EQIX - NASDAQ

Good afternoon, and welcome to the Equinix Second Quarter Earnings Conference Call. [Operator Instructions] Also today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'd now like to turn the call over to Mr. Chip Newcom, Senior Director of Investor Relations. You may begin.

Good afternoon, and welcome to today's conference call. Before we get started, I would like to remind everyone that some of the statements that we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we've identified in today's press release as well as those identified in our filings with the SEC, including our most recent Form 10-K filed February 12, 2025, and our most recent Form 10-Q. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter unless it's done through an explicit public disclosure. On today's conference call, we will provide non-GAAP measures. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor Relations page at www.equinix.com. We've made available on the IR page of our website a presentation designed to accompany this discussion, along with certain supplemental financial information and other data. We 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 Adaire Fox-Martin, Equinix' CEO and President; and Keith Taylor, Chief Financial Officer. Following our prepared remarks, we will be taking questions from sell-side analysts. At this time, I'll turn the call over to Adaire.

Thank you, Chip. Hello, everyone. Good afternoon and a warm welcome to our earnings call for the second quarter 2025. Our Q2 results demonstrate that our strategy is meeting the opportunity. This is evidenced not only by strong financial metrics, but also by our continued customer momentum and strong delivery in key areas of our business. By way of highlights. First, from a financial perspective, the Equinix team delivered. In Q2, our revenues, adjusted EBITDA and AFFO were all in line with or better than expectations. This performance was underpinned by strong recurring revenue growth and solid operating flow-through, resulting in adjusted EBITDA margins hitting 50%. Second, our relevance to existing and new customers continues to deepen. In Q2, we closed 4,100 deals across more than 3,300 customers, resulting in $345 million of annualized gross bookings for the quarter, a new metric that we disclosed at Analyst Day. Our teams delivered this performance through strong small- and medium-sized deal activity with a notable uptick in inter and intra region sales, all whilst maintaining favorable pricing across deal sizes. Third, our performance translated into solid nonfinancial results with substantial net interconnection additions, solid cabinets billing led by the Americas and strong MRR per cabinet yields. Our diverse interconnected ecosystems continue to drive industry-leading returns as seen in the performance of our stabilized asset portfolio. Now before we take a closer look at Q2, I want to focus for a moment on our long-term vision. It was a pleasure to connect with many of you at our Analyst Day last month. At that time, we outlined the opportunities we see in the market across AI, hybrid and multi- cloud and networking. We presented this strategy we have defined to unlock these opportunities and against which we are already rapidly executing. And we shared important financial guidance for the next 5 years. Since Analyst Day, we have had a fruitful dialogue with many of our shareholders and analysts to listen to your feedback and to answer your questions. With those conversations in mind, I would like to offer some key points of clarity on the Build Bolder component of our strategy, whilst Keith will provide additional commentary on the long-term financial outlook in his remarks. First, as outlined on Slide 6, our capital expenditure is about capacity expansion with the aim of accelerating revenue. The vast majority of our investments over the next 5 years are expected to be allocated to our future growth. This includes the purchase of land, the construction of new IBX data centers, investment in our xScale joint ventures and developing digital product offerings. As I outlined in my presentation at Analyst Day, we see a significant addressable market opportunity in front of Equinix. And this opportunity is affirmed by the demand signals from our customers. Our customers rely on Equinix for the digital infrastructure necessary to support and scale their AI models. They look to us as they embrace hybrid and multi-cloud strategies for their application architecture. Our customers are the motivation for the expansion and scale of our capital investments. Second, only about 1% of our nonrecurring capital expenditures will be allocated to the redevelopment of select high-value IBX assets. The redevelopment of key ecosystem facilities like Washington, D.C. and [ Miami1 ] will not only extend the economic lives of these assets. But at the conclusion of these projects, we believe we will be able to yield meaningful additional space and power capacity at attractive returns. Third, with regard to returns, we expect to underwrite our investments in assets that will yield approximately 25% at stabilization, in line with our current stabilized portfolio. Our growth investments are intended to skew towards our major markets, where we generate over $100 million in annual revenue. By prioritizing our large markets, we can leverage our diverse and deep customer relationships and our in-place operating capabilities to derisk our investment plans and drive efficiencies at scale. Finally, with regards to timing of revenue, whilst it takes approximately 18 to 24 months to build a core shell and first phase of an IBX asset, we are anticipating an accelerated path to stabilization relative to historical trends. Hence, whilst we guided through 2029, our near- to medium-term investments will support our durable growth beyond 2029. We see a path to drive the business to double- digit revenue growth as our Build Bolder strategy becomes fully operational. Our capital expenditures and data center expansion are grounded in the demand signals we see from our customer base. Organizations are moving beyond the experimentation and pilot phase of AI adoption into the phase of agentic integration and automation. Many of our customers have deployed AI centers of excellence. These teams are working to establish standardized governance policies and TCO-based management of enterprise AI road maps. These are the necessary prerequisites to enable the scaling of agentic use cases and their integration into core systems, resulting in always-on AI that is compliant to policy. The use cases that we see are far ranging from those that are grounded in privacy and sovereignty requirements to use cases requiring distributed delivery and secure interconnection to those that have at their core predictable performance, coupled with neutrality and control. Customers' priorities are unique but Equinix is uniquely positioned to address these priorities. Alembic, Block, Bristol Myers Squibb, Continental, Harrison.ai and ServiceNow, amongst many others, are working with us to support their AI ambitions and their growth objectives. As I noted at our Analyst Day, we firmly believe that Equinix has been built for this moment. We are investing in our future in service to our customers and in service to the opportunity ahead. Through these efforts, we believe we will continue to deliver attractive revenue growth, expanded margins and accretive value to our shareholders over the long term. Now I would like to take a closer look at our financial results for the quarter and our customer momentum. As a reminder, the growth rates shared are all on a normalized and constant currency basis. In Q2, we delivered revenues of $2.26 billion, up 5% year-over-year. This was driven by strong recurring revenue growth, up 7% year-over-year, the result of our continued strong bookings performance. As previously stated, our second half outlook implies underlying recurring revenue step-up, a reflection of our strong first half bookings and conversion of backlog. For nonrecurring revenues in Q2, we had lower xScale fees, which was as expected and planned for. Based on our current pipeline for xScale and consistent with our initial full year guidance, we are anticipating a meaningful step-up in NRR in the second half, more specifically in Q4. Adjusted EBITDA margins increased to 50% of revenues for the first time in our history. AFFO per share increased 8% year-over-year. In both instances, results were above our expectations due to strong operating performance and lower-than-expected SG&A expenses, in part due to the timing of spend. Keith will provide additional insight into these numbers shortly. Turning to our customer momentum. We continue to cultivate and win opportunities across our product set and in service to the enduring demand for AI, hybrid and multi-cloud deployments and networking requirements. Lyceum Technologies, a German GPU as a service provider recently added a liquid-cooled AI deployment in EMEA to bring automated cloud experiences to their customers. Schneider Electric chose Equinix to lower the overall carbon footprint of their digital infrastructure as they build out a multi-cloud solution leveraging fabric cloud router. Woolworths, the largest retailer of food and everyday essentials in Australia and New

Thanks, Adaire, and good afternoon to everyone. Well, we had another great quarter, and we're very excited about what the future holds for Equinix. We had strong and diversified annualized gross bookings, our new metric of $345 million in the second quarter. These bookings are foundational to the expected quarter-on-quarter recurring revenue growth in the next 2 quarters and as we set the stage for 2026. Also, we delivered healthy operating leverage to the business, resulting in adjusted EBITDA margins hitting 50% for the quarter, the first time in our history. And our nonfinancial metrics continue to trend favorably. All of this, alongside stronger non- U.S. dollar operating currencies allowed us to raise our guidance across all of our key operating metrics, while maintaining flexibility to invest in the second half of the year in support of our strategic moves. Now before I get into details for the quarter, I wanted to provide some clarifying thoughts related to the long-term financial outlook, which we shared with you at the June Analyst Day. First and most importantly, our Build Bolder investment strategy is about pressing our advantage by investing in future growth through the development of new data centers, as highlighted by Adaire. This build strategy is in support of our selling strategy to put the right customer with the right application into the right asset. Simply Build Bolder is about creating new capacity to meet the future demands for digital infrastructure. Second, the Analyst Day 5-year plan made a number of assumptions about the funding of our growth. As you've seen over the past couple of years, we've benefited by accessing many foreign debt capital markets, where interest rates are not only lower but where we can also mitigate potential FX exposures while also being tax efficient. It is our intention to continue to access these 4 markets to our fullest ability while not exposing our balance sheet to undo FX risk. Over the short term, you should expect us to continue to access lower capital cost markets in Canada and for -- while raising more debt capital in Europe in 2026. And finally, when rates and spreads move in the right direction in the United States, you should expect us to appropriately move to access this market while looking at the appropriate tenor for these capital raises. As it relates to our forecasted interest expense, we fully expect to capitalize a portion of our interest expense, which will be determined by the cost of that raised, the amount of assets under development, including land and the time line to operationalize these assets. Later this year, as we work through the annual planning cycle for next year, we plan to refine our estimate of net interest expense after interest capitalization, and we'll share these details with you in early 2026. And finally, as a reminder, our long-term goal is to deliver $50 or greater of AFFO per share in 2029. This AFFO per share target implies a 7% CAGR growth rate from 2025 through 2029. Given we expect 2026 will be at the lower end of our guided range, this outlook, therefore, implies an AFFO per share growth rate towards the top half of the range each year thereafter with 2029 being at the top end of the range. Now let me cover the highlights for the quarter as depicted on Slide 7. We do know that all growth rates in this section are on a normalized and constant currency basis. Global Q2 revenues were approximately $2.26 billion, up 5% over the same quarter last year and slightly above the midpoint of our guidance range. Our continued bookings momentum resulted in another quarter of strong recurring revenue growth at 7%, offset by a decrease in nonrecurring revenues, largely due to lower xScale fit out revenues and fees as expected. Net of our FX hedges, there was minimal FX impact when compared to our prior guidance rates. Global Q2 adjusted EBITDA was approximately $1.13 billion or 50% of revenues above the top end of our guidance range due to strong operating performance, including solid gross profit and lower-than-expected SG&A expenses in part due to timing of spend. Q2 adjusted EBITDA, net of our FX hedges, included a $2 million FX headwind when compared to our prior guidance rates. Global Q2 AFFO was $972 million, up 11% over the same quarter last year and well above our expectations for the quarter due to strong operating performance and lower income tax expenses. Q2 AFFO included a $3 million FX headwind when compared to our prior guidance rates. Global Q2 MRR churn was 2.6%, slightly above the high end of our range primarily due to the [ HEO ] bankruptcy. Absent the specific MRR churn, our metric would have been 2.4%. For the full year, we continue to expect MRR churn to be comfortably in our 2% to 2.5% quarterly guidance range. With respect to our nonfinancial metrics, they continue to trend favorably with global MR for cabinet yields stepping up $33 quarter- over-quarter on a constant currency basis, largely the result of favorable pricing and increasing power densities from the base. Cabinet's billing also saw a solid step-up in the quarter led by the Americas region, and we added 6,200 total net interconnections for the quarter. Now looking at our capital structure. Please refer to Slide 10. Our balance sheet increased to approximately $39 billion, including elevated cash and short-term investments totaling approximately $4.5 billion. Higher than typical, given the $1.2 billion of Q3 senior note repayments, one which has already been settled in July and the other expected to be settled in September. In the quarter, we issued $1.7 billion of euro-denominated senior green notes at a weighted average rate of 3.625%. Cumulatively, Equinix has issued $9 billion of green bonds making Equinix a top 5 U.S. issuer in the investment-grade green bond market. Our net leverage was 3.5x our annualized adjusted EBITDA. As noted during our Analyst Day, we fully expect our net leverage to increase over the next several years as we fund our growth both from the cash generated in business and with the incremental debt we plan to raise. Through 2029, we continue to remain comfortable raising our debt levels up to 4.5x in support of this growth and to fund our other strategic initiatives while maintaining our investment-grade rating. Turning to Slide 11. For the quarter, capital expenditures were approximately $990 million, including recurring CapEx of $55 million. We opened 5 major projects since our last earnings call, adding retail capacity in Chicago, Dallas, Toronto, Washington D.C. and Salalah, Oman. Over 70% of our announced retail expansion project spans is allocated to our largest metros where we have strong established ecosystem and can benefit from our economy of scale. Now moving to Slide 12. Our capital investments have continued to deliver strong returns. Our now 189 stabilized assets increased recurring revenues by 3% year-over-year on a constant currency basis and are collectively 82% utilized and generated a 26% cash-on- cash return on the gross PP&E invested on a constant currency basis. And finally, please refer to Slides 13 through 17 for an updated summary of 2025 guidance and bridges. Do note, all growth rates are on a normalized and constant currency basis. For the full year, we're raising our 2025 revenues guidance by $58 million. This maintains a 7% to 8% normalized and constant currency growth rate. Importantly, our outlook continues to imply a robust quarter-over-quarter step-up of our underlying recurring revenues in Q3 and Q4 and strong NRR activity in the fourth quarter driven by our pipeline of xScale opportunities. We're also raising our 2025 adjusted EBITDA guidance by $46 million. Adjusted EBITDA margins are expected to be approximately 49% with strong second half adjusted EBITDA margins at or near 50%. We're raising our 2025 AFFO guidance by $28 million. AFFO is expected to grow between 10% and 12%, and AFFO per share growth is expected to range between 7% and 10% compared to the previous year. And finally, 2025 CapEx is now expected to range between $3.8 billion and $4.3 billion, including approximately $450 million of on- balance sheet xScale spend, funds we expect to be reimbursed later this year as we transfer these assets into our U.S. joint venture. The increase in nonrecurring CapEx spend is largely due to a meaningful investment in prepurchase of long-lead equipment, the timing of contributing our xScale investments to the new xScale joint venture and our newly approved projects. Recurring CapEx spend is expected to be about $280 million. So I'm going to stop here and turn the call back to Adaire.

Thanks very much, Keith. In closing, we delivered a strong first half of 2025, achieving robust bookings and financial outcomes. We remain excited and optimistic about the future of Equinix and our differentiated and durable market position. We were built for this moment. No other player in the digital infrastructure landscape possesses the unique combination of strengths that are an inherent part of Equinix. Our diverse and neutral interconnected ecosystems, our extensive global footprint across key metros, our more than 10,000 enterprise customers across geographies, industries and segments, our track record of reliability and service excellence. As the world's digital infrastructure company, we are shortening the path to bandwidth connectivity to enable the innovations that enrich our work, life and planet. I'll stop here and open it up to questions.

[Operator Instructions] Our first caller is Nick Del Deo with MoffettNathanson LLC.

It was great to see the interconnection adds step back up this quarter, but they've had a bit of a sawtooth pattern over the past couple of years. So I wonder -- I was wondering if you could dig a bit more into what helped this quarter. Maybe talk a bit about what we should expect over the coming quarters for that metric.

Yes. Thanks for the question, Nick. I'm very happy to take that. As you mentioned, a very strong position for interconnection this quarter with revenues up 8% year-on-year and of course, contributing overall to the revenue of Equinix 6,200 additions, mostly focused around cloud and AI expansion opportunities with our customers. So largely looking at how the ecosystem of cloud and AI opportunities in our customer base look to secure their network presence in order to support the kind of workloads that they are hoping will be part of their landscape going forward. So this was, I think, a very strong quarter for us for interconnection. We saw use cases around our data center interconnect around FCR, our Fabric Cloud Router and on Network Edge being pulled through as well. And we look forward to continuing to work in order to ensure that we continue to grow and evolve the value of this part of the Equinix franchise.

John Atkin with RBC Capital Markets.

I was interested in the comment on the strong bookings momentum to start the third quarter. Is this seasonality? Is it sales incentives? Is it product appeal to certain customer bases or segments or maybe drill down a little bit as to what's driving that and what that might portend for even the rest of the year?

Yes. Happy to do that. Thanks very much. Maybe I can just perhaps characterize this a little with what we saw in the demand profile for the quarter just closed in Q2. We certainly saw a very broad-based set of activities across regions, customers and segments. We experienced very strong pricing in the second quarter. And we saw some great opportunity amongst retail, small and medium-sized transactions in the quarter. And interestingly enough, inter and intra-regional pickup. So again, supporting customers as they navigate from one region to another. So when we look forward into our bookings landscape for Q3 and the fact that we are at 40% as of yesterday of our bookings quota concluded. I think this speaks to a couple of things. First of all, to the momentum that we saw in the close of Q2 and how that carried forward into our Q3 bookings framework. Secondly, that we are very, very focused on growth. This is a very powerful aspect of our strategy, and of course, is an important aspect of driving ultimately AFFO per share. So as we look at this bookings momentum, you can see that we are giving you this view of inside our business so that you can see how that line is actually evolving. For us, Q3 will be less about impacting in a huge way recurring revenue in Q4. It's more about setting us up for the exit out of 2025 and into recurring revenue momentum of 2026. So a combination of focus, execution, continued momentum. And obviously, some presales from previous quarters coming into action at the start of the quarter but also just endless execution against what is a very strong pipeline in Q3. And also, as I mentioned in my remarks in our Q4 period. Very strong conversion rates that we saw in Q2 also coming through in the early days of Q3.

And Jon, maybe just one other thing. It was -- for us, we opened up 5 assets and 3 were very important markets for us. And I think that gives -- as Adaire was saying, that gives us the ability to build up on the momentum when you've got the Dallases, the Chicagos and markets like that coming online. And so there's a lot of opportunity there. And then the second thing I would just say, and Adaire alluded to it, benefit that we've seen is not only having a strong pipeline and the momentum, but it's also -- the backlog was a decrease quarter-over-quarter, and therefore, that sets up nicely for the second 2 quarters of the year.

I just wonder if there's anything also to call out on direct sales contributions versus indirect and partner channels. Any kind of update since Analyst Day on that mix?

Not particularly. I'd say that based on Q2 and '24, we saw a very steady resale motion in our channel business. Although in Q2 referrals were slightly lower. But we can still continue to execute very closely with our channel partners and still continue to evolve how we execute parts of our business relevant to our ecosystem. For example, in Indonesia, we've just launched a new partner program to allow us to sell in that way.

Our next caller is Eric Luebchow with Wells Fargo.

Adaire, you touched on this in your prepared remarks, I believe you said that you expect to accelerate the timing to stabilization in your Build Bolder plan versus what you've done historically. And I think historically, it would take about 2 to 4 or 5 years, if I recall. So maybe you could give us an update on your thoughts on how quickly you can stabilize some of the properties that you're planning to develop over the next for 4-plus years? And is the plan to potentially presell or pre-lease larger portions going forward to perhaps derisk some of the future capital spend?

Thank you for the question. So we mentioned that the typical build profile for us is an 18- to 24-month period. The time that we need to build the core and the shell and prepare that asset to its RFS status. Behind the opportunity to accelerate the path to stabilization relative to our historical trends are a couple of things. First of all, building in fewer or even singular phases as far as possible. That is part of our Build Bolder approach, looking to reduce or bring the phases down to a single phase of build and typically considering how we define stabilization that will, by itself, naturally move a stabilization process forward. Secondly, I think that we are seeing from our enterprise customers a larger footprint requirement for enterprise customers as they look to embrace the opportunities for their businesses afforded by AI and its capabilities. And so that also will, I think, progress the rate at which capacity is consumed in our assets. And then thirdly, the opportunity to look at presales activity in advance of RFS states when those states become known and clear, enabling us to de-risk the process and investment process towards these assets that we are building at the minute.

Our next call is already Aryeh Klein with BMO Capital Markets.

Maybe on the CapEx guidance, was it increased a decent bit here. Curious if you could maybe accelerate some of the investments that you're looking at to get capacity delivered more quickly. Do you have flexibility to do that? Is that something you can consider?

Right, look, it's probably not a to surprise you. Some of the things that impact the ability to deliver is things out of our control, supply chain and access to energy. All that said, we're doing our level best where possible to accelerate, which makes absolute sense. And then we're planning appropriately as we look forward. One of the references we made to a substantial increase in our CapEx was the amount of pre-buys that we're making inside the system so that we can deliver the capacity as quickly as possible. But I would just tell you, overall, Raouf and his team are wholly focused on delivering against what we refer to as the ready-for- service dates. And the extent that we can accelerate it, we will to the extent that we can collapse phases into one another, we will, as we referred to at the Analyst Day.

Yes. The focus on RFS and RFS delivery is something that is part of the regular cadence of our business now. We hope with the same accuracy that we're forecasting some of the differential aspects of our business. So there's a lot of attention on all of the levers that we have available to us to accelerate the investment into capacity.

Our next caller is Michael Elias with TD Cowen.

Two for me. First is on the prebuying of equipment, I presume it's things like backup diesel gen sets. My thought there is that if you're going to be warehousing of this equipment that actually kind of smooths the CapEx curve potentially to the end of driving better growth -- AFFO growth next year. Just wondering if I'm thinking about that right. And then the second question is that earlier you talked about the demand signals that you're seeing from customers? Any color you could give around those demand signals just to give us greater conviction around this Build Bolder initiative.

Maybe I'll take the second part of the question first and then Keith, if you wanted to address the first part. So let's speak a little bit to customer demand signals. I think there are some trends that we're seeing right across the infrastructure landscape, trends towards distributed workloads, trends towards clan activity and the importance of that. We're absolutely seeing density increase in the footprint within our data centers. And we're seeing deployment sizes trend up in the enterprise and retail space. And Build Bolder is really our response to those deployment sizes trending up because whilst most of these aspects play to our advantage to distributed workloads, the requirement for cloud connectivity and the ability to afford and offer denser workloads within our environment. And the deployment of size is trending up is in capture by our Build Bolder strategy building to the scale that our customers now require and need. Specifically to some of the demand signals that we are seeing from our customer, I think they form around a number of use cases, especially as it relates not just to the broad-based digital transformation demand, which, of course, is still very real for us. But as it relates to the demand for AI and AI-orientated workloads, those use cases focus around a number of topics. Around the concept of data privacy and sovereignty and that is a very important topic, broadly, globally, but more specifically, I think, in EMEA than in other regions. Around the need and the support to distribute AI so that the interconnect edge of Equinix becomes the connector between the cloud and the far edge for these workloads. Secure interconnection so that enterprise systems can connect to cloud, models, partners, service providers and do so securely. And the opportunity for neutrality and flexibility. So customer is recognizing that having freedom of choice is an important aspect of a value proposition as they navigate through the deployment of these different workloads. So these are some of the use cases that we're seeing in terms of conversations with our customers around the demand profile that we're addressing with them in a very collaborative and supportive manner. Keith?

Yes. And then Michael, the first part of your question on prebuy. Look, I think if you look at things in isolation and on the margin, your point would be valid that if you accelerate things into one year, it doesn't have an impact on the subsequent year. But I think given the scale and size of our investments over the 5-year period that we referred to at the Analyst Day, look, there's going to be ins and outs all the time. And so it wouldn't be appropriate -- there's time to suggest that it's going to cause any meaningful change to our AFFO. That all said, I think what is most important, and I know you know us really well. It is up to us to drive the most meaningful impact that we can have to our AFFO results is driving performance. And as Adaire talked about the momentum on the revenue line. And when you get revenue, it drives cash flow and profit. The second thing is the debt that we raised, and we talked a little bit about it at the Analyst Day and we had it in the prepared remarks. Just principally speaking, we're going to try and find ways to raise debt as efficiently as we can because it is such a big component of our business. And on the go forward, at least on an incremental basis. So to the extent we can access lower-cost capital markets, we're going to continue to do that to the extent that we can go raise more capital in Europe, we're going to go do that. We're looking very closely at inter capitalization, as we've talked about. We're looking very closely at how to get a good yield on the cash that does sit on the balance sheet so that we have effectively the best view into the sort of the net interest expense on a go-forward basis. But the biggest impact, of course, is just operating performance. And again, we're going to be very judicious on managing our funds both as it relates to funds we have today on the balance sheet and how we raise our future capital. But our goal is really to optimize the AFFO per share, as you would expect. And these timing events, I guess it was something that was out of the norm, we'll definitely let you know. But that -- this on the margin is not big enough to suggest any meaningful change.

Our next call is Frank Louthan with Raymond James.

Great. On the capitalization of interest, can you walk us through why you weren't doing that before? And then how much of an impact could that bring going forward?

Well, Frank, no, we weren't doing it before. We do capitalize interest. Remember, there's a couple of things that are going on that are different than the past as you look -- compared to what you look -- as you look forward. Number one, we have a really low cost of capital historically, as you and everybody knows. Two, the amount of investment that we're making is much greater tomorrow than it is today, if you will. And so that's an impact. Number three, you got to look at how much land are you carrying on your books and over what period are you capitalizing interest attributed to land that's certainly under development and then eventually to be built on. And so a number of factors that we look at. And so when you look at us, perhaps relative to others, we are a little bit lower generally because we have less assets under development on our books. So that would be one response. But the second response is as we look forward, we absolutely are looking at all of the all of the appropriate areas to determine exactly what should and should not be capitalized, whether it's interest or any other type of expense that we incur as a business. And so I would just say that overall, we're on top of it, but we have -- it's not that we weren't doing it before. I just think it will be a bigger component going forward largely because we're going to be carrying more debt and that debt is more expensive. And then the time line to build is extended as we all know, given supply chain and other circumstances.

Is there a range of impact you think that could have to the results? Or is it too early to tell?

It's too early to tell because as I said, number one, you have to understand what you're going to raise and when, what it lies on the balance sheet, which I think is really important. And I would just say that in all cases, we're going to try and drive down, if you will, the gross cost of our debt. So as I said, we're going to borrow money as we've been doing in other markets that are lower than the United States. So that's going to be a net positive relative to the guidance rate that -- the long-term guidance rate I gave you at the Analyst Day. So that's number one. Number two, we're going to look at capitalization. And to the extent that we have more hanging on our balance sheet, you're going to see more interest get capitalized as you would expect and as appropriate. And then the third piece is going to continue for us to invest our money judiciously so that we get a good return on the income that's sitting on the balance sheet, waiting to be deployed. And so these 3 components sort of make up effectively the net interest expense that we share with you on a quarterly basis. But I would just say, overall, we -- as you would expect, we're going to be working in all of those areas, plus all the things to run a better business that is as strong as it can be. Let me leave it at that.

Michael Rollins with Citi, you may go ahead.

Just a couple of follow-ups. So first, I'm curious on the MRR churn. What are the opportunities to improve MRR churn over time? And has there been some developments on the analytics that you've been involving within the company that helped bring some new insights there. And then secondly, just curious for an update on your outlook for xScale leasing in the back half of the year and going into '26. And maybe give us a sense of how much inventory within that context is available to sell and deliver?

Okay. I'll take the churn question first. So I think in Q3, the 2.6% was above our range, largely due to our bankruptcy that we had mentioned to you, I think, in our previous earnings call. And without that, we would have absolutely been within our range of 2% to 2.5%. For the full year, in the second half, the data available to us shows us that we will be back within that range. There are a number of elements to churn as it relates to how we define and manage this aspect of our business. A churn does not actually equal automatically a customer departure from Equinix. In fact, less than 10% of our churns actually resulted in an ultimate termination of the relationship Equinix. And it's interesting as we dive into the data that we can see that some customers are back in the same metro in the same product within a 12-month period and that a large proportion of the churn customers continue to grow revenue with us on a year-on-year basis. In fact, in some cases, over half of those customers do it at a greater than 10% click rate. Actually, managing and navigating churn is really an element behind our lean in on our CapEx and our growth. Because as you can see from Q2, we delivered $345 million in annualized gross bookings. And that means that we need to ensure that we have the capacity on our platform to deliver against those bookings. And the opportunity exists for us to relieve some pressure by bringing new capacity online. So driving growth is actually going to be a key lever for us in getting to a steady state on the bottom half of the churn range, which is actually also an objective that we're focused on. And that, of course, will release significant revenues to us. So I think it's fair to say that we've done tremendous work on the insights into this part of our business that there is certainly a period of time when one needs to preempt a salvageable churn. And that is often outside the context of a single financial year given all of the nuances that a customer needs to navigate and manage. As they look to upgrade or manage their own infrastructure and environment within our colo facility. But I feel that we are in a really strong position now with the data and the analytics that we have at our disposal to be able to look at this problem holistically and with a longer-term view. But ultimately, capacity is something that would be -- additional capacity will be a big solve here because we will be able to serve all customers who want to be part of the Equinix story. So that's as it relates to churn. Let's comment and have a look then at the xScale question. I think, first of all, it's important to recognize that we have a very strong track record here as it relates to xScale. In our remarks, we made a comment that 85% of our xScale facilities are leased and under development are already pre-leased. As far as our xScale pipeline is concerned, the pipeline supports a step-up in NRR in the second half. We are back-end loaded against that pipeline, but that was always a characteristic of the year. That was always something that we knew and understood. We're very confident in the execution capabilities of the team because we recognize that overall, this number will have a significant impact, not just on performance but also on margin contribution. Many of the conversations that we're having with customers are in our pipeline are for capacity that is in late '26 and beyond and I might ask Keith just to give you a little bit of the numbers of that in a moment. I do just want to characterize one aspect of our xScale business, which I think is important to appreciate, not only for Equinix, but for the industry at large, these transactions are inherently lumpy. And they do have a dependency on RFS delivery dates. And as Keith has already mentioned in an earlier answer, we work exceptionally hard to maintain our delivery dates on track. We have undertaken the prepurchase of key components in our supply chain to minimize risk but there will always be some variables that are outside our control. That being said, xScale is a very critical part of our product continuum. It allows us to move from wholesale through to large footprint and it now enables us to enable in an AI world, not just for hyperscaler capacity, but also for capacity to support some of the increasing footprint that we're seeing in retail. And finally, just as a last remark for me on this topic, perhaps before we get into the specificity of the numbers here, we are very, very actively engaged executive to executive with our hyperscaler partners. And we continue to orchestrate and iterate against the needs they're expressing in the market. And Keith, I don't know if you wanted to pass some comments about some of the capacity elements that are coming on that.

Yes, Michael, perhaps just a couple of other points I would like to make, and maybe 3 points. First and foremost, as Adaire alluded to, and you see that in the slide that we shared with you on the earnings deck, I think it's Page 26, the xScale. We've effectively released 416 of the 480 megawatts of capacity that's either delivered or is under construction. In addition to that, in the prepared remarks, we've talked about Hampton and we've talked about other sites. It is our expectation, particularly with the demand environment looking out over an extended period of time, that we will be able to lock up other opportunities in capacity that has not yet been delivered or is not yet under construction. But I think that's important just to note. The second thing I just want to highlight is that the recurring revenue model, largely when you see the guidance for Q3 relative to Q2, there's a nice step-up in currency. We all knew that was coming. But what is even more telling is there's a nice step-up in recurring revenue. In fact, recurring revenue makes up more than 100% of the non-FX guidance increase to the midpoint, which tells you that nonrecurring revenues are going down quarter-over-quarter, and then we'll step back up in the fourth quarter. So I think that was -- that's important to note. And then the last thing I would just say, this quarter being Q2 NRR revenue represented about 5% of our revenues. In Q3, it's going to be about 4.5% of our revenues, and in Q4, it's going to be about 6% of our revenues. So it gives you a sense that as Adaire alluded to, is lumpy, and it will continue to be lumpy for an extended period of time. But I think the most fundamental thing that we wanted to share with you is that the recurring revenue model is continuing to accelerate, and that's what gives us the -- that's the attractiveness to the model, but it also gives us the entree into 2026, which again, that alluded to previously, which is really important for our '26 guide and onwards.

Our next caller is Michael Funk with Bank of America.

Thank you again, for the additional detail on the development spending breakdown. Very, very helpful. But partly different question for you, Keith. So thinking about the stabilized colocation portfolio growth of 2%. In my mind, given the strong re-leasing spreads across the industry, churn projected to come down, occupancy ticking up and then escalators baked in, I would think that number should be significantly higher. So if not, can you explain why? And then I guess if I'm right, what takes us to a meaningfully higher number for the portfolio growth?

Yes, Mike, let me give you a couple of comments and certainly feel free to ask a follow-up if we don't hit the mark. So between Adaire and myself will, I think, deal with this question. First and foremost, you have to appreciate that we have the highest returning assets in our portfolio, and you can see that at our price points. And so a 3% stabilized asset increased quarter-over-quarter, year-over- year. Those type of things really make a difference as you're looking at the performance of the business. And you see strong MRR is because of price, it's because of density and that's sort of the quarter-over-quarter comment I was really making is the $33 increase in MRR per cabinet. The year-over-year stabilized, again, it's attractive, knowing where you're coming from. But the other thing I would tell you is, remember that there's some development assets like when we took DC2 out of the stabilized assets and put it back into expansion as we went through the development exercise, it is one of our best-performing assets on the globe, and you've now taken it out of the stabilized pool, and you've moved it into basically the expansion pool. So it does a couple of things. You don't get to see it and stabilized. But also when you look at the cash on cash yield and the results that we shared with you, that has an impact on that output as well. Suffice it to say, I think the industry is at a very good point in our journey, largely because you've got an undersupplied market. You have a very robust demand environment. And then you combine that with -- again, I go back to some of Adaire's remarks, we have a uniqueness about our business offering and the platform that we share and the fabric that sort of extends to our assets across our portfolio simultaneously investing heavily in our growth that I think bodes well for the future. But part of what you see is there's a lot of assets inside the stabilized pool, a lot of assets that are in, what I call, emerging markets. And so in emerging markets, it's a much more competitive landscape in some of these cases. And so when you look at sort of the distribution of assets, I just feel -- I feel really confident about where we're going, less about where we've been because the pricing model has been so attractive. And it's really about filling up the major metros and then sort of secondarily coming back and working on, what I call, the non-Tier 1 metros.

One more, if I could, for Adaire. Adaire, you mentioned you brought on Shane. So great to hear Shane joining the company. Are there specific areas you can improve on meaningfully with the customer experience, customer care?

Thanks for the question. I'm delighted that he has joined us, not least of which because I no longer have to do 2 jobs. Look, I think that we've set a very clear set of priorities around the customer journey and all of the different milestones of engagement on that journey. And so that work has already commenced and Shane has incredible execution capabilities to enable us to continue to progress that work. We had some very strong NPS feedback from our customers, the highest that we've seen. We've swapped to a twice a year review of customer feedback, and so we had a very strong NPS score. And just supported by a whole series of anecdotal pieces of evidence from our cab around the kind of support that Equinix offers not just as customers are implementing but also post implementation. So we will really be looking for Shane to continue to navigate those milestones and customer journey to look at certain aspects of our business around the customer success portfolio around the project management once a customer is implemented and other data points that we think will overall improve the customer experience.

Thank you for joining our conference call today. Have a good afternoon, everyone.