Equinix Inc (EQIX) — Q4 2022 Earnings Call Transcript

Good afternoon, and welcome to today's conference call. Before we get started, I would like to remind everyone that some of the statements we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we have identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed February 18, 2022, and 10-Q filed November 4, 2022. 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 Investor Relations page at www.equinix.com. We have made available on the IR page of our website a presentation designed to accompany the discussion along with certain supplemental financial information and other data. We'd also like to remind you that we post important information about Equinix on the IR page from time to time and encourage you to check our website regularly for the most current available information. With us today are Charles Meyers, Equinix' CEO and President; and Keith Taylor, Chief Financial 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 ask these analysts to limit any follow-on questions to one. At this time, I'll turn the call over to Charles.

Thank you, Chip. Good afternoon, everybody, and welcome to our fourth quarter earnings call. We had a great finish to 2022, delivering one of the best bookings performances in our history, led by the Americas with continued strength in demand and favorable pricing trends across all three regions. For the full year, we delivered more than $7 billion in revenue for the first time and completed our 80th consecutive quarter of revenue growth, an amazing 20 years of continuous growth, all while driving AFFO per share performance above the top end of our long-term expectations. As we look to the year ahead, even amidst a dynamic and complex global landscape, it's increasingly clear that the secular tailwinds of digital transformation remain strong. In 2023, IDC estimates spending on digital technology by organizations will grow 8x faster than the broader economy. In the current macroeconomic environment, we believe spending on digital transformation will remain robust for two simple reasons. First, as companies work harder for each incremental revenue dollar, digital is seen as a critical driver of competitive differentiation, accelerating time to market and enabling product set evolution. And second, digital transformation is increasingly a means to do more with less, enabling businesses to reduce costs and drive operating leverage while simultaneously becoming more agile and responsive in serving their customers. In the context of this secular demand environment, we remain confident that Platform Equinix is uniquely positioned to support our customers' digital infrastructure needs. Digital leaders are demanding infrastructure that is more distributed, more ecosystem-powered, more flexible and more interconnected because it is fundamental to their ability to differentiate in the marketplace and lower their costs. Our market-leading global reach, vibrant digital ecosystems and comprehensive interconnection platform allow our customers to scale with agility, speed to launch of digital services, deliver world-class experiences and enhance value to all their stakeholders. While we will continue to closely monitor the macro environment and we'll adapt our execution accordingly, the fundamentals of our business remain strong, and we're investing behind the momentum we're seeing, including adding quota-bearing heads, evolving our product set and expanding our industry-leading data center portfolio. With regards to power, our multiyear hedging efforts continue to create visibility and predictability for Equinix and our customers in the coming year. Effective January 1, we raised pricing, passing on the full impact of these additional power costs to our customers, increasing costs but giving our customers much-needed budget certainty and, in most cases, leaving them with rates below the prevailing spot market. Overall, we believe we remain in a good position relative to competitors and the broader market, and I'm pleased with where we landed for our customers and our business. Turning to our results, as depicted on Slide 3, revenues for the full year were $7.3 billion, up 11% year-over-year. Adjusted EBITDA was up 8% year-over-year and AFFO per share grew 11% year-over-year. These growth rates are all on a normalized and constant currency basis. Our data center services portfolio continues to extend its scale and reach. And given strong demand and high utilization, we see continued opportunity to deliver highly attractive returns on capital, as evidenced by the largest development pipeline in our history. We currently have 49 major projects underway across 35 metros in 23 countries, including nine xScale projects representing over 34,000 cabinets of retail and over 75 megawatts of xScale capacity. New projects this quarter include new data center builds in Istanbul, Seoul and Tokyo, and our first builds in both Johannesburg, South Africa and Johor, Malaysia. Our new IBX in Johannesburg augments our current footprint in Africa, entering the largest and most digitally developed nation on the continent. And our new IBX in Johor represents our entry into one of the most requested markets in Asia Pacific by our global customers. Equinix remains the best manifestation of the interconnected digital edge. And with these new builds, our unparalleled global footprint will span 75 metros and 35 countries. The strength of our global platform continues to shine, with nearly 90% of our revenue coming from customers operating in multiple metros and nearly 2/3 coming from customers operating in all three regions. Key multi-market wins this quarter included one of the world's leading hospitality companies, finding performance gains at the edge by deploying in strategic markets across all three regions; and a leading cloud and CDN provider extending coverage and scaling globally to support new services and meet growing demand. IDC estimates that more than 750 million cloud-native applications will be developed globally by 2025. And as this digital transformation wave continues, customers see Equinix as the logical point of nexus for hybrid and multi-cloud deployments. This quarter, we won four new cloud on-ramps, including one in Mumbai, making it the 12th metro on Platform Equinix enabled with native cloud on-ramps from all five of the leading cloud providers. No other data center operator has more than one metro with all five clouds. In our xScale business, we continue to see strong overall demand, leasing approximately 8 megawatts of capacity across our Tokyo 12 and Osaka two assets with meaningful expansions in our forward pipeline. Enterprise wins leveraging the cloud this quarter include a global technology company in the payments industry, deploying infrastructure to place their corporate and customer networks closer to AWS and Azure; and a leading paints and coatings company choosing Equinix for its cloud on-ramp capabilities and virtualized service offerings. Our industry-leading interconnection franchise continues to perform well with revenues for the quarter growing 13% year-over-year on a normalized and constant currency basis, outpacing the broader business. We now have over 446,000 total interconnections on our platform. In Q4, we added an incremental 4,500 organic interconnections, slightly lower than our historical run rate due to seasonally slower gross adds, customer consolidations into higher bandwidth BCs on fabric and some elevated grooming activity. Equinix Fabric saw continued growth and is now operating at a $200 million revenue run rate, one of our fastest-growing products. Attach rates for Fabric continue to move higher, with 40% of customers realizing the benefits of connecting their digital infrastructure at software speed. Internet exchange saw peak traffic jump 7% quarter-over-quarter and 28% year-over-year to greater than 29 terabits per second, driven by FIFA World Cup streaming demand and reflecting the continued strategic importance of having the world's largest Internet exchange footprint on Platform Equinix. Key interconnection wins this quarter included one of Korea's largest conglomerates, establishing interconnection in Seoul for SJC2, the Southeast Asia-Japan Cable, which will be ready for service this year, and the largest water authority in the Netherlands, implementing Equinix Fabric to directly and securely connect to distributed infrastructure and digital ecosystems to ensure a clean water supply. Turning to our digital services portfolio, we saw continued momentum with Equinix Metal and Network Edge, driving attractive pull-through to Fabric. Digital services wins this quarter included a leading insurance and financial services company evolving their internal systems from their own data center to a public cloud plus Metal approach at Equinix; and a Belgian advertising service provider using Equinix Metal for fast, efficient, reliable data movement to support localized online advertising. And our channel program delivered its seventh consecutive record quarter, accounting for nearly 40% of bookings and nearly 60% of new logos. Wins were across a wide range of industry verticals and digital first-use cases with hybrid multi-cloud as the clear architecture of choice. We saw continued strength from partners like AT&T, Avant, Cisco, HPE and Microsoft. Key wins included delivering a critical time-sensitive site migration for a multinational banking and financial services client in partnership with Options IT and Dell, leveraging a combination of Equinix Metal, Network Edge and Fabric to overcome supply chain delays and ensure continuity of operations while interconnecting to critical trading platforms. So let me turn the call over to Keith and cover the results from the quarter.

Thank you, Charles, and good afternoon to everyone. To start, we had a great end to the year, finishing Q4 with healthy bookings, strong pricing, which included a nice uplift in MRR per cabinet in each of our regions and a solid forward-looking demand pipeline. We closed over 17,000 deals across more than 6,000 customers in 2022, and no single customer represents more than 3% of our MRR, highlighting the tremendous scale, reach and diversity of our go-to-market engine that continues to produce despite volatile and shifting macro conditions. Given the weaker U.S. dollar relative to our prior guidance rates, FX has shifted from a meaningful headwind to a tailwind, which is positive, although 2023 exchange rates still remain below the average FX rates for 2022. And while we continue to remain vigilant to the challenges in the broader economy, we do remain optimistic about our business and the key demand drivers and feel we're very well positioned to grow and scale due to our industry-leading risk management efforts across procurement and strategic sourcing, power and treasury and our future-first sustainability program. Also, the diversity and mix of our customers is benefiting us, with large established businesses constituting a majority of our revenues. More than 80% of our recurring revenues come from companies generating $100 million or more in annual revenues. And more than 85% of our recurring revenues in the quarter come from customers deployed in three or more data centers, making Equinix a core vendor for our customers' digital infrastructure needs. Equinix remains in excellent financial health with strong liquidity positions, low net leverage, allowing us to be both strategically and operationally flexible in this current market environment. Now as part of our larger programmatic approach to managing power costs, we initiated efforts to enhance our customer communications last fall, providing our customers insights into our efforts while continuing to protect our customers and ourselves against the rising costs through our multiyear hedging efforts. At the start of 2023, we raised our power prices primarily in the EMEA region to recover these rising costs. While power markets remain volatile, our hedging approach meaningfully dampened the impact of the inflated energy costs for many of our customers. We expect these power price increases will generate approximately $350 million of incremental revenue and costs in 2023. And as a result, the cumulative power price increases are expected to increase our revenue growth by approximately 500 basis points. Now despite these increases, our cost management efforts have protected both our adjusted EBITDA and AFFO on a dollar basis, but as expected, have negatively impacted our adjusted EBITDA margins for the year. We expect these higher energy costs to be transitory and should reverse course over our future yet-to-be-determined period, at which time both our gross profit and adjusted EBITDA margins will return to our targeted and expected levels. Now let me cover the highlights for the quarter. Note that all comments in this section are on a normalized and constant currency basis. As depicted on Slide 4, global Q4 revenues were $1.871 billion, up 11% over the same quarter last year, above the midpoint of our guidance range on an FX-neutral basis, largely due to strong recurring revenues led by the Americas region. We continue to enjoy net positive pricing actions in the quarter. And similar to the prior quarter, price increases outpaced price decreases by a ratio of 3:1. Q4 revenues, net of our FX hedges, included an $8 million tailwind when compared to our prior guidance rates due to the weaker U.S. dollar in the quarter. As we look forward, we expect a significant step-up in Q1 recurring revenues, largely due to strong net bookings performance and significant power price increases. Global Q4 adjusted EBITDA was $839 million or 45% of revenues, up 7% over the same quarter last year, at the top end of our guidance range due to strong operating performance. Q4 adjusted EBITDA, net of our FX hedges included a $1 million FX benefit when compared to our prior guidance rates and $7 million of integration costs. Global Q4 AFFO was $658 million, above our expectations due to strong operating performance, including seasonally higher recurring CapEx and included an $11 million FX benefit when compared to our prior guidance rates. Global Q4 MRR churn was 2.2%, a derivative of disciplined sales execution, whereby we put the right customer with the right application into the right asset. For the year, MRR churn was better than expected with the average quarterly MRR churn at the low end of our guidance range. As we look forward into 2023, we expect MRR churn to remain comfortably within our targeted 2% to 2.5% per quarter range. Turning to our regional highlights, whose full results are covered on Slides 5 through 7. APAC was the fastest revenue-growing region on a year-over-year normalized basis at 17%, followed by the Americas and EMEA regions at 10% and 9%, respectively. The Americas region had another quarter of strong gross bookings, lower MRR churn and continued favorable pricing trends led by our New York, Toronto and Washington, D.C. metros. The strength in the region remains broad-based, and the acquired Antel assets in Chile and Peru have performed better than we planned. Our EMEA region delivered a strong quarter with continued healthy pricing trends and an attractive retail mix as well as record interconnects, adding 40 new logos in 2022, and we're already seeing customer interest for our Jakarta and Johor sites. And now looking at the capital structure, please refer to Slide 8. Our balance sheet increased slightly to greater than $30 billion, including an unrestricted cash balance of $1.9 billion. As expected, our quarter-over-quarter cash balance decreased due to the significant planned increase in growth CapEx and real estate purchases and our quarterly cash dividend. I said previously, we plan to take a balanced and opportunistic approach to accessing the capital markets when conditions are favorable. As such, we're happy to share that we recently priced a Japanese yen private placement, raising the U.S. dollar equivalent of approximately $600 million of debt with an average duration of greater than 14 years and a blended cost to borrow an attractive 2.2%. This transaction is expected to fund in Q1. We also executed some ATM forward sale transactions in Q4, providing $300 million of incremental equity funding when settled. Pro forma for these transactions, we have nearly $7 billion of readily available liquidity and remain very well-funded to meet our ongoing cash needs. Turning to Slide 9 for the quarter, capital expenditures were approximately $828 million, including recurring CapEx of $80 million. In the quarter, we opened six retail projects in Geneva, Los Angeles, Osaka, Singapore, Washington, D.C. and Zurich and three xScale projects in Dublin, Sao Paulo and Osaka. We also purchased our Geneva two and Sao Paulo four IBX assets as well as land for development in London. Revenues from owned assets increased to 63% of our recurring revenues for the quarter. Our capital investments delivered strong returns, as shown on Slide 10. Our now 158 stabilized assets increased recurring revenues by 6% year-over-year on a constant currency basis. These stabilized assets are collectively 87% utilized and generate a 27% cash-on-cash return on the gross PP&E invested. As a reminder, similar to prior years, we plan to update our stabilized asset summary on the Q1 earnings call. And finally, please refer to Slides 11 through 15 of our summary of 2023 guidance and bridges. Do note, all growth rates are on a normalized and constant currency basis. Starting with revenues, for 2023, we expect top line revenues will step up by nearly $1 billion, representing a year-over-year growth rate of 14% to 15%. Excluding our power price pass-throughs, we expect top line revenue growth to range between 9% and 10%, above the top end of our long-term growth rates, as highlighted at our 2021 Analyst Day, reflecting the continued momentum in the business. We expect 2023 adjusted EBITDA margins of approximately 45%, excluding integration costs. And excluding the impact of power price increases to revenues and higher utility costs, adjusted EBITDA margins would approximate 48%, the result of strong operating leverage and efficiency initiatives. We expect to incur $35 million of integration costs in 2023. 2023 AFFO is expected to grow between 9% and 12% compared to the previous year, and AFFO per share is expected to grow 8% to 10% at the top end of our long-term range from our 2021 Analyst Day. 2023 CapEx is expected to range between $2.7 billion and $2.9 billion, including approximately $150 million of on-balance sheet xScale spend, which we expect to be reimbursed as we transfer assets into the joint ventures and about $205 million of recurring CapEx spend. And finally, we're increasing the annual growth rate of our cash dividend on a per share basis to 10% due to strong operating performance. The cash dividend will approximate $1.3 billion, a 12% year-over-year increase, 100% of which is expected to be attributed to operating performance. So let me stop here and turn the call back to Charles.

Thanks, Keith. Our record of strong and consistent operating performance continued in 2022, and I'm proud of how the team delivered value for our customers and our shareholders. In 2023 and beyond, we believe the opportunity for our business remains significant as enterprises and service providers alike look to Platform Equinix as their key digital infrastructure partner to advance their digital transformation agenda. To expand our market leadership, reinforce our competitive advantage and drive sustained value creation, the leadership team and I have outlined a clear set of priorities for the coming year. First, we intend to press our advantage in our interconnected colo franchise, continuing to scale and evolve our best-in-class bookings engine, delivering on key projects to enhance operating leverage, further extending our superior global reach, refining processes and systems to enhance the Equinix experience for our customers and partners, and integrating our sustainability leadership into our services in ways that better help our customers meet their commitments to environmental and social responsibility. Second, we intend to continue to enrich our platform value proposition by accelerating our digital services growth, delivering a more unified set of platform capabilities and by investing in ecosystem enablement, empowering key partners to bring their value to our platform more quickly and easily and allowing us to leverage their significant go-to-market reach. And we will advance these priorities by continuing to cultivate a culture that remains firmly people-first. We're committed to making Equinix a place that attracts, inspires and develops the best talent in our industry, cultivating an in-service-to mindset and creating a place where every person every day can say, 'I'm safe, I belong and I matter.' In closing, our business remains well positioned. Despite a challenging macroeconomic and sociopolitical environment, digital transformation remains a clear priority across all industries and digital leaders will continue to harness our trusted platform to bring together and interconnect the foundational infrastructure that powers their success. In that vein, we're pleased to welcome Tom Olinger to our Board of Directors. As the longtime CFO at Prologis, Tom has extensive international operating experience spanning real estate and technology, which will benefit our business. I'd also like to thank Budd Lyons for his exceptional service and contributions to the growth and success of the Company over the past 15 years as he rotates off the Board. So let me stop there and open it up for questions.

It's great to hear about the strong outlook for 2023 and the positive commentary on current activity. Can you explain how this aligns with the comments from Amazon, Microsoft, and others regarding enterprises becoming more cautious in December and early in the first quarter? You mentioned some grooming in interconnect, but I understand the core value proposition. Are you noticing any of that cautious behavior? What gives you confidence that it won't be an issue for your enterprise or other customers facing challenges in this macro environment? Also, regarding pricing, it's good to see the details on that. Have you successfully implemented the payment changes? Have there been any objections or difficulties from customers regarding these increases? Any insight on that as you navigate the first few billing cycles would be appreciated.

Sure. Thank you, Simon. We anticipated both questions. Regarding the overall macro environment, the discussions among cloud providers indicate that customers are being a bit more cautious. Specifically, customers who have significantly increased their cloud investments and workloads have expressed concerns about the rising costs associated with cloud services and are reassessing their spending. We observe that some of this caution is actually benefiting us, as customers are evaluating their infrastructure needs more thoughtfully, determining the right mix of services across various clouds, and considering how to move resources efficiently between them. Customers remain committed to their digital transformation goals, but this commitment is set against a backdrop of tighter budgets, prompting careful consideration of their investments. One CEO described this mindset as "measure twice, cut once" when it comes to decision-making about expenditures. Nevertheless, we see a strong overall commitment to digital initiatives. In the cloud segment, the growth in additional services and revenue from cloud providers remains impressive, although the growth rates are decreasing as they come off a substantial base. Customers are still favoring hybrid and multi-cloud architectures and increasingly see Equinix as a vital partner for managing and optimizing their infrastructure costs. While customers are exercising appropriate caution given the macroeconomic conditions, we are optimistic about the demand outlook in our pipeline, and our conversion rates reinforce that confidence. As for the power pass-through, we are pleased with our handling of that aspect. We have communicated details to our customers, and we've received many inquiries, mainly seeking clarification about the charges. Overall, we feel confident in recovering those costs fully, and we will keep you updated as we progress. As of now, everything is moving smoothly.

Can you provide some insight into the revenue growth guidance? You've mentioned the increases in energy prices, but aside from that, could you discuss your expectations for cabinet growth compared to cross-connect growth and the various types of digital services for 2023?

We are very excited and remain optimistic about the business's top line, as shown in our guidance. While the recent increase is somewhat influenced by the power price pass-through, even when adjusting for that, we expect a growth of 9% to 10%, surpassing the long-term projections we shared at Analyst Day. This growth indicates the overall strength of our business, which is evident in various areas including colo and interconnection, digital services, and across different regions. We are experiencing a strong combination of solid volumes and excellent pricing. I believe pricing will continue to play a significant role, regardless of the power price increase. Even when factoring in that 9% to 10%, we have successfully increased our list pricing, which is essential in the current inflationary environment. Our colo business remains robust, with unit volumes for colo interconnection growing by 13%. While we observed a slight decline in unit additions, we anticipate normalization throughout the year. Our digital services experienced a strong quarter, with 2022 marking a pivotal moment as more people recognize how to leverage Equinix's interconnected edge. The Americas had an exceptional year in 2022, and EMEA showcased its strength following the interconnection price increases while evolving its retail suite. Asia, meanwhile, is our fastest-growing region at 17%. Overall, we have solid strength in both volume and pricing across our products and geographies.

So just by way of follow-up and what you're expecting in terms of customer decision cycle this year, book-to-bill intervals in your core business, it sounds like no change. I just wanted to kind of verify that. And then turning to xScale briefly, if you could maybe comment on pricing in the wholesale segment, and how is that keeping pace with higher build costs and higher financing costs?

Sure. Generally, we have not observed any extensions in book-to-bill. Regarding quote to book, we are seeing some indications of customers being extra cautious and ensuring they are purchasing exactly what they need in the right quantities. The team is experiencing strong conversion rates and has a solid pipeline, so overall, we feel positive. Although we haven't seen any significant changes, there is some anecdotal evidence of caution among customers, which aligns with the current macro environment. Keith, do you have any additional comments on book-to-bill and xScale?

Yes. The only other thing I would say in book-to-bill, last year, there were some supply chain constraints. We don't foresee any meaningful amount of that this year as it relates to the installation of our customers, so continue to be optimistic about that. And as it relates to xScale, I was just saying in the prepared remarks, you can see that there's a tremendous amount of capacity that we're building across our xScale sort of portfolio. And it's exciting. And so as that relates to not only the opportunity, and not counter to Simon's maybe worried bit, we're seeing a lot of volume opportunities sitting inside the xScale business. So that's good. And then from a price point, no surprise, costs have moved up and pricing, therefore, has moved up to recover that cost and get the appropriate returns. So, I feel good from both perspectives. One, there's the volume that's there. There's the activity that we're building to support that volume, and we're getting the price points and the returns that we feel are appropriate for this juncture.

Can you walk us through a little bit of the difference between sort of what's the pass-through from the revenue side, from the power increases versus what flowed through from the price hikes that you put in this year? And what had the biggest impact from the price increases? Was it more the base rents or the cross-connects? How would you characterize that?

Sure, I can explain the power pass-through. It's approximately $350 million on both the revenue and expense sides. This accounts for the 500 basis point increase in revenue, which doesn't translate to EBITDA, thereby affecting the EBITDA margin. On a normalized basis, the guidance is 45%, but excluding this factor changes it to 48%, which remains strong. Additionally, we are making pricing adjustments across our entire portfolio, including power and digital services, in response to the rising expense environment and increasing costs within the business. This also reflects the significant value we provide to our customers. The growth we are experiencing is partly driven by strong pricing, which is evident across both the power and interconnect sectors.

And Frank, let me add to what Charles mentioned. As we evaluate our business, which I discussed at the Analyst Day two years ago and will update during the upcoming June Analyst Day, it’s important to note that historically, pricing represented about 6% of our bookings. We have indicated that price increases are in the range of 3% to 5%, and our stabilized assets are currently achieving a recurring revenue growth rate of 6%. You'll see contributions from various factors: first, inflation, which is impacting pricing by pushing it higher than our historical levels. Additionally, we are also adjusting list pricing. Therefore, when you combine list pricing, inflationary increases, and the value we provide through our range of products and services, you can see a broader impact from both quantity and pricing. This is something we will continue to monitor and share updates on as we approach the June Analyst Day.

And can you remind me what your average contract length is?

Two to three years.

Remaining, two to three years.

Inside the retail business. xScale, of course, is longer than that.

What's the average kind of outstanding currently?

Yes, the average is two to three years. I can't provide more specific details than that, but it offers a sense of how renewals will proceed. As I mentioned in my prepared comments, when considering price increases alongside price decreases, we often talk about net positive pricing actions, something we've consistently highlighted for years. This indicates that our business is dynamic, with ongoing adjustments as we renegotiate with customers. While some prices may be adjusted downward, the trend is generally towards price increases. This is driven by the model's structure as well as the effects of inflation and rising power prices, which will be reflected in our currency-adjusted monthly recurring revenue per cabinet across all three regions. We will keep a close watch on this.

Yes, we've become skilled at managing and optimizing the overall return profile of the business. In the current environment, we see strong underlying demand signals and high utilization rates in certain markets, especially those that are quite tight. This situation gives us the opportunity to optimize our approach. In a rising rate environment, we can either resell unutilized capacity at significantly higher rates upon renewal or, in some cases, take proactive measures. I believe this strategy works in our favor as we continue to show that we have pricing power in the business.

Just a couple of expense questions and then a revenue question. So on the expenses, as you close the books on 2022, if I'm looking at the slides, it looks like there was some impact both to revenue and EBITDA or expenses from the power pass-throughs you previously have discussed, Singapore. Can you share the funnel dollar amounts of impact that we should just be bouncing off of for 2023? And then as you look at 2023, are there incremental sales or product investments that we should be mindful of as we think about the types of opportunities, Charles, that you were discussing in the priorities to enrich the platform? And then I get to the final question of just, what are some of those examples maybe specifically on how you're trying to enrich the platform for 2023 and beyond?

Let me take a step back and discuss Q4, which is the most current guide. We performed slightly better than our expectations despite some fluctuations. As noted in our previous call, we typically accelerate certain costs into the fourth quarter, mainly for repairs, maintenance, and some external consulting. We anticipate an increase in utility costs largely due to seasonal factors, not so much from the Singapore PPIs. The reason we performed better was that utility rates did not rise as much as we expected, and there has been some moderation in prices. While power prices remain elevated, they are lower than some of our earlier assumptions. Therefore, the fourth quarter turned out as anticipated, with a slight advantage from power savings and improved operating performance along with better revenues. Specifically regarding Singapore, last year the net impact was around $50 million to $60 million. I mention a range due to a significant weakening of the U.S. dollar against the Singapore dollar. This currency shift affected our results since costs were absorbed at a higher exchange rate. Looking ahead to 2023, in 2022 we had costs in Singapore that we could not recover due to being out of the market, but the market has shifted to Equinix. Part of the recovery reflected in the $350 million is for the cost increases in Singapore that were not recouped last year. Therefore, you should consider that $50 million to $60 million as a relevant figure for planning.

The overall amount for 2023 is significantly higher, as I mentioned earlier. I believe we have a clear understanding of how this impacts both revenue and margins.

Yes, definitely. Let me provide some insight on that, Mike. We are maintaining a tight control over general and administrative expenses. However, we are definitely investing in our go-to-market strategies, which is a significant focus for us. We expect to have around 700 quota-bearing employees, and we have already made that investment. Many of these new team members were on board for our Connect sales kickoff event and are eager to start the year, and we are still adding to the team as we speak. While we are not making significant additional investments in product development, we are adjusting the way we allocate our product-level resources. Scott Crenshaw is now leading our digital services area, and we are refining our focus. We believe Metal has considerable potential, and Network Edge continues to gain traction in the market. We see Metal evolving into a more foundational platform that can deliver greater value to our ecosystem. We are enthusiastic about our partnership with VMware regarding VMC on Equinix, which represents the direction of our future investments in the ecosystem. Furthermore, we plan to implement some efficiency programs that we believe will enhance long-term operational efficiencies, whether through power savings or labor efficiencies, as we recognize that margin expansion will be essential for driving growth in AFFO per share. Currently, our guidance is primarily influenced by revenue growth and consequent financial flow, and we are maintaining a healthy margin of about 48%, which has seen a slight increase of about 10 basis points from 2022. We would have performed better if we hadn't reinvested in the areas I've mentioned.

Sure. One important focus is on enabling our ecosystem. We need to simplify the process for partners to showcase their value on our platform. We plan to support them through improvements in software, such as more robust APIs and an overall better experience for customers and partners. Enhancing our portal and creating programmatic engagement opportunities at the API level will be key areas for our investment. Additionally, we want to make the platform more user-friendly and consistent, as our channel partners have indicated that simplifying quoting, ordering, and delivering our services is a priority. We will continue to invest in this area as well.

I guess, Keith, you probably expect this question. But if I take your fourth quarter revenue and multiply it by four, I add the $350 million of power pass-throughs and I subtract it from the midpoint of your 2023 outlook, the math suggests that you're telling us we're going to see mid-$30 million per quarter sequential revenue growth versus what we saw in 2022, which was closer to mid-$40s million. And so, I just want to make sure I didn't mishear anything about the strength of the platform and other things that we might need to be concerned about. And then I guess my second question is, other than raising your revenue growth guidance over the course of the year, as we think about the June Analyst Day, what kind of expectations do you want to set that we're going to hear when we get to the midyear time?

So let me take the first question, David, and thanks for doing the math. So let me start off at the highest level. We expect to book more in 2023 than we booked on a net basis than we did in 2022. So you can see that the business is going to continue to perform at a nice clip. There's a lot of non-recurring activities that go on in the business, particularly around xScale. But I would say that xScale, in addition, we expect to do more in 2023 than we did in 2022. You've got some currency movements and some relatively meaty movements. But currency is now starting to feel like it's at our back. But as I said, 2023 rates are still below the average rates of 2022, and so you're taking a little bit of a hit. And the order of magnitude of that hit, just to give you a sense on the averages is about $160 million to the top line. So you've got a little bit going on there, but I think if you go back just to the fundamentals, all else being equal, if currencies continue to move as they had been, although we've been a little bit of a blip over the last couple of weeks, another 10% move in currencies is a substantial uplift in our revenues. And so not only would it recapture the averages that we saw in 2022, it would give you more wind at your back for 2023. And so bottom line is there's nothing fundamental. We're obviously giving you a little bit wider range, given the economic environment that we're operating in today. That was very deliberate, and it's very early in the year. And so for those reasons, I say, look, that's the guide. It's got a wide range and we're planning to execute against the plan that I just mentioned.

In terms of Analyst Day, we will be making significant progress throughout the year, and we will provide ongoing updates on momentum in various areas. We will also give you insight into how we are evolving towards a more comprehensive platform value proposition. Our focus will be on becoming the infrastructure platform of choice for customers implementing hybrid and multi-cloud architectures. We will update you on what this means for our traditional interconnected colocation business, the expansion of the platform, and the continued improvement of the customer experience. Regarding digital services, we will discuss how we are evolving the platform's service offerings, with a strong emphasis on Metal as a foundational element, as well as cloud networking. Networking has always added value for our customers, and we aim to enhance our platform to make it easier for customers to interconnect different forms of infrastructure in a cloud-centric world. We will outline these strategic evolutions and update you on our investments and long-term outlook.

So just curious on your development pipeline, I think it's about as big as I've ever seen in terms of new expansion capacity. Maybe you can talk about, based on pretty tight industry supply, what kind of fill rates your utilization rates you expect to deliver on new development. Is it happening faster than it has in some historical periods? Then in terms of development cost inflation, have we started to see that cost curve flatten out? And do you think that, to some extent, could dictate how much your ability is to raise rents, excluding power pass-throughs as we look throughout the year?

Yes, we are definitely experiencing strong fill rates, which is influencing our ongoing investment in the development pipeline. I think we are aligning our return profiles with what we've observed in the past. Regarding the second part of your question, we have noticed a significant increase in costs, and we are preparing for and managing potential price increases to ensure consistent returns. So far, our ability to implement these price increases in the market indicates that our pricing power remains robust. As for stabilization, I agree with Keith that the supply chain situation appears more stable. Due to our strong execution, scale, and capabilities, we have managed it effectively. We are committed to continuing this diligence moving forward, and we have mitigated many supply chain risks. However, labor remains tight in certain markets. For example, in France, with the upcoming Olympics, progressing projects on the desired timelines is quite challenging. Labor is the main area we need to monitor in the supply chain. Overall, we feel confident about our underwriting, with a significant portion directed toward our core campuses that have a proven track record of fill rates. Additionally, some of our newer edge markets are performing well beyond expectations. We have a substantial development pipeline that we are managing effectively, and we feel positive about our ability to meet our underwriting goals.

And Eric, let me add to what Charles has said. One of the key points we wanted to share is that we are funding the business. We not only have cash on the balance sheet but are also bringing in more capital to support 49 major projects that we have announced so far across various metros. We plan to be in 75 metros soon. This shows that our capital plan is expanding. We believe our supply chain is well established, supported by a strong procurement and strategic sourcing team that ensures we have the necessary resources. Additionally, our global design and construction team is doing an excellent job delivering capacity as quickly as possible. While the market conditions are challenging in some areas, it’s important to note that we have strategic planning and sourcing in place, along with the capital required to support our initiatives through 2023, positioning us well as we enter 2024. Our leverage will remain stable, offering us enhanced flexibility. Furthermore, we have effectively prefunded many costs in our model, allowing us to benefit from the large expansion initiative Charles mentioned, covering both the physical and digital aspects. All these factors contribute to our strong confidence in our capital plan, balance sheet, and current liquidity position.

First, Charles, you noted that interconnection adds were a bit soft due to seasonality, grooming and some virtual interconnections being consolidated. I guess, can you just expand a bit more on what's specifically driving those trends, the relative importance of each one and why you feel comfortable that it's going to normalize over the course of the year? And then second, in the current environment, you've got customers more cautious about spending in general but maybe more averse to capital outlays. Do you see that as sort of a net neutral for services like Metal or net positive or net negative? And do you feel like you're educating your customers appropriately today to take advantage of them?

Yes, that’s a great question. Regarding our interconnection business, we are optimistic about its growth at 13%. We are successfully adjusting interconnection pricing alongside our general list prices, so our pricing strategy is solid. While Q4 is typically a seasonally weaker period, this year's Q4 has been noticeably weaker than previous ones. There seems to be some consolidation occurring, partly because, as I mentioned, interconnection functions similarly to a usage-based service. When budgets come into play, customers often scrutinize their expenses and tend to evaluate their portfolios for underutilized interconnection services they can consolidate onto higher circuits. This dynamic is something we are currently observing. Additionally, we've seen a slight decline in gross adds for virtual BCs to cloud ZNs, although overall, the gross adds remain healthy. The cloud and workload migration activities are still progressing vigorously, even amidst discussions about slower growth rates in the cloud sector. However, gross adds are lower than before. Typically, these dynamics reflect an initial surge in activity during budget cycles, followed by a lull as customers exhaust their capacity to maximize their resources. We will keep a close watch on this trend. Crucially, our customers regard our interconnection platform as essential for their future hybrid and multi-cloud strategies, indicating that the long-term demand for this business will remain robust. Regarding digital services, we’re beginning to notice customers recognizing the benefits of offerings like Metal, as our sales teams effectively communicate how these services provide on-demand infrastructure for greater agility. We secured significant deals in Q4 last year, and major service providers and enterprise clients are starting to explore their options. They perceive this as a chance to streamline technology management and enhance infrastructure implementation agility. Exciting developments such as VMware Cloud on Equinix Metal are generating positive interest in this area. We are optimistic about this segment, continuously learning how to sell these services effectively and engage with various customer profiles. Our go-to-market teams, led by Karl, are adapting our strategies accordingly, and we are positive about the future prospects.

This concludes our Q4 conference call. Thank you for joining us.