Equinix Inc (EQIX) — Q4 2023 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 that we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we've identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed February 17, 2023 and 10-Q filed October 27, 2023. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter unless it's done through an explicit public disclosure. In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of these measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor Relations page at www.equinix.com. We've made available on the IR page of our website a presentation designed to accompany this discussion, along with certain supplemental financial information and other data. We would also like to remind you that we post important information about Equinix on the IR page from time to time and encourage you to check our website regularly for the most current available information. With us today are Charles Meyers, Equinix's 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 1 hour, we'd like to ask these analysts to limit any follow-on questions to one. At this time, I'll turn the call over to Charles.

Good afternoon and welcome to our fourth quarter earnings call. We had a solid close to 2023 as digital transformation and accelerating AI demand drove a record quarter for xScale leasing, robust pricing dynamics, and continued momentum across our data center and digital services portfolios. For the full year, we delivered more than $8 billion of revenues, eclipsing 21 years of consecutive quarterly growth, all while driving AFFO per share performance above the top end of our long-term expectations. As we look ahead, we see our overall relevance to customers continuing to rise with our global reach, highly differentiated ecosystems, and full-range portfolio of services, positioning us as a key long-term partner to fuel digital transformation and unlock the enormous potential of AI. At the same time, many customers remain cautious in the face of macro uncertainty and are driving optimization across their broader IT infrastructure, freeing up dollars for AI-related investments while still managing within tighter overall budgets. These dynamics, combined with capacity constraints in certain key markets, continue to create crosscurrents in our business, with solid gross demand and strong pricing dynamics offset by more deliberate buying decisions and slightly higher levels of churn. Meanwhile, we continue to realize the benefits of efficiency investments over the past few years and are showing strong operating leverage in the business, allowing us to maintain our differentiated return on invested capital, expand margins, and deliver outsized performance on AFFO per share which we continue to see as our lighthouse metric and the bedrock of long-term value creation. As we work to make digital infrastructure more powerful, accessible, and sustainable, we are building relationships as trusted advisers to our customers, innovating across our product portfolio, deepening our technology partnerships to solve customer challenges, and maintaining our discipline to put the right customers with the right workloads into the right assets. This approach reinforces the kind of advantages of Platform Equinix as we focus our efforts in 2024 on four key areas: First, we plan to continue to expand our unmatched global reach, extending to 76 metros in 35 countries by year-end, including opening new markets in India, Indonesia, Malaysia, and South Africa. We also intend to add much-needed capacity in high-demand existing markets across all three regions, including significant retail phases in New York, Paris, and Tokyo and accelerated investment in our xScale portfolio. Second, we intend to extend our interconnection leadership by combining the scalability and performance of physical interconnection and the agility of Equinix Fabric with a commitment to lead the way in the massive market of multi-cloud networking, with new innovations and products like our recently announced Equinix Fabric Cloud Router. Third, we'll continue to prioritize our future-first sustainability strategy, making Equinix a clear partner of choice to help our customers track and achieve their sustainability goals and manage an increasingly complex global power landscape. And finally, we intend to unlock the power of platform clinics, embracing key partners and making it easier than ever to combine our value with theirs to solve our customers' problems together. In particular, we focus on Gen AI as we join forces with incredible partners such as NVIDIA, to ensure that Platform Equinix is the place where private AI happens. Turning to our results, as depicted on Slide 3, revenues for the full year were $8.2 billion, up $925 million, a 15% increase year-over-year or a 9% increase, excluding the impact of power price increases. Adjusted EBITDA was $3.7 billion, up 11% year-over-year. AFFO was more than $3 billion for the first time, resulting in AFFO per share growth of 11% year-over-year. These growth rates are all on a normalized and constant currency basis. On the AI front, we saw strong momentum across the value chain in Q4 as we cultivated key partnerships and one significant opportunity. While still early, Gen AI has the capacity to transform every industry and is poised to accelerate rapidly. By 2026, Gartner predicts over 80% of enterprises will have used Gen AI APIs and models or deployed Gen AI-enabled applications in production environments, up from just 5% in early 2023. We're leaning into this opportunity and recently announced our expanded partnership for IBX private cloud at Equinix. This new service provides customers a fast and cost-effective way to adopt advanced AI infrastructure that's operated and managed by experts globally. So enterprises can move quickly while balancing performance requirements, a need for cloud adjacency, and a rapidly increasing desire to maintain control of critical enterprise data. We're seeing strong interest in this service across all three regions with early adoption from digital leaders in biopharma, financial services, software, automotive, and retail subsegments. Early wins in this partnership include a Fortune 100 global biopharma company that will create an AI excellence center to accelerate its research and development process and shorten time to market for new medications. Our data center services portfolio continues to scale with nine new data center openings since our last earnings call. Given the strong underlying demand for digital infrastructure and the long duration in delivering new capacity, we continue to invest broadly across our global footprint. We currently have 49 major projects underway in 35 markets across 21 countries, including 11 xScale builds representing nearly 20,000 cabinets of retail and more than 50 megawatts of xScale capacity through 2024. Wins this quarter included a European biotechnology company exiting their traditional data centers in favor of a global network dense, hybrid and multi-cloud environment, including liquid cooling requirements. Andorin Holding, a Turkish conglomerate, primarily serving as a strong global automotive supply company, is expanding with Equinix to support their operations across 15 countries. Shifting to our xScale initiative, the wave of hyperscale demand to support AI and cloud is translating into robust demand in pre-leasing activity. Since our last earnings call, we leased 90 megawatts of capacity across six assets in EMEA and APAC, including approximately 32 megawatts leased at the start of the year. This brings total xScale leasing to 300 megawatts globally. Wins this quarter included supporting strategic Gen AI workloads as well as the hyperscalers' first-scale liquid cooling deployment at Equinix. Looking ahead, we have a meaningful pipeline of opportunities to drive continued xScale momentum in the quarters to come. Turning to our industry-leading global interconnection franchise, we now have more than 462,000 total interconnections deployed on our platform. In Q4, interconnection revenue stepped up 8% year-over-year on a normalized and constant currency basis, and we added an incremental 4,300 organic interconnections for the quarter. We again had healthy gross add activity, offset somewhat by continued grooming and consolidations into higher bandwidth connections. Internet exchange saw peak traffic up 3% quarter-over-quarter and 22% year-over-year, to nearly 36 terabits per second, led by expansion from existing customers. Additionally, during the quarter, we added four new native cloud on-ramps in Bogotá, Calgary, and Zurich. Equinix customers can now enjoy low latency access to multiple native cloud on-ramps in 37 metros, including eight out of the ten world's largest metros by GDP. Wins this quarter included a leading European quantum computing company, offering its technology through Equinix Metal and Equinix Fabric, enabling different industries to explore potential use cases in quantum computing. And on insurance, a South African insurance company expanding in EMEA is leveraging Equinix Fabric and a managed service solution to be ready to begin trading. In our digital services portfolio, we saw continued momentum as Equinix Metal and Network Edge drove attractive pull-through to Equinix Fabric. In January, we announced the general availability of Equinix Fabric Cloud Router, a new virtual routing service to simplify enterprises' complex cloud-to-cloud and hybrid cloud networking challenges by providing an easy-to-configure enterprise-grade multi-cloud routing service that can be deployed in under a minute. Customers can deploy Equinix Fabric Cloud Router in all 58 Equinix fabric-enabled metros globally, with low latency connectivity to all the major cloud providers as well as hundreds of other service providers. Key digital wins included NetApp, who expanded their partnership with Equinix to deliver a Bare Metal service solution, a comprehensive compute, network, and storage infrastructure stack with low latency connections to major public clouds. And a leading semiconductor company is establishing a cloud-adjacent storage presence using Equinix Metal and Pure Storage with integration into AWS. Our channel program delivered another good quarter, accounting for 35% of bookings and over 50% of new logos. We saw continued growth from partners like HPE, HCL, NVIDIA, and WWT, with wins across a wide range of industry verticals and digital first use cases. Wins this quarter included supporting a consumer healthcare company's business unit spin-off with Dell, setting up a hybrid IT environment by leveraging colocation and cloud for their SAP environment in London and Singapore. Now let me turn the call over to Keith to cover the results for the quarter.

Great. Thanks, Charles, and good afternoon to everyone. As highlighted by Charles, we had a solid end to 2023. The Equinix team continued to execute across all levels of the organization to ensure our strategy as the world's digital infrastructure company continues to separate us from our peers. For the full year, our healthy gross bookings allowed the team to close almost 17,000 deals across more than 5,900 customers, highlighting the diversity and strength of our unrivaled go-to-market engine. Pricing activity, both in the quarter and throughout the year, created strong pricing dynamics resulting in normalized and constant currency MRR per CAP yield stepping up $38 for the quarter and $127 for the year to $2,227 per CAP. And we had record xScale leasing over the year while generating approximately $49 of nonrecurring xScale fee revenue in the quarter, primarily related to the EMEA region. On the sustainability front, we're pleased to again be listed on CDP's prestigious 2023 Climate Change A-List and again to be recognized in JUST Capital's 2024 rankings as number one in real estate. As we look forward into 2024, our customers remain committed to all things digital, and we believe we're the best manifestation of this opportunity as customers digitally transform their form, both in the cloud and through AI. Hence our enthusiasm about our position in the broader market and the opportunities that lay out for us. That said, we remain highly vigilant to the current market conditions and the impact on our customers. As mentioned last quarter, capacity constraints exist across a few of our markets, driving continued firm pricing power, albeit with some moderation to short-term growth. But as highlighted on our expansion tracking slide, we have several new markets and additional capacity coming online later this year, with many other projects currently being contemplated as we look to extend our platform and drive growth. Also, we're very pleased with the operating leverage the business is delivering, benefiting from prior investments while being highly prudent on future spend, resulting in improving adjusted EBITDA margins for the year. Importantly, our forward guidance on our core metric being AFFO per share reflects our confidence in the long-term opportunity of our business, a preferential position I believe, relative to any others in our space given the foundational differences of our platform. Additionally, our as-reported guidance includes positive FX tailwinds due to the weaker U.S. dollar relative to '23 rates and net power price decreases as utility rates moderate across both our regulated and unregulated markets. Now let me cover the highlights from the quarter. Do note that all comments in this section are on a normalized and constant currency basis. As depicted on Slide 4, global Q4 revenues were $2.11 billion, up 15% over the same quarter last year due to strong recurring revenue growth, power price increases, and record xScale nonrecurring fees. As you would expect, we're very pleased with the continued success of our xScale portfolio and the MRR and other fees generated while also expecting a strong year in 2024. As noted previously, xScale MRR is inherently lumpy. For Q1, we expect MRR will step down sequentially yet remain elevated as a turn of revenues due to strong APAC leasing activity in January. Q4 revenues or FX hedges include a $3 million benefit when compared to our prior guidance rates. Global Q4 adjusted EBITDA was $920 million, or 44% of revenues, up 12% over the same quarter last year due to strong operating performance, although down quarter-over-quarter due to a $15 million charge related to our planned corporate real estate activities and a higher seasonal increase in repairs and maintenance spend. Q4 adjusted EBITDA net of our FX hedges had a minimal FX impact when compared to our prior guidance rates and does include $4 million of integration costs. Global Q4 AFFO was $691 million, above our expectations due to strong business performance and favorable interest income, offset in part by higher seasonal recurring CapEx. The Q4 included a $4 million FX headwind compared to our prior guidance rates. Global Q4 MRR terms stepped up to 2.4% in the higher end of our range due to customer optimizations. For 2024, we expect MRR churn to stay on the upper side of our churn range in the first half of the year, then moderate down in the second half and we expect this key metric to average within our targeted 2% to 2.5% per quarter range for the year. Turning to our regional highlights, whose full results are covered on Slides 5 through 7. On a year-over-year normalized and constant currency basis, EMEA was our fastest-growing MRR region at 27% due to power price increases, followed by our APAC and Americas regions at 9% and 7% MRR growth, respectively. The Americas region had a solid quarter of strong new logo growth and firm pricing led by our Chicago, New York, and Washington, D.C. metros. The Americas saw a step-up in cabinets billing in the quarter which now includes the intel assets in our non-financial metrics. EMEA business had a strong quarter led by our German business and our growth in emerging market metros. We've had strong xScale activity across a number of our markets over the year. MainOne, our business in Ghana, Ivory Coast, and Nigeria is performing better than our business case on a constant currency basis. Additionally, we signed our first deal in our Johannesburg 1 asset in South Africa which opens in Q3. And finally, the Asia Pacific region saw good performance in both our Japanese markets and in Mumbai. As it relates to our soon-to-be opened new markets in the region, we're actively building a strong pipeline of key ecosystem customers that we expect to close prior to the IBX openings. Also, we're pleased to have recently announced our first long-term PPA in APAC for 151 megawatts. To date, Equinix has executed 21 PPAs across Australia, France, Iberia, the Nordics, and the U.S., which will generate more than 1 gigawatt of clean energy once operational. This will certainly help these markets accelerate their clean energy transition. And now looking at our capital structure. Please refer to Slide 8. Our net leverage remains low relative to our peers at 3.7 times our annualized adjusted EBITDA. Our balance sheet increased approximately $32.1 billion, including an unrestricted cash balance of $2.1 billion. Our cash balance includes the settlement of approximately $433 million of ATM forward equity sales, the timing triggered by the increase in our Q4 quarterly cash dividend. Additionally, during the quarter, we executed an incremental $500 million of ATM forward equity sales which we expect to settle in late 2024. As I've noted previously, we expect to remain opportunistic in the timing and currency of our financing strategy, including our plans to refinance the $1 billion of debt maturing this year. Turning to Slide 9 for the quarter. Capital expenditures were $996 million, including recurring CapEx of $105 million. Since our last earnings call, we opened 7 retail projects, including 4 new data centers in Frankfurt, Kuala Lumpur, and Washington, D.C. In our xScale program, we opened 7 new projects and are now 87% leased or pre-leased for all of our operational and Nose projects. During the quarter, we also purchased our London IBX asset and land for development in Mexico City. Revenue from owned assets increased to 66% of our recurring revenues, a meaningful step up since last quarter, highlighting the progress we've made around asset ownership and long-term control of our assets. Our capital expenditures delivered strong returns, as shown on Slide 10. Our 174 stabilized assets increased revenues by 9% year-over-year on a constant currency basis or 5% excluding the benefit attributed to our power price increases. Our stabilized assets are collectively 85% utilized and generate a 27% cash-on-cash return on the gross PP&E invested. As a reminder, unlike prior years, we plan to update our stabilized asset summary on the Q1 earnings call. And finally, please refer to Slides 11 through 15 for an updated summary of 2024 guidance and bridges. Starting with revenues. For the full year 2024, we expect top line growth of 7% to 9% on an as-reported basis or 7% to 8% on a normalized and constant currency basis, excluding the impact of lower power cost pass through to our customers. We expect 2024 adjusted EBITDA margin to be approximately 47%, a 160 basis point improvement over last year due to strong operating leverage, targeted expense management initiative and power price decreases. We expect to incur $25 million of integration costs, primarily related to the MainOne business, projects which we expect to complete by the end of the year. AFFO is expected to grow between 9% and 12% compared to the previous year. AFFO per share is expected to grow between 8% and 10% at the top end of our longer-term targeted range on both an as-reported and normalized and constant currency basis. 2024 CapEx is expected to range between $2.8 billion and $3 billion, including about $220 million of recurring CapEx. And finally, after moving forward with the 25% increase in our per share cash dividend last quarter, we're holding our quarterly cash dividend cost at $4.26 per share for 2024. For the full year, the cash dividend will approximate $1.6 billion, a year-over-year increase of 19%, 100% of which is expected to be funded from ordinary income given our expected strong operating performance. So, let me stop here and turn the call back to Charles.

Thanks, Keith. In closing, 2023 was a year of significant progress and focused execution against our ambitious agenda. While macro uncertainties persist, we anticipate continued economic recovery as we move through 2024 and believe this will continue to embolden customers to accelerate their digital transformation agendas with a keen focus on capturing business value through the extraordinary power of AI. Against this backdrop, demand for hybrid digital infrastructure should continue to grow, and we're confident that the character of this demand will increasingly align with the distinctive advantages of Equinix, offering customers flexibility to deploy architectures that are more distributed, more cloud connected, more on-demand, and more ecosystem-rich than ever before. Features that have positioned Equinix once again as a leader in IDC MarketScape's worldwide assessment of data center services. Digital transformation is reshaping the fabric of our world, unlocking extraordinary possibilities and changing the basis for competition in almost every industry. Thanks to our distinct and durable advantages, Equinix is well positioned to capture these opportunities. Through the combined balance sheet power of Equinix and our JV partners, we'll continue to invest in supporting the vigorous demand for large-scale cloud and AI infrastructure around the world. Simultaneously, we will leverage the reach and connectivity of the world's leading retail platform to ensure that Equinix remains the best manifestation of the digital edge and a critical point of nexus for modern cloud-centric architectures. Reaffirming our purpose to be the platform where the world comes together, enabling the innovations that enrich our work, our life, and our planet. So, let me stop there and open it up for questions.

Great. I have two questions. First, regarding the revenue guidance mentioned at the Analyst Day, where you forecasted an 18% revenue growth. Is the lower end of that forecast at 7% this year influenced by macroeconomic conditions? Additionally, Charles, you've previously discussed potential in the U.S. xScale and hyperscale market. Do you have any updates on your perspective there?

Sure. Thanks for the question. Overall, I believe the demand signal remains strong. However, we are experiencing some crosscurrents in the business. We've encountered significant revenue headwinds recently from three main sources. The first two stem from macro conditions, while the last is more specific to our company. Firstly, there has been a slight extension in the sales cycle. In Q4, similar to Q1 of '23, we observed more delays in deals, which we didn't see in Q2 and Q3. While we didn't lose many deals, several were postponed by one or more quarters, impacting our quarter and exit rate. Secondly, churn has been somewhat elevated, particularly towards the higher end of our range, reflecting ongoing optimization activities that we and others in the infrastructure space have been highlighting throughout 2023. Lastly, we are grappling with capacity constraints in some key markets, which affects our ability to accommodate larger requirements and contributes to churn as we attempt to free up capacity. These factors together resulted in a lighter Q4 and a lower exit run rate. In a business with 95% recurring revenue, this puts us at a disadvantage. Consequently, our full revenue guidance is slightly below the range we presented at our Analyst Day. Nevertheless, there are positive aspects to acknowledge, such as the strong performance in our xScale segment and our retail sweet spot, along with a healthy pipeline and early signs of a larger AI-related pipeline. We're optimistic about the long-term opportunities ahead. Despite the reduced revenue guidance, we continue to maintain robust pricing, leading to operating leverage and attractive returns on capital. Our growing dividend and AFFO per share performance are at the top end of our long-term guidance. We would have preferred to be in that target range, and it’s disappointing that we aren’t. However, we are providing a realistic perspective on the current market context and are committed to exceeding these expectations moving forward. Regarding U.S. xScale, we are actively exploring ways to be more aggressive in this market, as we see potential opportunities. My stance on this has evolved over the past couple of years, and we believe that advancing our investment in this area will yield significant economic and strategic benefits. We are diligently working on this and anticipate sharing more details with you in the near future.

Maybe just on the AI front. Clearly, the momentum is accelerating. Curious how you think about the TAM there, particularly relative to the $21 billion outlined at the Analyst Day. And then maybe just on the NVIDIA DGX offering, how meaningful can that become? And is that something you can ultimately offer anywhere and beyond the $12 billion markets initially targeted?

AI presents a fascinating opportunity, and we believe it holds tremendous potential. Like many others in the industry, we see rapid growth, although we are still in the early stages. It played a significant role in our xScale leasing, contributing to record bookings, and I anticipate continued strength in this area, which is driving our investment strategy. However, it hasn't yet significantly impacted our retail bookings, which fell slightly short of our expectations. That said, we are observing positive early signs, particularly in our retail segment, where we established network nodes to meet large-scale training needs, as highlighted in our recent discussions about service offerings. We've also secured substantial enterprise contracts as clients pursue large-scale training and inference, which will help unlock AI's full potential. Our NVIDIA DGX private cloud managed service is a unique proposition, and we are witnessing a substantial pipeline growth in collaboration with NVIDIA. We are confident in our ability to expand these offerings globally over time, and it represents a highly exciting opportunity. Regarding the total addressable market, as I mentioned during our Analyst Day, I believe it is significant and possibly larger than we originally indicated. The potential impacts and our early observations on AI suggest continued substantial investment in this area. Our focus is on differentiating ourselves distinctly within this market. While we will participate in the xScale segment, I believe our unique advantage lies in leveraging the AI ecosystem through our cloud-adjacent offerings. Our digital services, including cloud-adjacent storage and Fabric Cloud Router, align perfectly with what customers need—enhanced control over enterprise data and access to rapidly evolving AI tools from major providers, all integrated seamlessly to meet their requirements. We remain very optimistic, but I advise a measured approach, as it may take time for these opportunities to fully translate into bookings.

On the churn commentary, is there anything to call out in terms of reading where you saw it or which products? Was it mainly cabinets or cross connects or other?

Yes, I would say that the situation with cabinets and power looks similar to what we've experienced over the last several quarters. The growth activity remains strong. We are observing some adjustments, particularly within the network service provider segment, as they face challenges and focus on reducing costs. There is also a trend towards consolidating into higher speeds, which presents a bit of a challenge. However, the main emphasis is on cabinets, power, and capital expenditures. This is primarily driven by companies resizing their footprints to better align with their current needs. In 2022, many felt they had excess capacity but chose to retain it. In 2023, though, budget pressures have become more pronounced. Some customers have indicated that their budgets were exhausted due to the recent price increases, limiting their growth ambitions. As a result, they need to make adjustments if they wish to pursue initiatives in areas like AI. Consequently, we see them tending to contract their footprints. Let me provide a bit more detail on a few points. Only a small percentage of our churn involves complete customer departures; most of it is simply customers resizing their operations. Encouragingly, when looking at customers who are churning, we notice they are still active on the rest of the platform, purchasing elsewhere while optimizing their activities. It's worth noting that we are experiencing these trends more significantly in Europe, likely due to the larger customer base there. Our forecast suggests that this trend will continue into the first half of the year, with some tapering expected in the latter half of 2024.

Got it. And then secondly, I was curious about the xScale initiative and the growth path in the Americas and kind of the puts and takes of pursuing that organically versus inorganically?

Yes, I think we are currently very focused on organic growth. We are not completely dismissing the idea of pursuing inorganic opportunities, but identifying those assets is challenging. The valuations for such assets are quite high, and there is significant competition for them. Therefore, our main concentration remains on organic growth. However, if circumstances change, our balance sheet is prepared, and we would consider inorganic opportunities. Overall, our primary focus is on organic growth.

I wanted to follow up on your point about customer optimization. In the past, you've compared managing the retail data centers to playing a game of Tetris, fitting different pieces and deployments together. With the ongoing optimization, could you discuss your ability to resell any recovered space or power capacity and how that will affect your strategy in 2024? Additionally, I am interested in understanding the constant currency organic growth range of 7% to 8% excluding power, specifically what stabilized growth looks like. Within that stabilized growth, how should we consider the price ARPU component in relation to the volume component?

Sure, I'll let Keith add to this as well. First, regarding your initial question, you're right. We've often likened our business strategy to a game of Tetris, seeking optimal returns from our capacity. With the current increase in prices and a tendency for our churn to lean towards larger accounts, we generally view churn as beneficial in the long run. While we don’t desire excessive churn, it can sometimes be necessary, and we may even encourage it in markets like Singapore. There is a trade-off between growth rates and return on invested capital. Even in high-demand markets, we experience some delays in fully replacing churn with new revenue, especially when substituting a single large account with multiple smaller ones. We’re noticing a more extended vacancy period than we anticipated. Although there are opportunities for improvement in our business mix, which is essential for enhancing monthly recurring revenue per cabinet and ensuring stable asset performance, it can occasionally pose a revenue challenge for us. Regarding the growth forecast of 7% to 8%, stabilized assets, excluding price increases, are around 5%. However, this includes interconnection sales, which might not add significant volume growth since they're already utilized at fairly high levels. I expect some positive pricing adjustments and continued interconnection activity within our usual range. Additional growth will come from our broader market presence, notably from non-stabilized assets that are likely expanding at a slightly faster pace. Is there anything else you would like to add?

Yes. And Michael, let me just add a few other quick points. We've always said that we believe stabilized assets can grow 3% to 5% on a constant currency and normalized basis. This quarter, we're at that range, achieving 9% due to power price increases. As we look ahead to 2024, there are a couple of things to consider. We've neutralized currency effects and done the same for power price decreases, which will have about a 30 basis point impact on growth. Our main focus now is on timing. As Charles mentioned, we've experienced slightly higher churn as we entered and exited the year. Therefore, if you look toward the end of the year, you can expect a more attractive growth rate than what we see at the beginning. Ultimately, we've projected a growth rate between 7% and 8%. Overall, the business dynamics are very strong, and we are considering potential timing delays. While there is a reasonable book-to-bill ratio, the conversion speed from the pipeline into billable events is taking longer than expected. Additionally, nonrecurring revenues are expected to be roughly flat year-over-year, fluctuating quarter to quarter as we discussed before. Q4 had strong performance, and Q1 remains solid since we closed two large assets in the xScale space in January, which will generate some fees. However, it's crucial to understand that the strength of the pipeline, the timing within the year, and our expectations for exiting 2024 give us confidence in our ability to continue driving value into the main FFO per share number and achieve growth.

Well, Mike, the summary is that we expect growth in the range of 7% to 8%, with about 3% to 5% coming from stabilized assets. The remainder will likely come from the broader portfolio, which may have less immediate benefit from market adjustments. The 3% to 5% growth will partly stem from opportunities in the stabilized assets, as these are the ones being transitioned. The non-stabilized portfolio will contribute slightly less due to being newer and having narrower margins. We also need to maintain strong performance in gross bookings.

Two, if I could, just real quick. Charles, we've been talking about the hybrid private-public cloud infrastructure for the longest time. You brought up a new term that I hadn't heard before, the private AI. And I wondered if you could maybe elaborate a little bit how that compares, contrasts, or doesn't to our understanding of hybrid private public cloud. What does that, the private AI architecture, look like as far as Equinix is concerned? And then second, Keith, last quarter, we talked a lot about cabinet equivalent billing and how that's evolving and the potential to bring a new number to the forefront which would be something like a cabinet equivalent billing number. Could you kind of elaborate a little bit on how that looked like in the fourth quarter and where we are in evolving that disclosure?

Thank you, David. Regarding private AI, there are strong similarities and some differences when compared to our thoughts on private cloud or hybrid cloud, but the dynamics are quite alike. An industry survey that I reviewed recently indicated that approximately 32% of companies implementing Gen AI are utilizing public clouds exclusively, while another 32% are using private clouds exclusively. Additionally, 36% are employing a hybrid approach that combines both private and public clouds. Many of those using public clouds are actually working with multiple public cloud providers. I believe that the percentage of users engaging in hybrid solutions will significantly increase. In essence, more individuals will pursue their AI strategies through a mix of both public and private infrastructure. The focus of private AI often centers around data placement preferences. This reflects a desire for proprietary control over data and the costs associated with transferring data in and out of public clouds, as well as performance considerations. We're observing a trend where organizations want to maintain control over their enterprise data while placing it in cloud-adjacent environments. Hyperscalers are innovating rapidly, prompting the use of their models and tools. Additionally, there's an evolving broader ecosystem beyond the hyperscalers that people aim to connect with. Tools like cloud-adjacent storage, Equinix Fabric, and Fabric Cloud Router are powerful options. When paired with the need for GPU infrastructure, this encapsulates the essence of the private AI opportunity, which appears to be developing positively for us.

Yes, David. As it relates to new metrics, we are reviewing the data sets. The team is not completely clear on what we can present consistently to the market. One idea we are considering, although we are not ready to implement it yet, involves looking at density or a threshold. If there is a certain amount of density over a required threshold, we will adjust the cabinets accordingly, as we report on a cabinet equivalent basis. We believe the cabinet serves as the best representation of how we utilize the asset. That said, we need to maintain transparency about the overall density of the cabinets sold to show a trend line. We have also discussed power prices, but it doesn’t seem like the right metric for our business model compared to others. We are a retail player, and this varies the metrics that are valuable to us. Moving forward, we will keep working on this and plan to be ready in the first half of the year with either adjusted metrics or a new approach to representing our fill rates.

Great. Two, if I may. One of the questions we get from investors is whether GPU-based compute is displacing CPU-based compute. And if so, how the legacy data centers designed at lower cabinet densities, will be able to handle that. Are you seeing customers swapping CPUs for GPUs for their existing data center deployments? If so, how do you mitigate essentially against the obsolescence in existing facilities? That's the first question. And then the second question is along a similar vein for AI inference. The thought is about the model we need to sit proximate to the data which candidly lives within your facilities. Although I think there's also a question of whether that's CPU-based or GPU-based. As you look to capture demand for inference, how is the standard data center design for you guys evolving from both a power density perspective and a cooling architecture standpoint? Any color there would be helpful.

There's a lot to discuss, and I appreciate your question, Michael. The topic of GPUs is certainly relevant in various contexts. It's clear that GPUs are becoming more specialized, dedicated computing units that extend beyond traditional CPUs. However, I don't believe that the future of computing and AI is exclusively reliant on GPUs. There will be a variety of players that continue to innovate in the computing sector, creating chips with diverse applications in AI. We're not witnessing a significant migration from CPUs to GPUs; instead, we see users adopting GPUs alongside CPUs. I anticipate that some tasks currently dominated by GPUs may eventually be better suited for either existing or future CPU generations, so I don't view this as a major trend toward obsolescence. This ties into your second question regarding inference and training. The evolution of data center design must address both aspects. The immediate changes are more pronounced in training, which is notably more power-dense and requires a different approach to power density and cooling solutions. For our xScale builds, we've adjusted designs to accommodate these higher average densities, reflecting the urgent need for adaptation. On the inference side, especially in retail, we do see power density increases, albeit at a slower pace. We are well-positioned to implement liquid cooling, provided we have access to a chilled water loop, which enables us to support high-density setups effectively. We have also confirmed our capability to offer this solution across many global markets. Therefore, I don't foresee significant obsolescence concerns for our older assets, particularly with our ability to integrate liquid cooling. We will continue monitoring these developments closely, as they will remain crucial for us. I expect the overall pace of change in our design will accelerate in this coming decade compared to the last.

I will keep it brief with two follow-ups. First, what influences your expectation for a slight improvement in churn in the second half? Are there any indicators or insights guiding that expectation? Secondly, regarding the macro situation, you mentioned some instances of deal slippage and dynamics similar to the first quarter of 2023 that you experienced in the fourth quarter. Do you have any updates now that we’re halfway through the first quarter? Have those deals closed, or are they still pending? Any insights you can share from the first six weeks of this year would be appreciated.

Sure, let me address that, Matt. Some of our business has closed quickly right after the quarter, which is a natural occurrence. A portion of it is included in our commitments for Q1, while some has been pushed to Q2 or later quarters. So we lost very little overall. Although some was lost, it was a small amount. The trend is primarily forward-moving. Unfortunately, Q4 resembled Q1 more than we would have liked; we had hoped it would align more closely with Q2 and Q3. This is the current situation, and predicting outcomes is challenging. However, from our conversations with customers, we see that while there are tighter budgets and a continued focus on optimization, there is also a strong commitment to digital initiatives. Customers are interested in discussing our work in AI and exploring data placement strategies, but these factors will take time to convert into firm bookings. Regarding our ability to manage churn, we have solid visibility into our pipeline. We have become proficient at forecasting large deal churn, but we experienced some elevated churn in the midsized segment during Q4, which we need to monitor closely. I don’t have much more to share on that front, but we believe it is realistic to expect some reduction in churn in the latter half of the year based on customer interest levels. Additionally, for most of 2021 and 2022, there was a scarcity mindset around data center capacity, but 2023 has seen a significant shift. Macro conditions have evolved, with an emphasis on budget tightening and mitigating PPI impacts, which has influenced customer behavior towards more optimization. We've begun to hear from some customers indicating they are hesitant to release capacity back into the market, as they're unsure about relinquishing it at this time. This sentiment is emerging especially from larger service providers, and it's a new perspective we haven’t encountered in a while. If macro conditions improve, as we anticipate an upturn in interest rates throughout the year, we expect a generally better macro environment, which guides our outlook.

I wanted to follow up on the competitive environment. Are you seeing deals go to competitors or...

Yes, we do experience some competitive loss, particularly with larger footprint projects. Certain use cases stand out as being competitively unique, making it less likely for us to see losses there. Often, timing plays a significant role. When we face constraints, customers may resort to alternative options, which is unfortunate but does happen. However, there are markets where we have a strong presence and a solid value proposition that allow us to compete effectively. Additionally, we're noticing that customers are re-evaluating how they allocate their workloads. Consequently, the overall share of wallet is becoming a key consideration as customers think about their future spending.

And then in terms of pricing actions for the year, what's kind of implied in guidance? And should we expect that there are some price increases for interconnection this year?

Yes, overall, we are experiencing a strong pricing environment. We have implemented several price increases, and we are considering a price increase for interconnection in the U.S. market. This is definitely a factor contributing to our continued growth. The firm pricing reinforces our confidence and provides an attractive outlook for improving profitability and our AFFO per share guidance, which is near the upper end of what we projected during our Analyst Day. This metric is crucial for us as it lays the foundation for value creation, especially when paired with our dividend yield, creating a compelling story.

Great. And just maybe to follow up on that, Charles. With some of this optimization with customers, any thought about customers possibly looking for some products you have to just cross-connect or others trying to find that from others for less as they're trying to optimize their budgets? Is there any concern there?

We don't consider this to be typical. In many markets, our position is strong, and we're not the only option available. While there is some substitution occurring, we notice that customers are consolidating their usage on higher-speed circuits and utilizing services they hadn't previously considered. Additionally, we're observing the advantages of offering a full range of services to our customers. They might find our metal offering suits their immediate needs due to its agility and flexibility. Over time, they may transition to colocation or vice versa. I believe we are gaining momentum in both data center services and digital services. However, we need to continue evolving our market approach and enhancing our cash systems and processes to better support the as-a-service model in digital services. Overall, we are making steady progress, and our complete range of offerings is appealing to customers.

This concludes our fourth quarter earnings call. Thank you for joining us today.