Equinix Inc (EQIX) — Q3 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 July 31, 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'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 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 within 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 third quarter earnings call. We delivered another strong quarter, as the power of our global platform, as well as the depth and breadth of our digital ecosystems, are translating into sustainable growth, including record net bookings, stable yields, and healthy interconnection activity. Our bookings momentum in cloud and enterprise reflects our position as a key enabler of IT transformation. Cloud service providers are choosing platform Equinix to scale their infrastructure globally, and enterprises are increasingly turning to us as a partner in adopting hybrid and multi-cloud, as part of their next-generation IT architectures. As depicted on slide three, revenues were $686.6 million, up 4% quarter-over-quarter, and up 17% over the same quarter last year, on a normalized and constant currency basis. Adjusted EBITDA was $321.5 million for the quarter, up 3% over the prior quarter, and up 20% year-over-year, on a normalized and constant currency basis, delivering a 47% margin. AFFO grew 17% year-over-year, on a normalized and constant currency basis to $210.4 million. With 169,000 cross-connects, and 4 terabytes per second of traffic, on our Internet Exchanges, which are growing at 33% year-over-year. Equinix is benefiting from the strong secular trends and momentum, as businesses are becoming increasingly interconnected. A recent industry survey of over 1,000 CIOs and other IT leaders globally showed the number of enterprises deploying direct interconnections is poised to more than double, to over 80% by 2017. Enterprises that have already moved to interconnected solutions reported significant value creation from enhanced application performance and cost savings. Clouds continue to be the fastest growing interconnection destination at Equinix, although strong growth was delivered from all ecosystems. We added a record 7,000 cross-connects this quarter, and revenue from interconnection grew 21% year-over-year on a constant currency basis, meaningfully outpacing overall revenue growth as we mature our ecosystems and penetrate new markets. Our digital exchanges saw another quarter of record traffic in provision capacity growth, including the addition of 172 ports on our Internet Exchanges. This includes 24, 100-gig ports doubling the provision capacity added in any previous quarter, and an important reflection of the confidence our customers have in our Internet Exchanges and our role in connecting network traffic. We expect continued traffic growth as this 100-gig capacity is absorbed into peering architectures. Internationally, we are augmenting strong organic growth with our planned acquisitions of Bit-isle and Telecity to build market leadership, increase capacity, enhance cloud and network density and grow customer ecosystems across Europe and Asia. Turning to slide four, as announced in September, we are acquiring Bit-isle, a co-location leader in Japan for approximately $280 million. Japan is one of the world's largest co-location markets and for several years, Equinix has been evaluating how to accelerate our leadership in this market. With this acquisition, Equinix will become the fourth largest data center operator in Japan. Bit-isle's facilities are adjacent to our carrier dense sites in Tokyo and Osaka, giving us customer-ready capacity as well as the opportunity to scale platform Equinix in this increasingly constrained but important global market. Bit-isle also complements our cloud and network service provider customer base with a strong Japanese enterprise and systems integrator customer set, including some of Japan's largest companies. With Bit-isle, Equinix also adds strong local expertise to help drive success in Japan, and we look forward to completing this transaction in the fourth quarter. Turning to the Telecity acquisition, we're excited about this compelling and unique opportunity to expand our presence in key markets in Europe, delivering significant value to our global interconnection platform. Regarding regulatory status, we are seeking approval from the European Commission and we have had ongoing dialogue over the past several weeks to review the transaction. Based on those discussions, we have proceeded with a formal offer to the Commission with proposed commitments, which are now being market tested. We expect to hear a response by November 13 and are of the view that this transaction should be cleared during its phase one review, based on those commitments. Our pre-close work streams are progressing well and will remain on track for a first half 2016 close. In addition to our acquisitions, the Equinix global platform continues to grow organically as customers leverage our broad geographic reach to deploy applications that serve their employees, partners, and customers across the world. Today, 54% of our revenue comes from customers deployed globally across all three regions, and over 83% is from customers deployed across multiple metros, a reflection of our differentiated global reach. We continue to invest in international markets to meet growing global demand and seek critical business ecosystems that will deliver incremental growth and value. We're currently building across 12 metros worldwide, focusing on our investments where we can deliver a differentiated offer and generate very attractive returns. Globally, we have 13 announced expansion projects underway, of which 12 are campus builds or incremental phased builds, which helps mitigate risk while driving returns. We continue to increase the number of owned data centers, including purchasing the land for our new build in São Paulo. Owned properties now generate 38% of recurring revenue and 39% of NOI, and over 93% of NOI is generated by owned or leased properties or lease expirations extended to 2029 or beyond. Shifting gears, let me address our continued investment in green technology. We believe it is our responsibility to power the digital economy in an environmentally sustainable way, both to serve the needs of our customers and to protect the communities in which we operate. This quarter we signed a power purchase agreement for solar power with SunEdison. This purchase of 105 megawatts ensures the generation of renewable power equaling 100% of the energy for Equinix's California data centers. This agreement will increase our use of green energy sources from 30% to 43% of our data center footprint and represents significant progress towards our stated long-term goal of using 100% clean or renewable energy. Now, let me cover the quarterly highlights from our industry verticals. Network operators continue to expand their infrastructure as they implement 100-gig platforms and augment their networks to deliver new services for mobile, content delivery, video streaming, and cloud-based services. A resurgence of subsea cable projects is also creating opportunity for Equinix, helping service providers accelerate returns by terminating cables directly into our IBXes. Equinix is working with AquaComms, which is deploying one of the first trans-Atlantic subsea cables in more than a decade to meet increased bandwidth needs for global businesses. Our New York and London data centers will serve as the carrier neutral, low latency network access points to this cable system. In addition, our West Coast data centers will anchor the new trans-Pacific subsea cable system named FASTER. This new cable route will be one of the longest high-capacity routes in the world and will be backhauled into four of our data centers in Silicon Valley, Seattle, and Los Angeles. In the content and digital media vertical, we continue to see consumer content companies architect their delivery infrastructure via platform Equinix to respond to cost and performance imperatives driven by the demands of today's mobile users. Growth was driven by global expansions from players including Baidu, a Chinese web services company, and Créteil, a French company specializing in performance marketing, as well as new wins with three of the largest consumer application providers in music, social networking, and accommodations. Advertising and e-commerce sub-segments continue to be our strongest growth performers in this space. Turning to the financial services vertical, we see continued diversification in our financial services business with additional wins from Australian Securities Exchange operations, a global financial market exchange, as well as wins with a leading global insurance syndicate and one of the largest banks in the world. We also had lighthouse wins in digital payments and we see encouraging signs of ecosystem formation in this area. Turning to cloud and IT services, we are experiencing continued momentum across the cloud ecosystem, which drove strong bookings this quarter as major cloud and IT players, such as AWS, Cisco, Dimension Data, and EMC continue to expand and our relationship with Rackspace extended to include their participation on the Equinix Cloud Exchange. With over 240 customers provisioned, we continue to see momentum on our Cloud Exchange, our cloud interconnection solution that allows customers to dynamically create and manage private, secure virtual connections to multiple cloud services over a single port, simplifying cloud migrations, and enabling workload mobility from cloud-to-cloud. We're pleased to announce we are also collaborating with Oracle to enable high performance global direct access to Oracle's full suite of cloud services across six markets. This will allow customers to easily create connections to Oracle's cloud-based business applications while reducing the application latency often associated with traditional cloud access. As one of the largest cloud providers, the addition of Oracle Cloud to the Equinix Cloud Exchange strengthens our ability to deliver unrivaled choice to our customers. In October, Equinix worked closely with Microsoft to launch a private Azure ExpressRoute connection to Office 365 through the Equinix Cloud Exchange. Office 365 is one of the most requested applications by enterprises and leveraging ExpressRoute via Cloud Exchange dramatically improves the performance and security of Office 365. We're now offering this solution across all 16 metros where ExpressRoute is available on Cloud Exchange and have seen very strong interest. Turning to the enterprise vertical, the enterprise vertical delivered record bookings, and we are seeing continued traction in penetrating this massive addressable market. Notably as of the third quarter, enterprises became our largest source of new customer adds with traction in transportation, manufacturing, logistics, and healthcare. Over 250 customers have now deployed our Performance Hub solution to optimize network architectures and drive application performance by securely and efficiently connecting to network and cloud services. Turning to slide five, our enterprise go-to-market strategy is based on four use cases for people, clouds, locations, and data that allow us to effectively solve enterprise pain points by making the transition to an interconnection-oriented architecture. Whether it's deploying applications to distributed users or leveraging data-intensive analytics, enterprises are facing challenges around security, networking costs, and performance that we are helping them solve. For example, a global media and software customer worked with Equinix to solve inefficient and insecure access to multiple cloud providers. By deploying a distributed hub infrastructure inside of Equinix and connecting privately to multiple clouds, this customer benefited from a 25% reduction in latency and a 50% reduction in OpEx per application. Our global reach as well as networking cloud density represent powerful and difficult-to-replicate advantages in servicing the demand for multi-cloud. But translating these advantages into customer acquisition and market share capture requires a continued evolution of our product and go-to-market capabilities. We have made significant progress in 2015 with our Performance Hub and Cloud Exchange offers and will continue to expand our portfolio of high impact, channel-ready offers to help enterprises satisfy their hybrid cloud aspirations. On the go-to-market front, we continue to drive productivity improvements in our direct selling teams and are investing in parallel in our channel and partner program to dramatically expand market reach and enable the delivery of more complete solutions to meet key customer requirements. We're pleased with the progress of our channel initiatives and continue to see partner bookings grow as a percentage of our overall sales. So, let me stop here and turn it over to Keith, to go through the results for the quarter.

Great. Thanks, Steve. Good afternoon to everyone on the call. We had another great quarter, and the value of our platform as reflected in the health of our key operating metrics continues to rise. We had once again strong gross and net bookings, and our MRR churn remains at the lower end of our guidance range. Consistent with the last four quarters, we had positive net pricing actions, and we recorded the highest increase in net cabinets billing in our history, adding 4,700 incremental billing cabinets in Q3, more than double the average quarterly rate in 2014. Our MRR per cabinet on an FX neutral basis remained firm. We're delighted with the interconnection activity in the quarter, and we added significant new cross-connects and exchange ports. Interconnection revenues as a percent of our recurring revenues continue to pick up across each of our regions. So, based on the strength of our gross and net bookings activity, as well as the continued momentum across our business, we are once again raising our guidance expectations despite the continued strengthening of the U.S. dollar for each of revenues, EBITDA, and AFFO for Q4 and 2015. And as we finish the year on this strong note, this clearly positions us for a solid start to 2016. Our updated revenue guidance now implies a normalized and constant currency growth rate of over 16% compared to the prior year, the highest annual growth we have seen since 2012. Now moving to some comments on the acquisitions. We continue to progress with both our Telecity and Bit-isle transactions. The Bit-isle share tender period closed this past Monday, and we are happy to note that 97% of the Bit-isle shares were tendered. We expect to acquire the remaining shares of Bit-isle by the end of the year. The Bit-isle transaction will officially close in early November, and we'll report their results in our consolidated financials from that point forward. Please note, we have not included Bit-isle in our guidance. And accordingly, we'll update you on the financial results on our next earnings call. As stated previously, we expect Bit-isle to create significant value for our shareholders and to be accretive to Equinix's AFFO per share upon close. Also we're continuing our journey as a REIT, and in August, Equinix was added to the MSCI US REIT Index as the largest data center REIT. We remain pleased with the diversification of our shareholder base as many REIT investors joined our traditional technology investor base. Given the changing investor mix, we'll work to clearly message our story to both these investor groups. So now moving to the slides. As depicted on slide six, global Q3 revenues were $686.6 million, up 4% quarter-over-quarter, and up 17% over the same quarter last year on a normalizing constant currency basis. Our revenues over performance was due to strong bookings activity and net positive pricing actions. Q3 revenues net of our FX hedges absorbed a $4 million negative currency headwind when compared to either the average FX rates of last quarter or our prior FX guidance rates. Given the continued strength of the U.S. dollar, our updated 2015 guidance now includes incremental FX headwinds of $13 million on the revenue line and $4 million related to adjusted EBITDA when compared to our prior FX guidance rates. Therefore, our current 2015 revenue guidance now absorbs $138 million currency headwind while EBITDA is negatively impacted by $56 million when compared to the average rates used in 2014. As we look to 2016, we continue to believe the U.S. dollar will remain strong and create some level of headwind when compared to the average rates in 2015 in addition to the averaging down of our current hedge positions. We'll update you on the estimated impact of FX on the next earnings call. Global adjusted EBITDA was $321.5 million, above the top end of our guidance range, and up 3% over the prior quarter and 20% over the same quarter last year on a normalized and constant currency basis, largely due to strong revenue flow-through. Adjusted EBITDA margin was 47%. Our Q3 adjusted EBITDA performance net of our FX hedges reflects a negative $800,000 currency impact when compared to the average FX rates from last quarter and a $500,000 positive benefit when compared to our FX guidance rates. Global AFFO was $210.4 million. Excluding the $11.6 million FX loss related to net investment hedge for the Telecity acquisition and $4 million of incremental financing cost related to both the Telecity and Bit-isle acquisitions, AFFO on a normalized and constant currency basis increased 2% over the prior quarter. As a reminder, we've hedged the majority of our pound sterling net investment exposure related to the Telecity acquisition. When we mark-to-market these hedges whether realized or unrealized, the fluctuations will flow through net income on the other income and expense line and therefore affect AFFO and other reported metrics until we close the deal. As we look forward, we'll continue to keep you updated on the impact of this hedge position and how it affects our AFFO metric. Global net income was $41.1 million or diluted earnings per share of $0.71, including acquisition cost of $13.4 million and the $11.6 million FX loss in the Telecity acquisition related hedge. And finally moving to churn. Global MRR churn for Q3 was 2%, our fifth quarter in a row at this lower level. For Q4, we expect the quarterly MRR churn to be at the high end of our range between 2% and 2.5%, which includes some of the MRR churn originally expected to incur in Q3. Now turning to slide seven, I'd like to start reviewing the regional results, beginning with the Americas. The Americas region had a strong bookings quarter, lower than planned MRR churn, and favorable pricing. On a normalizing constant currency basis, the Americas revenues were up 4% quarter-over-quarter and 13% year-over-year. Americas adjusted EBITDA was up 2% over the prior quarter and up 12% year-over-year on a normalizing constant currency basis. Americas interconnection revenues represented 22% of the regions recurring revenues and we added 3,500 net cross-connects and 78 exchange ports in the quarter. Americas net cabinets billing increased by 1,500 in the quarter. Also we're proceeding with a new build in São Paulo, the financial capital and the main data center market in Brazil. This will be our third IBX in the São Paulo market and a fifth IBX in the Brazilian market. Equinix purchased land for São Paulo III, consistent with our desire to own more of our IBXs as we expand the business. We also broke ground on our Ashburn North campus, undeveloped land that we will also – pardon me – that we also own next to our current Ashburn campus, which is the largest Internet Exchange point in North America. Equinix currently has 10 IBXs in Ashburn and the surrounding area. This new campus, which we plan to develop over the next few years, will effectively double the capacity we have in this market. Now looking at EMEA, please turn to slide eight. EMEA delivered another strong quarter with record bookings with particular strength in the French and Dutch markets. On a normalizing constant currency basis, revenues were up 3% quarter-over-quarter and 22% year-over-year, and adjusted EBITDA was up 4% over the prior quarter and 26% over the same quarter last year. We had another solid quarter of increased interconnection activity, adding 1,800 net cross-connects. EMEA interconnection revenues represent 9% of the region's recurring revenues. EMEA MRR per cabinet was flat on a constant currency basis, and net cabinets billing increased by 1,800. Given the strong performance in our key markets, we plan to move forward with additional expansion phases in both Amsterdam and London. This includes the next phase of London 6, the new build in our Slough campus that only opened earlier this year. And now looking at Asia-Pacific, refer to slide nine please. Asia-Pacific continued its rapid growth as customers continue to deploy into this region. Revenues were up 6% over the prior quarter and 26% over the same quarter last year on a normalizing constant currency basis. Adjusted EBITDA on a normalized and constant currency basis was up 6% over the prior quarter and 37% over the same quarter last year. Adjusted EBITDA margin was 52% with strong flow-through from the revenue line. MRR per cabinet on a constant currency basis was down slightly quarter-over-quarter, which included a large number of billable cabinets being installed. Net cabinets billing increased by 1,400 over the prior quarter and we added a healthy 1,700 net cross-connects. Interconnection revenues stepped up to 13% of the region's recurring revenues. For builds, we opened a new phase in Hong Kong and Singapore this quarter and currently have five expansion projects underway across four countries. And now, looking at the balance sheet, please refer to slide 10. Unrestricted cash and investment decreased this quarter to $340 million, largely due to our continued investment in CapEx and the payment of our third quarter cash dividend. Our net debt leverage ratio currently is 3.4 times of Q3 annualized adjusted EBITDA. As we look forward, we continue to actively review our capital structure and financing needs, largely due to the planned acquisition of Telecity and soon to close Bit-isle transaction. But as well as we continue to just stay at the level of investment as we spend our platform to support the trajectory of our business. Now, switching to AFFO and dividends on slide 11. For 2015, we're raising our expected AFFO guidance to now range between $866 million and $870 million, an effective dollar increase of $29 million over our prior guidance or a 24% year-over-year increase on a normalized and constant currency basis. Our AFFO guidance, as mentioned previously, includes the impact of the Telecity net investment hedge in Q3, but no, our updated AFFO guidance does not make any assumption for Q4 relating to the net investment hedge for Telecity. Also today, we announced our Q4 dividend of $1.64 a share – sorry, pardon me – $1.69 a share, consistent with our prior quarterly dividends. Our AFFO payout ratio remains at 45%. Our previously announced 2015 special distribution of $627 million will also be paid in the fourth quarter in a combination of up to 20% in cash and at least 80% in stock. Do note, by the virtue of the special distribution being paid before the Q4 quarterly cash dividend record date, we're effectively increasing our quarterly dividend by 3% as the 1.7 million incremental shares from the distribution will have already been issued to our shareholders. Now looking at capital expenditures, please refer to slide 12. For the quarter, capital expenditures were $216 million, including recurring CapEx of $26 million. Given our rapid fill rates and over performance year-to-date, we're closely assessing our inventory and expect to continue to invest to support our platform. We're narrowing our 2015 CapEx guidance to the top end of our prior range of $830 million to $850 million. Turning to slide 13. The operating performance of our stabilized 67 global IBX and expansion projects that have been opened for more than one year delivers steady as reported growth of 6%, an increase over the prior quarter and more closely aligned with our expectations. Utilization of these assets increased to 86%, up 2% over the prior quarter as we filled additional capacity in these stabilized assets with particular high absorption in London, Munich, and Silicon Valley markets. At the end of Q3, our stabilized projects generated a 33% cash-on-cash return on the gross PP&E invested, reflecting the economic value these stabilized campuses deliver. So with that, let me turn it back to Steve.

Okay. Thanks, Keith. Let me now cover our 2015 outlook on slides 14 to slide 17. Note that the following guidance does not include the Bit-isle transaction that is expected to close in Q4. For the fourth quarter of 2015, we expect revenues to range between $701 million and $705 million and normalized and constant currency growth rate of 3% quarter-over-quarter, which includes $4 million negative foreign currency impact when compared to the average FX rates in Q3 of 2015. Cash gross margins are expected to approximate 69%. Cash SG&A expenses are expected to approximate $153 million to $157 million. Adjusted EBITDA is expected to be between $328 million and $332 million, which includes a $4 million negative foreign currency impact when compared to the average FX rates in Q3 of 2015. Capital expenditures are expected to be between $242 million and $262 million, which includes approximately $34 million of recurring capital expenditures. For the full year of 2015, we are raising revenues to range between $2.696 billion and $2.7 billion, a 16% year-over-year growth rate on a normalized and constant currency basis, which includes $13 million of negative foreign currency impact when compared to our prior guidance rates. The revised revenues are a $21 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 $601 million to $605 million. We are raising our adjusted EBITDA guidance to range between $1.267 billion and $1.271 billion or a 47% adjusted EBITDA margin. This guidance includes $4 million of negative foreign currency impact when compared to prior guidance rates or a normalized and constant currency growth rate of 19%. Excluding this currency impact, the revised adjusted EBITDA is an $18 million increase compared to prior guidance. We expect adjusted funds from operations to range between $866 million and $870 million or a normalized and constant currency growth rate of 24%. As noted by Keith, this guidance does not include the impact from the Telecity transaction hedging for Q4, although, this will continue to impact our as-reported AFFO results. We expect 2015 capital expenditures to range between $830 million and $850 million, which includes $110 million of recurring capital expenditures. In closing, we are expanding our market leadership and driving disciplined execution of our differentiated strategy. We believe that the strength of our digital ecosystems and the global breadth of our interconnection platform create a powerful flywheel to fuel our business and drive IT transformation. Our role as an enabler of the hybrid and multi-cloud represents a powerful near-term catalyst for enterprise penetration and we will continue to invest in this significant opportunity. We are working to accelerate our alignment and agility as an organization and look forward to updating the market as we progress with these initiatives. So let me stop here and we'll open it up for questions. So back over to you, Bob.

Thank you. That concludes our Q3 call. Thank you for joining us.