Equinix, Inc. (EQIX) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Equinix conference call. [Operator Instructions] Also, today's conference is being recorded. If anyone has any objections, please disconnect at this point. 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 in Form 10-Q filed on November 6, 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 is Equinix's policy not to comment on its financial guidance during the quarter unless it's done during explicit public disclosure. In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and the 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 up in an hour, we would like to ask analysts to limit any follow-on questions to just one. At this time, I'll turn the call over to Steve.

Thank you, Katrina. Good afternoon, and welcome to our fourth quarter earnings call. I'm pleased to report Equinix delivered strong business and financial results in the fourth quarter, and another year of solid revenue and adjusted EBITDA growth for 2012. As depicted on Slide 3, revenue grew 21% to $1.896 billion for the year and adjusted EBITDA increased 24% to $896 million. The overall health of our business remains strong, with solid performance across all industry verticals. Deal size and pricing remain positive as we are winning the right mix of applications and customers in our IBXs. Despite uncertain economic conditions around the globe, we continue to experience strong sales momentum in bookings. Turning to Slide 4, I'd like to highlight how we invested in the business in 2012. We generated approximately $705 million in cash from operations for the year and reinvested $608 million in 21 global IBX expansions with consistently high levels of returns. We now have over 7 million gross square feet of space, which is the largest retail data center footprint in the world. Ongoing CapEx was $157 million for the year, which included success-based installations, maintenance and value-enhancing initiatives such as our IBX optimization efforts and global IT initiative. Other successes for the year include record bookings achievement, increasing interconnection revenue by 21% and expanding the platform into 3 new markets, including Mainland China, Dubai and Jakarta. We won important new customers and expansions in 2012 including business from Amazon Web Services, BATS trading, cable and wireless, Chicago Board of Options Exchange, Deutsche Telekom, Netflix, [indiscernible] and XO Communications. Finally, we announced that we plan to pursue conversion to a real estate investment trust to enhance shareholder value while delivering profitable strategic growth. We finished the year having been added to the Nasdaq 100 index,…

Thanks, Steve, and good afternoon to everyone on the call. I'm pleased to provide you with additional detail on the fourth quarter and the full year of 2012. With the exception of the consolidated financial results, the majority of the other key non-financial metrics will exclude the impact of ALOG, ancotel and Asia Tone as we continue to integrate these acquisitions and their service offerings into our systems and our metrics. So starting with Slide 6 today, from our presentation posted, core Q4 revenues from continuing operations was $507 million, a 4% quarter-over-quarter increase and up 20% over the same quarter last year, including a $2.3 million nonrecurring benefit in the quarter. This is the first quarter we've delivered half a billion dollars of revenue or more, underscoring the scale and reach of our business. Asia Tone and ancotel contributed $18.4 million to the quarter, up 14% quarter-over-quarter increase. Also ALOG continues to perform well, contributing $19.4 million of revenue in the quarter whereas 7% quarter-over-quarter increase after adjusting for the weakening Brazilian real. Our Q4 revenue performance reflects a $3 million positive currency benefit when compared to the average rates used in Q3 and a $900,000 negative impact when compared to the FX guidance rates. For the year, our revenues from continuing operations were $1.896 billion, a 21% increase over the prior year. Global cash gross profit for the quarter was $348 million, a 5% increase over the prior quarter and up 23% over the same quarter last year. Cash gross margins were 69%, higher than originally anticipated due to stronger than planned revenues and lower than expected utility expenses and other variable costs. Global cash SG&A expenses were $108 million for the quarter, a 6% increase over the prior quarter yet below our expectations due to lower professional…

Thanks, Keith. Let me now shift gears and cover our go forward strategy and outlook for 2013 on Slide 15. We will continue to execute on our 5 strategic priorities designed to further differentiate our global offering of network IBXs, and we do have the unique ability to help inefficient markets become more productive with Platform Equinix. First, we'll continue to proactively develop our ecosystems to drive customer value and improve business performance through more interconnection in our IBXs. We will further solidify our leadership in the network and financial ecosystems and accelerate momentum in our emerging ecosystems. The customers find unique value in connecting to their customers and partners in our IBXs as evidenced by cross-connects between customers growing at 2x the rate of connections to network service providers. For example, financial to financial cross-connects grew 35% year-over-year showing a scale of this ecosystem. We are also targeting new ecosystems where Equinix can uniquely differentiate its offerings such as e-commerce, over-the-counter trading exchanges, digital advertising exchanges, network performance hubs for enterprise WANs, as well as cloud access nodes and Direct Connect capability to enable the hybrid cloud. Second element of our strategy is to expand the global reach and scale of Platform Equinix both organically and through acquisitions. In the Americas, we will leverage our market leadership to drive more interconnection in core markets. In Europe, our focus will be to deepen our penetration of critical ecosystems. And in Asia, we will expand our footprint into emerging and adjacent markets in order to gain market share. Our global platform is a unique differentiator for Equinix. We offer services in 31 cities across 5 continents, more than any other data center provider. Customers value our ability to make global expansion easy by managing deployments with a single supplier. Today, over…

[Operator Instructions] Our first question comes from Mr. Jonathan Schildkraut [Evercore Partners].

Actually I'm trying to sneak 2 in here. Keith, in your prepared remarks, you mentioned a $2.3 million nonrecurring benefit. I was wondering if just if you could tell us what market that came in? And then separately, you gave some nice color commentary about bookings and I was wondering if you can kind of sum up the bookings activity for the quarter versus maybe what you had seen over the rest of the year or if it makes sense to talk about it seasonally versus other years. And as you drive bookings, a big part of that has been your scaling of the sales force and I'd love an update on the productivity that you're seeing in terms of the folks that you hired and I wonder if there are any additional plans to add to the headcount?

Great. So I'll take the first one, and Steve and Charles will take the second. The $2.3 million -- the $2.1 million of it relates to Asia Pacific and $200,000 is Europe, specifically, Singapore and Switzerland. And so those are one-off benefit that will not theoretically repeat itself, so we want to make sure we call that out.

And that was a revenue benefit or just cost benefit?

That was actually a revenue benefit. Top line benefit associated with certain customer contracts.

And on the second part of your question, Jonathan, let me give you some color and then Charles can probably add some points here. But first of all, I think, everybody on the call, it's probably good context to know that Q4, from a gross booking standpoint, was our second best quarter, historically. So a very good performance by the team by any measurement. And as we told you in past calls, we're closely tracking new rep productivity, as well as tenured rep productivity and I will tell you that it's continuing to move as we've described in the past up into the right with meaningful improvement actually in Q4 with our new rep productivity and Charles can probably give a little bit more color on that. And I would say the vertical orientation that I described is really starting to pay dividends for us because we're speaking in the customer's language. We understand their application needs. It's helping us to really determine the right mix of applications into the right assets. And just very quickly in the quarter from a booking standpoint, pretty similar history by vertical. We have roughly 23% of our bookings come in the network and cloud verticals on a global basis. About 21% of the bookings fell into the content digital media. Roughly 20% in financial and enterprise was the remainder, about 13%. So from a bookings in the quarter standpoint, pretty good spread and I would tell you, there's no big trends, Jonathan, on a regional basis by those verticals. We're seeing, because of the global platform focus, a pretty good mix across all industries. I don't know if you'd add anything there, Charles.

Yes. I will give a little more color, Jonathan, relative to the -- specifically, on the Americas. As Steve indicated, we have record bookings performance across many of our verticals and geos and really continue to see very strong demand for platform deals that are leveraging our presence in multiple regions. Q4 was a particularly strong contribution from our new rep cohort, which some of them have been on for as much as a year now, some shorter than that. But the overall contribution from that cohort has more than doubled than in the past several quarters and continues to trend up into the right. So Q4 was definitely a strong bookings quarter, a good solid continued momentum in the mature verticals and really some realtime momentum in some of the more emerging areas. As Steve said, we're seeing some significant benefits from the vertical alignment of the teams and in terms of our plans going forward, we probably will make some modest additions and some modest force redeployment actions in terms of just trying to put the forces where we can believe we'll get the most return from them in '13. But we'll probably make a few modest additions. I think the additions in the other regions will be slightly higher.

Yes. Just to put a point on that, Jonathan, we're running at, call it, 207, 208, 209 quota-bearing heads around the world today by the end of the year based on pace and performance it might creep up to 235, 240 somewhere in that range. Call it the quota-bearing heads on a global basis.

Our next question comes from Mr. Sterling Auty [JP Morgan Chase & Co.]. Sterling P. Auty - JP Morgan Chase & Co, Research Division: I want to talk about the Asia Pacific region. You mentioned that the relationship with China Telecom -- is the focus still on companies looking for colocation where the data traffic's going in and out of China? Or does this relationship open up the opportunity to expand in Mainland China for companies where a lot of their data traffic going in and out of the data centers stays within Mainland China?

Well, the primary -- the business in Shanghai, to get started, can be a little different than in markets where you have multiple network density type of situation. So China Telecom is the predominant provider in southern China versus China Unicom in northern -- in the Beijing area and then, of course, you have China Mobile that's in the mix. So there's 3 big carriers in that market. And then the other international carriers, obviously, leverage wholesale basis those relationships. But our intent is to work with multinational companies that have either customers or employees in the Shanghai region, and they just need a high-quality data center provider to provide space. And we can do interconnections within that facility. But it's a little bit different mix than, say, 21 Vianet or some of the other local providers are doing from a license standpoint. So we will be primarily focused on high-quality data center space and interconnection within the 4 walls of that facility. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Okay, great, and then maybe one follow-up. We saw the Rackspace results last night and what they're doing in dedicated hosting in cloud. I'm wondering -- and the new customers coming in for colocation, is there any change in kind of the use cage, what they're looking to do, as well as maybe cage size and power requirement right off the back as we also talked about increased density a lot through 2012?

Sterling, this is Charles. I'll respond a little bit on that. I think that we are seeing a pretty significant uptick in terms of CIOs looking at hybrid cloud architectures as sort of their future. And so I think what that is resulting in is really our ability to act as that sort of cloud hub for them both to meet their traditional colocation requirements for things where they need the security and the control, and so that we still see an appetite for colo, but that's augmented by them using our interconnection to the public cloud players in a direct connect format and using our network density to censor and stitch together hybrid clouds. And I think what that means is that we are seeing, actually, some use of, what I would consider, cloud nodes that are sort of relatively smaller implementations but that are more interconnection dense. But we see -- we definitely see an appetite for them, for people accessing public cloud providers and using cloud-based SaaS applications to meet their needs and really leaning on Equinix as the place to do that from.

Our next question comes from Mr. Frank [indiscernible].

Can you talk to us a little bit -- I think you mentioned earlier and I apologize if I missed the details, some larger wholesalers may be moving down market. Any thoughts there? What sort of steps are you taking there? And it seems like the enterprise side is picking up a bit as a percentage of the bookings, it sounds like, how is that trending and any thoughts on trying to drive higher penetration out of the enterprise area?

Sure, Frank, this is Charles, I'll pick up and then if Steve or Keith want to add anything... Again, I tend to view the competitive overlap with the wholesalers as very modest. There are, as we said on a number of occasions, occasionally we'll look at larger footprint opportunities that may, in fact, have wholesale as a viable alternative. But that tends to be the exception rather than the rule. And so we still continue to see ourselves on a relatively different supply curve and meeting different set of customer needs, generally, vis-à-vis the wholesale market. As it relates to the enterprise, I would say that I think we are relevant to a portion of the enterprise need, where application performance, network density and global reach really matter. Again, that's the sweet spot for Equinix. We are not going to chase large footprint, razor thin margin deals for back-office applications, et cetera. That's not what we're about. But what we are seeing is people who want to, for example, use our network density to optimize the performance of their WAN or if they're implementing SaaS based applications that need performance -- have certain performance requirements or want to interconnect to use public cloud via Direct Connect or SaaS-based applications with higher performance, they're looking at putting in relatively small but distributed application implementations across the Equinix footprint, and that's the sweet spot for us and really provides them with compelling value.

The only thing I'd add, Frank, this is Steve, is that the other dynamic you have going on in the market is the global telcos are all trying to service enterprise also. And so the way they're doing that is cloud-enabled activity. So our conversations with the telcos today are spreading their footprint deeper and wider inside of Equinix with access nodes and primary nodes, et cetera to help get to the enterprise. And so that will have a pull through effect to enterprises understanding that get to the networks inside of Equinix's data center. So there's lot of dynamics going on here in the enterprise.

Our next question comes from Mr. Brett Feldman [Deutsche Bank].

Just to maybe clarify on some of the one-timers, I think you also mentioned some one-time benefits at the EBITDA level, did I hear that correctly?

Yes, Brett. So there's 2 -- the $3.5 million in total this quarter that we wanted to pull out, specifically, $2.3 million sitting on the top line and then $1.2 million sitting in the cost of revenue line that's specific to the Americas region. But the $2.3 million, as I said earlier on, $2.1 million relates to Singapore and $200,000 relates to Switzerland. And so that's the $3.5 million in one off benefit that we think is appropriate for you to pull out this quarter.

So then even if I make that adjustment, you still came in well ahead of the EBITDA guidance you had provided for the fourth quarter. It looks like SG&A in the Americas was a contributor there. I was hoping I'd just get a better understanding of what the spending pattern has been and then what's going to happen in the first quarter? Because you're kind of guiding towards more of a flattish EBITDA result.

Yes, as you know our model pretty well, our costs are predominantly fixed and are the same bucket of costs that we see quarter in and quarter out. And sort of when we look at the trendlines, we did a little bit better on the revenue line partly due to this one-off benefit, but we also did better on the cost of revenue line. When you look at the SG&A line, it's the standard discussion, it was salaries and benefits less advertising and promotion and lower than anticipated professional and consulting fees. We originally felt we spent a little bit more in the REIT workout coming through the quarter and some of that's getting pushed into the Q1 timeframe. So that sort of addresses sort of Q4, sort of really across-the-board. There's nothing really substantive that I've pulled out. And the only other thing I'd say is maybe a little bit lower in the salary line. We didn't hire quite as many people as we planned and that seems to be a trend that holds true. If you look then forward into Q1, there's a couple of things I wanted to make sure I highlighted. And so when you look at this quarter, we did just roughly $239 million of EBITDA. If you take out the $3.5 million of benefit, you're roughly at $235 million of EBITDA. Next quarter, so being Q1, we're going to -- we're guiding you -- we take you to the midpoint, which is 5 20. Net add is roughly $60 million. So your modified EBITDA should be in the range of 2 50. That would be the standard expectation for the Street. So the question is what's causing it to be relatively flat? Well consistent with all the prior years, given the employee benefits and sort of the employer costs associated with FICA and all the other added costs that are coming into the equation this quarter, we're going to actually increase our employee benefits and the employer portion of it in or around $5 million this quarter. In total, employee benefits are going up $9 million but embedded in that $9 million is $5 million. Salaries are going up $4 million and utilities are going up $5 million. And that's offset by roughly $5 million in net savings quarter-over-quarter. So overall, a lot of numbers there, but it really sort of tells you that quarter-over-quarter, it's the seasonal aspect primarily of employee benefits that are affecting the flow through that you're going to experience.

And your full year guidance incorporates all that as well?

Absolutely.

Our next question comes from Mr. David Barden [BofA Merrill Lynch].

Keith, maybe just following up on that. Because I went back the last quarter, you were giving a midpoint of fourth quarter guidance that was below what you've produced for 4Q. If I had annualized that old guidance, your $1.01 billion EBITDA number implied about $100 million of year-over-year growth. If I annualize what you actually produced in the fourth quarter, it suggests that the 1 0 1 0 target is actually only about $60 million higher. So I guess based on what I heard Steve saying about sales force productivity and the second-best bookings ever in the fourth quarter, it seems to me like the 1 0 1 0 is increasingly in the rearview mirror from a 2013 outlook standpoint. Could you address more specifically why you didn't feel like you wanted to move that floor up because it seems to be getting less and less realistic? And then if I could just one more question. There seems to be, in the last couple of months, with your choice to become a REIT in 2015, we're using REIT valuations, we're using AFFO valuations. And there seems to be a debate about how the right way to calculate AFFO is for Equinix. Could you weigh in and just tell us what Keith thinks about that?

Okay, David. So in the end we did modify our guidance. We fully understand that. I think first and foremost, I'd like to talk a little bit about the revenue side. When you think about revenues and basing what we offered to the midpoint of guidance, so it's an $18 million net uplift quarter-over-quarter. So Q1 versus Q4, a net uplift of roughly $18 million. So I got to take out that 2 -- $2 million, $2.3 million one-off benefit. And so if you just take that and assume every quarter throughout this year we're going to add roughly $18 million, it gets you really to what we call our floor of roughly 2 -- $2.2 billion or greater. Certainly, expected inside the performance of the business is that we'll continue to produce more from a sales productive -- productivity perspective. Clearly, we're being muted today, sort of the last quarter, this quarter, by the churn that we're absorbing. But all that said, we certainly expect to, given the guidance we're delivering to you today, we expect that we'll continue to produce better. And in fact, we think that we'll deliver higher growth through the back end of the year versus the first half of the year. So that's sort of just talks a little bit about the revenue line. If I take to the cost line, there's a couple of things. Certainly, when we look at our annualization of our Q4 EBITDA, you got to take that $3.5 million benefit, which again it doesn't explain the whole difference, but you also have to recognize there's $20 million of REIT cost. The REIT cost that are coming into the equation. Not to mention the massive investment this company is making to move towards the REIT, not just from the discrete…

And the AFFO question?

I was hoping you would forget that one, David. But Charles reminded me of it. AFFO, again, what we did this quarter, very much like we've done in the past. Adjusted discretionary free cash flow is a very good surrogate, we believe, for the AFFO. And as you saw what I said in my prepared remarks and as you see in the chart, it's north of $11 of AFFO per share. But the thing that we're working on is doing a much better job of trying to break down all of the CapEx because I think some of the confusion is not so much around how we get to the operating metrics. It's more about how do we allocate what capital into the theoretical AFFO calculation. To us, it's still a little bit early to do that, but we're eleven dollar four of -- $11.41 on sort of basic share count of $48 million of AFFO. The thing that we haven't really fully burdened is really where we're going to take it. But what I did give you this quarter was $10 million and what I consider to be true maintenance spend in our CapEx line and what maintenance CapEx. And that's the thing that sort of -- we want to make sure we get it all right. And so we'll be updating that probably as we come through 2013. We'll start to give you not, only a discretionary free cash flow number, but we'll start to think about the AFFO. But having said all of that, AFFO, our discretionary free cash flow, we saw a roughly 19% increase this year over last year. The guidance we have given you would suggest that we grow another 15%, 2013 over 2012. And right now I would ask you to continue to use discretionary free cash flow or what we call adjusted discretionary free cash flow as the metric that will be a good surrogate for AFFO.

Our next question comes from Mr. Colby Synesael [Cowen and Company].

Two, if I may. First one just wanted to talk about optimization projects in Europe and Asia. I know you initially focused on Americas, but seems like you're talking more about transitioning that to Europe and Asia. I was wondering if you could just talk about that in terms of how far along you are in the process when you compare that to where you are in America? And then also kind of tying back into that, I just wanted to get an update on churn. It seems like in some of your more recent public forums, you've actually talked about churn coming down in the back half of 2013. Curious if you're still expecting that. And then just briefly, was hoping you could talk about how the sales cycle has changed, if at all, in the European market over the last few months.

Colby, let me start and then Charles can pick up the churn conversation in the Americas. On a global basis, the work that Charles and his team started late -- well, I guess, late the year before, early last year, he did take that learning and poured it over to Asia and Europe. We have started to apply the same methodology, if you will, or frameworks, if you will, as we're renewing contracts. So we're putting the same lens on optimization around the world. It's just more -- it's a larger activity in the Americas. But as we renew and we look at that multi-tiered architectures and how customers are bifurcating the deployments, we're applying the same discipline around the world. And I would tell you it's early days in Europe and Asia for that. And I don't know, Charles, how you describe Americas, but we're well into it in the Americas.

Yes, we're certainly well advanced in our overall optimization efforts, which has a number of dimensions to it. And through the overall IBX optimization project, we've now sort of bridging to churn. We've got a very good handle on our book of business, and we evaluate our renewals with a very disciplined approach that considers a number of factors and, therefore, in any given quarter, churn can be volatile depending on where we land with certain renewals. But I can tell you that I'm very confident the decisions we're taking will allow us to moderate churn downward over time as we ensure that we're matching the right assets to the right applications. And certainly some of those churn decisions creates some headwinds, but our view is if managing through those headwinds is required to protect our long-term returns, then that's absolutely what we're going to do. So in terms of precise outlook, very hard to be exact about churn level, quarter by quarter. But we feel very confident that we've addressed, actually, maybe customers that we think moved -- need to move to multi-tiered architectures, as I said, quarter-over-quarter, as we look at key renewals. It can be a bit more volatile. But I do expect that it will moderate over time and allow us to expand our net bookings' performance.

And then, Colby, I think you had a question -- what was the question on...

Sales cycle in Europe?

Sales cycle in Europe I would describe as like every other company in Europe, there's been some delayed decisions with probably some enterprises. But generally speaking, we performed very well in Europe. Our team has exceeded expectations in top and bottom lines. We get the advantage as we talked about in terms of pouring inbound bookings into Europe. Actually, this last quarter Europe exported as much as they've been importing from the U.S. in a quarter. So the global sales team has started to really kick in and push bookings around the globe. So doing very well in the U.K., doing very well in Paris with the new asset, as Keith described, is 50% sold, preassigned. And so, in general, I would tell you probably because it's fortunate we're in the good markets, we're performing quite well, and they have the benefit of the global sales team pushing business into Europe.

I guess what I was getting at, Steve, was I think you made comments at the Investor Conference that you're seeing weakness in Frankfurt and Switzerland a few weeks ago and I was curious if that was still the situation.

Well, I don't -- I think the question was posed to me, which markets are the hottest markets and which markets are at the other end of that and the German market is a little bit tougher market from a competitive standpoint. There's a lot deeper competition, which obviously puts pressure on price. But this past year, our German market actually grew, including the ancotel acquisition, almost 30%, just under 30%. And without ancotel, it was in the high teens. So the growth of our German businesses is still doing fine. It's just a little bit more acute in terms of the competitive nature, much deeper in Germany than in almost any other market in the world. And that's what I was referring to.

Our next question comes from Mr. Jon Atkin [RBC Capital Markets].

I was interested about the adjusted discretionary free cash flow for 2013. You increased your guidance by $20 million at midpoint and what drove that, given that you kept the revenue and the EBITDA guidance the same and the CapEx guidance? And then secondly, operationally, I was wondering if you've seen any impacts from the property divestiture to 365 Main?

Okay, I'll take the first one. So, Jon, when we adjusted the adjusted discretionary free cash flow when we gave the initial guidance it had some conservatism built into it. We wanted to see how we're going to perform in Q4 and then also how that was going to lead it into the 2013 time period. But also as we looked more at our internal budgets, Steve and I just came off December roadshow where we met all the regions and reviewed the budget, we had a much better sense of the timing of when we're going to actually spend money and not spend money in. So when we took all of that into consideration and recognizing, if you will, the size of the range that we originally had, we felt that we can give a little bit on this call. And so we've modified the range up to the 6 20 to 6 40.

And relative to the divestiture of the assets to 365 Main I'd say we've been extremely pleased with how that's gone. Really no substantive adverse impacts. I think kudos to the internal team here who had put a ton of effort into making sure that we had the planning effort up front, so that we could not impact customers. 365 has been a great partner in that. And we've had a couple of situations relative to splitting contracts and various other things that customers need us to help them work through, et cetera. And the inevitable bumps and irritations that may cause customers. But we took great pains to preplan that and put money aside to invest to make sure that the transition went smoothly and, overall, I would say it has.

Our final question comes from Mr. Gray Powell [Wells Fargo Securities].

I just had one quick one. So net leverage looks like it's about 2.6x today versus your 3x to 4x target, in other data center REITs that's over 5x. Just how should we think about leverage and your use of cash given that EBITDA is growing about 20% per year, which gives you capital to reinvest and the fact that you're now free cash flow positive?

Yes. So, Gray, a couple of things, certainly as we've said in the past, last I checked, the company will go through a fairly meaningful deleveraging through 2015, 2016 time period. Recognizing that there's a number of things that are taking place, and we're in the middle of our PLR submission to the IRS. Not understanding exactly where that's all going to come out, the company has obligations that we'll have to meet from a cash perspective including E&P purge including incremental taxes, of course, we're going to continue to invest in the business organically through capital allocation towards the construction projects. So that all said, I think what's important to note is the company has great flexibly as we look forward. Part of what we want to look at is optimizing the balance sheet, making sure we have the appropriate level of leverage on the books. It's going to be a little bit different than others and perhaps some of the other data center REITs primarily because we've targeted a 3x to 4x net leverage target. Our contracts tend to be shorter than theirs. And so when you look at sort of the relative exposure to the balance sheet, you want to make sure you marry up that exposure with, basically, your leverage, that will be one thing. But the other thing I think is important, as Steve noted. We're also going to continue to grow the business organically. We'll also look at inorganic opportunity, and we also have to look at what distributions do we have to do and do we do to our shareholders within the REIT structure and outside of the REIT structure. So all that has to be contemplated. So if I could take that together and summarize it, right now we have a tremendous amount of flexibility and we're going to continue to look at our capital allocation strategy and we'll update you over the next few calls as we hear back from the IRS, and we start to move more and more towards that REIT conversion.

That concludes our Q4 call. Thank you for joining us.