Equinix, Inc. (EQIX) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Equinix Conference Call. [Operator Instructions] Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'd like to turn the call over to Katrina Rymill, VP of IR. 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'll be making today are forward looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed on February 24, 2012, and Form 10-Q filed on April 27, 2012. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it's Equinix's policy not to comment on its financial guidance during the quarter unless it's done through an exclusive public disclosure. In addition, we will provide non-GAAP measures on today's conference call. We will provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor Relations page at www.equinix.com. We would also like to remind you that we post important information about Equinix on the Investor Relations page of our website. We encourage you to check our website regularly for the most current available information. With us today are Steve Smith, Equinix's CEO and President; Keith Taylor, Chief Financial Officer; and Charles Meyers, President of the Americas. Following our prepared remarks, we'll be taking questions from sell-side analysts. In the interest of wrapping this call in an hour, we would like to ask these analysts to limit any follow-on questions to just one. At this time, I'll turn the call over to Steve.

Thank you, Katrina. And good afternoon, and welcome to our second quarter earnings call. I'm pleased to report that Equinix delivered another quarter of strong financial results, and we made solid progress against our operating goals in the first half of 2012. As shown on Slide 3, revenues were $466.3 million, up 3% quarter-over-quarter and 18% over the same quarter last year. Adjusted EBITDA was $222.1 million for the quarter, up 22% over the same quarter last year. Our results demonstrate our focus on disciplined execution, striking an appropriate balance between revenue growth, margin expansion and attractive returns on invested capital. We are executing on our strategy of building network density in key metros, deepening our ecosystems and interconnection across our 5 verticals and expanding our global reach. Our global platform continues to be a unique competitive advantage for Equinix. Today, 58% of our revenue comes from customers deployed across multiple regions, and revenues from companies who are deployed in all 3 regions increased by 34% over the last year. With more applications benefiting from a distributed architecture, we've seen attractive opportunity to help our customers expand their deployments into multiple regions across our global footprint. Specifically, we have an increasing number of customers in Europe and North America who view Asia as a critical market for expansion. To enhance our ability to meet demand from these customers, this quarter, we acquired Asia Tone for $230.5 million, making Equinix the market leader in Hong Kong, strengthening our position in Singapore and establishing a significant presence in Mainland China. Equinix gained a total of 6 data centers and 1 disaster recovery center, which includes 2 existing data centers in Shanghai plus a third under construction. This world-class data center is expected to open in Q3 this year, and we are already seeing a significant pipeline from customers looking to extend their footprint into Mainland China. Having just returned from Shanghai, I believe our strong local operating team, combined with this impressive facility, will give customers full confidence to expand with Platform Equinix into this critical market. Similarly in Europe, we are using M&A to build network density in this region. Network density is the foundation upon which we build and support robust global ecosystems. As announced earlier this month, we completed the acquisition of ancotel, one of Europe's leading carrier-neutral colocation providers, for $86 million. With ancotel, Equinix increases its network customer base from 700 to 900, considerably expanding our network density to include a broad mix of networks from both Western and Eastern Europe. Equinix now operates in over -- operates over 220,000 net sellable square feet of data center capacity across 4 data centers in the Frankfurt market, one of the world's busiest data hubs. Ancotel also adds over 6,000 cross connects, bringing the total number of cross connects across Platform Equinix to approximately 110,000. Ancotel is a powerful addition to our European business and delivers significant value to our global offerings. In the second half of this year, we will open several flagship data centers, providing additional inventory in key markets to satisfy our growing deal funnel and support the growth of our ecosystem. In Europe, we will open Amsterdam 3 located in the Amsterdam Science Park, one of the most carrier-dense locations in Europe, as well as Paris 4, which will be tailored to our highly networked Paris campus. In the U.S., we have 2 important new builds: NY5, which is located next to NY4, will provide critical inventory for the financial ecosystem; and Miami 3, located in Boca Raton, near several major fiber-optic cable landing stations in the lowest latency route to Brazil. These new data centers are in addition to the phased builds we will be opening in existing sites across all 3 regions. In addition to growing our platform and increasing network density, we have launched a handful of efforts over the last year aimed at expanding operating margins and improving capital efficiency. On the demand side, we have implemented several mechanisms aimed at carefully managing our existing customer mix and assessing new deals in terms of size, power density, target vertical and interconnection profile. These efforts are delivering strong results in terms of revenue yield per cabinet and overall price stability and are allowing us to fully realize the benefits of our ecosystem strategy. On the supply side, we have broadly implemented our IBX optimization program in the Americas and are actively incorporating elements into both EMEA and Asia Pacific. Through this program, we rigorously evaluate our facilities with a focus on balancing space and power utilization, increasing energy efficiency and identifying ways to add sellable capacity with limited incremental investment. Over the past year, we have generated substantial energy savings, significantly improved our customer mix and increased our sellable inventory by over 2,000 cabinets, including 700 this quarter, giving us more than $50 million of incremental revenue potential with very little additional capital expenditure. Our intention is to remain disciplined around our ecosystem-driven strategy, and IBX optimization is an important component of that. Applying the strategy to both new customer acquisitions as well as renewals is proving to be the right balance to enhance our returns. As we saw this quarter, this program may result in a temporary increase in churn, which is more than offset by margin improvements as we resell capacity at market rates. As an example around renewals this quarter, we negotiated with a top digital media customer to embark in a multitiered plan to further optimize their multitiered architecture. This deal will allow us to retain the high-value elements of their deployment and preserve the majority of their high-margin interconnection revenue while transitioning out of the larger-footprint applications that are not well aligned with the Equinix value proposition. This proactive effort will allow us to dramatically improve profitability with this customer and, importantly, will free up inventory in critical sites such as 111 8th in New York, enabling us to satisfy demand for other high-value applications. In this specific instance, once the capacity is resold, we expect operating profit to improve by more than $1 million per month, nearly a full point increase in gross margin for the Americas business. We believe this level of operating discipline is critical to our long-term success and essential to our ability to manage the business effectively through an increasingly dynamic market. We are executing with discipline and focus and remain on target to generate positive adjusted free cash flow in 2013 and over $3 billion in annual revenue by 2015. So let me stop here and turn it over to Keith to review the financials for the quarter.

Great. Thanks, Steve. Good afternoon to everyone on the call. So I'm pleased to provide you with additional detail on the second quarter. And as a reminder, with the exception of our consolidated financial results, all of the other metrics will exclude the impact of ALOG. So I want to start with Slide 4 today for our presentation posted. Our Q2 financial results and key operating metrics closed very strongly. Global Q2 revenues were $466.3 million, a 3% quarter-over-quarter increase and up 18% over the same quarter last year. Our favorable performance was meaningfully offset by the negative currency trends across most of our operating currencies, reducing revenues by $3.9 million when compared to the average rates used in Q3 and $3 million when compared to our FX guidance rates. On an FX-neutral basis, our Q2 revenues increased 4% over the prior quarter and up 22% over the same quarter last year. Pricing per cabinet equivalent remains firm across each of our regions. Global cash gross profit for the quarter was $320 million, or cash gross margin of 69%, higher than our expectation in part due to lower utility costs. Our cash gross profit increased 3% over the prior quarter and up 24% on a year-over-year basis. Looking forward, we expect the Q3 cash gross profit margin to decrease slightly largely due to higher seasonal utility prices. We expect our net utilities expense to increase by approximately $7 million over Q2. Global cash SG&A expenses were $98 million for the quarter, slightly below our guidance due to slower-than-anticipated hiring, lower spending on advertising and promotion and less-than-expected spend on a global IT project. Global adjusted EBITDA was $222.1 million for the quarter, a 48% EBITDA margin or a 3% improvement over prior quarter and up 22% over the same quarter last year. Adjusted EBITDA reflects strong revenue performance, continued strong gross profit margins and lower-than-planned SG&A spending. On a normalized basis, taking out the net one-off benefits realized this quarter, our global adjusted EBITDA would have been $2 million lower, or a normalized adjusted EBITDA margin of 47%. Global net income was $36.4 million for the quarter, a 19% improvement over the same quarter last year, the result of our strong operating performance and lower net interest expense. Fully diluted earnings per share was $0.73, which includes the following: first, the dilution from 623,000 shares issued to partially settle our 2.5% convertible notes in April; and second, given the dilutive treatment of our 3% convertible debt, diluted EPS also includes 2.9 million shares attributed to this debt as if it's been converted in the quarter. Looking forward, given the number of IBX openings in Q3, our depreciation expense will increase by approximately $14 million over Q2. Also, given the paydown of the Asia Pacific financing in July, we expect to write off the remaining debt issuance costs on the balance sheet attributed to this debt, which approximates $5 million. And finally, due to the closing of the ancotel and Asia Tone acquisitions in Q3, we expect to incur approximately $2 million of acquisition costs in the quarter. Now looking at global MRR churn. Global MRR churn increased to 3.2% this quarter, higher than our targeted range in part due to the IBX optimization efforts that Steve outlined earlier. This churn allowed us to recover capacity in a number of highly desirable IBXs, and we expect to resell this space over the next few quarters. Looking forward over the second half of the year, we expect our MRR churn to moderate down to between 2.4% and 2.8%. It is our expectation that continued discipline around deal mix and pricing will improve our operating model in terms of pricing and margin, it will increase our return on capital and it will lower our future churn risk. So on this subject, I want to leave you with 2 key takeaways. First, global net booking activity is ahead of plan on a year-to-date basis, and we have a healthy backlog from the prior quarter's activity, driving the increase to our guidance. And second, despite the higher churn levels, which are fully contemplated in our guidance, we continue to deliver strong, sequential performance across our key operating metrics, that being revenues, gross margin and MRR per cabinet. So moving on. Looking forward, the U.S. dollar exchange rates used for Q3 and the remainder of 2012 guidance have been updated to $1.21 to the euro, $1.55 to the pound and SGD 1.27 to the U.S. dollar. Our updated global revenue breakdown by currency for the euro and pound is 12% and 8%, respectively. The Singapore dollar represents about 6% of our global revenues. Now touching on the tax area. As discussed on the prior earnings call and at our Analyst Day, we're continuing to look seriously at the global tax strategy, which includes assessing the feasibility and applicability of Equinix converting to the REIT structure. We continue to proceed with the due diligence and assessment of this structure. But at this point, we're still not able to update you on certainty or timing of this project. Turning to Slide 5. I'd now like to start reviewing the regional results. So let's begin with the Americas. Americas revenues grew 3% quarter-over-quarter to $297.1 million. Cash gross margin increased to 71%. Adjusted EBITDA was $145.5 million, an increase of 6% over the last quarter and up 19% over the same quarter last year. Americas adjusted EBITDA margin was 49% for the quarter. This region also absorbs all the corporate costs, including our global business system initiatives. Net cabinets billing increased by approximately 1,000 in the quarter. Deal size and overall pricing trended positively compared to the prior quarters as we target small to midsized deployments where performance matters. Americas interconnection revenue continues to represent approximately 20% of the region's recurring revenues, and we added a healthy increase of approximately 1,600 cross connects in the quarter. Our ALOG asset continues to perform well, in fact ahead of plan at the local currency level, and is gaining momentum. Our growing deal funnel is driven by strong local and international demand in part due to the Olympics and World Cup planning as well as multinational expansion into the largest economy in South America. In support of this demand, we're building a second facility in Rio de Janeiro, which, while proceeding with the second phase of our Sao Paolo 2 IBX, both of these expansions are expected to open in Q1 of 2013. Also, we're proceeding with the third phase of our Chicago-3 build. Chicago is a key bookings engine for North America, and the sales team has successfully positioned our Chicago suburb campus with customers looking for geographic diversity in North America. Now looking at EMEA. Please turn to Slide 6. EMEA had a strong quarter and performed ahead of plan, and we expect the region will perform above plan expectations for the rest of the year. Despite the continued negative economic backdrop, revenues were $102.7 million, up 1% sequentially and 5% on a normalized and constant currency basis, benefiting from new and strategic installations as well as strong import activity. Adjusted EBITDA decreased to $45.2 million or an adjusted EBITDA margin of 44%, a decrease due to one-off benefits in Q1. Normalized and on a constant currency basis, our adjusted EBITDA improved 4% over the prior quarter and is up 41% compared to the same quarter last year. EMEA added over 900 cross connects in the quarter, and interconnection revenues remain at 4% of the region's recurring revenues. EMEA cabinets billing decreased over the prior quarter largely due to the termination of contracted space related to a large legacy digital media customer. That prior component [ph] of this deployment churned over a number of quarters ending in 2011, yet the billing cabinets churned this quarter, which drove the 4% increase in EMEA MRR per cabinet. Including this 1 churn, our net cabinet additions would have been 600, in line with past quarters. And now looking at Asia Pacific. Please refer to Slide 7. Asia Pacific revenues improved 6% sequentially, or 7% on a constant currency basis, with record gross bookings driven by cloud, content, financial and network segments, including large inbound deals from both the Americas and the EMEA regions. Adjusted EBITDA was $31.4 million, up 5% quarter-over-quarter and up 34% over the same quarter last year on an FX-neutral basis. Overall pricing remains firm in all of our Asia Pacific markets and pipeline for the new Shanghai expansion is healthy. Cabinets billing increased by over 500 from the prior quarter, and we added greater than 800 cross connects this quarter. Interconnection revenues continue to represent 12% of the region's recurring revenues. And now looking at the balance sheet data. Please refer to Slide 8. Our unrestricted cash and investment balance was $823 million at the end of the quarter. This quarter, we increased our liquidity position through the completion of a newly negotiated 5-year, $200 million term loan and $550 million revolving line of credit. This new senior credit facility enhances our liquidity position while substantially lowering our negative carry associated with this increase in flexibility. In July, we completed the acquisition of both ancotel and Asia Tone, reducing our pro forma cash balance to approximately $500 million. Looking at the liability side of the balance sheet, we ended the quarter with gross debt of $2.9 billion or net debt of $2.1 billion, about 2.3x our Q2 annualized adjusted EBITDA. Subsequent to quarter end, our net debt balance increased to $2.4 billion. Now looking at Slide 9. Our Q2 operating cash flow increased $194.8 million, a 55% increase over the prior quarter and up 39% over the same quarter last year. This substantial quarter-over-quarter increase was largely due to a Q1 payout of our 2011 corporate bonus and a large shift in our working capital balances. Our discretionary free cash flow was $157.2 million. We now expect 2012 discretionary free cash flow to range between $520 million and $540 million. And now looking at capital expenditures. Please refer to Slide 10. For the quarter, capital expenditures were $196.5 million, lower than expected and largely due to the timing of cash payments to our contractors. But also, the Americas region had a larger-than-planned savings on a number of key construction projects. Ongoing capital expenditures were $37.5 million. And now turning to Slide 11. The operating performance of the 24 North America IBX and expansion projects that have been open for more than 1 year continue to perform well. Currently, these projects are 85% utilized and are generating a 33% cash-on-cash return on the gross PP&E invested. Our 8 oldest IBXs grew 9% year-over-year as customers continue to buy additional power, cross connects and speed as it becomes available through our optimization initiatives. So at this point, let me turn it back to Steve.

Thanks, Keith. Now I'd like to provide an update on 2012 guidance outlined on Slide 12. For the third quarter of 2012, we expect revenues to be in the range of $492 million to $498 million, which includes absorbing about $4 million of negative currency headwinds. Q3 guidance also includes $13 million to $15 million of revenue attributed to the Asia Tone and ancotel acquisitions, which closed in July. Cash gross margins are expected to range between 67% and 68%. Cash SG&A expenses are expected to range between $110 million and $115 million. Adjusted EBITDA is expected to be between $220 million and $222 million, which includes $4 million to $6 million of EBITDA contribution from Asia Tone and ancotel and $2 million of negative currency headwinds. Capital expenditures are expected to range between $240 million and $260 million and include expected CapEx for Asia Tone and ancotel. It also includes approximately $30 million of ongoing capital expenditures. For the full year of 2012, we are raising total revenues to be greater than $1.92 billion, including approximately $30 million of revenue attributed to the Asia Tone and ancotel acquisitions and absorbing approximately $18 million of negative foreign currency headwinds compared to our previous annual guidance rates. Global year cash gross margins are expected to be 68%. Cash SG&A expenses are expected to range between $420 million and $430 million. We are raising adjusted EBITDA guidance for the year to be greater than $880 million, which includes approximately $10 million of adjusted EBITDA attributed to the Asia Tone and ancotel acquisitions and also absorbs $8 million of negative currency headwinds. We are tightening our total CapEx guidance for 2012 at a range of $740 million to $800 million, which includes expected CapEx of $30 million from Asia Tone and ancotel. This also includes $135 million of ongoing capital expenditures. So in closing, we continue to focus on strengthening our business model by putting the right customers with the right applications into the right assets. By targeting customers that value network density, reliability, application performance, ecosystem access and global reach, we continue to deliver strong results across all 3 operating regions. So at this time, I'd like to open it up for questions. So Jerry, I'll turn it back over to you.

[Operator Instructions] Our first question comes from Sterling Auty. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Given the moves that you've made in Asia, I'm just kind of curious why you want to continue to expand in the region. How full do you feel your portfolio is now? And how much do you need to fill through acquisition from here to kind of capitalize on the strategy?

Sorry, are you referring just to the Asia region, Sterling? Sterling P. Auty - JP Morgan Chase & Co, Research Division: That's correct.

Yes, well, we've got activity going on in all 3 regions, as you are aware. So if you look at the deal expansion sheet, you'll see that we continue to have capacity coming on in all the core markets. The decision going -- to do the Asia Tone deal was primarily driven by the opportunity to get ourselves deeper into Mainland China. We pick up a very solid operating team. We pick up 4 assets in that market, 2 existing ones, a disaster recovery center and a brand-new build, as I said, that will be opened in Q3. So this was emerging market decision. There's a couple of other emerging markets we're looking at, but in this part of the world, our customer demand from Europe and Americas into the Asian market is in the core markets. But as well, the demand has definitely picked up for Mainland China. So this is customer driven, demand driven. And the decision, we think, is going to play very well for us because the pipeline that's developing even before we've opened up. It’s extremely strong. I just came back from a trip there last week and it's -- it will be one of the most impressive data centers in Mainland China. And the team we picked up on the ground is outstanding, and the pipeline is extremely strong. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Great. And one follow-up question. You talked for a couple of quarters now about the increasing density and the increased power needs by customers. I'm kind of curious, which of the geographies are you seeing that playing the biggest benefit to your numbers and to your outlook?

Probably in the Americas. Charles, you have a thought on that?

I think that they -- I think power [indiscernible] requirements are less geographically specific as they are vertically specific. So one of the great things about the nature of our business is because we have broad coverage across a range of verticals, we are able to sort of mix business. And as we talked about in terms of the deal discipline, one of the things we're doing is really looking hard at the front end on how to balance power density in a way that really provides maximum return for the facilities. So as you're aware, in some cases, we have power utilization lagging space utilization, and that's a great opportunity for us to focus, for example, on content and digital media where we tend to see higher densities per cabinet in order to sort of sop up some of that power and provide greater returns on invested capital. So I think it's less regionally specific and more vertically specific. But it really depends -- our ability to exercise those levers really depend on the balance between space and power utilization.

Our next question comes from David Barden.

So Keith, obviously another month since the Analyst Day has gone by. We -- you're still kind of I-dotting and T-crossing on the research you want to do for the REIT conversion process. Could you talk a little bit about, though, like how much time can really go by before you have to make a decision? And then, in order to get in a position to do what you want to do, presuming you want to do it by January 1, 2014, it feels like after 6 months, we should be getting closer to a conclusion. And then second, if I could, just I remember last year we spent a lot of time talking about the headwind costs of the additional 60% sales force growth that you guys brought on board. But obviously, even net of currency headwinds and factoring all that in, the guidance seems to suggest that the actual business will actually slow down in terms of organic growth in the second half versus what you've done in the first half. But theoretically, with these higher productivity salespeople, 60% growth year-on-year, I would expect we'd actually see accelerating growth in the second half of the year. Could you kind of talk about reconciling guidance and the -- this much larger sales force as it becomes more productive in the second half?

Great, both good questions. I think, first and foremost, when we look at the REIT, we really try to let of course yourself, David, plus the investing community know that this REIT discussion is a very -- a lot of work has to go into it. There's a lot of complexity, there's a lot of moving [ph] pieces than people would think. And you don't have to go very far to look at some of the other companies that have gone out there and disclosed some of the issues that they've had to confront. All that said, we think it does take quarters and it's not months. And because of that, we still -- we're doing a lot of hard work. And as I said, you met Randy [ph] and Catherine [ph] at the Analyst Day. They're working heads down with a bunch of advisers to help us think through a lot of these key issues. So I'd like to tell you, certainly, as the passage of time -- or as time passes, clearly we are closer and closer to a decision. But at this point, we're just not ready to give you a specific date because there's some things we're still chasing down. And hopefully, over the not-too-distant future, we'll go -- we'll give you more clarity. So that deals with that question. I think the second thing, I'm going to tag team with Charles. But I think it's important to note -- I think you should think about our business, and what -- and Steve talked a lot about it, with the focus around deal discipline and looking at sort of the right customer with the right application going to the right data center and making sure that we look to the mid and sort of small to midsized deals that really depend on performance. That causes us to really think about how we build out our facilities and what type of booking activity we have. All that said, when you look at the first half of the year and then you look at the second half of the year -- and I want to take out ancotel and Asia Tone because, again, as you know, they just closed. We've given you some directional guidance on that. If you go back and you look at just the organic business, the currency impact is not insignificant, as you know. It's $18 million in the top line, it's $8 million on EBITDA line relative to our prior guidance. And as you look at this quarter, as you look at this -- the -- at Q3, and I'll take that as an example, it's very -- when you start to take out the one-offs and you look at our guidance range, quite frankly, we're running at roughly the same level of growth quarter-over-quarter. And that's Q3 growth over Q2 versus Q2 growth over Q1. And then for the latter part or the last quarter of the year, as we've done historically, we're giving you just a greater than, then over sort of pinning ourselves a little bit into the guidance range. But it is a greater than and we fully anticipate we can deliver on those numbers, and yet at the same time, we're being somewhat cautious about our European business given the economic backdrop. And again, I want to remind everybody, when I said -- when I think about Europe, it did very well for the first half of the year. We think they're going to continue to perform above plan. But we will also want to remain very cautious about what they can do and cannot do. And so we're maintaining a little bit of that sort of that cautiousness in our guidance ranges.

Anything else that...

No, I guess I'll add a couple of things. This is Charles Meyers. And again, the underlying fuel, obviously, for the revenue growth is net bookings. And I think we're continuing to sort of work both sides of that in terms of on the gross bookings side, we are seeing improvement in productivity. In fact, this quarter, we've got the -- we've seen the greatest increase in new rep productivity since we began the sales force expansion in early 2011. So good signs there. We have pockets of overperformance, pockets of underperformance. But in general, we are seeing up and to the right, but -- overall. So balancing that against our desire to maintain -- continue to maintain strong deal discipline. And then on the churn side, we are continuing to make good decisions there that we think are in the best long-term interests of the company, and will drive performance over the long term. We talked about some of those in the script. To the extent we have some of those opportunities that drive long-term margin expansion, we'll take advantage of them. And we think that the guidance represents kind of a prudent look at what we said -- what we expect over the next quarter or 2.

Our next question comes from Jonathan Atkin.

On Brazil, I was interested with the expansions that you announced. Are you planning to continue the existing mix of managed versus colo? Or will it be weighted towards one of the other segments going forward? And then domestically, for your business suite software, I wonder if you can kind of update us on whether you plan to expand that to additional geography beyond Virginia. And how much of that product is there left to sell at -- in Virginia?

Sure. Thanks, Jon. Relative to Brazil, actually, I would expect that we're going to see some shift, some slight shift towards a little bit more colo. I think it's still a very healthy managed services business. But because of the outbound business from the Equinix pipeline, which we're now really beginning to see accelerate, those customers are more typically colo-type buyers, although we do believe that once we get them in, we have a substantive opportunity to up-sell them into managed services in the ALOG asset and in the Brazil region. So probably, some slight shift in the near term towards colo, but we think again that will represent an opportunity for managed service expansion. And both deliver strong returns, so we feel very good about both of these expansions. Relative to the business suites asset, as you noted, we -- our -- in the last quarter, we triggered our phase II expansion early. And so we -- we've definitely seen strong demand. We do still have inventory available. We see a very healthy pipeline of opportunities to fill that. It is a key mechanism for us to use as we look at the evolution of customers to multi-tier architectures. And we found that, that plays very well. Customers who have -- currently may have deployments in core IBXs that we essentially moved to sort of high-value network nodes in the core campuses and moved some of their larger footprint applications into suites, we think that plays particularly well in Ashburn. And so we'll continue to invest in that product consistent with the demand we see.

And then finally, the slide that shows the first 8 -- or lists the performance of the first 8 IBXs, I think you had a 9% year-on-year revenue growth, which is consistent with what you put up prior quarters. I was wondering how much of that lift is from pricing versus selling additional cross connects or other services.

Yes, and Jonathan, it's predominantly, as I said, selling more cross connects and more power. And to the extent that we have the ability to sell more space, I think there's the trend and the opportunity to get a little bit of a price lift there. But overall, it's predominantly due to more services that are being added to that mix.

Yes, the other thing is that in those assets, one of the things that fueled continued growth in there is our program. One of the elements of the IBX optimization program is to continue to look at -- ways to free up or augment capacity in those, and take underutilized power and monetize it more effectively. So that represents continued upside in those core assets.

We have a question from James Breen. James D. Breen - William Blair & Company L.L.C., Research Division: I just had a question about the competitive environment now that we are a year past the Terremark and Savvis deals. Has the supply for data center space changed now that those organizations are part of larger organizations? It would have seemed when they were independent that a lot of their focus was on top line growth, which was directly tied into building out. Now the focus may be a little bit different inside those larger organizations.

I -- Charles, you probably have a deeper view of the -- point of view on that, but I would tell you that anecdotally at the top, as we watch these 2, they're very busy integrating these 2 assets, and they're completely consumed with shifting the core telco assets with the new managed service cloud capability that they acquired with those 2 companies. So I don't think there's any big difference in competitive supply. We haven't seen any new supply come on that's changing the dynamics of our pipeline, of our bookings rate in the critical markets. But I don't know if there's anything you'd add to that, Charles.

I mean, I would not say there's been any substantive shifts in the competitive dynamics in the market. I would -- in fact, I would actually say that those 2 companies, generally, I think, are often synergistic with us in the marketplace. They tend to sell at a higher layer in services. I think they target slightly different customer sets and application sets than we do. And so I've not seen what I would consider to be a substantive shift, particularly as it relates to those 2 companies. One thing that is happening, I think there is some customer reaction to the Terremark and at the Americas' sort of ownership situation with Verizon. We do think that represents some opportunity for us in the new Miami 3 asset and have seen a strong follow for network providers wanting to gain access to that facility. But then we also continue to work closely with Verizon as a partner and customer and are winning business with them on a global basis. So nothing specific relative to those 2 that I think are really impacting the competitive situation. And candidly, in the Americas, I think we continue to have just an extraordinary competitive position relative to the rest of the field, again because of our global footprint and kind of the really performance-sensitive segments of the market that we're focused on. James D. Breen - William Blair & Company L.L.C., Research Division: And then just one follow-up in Brazil as you add those data centers there. Can you talk about any sort of differences between the U.S. market versus Europe versus Latin America in terms of siting the projects, power availability and so forth?

There's definitely some uniqueness to site selection in various markets across the world. But I think we've got a team that's got broad experience with that. For example, in Brazil, security concerns as to siting a location are a factor that aren't necessarily considered in other places. We consider that carefully as we made those selections. Power availability and the quality and reliability and availability of power is absolutely something that comes into play. But again, I think we've -- we feel very good about the site selection we made for the new Rio facility. And in the case of the São Paulo 2 facility in Canberre [ph], that really is a strong environment right now for data center demand in Brazil, and we're seeing that in the strength of the funnel.

Our next question comes from Michael Rollins.

Just a few questions. First, if you can just talk about tally for CapEx for next year? If you look at all pending projects that will be completed in '13, what's that total for the CapEx at least so far that's slated for 2013? Secondly, Keith, I was just wondering if you can clarify. You guys have been good about updating your guidance each quarter for the moves in currency, and I feel like at times we lose sight of what the total FX impact is on the full year because we -- right now, we're thinking about it in your guidance relevant to what you gave in the prior periods. But can you actually help us take a step back and just give us a sense of what the total FX dilution is for the year, just to put that in perspective? And then finally, can you give us some details by segment, vertical segment, and maybe where you saw some strength or changes in the environment for bookings?

Yes, okay. So let's take the first one, CapEx. We'll probably have to come back to that one. We haven't actually calculated that right now. But clearly, as you know, the way that we report CapEx, it's on a cash basis. And so we're still pretty comfortable. As you know, we've tightened [indiscernible] on CapEx to $740 million to $800 million. That includes $30 million of CapEx for ancotel and Asia Tone. And so I think we're going to be fine within that range. And so my expectation is that the majority of that will be sort of spent in 2012. As we look forward to 2013, there's probably -- maybe we can get a little bit more accurate just maybe next time around. There's probably $200 million or less of CapEx that's already earmarked for 2013. And so it gives you a sense. And right now, we continue to look at projects. There's a lot of different things on the whiteboard, and we'll update that on the next call. I can now take you to the currency, and I'll pass it off to the other -- to Steve or Charles. Currency is very interesting. As you know, relative to the very first time that we offered guidance there, a shift in guidance that we've hit -- we've taken or absorbed is $42 million on the top line and $18 million in the EBITDA line since we delivered our first set of guidance to you in October. So a meaningful movement that we feel that we're absorbing. And recognize that we continue to perform well. And so from our perspective, we'll continue to update you on our performance on a year-over-year basis as needed certainly on a sequential quarter-over-quarter and then on a change relative to the guidance range that we're using. And I think it gives you a good sense of our, if you will, our currency-neutral performance quarter-over-quarter and year-over-year.

And then on the vertical bookings in the quarter, Mike, the heaviest force was in cloud and IT services, which was about 26% of the bookings in the quarter. It's followed closely by network, which is still very, very strong for us, which is about 25% of the bookings in the quarter. The networks -- not surprising, I guess, it -- with all the network stuff going on, they're upgrading their networks and their infrastructure, we're winning service aggregation nodes. There's a lot of mobility expansion, infrastructure that we're seeing. Cloud stuff is coming at us from them. So network is still a very, very strong force around the world. And then followed by those 2. Financial services and content digital media were both about 18% of the bookings each. And then enterprise was about 13% of the bookings in the quarter. Enterprise is actually in certain pockets because of the cloud. We're benefiting from the cloud-enabled enterprise strategy. And they're starting to embrace hybrid cloud infrastructure deployments. And so we're seeing an uptick there predominantly in the health care and business and professional services subsegments. So we're pretty balanced.

Our next question comes from Scott Goldman.

A couple of questions. I guess first maybe, Steve, you could talk a little bit about ancotel, bringing on a lot of network density in Europe and how you can leverage that with your existing base over there. But perhaps more importantly, does this help change the equation at all in terms of your ability to get a higher contribution from cross connects not just from bringing on the cross connects that they have already but in terms of your ability to charge for cross connects? And then secondly, maybe just to touch on the last question on the vertical side, maybe you could expand a little bit in terms of enterprise. You've talked at the Analyst Day about how that's sort of underpenetrated and a big opportunity. I think the level of bookings you just talked about probably exceeds your revenue exposure there if I'm correct. But maybe talk about your strategy to attack that more aggressively. And, on the cloud side, how the partnerships -- if you can give us any update in terms of the partnerships you've signed and whether or not they've been able to bring in incremental revenue for you.

Yes, 2 good questions. Let me start. I think Charles can probably give us some color on the second piece of that. But on the ancotel acquisition, the primary rationale for us in Europe was to increase our network density, which -- so our core value proposition, all the ecosystem activity and interconnection, as you all know, sits on top of a good choice around network density. So this is one data center. It's about a 23,000-square-foot facility. Very dense, 400 networks in there. 200 are actual new networks to us from 63 different countries. So it's a very diverse network base. As I mentioned, we did pick up about 6,000 new physical cross connects. And they've got a -- and -- this is very similar to a Meet Me Room in the U.S. So it's -- they've got a virtual Meet Me Room product that's very complementary to our interconnection portfolio. And this supports circuit-based peering and active Ethernet Exchange activity and have another 9,000 virtual cross connects that's not included in the cross connect count. We've got to go get our hands around that business. But generally speaking, this puts us in a very strong position in Germany to leverage the ecosystem focus on top of this network density. Choice provides all kinds of opportunity for OpEx takeout, for performance enhancement, et cetera, when you're thinking about the ecosystem. So that was the primary driver for this transaction. And I think from an enterprise standpoint...

Yes, building on the vertical question, I think that you're right, the -- so the 13% was the smallest contribution from our vertical. It is in fact, overindexed relative to our current revenue in that segment, and that's obviously a good sign. And so I think it demonstrates that we're building some momentum. A couple of things are happening in the enterprise. One, we've identified a few horizontal application sets particularly around WAN optimization and performance of people's -- the economic performance of their WAN that we think is -- are gaining some momentum. And then also, our success in cloud is essentially a sort of increasing returns effect. We are seeing great success with cloud service providers who, it's -- in many respects, obvious why service providers resonate with Equinix, particularly for revenue-facing application. But we think what that's doing is it will eventually promote sort of a cloud-enabled enterprise story where they're using hybrid clouds, private, public hybrid clouds as a fundamental part of their enterprise infrastructure. And we're beginning to see the early signs of that, and we think that's a -- that represents great potential for us over the long haul on enterprise.

Our next question comes from Gray Powell.

I just had a couple. Maybe I missed this in the prepared remarks, but can you just -- can you help us quantify the impact to recurring revenue from the heightened churn that you're seeing? And then in the past, you guys have been able to sell forfeited space at a pretty decent premium. Can you help us quantify that premium?

Well, the -- on the second question relative to -- I think that the optimization efforts clearly involve us taking business that is typically being -- that's typically under market today and most typically associated with application sets that are less performance sensitive and optimizing that out and then getting into market rates. And we clearly enjoy a nice sort of price point in the marketplace because of the value we deliver on those higher performance. So it's really a matter of how much of a premium we get versus what was in there depends on, one, what was in there previously and how it was priced and what we replace it with. But in some cases, that's indicated by the optimization we outlined in the script. That can be very substantial and, in this case, we believe, has potential to expand operating margins in the Americas region by a full point. So that's kind of the story there. I -- and then the -- in terms of the revenue headwinds, it's fully contemplated within the guidance that we provided. And yes, it does have some near-term impacts, but typically, we're able to resell capacity quite quickly into -- because typically, these are into high-demand assets with high levels of fill. And so, for example, a couple of our large churn events that we've seen in the last few quarters are either already refilled or have ample opportunity in the funnel to refill those in the next quarter.

Got it. Okay, that's helpful. And then I just wanted to switch topics. If I look at your same-store sales disclosure for the U.S. business, it appears that gross margins are already at or above your long-term targets. Do you think your long-term margin targets are conservative? And is there a point where you would have to think about increasing your LTOP?

So again, a lot of times, we're -- if you sort of step back to the Analyst Day, one of the things that we really talked about was bending the cost curve. And a couple of things that we're looking at is -- first and foremost is developing systems and processes that make it a lot easier for not only our customers to do business with Equinix but our Equinix employees can do business with Equinix. And so in both cases, you're -- what you want to try to do is take the frictional costs out of the equation. So we think we can do a good job in that and we'll continue to make that investment. And as usual it's a $30 million to $35 million investment, at least this portion of it. The second piece is we've done a really good job at managing the utility spend. And there's a lot of reasons that, that has happened, partly how we negotiate with our contractors. It's partly the infrastructure that we've put in and the efficiency programs that we have in place. And so when you look at those 2 costs and then at the highest level, the headcount costs, if we can do what we think we can do from the citizen [ph] perspective, it will allow us to bend that cost curve on a per-head basis over time. And so all that leads me to suggest that over a period of time, we think we'll continue to see margin improvement, and that margin improvement will come in both size -- sorry, in both areas of the -- of income statement and both on the gross profit side and also in the amount of cash spend that we see in the SG&A side and allow us probably over time to see some margin expansion.

Our next question comes from Jonathan Schildkraut.

I've gotten so used to hearing about record bookings from you guys every quarter, and we didn't hear about it this quarter, understandably, given the economic environment. Some of your competitors have reported extending sales cycles, and I was wondering if you might give us some color in terms of your bookings levels and any kind of impact you might have seen from macro in the last 3 months.

Yes, it's a good question, Jonathan. And when -- we've got rising gross booking targets, as you would imagine, as we continue to grow the company. But funny enough you should ask. It was our second highest gross bookings quarter in our history. I guess we just decided not to throw that into the script. So it was very, very good gross bookings target quarter for us. And also, the net bookings were ahead of plan, as you heard Keith or Charles mention. Also, our cross-border bookings are still very, very strong, predominantly Charles's business pushing it out to Asia and Europe, multinationals that are still continuing to buy in those 2 regions, heavily from cloud and content digital media companies. So we -- the bookings engine is working very well. The productivity, as Charles talked about, is up and to the right. And the -- we're grooming the reps that aren't performing. We're running just under a couple of hundred reps around the world, quota-carrying reps. They're all selling Platform Equinix, growth in revenue sold [ph] was 34% up in all 3 regions year-on-year. So it's working. The sales productivity is happening. And we're -- as Charles said, we're managing. And Eric and Samuel are doing the same thing in Europe and Asia. Our deal discipline and our pipeline inspection on a weekly, monthly, quarterly cadence is at a whole new level, and that's helping us. We're very, very focused on getting the right applications into the right assets.

Yes. Jon, to directly answer the question in terms of are we seeing -- at least in the Americas, we are not seeing what I would consider to be any kind of effects of macroeconomic uncertainty or anything like that. I think our actual funnel coverage, if you look at our 2- and 3-quarter funnel coverage, we're actually more robust than we've ever been. I think we did have a quarter where we, I think, pulled -- had a very strong quarter and pulled a fair amount out of the funnel, which probably led to the not continuous records. But nonetheless, we delivered strong performance, continue to see coverage levels high, are not seeing extended sales cycles. They feel the same as they have been. So no real ill effects from what we can tell in the Americas business. And I think the broader global business is performing similarly given that we tend to operate in the strongest economic centers.

The only caution we'd add to is what Keith mentioned, which is in Europe, we're eyes wide open. We have to watch the market in the second half given the broader issues. But that team is doing very well and executing very well as Keith said, and they're ahead of plan. So we feel good about the overall plan.

Super. And if I could just get one housekeeping item. Keith, I was wondering if you can give me the RP [ph] basket numbers and the NOL number as of the end of the quarter.

There's no change in the NOL position. And the RP [ph] basket, I have not calculated this quarter. But clearly, there was more net income there. Add roughly 50% of the net income to the basket plus the stock option exercised in the quarter and it'll give you a sense of what that RP [ph] basket is. I apologize, I have not calculated it before this call.

Our final question comes from Simon Flannery.

Two quick ones. Keith, you mentioned in your commentary about SG&A benefiting from better numbers on IT advertising, hiring. How much of that is something that will be ongoing savings? And how much was just timing between Q2 and Q3? And then at the Analyst Day, you talked about future data center builds. You'd like to own more of your data centers than leasing them. Can you just give us an update on your thoughts there?

Sure. Good questions, Simon. I think certainly, if you look at the SG&A spend and we look at our performance year-to-date, we've done better than we anticipated. We've done better than we guided to. Certainly, some of the costs are moving into Q3 and into the rest of the year, but there's an element that isn't. And hence, that's why we rose -- we raised our guidance by $10 million this quarter over what we had last quarter. And so just to remember, our EBITDA, we're raising it basically because we're keeping revenues -- keeping ancotel and Asia Tone out of it, we're keeping revenues at greater than $80 million, $90 million. And so when you then look at our EBITDA, we're saying it's greater than $880 million. Take off $10 million for ancotel and Asia Tone, it's greater than $870 million. Now that's a $10 million uplift, and we're absorbing $8 million of currency. So it's fair to say that some of the costs are going to be -- are permanent and some, of course, are going to be temporary. And we're going to continue to focus on our spend and try to marry it up as much as possible and deeply throughout the rest of the year. But it'll come in chunks at times, and we'll update on the next earnings call with that. When you think about then the acquisition of our assets, we're going to continue to look at it. We think it's a prudent thing to do as a business. So again, there's no meaningful update at this stage. There's a number of assets that are out there that are -- potentially could be acquired. But we'll have to take it on sort of on a periodic basis and give you an update when we're closer to realizing any decisions around that area.

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

That does conclude today's conference. Thank you for participating. You may disconnect your lines at this time.