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InterXion Holding N.V. (NYSE:INXN)

March 12, 2013 9:45 am ET

Executives

M. V. Joshi - Chief Financial Officer and Principal Accounting Officer

Unknown Analyst

So we're delighted to have Interxion's CFO, Josh Joshi here to present to us today. I'll hand it over to Josh who will give us a presentation on the business, and then I will kickoff Q&A. Thanks, Josh.

M. V. Joshi

Great. Thank you very much. So thank you very much, and thank you for those on the webcast as well, for listening in.

So Interxion. We are a carrier-rich, carrier-neutral data center provider. And that's a very important distinction because simply just being carrier-neutral is -- it's possible for anyone to do. But it's actually the carrier density within our data centers and the data centers of our peers that make a significant segment differential and also a moat around our business. In 2012, we've just shown EUR 280 million of revenue. And in Europe, in terms of European businesses, we're all about -- the 3 core players in Europe, are all about the same size. Interxion is focused on high-growth customer segments, and we're looking to create value to identify communities of interest within our data centers. We've got the largest footprint in Europe, allowing our customers to access 75% of the GDP of Europe. Now in and of itself, that's nothing more than a metric, but why would we quote that? Because what we see is that carrier-rich data centers that are helping customers deploy response time-sensitive applications are trying to help our customers gain access to their customers. And their customers are sitting within the economic population. And to be able to get access to them with a reasonable response time, what we we're able to do is allow them to get access to 75% of the economy.

Nothing other than a factoid, but when comparing us with others in the peer group to date, we've be nothing more than 100% organic growth. And that growth has been disciplined and demanded.

So a few key highlights. We've got strong secular demand, and I will spend a few minutes on that. Interestingly, this business has significant barriers to entry. And so what we've seen in Europe, as I mentioned earlier, is that these entities -- these data center providers -- carrier-rich providers have put together deep connectivity hubs. These are incredibly difficult to replicate. And in the last 10 years, in fact, I've been saying this now for the last 3 years, and I've been in the data center industry or a big customer of the data center industry for the last 15 years, but certainly, the last 10 years, there's been no new entrant in the Pan-European carrier-rich data center market. Interxion has got a leading position in Europe. We've got a very attractive customer base, which we focused on and cultivated over the last 7 years. A very predictable business model with strong operating leverage and a few gray hairs on the management team.

The technology that's evolved over the last several decades, data centers in and of themselves have been around for 30, 40 years. And 30, 40 years ago, you might have added AS/400 or some other server and some other platform -- IBM platform sitting in a room, and you and I would have had to go in there with punch cards, and when I was younger, actually did this, to actually communicate with and engaged with the computer. As time has gone on, we've moved into the '90s -- in the early '90s in terms of the cloud server era and the concept of the Internet. But during that time scale, you've got data providers really putting out by-the-data networks to get prepared for something called the Internet and the cloud. And all of this time, what's happening is that the accessibility of this data has been ever-expanding. And now, we're in a situation where this word called the cloud pops up, but really what it is, is about maximizing the trends -- the societal trends that we participate in. And it is simply about accessing data wherever it is at any one point in time in a manner that is convenient to you. But to do that, you need to be able to access it, and that's what this connectivity is about.

Back in '97 to 2002, what was going on was companies were building data networks in support of something called the Internet, which was just starting out at that point in time. And these Internet -- these data companies, these carrier networks who build a fiber -- new fiber networks and they would realize that the Internet is nothing more than an aggregation of service. When you go to a website, it's on a server somewhere on this planet, but you need to go through a network to get it. But you can't go through just one network. And so what was happening in those days, with the networks to come together in carrier-neutral data centers where they could interconnect traffic. And at that point in time was born the first community within data centers. Thereafter, managed service providers came along and said, hey, fellas, we can, like, come into an interaction data center and connect with all of these data -- carrier footprints and reduce our costs. And later on, as actually accessing data and manipulating data became more important on a mobile basis across the world, we had communities of interest and a reduction of latency and improvement of response time. And then companies came into our data centers to start to create value. And that is the source of Interxion's future growth.

I think our industry has shown this demand chart out a thousand times, and I'm not going to spend a lot of time on it. But clearly, where there's video or cloud workspaces, if you look over the last several years or even the last decade, the demand is measured in terms of megabits or IP traffic or work cycles, has dramatically increased, all right? But then what's been going on in Europe? And clearly, what we're seeing is that in Europe, you can translate this -- the landscape of data centers in our view across 5 different segments. And this is something that I put together, I think, 5 years ago now, and I've been talking to, and it's actually something that hasn't changed, into its landscape in Europe. Around 85% of the service -- remember I said the Internet was an aggregation of server footprint across the planet. Within Europe, 85% of those servers were in-house. They're in your basement in your office, they're in a data center footprint that your IT guys have put together, 15% are outsourced. But when they are outsourced, they're outsource to different types of service providers and it's about the right tool for the right job. And by that, I mean, is that a certain portion of this outsourcing goes to a wholesale player. And there are some very quality wholesale players out there, like Digital Realty and Global Switch on my chart, that provide a super service with super data centers. And it's the right tool for that job. It is a cost transaction and a real estate transaction. Then there are a bunch of guys which run networks or provide managed services, such as hosting. They also have servers which need to sit in data centers, and many of these characters are all have been excellent service providers and do excellent jobs on what they do, run data centers themselves. But where they have an application that requires any sense of response time sensitivity, whether they're running it for themselves or for their customers, they tend to come to the fellows on the right. And the guys on the right, are the carrier-rich, connectivity-hub type data centers, incredibly difficult to replicate. And pretty much everybody in the middle 2, network operator, the managed services segments, all of the guys on there and many more end up being customers of the guys on the right. And the carrier-rich data center providers tend to get a small portion of this pie. And as this pie grows, this portion grows. And if you look at that European demand, I was crunching some of the numbers and an external data provider has identified that the potential for outsourcing can grow from currently around 2011, around 16% outsourced to around 28% outsourced by 2015.

Demand and supply continues to be disciplined and continues to exceed each other. Demand continues to exceed supply and there are significant key differentiators are providing relative long-term value creation compared to the leaders in outsourcing, which is in the U.S. And currently, our own standing in the U.S. outsourcing is approximately 70%. I apologize, 30%, 70% in-house.

But this seems like there's great demand, there's great potential to get superior returns, and I'll talk about that, but then, nothing is actually too good to be true. Why wouldn't people just build supply to support this demand? There are 2 components to it. One is around discipline, which I'll talk to, and then the second one is about, it's actually difficult to build this stuff. So in terms of discipline, what you see in the chart here are there are 3.5 providers of carrier-neutral data centers space or carrier-rich data center space in the Big 4 markets in Europe. And those Big 4 markets are France, Germany, Netherlands and the U.K. And if you look at what those Big 4 fellows have a doing, they have been deploying incremental capacity, and the chart shows capacity being deployed annually since 2009. And it's a little lumpy, but underlying all of this is that the incremental capacity coming on is in the low-teens or single-digit growth from the existing base. But importantly, and what you see the sector doing in Europe, is that they are matching, in a particular interaction, they're trying to match the demand that comes online and the -- to the data center buildout or vice versa, to match the data center buildouts to the demand that's coming online. How can you view this? Well, the average utilization across this footprint in the Big 4 markets is continuing at -- in the mid-70s region. Actually, some of our peers do a lot of acquisitions and so their utilizations are substantially higher. Interxion tends to maintain its utilization in the mid-70s, somewhere around the 72% to 77% range.

The other barrier to entry is just simply the ability to replicate these network-rich data centers. You can get the designs of a very decent data center off the Internet. And in this current economic environment, there are plenty of construction companies that would do a good deal to build one, and there are plenty of banking houses that would finance it. The reality of the situation is, is that if you want to build a carrier-rich data center environment, it is almost, and I say almost because nothing is ever impossible, but it's almost impossible to replicate that. And companies like Interxion have spent the last 10 years doing it. So if you've got a 10-year roadmap, then maybe. And the reason for that is because between '97 and 2002, the carriers in Europe built their network and their network backbones into data centers, like Interxion, like Telecity and like Equinix, and they're not going to be doing it again in a hurry. And that's the fundamental basis of the moat that is around our business. And so long as people are searching for response time-sensitive applications that moat, we'll retain.

So therefore, what does Interxion do and what does it not do? Well perhaps, what we should focus on, is what does Interxion not do? We don't own software or we don't own our own servers and we don't provide hosting platforms or network assets. Our customers do that from within our data centers. We don't provide commoditized wholesale data center space in the sense that we're very focused on trying to find customers that actually value our response time-sensitive applications. We're not a managed service provider. We're not a real estate business. And we try very hard to match our data centers' supply to the demand that we see coming on. And therefore, we do not build speculative data center capacity.

Underlying much of what I would tell you today, there are 3 core value components. They're around connectivity. Interxion has the widest and most deep connectivity community amongst our peers in Europe. And whilst we can talk about 400-plus carriers and ISPs and into Internet exchanges, actually there's a lot deep thought that's going to cultivating that community across 5 pillars. Whether they're fixed on mobile networks, content distribution networks and other types of connectivity or exchange and Internet exchanges -- ethernet exchange and Internet exchanges. That coverage then of connectivity is across a wide geographic footprint and then importantly, this is secret source that allows Interxion to continue to grow on an organic period, on an organic basis, faster than most in Europe. And that is about the communities of interest that exists within our data centers and that we seek to maintain.

The original community of interest within Interxion data centers were the network providers or the carriers, okay. When I first became CFO of a business -- of a data center business back in 2002 in Europe, 80% of revenues came from these carrier networks. Those networks have continued to grow within our data centers. But they continue to be a smaller and smaller part of our revenues as other communities within our data centers have grown. Other communities are: managed service providers, which during the course of this year have grown from 17% of our recurring revenues to something like 22% of recurring revenues. We've seen the financial services grow, and that's a very core community within data centers. On the other side of the page, we've seen digital media and distribution growth in our business. And again, when you think about the transmission of video across various networks, it's a very response time-sensitive application. Enterprises continues to grow, but it is actually because of the macroeconomic climate, become a smaller part of our revenues in the short-term. And I think that, that sector will continue to be impacted by the macroeco climate [ph] .

Interxion has a strong operating model. We've got very high visibility. Actually, our recurring revenues have consistently been, over the last several years, greater than 95 -- around 95% of our recurring revenue, and certainly, greater than 90%, which has been recurring revenues. More than 60% of our new business comes from existing customers. In the fourth quarter, it was almost 70%. And we've got a diverse revenue base across multiple segments, with a significant portion of our revenues, approximately 30%, in 5 locations or more, with over 1,200 customers. And underlying that, we've got a very fixed and predictable cost base, driving high margins and strong cash flow. As I've said before, this business is about execution and it is about driving forward in a considered manner. We've grown consecutively for 25 quarters, both revenue and EBITDA. And what this chart is showing is that since 1Q '08, when Bear Sterns went bankrupt, what you're seeing is that interactions have grown consistently through to 4Q 2012 when what we've been able to do is to more than double revenue, more than triple EBITDA and expand our margins by 10 percentage points. We've dramatically increased our cash flow generation as well. And what we've done that with our incremental cash is continue to invest it in new data center opportunities led by demand. But the important point to note here, well there are 2 further important points, the first thing is, is that this has been done entirely organically. There's been no acquisitions throughout this process. And as I said before, it's the communities of interest that has helped us to drive the growth profile. Another thing that's interesting to note on this chart, as you can see, in 2008 and 2009, it was 30% to 40% growth year-over-year organic, and this was consistent with the sector. In 2009, it's my belief that the economic impact in Europe has had an impact in the way the businesses in Europe have grown. And you can see that in a way that the growth profile is worked in the chart. And now what you see is mid-teens growth in Europe right now, given the economic climate. And at Interxion is further bifurcated within our Big 4 markets, which is growing at 18 -- plus percent a year, and the Rest of Europe market is growing at some -- at high-single digits. So maybe low-double digits. And that bifurcation has pretty much taken place in 2012. But nevertheless, in 1Q '08, our Big 4 markets was 60% of our revenues, and the Rest of Europe markets were approximately 40% of revenues. And yet, by the time we get to 4Q '12 in an organic growth platform, our Big 4 markets are just over 60% of revenues, and the Rest of Europe markets are just under 40%. There has been some change, but not meaningful in that timescale.

As I said before, this business has significant operating leverage. And this is a chart -- and this chart is downloadable from the Internet, but it's showing you the way that the operating leverage is available in the business. And it's really coming from property and personnel costs and being able to drive operating leverage through that. Energy cost is really a direct cost and other costs, which include maintenance and other overheads is a controllable cost which you can manage, and that's about tight cost control.

Interxion looks to deploy its capital on a demand-driven basis. And so what we're trying to do is we're trying to say, look, we have -- we're looking at the market, we're evaluating where the utility power is going to come from, what -- where are the different capacities available, and we're sizing our data centers to meet the demand that's in that market. So we will be in the 4,500 square meter data center in Paris where we've got a significant presence, and it's a significant market, where -- and we will build a 1,500 square meter data center in Madrid. And in fact, they only built the first 800 square meters on day one because the market is much smaller, and yet we have a very good presence there. And we're the only carrier-rich player in that market. So you can see that we -- since we've got our IPO and received access to the incremental capital, we significantly increased our capital deployment. But as I've said before, it's specifically demand-related, and we have directed that demand. And in 2012, we spent over 80% of the cash on our Big 4 markets, and we followed the demand. And the vast majority of our capital expenditure, by nature, is either expansion or upgrade and are discretionary revenue-generating. A small proportion of our CapEx is maintenance and/or other corporate type CapEx.

Operating leverage and discipline in terms of expansion has generated significant cash from operations with significant growth over the years. Since 2008, we've doubled our revenues, strong operating leverage with stable utilization rates. In terms of deploying our data centers to meet the demand that was see, we've been able to triple the cash-generation capability of the business. This is about being disciplined and demand-driven. It's about seeking returns on the investment. And we've been able to consistently achieve mid-teens cash returns on cash return on gross invested capital.

So we've been expanding our facilities, and in this chart, we've set out the detail of those expansions of our facilities. One of the things that I would say is that we had, in 2012, it was almost a catch-up year of expansion. We expanded our footprint by almost -- just over 20%. We've now got 74,000 square meters of equipment space in Europe. And we have got -- we've announced another 5,000 square meters, which will come online in the first half of 2013. It brought up a number of anomalies in 2012 with quarterly margin movements and ARPU movements. We also saw a 6% sequential year-over-year growth in our recurring revenues in the fourth quarter, and that was partly because we opened up a number of data centers at the -- right at the beginning -- right at the end of the third quarter and the beginning of the fourth quarter, which allowed us to show a significant uplift. I don't think I expect to replicate that uplift as we go into the first quarter 2013. And I think we'd return to more normal levels of sequential growth that we've seen in the past. And equally, as of the end of 2012, we are just short of 18 megawatts of customer available power. And the way Interxion provides its service is that we provide space. This power metric, which is nothing more than a measure of cooling capacity in a data center, and then on top of that, energy, which is -- which we'll all be familiar with in terms of utility bill from home, which is kilowatt hours and we charge that in a -- on an arrears basis. With the customer available power was 79 megawatts at the end of 2012, and based on the announced expansions that we've made, we've got capacity to expand that to a further hundred -- to a total of 107 megawatts.

Interxion has got a very strong balance sheet. We're fully funded for our future capacity expansions. We've got a EUR 60 million revolver which as yet is undrawn. We've got a significant tax shield, and our cash tax has continued to run low. We've taken out some mortgages. It's important to certain of our strategic assets. Our gross leverage ratio, which I believe is the right way to measure leveraging business such as ours, are low, running at 2.5. And we have plenty of capacity on the balance sheet to continue to do what we need to do.

Great. I thank you very much for your time, and open to questions.

Question-and-Answer Session

Unknown Analyst

Thanks a lot, Josh. Just before you gave your presentation, we heard from Arm [ph] , who are clearly bullish on the several opportunity for their technology with their new 64-bit process server. They're claiming to have exposures to 90% of the server markets in time. Is this something that's already an incoming dynamic for your business? Or what are you anticipating in terms of the impact of this?

M. V. Joshi

If you look at one of the areas that I talked about before is that there is this secular shift in the way that people interact with data. And there are 2 things going on that I think companies like Arm [ph] , are doing extraordinarily well, and one is that they're improving in their capacity -- processing capacity that come online and reducing the amount of power that each incremental bit of processing capacity, if you like, is requiring, and that's actually very important. Both are important. Both are demand stimulants, I believe, for companies like Interxion. Why? The reason why is because both of those activities are enabling the further manipulations of data. And so the further societal trends that I've been talking about that are driving the activities that need to go on in response time-sensitive data centers, this kind of activity, an improvement in server efficiency and server processing capacity will significantly drive up the kind of activity that can be done. And therefore, the incremental demand in our data centers.

Unknown Analyst

Okay. So even though they're talking to being able to compress many more servers in the same space which is a charge to you [ph] , you don't see that as a headwind to revenues going forward?

M. V. Joshi

No. I think I see that as a significant opportunity. An opportunity that's one, as I said, that 85% of servers is still in-house. So I think that as -- one of the features here is that as you compress these servers, they become more specialized. They become -- the more requirements for more specialized data centers. And I believe that what it's doing it's that whilst -- there are 2 things going on. The secular fundamental trends are expanding the size of the pie. And then the other thing that I think is going on is that the pie is just getting more efficient. So whilst you might get from in-house being outsourced, you might get 1,000 servers, it doesn't mean that 1,000 servers end up in the outsourced portion. It might be the 500 servers end up in the outsourced portion, but that's 500 servers that were never outsourced before, point number one. And point number two, there's vast areas of outsourcing that have yet not even been touched for instance, desktop virtualization which is just a type of server here.

Unknown Analyst

And looking at your guidance for 2013, guided to, I think, between 18% and 24% organic revenue growth in that region. I think your constant currency revenue growth for 2012 was 12%. And what gives you the confidence for that uptick in revenue growth that you're guiding towards? Is that price or volume or what's the mix within that?

M. V. Joshi

Actually, if you look at our total revenue guidance, we -- at EUR 307 million, EUR 322 million for next year, that's 11% to 16% guidance in terms of revenue growth. And there are various factors. One of the things we've assumed is that the economies in Europe will not change. And one of the things that I said earlier was that the growth that we've experienced in our Rest of Europe markets has been high-single digits, low-double digits. And we've continued to expand our margins. But the -- and I think in those markets in Europe, that kind of growth, including cash -- significant cash generation, you'd get your hand ripped off for. But nevertheless, compared to what we've been able to achieve in the Big 4 markets, which has been closer to 18% year-over-year growth, it's obviously slower. I don't see that changing in 2013. And 15% of our revenues is in Sterling. And so, there's an element of foreign exchange movements. We've also got something like 6% to 7% of our revenues in Swiss francs as well. And again, so there are foreign exchange impacts going to next year. And then the other component is just about deploying data center and then filling up that capacity. The underlying drivers and the underlying trends supporting the longer-term business outlook have continued unabated.

Unknown Analyst

I mean, you make the emphasis on organic growth, but there's few sectors out there where there's probably less integration risk and acquisition risk than in data centers. Why have you not done acquisitions? Would you consider them? Is it the price of organic build versus acquired growth?

M. V. Joshi

I think that's a very good question. The -- there are a number of reasons. One, we are not holier than thou. We would look up acquisitions, and we have looked at acquisitions. We are -- and Interxion is one of the big 3 players in Europe, and a potential acquisition opportunity that's come out there has come across Interxion's desk. So we have looked at it. We continue to be very disciplined about how we want to create value for our stakeholders. And the process of creating value is, in our view, around trying to find a communities of interest. Now the first thing is, is that we are in -- we have the widest geographic footprint in Europe. So a number of our peers have got some catching up to do in terms of catching up with that footprint in the first place. Secondly, it's -- if you talk about bolt on acquisitions in country, we've certainly looked at those kinds of transactions, and the question is then about, if you truly believe that your community of interest is where the future of value creation opportunity is, then that is the first port of call when you look at acquisition to see 2 things. One, what is the community of interest look like. And two, what does management look like. And then is a question of, if the community of interest is not there, or is -- requires certain development -- so for instance, you need to engage in certain extra churn to develop the community that you need, it's always then a question about where is the most appropriate place to allocate our capital. And in each of our managing directors in each of our countries, there's a competition for capital. And if they wish to progress on acquisition, we have continued to review that on the basis of the other opportunities that we have had and asked them to compete for the capital required to do that. I hope that answers your question.

Unknown Analyst

Can I just ask briefly, in terms of the supply environment in Europe, you've really flagged in your presentation about your capital deployment being demand-driven. But from where you stand, you have a feeling that your -- the other peers in the market have a similar approach to yours?

M. V. Joshi

Yes, I believe they do. And one of the reasons why is that if you look at the utilization levels -- so since 2009, if you look at the way that utilization levels have developed -- and let's just pick the Big 4 markets then -- and pick the big 4 players, if you like, in the Big 4 markets, I think that we have all been very disciplined about the way that we deploy. And when I talk about this, I'm really talking about the carrier-rich segment. I think that you can pick wholesale markets, developed markets where the moat is not is that deep and as long, and it's much easier to become a wholesale player. I think there's been a lot more development, particularly in London, for instance, recently. That's not the case for the carrier-rich environment. And you can speak to any of my peers, and I believe that they will tell you the same, that they are demand-driven and disciplined in terms of their focus, and they're looking at their customers to see where they need to go next. And it shows up in the numbers.

Unknown Analyst

Several questions, if I may. How do you think about like-for-like revenue growth on a per square meter basis on a longer-term basis, let's say, 3, 4, 5 years out? If you could you provide that, that will be helpful. And just on your call, you highlighted nonrecurring revenues which you expected to pickup in '13, if I'm not mistaken. So if you could explain why that is? And the last if I may, just your CapEx is coming down this year, an absolute. And what's the reason for that? Is it just because '12 was a catch-up year and then -- so you're slowing that down in '13 or if you could provide color, it will be helpful.

M. V. Joshi

Okay, thank you. Three good questions.

Unknown Analyst

Like-for-like revenues, Capex and nonrecurring revenues.

M. V. Joshi

I'm sorry what was the first question again?

Unknown Analyst

Like-for-like revenue in the first quarter of...

M. V. Joshi

So MRR or ARPU's. And if -- I want to come back to that as a final point. If you look at our nonrecurring revenue, the specific point that I've made on our 4Q earnings call was that I actually do not expect to -- our 4Q earnings went -- nonrecurring revenue went down to more normal levels, which is somewhere between EUR 3 million and EUR 4 million. In both 2Q and 3Q, we saw our nonrecurring revenues being at approximately EUR 5 million each quarter. And if you think about it, they were lead indicators to some significant revenues generating space, which came online in 3Q and 4Q. And what I was trying to say was that we don't expect, as we step into 2013, that we're going to have replications of that kind of nonrecurring revenues at those sorts of levels. Were expecting actually to be more in line of the 3 to 4 level of third quarter. Okay? And if you look at our...

Unknown Analyst

[indiscernible] into that? What goes into that? [indiscernible]

M. V. Joshi

There are several components. So if you think about what customers are doing into our data center, they're deploying cabinets and server footprints. And so we will provide them with one-time items, such as racks [ph] . We will provide them with services such as cabling. Racks [ph] are not very profitable. Cabling is very profitable. And then -- and they tend -- these items tend to be very lumpy. There's an underlying more rate, which is just about customers calling us up and saying, please will you go and do a sever reboot, or please will you go and check on this particular connection. And we will just charge that on a per-hour basis, and one of our NGLS would go and provide that service. And that is, again, nonrecurring service which we provide.

The point you raised on CapEx. Yes, in one sense, you can see that in 2012, there was an element of catch up. But you can see that in 2011, we did approximately EUR 160 million of CapEx. We've done EUR 178 million in 2012. And our guidance is around the EUR 140 million, EUR 150 million level, EUR 130 million to EUR 150 million for 2013. The one thing that we've always said is that we try to match our deployment of capital against the data centers and the markets. And so one of the areas where you've seen growth at sort of the 7% to 11% is at in our Rest of Europe markets. And so the majority of our data center CapEx is currently focused on our Big 4 markets. And of the EUR 130 million -- EUR 140 million at the midpoint, about half of that expansion CapEx is already been earmarked and committed, and that includes maintenance and administrative CapEx as well. But there's no set sentiment there that we're moving into a sort of a cash flow -- free cash flow positive area. I think that what we're doing and what we continue to do is to be very focused about matching our data center footprints. And you said it right at the beginning, which is that we had a big year in 2012. And so we've got a little bit -- we can take a little bit of a breath in 2013.

Finally getting on to your MRR point. What we saw in 2000 -- in fourth quarter, is recurring revenue per square meter dipped by 1.5% in the quarter. And that's an indicator of a number of things that come together in recurring revenue in terms of mix. One, if you look at an Interxion invoice, they'll get paid -- you'll see on the bill as a component for space per square meter. And that's the amount that's invoiced in advance -- quarterly, in advance, and they pay us in 30 days. And it's a recurring fee committed in 3- to 5-year contract terms, and we have annual escalators on that number. And then, as a data center business, we do ourselves no favors by talking about power. Because we don't differentiate between power and energy. Power is, in our business, cooling capacity. And if you look at an Interxion invoice, our customer for one square meter or for one cabinet, which is 2.5 square meters, they could buy between 1 kilowatt and 10 kilowatts, even 20 kilowatts for that single square meter of Cooling Capacity measured in kilowatts. And on day 1, a customer may buy, for the sake of argument, 1 kilowatt of the 20 that they can buy. And that's billed quarterly in advance on a fixed fee on 3- to 5-year terms just like space. And then of course, as a customer switches on their server and uses energy, and just like we all do in our homes, kilowatt hours, that's billed by meter in arrears monthly. Ok, but then as you put those 3 components into an individual data center footprint, on day 1, you've got the space component of your recurring revenue. And as time progresses, as the installation develops, the power or Cooling Capacity increases and the server or the arm semiconductor footprint increases as well, and the transactional capacity increases. So the power consumption increases and as a result, the energy consumption increases. All 3 components impact your recurring revenue per square meter over time, all in a north-bound growth dimension. The final component, which is impacting the way you think about recurring revenue, is that, for instance, in London, has the highest ARPUs in the European market. And if you compare London versus France, it's probably twice as much. Now in our French business and our London business, which have the same EBITDA margins, both at 50% plus EBITDA margins, but the -- it's just that the costs are higher in London than they are in France, and there are different dynamics in terms of energy. And so there's a geographic dimension to the way the group ARPU is developed. Over time, what we've seen is a mixture of price, which tends to go up at low-single digits over the last few years. I don't see that changing going forward, certainly in 2013. And when someone can tell me when the economy will improve, I'll then they'll be able to answer that question more explicitly. And then with regard to volumes, they're very much more difficult to predict because they're dependent on customer deployment on the underlying energy infrastructure and the underlying kilowatt infrastructure. I hope that answered your question fully.

Unknown Analyst

So it's based on, I think you said, low-single digit. The CPI-type growth?

M. V. Joshi

Yes.

Unknown Analyst

And for the other 2, [indiscernible]...

M. V. Joshi

So for space and power capacity, we have underlying escalators within our 3- to 5-year contracts. And they will grow in low single-digits, and have done historically. Energy costs will grow based on volume, and companies like Interxion will have the ability to pass on price changes at a very reasonably quick -- a very quick notice.

Unknown Analyst

Do you make margin on power facilities [ph]?

M. V. Joshi

Yes, we do.

Unknown Analyst

We had Teddy sitting in earlier when we were discussing the potential for charging around interconnect fees. What's your view or position on that?

M. V. Joshi

I think all companies currently can charge for interconnect. The question is what is the basis of that charge? Is it one-time, which has been the historic perspective in Europe? Or should it be on a recurring basis? And I believe all entities in Europe currently are looking at where is it charging on a recurring basis. And I see the interconnect as a recurring revenue for companies like Interxion to be a part of the revenue profile it is today. But it's predominantly a nonrecurring revenue component, we charge a one-time fee. We have significant interconnects. But this is not the same as an Internet exchange and providing a 10-gigabit port. Now in the U.S., Internet exchanges are owned by companies like Interxion, and like Telecity. And in fact, the biggest owner of Internet exchanges in the U.S. is Equinix. But they actually physically own the underlying peering fabric for public peering. In Europe, that underlying peering fabric for public peering opinion is owned by a third-party called an Internet exchange that exists in a symbiotic relationship within our data centers. But they take that lion share of this kind of interconnect revenue. And the interconnect revenue that is available generally in Europe is simply connecting one server to another with probably a couple of fiber pairs. I'm not dismissing the potential revenue opportunity, but I don't perceive it as being similar to what's currently available in the U.S.

Unknown Analyst

We've only got time for 1 or 2 more questions.

Unknown Analyst

Just a quick one for me while we're waiting. On the U.S., which you just mentioned, I gather that you have partnerships with a couple of U.S. players, Telex and CoreSite, I believe. Could you give us an update on how they're going, what shares of revenues do they currently bring?

M. V. Joshi

So the relationships that we have with -- the strategic relationships with both CoreSite and Telex, and they're allowing us to get a significant insight into the U.S. market. Those relationships have been developed over a couple of years. And I think that they're going very well in the context of being able to provide each other with access to significant customers, particularly for us in the U.S. If you look at other opportunities that we've taken, we've also taken up agency relationships in the U.S. The U.S. compared to Europe, there's a lot more indirect channels. Whereas in Europe, they really aren't any indirect channels. Most of the sales work done in Europe by companies like Interxion and our peers, is done on a direct basis. So the agency relationships in the U.S. is something that we've started to work on and look forward to seeing some fruits. So I would say that it's still too early to tell. There have not been meaningful earn impact in terms of the income statement to date and in 2012. But I'm looking forward -- we're looking forward to continuing to work them and to see improvement there.

Unknown Analyst

Final question, please?

Unknown Analyst

Just -- I was wondering if you could comment on where do you see EBITDA margins lending kind of the long-term just being on your geographic footprint? And second, as you mentioned, you're making a margin on powers. So if you could explain just how do you contract power with your power providers or which contract life, what pricing, et cetera?

M. V. Joshi

Okay. So looking at the power question. If you can come back -- if you can repeat the first question in a second, but the power question is very simple. We provide a power service, and what our customers are looking for. So our customers are implementing in the tens of millions of euros of equipment into our data centers. They're going into data centers and signing 3- to 5-year contracts. These are long-term commitments on strategic priorities, and they engage in communities of interest within our data centers, okay? One of the things they look for from is certainty around power pricing, okay? That's not a bother they want to be engaged with, and that's what we provide them. We purchase power from utilities and we take advantage where markets allow us to take advantage of, fixing the price of power and creating certainty the price of power, say for instance in 2013 or 2014. We do that and we look forward and do that. And then what we do is we provide -- we price power to our customers on the basis of the power that we use to support them and the power that they use. And over time, we make a margin on that power. Our -- many of our customers run much larger data center footprints than we do. They very much understand how -- what they value and how they access value within our data centers.

Unknown Analyst

So you contract 1 or 2 years out in the power?

M. V. Joshi

Yes. Your question was do we contract 1 or 2 years out because you're not using your microphone. But do you contract 1 or 2 years out in power? Yes, we do. We try and fix where we can. Not all markets can do this, but where we can, yes we do.

Unknown Analyst

And the second question was on EBITDA margins, long-term.

M. V. Joshi

Over the last several years, you've seen Interxion continue to post annual 100-, 150-basis-point EBITDA margin growth. And if you look at our margin, despite the significant expansion that we took in 2012, we continue that track record and our guidance in excess to continue that track record. Where does this come out at? I think that in -- these businesses have demonstrated that being able to achieve 50% EBITDA margins is certainly within a reasonable roadmap, and this is for businesses that lease a large chunk of data center capacity. And that's because gross margins tend to run at full data centers, around 65%. And it's a question of actually amortizing your overhead. And it's a mixture of economies of scale and optimizing the costs around overhead.

Unknown Analyst

Great. Thanks again, Josh.

M. V. Joshi

It was a pleasure. Thank you very much.

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