Equinix, Inc. (EQIX) Q1 2013 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. Ma'am, you may begin.

Good afternoon, and welcome to today's conference call. Before we get started, I'd like to remind everyone that some of the statements I'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 26, 2013. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter unless it is done through an exclusive 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 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 will be taking questions from sell-side analysts. In the interest of wrapping this call up in an hour, we'd 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 first quarter earnings call. I'm pleased to report Equinix delivered another quarter of strong business and financial results. As depicted on Slide 3, revenues were $519.5 million, up 3% quarter-over-quarter and 17% over the same quarter last year. Adjusted EBITDA was $243.5 million for the quarter, up 2% quarter-over-quarter and up 16% over the same quarter last year. Our MRR per cabinet remains firm, and we continue to experience positive sales momentum in bookings. Our vertical go-to-market strategy and continued IBX optimization efforts are allowing us to win and maintain the right mix of applications and balance healthy top line growth with outstanding margin performance. Over the last year, we have taken a highly disciplined approach to evaluating new deals and customer renewals. And this proactive effort has resulted in solid pricing dynamics, better customer mix and significant CapEx efficiency but has also resulted in elevated churn. We believe we have reached a turning point in these efforts and expect churn to trend down as we move through the remainder of 2013. This quarter, we saw accelerated growth in new customer wins, as well as healthy expansion from our existing customer base. We continue to see customers deploy across multiple IBXs and see very strong correlation of this trend with key metrics such as win/loss, price per kilowatt and renewal rate. Whether it's across multiple metros, multiple countries or multiple regions, our ability to address our customers' footprint needs with our unique global platform continues to drive customer value and sets Equinix apart from the competition. Demand for our highly networked and distributed data center services is being driven by technology trends, including the explosion of video, emerging cloud-based IT services, the proliferation of mobility, growth in IP traffic, electronic trading, as well as e-commerce. Each of our industry verticals performed well this quarter, with clear indication that customers are using Platform Equinix to support global expansion and to connect with partners and customers to accelerate their business performance. I'd like to provide you with a quick overview of the trends we're seeing across each vertical, including a deep dive into cloud, our highest growth segment this quarter. At the heart of our business are the networks. The company was founded by providing a neutral location where networks meet and trade traffic. 14 years later, this strategy is still paying off. This quarter, we saw double-digit revenue growth year-over-year across all 3 regions for the network vertical, with particular strength in Asia Pacific. Further, as IP traffic continues to grow, we see the beginning of a refresh cycle for subsea cable systems. Equinix's strength as a market leader and our ability to concentrate demand is a key priority for subsea cable operators looking to quickly monetize new projects. An important customer win this quarter was Seaborn Networks, which will establish its first Brazil gateway in Equinix's São Paulo 2 IBX. By offering direct connectivity to Seaborn's low latency route between São Paulo and New York, we can support the needs of our global customers in these 2 key markets, reaffirming the importance of our ALOG asset. In wireless, we experienced more that 30% year-over-year growth, which includes 450 service providers and enablers in this developing ecosystem. Mobile network operators such as U.S. Cellular, MetroPCS and China Mobile are leveraging Equinix facilities to efficiently deliver applications and content to their users. With increased traffic across mobile networks supported by 4G and LTE, mobile backhaul continues to be a major benefit of locating within our IBXs. In addition to the operators, ecosystem players operating inside our IBXs include content and application providers, service enablers, cloud service nodes, advertising platforms and traditional voice and messaging services. If I move now to the financial services, we see trading platforms and participants expanding globally as they seek to access new markets and provide enhanced services for clients. For example, the Chicago Mercantile Exchange will deploy in London to provide the fastest access back to their Chicago services hub and to establish a [indiscernible] for their new European derivatives market alongside other key financial companies. Financial services continues to demonstrate an incredible ecosystem power, as financial to financial cross connects grew over -- more than 30% year-over-year, and we gained traction in new areas such as foreign exchange and over-the-counter trading. In content and digital media industry vertical, we continue to see significant demand, as latency-sensitive, high-performance applications like video and online content continue to grow. In addition to serving the multi-tiered architecture needs of top content providers, we are attracting emerging technology players such as digital advertising exchanges. Last week, we announced a partnership with BrightRoll to enable the fastest real-time bidding in the video advertising marketplace. Similar to the dynamics in electronic trading, real-time bidders must analyze ad impression information from exchanges and submit bids within milliseconds. Reducing latency helps buyers by increasing their ability to successfully respond to more bid requests within the required time limit, which translates into better performance for advertisers and increased revenues for companies in this rapidly evolving ecosystem. Moving to the enterprise industry vertical. Our vision for this market is to provide Platform Equinix-enabled solutions that help enterprises optimize and scale their data, their networks and applications around the world. Improved application performance and IT utility are necessary to achieve key business objectives, and progressive enterprises are rethinking how to deploy applications, innovate around their data and improve the connectedness of their business. Challenge to deliver more business solutions faster with less resource and at a lower cost is increasingly more difficult. Many enterprises are responding to these challenges by evolving to hybrid cloud architectures, often facilitated by the move from in-house into co-location facilities. By leveraging Platform Equinix, enterprise companies gain access to network density and to a host of cloud services that optimize performance and reliability. Key customers in this vertical are Walmart.com, L'Oréal, Sanofi-Aventis, with new wins coming from the Fortune 500 and from subsegments, including legal, oil and gas, retail and healthcare. Finally, I'd like to highlight the drivers behind the acceleration of cloud-related demand across all of our verticals. Turning to Slide 4, our cloud vertical delivered record bookings this quarter and was a substantial driver of new logos. With over 1,100 cloud and IT service provider customers who deliver 24% of our revenue, Platform Equinix represents a significant advantage for CIOs looking to leverage the economies of the cloud without sacrificing security or performance. At the heart of our cloud ecosystem are both cloud service providers who naturally resonate with the Equinix value proposition and the buyers of cloud services or what we refer to as cloud-enabled enterprises. Cloud service providers are deploying at Equinix to achieve network reach, support mission-critical workloads and gain access to our more than 4,000 customers and their customers around the world. These providers are tapping into the global breadth and network density only available in Equinix data centers, allowing them to overcome the limitations of the Internet and offer services closer to end users to meet performance requirements. Present in Equinix data centers are 4 types of cloud service providers. First, at the foundation are cloud compute and processing services provided by the Infrastructure-as-a-Service providers, such as Amazon Web Services, GoGrid, Rackspace and others that are deploying critical cloud nodes at Equinix to provide lower latency and improve security to their end customers while reducing their network cost. Second, Platform-as-a-Service providers such as Windows Azure and Zynga are leveraging Platform Equinix to build their computing platform and solution stack to simplify the delivery of these complex offerings to businesses through a direct connection. Third, the Software-as-a-Service market, which today is twice the size of the Infrastructure-as-a-Service market, is one of our largest opportunities with hundreds of customers that are evolving to deliver applications on a cloud platform. In the cloud segment, Software-as-a-Service wins are driving the majority of new logo count and bookings, and Equinix customers include Box, Salesforce.com, ServiceNow and Workday that are leveraging our network density and global platform to enhance application performance. And fourth, beyond these more established industry classifications, we are seeing traction among cloud service enablement companies like Citrix, NetApp, RightScale and others that offer complementary services and capabilities that help with the effective use of management of cloud deployments. As we grow our base of these service providers and enablers, buyers of cloud services are drawn to this cloud ecosystem to interconnect and optimize their infrastructure by moving a portion of their data and applications to the cloud. Increasingly, customers like Autodesk, XO [ph], McGraw-Hill come to Equinix to realize the benefits of hybrid cloud deployments which allow for optimal efficiencies, security and control in managing their IT workloads. Now let me shift to an update on our expansion activity. As demand across the verticals continues, we are investing and building out our global platform to meet customer needs. This quarter, we opened up our first IBX in Jakarta in partnership with a company called PT DCI. Indonesia is the fourth most populous country in the world and the fastest-growing economy in Southeast Asia. Equinix has the opportunity to provide high-quality data center services to support that growth. We are also making investments in Tokyo and Singapore to build out data centers in the heart of their financial districts. Singapore 3 is a significant build, with expansion potential of up to 5,000 cabinets. In the Americas, we are building a new data center in Rio de Janeiro to support a robust Brazilian economy and customer demand associated with the upcoming World Cup and Olympics in Brazil. We also expect to complete the critical phase 2 expansion of Silicon Valley-5 to support growth in a technology-focused Silicon Valley market. Additionally, we are already seeing strong early demand in our newest data centers in Seattle and Miami. In Europe, we will open our fifth IBX in Zurich, a standalone data center that is tethered back to our network-dense downtown location. We also plan to expand London 5, which has far exceeded our expectations with a fourth and final phase of this project. Our new expansions remain on time and on budget, but as a reminder, reported capital expenditures can vary depending on the time of actual payments. As always, we continue to expand with a disciplined approach as we evaluate new markets and opportunities. And finally, sales productivity continues to be a top priority for us as we mature our go-to-market strategy. Our sales and marketing organizations around the globe are aligned by industry vertical in order to gain a much deeper understanding of our customers' requirements, which allows us to help them deploy the right applications in the right IBXs across the right markets, leveraging Platform Equinix to meet the needs of an increasingly global customer base. Our sales teams are doing a good job maintaining deal discipline, presuming the right mix of deals in terms of size, power density and application type to enhance price realization and keep new deal pricing steady. As a result, our pipeline and quarter coverage ratios remain healthy and in line with our annual operating plan. So let me stop here and turn it over to Keith to review the financials for the quarter.

Great. Thanks, Steve, and good afternoon to everyone on the call. I'm pleased to provide you with additional detail on the first quarter of 2013. With the exception of our consolidated financial results, the majority of our other key non-financial metrics exclude the impact of ALOG, ancotel and Asia Tone. So starting with Slide 5 from the presentation posted today. Global Q1 revenues were $519.5 million, up 3% quarter-over-quarter increase and up 17% over the same quarter last year. Our Q1 revenue performance reflects a $2.3 million negative currency headwind when compared to the average rates used in Q4 and a $2.5 million negative impact when compared to our FX guidance rates. When adjusted for these changing FX rates, revenues were at the top end of our guidance range. Turning to Slide 6. We wanted to highlight the diversification of our revenues across our regions, our verticals and our product categories. Interconnection services represent 15% of our revenues, a key metric that we remain focused on as we develop new ecosystems. The operating performance of the business remained strong as we invest across a number of fronts. Specifically, our gross margin -- our cash gross margin and our operating profits are all trending positively after taking into account the significant investments in our global sales and marketing functions and our corporate functions. Global cash gross profit for the quarter was $356.7 million, a 3% increase over the prior quarter and up 16% over the same quarter last year. Cash gross margins were a healthy 69%, consistent with the prior quarter and the same quarter last year, although better than planned due to lower payroll costs and utility expenses. Global cash SG&A expenses were $113.2 million for the quarter, a 5% increase over the prior quarter and slightly below our expectations due to lower professional and consulting fees and a smaller-than-expected advertising and promotion spend. Cash SG&A expense increased by 18% over the same quarter last year. Global adjusted EBITDA was $243.5 million for the quarter, a 2% increase over the prior quarter and a 16% increase over the same quarter last year. Adjusted EBITDA growth reflects increased revenue performance, lower-than-expected utility costs and lower-than-planned SG&A spending. Our adjusted EBITDA margin was 47%. Our Q1 adjusted EBITDA performance reflects a negative $900,000 currency effect when compared to the average rates used in Q4 and $1 million negative impact when compared to our FX guidance rates. Global net income attributed to Equinix was $35.9 million, down quarter-over-quarter primarily due to the $11.9 million after tax gain from the sale of our 16 IBXs in Q4 and up 4% on a year-over-year basis. Our fully diluted earnings per share was $0.71. I'd now like to spend a minute on currencies. As you know, we're operating in a more volatile currency environment, and significant shifts in our operating currencies are having an impact on our quarterly results. Also, the recent fluctuations in exchange rate have created a currency headwind for us against the full year guidance. In addition to fluctuations in our major currencies, we've also seen large currency movements in other markets. For example, the Japanese yen, which represent 3% of our global revenues, devalued 14% against our budget rates in the quarter. Recognizing the change in currency landscape, we'll continue to provide through the FX rates used for the forward guidance, consistent with the details provided in our press release today. Now let me turn to global MRR churn. As we had discussed last quarter, we expected elevated MRR churn over the next few quarters and anticipated it to moderate downwards over the second half of the year. As reported this quarter, MRR churn was 3.7%, higher than our expectations for the quarter, solely due to 1 large churn event that we knew would hit during the first half of the year, although it landed on the last day of Q1. This churn represents 0.7% of the Q1 metric. Absent this Asia Pacific churn, our MRR churn would have been 3%, consistent with our expectations. With this behind us, we believe we're past the high watermark and expect MRR churn to step down to approximately 2.5% per quarter for the remainder of the year. In this specific case, a large digital media and content customer will be transitioning to a multi-tier architecture in Asia Pacific, moving at server farms to their own data center while the core network nodes remain at Equinix. 20% of the space is already being rebooked, with the remainder expected to be sold by the end of Q3 of this year. Additionally, we expect to replace the MRR churn at better average price points. Moving on to comments on REIT. With regards to the REIT, we continue to progress towards our goal of converting to a REIT beginning January 1, 2015, but at this stage, we have no additional details to share with you. On Slide 7, we summarize the various expected REIT cash costs and tax liabilities, similar to our discussion last quarter. In the second quarter, we expect to incur approximately $4 million in incremental cash costs related to the REIT program, which is reflected in our Q2 guidance. Separately, we've modified downwards our 2013 estimated cash tax liability now to a range between $150 million and $225 million. Turning to Slide 8. I'd like to start reviewing the regional results, beginning with the Americas. Overall health of the Americas business remains strong. Average -- Americas revenues were $308.6 million, a 3% increase over the prior quarter and up 11% over the same quarter last year. Cash gross margins decreased slightly to 71%, largely due to the expansion drag from the newly opened IBXs. Cross-border bookings across all of our regions continue to be strong and validate our global platform strategy. Adjusted EBITDA was $146.5 million, although -- as a reminder, the Americas region absorbed the headquarter costs and the majority of the corporate overhead spend. The Americas region, excluding these costs, increased 1% over the prior quarter after absorbing higher costs related to the expansion drag from the new IBXs opened in the second half of 2012 and the annual FICA reset and up 13% over the same quarter last year. Corporate spending increased 13% over the prior quarter and 21% on a year-over-year basis. Americas adjusted EBITDA margin was 47% for the quarter. Americas net cabinets billing increased by 1,300 in the quarter, and MRR per cabinet remains steady within our targeted range, although down slightly over the prior quarter due to the timing of customer installations. Americas new logos increased 17% above the rolling fourth quarter average. Interconnection revenues remained at 20% of the region's recurring revenue, while net cross-connect adds rebounded to 1,300 for the quarter. Now looking at EMEA. Please turn to Slide 9. Despite the macroeconomic uncertainty across this region, EMEA had record bookings this quarter and maintains a very healthy pipeline. The U.K. had a positive start to the year, with strength in the financial services, content and cloud verticals. Our Netherlands and France teams are progressing well against their operating targets with the newly opened Amsterdam 3 and Paris 4 IBX assets. EMEA revenues were $120.3 million, up 2% sequentially and 16% on a year-over-year basis normalized with constant currency. Adjusted EBITDA increased to $49.1 million or an adjusted EBITDA margin of 41%. Normalized and on a constant currency basis, our adjusted EBITDA increased 7% compared to the same quarter last year. EMEA interconnection revenues remained at 7%, adding approximately 700 net cross-connects in the quarter. Net cabinets billing increased by approximately 400. And now looking at Asia Pacific. Please refer to Slide 10. Asia Pacific had solid sales momentum this quarter, driven by wins in the cloud, digital media content and financial verticals. Asia Pacific revenues were $90.6 million, up 1% sequentially or 4% on a constant currency basis and up 24% on a normalized and constant currency basis over the same quarter last year. Adjusted EBITDA was $47.9 million, up 10% quarter-over-quarter or 33% on a normalized and constant currency basis over the same quarter last year. MRR per cabinet remained strong, with a 2% sequential increase on an FX neutral basis. Cabinets billing decreased by approximately 400 compared to the prior quarter, solely due to the timing of a large cabinet churn. Interconnection revenues were 11% of the region's recurring revenues. Through the quarter, we added approximately 400 net cross-connects, with a positive shift from copper to fiber as customers migrate to higher bandwidth-consuming business practices. And now looking at the balance sheet. Please refer to Slide 11. In March, we raised $1.5 billion of high-yield notes at a blended interest rate of 5.2%. In Q2, part of the proceeds from this offering were used to redeem our $750 million 2018 senior notes, while $81 million was used to settle the make-whole payment to the bondholders, which was effectively the interest that would have been earned for the March 1, 2014 call date, plus an applicable premium. This net present value positive financing accomplished a number of objectives for the company, including improving our financial flexibility specifically related to restricted payments; placing long-dated debt on our books at a preferential interest rate; and providing the company with sufficient capital to continue to scale the business while meeting discrete funding requirements as we progress towards REIT conversion. In Q2, we'll record a onetime charge to the income statement of approximately $90 million as a loss on debt extinguishment, which is effectively the make-whole payment, plus the write-off of the unamortized debt issuance costs. We ended the quarter with $1.2 billion of unrestricted cash and investments. Looking at the liability side of the balance sheet, pro forma for the redemption of the senior notes, we ended the quarter with net debt of $2.6 billion, about 2.6x our Q1 annualized adjusted EBITDA. Going forward, we'll continue to review and optimize our balance sheet and capital structure. Now looking at Slide 12. Our Q1 operating cash flow decreased to $84.2 million due to shifts in our working capital balances, including an increase in our DSOs to 33 days, the timing of cash interest payments on our outstanding debt and the payout of our corporate bonus program. For 2013, we expect our adjusted discretionary free cash flow, excluding any REIT-related cash costs or taxes, to range between $620 million and $640 million. Adjusted free cash flow, excluding $836 million of cash placed into an escrow account to fund the redemption of our senior notes, was a positive $30 million for the quarter. Now looking at capital expenditures. Please refer to Slide 13. For the quarter, capital expenditures were $75.7 million, well below our expectation, solely due to the timing of cash payment to our contractors. Ongoing capital expenditures were $34 million, which included less than $10 million in maintenance, efficiency enhancement and single points of failure capital. Finally, turning to Slide 14. The operating performance of our 24 North American IBX and expansion projects that have been open for more than 1 year continue to perform well. Currently, these projects are 82% utilized, in January have 35% cash on cash return on the gross PP&E invested. Our 8 oldest U.S. IBXs grew 5% year-over-year, as customers continue to purchase additional power and cross-connects. So at this point, let me turn it back to Steve.

Thanks, Keith. Let me now shift gears and cover our outlook for 2013 on Slide 15. For the second quarter of 2013, we expect revenues to be in the range of $530 million to $534 million. Cash gross margins are expected to range between 68% and 69%. Cash SG&A expenses are expected to range between $120 million and $124 million. Adjusted EBITDA is expected to be between $240 million and $244 million. Capital expenditures are expected to range between $170 million and $180 million, including approximately $45 million of ongoing capital expenditures. The increased CapEx guidance for Q2 reflects an increase in payments related to the shortfall that Keith just discussed in Q1. For the full year of 2013, we are maintaining total revenue expectation at greater than $2.2 billion or greater than 16% growth on a year-over-year basis, which absorbs roughly $21 million of currency headwinds relative to guidance rates provided on our last call. Total year cash gross margins are expected to be between 68% and 69%. Cash SG&A expenses are expected to range between $490 million and $510 million. We are maintaining expected adjusted EBITDA for the year to be greater than $1.01 billion, which absorbs roughly $9 million of currency headwinds relative to prior guidance rates and also includes $20 million in REIT conversion costs. We are maintaining our total CapEx guidance for 2013 at a range of $550 million to $650 million, which includes $165 million of ongoing capital expenditures. We are investing in our business at a very attractive risk return profile, and we continue to achieve our targeted returns. So in closing, we're off to another good start in 2013. The external secular trends driving vertical demand, combined with the maturation of our sales force and the moderation of churn, point to another year of strong and predictable growth. Our focus on building global interconnected ecosystems, along with a disciplined balance of top and bottom line growth, is providing us continued differentiation from our competitors. As a result, we are well-positioned to help our customers and new prospects accelerate their business performance and drive operational efficiencies in the most important markets in the world. So let me stop here and open it up for questions. And, Fred, I'll turn it back over to you.

[Operator Instructions] Your first question is from Colby Synesael from Cowen.

I guess just to get a little bit of clarity on the churn. So you mentioned that going to 2.5%, I think, for the remainder of the year, which has obviously puts you at the high end of your long-term target range of 1.5% to 2.5%. Is that an indication that, really, on a go-forward basis, it's your view that we'll be back in that range? And then the second question, I just -- I saw in the press release last week when you were announcing the Singapore expansion, you talked about providing business suites in that facility, which is obviously an extension from what you're already doing with DC 10. Is this now some type of confirmation that you guys do believe having some type of wholesale blend does make sense in other markets and we should expect to see that in other press releases, I guess, as we move through the year?

Great. Good question. So Colby, I'll take the first question, and then I'll let the team sort of answer the second question here. As it relates to churn, clearly, the 0.7% increase in churn this quarter was something that we didn't originally anticipate. We knew it was going to, as I said, occur in the second -- or, sorry, the first half of the year, we thought it would be frankly in Q2, bump up forward [ph] to Q1. That left us at 3%. Had it stayed in the sort of the Q2 time frame, ideally, we would have been in the range that we've guided to, and that was sort of the 2.5% to 3.2% that we said that we'd experience over the next few quarters. All that said, with the acceleration of that forward and now it put us in a position we think we're over the hump. And we're comfortable at approximating what we think churn will be for the foreseeable future through the remainder of this year anyway at 2.5% per quarter, and that is an approximation. And again, as you probably know and as many of the listeners know in the call here, churn tends to be lumpy. Sometimes when a customer indicates to us that they're going to churn, it sometimes gets pushed out. In other cases, it gets accelerated. In this particular case in Singapore, this is a churn that we've been anticipating for over 2 years, and had just not -- had not happened. And then the team forecasted and budgeted it in their 2013 plan. And so we recognized that we thought it was going to happen this year, it just happened a little bit faster. And so there's no net revenue impact to us. It just affects -- affecting this 1 churn metric. But as a go-forward basis, recognizing that I said the churn will be lumpy, I think it's important to know that as a company, we recognize that churn is something that we want to pay close attention to. Yet at the same time, with the actions that we're taking and recognizing some of our customers will bifurcate their infrastructure, what it really does for us and what you've seen over the last few quarters is it's giving us great price stability. You see our margins have been accelerating. We're managing our CapEx differently. And so from our perspective, recognizing it is one metric and not necessarily all the metrics that we need to look at. It's something that we take into consideration. And as we go forward, we'll continue to give you a perspective on what we think will happen, but overall, I think we've got a pretty good track record of, one, telling you what's going to happen, when it's going to happen; and two, delivering on our financial expectations. And so as I said here, we've now taken that into consideration, and we believe on approximate 2.5% per quarter is what you should see through the remainder of this year.

And now to the second part of your question, Colby, in Singapore, you are accurate in that we are including a business suite hybrid model in Singapore, which is a little different than what Charles and his team has done in the Americas. But what we have learned off the back of what we did in DC, we've applied that learning elsewhere in the world, and we are considering other markets where it might make sense to have that product mix. Singapore is very unique, as Keith just described. The multiple tiers of the architecture do end up getting deployed in Singapore for companies that generally run their infrastructure for all their Asia Pacific business out of that market. So we see a little bit more dynamics in the Singapore market to support companies that want to deploy multiple tiers of their architecture into that market to support their Asia Pacific business. So we will follow that product line in a little different model, built in with the retail business in our next builds in Singapore. Charles, do you want to add?

Well, the only I would say is that adjusted statement is -- in terms of comparing that, making that a wholesale substitute. It's not really a wholesale substitute. I think it is an extension of our products that we believe is necessary to serve the full requirements of our customer set when they implement multi-tier architectures and need a larger footprint option. So it's not a direct substitute for the wholesale space, it's really for customers that really want to do these multi-tiered architectures with us, have a requirement for a service level that we deliver, a level of quality and service and reliability that we're known for. And so I wouldn't characterize it as a wholesale substitute, but I would say that we do believe it is an appropriate extension of our product continuum to continue to feed the sort of premium retail business that really drive the economics of the business.

Next question is from Simon Flannery of Morgan Stanley.

This is Lisa [ph] for Simon. Can you elaborate a little bit more on your guidance for Q2 and maybe how that plays out for demand over the remainder of the year?

Just so we're clear, I just want to make sure, are you specifically talking about guidance as a whole? Are you referring to the quarter? I just want to make sure we knock the right point here.

Yes, maybe color on both. So basically for next quarter and also kind of how you see growth coming on for the remainder of the year.

Okay. So let me just start. If you actually step back and look at our Q1 -- because I think -- obviously, you have to ground yourself first. How did we do in Q1 relative to what we said we'd do? And so as you know, if I take you back -- I'm going to take you back 2 steps here, first, coming out of 2012 Q4, we did $506.5 million. And so that was sort of the base, if you thought, the -- if you will, the entry point into 2013. As you might recall, there's a one-off benefit in there of $2.4 million. So normalized Q4 was $504 million. So the guidance that we give this quarter, we're looking really at a midpoint of $520-odd million, with a top line of $522 million. So we came in at $519.5 million. That absorbed $2.3 million of currency headwind. And so you're basically at the top end of the range, although this quarter, there is a $1 million one-off benefit that we -- with some complex accounting that we probably won't see in the forward quarters. So on an adjusted basis, this quarter, we sort of came in at $520.8 million. And so that sort of set the stage. We grew 3.3% quarter-over-quarter or roughly $16.7 million quarter-over-quarter. When I fast forward then, look at the guidance that we give of $530 million to $534 million for Q2 here, again, recognizing there's $3.7 million of currency headwind in that guidance but said differently, if we use the Q1 exchange rates for Q2, the guidance number would have been $3.7 million higher. So when you look at that on an adjusted basis and relative against the midpoint of what we're guiding to, we think we'll deliver roughly 3.3% incremental revenue growth. So having said that, the first 2 quarters -- so the first 2 quarters, we recognize that, clearly, we're growing below what we think the average is -- the average would be for the year, recognizing we'd give you a floor of 16%. And, again, I'm talking about the top line here. So what's happening for the second half of the year? Well, clearly, we've been very upfront by the fact that we've absorbed more churn. You can see that in our elevated churn metrics over the last few quarters. So number one, we think that's going to abate. Number two, we think the production out of the team and the gross volume is going to increase. And it's planned for us, how we set our plan up for 2013 and I think, what got approved by our board. So it's in anticipation that we see better gross production on the top line, less churn as we moderate it downwards through the remaining part of the year. And that would deliver greater than 5% growth for the next 2 quarters to take us through, say, greater than 5% growth for the next few quarters in Q3 and Q4 to get us at our -- what I'd call our floor of $2.2 billion or greater. And so that's basically how we sort of constructed our model. It's how we constructed it back in October when we first delivered it to you. And it's relatively consistent with what we've executed again thus far this year. So let me leave it there and just make sure I've answered your question.

Next is Brett Feldman from Deutsche Bank.

This is Jiorden Sanchez calling in for Brett. Just have a similar, I guess, line of questioning on the EBITDA line. I guess, obviously, it's benefiting from some of the back half trends in revenue, but we're seeing a sequential decline in revenue, it seems, into 2Q on EBITDA. Is there anything that's particularly driving that? And then I have 1 quick follow-up question.

Again, there's a couple of things that are going on in EBITDA. And so look, without getting into too much detail of sort of trying to take it to a different level, when you look at the midpoint of our Q2 guidance, we're at roughly the same level. And I say that because this quarter, we did 2 -- Q1, we did $243.5 million. If you take out that one-off revenue benefit I referred to, you're basically $242 million. The midpoint of our guidance for this quarter is $242 million. So what's happening? Number one, utilities, we're going to increase our utilities by approximately $7 million this quarter, Q2 over Q1. That's one thing. Second thing is professional fees, a lot of it related to the work we're doing on REIT and the implementation of our other tax strategies. That's going to be $4 million increase over the prior quarter. So those two alone, that's an $11 million increase. And then you take into consideration the salaries and benefits. As I said in my prepared comments, the FICA reset that we experienced in Americas in Q1, the net benefit we get is we get actually a net decrease in salaries and benefits in Q2 by $1 million. So those 3 items alone is a net cash increase of $10 million. And so when you look at that relative to what we think we can do for the rest of the year, we -- similar to revenues, we think we can accelerate through this, through the spend program that we have and deliver EBITDA margins at the level that we suggested. And then to ground everybody, again, we said we could do $1,010 billion, so $1,010,000,000 of EBITDA in 2013. When you take into consideration the $9 million hit related to currency, that's effectively almost a $1,020 billion number relative to what we previously provided. As we go through the year and continue to manage our spend, we'll update you on every single quarter. But we feel relatively comfortable in the guidance that we've delivered from an EBITDA perspective. Recognizing the timing of expenses is something that we're going to pay a lot of attention to. But overall, we think we can deliver on or about that 46%, 47% EBITDA margin level.

I think it may be worth noting is that the -- Keith mentioned in the script, the expansion drag, particularly in the Americas where we put, in the last 7 months about 6,000 cabinets capacity online, including 4 net new locations. And so we felt that in Q1. We'll continue to feel that into Q2, but then we'll see that ease as we ramp into those locations in the latter half of the year.

Next is Gray Powell from Wells Fargo.

Great. Maybe just a bigger picture question. One of the main themes we've heard this year is that cloud computing is impacting managed hosting and other parts of the traditional data center. Can you give us a sense as to the applications that need to be on physical servers in low latency environments versus those that can reside in the cloud? And then just kind of help us convince people why Equinix is somewhat immune from the trend.

Start on the Americas, Charles, and I'll chime in.

Yes. I mean, I think that there's -- I mean, there's a number of things that I think that -- areas where people really require a level of flexibility, security and latency performance. That's when I think a colocation-type strategy versus a traditional cloud or virtual machine strategy tend to resonate. We see that in customers all the time. And so I think that it's -- it really depends on the complexity and the level of change that is part of it. So if it's raw compute, raw storage, those kind of things tend to lend themselves well to a public cloud type of environment. But even that, again, benefits us in terms of the relationships that we have with some of those providers and the Direct Connect kind of connectivity that we can provide to customers there. So I think that right now, we're seeing that cloud computing overall is a net add in terms of people being more creative about how they are deploying applications. And, again, certainly, a portion of those are going into hybrid cloud architectures because of either security, latency or manageability kind of reasons.

Gray, this is Steve. The only thing I'd add to that -- and a lot of this, it does emanate in the Americas initially and then we end up on the same trends in Europe and Asia. But some of these big secular trends that we talk about are really underpinning a lot of this, as Charles just alluded to. So as I talked about in my prepared comments, SaaS, Software-as-a-Service is probably 70% to 80% of the activity we're seeing today of the cloud workloads coming into Equinix. And so that is a big driver. The Infrastructure- and Platform-as-a-Service players are starting to come in, as I also indicated. But historically, we've gone from very low single-digit percent of our business being cloud-related to 24% today over the last 3 or 4 years. It is clear to us, as you look at all the industry verticals, that all CIOs around the planet are putting some workloads -- some type of test and development at least into cloud environments. And so it streams across many application fronts. Big Data is a good example. So all the Big Data players today use Equinix in many forms and fashions around the world. And so they're moving big cloud or Big Data workload in and out of the cloud. They like us because we've got public cloud nodes in here. We've got the private cloud nodes, and we're creating this hybrid environment for them. So they can move all kinds of workloads, but as Charles said, it's mostly mission-critical, real-time, high-performance-type applications that are finding their way into our IBXs.

Got it. That's very helpful. And then just one more, if I may. I think you may have touched on this already, but can you talk about the pricing environment in the U.S.? And then just generally speaking, what percentage of deals or bookings, are customers taking something like 40 or 50 cabinets in 1 location?

Yes, I'm happy to take that. So overall, again, as Steve indicated, pricing remains pretty steady in the Americas. We really -- we look at 2 primary revenue or pricing-related metrics, the revenue yield or MRR per cab, which, again, we saw slightly down in the Americas this quarter in the metrics that we send out to you guys driven by 3 factors. One, our Q4 number is a little bit inflated due to some accounting adjustments and increase to revenue but weren't recurring in nature. And we're starting to see some impact of product mix as we introduce business suites into the mix. But the largest impact is really just due to, as Keith said, to customer installs and terminations and the timing of those. And so we expect to continue to stay in a very positive range from a revenue yield standpoint. In terms of new deals on an MRR per kilowatt basis, which is typically what we assess those on, again, it depends -- it varies across our assets but continues to be pretty firm on an apples-to-apples basis. And in terms of the percentage that is in larger deals, we have a sort of a more ideal mix in our minds of what we want to see, and our business mix continues to reflect that. This was a quarter where we had, actually, our third-largest bookings quarter ever in the Americas and did that without really large deals. Our other large bookings quarters that were larger than this one typically had the benefit of some sort of very large deals in those quarters, whereas this quarter, we did it with a series of more midsize deals, as well as continued strength in the smaller deals in our sweet spot. So we're seeing -- and those tend to be firmer in terms of pricing. So like, for example, in our network vertical, we were actually up in terms of price per kilowatt, and then we realized we were a little down in cloud because of a few larger deals with some key customers. But overall, we're seeing it as pretty firm in the market.

Next is Jonathan Schildkraut from Evercore Partners.

A couple of detailed questions, if I may. First, can you, Keith, break out the revenue from -- that's not associated with cabinets, the ancotel, Asia Tone, ALOG revenues?

I certainly can. Let me look up each of those specific things for you, Jonathan. Do you have a follow-on question?

Yes. No, no. Absolutely. You talked about the higher churn or the big churn event in the Asia Pac region. As we look at the cabinets, I think the cabinets came down in that region in the quarter. So are we going to see further cabinet declines as a result of that piece of churn? Or is that now reflected in the cabinet count as of the end of the period?

Yes, great question. So the cabinet count is fully reflected in those, over 500 cabinets, 519 cabinets to be very specific, that occurred in the Singapore market. I think there's 2 things I'd like to leave with you. One is the customer chose to build in that environment. Many years ago, when it was -- without getting into all the specifics, I think a lot of it was driven through the EDB, which is basically the development arm, if you will, of the Singaporean government. And so there's a lot of tax incentives for what they did. That is atypical for what we see with our large customers in that market. Most of them like to reside in a facility like Equinix or potentially one of our competitors. So from a cabinet perspective, that's done. What we're now going to absorb unfortunately and what is reflected in our guidance, of course, is the cabinets stopped billing on the last day, if you will, of the quarter. So as a result, that $1 million churn or thereabout is going to -- we're going to feel the full impact of that in Asia Pacific through the next quarter. And so when you look next quarter, when we give you, if you will, the final results for Asia Pacific, it's going to be very much muted because of that large churn event. And let me just answer your other question, Jonathan, if I may. And so from a revenue perspective, again, it's something that we probably don't want to keep on doing because we're -- if you will, the ancotels and the Asia Tones are getting fully integrated into our businesses. But let me at least just give it to you for this quarter. ancotel did -- just over $6.3 million for the quarter. Asia Tone did $11.4 million. And then ALOG did just under $21 million. Again, a little bit -- they were a little bit aided by some positive currency with the Brazilian real. But overall, that's the numbers that we had for those 3 assets.

Understood. It just makes it easier for forecasting to have the Ps and Qs. And so this helps us back it out. But I understand that you're not going to want to break it out indefinitely. I do have just a couple other things here. We did see a pretty big margin move in both Asia Pac and Europe in the quarter, more dramatic in the Asia Pac region. And I was wondering if you might comment on that. And then finally, if you could tell us where we are in kind of the sales force ramp and the productivity and the success, that would be really helpful.

Yes. Asia Pacific, yes, they actually had a pretty healthy increase in margins quarter-over-quarter. Part of it was due to this one-off benefit I alluded to. There was a, in fact, $1 million one-off benefit that they hadn't planned for in the revenue line. We're now hedging -- it's very much a very complex accounting issue that we have on that revenue line in Singapore. We're now hedging against that effectively on a go-forward basis. So you shouldn't see that again. So part of it, if you take out $1 million of effective pure profit, that will give you a better perspective. In addition, there was just some timing of their spend. And so I would think they'll get back to their traditional levels in the range between 48% and 50% for the remaining part of the year.

Yes. And then relative to the -- to sales force evolution, I'll speak to the Americas, we're probably the furthest along in terms of the evolution and adjustment. So the sales teams that we've making and overall, I continue to be very pleased with that progress. The key metric that I watch carefully is median rep productivity. Averages jump around a little bit if you're closing large deals, but the median gives you a good sense for baseline performance. And we continue to see tenured rep median performance actually trending back towards historic norms despite the fact that we've pared down territories and redistributed customer patches to the new reps and seeing nice, healthy up and to the right median performance from the new rep population, indicating that the baseline performance is improving and that we should have continued upside potential in our gross bookings performance. So very pleased overall. I think we're realizing pretty significant benefits from the vertical alignment and get strong performance in our mature verticals and, as you said, record quarter in cloud this quarter and really seeing some of the emerging verticals really begin to perform. So overall, I think very solid and we'll continue to press on it.

The only color I would add, Jonathan, on top of that from an Asia and a European standpoint is that, actually, I don't think we mentioned on this call yet, but actually, Europe had its highest production of bookings this past quarter. So even with the macroeconomic situation in Europe, that team is performing very, very well, primarily driven by the fact we're concentrated in these more robust, stronger markets. But generally, what Charles just described is happening across all 3 regions. Funnel and coverage ratios are in good shape, the deal discipline is taking hold across all the countries and all the regions. So we're globally doing deal reviews, and we're making good long-term decisions. And the vertical orientation of the sales force in the marketing organization is really helping us have just better conversations with customers. So we really understand the mix of applications coming into these IBXs. So generally speaking, everything is moving in the direction that Charles described on a global basis.

Next is David Barden from Bank of America.

Obviously, my usual guidance question kind of got hit early, so I do have 2 though. First would be, Keith, during the quarter you mentioned you did a redemption. You took out one of your most restrictive high-yield securities. You've opened up roughly $1 billion of RP basket that you could be deploying to any number of options. Your leverage is half a term below your target and improving as EBITDA grows and cash flow grows over the course of the year. Yes, you've got some taxes. Yes, there might be an E&P distribution 1 year and change down the road. But what would be the best reason that you can give that you shouldn't be buying back stock with the new freedom you have and the cash flow you have and the leverage capabilities you have? Because it seems like it would be the right thing to be doing at this stage of the game to lower the future dividend burden on the business. And then, I guess, second would just be big picture. It sounds like a softball, but when people saw the churn number, there was a lot of hyperventilation in the aftermarket. Obviously, the stock has recovered pretty strongly as the course this call is going on. But the reason why I think people are hyperventilating is because you see Rackspace getting crushed when they lower cloud pricing or you see companies that sell into data centers, talk about how they can't sell anymore because businesses aren't making decisions. And yet you guys are able to come up and deliver kind of quarter-after-quarter. What makes this sale so much better, so much easier to make than all these other guys who seem to be struggling in the "data center market?"

Why don't I take the first one? I think Charles will take the second one. I think the highest level and part of my comment around, we have $1.2 billion of cash, we raised the money at the time partly because we wanted to make sure we could do that, do what I call positive trading, knowing that we had to eventually take out these 2018 bonds to give us that financial flexibility to either purge pre-REIT conversion or to disburse dividends on a post-REIT converted basis. And so probably the largest one thing I'd tell you, David, and to the listeners on the phone, plus all the investors that I've spoken to over the last few quarters, is recognizing we're going to have some pretty big cash payments over the foreseeable future. Without fully understanding yet exactly how the funds are going to flow through the organization and what the optimal capital structure is, which very much is going to depend on what we hear back from the IRS vis-à-vis our request for a private letter ruling, it's just premature. In the end, we want to make sure we maintain all the flexibility in the organization so that we can get the funds in the right locations because the complexity of our model is vastly different than many others who are converting to REIT because a large piece of our business is offshore. And as I said, by 2015, roughly 50% of our revenues are going to be outside of the Americas. So for that very reason, you're going to see us refinance at the right time, recognizing that there's a lot of noise in the global market. We thought it was the right thing to do at the right time, but it also gives us the flexibility to now make some decisions on how we deploy that capital. We recognize we want to continue to grow, we got to take care of the shareholders, we got to get to the REIT conversion, we got to fund this organic expansion. And as I said previously, I think there's a scenario, if we deliver on the plan that we have set ourselves on this year, the fact of the matter is, CapEx is going to -- we're going to spend more in 2014 than we're going to spend in 2013. And as a result, you got to make sure you have the capital to fund that growth. So there's a lot of things going on. And all I'd ask of you and then the rest of the listeners is we recognize that there's a lot of cash on the balance sheet. We're half a turn under. But I think all it takes is a payment to the IRS, and basically, you're right at the low end of our range. And then a couple other things that we could do and all of a sudden, you've got a much better cash position vis-à-vis what our debt load is. So why don't I turn it over to Charles.

Yes, happy to answer that question, David, relative to -- I think what you're hearing from us, and again, maybe Steve can pile on here on the back-end, but I think a solid strategy that we have communicated to you over the past couple of years and I think the courage to execute on that strategy in a disciplined fashion. And I think that even in the face of making some decisions around the churn and living through those headwinds and making good long-term decisions that will generate the kind of returns that we believe are there for us in the business. And I think the reason that -- directly to your question of why it is easier for us to deliver than perhaps others who might claim, would want to have a similar value proposition is because I think we are selling based on value to deliver to our customers. A significant portion of our customer set is service providers that have a significant revenue off of the back end of the services that they deploy into our centers. And they value what we deliver, which is high-performance, low latency, mission-critical reliability, global reach that simply others just don't have the ability to compete on a head-to-head basis. And so we, whereas others, I think, in a more broadly defined data center space, which people seem to want to throw all into 1 bucket, often find themselves with the only lever they have in their hand to win a deal being price. And they end up in a very uncomfortable situation in terms of margin performance and the subsequent capital intensity of their business because they can't sustain price points and really deliver value. And so I think that's why we are having good success in the market. I think we're seeing a set of secular trends around the emergence of cloud into all of our verticals around mobility, around various other trends that I think keep the wind at our back. And I think as long as we remain disciplined about selling into targeted application sets, that meet the Platform Equinix profile, I think, we'll continue to see solid results.

The only thing I'd add -- David, I thought you asked at the tail end of your question that -- how are we having record bookings in our cloud business when it seems like other companies that are in that space are fighting and lowering price and battling it out? Remember, our whole strategy is to be the home of as much cloud as we possibly can, private, public hybrid, all flavors of it. And so we're enabling these companies. Some are going to win, some are going to lose, but we're not caught in the middle of that price war. We're enabling these companies to come in and get access to our 4,000 customers and set up shop so they can deliver cloud services out to the world. So we're in this neutral position and the fact that cloud is bleeding into every industry vertical and our entire sales force is selling in each vertical, cloud is not just an industry vertical, even though that's how we report it, it's happening in each of the industries. And so it's proliferating at a pretty good rate.

Our last question comes from Frank Louthan from Raymond James. Frank G. Louthan - Raymond James & Associates, Inc., Research Division: Can you give us an idea of any other sort of server farm exposure that we might need to be aware of that could churn? I mean, you talked about kind of coming off the tail end of that. Is that more the tail end for this year or the tail end kind of ever? Or should we look for any more of this churn? And then at some point, is it appropriate for you guys to move to reporting on more of a megawatts under roof, when we talk to other colocation providers and private folks and they tend to think and talk in the industry in that term? And at what point would you move to that sort of reporting versus the cabinets?

Frank, this is Charles. I'll let Keith handle the second part of that. But as to the first question around "server farm exposure," et cetera, I will say that as we have indicated, we feel a comfort level of level that we've turned the corner on churn, in part just because we have very good visibility to our book of business to contract expirations to how our customers are viewing their architectural evolutions, et cetera. And in previous calls, people have asked me to say how far along are we in IBX optimization, et cetera. I would say we're well-advanced in terms of saying that we have worked through much of the exposure that was there, and that was causing the elevated churn, which is why we came onto the call today and indicated a turning point. However, I would also say that evolution of architectures by customers as they grow is something that's natural and inherent to our business. And so it's not going to go away. We're not going to work it all out and assess them then never see it again. That's simply not the way it works. But by having good discipline on the front-end, by having solution architects engage with our customers to talk through how they evolve their architectures and by virtue of the fact that we simply do not have a concentrated business, neither in terms of revenue, customer exposure, vertical exposure, et cetera, we can handle a customer who we believe, working with them, ought to move to a multi-tiered architecture. We can handle that within the scale of the business. So it's not something that is -- it isn't going to go away. I do think we work through some nonrecurring exposure, if you will, that was just cleaned up on many years of trying to get after that. And I think we've done that now. We feel comfortable with our ability to turn the corner. But it won't completely go away. But we feel comfortable with what we've articulated to you in terms of what that implies for go-forward churn.

And Frank, said another way -- and then Keith can have the megawatt question. But said another way, we've made a business decision here to catch -- and we do very frequently very high-growth companies that will continue to scale with us around the world, and at some point, they're going to get big enough where they're going to consider building their own data center or doing, as Charles just described, this bifurcation or multi-tiered architecture. And they're going to naturally churn out. But for that time period, while they're growing and they're young, they're going to grow inside of Equinix, and we'll help them do that. And that will be the business model. And so we're going to continue to find companies that are high-growth companies, that will get to a certain stage in their evolution and they're going to bifurcate it or they're going to get more sophisticated on their multi-tiered architecture. And as Charles just described, you'll have that phenomenon. So the churn is going to -- we're going to have some amount of churn for those types of customers.

Frankly, it really is about the discipline and then just being able to make sure that we forecast and understand what's happening with the customer. And Charles alluded to the fact that he gets a very good understanding of his business on what -- where the contracts are, where the expiration dates are and what the risk exposure is to our customer renewing. So all that said, I think at this stage, we feel pretty comfortable with what we have. And to the extent it happens different than that, we're going to update you and give you a sense of what's going on. But right now, we're very comfortable with where we are. So dealing -- last point was dealing with the question on reporting. I think it's important to recognize that -- you said, like many others report megawatts, you have to recognize, we don't think we're on the same supply and demand curve as many of our theoretical competitors. I think we have a different customer set that we look at. And not just that you asked, as we move towards REIT conversion that an alteration of our market metrics is not appropriate. I think we're going to look at that to make sure we can effectively communicate to the market, what's going on in the business, recognizing we could have a different investor set or at least a mix of our investor set. And so we have to recognize that, that metric might change. But suffice it to say, I also think it's important to recognize we have 4,500 customers. The average size of our deals are a lot smaller, and I'm not so sure stelling [ph] on megawatt is the right metric to give you a sense of where the market is moving. So right now, we're going to keep it at MRR per cab. We might occasionally talk about it, revenue per kilowatt, because that's a very good metric. It boils it all down to, if you will, the base, if you will, which is really our consumption. And then we'll also consider other metrics. And so give us some time in that. As we evolve to REIT conversion, we'll certainly be thinking about what alternate key metrics we might want to share with the market through that process.

Thank you. That concludes our Q1 call. Thank you for joining us.