Q3 2022 Equinix Inc Earnings Call
Yes.
Good afternoon, and welcome to the Equinix third quarter earnings Conference call all lines will be able to listen only until we will for questions. Also today's conference is being recorded if you have your objections. Please disconnect at this time I would now like to turn the conference or to between a rigor senior Vice President of corporate Finance and sustainability you may begin.
Good afternoon, and welcome to today's conference call before we get started I'd like to remind everyone that some of the statements we'll be making today are forward looking nature and involve risks and uncertainties.
<unk> results may vary significantly from those statements and may be affected by the rest 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 18 2022.
And 10-Q filed on July 29, 2022.
<unk> assumes no obligation and does not intend to update or comment on forward looking statements made on this call and.
In addition in light of regulation fair disclosure. It is equinix as policy not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure in.
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 on the Equinix IR page at Www Dot Equinix Dot com we.
We have made available on the IR page of our website a presentation designed to accompany this discussion along with certain supplemental financial information and other data.
We'd also like to remind you that we post important information about equinix in 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, as CEO , and President and Keith Taylor Chief Financial Officer.
Following our prepared remarks, we'll be taking questions from sell side analysts in.
In the interest of wrapping this call up an hour we'd like to ask these analysts to limit any follow on questions to just one.
At this time I'll turn the call over to Charles.
Thanks Katrina.
Afternoon, and welcome to our third quarter earnings call. We had another outstanding quarter as global demand for digital infrastructure continues to grow and customer preferences trend convincingly toward architectures that are highly distributed persistently hybrid deeply cloud connected and increasingly on demand all factors fueling the equinix position as a trusted.
Partner in digital transformation.
This vigorous demand backdrop fueled another great quarter, delivering record gross and net bookings with strong demand across all three regions, resulting in our 79th quarter of consecutive revenue growth and further demonstrating the resiliency and durability of our business even in the face of a complex and challenging macro environment.
It is increasingly evident that the global pandemic has been a catalyst for a fundamental shift in how customers view digital transformation and its importance as a strategic imperative and.
And this commitment to digital transformation continues even in the face of a broader dynamic of belt tightening as companies look to do more with less and see digital as a catalyst to both maximize revenues and optimized costs. While we continue to closely monitor macro conditions and adapt our execution accordingly, the fundamentals of our business remain.
<unk> strong.
Our expansive global reach and robust interconnected ecosystems continue to attract a wide and diverse customer set as they prioritize digital investments and embraced platform equinix as a point of Nexus to support hybrid and multi cloud.
This wave of digital infrastructure demand and our highly differentiated value proposition are translating to a robust pipeline of highly favorable pricing environment and low churn all fueling record performance across the business year to date and setting us up for a strong trajectory as we look to 2023 and beyond.
As customers navigate rising interest rates and broad based inflation theyre benefiting from our scale purchasing power and our sophisticated capabilities and hedging risk management and sustainability, our operating scale and scope gives us a variety of levers to manage an increasingly dynamic environment.
<unk> currency power and interest rates investing in advanced procurement teams, expanding renewables coverage and taking a programmatic approach to improving the efficiency of our world class data centers and advanced set of capabilities supported by a strong and flexible balance sheet.
Specifically on power, we have had a keen focus in this area and continue to feel confident in our position our approach to multi year hedging is affording equinix that visibility and predictability to communicate to customers in advance of expected power price increases and is allowing us to deliver cost points to customers that remain highly favorable against spot rates.
In many markets as volatility persists, while our aim remains to dampen this volatility for our customers through hedging we do expect meaningful increases in power costs in many markets and per our contracts. The full impact of these additional power costs will be passed onto customers.
Overall, we believe we remain in a good position relative to competitors and the broader market.
Turning to our results as depicted on slide three revenues for Q3 were $1 $84 billion.
Up 11% over the same quarter last year, driven by strong recurring revenue growth adjusted EBITDA was up 11% year over year with <unk> meaningless meaningfully ahead of our expectations due to strong operating performance.
Connection revenues continue to outpace the broader business growing 13% year over year. These growth rates are all on a normalized and constant currency basis.
Equinix continues to extend its leadership as the most interconnected platform with four on ramp wins this quarter, bringing the total in our portfolio to more than 200 on ramps across 44 markets. We now have 11 metros across platform Equinix enabled with on ramps from all five of the leading cloud providers no other.
<unk> has more than one.
In addition to placing critical networking nodes in on ramps at Equinix Hyperscale are also integral to our go to market motion as customers continue to aggressively migrate workloads to the cloud and demand cloud proximity for their own private cloud implementations.
As indicated in our recently published global Interconnection index current trend lines indicate that more than 80% of global 2000 companies will be interconnecting with more than four hyperscale providers and over 30, SaaS providers or other business partners on average by 2026.
We're continuing to invest behind the momentum we're seeing in our data center services business with 46 major projects underway across 31 markets in 21 countries. We continue to build capacity under our ex scale offering, including 10 ongoing X scale projects that we expect will deliver another 80 megawatts of capacity once.
<unk> opened.
This quarter, we added six new projects, including New data center builds in Barcelona, Tokyo, and our first organic build in Jakarta Jakarta, Indonesia.
Our new AVX in Jakarta will add a strategically important high growth market to our platform as we look to enable local businesses and global organizations to unleash Indonesia digital potential.
This commitment to market, leading reach continues to drive our business with customers operating in all three regions now accounting for an amazing 64% of our recurring revenues.
Key customer expansions this quarter included stack path of leading edge computing computing platform provider, which expanded into Dubai in Mumbai to support the growth of its worldwide edge compute delivery and security offerings.
Win with a global multinational airline leveraging equinix to connect to their Federated ecosystem, a partner airlines as well as a significant multi metro expansion with one of the world's largest custodian banks deploying across all three regions and utilizing the full suite of Equinix digital services.
On that note our digital services portfolio saw continued momentum as companies increasingly demand infrastructure and interconnection services that can be delivered as a service and on demand.
Clinics metal had a strong bookings quarter as customers leverage flexibility and agility across multiple metros wins. This quarter included a major design win with a global SaaS provider and a significant expansion with a leading pediatric treatment and research facility using network edge and equinix fabric to create an edge hosting environment in key U S Metro.
<unk> and enables seamless and high performance connectivity to their cloud partners.
Q3, we added an incremental 7300 interconnections and now have over 443000 total interconnections on our platform.
Equinix fabric had another strong quarter as interconnection diversity continues to increase expansions. This quarter included coal technology services further expanding its footprint in Europe , and Interconnectivity with Equinix fabric to optimize performance for its customers as well as our financial software tools and enterprise applications provider implementing a global network.
Optimization project leveraging equinix fabric.
Internet exchange saw peak traffic up 8% quarter over quarter, and 28% year over year to greater than 27, Terabits per second representing the largest peak traffic growth since prior to the pandemic.
Our channel program delivered a sixth consecutive record quarter accounting for 37% of bookings and approximately 60% of new logos and remains a critical vector and how we are expanding our reach and scaling our go to market engine.
We continue to see particular strength for our strategic cloud technology and systems integrator partners like AWS, Cisco Dell, Google HPE emphasis and Microsoft This segment accounted for approximately half of our channel bookings and continues to grow in both deal dollar deal and dollar volume with these partner.
As we jointly offer a blend of I T and networking technologies that allow customers to interconnect seamlessly with Hyperscale cloud and other as a service providers and benefit from solutions that deliver optimal performance cost security agility and scale across our global platform Chan.
Channel wins included a U K insurance firm with Equinix partners soft cap for a data center consolidation and modernization project at our London campus, where tip technology elements from HPE, Cisco and Palo Alto networks are being brought together in a cloud adjacent architecture, all directly interconnected to Microsoft and AWS now.
Let me turn the call over Keith and cover the results for the court.
Thanks, Charles and good afternoon to everyone.
As you can see from our results. The Equinix team continues to execute for our customers our communities and for our investors.
Our go to market engine delivered record gross and net bookings in Q3 closing over 4200 deals with more than 3000 customers.
Our success is derived from the breadth of our service offering the scale of our growing platform the quality of our operations organization and the focus of our investing for the longer term.
For the quarter, our net bookings performance moved up significantly when compared to our Q3 expectations and the same quarter last year due to strong gross activity, a favorable pricing environment lower than expected churn and the strength of our digital services offerings.
Again, we had net positive pricing actions.
Our consolidated MMR per cabinet increased to greater than $2000 per cabinet, despite the weaker foreign operating currencies.
And note the expected price increases or PPI as discussed by Charles or not in either our reported or guided numbers. These price increases will be passed through to our customers in 2023.
Over the past couple of months, we've been communicating with our customers about the pending prior price increases and most recently with notified them of the expected range of their power cost increase at the market level.
The dialogue with our customers highlighted the value of our multi year prior planning and sourcing efforts, which is expected to mean meaningfully dampened the impact of inflated energy cost to many of our customers both relative to the competition and the broader market.
Finally, notwithstanding the strong bookings performance in Q3, our forward looking pipeline remains healthy and our backlog and our book to Bill interval remains constant, allowing us to remain confident as we look ahead into Q4 and plan for 2023.
So given the momentum in our business, we're again, raising our underlying guidance across each of our core financial metrics for the year.
Now, while our business remains well positioned and resilient, we continue to keep macro factors top of mind. Consequently, we chose to increase the liquidity position of the company at quarter end, we had over two 5 billion of unrestricted cash and our bank accounts and full access to our $4 billion line of credit increase.
<unk>, the financial and operational flexibility of the business.
Our net leverage remains low at three five times, our adjusted EBITDA, creating plenty of balance sheet flexibility.
Now let me cover the highlights for the quarter note that all comments in this section are on a normalized and constant currency basis.
As depicted on slide four global Q3 revenues were 184 1 billion up 11% over the same quarter last year above the top end of our guidance range on an FX neutral basis, largely due to strong recurring revenues.
Q3 revenues net of our FX hedges included a $9 million impact when compared to our prior guidance rates largely due to weaker euro and British pounds.
Global Q3, adjusted EBITDA was $871 million up 47% of revenues up 11% over the same quarter last year above the top end of our guidance range due to strong cash gross profit and lower than planned operating costs, including professional fees and consulting costs.
Q3, adjusted EBITDA net of our FX hedges included a $5 million FX impact when compared to our prior guidance rates and $4 million of integration costs.
Global Q3, <unk> was $712 million above our expectations due to strong operating performance and lower net interest expense and included a $5 million FX impact when compared to our prior guidance rates.
Global Q3, MMR churn was one 9% a continued reflection of our disciplined sales execution to put the right customer with the right application into the right asset.
For Q4, we expect to have our churn to continue to trend at the lower end of our two to two 5% per quarter range.
Turning to regional highlights whose full results are covered on slides five through seven.
Apex was the fastest growing region on a year over year normalized <unk> basis at 19% followed by the Americas, and EMEA regions at 11% and 10% respectively.
The Americas region had another great quarter with strong gross bookings, Laura MLR churn and favorable pricing trends led by our Washington D C and New York Metros.
In August we added Lima, Peru to our platform as part of the Intel acquisition, expanding our Latin American footprint to a fifth country and extending the equinix platform to 32 countries and 71 markets globally.
Our EMEA region delivered another record bookings quarter with strong pricing and robust channel activity led by our Amsterdam, and Dublin, and Frankfurt markets with strength in our it services and enterprise verticals.
And finally, the Asia Pacific region had a strong quarter with robust exports from Japan.
As part of our future first sustainability strategy, we're very proud to announce a partnership with the center for energy research and technology at the National University of Singapore to explore sustainable technologies and alternate fuel sources for data center infrastructure.
And now looking at our capital structure, please refer to slide eight.
Our balance sheet increased slightly despite the weaker non U S operating currencies to $29 $3 billion, including an unrestricted cash balance of $2 5 billion.
Our cash balance increased quarter over quarter due to strong operating cash flow and about $800 million of ATM activity settled in the quarter.
As stated previously we will continue to take a balanced and opportunistic approach to accessing the capital markets when conditions are favorable.
On the debt side of the house on the heels of the rating upgrades from both Fitch and Moody's last quarter S&P increased our debt tolerance for the company by one leverage turn, thereby increasing the level of flexibility from our balance sheet.
We're pleased and appreciative of the rating improvements over the past quarters and look forward to our continued dialogue with our rating agencies.
Turning to slide nine for the quarter capital expenditures were approximately $553 million, including a recurring capex of $50 million and.
In the quarter, we opened six retail projects and assemble Madrid, Manchester, Melbourne, Paris and Toronto.
To X scale projects in Frankfurt and London, We also purchased land for development in Monterrey, Mexico.
Our capital investments delivered strong returns as shown on slide 10.
Our 168 stabilized assets increased recurring revenues by 7% year over year on a constant currency basis.
These stabilized assets are now collectively 88% utilized and generate a 29% cash on cash return on the gross PP&E invested.
And finally, please refer to slides 11 through 15 for our updated summary of 2022 guidance and bridges, including the anticipated financial results from the <unk> purchase.
For the full year 2022 due to strong momentum.
But we're seeing the organic business, we now expect our revenues to increase between 10 and 11% on a normalized and constant currency basis over the prior year relative to our prior guidance, we're increasing our underlying revenues by $15 million due to strong recurring revenue performance.
We expect 2022 underlying adjusted EBITDA increased by $46 million compared to our prior guidance due to strong revenue performance and lower operating spend.
We now expect to incur $20 million of integration costs in 2022.
We're raising our underlying 2022, a if a full by $52 million to grow between 10, and 11% on a normalized and constant currency basis due to strong operating performance a lower net interest expense and as a result, our <unk> per share is now expected to grow between nine and 10% on a normalized and constant currency basis.
Above the top end of our prior guidance, including the impact from our Q3 ATM activity.
Finally, 2022 Capex is now expected to range between two one and $2 3 billion, including about $190 million of recurring capex and about $135 million of on balance sheet X scale spend down slightly due to timing of expansion spend.
So let me stop here I'm going to turn the call back to Charles Thanks.
Thanks Keith.
Our results this quarter continue to reflect strong execution by our global team and highlight the unique position that equinix enjoys in facilitating digital transformation.
As we continue to deliver exceptional business results I want to also highlight our significant progress in advancing hartford's future first sustainability commitments. This quarter. In addition to our continued investments and commitments around environmental sustainability. We're very pleased to have launched the Equinix Foundation and employee driven charitable organization working to advance.
Digital inclusion through philanthropic Grantmaking and strategic partnerships to foundation reflects our ongoing commitment to social sustainability and we're excited about the work we can do to build a better more inclusive more sustainable world harnessing and amplifying the passion of our people to help close the digital divide in our communities across the globe.
As we advance Q4 in position for 2023, our highly differentiated position continues to drive strong momentum robust customer demand and a deep high quality pipeline, we are delivering sustained growth better the top line and <unk> <unk> per share, while maintaining our clear focus on driving operating leverage across our business.
We continue to effectively exercise multiple growth levers, including expanded market reach enhancement of our product portfolio accelerated new logo capture through our multichannel go to market engine pricing adjustments to reflect our exceptional value and a commitment to a bold innovation and sustainability agenda, all of which demonstrates the resilience of platts.
Norm Equinix and highlights our ability to deliver distinct and durable value to our customers and our shareholders. So let me stop there and open it up for questions.
Thank you we will now begin the question and answer session if you'd like to ask a question. Please press star one.
Paul and record your name clearly your names required reduce your question if you need to withdraw your question Press Star two.
To ask a question. Please press star one ill take a few months further questions to come through please standby.
Our first question is from Jon Atkin from RBC capital markets Go ahead. Your line is open.
Thanks got two questions on energy one is piece if you could maybe.
Refresh us on what portion of cash Opex. This quarter was for energy and then on the P. Is that you are pushing through starting next year can you talk a little bit about.
To what extent it applies to customers that are in the middle of their contracts versus renewals and new contracts.
So John I'll take the first one that I think I'll pass the second one a charles.
It's roughly 13% again it moves around quarter on quarter and it's also dependent on in some cases the currency movements.
For this year, you should see the range anywhere from 12% to 13%.
On a per revenue dollar basis.
Yeah and on the.
<unk> John .
Look our the way our contracts rates were not impaired in any way from putting those through.
During the course of the contract. So they are not limited to when you take renewals. So just sort of back up and give you a view on you know we talked a little bit about it in the script, but I think that will give you details more details and when we do the 23 guy, but I think thanks to some really incredible work by our teams we feel really good about where we are on that.
On the P I.
And I'm I'm power generally.
No I think we're we're about 90% plus or no more than well over 90% hedged in our deregulated markets and they're gonna be topping off those positions.
Coming weeks and months.
And we've already communicated and those planned increases to customers and are generally able as Keith mentioned in his script able to provide them with cost points that are meaningfully advantageous relative to current spot.
In those markets so.
I think we're going to we're in a really good position. There I think we're going to be able to pass us you're obviously theyre not yet pass through because we're still operating at our hedged rates from this year, but as they adjust we've given them the advanced visibility to what they expect to see and I think broadly speaking.
They knew it was coming and I think in a lot of cases. They are pleased to see that it's not quite as bad as they had feared it might be.
And if I could ask a little bit about cloud, we saw slowing growth at two of the three largest CSP.
Not just for Saturday, but even in terms of like incremental revenue dollars and I wondered what does it mean for your business in terms of maybe affecting the pace of cloud repatriation and more broadly as you look at your cabinet adds how much of that would you attribute to things like cloud repatriation versus versus new logos versus just existing customers upsizing, maybe talk a little bit about.
Got those moving parts.
Yeah, John I didn't quite.
Repatriation does happen, but I think it's probably getting more airtime than maybe it's a it really is appropriate. It's I mean I think we're still very early in the in the movement of clouds from traditional IC architectures into cloud.
And that's what we continue to see and well I recognize we did see some slowdown from the cloud providers.
One that was impacted significantly by currency and two I think a lot of it as well.
As I look through through those reports in her there was sort of reductions in usage base volume on what our likely sort of non mission critical workloads and so I think that is.
As I talked to Cio's, there their commitment to moving to cloud based architectures their commitment to moving significant percentages of their overall workloads to public cloud and then integrating that with private cloud infrastructure that needs to be cloud proximate is still full tilt and.
And in fact, I talk to a CIO that said that they had a bit of this a fortune 200 type C. I O, but data application estate that was 4000 plus applications and when I asked them. How many of those have been migrated to cloud. It was it was in the range of 200.
And so a long way to go and so I you know you look at the just the quantum of growth that's happening in the cloud in any given quarter there, adding three just the top five providers are adding $3 billion to $4 billion of incremental recurring revenue.
And so I think there's still a long way to go and I think that we continue to be particularly relevant as people think about the way things used to work in hygiene architectures. They all live nicely together in Iraq next to each other in an enterprise data center well as soon as you start migrating workloads to the cloud.
And then trying to interface them with your data and applications that youre still managing on your own things don't work quite the same and that's what we're seeing in our pipeline people are saying, Hey, I've got to have my hybrid private cloud proximate. It's gotta be distributed applications all have to work together and so I think we're still going to continue to see vigorous.
Demand for this migration to hybrid and multi cloud for the foreseeable future.
Our next question from Simon Flannery from Morgan Stanley Go ahead. Your line is open.
Great. Thank you very much good evening, just a couple if I could just continuing on its great to hear that the strong demand trends are you seeing any any softness anywhere any kind of whether it's Europe or whatever one of your competitors talked about small enterprise some pressure at the margin there and it seems like there's certainly some caution around the.
Uncertain macro environment and if you put through some of these power price increases does that change some of the profitability dynamics of some of these companies and then just on margin. Some really good performance I saw in particularly in the Americas. This quarter, maybe you can update us on the 50% target on the house, Singapore is playing out as we exit 2020.
Thanks.
Sure there's a lot there Simon.
But let me let me try to cover it and if I forget any of it is just.
Bring it back up but.
Any softness.
We are not blind to sort of the challenging macro conditions in which we're all operating that's for sure.
But I would say that our bookings trajectory of our sales execution, our pipeline quality of pipeline volume of pipeline all continue to be very solid and.
And that is across regions and it is across sectors.
And I think that the phenomenon that I was just describing in answer to John's question as an exceptionally horizontal one people just moving to these new cloud first hybrid it architectures and I think seeing the relevance of equinix in that and so are there.
Customer segments or types that are having more challenge that that we couldn't get that question a lot I do think that we are less exposed to either startups are small company. That's typically not our sweet spot of our business, we're really more on enterprise level, both service provider and enterprise architectures.
How people are rethinking those globally and so we continue to see a strong level of demand and so you know I think we're less exposed to that perhaps then maybe public cloud providers and others that on small small our startup type businesses that might be impacted.
In terms of power and Europe , generally I would say our European business is performing very well and yes, we do expect that power is going to and again it hasn't yet impacted the we haven't rolled those through.
A couple of comments on that one our history is that we've we've rolled pricing through in interconnection. In fact, if you look at the non financial metrics, we've increased MMR per cab in Europe 100 Bucks over the last four quarters, and that's driven by interconnection pricing, that's driven by mix of business et cetera.
But the European business is performing very well I do think it will it will create a pinch for people that theyre going to have to pay for more for power, but just to put that into context, we think that a lot of our customers are going to see monthly increases that are really modest dependent on how concentrated they are in highly.
<unk> markets, but.
But we think that even in even in worst cases, where people are in a high impact market.
Might be impacted by you know call it 15% to 20% of their of their monthly Bill and so for most people. We don't believe that is something that will impact their overall commitment to their digital transformation.
But it does create.
And we think so we think that we're going to be able to continue to sustain the demand levels that we're seeing.
And then the last piece on on margin.
Again.
Kind of what we would expect we're actually slightly ahead in Q3.
Where our expectations would have been and.
Singapore is actually slightly better than what we expected for the for the full year, but thankfully that's sort of coming to an end. This is the last quarter, where we will see that I think we'll be able to now make the adjustments that we needed to make in terms of passing through the appropriate price increases.
In full.
In the markets impacted <unk>.
Beginning in 2023 as I said, I think we're going to be able to do that in a way that customers. Even though they are certainly not going to applaud those price increases I think as they look at it you know in a lot of those markets theyre feeling it as consumers and they're feeling out at a very acute level.
And I think you know I think they're going to realize they are starting to realize what I think the benefits of our hedging programs are in terms of dampening that volatility for them.
Great. So let me just add a couple other quick points if I may just.
In addition to what Charles said first and foremost the objective to get to 50% margin targets.
Sort of Charles alluded to we're doing better than we anticipated in the Americas Singapore's.
Better than anticipated and overall, we're running the business.
With a great deal of discipline, and I say that lets say that with emphasis.
And so number one we are seeing margin a margin profile, that's better than you might have otherwise anticipated too when you sort of look into the fourth quarter, we're making some discretionary decisions to accelerate cost into the fourth quarter.
Does that.
We continue to drive the business with great efficiency.
As it relates to the 50% EBITDA margin target.
I've said this a number of the number of non deal Roadshows and one on one discussions with investors, we're not shifting our emphasis to 50% EBITDA.
We believe that we can get there in fact, the performance of the business post the analyst day, we're actually doing better than we thought than we anticipated at that point in time, but you've got a very volatile and fractious market and so we got a deal with the consequences there, but if you look at it from a value on a per share basis were as good if not better than we told you we're going to.
And so I think that's really important and then the last thing I just want to leave you with is to sort of an adjunct to what again, what Charles said the whole dialogue around small customers. We part of the reason that we disclose.
Our prepared remarks, the amount of transactions. We did is to give you a sense of just the volume of activity and so we did 4200 transactions again with 3000 customers.
As we said last quarter, our pipeline is as strong as it has ever been and in fact I said it was healthy this quarter is actually where our pipeline is bigger this quarter than it was last quarter and so we're really optimistic about the business and where we position ourselves and we can continue to drive value into the overall equation and again with our long term focus we want to drive.
And to the Investor and we're very much focused on <unk> per share.
Great. Thank you.
Our next question is from Michael Rollins from Citi Go ahead. Your line is open.
Hi, good afternoon.
First.
On the stabilized constant currency revenue growth of 7% year over year can you unpack that in terms of what was driving the strength between literally utilization just overall pricing interconnection et cetera.
And then second topic is on capital allocation and just curious in the wake of higher rates, if you're considering any changes to the pace and breadth of the development strategy and as the <unk>.
S. S. So dollars are approaching the combination of nonrecurring capex and cash dividends.
You know what does Equinix wanted to do with the balance sheet flexibility that you were describing earlier in the call.
Yeah, I'll, let I'll.
I'll, let Mike I'll, let Keith take the second part of that Mike and then.
Let me talk a little bit about stabilized assets and he can talk to you a little bit more on the balance sheet side and rates et cetera, but the.
Yeah. It was a tremendous quarter, obviously on stabilized assets, 7% is particularly strong.
There is still a little bit of juice in there on the Singapore piece, but.
But it was but.
It's definitely even without that significantly above kind of where we've been trending and I think it's kind of a combination of all those factors that youre seeing pricing.
As interconnection utilization power density all of those things probably are really playing in so and I think youre starting to now see the beginnings of seeing price actions now youre not seeing the PPI is the power price increases because those will row roll through in 'twenty, three but as we've talked about we are we've already adjusted.
Did list pricing on a number of our products youre starting to see that roll through in renewals.
And youre seeing it.
On on other products around interconnection et cetera, and so so I think youre starting to see that as you saw broadly speaking utilization.
It's trending up nicely in fact, if you look over the last four quarters.
<unk> and APAC are both up 5% and so Europe is down about 2%, but a lot of capacity added in that region right and so.
So I think we're continuing to get more out of the assets that we've deployed continuing to feel very good about the pricing environment.
Continuing to dense people driving good commercial decisions.
And I think thats really showing up in the stabilized assets. We also had a couple of retired assets in there that probably also further help and then the last piece I would say is churn continue to trend favorably, we haven't talked a lot about that but boy.
I think we've always said look the right to get the right customer right application right asset that's the way to drive turned down and I think we've seen that effect over the last many quarters.
And continue to feel really good about that we had obviously elevated levels of churn in the Verizon assets, which I think was really impacting our stabilized asset performance for a period of time and have now really come through the backend of that really nicely in <unk> and I think feel really good about.
I candidly I'm like I'm not sure that that current level is a little above the range that we've typically guided you guys do but we will certainly take it and are pleased with the performance.
Michael just go into the maybe just a couple of things one of the things that you probably noted in our same store reporting in the earnings deck. As you can see that a lot of the value on a stabilized basis is coming from Colocation and interconnection in fact interconnection on a stabilized basis is up 10% year over year on a constant currency basis, whereas cool occasions.
Seven it's been diluted a little bit by the other the other services, which is only up five and then nonrecurring is down quarter over quarter largely because of the.
The one off nonrecurring fees that we get from the X scale business, but overall youre seeing just strong I was.
Just to validate what all that Charles said, it's just you can see it in that slide just perfectly.
As it relates to.
The balance sheet.
If you wouldn't mind.
I'd like you to reframe. The question just one last time I want to make sure we get it right in.
And respond to so could you just ask that question again on on where we are vis vis our capital allocation.
Yeah. Thanks.
Two parts first if you're considering any changes to the pace and breadth of your development strategy in the wake of higher rates.
Then as the <unk> dollars or approaching the combination of the nonrecurring capex and cash dividends.
What do you want to do with the flexibility on the balance sheet that you were describing earlier in the call.
Yep.
Yeah. So thank you on that.
First of all for most I think.
We see ourselves as pretty darn good capital allocators.
Obviously, we want to invest in the highest returning investment we can make is in the organic business and we're going to continue to focus on that.
No surprise this quarter, we have 46 projects currently underway across 31 markets in 21 countries and so we remain very active and we want to continue to grow.
And expand the business.
Horizontally, while at the same time investing quite openly on the vertical side of <unk>.
<unk>, which is the digital services, so youre going to see a combination of the two and as we look into 2023, we'll give you more guidance on that but suffice it to say that there is an appetite to continue to invest in the business and and we really get to enjoy the cash flows we generated in the business and the low payout ratio basically self fund that for all intents and perk.
So I feel extremely good about that as you look forward then.
We are carrying a little bit excess cash right now we saw an opportunity in.
In the market in the quarter pardon me too.
To pull down a little bit of our ATM.
And so so we settled some stuff that we did in Q2.
This quarter and then we also we.
We sold some in the quarter in and of itself at 690, I think the average was $697 a share.
So we chose to do that because we knew we're going into a period of volatility and we wanted to make sure that we could fully effect the use of our cash flow and invest in the long term the long term growth of business, which is really on the expansion capital. While also investing in digital services. So that's what you're going to continue to hear us talk about.
And then we're also being very judicious about I've spoken quite openly about we want to raise more debt even in the current environment, but the question is where do we source that that Permian can we take advantage of different markets around the world based on prevailing cost to borrow.
And so you'll you'll hear more about that but suffice it to say I think youll see more more debt activity over the coming coming quarters, then than otherwise you would see with ATM.
And then just as it relates to investment in capital.
Yes, I know the cost of capital is moving up but we.
The benefit of our model is and for all the reasons, you've just heard Charles speak about <unk>.
We get a really good return on our assets are stabilized assets or getting 29% on them.
And on the gross PP&E invested so anytime we increment that knowing that we're keeping our costs.
Well in check here.
Youre going to get a nice incremental return and so.
From our perspective, we're not arbitrage over our cost of capital, we're driving real value into the business for our customers.
And for the future and as a result, we want to continue to make that investment and we'll be very wise about what we raised in the form of capital to fund our growth knowing that you've got a dividend that's growing and you've got a business that's growing and as a result, we've got to fund not only the business and also the capital redeployment back to the back to the Investor. So I think it's a great question.
Asking we spent a lot of energy on it I've got a fantastic treasury team that work underneath us and.
We're looking at all ways to source are a source of our capital and fund fund.
<unk> value on a per share basis to the business and so stay tuned.
Guys are pushing a lot of the buttons here so.
I want to offer an anecdote that I think is really powerful and that is kind of when I'm out talking to customers and with sales teams, it's pretty amazing because what I hear from sales teams their number one concern not enough capacity there like we're worried we're going to run out of capacity, we need to or you're building more capacity.
On hearing Hey, what are you going to do to my quoted next year, we know the answer to that question.
I'm not hearing a challenging passing through these power increases is challenging what I'm hearing is we need more capacity, we need to continue to invest in the business.
When are we going to get more coverage on digital services I want to cover more markets, we need to respond to our customers' needs and so you know I think it's just a reflection.
We're pushing utilization up.
<unk>.
Create some pinch points and so.
From our perspective as we look at the how the business is performing continue to invest in organic growth prudently and appropriately and always in with it.
Keen eye on the macro environment is still best and highest and best use for us.
Thanks.
Our next question is from David Barden from Bank of America Go ahead. Your line is open.
Hi, Good afternoon, everyone. This is Alex on for Dave.
To start with maybe just on those comments that you just made in terms of building out more capacity are you seeing any issues just similar to what's going on in northern Virginia, and other areas of the world of power transmission issues or power procurement issues.
Yes, it's a great question.
The answer is yes, I mean, I think youre seeing that.
Markets around the world are thinking about how to allocate energy. They are also thinking about the sustainability impacts of data centers and they're in their markets and how they want to sort of how they want to think about providing energy and permitting to support those et cetera. So obviously, that's a key area of focus for us I do think that.
Overall, we're in a very good position I think that not only do we have really well established relationships across those markets. We have a level of commitment and I think sophistication on the sustainability side that people I think feel comfortable that we are going to make the commitments necessary to support digital transformation.
Their markets and digital growth in their markets in a in a way that is responsible and so I think that's going to continue to be a differentiation for us.
But we and the other thing is is that our market or our business and our business model are very different when it comes to power they need to support and for example, a hyperscale facility, that's going to support one or two customers and allocating that power entirely to those is very different than the.
The power situation, we find ourselves in we have a much greater level of flexibility in terms of looking at how we are using power moving in power around overtime and so I think there is some additional flexibility for us there, but the short answer is yes that is a dynamic that I think is not unique to northern Virginia, we feel very good about where we are in that market.
The way I'm, just in terms of our position there but.
But it is something that I think is going to be.
On People's Minds, and I think we're on the capacity question, we're even seeing that churn people, who were planning churn are now unplanned yet.
And because I think they feel like they.
And ensuring that they have capacity and sometimes under existing terms or something.
Close to those existing terms is a strategic decision for them and I think we're we're continuing to see favorability in churn for those reasons.
Perfect. Thank you and then maybe if I could just ask one more just you completed in town and then you announced a smaller deal in Latin America could you just kind of walk us through the Latin America strategy, and where you kind of see that that business going.
Sure.
Generally I would say that we feel like that.
The Chile addition, with Intel was our best strategic one that sort of fills out the.
Latam portfolio in a really powerful way.
And so I think we feel good about the level of coverage that we have there that's not to say there wouldn't be potentially incremental opportunities there, but our businesses in Brazil, our business, Brazil continues to thrive obviously.
Current market currency wise, it can be challenging and has been for years, but the growth. There has been really strong and our our differentiated position in that market continues to be very good. So I think that continue to invest in that business. We were happy with the early returns on our business in Mexico.
As Keith said, we've made some investments there for land and continue to see that as a.
With additional market opportunity there excited about the early returns and that's one of the thing we see on these businesses, we underwrite them to a certain level of performance and almost always we're seeing that the power of bringing those assets into our channel our channel broadly speaking mean, our direct teams and our partners and giving them access to those.
We are where we're really typically hitting bookings velocities that are much better than what we underwrote to.
And so so we feel good about that but yeah. I think we feel good about Latam I think there is potentially incremental opportunity, but if I were to prioritize where I think we were more likely to make incremental M&A activity.
B and probably maybe some other parts of the world and we've talked about those in a variety of places South East Asia. I think there is continuing to reshape a bit and there is a market that.
Organically and potentially through M&A, we would find attractive India is a market that I think we will continue to invest in organically and potentially inorganically and obviously, we've got a starting point in Africa.
Excited about.
But there's more more potentially to do there so sorry.
So I think that's it.
Kind of waned a little beyond your question, there, but that's a little bit of a frame on the M&A world.
That's great. Thanks, so much Charles.
Next question from Ari Klein from BMO capital markets go ahead. Your line is open.
Thank you maybe following up on churn.
Low for a while here as we move into potentially tougher macro and your app customers.
So are you know kind of the full brunt of the price increases.
That's something that you would expect it to pick up.
No.
So I mean.
We really don't see that I think that we've seen one I think the history of our business and this is pretty empirically validated is that our demand tends to be pretty inelastic and so and I think that's likely to be particularly true relative to the power price increases which I.
I believe and hope will be at least to some degree transitory and whether or not we get back to energy level pricing levels that were we were at before I don't know, but I think that I don't we don't currently see that as a driver for people to say, Oh, well, we're going to churn out of our.
Out of our capacity so I think it increases the level of focus that people are have an efficient utilization of the capacity they have deployed.
And I think you see that same dynamic a little bit in cloud right, which is people are saying hey, we got to tighten up on our cloud bills. We got a we're going to reduce usage on non mission critical workloads and I think youre seeing some of that impact in that business. Our business is much more on fixed contracts.
We're starting to we are a little bit of usage based revenue in some of our digital services, but I.
I don't I don't foresee us ticking up in churn.
In any meaningful way as a result of.
Sort of the pricing adjustments I think that we're going to continue to see people very committed to their digital transformation I think like that will be an element of inflationary forces that our customers are going to deal with much like we and every other company is dealing with out there.
But I think it boils down to kind of how you.
What priorities you place and we really feel like digital transformation and the move to hybrid and multi cloud is as we said in the script. Both a both a revenue maximizing driver and a and a cost driver in many cases in terms of doing more with less so we feel like that.
A man profile is going to continue to be strong.
And again, our or our ability to forecast churn has been very very good and so we're not you know we're not going into that blind. We we continue to have confidence there, but well we'll have to continue to monitor it very very closely and see how the market responds, but I think our history and in our empirical data would indicate that we have a market that is.
Pretty inelastic from a demand perspective.
Thanks, and then Keith I think you mentioned some of the timing related to some spending during the quarter.
Looking at Q4 the margin.
For the quarter or towards the lower than they've been in a long time that the implied margin.
How should we think about the spending in the fourth quarter and how that may be carried into 2023.
Well, yes, as I said in the prepared remarks, there is an element of discretionary spend that we accelerated into the quarter and think of that in the $20 million to $30 million range and then you've got a pretty large range in <unk>.
And accordingly.
So so.
I would say like.
Look at the underlying performance, you've got some seasonal costs to that.
Take place in the fourth quarter that we absorb but overall the business continues to perform.
Other than we anticipated the margin profile of the cash is generally in the businesses is stronger than we than we are and we are planning and as a result, we use that as an opportunity to accelerate costs and put us in a pretty good spot as we as we start to think about 2023, Yeah. Just give me a little more transparency on what some of those are we're pulling forward some R&M.
Pulling forward.
Finishing out some projects that we are focused on both on the go to market side and on.
On the product side.
<unk>.
You know to really give us that the net momentum going into next year, we gave a little bit more what little lighter birth to the teams on TNT in Q4.
Because we really continue to believe that getting our teams reconnected.
Both to our customers and to each other is important.
And I think we're really seeing the dividends of that and so but we definitely have not lost the plot in terms of our focus on operating leverage.
In fact, if you look at our SG&A line, it's flat quarter to quarter and that's in the face of increasing investment in sales and marketing and so that implies that were.
Started tightening down on G&A.
And even though we're adding head count in very targeted areas to support a very healthy organic performance of our business. We're also really tightening down in areas of the business and recognizing that we continue have to continue to have a focus on automation and simplification and efficiency and we got to get that get to that.
G&A leverage that we need in the business over time so.
We're trying to make good balanced decisions on that front and again, we will give you more more perspective I cover what that means but feeling very good about the trajectory of the business as we exit.
Towards the end of the year.
Okay. Thanks for the color.
Next question from Sami Badri from Credit Suisse Go ahead. Your line is open.
Thank you.
Keith earlier, you said that you have been having conversations with your customers regarding those.
And you said that you have been sharing with them. Some ranges I was hoping you could kind of share with us what those ranges actually are just so we have an idea of magnitude when we enter 2023.
Then I think there was a question about <unk>.
General activity and trends and I apologize. If this is a duplicative question, but the tech sector is reporting some elongated lead times in some sales cycles extending it.
To a certain degree there are even it budgets or acquire board level approvals, which are just slowing some things down I was hoping you could tell us if that those are the things that youre seeing or not at this stage.
And then I have one follow up.
Okay.
Let me maybe just start with.
With the ranges.
First and foremost we wanted to have.
Our go to market engine.
Facing teams wanted to have some dialogue with customers on.
And sort of power power increases so the first of all he was really everybody seeing what's going on in the broader market.
Particularly in Europe , and as a result, making sure that you're you're sort of advising the customers that theres going to be affect the prior increase at some point. The second volume was effectively look depending on where you are.
One more very very different than other markets. Some are regulated somewhere unregulated. This is the sort of the range that you should expect is both Charles and I have mentioned, we've got a sophisticated hedging program.
We basically.
Solidified what we think is a good portion of the exposure for next year.
And so we have specific information on that and so we give them a range of what what that could be and again, it's market specific as volume specific is application specific again customers theres, good theres going to be a wide range for these customers, depending on where they operate and the third Vale will be in the not too distant future here is your.
Vic increase.
And so part of it is just making sure that the customer is fully understood that we're communicating with them and we got it with them and we give them enough time to understand what was going to happen, particularly if they.
As they start to think of other 2020, sorry, 2023 planning cycle and so that was that's the first part to give you something specific about what but I could tell you in some markets. If you look at spot you are talking about multiples of increase.
In the U K market National where we are as a company we've done a very good job of buying forward and making sure. We have a good position with and I think our customers. As we said, we think we'll be in a better spot relative to our.
Competition, and we will be certainly well below what I think prevailing market rates are so that's the positive.
That is that as a European discussion as you look at Asia and in Americas, It's a different dialogue you've got a much more structured increase in and overall I feel very good about that I think one of the things that you should walk away, though is understanding that the company is.
Is almost wholly hedged for next year and certainly Europe is almost is even more hedged than broader company and so that's that's the one the one thing I think is really really worth noting here because last year, we had some exposure to Singapore we.
Feel much better where we are going into 'twenty three on Singapore.
As we set the Mark we would come back to the market and the market would come to us and it all indications is the market is coming to us and as a result, we will pass through those incremental costs as well.
So hopefully that helps you a little bit, but I can't give you a specific ranges.
As market and customer specific we will get it I mean, obviously, we'll get more.
As those tighten up and as we get go onto the call in February we will give you a lot more transparency there.
I mean, what's the second question I think it was going to go to Charles and that way. It was yeah. It was around the general trends in extended cycles and are we seeing tighter budgets and those kind of things like as I said, what we're seeing is generally a substantial commitment to the digital transformation agenda and.
That doesn't mean people.
Aren't seeing.
The need to tighten their belt on it.
In other ways, but typically we see that they are they are not they are trying very hard not to sort of distract their agenda in terms of the move to hybrid mark to multi cloud as the architecture of choice and I was just reading something from Gartner. The other day in terms of just looking at you know how important is is a particular it.
Project to your sort of digital agenda, and what is it going to do to impact your your competitiveness to drive topline growth to say no to save money et cetera.
We continue to see a vigorous commitment to those kinds of things and so.
And we have generally and keep talking about this both in terms of our cycle sales cycle and our backlog have not seen extensions of either of those things and so.
Sales execution has continued to be.
Very very good pipeline continues to be strong pipeline.
Execution and.
Conversion continues to be strong and so.
We're we're not saying it doesn't exist although were but we would what we would say is that the demand profile and how it's translating for us in bookings and pipeline is very very good and we're we're continuing to invest in the business accordingly.
Got it. Thank you for the color on both of those but my last question is more on bare metal and you mentioned, how you have a new SaaS customer coming on using the service and you also have a health care.
Enterprise or a customer using a service in one of your private data center peers recently introduced a metal service and product. So I kind of wanted to just understand what's the vision here for Equinix and the metal solution. Overall like are you guys trying to.
So this two to three times is going to become a much more integrated.
Or interconnected piece to everything you do and just want to understand what the kind of pipeline or the roadmap is there.
Sure well, yeah definitely I think can be two to three times and more than that other than its current size for sure I think it can be so either we definitely believe it's a meaningful business going forward.
For Us I also think we want to see it be more fully integrated in fact, I think that as feedback we're getting from our customers is we love your individual digital services, but they don't work as effectively as an integrated platform as we would like and so.
Got.
Who <unk>, who joined US as is sort of out there talking to customers hearing what's on their mind that has been a topic.
We're really continuing to align our our product and development agenda to ensure that we're addressing the needs of the customers have and so we do believe that an integrated platform of yeah. If you look at network edge fabric.
And metal, we think thats, a compelling combination of offerings for customers as they look to implement.
Digital transfer the transformation strategy strategies in hybrid and multi cloud and so.
But I think it's important that we really continue to view that as you know.
Giving them the right sort of portfolio of services to meet their needs. We think that actually public cloud will be a great home for a significant portion of their workloads.
We definitely see sometimes repatriation back to either a colo based solution or a metal type based solution that allows sort of different level of economic scaling and utilization is something that happens, but we are where.
We want to respond to the needs of the customer and have the right solution for them and so when that is cloud. That's great. You know move the workloads to cloud will give you the connectivity you need to connect it to the data and other applications you need to have it perform well and we will distribute that infrastructure around the world and so I think us being able to go in.
With that trusted advisor status with the customer is really what's driving the business, but we definitely see a big opportunity in metal and I think and with the broader digital services portfolio.
Continued and as we've said in the past it's growing at a multiple of the of the rate of our of the broader business.
Got it thank you.
And our last question today is from Matt Nicolai from Deutsche Bank Go ahead. Your line is open.
Hey, Thanks for taking the question and I'll keep it to one because I know we're over the hour.
You're tracking a 9% to 10%.
Not a problem so I know you're tracking a 9% to 10% constant currency growth on <unk> per share this year, but theres, obviously headwinds from rising interest rates and <unk>.
Higher power costs, and I know you've mentioned you intend to pass those through but the question is really what confidence level do you have in the ability to stay within that 7% to 10% <unk> per share growth range for next year with a number of headwinds out there. Thanks.
Sure.
Clearly we can't.
We're not going to give you any sort of a guide for next year and we'll give you that early I guess I'd sort of reposition the question to simply tell you that if you look at our performance of what we said we would do at analyst day at the Analyst day, and what we've now done.
I think we continue to feel really good about the trajectory of the business topline growth is strong stronger than you know outside of the bounds of what we had said.
I think that and I think that's really on the strength of underlying business momentum.
And go ahead, and we feel really good about the trajectory going into next year from a topline growth standpoint, too I think growth will be a little wind assisted on PPI as next year, but I think we will we will give you clear transparency.
And what that what that is but I think it's going to be on top of really strong underlying momentum in the business.
And we think thats translating in.
<unk> per share sort of growth that we that we think is needed and attractive and then you combine that with a healthy dividend yield.
And we think it's we think it's a great story so.
Just generally I would say we feel good about the momentum topline growth is good we're going to continue to focus on operating leverage.
And we think therefore, we're going to be able to deliver strong performance on an <unk> per share basis, Keith anything to add there.
The only other thing I would say as you know one of the things that again, you talked about normalized constant currency.
And so on a constant currency basis.
We're taking roughly relative to where we started the year by $180 million hit to the topline because of currency movement and about $85 million to the EBITDA line. So it gives you a sense that we're absorbing so the performance of the businesses is doing much better than we had anticipated.
Dissipate and you can see that coming in so many different places, including the Americas business.
I think when the I think the other thing that's going to certainly aid many of US, particularly those are U S domiciled.
As currencies start to move the other direction, which I suspect that they will at some point that Youre also going to get wind at your back from currency. So not only do you have the momentum coming from Port Charles alluded to but I also think that <unk> got youre going to have currency movement.
Where other central banks move their rates up to to the U S or the U S starts to slow down on the rate increase and that is going to be.
The real benefit to the business.
As I said before if you just take would be.
Could you just take our top three currencies.
You take them back to our traditional parity level not a deviation.
There are lower I mean, you're really talking about a significant.
Increase in revenues just from currency movements now of course, we had yourself. So we do a really good job of of currency hedging, but but they wanted to leave you with that thought as well, it's not just about that.
The pure execution to the business.
Operating it but also there's some currency movement that I think is going to benefit us as well.
That's great. Thank you.
Thanks, Matt.
Thank you that concludes our Q3 call. Thank you for joining us.
Okay Goodbye and thank you for participating you may disconnect at this time.