Equinix Inc

NASDAQ:EQIX

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon and welcome to the Equinix Second Quarter 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 objections please disconnect at this time.

I'd now like to turn the call over to Katrina Rymill, Vice President of Investor Relations, you may begin.

[Katrina Rymill, VP, IR]

Thank you. Good afternoon and welcome to today's conference call. Before we get started, I'd like to remind everyone that some of the statements 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 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 and 10-Q filed on May 3, 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, it is Equinix's policy not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. In addition, we'll 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, and 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 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 Meyers, Equinix's CEO and President and Keith Taylor, Chief Financial Officer. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of wrapping this call within 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.

[Charles Meyers, President and CEO]

Thank you, Katrina. Good afternoon and welcome to our second quarter earnings call.

As you can see in our results, we continue to enjoy significant momentum in our business. Our ability to deliver distinctive and durable value for our customers as they pursue their digital transformation agenda is feeling strong bookings performance and accelerated new logo capture.

Our platform continues to be highly differentiated due to our superior global reach, vast operating scale and the power of our interconnection platform, separating us from other data center providers and positioning us as the trusted center of the cloud first world.

We continue to execute well against our strategy, achieving our second best gross bookings quarter with incremental deals for more than 3,000 of our customers and strong cross-border bookings driven largely by the Americas team.

We achieved our 66 consecutive quarter of revenue growth, tops among S&P 500 companies, and we now serve more than half of the Fortune 500. With a record number of Fortune 500 and Global 2000 prospects, still in the pipeline.

The diversity, volume and velocity of our selling engine continues to shine. Generating over 4,000 deals in the quarter, with the majority comprised of small to mid-sized multi metro deals, reflecting the tremendous health of our interconnection centric retail business and foreshadowing future land and expand opportunities, as these customers use Equinix as the nexus for implementing their hybrid and multicloud aspirations.

Our global reach continues to fuel our top-line with revenue from customers deployed across all three regions ticking up to 61% and multi-region revenues at 73%. We saw substantial progress against the six priorities I outlined at the start of the year, including evolving our portfolio of products, expanding our go-to-market engine including channel and delivering on our hyperscale strategy.

We signed our first hyperscale JV a greater than $1 billion deal with GIC, Singapore's sovereign wealth fund targeting development projects across Amsterdam, Frankfurt, London and Paris to serve the unique core workload deployments for a targeted group of hyperscale companies. And we continue to expand our global platform with 30 projects underway including 5x scaler builds and Q2 openings in all three regions, including Chicago, Madrid, Osaka, Perth, Seattle, Sofia, and Tokyo.

Digital transformation continues to be a top priority for our customers in a variety of key trends are making them think differently about their infrastructure. We are responding to this changing demand by both investing across our traditional strengths and layering in incremental capabilities.

We are expanding our data center footprint enhancing our market-leading interconnection platform and have now launched the first offering in our planned and services portfolio. Positioning Equinix as an easier to use, more valuable and more accessible platform and driving attach rates that will help us sustain and enhanced cabinet yields over the coming years.

Turning to the quarter. As depicted on Slide 3, revenues for Q2 were $1.385 billion, up 10% year-over-year. Adjusted EBITDA was up 12% year-over-year and AFFO was meaningfully ahead of our expectations due to strong operating performance.

Our interconnection platform continues to perform well, once again, outpacing collocation revenues growing 13% year-over-year, as our ecosystems continue to scale. These growth rates are all on a normalized and constant currency basis.

We now have 348,000 interconnections over four-times more than the next closest competitor. In Q2, we added an incremental 7,000 interconnections with strong growth in virtual connections. For our Internet exchange platform, we are seeing strength in the APAC and EMEA markets with IX provision capacity up 30% year-over-year.

ECX Fabric, our SDN-enabled interconnection service now has over 1600 customers. We are seeing increasing adoption of ECX for new use cases, including a diversification of ICX end destinations and more frictionless hybrid multicloud deployments enabled by API level integration between ECX and market-leading cloud and network providers.

In Q2, we also launched Network Edge services and NFV offer that provides enterprises a faster, easier and more efficient way to deploy virtual network services at Equinix, as we extend our portfolio of interconnection offerings.

Customers can choose virtualized services such as routers, firewalls and load balancers from industry leading partners, including Cisco, Juniper and Palo Alto Networks. Early customer response has been great. We have a healthy pipeline ahead and we are working to build out the service offering with additional partners and locations over the coming quarters.

Now let me cover some highlights from our verticals. Our network vertical experienced solid bookings led by growth in EMEA and strong resale activity from our top global network partners.

We also continue to deepen our network density, with over 1800 networks now available on Platform Equinix, including every network provider in the Fortune 500 and 90% of those in the Global 2000. New wins included a Chinese telecom provider serving 40% of China's Internet users and Wander, a U.S. regional ISP deploying infrastructure to launch wireless services for West Coast residential customers.

Our Financial Services vertical achieved record bookings led by capital Markets, banking and insurance sub segments, as firms embrace digital transformation. Expansions included a key win with CME Group, a top three global exchange, re-architecting their network and securely connecting to ecosystem partners and Hannover Life Reassurance, a top five global insurer deploying infrastructure and connecting to ECX Fabric.

The Content & Digital Media vertical produced solid bookings led by the Americas and strong growth in gaming and publishing sub-segments. Expansion wins included Akamai, a top content distributor extending coverage and scale and supporting existing security solutions. And Zynga a leading mobile gaming developer expanding across Platform Equinix to support enterprise IT.

Our Cloud & IT vertical captured record bookings led by the APAC region and the infrastructure in services sub-segments. Equinix continues to be the leading solution for cloud connectivity today, with over 40% of all cloud on-ramps from the top cloud service providers in our IBX's across our metros.

Expansions this quarter included a Fortune 75 technology company hosting unified communication services and service now, expanding its footprint to support its rapidly growing customer base.

Our enterprise vertical experienced diversified growth with particular strength in travel, legal and healthcare sub-segments. New wins included a global build and operator of toll roads enabling IoT smart transportation systems and Tapestry Premium, a leading fashion brand, implementing a multi-cloud strategy as well as expansions, with the top three food services company re-architecting their network to enable data access and analytics.

Our channel business had another great quarter with broad-based strength driving over 25% of bookings and accounting for 60% of our new logos, as we deepen our engagement with high priority partners to significantly amplify our go-to-market reach.

We are focusing our efforts and driving more productivity and joint offer creation across our reseller and alliance partners, which include Amazon, AT&T, Microsoft, Oracle, Orange, Telstra, Verizon and WWT. New channel win this quarter included a win with Telstra for Genomics England solving for cloud connectivity to increase computing, storage and resiliency.

Now let me turn the call over to Keith to cover the results for the quarter.

[Keith Taylor, CFO]

Great. And thanks, Charles. And good afternoon to everyone.

While after a very strong Q4 to enter the year, followed by our best ever first quarter, it's great to now discuss the continued momentum we see in the business has reflected in our Q2 results. We had better than expected gross and net bookings in the quarter, including strong cross-border activity in addition to healthy core operating metrics.

This is simply another positive indication that our strategy is bearing fruit as Platform Equinix continues to differentiate ourselves from our competitors. As a result, we are raising 2019 guidance across the board including a substantial raise in our key AFFO and AFFO per share metrics due to better than expected revenue performance and improved operating leverage in the business.

And as you might expect, we are delighted to have received our second investment grade - investment grade credit rating from Fitch, a clear recognition of our efforts to improve our debt leverage and liquidity position.

Also this quarter, we are very excited to announce our hyperscale JV partnership with GIC. This joint venture will provide us the opportunity to make significant capital investments to capture targeted and strategic large footprint deployments, while maintaining a strong and flexible balance sheet.

Upon closing of the joint venture, we expect to receive net cash proceeds from the sale of our London 10 and Paris 8 IBXs and other development properties, as well as other proceeds related to the reimbursement of net cost incurred and fees earned from the joint venture. We are delighted to be partnering with GIC and we will continue to work hard to close the transaction in Q3.

Now let me cover the quarterly highlights. Note that all growth rates in this section are on a normalized and a constant currency basis. As depicted on Slide 4, global Q2 revenues were $1.385 billion, up 10% over the same quarter last year, reflecting better-than-expected recurring revenues and lower than expected non-recurring revenues due in part to the mix of small and medium-sized deals closed in the quarter.

As we have stated before, NRR activity is inherently lumpy. We expect NRR as a percent of revenues to decrease modestly from current levels for the second half of 2019 consistent with our comments on the prior earnings call.

Global Q2 adjusted EBITDA was $677 million, up 12% over the same quarter last year and better than our expectations, largely due to strong recurring revenue performance and timing of certain costs incurred.

Over the second half of the year despite the increased adjusted EBITDA guidance, we expect it to continue to invest in our growth and scaling initiatives, which includes expansion drag related to new markets and leases, while it also incurring higher utility spend across the platform.

Global Q2 AFFO was $498 million, a 14% increase over the same quarter last year, largely due to strong operating flow through and lower net interest expense. Recurring capital expenditures increased $16 million over the prior quarter as planned. Q2 global MRR churn was 2.4% better than expected. We expect MRR churn to remain within our guided range of 2% to 2.5% per quarter over the remainder of the year.

Now turning to regional highlights, whose full results are covered on Slides 5 through 7. APAC and EMEA were the fastest MRR growing regions at 17% and 13% respectively on a year-over-year normalized basis, followed by the Americas region at 5%.

The Americas region saw continued momentum, including strong net bookings, solid pricing, as reflected in our MRR per cabinet metric and a high mix of small deals including a healthy level of cross-border activity. It's fair to say the Americas region fully embraces the global platform vision and remains a strong source of deal flow for the other two regions.

Our EMEA region had another very strong quarter, led by our UK and Dutch businesses. We saw robust increase in billable cabinets and interconnections. As you are aware, we have been opening meaningfully new capacity across our flap and emerging markets and nicely consuming this inventory.

We opened new capacity in London, Madrid and Sofia this past quarter. And Asia Pacific region delivered solid bookings across the region, mostly driven by small to medium-sized deals led by our Singapore and Australia businesses. And we booked our first deal into our soon to open sole IBX.

And now looking at the capital structure, please refer to Slide 8. Our unrestricted cash balance is approximately $1.6 billion, flat over the last quarter, as the operating cash flow and proceeds from the ATM program were offset by higher capital expenditures, debt repayment and our quarterly cash dividend.

Our balance sheet and liquidity position continues to create a strategic advantage for us. Our net debt leverage ratio dropped to 3.4-times at Q2 annualized adjusted EBITDA, well within our targeted range. Our strategic strength, lower debt leverage, increased asset ownership and a commitment to use both debt and equity to fund our future growth, drove our second investment grade rating from Fitch and establish us as a full-fledged investment grade rated company. Reaching this milestone ensures that we have market access to a deeper pool of investors at a lower cost of capital and provides a greater set of immunity to the macroeconomic environment we now operate in.

We also expect to drive substantial interest rate savings into the business over the next few years, both as we refinance our current outstanding debt load and as we borrow new incremental funds to invest in our future growth initiatives.

Turning to Slide 9 for the quarter. Capital expenditures were approximately $444 million including recurring CapEx of $37 million. We opened seven new builds, including two new IBXs, one in Sofia and the other in Tokyo.

For the quarter, we added 3300 cabinets to our available inventory and we continue to purchase land for future expansion. This quarter we acquired land for development in Madrid. Lastly, revenues from owned assets remained at 55%.

And our capital investments delivered strong returns as shown on Slide 10. Our 138 stabilized assets increased recurring revenues by 4% year-over-year on a constant currency basis, an improvement over the prior quarter. Our stabilized asset count increased by net four IBXs, as we are now including the applicable Metronode assets in our stabilized account. The stabilized assets are collectively 85% utilized and now generate a 30% cash-on-cash return on the gross PP&E invested.

Finally, refer to Slides 11 through 15 for updated summary of 2019 guidance and bridges. Please note that quarter-over-quarter growth rates for both revenues and adjusted EBITDA are now updated to include the expected impact of the hyperscale joint venture closing in the third quarter and certain other one-time adjustments, as shown in our earnings deck.

For the full year 2019, after absorbing a $7 million reduction in revenue attributed to the sale of our IBXs to the EMEA hyperscale JV, we're raising revenue guidance by $10 million and our adjusted EBITDA guidance by $15 million, primarily due to strong operating performance in the business.

This guidance applies a revenue - implies a revenue growth rate of 9% year-over-year and a healthy adjusted EBITDA margin of approximately 48%. Also we are reducing our 2019 integration cost to $11 million, a $2 million reduction.

And given the operating momentum of the business, we continuing to improve our AFFO and our AFFO per share metrics. After absorbing a net $5 million reduction in AFFO from the sale of our IBXs to the joint venture, we're raising our 2019 AFFO by $25 million, a growth rate between 13% and 14% compared to the previous year, largely due to strong adjusted EBITDA performance and a lower net interest expense.

AFFO per share is expected to grow between 8% and 9%, which includes the dilutive impact from both our ATM program and the prior equity raise. We have assumed a weighted average 84.6 million common shares outstanding on a fully diluted basis. And we expect 2019 cash dividends to now increase to approximately $825 million, a 13% increase over the prior year and reflects an 8% increase year-over-year on a per share basis.

So with that, I'm going to stop here and turn the call back to Charles.

[Charles Meyers, President and CEO]

Thanks Keith.

In closing, we're delighted with the performance of the business and we continue to execute with focus and urgency against our priorities. We see a large and expanding market opportunity and believe we are uniquely positioned to capture this opportunity, as customers embrace digital transformation and adopt hybrid and multi-cloud as their architecture of choice.

We remain confident that the reach and scale of our global platform, the breadth of our ecosystems, the strength of our interconnection portfolio and the depth of our balance sheet will allow us to further extend our market leadership.

We are continuing to scale our go-to-market engine and will maintain our focus on operating leverage, balancing margin expansion with additional investment in developing innovative new services and curating a robust partner ecosystem that will help us drive top-line growth and sustain our industry-leading return on capital.

We remain firmly focused on building a company that attracts, inspires and develops the best talent in our industry, delivering distinctive and durable value to our customers and sustainable long-term value creation to our shareholders.

Bottom line, the Company is executing well on a highly differentiated strategy to become the trusted center of the cloud-first world. We're excited about the road ahead and look forward to sharing our continued progress.

Let me stop there and open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from Philip Cusick with JPMorgan. Your line is open.

[Philip Cusick, JPMorgan]

Let's talk about the company sort of potential to grow either organically or inorganically from here. Outside of price, what are the important strategic characteristics that drive your decision to do acquisitions from here? And are there significant holes left in the portfolio? You've moved into South Korea in the last year, what else is left that you really need to do? Thank you.

[Charles Meyers, President and CEO]

Sure. Phil, I'll start and Keith can add on as needed. Look, I mean, we definitely think there are substantial remaining growth opportunities for the business both organically and non-organically. I think in particular, I think, I'd focus on the organic side, which is the - our customers are responding exceptionally well to our value proposition, we're seeing strong bookings growth, new logo capture and really strong land and expand activity with those customers. So, we're going to continue to focus on that as our primary growth factor.

That said, I do think that there are, we've said it on multiple occasions, we think M&A is still a tool in the toolkit for us. We have said that we think there are gaps in the platform in terms of our opportunities to expanded and add to our market leadership in terms of global reach.

We've talked specifically about a couple of opportunities areas, where our customers are asking us about our future plans. Those include India. Eventually I think they include the African continent for us, and probably another - other select opportunities, including potentially Mexico as an opportunity for us south of the border here.

And so I think there, as you said, well there is - we'll have to look at those carefully in terms of understanding the price for those assets that might be available and we'll be disciplined about that, but I do think that those represent an opportunity for us for growth.

[Keith Taylor, CFO]

Phil I've just said, what I'd add on just to what Charles said is, there's two other things it's certainly come to the top of my mind, it's new products and services. And Charles alluded to NFP as one example of a new service that we're going to deliver, but we're going to continue to invest around product and service offerings and think of that is a potential for growth.

Certainly continuing to invest in included that is the hyperscale initiative, albeit it's going to be in the JV in the majority of that, the growth at least on a cash flow basis would come below the line.

And then the last thing that sort of you feel it today's for certain given the macro environment, we're operating in and with the strength of the U.S. dollar as a reminder, 60% of the business in rough numbers is outside of the U.S. and we've got a, with a strong dollar policy and soon to be maybe a weaker U.S. dollar policy on a go-forward basis.

There is an opportunity on a currency basis, as our hedges flush out that I would provide an element of growth, whether it's the Brexit - no matter how we think about Brexit and the implications of that and how that's affected our revenue base out of the UK to other markets in Europe and beyond. So, I think there is a lot of opportunity for growth in addition to what Charles has alluded to.

[Philip Cusick, JPMorgan]

That's really interesting on the currency side. if I can follow-up once, should we think of new capabilities is a sort of relatively small tuck-on acquisitions to really drive the internal knowledge of the company? Or do you think of bigger service acquisitions as possible? Thank you.

[Charles Meyers, President and CEO]

Well, I think that in terms of our edge services portfolio, which is probably, we're going to continue to grow the interconnection portfolio in terms of reach in services and feature function and then the edge services portfolio. The first one off the line so to speak, is the Network Edge, which is a little bit of a blend between interconnection and these edge services.

But I think that we are going to, we probably will look at augmenting our capabilities, potentially through targeted M&A, but I think that we'll be looking at a lot of organic development in that portfolio initially. And over time, we'll have to determine, whether or not that warrants a more aggressive posture there from the services addition standpoint.

[Operator]

Our next question comes from Ari Klein with BMO Capital Markets. Your line is open.

[Ari Klein, BMO Capital Markets]

It sounds like you're seeing some better momentum in the Americas. Can you talk a little bit about that market, what are you seeing there and how you kind of expect that growth rate to maybe improve over the next few quarters?

[Charles Meyers, President and CEO]

Sure. Yes, I think what you know the Americas business for us continues to be an exceptional attractive business, its size, the profitability of that business. If you look at it from a MRR per cab standpoint at almost $20 for a cab. It's really an exceptional business, large number of customers and really good traction from the selling team, not only selling our capacity local to that market, but as a huge outbound engine for the rest of the world.

And so, we're super pleased with the performance of the business. It is growing at a rate that's probably roughly in line with the broader retail colocation market. But in some respects, I think that's a bit of an unfair comparison, because we are - what I would say is our real addressable market is, the market opportunity for colocation services that deliver a 30% cash-on-cash yield.

And I'll tell you our share in that business is substantially higher than then it's a vary to the high share and in terms of being able to grow that business at market rate is, I think an impressive accomplishment.

So, we still are seeing a little bit of headwinds from the tail of churn in Verizon assets in particular, we talked about that, it just continues to take a little bit longer to come out than we had anticipated. Again net-net, that's a good thing, but it does create some a little bit of headwind in that business.

But yes, we see good success. And I think now, as we add new services like Network Edge and some of the other things, I think we're going to continue to have the opportunity to sustain that business in a very positive way.

[Operator]

Our next question comes from Jon Petersen with Jefferies. Your line is open.

[Jon Petersen, Jefferies]

I wanted to talk about the GIC joint venture in Europe. You guys have been a little bit coy about the details. I think towards the end in Keith remarks you said is about a $5 million net impact to AFFO for the balance of the year. But I'm hoping you can maybe give us just a little more details on what we should expect for the balance of the year and then kind of the growth of that JV over the next couple of years.

[Keith Taylor, CFO]

Sure. Jon, let me start off, I just want to make sure there's a clarifying comment. So, when we talk about the $5 million impact, that is basically from us selling the assets to the JV, so we're reducing our AFFO by $5 million because of that. That all said, as you're all aware, we are going to close the transaction in Q3 and we'll certainly update you on the next earnings call with all the specific details.

But suffice it to say, there is a number of things that are going to happen and the first thing that's going to be important for everybody note, is the amount of cash proceeds that come back into the business, given the sale of our Paris or London 10 and Paris 8 assets.

And again, we've said that we're going to get add market or better cap rate on basically the recovery of our cash flow. We're going to get reimbursement of fees, reimbursement of costs, but we're also going to get our stake our 20% equity interest in the joint venture. And so we're excited about that opportunity.

We've announced the two assets that will go in to the stabilizers, potentially out of the gate for more, as we've highlighted in the earnings deck. But then we're going to be active elsewhere in the world. And we really want to be clear, this is not about getting into wholesale business. This is about us being very, very strategic by the decisions we make that would add value to the overall franchise on our platform.

And so we'll be very transparent about the deals that we do. We will share with the market. But they're going to be - there's going to be a number of different JVs that will be established over the coming quarters and years that will give you a good sense of the momentum and that value will come in typically through the income from affiliated entities, which will be below the line.

Some of the fees will be the fee income that we earn from the JV will be on the top-line. And again, it will be typically and typically on the top-line, but I will just be with the fee income. So, there's a lot of discussion still to be add here, the deals got to close, but we're very optimistic about the decisions we're making and we're delighted by I'll get out with our partner. I think they're going to be a great global partner for us that we will go to almost any market that choose to partner in.

[Jon Petersen, Jefferies]

And then just maybe one follow-up. I'm curious about the decision you - I guess essentially bringing GIC as a development partner to kind of share in the development like through the whole process versus finding more of a takeout partner, where you can develop on your own balance sheet and then sell into a joint venture, once it's stabilized, which I assume would probably carry a lower cap rates. Just curious your thought process around how you wanted that capital to come in?

[Charles Meyers, President and CEO]

Yes. I think first recognizing is the first two projects, which are stabilized, we're going to get full return for the investment decisions we've made, including all of the development profit associated with those assets. That's said on a go-forward basis, our decision is not to take what we think it is very dear capital and try and use that as a means to fund a low returning business.

We think partnering with GIC, we're happy to share on those development profits because our focus is really on adding to the overall global platform, in the retail business and we're going to consume all the capital that we have in our balance sheet and more as we shared in the last Analyst Day on growing the retail business.

So, this is about making a good decision, driving value into our shareholder base and at the same time augmenting, and I said - I've said on a number of - at a number of investment meetings, between the new services, which includes the hyperscale and the new interconnection services. We're not only sort of widening our mode, we're also deepening the mode around our business.

And I think that's just a good use of our capital and let our partner participate with us and appropriate returns. We'll get outsized returns because the fee income that get attached to, to those levered returns.

[Operator]

Our next question comes from Colby Synesael with Cowen and Company. Your line is open.

[Colby Synesael, Cowen and Company]

I just have two modeling questions actually. One is on the ATM the $348 million that you raised in the quarter, a bit surprised just considering you just done the equity raise the quarter before. Can you give us any color on expectations further range of this year to extent possible. And then secondly cabinet and cross connects they were down quarter-over-quarter and just taking into consideration the developments and how much you are building out, any color on what we can expect for both cross connects and talk about physical, cross connects and cabinets as we go into the back half of the year as well? Thank you.

[Keith Taylor, CFO]

Why don't I take the first one, Colby and Charles will take the second. One on the ATM, we've always said that we would use it appropriately at the right time. And as a Company we knew what our funding needs where between now and the end of the year and as we looked into 2020 and we always felt that there would be a little - that always be a little bit of ATM that we take off the table at the right time and certainly with market conditions being as volatile as they were, I was doing this deal take using this ATM at roughly an average price of $485 a share. We thought it was the right thing to do.

Having said that, in my prepared remarks, I really wanted to - I was trying to highlight our new ones that as we look forward a lot of our capital needs will come from debt. So, we want to make sure that we continue to balance that debt.

The capital scores with debt and equity, but this was a unique opportunity because one, we knew that we could get to the market - the market. We've got a good price for to sell the equity for our shareholders. Yet at the same time, it also assured us of that second investment-grade rating.

And so you saw the market reaction after that, it was very, very positive. And ultimately when I step back and now reflect on what we potentially could do to save from an interest perspective, we historically said, it could be $100 million, I believe today given market conditions and also because of that second investment grade rating that number can now be between $100 million, say $130 million, $140 million of cash interest savings over some period of time.

And that's, what really excited us, it's making sure that we have the liquidity position, the strong balance sheet, we'll use the ATM sparingly, but on a go-forward basis. I would tell you - absent any M&A or any other sort of strategic thing, we would typically focus more on debt than anything else at this point.

[Charles Meyers, President and CEO]

And then I will take the second one Colby. Relative to cabinets, we feel very good about the momentum in the business. We've always said that sort of cab adds is one that can be a little lumpy in depending on timing and various other factors and so. We really encourage folks to look at sort of rolling four quarter average as sort of an indication the health of our ability to translate capacity into sort of utilized and billable cabinets.

And when you look at that we think that the trajectory across all three regions continues to be very strong. And again we have added a lot of capacity. It is also it is important to note that we're doing that with a very attractive deal mix. And so large deals are a way to add a lot of cabinets, there's just not a way to add as much value. And so, I think what you're seeing is shifting in our mix and is still being able to deliver the cabinet additions that we think are appropriate and attractive by doing that at much higher returns.

And so we feel good about that overall and again, we encourage you to really look primarily at the rolling four quarter average as the primary metric. And then relative to interconnection and cross connect - physical cross connects in particular. Solid quarter we were sort of right at the bottom end of our range. I do think that we’re seeing a little bit of the continued 10 to 100 Gig migration sort of impacts in terms of slowing that down a little bit, but gross adds continue to be very strong.

And when you combine that and you look at then you add in the virtual I think you're seeing a number that looks very good. And recognize that both of them are very important to us and actually with very similar economics. We talked about that previously, which is our ARPU and return profile on virtual interconnection is actually every bit as good as physical. And so it's a matter of just the customers choosing a - different tools for different jobs, so to speak. And so I do think that we're going to see.

I think - we kind of stick by our prior views on the sort of evolution of 10 to 100 Gig migration flattening out at the end of this year. And we think that will represent some upside in the Americas as we go into next year. So interconnection overall, we feel great about 13% year-over-year growth. I think we're seeing some improvements in pricing globally and again strong performance on the platform overall.

[Operator]

Our next question comes from Frank Louthan with Raymond James. Your line is open.

[Frank Louthan, Raymond James]

Can you comment a little bit on the Americas business and what you're seeing in pricing, particularly in Northern Virginia and then I have a follow-up?

[Charles Meyers, President and CEO]

Sure yes, I think that revolves around the, some of the others who have reported some of the challenges in Northern Virginia, which I think revolve primarily around the hyperscale business and large footprint capacity and sort of the supply-demand dynamics of that business. I think that as we've said in the past, we're kind of taking a pass on playing in that market relative to hyperscale in Northern Virginia.

Instead, we’re kind of the center of that universe relative to interconnection and relative to sort of the overall ecosystem in that market, which again continues to be the largest teller market in the world and so. So I think there is going to be, I think there is some sorting out at the hyperscale side is impacting pricing, but it's not really having significant effect on our business there, which we continue to see strong levels of interconnection, good solid cabinet yields in pricing and feel like we really play out a differentiated position there in terms of the center of that ecosystem.

[Frank Louthan, Raymond James]

I believe you will raise pricing in Europe earlier in the year, was that pretty much - if those price - increase is pretty much played out - the quarter is anymore to bleed in to impact the back half?

[Charles Meyers, President and CEO]

Now they're going to bleed in actually over a long period of time. We took a very measured approach in terms of how we wanted to go about normalizing those to what we thought were appropriate market rates. And we did that for a variety of reasons because we really value the long-term relationship with the customers who want to do that in a way that is measured. But we also want to make sure that we're getting a fair return on what we think is an exceptionally high value service.

And so, the way we've done that as we've rolled them in at renewals typically. And so, they're coming in as - and we've already changed the price on new adds. And so, those will begin to obviously to have an impact. And then others will roll in and renewals over the coming quarters and years. So, it will be a bit of a slow growth there, but we think it will have a positive impact and sort of ongoing lift in that business.

[Frank Louthan, Raymond James]

Any competitive reaction from that?

[Charles Meyers, President and CEO]

No I think, well I think that, what we've seen is that there is general stability in that market in terms of people delivering. I think there has been some upward lift in the overall market pricing. And so, and again I think that's a reflection of the value delivered to the customer and so. So overall, it seems to be going well.

[Operator]

Next we will hear from Tim Horan with Oppenheimer. You may go ahead.

[Tim Horan, Oppenheimer]

Well, thanks guys. The 40% of all cloud on ramps could you just elaborate on that a little bit, what do you mean by that. And do you think that's been growing as a percentage of share and will platform Equinix is that designed to capture more of those on ramps broadly speaking? Thanks.

[Charles Meyers, President and CEO]

Yes, it's a great question. We will - I don't know that will continue to grow share on the - on-ramps because I think that we - most of the providers are looking for some level of redundancy and they're looking for often times multiple on-ramps in a market. They've very frequently led with us. And so that is why I think we jumped out with a very large share position. And so, I think we can continue to grow with them. And as our geographic footprint expands, hopefully continue to maintain very, very high market share ratings there.

If you look at it in terms of a coverage - from a coverage standpoint in the markets in which we operate, we have a 70% coverage of on-ramps with the - largest cloud service providers and 40% share overall. So it's going to continue to be an area of focus for us. We think that the combination of us being able to continue to invest in sort of the retail-centric portions of our hyperscale relationships with Equinix.

And focus our balance sheet firepower on that. And then being able to leverage the strength of our X scale JV with GIC to pursue the large footprint is really absolutely spot on and the right strategy for us. And we think we're going to continue to play a very differentiated position in the overall cloud ecosystem.

[Tim Horan, Oppenheimer]

And can you add many new products to platform Equinix and I guess, can it be like a material business for you?

[Charles Meyers, President and CEO]

Yes and yes, I think that the edge services portfolio that we're looking at I think network edge services is absolutely capable of being a meaningful contributor to the topline over a period of years and as we look at other augmentations to our edge services portfolio. I think, we absolutely think those can be meaningful additions. And we think that they can come at attach rates strong attach rates and low cost to sale that we think will prove out to be very, very attractive economics. And will be able - to allow us to sustain return on invested capital at our market leading rates.

[Operator]

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

[Simon Flannery, Morgan Stanley]

I think and Keith you talked about on the EBITDA, some delayed spend, can you just give us a little bit more color around that. And then, just coming back to your comment on the currencies, can you just remind us of the hedges that you have right now and what the remaining term - do you have any hedges that extend deep into 20 or is it pretty much say 6, 9 months left on the existing hedges? Thanks.

[Keith Taylor, CFO]

I think as it relates to EBITDA, and when we talk about delayed spend. Again as a company as you recognize, we've been able to increase our EBITDA guidance this year relative to the beginning of the year, roughly $45 million and $70 million at AFFO line. And part of that of course is timing and timing relates to things that we talked about at the outset when we highlighted some of the areas that we - expose the P&L to this year, it was about expansion growth at a rate that we've never seen before.

Through the second half of the year, you're going to see some of those costs come in whether Seoul or Hong Kong, Singapore, where we're making substantial investments for future opportunity and those costs will run through the P&L. Now our affect is by roughly $7 million through the second half of the year incrementally. And then utility spend as we've said, utilities are going up and we felt it. We've experienced a lot of it both from a pricing perspective and a consumption perspective, and that's going to hit us by roughly another $7 million.

So there's $14 million of costs that we anticipate at least we've embedded into our guidance that reflect that outcome. As it relates then to just currency, we hedge out typically over eight quarters. And as you can see in the stated guidance that we delivered with our press release, you can see that we breakdown our - what I call the blended rates. So not only the spot, but also the hedge rate and right now with the euro is roughly at 111 and we're hedged out at 117. Pound is trading at 121 and we're hedged at 134.

And so it just gives you a sense, and I'm sorry let me size that for you. The euro is roughly 20% of our revenues and pound is 9% of our revenues. And one of the things that was really telling to me so, we've got a good hedge position. Of course, those will fall off over again in the next 6 to 8 quarters and we'll continue - to feather in future hedges and sort of smooth the impact of the currency movement. But the thing that was very telling to me is, if you think about the UK sterling alone and from pre-Brexit, sorry pre-Brexit to where we are today.

The rate differential is roughly, it was 160 when dollars to the pound and today it’s roughly 120. So there is a $0.40 movement and we have $500 million roughly 9% of our revenues are $500 million just for that - for the pound to go back to its level of pre-Brexit. I mean that's roughly $170 million to us on the topline. And so, you get a sense of how substantial those currency movements have been and the impact that we've absorbed in the business over this relatively short period of time.

So we're optimistic as things get back to normal, one day whenever that one day will be. So it's hard to imagine anytime soon. You're going to see the benefit that will accrete to this business because of our diversified portfolio with a lot of growth occurring in markets outside of the U.S.

[Operator]

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

[Michael Rollins, Citi]

Just thinking back a little over a year ago, you provided some long-term financial goals. And you now had a little more than a year of operating results and progress. And I'm curious how you see future performance relative to some of those annual goals, including the revenue target of 8% to 10% annually? Thanks.

[Charles Meyers, President and CEO]

Yes, Mike I think relative to our Analyst Day - what we talked about at our Analyst Day last June we continue to feel good about that. And I think that we've delivered in retrospect over the past year, plus in strong fashion relative to those expectations. And so, and I think the results today show another step in that direction. So again, I think our business is performing very well. I think we're comfortable with kind of what we had laid out there.

We think there is a huge opportunity for us. We think the addressable market is actually expanding. We think we are actually adding to it by continuing to deliver new and incremental services on top of what we're already doing. And so yes, we feel good about what we articulated.

[Operator]

Our next question comes from Jeff Kvaal with Nomura's Instinet. Your line is open.

[Jeff Kvaal, Nomura's Instinet]

Yes, thank you very much. I'd like to follow up on Mike's question a little bit it sounded as though in your prepared remarks that your sort of organic growth is in the 3% range. And it also sounded as though your intention over time is maybe to lean, a little bit more on organic and inorganic for growth. So I guess if organic is only growing at 3% of that 8% to 10% growth rate. Are you suggesting that the organic growth should pick up a little bit with some of these new products or how should we think about that?

[Charles Meyers, President and CEO]

I think you're referencing, our stabilized asset growth at 3%. But our combined growth is much higher number. So, I think our organic growth - again we're comfortable in that in the range that we just had articulated. So, I think in fact, we just delivered a quarter that was 9% year-over-year. And so - that we feel very comfortable that the organic growth can sustain in the range that we had articulated.

[Jeff Kvaal, Nomura's Instinet]

Okay, so ongoing CapEx that makes sense?

[Keith Taylor, CFO]

Yes and Jeff just to be fair, I mean we have stated over a five-year period when we delivered our guidance to our investors at the June 18 Analyst Day. We said over the next five years, you should expect growth to be in eight - and this is what I call non-acquisition growth 8% to 10% on a normalized basis, normalized for currency movements and the like over that five-year period.

And that was in our CAGR it would be play in that range depending on inventory development and timing of builds and the like that. We feel, 8% to 10% is a reasonable expectation from that 2018 through 2022.

[Jeff Kvaal, Nomura's Instinet]

And then on follow-up, I think Charles, you talked a little bit about being resilient to the macro, it's been quite a while since there has been a bit of a down turn in some respects. And I'm wondering if you can sort of help us understand how your business has played in prior downcycles or how the business is different now from prior downcycles?

[Charles Meyers, President and CEO]

Well, again, I think our history in terms of our performance during downcycles has been very, very good. And so I think that - and I think the importance of the infrastructure that we provide to our customers in terms of how they operate their business I think makes it quite resilient.

I think that's particularly true as you look at how they use us in terms of thinking through things like the priorities for our customers like when we architecture, which is a way of improving the performance of their business, but also taking cost out.

And so, and as they implement hybrid and multi-cloud as a way to stretch their CapEx dollars and drive application performance those are things that we think are going to be very, very resistant to sort of fluctuations or macroeconomic conditions. So again, we feel good about the strength of our business, and I believe it will be very resilient through the macroeconomic cycles.

[Keith Taylor, CFO]

Jeff, let me just add one other a couple of a quick comments. First and foremost as Charles said, we love the fact that we can be resilient and we've historically thrived in periods of economic turmoil and yes, we can sort of influence how the market reacts and so at times and values at start, we certainly can take advantage of the opportunities and we've done that over the years.

The other part that I think we really tried to highlight that today being an investment grade rated company but understanding that we have $1.6 billion of cash on our balance sheet, we have an unused line of credit of $2 billion. We are generating AFFO of $1.9 billion a year that and we said we think you can grow from - it can grow meaningfully over that five-year period.

Our leverage is 3.4 times. We've just partnered with GIC for our hyperscale initiative. And our payout ratio over an extended period of time, it's going to be in the mid to sort of low to mid 40s. And so that gives us a lot of strategic flexibility as a Company and the extent thing we have to pull back.

We're absolutely weak. We've always felt we can push and pull levers as needed whether it's the operating spend or the capital spend. So we have a lot of comfort in who we are and what we're doing and as we said in the prepared remarks, we think we're strategically advantage relative to anybody else in our space.

[Operator]

Our next question comes from Nick Del Deo with MoffettNathanson. Your line is open.

[Nick Del Deo, MoffettNathanson]

First, as we think about the new products and services that you're introducing or planning to introduce, are there boundaries we should consider regarding how far you're willing to push out, for example limit in terms of your willingness to hardware that customers consume virtually or services that may compete with customers, things of that nature?

[Charles Meyers, President and CEO]

Yes, what I would say is I think that we view ourselves really as an infrastructure company and I think, but I do think the ways people think about consuming infrastructure is changing and I think we have to adapt to those changing market needs and be willing to adapt the how we deliver our underlying value proposition, which is centered around global reach, ecosystem and access, interconnection and service excellence. And so I think that we will - we are probably not likely to go way up the stack.

I think we are very comfortable being an infrastructure provider that is an enabler to other people sort of broader digital transformation aspirations. We believe we unlock ecosystem value by combining our infrastructure value proposition with sort of higher layer value propositions of our partners, and I think that's proving out every day whether those be partnerships that we have with the likes of our network service provider partners or the hyperscalers themselves or other things that - we'll continue to look at further down the road.

So I think that we're going to - we're not going to go too far away from what we believe we're really good at. But I also think that we certainly wouldn't shy away from things that are slightly different than what our traditional business has been, if that's what's needed to deliver the value proposition to our customers.

So, and in terms of competitive overlap I do think that we are - we really believe that we need to continue to be that trusted partner. We have a - our business has been built on an ability to be a sort of a neutral provider that gave us people broad choice and access to a broad value proposition. And I think our strategy will still within reason need to stick to that underlying heritage.

[Nick Del Deo, MoffettNathanson]

And then I was hoping to get a few more details on xScale, how do you determine what deployments going to xScale versus what goes into Equinix. A material amount of your current leasing shift index scale and how tight or lose the exclusivity component of the agreement with the GIC?

[Charles Meyers, President and CEO]

Yes, let me take some of them and Keith can add on as needed. But really, there is a pretty distinct difference typically in terms of a very large multi-megawatt footprint and the requirements of that for hyperscalers as they look at availabilities zone type of deployments. And they look very different than a typical either sort of on-ramp platform or network node.

And so most of that business I think on a very large side of that, we will try to direct to the xScale facilities and so because we think that's a better way to allocate our capital. And so there - there are mechanisms in place for us to evaluate that and again if we have availability of capacity in an xScale environment to take on those very large footprint we would prefer to do that just because that provides better returns overall.

[Nick Del Deo, MoffettNathanson]

Just a follow real quick. My understanding was willing to take some larger deployments in your European footprint, you're saying that what xScale is targeting is even larger than what you've done there historically?

[Charles Meyers, President and CEO]

Well, as you look at what we did in London 10 for example that was exactly that type of footprint and it was in a hybrid facility and that now that facility is being sort of recap, being sold to the JV.

And so, yes, we were doing some of those, I mean, I do think that there are - we talked a little bit that this I neither last - is the prior earnings call or last one, or the one before that. But we've been - we selectively done some of that in our hybrid facilities in Europe. I think our preference would be to do that in the xScale data centers. That has to say it's out of the question the dynamics of the market, either from a capacity or availability standpoint would preclude us from doing something different. But given our druthers, we would prefer to move that capacity into the xScale JV.

[Nick Del Deo, MoffettNathanson]

Okay. And then regarding the exclusivity component?

[Keith Taylor, CFO]

Yes, so on exclusivity and other parties exclusive to the other, but there is a lot of compelling reasons that we want to partner for allowing the extended period with each other and again there is the flexibility that we choose to do something that they are not interested in. Then, we can go do it ourselves or they can go do something their selves.

But overall, we have to be careful there is no competitive tension in the markets that we operate in. And that's sort of the understanding of the parties that we're not going to compete against each other in market, but there are - there could be markets where again one of the other chooses to be in. And the other is not interested.

[Operator]

Our next question comes from Erik Rasmussen with Stifel. Your line is open.

[Erik Rasmussen, Stifel]

And maybe just continue with xScale. How should we think about the particulars of the xScale opportunity, especially around capacity at full build out. I know you put out in the announcement is - what do you expect the capacity of would be, but and then just a number of sites initially in relation to what was laid out at Analyst Day. Maybe just compare how that compares to what was laid out?

[Charles Meyers, President and CEO]

Yes, I think it's very much the first step along the vision of what we painted at Analyst Day. So we continue to feel like that we can, I think that if you recall that slide from there, we were talking about larger number of markets and probably 500 megawatts, I think over time. Those are things that I think are absolutely doable through a series of joint ventures, and so obviously this one covers sort of four key markets that are really we think critical to the overall ecosystem.

And as we add incremental JVs we think we'll add additional metros, and so, yes, I think the vision that we laid out is I think very, very accessible. If not, I think we can, it may even - we may even have the opportunity to grow. I think the overall collection of JVs for xScale to something that is better than that.

We think there is a big opportunity there. We think we're going to operate at the sort of deep into the demand pull there and. And so I think this is a great first step for us and several more I'm sure to come in the not too distant future.

[Erik Rasmussen, Stifel]

And then maybe just related to that, one of the properties, that was I guess under committed and will be under development, would be in Amsterdam. And I guess it relates to what we've heard recently about the 12-month moratorium on data center construction, do you have any thoughts on the potential impact and what that might mean for this project. And maybe just in relation to others.

[Charles Meyers, President and CEO]

Yes, I mean we've - obviously the Amsterdam is a significant market for us. And in the sort of global scheme of things we've stayed very close to that. And the good news is that I think we have the runway on our projects that are already sort of grandfathered in and so we're going to have, I think plenty of capacity to keep things moving as we sort through that moratorium and I think we'll stay very close to that.

But I also think that we're going to have the opportunity, as the market leader there to a really continue to serve that market. Well, and because we have so much already committed development to do. I think we're going to be well positioned as we go through that phase.

[Operator]

We do have time for one more question. Our last question comes from Robert Gutman with Guggenheim Securities. Your line is open.

[Robert Gutman, Guggenheim Securities]

Yes, thanks for taking the question. Regarding the $12 million portion of the revenue guidance that raise attributed to outperformance, can you - with any more specificity to what is performing better than plan. We've talked about a lot of stuff in this call, but it's something is going faster than you thought it would. Is it, would you say it's Europe, would you say it services uptake. Is it the channel deals is it multi-region deal demand, would you highlight anything in particular that's pushing your head faster.

[Keith Taylor, CFO]

So Robert I mean the 12 part of us just highlighting that is - that where we try to sort of give everybody an indication of where the strength is coming from us in the recurring element of our revenue stream. And now, it's important for us to highlight on the prepared remarks, number one, number two, when you look at our forward guide for Q3 is relatively modest to the overall guide for the second half of the year, which really is telling you that the momentum is going to come in the fourth quarter more so than that of the third quarter of based on some book-to-bill differentials and then there some one-off anomalies they're going through our results in Q3 from asset sales to how we get reimbursed for some costs with under a favorable tax ruling situation in Dallas.

But overall, I mean there is momentum right across the portfolio across the platform and we're delighted with all three regions, and how they're performing and that was really what Charles alluded to earlier on today.

[Katrina Rymill, VP, IR]

Great. That concludes our Q2 call. Thank you for joining us.

[Operator]

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