Q2 2019 Earnings Call
Good afternoon, ladies and gentlemen, thank you for standing by welcome to the two Q2 0, Ninee chain results webcast.
At this time, all participants ventilation only mode.
During the presentation, we'll have a question and answer session.
This time, if you wish to ask a question you will need to press star one on your telephone keypad. Alternatively, you can submit your question anytime via the webcast to submit a question kick the Q an icon on the lower left hand corner of your screen type. Your question in the open area and click send to submit.
I must advise you that this webcast is being recorded today Wednesday, the seventh of August 2019, and I'd like to turn the webcast over to your presenters today, Jim Who's Baker. Please go ahead.
Thank you Tony.
Hello, everybody and welcome to interaction to second quarter 2019 conference call.
I'm joined by David Ruberg interaction as Vice Chairman and CEO , John already Chief Financial Officer, and Giuliano di Vitantonio, Chief marketing and strategy Officer.
We have a slide deck to accompany our prepared remarks is available on the Investor Relations page of our website at investors started traction that's all.
Before we get started a brief reminder, regarding or Ussixteen as discussed during last quarters Conference call. The implementation Alliance was 16 on January 1st 29 game had a significant impact on our reported financial statements. Please refer to the reconciliations in our earnings press release and slide deck for further information on the impact of this accounting change.
Also I'd like to remind everyone that some of the statements we'll be making on todays call are forward looking in nature and involve risks and uncertainties.
Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and those identified in our filings with the SEC.
We assume no obligation and do not intend to update or comment on forward looking statements made on this call.
In addition, we will provide non IRS measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable measure in the press release, which is posted on our website at investors started attractions.
Also to remind you we post important information about interaction on our website and interaction dot com and on social media sites, such as linked quarter.
Following our prepared remarks, we will be taking questions and now I'm pleased to hand, the call over to interaction CEO , David Ruberg David.
Thank you Jim.
And welcome to our second quarter earnings call.
Please turn to slide four.
Our results for the second quarter.
Reflect our consistent and solid execution.
Which has again delivered strong revenue and adjusted EBITDA growth.
During the quarter.
Interaction continue to experience favorable demand.
For Colocation capacity.
Reflecting the differentiated physician.
Of our highly connected data centers.
Cloud and content platform providers continued to be the largest source of this demand.
Driven by the secular trends created are centered around the shift towards digit processing services.
And content delivery of course to consumer and business economies.
Digitization is an unstoppable trend it is fundamentally changing the way in which we work.
Live and communicate.
Our industry is benefiting from the generational shift in infrastructure.
Enterprises are migrating away from highly customized on premise installations.
To hybrid multi cloud compute deployments.
With increasing connectivity requirements.
The notion.
Connect you compute.
Lies at the heart of many of the major industry trends, we are seeing today.
The performance expectations of users of cloud based applications and content services are growing all the time.
Slow.
In consistent response times.
And sub standard quality are unacceptable.
For real time applications.
Particularly where these are mission critical are central to the revenue streams, our operational performance of the application providers.
This year pace of change means the technology landscape in a few years.
Hey look quite different to what the consensus expects today.
What is certain however.
Does that we remain in the early phases of this global transformation.
Interaction is playing an important role in this evolution.
For many years, we have been creating connected community Center Datacenters.
That offer the platform providers high levels of connectivity and performance.
Together with access to large pools of customers.
Ultimately.
We are enabling access to a substantial portion.
Total European GDP.
This strategy remains more relevant than ever.
And represents for us and increasingly entrenched source.
Of competitive differentiation.
As a consequence.
We believe that we remain well positioned.
To deliver sustained growth and attractive returns on invested capital going forward.
Briefly.
Highlights for the second quarter include.
A 14% organic increase year over year, and both total revenue and recurring revenue.
A 26% increase year over year and adjusted EBITDA.
An increase in equipped space of 6500 square meters.
An increase in revenue generating space of 2500 square meters.
Solid bookings and a healthy sales pipeline.
Stable pricing with churn within our historical ranges.
The opening of Madrid three.
In addition.
Today, we announced that we will construct Stockholm six.
And further expand capacity in each of Frankfurt 15, MRC three.
We have also acquired the Paris seven lands.
At the beginning of July we completed the race for approximately 283 million euros.
From an equity issue of 4.6 million shares.
Further strengthening our balance sheet.
And supporting our continued expansion for future growth.
And.
Lastly.
The equity issue.
Combined with subsequent improvement in our credit quality contributed to a one notch upgrade by S&P.
Please turn to slide five.
Revenue in Q2 came in at a 158 million euros.
Up 14% from Q2 of last year and up 5% sequentially.
Recurring revenue of 150 million years represented 95% of total revenue.
And was 14% higher than the same period last year.
Q2, adjusted EBITDA was 80 billion years, representing an adjusted EBITDA margin of 51%.
John will talk in more detail about the financial numbers later in the call.
Please turn to slide six.
We added 6500 square meters of equipped space in the second quarter.
The year over year increase of 16.8%.
And ended the period with 154800 square meters.
We installed 2500 square meters of revenue generating space.
Led by the Netherlands, Germany.
Austria and Spain.
We ended Q2 with a 121600 square meters of total revenue generating space.
Which equates to an overall utilization rate of 70%.
Please turn to slide seven.
During the second quarter, we added new capacity in seven different markets.
And construction continues across most of our footprint.
With an emphasis on larger builds in certain markets.
In response to the favorable customer demand patterns and orders that we are experiencing.
Today.
We announced the build out of two additional phases at Frankfurt 15.
Great demand remains particularly strong.
This is an artistic data center in the city.
Where we are well established as a market leader.
With very high density of connectivity in our campus.
With the addition of stock themselves and another phase and Marcy three to our expansion schedule.
We now expect to open over 20000 square meters of nuclear space.
In each of 2019 and 2020.
Looking out a little further we have also announced over 10000 square meters of equipped space, which is scheduled for completion in 2021.
In aggregate, we have announced the addition of 44200 square meters of equipped space scheduled to become available.
During the second half of this year through to the end of 2021.
And this represents an overall expansion of 20% 8%.
Of our current capacity.
We continue to add to land ownership across our markets in Paris during Q2.
We completed the acquisition of a land on which our Paris seven data centers located.
For 19 billion euros.
The parasite.
His sits is adjacent to additional land of 68000 square meters for which we have a purchase option.
This property has it industrial zoning and 50 megawatts power has been secured.
Finally.
As many of you may be aware.
The municipal government of Amsterdam, and certain adjacent municipalities.
Recently announced a temporary moratorium on the additions of building permits for new data centers.
This temporary moratorium does not affect any of our datacenters currently in operation.
Or any that are under construction.
As we already have the permits and sufficient power to bid out the entire amsted intent data set us up for 2000 square meters.
Please turn to slide eight.
Reflecting our continued strong growth and capacity expansion.
Platforms now chain account for around 80%, 40%.
Of our monthly recurring revenue.
While connectivity and enterprise segments are each at around 30%.
Cloud and content platforms again led the way in terms of recurring revenue growth in Q2.
The leading b to b platforms to continue to expand.
Excuse me in the big four.
And are starting to select new locations in tier two markets.
While the BDC platforms, our rapidly expanding across all locations as they build their infrastructure to get closer and closer to the end users.
Hi, conductivity density is at the heart of our business.
And we continue to undertake initiatives to further increase the connectivity presences across our locations.
In recent quarters, we've seen orders coming from both local and international connectivity providers.
And this remained evident in Q2.
These providers or in many cases, capturing the increase in network traffic.
And our datacenters due to substantial growth in our data and into data driven by the content and content cloud providers.
The interplay of platforms and connectivity is a perfect example of why focusing on communities of interest.
Of highly connected workloads has been and will continue to be.
As central focus of our strategy.
It is a strong driver for the value creation.
And sticking this our communities that sustains enhances the value of our data center campuses overtime.
Our state campus and that is an excellent example of this.
For our initial focus on building the connectivity foundations.
And significantly expanding the number of network providers served to retract the cloud and digital platform providers.
A virtuous cycle was created and many additional connectivity providers. We were then drawn to the campus.
Today over 150 network service providers are connected to our Marci campus, which is becoming a primary gateway.
For subsea cables coming into Europe .
In the enterprise segment, we're seeing an uptick in new enterprise logos, which is a clear indication that.
While the enterprise market remains relatively early phase in their path of migrating the digital infrastructure cloud.
The value of flow co location is becoming evident to them.
They increasingly understand that are highly connected data centers are the ideal venues to establish secure private connections to all of the leading cloud platforms for a growing range of hybrid multi cloud applications.
More specifically.
We're seeing growing demand from enterprises that are either digitally native.
Or tissue to mature such as online retailers.
They tend to be large and mid size based in large metropolitan areas.
Deploying the data intensive or front end applications and using one or more clouds.
For this profile.
A highly connected location.
Becoming the natural choice.
While in the past we would have competed with wholesale providers or top telcos against a narrower set of requirements.
Primarily focused on cost resiliency.
Our operational excellence.
I would now like to turn the call over to John .
Thank you David Please turn to slide 10.
The second quarter was another period of solid growth across all of our markets.
We enjoyed a robust first half delivering year over year revenue growth, 14% and adjusted EBITDA growth of 13% on a like for like basis.
At the same time, we are scaling the business commensurate with our long term growth profile and investing for the future and disciplined manner.
Which is resulting in continued attractive returns on invested capital.
Like last quarter I will provide reported results as well as the comparison with IR 16, adjusted figures for ease of comparison to prior period.
There are reconciliation tables in the press release and in the appendix slide deck, which show the impact of the accounting change on our reported results.
Total revenue in Q2 was 158.5 million euros.
Up 14% compared to Q2, 2018 and up 5% sequentially.
Hi, parts 16 had no meaningful impact on reported revenue.
Foreign exchange movements on balance.
Also did not have a significant impact on a year over year or sequentially.
However, we cannot rule out continued weakness in the British pound versus the euro in the second half of the year.
These currency movements accompanied by the uncertainty intention that a potential no deal Brexit is creating work together likely moderate our UK revenue growth in the back half of the year.
Recurring revenue in the quarter was 150 million euros also up 14% year over year, representing a 3% sequential increase.
Recurring revenue was 95% of total revenue while recurring ARPU increased two euros to force 214, excuse me 200, 416 euros for the quarter.
For the remainder of the year, we expect ARPU to be in the range of 414 to 470 euros and will continue to be influenced by the timing of new customer installation.
Cross connect revenue was 6% of total revenue and we expect it will remain at this level in the second half of the year.
Nonrecurring revenue in Q2 was 8.5 million euros.
And represented 5% of total revenues.
The increase was due to the completion of large customer installations in Germany, France and Austria.
As we have discussed in the past nonrecurring revenue can be lumpy as it is typically.
Customer specific and often dependent on changes that the customers are making to their deployments.
We expect nonrecurring revenue to be around 5% total revenue for the remainder of the year.
Cost of sales was 54.7 million euros in Q2.
Reflecting the treatment of 7 million euros of operating lease expenses as a result of higher parts 16.
Gross profit was 103.7 million euros.
Up 3% from last quarter.
Backing out the accounting change gross profit would have been 96.7 million euros, a 14% increase year over year.
The reported gross profit margin for the quarter was 65.5%.
While the comparative gross margin excluding the impact of IR 16 was 61% at 30 basis point decrease year over year due to a higher proportion of energy revenue as a percentage of total revenues as well as higher levels of nonrecurring setup fees in Q2 compared to the same period last year.
Sales and marketing costs were 9.4 million euros in the quarter down 2% year over year, but up 3% sequentially and represented 5.9% of total quarterly revenue.
Just below the low end of our typical range.
We expect sales and marketing costs to remain between 5% and 6% of revenue for the balance of the year.
Excluding depreciation.
General and administrative expenses were 14.2 million euros in the quarter up 17% year over year.
And down 4% sequentially.
The year over year increase primarily reflects ongoing investment and operational enhancements to support our customers.
While the sequential decline is due to onetime items that were incurred during the first quarter and not repeated in Q2.
Total DNA expense was 9% of revenue this quarter within our typical range of 8% to 9% of revenue.
And we expect it to remain within this range for the remainder of the year.
Adjusted EBITDA was 88.2 million euros.
50.6% margin.
Excluding the 8.6 million Euro impact of our 16, adjusted EBITDA grew 13% year over year and 2% sequentially.
The adjusted EBITDA margin, excluding the IRS 16 impact was 45.1%.
A year over year decrease of 60 basis points.
Depreciation and amortization expense was 44.3 million euros in the quarter, including 7.3 million euros due to the impact of IR 16.
Excluding the impact of our 16, depreciation and amortization increased by 15%.
Year over year.
Net finance expense in the quarter was 17.1 million euros.
Including the $3.1 million from the impact of our parts 16.
Sequentially, the finance expense increased 3%.
Due to a drawdown under our revolving credit facility in the quarter, which was repaid post the end of the quarter.
On a like for like basis, excluding the impact of our 16.
And one off costs relating to our 2018 refinancing.
Finance expenses, 20% higher year over year.
Due to the higher average level of borrowing in Q2.
Income tax expense in the quarter was 3.6 million euros.
30% increase year over year, and a 24% decrease from the first quarter.
The effective tax rate in Q2 was 30%.
Compared with 36% in Q1.
The sequential reduction due to a one off deferred tax adjustment in connection with the acquisition of Powerset, Atlanta, which has no cash impact on cash taxes.
Our LTM cash tax rate was 34% in Q2.
Down from 37%.
In the prior quarter.
Net income was 8.6 million euros in Q2 up 3% sequentially.
Diluted earnings per share for 12 Euro cents on a diluted share count of 72.5 million shares.
As a reminder, the equity issued did not close until July onest.
So there is no impact from the offering on our second quarter results.
Please turn to slide 11.
Okay.
Overall demand in Europe .
Remained strong.
With activity focused around some of the largest market Frankfurt and Amsterdam in particular.
Customer demand with less evenly distributed in Q2 than in previous quarters.
As the platforms are prioritizing securing long term capacity in their primary markets. While they are rolling out appointments in tier two cities more gradually.
Interaction Big four markets continued to see strong growth.
Second quarter revenue of 105.6 million euros up 15% year over year and up 4% sequentially.
Adjusted EBITDA in the Big four was 62.9 million euros, representing a 59.6% margin and up 3% sequentially.
Excluding the impact of IR 16.
Big four our adjusted EBITDA was up 12% year over year.
The comparative adjusted EBITDA margin this quarter with 54.3%.
Representing a year on year decrease from 56.2% due to the higher level of nonrecurring revenue earlier.
Germany, and France led the way with the Big four segment.
Our rest of Europe segment delivered second quarter revenue of 52.8 million euros.
With recurring revenue up 11% year over year, led by Austria, Denmark, Sweden, and Spain and up 5% sequentially.
Adjusted EBITDA for the rest of Europe segment came in at 32.6 million euros.
Equating to an adjusted EBITDA margin of 61.7%.
Excluding the impact of IR 16, adjusted EBITDA was up 10% year over year and up 1% sequentially, while the comparable adjusted EBITDA margin declined by 60 basis points to 56.8%.
Please now turn to slide 12.
Capital expenditures, including intangibles totaled 123.5 million a year in the quarter.
Of this sum.
117.3 million euros or 95% of the total was deployed on expansion and upgrade projects, while 2.6 million euros or 2% of the total spend on maintenance and other and 3.5 million euros on intangibles.
63% Q2 capital expenditure was spent in the big four this quarter compared with 69% last quarter.
Please turn to slide 13.
During the final week of the second quarter interaction raised 283 million euros net proceeds through the issuance of 4.6 million shares.
The success of the equity issue reflect the positive Investor response to our strong track records in the healthy momentum we have across our business.
Our commitment to using both debt and equity to fund the growth of our business.
Is in line with our objective to have an optimal capital structure over the longer term.
We expect to continue investing on the basis of our proven and disciplined approach to acquiring the necessary assets.
Including land.
Our capacity and data infrastructure in order to continue to scale, our underlying asset portfolio in an appropriate return focused manner.
Turning now to the balance sheet.
Interaction ended the second quarter, with 55.6 million euros, and cash and cash equivalent.
Down from 186.1 million euros at the end of 2018.
At June Thirtyth.
Interaction had drawn 40 million euros on the revolving credit facility.
Pro forma for the equity raise subsequent Rcs repayment the cash balance at quarter end would have been 298.8 million euros.
The LP way net leverage, including IRS 16 related lease liability was 5.2 times.
While gross leverage on the same basis was 5.4 times.
Excluding the impact of our 16.
Okay, Ray net leverage including the lease liabilities was 4.3 times.
Healthy rate gross leverage with 5.3 times.
The LTM net leverage ratio was 4.6 times.
And pro forma for the offering the LTM net leverage ratio, excluding the impact of Bicuar 16 was 3.7 times.
Cash Roger our broad measure of return on gross invested capital was 11% for the last 12 months.
Taking into account the fund raising the equity offering combined with the existing cash on the balance sheet and Undrawn 300 million Rcs at present.
And the growing cash generation of our datacenter asset we have significant available liquidity.
S&P recognized our improved credit profile and recently upgraded our rating to double B.
Please turn to slide 14.
At the end of Q2 2019, our fully built out data centers at 89100 square meters of equipped space and we are 79% utilized.
They generated 408 million euros in revenue over the last 12 months.
After deducting direct cost and maintenance Capex.
We are left with 259 million euros on a cumulative investment of 1.17 billion euros.
This equates to an attractive cash returns of 22% over the last 12 months.
To summarize.
The European Colocation market remains healthy driven by secular trends that favor of digital adoption by consumers and enterprises alike.
We continue to be well positioned against our competitors in the carrier and cloud neutral co location market and continue to focus on acquiring the land required to expand our footprint as required by customer demand.
We expect solid growth across 2019, as we invest in and scale the business.
When thinking about the profile of our growth in the second half.
It is worth bearing in mind, the various moving parts.
Platform deals are invariably lumpy and may impact the timing of revenue realization, particularly in the tier two markets, where larger deals can create step changes in utilization.
As noted earlier, we're also monitoring macroeconomic development from the twist in terms of the Brexit process.
As well as trade tensions between the us and China.
We do expect some potential.
Impact from currency in the second half due to sterling weakness and the uncertainty of which appears to be having an impact on enterprise decision, making in the London market.
Lastly, we remain disciplined in the execution of our capital investment program and we are resolutely focused on maintaining the attractive profile of our returns on invested capital.
And with that I would now like to turn the call back over to David.
Thank you John .
Please turn to slide 16.
The patterns of demand for datacenter co location are continuing to evolve.
And in line with our expectations.
At the present time the main demand driver is the migration of applications.
From legacy Datacenters to the public cloud.
Consequently, the architecture and infrastructure requirements of the cloud platforms continue to shape our industry.
Both in terms of direct demand for sizable compute deployments and through the creation of connected communities in our data centers.
The leading club public cloud providers are fueling the growth of the industry through aggressive initiatives.
To migrate enterprises to the public cloud.
They are in an arms race to capture market share.
Promoting a public cloud first approach this starting to lead to the gradual movement of existing enterprise applications.
Out of on premise and outsource data centers.
The largest end market.
In the cloud providers is large enterprises, which are being drawn into the public cloud by a migration incentives.
The migration of existing applications is becoming an important trend in Europe .
Whether through the adoption of container technologies towards her replatforming of existing applications.
Against this backdrop of favorable secular trends a key element of demand uncertainty facing our industry is the degree to which platforms will build their own datacenters rather than relying on third party data center providers.
The nature of the projects that we are involved with with the platforms are providing clues on how the build versus buy strategies and the market leaders will play out.
Two significant observations by the file.
First.
Time to market remains a primary driver for cloud providers.
When choosing third party data centers.
Which is likely to be relevant in fewer locations over the coming years.
Second.
But for the new generation applications, where performance and workload placement play a more critical role proximity to interconnection points is becoming a key selection criteria.
This demand is starting to represent a distinct category with an overall cloud and content platform demand.
While platforms continued to drive growth in Europe .
Direct demand for co location from enterprises is picking up.
As they seek to transform their IP architectures that high cost of maintaining legacy data centers for residual applications that have not moved to the public cloud is a primary reason for considering co location.
This type of demand, which has been growing in recent quarters. This rather difference to the classic II outsourcing in the past.
Today, the vast majority of new co location opportunities include secure access to the cloud is a key requirement.
And in many cases also require proximity to end users as well.
Given these additional requirements our carrier and cloud neutral data centers have a differentiated and superior value proposition versus many of our competitors.
At the same time.
Some customers are simply looking for a place where they can access one or more clouds for transfer data across to public clouds.
Highly connected care and cloud neutral data centers, such as ours, an ideal location for migration and transfer data and workloads between cloud platforms.
As a consequence, we are seeing growing interest in these types of deployments.
These deals are typically smaller in size.
But served to substantially strengthened the depth and value of our connected communities and we believe will lead to larger deployments overtime.
Please turn to slide 17.
Looking beyond existing demand patterns.
We are witnessing the emergence of new cloud native applications, which are focused on real time data analytics artificial intelligence and the internet of things.
These next generation applications, our data intensive.
And often distributed across multiple locations.
We're workload placement this vehicle.
As performance becomes a more central theme and infrastructure design.
Enterprising are starting to devise optimal workflow replacement strategies, especially for customer facing applications.
This trend will accelerate adoption carrier neutral co location.
As the key requirements, our access to multiple clouds as well as proximity to the end users and to edge nodes.
In many ways, what we're currently seeing with BDC platforms, providing provides an early indication.
Our broader range of native cloud applications will evolve.
These content providers represent a growing and substantial segment of the market.
As more and more applications target consumers through data intensive applications.
This type of demand is perfectly suited to carrier and cloud neutral colocation and we are capturing a large market share which is also strengthening the value of our interconnection hubs.
As enterprises optimize the application design.
We expect a growing realization on their part.
That in public cloud only architecture is unlikely to meet all of their cost and performance objectives.
And therefore, we will decide to leverage co location.
Proportion compute requirements.
And your interaction is well positioned to capture very significant portion of this demand as we offer some of the most highly connected cloud hubs in the vast majority of our locations.
The combination of sustained demand from platforms and emerging demand from enterprise. It provides our view.
With ample opportunities for us to maintain attractive growth rates in 2020 and beyond.
Please turn to slide 18.
Today, we are reaffirming our previously announced full year financial guidance for revenue.
Adjusted EBITDA and capital expenditures to be specific.
For the full year 2019.
We are expecting revenue to be in the range of $632 million to 647 million euros.
We expect adjusted EBITDA to be in the range of 224 to 334 million euros.
And we expect to invest between $570 million and 600 million years and capital expenditures this year.
And before we open the call up to Q any I would again like to express my thanks to all of our employees for their unrelenting commitment.
To quality and customer focus.
The ongoing success of this company has the product for their hard work.
And dedication.
And I would also like to thank our shareholders and bondholders for their continued support for interaction.
And with that now let me call the.
I hand, the call back to the operator to begin the question and answer so.
Thank you once again, if you wish to ask a question you will need to press star one on your telephone keypad and wait for your name to be enhanced to submit your question via webcast kick Mccune icon on the lower left hand corner of your screen type. Your question in the open area and send to submit.
In the interest of time, we were crushed to each person just submit one question.
And your first question comes from the line of Erik Rasmussen from Stifle. Please ask your question.
Yes. Thanks.
And.
Nice so I appreciate the commentary on on.
Business dynamics, there, especially around your communities of interest but.
Can you just comment on the competitive landscape.
This seems to be more of a focus on Europe .
What are your thoughts on the number of new entrants coming into the region.
How much of a competitive threat do you think they pose and then maybe just to follow on to that what are you hearing from your customers as it relates to some of the strengths that you talked about with highly connected sites maybe versus those that are not just trying to understand the dynamic the.
Demand profile there thanks.
Okay, how about I'll handle the first half of that question Julian will handle the second okay.
So.
I think we said many times before the European market is approximately the same size from a technology standpoint is the American.
The Americas, we have far fewer competitors here in Europe than we do in the United States. The market here is more fragmented than it is in United States and we have been doing this for a long time. So I think what you're seeing happen is those that by the way there are not that many new entrants.
And those that are coming in I think are beginning to realize that there are substantial barriers to end year that they do not experience in United States. So overall I think there is a market opportunity in a growing market community for all of us.
And I believe that we are really well positioned.
From a historical perspective.
From an orientation perspective, our communities of interest concept puts us in a really good position to get more than our fair share of a growing market and.
When you get our customers, yes, I will add a few a few comments on what we hear from customers at the end of the day to day look at requirement for customer staple in three broad categories.
The first one is that the table state aid operational excellence, they really want to make sure that the data centers that deliver the quality of service. They expect and we have a very strong rack, where we doubled our customers from that so they keep coming back to us.
With that assessment that we're going to deliver what we promise we deliver.
The second one eight.
Very specific to Europe , the know how of the local market.
They understand that Europe is different from the U.S., they understand that today, especially in the smaller contracts that needs to be some local knowledge on how to deal with the local bureaucracy, the local fit consented and our European footprint.
Enabled them to to get that we did leading debt knowledge of the kind of before we open it.
And then of course that the differentiator that make the difference, especially with the new type of workloads that are more data intensive which is conductivity and this is something we've been we've been building for.
Well almost 20 years now.
This is not something that can be recreated overnight.
The something that has enabled us to be leaders in conductivity first and then also.
Really get a very significant portion of all the cloud on ramps that have been deployed in Europe over the last four years. So when you put all of these things together the operational excellence the know how of that of the European market and the connectivity.
And cloud access that we provide at that creates some very high barriers to entry that to all of all of the competitors that commenced and catalyst acknowledge that all the time.
Great.
Maybe just a follow up.
It it seems like there's a lot of activity picking up around Paris, and you had secured some land into some adjacent land there.
Yes, how do you see this market and maybe just the sustainability. Thank you.
Okay.
It's it's not just Paris.
It's actually France.
With oil.
If you look at the kind of activity came from the United States into Europe in General a lot of it used to go through Ireland or.
The UK and with Brexit, what's happening is people are looking at.
It's coming from the United States, particularly otcs upcoming directly to the continent and bypassing.
UK.
If you look at emerging markets in both the east coast and the West Coast of Africa, and the traffic patterns coming from.
Asia.
Again trying to establish commercial relationships with the continent of Europe .
A logical places to come into France with submarine cables MRC. So we I think we are really well positioned with where we are in Paris and in more say as the evolving traffic patterns are beginning to emerge.
And people are looking at West Coast, South coast to Francis away of the probably the most convenient way.
From.
North America and from the east to get into Continental Europe anything you want to add to that.
Just one additional comment as we've talked about this a few times that is a nash and natural evolution of the auto natural pattern.
The pulmonary technology rollout the technology in Europe . This past into UK, then hit North in Europe , and then the next drop it front and now we have reached that tipping point for France, where the market is mature enough for the platform.
And the enterprise. It is felt good about the technology. So thats why we are seeing is that this uptake and competitive.
Thank you.
Okay.
And your next question comes from the line of Michael Rollins from Citi. Please ask your question.
Hi, good morning.
During your prepared comments you touched on.
The demand that you're seeing for platforms and I was curious given some of the lumpiness and scaled bookings in the U.S. If you could just further on pack what you're seeing in terms of the flow of demand in bookings from cloud new platforms.
In Europe relative to the us experience.
And do you still see the prospect for revenue growth to improve.
Over the course of 19 and into 2020 for the overall portfolio.
And then just secondly, if I could follow up with another question just as you increase the development pipeline again this quarter.
Can you provide some context for how the level of pre leasing or reservations is influencing the growth opportunity for interaction for the coming one to two years.
Thanks.
Okay, Mike outbound Viggiano started the demand that I'll hand, it over to John then and and David we hinted at basing that in the prepared remarks.
The platform, we really need to distinguish between the cloud platform and the company.
And the content platform already deployed.
By now that deploying all of obligation that they have very granular and that leads to the end user and so we see demand across all though our location from that from the company.
When it comes to the cloud platform a similar thing applies to the netbook note of the cloud platform. Then now reached most of our about location and when it comes to the larger deployments, which have compute node. They tend to at this point, what we are seeing that really focusing on making sure that they had line of sight to future capacity to decrement in the main in the main stated the big four and weed out specifically very strong in Frankfurt and obvious to them and now starting and Patty. So they are really focused on making sure that they had that debt capacity to Qs several quarters out which it is also behind some will deem the announcement, we made today sell that future future expansion. So you're seeing the you will track with the beacon be platform focusing primarily on the on the lot, Steve and stocking more gradually to moving to the smaller stated while the BDC platform had a much more homogeneous deployment across the across the entire footprint.
Mike I'll take the second piece of that and you mentioned just.
We reiterate on the question the growth 2019 into 2020 and the answer to that is absolutely. We still have you mentioned as part of the prepared remarks.
Expect very solid growth throughout the next what would be six quarters.
We remain highly confident in the business.
Giuliano when David talked about demand and as a result, we also reaffirmed our guidance.
However, as we mentioned we are seeing some headwind from what's happening, particularly in the London market there's uncertainty.
In terms of the enterprise community, it's also particularly manifested.
Across financial services that as well as.
Some of the FX movement that were seeing and if you looked at the back end of the quarter from high to low pound Euro was about 7% differential I'm not saying, it's going to stay there.
But that does have some impact on the second half of our growth rate.
That said, we still expect it to have a very solid second half of the year.
And and Mike to the last part of your question.
Short answer is we are getting pre bookings.
And we decided a year ago were not going to release the amount.
The fact of the matter is Julianna said some of these guys.
We really need to see this.
The business they give to us is really sticky and so they want to see a path.
A growth opportunity and in some cases.
We have to fight with them not to take a pre booking because we want to develop the community ventures the way we want to.
So in a number of the bills that we have announced we do have pre booking levels to Mitch and again, it's all part of our very disciplined approach to how we deploy capital.
Okay.
Thank you.
Hi, Tony were.
Sorry did you want to take your next question.
Yes. Please. Thank you. Your next question comes from the line of Colby Synesael from Cowen and company. Please ask your question.
Great.
You've talked about this a little bit already but when you disclose your your revenue breakdown do you talk about it in terms of verticals the cloud enterprise connectivity.
I was wondering if you can talk about in terms of size of deployment.
So you know I've historically thought of.
In interconnect oriented deployment is being caught sub 250 kw in.
Yes more the.
The larger hyperscale or cloud connectivity deals as being.
Well north of one megawatt.
What are you seeing just in terms of deal size and if you can can you give us some color in terms of what that make up in terms of revenue looks like broken out by some type of deal size breakdown.
And then secondly, as it relates to churn.
For many quarters as far back as I can remember you've talked about churn being in line with your.
Your your normal.
Ray our number one is that churn number and what are some of the reasons that customers are typically leaving.
Your facilities. Thank you.
Cold individually I'll take the first part of your question. So you're right. Historically, there was a clear demarcation in terms of the size of deals between mall interconnected deployment at the larger compute nodes.
Let's now evolving it really evolving more along the lines of the type of application. That's some applications that are larger in size in terms of compute footprint that require a high degree of connectivity and actually this is going to increase with the internet of things with the official intelligence. What you would really need proximity either to get you that will proximity to the cloud platform Eagle Ford deployment is about in excess of our megawatt. So the traditional dislocation that that you're referring to is the evolving towards something at a much more around.
The title type of workloads that type of applications that are suited to a highly interconnected environment. So we don't really talk too much in terms of the size of the deployment with that's why we tracked by by segment and you've seen the pattern revenue split on those on slide eight.
40 for the platform 30 30 for the other two segments when it comes to the demand we touched on this in the in the past the quarter than we have still stable around that two thirds of the demand is coming from the platforms at the moment.
And Colby I'll take the churn one.
We have mentioned this before basically on a monthly.
Measure, it's 0.50, 0.7% as I mentioned on the call we were 0.5%.
This quarter on average and as you know the business that we run as a very sticky business.
Particularly in our connected data centers.
And the overall profile of how our business comes into our data centers.
And the reason why they would ultimately leave.
It's really tend to be around companies that would have a bankruptcies last restructuring or some form of M&A, where there is some underlying business combination and companies are looking for integration opportunities. So that's pretty much. The three main drivers of what we would say.
Great. Thank you.
[laughter].
Okay next question please.
And your next question comes from the line of Jonathan Atkin from RBC capital markets. Please ask your question.
Thanks.
Maybe quickly as a follow on.
Ask it a different way, but as you have these newer data center expansion announcements across the various markets are you.
Expecting a similar customer density.
Size of deployment interconnect intensity as you have seen in your.
Business to date.
And then and then maybe turning on to some of the comments that David made in the script around enterprise logos I'm just interested if thats coming in from.
Channel contributions increasingly or more kind of it. This is the same mix of direct versus indirect as you've seen to date.
As you brought in new logos.
And then in the Giuliani you mentioned AI in there was in the video announcement I guess back in in July and they're deploying across 11 of your data centers and is that the type of thing that kind of sets the stage for future growth or is that already having.
Kind of noticeable impacts on.
On demand thanks.
Hi, Jonathan in terms of the mix.
And the Datacenters for the next year or two.
We expect them to be comparable to what we're seeing now.
And as far as.
Yes, so I don't I think the other two questions. Let me start with Nvidia and that that was a very important announcement for us because it's really an example of the type of the community that we want to do in the future.
We really want to glass is a highly connected deployment.
Deployment in our in our data center and Oh of course will be getting a customer of ours and we have oh, we have good business with them, but we're also starting to see the effect of that announcement in terms of interest from other customers, who want to be oney proximity to India. So it's absolutely a spot on that's exactly the type of things that we would develop and moving forward very very early days I would emphasize if enterprise. It's early days, we truly are today, but it's a it's one of the examiner fight why the strength of the community. We continue to pan out over future years, and ER and then continue to position us very well in anything.
In terms of enterprise are getting we touched on this a white tail some detail in the prepared remarks.
Does the cotton demand is coming primarily from the migration of existing application, which is prime modeling that from Audi moving into into the public cloud.
But those deployments those deployment that going to the cloud.
Now they really looking for things like access to the cloud secure access to the cloud because you can access the cloud over the public Internet you want secure access to the cloud you need to do to it a private connection.
Ah, they're looking for a proximity to the end user so the new wave of a collocation climate is really really suited to.
Lauer.
Our value proposition.
And it would be even more so for the future weight of applications like the one we just discussed with convenient.
Where the workload placement is another not a term that comes up a lot in our conversation with enterprise. The workload placement is the key driver for them to be optimized web deck on that are there going to be signed that infrastructure and where they're going to deploy different different workload.
That's what we're starting to see in terms of yes.
Right, Yes, I think so it is something that is being.
Relatively recent couple of quarters the city by city.
So is the channel or systems integrators or other partners have been happy on that or is it just the enterprise is given how they are architecting themselves and using your platform, it's more happening organically rather than any or any sort of channel strategy that you're that you're pursuing.
Sorry, I forgot that property. Your question apologies for that yes, we are seeing a combination or some some direct but also to different types of channels at Yankee service providers is one example, but also increasingly the telco the carriers because of course, they are divesting their own data centers and they still have a very very intimate relationship with the enterprise customer, especially in helping them design their networks and behind the infrastructure. So we are seeing more and more of the carriers being willing to partner with us to position our carrier neutral data centers as part of their offer to the enterprise. So it's a combination of direct and indirect and the currency is a new component of the indirect that said that they are picking up.
Jonathan One does this company has always been focused on collaborative efforts.
And one of the things that we're trying to develop as these channels.
But if you listen to what Giuliano said, we referred to.
Some of these players are behind the times in terms of understanding what their future looks like.
So.
Not only do we have to educate end users about the value of Colocation and what role the place. We spent a substantial amount of time working with some of these other elements.
The systems that we deal with trying to get them to understand what role they play.
And then I want to make one final comment for us the data component.
It's important because it gives us direct exposure to the end customers, which again has indeed the educational.
Pity that David was referring to it's important for us to get to hear first hand from CIO, how that migration how that digital.
Digital journeys evolving because the position us better understand the overall requirements that crop gets out of unchanged.
Thank you very much.
Next question please Tony.
And your next question comes from the line of Robert Gutman from Guggenheim Securities. Please ask your question.
Hi, Thanks for taking my questions. So you sound incrementally positive.
Relative to your prior comments on the pace of enterprise.
Activity across Europe , and is that specifically tied to what you just said about the telco carriers as.
Incrementally contributing or are there other factors across Europe that caused some difference and secondly.
I was wondering if you could answer how constrained are available our power and land in the other big four.
Markets in the context of the Amsterdam moratorium.
Okay. So.
Overall, I think the timing is tapping to be right for enterprises. They are really starting to migrate to the cloud in Europe or in the that migration is a is growing and so that's the fundamental trend behind a lot of the things that we're seeing both the demand that we're getting from the platform to serve that demand, but also the demand we are starting to see from enterprises that compliment that cloud strategy with a with a presence in the colocation environment. So it just that the market is starting to grow in Europe are you starting to mature and are you seeing there we are starting to see the inflection point than we've been referring to for quite some time in terms of adoption of cloud that the that the underlying.
Trend that is happening at the moment.
In terms of the other part of your question I know that everybody is focusing on what happened in Amsterdam.
In the surrounding municipalities.
That's just one something thats extremely visible relatively abrupt.
But when you look at what's behind this economic political and environmental issues that have prompted them to do this but other countries have been in some respects way ahead of them.
In terms of establishing what their priorities are in these areas and we have been dealing with these for a long time I think that's one of the issues. When you come to do not just from the United States here and look out and you see land and you see power lines decent hi struck it rich it doesn't work that way.
So this is.
This has been going on in particularly in France.
And in Germany.
In Austria.
And by the way, it's not just power in lane consumption. They are going to focus eventually on how efficient you are in terms of water utilization in terms of what do you use.
You've got a border cooling and I can tell you we are extremely well positioned for that so this is not something that's unique here. It's just something that's become highly visible and that was motivated by one politician.
But.
At the end of the day, they recognize the value of what it is that we bring to the community and wouldn't have this growth problem in Amsterdam, the connectivity, which we support and other support wasn't here.
People wouldn't be coming from the UK as a result of breakfast to hear if they didn't have really good communications. So it's something this become highly visible in one city, what's been going on for a long time.
Okay.
Yep. Thank you.
We have time for one more question.
And your next question comes from the line of some boundary from Credit Suisse. Please ask your question.
Thank you very much for fitting me in.
My question has to do with the platform ramp that you're seeing as a percentage of your revenue mix. So this quarter, we saw about 40%.
Your your customers make up all coming from platform now maybe just we can get a better idea on the expectation going out a couple of quarters, even a year should we expect this 40% to inch up even higher given that platforms have a higher deployment velocity than typical enterprise and then maybe we could just think about the cyclicality here are we expected to see this go from 40% to 50% before it retracts or any kind of real color on how you really see the network being built out with platforms and enterprises complementing that capacity as they also build out their plans.
Okay. The first part of the question, it's easy to answer because we are at 40% today, but I already mentioned that two thirds of our bookings are coming from the platform. So you can you can figure out that we've continued to see for the.
For the coming quarters, an increase in the proportion that come from the proportion of revenue that comes from the profit on the second part of the question is more difficult to answer because at least I don't have a crystal ball out David or John if they do.
But how long will this trend continue before we see more of a.
Elbits wind back to a point of equilibrium between between between different segments.
We expect that at least for a couple two or three years, there will be a.
The majority of the demand will come from the platform, but then at some point the migration to the cloud we become a start to mature and you would see the demand from enterprise pickup.
So again, we don't have a specific date in mind, but certainly two or three years out we will start to see a rebalancing of that.
Of the booking and the subsequent of the revenue as well.
Keep in mind that we're talking about multiple types of platforms.
Both digital media and cloud.
And even within them Theres sub segments of whether it's a connectivity or computer heavy compute so there's a whole variety of these things that basically make up what we're looking for.
And as far as the transformation is concerned we do have an internal back can you just said, it's approximately two or three years out before we believe that the enterprises, what we consider the colocation hybrid portion of it will begin to make a substantial impact on our bookings, but keeping in mind.
That even though we're taking more and more of the cloud.
The platform business.
We believe it is.
Strategically important to stay relevant.
And probably more important given the pricing that were getting contributes to substantially.
Attractively to the returns so we're not taking bad business, it's good business.
When we get the enterprises, it will be better business.
Better returns alright.
Great perfect. Thanks.
I just have one clarification my question I was asked earlier.
Have you do you have an idea or a percentage of mix that is coming from the channel in terms of new bookings have you guys given out anything or can you characterize any kind of percentage mix regarding channel stores as direct it's right it's very low.
Got it thank you.
That concludes our conference call for today. Thank you for joining US we look forward to seeing many of you out on the road and speaking with you soon and we will have our next earnings call.
In early November . Thank you very much and you may now disconnect.
Ladies and gentlemen that does conclude our conference for today. Thank you for participating you may now disconnect.