Katrina Rymill - Vice President-Investor Relations, Equinix, Inc. Stephen M. Smith - Chief Executive Officer, President & Director Keith D. Taylor - Chief Financial Officer Charles J. Meyers - Chief Operating Officer.

Jonathan Atkin - RBC Capital Markets LLC Paul B. Morgan - Canaccord Genuity, Inc. Jonathan Schildkraut - Evercore ISI Colby Synesael - Cowen and Company Richard Y. Choe - JPMorgan Securities LLC Amir Rozwadowski - Barclays Capital, Inc. Michael I. Rollins - Citigroup Global Markets, Inc. (Broker).

Good afternoon and welcome to the Equinix Second Quarter Earnings Conference Call. All lines will be able to listen-only until we open for questions. 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.

Ma'am, you may begin..

Thank you. 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, 2016 and Form 10-Q filed on May 9, 2016.

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's Equinix's policy not to comment on its financial guidance during the quarter, unless it is done through an explicit public disclosure.

In addition, we'll provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor Relations page at www.equinix.com.

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

With us today are Steve Smith, Equinix's CEO and President; Keith Taylor, Chief Financial Officer; and Charles Meyers, Chief Operating Officer. Following our prepared remarks, we'll be taking questions from sell-side analysts.

In the interest of wrapping this call up in an hour, we'd like to ask these analysts to limit any follow-on questions to just one. At this time, I'll turn the call over to Steve..

Okay. Thanks, Katrina and good afternoon and welcome to our second quarter earnings call. We had a great first half of 2016, delivering both revenues and adjusted EBITDA above the top end of our guidance range, as our global scale and reach, strength of our digital ecosystems, and service excellence continue to drive profitable growth.

As depicted on slide three of our presentation, second quarter revenues were $900.5 million, up 3% quarter-over-quarter, and up 15% over the same quarter last year on an organic and constant currency basis.

Adjusted EBITDA was $420.3 million for the quarter, up 5% over the prior quarter and up 18% year-over-year on an organic and constant currency basis. This drove AFFO growth of 37% year-over-year on a normalized and constant currency basis. We delivered strong growth in net bookings with increasing contribution from our indirect channel.

Our key operating metrics continued to be very healthy with firm MRR per cabinet, low churn and strong growth in both billable cabinet and interconnection.

We continue to progress against key operational and business objectives in 2016 to grow our market position globally, centering on successful acquisition integration, sustained organic development and scaling our interconnection services. So, let me provide some commentary in each of these in turn. Starting with acquisitions.

We are focusing our energy on successfully integrating Telecity and Bit-isle, scaling the business to drive even more value for our customers and enhancing our cloud and network density across EMEA and Asia. We've delivered against key integration goals and milestones, and are pleased with the progress we have made in the first half.

The Telecity business delivered solid financial performance, despite normal integration challenges and complexity associated with the divestitures and we are seeing value creation across a broad range of synergy category.

Our EMEA sales force has been fully integrated and our cross-selling program is tracking ahead of plan, with particular customer interest in the overlapping markets of London and Amsterdam and our new markets in Stockholm and Manchester.

The financial and IT systems work is well underway and we've defined the critical initiatives to operationally integrate our back op. We have completed the first large systems conversion with the Telecity Dutch business, now operating within the Equinix corporate systems and processes and plan to migrate the remaining countries through 2017.

In early July, we also completed the sale of eight European assets for $882 million, updated for FX, as required by the European Commission as part of its approval of our purchase of Telecity Group. Completing this last milestone in the acquisition process paves the way for us to fully focus on selling our new combined European platform.

We were also pleased with Bit-isle's progress and the market reaction to the acquisition has been positive. The business is performing well, with cross-selling momentum accelerating, including several wins with Japanese multinationals that are leveraging space and connectivity across existing and acquired sites.

We are further optimizing this business by divesting two small non-core businesses, which we completed in the first half of 2016. We also expect to divest TerraPower, a collection of solar power assets in the second half of this year.

Turning to our organic development activity; we continue to invest and expand globally, allocating 95% of our expansion capital to building out campus or existing market build where a deep knowledge of fill rate, pipeline, and competitive supply leads to higher returns. We now have 19 announced expansion projects underway.

In this quarter, we're moving forward with additional expansions in Ashburn, Frankfurt, Paris and Singapore, totaling over $250 million of capital expenditures. We're starting work on DC12, the first data center build in our Ashburn North Campus in Northern Virginia, which is on 44 acres of owned undeveloped land next to our current Ashburn campus.

Today, Ashburn is one of our major campuses with over 14,000 cabinets across 10 IBX and it's the largest Internet exchange point in North America. The new Ashburn North Campus, which we plan to develop over the next few years, will expand our asset ownership and effectively double our capacity in this important market.

Turning to Frankfurt, we see continued demand in this vibrant market coming from Internet and cloud providers due to data sovereignty compliance, as well as financial services growth. We're building Frankfurt 6, a new IBX located on owned land next to Frankfurt 4 and tethered to our core network hub in this market.

These capital investments are delivering very healthy growth and strong returns as shown on slide four. Revenues from our 70 stabilized IBXs grew 8% year-over-year, above our historical trend line, and largely driven by an increase in cross connect and power density.

We continue to find ways to optimize our asset base, putting the right customer and application into the right asset, which drives a firm yield per cabinet. These stabilized assets are generating a 32% cash-on-cash return on the gross PP&E invested and utilization remains at a stable 86%.

In terms of our asset ownership strategy, our goal is to produce over 50% from owned properties over time by developing land such as in Silicon Valley and Ashburn, as well as purchasing additional sites, as it makes economic and strategic sense.

Consistent with this strategy, we purchased our Paris 2 and 3 IBXs for $211 million from Digital Realty, which closed this week. Over 70 carriers reside in Paris 2 and 3, the second most densely connected data center campus in France.

Ownership will enable us to achieve better operating costs, enhance customer service and further expand this campus over time. The acquisition of Paris 2 and 3 is an example of where we can acquire assets and operate the property more efficiently for our own purpose, thereby allowing us to enjoy a higher return.

With this purchase, 35% of our revenues now come from owned assets. Turning to interconnection, the need to build next-generation IT architectures that connect network, cloud, people and data continues to drive customer demand for interconnection.

We now have 183,000 cross connects and interconnection revenue grew 21% year-over-year on an organic and constant currency basis. Interconnection revenues represent 16% of our global recurring revenues, and this is the eighth quarter in a row where we added greater than 5,000 cross-connects.

We saw particularly strong growth in connections to cloud providers with accelerated additions of participants, port and virtual circuit on our market-leading Cloud Exchange platform and strong sales of cross-connect to facilitate direct connections to pure play cloud.

Our Internet exchange continues to scale with 5.6 terabits of peak traffic, growing over 35% year-over-year, as network and cloud providers upgrade their capacity and transition to 100-gig equipment.

The transition to cloud continues to unfold as enterprises are re-architecting IT to drive down costs, improve performance and leverage clouds and networks.

We continue to see growth in Fortune 500 new customer and expansion wins, as the explosion of data and devices are transforming how large multinationals architect their infrastructure leveraging interconnection as a core design principle.

We added seven new Fortune 500 customers in the quarter, such as Ticketmaster, an online ticket vendor, leveraging Equinix to improve digital experience and integrate cloud infrastructure. We now have over 150 of the Fortune 500 customers and over 500 of the Global 2000.

Now let me cover quarterly highlights from our industry vertical, starting with the network. This vertical experienced strong bookings, led by strength in Asia as wireline providers including Telstra, SingTel and SoftBank expanded with multi-region deployment. We saw growth with regional Internet service providers, including U.S.

Internet Corp., a regional ISP peering to support growing enterprise cloud demand, and GCI, a regional telecom provider adding cloud connectivity capabilities via our Cloud Exchange to augment their network service offering.

Additionally, our strength as a global platform allows us to target strategic subsea cable projects to land within our ecosystem hub, and we are seeing pipeline and activity build in this growing segment, including two new wins this quarter.

Equinix is the biggest aggregator of digital ecosystems, making us the most logical choice for subsea cable operators to get the immediate benefit tapping into a mature ecosystem of buyers. The financial services vertical experienced continued expansion into our core electronic trading ecosystem, as well as diversification into other sub segments.

This quarter we saw additional expansions from investment banks such as Morgan Stanley that are leveraging Equinix for critical data center, network, cloud connectivity.

We're also observing the beginning of clustering of electronic payment counterparties across regions, including the addition of Merchant Customer Exchange, a leading merchant payment system that is deployed to peer traffic and connect to multiple clouds.

In the content and digital media vertical, advertisers and digital media were the growth drivers for booking. Asia delivered strong bookings this quarter, reflecting digital adoption in the region.

Customer wins, included Index Exchange, a premier ad-tech firm leveraging AD-IX and Taboola, a content discovery platform optimizing performance at the edge to better serve the APAC region.

The cloud and IT services verticals is the second fastest-growing vertical, driven by cloud hyperscalers continuing to deploy access nodes globally, as well as strategic wins with leading SaaS providers. Our traction in the software-as-a-service space is enhancing the value of our platform to enterprise clients.

We're also observing a maturity cycle where many SaaS providers launch in the public cloud then transition to hybrid cloud as they scale and service a wider customer base. We had a great quarter for cloud services adoption with over 460 enterprises, cloud, IT service providers and networks now interconnecting on our Cloud Exchange.

Turning to the enterprise, this vertical continues to be the fastest-growing vertical with a record number of Performance Hub deployments this quarter. Wins included a Fortune 100 manufacturer that is re-architecting by building edge nodes at Equinix, and a U.S.

federal agency providing delivery services that is deploying multiple Performance Hubs and integrating multiple clouds on our platform. Today, over 470 customers have deployed our Performance Hub solution, which helps enterprises optimize their network architectures, access the cloud and drive application performance.

Updated for acquisition, cloud and IT services and enterprise verticals, now represent 29% and 14% of our revenues respectively, and we continue to expect these verticals to lead growth as we progress with enterprise cloud adoption.

And finally, we are seeing solid progress in our channel and partner programs, as the percentage of our bookings coming from channel has increased from high-single digits three years ago to over 15% today. Our channel strategy leverages a range of partner types, each playing a critical role in scaling our enterprise sales.

Platform partners help us leverage mind share and awareness with high-value target customers committed to hybrid cloud as the IT architecture of choice.

Referral partners create leverage in our lead generation engine and resellers magnify our sales effort and combine key value-added services that Equinix offers to deliver complete solutions that more directly address the integrated needs of enterprise customers.

By coordinating our sales activity with key partners at the local level, we've been able to meaningfully expand our market reach and have seen our channel program as our most prolific source of new logo for the past several quarters. So let me stop here and turn it over to Keith to cover some of the results for the quarter..

Great, thanks, Steve. Good afternoon to everyone on the call. It's great to be able to update you on our second quarter performance, our 54th quarter of top-line revenue growth. By almost any measure, this was another strong quarter for Equinix.

For the first-half 2016, we delivered results better than our expectations and created value for our investors by scaling revenues, while improving margin, resulting in meaningful flow through to adjusted EBITDA and AFFO with an absolute dollar terms as well as on a per share basis.

The organic business continues to perform well and our acquisitions are delivering against our expectations. Also, the number of cross-sell successes and the depth of the sales pipeline continues to grow. Overall, we're delighted with the progress of our integration efforts related to both Bit-isle and Telecity.

Bit-isle has moved up the margin curve faster than expected, despite our anticipated higher churn levels, and we've optimized the business more quickly than originally planned. As Steve noted, we now expect to sell three non-core Bit-isle business lines prior to the end of the year.

This allows us to focus on the higher value co-location and interconnection offerings, along with some managed services in support of the local Tokyo market. With regard to Telecity, now that the divestiture process is complete, the team is highly focused on integrating the former Telecity businesses into Equinix as quickly as possible.

In July, we fully integrated the Dutch business, which is now operating within our systems and processes. This will soon be followed by the UK, Irish, and Swedish businesses over the next few quarters.

With regards to our key operating metrics as highlighted by Steve, yet worth mentioning again; our MRR per cabinet yield remains firm at just over 2,000 per cabinet, up $18 on a constant currency basis over the prior quarter, with particular strength in the Americas region.

Also, we added 3,300 net billable cabinets in the quarter, effectively returning to our normal add level, and the MRR churn was lower than expected. With respect to our interconnection offerings, net cross connect additions remains very positive, adding another 6,100 in the quarter.

Also the provision capacity and traffic growth on our Internet exchanges has substantially outpaced our competitors, partially reflected by the meaningful increase in the number of 100-gig ports provisioned on our exchanges.

As we measure the health and success of our exchanges, we now will would provision capacity in addition to the total port count to highlight the momentum we're seeing in the interconnection offering. Now, I'd like to add a few comments on foreign currency movements in the quarter. The U.S.

dollar weakened during the back half of Q1 through most of Q2 against many of our operating currencies. This resulted in a meaningful FX benefit for the second quarter relative to Q1. However, following the Brexit announcement on June 24, the U.S. dollar strengthened significantly against the British pound and the euro.

Despite these FX movements, we expect no significant change in either our 2016 revenue or adjusted EBITDA guidance related to FX movement, as many of the other operating currencies that we operate in strengthened against the U.S. dollar in Q2.

Now, with we continue to place currency hedges into our business to reduce financial volatility and protect certainty of our cash flow. Most recently, we benefited from the FX hedges put in place to protect the proceeds we expected to receive from the EMEA asset sale, which was denominated in pound sterling and euros.

With these hedges in place, our U.S. dollar proceeds totaled $882 million, but would have been $55 million lower without these hedges. Separately, we also hedged approximately 50% of the EMEA revenues and cash flows. As we continue to integrate Telecity into our EMEA business, we'll increase our revenue and net cash flow hedge position.

Turning to the second quarter, as depicted on slide five, global Q2 revenues were $900.5 million, the first time we've achieve this milestone level. Revenues were up 3% over the prior quarter and 15% over the same quarter last year on an organic and constant currency basis.

Our global platform continues to expand with Asia Pacific and EMEA showing organic and constant currency growth over the same quarter last year of 21% and 15% respectively, while the Americas region produced steady growth of 12%. Our as-reported revenues include $144.5 million from acquisition, consistent with our expectation.

Q2 revenues net of FX hedges included a $15.5 million positive currency benefit when compared to the average FX rate used last quarter, and $2 million positive benefit when compared to our FX guidance range.

Global adjusted EBITDA was $420.3 million, up 5% over the prior quarter and 18% over the same quarter last year on an organic and constant currency basis, above our expectations due to strong revenue flow through and lower than expected utility and integration costs.

Our as-reported adjusted EBITDA includes $64 million of contribution from our acquisition and $10 million of integration costs. Our adjusted EBITDA margin was 46.7%, a 160 basis point increase over the prior quarter.

Our Q2 adjusted EBITDA performance, net of our FX hedges, reflects a positive $8.7 million currency benefit when compared to the average FX rates used last quarter, and a $1.3 million positive benefit when compared to our FX guidance rate.

Global AFFO was $290.5 million, a 38% increase over the prior quarter and increased to 69% of our adjusted EBITDA. Excluding integration costs, AFFO on a normalized and constant currency basis increased 7% over the prior quarter, largely due to the strong business performance and lower than expected interest expense.

AFFO per share on a fully-diluted basis was $4.04 for Q2, or if you exclude integration costs, $4.18 on a per share basis. After we posted our original earnings deck today, please note that we've reissued our earnings deck and posted a new deck that will include AFFO per share data.

Moving to churn, global MRR churn for Q2 was 1.8% better than our expectation. We expect the MRR churn for the second half of 2016 to remain in our targeted range of 2% to 2.5% per quarter.

And as mentioned at the Analyst Day in June, we continued to expect 2017 MRR churn to average 2% to 2.5% per quarter, which includes the elevated churn in Q1 2017 related to the final phase of LinkedIn's bifurcation strategy. I had said before, MRR churn could be lumpy and the LinkedIn churn is a perfect example of this.

Although the LinkedIn churn will create an increase in both our cabinet and MRR dollar churn, we expect our MRR per cabinet yield to increase at the same point in time reflective of LinkedIn's per cabinet yield being significantly below the Americas MRR per cabinet average.

Now I'd like to provide a few highlights on the regions whose full results are covered on slide six through eight. The Americas region had another solid revenue quarter with particular strength coming from the Brazilian business. The region's MRR per cabinet yield benefited from continued interconnection growth and lower than planned MRR churn.

Also, the region had higher than expected adjusted EBITDA, largely due to lower than expected utility expenses. EMEA delivered another solid quarter of revenues with particular strength in our Dutch market. EMEA continued to execute against its key business initiatives, including the integration of the Telecity business.

Asia-Pacific remains our fastest growing region with strong bookings in our Tokyo and Sydney-based markets, driven by network and cloud and IT verticals. Interconnection revenues continued to outpace overall growth of the business with the Americas, APAC, and EMEA interconnection revenues now at 23%, 13%, and 8% respectively of recurring revenue.

Now looking at the balance sheet, please refer to slide nine. Unrestricted cash and investments increased over $1 billion after taking into consideration the proceeds related to the EMEA asset sale, as well as funds used to purchase our Paris 2 and 3 assets.

Again, as mentioned during the Analyst Day, although our business plan remains fully funded, including the partial drawdown of our revolving line of credit, we do expect to fully consume the cash in our balance sheet as we continue to invest in scaling our organic business with capital expansion initiatives, as well as returning capital to our shareholders through our quarterly cash dividend payout.

Finally, we settled the remaining portion of our June 2016 convertible debt instrument and cap call with a net 1.6 million of shares issued.

Our pro forma net leverage stepped down to 3.5 times our Q2 annualized adjusted EBITDA, largely due to the cash received from the EMEA asset sale, bringing us back into our targeted net leverage range of 3 to 4 times adjusted EBITDA. Now switching to AFFO and dividends on slide 10.

For 2016, we are raising our as-reported AFFO to now range between $1.04 billion and $1.05 billion, a 26% year-over-year increase, the result of strong operating performance and lower than planned interest expense.

Our normalized and constant currency AFFO is expected to now range between $1.159 billion and – pardon me, we'll start again – $1.159 billion and $1.169 billion or a 32% increase over the prior year.

Normalizing for integration costs in the Telecity FX translation loss in Q1, our 2016 fully-diluted AFFO per share is expected to increase 11% year-over-year to $16.21 using on a weighted average 71.7 million common shares outstanding, as presented on page 32 of our earnings deck.

Also today, we announced our Q3 dividend of $1.75 a share, consistent with our Q2 quarterly dividend. Our AFFO payout ratio was estimated to be 48% for 2016. Now looking at CapEx, please refer to slide 11.

For the quarter, CapEx expenditures were $250 million, including a recurring CapEx of $32 million, below our guidance expectations due to timing of cash payments to our contractors.

Given our currently high utilization rate of 82% as well as the strong development returns across our new expansion and stabilized IBXs, we continue to invest in many of our key markets with 19 in-progress builds, eight of which are expected to open by the end of this year.

As a result, we expect to spend between $950 million and $1 billion of CapEx in 2016. With respect to new builds, we've opened Sydney 4 earlier this month, our 146th data center and our fifth in the Australian market.

This large-scale facility will provide 3,000 cabinets of colocation space when fully built out, effectively doubling our existing capacity in Sydney. And finally, we provided you a number of slides that bridge our 2016 guidance from the normalized 2015 performance, including slides for revenue, adjusted EBITDA and AFFO.

Please refer to slides 12 through 16. I'll now turn the call back to Steve..

Okay, Keith. Thanks. And finally on slide 16, which summarizes our updated Q3 and full-year 2016 guidance, including the impact of FX changes. Now, let me cover our updated 2016 outlook.

For the full year of 2016, we're raising our revenue guidance to now range between $3.598 billion and $3.608 billion, a 32% as-reported growth organic, and constant currency growth rate of 13.8% compared to the prior year. This $8 million revenue increase includes a positive $2 million FX benefit when compared to prior guidance rates.

Net of adjustments for Paris 2 and 3 acquisition and Bit-isle divestitures, revenue's stepping up $3 million, the result of our strong Q2 performance.

For 2016, we are raising our adjusted EBITDA guidance to now range between $1.658 billion and $1.668 billion, a 31% as-reported increase for organic and constant currency growth rate of 16.8% compared to the prior year. This $13 million adjusted EBITDA increase includes a positive $1 million FX benefit when compared to prior guidance rates.

Net of adjustments for the Paris 2 and 3 acquisition and Bit-isle divestures, adjusted EBITDA is stepping up $8 million, the result of our strong Q2 operating performance. And the growth of our business is driving increased adjusted funds from operations, which drives corporate cash flows and ultimately dividend.

We're now raising our AFFO to range between $1.04 billion and $1.05 billion, a 32% normalized in constant currency growth rate compared to the prior year. This $30 million AFFO increase has negligible foreign currency benefit when compared to prior guidance.

And finally, we are narrowing our 2016 capital expenditures to now range between $950 million and $1 billion for the year. So in closing, we continue to achieve above market growth rates, while reinforcing and extending our differentiated market position.

We are capturing the significant shift to the cloud, executing well to capture the enterprise and continuing to invest across the business. The benefits of our interconnection strategy drive a growing and durable business that will continue to increase our revenues, AFFO, cash flow and dividend. So let me stop here and we'll open it up for questions.

I'll turn it back over to you Sam..

Thank you. And we will now begin the question and answer session. Our first question comes from Jonathan Atkin with RBC Capital Markets. Your line is now open..

Good afternoon. So on slide three, you talked about the 8% growth in stabilized IBXs being at the upper end of the range and I wonder if you could drill down a little bit more as to what you're seeing.

You mentioned power entity and cross connects, are there any regions or metros where you're seeing that more than others?.

Hi, Jonathan, I'll take that one.

As we think about that number, number one is 8%, as we said year-over-year growth and 9% on a constant currency basis, we're seeing continued growth – part of the metrics that we provided you today were certainly provision for growth cross-connects, but also just giving you a sense of the momentum on an MRR per cabinet basis.

So a lot of that's attributed to, again, power and interconnection revenues. As a result, no matter where you look across our portfolio, in all three cases, our MRR per cabinet has moved up and to the right. That's reflective of the performance across all three regions.

And as a result, you're seeing that benefit really holds true in all stabilized assets in each of our markets..

Yes. And I guess, I might just add that the – Jon, that we talked a lot about the interconnection-oriented architecture and how that is becoming relevant to how people are architecting their IT.

And that's definitely filling up in terms of how people are adding interconnection both in terms of cross-connects as well as greater leverage in our other interconnection-oriented services like Metro Connect, et cetera. So we're adding nice interconnection revenue.

And then, of course, we are seeing interconnection – I'm sorry, power densities increase on average. And we have quite a unique advantage in that we have a very large number of customers across a range of power densities, which allows us to continue to extract underutilized power and use it to our economic advantage.

So, we see both of those factors and they continue to drive into very healthy performance on stabilized IBXs..

On enterprise and performance, I was sort of interested you had some success now for several quarters.

And what are you seeing one year in from some of those deployments? In other words, is there a consistent trend that you're seeing where those are kind of stable and a lot of growth is coming from new logos? Or are you seeing these one-year-olds or older deployments expand either the number of locations or the size of their footprint within existing locations?.

Yes, very much both. We are – we definitely have – it was our strongest quarter of Performance Hub deployment, and that was both in terms of new logo capture both on the enterprise side, as well as a number of service provider categories who are effectively using Performance Hub to optimize our network architectures.

And we are seeing a very strong land-and-expand sort of behavior in the Performance Hubs.

So people are – typically initially come on the with one, two, three Performance Hub locations, prove out the benefits of those in terms of both performance and cost savings, and then they circle behind relatively quickly to add locations after the validated benefits.

So, we see both of those and continue to be very excited about that offering in the market and how it's being received..

I guess, I'd pile on top of that, Jonathan, this is Steve, that – as I mentioned in the script, we're – we added seven Fortune 500 customer wins this quarter and a record number of Performance Hubs, which is exactly tied to what Charles was pointing is that it's now turned into our largest contributor of new customer adds.

Inside of that, the manufacturing and professional services segments, inside the enterprise verticals are, in this quarter, where we saw a pretty big uptick of win..

On Europe, just quickly, I wondered if you could share with us some of the feedback that you're maybe seeing from your various partners and customers with regards to Brexit and how that might affect IT spending trends?.

Yes. The Brexit impact is, at this point, very early. I think everybody's waiting the regulatory changes. And as you guys know, typically in the past, any regulatory changes have benefited Equinix. So, it's too early for us to determine. And we certainly haven't seen it in our bookings or our pipeline yet.

There's a lot of uncertainty around the regulations, and I think we're watching the market very closely as everyone else is. We've not made any changes in our guidance reflective of Brexit at all, but we're continuing to see financial services deals close in the quarter, particularly in the UK and EMEA.

Generally, the secular trends are unchanged, so we're still seeing the typical trends that we see in this part of the world. I think the regulatory thing has to unfold as I said..

Thank you..

Thank you. Our next question comes from Paul Morgan with Canaccord. Your line is now open..

Hi. Good afternoon. On the – just focusing on the domestic side in terms of your MRR per cab up $36 sequentially, I mean, you highlighted cloud cross-connects as one thing, but it sounds like it's just – it's running ahead of your own expectations.

And I'm just wondering if you could drill down into kind of maybe some areas where you think the drivers are really occurring.

And then kind of following on that, whether looking out at change, are you seeing greater acceptance of that product? And then on top of that kind of subsequent add-on of cross-connects as your customers adopt that?.

You want me to start, Charles, or....

Go ahead..

So a couple of thoughts on that, Paul, I think earlier, to Charles' comments, we're starting to see the advantage of this interconnection-oriented architectural approach we're taking to the market.

And as they help solve customer pain points with our – with – across the globe, the user experience with people is a big requirement that we're seeing, and interconnection is helping that. Location is a big factor in these requirements we're seeing, driven by bandwidth costs.

The cloud, most customers we're dealing with are trying to get access to the multi-cloud. And so we're able to facilitate that. And then there's a lot of data-driven needs and requirements around compliance and customer insight.

And so all the typical things that Charles talked about earlier around the Internet-oriented architecture is driving requirement. And we're well positioned to address many of those, and that's underpinning a lot of this interconnection growth..

Yes. Fundamentally, I'd say that you've heard us talk a lot over the last several years about the discipline of putting the right customer at the right application into the right asset and that fundamentally, good execution and discipline against that strategy is what has driven our yield – continue to drive our yield up.

So, we're really targeting workloads that tend to be interconnection oriented, we're quite disciplined in terms of finding that sweet spot of implementation size that really works well for the business and deliver strong value to the customer.

They're typically adding both cross-connects in terms of getting direct connectivity to pure-play public cloud. And then as they expand, their commitment to hybrid cloud and the use of SaaS players, they're really looking at using ECX as a very convenient multi-cloud platform.

And so we're seeing a lot of interest and uptake on those, even though it's, I think, relatively early days in the overall transformation. But that continues to show up in our results from a yield perspective..

Great. Thanks. And just as a follow up, you've talked about at your Investor Day and elsewhere about IoT as kind of the next wave of potential growth.

I'm just wondering if you have any kind of color on whether you're seeing anything meaningful in terms of IoT-related workloads? And, is that something that's a 2016- 2017 driver? Or, is it really looking beyond that?.

Well, I think it's real now in terms of we're seeing some pretty sizable major IoT players who are deploying their platform inside of Equinix for a variety of reasons, primarily around the effectiveness of them to do aggregation cost effectively and with the right performance inside of our facilities.

And so we're definitely seeing those early players come in and use Platform Equinix. So we think there is a real contribution, but obviously, we're very early stages in that. So I think it's going to continue to play out. We have a number of the, sort of emerging ecosystems.

We have targeted business development efforts that make a very concerted effort to sit down and talk about who we think the critical magnates are going to be, deploy business development resources to go out and engage with those players, optimize Cloud Exchange to enable integration with those services and really begin to see the clustering and curating of those ecosystems that we've duplicated – that we've done in the past with others.

So, still early days, but very positive signs, and I think it's already contributing but just tip of the iceberg..

Okay. Great. Thanks..

Thank you. Our next question is from Jonathan Schildkraut with Evercore. Your line is now open..

Great.

Can you guys hear me?.

You bet..

All right. Thank you for taking the questions. I guess, Keith, I'd love to get a little help on guidance. There is a lot of moving parts here, and I just wanted to understand a few things and maybe you can tell me how they all fit together.

The first thing I'd say is I think last quarter, you sort of set us up that nonrecurring revenues would take a step down, maybe $5 million and $6 million.

And I think that didn't really materialize this quarter, and so just trying to understand what happened there? Maybe the intersection of that and sort of the organic growth expectations for the year, they moved up 40 basis points, but still when I looked over the first half of the year, you had 16% in the first quarter and 15% organic growth in the second quarter.

And so just trying to figure out how it all fits together?.

Okay. Great, Jonathan. So, let me start by taking you through revenue at the highest level. As you know, we revised our guidance up by roughly a net $8 million. 50% of that $8 million really comes from the acquisition of the Paris 2, Paris 3 assets. That will add roughly $4 million of revenue to the second half of the year.

For all intents and purposes, the FX and the divestitures that we referred to from Bit-isle, they will offset each other. So we have a little bit of a positive currency benefit, offset by the loss of the divestitures. So that really is leaving roughly 50% of $4 million of value attributed to the performance in our Q2 result.

So that all said, that gives you a 13.8% year-over-year growth rate on an organic basis. As we look at the acquisitions, so both Bit-isle and Telecity, they're performing against our expectations. As you've heard us say before, there's a lot of friction as we close out the Telecity transaction and then sold off a number of the assets.

We're now looking forward to seeing the focus on that business, and I would expect that at some point, you'll see the momentum pick up in Telecity. As it relates to Bit-isle, as you've heard us refer to, there was a lot of churn that was embedded in the business. And yes, we're experiencing the churn, but the team is continuing to perform well.

And so in both cases, when we combine and look at the acquisitions, they are performing to our expectations. The last thing I'd say is one of the things that probably is – well, let me say two things.

One of the things that probably not clearly evident is as we think about our booking expectations, we delivered almost exactly what we expected for the quarter and so very consistent with performance relative to what we have seen in the prior quarters from a gross and net bookings perspective.

That all said, there's been a positive increase effectively to our backlog because as we think about the complexity of the global hybrid cloud implementation, they're extending the book-to-bill interval.

And to give you a sense of size or order of magnitude, is in there about $4 million of delayed revenue associated with increased backlog attributed to our book to bill interval. So that would be that one – second last comment.

And the last comment I'd make is, as we think about nonrecurring, back to your initial question, nonrecurring, we saw a little bit of an uptick this quarter over and above what we originally anticipated. But we still have the – our underlying assumption is nonrecurring revenue will revert closer to 5% as we scale through the year.

And to the extent there's any change in that, we'll certainly guide to, but that's the assumption that we've made in the Q3, sorry, the updated revenue guidance..

Okay, great.

And as you look through your expectation of improved organic performance, if I could ask, have you seen any changes in the competitive environment as it relates to the core performance product that you guys offer?.

Let me give you a couple of perspectives. I'm sure Steve and Charles will jump in as well. I think overall, when you look at how we're performing, one of the things that you'll notice is the number of net cabinet adds that we had this quarter, so we're back up to 3,300 net cab adds. So again, this is showing continued momentum in the business.

As I said, we're still driving, we're driving our bookings engine as we expect and with momentum that we think that will continue to come from the channel. That gives us, it gives us a perhaps a greater opportunity as we look forward. All that said, you can see our utilization levels moving up.

And so one of the things I would leave with you is, as we see utilization levels move up, there's really a need for us – there's eight new projects that are coming online this year, and there's 19 that are in the hopper.

It's important for us to continue to build out our expansion initiatives so that we can continue to sell at that same clip with the same set of opportunities. Certainly, there's a number of markets where, all else being equal, we have some constrained inventory issues that we have to address.

And hence, we're really focused on making sure that we continue to develop those properties..

Thanks a lot, Keith..

Jon, I might just add just a little more color, I think, on the overall competitive environment.

No meaningful change in my view, but I would say that as we look across the globe, I think we see pretty favorable supply/demand dynamics across all of our operating regions, which I think continues to mean that the overall market is operating with a pretty high level of discipline.

But I also would say that we're seeing the unique strengths of Equinix begin to become increasingly important to the targeted buyers that we're going after.

So the global reach, the ability to implement hybrid cloud effectively and gain access to the cloud density that we have and implement multi-cloud effectively, those are things that I think we're seeing in terms of.

And if you look at our bookings in the really what we see as the critical growth verticals of cloud and IP and enterprise, really the two sides of the cloud ecosystem. Again, they continue to over-index. I think this is the ninth quarter in a row that that's been the case.

And that speaks to I think the competitive dynamic in terms of our ability to win really targeted implementation..

Thanks, Charles..

You bet..

Thank you. Our next question comes from Colby Synesael with Cowen and Company. Your line is now open..

Great. Thank you. One of the areas where you outperformed in the second quarter was on the EBITDA side in a fairly notable way, and I think you mentioned some benefit that you saw in SG&A.

But when I look at your guidance for the third quarter, it's implying roughly an $18 million increase to revenue at the midpoint and about a $2 million increase to EBITDA.

So I'm just curious, is there anything in the SG&A in the second quarter that was one-time in nature that we should be mindful of when we're trying to get back to your guidance for the third quarter in our modeling? And then my second question is on Paris. It looks like you're including a $4 million benefit both to revenue and to EBITDA.

Obviously, you were once a customer there yourself so that may have some impact, but trying to understand why those are the same numbers. Thanks..

Let me start. Let me take the first question, Colby. As it relates to Q3, as you know, it's typically our seasonally high utilities quarter. And if you go back a dozen years, you're going to see that historically utilities move up in that market, particularly in Silicon Valley and then certainly some of our European markets.

As a result, there's $7 million of incremental utilities expensed in Q3 that was not there in Q2. And so although we got the benefit of utilities, I refer to that in our over-performance in Q2, we're still going to see a meaningful step-up of $7 million. So that would take your quarter-over-quarter EBITDA growth up to roughly 3.7%.

So that'd be the first comment. As it relates to Paris, one of the benefits that we have as we said is, there's a great opportunity as a company as we acquire assets, we can operate it differently than the landlord.

And in this case, there's an opportunity as we think about the revenue we can derive from the incremental customers inside those data centers.

In addition to the fact that as we think about the lease treatment probably going to look – the lease treatment or the acquisition treatment is going to look as if you take all those operating costs away as a business, and then you put it on to your balance sheet, and then you'll have some depreciation.

So we get the benefit attributed to revenue, but we also remove the costs associated with how we treated those assets. And then obviously operationally, we think we can leverage off of our existing – not to suggest we're not going to make some incremental investments.

We can leverage off our existing staff, and so we get the benefit of that incremental revenue without having to meaningfully augment our staff. So in both cases, you get a nice top line and you also get a nice bottom line improvement.

And then you'll continue to see us make good strategic decisions around those two assets and how to explore an even better return from the costs that we acquired these assets from DLR at..

Great. Thank you. And just to be clear on Jonathan's last question there. Just I'm getting questions myself on this. The increase, the $8 million increase in revenue, that is coming from MRR. That is not coming from upside to NRR. It sounds like you're keeping your nonrecurring assumptions for 2016 in your guidance the same as they were last quarter.

Is that correct?.

I wouldn't say that. I haven't dissected it to that level. But certainly, we're looking at it holistically and certainly things move around quite a bit, as you know, in our different operating businesses. But bottom line, the team is committing both on an MRR and likely some NRR to augment our revenues by the $8 million.

So, I'd have to do more work to give you an exact number. But overall, there's probably a little bit of both, Colby. I don't want you walking away thinking it's just MRR..

Great. Thank you..

Thank you. Our next question comes from Phil Cusick with JPMorgan. Your line is now open..

Hi, this is Richard for Phil. Just wanted to follow up on the EMEA performance. It had pretty strong performance, but you mentioned earlier now that all the acquisitions and dispositions have been done.

Could we see an acceleration in performance – in that part of the business?.

Well, the hard stuff, the divesting and the initial integration plan is going to – the integration is going to go on through 2017, but the primary underpinning of the opportunity to do that is the fact that we've got our sales forces integrated now, and we're completely focused on cross-selling into both sets of assets.

And so trying to quantify that is difficult to do at this point, but our complete focus now is globally selling into these assets and getting that sales force in Europe completely focused on selling globally, including the assets in Europe.

So that will help us, obviously, with the distraction behind us now, the divestitures and the preliminary integrations. But we still have other countries to integrate from a systems and process standpoint..

So I'd just add one other comment to Steve's comment. As you can appreciate now that we are through the divestiture process, we're working hard on the integration, and this relates both to Telecity and to Bit-isle. One of the benefits that we're going to have is we get to sell across a combined platform today.

And understanding exactly who should be the, if you will, the true beneficiary of that booking and where the costs will go is becoming increasingly cloudy. So when we think about how we're going to perform on a go-forward basis, we're very much trying to look at it holistically.

But it's clear that, from our perspective, we've taken away substantial distraction from the business now that we've not only closed the acquisition of our Paris 2, Paris 3 acquisition, but the divestiture of the eight assets to Digital Realty. And so now we can really focus on scaling the business and taking away a lot of the noise in the system..

And the follow-up on that. It seemed like your cloud and IT services along with your enterprise customers all expanded into more data centers or IBXs.

Can you give us a sense on how that conversation goes and where that could go over time?.

Yes. This is Charles. We definitely see that people are – well, there're two sides to it. There's the supply side, if you will, in terms of CSP. And we typically see CSPs, particularly those who have global aspirations, and that tends to be the bulk of them operating across our regions and they tend to have pretty high total IBX count.

And then on the enterprise side, similarly, in order to implement these interconnection-oriented architectures and take advantage of the network density and cloud density we have, they tend to start with a, as I said earlier, with a few locations and then have a land-and-expand sort of appetite or behavior over time.

So, we definitely are seeing, I think, an increasing average number of IBXs for a deployment of customers. And we certainly believe that, that will continue..

Great. Thank you..

Thank you. The next question comes from Amir Rozwadowski with Barclays. Your line is now open..

Thank you very much and just a follow-up on that last question. What we received from investors is that obviously there's been a large amount of build out with respect to the cloud service providers within your facilities in the back half of the last year and continuing into this year.

I was wondering, are you starting to see some of that expansion as you mentioned in terms of either additional applications or other geographic locations with respect to the cloud service providers?.

Yes, you're absolutely right. I think we saw a bit of a land grab going on last year, as sort of the top CSPs really tried to quickly get into what they saw as the critical baseline set of markets for their services.

And I think that's slowed down a little bit, but now what we're seeing is behavior in terms of people adding incremental services beginning to scale their revenue lines. Obviously, that's evident in the results of the likes of AWS and Microsoft. And we think that's fueling other CSPs to be – to have an interest in expanding their platform as well.

So, we do see a little bit of that sort of big build-out bubble as maybe taking a bit of a breather, but we're seeing, particularly for us, because of our global footprint, see strong demand from the CSPs and then, again, translating that into momentum on the buy side of the ecosystem with the enterprise..

The only other thing I think we're hearing, Charles, Amir, this is Steve, is they continue to deploy in the big markets. And we benefit from that because but we're in the big markets. But we're also seeing them going to emerging markets now at a pretty high clip, trying to extend their platform all over the world.

And sometimes we're there, and sometimes we aren't. So in the – obviously, with our footprint, we're experiencing a lot of pipeline with these guys. But they're pushing beyond even the footprint that we have around the world into emerging markets. So at some point, that will pull us into future emerging markets.

That kind of demand is what does that, big customer drivers, so we stay tuned and we watch that very closely, too..

That's very helpful. And then if I may, a quick follow-up. If I look at the interconnection growth this quarter, I mean certainly saw an acceleration versus the prior quarter. Where do you think sort of trajectory could end up? I mean it sounds like you're getting additional footprint expansion. The enterprise seems to be gaining faster traction here.

I mean how should we think about that sort of growth profile going forward?.

Charles, you want to take that..

Yes. I mean, it's hard to anticipate. And it's because it's been so healthy and continues to be so much interest in terms of people utilizing the interconnection service offers that we bring to architecture infrastructure.

So we – I can't really – I couldn't pinpoint what we think is possible in terms of whether there's a continued acceleration of that, but I would say that it continues to over-index on the interconnection line relative to the other services based on the strength of the ecosystem. And we foresee that continuing..

Great. Thanks so much for the additional color..

Thank you. And our next question comes from Michael Rollins with Citi. Your line is now open..

Hi. Thanks for taking the questions. Two if I could. The first one, which is more of a numbers question.

Maybe you could just talk a little bit about how much the hedging benefits on currency are affecting the financials? And how you are looking at the hedging strategy for foreign currencies going forward? And then secondly, if I could just take a step back to the analyst meeting that you held.

You put some information out about the pipeline of new build out opportunities that you currently control across your portfolio between new phases and land where you could construct new buildings.

And what I'm curious about is if you can give us an update on sizing that opportunity, whether in terms of cabinets or revenue? And also help us think about maybe the CapEx associated with those types of opportunities in the future? Thanks..

I'll take the hedging question, Mike, and Steve or Charles will jump in on the other one.

First, as it relates to hedging, our philosophy is to, as you know, is to provide effectively a soft landing for currencies as they move around, it's really to provide predictability with our results and with more focus on revenues and then also to create some certainty around our cash flows, again, because we're distributing a lot of our capital today back to shareholders.

So those are two things that are highly important for us. And so when we think about how we deploy our hedges, number one, there's been increased volatility and so one of the things that we wanted to do is try and feather out these hedges over a longer period of time. And so we are hedging partially into 2018 now.

We're focusing on typically the European currencies because of – without getting overly complex, our business in Europe is run as U.S. dollar functional. And when we hedge against our – whether revenues are costs for our cash flow hedges, we get the treatment against the lines in which we're hedging. So those are things that we try and do.

And clearly, as a result, you're seeing the benefit of us not only in our result, but also on our guidance rate on how we've layered in those hedges over a period of time. So absolutely, we're benefiting from the hedges, but it'll depend on the currencies and the markets that we're talking about.

But the philosophy is to continue to hedge, and then there also is our cash – as I said, there's the cash flow hedges, then the hedges that we put in place when we're moving money around the markets. And in this case, as you know, with the pending sale of the EMEA assets, we wanted to make sure we hedge the cash flow associated with that.

And as I said, absent putting that hedge in place, we would have been $55 million shorter have we not put our hedges in place because of what happened with Brexit.

And so again, we're being very thoughtful about our overall hedging strategy to create that predictability with our cash flows but also make sure that there's a smooth glide path as currencies rebase in some cases, like the euro or the pound, yet at the same time, you're going to get the volatility pick up because we only hedged 70%, 80% of the exposure..

And Mike, I don't know if Charles – the second question there's no real difference in our prosecution of making decisions on new build. It's driven across all the regions. We have that standing cadence every month, and it's driven by fill rate, pipeline, competitive knowledge in each of those markets, Mike. And we roll those up every month.

We look at them around the world. We direct the CapEx based on the highest need and the best return, and we've got a mechanism that does that on a regular basis. So I don't....

I don't have in hand – at the tip of my fingers here in terms of our Analyst Day, but we did provide what we thought the total incremental capacity would be available to us if we built out essentially the phases that we have available to us of existing projects as well as building out on our existing land base.

And I don't remember, Keith, what that total was, but I think we sized that in terms of incremental capacity. I thought....

That's 90,000 cabinets..

How many?.

90,000 cabinets..

And so I think that's the – that's what we have. We'd have to go back and confirm that, but that's the number, I think. And then you can sort of estimate the CapEx for that by giving a rough CapEx build-out cost that we have on a per-cabinet basis, and that will give you an order of magnitude of what that would take..

And I would just add, the one thing I'd just say, at the Analyst Day on that particular point was if you think about cost to build out that capacity, as Charles referred to, that was embedded in the underlying model that I shared with everybody or the cash flow model and how we would still be fully funded investing in billion dollars plus a year to build out that cabinet capacity to give us the growth that we felt that we would need as we look into 2020 and potentially beyond..

Thanks very much..

Great..

Great. Well, thank you everyone. That concludes our Q2 call. Thank you for joining us..

Thank you. And this does conclude today's conference. Thank you for joining. All parties may disconnect at this time..