Q2 2023 Equinix Inc Earnings Call

Good afternoon, and welcome to the Equinix second quarter earnings Conference call.

We'll be able to listen only until we open for questions. Also today's conference is being recorded if anyone has any objections. Please disconnect at this time.

I would now like to turn the call over to chip Newcombe Senior director of Investor Relations. Thank you Sir you may begin.

Good afternoon, and welcome to today's conference call before we get started I would like to remind everyone that some of the statements that we will be making today are forward looking in nature and involve risks and uncertainties.

Actual results may vary significantly from those statements and may be affected by the risks we have identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed February 17th 2023, and 10-Q filed may 5th 2023.

Equinix 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's done through an explicit public disclosure.

In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor Relations page at Www Dot Equinix Dot com.

We've made available on the IR page of our website a presentation designed to accompany this discussion along with certain supplemental financial information and other data. We'd also like to remind you that we post important information about equinix on the IR page from time to time and encourage you to check our website regularly for the most current available information.

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 the interest of wrapping this call up in one hour, we'd like to ask these analysts to limit any follow on questions to one at this time I'll turn the call over to Charles.

Thank you chip good afternoon, and welcome to our second quarter earnings call as reflected in our results Equinix continues to enjoy momentum in our business as digital transformation accelerates the pace of innovation and changes the way business is done by 2026 IDC is forecasting that 40% of revenue from <unk> 2000 companies will come.

From digital products services and experiences a dynamic that is reshaping the basis of competition in nearly every industry and making digital an unprecedented force for economic growth.

Secular drivers combined with an accelerating appetite for companies to rapidly integrate AI into their operations are driving increased demand for data center capacity as a broad range of service providers extend and scale their global infrastructure to support the clear enterprise commitment to hybrid and multi cloud as the it architecture of choice.

Equinix remains exceptionally well positioned to respond to this demand environment delivering against the need for infrastructure that is more distributed more cloud connected more sustainable and more ecosystem centric than ever before.

This backdrop, we had a great second quarter with solid gross and net bookings very strong pricing dynamics excellent pipeline conversion and healthy new logo growth. We continue to drive disciplined sales execution at scale with more than 4100 deals in the quarter across more than 3100 customers demonstrating the continued strength of our unmet.

<unk> go to market machine and approach.

Turning to our results as depicted on slide three revenues for Q2 were $2.02 billion up 14% year over year, driven by strong recurring revenue growth power price increases and timing of X scale fees. Adjusted EBITDA was up 7% year over year, and <unk> was again better than our expectations due to strong operating performance.

These growth rates are all on a normalized and constant currency basis.

With customers deployed in all three regions now representing approximately two thirds of our recurring revenues, we continue to invest behind the scale and reach of our data center services portfolio.

We now have 53 major projects underway across 40 metros in 24 countries, including 11 next scale builds that we expect will deliver approximately 90 megawatts of capacity. Once opened this quarter. We added 12, new projects, including New data center builds in Lisbon, Monterey, Mumbai, and our first build in Kuala Lumpur.

For Malaysia.

Over the past several years, we have seen Malaysia emerge as an increasingly important location for digital infrastructure.

By expanding platform Equinix and Johore in Kuala Lumpur, the two most strategic markets in Malaysia, we will enable local and global businesses to leverage our trusted platform to bring together and interconnect the foundational digital infrastructure that will power their success. Additionally.

Additionally, we are delighted with the recently announced results of Singapore's datacenter call for application, where Equinix was one of a very limited set of participants selected to build incremental data center capacity in the critical Singaporean market.

<unk> is honored to have this opportunity to strengthen Singapore, its digital capabilities delivering sustainable infrastructure. It will fuel the economy cultivate critical ecosystems and aligned to Singapore as Green plan.

Multi region customer wins this quarter included Cogent communications, a U S. Multinational ISP using equinix is robust ecosystem and interconnection platform to optimize and enhance their global services and <unk> and <unk>.

Higher a software defined cloud optimized networks for digitally transforming global enterprises as they leverage equinix fabric and other digital services for low latency networks and cloud connectivity.

Our global interconnection franchise continues to thrive with over 456000 total interconnections on our platform.

In Q2 interconnection revenue stepped up 11% year over year on a normalized and constant currency basis, driven by healthy pricing, increasing traffic levels and strong gross adds.

Net interconnection adds remain on the lower side at 4100 due to continued grooming activity and consolidation into higher bandwidth connections, but the number of unique interconnection relationships across our platform continues to expand with over 110000 unique pears, reflecting the exceptional value of our scaled digital ecosystems.

Equinix fabric had another strong quarter with total virtual connections passing 50000 for the first time and the addition of new capabilities to support data intensive workloads like AI and cloud migration.

Beginning in the third quarter fabric customers will be able to provision virtual connections to cloud providers with bandwidth up to 50 gig per second with Google cloud as the first cloud partner to support this capability.

Internet exchange saw strength in our EMEA and APAC markets with peak traffic up 4% quarter over quarter, and 25% year over year to nearly 32 terabits per second.

Key interconnection customer wins this quarter included a gaming and entertainment company expanding interconnection across all three regions to optimize the game experience and pier one a Brazilian telco leveraging platform equinix to establish its digital presence through network hubs, beginning with South America and Miami.

Turning to our <unk> portfolio, we continue to see strong overall demand as cloud adoption remains a driving force in digital transformation.

In Q2, we leased 10 megawatts of capacity in our Osaka, two asset with cumulative X scale leasing now over 200 megawatts globally, and we have a strong funnel of additional X scale opportunities for the back half of the year.

We also won three new native cloud on ramps this quarter in Bogota, Madrid, and Toronto further strengthening our cloud ecosystem, which represents nearly 15% of total interconnection on our platform.

Key enterprise to cloud ecosystem wins, this quarter, including one of the largest auto insurers in the U S. Continuing to expand interconnections on our platform to optimize its networks and multi cloud connectivity and a leading European automotive company deploying at Equinix to support reliable and scale scalable connectivity to the cloud worldwide.

As businesses increasingly look to consume their digital infrastructure and software speed, we're continuing to enhance our platform strategy and expand our partnerships.

In Q2, we announced our expanded partnership with Hewlett Packard Enterprise for pre provisioned HPE Greenlight for private cloud enterprise and HPE Green Lake for private cloud business edition, both available on demand at select Equinix Ibs data centers. These new offerings and seven metros around the globe will help businesses expand our hybrid.

Multi cloud strategies, while providing greater agility control and predictability of workload costs and data.

Additional key digital services wins this quarter included bio <unk> to Brazil, a healthcare company that offers digital solutions for managing health care processes, using fabric and network edge for seamless connections with partners and customers, while reducing complexity and cost and telling them a global mobile network infrastructure provider use.

<unk> platform Equinix to facilitate its marketplace for cellular connectivity among its customers.

Our channel program delivered another strong quarter accounting for 40% of bookings and nearly 60% of new logos. We continued to see growth from partners like Accenture about Dell, Cisco and HPE with wins across a wide range of industry verticals and digital first use cases key wins this quarter included partnering with kindred to support.

A large American health insurance provider with their network and application modernization efforts featuring the deployment of cloud adjacent of restructure and interconnection to the health care ecosystem.

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

And good afternoon, everyone I hope, you're all doing well and enjoying the summer months.

I must say it was great to be back in New York City is spending time with many of you at our June analyst day in person.

You might have guessed we were excited to share with you our views on the expanding market opportunity. Our continued ability to manage through this dynamic and complex global environment, while working to maximize the value of our business.

And perhaps most importantly, our share our thoughts on how we believe we can deliver durable shareholder value.

Now as you can see from our Q2 earnings report, we again delivered solid results, while addressing many of the complexities affecting our business.

We had solid gross and net bookings and positive pricing dynamics reflect the continued momentum we see in the market.

Overall, we continue to focus on driving a higher yield on both our new and existing investments.

On a constant currency basis, including our net positive pricing actions global MMR per cabinet was up $39 quarter over quarter to $21 56 per cabinet.

Now given the tight supply environment across many of our metros and the high utilization levels across our portfolio. We remain very focused on our strategy of putting the right customer with the right application into the right <unk>.

Also we're being particularly selective it back filling space in certain constrained markets.

Kissing on high price points and increased power densities.

As a result, the timing of these deployments may create some fluctuations in our quarterly net cabinets billing metric and outcome. We are actively managing across all three regions.

This is positively offset by strong stabilized asset growth higher MMR per cabinet and better returns on our invested capital.

Turning to some of the macro factors affecting our business. We remain pleased with how the organization has mitigated the impacts of energy price volatility across our business and with our customers.

Concessions industry remained low at our cash collections are in line with historical trends.

As it relates to our foreign operating currencies, we continue to hedge where we where appropriate to dampen the volatility attributed to the actions of many central banks to adjust interest rates.

Also we've made some modest FX adjustments to our 2023 outlook largely attributable to the recent devaluation of the Nigerian naira and the weaker Japanese yen two of the currency that we do not hedge.

Now let me cover the highlights from the quarter note that all comments in this section are on a normalized and constant currency basis.

As depicted on slide four global Q2 revenues were 2.0, $1 8 billion up 14% over the same quarter last year due to strong recurring revenues prior price increases and the timing of egg scale nonrecurring fees.

As we've noted before nonrecurring revenues, particularly those attributable to our <unk> business and certain custom installation works are inherently lumpy.

<unk> was down quarter over quarter as planned.

But.

Given our significant scale pipeline weeks, we expect to see a meaningful step up in <unk> in the second half of the year.

Q2 revenues net of FX hedges included a $3 million FX headwind when compared to our prior guidance rates.

Global Q2, adjusted EBITDA was $901 million or <unk>, 45% of revenues up 7% over the same quarter last year due to strong operating performance, including an $11 million one off software expense related to our Americas managed services business.

And higher variable salaries and benefit costs.

Also Q2 saw certain Amit EMEA energy contracts reset at higher average rates, resulting in increased net utility costs as forecasted.

Q2, adjusted EBITDA net of our FX hedges included a $2 million of FX headwind when compared to our prior guidance rates and $3 million of integration costs.

Global Q2, <unk> was $754 million above our expectation due to strong business performance.

Lower net interest expense Q2, <unk> included a $1 million FX headwind when compared to our prior guidance rates.

Global Q2, <unk> churn was two 3% for the full year, we continue to expect MMR churn to average at the lower half of our two to two 5% quarterly guidance range.

Turning to regional highlights whose full results are covered on slides five through seven.

On a year over year normalizing constant currency basis, EMEA and APAC were our fastest growing regions at 'twenty, one and 16% respectively, although when excluding the impact or the benefit attributed to the power price increases EMEA and APAC region growth rates were eight and 11% respectively. While other while the Americas region grew 7%.

Year over year.

The Americas region had another solid quarter with continued strong pricing trends solid momentum from our channel and public sector teams and healthy exports across the global platform.

We had strong activity in Boston, Chicago, and Culpeper, Metros and the Canadian business.

Our EMEA business delivered a solid quarter with firm pricing continued lower churn and a healthy step up in deal volume.

<unk> was down slightly due to the timing of large NR deals between quarters.

We had strength come from in our Amsterdam, and Dublin, and Frankfurt metals, while booking at substantial space in prior deal in Lagos, Nigeria.

With a large multinational energy companies highlighting the momentum across our platform, including our main one assets.

And finally, the Asia Pacific region had a strong quarter with record net bookings and firm deal pricing as well as strong importance to our Mumbai, Osaka and Singapore markets.

And as evidenced by the number of new expansions, Chennai, Jakarta, Johore, Kuala Lumpur customer interest in expanding their footprints into new Asian markets is high and we're investing behind this demand.

And now looking at our capital structure, please refer to slide eight.

Our balance sheet increased slightly to approximately $31 $6 billion, including an unrestricted cash balance of over $2 3 billion.

As expected our cash balance decreased slightly quarter over quarter due to our investment in growth Capex and a quarterly cash dividend offset by our strong operating cash flows.

Our net leverage remains low at three six times, our annualized adjusted EBITDA.

And as mentioned previously we plan to Opportunistically raise additional debt capital and reduce rate environments, where we currently operate this will create both incremental debt capital to fund our growth have placed a natural hedge into these markets.

Additionally, during the quarter, we executed about $200 million of ATM forward sale transactions, which will be settled in early 2024 to help fund our 2024 growth plans alongside our other sources of capital.

Turning to slide nine for the quarter capital expenditures were $638 million, including a recurring capex of $40 million.

Since our last earnings call, we opened seven retail projects across both the Americas, and EMEA regions and <unk> projects in Frankfurt and Tokyo.

Revenue from owned assets increased to 64% of our of our recurring revenues for the quarter.

We expect this trend to continue with over 85% of our expansion Capex spend on owned a long term ground lease properties, including 100% of our 16 bills in the Americas.

Our capital investments delivered strong returns as shown on slide 10.

Our now 174 stabilized assets increased revenues by 10% year over year on a constant currency basis.

Taking out of the benefit attributed to the prior price increases stabilized assets increased 7% year over year.

Our stabilized assets are clinically, 85% utilized and generate a 27% cash on cash return on the gross PP&E invested.

And finally I'm pleased to repurchase slides 11 through 15 for our updated summary of 2023 guidance and bridges do note all growth rates are on a normalized and constant currency basis.

For the full year 2023, we're maintaining our underlying revenue outlook with expected topline growth of 14% to 15% or 9% to 10% excluding the impact of prior cost pass through to our customers a reflection of our continued strong execution.

We're raising our underlying 2023, adjusted EBITDA guidance by $20 million, primarily due to favorable operating cost and lower integration spend.

And we are raising our underlying <unk> guidance by $28 million to now grow between 11% and 14% compared to the previous year.

<unk> per share is now expected to grow between nine and 11%.

Capex is expected to range between $2, seven and $2 9 billion, including approximately $120 million of Anqing on balance sheet X scale spend which we expect to be reimbursed as we transfer assets into the JV later this year.

Our early next year and about $220 million of recurring Capex spend.

So let me stop here and I'll turn the call back to Charles Thanks, Keith.

In closing we had a strong first half of the year and continue to see a robust demand environment as key secular drivers positively influenced buying behavior, even in the face of a challenging macro climate. The relevance of platform Equinix continues to grow and service provider scale out their global infrastructure in response to growing enterprise demand for hybrid and multi cloud.

<unk> as the architecture of choice and the associated need for hybrid infrastructure to deliver performance agility scalability and sustainability.

In this context, we believe equinix remains uniquely positioned and highly differentiated and will continue to drive disciplined execution of our strategy with a focus on extending our market leadership driving operating leverage and expanding our platform capabilities to fuel sustained growth and delivering superior returns on capital all of which we are confident.

We will translate to distinctive and durable value for our customers and sustained performance for you our investors with a keen focus on <unk> per share as our lighthouse metric. So let me stop there and open it up for questions.

Thank you if you would like to ask a question. Please on mute your phone press star one and record your first and last name slowly and clearly one prompted so let me introduce you to.

To withdraw your request please press star two.

To ask a question or one.

Our first question comes from Ari Klein with BMO capital markets.

Thanks, and good afternoon.

Maybe on the AI front and as it relates to X scale nurse, an exceptionally large leases being done with the vast majority of that was in the U S. We're at scale doesn't have a presence.

Are you thinking about potentially entering the market to capture some of that demand.

Yes, we've talked about this in a few different forums I do think that our our posture has probably evolved a little bit in terms of our thinking around.

Around X scale in the Americas broadly and in the U S. Specifically.

And I think AI is part of that and so it's not the only factor, but I do think we had already been thinking about certain markets, where we believe that what we've seen.

Around the world is that the markets, where we have the full portfolio ex scale retail digital services at scale really perform best tab and you can argue a little bit of whether it's chicken or egg there in terms of what what's driving what but it's what we do see is that when we have the full portfolio, we're able to address.

It's a broader.

Set of customer demands and so I think as we looked at that we do think that there are markets in the U S that we would like to have an ex scale presence.

And so we're I think we're looking at how we would do that.

And potentially through a combination of organic and potentially inorganic pursuits. So I do think that AI is as a part of that but really only apart and I think that.

The continued the continued demand for cloud services and <unk>.

The commitment to cloud cloud adoption I think.

<unk> Z at pace with the enterprise all of that.

Driving really strong pipeline across the world and that does lead us to believe that thinking about how to how to solve for ICL and our air because this is something that is.

On our minds.

Thanks, and then just the Americas and EMEA saw sell cabinet declines that sounds like maybe there was some timing and charm potentially there can you provide some color on.

Some of the moving pieces and maybe give us a sense of the size of the backlog.

Sure Yeah.

I'd start with the backlog question and tell you that backlog continues to be very healthy.

We do see as we've said over the years billable cabs can really be a pretty volatile metric and it can swing meaningfully both due to timing of installs and therefore our backlog.

In particular churn activity.

Undoubtedly we recognize that billable cab has to grow over time to fuel the business, but.

But we do see short term fluctuations in that metric as we really optimize the platform. So if you look at it as you noted we've always encourage people to really look at rolling four quarter averages.

That volatility and if you look at Americans are running about 90% of the rolling four quarter is about 90% of what it's been for the last three years typically.

EMEA is actually it's rolling four quarter average is actually meaningfully ahead of what the three year averages in APAC is lower with.

With three consecutive quarters of really lower cab adds but it's been about a unique dynamic in APAC.

Related to some of the capacity constraints in Asia.

Particularly Singapore, which is why we are so excited to have been able to announce the deal.

The allocation of capacity to Equinix in the Singaporean market. So.

So I think that we're comfortable there there is some.

Some churn activity that I think is in the markets and some some backlog that I think is going to roll through and so I think when we look at that on a rolling four quarter basis, I think we will see those things normalize a bit but let me.

We knew this would be a cabinet issues I want to maybe give you a little more concrete insight into into the available caps. If you look at it specifically on the churn side over the past five quarters, we've had about a 37 deployments of meaningful size churn.

And 85% of that total cap volume coming from those churns are what we would consider favorable churn basically caps that are in constrained markets, where we really welcome the additional capacity and can sell it at a very positive mark to market.

And given that trajectory right now that we're seeing in market on pricing on power density on interconnection.

As we rebuild those cabs at prevailing prices in power densities, we actually expect uplifts on those three.

The 80, 785% of those cabs in the 50% to 70% MLR uplift a range. So that's that's just a reflection of kind of the kinds of actions that we're taking to optimize the platform that have impacts on billable cabs, but really positive impacts in upside in.

In terms of because we look at it and we believe we're going to get millions of dollars of extra MRI Bye bye.

Turning those cabinets over our tens of millions on an annual basis with zero Capex.

And so that's some of the dynamic that youre seeing there.

And I think it'll move around a bit as we identify that now granted there is there's not that many of those out there.

So that's.

That is a dynamic that is impacting has impacted available cabs a bit over the last couple of quarters.

Thanks, I appreciate all the color.

Our next question comes from Michael Rollins with Citi. You May go ahead.

Thanks, and good afternoon, I'm curious if you could unpack a bit more of the stabilized cost.

Currency growth without the power price increases I think would tell you that 7% year over year.

In the quarter and as you look at the opportunity that you were just describing in terms of re leasing opportunities and the current environment.

What's your is there an updated view of what stabilized organic growth should look like for Equinix over the next few years.

Yeah. It's a good question, Mike I do think that we had we had guided to a range.

Lower than certainly that 7% that we're seeing absent the PPE is.

Obviously <unk> are having a major impact there and are reflected in as reported or 10, but I think that's not really a valid valid number.

Because that'll that'll bounce around a little bit and will based on what's happening with power pricing, but I do think that 7%, obviously is a very attractive level.

I do think that we're seeing that pricing right now is very firm.

We are raising we raised prices on our on our underlying colo products and on an interconnection.

Meaningfully and and continue to see strong demand.

<unk> and stable churn and so I think that's going to be a positive factor. The other one that I just mentioned in the previous conversation a little bit about double cabs as power densities.

Howard entities are definitely on the rise.

And so.

Some of the churn activity that I just talked about there. Those 37 deployments were are many of them are in stabilized assets and so youre going to see some uplift there as you turn turn some of that over so.

Long answer or not answer non answer to your question in terms of what is the right range. Obviously I think we have been talking about three to five seven.

<unk> is obviously nicely above that I would certainly hope that you and I do think the current dynamic of pricing in the market as a major driver.

And so we'll just track that and see how it yet, but obviously, we love being above that that guided top band in and if we feel like that's a sustained trajectory will will come back in and look at that.

Okay. If I could just follow up with one other you mentioned the variability of the power side of the equation.

And as you are looking at the pricing environment for power, specifically any updates of how.

Tower pricing in power revenues and those surcharges might look for 2024.

Yeah, I figured that might come up to me so.

What I'd say is that we are obviously, where you are.

<unk>, just a little over halfway through the year.

We've been hedging into our positions and in some markets hedging in at rates that are.

Below where we had been previously and in some cases a bit mature.

Somewhat materially below that obviously theres, yet we still have we have seen.

A portion of our hedging positions yet to fill and there is a lot of year left and so it's impossible I think for us to predict exactly what will happen. So I don't want to be too concrete on this matter, but I would think that there might be some markets. If current course continues where we will hedge into a rate in 'twenty four.

That is below what it was in 'twenty three and.

And as we said to our customers and I think as we've communicated to our customers and they really sort of embraced and understood. The benefits that our hedging program provides and we've told them. If that if that is too would occur. We will have we would pass that through to you as well and so so.

So I think.

How many markets that might occur in not sure.

But as we said when we provided the guide and when we provided.

And at Analyst day, and in other forums, we said look we're.

This sort of assumes nothing relative to power price increase.

Increases or decreases and will adjust that accordingly, or is sort of normalize it out because what's really important from our perspective is the underlying performance of the business and while we do recognize that.

Power price for example has some impact on the optics of margin.

I think it really isn't an underlying.

Fundamental sort of impact on the business and so we will let you know.

A shorter answer would be I do think that we may see some markets in which we would see a PD or a price decrease next year and others that we would see it flat and perhaps others, whether we'd see it go up but still more work to do in terms of hedging into our positions and.

And we will we will keep you updated as we as we know more.

Yeah.

Thank you.

You bet Mike.

Our next question comes from Jon Atkin with RBC you May go ahead.

Yeah, a couple of questions I was curious just about decision timeframes by customers.

Closing rates, our book to Bill that sort of thing and then if.

If you look at stabilized gross margins looks it looks like that was down and I forgot. If you might have mentioned this earlier, but why why.

While the pressure on stabilized gross margins. Thanks.

Yes, I'll, let I'll, let Keith tackle the second one I'll give you the first one and I'll give you a little color on the quarter really solid quarter from a bookings perspective, and I think we saw even though I think there are some customers who continue to be cautious in the overall environment.

What we saw in Q1 as we told you we saw a little more deal slippage from Q1 into Q2, but we had said they close rates were pretty consistent in Q2. We saw the same thing we had actually a very good pipeline conversion and we are we saw sales cycles not not really extended very much in line with our historical norms and we saw.

The push rate from quarter to quarter actually come bounce back to where it had been previously so I would say overall, a very solid quarter.

Do think the dynamic that we described previously which is some customers be it just being cautious about how much capacity they are buying.

Obviously negotiating hard which is a norm for us those kind of dynamics and then in some cases going back and if they have more capacity than they need coming back and having a dialogue with us about whether we want to take some of that back and as I said that that is a bit of the dynamic coloring some of our because we see.

<unk> look very favorable for us to do that we will take advantage of them that some of the some of what's impacting the billable cab numbers. So overall, though I would say I feel good about the quarter from a sales execution standpoint, and from an overall customer sentiment standpoint, and also feel good about where we are in terms of overall funnel for the second half of the year.

Obviously, we have a big hill to climb every quarter in terms of a lot of deals.

4100 deals in a quarter you got to do a lot of selling but our team I think has had a really strong Q2 and in our and based on my customer visits and in time with the sales teams I think there's a lot of optimism for the second half of the year.

And John really relating to the second part of the question.

No surprises you've seen that youll see the sort of the margin.

Erosion across a number of the key metrics, whether it's the total basis, whether it's in Europe or whether whether it's in the stabilized assets primarily related to the reset of the part of the energy contracts.

As you look at the first quarter, we had the we had the benefit if you will.

Of contracts.

Contracts, where they were but as a reset.

That was a there was a meaningful step up in the second quarter and that was felt throughout a number of our core metrics.

And as they look forward most of that is now going to stabilize which is the good part and that was all factored into the pricing sort of structure that we had when we started the year, we anticipated what was what the price points, we're going to be on an average basis and that was the rate of which we pass through to our customers.

And then lastly, I wonder if youre seeing any tailwind in.

In segments of your cross connect business that you would attribute to AI given that you might expect a little bit of an uptick in connectivity requirements. As these training models get spun up are you seeing that at all or not.

We've seen specific instances of interconnect to support AI in fact, we had a pretty significant win this quarter.

EMEA I realm with AI as a service provider that really put their core network nodes with us to really drive interconnection to the multi cloud connectivity and really to support the inference and interconnection and cloud and so we do we did see that I Wouldnt say thats likely shown up.

In fact that Hasnt shown up in our results yet because we just book the deal.

But I think that's indicative of some of what's going on out there is probably a little tough to tell interestingly on interconnect.

John what I would say is that.

We've seen really strong gross add activity.

And it's really in line with our nine quarter averages and so that's I think a really encouraging sign and in fact are interconnected.

To clouds as the yen is up meaningfully year over year. It was moderated a little by the financial ecosystem, which was a little down year over year in terms of gross adds but but we're very stable on the on the <unk> side in terms of gross adds and so and I'm sure that some of that is attributable to.

And then but then on the churn side, we are seeing a little bit more youre also seeing a little more churn activity with cloud ASEAN, but more between between service provider types cloud to cloud cloud to network.

Et cetera, and so and that's I think a lot of grooming a lot of 10 to 100 migration in some M&A activity. So so I gave you a little more there than you were looking for on interconnect, but.

But I do think that.

You're going to see a lot of a lot of data transfer happening.

And I think we're just really well positioned on that in terms of our multi cloud connectivity and the and the sort of more advanced nature of fabric and in terms of being more agile to that demand over time. So we're we're excited about that opportunity and that certainly is coming up a lot out there in the market is as people are talking about and really I think more of it.

More on the service provider side, but but also enterprises really talking about the things they're doing to bring AI into their operations.

Thank you.

And our next question is from Simon Flannery from Morgan Stanley You May go ahead.

Thanks, very much good afternoon.

<unk> talked about the power density requirements a couple of times. So how are you thinking about that strategically are there redesigns of retrofitting, you're thinking about doing to your IP excess in and how does that impact your ex scales that you've built so far in that.

Built from here I know people like matter has been reconsidering data center design.

Yes, Yeah, and we certainly are actively thinking about what are the.

Evolution of our design and ensuring that it's evolving and keeping pace with the market.

In our retail space, we do have.

What's really nice about the retail business is when you serve a very broad range of customers with differing density requirements.

Well to sort of dense up and extract more from the system over time, and we really I think benefited from that when you in that.

Indeed, and more of that Hyperscale or X scale type arena.

It's a little more challenging I think you have to just be because you allocate all of that power out typically to a single customer or maybe two and a facility and it's a little bit different and so I do think average.

Density design densities are going to need to be going up I think that also though your ability to cooling as often as.

It is often the constraint.

And and I think we are actively looking at in fact in our.

Our innovation center in D. C. We're actively looking at and testing liquid cooling as a way to get more out of our current designs as well as implement as a more standard feature in our go forward designs and so so I do think we're going to have it youre going to be seeing design density is going up and your <unk>.

Also going to be seeing us use technologies to augment existing facilities to get more out of them.

Right. Thank you.

Our next caller is Eric <unk> with Wells Fargo You May go ahead.

Thank you I appreciate the question.

One one for Keith I think you mentioned the nonrecurring side of the business would see a material step up in the back half and so maybe you could provide a little more color on that is that more custom install work upscale piece, maybe just the right run rate to think about <unk> as we look out the remainder of the year.

Yes.

You can tell from the guidance that we've delivered and.

No.

Charles has mentioned a few times the recurring aspects of our business is performing exceedingly well the nonrecurring a lot of what you experienced particularly with the step ups in the step downs as it relates to the X scale fees.

We're a wholly aware theres two nonrecurring guys scale fees and there are two recurring ex scale fees as it relates to the nonrecurring is really the sales and marketing fee that has the biggest impact her business.

So as we said the pipeline is very is.

It is very deep there's a there's a lot of opportunity that's right in front of us.

And so we are we anticipate that there will be a very large set of fees that they get earned over the second half of the year right now we're targeting that to be in the fourth quarter.

I guess, there's always a scenario where it could be the third quarter, but it's really a it's a second half.

Anticipated close and so with that that's what we've got in the guidance.

And then on top of that of course, the recurring the recurring.

The recurring part of our business is still youre seeing a nice meaningful step up on that and you just have to go to the midpoint of the guidance.

Over the rest of the year and you can see that that one of those quarters is going to be one of the largest step up you've ever seen in our history.

Part of that of course was driven from the nonrecurring fees.

Great. Thank you and just one follow up.

If I look at churn it ticked up a little bit to two 3% just wanted to confirm is that related to some of the volatility that you're seeing with cabinet build metrics you mentioned earlier in the call. Some of the network grooming on cross connects any any any way to think about.

How we should think about churn going forward still on the lower end of the 2% range or will it be a little more variable based on what you said earlier.

Yeah, and not so much related to the interconnection because that does on a net basis, probably not having it not a huge driver on the churn metric, but it is it is related in part to those deployments that I talked about when I was giving color on the billable cabs.

That related to the churns that we view as favorable again, those 37 deployments to 85% of those calves are going to have mark to markets that are in the 50% to 70% positive range and so so.

So that's.

We will take those take to take those when we can get them and.

And several of those in Singapore, and so we will even even with our additional allocation that's out there in the future.

In terms of build and so it's a precious resource to have capacity in it.

Singaporean market, particularly capacity that has the kind of characteristics that we do in terms of cloud proximity in and sort of network density and our ability to drive the performance et cetera, and so so we will we'll take that capacity and those are those are some of the things that led to us seeing a little bit of an uptick there.

But as we said in the in the prepared remarks.

We're comfortable that we on a on average for the year will land in sort of the lower part of our of our guided range.

And you may see a little little spikes in there like we did a little bit higher this quarter, but but that generally is probably more attributable to favorable type churn activity.

But just maybe just one other thing you know as we look forward and Charles alluded to it earlier on as we think about some of the negotiations we have to get back capacity in some highly constrained assets and markets.

Part of that is Singapore, and so we are working on one thing that that clearly we will we will <unk>. It if we come to an appropriate negotiate a negotiated outcome, but suffice it to say those are the examples of things that cause those small blips, but we're going to we'll call it out for you.

Thank you Bob.

Our next caller is David Barden with Bank of America, You May go ahead.

Hey, guys. Thanks, so much for taking the questions.

I guess Charles.

When you look at the kind of the global landscape and you start extrapolating the.

The dynamic that we started to see in places like Northern Virginia, or Toronto, Mexico City Silicon Valley.

How should we as investors think about the P versus the equation as you know power availability kind of Constricts V.

And how do you think about your ability to.

Ramp the Pea on the price to kind of monetize that scarcity element of the business that you're in thanks.

Yeah, there's a lot in that question.

On the <unk>.

On P times D or Q or whichever you prefer.

You know I think we're.

We're definitely seeing a firm pricing environment and I think that's true of the data capacity industry at large.

But I think that we see we obviously operate in the retail side of the business had a very different price point than the prevailing broader industry, which I think is center is more around our wholesale or hyperscale type price point, but both are on the rise and I think that's going to continue to be the case.

For a for a bit of time here.

In terms of volumes I think volumes are also going to grow.

The question of whether or not power availability would constrain supply is an interesting question I think that.

Yeah.

On our side, we feel very comfortable that our relationships and our visibility to power allocations are going to allow us to continue to execute on the build plan that we have in place.

On the X scale side, I think it's a little more challenging but we are actively working with.

With the folks to make sure that you identified and we're also actively looking at alternatives and for example, things like onsite power generation I think are probably more of a reality in some of those in that market over time. So we've done that in certain markets. In fact, our recent Dublin facility is.

Has onsite power generation with with fuel cells that natural gasoline fuel cells as a primary source of power we actually use.

Bloom energy fuel cells in Silicon Valley, not as a primary source, but as a but I think that you know that's that's I think we're going to continue to see trends in that in that area. So I I don't and I also think that youre going to see that if necessary.

Positioning.

Certain forms of data center capacity, particularly in the Hyperscale area and some of the AI training may adapt to simply go where the power is and so I think that you may see some of that movement as well. So I you know I don't think.

Quantity is going to be.

Material constrained materially constrained in our retail business by power availability, but it is something that I think we as an industry need to continue to grapple with.

Thank you Charles.

As a follow up to that specifically to that point about going to where the power is do you see a shift in your capex.

Occasion into kind of.

Let's just call it more novel land Bank.

Development opportunities.

Obviously, we've seen reports that meta for instance is looking to do a gigawatt in Wisconsin or other places like this that would not tend to be in the traditional.

Geography of data centers.

Yeah short answer is not yet and in fact, obviously the vast majority of our demand in our revenue and our profitability is sourced from sort of our large campus environments around the world and that's where the bulk of our land investment has been.

Youre seeing the rise in our sort of owned asset revenue because we're continuing to build now on owned land and owned facilities around the world and so the bulk of our land bank is really still going towards that that doesn't mean, we necessarily be opposed to that I think that would more likely be X scale type thing, which would probably run through the JV.

But but I do think those are the kinds of things that that we have to be thinking about I do think in terms of more <unk>.

Some of our <unk>, although I think he is going to be more practice more approximate to our campus locations.

There's areas, where we think we can support that but I don't think it's out of the question, we do that but right now the shorter answer that question is no thats not really yet part of our equation.

Got it thank you guys.

David as you probably noted just on the number of projects that we have underway across 40 markets today.

Again, we're in a we're actually spreading our capital are far and wide.

To capture the opportunity in and most of that's where the major centers around the globe and as a result, that's going to be I think more of the emphasis going forward smaller bite sizes that makes sense and particularly those ones that are adjacent or contiguous with your existing facilities and thats just what youre seeing and then you heard us talk a little bit about at least in the prepared remarks.

The new markets that we're sort of entering into and so we'll continue to push our advantages and are in the markets that we have today, but also go to markets, where others are less likely to go when we get to enjoy the sort of the experiences of our retail business versus just focusing on hyperscale.

Thanks, Keith Thanks Charles.

You bet.

Our next caller is Brett Feldman with Goldman Sachs. You May go ahead.

Thanks for taking the question Keith I want to come back to some of the comments you made in your prepared remarks about dealing with some stresses in the supply chain, obviously, you've been grappling with that to some degree for a number of years now I'm just curious how broad based is it is it was it concentrated in the market who sit around certain elements that go into <unk>.

Development and then just to clarify is that distinct too.

Quite literal physical supply chain or what are you embedding within that challenges associated with power procurement and criminals. Thank you.

Yes, Brad.

Just generally speaking.

Given the demand for data centers, and all things are surrounded to that industry and the supply chain to continue to be constricted.

I think even at the analyst day, Charles made a reference to the fact that.

Generator three megawatt generators.

Today has roughly a 120 week timeline. So it gives you a sense of how far out you have to start thinking and planning and so one of the things that we tried to emphasize in the analyst day was we look at all of our.

Look at all of our markets all over the projects.

And determine exactly what we need where and then we have a very sophisticated procurement team that focuses on making sure we work with the larger larger providers.

And get availability either to production capacity for our slot in the production line or available capacity from the inventories and I. Just think that's something that we proved prudently do we manage ourselves in and it's something that can be very important on a look forward basis as well and the upside of that back into the comments Charles made about power demand you have to have the available.

Or do you have the available cooling and making sure that you have the appropriate kit to rollout of the data centers.

And a fair way that you can deliver the capacity to the to the need.

And again a lot of work done on that.

The team the team.

The construction and the design construction procurement sourcing teams are all working together in tandem and we look out five years and in some cases as I said will go out as far as 10 or 15 years like the London market, where we see it broad.

Broad future opportunity as well.

Yes, Brad I'd add that I do think that one thing I Didnt mentioned previously that you all put in there now is that I think one of the really critical factors and ensuring availability for what is inevitably going to be a somewhat constrained resource sunpower.

In places around the world is to bring forward, a really thoughtful approach to sustainability.

So and that was one of the driving forces I believe in terms of our success.

Successfully getting an allocation in Singapore.

And so similarly, I think our ability to work closely with and I've been on the phone with you know utility Ceos.

In the recent past talking about.

These topics in terms of how to put our heads together and try to solve for some of these things and sustainability has to be I think part of that picture and so so I do think that.

That's something we're going to bring to the table, we're going to lean in and really continue our market leading emphasis on sustainability.

Not only for our customers, but in tandem with our partners.

On the utility side as well and so I think those are those are other factors that I think come into play when we really think about the power the power issue.

Thank you.

Our next caller is Matt <unk> with Deutsche Bank You May go ahead.

Hey, guys. Thank you for taking the question.

Just a couple of housekeeping ones for me first if you can comment on what drove the slight increase I think it was about 10 million increase of recurring capex.

And then also I noticed DSO stepped up somewhat modestly I think accounts receivable, it's about a headwind of 100 mill in the quarter. Just wondering if there's anything that you'd call out beyond typical seasonality.

Seasonality thanks.

Yes.

One just recurring Capex is when you look at a year over year Q2 tends to be Q1 is our lowest spend on a on a seasonal basis Q2, we're sort of right on line with where we thought we'd be.

2%.

And that was consistent with last year and then you see over the next two quarters, we step it up even further and so part of it is just timing and making sure. We do we do the work that we need to based on the needs inside the different buildings in Azure and as a result, it will move around by quarter, but.

We can sort of massage at times into different into different quarters, but I would just say nothing nothing meaningfully has caused that it was $19 million step up quarter over quarter, just to put you know to be exact about it as it relates to dsos as I sort of said in the prepared remarks.

Dsos are recovery as its gone up a little bit, but what I would tell you is some of the things that we've been working with their customers. As you can appreciate as I said there is not.

There are certainly some discussion around the prior price increases.

Although we were ahead of what we anticipated there's still some negotiations and as a result.

Dsos it moved up a bit customers.

Some of the customers werent paying the entire bill.

Instead of just disputing what the prior price increase was the whole bill was being held back and some of those payments have since been made in the July timeframe, and so DSO I think youre going to see that step back down to a more traditional level, but overall I would just say you've got liquidity in the business the cash we're generating and the collections.

Get some seasonality we're running ahead of what we anticipated we'd be beat for the third quarter already and.

And as I said I think DSO is an average days delinquent will go down.

Keith just to just to clarify so it was more on the guide for recurring Capex I think that stepped up $10 million relative to the prior guide for the year. So I'm just wondering if there's anything notable to be aware of there.

I'm sorry, I misunderstood. Your question then as it relates no theirs.

There's a little bit more recurring Capex you know when we have capacity and we look across the portfolio and think what can we do based on the capacity as we have in and so sometimes where you work with I'll wrap up Dallas organization said, we have capacity to put a little bit more recurring capex into the year. So what you could do is pull it forward from one year and put it in into into the year prior.

And so that's what you've just seen we have we felt we had a little bit more capacity to invest in some recurring capex. This year is it really it takes away that obligation for next year.

Perfect. Thank you.

And our last question comes from Nick del Deo with Moffett Nathanson you May go ahead.

Alright, Thanks for squeezing me in.

Charles on the interconnection front are you still expecting an improvement in.

It adds as we move through the year like.

<unk> communicated previously or do you think these headwinds are a bit steeper than expected.

Yeah, Great question, Nick I would tell you in all honesty I had expected we would have seen a bit of a moderation back up towards prior levels by now but.

But but there are a lot of a lot of factors in play there I think that the short answer is I do believe we're going to see that because when I look at it. The gross adds continue to be really strong. So overall demand for interconnection is persistent.

As I said, even growing it with the cloud as a V and so so I think that that is the most encouraging to me when we look really unpack what is what is suppressed the net adds it's clearly on the churn side.

And so we've unpack that in great depth as you might imagine.

And it really is almost all from the service provider side in terms of where we're seeing the elevated churn over normal levels and as we unpack. It further you see there is there is definitely 10 to 100 migration and I think that has accelerated a bit more than we expected just because it maybe we should have anticipated. This.

But as yet the cost of electronics goes down it is more broadly available to people who have.

Sufficient number of Interconnects to really justify that and so we did see continued uptick.

And so it seems almost like what Youre seeing is you know.

10 to 100 migration was led by the most sophisticated customers with the most at stake and then you'll see another blip as sort of the broader the broader population begins to sort of integrate that but again, it's not going to be relevant for everybody. You have to have some level of concentration to routes to really make it.

Make it a economically viable proposition so youre seeing 10 to 100.

Partially impacted there then you saw some that you see some M&A activity.

That's true in the CDN space and in the network space.

Those are finite things they worked their way through and then you and then you go back to you know to some sort of a normal and then and then I would say the third area is just a more aggressive inventory management, particularly from the network space, where as you. Many of you know better than we do theres. Some real overall business challenges were.

People are looking to aggressively tightened their belt in any way they can and so I think those dynamics several of those dynamics are finite in nature.

And which is why I kind of fully had expected that we would return.

And I don't know, whether we get all the way back to so our previously guided range, but I think we will see potentially see some lift back there, but independent of all of that even at our current level of ads. We're seeing one we're seeing very strong pricing and that is driving and we're seeing a migration towards higher port speeds on on offerings.

That are priced by speed.

And so that mix is helping and you say as a result, I think youre going to continue to see very healthy revenue growth. So we'll track that it's certainly my my hope that we will see some elevation through the back half of the year, but we'll just have to see how that plays out.

Okay. Okay, great. Thank you and then.

Singapore, obviously, great to see the 20 megawatt allocation you got how long before you can actually bring that online and then about how long will 20 megawatts last year.

Well, we can't we can't speak to that to the actual size of the allocation. So.

Don't doubt there is information out there, but I can't confirm or deny anything relative to the size of the allegation I would simply say that we're very excited about what we've got we're very excited about the opportunity to build incremental capacity in that market.

And we believe it will give us some really solid runway and an incredibly important market and in the meantime, we're continuing to sort of very opportunistically harvest capacity to continue to meet the demands of our customers and to drive very superior returns in that market.

Okay. Thanks Charles.

Thank you everyone. This concludes our Q2 earnings call.

Goodbye.

And this concludes today's conference. Thank you for participating you may disconnect at this time and have a great rest of your day.