Equinix Inc (EQIX) — Q2 2015 Earnings Call Transcript

Good afternoon and welcome to today's conference call. Before we get started, I'd like to remind everyone that some of the statements that 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-Q filed on May 1, 2015. 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 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 IR page at www.equinix.com. We would also like to remind you that we post important information about Equinix on the IR 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. Thank you, Katrina, and good afternoon and welcome to our second-quarter earnings call. This marks our 50th quarter of consecutive revenue growth. We deliver both revenue and adjusted EBITDA significantly above the top end of our guidance ranges, while global demand for interconnected data centers drove record net bookings and our second best gross bookings. This momentum reflects our strategic position in the digital economy and the value of our global platform in addressing customer needs. Additionally, we are extremely well positioned to capture a sizable share of enterprise demand, driven by a variety of factors, including a rapid adoption of hybrid cloud as the architecture of choice. As depicted on slide 3, revenues were $665.6 million, up 3% quarter-over-quarter and up 10% over the same quarter last year. Adjusted EBITDA was $311.3 million for the quarter, up 2% over the prior quarter and up 13% year-over-year, delivering a 47% margin. AFFO grew 18% year-over-year to $221.4 million. The benefits of operational discipline and a strategic approach to meeting customer demand continue to manifest in stable pricing, firm yields, and one of the lowest churn quarters on record. We now have 6,300 customers around the globe, including more than 100 of the Fortune 500. Over 4,000 Equinix employees support our operations, product development, and the execution of our go-to-market strategy, to offer the only global interconnection platform in the largest retail data center footprint worldwide. With over 161,000 cross connects and vibrant use of our internet and cloud exchange offers, we sit at the crossroads of the internet, where customers locate inside Equinix to innovate and accelerate their businesses. Interconnection is 17% of our recurring revenue, making it a $400 million annual business. The scope, scale, reach, and diversity of our platform remain without parallel. We are continuing to invest in systems, processes, and people, to ensure consistent service delivery on a global basis and manage the complexities associated with a massively scaled retail business, rapidly approaching 20,000 customer deployments and generating over 0.5 million customer interactions each quarter. We are now live across all regions with Equinix Customer One; our initiative to streamline our 'Quote to Cash' process and standardize our products and services worldwide. This is a major milestone in our drive for global consistency, and a critical capability to scale our sales engine and provide a high quality experience for customers. The importance of global selling is reflected in the business we are winning. Today, over 50% of our revenue comes from customers deployed globally across all three regions, and over 80% is from customers deployed across multiple metros, showcasing how customers leverage the platform Equinix to support their businesses. Turning to the Telecity acquisition, we continue to expect this compelling combination to deliver solid value to shareholders of both companies. Telecity announced solid quarterly results this morning, which were consistent with our expectations. Regarding the regulatory status of the deal, Equinix has received approval of our request to work through the EU Commission to secure clearance for the acquisition and the efficient process that will use a single regulatory authority to evaluate this transaction. In anticipation of the expected close in the first half of 2016, we have multiple teams working together to map out an immigration plan and determine the optimal organizational structures. We continue to believe the deal offers the opportunity to increase networking and cloud density to better serve customers and will enhance our existing European portfolio. As it relates to the broader M&A landscape, we have our eye on the consolidation activity happening in our industry and will continue to be both proactive and highly selective in pursuit of opportunities that we believe complement our strategy and create significant shareholder value. Interconnection is a critical source of sustaining value for Equinix and we continue to invest here in order to maintain market leadership and execute on our highly differentiated strategy which is centered on creating and curating digital ecosystems. Revenue from interconnection grew 15% year-over-year and we added over 6,100 cross connects this quarter, the fourth consecutive quarter delivering at this level. Connection to cloud providers from buyers across all vertical markets is a strong driver of interconnection; and we also see growth in connectivity among content and network companies, as the exponential growth in data drives the need for more pairing. Our digital exchange has experienced a sizable increase in both traffic and ports, with a step up of 158 ports added on our internet exchange. Fiber and ecosystems where multiple customers are interconnected within a data center generate attractive returns. Our portfolio of stabilized assets continues to grow at 4% and is tracking to over 32% yields on our gross PP&E investments. The majority of our development pipeline is allocated to current campus expansions to meet the demands of existing customers and achieve operational scale that maximizes returns while mitigating risk. Now let me shift to cover the quarterly highlights from our vertical industries. Inside our data centers, networks, clouds, IT service companies, and enterprises are interconnecting to offer businesses improved service delivery and performance by putting systems, applications, and data closer to end users. In the network vertical, we delivered solid growth this quarter, with network expansions across all regions to support traffic growth and deliver new cloud services. Network-to-cloud cross connects doubled year-over-year as providers deployed new routes to connect traffic and services. There are a variety of catalysts generating growth in the network segment, including mobile computing, which is changing how service providers and enterprises interact. Equinix is benefiting from the proliferation of mobile applications and content, with increased demand driving new interconnection activity. Mobile operators and major content companies are using Equinix data centers to peer mobile content, aggregate networks, facilitate mobile payments, and deploy roaming exchanges. For the content and digital media vertical, growth was driven by global expansions from players including Criteo, a global French technology company specializing in performance marketing; and Tencent, a Chinese media and entertainment and internet firm. We are also seeing an emerging opportunity to support media and entertainment companies that are moving workloads to the cloud, leveraging Equinix and the cloud services inside our facilities to collaborate on production and editing. Turning to the financial services vertical, we see continued diversification in this segment, with a series of lighthouse wins in insurance, electronic payments, and asset management. New customers this quarter include AIA, a top Asian insurance firm; Currenex, a top 10 foreign exchange, that is deploying a performance hub, as well as its matching engine in our Secaucus campus; and a top five global asset management firm that is deploying across Asia. Turning now to cloud and IT services, we are experiencing continued momentum across the cloud ecosystem, which drove strong bookings this quarter as major cloud players such as AWS, Datapipe, Oracle, and ServiceNow continue to expand. Last quarter, we were a major partner of both Microsoft's worldwide partner conference and a Google Cloud Platform Global Roadshow, where developers and partners were educated on how to leverage our industry-leading cloud exchange capabilities. Software-based provisioning and control capabilities offered by the Equinix Cloud Exchange are a critical innovation in allowing customers to dynamically create and manage private, secure virtual connections to multiple cloud services over a single port. We continue to see momentum on the exchange, which is live in 21 markets globally and has over 180 customers provisioned. In the second quarter, this solution was awarded the most innovative carrier cloud service by Light Reading, a powerful recognition of our progress and our commitment to delivering steady innovation. To date, our effort to build cloud density inside Equinix has primarily been focused on private connectivity, particularly for leading infrastructure-as-a-service platforms, including AWS, Microsoft Azure, and the Google Cloud platform. As customers expand their use of hybrid cloud, we are responding to offer cloud connectivity options that significantly improve the end-user experience for a wide range of software-as-a-service applications. Software-as-a-service is the largest segment in the cloud market, and is experiencing rapid adoption among enterprises. We have expanded our relationship with Microsoft, and later this year, we will begin offering direct access to Microsoft Office 365, breaking new ground with secure private connectivity to one of the most widely used enterprise SaaS applications. We are building features and functionality on the cloud exchange to support this application, which paves the way for additional SaaS providers to deliver similar services. We also continue to expand the diversity of service providers leveraging the cloud exchange to deliver services to their customers. This quarter we announced an agreement with Aliyun, Alibaba's cloud computing arm, to provide dedicated and secured direct access to Aliyun's full suite of cloud services. Turning now to the enterprise vertical; the enterprise vertical delivered record bookings, and we are seeing traction in penetrating these verticals as customers seek to rearchitect their IT to connect people, locations, clouds, and data. We added a record number of new customers, including multiple Fortune 50 firms, and secured performance hub wins with Carestream, a healthcare medical device company, and Harman, a premium audio equipment maker. Our performance hub solution is now the primary entry point for enterprise clients. Over 190 customers have deployed the performance hub to optimize network architectures, distribute applications closer to end users, enable critical big data use cases, and provide efficient secure private access to cloud services. By deploying these solutions, customers are reducing operating expenses and improving application performance, as well as the end-user experience. For example, a global engineering and construction customer that deployed their performance hub solution at Equinix increased bandwidth per employee by 2.5 times. They have reduced their operating expenses by 25% and improved application latency by 38%, which was critical for global workforce collaboration. A Fortune 50 industrial conglomerate customer that migrated to a hybrid cloud architecture at Equinix achieved a 30% cost reduction in cloud connectivity per acquisition, and over $8 million in annual operating savings. Turning to our go-to-market strategy, we are expanding our routes to market through our global channel program, which now has over 200 partners, including referral partners, agents, resellers, and cloud and technology partners, who are all implementing sell-through and sell-with models. The initial focus is on building the framework, programs, and tools necessary to allow partners to effectively embed Equinix as a foundation for their enterprise solutions. Particularly with our resellers, who today are driving the majority of channel bookings. For example, Telefonica, a leading global telecommunications provider and an Equinix certified reseller, is helping a key mobile company move to a cloud-based business model. This customer required a large infrastructure enabler to help with their transition to cloud, and Equinix delivered a compelling global solution sold through Telefonica. So as we continue to see broad adoption of the hybrid cloud, we expect an increase in the proportion of new growth to come through the channel. So let me stop there and turn the call over to Keith, to cover some of the details and results for the quarter.

Great. Thanks Steve and good afternoon to everyone on the call. I am pleased to have this opportunity yet again to provide you an update on our quarterly performance. Q2 was another very strong quarter, with all three regions delivering better than expected results. On a normalizing constant currency basis, EMEA and Asia Pacific regions delivered very healthy year-over-year revenue growth at 23% and 26% respectively, while our larger Americas region produced another double-digit growth, 9.75% over the same quarter last year. Our key operating and performance metrics continue to reflect the strength of the value proposition we deliver to our customers. We added 3,800 net billable cabinets in the quarter, our highest level of cabinet installs ever. This is effectively selling an entire capacity of two large data centers in one single quarter. MRR per cabinet on an FX neutral basis was up slightly to $2,015 per cabinet or 1.2% quarter-over-quarter improvement, largely due to increased interconnection activity. Over the past three quarters, the business has shown signs of accelerated growth. Given our success over the first half of the year, particularly the strength of the gross and net bookings, we are meaningfully raising our guidance for revenues, adjusted EBITDA, and AFFO. Updated revenue guidance now implies a normalizing constant currency growth rate of over 15% compared to the prior year, eclipsing last year's growth rate of 14%. Also, we are very pleased to have completed the first six months of the year operating and reporting as a REIT, including paying our first two quarterly dividends and announcing our third dividend earlier today. We also received a favorable private letter ruling from the IRS in May, which for all intents and purposes, matches the specifics of our desired REIT structure. The PLR ruled favorably on how we classify our revenues and assets. Basically, interconnection revenues are qualified REIT income and our data centers are qualified REIT-able assets. Now moving to the slides; so as depicted on slide 4, global Q2 revenues were $665.6 million, up 4% quarter-over-quarter and up 16% over the same quarter last year on a normalized and constant currency basis. Our revenue's overperformance was due to many factors, including strong bookings activity, higher than expected custom sales order activity, net positive pricing actions, and lower than planned churn. Q2 revenues net of our FX hedges absorbed a $5.2 million negative currency headwind when compared to the average FX rates of last quarter. Although currencies remain volatile throughout this quarter, across all of our operating currencies, there was no meaningful FX impact when compared to our guidance rates, as the EMEA net cash flow hedges continue to offset a good portion of the negative impact attributed to a stronger U.S. dollar. Our global cash gross profit increased 2% over the prior profit, although our cash gross margin decreased slightly due to higher seasonal utility rates. Global cash SG&A expenses increased $149.6 million due to increased sales compensation expense in the strong booking activity, and lower than planned capitalized IT costs, given the rollout in all three regions of our Equinix Customer One initiative. Global adjusted EBITDA was $311.3 million, above the top end of our guidance range and up 3% over the prior quarter, and 18% over the same quarter last year on a normalized and constant currency basis; largely due to strong revenue flow-through. Our adjusted EBITDA margin was 47%. Our Q2 adjusted EBITDA performance, net of our FX hedges, reflects a negative $3.3 million currency impact when compared to the average rates used last quarter, and a $1.4 million positive benefit when compared to our FX guidance rates. Global AFFO was $221.4 million, or up 26% year-over-year on a normalized and constant currency basis. Our Q2 AFFO includes approximately $1.3 million in commitment fees related to the Telecity bridge loan. Global net income was $59.5 million or diluted earnings per share of $1.03, including the acquisition cost of $9.9 million. Now over the next few quarters, we expect our net income to fluctuate due to acquisition and financing costs related to the Telecity acquisition. Also, we will start to hedge out our Pound-Sterling net investment exposure for the acquisition. As a heads-up, when we mark-to-market the hedges, whether realized or unrealized, the fluctuations will flow into the income statement on the other income and expense line, and therefore, may cause our go forward as reported GAAP earnings to fluctuate. Global MRR churn for Q2 was better than expected at 1.8%, our fourth quarter in a low this low a level. As previously stated, MRR churn is inherently lumpy, based on the timing of customer decisions, and therefore, as we look forward, we expect our quarterly MRR churn for each of the last two quarters of the year to range between 2% and 2.5%, which includes some of the MRR churn originally expected to occur in Q2. Now turning to slide 5, I'd like to start reviewing the regional results beginning with the Americas. The Americas region had a strong booking this quarter, lower than planned MRR churn, and improved pricing metrics. On a normalized and constant currency basis, the Americas revenues was up 3% quarter-over-quarter and 10% year-over-year. Americas adjusted EBITDA was flat over the prior quarter, largely due to higher seasonal utility costs over the summer season and at 11% year-over-year on a normalized and constant currency basis. Americas interconnection revenues represent 22% of the region's recurring revenues and we added 2,600 cross-connects and 102 exchange ports in the quarter. Americas net cabinets billing increased by 1,100 in the quarter. For new builds, we are proceeding with our Dallas 7 project. This build strengthens our value proposition in the Dallas market while taking advantage of our interconnection density and our other Dallas IBXs. Now looking at EMEA, please turn to slide 6; EMEA delivered another strong quarter with record bookings. We continue to see strength in our Dutch and U.K. businesses, as cloud service providers continue to deploy across these markets. On a normalized and constant currency basis, revenues were up 7% quarter-over-quarter and 23% year-over-year, and adjusted EBITDA margin was up 7% over the prior quarter and 31% over the same quarter last year. We had another solid quarter of increased interconnection activity, adding 1,300 net cross-connects. EMEA interconnection revenues now represent 8% of the region's recurring revenues. EMEA MRR per cabinet was up 2% on a constant currency basis to $1,472 per cabinet, and net cabinet's billing increased by 1,500. Over the quarter, we opened additional phases in our key data centers in Amsterdam, Frankfurt, and Paris, and intend to proceed with a next phase of our Frankfurt 4 IBX to support the underlying demand in this robust and improving market for us. And now looking at Asia Pacific, please refer to slide 7; Asia-Pacific remains our fastest growing region, with revenues up 7% over the prior quarter and up 26% over the same quarter last year, on a normalized and constant currency basis, driven by strong sales momentum across all our verticals. Adjusted EBITDA on a normalized and constant currency basis was up 10% over the prior quarter, and 33% over the same quarter last year. Adjusted EBITDA margin was up over 50%, with strong improvement coming from our Japanese business. MRR per cabinet on a constant currency basis was essentially flat quarter-over-quarter, despite a number of large cloud-based deployments installed over the quarter. Net cabinets billings increased by 1,200 over the prior quarter, and we added a healthy 2,200 net cross connects. Interconnection revenues remain at 12% of the region's recurring revenues. For builds, we opened a new phase in Hong Kong this quarter and had seven expansions, and we have seven expansions currently underway across six metros, as we continue to scale our business across this region. Now looking at the balance sheet, please refer to slide 8. At the end of the quarter, we added $436 million of unrestricted cash and investments, a large decrease over the prior quarter, principally due to the funds we escrowed for the Telecity acquisition and the increase in capital expenditures. Our net debt leverage ratio increased to 3.4 times Q2 annualized adjusted EBITDA, the result of reduced cash levels and an increase in capital lease obligations. As we look forward, we expect a pro forma net debt to adjusted EBITDA to temporarily creep above our stated target of three to four times to 4.5 times due to the Telecity acquisition. Although, given the cash flow attributes of our model, we should return to our target range over a reasonably short period of time. Now switching to AFFO and dividends on slide 9; for 2015, we are raising our expected AFFO guidance to now range between $850 million and $860 million, an effective dollar increase of $25 million over prior guidance or a 90% increase year-over-year on a normalized and constant currency basis, the result of strong operating performance. Our AFFO guidance now includes approximately $6.8 million in costs related to the bridge loan. Also today, we announced our Q3 dividend of $1.69 a share, consistent with our prior quarterly dividends. Our AFFO payout ratio equates to 45%. As we look beyond 2015, our transitional year, we continue to believe that both organic and inorganic growth will be the primary ingredient for steadily growing cash dividends, as well as moving more assets from the taxable REIT structure to the qualified REIT structure. Now looking at capital expenditures, refer to slide 10 please; second-quarter capital expenditures were $221.3 million, including recurring CapEx of $27 million. Given our strong and above-expected performance year-to-date, we are closely assessing our inventory and build rates across our Tier-1 markets. It is our expectation that our capital expenditures will now remain at the Q2 levels for the remainder of the year, and therefore we are raising our non-recurring or expansion CapEx for the full year to now range between $685 million to $735 million. Recurring CapEx is expected to remain consistent with our prior expectations at $115 million. As presented on the expansion tracking slide, we currently have 15 announced expansion projects underway across the globe, of which 14 are campus-built or incremental phase builds. We are currently building across 11 metros worldwide, focusing on investments where we can deliver a differentiated offer and generate attractive returns, prioritizing in those markets that support our key ecosystem objectives. And finally turning to slide 11; operating performance of a stabilized 67 global IBX expansion projects have been open for more than one year delivers steady as reported revenue growth of 4%, a decrease over the prior quarter, primarily due to a stronger U.S. dollar. Currently, these projects generate a 32% cash on cash return on the gross PP&E invested, reflecting the premium value these mature campuses deliver, particularly where ecosystems are especially vibrant. I will turn the call back to Steve now.

Okay, thanks Keith. Let me now shift gears and cover the 2015 outlook on slide 15. For the third quarter of 2015, we expect revenues to range between $681 million and $685 million and a normalizing constant currency growth rate of 3% quarter-over-quarter, which includes negligible foreign currency impact when compared to the average FX rates in Q2 2015. Cash gross margins are expected to approximate 68% to 69%. Cash SG&A expenses are expected to approximate $150 million to $154 million. Adjusted EBITDA is expected to be between $313 million and $317 million, which includes a $1 million negative foreign currency impact when compared to the average FX rates in Q2 2015. Capital expenditures are expected to be between $222 million and $242 million, which includes approximately $32 million of recurring capital expenditures. For the full year of 2015, we are raising revenues to a range between $2.685 billion and $2.695 billion, a 15% year-over-year growth rate on a normalized and constant currency basis, which includes negligible foreign currency impact when compared to prior guidance rates. The revised revenues represent a $55 million increase compared to our prior guidance. Total year cash gross margins are expected to approximate 69%. Cash SG&A expenses are expected to approximate $595 million to $605 million. We are raising our adjusted EBITDA guidance to range between $1.25 billion and $1.26 billion or 46.7% adjusted EBITDA margin. This guidance includes a $2 million of positive foreign currency impact when compared to prior guidance rates or a normalized and constant currency growth rate of 18%. Excluding this positive currency impact, the revised adjusted EBITDA is a $23 million increase compared to prior guidance. We expect adjusted funds from operations to range between $850 million and $860 million, or a normalized and constant currency growth rate of 19%. We expect 2015 capital expenditures to range between $800 million and $850 million, which includes $150 million of recurring capital expenditures. So in closing, we delivered a strong first half and are delighted to see momentum across all our industry verticals and geographies as customers continue to select platform Equinix as the key enabler of IT transformation. We are pleased with our team's discipline and execution and the strength of our ecosystems is translating into solid revenue growth, firm pricing, and expanding margins, all of which combine to give us the financial firepower to continue to invest in our global service delivery model and develop innovative solutions. Our operating performance reflects the significant role we play in a rapidly evolving digital economy, and we will continue to focus on creating sustainable value for our customers and our shareholders. So let me stop here and open it up for questions, so I will turn it back over to you, Kate.

Hey everyone. Thank you for your questions. It was a solid quarter. I wanted to ask three things if I could. First, Keith, you mentioned something about North America, or possibly global pricing, and the net positive pricing activity. Could you elaborate on whether that's driven more by geography or specific contracts? Second, regarding the churn rate you mentioned, around 2% to 2.5%, it seems a bit higher than we typically anticipate. Can you clarify if you have specific expectations for that, or is this just a general conservative estimate? Lastly, Steve, we understand Equinix's strategic goal of creating platforms to connect businesses to the cloud. However, it's a bit challenging to qualitatively assess how well this is working and its impact on revenue growth. Could you provide some quantitative insights on how this strategy is unfolding? Thank you.

Good questions David. First and foremost, as it relates to net positive pricing actions; we as a company, we continue to monitor how we perform as we renew our contracts with our customers. And clearly, there are times there are negative pricing actions, and of course, there are positive pricing actions. Over the last few quarters, the message that we have been delivering, globally, we are seeing net positive pricing actions, which means the price increases are outweighing the negative price decreases. So it’s a global phenomenon, you can see it across affecting the price points. The MRR per cabinet yields across all three regions. Second question to that I will take is on churn; when we looked at the year, certainly, we are very-very pleased with how we performed in Q1 at 2%. We were delighted with what we saw in Q2, 1.8%. But we really were trying to guide for the total year, somewhere between 2% and 2.5% per quarter, and we said the price is likely to the lower end. With our overperformance in Q2, we recognized that some of that is timing based, and therefore we are going to forecast it in Q3. Equally, there are churn that's going to take place in Europe that we are fully aware of and had planned for, where a customer had taken down a sizable piece of space in one of our important data centers, and it was going to get relocated this year. This was something that was planned for from the outset, and so we are going to absorb that churn in our Q3 and therefore Q4 results. And so there is nothing fundamental going wrong with the business and nothing fundamentally causing us concern around the churn area. In fact, it’s the exact opposite. We see great momentum but recognizing that churn is lumpy and it is sometimes based on how customers decide to notify the churn, sometimes causes it to get a bit more allocated to one specific quarter or period. But nothing to be concerned about.

And David, on the third component of your question; couple thoughts here, first of all, in the quarter, this quarter, a little over 30% of our bookings this quarter came from cloud and IT services and almost 17% of the bookings came from the enterprise vertical. So in terms of creating this cloud environment to attract enterprise, as that is unfolding as we expected, and some of the steps that I spouted out to you, you’ve heard that we have had good success with both enterprises in the cloud vertical. The other industry verticals continue to still underpin good growth; so we have got solid growth across content digital media, financial services, and the networks suppliers, all actually also pursuing cloud with their end customers. So we are seeing the same trends as we think about the cloud, how it's affecting everybody. So we have record net bookings this quarter. You heard me talk about key wins with the Fortune 50, so we are getting use cases and success stories built with big profile companies in several of the industry's segments that make up the enterprise. We are starting to crack into the Fortune 500 as I mentioned. We have got performance hub wins being deployed across multiple industry verticals. So the overall strategy to become the enabler of this transformation to the cloud computing paradigm shift is working. The indirect channel is starting to show up for us. We are seeing these enterprises take advantage of the hybrid cloud at Equinix. Actually our acquisition that Charles and his team oversaw with this company called Nimbo, we are starting to see the professional service traction take place to help companies bridge and find the hybrid cloud. So there is good progress across lots of fronts here, lots of new logos. Charles, I don't know if there's anything you'd add to that?

No, I think you hit most of them. It is a little hard to see the impact at the sort of macro level of the publicly reported metrics. But I think as we dig down into the operating metrics that we are tracking on a week-to-week, month-to-month basis, I think we are definitely seeing the momentum in the numbers that we feel sort of more intuitively. And I think that includes, as Steve said, enterprise bookings over indexing relative to the revenue proportion, so that is a growing area. Enterprise and cloud combined actually combine for the majority of our new logo capture, and so we are having success on both the supply side of the cloud ecosystem, and now increasingly on the demand side, good traction in the channel with getting additional reach into the enterprise, and again, seeing overall, very solid results in interconnection, including what we track, which is interconnection between subsegments. Meaning for example, enterprise to cloud, cloud to network, etcetera, with really cloud being a primary driver there. So the underlying metrics are definitely indicating some good solid momentum.

Got it. All right. Thanks guys.

Thanks. I had one follow-up and one question. The follow-up is just the FX impact sequentially in the quarter, can you break that out between the gross FX impact and the hedge? And then you also frame this more broadly, as you look at the performance in the second quarter and you look at the guidance for the year, how much of the improvement was from non-recurring revenue, which from my understanding, you were looking to decline over the next few quarters after some strength in that metric in 2014, and how much is from the recurring revenue? Thanks.

So Mike, regarding the non-recurring activity, we observed a slight increase in NRR activity this quarter, roughly $5 million higher than the previous quarter. When we provided our guidance, we had an expectation of our performance, and most of that was included in our forward guidance. However, we are definitely seeing higher figures than we initially anticipated at the beginning of the year. If you remember, two quarters ago during the Q4 earnings call, we mentioned being about $5 million behind on a quarterly basis. All of this means that a significant amount of the growth you're noticing, along with the revenue increase, is largely attributed to the non-recurring activity, which is now $15 million higher than we expected. The remainder of the growth stems from our increased booking rate, faster bookings this quarter, achieving our price points, and experiencing less churn than we projected. This has been the main factor behind our success. More of our growth is coming from MRR, while less is derived from NRR. Concerning your question on FX, as I mentioned in my prepared remarks, there was a net exposure on the revenue line of $5.2 million as a headwind compared to Q1, and $3.3 million on the EBITDA line. Looking at the net hedge impact from quarter to quarter, it was a negative $700,000 on the revenue line and about a negative $400,000 on the EBITDA line. This reflects the hedges we had in place in Q1, offset by the benefits we experienced in Q2.

Okay. Thanks very much.

Thanks. So on the Telecity transaction and the regulatory scrutiny that's currently taking place at the EC level, I wondered if you can go into a little bit more detail? Although looking at this combination, surely, on a regional level or also at a national level? And is there antitrust review by country level governments, that goes on concurrently, should the review occur to the EU level? And then on a related topic, just M&A, given the situation with Digital Realty and Telx, you're top customers of each of those companies. Just wondered, how to think about potential strategic or even commercial impacts on your business from that combination?

Sure, why don't I start, and then Keith and Charles, why don't you guys kind of chime in. So let's start with the Telecity question Jonathan. As I mentioned in my comments, we are moving forward at the EU level with EU Commission, which we think is going to be a more efficient process, because we are dealing with a single authority. So that's the approach versus going country by country. So it will be a little bit more efficient we believe, and we got the approval to move forward with the antitrust review at that level. So I think that was the nature of your question; and we are well into that process. So we are full speed ahead with those interactions as we speak. That doesn't change any of the timing for this, we are still anticipating a first-half 2016 close and all the other commitments we made around value creation sources, etcetera, nothing has changed on any of that. The work that we are able to do now, because of the rules around the U.K. takeover panel, is that there is integration planning going on as I mentioned, Jonathan, and we have actually put retention and incentive programs in place. As you heard on the results this morning, Telecity is moving forward in a good format and a good fashion. So I think we are very happy with what we see here, and all the planning is on a good path. Do you guys have to add anything to that?

Well specifically to your question, there is no parallel review at a national level. The countries were provided an opportunity to object to an EU review, forewent that objection and have now yielded to essentially the European Commission to do the review.

Does that answer your question Jonathan?

Yes, it does.

We are closely monitoring the M&A and consolidation activities in the industry. As a team, we are being very strategic about how we focus our efforts to create shareholder value and enhance our global leadership position. We will remain proactive but selective in our areas of focus. We are aware of the recent Telx transaction, and while I cannot comment specifically on it, our interest in scaling our platform globally remains unchanged. We aim to deepen our interconnection and network density as we pursue M&A opportunities and capture the cloud and enterprise marketplace. Our competitive approach will rely on the strengths and value we deliver to our customers. We believe the platform we have established globally is quite difficult to replicate, and we are confident in our ability to continue competing effectively, even amidst this new combination.

Jonathan, I would like to add that we are indeed a major customer for both of those companies, and we expect this to remain the case as it reflects the ongoing momentum of our business. With DLR as a landlord, we have secured long-term contracts that allow us to maintain strategic control of essential assets critical for our future and our strategy execution. Regarding Telx, we are utilizing their services for our interconnection efforts in specific instances, such as providing interconnection through certain meeting rooms. Our business momentum is actually contributing to their interconnection as a result. We appreciate this and hope it continues. Concerning the competitive threat and the outlook of the combination, I would reiterate Steve's comments that our customers are responding positively to our value proposition. They seek global access to extensive network connectivity, which we believe we offer better than anyone in the industry—providing diverse, secure, high-performance private connectivity to cloud service providers worldwide, as well as consistent scalable operations that can adapt to their rapidly changing needs. We have invested significantly in this area and have a dedicated team globally to ensure excellence day after day. Therefore, we feel confident in our ability to compete effectively against any combination of players in the industry.

Thank you. And then just a quick question on sales, you mentioned channel, and I wondered what portion of bookings this quarter compared to prior quarters came from indirect partners? And then on the direct side, can you give us an update on the sales headcount versus the prior quarter?

We haven't typically disclosed the exact percentage of indirect channel bookings, but I can say that it is increasing. Specifically, our reseller community is engaging in sell-with motions. The market remains somewhat immature; enterprises are still exploring solutions for adopting hybrid cloud, which means they often collaborate with us and partners to provide a more comprehensive solution. We're seeing strong success with our key resale partners, which is where we find real momentum in our channel efforts. On the direct side, we currently have about 220 quota-bearing sales representatives globally. We plan to marginally increase that number in markets where we're seeing success, and this applies across all three regions. Recently, I reviewed with our regional presidents their plans to add sales personnel in response to market conditions, and all of them are looking to do this in a disciplined manner, targeting areas of latent demand. While it won't be a significant increase, we believe, given our market momentum, we will continue to grow. We currently stand at 220, and I expect to add around 20 to 30 additional sales heads over the next few quarters, depending on our ongoing momentum.

Thank you.

Great. Good afternoon. Thanks for taking the question guys. So listen, I guess I have one question about the guidance and then just one question about sort of where the stock is. So on the AFFO side, you guys have done about $440 million, a little north of that through the first half of the year, and the guide for the full year implies obviously, a deceleration in the back part of the year. Just looking at sort of where your EBITDA guidance is, it shows sort of steady progression as we go through the course of the year. So I'd just like to get a sense as to what's happening from the EBITDA down the AFFO line from a translation perspective, that wouldn't have sort of the same similar growth pattern? And then, I will come back for a second. Thanks.

Jonathan, I believe this relates to the most significant change. If I summarize the operational performance, I would say that we are improving, and this trend will continue for the rest of the year. However, there are two factors offsetting this progress. The first and most significant is the interest expense, which includes the $7 million commitment fee for the bridge related to the Telecity acquisition. Additionally, when we increase capital and convert operating leases to capital leases, it impacts our figures. We also implemented several large projects in Q1, including Singapore 3, Melbourne 1, Toronto 2, New York 6, and London 6. The interest that was previously capitalized in those transactions is now reflected in the operating line, affecting our AFFO. Nevertheless, we continue to experience momentum in increasing our EBITDA, and over time, AFFO will generally align with that growth. However, some irregularities are occurring in the latter half of the year, mainly due to our construction activities and the recent acquisition.

Okay, great. So look, since the last time we got on a call, you guys have gotten a PLR, which I think everybody was pretty excited about. And earlier in the year, there was a lot of progress on index inclusion. The RMZ is still out there. I think the last time we spoke, you guys were still looking for your GICS code to get changed. Maybe could you take us up to date as to where that process is and how we might think about new index inclusion through year-end, that'd be helpful? Thanks.

Sure Jonathan, this is Steve. I will give you just a quick update. As you know, we were added to the FTSE NAREIT index which happened pretty quickly, I think it was in March. The GICS code changed in June of 2015, and we are now in the specialized REIT sector. They conduct quarterly reviews, and while Katrina and Paul are working hard on that, I am not sure when the selection for the next quarterly review will happen. Additionally, the team is looking into the iShares Dow Jones REIT index. We have made initial contact, but we have limited visibility on how that will proceed. So those are the three activities we have been focused on. We are monitoring the quarterly reviews closely.

All right. Great. Thanks for taking the questions.

Thank you very much. Steve, you mentioned the ongoing mergers and acquisitions in the industry and that you would take a selective approach. Could you elaborate on those comments? Most of your expansions have involved campus builds in existing markets, and acquiring Telecity introduces you to new markets in Europe. Are you considering entering new markets in Asia or other regions? It's encouraging to see the growth reaching that 15% level. Previously, you discussed a total addressable market that was growing in the high single digits to low double digits. Are you seeing an acceleration in your market share, or do you believe the growth rate of the total addressable market has also improved? Thank you.

Sure. Let me start Simon, and then Keith and Charles can chime in here. But on the M&A color, as I mentioned to the previous question earlier here, I think from David; our focus on M&A activity is active. We have an active gain board. We have three heavy filters that we tend to put any regional input through, which is scale to platform. And we enhance our interconnection and network density secondly. And then thirdly, can we do something that will accelerate our capture of cloud and enterprises that come in and connect to the cloud? We put most of the deal flow through those three lenses, and if you go back and look at our 2010 or 2011 acquisitions, we can point to some combination of those three things. We are, I would tell you most of the activity is outside of North America. Latin America, as I have mentioned to you guys in the past, is of interest, to continue to expand the platform beyond Brazil, when and if the opportunities exist. In Asia, we are continuing to look at going deeper into China. We are working very hard in that market, to try to expand beyond our footprint in Shanghai, and that's of high importance to us. India will remain on the radar scale for us but India, to find the right partner and the right partner has proved challenging. But across other parts of Asia, there are opportunities. And then in Europe, I think the Telecity activity is going to consume us, as you might imagine. It would put us in six to seven new markets and strengthen our footprint in existing markets. So that's kind of where our focus is today. And I think someday you are going to see us show up and probably start in South Africa, as we head to that part of the world, and there will be opportunities there that might broaden our reach in that part of the world. As far as the TAM is considered, Charles, do you want to talk about the TAM?

We are pleased with the growth acceleration in our business and reaching a 15% growth rate is a positive achievement for us. This reflects a mix of factors, including our continued market share gains. It's important to note that the total addressable market is defined in various ways, and we believe that the segment of the market where we offer the strongest value proposition is indeed growing. This growth is driven by enterprises increasingly adopting hybrid cloud as their preferred IT architecture. Our offerings in network performance solutions and cloud exchange aim to empower companies to implement hybrid cloud architectures effectively, including the necessary professional services. Therefore, we see the total addressable market as accelerating and we believe we are also gaining additional market share. When we mentioned the macro market growth being in the high single to low double digits, we recognize that we are experiencing growth above that in targeted areas related to enterprise IT transformation and cloud adoption, and we are capturing more than our fair share of that growth. We expect this trend to continue in the future.

Correct. Thank you.

Great, thank you. Two questions if I may; one is, I was hoping if you could update on your Business Suites strategy, how many markets you are in with that product now, perhaps the percentage of revenue that's being driven off of that? What customer has been? And then the second question is, I guess more housekeeping and tied to the model, can you just tell us what share count we should be using for 2015 AFFO per share when we are putting that into our model? Thanks.

Why don't I take the first one and then obviously kick the second one back to Keith. Colby, as you know, Business Suites are something that we responded to an evolving market demand in terms of people looking to implement multi-tiered architectures. This continues to be a phenomenon that we see. As you know, we have continued to have a very strong discipline around right customer, right application and the right assets. And frankly, it is that discipline that's driving the pricing behavior that Keith talked about earlier, and driving the churn dynamics that we are seeing, which is improvements in both of those areas. But as it relates to business suites, we have seen some success in that. It's really in a small number of markets. We have really implemented our product like that basically in Ashburn and in New York. Even in those markets, we are evolving it based on our updated understanding of the customer's requirements. And so, what we are finding is, that we are now implementing a more complete hybrid cloud solution, that often looks like a performance hub implementation, which is a smaller implementation, more network dense, more rich in connectivity to other clouds. But often paired with a slightly larger implementation that maybe an adjacent site or in a different metro that allows them to put certain applications there that allow them to really fully implement hybrid cloud. So we are evolving it a bit. We continue to build out sites that we think can support that sort of multi-tiered architecture. You will see upcoming announcements from us relative to how our product set is evolving to meet that demand. We feel very good about what we are doing to really support the complete needs of the enterprise customer.

Colby, on your second question, I am going to refer you to two slides. On slide 14, we give an appropriate bridge of our AFFO and consistent with my comments that I made to Jonathan earlier, you can see how AFFO plays itself out for fiscal year 2015. Technically, FFO is going to run at the same rate, with increased AFFO at effectively the same rate as increased EBITDA for the remaining part of the year. As it relates to share count, I refer you to page 33, which gives you a fully dilutive weighted average share forecast. And we give it to you in all sort of shapes and sizes, so that you can look at it, based on what your needs are from an actual number to a weighted average number to a fully diluted number. So I think that will be a good representation for you to use, and if there are any follow-up questions, happy to take that, or Katrina and Paul will be happy to talk to you about it as well. But page 33 is a pretty detailed analysis of our diluted share position.

So it looks like then, I should be using the 59 and I guess what, in change for the full year?

Yes, if you consider a fully diluted basis with the convertible notes. Those notes will convert in 2016, but you should also think about what might happen with the special distribution, which will likely occur in Q4. You are looking at around 59 million to 60 million shares.

Okay. Thank you.

Hey guys, thanks. Maybe just a quick comment on the Asia-Pac MRR per cabinet. I know Keith, I think you said you had some pretty large cloud deployments. How should we think about that as it goes through the back half of the year? Do you expect more big clouds coming in there, that would continue to weight on that? And then maybe just a broader question on REIT investors and sort of your recent conversations, their appetite and interest in the company?

I believe, Mike, to respond to your first question, the Asia-Pacific region has shown significant growth, both in reported figures and on an FX neutral basis. This growth has resulted in increased activity in the IBXs. When you have this kind of growth and volume, it takes time for interconnection and other services to align. Additionally, we have seen great success in Singapore with our cloud deployment, which often comes in larger volumes and at different price points. This has slightly diluted our overall metrics, and currency fluctuations have also contributed to variations. Overall, we are satisfied with the situation in Asia-Pacific and are not surprised by our current price points. Looking ahead, I would expect stability in average yield per cabinet across all regions, including Asia. I'm sorry, I lost track of your second question regarding the REIT investors? Overall, look its no surprise to you that we are meeting with a number of investors. Katrina and Paul do a good job of looking out for those type of investors who have taken a broad interest in basically our story. We think it’s a very compelling story, as we have said before. We are going to mix yield with basically a faster growing company, and that's evidenced by our results posted today and our forecast for the rest of the year. We could think we can deliver a total shareholder return to all our investors, but particularly those REIT investors who like our story in a very meaningful way. So from our perspective, we will continue to focus on them. We are gaining momentum. We certainly have interest in our story, and we spend a lot of energy talking with those investors.

Great. Thanks guys.

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