Equinix, Inc. (NASDAQ:EQIX)
Q2 2014 Earnings Conference Call
July 30, 2014, 05:30 PM ET
Katrina Rymill - Vice President, Investor Relations
Stephen Smith - Chief Executive Officer and President
Keith Taylor - Chief Financial Officer
Charles Meyers - Chief Operating Officer
Michael Rollins - Citigroup
David Barden - Bank of America
Simon Flannery - Morgan Stanley
Colby Synesael - Cowen & Co.
Mike McCormack - Jefferies
Amir Rozwadowski - Barclays Capital
Jonathan Atkin - RBC Capital Markets
Jonathan Schildkraut - Evercore Partners
Good afternoon, and welcome to the Equinix conference call. (Operator Instructions) I'd now like to turn the call over to Katrina Rymill, Vice President of Investor Relations. You may begin.
Good afternoon, and welcome to today's conference call. Before we get started, I would like to remind everyone that some of the statements we'll be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed on February 28, 2014, and Form 10-Q filed on May 2, 2014.
Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.
In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor Relations page at www.equinix.com.
We would also like to remind you that we post important information about Equinix on the Investor Relations page of our website. We encourage you to check our website regularly for the most current available information.
With us today are Steve Smith, Equinix's CEO and President; Keith Taylor, Chief Financial Officer; and Charles Meyers, Chief Operating Officer. Following our prepared remarks, we'll be taking questions from sell-side analysts. In the interest of wrapping this call in an hour, we'd like to ask the analyst to limit any follow-on questions to just one.
At this time, I'll turn the call over to Steve.
Thank you, Katrina. And good afternoon, and welcome to our second quarter earnings call. In Q2 we delivered both revenue and adjusted EBITDA above the top-end of our guidance ranges, as the disciplined execution of our strategy continues to drive momentum in our business.
As depicted on Slide 3, revenues were $605 million, up 4% quarter-over-quarter and 14% over the same quarter last year. Adjusted EBITDA was $275 million for the quarter, up 6% over the prior quarter. We achieved record bookings and delivered positive fundamentals, including firm MRR per cabinet, stabilized churn and healthy operating margins, reflecting the strength of Platform Equinix.
Interconnection revenue continue to outpace overall revenue, growing 16% year-over-year with cross connect growth driven across all verticals. With a strong focus on real-time applications, customers are taking advantage of a myriad of interconnection options we offer, to achieve higher levels of performance and enhance end-user experience.
In the quarter, we added 3,600 cross connects and 153 ports, and we now have over 135,000 cross connects and 2,400 ports connecting our customers with their customers and their partners. With over 100 data centers in 15 countries, our geographic footprint is unmatched and remains a unique differentiator, as we deliver on increasing demand for a consistent global offer.
Multi-region deployments continue to outpace single-region deployments, and are often associated with lower churn. Today, 66% of recurring revenues come from customers deployed across multiple regions, up from 62% last year and 80% of recurring revenues come from customers deployed across multiple metros, up from 78% last year.
Last week, we acquired the remaining minority interest in ALOG Data Centers for approximately $225 million, demonstrating our commitment to Latin America and our optimism about the future growth of this important market.
Turning to Slide 4. Equinix entered Brazil in early 2011, by acquiring a 53% majority stake in ALOG. ALOG is the leading carrier-neutral provider in Brazil, with approximately 1,500 customers across four data centers in Sao Paulo and Rio de Janeiro.
Since the initial investment, the ALOG business has exceeded our expectations and has grown revenue at a 24% CAGR for the past three years on a constant currency basis, while simultaneously expanding adjusted EBITDA margins over 500 basis points.
The ALOG team has done an outstanding job, leveraging the company's strengths in Brazil, specifically in cloud and mobility, and has benefited from many Equinix customers expanding their infrastructure into Brazil, including CenturyLink Technology Solutions, Level 3, Microsoft, Orange Business Services and Telefónica, to mention a few. Latin America is an important market for us and we expect continued investment in this region.
Now, let me shift to an update on industry verticals. Secular and technology trends are making Equinix increasingly relevant to a larger universe of businesses, with over 4,600 customers, we are expanding and developing new ecosystems. This quarter, we passed a major milestone of having over 1,000 networks accessible on Platform Equinix. This network density combined with over 1,200 cloud and IT service providers is at the heart of value creation for our company.
The network vertical continues to deliver consistent growth, as we expand the wireline and wireless carriers, who are evolving to deliver cloud services and upgrading their infrastructure to 100-gig to support continued bandwidth demand.
In the financial services vertical, we continue to leverage our strong relationships in this market, establishing our leadership with trading exchanges, while also penetrating new sectors like electronic payments and insurance. This quarter, new wins include a leading global insurance broker, as well as Llyods of London, the world the world's specialist insurance market.
In the electronic trading sector growth continues, particularly in New York, London and Chicago, and financial represents our largest connected ecosystem outside of network. We see continued growth opportunity in this sector, as the digital transformation of trading moves to other asset classes, like foreign currencies and fixed income.
In the content/digital media area, AD-IX ecosystem continues to grow, with over 100 customers participating in real-time, bid-based digital advertising, converging into eight geographic hubs worldwide. Other areas of the digital media domain are experiencing growth, ranging from established broadcasters, the new streaming platforms related to the explosion of IP video traffic, and we remain focused on developing ecosystems where Platform Equinix delivers unique value to this industry./
Tuning now to cloud. Well, cloud and IT service delivered record bookings and rapid revenue growth at 19% year-over-year. Cloud wins accounted for a-third of new customers, including wins from Clear Gov a government certified, cloud Infrastructure-as-a-Service provider; Digital Ocean, a cloud hosting service; and VeloCloud, cloud wide-area network provider. In this segment, we see many companies deploying in multiple regions, including both emerging cloud service providers and leading providers, such as Amazon Web Services and Microsoft Azure.
During the quarter, cloud players including Oracle, Workday, and Marketo expanded into additional global markets to capture the performance and user experience, benefits of customer proximity. This is creating a diverse inventory of providers across all regions, making Equinix even more attractive for these enterprises adopting cloud services.
Private interconnection is an increasingly popular access methodology for connecting to the cloud, as public IP proves insufficient for the performance of security demands of mission-critical applications. There is a growing recognition that cloud application performance and user experience can be enhanced by connecting privately to cloud services and bypassing the public internet.
Today, we offer private access to both fiber cross-connects and our Ethernet-based Cloud Exchange to over 50 cloud service providers, including AWS, Blue Box, Datapipe, GoGrid, IBM SoftLayer, Lucera and Microsoft Azure.
The Equinix Cloud Exchange are advanced interconnection solution that enables on-demand direct access to multiple clouds and multiple networks is now live in 17 markets globally. The physical presence of key cloud service provider nodes in these markets offers customers the ability to access these services via single-port interface inside an Equinix IBX with low-latency and enhanced security. This is an important differentiator for us as customers began moving workloads in and out of the cloud.
We are seeing rapid adoption of the Cloud Exchange from leading cloud, network and managed service providers and recently announced exchanged participants including Carpathia, EMC, Level 3, NetApp, Orange and TW Telecom.
Shifting now to enterprise. This segment is increasingly looking at distributed architectures as a mechanism for improved to cloud resources as well as the ability to improve the performance of their owned-IT infrastructure. As a result, we see enterprises moving certain application at a private data centers and into co-location facilities on a worldwide basis.
Launched earlier this year, the Equinix Performance Hub is an offering that extends enterprise IT infrastructure to the data center, allowing customers to create a private wide area network node inside Equinix, where they can host applications closer to end-users, optimize the network architectures and directly connect the multiple cloud and network providers.
Locating performance-sensitive elements of enterprise IT infrastructure inside Equinix creates the ability to accelerate application delivery and network performance and improve the end-users experience.
Often incorporated into a Performance Hub architecture is the Cloud Exchange, which further simplifies how enterprises manage connections between public cloud service and private cloud infrastructure, allowing on-demand interconnection to multiple cloud providers using one connection.
We are helping customers design and deploy these new architectures through Solution Architects and are also leveraging our Solution Validation Centers to run proof-of-concept test for many large enterprise companies. Test results show that enterprises on average save over 25% on network bandwidth cost with a Performance Hub implementation. With the added benefit of being able to securely transfer data from the backbone network to cloud providers available in our data centers.
We now have over 50 customers with Performance Hub deployment, and while still very early in the stages of adoption, we continue to land marquee accounts, including recent wins with Cerner, a leading provider for healthcare industry and MICROS Systems, a software and hardware solutions provider for the hospitality industry.
So let me stop there and turn the call over to Keith, who'll go through some results in the quarter.
Great. Thanks, Steve. Good afternoon to everyone. I'd like to start my section of the call by saying how pleased we are with the performance of the business, both for the current quarter and year-to-date.
The Equinix platform strategy is clearly going through to our operating results, driving strong growth with healthy returns. In the quarter, we experienced a number of record, related to our bookings activity, reflecting momentum in the business including the highest ever quarterly gross bookings for the company.
Record bookings for both EMEA and Asia-Pacific regions, record bookings in our cloud and IT services vertical. Also, the Americas region delivered its second highest gross bookings production of all time, including strong exports for the other two regions, demonstrating continued importance of our global offering.
Moving on to Slide 5 from our presentation posted today. Our global Q2 revenues increased to $605.2 million, a 4% increase over the prior quarter and up 14% over the same quarter last year. Our Q2 revenue performance reflects a $2 million positive currency effect when we compare to the average rates used in Q1, and a $1.1 million positive currency benefit when compared to the FX guidance rates. Our FX hedges offset the benefit of the positive currency rates by $1.8 million.
Non-recurring revenues increased 2% quarter-over-quarter, higher than our expectations driven by our continued focus on selling incremental value-added services to our customers, such as custom installation work. In addition, in the quarter we received $3 million in early termination fees. These payments were reported in non-recurring revenues, they're typically one-time in nature.
Interconnection revenues continue to outpace the overall revenue growth, increasing 16% over the prior year, as our comprehensive suite of interconnection solutions continues to drive healthy gross additions for both cross connects and exchange ports.
Separately, given the lengthening of the average life of our customer installations. What we see is a positive trend, we lengthened the period by which we amortize our deferred installation revenue from four years to four-and-a-half years, effective at the beginning of the second quarter.
This resulted in a $1.8 million negative impact to our Q2 revenues and EBITDA, and a $5.3 million decrease to our expected 2014 guidance. This reduction is a timing difference and the offsetting benefit will be recognized in 2015 and beyond. This change is fully absorbed in our revised guidance.
Total cash cost of revenues were consistent with our expectations, and cash SG&A expenses increased to $139 million for the quarter, including approximately $9 million of REIT-related cash costs.
Total adjusted EBITDA was $275 million, above the top-end of our guidance range and up 6% over the prior quarter. Our adjusted EBITDA margin was 45%. Our Q2 adjusted EBITDA performance reflects a $900,000 positive currency benefit when compared to the average rates used in Q1 and a $600,000 positive benefit when compared to our FX guidance rates.
Our Q2 net income was $11.3 million, including the loss and debt extinguishment of $51.2 million related to the convertible debt exchanges this quarter. Excluding this loss, our pro forma net income would have been $49.3 million or diluted earnings per share of $0.94, a 15% increase over the prior quarter and up 9% over our pro forma diluted earnings per share last year.
MRR churn was better than our expectations at 2.7%. This result includes the full impact of the LinkedIn churn that occurred at the end of Q2. As stated in our prior earnings call, the LinkedIn MRR churn had no meaningful impact in our Q2 revenues, but will reduce Q3 recurring revenues by $4 million. This has been fully contemplated in our guidance. We expect churn to decrease to 2.5% in Q3, and for the full year of 2014, we expect MRR churn to average approximately 2.5% per quarter.
Now moving on to our comments on REIT. We remain in active dialogue with IRS about our pending PLR request, and are pleased with current momentum. Also we continue to be on track with our plans to convert to REIT on January 1, 2015, and recently finished a major milestone with the completion of our financial system conversion earlier this month.
On Slide 6, we summarized various expected REIT-related cash cost and taxes. For the full year 2014, we now expect to incur approximately $35 million of cash cost and $18 million of capital expenditures on the REIT conversion. In the third quarter, we expect to incur approximately $8 million in REIT-related cash costs. For the year, our estimated cash tax liability is now expected to range between $145 million and $180 million.
Well, turning to Slide 7, I'd like to start reviewing the regional results, beginning with the Americas. Americas revenues increased 4% over the prior quarter and 10% over the same quarter last year on a normalized and constant currency basis. Americas adjusted EBITDA was up 6% over the prior quarter and 4% year-over-year on a normalized and constant currency basis.
As a reminder, the Americas region continues to be fully burdened with corporate functions, including cost of the corporate projects such as REIT conversion and Equinix Customer One. Americas adjusted EBITDA margin was 46% for the quarter.
As announced last week, we're acquiring the remaining minority interest in ALOG for approximately $225 million. As a reminder, we already fully consolidate ALOG in our financial results. Americas net cabinets billing increased by 100 in the quarter, which includes the full impact from the LinkedIn churn.
Americas added 1,400 net cross connects this quarter, 6% above the prior four quarter trend. We also added 85 exchange ports in the quarter, a significant uptick compared to 2013, driven by demand from content and network providers. MRR per cabinet remains firm at very attractive levels. And while up 1% quarter-over-quarter, we expect this metric to remain stable going forward. Interconnection revenues as a percent of the regions recurring revenues remained at over 20%.
For new builds, we're proceeding with a third phase of our SV5 IBX build in Silicon Valley. This campus has one of two major peering locations in Silicon Valley and has had strong demand from both, network, cloud and content companies, resulting in attractive returns and firm pricing.
Now looking at EMEA, please turn to Slide 8. EMEA revenues on a normalized and constant currency basis were up 4% quarter-over-quarter and up 15% year-over-year, and reflect strong performance in our Dutch and German businesses as well as an increase in the level of cross-regional deals for cloud.
Adjusted EBITDA on a normalized and constant currency basis was up 4% over the prior quarter and up 22% over the same quarter last year. Adjusted EBITDA margin remains at 42%, due to a number of one-off adjustments booked in the quarter. Absent these adjustments, EMEA adjusted EBITDA would have been 44%.
EMEA interconnection revenues increased 8% over the prior quarter and up 39% over the same quarter last year, largely driven by the U.K. and German markets. We added 1,200 net cross connections in the quarter and net cabinets billing increased by approximately 900. Interconnection revenues as a percent of the regions recurring revenues increased to over 8%.
In addition to our expansion activity in London and Amsterdam, we're now moving forward with the next phase of our Paris 4 asset. With over 200 networks in Paris, this phased expansion will develop our position with cloud, network and enterprise customers.
Now looking at Asia-Pacific, please refer to Slide 9. In Asia-Pacific, we passed an important milestone by generating over $100 million of revenues in the quarter. For Q2, revenues were $105.7 million, a 6% increase on a normalized and constant currency basis over the prior quarter and up 22% over the same quarter last year, driven by strength in our content and cloud segments. Adjusted EBITDA on a normalized and constant currency basis was up 8% over the last quarter and 24% over the same quarter last year.
Asia-Pacific added 67 new customers in Q2, 20% above the rolling four quarter average. MRR per cabinet remained strong and cabinets billing increased by 1,000 over the prior quarter. We added 1,000 net cross connects and interconnection revenues remained at 12% of the regions recurring revenues.
And now looking at the balance sheet, please refer to Slide 10. We ended the quarter with $704 million of unrestricted cash and investments on our balance sheet, a decrease over the prior quarter level, primarily due to our share repurchase program and debt extinguishment activities.
Also in July, we funded the $225 million to purchase the minority interest in ALOG, which will further reduce our cash balance. Our net debt leverage ratio decreased slightly to 2.9x our Q2 annualized adjusted EBITDA.
Under the share repurchase program, we repurchased 1.8 million shares since last December, including 1.5 million shares in 2014 to date. Our repurchase investment totaled $347 million, leaving a $153 million of capacity under our program. In the second half of the year, we plan to continue to evaluate additional opportunities to optimize our capital structure.
Now, switching to Slide 11. Our Q2 operating cash flow decreased over the prior quarter to $99 million, primarily due to tax payments of $75 million related to both REIT and non-REIT related obligations, and $54 million of accelerated vendor payments due to our financial system conversion. We expect this offsetting benefit to be realized in Q3. Also our DSOs increased to 35 days, a trend we expect to reverse over the next few quarters.
For 2014, we're raising our guidance for AFFO to be greater than $740 million, due to increased expectations from adjusted EBITDA and lowering recurring CapEx. As a reminder, AFFO includes $35 million of REIT-related operating cost in 2014 and $9 million of cost related to the FX Customer One program.
In 2015, we expect our ongoing REIT-related cost to decrease to a range of $5 million to $10 million. We continue to expect our 2014 adjusted discretionary free cash flow to range between $620 million and $650 million, and adjusted free cash flow to be greater than $200 million, both of these metrics excluding any REIT-related cash cost or taxes.
And now looking at capital expenditures, please refer to Slide 12. For the quarter our capital expenditures were $160 million, including recurring capital expenditures of $27 million, in line with our prior guidance. We opened two new IBX phases in Hong Kong and Sao Paulo in the quarter. We currently have 12 announced expansion projects underway across the globe, of which 10 are campus builds or incremental phase builds.
As announced at our Analyst Day, we revised the breakout of our ongoing capital expenditures to align with our AFFO calculation, and now refer to this component of AFFO with recurring CapEx. Slide 13, maps out the details of both recurring and expansion CapEx, which we believe more appropriately reflect the true reinvestments and maintenance rate of the business.
Since Analyst Day, we made some minor adjustments to our AFFO, slightly reducing recurring CapEx to reflect certain capital dollars, either increase revenue or reduce our cost. We will continue to review the components of AFFO, including recurring CapEx, through our reconversion date of January 1, 2015.
And finally, turning to Slide 14. The operating performance of our stabilized CC9 global IBX and expansion projects that have been open for more than one year continue to perform well with revenues increasing 7% on a year-over-year basis. Currently these projects are 81% utilized and generate a 32% cash-on-cash return on the gross PP&E invested consistent with our targeted range of 30% to 40%.
Now, let me turn the call back to Steve.
Thanks Keith. Let me now cover our outlook for 2014 on Slide 15. For the third quarter of 2014, we expect revenues to be in the range of $614 to $618 million. Cash gross margins are expected to approximate 68% to 69%. Cash SG&A expenses are expected to approximate $140 million. Adjusted EBITDA is expected to be between $278 million and $282 million, which includes $8 million in costs related to the REIT conversion.
Capital expenditures are expected to be $175 million to $185 million, which includes approximately $25 million of recurring capital expenditures. For the full year of 2014, we are raising revenue to range between $2.425 billion and $2.435 billion or a 13% year-over-year growth rate, which includes $6.5 million of positive foreign currency benefit compared to our Q2 guidance range.
As a reminder, this guidance includes a $5 million decrease to both revenue and adjusted EBITDA, due to the change in accounting estimate. This is a non-cash change-only and result of a longer estimated life for customer installations.
Total year cash gross margins are expected to range between 68% to 69%. Cash SG&A expenses are expected to approximate $550 million.
Adjusted EBITDA is expected to range between $1.105 billion and $1.115 billion, which includes $3 million of positive foreign currency benefit, compared to our Q2 guidance range, and also includes $35 million in cost related to our REIT conversion efforts. We expect 2014 capital expenditures to range between $600 million and $650 million, which includes approximately $115 million of recurring capital expenditures.
So in closing, I would tell you that discipline execution of our strategy continues to drive positive results and solid momentum in our business. Innovation, including customer-enablement solutions like Performance Hub and Equinix Cloud Exchange is further differentiating us from our competitors.
Our strategic priorities are focused on preserving and enhancing our competitive strengths. And we have the operating scale and financial strength to capitalize on our unique position to become the home of the interconnected cloud.
So let me stop here and open it up for questions. And Rachel, I'll turn it back over to you.
(Operator Instructions) Our first question comes from the line of Mr. Michael Rollins.
Michael Rollins - Citigroup
If I could ask one clarification and more of the business related question. On the clarification, for the FX for the third quarter, what would be the potential benefit in the guidance, not relative to prior guidance, but relative to the average second quarter rate. And then I'll follow-up with the business question.
That's $1.5 million, Michael.
Michael Rollins - Citigroup
And then just taking a step back, if you could talk a little bit more about the cloud initiatives and the enterprise focus? And since the Analyst Day, you're seeing incremental progress, and is that contributing to some of the strength in sales productivity?
Yes, sure. Thanks for the question, Mike. It's Charles. Yes, I think that we certainly have seen incremental progress. Obviously, we're on steep part of the curve in terms of the advancement of our enterprise business, as well as, the overall dynamics of the cloud business in our industry overall and for us. And we continue to be very excited about how the cloud opportunity is playing out.
What we've seen, as we talked about at the Analyst Day, that really hybrid cloud has emerged as, I think pretty unequivocally the IT architecture of choice. And what we're seeing is, virtually, every CIO we speak with, whether that'd be service provider or enterprise, are saying that they plan to segment their workloads and utilize really a blend of public cloud, private cloud, owned infrastructure, et cetera, to really meet for what is a pretty wide range of cost reliability, security, performance requirements, et cetera.
And as they are moving away from sort of traditional homogenous infrastructures in their own data centers, they're really moving towards sort of a more modern cloud-based architecture and that is inherently multi-network, multi-cloud in nature.
And the other thing that's happening is that they are increasingly finding the private access to cloud resources are going to be required in order to satisfy the performance and security requirements. So we talked a little bit about that in the script in terms of really to architecting around the public internet and finding that that doesn't meet their needs. It's certainly does for some workloads, but for many that's not the case.
And so I think again, we are building off a heritage where similar to what we did in the evolution of internet pairing where there was no neutral, trusted, commercially set scalable mechanism available, that same dynamic result occurs now in the cloud environment. And we think Cloud Exchange really sort of meets that need. And so we are seeing great momentum.
I think that it's still early days, as we said in the script, we've seen a number of big marquee sort of lighthouse wins over the last several quarters. We're beginning to build, both our professional services and our channel capabilities to be more responsive to certain large complex enterprise needs.
And where we're seeing those winds, I wouldn't say an area of major contributor from a bookings perspective at this point. But we did see strength across the board in our other verticals and in our more mature ecosystems, which sort of combined into what we obviously feel like is a very strong and solid performance for the quarter.
The only thing I think I'd add, Charles, and I don't know if you mentioned it was that, I think we pointed to in the script, Mike, is that we're live in 17 markets globally today. And we'll push that to probably over 20 markets by the end of the year. So we've got interest coming from several customers to expand it to Sao Paulo to Osaka, to Melbourne two of our new sites, as well as in Zurich, which wasn't considered in the original 16 or 17.
So the demand is good. The pipeline is very large. And so we're working through all the challenges and requirements from our customers to make sure that we customize as much possible to get the implementation set up, but it's got a lot of momentum.
And maybe another data point in order to be mentioned in the script 50 cloud service providers that are available via private access mechanisms, either Direct Connect or through the Cloud Exchange. And we've got pretty concentrated business effort underway to stimulate that ecosystem. And in the same way, we have made a pretty good living by differentiating ourselves on network density. We're seeing the same thing sort of repeat itself on the cloud side.
And so we've got a big backlog of customers that we're trying to bring on to the Cloud Exchange and scale our interpretability efforts. And we already have enterprise customers that have joined the Exchange and already demonstrated the automated provisioning functionality of Cloud Exchange. So very exciting progress, and we're very pleased with it.
Our next question comes from the line of Mr. David Barden.
David Barden - Bank of America
I guess two, if I could. The first one would be just putting a little flesh on the bones on ALOG purchase. We're all seeing the $225 million go out the investing cash flows. Could you talk about the valuation difference between what you bought it for, what you think it's worth now, and kind of what we're going to see happen on the cash flow statement as a benefit for that $225 million going off out the door.
And then second, just on the North America cabinets billing, I think that it's been a noisy number. Last quarter we had the Level 3 cleanup. We had the Switch and Data lease expiration in the 111 8th Avenue. This quarter we've got LinkedIn. Could you talk about kind of an underlying core business momentum in the North American market that we can think about as being kind of the trend line for the second half of the year? That would be super helpful?
Great questions, Dave. So let me take the first one on ALOG. As you know, we paid $225 million for the remaining 47%, put that in perspective for the first 53% we paid roughly $60 million. So to give you a perspective of sort of the value that accreted into business over the three years, since we became involved in the deal.
And from a valuation perspective think of it as, we basically bought it for roughly our current trading multiple today, albeit with a much higher growth trajectory. And so I see that as the very positive transaction, not only for ourselves, but certainly for our partners.
And then release the financials, I think that you will see is you see of course the $225 million cash flow statement but we already fully consolidate this asset. And so what you're going to see on a go forward basis, is basically as a company you'll get a full benefit now, if you will, from the cash flow, but it's not going to have any meaningful changes to our financial statement.
This is Charles. I'll take the Americas business, particularly North American business. In a nutshell I'd say, we're very pleased with the momentum in progress of the business in North America. I think that as you said, it is in fact the MRR per cabinet earning about -- the billing cabinet is in fact a noisy number. And we would continue to caution you in that way that that it tends to bounce around a little bit based on timing of the install and other factors of large deals. And so we will probably continue to see some of that volatility.
But again, I think if we look at it over a longer period of time, we see a solid upward trend, and we believe we'll continue to see that. And I think again, it's based on momentum across a range of portions of the business. We are seeing lower average deal sizes, as we talked about in terms of multi-tiered architectures, et cetera.
This quarter we did actually see a number of larger implementations associated with some cloud wins, which was partially fueling some of the bookings strength that we saw. But across the board, the verticals are performing well, funnel continues to grow, interconnection activity at record levels, and again I think that's driving strong yield numbers.
We are, as we talked about, at a very, very attractive level of yield in the Americas. And I think we would hope to continue to sustain those levels. But again, I think overall we're seeing solid momentum and good performance in the Americas business.
Our next question comes from the line of Simon Flannery.
Simon Flannery - Morgan Stanley
Just touching on CapEx a little bit, it moved at sort of towards the higher end of the range. Is that reflecting some spend on Silicon Valley and Paris, the new expansions, or is that mostly 2015 spend, any color around that? And then on M&A, did you do anything on the land or facilities purchases during the quarter? Where does that stand today? And any thoughts about entering new markets beyond your current footprint?
Why don't I take the first question, Simon, just on CapEx. Certainly, we have announced some incremental builds that are taking place. At the start of the year we look at -- again, CapEx is reported on a cash basis. We looked at a range of $550 million to $650 million.
Now, that we're getting to the latter part of the year, we've been able to tighten that range, because we have a much better idea of what cash is going to flow-in and flow-out of the system, if you will, in the fiscal period. So part of it just really tightening it. But to suggest though, that we have decided to make some incremental investments as you alluded to.
And Paris is the one that that comes at the forefront there, where we're going to spend a little bit of incremental capital to build out the next phase of our Paris 4 asset. And then Silicon Valley, again that asset is going to be build out over a period of time, both 2014 and 2015. So the majority of that investment will be made -- sorry, the majority of cash outflow will be made in 2015.
On your M&A question, Simon, no real change in the historic representation about where we're looking in expanding the platform. It's predominantly in Asia and Europe. I would tell you in the U.S. market, domestic U.S., where we feel like we're in very good shape. As I alluded to in the script, I think in Latin America, I think as Karl Strohmeyer and his team continues to advance our strategy down there, there maybe more opportunity in the future in that part of the Americas business.
But in Asia probably, it presents the biggest opportunity to go deeper into China, continue to stare at India. Korea continues to be an interesting market to watch. So no real change on the big markets that we're looking at in terms of M&A geographic orientation.
Simon Flannery - Morgan Stanley
And any opportunities to buy any of your facilities?
Simon, we continue to look at the opportunities, and as I sort of talked about at the Analyst Day, we're going to look at them sort of just based on what presents itself over a period of time. And I'd tell you, it doesn't always make sense for us, because we do have the economic control over many of our assets for an extended period of time. And to the extent something does present itself, we will look at it. And so there's a few things that are on the table, but there is nothing that's sort of worthy of announcement at this point.
Our next question comes from the line of Colby Synesael.
Colby Synesael - Cowen & Co.
Two questions, if I may. One on growth, just kind of going back to your Analyst Day when you put out the guidance long-term for I think greater than the markets growth of 10%, and then I compare that with increase that you've given today to your revenue growth and what that implies.
I'm just going back to conversation I remember having with Steve about how, if the cloud actually played out the way you guys expected, you thought that could actually lead to an acceleration in growth. And I'm just curious if you think that you're seeing ultimately that 10% guidance that you gave was really meant just to be floor more than anything else.
And then also for Keith, just specific to a comment you made in your script, where you noted that you're also looking at other ways to optimize the capital structure. I was wondering if you could expand on that and perhaps give a timeframe for what it is you're thinking about?
Why don't I start on the cloud question, Colby, or on the growth question? I would tell you, yes, the way we represented ourselves at Analyst Day was that to grow at or above market growth rate was in that high-single digit, call it low-double digit growth at the industry. We wanted to be at or above that growth rate.
I think what you are starting to see now in the raised guidance is the cloud-enabled enterprise starting to play itself out. So we are, as Charles alluded to, we are dead in the middle of all the public private hybrid cloud players in the market, trying to get them to come in, and put access nodes, network nodes, all over these data centers to attract enterprise to come in.
It's very early days, as Charles said. But there really isn't a deal in our pipeline that's not affiliated with how do I figure out how to start taking advantage of the cloud. And so it's unfolding, the on ramps are building, the off ramps are building, and I would call it the guidance predominantly behind our cloud-enabled activities to attract enterprises and the big cloud players themselves. I don't know if you want to answer that. Charles?
No. Again, I think the posture that we articulated at Analyst Day remains intact that that is a level that we felt we could be comfortable with, without taking any kind of undue assumptions about the magnitude and timing of certain trends that we are seeing begin to take shape play out. And are we optimistic about that? Do we see early sign of success? Are we getting light house wins? Yes.
For example, reflected in behind that success we're investing, as Keith articulated in making accelerated investment in our channels, which is in the second half of the year here to prepare for what we see as continued success in '15. And we certainly hope and believe that that may have the opportunity to invigorate growth in the business. But I think that our posture remains the same as it was in Analyst Day. We're being appropriately prudent in terms of what we're committing out there, and like again, seeing very good times.
The second part of question was around the capital structure. I think there was a number of levers that the company will continue to look at to optimize capital structure. Number one, we saw the $153 million left in our share repurchase program. We will opportunistically look at what and when to buy incremental shares as those opportunities present themselves. That would be one.
Number two, we'll continue to occur convertible instruments. But one of the things we've been trying to do with our converts is get them into the equity base, partly due to the fact that there's dilutive aspects to what occurs, if you don't get it into the equity base in a timely fashion, and sort of we're very, very pleased with the historical transactions that we've done. As we have offset, I mean the amount of dilution that would otherwise have happen.
So we'll continue to look at our convergence. And again, asses whether it probably makes sense, again the deal where we're focused on is going to be a net present value positive transaction for us, and we're going to drive more AFFO with the system. And is it in fact a good economic decision, both for ourselves and presumably the people that are sitting on the other side of the table from us.
And then the third piece plays, as I said, cash balance was $704 million, but when you take out the $225 million for the ALOG acquisition, you're at some $500 million of cash. And then we obviously have some payments to make through the latter part of the year, whether it's the E&P Purge or other tax payments. And so we're going to be very mindful of our cash balance.
So the team is quietly looking at how to capitalize the business on go-forward basis. And one of the things that we would sort of somewhat communicate the market to already is we'll look for straight debt. We said if there is a debt transaction that would make sense, and we need to raise capital and will certainly be active in the market.
But there is no urgency. I think by the end of the year just give you -- I think, if you will, we'll probably end the year somewhere between all else being equal between $300 million and $400 million of cash on our balance sheet. And so we're still on a very sort of comfortable position from a liquidity perspective, particularly in the operating line of credit.
Our next question comes from the line of Mr. Mike McCormack.
Mike McCormack - Jefferies
I was thinking, it would be impossible that Windstream got a PLR before you guys did. A couple of questions, just thinking about I guess pricing and competition. But with respect to your various customer segments, can you just make a comment on sensitivity to pricing across those segments? And then secondly, just maybe some comment regarding the wholesale side, what you're seeing from their entry into retail as well as any Open-IX initiatives?
Mike, this is Charles. I'll take that. I think pricing is often times -- although, there are probably some segments that has certain characteristic relative to their appetite for quality, reliability and service delivery and end-user experience that maybe less price sensitive on overall basis.
And really I think the way we look it more typically is around applications and workloads. In that, where customers really value sort of the network density, performance benefits, global reach and mission critical reliability, et cetera that Equinix delivers. That's where we see quite rational decision on their part and willingness to sort of pay for the value that they get.
And so again, I think there are probably some segments of the market that have greater levels of price sensitivity certainly. But what they have typically done in that is looked to tier their architectures as a way to meet their needs at lower cost. And that's one of the dynamics that we've seen impact the business. I think we are well ahead of that trend now in terms of understanding what application types are really going to work and really extract value or leverage the value that Equinix delivers.
And in terms of from a competitive perspective, wholesale, as I've said, again and again for the most part, wholesalers play in a different level, in a different portion of the market. The wholesale, the large footprint portions wholesale are really going after that third-tier of the architecture.
And very often, we are working with customers to combine purchase decisions they made for wholesale footprint with more mission critical, performance-sensitive elements of the architecture that are housing side of Equinix. And one of the things our Solution Architecture's doing are helping them develop those multi-tiered architectures and helping them develop them in a way that they can really leverage the benefits of hybrid cloud.
And relative to Open-IX, again I went into some depth in that last couple of earnings calls. And we're not seeing any meaningful impact in our business. We continue to feel very good about the value proposition we deliver to our customers on our exchange. And I think the port adds that we've had and the acceleration of those port additions this year, really I think are a reflection of the competitiveness of our offering in the market.
Next question comes from the line of Amir Rozwadowski.
Amir Rozwadowski - Barclays Capital
From my side, I wanted to ask specifically about sort of the churn levels. I think they came in slightly better than expected. I would love to hear your thoughts in terms of how we should expect that trajectory going forward? I mean you folks continue to have gained notable traction in some of the international markets. I was wondering with respect to Europe, do you continue to see some capacity constrained in that market? I would love to hear your thoughts around competitive dynamics within that region?
Maybe I'll take the first one, Steve, and you can pick up on Europe. From a churn perspective, again, we did come in slightly better than what we had guided to last quarter. And we did absorb the full LinkedIn into that number. So we saw a slight uptick, but not as much as we had anticipated.
Some of that is probably timing. And as is often the case, some times the specific timing of churn isn't really precisely known and things can slip from one quarter into the next. And then probably some churn that we anticipate it could occur that we found a way commercially that we thought was attractable to maintain that business.
But I think that generally, the 2.5% that we've guided to is an area that we feel comfortable in, as we've referred to it sort of a level of frictional churn that accommodate some of the realities in the market. Because as we said, there are continued and natural evolutions of people's infrastructure that they make towards more multi-tiered, sophisticated infrastructures, and that often does result in a level of turning in migration out of Equinix in some cases.
Since 2.5% is a level that we're pretty comfortable with, we are happy with the performance this quarter. We probably did see some deferrals, but again that's probably the level that we're comfortable with, but always working to improve that. And I think the important piece is, as we've always said, getting the right business in the door upfront is our best defense against elevated churn down the road, and our teams are doing a great job of disciplined execution in the field.
Thanks, Charles. And I think on the European question, I would tell you that our team in Europe tells and continues to signal that the economy remains challenged. But even within that environment, just in this quarter, as Keith alluded to, we had record bookings in EMEA, and we exceeded all our internal targets, very strong performance in the Netherlands and Germany.
And as you know, a differentiator we have versus our competitors is we're inbounding a lot of bookings from our Americas and Asia business into that region. So there is an advantage, obviously that our team has from our global bookings.
Interconnection is up to 8% of revenue now, so they're doing a very good job on that. I think we're separating ourselves from our competition with the Cloud Exchange that we've launched in those European markets. Pipeline looks very good, coverage ratios look good, cloud ecosystem is unfolding and our footprint in Europe. So MRR per cap this quarter was up $24. So there is a lot of positive signals in Europe this quarter versus the competition. So I would say there is any big change, it's still a very competitive market with the players that you're well aware of. But we're continuing to scale and build the core of our ecosystem strategy there.
Our next question comes from the line of Jonathan Atkin.
Jonathan Atkin - RBC Capital Markets
So a financial question and then a cloud question. On the guidance hit in the flow-through to EBITDA, the higher revenue guide, what would impede some of the margin expansion that you're guiding to? You referenced the REIT conversion cost, the one-time projects, is there anything else that is impeding some of the EBITDA margin growth? And then, in terms of cloud connectivity demand overall as a category, just manifest itself as is cloud existent [Technical Difficulty] traction, does that manifest itself more in exchange port growth or cloud connect growth?
Jonathan, we're going to do two things here. I can answer the first question, but we're going to have to ask you to repeat the second question, because your line had broken up in proportionally. So we didn't get the full question. But as it relates to the guidance and takes the flow-through from revenue to EBITDA, whether you're looking at Q3 or for the total year, there is a number of things that are going on.
And certainly, as I alluded to in my comments, first and foremost there is $3 million of early termination fee payments. One was up $2 million payment to one customer. So as those things don't typically recur on a very regular basis, and so we lose the benefit of that in Q3 and certainly that's one thing that affects the flow-through.
The second thing that's impacting us is the deferred installation adjustment that I spoke of and Steve alluded to. Again, when we make those type of adjustments, it doesn't do anything to cash flow, but has a direct drop from the revenue line all the way down to EBITDA line, and as we said there is $5.3 million of hit to the year with respect to that.
If I summarize it, well, the things there that are changing that you should -- if I take out the noise and I normalize everything, the one thing that I would tell you, there is two incremental cost that are coming into the system that we hadn't previously guided to. And one of them is higher utility. So normally from a volume perspective, so you see our revenues coming up and we're consuming more. And as a result, we're going to incur higher utilities than we originally anticipated and some of that is pricing. And I think of that for the year at roughly $4 million.
And the other thing that we've talked about is channel. We expect to spend roughly another $3 million or expect to invest $3 million in channel in the latter half of the year, roughly $1 million in Q3 and $2 million in Q4. So that's $3 million of cost that we didn't originally anticipate. So when you adjust for all of that and you look at the flow-throughs, basically the numbers all work out, and work out with a consistent flow-through based on the revenue flow-through.
Your question was on with the interconnection uptick that we've seen it mostly in cross connects or port or both, is that the nature of your question?
Jonathan Atkin - RBC Capital Markets
Well, just cloud in general. If that continues to grow as you anticipate, does that growth manifest itself more in exchange port growth or cross connect growth?
I mean, we're going to see in both. And Charles probably has a point or two. I'll you give you a couple fact away that will give you a sense of it. With the numbers I gave you in the script, we added 3,600 cross connects this quarter and 153 ports. So 3,600 cross connects, roughly 1,400 in Americas, roughly 1,300 EMEA and just under 1,000 in Asia. So you can see we've got good geographic coverage on the cross connect growth.
And then there is port growth everywhere, but we have actually -- in the vicinity of 3,700 direct access cloud cross connects that have been accumulated here since we've been focused on the cloud, it gives you a kind of an order of magnitude that how much cloud density cross connects we're starting to see. But my guess, Charles, we're going to see it coming out of both channels.
Absolutely. In fact, I guess what I would say is that one of the reasons why I think customers are finding Platform Equinix such a compelling platform to sort of base their hybrid cloud strategy off of, is because of the flexibility that it provides in matching workload to certain requirements.
And so by implementing a performance out for example and attaching into cloud exchange, people can segment their workloads and say, hey, look, I've got workloads that actually are well-suited to putting into a public cloud environment over public internet. And by the way, they can do that very easily from within an Equinix facility and that would drive exchange ports.
But increasingly over time, what we see is they're saying, look there are certain things that from a security or throughput perspective, I need something different. And so that's where our private access really portfolio comes in and they can either do that over a fiber cross connect, which we see a lot of uptick on or they now can begin to do that in an automated fashion over Cloud Exchange. And so over time it will drive Cloud Exchange ports and virtual circuit that are provisioned over that Cloud Exchange. So we expect over time that we will see that full portfolio of interconnection continue to grow, as people really play out there hybrid cloud strategy.
And our last question comes from the line of Jonathan Schildkraut.
Jonathan Schildkraut - Evercore Partners
So I guess my first question would be on the book-to-bill or the commencement lag. I know last quarter we saw some unusual extensions. I was wondering if you give a little color on what happened in this quarter and what you're expecting for the remainder of the year.
And then, I was wondering if you could talk a little bit about sort of the professional services that you guys were delivering, I felt that was a very interesting part of your Analyst Day presentation. And since then we've been starting to think about how you're rolling that out, whether you're charging for it separately or has it become part of the sales process and package and whether there are any sort of longer-term margin implications?
I'll take book-to-bill, Jonathan, and then I will pass the other one on to Charles or Steve. Certainly, when you look at the performance of the booking activity this past quarter, again very, very healthy bookings across our entire portfolio. And so the one thing I'll leave you with is, there is a fairly large, a lot of that happened in the third month of the quarter again. Again, even though it was maybe a more smoother quarter than was historically you've seen, we still had a lot of activity taking place in the month of June. So when I look at my book-to-bill perspective that will continue, that will feather into the system in Q3 and Q4.
And so I want to give you maybe a hard point of view, when I think about incremental revenue that we'll see, and I'm adjusting for the one-off, the early termination fees, but I think about what's going to happen in Q3 relative to what happened in Q2. We're probably going to see more and more sort of organic revenue flow-through in Q3 than we saw in Q2.
And likewise, as I look into Q4 versus what happens in Q2, again it's going to be up a light level from Q3 performance. All that to say is I think the book-to-bill cycle is starting to, there are some things that were in our backlog coming out of Q1, we're starting to see that relieve itself. And so I feel very good, more about a more consistent book-to-bill interval going forward.
And then on pro service side, Jonathan, I'd say, still early days for us there. Today, the reality is that that we've significantly ramped our Solution Architect team, which is a bit filling that void in working with customers who we see as having significant opportunities and sort of filling in bit of that gap in terms of working with them on designing their infrastructure.
And in particular, on Performance Hub implementations and helping customers understand the benefits on how to go about implementing a Performance Hub. And that's pretty typical I think of the way you would see in that sort of technology maturity cycle is, as those types of very highly technical resources doing that early on.
But I think as we evolve, we would begin to envision a billable organization, billable threshold services organization delivering sort of packaged professional services type engagements to customers to very quickly assess and roll out some of those services.
And over time, I think that we'll probably evolve from, we're doing those, a significant number of those with perhaps resources ourselves. And then we will actually start to engage partners, because we think we'll get a lot of leverage in the partner channel, we'll able to deliver those similar types product services.
And over time that will move from sort of Performance Hub design into hybrid cloud type implementations on a broader scale, networking WAN optimization, and also continued services around data center migration. So those are all sort of areas of focus that we would have. It's still pretty early days, but we are starting to see customers really view us as a trusted advisor in looking at how to implement private hybrid cloud.
That concludes our 2Q call. Thank you for joining us.
And that concludes today's conference. Thank you for participating. You may now disconnect.
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