Equinix, Inc.

Good afternoon, and welcome to the Equinix Fourth Quarter Warnings Conference Call. All lines will be in a listen-only mode until we open for questions. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I will now turn the call over to your host, Ms. Katrina Reimel, Vice President of Investor Relations. You may begin.

Thank you, and welcome to today's conference call. Before we get started, I'd like to remind everyone that some of the statements we'll be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks 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, 2018, and 10-Q, filed on November 2, 2018. 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 IR page at www.equinix.com. We have made available on the IR page of our website a presentation designed to accompany this discussion, along with certain supplemental financial information and other data. We'd also like to remind you that we post important information about Equinix on the IR page from time to time and encourage you to check our website regularly for the most current available information. With us today are Charles Myers, Equinix's CEO and President, and Keith Taylor, Chief Financial Officer. Following our prepared remarks, we'll be taking questions from sell-side analysts. In the interest of wrapping this call up an hour, we'd like to ask these analysts to limit any following questions to just one. At this time, I'll turn the call over to Charles. Thanks, Kat.

Good afternoon, everybody, and welcome to our fourth quarter earnings call. We had a great end of the year, delivering our 64th consecutive quarter of revenue growth and eclipsing a key milestone with over $5 billion in revenue for the year. The opportunity for Equinix is as compelling as ever, as digital transformation is reshaping virtually every industry across the globe. Digital and the infrastructure that fuels it have emerged as board-level issues, and this digital imperative is transcending the macroeconomic volatility we see in the market. Customers are thinking differently about how they interact with their customers and every element of their supply chain. And the major tech trends, whether it be AI, IoT, big data, or 5G, are all amplifying this digital tailwind. In the wake of this digital transformation wave, a clear architecture of choice has emerged for our customers. That architecture is global, highly distributed, hybrid, and multi-cloud. And for a variety of reasons, customers are increasingly looking to locate this infrastructure at Equinix, leveraging our interconnected digital edge to achieve performance, security, compliance, flexibility, and total cost of ownership benefits that can only be supported by the physics of proximity and the economics of aggregation. These compelling advantages are translating into strong performance in the business, and give us solid momentum as we enter 2019 and beyond. To build on this momentum, we're investing to expand our unmatched global reach with 36 projects across 25 markets, adding new markets such as Hamburg, Muscat, and Seoul. We are committed to designing, building, and operating our data centers with high energy efficiency and environmental sustainability. In 2018, we sourced clean and renewable energy across 90% of our global platform. and we remain committed to our long-term goal of achieving 100%. We're extending our portfolio of interconnection offerings while building on our traditional interconnection portfolio with our market-leading ECX fabric, and we've developed a roadmap for a number of compelling new services for the year ahead. We're continuing to cultivate high-value ecosystems and will scale well past the 10,000 participants currently on our platform, and we're standing behind those ecosystems with our 20-year track record of service excellence. We remain focused on the six priorities I outlined last quarter, including expanding our go-to-market engine, evolving our portfolio of partners and products, and delivering on our hit strategy, all while remaining steadfast in our commitment to deliver against the revenue, margin expansion, and AFFO per share targets laid out at our last analyst day. We ended the year with a very strong fourth quarter, delivering record growth in net bookings, which sets us up nicely for a good start to 2019. As depicted on slide three, revenues for the full year were $5.1 billion, up 9% year-over-year. Adjusted EBITDA was up 7% year-over-year, and AFFO was meaningfully ahead of our expectations. These growth rates are all on a normalized and constant currency basis. Interconnection revenues continue to outpace co-location, growing 12% year-over-year, and multi-deployment metrics increased across the board, with robust cross-border bookings driven by continued strength in both cloud and enterprise. Today, over 60 percent of our recurring revenues comes from customers deployed across all three regions, and 86 percent from customers deployed across multiple metros. Our hyperscale initiative continues to enjoy significant momentum and will allow us to capture strategic large footprint deployments from select customers while mitigating strain on our balance sheet by employing off-balance sheet structures. We're seeing strong success with the initial capacity we've brought to market, and our customer pipeline is robust. Our Paris 8 asset is more than 60% pre-leased, and with our London 10 facility, we have pre-sold 20 megawatts of capacity to key Hyperscale customers, with an average contract tenure of greater than 11 years. We also have several other projects in development, including Tokyo 12, our first dedicated Hyperscale project in APAC, and have secured land across a number of other high-demand metros, including Amsterdam and Frankfurt. Our discussions with financing partners are progressing well. and we expect to have our first JV executed in the coming months with a compelling collection of assets. We expect the JV structure to have minimal impact on our P&L and other core metrics in 2019 as we continue to ramp up the initiative. We look forward to providing additional details when we announce the transaction. Shifting to interconnection, we have the most comprehensive global interconnection platform, now comprising over 333,000 physical and virtual interconnections. over four times more than any competitor. In Q4, we added an incremental 8,800 interconnections, including 1,800 virtual connections, and are adding more per quarter than other providers do annually. Software-defined networking is acting as a technology catalyst for our interconnection value prop, reducing the friction for buyers and creating a thriving environment that is driving demand across all our interconnection offerings. Customers using virtual connections are also our highest users of physical connections, showcasing the complimentary nature of our portfolio. For our internet exchange platform, revenues, ports, and traffic were all up due to strong global demand and new market growth in EMEA and Brazil. IX peak traffic surpassed 10 terabits per second for the first time and was up 8% quarter over quarter. Now let me cover some highlights from our verticals. Our network vertical had its second highest bookings led by EMEA and fueled in part by continuous strength and NSP resale to enterprise customers. With our leading network density and over half our sites along coastal locations, we also continue to win new sub-sea cable opportunities and have been selected in more than 25 sub-sea cable projects over the last few years. Wins this quarter included the Curie sub-sea cable landing station in LA-4, Google's first private sub-sea cable connecting Los Angeles and Chile, as well as Cross Lake Fiber, connecting the major financial metros of Toronto and New York under Lake Ontario. Our financial services vertical also saw its second highest bookings, led by insurance and banking, as well as strong new logo performance as firms embraced digital transformation. Expansions included a top 10 global asset manager re-architecting their network and securely connecting across seven metros, as well as a top 15 multinational insurance company leveraging hybrid multi-cloud and distributed data in Singapore and Hong Kong. In content and digital media, we saw record bookings, led by EMEA, and strength in the publishing and gaming subsegments. Customer expansions included Roblox, Tencent, Thompson, as well as Fastly, a global cloud edge platform that has been upgrading to 100 gig to support continued demand of mobile users across 23 IBXs. Our cloud and IT vertical also delivered record bookings, led by the software subsegment, as the cloud continues to diversify. Expansions included StackPath, a leading provider of edge cloud services, deploying infrastructure across 21 metros, as well as British ERP SaaS provider, expanding to support customer demand for cloud services at the edge. The enterprise vertical, which drove a full one-third of total bookings in 2018, continues to be our fastest-growing vertical, with bookings in Q4 led by the energy, healthcare, and retail subsegments. New wins included a global grocer transforming their network for a cloud-first strategy, a Fortune 100 global chemical company re-architecting their network to transform IT delivery, and a top automotive parts manufacturer leveraging ecosystem partners via ECX. Channel sales continue to represent a critical lever for expanding our market reach, delivering our third consecutive quarter with over 20% of bookings and accounting for half of our new logos, driven by solid performance across all partner types. We are very pleased with our channel progress and continue to build predictable and repeatable deal flow. In 2018, the channel drove over 4,000 deals, a great indication of the significant velocity of our retail selling engine. New channel wins this quarter included a joint win with Verizon for a high-performance semiconductor manufacturer, launching new dev test infrastructure to support the engineering community, as well as a partner win with CBRE for a U.S. regional bank, using Platform Equinix to lower their total cost of ownership and improve user experience across their 1,700 branches. Now, let me turn the call over to Keith to cover the results for the quarter. Great.

Thanks, Charles. Good afternoon to everyone. As we put a wrap on 2018, it's great to end the year with our financial results beating guidance across every one of our core metrics. As Charles highlighted, revenues eclipsed another key threshold, ending the year at greater than $5 billion, a 9% year-over-year growth rate. AFFO per share was $20.69, a great result showing how we're driving value at the share level. and tracking ahead of our key operating metric, as said, at the June 2018 analyst date. For the fourth quarter, we had extremely strong bookings across each of our regions, including a record in EMEA, while both America and APAC regions had their second-best bookings performance to date. Our bookings spanned across more than 3,000 customers, with a quarter of them buying across multiple metros, highlighting the unique diversity of our retail co-location business. Simply, we're seeing more cross-region, more multi-metro deals than at any other time in our history, a reflection of the strength of our platform and the scale of our global footprint. We had net positive pricing actions again this quarter, highlighting the continued strength of our differentiated value proposition. Our sales pipeline remains high, and we have a significant number of new Fortune 500 prospects. And we have a very active expansion pipeline with over 36 projects underway, and we're expanding our interconnected digital edge to 55 metros by the end of 2019, effectively twice the number of metros compared to our next largest competitor. Next, I'll cover the quarterly highlights. Know that all growth rates in this section are on a normalized and a constant currency basis. As depicted on slide four, global Q4 revenues were 1.31 billion, up 8% over the same quarter last year, and above the top end of our guidance range. Q4 revenues, net of our FX hedges included a $2 million negative currency impact when compared to both the Q3 average and the guidance FX rates. Global Q4 adjusted EBITDA was $617 million, up 5% over the same quarter last year, and better than our expectations due to revenue flow-through and lower integration costs. Our Q4 adjusted EBITDA performance, net of our FX hedges, had a $1 million negative impact when compared to both our Q3 average and guidance FX rates. Global Q4 AFFO was $414 million, including seasonally high recurring capital expenditures, better than expected, largely due to lower income tax expense in the quarter. Despite the lower income taxes in Q4, as we look forward, we expect our earnings in non-U.S. entities to increase. which as a result will increase our cash income tax costs as reflected in our guidance. Q4, global MRR return was 2.1%, better than our expectations. For 2019, we expect MRR return to average between 2% and 2.5% per quarter. Turning to the regional highlights, whose full results are covered on slides 5 through 7. APAC and MIR were the fastest growing regions at 15% and 11% respectively on a year-over-year normalized MRR basis. followed by the Americas region at 5%. The Americas region had a strong finish to the year, better than expected bookings, increased cross-border deals, and lower churn. Net cross-connect stepped up nicely, the best net ads in two years. Net cabinets billing rebounded too. The Verizon assets had their best gross quarterly bookings performance since we acquired the assets, in part due to the newly opened capacity. Verizon assets, as expected, absorbed higher MR return in the quarter. We expect these assets to return to growth in 2019. EMEA had a record quarter led by our Dutch and German businesses. We continue to expand with about half our global construction activity in the region, weighted towards the flat markets. As mentioned last quarter, we're seeing higher utility prices across many of our EMEA metros. This cost increase is partially offset by our utility hedges, which will roll off over the coming quarters and reset at market rates. These higher costs, as reflected in our guidance, are the result of higher unit prices, increased utility taxes, and increased consumption from our customers. And Asia Pacific delivered solid bookings across each of the core metrics, metros. Cabinet billing is more than doubled compared to the four-quarter average driven by cloud and content deployments. MRR per cabinet moved down, the result of significant new cabinet deployments, and the impact of the Metro Note acquisition. Turning to our interconnection activity, net ads were at the high end of the range for both physical and virtual connections. The Americas and Asia Pacific interconnection revenues were 23% and 14% respectively, while EMEA was 9% of recurring revenues. From a total company perspective, interconnection revenues were 17% of total recurring revenues. And now looking at the capital structure, please refer to slide 8. Our unrestricted cash balance is approximately $610 million, a decrease over the prior quarter due to our capital expenditures and the quarterly cash dividend. Our net debt leverage ratio was 4.4 times our Q4 annualized adjusted EBITDA. We also exercised the remaining portion of our inaugural ATM program in the quarter, raising $114 million. And as we've discussed previously, we remain steadfastly committed to driving long-term shareholder value and will continue to fund the business primarily through strong operating results while also accessing the capital markets with a desire to unlock significant value, which includes becoming an investment-grade rated company. Turning to slide nine, for the quarter, capital expenditures were approximately $680 million, including a recurring capex of $70 million. We opened six expansions across five markets in the quarter, adding about 8,000 cabinets. We announced 12 new expansions, including our Dallas 11 build, which will be adjacent to our InfoMart Dallas asset, effectively creating a new and significant campus to support the strategic market. Revenues from owned assets stepped up to 54%, a meaningful increase over the prior quarter largely due to the conversion of our strategic New York 4, 5, and 6 assets to owned facilities as we entered into a long-term ground lease with our landlord, similar to the Slough campus in our London market. This decision will increase our operating flexibility for future developments, while securing the assets over the long term, particularly given the importance of this financial campus. We also purchased our Zurich V facility, as well as land for development in Frankfurt, Hamburg, Lisbon, Osaka, and Rio de Janeiro. All of our real estate activities will help increase the level of revenues from owned assets, a key metric to support our investment-grade aspirations. Our capital investments are delivering strong returns, as shown on slide 10. Our 130 stabilized assets grew revenues 2% year-over-year on a constant currency basis, largely driven by increasing co-location and interconnection revenues, while continuing to absorb the headwinds we discussed last quarter. These stabilized assets are collectively 84% utilized and generate a 30% cash-on-cash return on the gross PP&E invested. And finally, please refer to slides 11 through 16 for our summary of 2019 guidance and bridges. Also know that we've adopted the new leasing standard, ASC 842, the impact of which is highlighted on slide 12. Starting with revenues, we expect to deliver a 9% to 10% growth rate for 2019. We expect to start the year with a significant increase in recurring revenues in Q1, largely due to our strong Q4 bookings performance. For the full year, we expect to deliver the largest annual absolute dollar increase in our history. the result of continued strong operating performance and a healthy pipeline. We expect 2019 adjusted EBITDA margins to be 47.7%, excluding integration costs, the result of strong operating leverage in the business, offset by significant expansion activity, including new markets, higher MEA utilities expense, and a new leasing accounting standard. Also, we expect to incur $15 million of integration costs in 2019 to finalize the integration of our various acquisitions. 2019 AFFO is expected to grow 10% to 13% compared to the previous year. For 2019, we expect AFFO per share to grow 8% to 11%, excluding financings, including capital market activities and taking into consideration market conditions and timing. We expect AFFO per share to be greater than 8%. consistent with our AFFO per share growth targets as discussed at the June 2018 Analyst Day. And we expect our 2019 cash dividends to increase to approximately $800 million, a 10% increase over the prior year and an 8% increase on a per share basis. So let me stop there and I'll turn it back to Charles.

Thanks, Keith. In closing, we continue to build our market leadership and cement our position as the trusted center of a cloud-first world. Our reach, scale, and innovative product portfolio puts us in a great position to build on a business model that is substantially and durably differentiated from our peers. The market remains in the early innings of the digital transformation journey, and our accelerating ability to both land and expand customers along that journey make us confident that we are playing the best hand in the business. We're excited about the road ahead, and we look forward to updating you on our progress throughout the year. So let me stop here and open it up for questions.

We will now begin our formal question and answer session. If you would like to ask a question, please unmute your phone, press star 1, record your first and last name. The first question is coming from Phil Cusack, JP Morgan. Your line is open.

Hi, I just wanted to follow up. It seems like a lot of your development, oh sorry, this is Richard. A lot of your developments in EMEA and Asia, with the big development and the Americas coming in Dallas in mid-20. It seems like in terms of your pipeline and commencements, can you give us a sense of do you feel like you have enough capacity in the United States right now and you don't have to focus on it and you can spend more capital in EMEA and Asia and kind of balance that growth rate? And two, do you expect the Verizon assets to ramp through the year, or will it be lumpy? And kind of following along with all this, your leverage is at 4.4 versus the 3 to 4 target. Do you feel like you need to use a new ATM to fund it, or will you grow into it as the business expands? Thank you.

Okay, there was a lot there, Richard. Why don't we start with the development, sort of the profile of our development portfolio. Actually, I think pretty much what you're seeing is just that the development profile is following the growth rates. And so we are in a period now of some pretty significant build activity in EMEA, have continued to see very strong bookings and growth out of the EMEA region. and so we're getting through, I think, sort of a lump of that investment, which will position us extremely well, and we continue to extend our market leadership in EMEA. APAC continues to be a very important region for us in the world, and I think you're going to see us continue to invest meaningfully there. In the Americas, as you noted, you know, we're going to start the journey to building out InfoMart as a campus, and I think that's going to be a big opportunity for us, but The growth rate is slower. We have made meaningful investments in some key assets in the Americas and feel very well positioned to continue to feed the bookings engine there. So I think what you're saying really is just a profile there that, one, runs a little bit in waves, and two, just sort of maps to the sort of region-to-region growth profile of the business. Second piece was on Verizon. I think it's a little tough to tell you. I think the business at some degree is always a little bit lumpy, I think we have now kind of worked our way through the bulk of the lumpier churn, and I think we're seeing those assets stabilize. And when you add in the fact that we've added capacity into some of the critical new markets where we believe there's strong demand, like Noda and Houston and et cetera, Culpeper, we feel good about that returning to growth, and we hope that that will sort of progress positively throughout the year. And then the last piece was on leverage, and so I'll let Keith comment on that.

Yeah, and you will notice, Richard, so the last quarter we did bump up to 4.4 times our annualized Q4 adjusted EBITDA. As we look forward, again, our goal is to get within three to four times net leverage range. We're going to accomplish that in many different ways, but the most easiest way to do that is continue to drive growth on the top line. with a strong operating leverage, and just by sheer growth, it will naturally delever the business. Simultaneously with that, as we continue to look for ways to raise capital, we're always going to take a balanced view, of course, between the ATM program and whether or not we try and secure any incremental debt. That's also going to help us delever, particularly as it relates to the ATM program. And then just overall, you know, collectively, I think it's important, you know, just to elaborate a little bit on our Our quest has always been, we have an aspiration to become an investment-grade rated company. Just simply put, we think it's worth 75 to 90 basis points on the $10 billion of debt. Assume let's just round it up to $100 million of cash pre-tax. When you put our multiple onto that, it's a meaningful amount of value that we can create for our shareholders over a relatively short period of time if we work really well to grow the top line, show the operating leverage, and bring our bring our debt balance into the target range, something that we've certainly shared with the credit rating agencies and with many of our investors over the years. So this is an area of high focus for us, and we'll continue to have aspirations to get to investment grade, and so we're going to work hard at doing that in 2019. Great.

Thank you.

The next question is coming from Jordan Sadler, KeyBank Capital Markets. Your line is open.

Thank you. Can you provide a little bit of granularity on the 2019 revenue growth? I think interconnection revenue growth slowed to about 10% year-over-year in the fourth quarter versus maybe 18% for the full year. Do you expect this driver to stabilize in 4Q or at the 4Q pace in 2019, or will it reaccelerate alongside the increased cross-connect volume you booked in the fourth quarter? And then second, what is the – year-end leverage target, just following up on Richard's question here, that's embedded in the 2019 guide. I kind of noticed that interest expense for the full-year guide looks like it's down somewhat from the full-year 2018 interest expense. And in the face of, you know, rising rates, that seems like maybe you're getting some savings either from lower leverage issuance or Maybe from some other area, could you maybe shed some light? Thanks.

Thanks, Jordan. I'll let Keith take the second part of that. But as to the interconnection business, you know, look, we feel like this was really a tremendous quarter and demonstrates continued strength in the interconnection business. We were at the top end of our range in physical interconnections, and now we've started to report the virtual interconnections with another 1,800 on top of that. And so really feel terrific about the interconnection value proposition and about the value that our customers are getting for that. In terms of the growth rate, it was 10% as reported, normalized to 12%. And so I think it moves around a little bit depending on some factors, but we feel like that is going to continue to outpace our co-location business and is obviously a very attractive business for us in terms of continuing to drive the overall financial performance. And there's a few areas, I think, that represent upside opportunities for us. You know, one, I think we've kind of begun the process of more sort of normalizing pricing in EMEA on interconnection, which is something we have talked about, you know, since the telecity transaction. So I think there's opportunity there. I think we're continuing to see an evolution in terms of percentage of revenue that is interconnection-based in the other two regions continuing to move positively. And, again, the performance in terms of volumes of interconnection in the Americas portfolio continues to be strong as well. So I'd expect that that is, again, it's not going to be at that previous 18% level, but I think we're going to see very strong interconnection growth in the business.

Okay, Jordan, let me see. Let me take the second part of the question. First and foremost, in the prepared remarks, one of the things that we've stated is we're highly focused on delivering growth on an AFFO per share basis. And irrespective of our financing, we're going to deliver an AFFO per share growth of 8% or greater. So I wanted to highlight that, number one. Number two, as I said, there's a lot of value in getting back into the investment grade We're working hard with our rating agencies and some of our advisors to execute against that strategy, and we think there's no better place to create substantial one-off value right out of the gate than getting to investment grade. So it's an area of high focus for us. As it relates to your specific questions on what we want to target, let me just say that we are looking at all alternatives. It's, of course, very dependent on market conditions. quantity, pricing, timing, source of capital. And so suffice it to say we as a company are going to look at all avenues to make sure that we can execute and maximize the shareholder value. As it relates specifically to the interest rate, as a company, no surprise to you, we work very hard to drive down our interest rate costs And over the years, as you probably have noted, that we've been able to take our average cost ex-leases, sort of the $10 billion of debt. It's a notch above 4% for a non-investment-rated company. But we've also recently done a cross-currency swap with one of our debt loads. And as a result, we're able to shave off some incremental cost into 2019 to the benefit of of everybody and you can see that reflected in the net interest expense. So again as a company we're going to continue to drive down as much as possible our cost of capital. I was noting the other day, I think it's worth noting, when you look at the flatness of the yield curve, whether you're one month out or you're 30 years out, you're dealing with a 50 basis point span, we're not overly concerned that interest rates are going to rise up significantly over the over the near term, and so we'll continue to manage ourselves to maximize, again, the value that we can contribute to our shareholders.

The next question is coming from John Atkin of RBC. Your line is open.

Thanks. Question about HIT, and I wondered if you could share some parameters or thoughts around build costs now that you're kind of further along in the projects afoot. So basically, financing considerations aside, what you're thinking about in terms of build costs and the updated thoughts there, resiliency level, density versus other wholesale products on the market, as well as pricing versus comparable products. And then I was interested in just on the network side, you've got obviously a bump up in the America's Cross Connects trend. Maybe elaborate a little bit more about what's driving that. And then as you network your IBXs together and cities together even more so, anything you're seeing in terms of customer adoption? Thanks.

Sure. Thanks, Jonathan. HIT, again, we feel very good about the progress there, making excellent progress against all legs of the stool, the demand side, the supply side, and the financing side. In terms of build costs, that's going to vary significantly market by market. What I would tell you is we're very confident that we can build in line with the best in the market in terms of because of our sourcing leverage and our engineering capabilities, et cetera. And so we think that we're going to continue to be able to do that. Obviously, I think that is going to be meaningfully below our sort of retail build costs, just given the nature of those facilities. but we think that we're going to be very much at parity with others in terms of our ability to build at the right price points. In terms of pricing, we've seen fairly stable pricing across the market, so we feel like supply and demand are still, despite a lot of investment in the market, are relatively balanced across the globe. We tend to be focused on the high demand markets where we have visibility to pipeline and access to customers that we think is somewhat advantaged. So we continue to believe that we're going to be able to deliver kind of in line with or maybe, you know, slightly above market as we deliver a more sort of comprehensive value proposition for those customers. But as we've said, we do believe that the hyperscale market is going to be very competitive. We think it's going to generate, you know, attractive but, you know, more – more challenged returns than our retail business, which is exactly why we're sort of pursuing it the way we are so that we can minimize our balance sheet exposure to that market but still have the strategic value of delivering that product to our key customers. So that's what I would say relative to hit. In terms of cross-connect trend, particularly in the Americas, yeah, you're right, we did see that tick up nicely there. I think that is actually an artifact. As you might remember, John, that I talked last time about the thing that I watch most closely is the gross in terms of are we continuing to really drive gross ads, which to me tells me that people are resonating with the value proposition and wanting to continue to consume the product. Well, that continued to be very strong, and what I think we saw on the other side of it is that our churn was lower this quarter, and I think that was partially due to a bit of a breather on the 10 to 100 gig migration, and that's probably driven by the fact that some of the larger players have moratoriums in their network in the latter part of the year, and that probably gave us a little bit of pause on that. We unfortunately don't think that's a permanent pause, but we do think that that'll taper off through the course of the year, and I think what you're seeing, I think, is a glimpse of what's possible given the strength of our gross ads. So, again, we feel super confident and positive about the overall interconnection business, and that's a little bit of the dynamic I think we saw in the Americas this quarter.

And then just on strategic products, you know, your old job basically, you know, you got the encryption product, and can you maybe talk a little bit about how that's trending and then other things that you feel like you're making progress on?

Sure. SmartKey is going great. We've got a ton of customers in trial on that service as well as a number of new customers added over the last quarter. It's not going to be a material differentiator and adder to the overall story, but for us it was a way of demonstrating that we could continue to bring new value-added products that really differentiate our position as a trusted party in assisting customers with their digital transformation. We do think it will be additive to the overall growth story, but again, it's not going to be a huge, huge offering. But we do think there are others sort of around the corner in terms of continuing to expand the feature set and reach of our ECX fabric, which now is becoming a meaningful contributor to our interconnection business, as well as we've talked publicly about Having our NFV marketplace product, that's not really a product name, but we're working towards sort of finalizing what the actual go-to-market names will be for these offerings. But they are already, from a functional perspective, in advanced pilot stages with customers, and we think those things can be, over time, meaningful contributors as we get attach rates on top of cabinets that are already deployed. That's one example, and then there are others that we're working through that we'll probably begin to give you visibility to in the next few quarters.

Thank you.

The next question is coming from Ari Klein, BMO Capital Markets. Your line is open.

Thank you. It seems like you're making a lot of good progress on HIT, but maybe the JV search has taken a little bit longer than expected. Can you maybe provide a little bit more color there? And then what kind of contribution from HIDAR are you embedding in 2019 guidance? Tim Stenzelman, Sure.

So it's not the search itself that's taking long. Believe me, those folks found us pretty fast in terms of wanting to have a discussion about what we were doing. And so we've already had initial dialogues with those and begun to sort of filter through the ones that we think are most philosophically aligned with Equinix as partners. And what has taken a bit longer is just the complexity of this from the standpoint of and legal structuring and accounting and various other things. I think I mentioned this last time. Those are, I think, some of the things that, frankly, perhaps we underestimated at some level in terms of our ability to get this thing finally executed and off the ground. The good news is the demand side of the business is progressing in terms of building pipeline, sort of independent of that or in parallel with that, I guess I should say. In addition, the supply side, in terms of sourcing land and making sure that we're positioned for the JV to really be effective in ramping quickly once established, are all moving in parallel. So the team has done a phenomenal job. Our tax re-accounting teams have literally been sort of just heads down trying to get this done. I think we're, as I said, I think we're going to have this done in the coming months. We're going to shortlist down to a a very small set of players that we think are most, as I said, most philosophically aligned with us and have the kind of reach and capabilities that we would want to see in a partner. And we think that will happen in the next couple of months.

And then same-store revenue growth was 2% this quarter, similar to last quarter. Can you maybe provide that number, X Verizon, and then what do you think that number will look like in 2019?

Sure. Yep, you're right. A little light again this quarter, and as we really dig into the metric and the underlying drivers, we really see a number of factors at work. One of them you mentioned, which is Verizon, and that's having a meaningful sort of suppressant effect on that metric. It is also a bit of a tough compare still, so we're going to need to lap that compare, but the last fourth quarter had some elevated NRR in our stabilized assets, and so We think that once you normalize for Verizon and some of that tough compare that you're probably looking at another maybe 150 to 200 bps. So a normalized same-store number would be in the 3.5% to 4% range. It's also being impacted a little bit, as I mentioned last time, by us actively managing customer migrations out of a select set of sites that are in the stabilized portfolio. And so altogether, you know, we're keeping a close eye on that, but we expect it will probably persist a bit towards the lower end of our historical range, even on a normalized basis for a period of time. Thanks.

The next question is coming from Kobe, Sinusel, Cohen, and Company. Your line is open.

Great. Thank you. I guess to song up on that last question, I think last quarter there was an expectation that that would improve as early as this quarter and that didn't happen. And then when I look at your organic growth for 2019, you're expecting 8% to 9% versus the 9% you just did in 2018, yet you are now expecting Verizon to be a growth driver. So I think there was an expectation that that could be the same, if not slightly higher. I'm just hoping we can dive a little bit more into that. And then on interconnect pricing, can you just talk about what your strategy is there, particularly for some of your network partners and for those specifically who are potentially connecting customers from other data centers into your facility and what you could potentially do to help monetize that maybe in a more efficient way. Thanks.

Sure. You know, on the growth picture, again, we provide that range. I think we're going to continue to drive hard in terms of continuing to drive the business. I do think that the stabilized asset growth being kind of where it is I think that's driven by not only those factors that we think are probably more temporal in nature, but it's also at some level, as we talked about, in terms of churn is a bit more concentrated in the single asset. And at some level, I think you're seeing either some repricing activity or some churn associated with movement and selection. All of that is consistent with our view of the long-term architecture for customers. And we believe it will have positive impacts for customers. with more of the sweet spot business. But I think what you're seeing is really a continued transition phase of the business to really this trusted center of the cloud first world kind of mindset in terms of the types of deployment, the level of interconnection that we're gonna see. Those are a bit longer sales cycles, but once landed, I think they tend to deliver very attractive cab yields and levels of interconnection. So I think the growth profile of the business has continued upside opportunity, both as some of those underlying headwinds subside. I do think that we're trying to be appropriately conservative about the pace at which Verizon returns to growth throughout the year. But that's, I think, the overall dynamic. We feel very good about the overall growth profile of the business and kind of what it's what it's going to look like over the next several years. And we think, as I said, I think particularly as we add new services and look at the potential to add attach rate to existing deployments, but I think that's going to be a multi-year process. In terms of interconnection pricing, look, the network providers continue to be major partners for us, and we are always in active engagement with them about how to make sure that you know, our product meets their needs effectively. And, you know, I'm sure, you know, there's always discussions about price points, but, you know, we feel good about the value proposition that we deliver. We have been creative about trying to deliver sort of volume benefits to some of our customers as well as give them, you know, greater degrees of flexibility in how to use the interconnection portfolio more comprehensively and creatively across their business. And so I think that there's really good momentum with not only the network providers but also the clouds and the other service providers and, of course, with the enterprise. Actually, enterprise is our fastest-growing segment. Enterprise to cloud is our fastest-growing interconnection segment. And I think, again, that's a reflection of, I think, the strength of our value proposition in the cloud.

Okay, thanks. The next question is coming from Sammy Baudry, Credit Suisse. Your line is open.

Hi, thank you for the question. And you gave us a good amount of context on your prepared remarks regarding virtual cross-connects and the traction you're seeing there in your business. Could you just give us some color on how billing rates differ between the virtual connections and the physical connections? Since you did make the comment that you're, I guess you'd say, big customers that are using physical connections are also opting into virtual connections. Could you just give us any color on how we should be thinking about that as you project out your model?

Sure. Yeah, it's interesting because we get the question a lot, and I think the way I would summarize it all is actually the unit economics are not radically different between the two. Because as we look at how people consume on the virtual fabric, typically they buy a port. Sometimes they can buy that as a full buyout port, or they can buy virtual circuits, you know, individually onto the port. And when we look at it in terms of our average unit price per connection from customers, when you take into account the port price as well as the virtual circuit price, which is on a unit basis meaningfully lower than a cross-connect, but as you look at them right now, there's not a huge gap. And both are good. The cost of goods on on a switched fabric is slightly higher for sure than it is just a basic physical cross-connect, which has very low cost of goods. But what we're seeing is that the way we're pricing them and the way customers are using them does not represent a dramatically different economic profile across those. And to your point, we're seeing them as very complementary. Generally, it is not, oh, I was using a physical cross-connect and now I'm going to use a virtual cross-connect It is, hey, I have a range of use cases. Physical cross-connect is very appropriate for me in certain instances, particularly with large and repeatable traffic flows. And then virtual cross-connects are really substantially better in an environment that is more dynamic where people need to be turning up and down capacity or moving workloads or traffic between endpoints. And then, of course, you augment that with IX. And we have many of our more complex customers who use across the entire portfolio. So they have a lot of Layer 3 traffic that they're peering through the fabric. And then as they see traffic being exchanged with peers in high volumes, they strip that off to cross-connects. And then when they want private interconnection to a cloud, for example, they might use a cross-connect and a direct connect way directly to Amazon, or they would use the ECS fabric and express route to get to Azure. So it's really a very diverse portfolio that tends to serve complex needs of customers extremely well. And again, we're not seeing a dramatic difference in terms of the overall economic profile and return on capital that we see across the intersection portfolio.

Got it. Thank you. Very good clarifications then. The second question is, what percentage of revenues are currently coming in from the channel versus direct to customer?

Yeah, we had said that we're about 20% of our bookings. We have not sized the actual revenue necessarily, but we did talk about that. I think we've had our third consecutive quarter north of 20% of bookings. And, oh, by the way, it generates more than half of our total new logo volume. And so it just gives you a real insight into the fact that, look, when we've talked about our, one of the things that I think is really driving my optimism about the future of Equinix is what I think is a really massive increase in the total addressable market. I think it is meaningfully larger than what we provided in our last analyst day or our last couple analyst days. And I think that is being driven by a really substantially larger enterprise market opportunity than we had previously given credit to. And I think that's being fueled, our optimism about that is being fueled by real feedback from our customers and real implementation of use cases. These are not just theories. These are 4,000 deals that are flowing through the channel. And what you realize is that this opens up the addressable market into hundreds and hundreds of thousands of addressable customers. Well, we can't get to them. We're going to add to our go-to-market engine this year, but let me tell you, we're not going to reach all those customers. And so the way to reach them is really through the channel. And so we have now really gotten our sales team's heads wrapped around working with partners as a key way to reach those customers. And they're really, I think they've gotten over the initial reluctance of thinking that somebody was about to steal their account, and now they're working very effectively with channel partners, and we're seeing great channel partners like AT&T and Orange Business and those kind of folks really driving significant volumes for us, Telstra, and then also sell with activity with our cloud partners, whether that's Microsoft, Amazon, Google, others, where we're seeing their customers say, look, we need a hybrid cloud solution. We want to engage with Equinix, and we're often being brought into those. Cisco is another one. Their Secure Agile Exchange has really, really seen tremendous traction with large customers, and we partnered with them on some very big enterprise wins. super excited about what's going on in the channel, and as I said, more than 20% of our bookings coming from that. I expect that number to go north from there.

Got it. Thank you.

The next question is coming from Eric Rasmussen of Stiefel. Your line is open.

Yeah, thanks for taking the questions. Maybe just circling back on, Charles, on the comments you just made, and it was kind of what I was thinking. You know, the enterprise segment... It sounds like you're then seeing a change in behavior, you know, and there seems to be more of a sense of urgency. Would you support that sort of commentary? And also, you know, does that then support their move towards implementing more of these hybrid architectures? Just want to get some further thoughts on that as you see that, especially as we look into 2019 and you see them moving more quickly.

Yeah, absolutely. I would say yes, but. Because yes, I see a sense of urgency. Yes, I see a clear sense of consensus emerging around the architecture of choice being hybrid and multi-cloud. But what I also see is a very deliberate sense of action and timing. And so these are careful people with jobs that require them to be careful. And so I think they are moving. They are figuring out which workloads they can use to sort of test that architecture. They are absolutely embracing cloud, but they are also embracing it in a very measured way. And so that's why we're seeing longer sales cycles for sure, and we're seeing average deal sizes being smaller. That's why I think we would love it if these were translating immediately into substantial inflection points or changes in slope on our growth rates. I don't think that's not yet happening, but I also think when you look at our land expand and expand activity, as people get more comfortable and as they increase their pace of deployment in these hybrid architectures, I think that's when we're going to really bear the fruit from our efforts. So I think the answer is yes, there is a sense of urgency. They increasingly see us as relevant to solving their problem. They're engaging with us, but longer sales cycles, smaller deal sizes, and so we're having to work through that in terms of how that translates into our overall financials. But again, I feel very good about the business and what the long-term opportunity looks like and about our ability to continue to really be relevant to them.

Thanks. And maybe just as my follow-up, you know, back to Verizon, you know, you previously talked about building capacity in five markets. But in 2019, is there anything else that you would see that maybe you can make further investments that could potentially get some growth or, you know, turn that growth faster into Verizon or maybe see a better return on that investment?

Well, one, it's been a damn good return on that investment. I think we're super excited about the return that we saw in the level of value creation and accretion that came from the Verizon transaction. So super happy about that. I know it seems like our time here over the last several quarters has been dominated more by the fact that we saw the elevated churn and flat growth from those. But, again, we made the investments where we believed that the fill rates and the utilization levels warranted that. You know, Napa the Americas was just down at that facility recently, terrific group of people, very excited about serving customers, you know, as part of Equinix. Culpeper. We think the federal business is going to continue to be an opportunity. That's an area where I would say investment, I think, could yield outsized results, and so we're going to track that carefully. I met with the team that's doing that, an amazing group of people, really energized about what they're doing. You know, we talked about Denver, Bogota, so we're making those investments. Where the fill rates and the utilization warrant it, we'll continue to invest in them, but I do think we've made the investments that we think are key to sort of driving the engine right now, and we're going to watch it carefully in the coming quarters.

Thank you.

The next question is coming from Mike Rollins of Citi. Your line is open.

Hi, thanks for taking the question. I was curious if you could discuss the longer-term opportunity for margins, and if you could give us a bridge in terms of how the company looks at building some operating leverage with the investments that have been made over the last few years.

You bet, Mike. Yeah, and I fully expected we'd be talking about that on the call to some degree. You know, I think, frankly, I would have loved to have had us on this call saying, here's the margin expansion we're going to deliver in 2019. I realize we didn't do that. And that's disappointing at some level to you and probably to us as well. but I think it's really important to put the guide into the appropriate context. At Analyst Day, we talked about our long-term margin aspirations and shared our view that we could hit the 50% target sometime in that timeframe between now and 2023. And that was based on the assumption that we continue to drive operating leverage in the business, which I can assure you we're doing at a very meaningful level. It also took into account, though, our need to invest in key elements of the business, and we've talked about that, go-to-market expansion, continued product and service development investments. Those are really the key areas, as well as overcoming some of the increased level of expansion drag. It should be no surprise to anybody when you look at the, if you just plot our profile of our CapEx spend over the last several years, it came up substantially. And that turns into new projects and new cabinets that it takes time to fill. And in some cases, particularly if those are first phases, that creates sort of some meaningful expansion drag. And so when you look at those factors, we believed we could do that, still overcome those things, and deliver in margin expansion. The sort of new things that came at us were the 30 BIPs as we sized the lease accounting impact, and then also, but more significantly, the utilities costs. And one thing to really understand, and I know, Mike, you understand this, but I think that Utilities flow through our business in a very different way than most of our wholesale competitors, for example, who pass through power. And so the impact of the increased utility expenses really chewed up what we had hoped to deliver in terms of drop to the bottom line kind of margin expansion. So that was a very long answer to the question, but what I would say is we continue to believe the 50% margin target is achievable. I think we're going to have to look at whether or not the utility impacts moderate over time, and then we'll have to – and then we'll also – I think we'll grow through hopefully our expansion drag, although if the business continues to be as robust as it is, we're going to continue to invest behind it. But I think the margin target of 50 percent is still achievable. It's a question, I think, of timeline. you know, if we continue to get hit by the utility impacts.

Mike, let me just add one other thing to what Charles said. The expansion dragon in and of itself is, you know, we track that every year, and it's not, you know, we recognize that we're always in the business of expanding, but what was different this year in particular relative to the prior years is the size and scale. What Charles and I refer to the fact there's 36 projects that are underway this of size and many other smaller projects around the world. But in addition, we're going to a number of new markets. And as a result, the drag in and of itself just for expansion is 50 basis points this year. And so when you take that into context, you're going to get the benefit of that further down the road, but you've got to absorb it this year. And again, we're going to bear fruit from these investments. The second thing I think is important to note is that as we guide to EBITDA this year, There's roughly a 20 basis point delta. Charles referred to utilities as one example. That's roughly 80 basis points. Expansion drag is 50 basis points. The new lease accounting is 30 basis points. But as we look through the year, you should expect, as all else being equal, that margins will continue to improve throughout the year. Q1 is always seasonally soft because of some seasonal costs. But as we get to the back end of the year, I think you would see us more exiting the year at a higher margin profile than what we exited in 2018.

Our last question is coming from Brett Feldman of Goldman Sachs. Your line is open.

Thanks for squeezing me in. During the discussion of the work you're doing to form the JV, you made a point that once you have this in place, everyone will have a chance to see just how great this asset portfolio is or can be. And I actually wanted to get some understanding of that statement The way I heard it, it sounded like there might be some considerable degree of asset in the JV when it's originally formed. I know you have talked about maybe putting in some of your existing assets like Paris 8. I'm curious maybe as you've had discussions, you realize there may be more of your existing assets that would be appropriate for the venture. And also, are the JV partners you're talking to, are they really primarily passive financial partners or have you discovered that these partners may also have assets that they could contribute to this JV, such that on day one, it might be more of an operating vehicle than we would have guessed. And I'll just throw in a third part to this question, which is, once it's up and running, are you capitalizing this primarily to be a business that you grow organically, or do you actually see it as an M&A vehicle, meaning there could be assets in the past you wouldn't have wanted to own because they didn't align with your IBX model, but maybe now there's a different approach you could take to M&A? Thanks.

Okay, a lot there. I'll try to tackle some of them, and Keith can jump in and help me. You know, in terms of the assets that might go into the JV, I won't go too far in terms of getting out over my skis, but I would simply say that, yes, there are assets that we believe are appropriate to include in the JV, and those assets have some level of existing either pre-leasing and or stabilization already, making them very attractive parts of a portfolio. In fact, we believe that that might also represent an opportunity at some point during the year for us to repatriate capital back into the Equinix system. We're excited about that. We think it's a really compelling story. That is the feedback we are getting from partners. In terms of partner types, I would say simply that we want good financial partners who are philosophically aligned with what we want to accomplish and ones that understand strategically what we're trying to accomplish. understand that proximity to the Equinix ecosystem and interconnectedness to it is important. And so we'll be tackling or we'll be attracting and working with those types of partners. And then as to whether the vehicle would in itself act as something that would drive other transactions. I don't know over time. I think that's something that's certainly not on our radar right now. We are fully consumed with getting a JV structure agreed upon and how decision-making would proceed with a partner and what the assets would look like and how we can start meeting customer needs because that's what we're really focused on. And so I think that's a little bit more color. Anything else in there to add, Keith?

And, Brad, you know, one of the things I just want to highlight, it's really important for us, as we've said before, we want to keep this off balance sheet. So recognizing there's the partnership, there's the arrangement on the ownership, but there's also the fee structuring. And so it's very, you know, as Charles alluded to, there's a lot of complexity behind the organization of this JV structure. And this is the initial, just this is the first of what we think could be many. And as a result, we've got to be mindful of, avoiding consolidation simultaneously, dealing with the complexity around tax. So we're looking forward to spending more time talking to everybody about this. As you can tell by Charles' tone, he's excited, we're excited. We're making great progress, and stay tuned.

Thank you.

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

This will conclude today's conference. All parties may disconnect at this time.