Equinix, Inc.

Good afternoon and welcome to the Equinix first quarter earning conference call. All lines will be able to listen only until we open for questions. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'd now like to turn the call over to Katrina Reimel, Vice President of Investor Relations. You may begin.

Thank you, Jennifer. Good afternoon and welcome to today's conference call. Before we get started, I'd like to remind everyone that some of the statements that we'll be making today are forward-looking in nature and 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 22, 2019. 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, 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, 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 in 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.

Thank you, Katrina. Good afternoon and welcome to our first quarter earnings call. We had a great start to the year delivering our best Q1 ever, including the largest revenue step up in our history and our second best net bookings quarter, reflecting strong customer demand and low return. Our bookings span more than 3,000 customers with cross-border bookings up substantially year over year. We processed over 4,000 deals in the quarter, highlighting the diversity and high-volume nature of our retail co-location business and the scale we've built across our entire go-to-market and customer support engine. During the quarter, we also announced adjustments to our org structure to globalize our operating model, scale our business, and execute with increased velocity against the growing opportunity for Equinix as a strategic platform on which customers architect their digital business. We moved three company veterans into new roles, including concentrating all of our customer-facing functions into a single global organization under Carl Strohmeyer, enabling us to provide consistent execution and deliver increased value as a trusted advisor to the businesses undergoing digital transformation. As depicted on slide three, revenues for Q1 were $1.36 billion, up 11% year-over-year. Adjusted EBITDA was up 12% year-over-year, and AFFO was meaningfully ahead of our expectations. Our market-leading interconnection franchise is performing well, with revenues continuing to outpace colocation, growing 12% year-over-year, as the cloud ecosystem continues to scale. These growth rates are all on a normalized and constant currency basis. Penetration in Lighthouse accounts increased to nearly 50% of the Fortune 500 and 35% of the Global 2000, showcasing the expanding opportunity as we deepen our reach into the enterprise. We are now the market leader in 16 out of the 24 countries in which we operate, and we're expanding our platform with 32 projects announced across 27 markets, with Q1 openings in Frankfurt, Hong Kong, London, Paris, and Shanghai. With regard to our hyperscale initiative, we are now in the final stages of discussions with a short and highly attractive list of potential financing partners. We expect to announce our first JV in EMEA in Q2 with a collection of both stabilized and development assets. We continue to see strong customer demand and lease up for our London 10 and Paris 8 assets is tracking ahead of expectations. we remain highly confident that the JV structure will allow us to extend our cloud leadership while mitigating the strain of hyperscale development on our balance sheet. We'll provide additional details when we announce the transaction, but fully expect that the JV structure will deliver significant strategic value and solid returns, all with minimal impact on our P&L in 2019. Shifting to interconnection, we now have over 341,000 interconnections and continue to add at a rapid clip. In Q1, we added an incremental 7,400, including 1,900 virtual connections. We added more interconnections year over year than the rest of the top 10 competitors combined. For our internet exchange platform, we're seeing strength in the new EMEA and Latin American markets with IX peak traffic up 20% year over year. ECX Fabric, our SDN-enabled interconnection service, now has over 1,500 customers and saw strong growth from enterprise ads. In Q1, We completed the full globalization of our ECX fabric, enabling customers for the first time to establish on-demand network connections between the Americas, Europe, and Asia Pacific. Our vision is to continue to evolve platform Equinix into a broader platform that interconnects and integrates global businesses at the digital edge. Expanding our capabilities at the edge is critical for our service provider customers looking to fuel the wave of digital transformation and for global enterprises striving to keep pace in an increasingly digital world. We are excited about the possibilities of our evolving platform and have developed a roadmap of compelling new services we anticipate rolling out over the next several quarters. Now let me cover highlights from our verticals. Our network vertical experienced solid bookings led by strength in AP and driven by major telcos, mobile operators, and NSP resale. Expansions this quarter included Hutchison, a leading British mobile network operator, upgrading infrastructure to support 5G and cloud services, as well as a leading Asian communication provider, migrating subsea cable nodes and connecting to ECX fabric for lower latency. Our financial services vertical saw near-record bookings led by EMEA and strong growth in insurance and banking. New wins included a Fortune 500 global insurer transforming IT delivery with a cloud-first strategy. a top three auto insurer transforming network topology while securely connecting to multiple clouds, and one of the largest global payment technology companies optimizing their corporate and commercial networks. The content digital media vertical produced solid bookings led by strong demand in the social media sub-segment as providers continue to strive to improve user experience and expand the scope of their business models. Our gaming and e-commerce sub-segments grew the fastest year over year led by customers including Tencent, Naver, and Roblox. Our cloud and IT vertical also captured strong bookings led by SaaS as the cloud diversifies towards a hybrid multi-cloud architecture. We see a robust pipeline as cloud service providers continue to push to new markets and roll out additional services. Expansions included a leading SaaS provider expanding to support growth in new markets and with the federal government, as well as an AI-powered commerce platform upgrading to enhance user experience and support a rapidly growing customer base. As digital transformation accelerates, the enterprise vertical continues to be our fastest growing vertical, led by healthcare, legal, and travel subsegments this quarter. New wins included Air Canada, a top five North American airline, deploying a hybrid multi-cloud strategy, SpaceX, deploying infrastructure to interconnect dense network and partner ecosystems, and one of the big four audit firms, re-architecting networks and interconnecting to multi-cloud to improve the user experience for both employees and clients. Channel bookings also saw continued strength, delivering over 20% of bookings and accounting for half of our new logos. We're seeing accelerated success selling with our key cloud and technology alliance partners, including Cisco, Google, Microsoft, and Oracle. New channel wins this quarter included a win with Anixter for a leading French transportation and freight logistics company deploying a mobility platform, as well as a win with AT&T for a top five U.S. bank accessing our network and cloud provider ecosystems. Now let me turn the call over to Keith and cover the results for the quarter.

Thanks, Charles, and once again, good afternoon to everyone. As highlighted by Charles, we're delighted with the start of our year, delivering great Q1 gross and net bookings alongside our 65th consecutive quarter of revenue growth. With this momentum, we're raising 2019 guidance across the board and are tracking well against the target set at our 2018 analyst day. MRR yields remained firm and MRR return was lower than planned, allowing us to retain more value in the business while still fulfilling a diverse set of new customer demands weighted towards smaller deal sizes. We're continuing to invest in our growth and scale, both as it relates to our organic expansion, as well as new product and services initiatives. And at the same time, we've been able to leverage how we spend our SG&A dollars, reflecting our priority to increase the operating leverage in the business and reduce the SG&A line as a percent of revenues. Now I'll cover the quarterly highlights. Note that all growth rates in this section are on a normalized and constant currency basis. As depicted on slide four, global Q1 revenues were $1.36 billion, up 11% over the same quarter last year and above the top end of our guidance range. Non-recurring revenues were 6% of total revenues and an 11% increase over the prior quarter and reflect the inherent lumpiness of this revenue line. We expect non-recurring revenues to remain elevated in Q2, but given our current visibility to customer activities, we expect to return to more typical levels in the second half of the year, which is reflected in our guidance. Q1 revenues net of our FX hedges included a $3 million positive FX benefit when compared to our prior guidance rates. Global Q1 adjusted EBITDA was $660 million, up 12% over the same quarter last year, largely due to strong operating performance and lower than planned utilities and repairs and maintenance expense. Our Q1 adjusted EBITDA performance net of our FX hedges included a $2 million positive FX benefit when compared to our prior guidance rates. Global Q1 AFFO was $488 million, largely due to strong operating profit, as well as lower net interest expense due to our cross-currency swap on a portion of our U.S. denominated debt, and a lower cost to borrow on our floating rate debt due to the credit rating increase. Also in the quarter, we had lower seasonal recurring capital expenditures, offset in part by higher cash taxes, as expected. Q1 global AMR return was 2.1%. better than our expectations for the quarter. For 2019, we expect MRR churn to average between 2% and 2.5% per quarter, although at the higher end of our range in Q2, mainly due to timing. Turning to regional highlights, whose full results are covered on slides 5 through 7. APAC and EMEA were our fastest growing MRR regions at 17% and 13%, respectively, on a year-over-year normalized basis. followed by the Americas region at 5%. The Americas region had a strong start to the year with solid net bookings with a higher mix of small deals and a healthy pricing and pipeline environment. Americas had record non-recurring revenues in the quarter, including a meaningful level of exports to the other two regions, as our teams continue to sell globally across our platform. Our EMEA region had a very strong quarter led by the UK business, with significant additions to our cabinet billings and interconnections. In Q1, we opened meaningful new capacity across our flat markets with a strong built pipeline continuing over the rest of the year. We also purchased Amsterdam 11 and IBX in close proximity to our existing highly networked campus in Southeast Amsterdam. This acquired asset will help defer CapEx while creating new near-term capacity to fill the growing demand for digital infrastructure connectivity in the Netherlands and then the broader European market. And the Asia Pacific region delivered strong bookings led by our Japan and Hong Kong businesses. APAC saw particular strength in the enterprise, cloud and content verticals as supported by our channel team. MRR per cabinet remained firm despite absorbing the significant new cabinet installations at the end of last year. And now looking at the capital structure, please refer to slide eight. Our unrestricted cash balance is approximately $1.6 billion, an increase over the prior quarter due to strong operating cash flows and, of course, the $1.24 billion follow-on equity raise, but offset in part by our quarterly capital expenditures and cash dividend. Our liquidity position remains very strong and our net debt leverage ratio dropped to 3.6 times our Q1 annualized adjusted EBITDA, well within the targeted range of three to four times net leverage. Also, given the strong momentum in our business and our commitment to use both debt and equity to fund our future growth, S&P upgraded all debt and our corporate family rating to investment grade. We believe we're on a solid path to attain a second investment grade rating, which once attained, will allow us to access the IG debt capital markets, thereby lowering our future cost to borrow. So at the end of the day, we have cash, we have liquidity, We're appropriately levered, and we have one of the lowest AFFO payout ratios in the industry. This creates immense flexibility as we continue to scale our business and drive to maximize long-term shareholder value. Turning to slide nine for the quarter, capital expenditures were approximately $364 million, including a recurring capex of $21 million. We opened seven new builds this quarter, including three new IBXs in London. Paris and Shanghai, adding 7,500 cabinets. We also purchased our Sao Paulo II facility as well as land for development in Milan and Frankfurt. Revenue from owned assets stepped up to 55%. Our capital investments delivered strong returns as shown on slide 10. Our now 134 stabilized assets grew revenues 3% year-over-year on a constant currency basis increasing quarter-over-quarter, reflecting a moderation of the prior headwinds experienced. Also consistent with prior years, during Q1, we completed the annual refresh of our IBX categorization. Our stabilized asset count increased by a net four IBXs. These stabilized assets are collectively 85% utilized and now generate a 31% cash-on-cash return on the gross PPE invested due to the strength of the new assets added to the stabilized portfolio. And finally, please refer to slides 11 through 15 for an updated summary of 2019 guidance and bridges. For the full year 2019, we're raising our revenue guidance by $25 million and adjusted EBITDA guidance by $30 million, primarily due to strong operating performance. This guidance implies a revenue growth rate of 9% year-over-year and a healthy adjusted EBITDA margin of 47% to 48%. Also, we're reducing our 2019 integration cost assumption to $13 million, a $2 million reduction compared to the prior guidance. And given the operating momentum of the business, we continue to improve our AFFO and AFFO per share core metrics. We're raising our 2019 AFFO by $45 million to grow 13% to 14% compared to the previous year. which includes the net interest benefits attributed to our credit rating upgrade. We're also narrowing our 2019 AFFO per share range to a midpoint of $22.70, excluding integration costs. AFFO per share is expected to grow between 8% and 9%, which includes the dilutive impact from the Q1 equity raise. We've assumed a weighted average 84.1 million common shares outstanding on a fully diluted basis. And we expect our 2019 cash dividends to increase to approximately $820 million, a 13% increase over the prior year, or an 8% increase on a per share basis. So with that, I'm going to stop here and turn the call back to Charles.

Thank you, Keith. In closing, we believe that digital transformation will persist as a driving force in the global economy, and we are positioning ourselves to seize that momentum. With our unmatched global reach, the industry's most comprehensive interconnection platform, an unparalleled track record of service excellence, and an expanding portfolio of edge services, we remain confident in our ability to deliver superior value for our customers, allowing us to build on and extend our market leadership. We are tracking ahead of our 2019 targets, and we have a clear set of priorities for this year to drive durable and growing FFO per share for our shareholders. So let me stop here and open it up for questions.

Thank you. If you would like to ask a question from the phone, please press star followed by the number 1. Again, that is star 1 to ask a question from your phone. The first question comes from Sammy Badri from Credit Suisse. Your line is open.

Hi. Thank you. Looking at your average revenue per cross-connect in Europe, it looks like it was down double digits year-on-year in 1Q 2019. So we just wanted to get a better idea on the market dynamics that are happening there. It's just the industry's perception that that business is stabilizing and standardizing in Europe, and with your exposure to financial services, you'd think that you would see a bit of a mix shift upward. Can you just give us some color on the dynamics in the region?

Yeah. I would say, out of the look at that particular stat, but I would say more generically, I think the interconnection business across the globe, including inclusive of EMEA, continues to be very strong. Um, and so I think the demand for interconnection, both, uh, you know, across our full, uh, interconnected portfolio of interconnection services, um, you know, continues to be solid. As we've mentioned, we are in the process of, uh, sort of normalizing our, um, our interconnection pricing, you know, to, uh, to Equinix levels across the board. Um, so I'd expect that over time we're going to continue to see, you know, an uplift in terms of our unit, uh, our unit performance in that region. On a macro level, interconnection in Europe continues to be very healthy with strong demand.

I would just add, one of the things we did, we adjusted some of the cross-connect counts in the last quarter as we reconciled some of the telecity install base. The revenue was still there. but the count was adjusted upwards to reflect the number of units. And so you're seeing a little bit of a reduction because of that. But there's nothing fundamentally that's changed within our pricing model. And, in fact, as Charles said, we're normalizing our pricing structure as we roll that out through Europe in 2019.

Yeah, that's right, Keith. I forgot about that. So that's been a bit of an optical thing. Essentially, whenever we do an acquisition process, we take a fairly conservative view of count because, you know, oftentimes the installed base is when you end up going in and doing the audit ends up differently. And so in this case, we had that reserve, essentially a reserve sitting out there on a unit basis, but all the revenue was there and then we brought it in. So that shows a bit of a sort of an optical disconnect.

Got it. Thank you. Reconciliation on the chart on the Q4 earnings deck, Sammy.

Got it. Thank you. Yeah, I saw the changes in Q4 specifically. The other question I had was on ECX, and maybe we could just get a better idea on the percentage of your customers that are using the ECX fabric to connect to multiple regions, just as we get an idea on how many clients or customers are leaning on specifically this as the key differentiator versus just deploying in their more traditional sense. We just want to get, if you could give us any kind of percentages or a quantified idea, that'd be great.

Well, we do have obviously the 1,500 customers, so you get a sense for just how many of our customers are actually implemented on it, and you also get a sense for how much upside remains for us there. I think in terms of the total percentage of those customers that have yet sort of availed themselves of the multi-regional connectivity aspect of ECX Fabric, That's still relatively small, but with a lot of upside opportunity there. It is actually well ahead of what our plan was, and so we're seeing uptake on that faster than we had even expected. But it's still a relatively small percentage, I would think, of the total number of customers that are yet using the cross-regional. But I think that they are absolutely seeing it, though, as a key differentiator. I think the ability... for them to house infrastructure in proximity to the multi-cloud, generate the performance and cost benefits that are part of being on platform Equinix, and then have the confidence that they can interconnect to the rest of their own private infrastructure and or to cloud endpoints that aren't in their chosen location is a compelling value proposition for them. And I will tell you that as I'm out with our sales teams, they continue to see ECX Fabric at least as the primary hook for conversations with customers these days. And so I'm very pleased with how that's playing out in the market.

Great. Thank you. And then my last question has to do with some of your JVs that were announced. And you've lasered focus on Europe. And based on what you laid out in your 2018 analyst day and some of the return profiles in the JV structured agreements, Are we looking at similar return profiles in these future JVs that are coming in that you laid out in the 2018 analyst day, or should we expect it to look a little bit different just given some time as digestion and partnerships are starting to form?

Well, again, we haven't announced any. You're talking specifically about the hyperscale JVs?

That's correct.

Yeah. No announcements there yet. As we said in the script, we expect that that will be announced, and we are focused on EMEA as the first JV opportunity. Tracking very well there. We feel very good about the financing partners we're talking to as well as the customer uptake. What we showed at Analyst Day I think continues to be consistent with our expectations and I think we're going to see really good, solid headline returns on those projects. And I think our pipeline, you know, reflects, you know, is supporting that notion right now. And then Equinix, you know, just due to the fee structure and the flow of fees for us as management fees and some of the other fees that flow to us and that, we'll see some upsized returns from that. you know, we'll get good solid equity returns and then see some juice from the fees as well. So, you know, we feel good about the structure overall, tracking well. And I think that the – I don't think that the structure would look meaningfully different over time, Keith, unless you had a different view on that. Yep.

That was good. Okay. Thank you. We'll definitely update you in Q2. Again, we're excited to announce – the final formation of the JV and the JV partner, and we'll discuss that in the Q2 timeframe. Great. Thank you.

The next question comes from Jordan Sadler from KeyBank. Your line is open.

Thank you. Good afternoon. I had a follow-up on the JV. I don't want to jump the gun relative to your planned announcement, but you made the comment of no impact, I think. to the P&L in 2019 or relative to guidance. I just wanted to clarify what specifically you were referencing, if it was guidance or the actual P&L. And then, because I would think, as you just mentioned, Charles, there could potentially be an uplift to you guys as a result of a fee stream, especially if there's some stabilized assets being stuck into the JV. Then I have a follow-up.

Yeah. You want to go ahead, Keith? Yeah, so Jordan, let me just touch base. So on the last earnings call, what we did do is we give you an update of basically the net burn that, you know, we're investing in the hyperscale initiative team right now, or what we refer to as our hit team. So there's a lot of, if you will, costs going through the P&L today, and so that is embedded in the guidance. What you have not seen is what we said was on a go-forward basis, the AFFO impact, because we're in the development phase and we'll be putting some stabilized assets into the JV, taking some cash out, and then investing in new developments, there will be no meaningful impact to AFFO per share when we make that announcement. But what that doesn't say is that there is an anticipation of a meaningful amount of cash, as Charles alluded to on the last earnings call, of cash coming back into the business. And then that's going to then fund the future developments. So there's a lot to talk about with respect to JV, but we don't want anybody to assume any incremental AFFO per share in fiscal year 19 related to this.

Okay. It sounds like there could be a flows issue as you'll have a cash flow coming in and over time that'll drag initially and over time that'll be redeployed, if I'm not putting words in your mouth.

It goes back to really what Charles said. When you look at the assets at the project level, very good returns for both ourselves and what we believe to be our financing partner. And so we're happy at the project return. In addition, Equinix will receive a certain amount of fee income associated with it. So when you look at basically the return on our equity, it's a very attractive investment decision for us. And it's a good project return for our partners. And then there's always the potential for the upside at some point in the future, depending on how we liquidate the assets.

And lastly, could you speak to the growth in physical versus virtual cross-connects? I appreciate the disclosure you guys have been providing there. I'm just curious. The virtual cross-connect volume clearly is growing at a faster rate, which makes sense. just maybe talk to what your expectations would be there, one versus the other, and then if you could elaborate on pricing.

Sure, sure. Yeah, we see continued health across the interconnection portfolio, and I think that's one of the key differences is that we bring a very rich set of interconnection options to our customers to solve a very different and varied set of use cases for them. And so, Depending on what they want to accomplish, depending on their confidence in traffic flows, depending on the timing and duration of their need, they might choose different alternatives. And so, you know, right now we are seeing tremendous uptake on ECX Fabric, particularly from enterprise connectivity to the cloud. That should be no surprise to anybody. And we expect that that will continue, you know, to be a very strong trend. element of our business going forward. But what often happens is a maturation and a staging of things where people initially begin to test moving workloads into the cloud. They may do that over the fabric using you know, buy a port and then provision capacity to a cloud, see how that works. But over time, it's often more cost-effective and more performant for them to actually move to physical connectivity, private, and an actual cross-connect at a future stage of the maturation of their cloud strategy. And so that's what we typically see is a customer sort of buying across that portfolio and, you know, doing whatever is right for them based on the, you know, the particular needs of the use case. So, That's why we've said that we don't really – there's probably some very modest level of substitution, but we see them generally as complementary, and that's why both of them continue to grow well. In terms of pricing, the individual unit cost for a virtual connect is lower, but you have to recognize that you do have to pay the upfront port cost to essentially enable those virtual connects. And so depending on how many virtual connects you might provision over a single port, You know, it can vary meaningfully. But in terms of, you know, yield to us right now, we're not seeing a dramatic difference. I think as virtual cross-connect volume scale, you will see a slightly lower average price point on virtual than physical. But, again, the economics of both and the return on capital for both of those products are exceptionally good for Equinix.

Thank you.

The next question comes from Philip Cusick from JP Morgan. Your line is open.

Hey, Gus. Thanks. Two, if I can. One for Charles. For the JV, are these going to be different sales processes for different customers going forward between the legacy Equinix and the JV facilities, or do you anticipate those being a single sales process? I'm just trying to think about how you plan to protect the high price and differentiated legacy business from being used to subsidize the new business. And then for Keith, can you dig in a little more into the SG&A scaling? How should we think about this long-term trend versus revenue, and what's being done to control costs? Thanks.

Yeah, so let me take the JV first. As we said, one of the key things for us is that we wanted to be able to deliver revenue a more comprehensive portfolio of offers to our hyperscale partners. As you recall in what I presented at the analyst day, you know, we currently have and now, you know, well beyond this, but at that time we were at a half a billion dollar a year business with the 12 top hyperscalers. And I showed how that was growing across the portfolio from sort of smaller, highly interconnected footprints up to sort of larger more, you know, more wholesale type, hyperscale, you know, type footprints, you know, for different needs. But I think the bottom line is, is that we want to use our single unified relationship with that customer, our understanding of their needs and the trust relationship that we have, as well as the integration between our platforms to continue to service their needs and We see the opportunity as quite distinct. Typically, they would be using Equinix facilities more for networking nodes, private interconnection nodes, and those kind of targeted elements of their architectures, and looking more for availability zones and large server farm type footprints in more of the hyperscale arena. But I think there's a relatively clean line there for us to manage, and we think there's plenty of opportunity for both the JV and Equinix and our partner to do very well with those large footprints, as well as for us to continue to grow the targeted, more interconnected footprints.

Okay. And, Philip, on the second question on SG&A scaling, I think this is a journey, as you can well appreciate, First and foremost, when you look at where we started, our SG&A, as we sort of top ticked, we were at between 22% and 23%. SG&A is a percent of revenue, and today we're closer to the 18 to 19 with the ability to potentially scale that down further. But how we're doing it is across, you know, I think it's important to understand, first and foremost, it really is about our team and taking our team and figuring out how to align them most efficiently. It is also about our systems and our processes. And the recognition that we're through many of the integrations that we've had as a company is we've integrated different businesses and acquisitions into the, if you will, the parent company. And then you couple that with we've invested quite heavily in 2018 and certainly into 2019 in the procurement and strategic procurement team and strategic purchasing team inside the organization. And that's certainly going to pay dividends as well as we continue to work to drive down our average cost units across many different functions and items. And then the last piece I'd just share with you is that Charles alluded to it on the last earnings call, and we have talked about it previously. There's an element of view. It's the savings. We want to make sure we take the dollars and we put them and dedicate them in sort of the right areas. And so we want to continue to take dollars where we can, where we can find those savings, We put it back into the business to fund the customer-facing initiatives, the new product initiatives, the go-to-market strategies, and the like. And so there's an element where we'll put it back into the business and hence invest in our future. And there's an element where we'll drive margins up, and that's effectively returning to the shareholders in the form of a growing cash dividend. But we're doing a real good job, again, of looking at our systems, our processes, allocating appropriately. And then the last piece I'll just say is we're doing a real good job at prioritizing and prioritizing throughout the organization. We say here internally there's never a project that we don't like, but it's always, you know, they're always well intended, just so many projects we can do as an organization, but we can only do so much. And under Charles' leadership, we're really focusing on how to prioritize to the highest and best use of our capital. And that's, again, that's part of the reason that you're seeing our SG&A as a percent of revenues go down.

Thanks, Gus.

The next question comes from Michael Rollins from Citi. Your line is open.

Hi, good afternoon. First, if you look at the non-recurring revenue, it continues to be pretty robust. What does that say about the installation and pace for the future? And also, how do we think about the non-recurring line item going forward? Thanks.

So, Michael, one of the things I said, at least in the prepared remarks, is we saw a meaningful step up in our NR this quarter. It was up 11% quarter to quarter. It's roughly 6% of our total revenues. It is a lumpy, it tends to be lumpy. It relates in many cases to custom sales orders or specific goods for resale that we might enter into with some of our large strategic customers. And so Q1, yeah, you saw a relatively large increase. Q2, I think you're going to see we're guiding to NR going down slightly, quarter per quarter, but still elevated relative to prior years. And then going into Q3, Q4, you should see it start to step down to a more traditional level. So, again, it's a reflection of the number of deals that we're doing with customers, the amount of custom sales order work, And it will be lumpy, and what we're going to try and do is, the best that we can anyway, is we'll continue to guide to it, because I think it's an important element of things that could go up and go down over any given quarter, at least on a sequential basis.

Yeah, Mike, I'd just offer also, I mean, I think it's part of the, you know, sort of the trusted advisor relationship we're developing with our customers. They really, and, you know, candidly, a big shout out to our global sales engineering team around the world for who does a phenomenal job of engaging our customers and developing a level of trust there where they're comfortable with us implementing these really very strategic implementations that are central to how they do business and trusting us to do that. And so it is something that we honestly have to watch and be careful. We want to make sure it's an appropriate sort of piece of our mix of business But we also, you know, we think we can do it at attractive margins. It's something our customers really want us to do. You know, as we said, right now we think we're going to continue robust through the first half of the year, and we've guided, you know, to a little tapering of that in the second half of the year based on our visibility. Thanks very much.

The next question comes from Simon Flannery from Morgan Stanley. Your line is open.

Great. Thanks so much. On the hyperscale JVs, good to hear the update on the EMEA. Are we likely to see other transactions this year, either in EMEA or other regions, or is it likely to be one and then we'll maybe see more down the road? And then secondly, any updates on merger integration for Inframart and Verizon? Where do we stand on some of that progress? Thanks.

Why don't I take the first one? I'll push the second one to Charles. On the JV, the first one is probably the more complex one. It is a European-based JV. There is a second one that is going to be forthcoming. It will be focused on the Asia market, more specifically at least Japan to start. And then we would anticipate other JVs after that. But it's still a little bit early, Simon, but we are progressing shortly to the second JV ends. In both cases, we look forward to announcing them over the near term.

And would the second one be smaller than the first one?

Well, the second one will have probably less units in it to start, as I said. But it's still a meaningfully sized JV. And again, initially dedicated towards the Japanese market, whereas the initial JV in For Europe, it's London, Paris, Frankfurt, and Amsterdam. Okay. Great. It gives you a sense that they are going to be somewhat market-specific. They're going to be timing-specific. Again, without getting into the details, the first one will have stabilized assets that we move into it. On a go-forward basis, unlikely stabilized assets would be moved into the JV market. It would really be about a partnership funding the hyperscale initiative.

And then quickly on the integration, obviously we're pretty well progressed on most of that stuff. You see that in terms of pretty small stub left of integration costs for the remainder of the year. I think we took that down to 13, 2 million down from where it was. You know, the bulk of the work is done. I would say that, you know, again, we continue to be very pleased with, you know, both the financial and strategic benefits that we've gained from, you know, the variety of transactions that we've done. You know, specifically to Verizon, you mentioned, you know, I think we're – We actually are seeing great bookings into those assets. We actually saw record bookings into the Verizon assets, but now they're really fully integrated into how we think about platform equinix now. But we see great momentum in a number of those markets. I would say that we're still seeing a little bit of the churn tail on Verizon. And it's not that it's bigger than what we thought. It's just that it's taking longer to work through, and that's not really all that surprising. And it's a goodness thing. In the end, we probably had that revenue for longer than we anticipated, but it is causing a little bit longer churn tail, and I think that's deferring the sort of return to growth a bit further into the year than what we had anticipated. But, again, really pleased with that transaction overall. InfoMart, you know, that's progressing well. We actually have now a project underway that's going to put nearly 2,000 cabinets onto that campus. And, you know, we feel very good about our ability to build a portfolio of offerings on the InfoMart campus and really take what we think will be a really outstanding market position in a very large and important colo market there.

Thank you.

The next question comes from Colby Sinasol from Cowan and Company. Your line is open.

Great. Thank you. Two, if I may. You added 4,400 cabinet spilling in the quarter, which was down from the fourth quarter and a little bit light, at least relative to our number. And you added 7,500 new cabinets to the base. Just curious that, you know, based on the 7,500 that you did add, would you expect to see a step up in cabinet spilling net ads, if you will, as we go into the second quarter. And then secondly, when I look at your EBITDA guidance for the second quarter, you're guiding to flat to maybe down $10 million, depending on where you come out. And I'm just curious what's behind that. I think that you mentioned part of the upside to gross margins in the first quarter was tied to lower maintenance and utilities. I'm assuming that that's one-time benefit, so maybe that's what explains it. But I'm also curious what the margin is. profile and the non-recurring looks like, and if that changes meaningfully quarter to quarter. Thank you.

I'll let Keith take the second part there on the guidance, but on the cabinet ads, I would just, I'd encourage us to look at sort of the, you know, the sort of overall body of work over the last two quarters, right, you know, and look at the, you know, the level of cabinet ads, the level of interconnection ads, the number of deals, the margin performance, the margin expansion. And so we continue to be extremely happy with the overall performance of the business and the momentum. I do think that cabinet's billing, as we've always said, is a little bit dependent on a variety of factors. Asia had a, you know, a breakout quarter last quarter, and then, you know, sort of you sometimes see a bit of a hysteresis from that. And, you know, so it's – I think that right now we're seeing a level of cabinet ads, you know, when we look at overrolling four-quarter averages that is super healthy for the business and, you know, would expect to, you know, continue to see that going forward.

And, Colby, as it relates to the second question, certainly as we alluded to in our prepared remarks, there's a number of things that went on in the first quarter, and part of it is just the timing of expenses. Part of it is utility-based. If you recall, on the last earnings call, we talked about the drag associated with utilities, and it wasn't quite as anticipated in Q1, but on a go-forward basis, we're planning utilities to continue to step up. And so that's affecting us to the tune of roughly 60 basis points. And then the other part is, to the extent they don't step up, then that's something that would come back to the business, of course, similar to what we experienced in Q1. Second part is just timing. Again, like anything with Q1, you've got Chinese New Year, you've got our annual sales kickoff, and so there's costs that move around in the quarter and our timing on when we make those decisions. And so there's some... some investments that we're going to make in Q2 relative to what we did in Q1. And then the last thing I would just say is, you know, it's important to note when we originally started the year, we thought that we'd take, you know, we originally anticipated the margins would come down slightly, but there was reasons why that. There was the expansion drag, there was utilities, there was ASC 842 and the like. As we look forward now, we're actually taking margins up slightly to 48.3%. percent for the year. And that also assumes that we still have roughly 100 basis point drag in the system, which is reflected in our bridges. And so, again, we recognize that it's not – we love to have all those nice straight lines and up and to the right, but the reality of how we run our business and the global nature, it causes different costs to fall in different quarters, and sometimes it's just timing-based and And so, again, I just guide you to the fact that overall for the year, we're now raising our guidance, we've raised our margins, and we still are preserving what we anticipate to be our higher cost model going forward as it relates to utilities.

Great. Thank you.

The next question comes from John Adkin from RBC. Your line is open.

Thanks very much. So I'm interested, I don't know if I missed this or not, but any sort of impacts that you're still seeing or expect to see from 10 to 100 gig migration? And then secondly, just maybe to put a finer point on some of the SG&A questions, a lot of moving parts, but can you talk about projected ramps or not in sales engineering headcount, sales headcount, and overall kind of shifts, if there are any, in kind of your go-to-market strategy?

Sure. So let me try to tackle all that. The 10 to 100, as we said last quarter, I think we reported last quarter about 7,000 physical cross-connects, 1,800 virtual. So very much at the top end of our sort of ranges that we typically give of 5,000 to 7,000 non-physical. We were at 5,500 physical this quarter and 1,900 virtual. So We did see a bit of a – we saw some of the 10 to 100 gig resume. In terms of that, we had mentioned that there was a bit of a pause on that, probably due to network moratoriums taking hold previously. But we still believe that the larger projects for 10 to 100 are very well advanced, and so we do think we'll see some tapering on that over the course of the year. We probably saw also a little bit of – NSP, Network Service Provider Consolidation, impacts in the quarter. And so with those things combined, when we look at gross ads, we're super pleased with the level of gross ads. Again, we do have a little bit of headwind associated with the 10 to 100 and a little bit on the consolidation side. But overall, strong performance, and we do think the 10 to 100 will probably taper off particularly in the Americas through the year, we will probably see some of that in the other regions, but to a much lesser degree given the concentrations of traffic. And then SG&A, you know, I think that we will ramp. We are expanding to go to market engine, and we have about 500 quota-bearing heads today. We will add to that in a, you know, probably, you know, over the course of the remainder of the year, targeting maybe five and a quarter or something like that. But, you know, we'll add, we'll continue to add if we feel like we're getting good ramps to productivity. And yeah, we are, we will add the, you know, sort of the full contingent of resources around the headcount to ensure their success. That includes both sales engineering and solution architect and other support type resources. But we're being very careful about how we do that to make sure that we keep our commitments to gaining some operating leverage in the business over the course of the year.

Jonathan, if I could just add one more thing in that I think it's important, if you look at the trend line over the last five, six quarters, you see that, yeah, we're continuing to invest in the sales and marketing area, and as Charles said, focusing the dollars in the right area. At the same time, you're seeing on a cash basis the G&A dollars sort of remain flat. So it gives you a sense that, you know, again, going back to my earlier comments, it's a percent of revenue as G&A on a cash basis is going down. But you're also seeing a greater investment in the front of house, customer-facing initiatives, which is exactly where we want to deploy our capital.

Thanks. Go ahead. Just that you also asked just a more generic piece about the go-to-market, I would just offer that, Mike Campbell, our Chief Sales Officer, and Carl in his new role are working really closely together to continue to drive efficiency and effectiveness in the go-to-market engine overall. I think that includes a couple of prominent features. One, continued investment in the channel and partnering with a number of partners who are having great success in partnership with us, the likes of AT&T and Verizon and Orange and and some great work with Cisco targeting some joint customers. So we're seeing we're going to continue to invest in the channel. Then we also are going to continue to add resources to both drive new logo capture as well as land and expand behavior with the logos we've already captured. When we look at it in terms of how much wallet share there is on some of the, you know, sort of Fortune 500 and Global 2000 customers that we've landed, we think there's an immense opportunity. And so we're shaping both the sales roles and the patches to make sure that we're continuing to drive that as well.

Thank you. And you mentioned channel. Any kind of quantification? I think you talked about successive quarters of 20% contributions or more, but how does that sort of break out by region? And then my last question, just on Asia-Pac, China, I saw the Shanghai 600, 400 cabbies, and wondering kind of the expected ramp there in the past. I think you've talked about maybe entering new metros in China, or is the focus for the time being likely to be just on that one metro?

Yeah, so on Channel, we are seeing we had probably lead in the Americas. just a more maybe mature channel market, and we invested our initial sort of resources and dollars there. One of the things that I think we're going to see, we have seen improvements on, and we'll see even more now with Carl taking a sort of consolidated global role, is driving a really consistent channel program across the world in terms of the resources that we have on the ground to do that. But all of them All three regions are tracking very well in their embrace of channel. That 20-plus percent number is overall, but I do think all three regions are tracking well in terms of embracing channel. As for China, again, I think we've seen good response to the Shanghai capacity that's come online. I think we're going to have to, you know, continue to monitor the situation in China carefully relative to, you know, kind of how much additional capital we would think about putting to work in that market. We do have the, you know, the JB relationship now, which allows us, you know, we think a high degree of confidence in terms of how we've approached the market. But I think we'll sort of see how the capacity uptake and customer uptake occurs, you know, there and kind of revisit that as we go.

Thank you very much.

The next question comes from Nick Del Deo from Moffett Nathanson. Your line is open.

Hey, thanks for asking my questions. You noted that cross-border bookings were up substantially this quarter. Can you give some added detail on that front? What share of deals fall into that category? And if we were to think about bookings by the region where they were sourced rather than where the revenue is generated, how would your business be split between the three regions?

Yeah, it's a great question, Nick. We do look at it that way, and we have, as you might expect, I think just given the sort of typical maturation cycles of technology and how they sort of flow across the globe, we do have a very significant portion of bookings that are exports from the Americas-based sales force to the rest of the world. But we have also seen continued efforts for the rest of the selling teams across the world to really embrace selling the global platform. And it, again, is one of the things that is a driving force for moving to this more globalized go-to-market model under Carl's leadership. But, you know, we look at that in terms of, you know, we look at all of our deals in terms of where they are sourced, you know, where the headquarter location is, and then we look at the assets. And if it is, you know, if there's a cross-border flow there, we consider that, you know, a cross-border global export booking.

Okay. Makes sense. And then, you know, one on Europe. You know, I think you've historically been willing to do more larger footprint deals in Europe, you know, versus other regions. Yes. Now, what share of bookings in that region would you characterize as being larger footprint? And to what degree might the HIT initiative siphon off some of those deals and perhaps weigh on consolidated growth?

Yeah, really good question. I do think that we have had a bit more of an appetite there. I think that's in part due to the pricing sort of dynamics in Europe and our capacity situation there and a variety of other factors. But what we have done is really looked at what we think that our sweet spot is in terms of bookings. There's no magical spot, I don't think. Over time, we used to refer to a large footprint as 250 kilowatt and above many years ago. And I think now you're talking about probably more like megawatt plus type deals that are more in that really large footprint category. And so So there's not a ton of those. I do think that we would, you know, our desire would be to, you know, funnel those to the JV because that's the right asset for the, you know, we have long used the sort of right customer, you know, right application in the right asset, you know, kind of mantra. And it's one we strongly believe in, in terms of driving returns and appropriate allocation of capital. So I think on the very large footprint with the hyperscale community, we would expect to see those begin to migrate probably to the JV. And that would affect, I think, our bookings to some degree. But I think we've contemplated that in our guidance. We've contemplated that in our projected growth rates for the business. And so it reflects that to some degree already.

Okay. Terrific. Thanks, Charles.

You bet.

The next question comes from John Hudlick from UBS. Your line is open.

Great. Thanks. Two quick ones, I think. First of all, what's driving the higher MRR churn that you guys talked about for the second quarter? I don't know if it's the Verizon churn you referenced in a previous question. And, you know, are we sure that that's just sort of a temporary move and not going to continue? And then anything you could tell us about conversations with the other two rating agencies and potentially any timing on moves on their part? Thanks.

Yeah, I'll let Keith take the second one. As it relates to the first, we reported at the very low end of kind of our two to two and a half with 2.1 this quarter. And I think really the way to think about it is just that we, you know, deferral of churn is a good thing for us, right? And so we work hard to defer it or make it go away as best we can. And, you know, in this quarter, I think we saw some deferrals that we probably would have initially expected to come into this quarter. And so, you know, we'll always take that, but I do think it represents a little bit of an uptick in the following quarter. But nothing structural there. I think, yes, some of that is definitely from the Verizon assets, absolutely. You know, and so over time, I think that we feel comfortable with our two to two-and-a-half range, and, you know, our objective would be to continue to really drive discipline and deal selection that over time we'd hope to, hope to lower that range when the time is appropriate for us to do so.

John, on the second question, as it relates to the rating agencies, no surprise to you on the heels of working with S&P with the upgrade, we were working with the other two rating agencies. I think continuing to have a strong strategic performance like we're having, our leverage going down, again, our commitment to use both debt and equity as we fund the business going forward and having a leverage ratio of 3.6 No surprise to you, both other rating agencies upgraded as one to one notch below investment grade with a positive outlook. So I remain meaningfully optimistic that we will get that second investment grade rating over the not too distant future. But again, it's not up to us to decide. We're going to do all the things that we need to do as a business to make sure we put ourselves in good stead, and we're going to focus on getting that second rating. But Again, we're doing as you would expect and working hard with the rating agencies to continue to share with them why we believe we should be investment-grade.

Okay, great. Thanks, guys.

The last question comes from Frank Lawden from Raymond James. Your line is open.

Great. Thank you very much. Got a quick question about the JV. Sorry for the background noise. Quick question on the JV for two things. First, how important is that to have multiple partners there? Are you seeking multiple partners from the JV? And then secondly, talking about the balance sheet and the leverage, how important is the JV structure to helping with the balance sheet?

Frank, we can tag team this. One, I'm glad to see your dog's excitement about our results. He's fired up. But, you know, I think that the –

I forgot your question. A number of partners. Oh, yeah.

I can't maintain the value to the call here. Yeah, no problem. We, you know, I think that right now we're really focused on getting this initial transaction done. You know, you know, we have talked about the fact that we could have multiple partners over time. At the same time, we would be happy to embrace, you know, more comprehensively global partners, you know, where we can. There's some efficiency and effectiveness in doing that. So I think it'll really depend on, you know, kind of on where we land on this one, and we'll evaluate each of the markets distinctly.

As it relates to the second question, Frank, I think it's important to understand that part of the reason that we really wanted to push it off balance sheet and have a minority interest was so we didn't consolidate. And although, as we said earlier on, the return profile for Equinix and return on equity on an IRR basis is very, very attractive, as it is also for our partner, We want to make sure that we can hold that debt off book and so what will typically happen is the rating agencies will look through into the JV structure and they'll allocate on a pro-rata basis the amount of leverage that sits in the JV to the parent company. Again, it's important for a couple reasons again. We care about our balance sheet and our core metrics, but the other part is having the JV in this partnership arrangement, as Charles alluded to, with one or potential more partners, allows us to get capital back in. We get to recycle that capital, put it back into the business as appropriate, and then there's a fee stream associated with it. So it gives us the opportunity to continue to focus our cash and our energy on the retail business, at the same time increasing strategic value by having it off balance sheet with our partners.

Great. Thank you very much. I appreciate it. Thanks, Frank.

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

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