, et cetera, that are occurring. We are seeing some headwind from that. And so I would say on a net basis, this sort of level of 5,000-plus in aggregate is pretty good, and we're -- it just depends on kind of what kind of migration activity or other things we're seeing. We did see, again, at the -- on the revenue line, the interconnection a little bit more of a -- some effects of us working through the reconciliation of our installed base of cross-connects post the Telecity transaction and some credits associated with sorting through that installed base and what's there. So I think that affected the revenue line a little bit and perhaps the count as well. But overall, the gross additions across the region tend -- continue to be strong.

Okay. So the migration is maybe mostly complete in Americas but still in the middle of the process in the other regions that might explain the net comparison?

Well, that's -- that would be -- I do -- I would say that 100 Gb migrations are probably more advanced in the U.S. We probably worked through more of those. So they are phasing globally, as these things tend to do. But the other thing is, is that, again, the reconciliation of sort of acquisition portfolio cross-connect sort of inventory is something that affects those numbers sometimes. And that tends to lag. It's one of the really long-tail items in our integrations. And what you actually are seeing this quarter is still an effect of -- is more in Telecity markets because we have to inventory -- this huge population of cross-connects that comes in through these acquisitions are inventoried one by one to reconcile them to the installed base and ensure the billing records are accurate, et cetera. And so that often sort of results in puts and takes in terms of the cross-connect count, and so you saw some of that in EMEA this quarter. But again, I think the most important thing in our mind is the continued health of the interconnection value proposition, and we measure that by really gross adds, our people continuing to buy into the full interconnection portfolio. And we're seeing that not only in cross-connects, but now also in terms of momentum -- continued momentum with the IX and then really strong performance of the ECX with Fabric now 10,000 plus and we added a good chunk to that this quarter in terms of virtual connections. So the interconnection portfolio, I would say, is performing very well.

Thank you also for that latter part about the ECX Fabric. And then on EBITDA margins, it looks like you saw sequential growth in EMEA and APAC and then pressures in the U.S., and if you can maybe kind of call out some of the factors there.

The U.S. -- the largest component of the U.S. is really the decision and it was always embedded in our internal plans as evidenced by our performance relative to EBITDA. There was the investment in, ultimately, the Verizon assets. As I said, there are 3 primary areas where we put more energy and invest heavily, and we anticipate that we'll continue to make those investments in Q3 and Q4. And it's really building out our operations team, our business support, doing more R&M than was ever done before. And if you go back to the point of time when we originally disclosed on the 8-K the Verizon transaction, they're doing very little relative to what we do, very little R&M relative to what we would invest and to meet our operating protocols. And so this is a natural output of our decision to acquire what's embedded in the internal plans, and it's certainly included in our forecast. So there's nothing meaningful, Jonathan, that's going on here other than we're executing consistent with what we said and it has a little bit of a knock-on effect on some of the margin profiles as you look forward.

And then lastly, you mentioned China Mobile, Tencent, Baidu as well as kind of Korean drivers as exports of business into other regions. And I'm wondering, are these mainly sources of cabinet adds at this time? Are they driving cross-connects as your ecosystem developing to speak out related to maybe some of the Chinese cloud players? Or is it too soon to be commenting on that?

My reaction would be it's probably too soon or at least I haven't looked specifically at their cross-connect data to see how much traction they're having. But clearly, it's been resulting in cabinet adds as they build out their platform. And with their business growth, we would certainly see cross-connects associated with it. But I don't have that. I don't know. I'm looking at Charles or Keith to see...

No, I would say I do think that they tend to be -- they come with a high absolute cross-connect count oftentimes because their private interconnection -- they include a private interconnection node along with the cloud footprint, but they also come with a lot of cabinets. And so I think they really serve our interests well strategically in terms of continuing to really enhance the overall platform value proposition. And in the end, that's really the core strategy is to continue to position Platform Equinix as sort of a central hub for people as they sort of deploy their hybrid multicloud architectures. And so these things really work very strongly in that favor. But they are high cabinet counts. They are high cross-connect counts. But on a cross-connect per cab basis, they're probably lower than the average just because they're so large.

Our next question comes from Michael Rollins of Citi.

Two, if I could. First is you mentioned, I think, the strength recently in indirect sales. I was curious if you could talk a little bit more about the types of sales that are being generated out of the indirect channels and how you see that impacting the bookings opportunity as you look out over the next 6 to 18 months.

Sure. And I'll take a first crack at that, Mike. It's Charles. The -- yes, we had really strong continued momentum in the channel overall. And I would say there's a variety of selling motions. Right now I still think we're seeing mostly sell-with activity, meaning that we're mobilizing sort of our direct teams to partner with our channel sales -- channel partner sales teams to win end user opportunities. We saw about more than 50% of our new logos came through the indirect channel, more than 20% of our bookings coming from that. In terms of the types of opportunities, to directly address your question, I would say it really falls into one continued sort of network optimization type opportunities, hybrid and multicloud as a primary use case, people really beginning to implement that at a much more aggressive pace and doing it really typically with larger enterprise customers with whom these channel partners are well positioned from an account access and decision-maker access standpoint. So -- and I think we've talked about who some of those are. For example, AT&T and other NSPs really acting as very effective sales -- or channel partners for us as they sell a more comprehensive sort of connectivity and cloud sort of solution and value proposition to their customers. And a lot of momentum with the hyperscalers themselves. They are -- I would say you have a range of appetite in terms of how they view hybrid cloud. But all of them are seeing now that their big customers are saying, "Look, that's the reality. That's what I want. That's what I need. I'm going to deploy and implement significant private infrastructure." And so we see, with the likes of Microsoft, for example, that has Azure Stack and other really core hybrid private cloud value propositions, really strong momentum in terms of going to big, large, global multinational customers implementing hybrid cloud. So those are probably the ones. But -- and again, AWS, same thing. I think several years ago, I would say that there was not a lot of discussion about hybrid in the context of AWS, and now I would say there's a lot more. And so we are actively partnering with them to serve customers who are looking at hybrid cloud architecture. So I think those are probably some -- a little color on what we're seeing there.

Our next question comes from Erik Rasmussen of Stifel.

We have Jeff Kvaal of Nomura Internet (sic) [Instinet].

I'm hoping to probe a little bit more on the interconnection revenues, if we could. You -- obviously, you've given us some qualitative sense about why things are lumpy up or lumpy down, and in this case, maybe lumpy down. I'm wondering if you could add a little bit of qualitative or quantitative color to that or help us gauge how quickly you think that interconnection revenue should be growing over the course of time, whether it's absolute figure or relative to colo revenue or anything that will help us think that through would be wonderful.

Yes, I mean, I -- you want to take first crack?

Well, I was just going to make the comment, we're just continuing to see it outpace the colocation business and feel good about the prospects of that continuing in terms of just all our selling activity and the nature of customers that we're bringing on board, a bit -- highly interconnection focused. Clearly, this quarter, the lumpy down, I like your term, some due to the specific, as Charles outlined, just billing cleanup and counts in the Telecity centers in Europe had some impact on that growth. But we're just continuing to see at a gross level 5,000 to 7,000 cross-connect adds every quarter, and that just continues to move forward with us. So certainly, some churn has come from the 100 Gb upgrades. But ultimately, the momentum with cross-connects is just continuing, and we'll continue to see it outpacing colocation.

So would it be fair to say then that a 5,000 to 7,000 per quarter growth rate is plus or minus steady state aside from some of these cleanups?

That's what it's been, yes.

Yes, I think that's right. And I think we're seeing more the low end on that because we are seeing some of the 100 Gb migrations coming through with larger cross-connect count customers. And so that does -- but I will tell you that in terms of when we look at the health of the overall gross additions in terms of cross-connect adds as well as just broader interconnection adds across the ECX Fabric and IX as well, we really see strong sort of metrics both in terms of customer count, the percentage of customers that are buying across the portfolio, the number of locations in which they're buying, all of those things which we sort of view as central to the health of the interconnection business overall are pointed in the right direction. So yes, I think 5,000 to 7,000 is a reasonable sort of steady state for us, and we're probably operating a bit more at the low end right now because of the -- some of the 100 Gb pressures.

We have now Erik Rasmussen from Stifel.

Just 2 quick. First, I guess, in terms of the Infomart in Dallas, you had that now closed in the quarter. Are you seeing any surprise -- any positive surprises to your prior expectations? And then what are your plans for the adjacent land and time line for future development? And then in terms of the interconnection, obviously, we're talking about 100 Gb right now, but the industry continues to migrate and we're even hearing of 400 Gb. Is this also coming up more with discussions with your customers?

Yes, to the first one, Infomart, no real surprises to the upside. But coming into it, we knew our investment and expansions that we planned there were going to deliver the upside and growth in the Infomart acquisition. Clearly, we did it through the strategic value of the interconnection hub that sits there and the opportunity that, that Dallas market presents from just overall colocation and interconnection standpoint. So yes, we're moving on the next phase of the Infomart Dallas 6, I believe, is the current count. But we're also doing the groundwork to look at expansions and take advantage of that parking lot to do something more meaningful both at a retail and hyperscale level. And so that work is underway, but nothing to announce from a specific investment standpoint as yet on those expansions. But really a lot of the upside with Dallas will be about our expansions in that market. And then on 400 Gb, we're not seeing or hearing anything from customers to that end as yet. We've continued to live through a number of upgrades. 10 Gb was a big step years ago and now, of course, at 100. I don't see anything from 400 on the horizon anytime really soon.

We have Aryeh Klein from BMO Capital Markets.

Just going back to the interconnection revenues. Is the reconciliation with Telecity a one-quarter phenomenon? Should we expect it to bounce back relatively quickly? And then it looks like you had a couple of pushouts on some projects, including in Paris. Is there anything notable related to those?

No. I'll hit the last one and Keith, if you want to talk at all about the first one. But the last one, relative to Paris, it was a soils issue that resulted in a slight delay in that project. But that's nothing particularly out of the ordinary, very slight delay in that project, nothing to worry about.

And Aryeh, as it relates to the reconciliation of the installed base, as Charles alluded to, it's really the long tail of our integration efforts. And because we have to count every single unit to make sure we tie the physical to basically the contract and ultimately to the bill, it takes an exceedingly long amount of time to do that, no different than what we've experienced in some of our prior acquisitions. And so it's something that you should continue to expect us to do. I'm not -- I don't anticipate the same level of adjustment from a -- with our customers or from a revenue perspective, but you should anticipate that this is going to last many quarters well into 2019.

We have Simon Flannery from Morgan Stanley.

This is Lisa for Simon. Maybe a quick one on just how you think about your balance sheet comfort. I know you target kind of 3 to 4 leverage ratio and there's talks and you continue to look for an investment-grade rating. Just maybe an update on kind of the progress towards that.

Yes, Lisa, thanks for the question. Again, relative to what we talked about at the Analyst Day on June 20, we thought we'd be about 4.5x levered coming out of this quarter. Numbers looks more like 4.3x, and there's a couple reasons for that. Number one, we're continuing to show progress towards our EBITDA goals, and we're seeing an uptick in EBITDA helps with that immensely. Secondly, when we did the acquisition of the Infomart transaction, because of how we -- the way it gets accounted for, we took roughly $200 million of debt off our books from build-to-suit transactions that we had previous to the acquisition. And also given currency movements in Europe and then the fact that we've got the Infomart secure -- senior note, I should say, senior notes that will be paid off at $150 million a quarter, you can see over a relatively short period of time we're going to get well into our targeted range of 3x to 4x net leverage. So I feel good about the progress that we're making. That all said, our appetite, as again we -- sort of levering off of what we talked about at the Analyst Day, we're going to continue to invest across our global footprint, and with that comes a lot of capital spend. Capital spend, with that comes incremental raising of capital. And so as a company, we're going to continue to focus on the growth and not -- we absolutely care about investment-grade, but that will continue to be aspirational because we think the way we can drive the most return to all constituents is really by growing the business and driving more cash flow into it. And so that -- what I would tell you over that time horizon and the plan that we shared with everybody '18 to '22, we're well within the targeted range of becoming investment-grade simultaneously -- simultaneous with investing in the business, paying our dividends, paying our taxes and scaling the business. So I'm confident we're on the right path. I'm just not confident that it's -- we'd be investment-grade over the next quarter or 2. I think it's going to be a little longer than that.

Our next question is from Robert Gutman from Guggenheim Partners.

As I just looked at the guide -- the midpoint of guidance for the full year and for the third quarter and I just back into what's implied at the end of the year, it looks like there's an implication of EBITDA margin, a bit of a step-down towards the end of the year. Is that right? And what would that be due to?

Yes, Robert, look, there's a lot of -- we've given you relatively broad ranges. As we said, we're going to continue to invest in a number of areas related to the Verizon assets. There's a number of integrations that are taking place. But overall, when you look at how we're progressing through the rest of the year, depending on whether it's mid- to high point of range, feel very comfortable what we're delivering relative to what we told you at the beginning part of the year. And so just recognize there's a little bit of comfort in the guidance that we've delivered. And as we continue to progress through the quarter and into Q4, we'll give you certainly updated color at that point in time. But overall, it's just -- it's a manifestation of the range that we provided, giving ourselves a little bit more flexibility.

Our last question comes from Jonathan Atkin of RBC.

Just to follow up on the channel comment and passing the 20% benchmark, I'm assuming that a lot of that business is sourced from the U.S. including into other regions. But I wondered if there was anything to call out in terms of channel contributions that came from within EMEA or within Asia Pac.

Actually, no. I would say there are mix of business, so the channel is actually quite good. So I don't have off the top of my head exactly how big the range is in terms of percentage of bookings from channel. But it's not like that was -- that 20% is really a big over-indexing in one particular region. So all 3 of the regions now are fairly well advanced in the development of the channel program. And it probably looks slightly different in terms of the exact partners because I think that partners do tend to be a bit more regional in their scope of business. We do have some really big global channel partners certainly, but a lot of the activity does come from more localized partners. I'm personally very energized about how the channel program is progressing. And one of the things that's really, for folks who've been around these things over time, is you have to build a level of confidence in the sales team that channel is good for them. When you have a direct selling team and that's your history and legacy, it's actually often difficult for them to gain the level of sort of trust and credibility -- or for the channel to gain trust and credibility with them and vice versa to that matter -- for that matter. But I think we're really seeing that now. And as we add talent to our team in terms of -- we're now 460-plus quota-bearing heads. Many of those have been added over the last several years, and we try very hard to add people who are sophisticated multichannel sellers. And they get it. They understand how channel partners can be effective for them in sort of meeting their quotas. So -- and again, that's strong across the board across the 3 regions.

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