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spk03: Good afternoon and welcome to the Equinix Second Corner Earnings 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 would now like to turn the call over to Chip Newcomb, Senior Director of Investor Relations. Thank you, sir. You may begin.
spk05: Good afternoon and welcome to today's conference call. Before we get started, I would like to remind everyone that some of the statements that we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we've identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K, filed February 17, 2023, and 10-Q, filed May 5, 2023. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of regulation fair disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter unless it's done 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 gap measures and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor Relations page at www.equinix.com. We've 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 would 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 in one hour, we'd like to ask these analysts to limit any follow-on questions to one. At this time, I'll turn the call over to Charles.
spk09: Thank you, Chip. Good afternoon, and welcome to our second quarter earnings call. As reflected in our results, Equinix continues to enjoy momentum in our business as digital transformation accelerates the pace of innovation and changes the way business is done. By 2026, IDC is forecasting that 40% of revenue from G2000 companies will come from digital products, services, and experiences, a dynamic that is reshaping the basis of competition in nearly every industry and making digital an unprecedented force for economic growth. These secular drivers, combined with an accelerating appetite for companies to rapidly integrate AI into their operations, are driving increased demand for data center capacity as a broad range of service providers extend and scale their global infrastructure to support the clear enterprise commitment to hybrid and multi-cloud as the IT architecture of choice. Equinix remains exceptionally well-positioned to respond to this demand environment, delivering against the need for infrastructure that is more distributed, more cloud-connected, more sustainable, and more ecosystem-centric than ever before. Against this backdrop, we had a great second quarter with solid growth in net bookings, very strong pricing dynamics, excellent pipeline conversion, and healthy new logo growth. We continue to drive disciplined sales execution at scale. with more than 4,100 deals in the quarter across more than 3,100 customers, demonstrating the continued strength of our unmatched go-to-market machine and approach. Turning to our results as depicted on slide three, revenues for Q2 were $2.02 billion, up 14% year-over-year, driven by strong recurring revenue growth, power price increases, and timing of X-scale fees. Adjusted EBITDA was up 7% year over year, and AFFO was again better than our expectations due to strong operating performance. These growth rates are all on a normalized and constant currency basis. With customers deployed in all three regions now representing approximately two-thirds of our recurring revenues, we continue to invest behind the scale and reach of our data center services portfolio. We now have 53 major projects underway across 40 metros in 24 countries. including 11 next-scale builds that we expect will deliver approximately 90 megawatts of capacity once opened. This quarter, we added 12 new projects, including new data center builds in Lisbon, Monterey, Mumbai, and our first build in Kuala Lumpur, Malaysia. Over the past several years, we have seen Malaysia emerge as an increasingly important location for digital infrastructure. By expanding platform Equinix and Johor and Kuala Lumpur, the two most strategic markets in Malaysia, we will enable local and global businesses to leverage our trusted platform to bring together and interconnect the foundational digital infrastructure that will power their success. Additionally, we are delighted with the recently announced results of Singapore's data center call for application, where Equinix was one of a very limited set of participants selected to build incremental data center capacity in the critical Singaporean market. Equinix is honored to have this opportunity to strengthen Singapore's digital capabilities, delivering sustainable infrastructure that will fuel the economy, cultivate critical ecosystems, and align to Singapore's green plan. Multi-region customer wins this quarter included Cogent Communications, a U.S. multinational ISP, using Equinix's robust ecosystem and interconnection platform to optimize and enhance their global services, and Appsella, a provider of software-defined cloud-optimized networks for digitally transforming global enterprises, as they leverage Equinix Fabric and other digital services for low-latency network and cloud connectivity. Our global interconnection franchise continues to thrive, with over 456,000 total interconnections on our platform. In Q2, interconnection revenues stepped up 11% year-over-year on a normalized and constant currency basis. driven by healthy pricing, increasing traffic levels, and strong gross ads. Net interconnection ads remain on the lower side at 4,100 due to continued grooming activity and consolidation into higher bandwidth connections. But the number of unique interconnection relationships across our platform continues to expand, with over 110,000 unique pairs reflecting the exceptional value of our scaled digital ecosystems. Equinix Fabric had another strong quarter, with total virtual connections passing 50,000 for the first time, and the addition of new capabilities to support data-intensive workloads like AI and cloud migration. Beginning in the third quarter, Fabric customers will be able to provision virtual connections to cloud providers with bandwidth up to 50 gig per second, with Google Cloud as the first cloud partner to support this capability. Internet exchange saw strength in our EMEA and APAC markets, with peak traffic up 4% quarter-over-quarter and 25% year-over-year, to nearly 32 terabits per second. Key interconnection customer wins this quarter included a gaming and entertainment company, expanding interconnection across all three regions to optimize the gamer experience, and PierOne, a Brazilian telco leveraging platform mechanics to establish its digital presence through network hubs beginning with South America and Miami. Turning to our X-scale portfolio, we continue to see strong overall demand as cloud adoption remains a driving force in digital transformation. In Q2, we leased 10 megawatts of capacity in our Osaka 2 asset, with cumulative X-scale leasing now over 200 megawatts globally. And we have a strong funnel of additional X-scale opportunities for the back half of the year. We also won three new native cloud on-ramps this quarter in Bogota, Madrid, and Toronto, further strengthening our cloud ecosystem. which represents nearly 15% of total interconnection on our platform. Key enterprise cloud ecosystem wins this quarter included one of the largest auto insurers in the U.S., continuing to expand interconnections on our platform to optimize its networks and multi-cloud connectivity, and a leading European automotive company deploying at Equinix to support reliable and scalable connectivity to the cloud worldwide. As businesses increasingly look to consume their digital infrastructure at software speed, we're continuing to enhance our platform strategy and expand our partnerships. In Q2, we announced our expanded partnership with Hewlett Packard Enterprise for pre-provisioned HPE GreenLake for Private Cloud Enterprise and HPE GreenLake for Private Cloud Business Edition, both available on demand at select Equinix IBX data centers. These new offerings in seven metros around the globe will help businesses expand their hybrid multi-cloud strategies while providing greater agility, control, and predictability of workload costs and data. Additional key digital services wins this quarter included Bionexo to Brazil, a health tech company that offers digital solutions for managing healthcare processes using Fabric and Network Edge for seamless connections with partners and customers while reducing complexity and cost. and Telna, a global mobile network infrastructure provider using platform equinix to facilitate its marketplace for cellular connectivity among its customers. Our channel program delivered another strong quarter, accounting for 40% of bookings and nearly 60% of new logos. We continue to see growth from partners like Accenture, Avant, Dell, Cisco, and HPE, with wins across a wide range of industry verticals and digital-first use cases. Key wins this quarter included partnering with Kindrel to support a large American health insurance provider with their network and application modernization efforts, featuring the deployment of cloud-adjacent infrastructure and interconnection to the healthcare ecosystem. Now let me turn the call over to Keith to cover the results for the quarter. Thanks, Charles.
spk06: And good afternoon, everyone. I hope you're all doing well and enjoying the summer months. I must say it was great to be back in New York City spending time with many of you at our June Analyst Day in person. As you might have guessed, we were excited to share with you our views on the expanding market opportunity, our continued ability to manage through this dynamic and complex global environment while working to maximize the value of our business, and perhaps most importantly, share our thoughts on how we believe we can deliver durable shareholder value. Now, as you can see from our Q2 earnings report, we again delivered solid results while addressing many of the complexities affecting our business. We had solid growth and net bookings and positive pricing dynamics, reflecting the continued momentum we see in the market. Overall, we continue to focus on driving a higher yield on both our new and existing investments. On a constant currency basis, including our net positive pricing actions, global AMR per cabinet was up $39 quarter-per-quarter to $21.56 per cabinet. Now, given the tight supply environment across many of our metros and the high utilization levels across our portfolio, we remain very focused on our strategy of putting the right customer with the right application into the right IBX. Also, we're being particularly selective at backfilling space in certain constrained markets, focusing on high price points and increased power densities. As a result, the timing of these deployments may create some fluctuations in our quarterly net cabinets billing metric, an outcome we're actively managing across all three regions. This is positively offset by strong stabilized asset growth, higher MRR per cabinet, and better returns on our invested capital. Turning to some of the macro factors affecting our business, we remain pleased with how the organization has mitigated the impacts of energy price volatility across our business and with our customers. Concessions and disputes remain low and our cash collections are in line with historical trends. As it relates to our foreign operating currencies, we continue to hedge where appropriate to dampen the volatility attributed to the actions of many central banks to adjust interest rates. Also, we made some modest FX adjustments to our 2023 outlook, largely attributable to the recent devaluation of the Nigerian Naira and the weaker Japanese Yen, two of the currencies that we do not hedge. Now let me cover the highlights from the quarter. Note that all comments in this section are on a normalized and constant currency basis. As depicted on slide four, global Q2 revenues were $2.018 billion, up 14% over the same quarter last year due to strong recurring revenues, power price increases, and the timing of X-scale non-recurring fees. As we've noted before, non-recurring revenues, particularly those attributable to our X-scale business, and certain custom installation works are inherently lumpy. Hence, NRR was down quarter over quarter as planned. But given our significant X scale pipeline, we expect to see a meaningful step up in NRR in the second half of the year. Q2 revenues, net of our FX hedges included a $3 million FX headwind when compared to our prior guidance rates. Global Q2 adjusted EBITDA was $901 million, or 45% of revenues, up 7% over the same quarter last year due to strong operating performance, including an $11 million one-off software expense related to our America's managed services business, and higher variable salaries and benefit costs. Also, Q2 saw certain EMEA energy contracts reset at higher average rates, resulting in increased net utility costs, as forecasted. Q2 adjusted EBITDA net of our FX hedges included a $2 million FX headwind when compared to our prior guidance rates and $3 million of integration costs. Global Q2 AFFO was $754 million above our expectation due to strong business performance and lower net interest expense. Q2 AFFO included a $1 million FX headwind when compared to our prior guidance rates. Global Q2 MR churn was 2.3%. For the full year, we continue to expect MR churn to average at the lower half of our 2% to 2.5% quarterly guidance range. Turning to our regional highlights, whose full results are covered in slides 5 through 7. On a year-over-year normalized and constant currency basis, EMEA and APAC were our fastest growing regions at 21% and 16% respectively. Although when excluding the impact or the benefit attributed to the power price increases, EMEA and APAC region growth rates were 8% and 11% respectively, while the Americas region grew 7% year over year. The Americas region had another solid quarter with continued strong pricing trends, solid momentum from our channel and public sector teams, and healthy exports across the global platform. We had strong activity in Boston, Chicago, and Culpeper metros, and the Canadian business. Our EMEA business delivered a solid quarter with firm pricing, continued lower churn, and a healthy step up in deal volume. Revenue was down slightly due to the timing of large NRR deals between quarters. We had strength come from our Amsterdam, Dublin, and Frankfurt metros, while booking a substantial space and power deal in Lagos, Nigeria, with a large multinational energy company, highlighting the momentum across our platform, including our main one assets. And finally, The Asia-Pacific region had a strong quarter with record net bookings and firm deal pricing, as well as strong imports to our Mumbai, Osaka, and Singapore markets. And as evidenced by the number of new expansions, Chennai, Jakarta, Johor, Kuala Lumpur, customer interest in expanding their footprints into new Asian markets is high, and we're investing behind this demand. And now looking at our capital structure, please refer to slide 8. Our balance sheet increased slightly to approximately $31.6 billion, including an unrestricted cash balance of over $2.3 billion. As expected, our cash balance decreased slightly quarter-by-quarter due to our investment in GrowthCapX and a quarterly cash dividend offset by our strong operating cash flows. Our net leverage remains low at 3.6 times our annualized adjusted EBITDA. And as mentioned previously, we plan to opportunistically raise additional debt capital and reduce rate environments where we currently operate. This will create both incremental debt capital to fund our growth and place a natural hedge into these markets. Additionally, during the quarter, we executed about $200 million of ATM forward sale transactions, which will be settled in early 2024 to help fund our 2024 growth plans alongside our other sources of capital. Turning to slide 9, for the quarter, capital expenditures were $638 million, including a recurring capex of $40 million. Since our last earnings call, we opened seven retail projects across both the Americas and EMEA regions, and two X-scale projects in Frankfurt and Tokyo. Revenue-promoted assets increased to 64% of our recurring revenues for the quarter. We expect this trend to continue with over 85% of our expansion capex spend on owned or long-term ground-leaf properties, including 100% of our 16 bills in the Americas. Our capital investments delivered strong returns, as shown on slide 10. Our now 174 stabilized assets increased revenues by 10% year-over-year on a constant currency basis. Taking out the benefit attributed to the power price increases, stabilized assets increased 7% year-over-year. Our stabilized assets are collectively 85% utilized and generate a 27% cash-on-cash return on the gross PPE invested. And finally, please refer to slides 11 through 15 for our updated summary of 2023 guidance and bridges. Do note all growth rates are on a normalized and constant currency basis. For the full year 2023, we're maintaining our underlying revenue outlook with expected top line growth of 14% to 15%, or 9% to 10%, excluding the impact of power costs passed through to our customers, a reflection of our continued strong execution. We're raising our underlying 2023 adjusted EBITDA guidance by $20 million, primarily due to favorable operating costs and lower integration spend. and we're raising our underlying AFFO guidance by $28 million to now grow between 11% and 14% compared to the previous year. AFFO per share is now expected to grow between 9% and 11%. CapEx is expected to range between $2.7 and $2.9 billion, including approximately $120 million of on-balance sheet X-scale spend, which we expect to be reimbursed as we transfer assets into the GVs later this year or early next year. and about $220 million of recurring capex spend. So let me stop here. I'll turn the call back to Charles.
spk09: Thanks, Keith. In closing, we had a strong first half of the year and continue to see a robust demand environment as key secular drivers positively influence buying behavior, even in the face of a challenging macro climate. The relevance of platform economics continues to grow as service providers scale out their global infrastructure in response to growing enterprise demand for hybrid and multi-cloud as the architecture of choice. and the associated need for hybrid infrastructure to deliver performance, agility, scalability, and sustainability. In this context, we believe Equinix remains uniquely positioned and highly differentiated and will continue to drive disciplined execution of our strategy with a focus on extending our market leadership, driving operating leverage, expanding our platform capabilities to fuel sustained growth, and delivering superior returns on capital. all of which we are confident will translate to distinctive and durable value for our customers and sustained performance for you, our investors, with a keen focus on AFFO per share as our lighthouse metric. So let me stop there and open it up for questions.
spk03: Thank you. If you would like to ask a question, please unmute your phone, press star 1, and record your first and last name slowly and clearly when prompted so I may introduce you. To withdraw your request, please press star 2. Again, to ask a question, star 1. Our first question comes from Ari Klein with BMO Capital Markets.
spk07: Thanks, and good afternoon. Maybe on the AI front and as it relates to X-scale, there are some exceptionally large leases being done with the vast majority of those in the U.S. where X-scale doesn't have a presence. How are you thinking about potentially entering the market to capture some of that demand?
spk09: Yeah, we've talked about this in a few different forums. I do think that our posture has probably evolved a little bit in terms of our thinking around X scale in the Americas broadly and in the U.S. specifically. And I think AI is part of that. And so it's not the only factor, but I do think we had already been thinking about certain markets where we believe that what we see, as I said, around the world is that The markets where we have the full portfolio X scale retail digital services at scale really perform best. And you can argue a little bit of whether it's chicken or egg there in terms of what's driving what, but what we do see is that when we have the full portfolio, we're able to address a broader set of customer demands. And so I think as we looked at that, we do think that there are markets in the U.S. that we would like to have an X scale presence in. And so I think we're looking at how we would do that, you know, and potentially through accommodation of organic and potentially inorganic pursuits. So I do think that AI is a part of that, but really only a part, and I think that AI You know, the continued demand for cloud services and the commitment to cloud adoption, I think, you know, continues at pace with the enterprise, all of that, you know, driving really a strong pipeline across the world and does lead us to believe that thinking about how to solve for X scale in America is something that is on our minds.
spk07: Thanks. And then just the Americas and EMEA saw cabinet decline. Sounds like maybe there was some timing and churn potentially there. Can you provide some color on some of the moving pieces and maybe give us a sense of the size of the backlog?
spk09: Sure. Yeah, I mean, I'd start with the backlog question and tell you that backlog continues to be very healthy. You know, we do see, as we've said over the years, billable cabs can really be a pretty volatile metric, and it can swing meaningfully both due to timing of installs and therefore backlogs. And in particular, turn activity. Undoubtedly, we recognize that billable calves has to grow over time to fuel the business, but we do see short-term fluctuations in that metric as we really optimize the platform. So if you look at it, as you noted, we've always encouraged people to really look at rolling four-quarter averages. because of that volatility. And if you look at Americans, they're running about 90%. The rolling four quarter is about 90% of what it's been for the last three years, typically. EMEA is actually, its rolling four quarter average is actually meaningfully ahead of what the three-year average is. And APAC is lower with three consecutive quarters of really lower cab ads. But it's a bit of a unique dynamic in APAC related to some of the capacity constraints in Asia, particularly Singapore, which is why we are so excited to have been able to announce the the allocation of capacity to Equinix in the Singaporean market. So, you know, so we, I think that we're comfortable there. There is some churn activity that I think is in the markets and some backlog that I think is going to roll through. And so I think we'll, when we look at that on a rolling four-quarter basis, I think we'll see those things normalize a bit. But let me, we knew this would be a kind of an issue, so I want to maybe give you a little more concrete insight into the billable cabs. If you look at it specifically on the churn side, over the past five quarters, we've had about 37 deployments of meaningful size churn. And 85% of that total cab volume coming from those churns are what we would consider favorable churns. Basically, cabs that are in constrained markets where we really welcome the additional capacity and can sell it at a very positive mark to market. And given the trajectory right now that we're seeing in the market on pricing, on power density, on interconnection, as we refill those cabs at prevailing prices and power densities, we actually expect uplifts on those 30, about the 87, 85% of those cabs in the 50 to 70% MRR uplift range. So that's just a reflection of kind of the kinds of actions that we're taking to optimize the platform that have impacts on billable calves, but really positive impacts and upside in terms of – because we look at it and we believe we're going to get millions of dollars of extra MRR by 2020. sort of turning those cabinets over or tens of millions on an annual basis with zero capex. And so that's some of the dynamic that you're seeing there. And I think it'll move around a bit as we identify that. Now, granted, there's not that many of those out there. And so that's, but that is a dynamic that is impacting, has impacted the billable cabs a bit, you know, over the last couple of quarters.
spk07: Thanks. Appreciate all the color.
spk03: Our next question comes from Michael Rollins with Citi. You may go ahead.
spk08: Thanks and good afternoon. I'm curious if you can unpack a bit more of the stabilized constant currency growth without the power price increases that I think was cited at 7% year over year in the quarter. And as you look at the opportunities that you were just describing in terms of releasing opportunities and the current environment, What's your – is there an updated view of what stabilized organic growth should look like for Equinix over the next few years?
spk09: Yeah, it's a good question, Mike. I do think that we had, you know, we had guided to a range, you know, lower than certainly that 7% that we're seeing absent the PPIs. Obviously, PPIs are having a major impact there and, you know, reflected in as reported of 10, but I think that's not really a valid number there. You know, because that will bounce around a little bit and will, you know, based on, you know, what's happening with power pricing. But I do think that 7%, obviously, is a very attractive level. I do think that we're seeing that pricing right now is very firm. We're raising, you know, we've raised prices on our underlying COLA products and on interconnection. you know, meaningfully and continue to see strong demand and stable churn. And so I think that's going to be a positive factor. The other one that I just mentioned in the previous conversation a little bit about billable cabs is power density. Power densities are definitely on the rise. And so, you know, some of the churn activity that I just talked about there, those 37 deployments were, you know, many of them are instabilized assets. And so you're going to see some uplift there as you turn some of that over. Long answer or not answer, non-answer to your question in terms of, you know, what is the right range? Obviously, I think we have been talking about three to five. Seven is obviously nicely above that. I would certainly hope that, you know, I do think the current dynamic of pricing in the market is a major driver. And so we'll just track that and see how we have. But obviously, we love being, you know, above that guided top end and And if we feel like that's a sustained trajectory, we'll come back and look at that.
spk08: If I could just follow up with one other. You mentioned the variability of the power side of the equation. And as you're looking at the pricing environment for power specifically, any updates of how power pricing and power revenues change? and those surcharges might look for 2024?
spk09: Yeah, figured that might come up too, Mike. So what I'd say is that we are obviously we're just a little over halfway through the year. We've been hedging into our positions and in some markets hedging in at rates that are below where we had been previously and in some cases somewhat materially below that. Obviously, we still have a significant portion of our hedging positions yet to fill, and there's a lot of the year left. And so it's impossible, I think, for us to predict exactly what will happen. So I don't want to be too concrete on this matter. But I would think that there might be some markets, if current course continues, that where we will hedge into a rate in 24 that is below what it was in 23. And as we said to our customers, and I think as we've communicated to our customers, they really sort of embraced and understood the benefits that our hedging program provides, and we've told them, you know, if that would occur, we will pass that through to you as well. And so I think how many markets that might occur in, not sure. But as we said when we provided the guide and when we provided at Analyst Day and in other forums, we said, look, this sort of assumes nothing relative to power price increases or decreases. and we'll adjust that accordingly or sort of normalize it out. Because what's really important from our perspective is the underlying performance of the business. And while we do recognize that power price, for example, has some impact on the optics of margin, I think it really isn't an underlying fundamental sort of impact on the business. And so We'll let you know. A shorter answer would be I do think that we may see some markets in which we would see a PD or a price decrease next year, and others that we would see it flat, and perhaps others where we'd see it go up. But still more work to do in terms of hedging into our positions, and we'll keep you updated as we know more. Thank you. Bye-bye.
spk03: Our next question comes from John Atkin with RBC. You may go ahead.
spk10: Yeah, a couple questions. I was curious just about decision timeframes by customers, closing rates, book-to-bill, that sort of thing. And then if you look at stabilized gross margins, it looks like that was down. And I forgot if you might have mentioned this earlier, but why the pressure on stabilized gross margins? Thanks.
spk09: Yeah, I'll let Keith tackle the second one. The first one, I'll give you a little color on the quarter. Really solid quarter from a bookings perspective. And I think we saw, even though I think there are some customers who continue to be cautious in the overall environment, what we saw in Q1, as we told you, we saw a little more deal slippage from Q1 into Q2, but we had said the close rates were pretty consistent. In Q2, we saw the same thing. We saw actually very good pipeline conversion, and we saw sales cycles not really extended very much in line with our historical norms. And we saw the push rate from quarter to quarter actually come bounce back to where it had been previously. So I would say overall a very solid quarter. I do think the dynamic that we described previously, which is some customers just being cautious about how much capacity they're buying, obviously negotiating hard, which is a norm for us, Those kind of dynamics. And then in some cases, going back and if they have more capacity than they need, coming back and having a dialogue with us about whether we want to take some of that back. And as I said, that is a bit of the dynamic coloring some of our, because we see opportunities that look very favorable for us to do that. We'll take advantage of them. That's some of what's impacting the billable cabs numbers. So overall, I would say feel good about the quarter from a sales execution standpoint and from an overall customer sentiment standpoint, and also feel good about where we are in terms of overall funnel for the second half of the year. So obviously, we have a big hill to climb every quarter in terms of a lot of deals. You know, 4,100 deals in a quarter, you've got to do a lot of selling. But our team, I think, had a really strong Q2. And based on, you know, my customer visits and time with the sales teams, I think there's a lot of optimism for the second half of the year.
spk06: John, relating to the second part of the question, just no surprise, you'll see sort of the margin increase. erosion across a number of the key metrics, whether it's on a total basis, whether it's in Europe, or whether it's in the stabilized assets. It's primarily related to the reset of the energy contracts. As you look at the first quarter, we had the benefit, if you will, of the power contracts where they were, but as they reset, there was a meaningful step up in the second quarter and that was felt throughout a number of our core metrics. And as they look forward, most of that's now going to stabilize, which is the good part. And that was all factored into the pricing sort of structure that we had when we started the year. We anticipated what the price points were going to be on an average basis, and that was the rate at which we passed through to our customers.
spk10: And then lastly, I'm wondering if you're seeing any tailwinds in segments of your CrossConnect business that you would attribute to AI given the that you might expect a little bit of an uptick in connectivity requirements as these training models get spun up. Are you seeing that at all or not?
spk09: We've seen specific instances of interconnect to support AI. In fact, we had a pretty significant win this quarter in the AI realm with an AI as a service provider that really put their core network nodes with us to really drive interconnection to the multi-cloud connectivity and AI really to support the inference and interconnection to the cloud. And so we did see that. I wouldn't say that's likely shown up. In fact, that hasn't shown up in our results yet because we just booked the deal. But I think that's indicative of some of what's going on out there. It's probably a little tough to tell. Interestingly, on interconnect, John, what I would say is that, you know, we've seen really strong gross ad activities. and it's really in line with our nine-quarter averages. And so that's, I think, a really encouraging sign. And, in fact, interconnect to clouds as the ZN is up meaningfully year over year. It was moderated a little by the financial ecosystem, which was a little down year over year in terms of gross ads, but we're very stable on the interconnect side in terms of gross ads. And I'm sure that some of that is attributable to AI. But then on the churn side, we are seeing a little bit more, you're also seeing a little more churn activity with cloud as the ZN, but more between service provider types, cloud to cloud, cloud to network. et cetera. And that's, I think, a lot of grooming, a lot of 10 to 100 migration, and some M&A activity. So I gave you a little more there than you were looking for on interconnect, but I do think that you're going to see a lot of data transfer happening, and I think we're just really well positioned on that in terms of our multi-cloud connectivity and the sort of more advanced nature of Fabric in terms of being more agile and to that demand over time. So we're excited about that opportunity, and that certainly is coming up a lot out there in the market as people are talking about it. And really, I think a lot more on the service provider side, but also enterprises really talking about the things they're doing to bring AI into their operations.
spk10: Thank you.
spk03: And our next question is from Simon Flattery from Morgan Stanley. You may go ahead.
spk01: Thanks very much. Good afternoon. You talked about the power density requirements a couple of times. So how are you thinking about that strategically? Are there redesigns or retrofitting you're thinking about doing to your IBXs? And how does that impact the X scales that you've built so far and that you might build from here? I know people like Meta have been reconsidering data center design.
spk09: Yes. Yeah. And we certainly are actively thinking about what are the evolution of our design and ensuring that it's evolving and keeping pace with the market. You know, in our retail space, we do have the what's really nice about the retail business is when you serve a very broad range of customers with differing density requirements. you're able to sort of dense up and extract more from the system over time. And we've really, I think, benefited from that. When you, you know, in more of the hyperscale or X-scale type arena, you know, it's a little more challenging. I think you have to just be, because you allocate all that power out typically to a single customer or maybe two customers, in a facility and it's a little bit different. And so, I do think average, you know, density, design densities are going to need to be going up. I think that also, though, your ability to, cooling is often the, you know, is often the constraint. And I think there are, we are actively looking at, in fact, in our innovation center in D.C., we're actively looking at and testing liquid cooling as a way to get more out of our current designs as well as implement as a more standard feature in our go-forward designs. And so I do think you're going to be seeing design densities going up, and you're also going to be seeing us use technologies to augment existing facilities to get more out of them. Great. Thank you.
spk03: Our next caller is Eric Lubko with Wells Fargo. You may go ahead.
spk02: Thank you. Thanks. I appreciate the question. You know, one for Keith. I think you mentioned the non-recurring side of the business would see a material step up in the back half. And so maybe you could provide a little more color on that. Is that more custom install work, X-scale fees, maybe just the right run rate to think about for NRR as we look out, you know, the remainder of the year?
spk06: Eric, as you can tell from the guidance that we delivered and Charles has mentioned a few times, the recurring aspect of our business is performing exceedingly well. The non-recurring, a lot of what you experience, particularly with the step-ups and the step-downs, relates to the X-scale fees. As you're wholly aware, there's two non-recurring X-scale fees and there are two recurring X-scale fees. As it relates to the non-recurring, It's really the sales and marketing fee that has the biggest impact to our business. As we said, the pipeline is very deep. There's a lot of opportunity that's right in front of us. We anticipate that there will be a very large set of fees that get earned over the second half of the year. Right now, we're targeting that to be in the fourth quarter. I guess there's always a scenario where it could be the third quarter, but it's really a second half anticipated close. And so with that, that's what we've got in the guidance. And then on top of that, of course, the recurring part of our business is still, you're seeing a nice meaningful step up on that, and you just have to go to the midpoint of the guidance process over the rest of the year. And you can see that one of those quarters is going to be one of the largest step-ups you've ever seen in our history. But part of that, of course, is driven from the non-recurring fees.
spk02: Great. Thank you. And just one follow-up. If I look at churn, it picked up a little bit to 2.3%. Just wanted to confirm, is that related to some of the volatility you're seeing with cabinet build metrics you mentioned earlier in the call, some of the network grooming on cross-connects? Any Any way to think about how we should think about churn going forward still in the lower end of the 2% range, or will it be a little more variable based on what you said earlier?
spk09: Yeah, and not so much related to the interconnection, because on a net basis, probably not having it, not a huge driver on the churn metric, but it is related in part to those deployments that I talked about when I was giving color on the billable calves that, you know, related to churns that we view as favorable. Again, those 37 deployments, 85% of those calves are going to have mark-to-markets that are in the 50% to 70% positive range. And so that's, you know, we're we'll take those when we can get them. And, you know, several of those in Singapore. And so we will, even with our additional allocation, you know, that's out there in the future, you know, in terms of build. And so it's a precious resource to have capacity in the Singaporean market, particularly capacity that has the kind of characteristics that we do in terms of cloud proximity and, you know, sort of network density and ability to drive performance, et cetera. And so we'll take that capacity, and those are some of the things that led to us seeing a little bit of an uptick there. But as we said in the prepared remarks, you know, we're comfortable that we, on average for the year, will land in sort of the lower part of our guided range. And you may see a little spikes in there like we did a little bit higher this quarter, but that generally is probably more attributable to favorable type turn activity.
spk06: And Eric, if I just maybe just have one other thing. As we look forward, and Charles alluded to it earlier on, as we think about some of the negotiations we have to get back capacity in some highly constrained assets and markets, Part of that is Singapore, and so we are working on one thing that clearly we'll identify it if we come to an appropriate negotiated outcome. But suffice to say, those are the examples of things that cause those small blips, but we'll sort of call it out for you. Thank you both.
spk03: Our next caller is David Barton with Bank of America. You may go ahead.
spk11: Hey, guys. Thanks so much for taking the questions. I guess, Charles, when you look at kind of the global landscape and you start extrapolating the dynamic that we've started to see in places like Northern Virginia or Toronto, Mexico City, Southern Valley, how should we as investors think about the P versus the V equation as power availability kind of constricts V, and how do you think about your ability to ramp the P on the price to kind of monetize that scarcity element of the business that you're in? Thanks.
spk09: Yeah, there's a lot in that question. On P times V, B or Q or whichever you prefer, you know, I think we're definitely seeing a firm pricing environment. And I think that's true of the data capacity industry at large. But I think that we see, you know, we obviously operate in the retail side of the business at a very different price point than the prevailing industry. broader industry, which I think centers more around a wholesale or hyperscale-type price point. But both are on the rise, and I think that's going to continue to be the case for a bit of time here. I think in terms of volumes, I think volumes are also going to grow. The question of whether or not power availability would constrain supply is It's an interesting question. I think that it could in market by market, but I think that on our side, we feel very comfortable that our relationships and our visibility to power allocations are going to allow us to continue to execute on the build plan that we have in place. On the X scale side, I think it's a little more challenging, but we are actively working with, you know, with the folks to make sure they identify that. And we're also actively looking at alternatives. And for example, things like onsite power generation, I think are probably more of a reality in some of those, in that market over time. So we've done that in certain markets. In fact, our recent Dublin facility is, you know, has, on-site power generation with natural gas-based fuel cells as a primary source of power. We actually use Bloom Energy fuel cells in Silicon Valley not as a primary source, but I think we're going to continue to see trends in that area. And I also think that you're going to see that, if necessary, the positioning of certain forms of data center capacity, particularly in the hyperscale area and some of AI training, may adapt to simply go where the power is. And so I think that you may see some of that movement as well. So, you know, I don't think, you know, quantity is going to be, you know, materially constrained in our retail business by power availability, but it is something that I think we as an industry need to continue to grapple with.
spk11: Thank you, Charles. And as a follow-up to that, specifically to that point about going to where the power is, do you see a shift in your CapEx allocation into kind of, let's just call it more novel land bank, um, development opportunities? Um, obviously we've seen reports that meta for instance, is looking to do a gig a lot in Wisconsin or other places like this that, you know, would not tend to be in the traditional, um, uh, geography of, of, of data centers.
spk09: Yeah, short answer is not yet. And in fact, obviously, the vast majority of our demand and our revenue and our profitability is sourced from, you know, sort of our large campus environments around the world. And that's where the bulk of our land investment has been. You know, you're seeing the rise in our sort of owned asset revenue because we're continuing to build now on owned land and owned facilities around the world. And so the bulk of our land bank is really still going towards that. That doesn't mean we'd necessarily be opposed to that. I think that would more likely be X scale type thing, which would probably run through the JV. But I do think those are the kinds of things that we have to be thinking about. I do think in terms of more Some of our X scale, though, I think is going to be more proximate to our campus locations in those areas where we think we can support that. But I don't think it's out of the question we do that. But right now, the shorter answer to the question is no, that's not really yet part of our equation. Got it. Thank you, guys.
spk06: David, as you probably noted just on the number of projects that we have underway across 40 markets today, again, we're actually spreading our capital far and wide to capture the opportunity and and most of the major centers around the globe. And as a result, that's going to be, I think, more of the emphasis going forward, smaller bite sizes that make sense, and particularly those ones that are adjacent or contiguous with their existing facilities. And that's just what you're seeing. And then you heard us talk a little bit about, at least in the prepared remarks, the new markets that we're sort of entering into. And so we'll continue to push our advantages in the markets that we have today, but also go to markets where others are less likely to go, and we get to enjoy sort of the experiences of a retail business versus just focusing on hyperscale.
spk11: Thanks, Keith. Thanks, Charles.
spk06: You bet.
spk03: Our next caller is Brett Feldman with Goldman Sachs. You may go ahead.
spk08: Thanks for taking the question. Keith, I want to come back to some of the comments you made in your prepared remarks about dealing with some stresses in the supply chain. Obviously, you've been grappling with that to some degree for a number of years now. I'm just curious, how broad-based is it? Is it concentrated in the markets? Is it around certain elements that go into development? And then just to clarify, is that distinct to the quite literal physical supply chain, or were you embedding within that challenges associated with power procurement and permitting? Thank you.
spk06: Yeah, Brett, just generally speaking, given the demand for data centers and all things surrounded to that industry, the supply chains continue to be constricted. And I think even at the analyst day, Charles made a reference to the fact that generator, three megawatt generator today has a roughly 120-week timeline. So it gives you a sense of how far out you have to start thinking and planning. And so one of the things that we tried to emphasize at the analyst day was, you know, we look at all of our, you know, look at all our markets, all of the projects and determine exactly what we need where. And then we have a very sophisticated procurement team that focuses on making sure we work with the larger providers and get availability either to production capacity or slot in the production line or available capacity, you know, from the inventories. I just think that's something that we prudently do. We manage ourselves, and it's something that's going to be very important on a look-forward basis as well. You have to tie that back into the comments Charles made about power. In the end, you have to have the available power, you have the available cooling, and making sure that you have the appropriate kit to roll out the data centers in a fair way that you can deliver the capacity to the need. Again, a lot of work is done on that. The team, the construction, the design, construction, procurement, sourcing teams are all working together in tandem, and we look out five years. In some cases, as I said, we'll go out as far as 10 or 15 years, like the London market, where we see a broad future opportunity as well.
spk09: Yeah, Brett, I'd add that I do think that one thing I didn't mention previously that I'll put in there now is is that I think one of the really critical factors in ensuring availability for what is inevitably going to be a somewhat constrained resource on power in places around the world is to bring forward a really thoughtful approach to sustainability. And that was one of the driving forces, I believe, in terms of our successfully getting an allocation in Singapore. And so similarly, I think our ability to work closely with I've been on the phone with utility CEOs in the recent past talking about these topics in terms of how to put our heads together and try to solve for some of these things. Sustainability has to be, I think, part of that picture. I do think that that's something we're going to bring to the table. We're going to lean in and really continue our market-leading emphasis on sustainability, not only for our customers, but in tandem with our partners on the utility side as well. And so I think those are other factors that I think come into play when we really think about the power issue. Thank you.
spk03: Our next caller is Matt Nicknam with Deutsche Bank. You may go ahead.
spk04: Hey, guys. Thank you for taking the question. a couple of housekeeping ones for me. First, if you can comment on what drove the slight increase, I think it was about $10 million increase to recurring capex. Then also, I noticed DSO stepped up somewhat modestly. I think accounts receivable was about a headwind of $100 million a quarter. Just wondering if there's anything that you'd call out beyond typical 2Q seasonality. Thanks.
spk06: Yeah, on the first one, just for current capexes, when you look at it year over year, Q2 tends to be, Q1 is our lowest spend on a seasonal basis. Q2, we're sort of right on line with where we thought we'd be at 2%. And that was consistent with last year. And then you see over the next two quarters, we step it up even further. So part of it's just timing and making sure we do the work that we need to based on the needs inside the different buildings. And as a result, it'll move around by quarter. But we can sort of massage at times into different quarters. But I would just say nothing meaningfully has caused that. It was an $18 million step up quarter of a quarter, just to be exact about it. As it relates to DSOs, As I sort of said in the prepared remarks, our DSOs, our recovery, it's gone up a little bit, but what I would tell you is some of the things that we've been working on with our customers, as you can appreciate, as I said, there's certainly some discussion around the power price increases. And although we're ahead of what we anticipated, there's still some negotiations, and as a result, or DSOs had moved up a bit. Some of the customers weren't paying their entire bill. Instead of just disputing what the prior price increase was, the whole bill was being held back. And some of those payments have since been made in the July timeframe. And so DSO, I think you're going to see that step back down to a more traditional level. But overall, I'd just say you've got liquidity in the business, the cash we're generating, And the collections, you know, you'll get some seasonality. We're running ahead of what we anticipated we'd be for the third quarter already. And as I said, I think DSO is an average days of Lincoln. We'll go down.
spk04: Keith, just to clarify, too, it was more on the guide for recurring CapEx. I think that stepped up $10 million relative to the prior guide for the year. So I'm just wondering if there's anything notable to be aware of there.
spk06: Oh, I'm sorry. I misunderstood your question then. No, there's a little bit more recurring CapEx. You know, when we have capacity and we look across the portfolio and think, what can we do based on the capacities we have and And so sometimes we work with Ralph Abdel's organization said we have capacity to put a little bit more recurring capex into the year. And so what you could do is pull it forward from one year and put it into the year prior. And so that's what you've just seen. We thought we had a little bit more capacity to invest in some recurring capex this year. And it really takes away that obligation for next year.
spk04: Perfect. Thank you.
spk03: Our last question comes from Nick Del Deo with Moffitt & Nathanson. You may go ahead.
spk08: Hi, thanks for streaming in. You know, Charles, on the interconnection front, are you still expecting an improvement in ads as we move through the year, like you communicated previously, or do you think these headwinds are a bit stiffer than expected?
spk09: Yeah, great question, Nick. I tell you, in all honesty, I had expected we would have seen a bit of a moderation back up towards prior levels by now. But there's a lot of factors in play there. I think that the short answer is I do believe we're going to see that because when I look at it, the gross ads continue to be really strong. So overall demand for interconnection is persistent. And as I said, even growing with cloud as the end. And so I think that that is the most encouraging to me. When we really unpack what has suppressed the net ads, it's clearly on the churn side. And so we've unpacked that in great depth, as you might imagine. And it really is almost all from the service provider side in terms of where we're seeing the elevated churn over normal levels. And as we unpack it further, you see there is definitely 10 to 100 migration. And I think that is accelerated a bit more than we expected just because, and maybe we should have anticipated this, but as the cost of electronics goes down, it is more broadly available to people who have a sufficient number of interconnects to really justify that. And so we did see continued uptick. And so it seems almost like what you're seeing is, 10 to 100 migration was led by the most sophisticated customers with the most at stake, and then you see another blip as sort of the broader population begins to sort of integrate that. But again, it's not going to be relevant for everybody. You have to have some level of concentration to routes to really make it an economically viable proposition. So you're seeing 10 to 100, you know, parcel you've impacted there. Then you see some M&A activity, and that's true in the CDN space and in the network space. Those are finite things. They, you know, they work their way through, and then you go back to, you know, to some sort of a normal. And then I would say the third area is just a more aggressive inventory management, particularly from the network space where, as many of you know better than we do, there's some real overall business challenges where people are looking to aggressively tighten their belt in any way they can. And so I think those dynamics, several of those dynamics are finite in nature, which is why I kind of fully had expected that we would return. And I don't know whether we get all the way back to our previously guided range, but I think we'll potentially see some lifts back there. But independent of all that, even at our current level of ads, One, we're seeing very strong pricing, and that is driving, and we're seeing a migration towards higher port speeds on offerings that are priced by speed. And so that mix is helping. And as a result, I think you're going to continue to see very healthy revenue growth. So we'll track that. It's certainly my hope that we will see some elevation through the back half of the year, but we'll just have to see how that plays out.
spk08: Okay, okay, great. Thank you. And then, you know, in Singapore, obviously great to see the 20 megawatt allocation you got. How long before you can actually bring that online? And then about how long will 20 megawatts last you?
spk09: Well, we can't speak to the actual size of the allocation, so I don't doubt there is information out there, but I can't confirm or deny anything relative to the size of the allocation. I would simply say that we're very excited about what we got. We're very excited about the opportunity to build incremental capacity in that market, and we believe it will give us some really solid runway in an incredibly important market. And in the meantime, we're continuing to you know, sort of very opportunistically harvest capacity to continue to meet the demands of our customers and to drive very superior returns in that market. Okay. Thanks, Charles. You bet, Nick.
spk05: Thank you, everyone. This concludes our Q2 earnings call.
spk03: Goodbye. And this concludes today's conference. Thank you for participating. You may disconnect at this time and have a great rest of your day.
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