Equinix, Inc. (EQIX) Q3 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 you have any objections, please disconnect at this time. I'd now like to turn the call over to Katrina Rymill, Vice President of Investor Relations. 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 and our most recent 10-Q filed on July 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 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 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, Chief Operating Officer. Following our prepared remarks, we'll be taking questions from sell-side analysts. [Operator Instructions] At this time, I'll turn the call over to Steve.

Thank you, Katrina, and good afternoon, everybody. Welcome to our third quarter earnings call. This quarter, we delivered our 43rd consecutive quarter of revenue and adjusted EBITDA growth with solid results across all 3 regions. Before I provide details on the quarter, I'd like to provide some context around current market dynamics. First, positive secular trends are driving significant demand in the broader data center market. As capital has flowed into this sector, the market has further segmented and we are seeing customers continue to embrace more sophisticated infrastructure strategies, such as multitiered architectures and hybrid cloud. Second, these dynamics are creating industry shifts that we believe Equinix is uniquely positioned to exploit, but are also creating a highly competitive landscape in adjacent markets such as cloud services in wholesale co-location. These dynamics are making it increasingly critical for us to maintain our disciplined approach by pursuing customer applications that require high-performance, global reach, ecosystem, access and mission-critical reliability. We continue to see solid demand in this sweet spot as evidenced by our healthy customer mix, strong operating margins and firm MRR per cabinet. Third, our strong operating model is supported by significant barriers to entry. Equinix celebrated its 15-year anniversary this quarter, and it was a chance to reflect on the significant scope and scale of our business. Today, Platform Equinix is comprised of 950 carriers, nearly 100 world-class data centers in 31 metros and over $7 billion of invested capital. We also have 3,400 committed employees serving more than 4,400 customers who are connecting with their customers and partners through over 124,000 cross connects and the largest digital exchanges in the world. Equinix is committed to delivering exceptional value to these customers, and we remain focused on enlarging the substantial competitive moat around our business as we accelerate our ecosystem strategy, expand our platform and invest in a seamless customer -- global customer experience. Each new ecosystem of interconnected customers creates momentum that helps build the defensibility of our business. Our network density has been foundational to the company's success and has given rise to other ecosystems such as electronic trading, content delivery and more recently, digital advertising. In addition, we're rapidly building cloud density with a new generation of service providers accessible directly in our sites and interlock with the networks in a way that make Platform Equinix the logical home for the hybrid cloud. Now turning to the quarter as depicted on Slide 3. Revenues were $540.5 million, at the midpoint of our guidance and up 3% quarter-over-quarter and 11% over the same quarter last year. Revenues on a normalized and constant currency basis increased over 3% sequentially and 13% over the same quarter last year. Adjusted EBITDA was $245.2 million for the quarter, above the top end of our guidance, a slight increase quarter-over-quarter and up 7% over the same quarter last year. Churn remained in line with guidance as we continue our highly disciplined approach to customer renewals. Yield per cabinet remains firm across the regions as our ecosystems mature and deliver a very healthy interconnection growth. This quarter, we added over 3,600 cross connects with particular strength in Europe and in the Americas. On a global basis, our industry verticals are performing well, and I'd like to provide you with a few highlights starting with the cloud. Many of you have asked whether the cloud is an opportunity or a threat. For Equinix, cloud is unequivocally a sizable growth opportunity. Cisco projects that cloud traffic will grow at a 35% CAGR over the next 4 years and will account for over 2/3 of the global data center IP traffic by 2017. Given our network density, Equinix is the natural place to meet this demand and provide competitive advantage for cloud service providers as well as enterprise. Turning to Slide 4. This quarter, cloud and IT services again delivered record bookings and continues to be our highest growth vertical as many cloud players leverage Platform Equinix to deploy their service. With over 1,200 cloud and IT services customers, Equinix is the best location for enterprises to access leading Software-as-a-Service, Infrastructure-as-a-Service and cloud enablers to leverage the cloud. Hybrid cloud deployments are a major growth opportunity for Equinix, as enterprises seek to take advantage of bursting into the cloud while retaining control over critical data and application. A major milestone in bringing this capability to our customers is the strategic relationship we recently announced with Microsoft that enables direct connectivity to Windows Azure in key markets around the world. Equinix customers can connect their infrastructure directly to Azure, establishing a private network connection that reduces latency, lowers network costs, increases their throughput and provides a more consistent network performance and security than Internet-based connections. This service will be available in multiple Equinix data centers in 2014, and we are onboarding a small number of customers for early trial this quarter. We also continue to innovate and expand our interconnection options to the cloud, such as providing flexible private connectivity to AWS through our Ethernet Exchange. On Slide 5, we will continue to focus on building cloud hubs in 10 major markets around the world for our customers to meet and deploy cloud services. Turning to our network vertical. We continue to deliver solid results and gain market share with key accounts, as this customer segment looks to amplify its relevance to the cloud. For some network customers such as the Japanese multinational firm IIJ, this entails deploying cloud infrastructure within Equinix that supports the delivery of native cloud service. Other such as Verizon and Time Warner Telecom are deploying private data networking services along their own Internet peering nodes, allowing their customers to connect privately to an array of cloud service providers inside of Equinix. Now turning to the buyers of networking cloud services in the enterprise vertical. We continue to see longer sales cycles, but also encouraging signs that CIOs view data center and networking decisions as key strategic levers for enabling hybrid cloud adoption. Building multitiered architectures and locating private network nodes inside Equinix, a solution we call Network Performance Hub, allows IT organizations to expand their Wide Area Network footprints, which creates value in 2 important ways: first, customers use our network density and vast collection of carrier services to optimize their Wide Area Network to deliver higher performance at lower cost; second, these Network Performance Hubs provide exchange points to procure scalable, secure private connections to cloud services, creating a hybrid cloud infrastructure that allows IT organizations to flexibly move workloads between private and public infrastructure. This quarter, we signed several marquee accounts, including a Fortune 50 energy company, who will initially deploy a Network Performance Hub across 3 markets, including a Direct Connect to Amazon Web Services. We believe these types of reference accounts are critical to shortening enterprise sale cycles, and we will continue to scale our go-to-market effort to capture more of these opportunities. In financial services, the electronic trading ecosystem remains healthy as key trading platforms and participants expand globally with Equinix, driving cross connects in the financial ecosystem, particularly in our Tokyo, Chicago, London and New York campuses. We are experiencing additional growth in this vertical as regulation is driving the over-the-counter derivatives market to move to electronic trading venues. This nascent ecosystem is forming as customers deploy critical infrastructure at Equinix because many of their current and potential customers are already located in our IBXes, effectively de-risking the development of this new market. Our proactive sales focus on this opportunity has paid off as 16 of the 19 U.S. swap execution facilities have located key infrastructure inside of Equinix. Finally, in the content and digital media vertical, we saw steady demand in this quarter as large content providers evolve to multitiered architectures in order to meet network costs and improve latency. Equinix is winning network and ServiceNow deployments that leverage our global footprint. These nodes are often connected to large-scale compute or storage applications typically served by wholesale or customer-built data centers. We are also pleased with the momentum of Equinix's digital advertising ecosystem referred to Ad-IX, which has similar dynamics to our financial services electronic trading ecosystem. We now have 90 ad exchanges, advertising networks, data aggregators and demand-side platforms operating inside our IBXes, transact real-time digital advertising placements. The Ad-IX ecosystem now operates in 7 regional hubs globally, including Silicon Valley, Los Angeles, Amsterdam and Hong Kong. Shifting to our global platform. We continue to differentiate ourselves in the market. Today, over 60% of recurring revenues come from customers deployed across multiple regions, and the number of customers deployed with Equinix in all 3 regions grew 23% year-over-year. We continue to invest in our global platform through campus expansions and growing our presence in core markets. Today, we announced 2 new expansions to meet robust demand in Asia. In Japan, we are proceeding with the next phase of our Tokyo-4 build to support the momentum of our financial ecosystem. In Shanghai, we are moving forward with the next expansion of our Shanghai-5 data center to capture growth from financial services, as well as global cloud and systems integrators in China. In the Americas, we opened a new IBX in Rio de Janeiro this quarter and are proceeding with the next phase of São Paulo-2 due to open next year. And just last week, we opened the second phase of Silicon Valley-5, one of our highest demand data centers, which is over 30% pre-assigned. Further, with the success of our business suite products in Ashburn, we are expanding the same offering to New York, a new build that will be tethered into the robust ecosystems in our Secaucus campus. And in Europe, we are on track to open the final phase of London-5. This campus has seen strong bookings performance in 2013, with notable growth in the financial services and network ecosystem. In addition, today, we're announcing London-6, a new greenfield IBX directly opposite to London-4, that will be an integral part of the Slough campus. And finally, we are progressing in an initiative to maintain and bolster control of our strategic assets through robust leasehold contracts and increased ownership over time. We are pleased to have negotiated renewal agreements at market rates for 5 of our assets with Digital Realty in Chicago, Dallas, L.A., Miami and D.C. This includes pre-negotiated rates on all renewal options, locking in effectively up to a 35-year period on these assets at rates in line with our expectations. We are also opportunistically expanding ownership of assets, as it makes economic and strategic sense. In October, we acquired the Kleyer 90 Carrier Hotel in Frankfurt, one of the busiest network nodes in Europe. This comes on the heels of acquiring and integrating ancotel, which is located inside of Kleyer 90 and exemplifies our commitment to being a leading interconnection hub in continental Europe. Additionally, we anticipate to close shortly on the acquisition of the London-4 and London-5 IBX buildings for approximately $35 million. Concurrent with this acquisition, we will enter into long-term ground leases on the London-4, 5 and future London-6 properties, effectively giving Equinix up to 50 years of control of our Slough campus. Upon completion of this transaction, we will own 21 of our 99 IBXs and owned assets will generate approximately 38% of our revenue. Before I turn the call over to Keith, I also want to share another exciting development for the company. As we consider the massive opportunities ahead of us in cloud, enterprise and interconnection, we have added 2 key executives to our team. First, we have hired Ihab Tarazi as our Chief Technology Officer, who brings 23 years of global Internet and telecommunications experience. Ihab will be an integral part of both our cloud and interconnection initiatives to help fuel our continued growth globally. And second, we have added Deborah McCown [ph], as our Chief Human Resource Officer. Deborah [ph] is a savvy HR leader with global experience, who is committed to ensuring that we continue to attract, develop and retain the best people in the industry. With that, let me stop there and turn it over to Keith.

Great. Thanks, Steve. Good afternoon to everyone on the call. So before I start my prepared remarks, I want to provide you with some additional comments related to our expanded disclosure in the press release posted today for the nonrecurring deferred installation fees. First, amortization of deferred installation fees is inherently imprecise. And in addition to making an adjustment last quarter, we need to ensure that the prior periods are correct before we filed our Form 10-Q. Second, as noted, any adjustments to our nonrecurring revenues is expected to be less than 1% of total revenues in any given quarter or period, covered by the current Forms 10-K or 10-Q and has no impact on our cash flows. Lastly, we'll be finalizing our announcements over the next week or so. And once that is complete, we will provide the appropriate disclosures on this matter, which will likely include an update in the press release and the required SEC filings. So starting with our third quarter results. We continue to see steady progress towards our operating goals, both on the top and the bottom line, while other key metrics reflect the momentum we see in the retail data center space. Specifically, interconnection revenues increased quarter-over-quarter by greater than 4%, growing at a rate faster than the overall growth of the business, the result of net cross connect and exchange port additions. Also, net cabinets billing increased nicely in the quarter with overall utilization levels growing to almost 77%. Our overall deal volume continues to increase, while the average deal size remains lower than the prior quarter and the rolling 4-quarter average in each of our region as we continue to focus on those deals in our sweet spot. Separately, given we're at the 1-year anniversary of both the Asia Tone and ancotel acquisition this quarter, our key financial and nonfinancial metrics now fully reflect these acquisitions. Although as a reminder, ALOG will continue to remain excluded from the nonfinancial metrics, given the nature of this business. Now turning to Slide 6 from the presentation posted today. Global Q3 revenues increased to $540.5 million, a 3% increase over the prior quarter and up 13% over the same quarter last year on a normalized and constant currency basis. Our Q3 revenue performance reflects a $3.1 million negative currency headwind when compared to the average rates used in [ph] Q2 and a $1.3 million positive impact when compared to the FX guidance rates. Given the volatility of the European currencies, starting this month, we initiated a cash flow hedging program to limit our future exposure to exchange rate fluctuations for the British pound, the euro and the Swiss franc, thereby, reducing FX volatility on approximately 40% of the EMEA revenues and adjusted EBITDA. The foreign currency contract that we'll use to hedge this exposure will be designated as cash flow hedges. Global cash gross profit for the quarter was $365.8 million, up 3% over the prior quarter and up 11% over the same quarter last year despite the higher seasonal utility costs, a trend that is consistent with our prior years. Cash gross margins were 68% of revenues, consistent with our guidance. Global cash hedging expenses increased to $120.5 million for the quarter, slightly below our expectations due to the timing of spend on our key strategic initiative, although some of these costs will be realized in Q4. Global adjusted EBITDA increased to $245.2 million, above the top end of our guidance range and 11% increase over the same quarter last year on a normalized and constant currency basis, including the change in accounting estimate initiated in Q2. Adjusted EBITDA was virtually flat when compared to prior quarter, impacted by an increase in global IT initiatives and REIT costs, higher seasonal utility spend and expansion cost from of new IBX openings. Our adjusted EBITDA margin was 45%. Our Q3 adjusted EBITDA performance reflects a negative $1.8 million currency effect, when compared to the average rates used in Q2, and a small $200,000 positive impact compared to our FX guidance rates. Global net income attributable to Equinix was $36.6 million, up quarter-over-quarter, primarily due to loss in debt extinguishment realized in Q2. Our fully diluted earnings per share is $0.72, a meaningful increase over prior quarter and the same quarter last year. MRR churn was consistent with our expectations at 2.5%. For the fourth quarter, we expect MRR churn to be approximately 2.5%, in line with our prior guidance. Now moving on to comments on REIT. We continue to move forward with our plans to convert to REIT starting January 1, 2015, and currently do not expect a delay to this timeframe. On Slide 7, we summarize the various expected REIT cash costs and taxes similar to our discussion last quarter. In the third quarter, we incurred approximately $8 million in cash cost for REIT and other tax saving initiatives, primarily related to professional fees, and expect to incur roughly $11 million in additional REIT-related cash costs in Q4. With respect to income taxes, similar to the prior quarter, our 2013 estimated cash tax liability is expected to range between $150 million and $180 million. On a year-to-date basis, we paid $58 million in REIT-related cash taxes. We're targeting our range of U.S. tax liabilities related to G&A recaptured to now range between $360 million and $380 million, of which $162 million is either being sheltered by our prior NOLs or cash taxes paid to date. Turning to Slide 8. I'd like to start reviewing the regional results, beginning with the Americas. Overall health of the Americas business remained strong. Americas revenues were $318.1 million, a 2% increase over the prior quarter and up 3% on an FX neutral basis and 9% over the same quarter last year, excluding the change in accounting estimate. Cash gross margins remained solid at 71%. Adjusted EBITDA was $148.4 million, a decrease of 3% over the prior quarter after absorbing higher corporate overhead spend from the strategic initiatives, including REIT. Americas adjusted EBITDA margin was 47% for the quarter. Americas net cabinets billing increased by approximately 800 in the quarter, while MRR per cabinet rose slightly and remained at very attractive levels. Americas added 1,400 net cross connects in the quarter and interconnection revenues, as a percent of the regions recurring revenues increased at a new all-time high of over 20%. Now looking at EMEA. Please, turn to Slide 9. EMEA revenues were $132.9 million, up 6% sequentially. Revenues on a normalized and constant currency basis were up 5% quarter-over-quarter and up 17% year-over-year. Adjusted EBITDA was $56.8 million, up 15% over the prior quarter, in part due to $2 million of one-off benefits. Adjusted EBITDA margin increased to 43%. Normalized and on a constant currency basis, EMEA adjusted EBITDA increased 14% over the prior quarter and 22% compared to the same quarter last year. The U.K. business, our strongest performing operating unit in EMEA, continues to execute well across a number of verticals. And we intend to build on our London-6 IBX to ensure the continued momentum we've enjoyed on our profitable Slough campus. Another highlight is our Swiss team is making good progress with our newly opened Zurich-5 IBX, booking both global and local Swiss deals with particular strength in the cloud and IT services vertical. The German business showed slight improvement over the prior quarter. And although we've taken a number of actions, we do not expect them to take hold until mid-next year. EMEA interconnection revenues have grown nicely over the past 3 quarters and added 1,400 net cross connects this quarter. MRR per cabinet remains firm across the EMEA market, and net cabinets billings increased by approximately 800. And now looking at Asia-Pacific. Please, refer to Slide 10. Asia-Pacific had record bookings this quarter driven by wins in financial, cloud and IT services and digital media and content verticals. Similar to EMEA, Asia-Pacific was the beneficiary of a number of large global deals, again reflecting the value of Platform Equinix. Asia-Pacific revenues were $89.5 million, a 2% increase over the prior quarter. Revenues on a normalized and constant currency basis were up 4% quarter-over-quarter and 17% year-over-year. Annual revenue growth was tethered by the Asia Tone acquisition and by the large Singaporean churn that occurred at the end of Q1, a space that has now been fully rebooked at better average prices. Adjusted EBITDA was $40.1 million, lower than the prior quarter, primarily due to higher seasonal utility costs, higher than a bad -- higher-than-planned bad debt provision and an increased salaries and benefit line attributed to new hires. On a normalized and constant currency basis, Asia-Pacific adjusted EBITDA margin increased 8% over the same quarter last year. MRR per cabinet remains strong, although decreased 1% on an FX-neutral basis over the prior quarter. New logos added in Asia-Pacific this quarter totaled 66, a 35% increase above the rolling 4-quarter average, and cabinets billing increased by a very healthy 800 compared to the prior quarter. We added net -- we added 800 net cross connects and interconnection revenue's now over 12% of the region's recurring revenue. And now looking at the balance sheet. Please, refer to Slide 11. We ended the quarter with $1.2 billion of unrestricted cash and investments on our balance sheet and our current liquidity position remains healthy, including access on our $550 million operating line of credit. Looking at the liability side of the balance sheet, we ended the quarter with net debt of $2.9 billion, including a $318 million increase in capital leases and other financing obligations since yearend, the result of recent lease negotiations and build-to-suit accounting on some of our new expansion projects. Our net debt leverage ratio increased 3x our Q3 annualized adjusted EBITDA. In the short term, we'll continue to maintain in a strong and flexible balance sheet, thereby, ensuring the maximum operational flexibility to execute against our future funding obligations, including our anticipated REIT-related need as we await the response from the IRS on our PLR filing. And going forward, we will continue to review our sources and uses of capital and we'll continue to look to maximize shareholder value by allocating our capital to the highest and best use. Separately, in September, we amended our senior secured credit facility to allow for greater flexibility in preparation for REIT conversion. We also amended certain financial covenants to provide greater operational flexibility as we renegotiate a number of our IBX operating leases, which we anticipate will convert to capital leases. Our cost of borrowing under this credit facility remains unchanged. Now turning to Slide 12. This is a summary of our ownership and lease renewal schedule. Consistent with our broader real estate strategy, we secured a number of our critical IBX assets with long-term lease extensions, and where appropriate, selectively acquired some of the strategic assets, such as Kleyer 90 in Frankfurt. If the company were to exercise all renewal options available, as of today, 83% of our leases by square foot would be secured through at least 2027. Looking forward, we expect our remaining operating leases will ultimately convert to capital leases, in part due to anticipated changes to the lease accounting rules and in part, due to the rules that define current capital lease accounting. This quarter, 4 of our 5 leases renewed with Digital Realty converted from an operating lease to a capital lease. Now switching to Slide 13. Our Q3 operating cash flow increased substantially over the prior quarter to $206.6 million, primarily due to reduced cash tax payments. Our DSOs decreased to 34 days, largely due to strong collection activity at the end of the quarter. For 2013, we expect our adjusted discretionary free cash flow, excluding any REIT-related cash costs and taxes, to remain between $620 million and $640 million, and adjusted free cash flow to be greater than $175 million. And now looking at capital expenditures. Please, refer to Slide 14. For the quarter, capital expenditures were $171 million, slightly below expectations due to timing of spend, including ongoing capital expenditures of $41 million. We currently have 15 announced expansion projects across the globe, of which 14 are campus build or incremental phase build, thereby, de-risking the investment given the current customer momentum and demand from the earlier phases. And finally, turning to Slide 15, the operating performance of our 24 North America IBX and expansion projects that have been opened for more than 1 year continue to perform well. Currently, these projects are 82% utilized and generate a 34% cash-on-cash return on the gross PP&E invested. Our 8 hosted IBXs grew 7% year-over-year as customers continue to purchase additional services. So with that, let me turn this call back to Steve.

Okay. Thanks, Keith. Let me now shift gears and cover our outlook for 2013 on Slide 16. For the fourth quarter of 2013, we expect revenues to be in the range of $559 million to $563 million. Cash gross margins are expected to approximate 68%. Cash SG&A expenses are expected to range between $123 million and $128 million. Adjusted EBITDA is expected to be between $255 million and $259 million, which includes $11 million of professional fees related to the REIT conversion. Capital expenditures are expected to be $190 million to $210 million, including $50 million of ongoing capital expenditures. And for the full year of 2013, we expect revenue to range between $2.145 billion to $2.149 billion. Full year guidance is also adjusted for $9 million of positive foreign currency tailwinds from our prior guidance rates. Total year cash gross margins are expected to approximate 68%. Cash SG&A expenses are expected to range between $470 million and $475 million. Adjusted EBITDA for the year is expected to range between $988 million and $992 million, which includes $25 million of professional fees related to our REIT conversion and approximately $4 million of positive currency benefit from prior guidance. We expect 2013 capital expenditures to range between $560 million and $580 million, including $165 million of ongoing capital expenditures. So in closing, Equinix's ecosystem consistent strategy, combined with our scale, network density, mission-critical reliability and global footprint are stimulating interconnection and driving solid business results. We will continue to make disciplined decisions to generate profitable growth and win the right deals to drive the acceleration of our ecosystem. So let me stop here and open it up for questions. So over to you, Heather.

[Operator Instructions] And our first question comes from Jonathan Schildkraut with Evercore.

I know there's going to be a lot, so maybe if we could just spend a little time on the lease renewals with Digital Realty and the accounting impacts that, that has as you move from operating leases to capital leases. I'm just trying to get a sense as to what that does to the fourth quarter or full year guidance on the EBITDA line.

Yes. Great question, Jonathan. So let me take that one. So the leases that we -- that went from sort of operating lease to capital lease, they're not going to manifest themselves through basically our cash flow statement. You'll see, obviously, in the P&L you'll see more depreciation, you'll see interest expense and then it will be principal repayment on the cash flow statement. So that all said, obviously there's a net benefit attached to that. That net benefit is going to be wholly offset by basically us entering into a ground lease for, as Steve alluded to, for the London-4 and 5 properties. And historically, we had what we had "build to suit accounting" for our London-4 and 5. Now that we're entering into a ground lease arrangement, that is actually a P&L hit. So basically, the 2 offset one another. And so there will be no net benefit -- no net benefit in the quarter in Q4.

Our next question comes from Michael Rollins with Citi Investment Research.

I was wondering if you could talk little bit more about the development of the sales force, what you're seeing in terms of productivity? And where do you stand on backlog, where I think earlier in the year, there was a little bit more build of the backlog, and where we are in that today.

Yes. Mike, this is Charles. Yes, I think that we continue to feel good about the overall progress on the sales force. As we've discussed previously, our steady-state productivity and the ramp to that productivity varies significantly by verticals. Our mature verticals, network and financials tend to ramp pretty quickly. Cloud, we're seeing some recent acceleration as evidenced by our results in the last couple of quarters. And enterprise continues to be slower ramp, given the more protracted sales cycles, which we talked about last quarter in particular. Although I will say there that we're seeing these green shoots of sort of marquee customers seeing the opportunities associated with leveraging Equinix for their hybrid cloud infrastructure. So I think there's some real reason for optimism there. Overall, most of the reps that we brought in, when we grew the force substantially in 2011, have either reached full ramp or in some cases, been managed out and then new players have been brought in. So we think there's still upside in the current force as the new reps mature and as we become more adept in the enterprise market. So overall, I think we're on -- generally, I'm very -- we feel very positive about the ability for the force to generate bookings in our sweet spot, and we're going to continue to define our go -- refine our go-to-market approach and active in looking at how we can augment that -- augment direct force with key channel partnerships. So that's a quick summary on the sales force and sales force productivity. Relative to backlog and book-to-bill, I think we see that as pretty stable right now. Again, we are -- it has inflows a bit, return activity and new bookings and et cetera. One thing I will say is that we talked last time about fewer large deals and Keith mentioned lower average deal sizes. That probably has actually a net beneficial effect relative to book-to-bill interval. It hasn't necessarily flowed through entirely, but I think that will allow us to realize revenues, which we typically do in a fairly rapid basis anyway, given the nature of the business. So we feel good about where we are with that right now.

Our next question comes from Scott Goldman with Goldman Sachs.

I guess a couple. One, maybe on the pricing side, I think looking at North America MRR per cab, we saw a nice acceleration versus where we had been running in the first half of the year. Just was wondering if you can talk maybe a little bit about what's driving that. Obviously, interconnect and power, but how sustainable do you think that is or could we see further movement from there? And then, I guess, just on the lease renewal follow-up, if I could on that. It read from the sides as though some of those weren't coming up for another 6, 7 years, I guess. So just curious as to why now go through that, and did you have to give anything up or can you give us any context for what types of increases you had to absorb as you renewed those?

Hey, Scott, it's Charles. I'll take the first part and hand it over to Keith for the lease items. Yes, obviously, we're pleased with the progress on the MRR per cab in the Americas. As we've told you guys before, there's always some volatility in that metric, so it's dangerous to be caught up on any particular quarter. But I do think that what we're seeing is we're beginning to see the benefits of the IBX optimization effort and some of the discipline we've implemented in terms of bringing the right business into -- or the right kinds of deals into the business. So again, I think we're at -- we're certainly at very healthy levels. It's certainly our aspiration to continue to drive the interconnection-rich business, higher power density implementations that are all going to have favorable impacts on MRR per cab. So certainly, we're going to aspire to continue that momentum. And I do think that we've got a very disciplined approach to the business that I think we're beginning to see the benefits of. So I'll hand it over to Keith on the lease stuff.

Great. To start on the leases, and you're absolutely right, so we have roughly 14 leases with Digital Realty. Seven of them were -- are long-dated, so we -- they weren't within our sort of our purview or focus, I should say. So the remaining 7, 5 have been renegotiated as we mentioned on this call and then 2 others are in the processes -- the process of being renegotiated. Part of the reason that we did it today versus delaying it, some of these leases are coming due 2014, 2015, 2016. And clearly, it was important for us, as we've sort of shared with the market and certainly shared with many of our investors, it's important to ensure that we have longevity in our contact life relating to these IBXes. And so this was a mutually beneficial time for both our sales and Digital Realty. Then turning to negotiation, obviously, something we've been working on for a while. And I'll just say, it was the right time. Vis-à-vis your request on the specific details, still a bit early to share that with you, but I they will tell you is I think it's a win-win for both organizations and it's consistent with the market -- sorry, the market and the expectations that we had set for ourselves, not only in our guidance, but also in our cash flow metrics going forward. And in fact, when it comes to some of the other leases that we're negotiating, in fact as we thought about our -- the expansion in those buildings 3, 4, 5 years ago, we'd already contemplated at that point in time what our anticipated rent increase would be, given the fact that we're in a subletting arrangement with some other parties. And so from that perspective, I would just tell you we're dead on the mark and we're happy with the outcome and I believe Digital Realty is happy with the outcome as well.

Our next question comes from Jonathan Atkin with RBC Capital Markets.

Yes, I'm interested in the deal size getting smaller and what implications that has for your business suites offer? And in general, what kind of impact you're seeing in the business from the increasing kind of encroachment from the REITs into -- more into the retail and interconnect peering segment of the market.

Sure. Yes, it's Charles. I'll take that one, John, and Scott -- or I mean, Steve or Keith can add any color. But I think that the -- overall, it's just that the dynamics are such that we're seeing this -- held in the sweet spot, but again larger deals, we talked about last time that it's really deals that previously were where the spread between retail and wholesale was smaller, we were seeing more undifferentiated large footprint deals close at market-clearing prices that simply -- what we simply don't find attractive. And so that is reducing those deals because we simply won't chase those deals at those price points, given the opportunity cost they represent when we can fill them with deals in the sweet spot. So as it relates to the business, we -- I see it as a fairly distinct issue in that we -- business suites is certainly a targeted offering for us, where we have the opportunity to serve certain key strategic customers, who may want to keep a larger portion of their total infrastructure need with a single provider and with one that they trust deeply. And that's the type of relationship we want to have with a number of players and so we very selectively decided to add some large footprint to the mix. But again, really not a wholesale alternative per se, but does give us an opportunity to serve certain select large footprint requirements. So and on a broader topic of wholesale and the competitive dynamics, it's interesting that many people have talked about blurring the lines between wholesale and retail, and frankly, I'd argue exactly the opposite. As the market segment, and as I've said, spread between retail and wholesales increase, the choice for people to move large, nonperforming, sensitive applications into wholesale is becoming an easy choice for them at the price points that wholesalers are offering. And again, we described it in kind of in our last call and what sort of marginal indications that has had on our business. There are certainly large sweet spot deals that we're doing: Core nodes for carriers, service nodes for cloud providers, et cetera, but these undifferentiated deals that close at low price points, simply are uninteresting to us. And it is true that some wholesale players have retail offerings or are signaling their intent to develop retail offerings, but in my mind, that's not a blurring of the lines, that's an entirely different matter and comes with -- that decision by a wholesaler would come with a very significant investment required to sell, install, build, support a large number of retail customers. And I'd encourage you to get a sense for that, all you have to do is look at our employee count, look at our SG&A investment necessary to support that retail model and compare that to pure wholesalers, and I think you'll very quickly conclude that players can't just declare themselves as retailers and expect that they're going to successfully meet customer needs, particularly heavily -- highly demanding customers, who need application performance, global reach, superior support, et cetera. So I really actually think we're seeing a brightening of the lines, a clearer segmentation of the market and the continued development of the sweet spot that Equinix serves tremendously well.

Charles, I think the only thing I'd add, Jonathan, and as you can tell by the comments, as Charles is doing this out of the North American business now and then on a global basis with his new role. It requires focus and complete coordination between sales and marketing. And we're going to do more transactions every quarter. We're going to do less large deals every quarter, but we are absolutely convinced the total addressable available market for those types of opportunities is significant and it's-- our-go-to-market channels, we just have to keep executing and that's what we're going to continue to do.

Are there any markets or regions where you're seeing book-to-bill, in fact, get a little quicker? Or is it too soon to be seen that, in fact, even on a regional or market-level basis?

I don't know. Keith, [indiscernible] quicker?

Yes, Jonathan, I would say, look, we're at levels that certainly, in some cases it's extremely fast and other cases, it takes a little bit longer. It clearly depends on the complexity of installation and what the customer is trying to accomplish. But I would tell you there's nothing that's out -- there's no major outliers that we see today that would change our opinion. And so at this stage, I'd just say it's roughly consistent with what we've experienced over the last few quarters and we'll continue to pay attention to looking forward. But as I said, it does depend on the customer installation, the complexity of that and certainly which market it's going to go into.

Yes, and what I would say is that we -- if you look to, for example, in the script, we talked about a Fortune 50 energy company was doing a network performance sub deal, which is really positioned to help them, not only with sort of re-architecting their WAN, but moving to a hybrid cloud environment. That type of deal, which is a multisite sort of 2:4 or 2:5 cabs in multiple sites, those tend to have a pretty attractive book-to-bill interval. And so again, as I think we see become more adept in selling that value proposition and landing those types of deals, we can aggregate -- can look like mid- to large size deals, but are made up of the smaller implementations. I think we might see favorability on book-to-bill, but I think it's too early to tell.

Our next question comes from Brett Feldman with Deutsche Bank.

Keith, I think you mentioned that on a currency-neutral basis, MRR in Asia was down slightly in the quarter. I'm wondering if some of that had to do with some of the transition that was going on in Singapore in terms of the churn and rebooking the space? And now that it has been fully rebooked at a higher average rate, should we see a better sequential trend in that metric going into 4Q? And then just one other one, a while back, you had set a goal for 2015 of getting to about $3 billion of revenue. It would seem that based on the revenue trajectory you're on right now, the time line for that could be pushed out a little bit. Is that a safe assumption at this point?

So yes, let -- so let me take those 2 questions. So first on the Singapore, the slight decrease you see quarter-over-quarter is wholly attributed to the fact that, and again I was dealing with it on a currency neutral-basis because obviously, the Australian dollar has weakened dramatically and so -- and the yen had -- has fluctuated over the last couple of quarters. But when you look at it, it's wholly attributed to a lot of this global -- the global deals that we're doing in Singapore. And they tend to come in the size and we're being pretty clear that sometimes these global deals, they come at more aggressive price points. And so that has some impact on the average pricing per cab in Singapore, so that'd be number one. And then number two, as it relates to basically the replacement of that capacity or filling that capacity that was vacated at the end of Q1, it did come at a higher average price points, which is good. But because it's only being booked, it has not yet necessarily been wholly built. We haven't seen the full value of that. So as we look forward, we're going to continue to see some movement that will depend on the specific IBX that we put the deployments into in Singapore, but we'll see it fluctuate around this to this level for the foreseeable future, particularly as we continue to scale with the global platform deals.

Great. And on the long term?

Sorry. And then on the second question, clearly, I think everybody is wholly aware of -- based on the trajectory that we have, as a business, and the implication that our recurring model has on the cumulative build, if you will, on this business plan. And so we have not -- we have not publicly come out and talked about whether or not we can attain a $3 billion target bid. At this stage, given the trajectory that we're on, it's fair to say that, that's going to get pushed out over a period of time as we continue to scale the business at the rates that we're scaling it at right now. And as you know, this quarter, on a currency-neutral basis, we are up roughly 3.4%. And then when you equate that into what it looks like next quarter, it's roughly another 3.4%, 3.3% quarter-over-quarter growth. And so the implications of that and the implications of currency, it does make it more difficult to achieve that target in 2015. But certainly, we're going to continue to push, to drive the business, accelerate as much as we can to grow it and clearly focus on driving our profitable growth into business, which is a focus on the EBITDA margin line.

Our next question comes from David Barden with Bank of America.

Just first, Keith or Steve, I think we've heard in the past kind of region-by-region bookings commentary. If you could kind of give us an update as to how kind of these bookings in 3Q kind of track relative to history, and cardinal ranking will be helpful. And then just second on the guidance change from last quarter, a portion of it was attributed to the kind of lengthening of the decision-making cycle. And I think that, that was when we had the government shutdown and we've kind of get this kick-the-can approach now towards a budget. Is there anything about the enterprise decision-making cycle you think will -- is incrementally influencing fourth quarter or maybe into 2014 that we should consider or have you kind of right-sized the timetable that these sales are kind of entering the funnel and then closing in billing on?

David, this is Steve. Let me start out. The trios can probably get after these questions. Let me start in Europe just to give you a sense of bookings, if you're trying to get a sense of where the growth is. In this quarter, quarter-on-quarter, we saw roughly an 8% improvement in bookings in Europe. And I know that's hard to gauge, what does that mean? But it's -- because we don't provide those numbers. But generally, even with a little bit of market or macro uncertainty, the business is performing very well in Europe. Revenues were up 5% quarter-on-quarter. On a constant currency basis, 20% year-on-year. So good performance in Europe. Cross connects actually jumped up significantly this quarter that underpinned some of the bookings. I think on a year-on-year basis, it was close to 30% step-up in cross connect revenue. So in Europe, good quarter. Actually in Asia again, we had another record achievement on bookings in Asia so all-in, gross bookings was another -- pretty flat with our highest quarter historically, but it just barely a record bookings quarter in Asia again. So the team has performed well there, mostly driven by a lot of inbound bookings coming, as Keith just talked about. Cloud also had, from a vertical standpoint, had another record bookings quarter. And then I don't how -- what you call a north [indiscernible] ?

Yes. I mean, I think we had solid performance across the verticals in the Americas as well. I think we -- as we mentioned last time, we are seeing some impact from fewer large deals, and that does create a bit of headwind, but as we talked about last time, and sort of on the margin and fully contemplated in our guidance. And then I think relative to your other question in terms of enterprise, sales cycles being a bit more protracted [ph] , I think a couple of things: one, yes, we sort of contemplated that within the remainder of our guidance and will continue to monitor that as we look at what we expect to guide to in '14. But I would say that a couple of things: one, we are seeing these sort of green shoots, lighthouse-account type wins. I think our ability to take those, package them, document the benefits with those customers and push them back out to market are really the key to us sort of shrinking those sales cycles and beginning to accelerate the momentum. So we would certainly hope to do that as we go into '14. But we'll be realistic and pragmatic about that and balanced about it as we develop our guidance. And as to the causes there, I don't believe they are really just driven per se by macroeconomic uncertainty or a broader enterprise anxiety or anything like that. I think they're candidly just driven the fact that the decisions of CIOs to move to sort of hybrid cloud infrastructures and optimize their WAN using third party co-lo, particularly given the network density that we, as Equinix, provide are complex decisions. And there are sales cycles that need substantive technical support, and we're building our solution architect team to provide that. And I think it's just a matter of really getting people comfortable with that value proposition, quantifying it for them and getting them over the hump. So I don't really see it as related to sort of broader uncertainty either with the economy or the crazy government or whatever else is going on out there.

Our next question comes from Colby Synesael with Cowen and Company.

Charles, at the recent investor conference, you indicated that you'd gone and extended up the contracts for 70% of your top 50 customers. And I think that, that was a new metric that you guys had provided. And I'm just curious were you -- giving that metric to kind of show that you guys are now well through that process and that we should start to see that wind down? Or were you trying to give the signal that you've seen an acceleration in that focus of recent and maybe we'd seen potentially an increasing level of pricing pressures and that's [ph] one of the things that you kind of trade-off, if you will, for those extended contracts? And then the other part of that question just have to do with the remaining 30%. Is that something you actually expect to achieve or those are customers that just for whatever reason aren't going to be moving to the longer-term contracts? Just a little bit of color, so we can get a sense of what the potential impact of those remaining 30% could be also.

Sure, sure. Great question, Colby. I think the answer to your first question is yes, meaning that it's probably both of those things to some degree. I think that it is -- that the metric was delivered, I think, in part to give some sense of confidence that a very significant portion of our revenue in these top 50 customers are things that we're sort of locking down under longer-term renewals. And that helps us in a number of ways in terms of what we actually see is that once we get renewals done it sort of reduces some of the buying friction and tends to reaccelerate our bookings with those customers. And so yes, it was intended to give some confidence about the durability and quality and tenure, if you will, of those revenue streams. At the same time, the other -- when you invert the 70% and say there's 30% remaining, it does imply that some of the headwinds that we have been indicating are there in the business associated with those renewals as we move through the 70%, will and undoubtedly repeat themselves to some degree as we pursue long-term renewals with the remaining 30%. So that is there. We believe again our guidance contemplates that. We're going to make good long-term decisions about when the trade-off between, perhaps, a modest commercial adjustment would make sense in exchange for term. And we feel pretty good about our sophistication in terms of making those decisions in the best -- our long-term interest of the business. But that is something that's out there. I think that we're going to continue to pursue those. I actually think we will get to most of them. I think occasionally, there are people who want to remain on shorter-term contracts. But most of our large customers are very interested in the discussion about how we maintain a more strategic long-term relationship together.

Our next question comes from Frank Louthan with Raymond James. Frank G. Louthan - Raymond James & Associates, Inc., Research Division: Looking at some of the trends in interconnect pricing, did any of the new Open IX developments or things like that concern you? You're seeing -- any additional competitive pressures on interconnect? And what are the trends as far as offering interconnection between various data centers? You mentioned sort of the multi-location thing with the large customer. Is that a growing opportunity for you?

Yes. Thanks, Frank. It's Charles. Let me cover several others. One, as you can see in our metrics, obviously, the health of the interconnection business overall at Equinix is very vital. Added a lot of cross connects, 3,600 in the quarter. We continue to see -- I think we've actually seen now the waning of some of the headwinds that were in the Americas business relative to some network consolidations that were causing a bit of headwind there, and I think we're back to sort of very healthy levels of cross connect adds. So overall, I think we see that, that -- interconnection provides enormous value to our customers and therefore, continues to be a very strong offering for us. No doubt we've heard a lot about, or have been asked a lot about, Open IX and other sort of peering initiatives out there, et cetera. On the topic of peering, I think it's important to look at the issue from the customer's perspective. When you back up and consider peering, customers basically have 3 alternatives: They can buy transit, an option that's always been available to them, which pricing has been dropping significantly for the past 10 years; they can join a public peering exchange like our IX platform or the other competitive exchanges or they can peer privately. And when customers consider what mix of those alternative to use and where they're going to locate to affect that, they really consider a number of factors: economics, what's the most cost-effective way for them to exchange their traffic; flexibility, how easy is it for them to evolve their mix between those choices as their traffic patterns change; and then really the quality and resiliency of the platform. And the first 2, economics and flexibility, and the overall value really of any exchange to a customer really is driven by the scale of the platform. And not just the number of participants directly on the exchange, but the number of peers that can be accessed within the facility for private interconnection. And unsurprisingly, when you have a 15-year head start, as Equinix does, that's where we really shine. And so we think the depth of our exchange is unmatched and feel very good about that. And then with regard to quality and resiliency, we've got the scale, the commitment and the balance sheet to continue to invest heavily in the platform and we're delivering industry-leading performance. So the reality of peering is that customers, they don't want to be single-threaded. So the dynamics of the markets are such that there typically is room for an alternative exchange in most markets. In some cases, we are actually the secondary exchange, but we've always maintained the position that competition is good for the customer. And so if you go specifically to say Open IX or some of these other ones, there may, in fact, be an opportunity for them to establish presence, but as long as we price our services competitively and deliver superior value for that price, we believe the impact to our business will be minimal, especially in light of the fact that peering revenues represent a very small fraction of our total interconnection revenues. So our -- we're very excited about the overall trend and trajectory on our interconnection business, continue to invest heavily in it and feel very good about it.

Our next question comes from Gray Powell with Wells Fargo.

So on North America MRR, how should we think about the factors that are influencing that metric? I mean, obviously, there's the competitive dynamic, but if Equinix is doing less large deals and just focusing on smaller latency-sensitive retail customers, just how should we think of the balance there and in MRR trends going forward?

Well, again, as I mentioned, I think you're seeing the benefits of the disciplined approach, our focus on interconnection-rich deals. It's pretty easy to do the math when you look at a relatively small deal. Let's take a 5-cabinet implementation and say, if you add 5 or 10 cross connects to that, what does that do to your MRR per kilowatt or MRR per cab? It can be pretty substantial. And so this level of focus is really important. And as we've moved through the IBX optimization process, moved some customers, at least the large print -- footprint portions of their infrastructure out of Equinix into more aggressively priced products and maintain their more network-rich or interconnection-rich implementations, we believe that, that would have a positive impact. And that is, in fact, beginning to materialize. So there is -- again, it's something that I think has some volatility in it. So we don't want to get too carried away with a single quarter, but I do think we're beginning to see that. Those deals are very attractive from an economic standpoint on an MRR and an EBITDA-generated per cab. And as importantly, they tend to be very sticky in terms of churn risk. So those are all the dynamics that have led us to manage the business as we have for the last several years and give us confidence that we're on to the right strategy and that we have a high ability to execute on them.

Understood. That's very helpful. And then just a bigger picture question, it, if I may. In our discussions with private companies and industry contacts, we've just increasingly heard of cases where customers using Amazon Web Services, they grow up, they mature and then they look to move certain workloads into a dedicated environment. I know you've had some interesting case studies on this topic in the past. And I'm just curious what you're seeing there and if you think that dynamic could be a longer-term driver of demand to you?

Yes, absolutely. And Steve or Keith can comment on this as well. But we definitely see that cloud is actually, and we talked about this in the past, it's actually an interesting entry level option for most folks. It's a completely variable cost model. It allows them to stand up infrastructure quickly. And as we've said, often, we're actually seeing that new entrants may be moving to that model increasingly rather than buying a cab or 2 from us and so -- but what we then see later is that as they scale and their requirements become more sophisticated and their AWS build grows, they very frequently look at how to move to a hybrid model and move certain workloads into a co-location environment or develop -- and/or develop a hybrid cloud architecture. And so we have actually had several examples of that. We have several documented case studies, where customers are doing that effectively within Equinix. And again, we believe that's one of several major vectors within the cloud growth opportunity for us. So absolutely, that is out there. And we think it's a win-win. We think public cloud is a major development for enterprise CIOs, and they're going to make significant use of it. But we're going to also be net beneficiaries, in that as they sort of balance that with a hybrid cloud architecture for security performance and cost reasons.

There's another element of that, Gray, too. As we discussed it in the script today, is we're very focused at bringing these big public cloud players to have access nodes around the world with us. And that will also help pull the enterprises, as we've discussed, to want to connect private workload with public workload, increase of hybrid cloud environment. So we're starting to see that start to happen at a faster pace. And back to to Charles' comments earlier on enterprise, on enterprise, you'll start to see that happening in 2014 as we get these success stories and we start replicating those use cases. We're going to be able to help enable the hybrid cloud in these data centers. And I think that's going to be an interesting play because at the same time, small companies can go to public cloud nodes, all those public cloud node players -- platform players are going to have nodes at Equinix, and you can access those public clouds at Equinix all day long. And that's going to be an interesting environment as that starts to scale.

Our last question comes from Sterling Auty with JPMorgan. Sterling P. Auty - JP Morgan Chase & Co, Research Division: Want to go back to the commentary, Charles, that you had around the wholesale versus the retail and the differentiation. I appreciate the comments. I guess one of the investor concerns is what part of the installed base or the customer base at the moment kind of sits at the fringe of those undifferentiated deals? So what are the ones that might be at risk if a wholesale provider decides to make that investment?

Sure. Yes, I get that question a lot, Sterling. And what I would say is that was really at least one major factor underlying the essence of the IBX optimization effort was identifying those and moving them, engaging them and in discussion about what their -- what was in their long-term best interest and moving them, some of them to -- many of those customers to these multitiered architectures. And that was really the underlying dynamic behind the elevated churn that we saw for several quarters. So now I would say, there is still work to be done there. And we certainly have not done that with every customer. And it's often difficult until you sit down with a customer and really engage them at an application level in their -- in a discussion with them at the application level that says, what are you really doing inside of your architecture and what are your long-term plans? It really -- you really don't often know what's in there until you have that discussion. And so I expect that we are going to see that the migration from a sort of more homogenous implementation or a monolithic implementation into these multitiered architectures is a reality we're going to face. And by the way, I guess what I'd say is that I think we feel like we can accommodate that within our sort of what we feel is a base level of frictional churn. And that's kind of the dynamic we're moving towards. I don't think I can pinpoint exactly how much existing nascent exposure there is, but I think we've made great progress in addressing it and we'll continue to be very focused on working with our customers in that regard.

That concludes our Q3 call. Thank you for joining us.

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