Q2 2019 Earnings Call
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I would now like to turn the conference over to Mr., Michael Schafer. Please go ahead.
Thank you Ben Good morning, everyone and welcome to Cyrus One second quarter 2019 earnings call today, I'm joined by Gary what topic, President and CEO and Diane Morefield CFO .
Before we begin I would like to remind you that our second quarter earnings release, along with the second quarter financial tables are available on the Investor Relations section of our website at Cyrus one dot com.
I would also like to remind you that comments made on today's call and some of the responses to your questions deal with forward looking statements related to Cyrus one and are subject to risks and uncertainties factors that may cause our actual results to differ from expectations are detailed in the companys filings with the FTC, which you may access on the Fccs website or on Cyrus one dot com.
We undertake no obligation to revise these statements. Following the date of this conference call, except as required by law.
In addition, some of the company's remarks. This morning contain non-GAAP financial measures you can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the investors section of the company's website.
I would now like to turn the call over to our president and CEO , Gary what topic.
Thanks, Schafer Howdy, everyone welcome to Cyrus one second quarter earnings call results for the quarter showed continued strong growth in our business and we have positioned the company to capitalize on the expanding opportunity in Europe , setting us up well for next year and beyond.
Slide four shows revenue adjusted EBITDA, FFO and FFO per share grew at industry, leading rates year over year, we signed leases totaling $26 million in annualized GAAP revenue, including leases signed shortly after the quarter end as the timing of several large deals moved from the end of June into July .
We delivered 21 megawatts of capacity in the quarter I have another 55 megawatts in the development pipeline, which combined represent over 10% growth in the portfolio.
We're also developing over 900000 square feet of powered shell that will position us to deliver race for quickly out of low cost to meet demand and we recently signed a long term lease for 24 acres of land in Dublin, giving us capacity for 72 megawatts.
We are again, increasing our normalized FFO per share guidance by 20 cents at the midpoint of the range. The new midpoint represents 10% year over year growth, which is significantly above the broader regroup average we expect that our AFFO per share growth rate will continue to grow at low double digit rates as all the investments we have made over the past 18 months I realized we are announcing a 9% increase in our quarterly dividend to 50 cents per share and the dividend has more than tripled since 2013, while still maintaining one of the lowest payout ratios amongst all the rights.
Turning to slide five.
In Q4 of 2018, I started mentioning that I was noticing a significant pullback in leasing velocity, particularly in the Hyperscalers and quickly adjusted our business plan Accordingly to focus more aggressively on expense control.
As we saw this quarter, our overall Q2 bookings, which do not include any of the proportionate share of bookings and our GDS or or data partnerships were light as several deals we expected to close in the quarter got pushed to July .
This should result in our Q3 bookings being above the $20 million to $25 million of bookings guidance per quarter that I have given at the beginning of the year.
Fortunately as we saw over the past three quarters, our enterprise and interconnection businesses remain very strong with enterprises accounting for almost 80% of the bookings in Q2 with 13, new logos signed across different verticals.
This is the third sequential quarter in which we have seen very strong demand from our enterprise businesses, which account for roughly 60% of our overall business and highlights how well diversified we are across both hyperscale and enterprise customers.
Additionally, our interconnection business grew at 20% this quarter, which is among the fastest rates at which it has ever grown.
Our next business is now nearly a $50 million run rate business and is equivalent to 5% of our revenue.
Pricing for deals signed during the second quarter was $183 per kilowatt, which is up 41% over the prior four quarter average and one of the strongest pricing quarters in the company's history.
Slide six provides updated stats highlighting the importance of the contribution from our existing customers to our growth.
Over the last three years, nearly 85% of our bookings have been with our existing customers. We have generally added about 16, new customer logos per quarter, which is significant as our customers typically have small initial deployments, but consistently grow with us over time.
To highlight the magnitude of the growth opportunity of our top 50 customers 40 were also customers at the end of 2015 over this period compound annual rent growth from those customers average 33%.
Additionally, once our customers begin to expand with us they generally prefer longer lease terms for the same group of customers. The average remaining lease terms was extended and increased nearly 50% over the same period.
As customers grow with us they expand their existing deployments and also deploy with us another locations. The customers. In this group are in an average of three of our facilities and for the entire portfolio, 76% of rent is from customers that are in multiple locations.
An important assumption that our underwriting for the European expansion was the expectation that are existing customers will drive much of the demand and then has been playing out just as we expected our European business grew at roughly 65% year over year, and we expect it will grow an additional 20% in the second half of the year.
We are fully staffed our European operations and expect to see our EBITDA margins there expand by 700 basis points in the second half of the year, increasing to 49% and we expect the margin to further increase in 2020 as that platform scales.
As slide seven shows our interconnection business continues to do really well and we have even seen an acceleration in the growth rate compared to recent quarters.
As I mentioned earlier revenue was up 20% in the quarter compared to last year matching the year over year growth and cross connects this also relates to the point I just made regarding how customers tend to expand and deploying new locations, which causes them to need more cross connects on average each customer now has 21 Crossconnects seven times higher than the three per customer in 2011, when we first started tracking this.
We believe that as data growth continues to explode datacenter network topology will change in the compute and storage nodes will be more important going forward, which will play to our strengths in this space.
Turning to slide eight over the past five years Cyrusone has been the best performing datacenter riet with revenue and adjusted EBITDA CAGR of 26% and 27%, respectively, and our 29 performance will continue that trend.
As you can see we are growing at much higher rates than other Reits across all of the key financial metrics and meaningfully faster than our peer group.
We have worked hard to position the business to continue maintained strong growth going forward.
The underlying demand trends over the next few years are expected to create a very attractive set of opportunities with data growth accelerating enterprise outsourcing continuing cloud adoption, increasing and a high in the very early stages, what could ultimately represent hundreds of billions of dollars of value creation for our industry.
We have been able to achieve these superior growth rates, because we have methodically continue to invest and expand our business, ensuring we have adequate land the shell capacity across all of our markets and we have extended the same approach into Europe as well.
Currently we have almost $1 billion of investment roughly $10 per share that we have made including $200 million of land and $800 million of in process construction and all of the key data center markets across the us and Europe .
Those investments will allow us to triple the size of our footprint at a relatively low build costs and thus are all highly accretive to our earnings.
As a result of all the investments, particularly in support of our expansion into the four new markets in Europe as well as Santa Clara, we should see a very high flow through of incremental revenue to our FFO per share results driving an acceleration and bottom line growth.
We expect that our FFO per share growth rate will begin to converge with our revenue and EBITDA growth rates.
Slide nine reiterate the point that we've made the last couple of quarters regarding the development yield progression that you can expect to see in these new markets that we are making investments in this quarter.
We are showing you the yield progression for our first Northern Virginia campus, we delivered our first datacenter, they're almost four and a half years ago with significant demand from Hyperscale companies last quarter showed the same yield trend for Phoenix and the quarter before that we showed our Dallas property and over the years, we have shown many others and the yield trends always follow the same path with negative initial yields then getting to low single digits, followed by mid teen yields at full stabilization.
We expect a similar yield progression for each of the four new sites, we are developing in Europe and for our new site in Santa Clara, which will be the largest datacenter campus in that area.
To my knowledge I believe Cyrus one is the only data center company that has shared these type of details on cost and development yields.
In closing this year subdued leasing velocity of $20 million to $25 million per quarter is right in line with our expectations and Fortunately, we identify the trend earlier enough such that we're able to change our business model accordingly.
Our expense and capital structuring initiatives have enabled us to exceed our own expectations and have allowed us to increase full year guidance again.
We believe that our decision to expand internationally was the right strategic call and we have successfully positioned our company to be the third largest global data Center company in the industry with a presence in Europe and partnerships in Asia and Latin America.
We have invested roughly $1 billion in land and CIP that should enable us to grow our revenue and EBITDA in the mid teens and FFO per share at low double digit growth rates.
Also I have as I mentioned, we do not plan on needing any additional equity capital and we'll maintain a rock solid balance sheet consistent with other investment grade Reits.
So first of all it continues to be the fastest growing company in the data center REIT industry and on a growth adjusted basis I believe offers a really compelling investment opportunity.
I will now turn the call over to Diana will proceed who will provide more color on our financial performance for the quarter and an update on our guidance. Thanks.
Thanks, Gary Good morning, everyone. As Gary said, we are really pleased with our second quarter financial results and our relative growth across all the key financial metrics, particularly compared to the broader range.
As slide 11 shows revenue adjusted EBITDA and normalized AFFO, each up between 20, and 30% compared to the second quarter of 2018.
Churn was relatively low at 2.6% and while we continue to expect full year churn to be in the range of 5% to 7% we are trending towards the lower end of that range.
Turning to slide 12.
And why grew 19% on an adjusted basis.
The decline in the margin year over year was primarily driven by higher sales, which have a low margin and higher pass through metered power reimbursements as a percentage of revenue, which resulted in zero margin contribution.
Equipment sales for the quarter totaled approximately $17 million, primarily consisting of sales associated with a couple of larger deployment.
For comparison equipment sales in the second quarter of 2018, we're only 2.4 million.
This increase in equipment sales year over year accounted for approximately 350 basis points from the decline in NOI margin.
Partners.
Adjusted EBITDA grew in line with ally and the increase in normalized FFO was driven primarily by the growth in adjusted EBITDA as Gary noted, we have invested in our European team quarter expansion in those markets.
Well, we should begin to see the SGN expenses as a percentage of European revenue decline as we build out the platform in that region becomes a more significant portion of our total revenue.
Our normalized FFO per share growth rate increased meaningfully up 14% compared to the second quarter of 2018 on an as adjusted basis for the 42.
As the chart at the bottom of the slide shows the adjustments to normalized FFO to arrive at AFFO netted to zero in the quarter as cash received for customer installation largely offset straight line rent adjustment.
Turning to slide 13, we continue to have a very balanced geographic contribution across our markets.
And our expansion in Europe will further diversify the portfolio.
Yes, our lease percentage for stabilized properties was down slightly compared to the prior year, but remained high at nearly 90% even with a 21% increase in capacity during the quarter, we elected not to renew or at least on the south Bend crossing property.
Legacy data center in our portfolio and that revenue impact was reflected in our second quarter churn.
Slide 14 shows our development pipeline, which includes projects across the us in Europe .
While the pre leasing percentage is lower than in prior quarters, we expect that with the conversion of deals in our late stage sales funnel. These projects will have a significant level of leasing once they are delivered.
Overall portfolio will be 27% bigger on the CSF basis compared to a year ago. Upon completion of all these projects.
And as Gary mentioned, we also have 925000 square feet of powered shell under construction that can provide nearly 150 megawatts of additional capacity upon full buildout combined with our existing shell inventory, we will have nearly 3 million square feet of powered shell across the portfolio.
Moving to slide 15, we continue to maintain a very conservative capital structure, and a strong balance sheet to support our growth.
Our leverage remains low at five times net debt to EBITDA meaningfully below the average for investment grade rate.
We have no near term maturities more than 1.4 billion of liquidity and we remain fully unsecured borrower as we discussed on last quarter's call. We have no need to issue additional equity and that the company's current scale, we can fund approximately $700 million to $750 million of annual capital investment.
Free cash flow and additional debt capacity, while maintaining our targeted leverage range.
Turning to slide 16, we are increasing the dividend third quarter Mike.
50 cents per share with a 9% increase over the previous quarterly dividend of 46.
Per share this represents an annualized yield in the 3.5% range as Gary mentioned, we've more than tripled the divestments in 2013 and note that 100% of our dividend payout was return of capital enhancing the after tax shield for investors with taxable income.
We also continue to maintain one of the lowest payout ratios among rate in order to retain internally generated cash flow to reinvest in the business.
Turning to slide 17, our revenue backlog as of the end of June was approximately 24 million.
Nearly 60% expected to commence in the third quarter relatively in line with the anticipated commencement phasing in recent quarters.
The backlog combined with the full year impact of leases commence within the quarter on the impact of leases that were signed shortly after quarter end.
Yes, our growth going into 2020.
Turning to slide 18, we are tightening the guidance ranges for total revenue and adjusted EBITDA were decreasing the range of capital expenditures and the new midpoint of 900 million 50 million lower than the previous mid point.
Primarily driven by the timing of spend back some of that spend will be pushed into 2020.
As Gary mentioned, we are increasing the guidance range for normalized FFO per share by 20 cents at the midpoint, primarily as a result of lower interest expense than we had previously anticipated.
This is driven by several factors first as I just mentioned the level of capital spend is lower than we previously anticipated and the timing of that spend is more delayed.
Additionally, capitalize interest was higher as a result of higher construction.
In progress balances than originally budgeted.
While we had previously decreased our rate assumptions for the year. Our is great outlook was still higher compared to our current forecast, particularly given the recent decrease in LIBOR on the current forward curve.
In addition, the company had pulled back expenses during the year that had a positive impact on both EBITDA and FFO.
While the midpoint of our EBITDA guidance remains the same and our current guidance we were trending below the mid point, but within our range. During the first half of the year and now are very comfortable at the midpoint.
Range, given our current outlook.
In closing we are pleased with our performance and the strong growth across our financial metrics. We have taken a number of steps to position the company to be able to execute on opportunities and maintain our continued strong growth and we remain very optimistic regarding the ongoing outlook for the business.
Thank you for participating on the call and we're now happy to take your questions.
Operator, please open the line.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then to you.
At this time, we will pause momentarily to assemble our roster.
The first question will come from Frank Louthan with Raymond James.
James Go ahead please.
Great. Thank you very much.
Can you what is sort of the nature of the growth in Europe that you are seeing is that sort of are you seeing more net new business that you are bringing in from some of your existing customers in the us or just expanding the existing base. There and then I've got a follow up.
Yes, Hey, Frank.
Yes, the European business, our original underwriting basically assumed that we were going to leverage all the.
Hyperscale relationships that we have any U.S. and expand them into into Europe and.
Thats proceeding right right. According to plan recognizing that was going to me. The vast majority of our growth. We also knew that we were going to be building out an enterprise.
An enterprise sales focused business, there as well trying to pull in some of our customers from the US and also attack the European market. We've closed a couple of enterprise deals, but as you know that takes a long time to build that typically from first customer touch the closing is about a three year process. So.
We didnt.
Make any assumptions in our underwriting for that but we are getting deals. We expect that that's going to just be additive to.
To our results there, but to date, it's all been enterprise and that was actually the only hyperscale booking that we had this this quarter was was in Europe everything else was enterprise in the <unk>.
Everywhere else throughout an entirely new U.S. was enterprise and other.
And that was the only deal we had an hyperscale was in was in Europe .
Was that multi megawatt deal or just right.
A couple of million it was about 2020, 5% of our bookings this quarter was was hyperscale.
The rest was all enterprise.
Okay, and then just a follow up as Youve as you've expanded a little bit more in the enterprise. This year actually how can we characterize how should we think about the development yields that you're getting off of these customers versus your more standard mix with hyperscale.
Sure look I mean, we we included Virginia, and our development yield this quarter that was on top of Phoenix last quarter top of Dallas before and what you see consistent across all of those is yields of 15, 17% and the reason that we're able to get the higher yields is because in each of those assets were blending into into those assets enterprise deals, which which commands substantially higher returns than just our hyperscalers and thats why so when you hear me talk.
About that we're underwriting hyperscale deals at the 12% 13% range.
When you actually look at the actual asset yields there substantially higher than that because.
Because we're putting in enterprise customers and we're also putting in I actually mean R.R.I.X. business. This quarter, just kind of knocked it out of the park.
And Frank our our rate this quarter of a 183 per kilo.
<unk> is also indicative that.
70% of the deals were less than 500 kilowatts and more enterprise focused so.
Obviously very profitable.
Okay, great. Thank you.
Our next question will come from Simon Flannery with Morgan Stanley . Please go ahead.
Great. Thanks, good morning.
You talked about the 13% sort of presale on on the development How's the funnel looking what what are you seeing in terms of.
Getting additional contracts there and maybe what are you expecting when are you expecting hyperscale to come back and then maybe for Diane.
Why now on the dividend I know you did raise FFO, but what's the are we on a new cycle now where you will review the dividend every kind of Q2 or what should we be expecting thanks.
Sure, Yes, so on me.
The fund also so it's it's flat quarter to quarter.
Yes, and the mix shift in there is actually 30% of the funnel now is associated with our European business. So so last quarter. If you recall it was at 20% of our funnel. So the European business has grown quarter to quarter, it's flat year over year, it's up 90%, so still up still up a lot.
That said.
We're not really no.
We're not seeing any you know any really noticeable change in the hyperscale or.
Environment, we're more conversations I mean on the margins probably slightly better now than it was at the beginning of the year, but not to the point, where I feel comfortable calling calling an end to this.
That's why we really kind of repositioned the company this year not knowing when this was going to turn around we really kind of buckle down focused on.
Focus on our expense management and capital structure in order to kind of drive the AFFO.
Per share performance up so hopefully by the end of this year I mean things turned around but even if it doesn't the way weve positioned the company now given all the investments we've made we should be able to drive really nice low double digit per share growth.
With with not a lot of topline.
Sales requirements, because we're going to be growing into all the investments we've made over the last 18 months.
In Taiwan.
Yes, so regarding.
Regarding the dividends I mean, it's a good question.
Beginning the year, when we came out with basically flat AFFO per share growth given our outlook.
Back in the January February timeframe, we thought it was prudent.
Keep the dividend plaque, we certainly didnt need to increase it.
Our dividend Nature's typically return of capital, but as the year progressed and to your point as we've increased our per share guidance now 10% growth range. We felt it was time to.
Evaluate an increase in the dividend obviously, it's ultimately a board decision and the board agreed that it made sense to increase that.
Given our per share growth.
As far as timing just generally when we increase at once a year again, we delayed it a couple of quarters. This time, but the company's history has always been to increase the dividend every year, we would anticipate that would continue.
Great. Thank you.
Our next question comes from Robert Gutman with Guggenheim Securities. Please go ahead.
Thanks for taking the question.
You said that the the Hyperscale deal landed in Europe .
In the quarter I was wondering about the second deal subsequent to quarter end if that was also in Europe .
Or in the us.
And I was wondering if you could provide an organic growth number for <unk> for the quarter.
In terms of revenue.
Sure sure yes so.
So actually subsequent to the quarter, we actually close.
Our largest.
Enterprise deal.
That we've done in a long time that was almost almost five megs with potential doubling for growth. So so far and that will be the new facility that will be bringing online San Antonio So that would basically be the capacity will be bringing online there is 100% sold.
That was a really good really good deal then it also allows us to break ground on that new piece of land out the only market in us that we.
We have been sold out and.
And it was so there was a couple of deals that close right. After the quarter end that was the big enterprise deal there were a couple of other.
Cloud deals and those were in in Europe predominantly.
And on your question are gaining from that dynamic than the 14% range.
Thank you.
Our next question comes from Richard Choe with Jpmorgan go ahead.
Hi, I was just wondering what kind of visibility do you have for the equipment revenue and what we should be expecting for the year and then.
Follow up.
Can you say that again rich.
What kind of visibility do you have in terms of the equipment revenue for the rest of the year.
Oh, we don't really assume much of that because there's really not a lot of low not a lot of high margin business in that.
You know we have a couple of million Bucks every quarter I mean, typically our average has been about three or 4 million Bucks every quarter, we had a really strong quarter here, but thats why we also don't see like really big flow through and an EBITDA commensurate with that with the pop that we got in revenue Theres a couple of points of margin that comes through but the really big improvement dye was alluding to in terms of within the range has really been the result of expense.
Expense management with regard to where we see bookings for the rest of the year I mean.
At this point, we're still comfortable with that $20 million to $25 million.
Quarterly range, we're not willing to call the bottom of this and we don't see the second half being significantly stronger than the first half well was.
Yes, Richard on the equipment sales second quarter dairy farm was really unusually large.
So we would not see that trend continuing we had a couple of really big deployments that I need to correct.
My answer on.
Okay.
Sorry.
Rob had on organic the organic for X Sandy and for the full year is going to be in the 14% to 15% range quarter to quarter because of course, we didnt.
Pose any until.
Early September and August last year quarter over quarter, the our organic growth was 20%.
Between years.
And then in terms of positioning the company in terms of development with the refocusing on enterprise is that effecting developmental or are you just kind of.
Going ahead as planned and at some point the hyperscale associated come back and you'd rather be well positioned for the yeah, Yeah, that's exactly it.
If you think about what we're trying to do which is like we have been putting up really big growth rates I mean, since we IPO Ed.
We have been the fastest growing company in revenue and EBITDA performance and that was against a strong demand backdrop over the last three years, we would have cumulatively invested roughly $3 billion of capital.
And that was all done strategically to build out a really big platform. So while we're a small player early on we built up I think a really great franchise in the us and with the way this expansion in Santa Clara We're in all the key markets that we wanted to be and when we made the decision to expand internationally, we weren't going to go in.
Fantastic franchise in Europe that just has grown at 65% year over year this quarter going to grow another 20% by the end of the year and we're planning for that that part of our business to be about 2020, 5% of our overall business and in a couple of years.
That was how we were deploying our capital but earlier this year when we saw that everything was.
It was was slowing down, particularly in the Hyperscale market.
We identified that trend early enough such that we really kind of scaled back our business and our aspirations on kind of increasing our SG in a in line with where we thought this was going to go. So we cut that back we focused on tightening up some other things that we're doing on our capital structure. The result was that you know we've got a really nice AFFO per share growth at the double digits.
Eventually that will converge with.
With our revenue and EBITDA growth, we wouldn't expect that revenue and EBITDA growth is going to be growing at in the in the 20% range, we expect that'll come down and the bottom line performance will increase so those should converge over time, so as we sit here right now and as we said on the last call is is that we're positioned really well, we do not need any additional equity capital. We can fund all of our capital needs.
Over the next.
Two years and not Miss a beat and we think that if the market does turn around given all the shell capacity that we're bringing online.
Roughly 900000 square feet, we position ourselves to to take a bigger share of that market. If it doesn't we're still in a good position because as you know our speed to market in terms of our product capability allows us to minimize the capital at risk. So as we think we're positioned well if it doesnt turn around but if it does turn around and we think that the growth rates that we're underwriting to are going to increase but the bottom line is we can do it all in our own balance sheet within our own internal cash flow, we feel pretty pretty good where we sit right now.
Good thank you.
Our next question comes from Erik Rasmussen with Stifel. Please go ahead.
Yes, thanks for taking the questions.
Noticed and this is obviously dove dovetails into a lot of the common so far you made about.
Hyperscale and leasing, but you did push out two construction projects.
In Nova.
You guys play each by about two quarters is any other sort of commentary you can give to that I mean, obviously, there's some digestion that the market is going through but can you just kind of give us a little bit more commentary on that.
Sure. There are they are all related to the same thing right. I mean, we don't we do not we build product in line with our well in line with the demand that we're tracking so so if we see demand slowing down then that we will be pushing out we will be pushing out capital commensurately. So in spite of some people thinking that we have a cowboy mentality here, we are really focused on kind of driving driving profitability and making money and.
We manage those to really really closely have you looked at my personal calendar you would you would see that probably 40% spent on sales and customers another 40% on capital.
And then the rest managing the rest of the business. So so those two work.
In tandem and and and saw and vice versa. It could be see us doing a lot more there.
You would anticipate that we are seeing a bigger funnel. So if you looked at where our growth is in Europe and the capital investment that we're doing there that continues to increase because you have a funnel that we're we're seeing there is increasing I mentioned on <unk>.
Simon's question, you know quarter to quarter, our funnel, while flat sequentially. The mix shift. This so that 30% of that of that funnel is now in Europe and so then with the funnel shift you should also see a capital allocation shift to add to that as well and that's why we've always believed that this is a global business and and the best benefit from being global is that your capital decisions are much better because you're playing in the portfolio Thats globally. We see some of my peers put up really great numbers this quarter basically because of the international growth.
And the benefit of being being global.
Great No and just as my follow up.
Maybe just revisiting investment grade.
It seem like you know with the lower Capex spend.
You know lowering sort of the the leverage ratios.
Can you just give us an update kind of way you know where you stand with that and no.
Sort of.
What's the next hurdle.
Well you should call the rating agencies.
Moody's review once a year and we would anticipate them reviewing.
Now at some point this year and.
Yes, we've had conversations with that so.
We're pretty transparent in the benchmarking that we feel we're already at investment grade. It just is a slow process to get there formally.
But we do manage to leverage the leverage being lower was more of a function. We raise cash at the beginning the year through the GDS down through the ATM.
That covered all the equity we needed and so our leverage is low we said we manage generally in sort of the mid five times range willing to go.
You know for short period, but we do feel it makes sense to stay on the investment grade half given the capital intensity of the business.
No all the large well capitalized.
Our investment grade so we're pretty confident we'll get there in the not too distant future. Yes. It was it was good to see Equinix finally get there right. I mean, we were when we got to investment grade with S&P actually before them, which which to me kind of like a bizarre anomaly because I would have thought.
Excellent I should have been investment grade a decade ago.
But since they basically now are there with all three eight rating indices that just provides a little more comfort.
Two.
To their comfort to this industry. So hopefully we get some PON positive benefit as a result of that but we ended this quarter actually at a lower leverage than we did last quarter. So we were in a really really strong position balance sheet wise.
Great. Thank you.
Our next question comes from James Breen with William Blair Go ahead.
Thanks for taking the questions just just a couple.
One on the 20 to 25 sort of quarterly guidance you gave.
I'm, assuming that's sort of the average over the year given some of the timing around this quarter and then.
Secondly, you talked about this being one of the highest pricing quarters.
Based on the mix how does how do you think about that as it flows through to FFO and some of the numbers how these smaller.
Customers effect.
As you get to cash flow. Thanks.
Yes, Hey, yes, so yeah. The 20 to 25 as an average for for the year. So we're tracking right in line with what we.
What we had thought and clearly we would like to.
Had a higher bookings.
This quarter, but fortunately all those deals that we thought were going to close close right. After the quarter end so.
As I mentioned like in those yield slides, Jim that we put in there you can see yields in this in this chart talking about 17% for Northern Virginia. So we invested about $312 million of capital in their yielding 17%. The way we achieved that 17% yield is because of the mix of enterprise customers that we have in there. So typically the enterprise customers are shorter duration, but higher price.
Compared to to the cloud customers, which are lower lower price, but but higher.
Higher.
Duration.
But that it's really important to the mix right. So our business model.
Weve since inception, we never knew what customer is going to walk through the door. We were completely agnostic. We just wanted to make sure. We can close that customer. So we can handle a customer and I just want to rack up to a customer that wants 50 megs.
But.
The opportunity here is on a blended basis is really what gets to the higher yields that's what's allowing us to get double digit AFFO per share performance.
In spite of revenue growth that I think is going to come down our per share performance should should actually increase.
Because of the yield.
And even though some of those enterprise customers are shorter duration given your historical knowledge is or do they really end up ever.
Can they do they end up being a longer duration. They just have shorter renewal periods. Yes. If you look this was one of the concerns where we first IPO.
50% of our entire portfolio at that point in time.
Either had matured or was about to mature in 12 months.
And so think about it so every customer all of our customers one out of every two customers have the ability to leave.
And and what you see if you look over our historical churn.
Metric over that period has been pretty much on changes I mean, it's in that 5% to 7% range over that period of time. So so even though one out of every two customers could have walked away. The reality is they don't.
Because if you if you provide a good product at a fair price and treat customers really well they tend to stay and I think a lot of people get caught into this you know everyone's like into the numbers right, but if you step back and you think about how much money customers actually paying in terms of the rent for a datacenter relative to all the investment that they have in that data center and the difficulty moving out of the data center.
It's not it's not the end of the World. If you pay a couple of Bucks more right and that that I think is.
As kind of like you know a lot of people just get caught up in the numbers all the time and kind of just can't see the the farce through through the trees.
Great. Thank you.
Sure.
Our next question comes from Colby so necessarily.
So net sale sorry about that with Cowen and company go ahead. Please.
Since the Sally how are you.
Yes, it's been pronounced where.
So a lot of detail and information in your prepared remarks that Jay.
Really appreciate your others do as well.
You talked very quickly so I just wanted to.
Just make sure I understood. If you think that more color. So first off you mentioned that in the third quarter, you expect to be above.
You're $20 million to $25 million, you've done 13 million.
Based on what you announced and if you assume that you may be three or 4 million in each of the next two months in enterprise that would get you to the lower end.
So it seems like you're expecting some bigger deals still to come I was wondering if you can give some color on that and really your visibility on that happening and maybe just more broadly your visibility.
As it relates to your to your pipeline and being able to close some of those deals and then secondly.
Margins.
You guys mentioned this opportunity really squeeze the margins, particularly in Europe .
Over the next.
Years. So I was wondering Dan if you can just give us some more color in terms of how that cannot be impact the aggregate.
Our total EBITDA margin line item.
Over the next few quarters can you can you quantify or give some more color around that to help us frame out the magnitude of benefit we should expect from some of the things. Thank you.
Sure.
So so yes, Colby so 20 to 25 million a quarter over over to that basically gets you to $40 million to $50 million of bookings.
For the for the two quarters and I think we're tracking pretty well there and we've got $26 million.
In the bag against that and we have a lot of of of deals that we feel pretty comfortable are going to close this quarter too to get us back there.
So weve got deals in hand. These are later stage. So we feel we feel better we feel better about the about being able to deliver delivered any any color in terms of markets, where you're seeing that the biggest opportunities. Yes, again, Europe I mean that is.
You know that those markets are doing really well we've got we've got some.
Some in the us, but yes, there are more conversations I mean, the real cloud demand has not in my mind at least what we're seeing is not really return yet too.
To the U.S. and we've got adequate inventory everywhere, so its not like a.
It's not like a supply issue, it's really more of a of a demand issue from both from customers in the us in the us market. So.
Our enterprise business is still really strong in any you ask but but the bigger growth opportunity that we're seeing is as in Europe with with Hyperscalers. So it sounds like some of those deals would would close later this quarter just based on where you're at our conversation that's right yes.
Yes regarding margins, we do see as the year progressed as an expansion and our EBITDA margin.
And in the comments on net Jna.
Well.
I think last year at DNA.
Just just shy of 10% thats trending down to the 9% range for this year and then going into next year and beyond as we keep SGN a relatively flat because we've already made that investment, particularly in growing in Europe .
Overhead well, we'll see that come down even further as a percentage of total revenue, yes, you should.
You should see flow through and our EBITDA margin by 100 points in the second half probably another 100 points.
By the end of next year.
Great. Thank you.
You're welcome.
Our next question comes from Nick del Deo with Moffettnathanson. Please go ahead.
Hi, Thanks, taking my questions.
Gary what do you think pricing will look like for scale deals in northern Virginia. When demand comes back I mean modular construction tends to limit excess inventory, but there are a fair number of players who are obviously hungry for business and have.
In Spain.
We.
Theres always a tremendous amount of talking pricing here I mean, our our yields in that market for the Hyperscalers haven't really changed we're still expecting and in the low double digits.
On on a yield basis.
But.
But you know you hear about a lot of stories about with with inventory out there, but for the most part most of the.
Most of the supply that you know you're we're looking at is mostly.
Due to land so theres not a lot of people that have delivered a lot of built out capacity.
But but in general I think the that northern Virginia market is absolutely over overbuilt burgers like there was like a gold rush mentality going on there and with land acquired probably last 10 years worth of inventory of all the demand. So I think that market is going to be.
Overheated for for some time on the supply side, but I don't know, where where where prices will will shake out I mean, the reluctance I think.
As I was mentioning remarks is.
You have to think long and hard if you are.
A fortune 500 company Thats interested to manage some of the most critical gear.
For some of the largest corporations in the world and not think that you have some sense of responsibility for dealing with a partner that is financially stable and so so you know if you have a choice of dealing with a partner that has a 100% debt financing on an asset versus a partner that is investment grade or soon to be investment grade you'd have to think that into your calculus, when youre going to choose to do business with those folks. So I think that's why if you look historically, 90% of all the deals that have happened in northern Virginia.
With the expect it with the exception of a couple of deals that were awarded when everyone else ran out of capacity have all gone to the public players, which is what I would think more advanced supply chains would always opt to do.
A world class organizations do not tend to deal with over Levered financially unstable companies they tend to deal with highly.
Public companies with strong balance sheets.
Well, you'll maybe tying into the last comment you made.
Over the last theme.
Do you see opportunities on the horizon to pick up distressed assets.
Well I hope not because that will that will cause a bigger problem for the industry. So I'm, hoping some of these people who didnt get the brass ring and got a hyperscale lease contract and lease at 100% debt financing are not going allow those things go into distress because if that happens I think that will create a bigger problem in terms of leasing velocity for for the industry. Overall, so I hope that does not happen clearly.
If it did and there were opportunities for US we would we would absolutely jump in and help out any of our customers make sure that we can provide.
Continuous service.
Okay. Thanks, Gary.
Our next question comes from Ari Klein with BMO capital markets go ahead.
Thanks, maybe just a quick one on the development spend.
As you look out to next year I think you previously guided for around 750 million.
Capex is that still the case and then separately based on the commentary it sounds like enterprises have been strong.
When I look at the vertical split looks like annualized rent from non cloud customers actually declined slightly from a year ago.
Maybe talk a little bit about what's going well from a vertical standpoint, maybe what's been a drag.
Yes, so so with regard to add to the capital.
At that 750 number sounds good even when we went above that that would be that would be fine I mean to the takeaway point is that we can manage our business and never have to issue any additional equity.
We build out the platform and now we're just kind of growing into it. So we're in a really good position earn no longer need to rely on any equity funding, even even though we'll be drilling.
At a slower rate.
With regard to to the verticals I mean, our financial services vertical has been.
It has been really strong we expect that that's going to continue and accelerate actually next quarter with one of the deals that I just mentioned.
One of the largest.
Enterprise deals that we've signed and a really long time.
But pretty much were seeing financial services, we are seeing some communications and even some smaller tech tech companies as well and in that space.
Thanks.
Our next question comes from Jon Petersen with Jefferies. Please go ahead.
Oh, Great I had a few questions on some markets in Europe , I guess kind of run through how many can answer I mean, whatever order you want so in Frankfurt a few weeks ago, you guys announced a new development. There I think it's your third curious if there was any pre leasing on that project and if not kind of why.
You know why you're starting the third building there and then in Amsterdam, I don't think Weve had any discussion about the the moratorium. There I know you have a development underway, but curious if you had any thoughts on when that's finished if you'll be able to turn the lights on and then finally in Dublin I know there has been issues in the past with Procurian power, even though you've been able to build and it's an issue I think across the whole market is curious if there's any update on whether all that's kind of behind us.
Yes sure so.
I'll hit also at all though so.
At Frankfurt has been the strongest market in Europe , we're basically sold a sold out there.
Right right now that that building that we.
Announcing the quarter's 22 megawatt building, we we expect that once that's delivered and in June that you know.
A good portion of that if not all of it is going to be pre pre lease that was yes.
Some of the thing we're working on a number of deals for that for that.
That opportunity right right now with regard to Amsterdam, Yes, there's a there's a moratorium going on in Amsterdam for those who have not seen it on data center builds.
We've got a really nice campus in.
And after that proper right near right near Schiphol over there.
Where we are on plan with bringing that out of the ground. We expect to have that completed by by the end of year, we'll have about five megawatts of capacity in that in that facility that is on track and that is we've received approval for that so that will be impacted by this moratorium, we expect that the moratorium once once they kind of work through that we expect that our design and what we're delivering is going to be compliant with that.
And it's really going to be I think move for us at a certain point, because we're going to have plenty of capacity there to sell in the market and by next year.
We expect that that moratorium is going to be cleared up we'll be able to deliver more capacity.
We have a fairly large building there we're going to have about 50 megs of capacity in that market double and you're right that is.
Incredibly constrained market.
We have been working on that property for just about two years.
We also announced after the quarter, we signed up thousand year lease.
In in double and Thats, another really big.
Development that we're going to be putting up there and we also have all the power secured for that as well.
So.
Roughly 70 Megs of power.
I think we're going to have a have there and then the last is in London.
We've got a couple a couple of megs of extra capacity available there, but we're going to have our third London site brought online.
Towards the towards the end of this year beginning of next year and that will give us additional 10 megawatt capacity or so.
Great very helpful. Thank you.
Our next question comes from Sami Bharti with Credit Suisse. Please go ahead.
Nice Sammy Bharti here.
Hey, Tom so.
My My first question has to do with some of your prepared commentary regarding IMAX and interconnection and maybe we could just get an idea on what's going on in terms of flow of connections and flow of traffic is this enterprises connecting to clouds or is this clouds connecting to networks like maybe you could just give us an idea on what exactly is densifying in the network.
Sure sure. Yes. This really gets my general and goals, we have some pretty sharing results and an IMAX. This this quarter was up 20% year over year, that's one of the fastest growing.
Fastest growing quarters ever for us So theres a couple of things that are going on I think this is a really important concept to understand right. There's no one thinks about.
Cyrus one as.
You know as as kind of a.
A go to I X company, we're kind of like this nocturnal kind of Sleepy Little company that people don't really look to us for for I.X. purposes. However, what you've seen is really big growth in IMAX because of what's happening is is that the data sets are exploding at a really really fast pace and what's happening is that the data as the compute nodes and the storage nodes in the datacenter landscape are growing at a much faster rate than than the than the network nodes and that is the part of the business that we play in right. We are building massively scale large buildings going after the largest organizations in the world and our application target set has been has been at 99% of the applications that are in the compute and storage we've never gone after the 1% of applications.
That CNHTC Onex's gone after which is the network and the networking part of it what's happening we have seen over the last couple of years as data becomes really like explosive.
And we're seeing a changing and landscaping the network topology and Thats why over the last couple of years, you've seen a lot more growth in parts of the business that we do.
Versus.
Versus on the networking side and and so the growth in cross connects here is just a result of that two things. One is we've done a great job of getting new logos, we add we add roughly one new logo.
A month.
From on the Enterprise Enterprise basin like three or four month on new logos overall, each time, you get a new customer and they start off with a couple of cross connects and continue to grow what I shared in my commentary is that the average number of cross connects per per customer has increased to 21 that is up seven fall from when we first track started tracking this about seven seven years ago, and we expect that that's going to be a trend thats going to continue to go on overtime and and the other thing we always talked about historically is the success that megaport has been having and driving more connectivity and making customers want to locate with us because they provide our customer with access to.
To all of the different cloud vendors and not only that what we're seeing is the cloud vendors are directing their customers to go to megaport.
To pick up access to to the cloud. So it's really kind of symbiotic relationship that we have with megaport. They have enabled us to.
To attract customers and you know they connect them to the cloud and we've done really well just because of the hybrid model that we're going after as they continue to do more and more deployment they require more cross connects.
Got it thank you.
And then.
Another question I have for you is regarding the overall demand market in Europe , and I want to kind of maybe get your take on how to compare this versus the past the U.S. tuck right. So you asked hasn't been big lumpy it spikes plateaus.
Do you think you're going to see a very similar cycle play out in Europe , and maybe just timing around that is this like one year window to your window do you think it's going to be very comparable from a cycle perspective to the way the U.S. group or is Europe and to be a little bit different trends. How this ends up unfolding over the next couple of years.
Yes look I think it's going to be.
Yes, I'm going to be similar similar growth that that you've seen in the U.S. and that's why that's why we're really focused on trying to build out that enterprise platform. There that is nothing that we are doing that is going to have an immediate return we know, though that once you build up a really strong enterprise platform, you're able to kind of minimize some of those valleys.
So we're always going to see peaks associated with a big demand from the Hyperscalers, but the real strength of your platform is determined by how well you do in those in those times when when sales are a little slow and so so while we are seeing the peaky demands now lumpiness associated with big Hyperscale builds.
Cash is focused on absolutely replicating the success, we've had in the enterprise and use in Europe .
So that in three years' time.
You know, we're going to have a really great enterprise platform there and that's why if you look at our results over the last three quarters. In spite of in spite of the Hyperscale business being somewhat muted we've had like record sales in enterprise, which comes in that really really high returns and so that's that's what we're trying to do and in Europe .
Got it thank you.
Our next question comes from Jordan Sandler with Keybanc go ahead. Please.
Thanks, guys.
Good morning, So just a clarification on the cross connect volume.
You mentioned Mega poor I'm, just curious about the split in terms of growth.
Sure the internal side, which one.
Physical cross connects versus Megaport.
In terms of the growth.
Yes, probably the vast majority of our growth.
As just internal cross connects so and so our cross connect business included a now has three different actual products right. You've got your you got your basic cross connect right.
And that continues to go up nicely I mean, you know we had a really big cross connect growth and in terms of the physical cross connects this quarter I was up 20%, but Theres also we do I X right, where we're basically weve interconnected our datacenters into metro's and between between Metro so across the country and that business is now.
Doing really well that's something that we we started years ago and and that's another line of business. The other one that we provide and there is a is selling bandwidth.
So were you know all of those are doing really well and actually the IMAX business from a from a profitability perspective, because we had a lot of upfront costs were first doing that the the EBITDA growth rates in that business are just kind of like off the charge now were going up.
Sequentially like a lot.
The Mega poor business is up 80% year over over a year, so still growing nicely, but on up.
From a.
Overall perspective still not material to our results, but but what it is material too is that it's enabling us to connect to other customers or attract other customers that would otherwise not be with us but for buffer megaport.
Okay, and then Dan just a clarification on the equipment sales $17 million was the number on the revenue side can you help us out.
What to back out in terms of the expense side or maybe what the per share FFO contribution was on the equipment sales in the quarter equipment sales the average around the 10% margin.
10% margin.
Okay and then.
Lastly.
Theres been.
Some some real volatility and read share prices and yet as you guys pointed out there's a tremendous amount of capital.
Cued up on the sidelines in the private market I'm curious.
Gary how you're thinking about.
The private capital market and the difference between this spread public versus private and whether or not there's any opportunity for you.
You mean, where private or.
For private.
Yes that where your stock is trading versus what people are willing to pay private equity players are willing to pay.
Well I've looked at it.
We've been saying all along I mean, it is really difficult to do any M&A done because the private players are willing to pay really big multiples 20, 530, sometimes we've seen deals at like 40 40 times in place in place EBITDA. Like these are just like really really high multiples, we cannot afford to to invest in those assets and that's why we strategically made the decision to kind of grow the business organically recognizing that we're not going to hit the same scale immediately as you would in an acquisition, but but we're definitely going to make much higher returns, we will be able to control our.
Control, our destiny, a little better.
That way and I think we're kind of seeing that now thats why even even next year.
I'm not expecting our revenue growth to be 28% I'm expecting that to come down, but I think the bottom line share performance is going to go up really nicely and we'll be able to sustain that for for the time until we grow into this this platform that we've that we've built.
Okay and the angle I was really going for was just is it.
You mentioned being a public company as being important for some of your world class customers right is it important for you to be a public company or would you consider.
You know availing yourself of maybe the opportunity to.
Take shareholders out at a higher price because there is a.
Quite a bit of private capital that would be willing to pay better higher numbers than where the stock. Yes. Okay. I think I think big companies like doing business with other big companies. So I think theres a clear benefit too.
Yes to to being a public company and particularly once you get investment grade.
Your access to capital is just just really kind of opened up dramatically I mean.
One of the tower guys. Today, you just posted like a 30 year 30 year deal on debt and that is really really attractive financing that avails itself to you only if you are.
Investment grade and typically public.
That's helpful. Thank you guys.
Our next question comes from Nathan Crossett with Berenberg. Please go ahead.
Hi, Thanks, Yeah, there's been a lot of talk about Europe on this call, but maybe one question on Asia.
Now what are your thoughts expanding into that region.
What are the aspiration there outside of GDS.
And then maybe you could just give us some color on South America with data.
Not sure how is that market then.
Yes, yes, so so so.
GDS has just been doing phenomenally well right I mean as I've mentioned like that is that is our partner in Asia ideally they would be the partner longer term to to do something more interesting in Asia, but for the time being we're not focused on doing anything more than focusing on building out what we started in Europe , we've got a number of projects underway for.
And we need to focus on making sure that thats a successful so far the results of proved really really well we are right on top of our underwriting expectations in Europe . So so we're not interested in doing anything more in Asia than than with the relationship that we currently have with GDS and.
I think as I've mentioned publicly before I believe that GDS has probably the best opportunity of all the global data center operators given that they are in the fastest growing data center market in the world and GDS has has a position that is second to none in that market. So we think we've partnered up with the ultimate player in that market, but have no aspirations for doing anything more at the moment owed data similar story right.
Brazil is a really hot market.
You know, Chris and the whole aseptic team have been doing really really well.
And I think Ricardo data team or equally doing well.
The sandbox is pretty big there is a lot of opportunities and data is actually growing at at a much faster rate than than we had originally underwritten.
They are doing a lot in Brazil on the show last quarter. They are also expanding into into Colombia, and we think that thats going to be a really great franchise to kind of help them succeed throughout the throughout Latin America, but but in terms of any more direct investments outside of what Weve done Ngs no data, we're not we're not focused on it now it's really just focus on Europe , and we don't think that you know.
We're going to need to spend that much more capital building out in Europe versus what we what we currently have in the plan and that said, there's no additional need for any additional equity in terms of any plan that we have for our capital our capital program.
Okay. That's helpful. Thanks, guys sure.
This concludes our question and answer session I would now like to turn the conference back over to Gary what Tosic for closing remarks.
Sure. Thanks. Thanks, everyone. We appreciate you taking time to join US today and like you know I think I'll just leave it with.
I think what you saw in this quarter was like really strong revenue and EBITDA growth performance and what you're seeing is the first of what I think you're going to see many quarters of a really strong per share guidance.
Growth.
We took to heart all the feedback that we heard out of the first call and just given.
Given the pullback in leasing and Hyperscale, we thought it appropriate to really kind of scaled back our capital investment program really focus on driving bottom line profitability and you saw that this quarter and you're going to see it for the next for the next year and a half or so so thanks, everyone. I look forward to seeing you on the.
The speaker circuit and have a great summer take care Joe.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.