Equinix Inc (EQIX) — Q1 2024 Earnings Call Transcript

Good afternoon, and welcome to the Equinix First Quarter Earnings Conference Call. Also, today's conference is being recorded. I would now like to turn the call over to Chip Newcom, Senior Director of Investor Relations. You may begin. 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 16, 2024, and recently filed Form 10-Q. 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. 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'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 of our website 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 one 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.

Thank you, Chip. Good afternoon and welcome to our Q1 earnings call. We had a great start to 2024 driven by our highest Q1 bookings performance on record, strong conversion rates, completely favorable pricing dynamics, and lower-than-expected churn, all resulting in our 85th key quarter of top-line revenue growth, the longest such streak of any S&P 500 company. We closed more than 3,800 deals across more than 3,100 customers for the quarter demonstrating both the scale and the consistency of our go-to-market machine. And we again saw accelerating hyperscale demand translate into robust xScale leasing in both EMEA and Asia. While we continue to operate in an environment of broader economic uncertainty and see some level of corresponding customer caution, our forward-looking pipeline is strong, and we remain optimistic about the opportunity ahead. Digital transformation, particularly given the rapid adoption of AI, serves as a powerful catalyst for economic expansion, and our customers remain steadfastly committed to their digital initiatives, recognizing the pivotal role they play in fostering long-term revenue growth and driving operational efficiency. As we continue to make digital infrastructure more powerful, more accessible, and more sustainable, we're thrilled that Merrie Williamson has joined our team as Chief Customer and Revenue Officer. Merrie is an operational and visionary leader with unique skills and experience to help drive the next chapter of our growth and brings a proven track record of building new routes to market, enhancing the customer experience, and accelerating go-to-market productivity. On the sustainability front, we continue to advance our bold future-first agenda, with Gartner estimating that by 2027, 80% of CIOs will have performance metrics tied to the sustainability of their IT organization. It's clear to us that companies are prioritizing sustainability in their digital infrastructure decisions. We recently published our ninth Annual ISR Report and continued our industry leadership with 96% renewable energy coverage across our growing portfolio, marking our sixth consecutive year with over 90% coverage. Equinix PPAs now support more than one gigawatt of new clean energy in high-impact markets, and we continue to seek additional clean energy projects that will support our growth. In late April, we were pleased to announce our first renewable PPA in Singapore, an important part of our plan to continue to grow in this strategically critical market. This project will provide 75 megawatts of solar and is in line with Singapore's Green Plan 2030, which seeks to have all business sectors supported by cleaner energy sources. In parallel, we remain highly focused on improving the energy efficiency of our existing facilities as measured by power usage effectiveness. In 2023, we invested $78 million in high-returning efficiency projects, improving our average annual PP&E by over 8% year over year to 1.42, another lever in continuing to drive performance in our stabilized assets. We also continue to make progress on adjusting the thermostat in our facilities, with more than 50 of our data centers now operationally ready to enable A1A and strong industry support for the implementation of this important new temperature standard. Turning to our results, as depicted on Slide 3, revenues for Q1 were $2.1 billion, up 7% over the same quarter last year driven by strong recurring revenues and xScale fees. Adjusted EBITDA was up 6% year-over-year and AFFO per share was meaningfully better than expectations due to strong operating performance. Interconnection revenues stepped up 9% year over year. These growth rates are all on a normalized and constant-currency basis. Our unmatched scale and reach continue to drive performance in our data center services portfolio. Given strong underlying demand for digital infrastructure and the long duration in delivering new capacity, we see a growing scarcity mindset, and therefore we continue to invest broadly across our global footprint. We currently have 50 major projects underway in 34 markets across 21 countries, including 14 xScale builds, representing more than 16,000 cabinets of retail and more than 50 megawatts of xScale capacity through the end of 2024. This quarter we added new projects in Frankfurt, Madrid, Osaka, and Silicon Valley. Key multi-market wins this quarter include ServiceNow, expanding with Equinix in multiple locations globally, powering their continued growth including new GenAI workloads, and Wasabi technologies, a cloud object storage service provider expanding across all three regions to support their continued growth. Our MRR per cabinet continues to rise increasing $119 year over year on a normalized and constant-currency basis to $2,258 driven by continued mark-to-market momentum, solid attach rates for interconnection and digital services, and increasing power densities. With respect to our net cabinets, building capacity constraints in certain key markets and the meaningful delta in power density between churned cabins and booked cabins continues to pressure this metric. But gross additions remain strong, and our booked kilowatts in the retail business were at near-record levels. Given strong bookings and upcoming capacity additions, we expect billable cabs to increase in the second half and continue to see cabinet growth as part of the long-term growth story for the business. Turning to our industry-leading global interconnection franchise, we now have more than 468,000 total interconnections deployed on our platform. In Q1, interconnection adds picked up to 6,200 supported by healthy grossadds and a moderation of consolidations into higher bandwidth connections, and we continue to see a healthy pricing dynamic with a roughly 16% spread in the quarter between churned interconnects and new additions. Internet exchange saw peak traffic up 5% quarter over quarter and 24% year over year to nearly 38 terabits per second led by the Americas. We remain confident that Equinix's unique and durable advantages will continue to position our platform as the logical point of nexus for buyers and sellers of digital services to come together to fuel digital transformation and unlock the enormous potential of AI. This year, Gartner projects the spending on public cloud services will grow 20% to reach $679 billion as business needs and emerging technologies, including GenAI, drive cloud model innovation. We're seeing this translate into strong demand across multiple vectors with key cloud and IT customers broadly and with the hyperscalers specifically. In the quarter, we added one new native cloud on-ramp in Madrid, bringing us to 220 native cloud on-ramps across our portfolio, spanning 47 metros. This represents nearly 40% market share of private cloud on-ramps in the markets where we operate. We remain an integral and growing part of hyperscaler architectures, with these customers collectively representing more than $1.3 billion of annualized revenue in Q1 in our retail business alone, with deployments across an average of more than 60 of our data centers around the world. Importantly, we're also seeing strong go-to-market momentum with these market-shaping players as we partner to meet end-customer needs for hybrid cloud and private AI, making the hyperscalers some of our most productive channel partners. In our xScale program, demand remains robust as cloud and AI needs are translating into strong pre-leasing activity. Since our last earnings call, we've pre-leased an incremental 48 megawatts capacity across our Frankfurt 10, Osaka 4, and Osaka 5 assets, including approximately 34 megawatts leased in mid-April. This brings total xScale leasing to nearly 350 megawatts globally with nearly 90% of our operational and under-construction capacity leased, and a meaningful pipeline of opportunities to drive continued xScale momentum in the quarters to come. Additionally, in mid-April, we announced our first U.S. xScale joint venture with PGIM Real Estate for our SV12x asset. When combined with our existing joint ventures in Europe, Asia Pacific and Latin America, this new JV will bring the expected global xScale portfolio to more than $8 billion in investment across more than 35 facilities and greater than 725 megawatts of power capacity when fully built out. We're also making good progress on additional planned xScale opportunities in the U.S., and we look forward to updating you on those developments in the coming quarters. Shifting to our digital services portfolio, Equinix Fabric and Network Edge continue to over-index relative to the broader business. We see solid interest from customers looking to use the combination of Fabric, Network Edge, and Metal for their digital infrastructure requirements. In support of this need, our engineering teams recently completed the integration of Metal and Fabric, significantly improving the VC creation experience for Metal users. Wins across the business included global security leader CrowdStrike, exploring a cloud-adjacent storage solution on platform Equinix in EMEA to leverage proximity to Equinix's rich ecosystem of cloud and storage provider customers. And an online AI and data analytics education company building out AI infrastructure to support learning for global practitioners. Our channel program delivered another solid quarter with channel and partner influence deals accounting for over 30% of gross bookings and over 60% of new logos. We continue to see growth from the hyperscalers and from other key partners like AT&T, Avant, Dell, Kyndryl, and Zenlayer with wins across a wide range of industry segments and a broad mix of Equinix services. As we expand into new markets, our partners are accelerating our efforts to sell the global platform. In Q1, we had a number of wins with Zenlayer in Malaysia, including delivering co-locations and interconnection solutions to a fintech firm, extending its reach into Kuala Lumpur, as well as supporting a logistics consulting firm extending into Johor. We also saw a win with Kyndryl, who also selected Platform Equinix to service some of its largest customers in Canada, including from the public sector. Let me turn the call over to Keith and cover the results for the quarter.

Great. Thanks, Charles, and good afternoon to everyone. As highlighted by Charles, we had a strong start to the year, delivering better-than-planned results across each of our core financial metrics. Our net bookings were meaningfully better than expected. We had strong customer momentum, lower-than-expected churn, and continued positive pricing actions, and our forward-looking pipeline remains deep as we look to execute against our plan for the remainder of the year. Global MRR per cabinet, our ARPU metric measured in U.S. dollars, continues to show momentum across all three regions. With each of our regions now eclipsing to $2,000 for the first time despite the weaker foreign currency relative to the U.S. dollar. Also, our xScale business continues to perform very well having leased another five assets year to date with a meaningful pipeline of opportunities for the quarters to come. Now, as many of you know, Equinix's competitive advantage in the marketplace is derived from both our interconnected digital ecosystems and our industry-leading global scale and reach. But also, Equinix's operational reliability and putting the customer at the center of everything we do is a third competitive advantage. As an example, our global ops teams strive to deliver greater than six-ninths of annual availability to our customers, which means being up and running for all, but approximately 30 seconds a year on average. To achieve this outcome, our ops team performed thorough capacity reviews and regularly monitored both our average and peak customer power draw against the shared facility capacity to ensure we can support our commitments to our customers. As demonstrated throughout our greater than 25-year history, we've reliably delivered against these operational commitments, which is why nearly 90% of our new reported bookings activity has historically come from existing customers, and by reliably delivering on our commitments to our customers, our team has also been able to deliver sustained value accretion to you, our shareholders. As an additional update, we're also pleased to share that the audit committee of the company's board of directors conducted and has substantially completed a previously announced independent investigation with the assistance of independent third-party professional advisors. Based on the findings of the independent investigation, the audit committee has concluded that Equinix's financial reporting has been accurate, and the application of its accounting practices has resulted in an appropriate representation of its operating performance. The audit committee had full discretion over the scope of the investigation and was not restricted in any way. As part of this assessment, the audit committee did not identify any accounting inconsistencies or errors requiring an adjustment to or restatement of previously issued financial statements or non-GAAP measures. Also, as previously disclosed, shortly after the release of the short seller report, we received a subpoena from the U.S. Attorney's Office from the Northern District of California. Additionally, on April 30th, 2024, we received a subpoena from the Securities and Exchange Commission. We are cooperating fully with both subpoenas and do not expect to comment further on such matters until appropriate to do so. Now, let me cover the highlights from the quarter. Note that all growth rates in this section are on a normalized and constant-currency basis. As depicted on Slide 4, global revenues were $2.127 billion, up 7% over the same quarter last year in the upper half of our guidance range on a constant-currency basis. As expected, non-recurring revenue stepped down sequentially yet still remained elevated as a percentage of revenue due to the level of xScale leasing activity in the quarter. For Q2, given our strong Q1 net bookings activity and increased non-recurring revenues related to our APAC xScale business in April, Q2 revenues are expected to step up 2% to 3% over the prior quarter. Q1 revenues, net of our FX hedges included a $14 million headwind when compared to our prior FX guidance rates due to the strong U.S. dollar in the quarter. Global Q1 adjusted EBITDA was $992 million or 47% of revenues, up 6% over the same quarter last year and above the top end of our guidance range due to lower utilities expense and timing of spend. Q1 adjusted EBITDA, net of our FX hedges, included $6 million FX headwind when compared to our prior guidance rates and $1 million of integration costs. Global Q1 AFFO was $843 million, up 8% over the same quarter last year and above our expectations due to strong operating performance and lower-than-expected net interest expense. As planned, we had seasonally lower recurring capex spend, consistent with prior years. Q1 AFFO included a $4 million FX headwind when compared to our prior guidance rates. Global Q1 MRR was better than expected at 2.1%. For the full year, we continue to expect MRR churn to average in the 2% to 2.5% quarterly guidance range. Turning to our regional highlights, these full results are covered on Slides 5 through 7. On a year-over-year normalized basis, APAC was our fastest-growing region at 12%, followed by the Americas and EMEA regions both growing at 6%. The Americas region had a great quarter with strong bookings performance led by the public sector activity and healthy pickup in exports to the other regions as our team sold across our global platform. We saw particular strength in our Atlanta, Culpeper, and Miami metros, as well as a strong interest in the additional soon-to-be-open capacity in the New York Metro. Our EMEA business delivered a strong quarter with robust gross bookings activity including an increased mix of medium and larger footprint deals. In the quarter, we saw booking strength in our Barcelona, Frankfurt, and Paris markets. And finally, Asia Pacific region had a great quarter with firm pricing and strength from our digital services products, including increased adoption of inter-metro connections on Equinix Fabric as customers continue to focus on their network optimization efforts. In the quarter, we saw Good Inc. recently opened capacity in Malaysia and continued momentum in our largest markets in the region including Hong Kong, Tokyo, and Sydney. Looking at our capital structure, our net leverage remained low relative to our peers at 3.6 times our annualized adjusted EBITDA. Our balance sheet decreased approximately $31.9 billion, including an unrestricted cash balance of over $1.5 billion. Our cash balance decreased quarter-over-quarter as our strong operating cash flow was more than offset by the growth investments and the quarterly cash dividend. As noted previously, and given our strong balance sheet and liquidity position, we plan to remain opportunistic as it relates to the timing, size, and currency of our future capital market activities, including when we plan to refinance the $1 billion of debt maturing later this year. Turning to our capital expenditures, they were $707 million including seasonally lowered recurring capex of $21 million. Since our last earnings call, we opened three retail projects in Mexico City, Mumbai, and Paris. We also purchased our Dublin 2, Mumbai 2, and Stockholm 3 assets, as well as land for development in Santiago, Chile. Revenues from owned assets increased at 67% of our recurring revenues, and more than 90% of the current retail expansion investment will be on owned land or owned buildings with long-term ground leases. Now, we're also entering a stage in our asset lifecycle where we're evaluating select opportunities to invest in highly valued IBXs that have been operating for 20 years or longer. Starting this quarter, we added a new category of non-recurring capex spend to our disclosures, referred to as redevelopment capex, to track these investments to enhance the capacity, efficiency, and operating standards of facilities in this category, and to attract capital investments that are intended to meaningfully extend the economic life of assets. Our first redevelopment project is DC2, one of our original IBXs that opened in the early 2000s, and home to our networking ecosystem in northern Virginia. Total estimated spend on this DC2 project will approximate $76 million broken into two primary categories of capex investment, redevelopment and recurring. We expect the $56 million redevelopment portion of the investment to yield meaningful additional space and power capacity, and, given the favorable pricing environment and high customer demand for the DC2 asset, we anticipate that this capacity will generate additional revenues and cash flow that should result in an IR well above our current stabilized asset yields. The remaining portion of the investment, which relates to maintaining our existing revenues, such as roof replacement, will be categorized as typical recurring capex. Now moving to our capital investments having continued to deliver strong returns. Consistent with prior years in Q1, we completed the annual refresh of our IBX categorization exercise and our stabilized asset count increased by a net six IBXs. Our now 180-stabilized asset increased recurring revenues by 5% year over year on a constant-currency basis, a quarter-over-quarter step-down as we lap the power price actions in 2023. Stabilized assets were collectively 84% utilized and generated a 26% cash-on-cash return on the gross PP&E invested. And finally, please refer to Slides 11 through 15 for updated summary of 2024 guidance and bridges. Do note all growth rates are on a normalized and constant-currency basis. For the full year 2024, we're maintaining our underlying revenue outlook with expected top-line growth of 7% to 8%, a reflection of our continued strong momentum. We're raising our underlying 2024 adjusted EBITDA guidance by $5 million due to lower integration spend. We're raising our underlying 2024 AFFO guidance by $25 million to now grow between 10% and 13% compared to the previous year due to lower net interest expense. AFFO per share is now expected to grow between 8% and 11%. 2024 capex is expected to range between $2.8 billion and $3 billion including about $220 million of recurring capex spend.

Thanks, Keith. In closing, we continue to see our customers derive compelling value from Platform Equinix, leveraging our superior global reach, our scaled digital ecosystem, our market-leading interconnection platform, and our greater-than-25-year track record of delivering on our commitments to fuel their investments in digital transformation. We are delighted to see the continued strength and fundamentals of our business. We remain highly confident in the integrity of our financials, and we are as optimistic as ever that we'll continue to be an important partner for digital leaders as they accelerate AI investments and embrace hybrid and multi-cloud as the clear architecture of choice. Before we turn to Q&A, I want to spend a few minutes on my transition. In reflecting on the last six years, it has been both a pleasure and a privilege to be the CEO of Equinix, showing up every day in service to our customers, to our employees, and to our shareholders. As I transition to the role of Executive Chairman later this quarter, I'll continue to take an active part in the business as Adaire Fox-Martin steps into the CEO role. Adaire is an extremely accomplished executive with a proven ability to deliver sustained value to the full range of stakeholders. I'm confident that she brings the experience, the skills, and the passion that we need to inspire our teams and support the evolving needs of our customers, driving growth and unlocking the extraordinary power of Platform Equinix. I look forward to working with Adaire in this next chapter of the Equinix journey. I'd also like to thank Peter Van Camp, a shining example of the magic of Equinix over the last 25 years, and look forward to partnering with him as he moves from our Executive Chairman to Special Advisor to the board. I look forward to further collaboration with both Adaire and the broader leadership team as we continue on our path as the world's digital infrastructure company, capturing and creating new opportunities and leveraging our distinctive advantages to ensure digital leaders can harness our trusted platform to create and interconnect the foundational digital infrastructure that enhances our world. So, let me stop there and open it up for questions.

xScale, just interested in what you're seeing in terms of targeted unlevered returns that you're underwriting. Any difference given the strong demand profile? And then, it looks like you've got $1 billion of senior notes coming due late this year, $1.2 billion due in 2025, and I just wondered what you're thinking in terms of refinancing cost of debt and whether a non-U.S. jurisdiction might provide a cost advantage.

Sure, Jon. I'll address the first part, and then Keith can add to that and handle the second part regarding refinancing. xScale continues to perform exceptionally well. We have experienced significant pre-leasing activity in recent quarters, and there is ongoing strong demand and confidence that we will successfully pre-sell that capacity. I believe we are seeing stable pricing, although costs are increasing as well. This combination leaves us with underwriting levels that are at least on par with last year, and we feel very confident about our cash and cash returns overall.

I want to build on what Charles mentioned. It's crucial to recognize that Equinix maintains a fee stream supported by a larger revenue base, helping to offset the increased costs that Charles pointed out. When I consider our overall returns, they are quite appealing as a business. As we've discussed in recent years, we're at a stage where not only do we have recurring and nonrecurring streams, but there is also potential for our partners to monetize some of their investments, leading to additional fee opportunities over time. Overall, I believe the return profile is attractive, although it reflects a higher cost model compared to the past, which you will see reflected in our results. Regarding the debt refinancing, I'd like to approach it from a different angle, focusing on the spread. The spread mainly pertains to our borrowing abilities relative to the base rate. As I mentioned earlier, I'll pause for a moment. Jon, can you hear me?

Absolutely, yes.

Thank you. We experienced a bit of an issue with our conference line here. I want to highlight that we are considering the timing and currency of our borrowing. We are exploring different markets for raising capital and refinancing existing debt. You should expect a spread based on our previous performance, likely between 105 and 115 basis points over the base rate. We may choose to borrow in euros or dollars and adjust based on cash flow needs. Overall, we are well-positioned to enjoy a competitive spread compared to others. The current market volatility is evident, which is why discussing the spread is important. I believe we will have sufficient access to capital; it just depends on the timing of the transactions, whether this year or next year. Additionally, we have an unused line of credit of $4 billion, which we can draw on if needed and refinance later, but I don't anticipate any issues regarding this.

Jon, I would back up a little bit to the xScale and just say in addition to the underwriting continuing to be strong, pre-leasing activity strong, I think we're seeing exactly it play out very much as we expected in terms of how the whole thing fits together from a platform strategy standpoint. So, very pleased with the xScale business and very pleased with how it fits in overall in terms of driving the broader value of the platform to our customers.

Just given the demand profile and the pricing dynamic that we've heard elsewhere, would low teens be an unreasonable kind of assumption to think about for unlevered return development yields or not?

I believe it's a fair assumption. Different markets indeed have varying price points. Overall, I think a low teens return is quite appropriate on an unlevered basis. It's important not to overlook the supply and demand dynamics at play; supply will continue to be a challenge in the market. Thus, when considering the demand profile, I expect pricing to stay robust. On an unlevered basis, we can achieve a strong return, especially when factoring in the fee structure that benefits our business. We also recently announced the Silicon Valley 12 transaction, and we are satisfied with the overall deal structure. We are diligently working to stabilize it, and we value the returns under consideration.

Thanks, Jon.

Charles, best of luck in the new role. I appreciate all the time you spent with us on these calls and other forums over the years. First, can you share any details regarding the mechanics of the internal review, like who is engaged to perform the work or the aspects of the accounting that were reviewed and how far back they went? Any suggestions for go-forward changes? Then anything along those lines would be super helpful.

Sure. I'll give you a bit of that, and Keith can certainly add to it. The mechanics that we did, the audit committee obviously was the one conducting that, and we have a very experienced audit committee acting independently. And then they retained independent advisors in WilmerHale, the law firm that led the investigation, as well as AlixPartners, the forensic accountants, independent forensic accountants that led that. And they looked at, particularly surrounding, obviously, the accounting-related matters that were sort of referenced in the allegations in the short report. And as a public company, as frustrating as it might be, that's our obligation to undertake an investigation to look into those. And so, we tried to keep people focused on the business while that investigation took place, and we tried to focus on serving our customers while the audit committee led that investigation alongside the advisors. They collected the right information that they deemed as appropriate to validate and understand the concerns that were there and making a judgment and an assessment about the accuracy of our financial reporting, both on a GAAP basis and the non-GAAP measures that were involved here. And again, as we said in the press release and in the prepared remarks here, they came back with a level of confidence in those results and in the accuracy of those results. And so, while the investigation remains open, in large part, because we have to sort of navigate the subpoenas with the SEC and the DOJ, we feel great about the outcome. I feel like it really speaks to the integrity of our team, which, as I said, I have great confidence in and in the integrity of our financials. So, I'll leave it there, and if there's anything you want to add there Keith?

No, I think, well said, Charles. Thanks.

OK. Again, great to hear. Thanks for sharing those details. I guess one other topic, Keith, you noted that DC2 is going through a redevelopment, obviously, a crown jewel facility for you guys. I guess you noted the attractive IRRs associated with the investments. I guess can you expand a little bit on the work that you're doing to that data center and what you think those capex dollars might unlock from a revenue perspective?

We've been developing this initiative for about a year as it involves a new form of expansion capital expenditure. Our goal is twofold: first, to extend the lifespan of the asset beyond typical expectations. We are essentially performing a major overhaul while the facility is operational, and it's one of our top-performing assets. To put it in perspective, the investment of $76 million is significant. This effort will prolong the asset's life and generate additional revenue opportunities, potentially increasing revenues by 15% to 20% in an already profitable environment. The $20 million allocated for recurring capital expenditures will address roof replacement and other needs, which will be classified under recurring expenses. However, the $56 million investment we discussed earlier is expected to yield a better internal rate of return than stabilized assets, with expectations in the 30s. Even if we factor in the recurring end-of-life expenses, we're still looking at returns in the 20s. This illustrates that our investment decisions are substantial for this critical asset. The last thing I also want to leave you with, when we make this type of decision, part of the reason we were really calling it a redevelopment is this isn't like getting something done over a quarter. Again, high-density live environment is going to take two to three years to get this done. So, it gives you a sense of the level of investment. It's not like replacing a motor. We're basically taking out the guts of the entire IBX and replacing it with basic new and updated equipment. So, overall, I'd just say it's one of those things. There's not a huge portfolio, but I think over the next three to five years or something like that, you should expect something like six to eight assets could fall into that mix. Again, it has to be older than 20 years, and we have to invest more than $20 million for it to be considered a redevelopment capex item.

I'll add some more detail. The capex investment is focused on the essential infrastructure needed for the data center, such as power and cooling. The key difference is that we're experiencing rising density needs, which sometimes forces us to reduce available space and place it on engineering hold. When we can unlock additional usable power—through efficiency projects or redevelopment investments that involve new equipment—we can match it to the space that is currently unused or on hold, resulting in significant incremental capacity. This essentially feels like a new phase of a project. In this instance, DC2 is transitioning from the stabilized assets, which negatively impacts that asset pool but returns to expansion because it significantly increases the overall capacity of the facility. This increase serves as our benchmark for determining if it qualifies as a redevelopment project, and in this case, it certainly does due to strong customer demand for that asset.

Congrats, Charles, on the transition. I guess going back to xScale, I think about 40% of all the leasing done by xScale since launch has been since the beginning of the fourth quarter. How does the pipeline look relative to the amount of leasing that's been done recently? And then when fully built out, you noted having about 725 megawatts of capacity. So, you're essentially almost halfway there with what's leased. Are you looking to add more to that? Are you rethinking just how big the platform can be and the investments you want to make in it?

The short answer is absolutely. We will continue to grow both the xScale and retail sides of our platform, and there is clearly a strong demand out there, which we believe supports our compelling story. The leasing momentum we have built over the past several quarters reflects this. We are confident about effectively leasing the remaining capacity, and as mentioned earlier, we are excited to provide updates on our announcements, including the SV12x asset, the first xScale in the Americas. We are also actively discussing how to expand our xScale platform in the U.S. and the broader Americas. While we don't have specific details to share at this moment, we look forward to updating you soon. Regarding the growth potential, while we are not ready to give precise figures, we believe that our expectations for xScale, discussed during our Analyst Day back in 2018, have been significantly exceeded. This remains an exciting opportunity, and we are very proud of our team managing this business, who are delivering great value for our customers.

OK, thanks. And then just separately, you noted some of the reasons that cabinet adds were soft in the quarter, and you talked about seeing better growth in the second half of the year. Can you just talk about what underpins that? And is that coming from backlog? Or is there an assumption in there around some of the longer sales cycle times moderating?

Yeah. I mean, the billable cabs, it comes from a few different things. You're right. We've always talked about the volatility in billable cabs based partially on timing of installs. It's not so much a longer sales cycle. Sometimes, it is a bit of a longer install cycle, and so, depending on the timing of installs and in fact the timing of churn, you can see volatility in any quarter. That's why we've always sort of told people over the years to look at a rolling four-quarter metric, but even that has really been under pressure, and has been under pressure primarily because of power density, and I think that kind of makes sense to people, but we're realizing, I think, that we really need to give people a bit more to hang their hat on relative to that particular metric. So, let me give you some of the math, I think, that will help people understand the billable cabs metric and how it plays here and what's causing the bit of pressure on that. We guide the 2% to 2.5% churn rate on our recurring revenue each quarter. So, we're running today at an MRR run rate of about $667 million. So, if you take 2% of that figure, at the low end of the range, so you're at $13 million to $14 million in MRR churn in any given quarter. As we said, our MRR per cab is averaging right now at 2,258. So, if you take that and divide those two together, you'd be churning roundabout 6,000 cabs in any given quarter. And more than that, if we're churning cabs that are at a lower-than-average MRR per cab, which candidly we would hope to be doing, if you're going to churn some cabs, it should be ones that are below the average, right? And so, in Q1, we were churning cabs that were at an average of 4.4 kilowatts. We were adding back cabs at an average of 5.8 kilowatts. And so, when you do that math, all in, in terms of that relatively large gap in density, you're looking at about a 1,500-cab hole that you've got to fill. So actually, staying flat on cabs is really a pretty significant win. The density increase that's causing that sort of hole in the bucket on cab count though is a really important factor in driving the MRR per cab. So, if you go and if you look at our year-over-year growth on billable cabs, Q1 to Q1, last year to this year, it's softer for sure. It's only up about 1%. But over that same time frame, our MRR per cab is up 6% across the estate, and so, you add those two together, and the composite gives you that 7% growth. So, long way of saying that, in other words that stable to slightly growing cab count is certainly a different dynamic than what we have seen. But the growth is coming. It's just coming in a slightly different shape. And so, we're still driving the growth in the business and getting the economic returns that we were anticipating. So, I think that, for us, rather than looking for a new indicator, I think, what we're going to look to do is moderate expectations on the cab growth and say, look, we're having to cover that whole quarter-over-quarter from a density standpoint, but it's really driving the MRR per cab, and it's the composite of those two things that really give you the solid growth model going forward.

So, Keith, just the first question would be, based on what Charles was just saying and the explanations that he's been having to make about this interpretation of MRR per cabinet and power density and cabinet numbers, where are we on the creation of these new metrics that I think we've been talking about for six months? And the second question, if I could, would be, it's great that the audit committee hired these independent advisors and it exonerated itself and the company and all the words that were used. But how much daylight is there between what you looked at and what the SEC and the DOJ are looking at and your comfort factor that we've buttoned this thing up, and in what time frame can we expect a resolution to that?

I'm considering the order of the points to address. We believe we have the necessary metrics, but introducing new ones adds complexity. The metrics we're focused on are the MRR per cab and the billable cab count, with the product of these two being the primary metric we refer to. Instead of introducing a new metric, we will concentrate on these two and aim to provide clearer visibility into what you can expect regarding their combined impact on growth. Regarding the investigation, I'm unable to comment specifically on the DOJ and SEC subpoenas, but the work done by the audit committee and independent advisors over the past few weeks lays a solid foundation to address the concerns raised by these subpoenas. It's not uncommon for discussions with the DOJ and SEC to take some time. However, I believe we have a good understanding of the situation and will provide updates as necessary, though it's challenging to offer specific timelines at this point.

Just to add, as Charles said, I think it's important to understand that the level of work that was done since March 20th, so five, six weeks of work, was also included what was anticipated to be needed by the DOJ and the SEC. So, a tremendous amount of work has been done, and it's surrounded by what I would call the matters that relate to accounting irregularities. And I would expect, and I know this to be true, that they're already in dialogue with the parties. They're appropriately within dialogue with the parties. And again, this is going to be done independently as you would expect. Of course, they're going to draw on the resources of the company where needed to answer questions and queries. So, I just think it takes a little bit of time, but getting to where we are that we filed the 10-Q yesterday should give you tremendous comfort on where we concluded. And, again, there are no adjustments, no findings. And so, as a result, I feel really good about where we are. And as Charles has said in his remarks, that relates to both GAAP and non-GAAP, and I think that was really important. So, again, it will take probably a little bit of time, but overall, again, I feel very comfortable that by the filing of our 10-Q, it's a pretty good strong indication of where we are in the journey.

Yeah, I think the shorter answer to your question probably would have been not a lot of light between those I think, and I think we feel confident that we're going to be able to navigate those. Again, how timely I'm not sure, because I think those are probably not things that are frequently rapid, just due to the parties you're dealing with. We'll navigate them on as rapid a time frame as we can, or the audit committee and the independent investigators will, and then we'll report that back to you as we know more.

Charles, I want to wish you the best on the transition as well. Wanted to ask a question about some of the comments from earlier. You commented that 1Q was better, I think, on the net bookings, your budget and you had lower churn, and you maintained the outlook for constant-currency revenue growth ex PPI of 7% to 8%. And so, I'm curious, has your view evolved on how you expect the second half in terms of organic year-over-year growth to ramp relative to the first half of the year? And are there other considerations that kept the organic constant-currency revenue guidance unchanged? And then I'll have a second one if I could as well.

Sure, thanks for the well wishes, Mike, and for your questions. I would say that our outlook for the second half remains fairly consistent. We mentioned that we anticipate some acceleration in bookings during the latter part of the year. We're confident about our pipeline, especially after a strong first quarter, which gives us a slight advantage as we head into the second half. However, we are still experiencing some level of churn, even though it was lower than we had initially projected. We need to manage that as we move forward. Overall, there are no significant changes in our outlook, which is why we've decided to maintain our projections.

And Mike, maybe just adding on to that, when you get to the second half of the year, you recognize that that certainly matters to the year, but it's not as important because it really matters to the year following. So, that's one of the things that you have to look at. We had a pretty good idea of what we think we could do for the first half of the year, and as Charles just mentioned, we're ahead of where we were. But offsetting some of that, of course, is some other things that have gone on inside the business, an example of metered power. And so, you're absorbing the fact that power costs have been down relative to where we were. We actually had a power price decrease, as you're aware, from the fourth quarter earnings call. And because of that, you're diluting a little bit of the growth. So, it's a combination of power being a little bit lower and sort of diluting it. In the second half of the year, we still anticipate to deliver against the expectations. But I would maybe characterize this as maybe a parting remark that when we look at risks and opportunities, the opportunities both in the revenue line and the cost line are much greater than those in the risk line. And so, where we are today, I just think that we're taking a posture that is appropriate given where we are at this time of year and just all the noise that's in the system.

Yeah. I mean, Mike, we've used this term on the last few calls as sort of crosscurrents, right, which is a sort of strange combination of a lot of interest in demand around digital transformation broadly speaking, around AI, in particular. I think we're still seeing that. I think we're seeing great interest in AI and in hybrid AI, private AI, sort of mixed with public cloud as a sort of preferred architecture for a lot of the AI workloads that we're looking at. I think we're seeing a lot of customers looking at where they want to place their data. And I think they are increasingly reaching the conclusion that sort of proximate to the cloud is the right answer, and I think we're really well-positioned to benefit from that, and we're seeing some demand there. We're seeing a nice pipeline on the managed DGX opportunity that we have out in the market with NVIDIA. And yet at the same time, we are also seeing, as I characterized in the script, some level of customer caution, some level of tightening and desire for optimization in a still somewhat uncertain macro environment. And so, I think it's all those things together that led us to say, hey, this guide is a good one. We feel like we've got the opportunity to outperform against it, particularly on the FFO line, but that's kind of where we landed and sort of overall balance for the guide.

I want to touch on the examples of how customers can use the Equinix platform. Can you share what you're seeing in terms of interest or realization of that interest regarding the number of deals you did in the quarter or the pipeline? Are there any additional insights on AI that the market should consider for Equinix?

Yeah. I would still characterize it as quite early days because I do think there is a ton of interest in AI, but I think that the actual execution of implementing infrastructure, driving workloads, etc. is I think still relatively early in the cycle. Now, I do think there is a lot of attention on really large-scale training workloads, and I do think we're seeing some of the demand in our xScale business being driven by demand from hyperscalers, which again are the largest customers of our xScale offering. And so, I think that is probably ahead of the game, but I think what we're now seeing is a really rich pipeline of enterprise training opportunities, as well as inference opportunities where inference is more distributed. And we've been saying this all along, I think that's where the unique differentiated creation of Equinix is likely to be because of our highly distributed footprint, and because I think we bring that blend of capabilities to the table not only xScale. And we did see an uptick, I will say this quarter, in larger footprint opportunities, and I think some of that is really associated with AI-related workloads, both service provider and enterprise. And so, we're seeing a little bit of a different mix. I think it's still relatively early, but I think a lot of room for optimism in the AI opportunity overall for us.

Charles, best of luck with everything. I wanted to come back to the cabinets if I could. I think you mentioned, Charles, at one point that you are limited for capacity constraints in certain key markets. If we look at the overall utilization, we're seeing 78%, 79%, and that's down year-over-year. You've added a lot of capacity over the last few quarters here. So, just help us unpack that a little bit because it looks like, at least, on an aggregate level, where are the pressure points here and what's the opportunity to relieve those.

Yeah, great question. I mean, I think there's a few markets around the world that we have recently added capacity or it is around the corner. A great example would be the New York Metro where we are already pre-selling capacity in that, but don't yet have as much available to actually bill into as we would like. And so, I think that's a classic area of constraint. We've also seen, of course, Singapore is a more, I think, more protracted area of constraint in the business. And it's one of the reasons why we talked about our sustainability efforts there, which were quite central in our ability to gain incremental capacity to sort of awards, if you will, from the Singaporean government. And so, I think that one's going to be a little bit of a longer slog for us. And I think, unfortunately, it means that we're going to have to continue to be opportunistic about churn and trying to rerate that and use that to continue to serve the capacity that is most critical there. But those are a couple of key examples. What might be some of the other ones, Keith, you already had some constraints there?

Overall, in some Canadian markets, the issue is more about distribution rather than generation. Northern Virginia serves as an example of this, along with certain areas in Canada and the Dublin market in Ireland. The goal is to optimize our environment, as Charles mentioned, with Singapore representing a clear example of how to approach re-evaluating the space while maintaining discipline in our sales strategy. We are considering the introduction of new capacity in second and third tier markets, which generally take longer to ramp up, while also recognizing the urgent need for additional capacity in major metropolitan areas globally. We are making investments to optimize our portfolio, understanding that each market has its unique characteristics. We are evaluating our churn activities and the impact of our capacity and engineering initiatives as we enhance efficiency. All of these factors are influencing our decisions. This relates back to our discussion about net cabinet billing, as it's important to recognize the revenue drivers within our business. In our second quarter outlook, we expect a significant increase in revenues, with approximately 65% to 70% of that attributed to monthly recurring revenue. This indicates that we anticipate more revenue in the following quarter, aided by MRR activity through xScale. While there is momentum in the business, it may not align with historical expectations since it's not just about adding new cabinets—there's more volume associated with the cabinets we currently have. This duality is prompting us to be somewhat cautious regarding our net billing cabinet discussions, but we are confident that the revenue is available to support our growth.

I believe that the stabilized assets are 84% utilized overall, and I see potential for increased utilization in the new class that has just been implemented. We are certainly going to continue to improve utilization while also adding capacity in response to the existing demand. Ultimately, it will depend on how the demand fluctuates and impacts the utilization rate.

This concludes our Q1 earnings call. Thank you for joining us.