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Equinix (NASDAQ:EQIX)

Q4 2011 Earnings Call

February 15, 2012 5:30 pm ET

Executives

Katrina Rymill -

Stephen M. Smith - Chief Executive Officer, President, Director and Member of Stock Award Committee

Keith D. Taylor - Chief Financial Officer and Principal Accounting Officer

Charles Meyers - President of North America

Jarrett Appleby - Chief Marketing Officer

Analysts

Gray Powell - Wells Fargo Securities, LLC, Research Division

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Michael Rollins - Citigroup Inc, Research Division

David W. Barden - BofA Merrill Lynch, Research Division

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Colby Synesael - Cowen and Company, LLC, Research Division

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Operator

Good afternoon, and welcome to Equinix Conference Call. [Operator Instructions] Also today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'd like to turn the call over to Katrina Rymill, VP of IR. You may begin.

Katrina Rymill

Good afternoon, and welcome to today's conference call. Before we get started, I would like to remind everyone that some of the statements that we'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 25, 2011, and Form 10-Q filed on October 28, 2011. 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 call, unless it is done through an exclusive 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; Jarrett Appleby, Chief Marketing Officer; and Charles Meyers, President of the Americas. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of wrapping this call within 1 hour, we'd like to ask these analysts to limit any follow-on questions to one. At this time, I'd like to turn the call over to Steve.

Stephen M. Smith

Thank you, Katrina. Good afternoon, and welcome to our fourth quarter earnings call. I'm pleased to report that Equinix delivered strong business and financial results in the fourth quarter, and another year of solid revenue and adjusted EBITDA growth for 2011. As depicted on Slide 4, revenue grew 32% to $1.607 billion for the year, and adjusted EBITDA increased 36% to $738 million, consistently outperforming market growth rates. Our business is running in all cylinders, driven in large part by the strong demand we are experiencing for Platform Equinix across all verticals, and our market is healthy with favorable supply-demand dynamics and pricing remains firm.

We are executing on our goal of generating over $3 billion in annual revenues by 2015, while targeting positive adjusted free cash flow in 2013. We're also implementing shareholder-friendly actions. In November, we announced intentions to deploy up to $500 million for the direct benefit of shareholders, which includes a share repurchase program of up to $250 million through the end of 2012. I'm pleased to report in 2011, we repurchased 870,000 shares for a total of $87 million.

Turning to Slide 5. I'd like to highlight how we invested in the business in 2011. We generated $587 million in cash from operations for the year, and reinvested $557 million in 20 key global IBX expansions with the same level of targeted returns. Ongoing CapEx was $128 million for the year, which included success-based installations, maintenance and value-enhancing initiatives. We now have over 6.5 million gross square feet of space, which is the largest retail data center footprint in the world. Other successes for the year include achieving 99.9999% of availability across the global platform, increasing interconnection revenue by over 20% ending the year with over 97,000 cross-connects, and growing Internet exchange traffic over 30% to 1.4 terabits per second.

In 2011, we also launched the Marketplace, a global portal that makes it easier for customers to conduct business with each other and quickly establish interconnections in our centers. The more interconnections that are created among our customers, the more valuable our ecosystems and our IBX has become. At the heart of demand for data center services is the exponential growth in IP traffic, video and performance-sensitive applications including financial trading, e-commerce, cloud and WAN optimization. Over the next decade, market sources expect a number of servers worldwide to grow by a factor of 10, the amount of information managed by a factor of 50 and the number of files by 75x. As we enter this new age of hyper-connectivity and data growth, Equinix will benefit by providing the right infrastructure and the right locations to achieve the performance requirements of these mission-critical applications.

Networks are at the core of this infrastructure. The broad choice of networks and network services inside our data centers is a critical reason digital ecosystems are thriving at Equinix. Networks are rapidly introducing new products to support cloud infrastructure, CDN capabilities and managed services, taking advantage of the unique revenue opportunity to sell services inside of Equinix.

During 2011, we saw several Cable MSOs in major networks upgrade their infrastructure in our centers, and we won several new service aggregation nodes. Carriers locate these nodes, which contain their main transmission and routing gear, near other network nodes inside our IBXs to make traffic hand-off as easy and cost-effective as possible. In turn, these nodes attract additional networks and increase our overall network density. Once established, these dense network sites are difficult to displace as peering and private networking hubs. The more network-dense our sites become, the more pull-through effect we have with critical ecosystems including financial services, cloud and digital media.

I'd like to spend a minute explaining how data growth and application performance requirements are influencing customer architectures. As customers grow in sophistication and skill, they often evolve to a multi-tier architecture deployment as shown on Slide 6. Many of our target market segments including cloud, mobile data and digital media, have multi-tier deployments. Let me explain what this means.

The first tier includes highly distributed network nodes to effectively manage network costs and improve latency. The middle tier includes larger service access nodes to deliver performance-sensitive applications at the edge of the network. The third tier in this architecture is comprised of large scale compute, storage or back-office applications that are less performance-sensitive. This final tier is typically served by wholesale or customer-built data center.

In the first tier, as depicted on the top of the slide, customers leverage Equinix to distribute their network access nodes which rely on network density to efficiently transport traffic and ensure a positive end-user experience, while substantially saving our network costs. These network nodes are smaller implementations that are highly interconnected and deploy across multiple IBX locations.

The middle of this multi-tier architecture typically consists of service aggregation nodes. These applications are mission-critical to an organization, very sensitive to performance, typically revenue-facing and demand a high quality of service. They also require access to ecosystem partners and customers across their digital supply chain so they can trade traffic efficiently and cost effectively. These deployments are substantially larger, often 50 or more cabinets deployed across a smaller number of IBX locations.

The third tier houses large footprint compute server farms or storage arrays for applications that are less latency-sensitive. These deployments are very large and housed primarily on wholesale or customer-built data centers. The first 2 tiers are the sweet spot for Equinix, and where we deliver the highest value for customers. While wholesale data centers serve a different market than Equinix's core target, it is an important element of a customer's architectures and an offering that is complementarity to the Equinix value proposition.

There are a couple of misperceptions related to multi-tier architecture deployments, especially with regards to supply. Some believe, for example, that if supply grows in the wholesale segment, it may adversely affect the part of the data center market where we operate. This isn't the case. Many of our customers already use multiple data center providers choosing the right location and services for the application they are deploying. And they come to Equinix when they need global reach, low latency, network choice and ecosystem access that others can't provide or replicate.

This highlights the strength and defensibility of our ecosystem-centric business model as wholesale data center supply grows, when other key business drivers supporting our growth is the paradigm shift to cloud computing, as it rapidly heads towards a $100 billion market.

Equinix now has over 300 pure-play cloud service providers, and we are seeing strong interest from CIOs looking to evolve their infrastructure to fully leverage the cloud. CIOs are facing the daunting task of being responsive to a rapidly changing application environment while simultaneously managing tight IT budgets. In response, visionary CIOs are embracing hybrid IT infrastructure models that leverage increasingly capable public cloud services while implementing private clouds for targeted applications and still continuing to invest in their own infrastructure.

As shown in Slide 7, Equinix is uniquely positioned of the de facto cloud hub simultaneously empowering our customers with 3 things. One, Direct Connect access to public cloud provider such as Amazon Web Services; two, a rapid implementation platform for private clouds through Equinix's Internet Exchange, Ethernet Exchange or rich range of private networking options; and three, ample capacity for expansion of customer managed applications with superior performance in mission-critical reliability. By providing this one-stop environment for hybrid cloud infrastructure, Equinix is able to help CIOs lower network costs, improve security and deliver a superior experience to their end-users.

Throughout 2012, Equinix will look to extend our lead as the cloud enabler by offering access to a wider range of public cloud services and a compelling choice of other cloud-based applications housed within Platform Equinix.

So let me stop here and turn it over to Keith to review the financials for the quarter.

Keith D. Taylor

Thanks, Steve. And good afternoon to everyone on the call. I'm pleased to provide you with additional details on the fourth quarter results, including an update on the regional performance. With the exception of our financial results, all other metrics will exclude the impact of ALOG.

So starting with Slide 9 that we posted today in our presentation. Financial results for Q4 were ahead of our expectations, and we remain focused on building the business around key verticals and ecosystems. Global Q4 revenues were $431.3 million, including $17.3 million attributed to ALOG, a 3% quarter-over-quarter increase and up 25% over the same quarter last year. A strong performance was offset by the negative currency headwinds experienced throughout the quarter. Quarterly revenue was negatively impacted by $7.6 million when compared to the average rates used in Q3, but $3.1 million when compared to our FX guidance rates. Quarter-over-quarter, revenues grew greater than 5% on a constant currency basis and, once again, reflect the strength in our operating model. Our pricing remains firm across each of our regions. Global MRR churn was approximately 2%, consistent with our expectations and within our targeted range, again, demonstrating the long-term nature of our customer relationships.

Looking forward, we expect global MRR churn to average about 2% per quarter in 2012, but it is important to note that MRR churn can fluctuate. Global cash gross profit for the quarter was $287.8 million or cash gross margin of 67% higher than our initial expectation. The result of stronger-than-expected revenues and a lower-than-planned utility cost. Global cash SG&A expenses were $89.7 million for the quarter, consistent with our guidance and reflect the full impact of our sales, marketing and IT initiatives. Global adjusted EBITDA was $198.1 million for the quarter. Our adjusted EBITDA margin was 46% and reflects FX -- and reflects a negative FX impact of $3.1 million when compared to the average rates used in Q3, a $1.6 million reduction when compared to our FX guidance rates.

For the quarter, our global net income was $17.8 million or an earnings per share of $0.35 on a fully diluted basis. Looking forward, the U.S. dollar exchange rate used for Q1 and for 2012 guidance are $1.31 to the euro, $1.57 to the pound, and Singapore $1.26 to the U.S. dollar. Our updated global revenue breakdown by currency for the euro and pound is 13% and 8%, respectively, and the Singapore dollar represents about 5% of our revenues.

Turning to Slide 10. I'd like to review our regional results starting with the Americas. Americas revenues grew 3% quarter-over-quarter to $277.5 million. Cash gross margins increased to 69%. Adjusted EBITDA was $133 million, an increase of 4% over last quarter, and up over 30% from the same quarter last year. Americas adjusted EBITDA margin was 48% for the quarter, including fully absorbing the corporate SG&A cost and continues to scale with the growth of our business.

As we analyze the Americas business for the year, it is clear to us their performance is a precursor of what we expect from each of our regions as we scale to size. In 2011, the Americas region generated roughly $500 million in adjusted EBITDA. The region invested approximately $240 million in expansion and ongoing CapEx, resulting in about $260 million of unlevered cash being generated. The success of the Americas region highlights its ability on a standalone basis to fully absorb the corporate functions and the annualized corporate interest burden of about $190 million while still generating a meaningful amount of free cash flow. The success in the Americas highlights the free cash flow potential of both our EMEA and AP regions.

Continuing on our Americas review, net cabinets billing increase by over 500 in the quarter, a lower sequential growth that experienced in Q3. This reflects the quarterly fluctuations that we have experienced due to timing of bookings and the installation intervals. The Americas sales force had solid bookings in Q4 with especially strong performance in the financial and network segments. Deal size and overall pricing continue to trend positively as we target value-aware customers. ALOG performed to plan despite the strengthening U.S. dollar, and ended the year with both a large backlog and a strong sales funnel.

During the quarter, cross-connects for the Americas increased by over 1,200 with strong interconnection ads in Dallas and New York. Interconnection represents 20% of the region's recurring revenues.

Finally, we announced 2 new builds for the Ashburn market, our most network-dense campus. We're starting new construction on DC11, as well as commencing the second phase of our DC10 business suite offering. This offering is gaining traction with customers who require a larger footprint that can be directly connected and fully integrated into our existing IBX infrastructure.

Now looking at EMEA. Please turn to Slide 11. EMEA had a strong quarter and bookings were on target for the quarter and year, despite a negative economic backdrop and the currency fluctuations for the region. Revenues were up 3% sequentially or 8% on a constant currency basis, the result of continued growth across the region and lower regional churn. Adjusted EBITDA increased to $39.7 million or an adjusted EBITDA margin of 42%, a 5% improvement over prior quarter, and up 43% compared to the same quarter last year.

The region's net billing cabinets increased by over 500. We added 1,600 cross-connects, a significant increase over the prior quarter. This reflects the continued success we are experiencing with our focus in key verticals and ecosystems. Interconnection increased to greater than 4% of the region's recurring revenues.

Our top European market was London, followed closely be Amsterdam and Frankfurt. London success, in part, is driven by our strong traction with the financial community, highlighted by the continued demand for our London campus. This strength allows us to proceed with the third phase of our London 5 IBX.

We also announced we won a super-core site with NL-ix, one of the world's leading Internet exchanges, to be deployed in our new Amsterdam 3 facility which opened in Q3. The new node will enhance traffic performance for Equinix customers enabling them to peer and improved performance while reducing their costs. The Dutch business and the new Amsterdam 3 facility positions us well to enable customer growth in one of Europe's fastest growing and network-rich markets.

And now looking at Asia-Pacific. Please refer to Slide 12. Asia-Pacific revenues improved 4% sequentially or 6% on a constant currency basis, with strong net bookings across each of our countries. Adjusted EBITDA was $25.5 million, down slightly due to onetime expansion and negative FX trends over the quarter, but up 37% over the same quarter last year. Singapore and Sydney are performing extremely well and we're proceeding with new construction initiatives in both markets. We expect to open our Sydney 3 Phase 2 project in Q4 of this year, and our Singapore 2 Phase 4 should open in Q1 of 2013. Cabinets billing increase by almost 580 over the prior quarter and unit pricing remained steady. Interconnection revenues in the region increased 6% quarter-over-quarter and represent 12% of the region's recurring revenue.

During the quarter, Asia-Pacific added 670 cross-connects. And now looking at the balance sheet data, please refer to Slide 13. Our unrestricted cash and investment balance is $1.1 billion. Clearly, we continue to be well-positioned from a liquidity perspective. As planned, we expect to use $250 million of this cash to sell our 2012 convertible debt principal to avoid future dilution. Our DSO decreased in the quarter to 30 days and remains at the low end of our expectations.

Looking at the liability side of the balance sheet, our quarter end gross debt was $3.1 billion. Our Q4 net debt leverage ratio was 2.6x our Q4 annualized adjusted EBITDA, and our overall cash cost to borrowing is 6.15%.

We're keeping our net leverage target at 3 to 4x adjusted EBITDA. Over the short term, we expect to maintain our leverage at or near the low end of this range, yet remain comfortable in managing the business up to 4x net leveraged under the appropriate circumstances.

Now looking at Slide 14. The cash flow attributes of the business continued to be very positive, in fact, nicely to our adjusted EBITDA metric. On an unlevered basis, which excludes cash interest, our operating cash flow is slightly over 100% of adjusted EBITDA. In 2011, we generated operating cash flows of $587 million, the results of strong operating performance and solid working capital management.

Our Q4 discretionary free cash flow was approximately $143 million or almost $3 per share, a 24% increase over the prior quarter and better than expected. We expect our 2012 discretionary free cash flow to increase our range between $500 million and $540 million, or approximately range between $10 and $11 per share depending on the weighted average basic share count over the year.

On a separate note, our current federal NOL balance available to offset future taxable income was approximately $450 million at the end of the year. And we do not expect to pay any meaningful cash taxes until 2014 or even possibly 2015. Our cash tax rate for 2011 increased approximately 16%, largely due to some foreign subsidiaries fully utilizing their NOLs.

Looking at capital expenses, please refer to Slide 15. For 2011, our capital expenditures were approximately evenly split across all 3 regions, highlighting the growth we expect in both our EMEA and AP regions. For the quarter, capital expenditures were $190 million, slightly above our expectations, and largely due to the timing of cash payments on our Frankfurt-2 and our New York-5 expansion projects. Also ongoing capital expenditures were $44 million, higher than our initial guidance, and reflect an increase in installation and success-based spending, higher capitalization of IT projects, and an increase in capital allocated to ALOG.

Turning to Slide 16. I'd like to update you on the operating performance of our 22 North America IBXs and expansion projects that have been opened for more than one year. Currently, these projects are 83% utilized and generate a 32% cash on cash return on the gross PP&E invested, in line with our targeted 10-year IRRs of 30% to 40% on a pretax basis.

So to wrap up, I want to highlight our priorities and investment expectations for 2012 and beyond. First, we want to continue to invest in the business to generate profitable and enduring growth. Second, we want to continue to evaluate select M&A opportunities that will enhance the value proposition of our -- I'm sorry, will enhance the value of our proposition of Platform Equinix. And finally, we want to continue to execute on actions that will support our shareholders.

So let me turn it back to Steve.

Stephen M. Smith

Thanks, Keith. Let me now shift gears and cover our go-forward strategy and outlook for 2012. For 2012, we have 5 strategic priorities to fuel the value proposition we offer customers, as shown on Slide 18. First, we will continue to proactively develop our ecosystems to drive customer value and improve business performance through more interconnection in our IBXs. Network choice facilitates competitive advantage; proximity to partners and suppliers improves performance; and cross-connects accelerate deployment and reduce cost for our customers. Each interconnection we add increases the value of our ecosystems to customers and, ultimately, enables Equinix to become the interconnection platform for many of the world's leading businesses.

Second, we will continue to expand our global reach and scale in order to maintain our position as the leading global data center business in our market. Today, over 59% of our revenues come from customers deployed in multiple countries, which demonstrates the benefit of having the broadest and deepest coverage around the world. We will continue to look at expanding Platform Equinix to key new markets to accommodate the growth of our existing customers.

Third, we will continue to execute our vertical go-to-market strategy for our sales force and expand our channel partnerships. In 2011, we completed our sales force expansion to improve our coverage and vertical orientation. This year, we will continue to refine our sales force deployment and evaluate additional partnerships to enable a choice in cloud brokering, private cloud and security services.

Our partnership strategy will focus on high-growth segments and increase our addressable market by leveraging new distribution channels, while offering additional solutions to our customers.

The fourth element is refining our capital allocation strategy. While our first priority is to invest cash in the business to capture the robust demand we are experiencing, we are also on a trajectory to generate positive adjusted free cash flow in 2013, which allows for shareholder-friendly actions as well.

The fifth priority driving our next wave of profitable growth will be a continued focus on making Platform Equinix seamless and consistent across our entire IBX footprint. Investments in products, processes and systems to help our customers offer in a global basis will remain a top priority. At the end of the day, it's all about making Equinix easy to do business with in a consistent, intentional and differentiated way. We firmly believe the solid execution on these strategic priorities will help create a business that very few companies, if any, will be able to replicate.

Now let's move to Slide 19 for our 2012 guidance. For the first quarter of 2012, we expect revenues to be in the range of $443 million to $446 million, which includes absorbing $2 million of currency headwinds. Cash gross margins are expected to range between 66% and 67%. Cash SG&A expenses are expected to range between $90 million and $95 million. Adjusted EBITDA is expected to be between $200 million and $205 million. Capital expenditures are expected to range between $180 million and $200 million, including approximately $30 million of ongoing capital expenditures.

For the full year of 2012, we are maintaining total revenue expectation at greater than $1.87 billion or greater than 16% growth on a year-over-year basis, which includes roughly $15 million of currency headwinds relative to guidance rates provided on our last call. Total year cash gross margins are expected to be 66%. Cash SG&A expenses are expected to range between $370 million and $400 million.

We are maintaining an expected adjusted EBITDA for the year to be greater than $850 million, which includes roughly $7 million of currency headwinds to the prior guidance rates. We are maintaining our total CapEx guidance for 2012 at a range of $700 million to $800 million, which includes $135 million of ongoing capital expenditures, including an additional $15 million allocated to the development of our global IT system. We are investing in our business at a very attractive risk-return profile, and we continue to achieve our targeted returns.

For 2012, we expect 65% of expansion capital expenditures will be for incremental phases on our campus builds, 30% for new sites and established markets and 5% for new market development. Campus builds are very attractive because they leverage existing cost infrastructure and network density. Decisions to build new sites in existing markets are based on visibility into current customer demand, competitive intelligence and ecosystem development, among other factors. For all IBX builds, Equinix's existing customer fill-rate analysis gives us strong visibility into a market demand, pricing and returns.

So in closing, I believe we are living through a technology evolution that occurs only once in every 10 to 20 years. And we are uniquely positioned to capture the opportunities created by the growth of the digital economy. I'm very proud of what our team has accomplished in 2011, and we will continue to deliver exceptional value to our customers and shareholders. As the great Internet buildup continues, we will execute our strategy with discipline in 2012 and beyond to deliver both predictable and consistent results.

So let me stop here, Matt, and I'll turn it back over to you for some Q&A. Matt, over to you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Gray Powell.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Just had a couple of quick ones. I'd like to make sure that I understand your CapEx budget correctly. On the last call, you said you had about $500 million in CapEx that included announced projects and ongoing CapEx. And that left about a $200 million to $300 million cushion in guidance. Today, you announced, I think, 5,200 cabinets by Q1 of 2013. So can you just update us on where that leaves the cushion, and just roughly speaking I was estimating these expansions will cost about $200 million, so can you tell me if I'm in the ballpark there?

Keith D. Taylor

Gray, I mean, ultimately, you're absolutely right. What we have now done is start to identify the projects we're embedded in, in that cushion. And so our DC11 site and the expansion into DC10 is an example of our Sydney and Singapore. So we fully intend to spend somewhere between $700 million and $800 million this year, and it is fair to say that you should probably shoot for the midpoint of that right now, and then we'll update you as the year progresses. But we fully intend to spend that

capital.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Okay, great. And then a second question, if I may. I mean the North American MRR saw that, that sequential increase since, I believe, Q2 of 2010. Can you just give us any insight on the pricing environment in the U.S. or has there been any benefit to the retail co-location pricing due to larger telco deals in 2011?

Charles Meyers

Yes, sure. Gray, this is Charles Meyers. Yes, we continue to see a very firm pricing environment, and I think the key to that is continuing to target the value where our segments of our customers really are achieving significant value out of using Platform Equinix. So we've seen very strong progress on our global platform deal, not only in the North America market but exporting business to our other regions as well. So we continue to see a very healthy pricing environment. As we noted and have noted in the past, our sweet spot really is in the sort of mid-sized deals for either network nodes or service aggregation nodes. And consistent with Steve's commentary on the multi-tiered architecture, our focus on the first 2 tiers of that architecture really allow us to deliver superior value, and correspondingly, get better price realization.

Operator

Our next question comes from Chris Larsen.

Christopher M. Larsen - Piper Jaffray Companies, Research Division

I wonder if you could just talk a little bit -- you alluded to the ability, Keith, of levering up the balance sheet, and I guess you've been fairly successful and quite successful, particularly with the ALOG expansion. If you could talk a little bit about other geographies that you might be looking at in terms of getting into. And I have a follow-up after that.

Stephen M. Smith

Let me start, Chris. I think consistent with what we've said in the past, we're very interested in the core, as we referred to in the past, BRIC countries. And as you all are aware, we made a play into Brazil. We're most interested probably in next priorities in China and India, and we have activity in both of those parts of the region, business development-type activity looking for the right opportunity. Our customer demand is very high in both of those parts of the world. I'd say that the fourth element of the BRIC countries is less priority today. And then there's a couple of tier 2 markets that are -- Keith and I have teams looking at. I think I have mentioned in Japan after the difficult times they had, a lot of data center companies in Tokyo are starting to look in Osaka for future builds. So we have a team looking in Osaka also. So we're investigating in that market. And then Australia, we've taken a look at the Melbourne market outside of the Sydney market. So those are the priority areas for the company.

Keith D. Taylor

And so, Chris, what else it does as you sort of start to think about cash that could be deployed tax for that, you think about the capital expenditures, and also sort of attached to that the shareholder-friendly action that we have taken and intend to continue to take. That actually will consume a lot of our cash that when we manage, basically, our net leverage, I think we should -- including liquidating some of the payables for our construction projects that sits on the balance sheet, we should get very close to the range, if not inside the bottom end of that range in 2012. And so it's something we'll continue to watch, as we sort of manage our capital plans and look at how we best take advantage of our capital structure.

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Great. And then just as a follow-up. Steve, you said that some of the differences are -- I think, actually it was Keith, you said something about the differences in Europe, it had to do with timing. And then I just wanted to understand, is that the contract length, the time from initiation to closing is taking a little bit longer in Europe, or just the timing of when certain contracts close was the difference in the revenue performance in Europe?

Keith D. Taylor

Yes, it's more -- it was Americas, and it was more the installation interval that we talked about, so we have good booking activity across all 3 regions. And as you've seen in the past, and it's no different this quarter, sometimes you're going to see ebbs and flows in the amount of cabinets that install, in particular at the end of the quarter. And of course a factor of that is also churn, what happens in churn over a given period of time and whether it's a large installation, low pricing. And Charles alluded to it on the last call, there are certainly some cases where we see positive churn as attached to a number of cabinets. That could leave us an impact to basically our net cabinets add. So overall, I would tell you it's more just a natural outcome of how we booked, our booking activity this quarter, and you will continue to see it ebb and flow, and then how that installs over a period of time. So nothing that we are drawing any concern from.

Charles Meyers

But we certainly aren't seeing an increase in our install interval.

Christopher M. Larsen - Piper Jaffray Companies, Research Division

And the increase in install intervals, is that a customer demand?

Charles Meyers

No, clearly not -- we're not seeing it.

Operator

Our next question comes from Frank Louthan.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Just sort of follow-up on that. You've talked in the past like getting to sort of $3 billion run rate. Is that, again, will you need to get into China and India to get there? And then can you comment on sort of the margin trends going forward? How should we think about that, should continue to see some continued improvements there or relatively flat?

Keith D. Taylor

Number one point, really, to get to the target of $3 billion or thereabout in 2015, we don't have to do any M&A, if you will. Having said all of that, our intention would be that we would get -- we would invest in some additional markets over that time period. And then putting all that into perspective, as we think about sort of rolling out our plan towards what we call our long-term operating targets, we do expect margins to improve over time. As you know, we're investing very heavily, again, in 2012, both in expansion projects, we're investing heavily in our IT platform, as Steve alluded to, and we're going to continue to verticalize our sales organization. And when you take all that into consideration, we still -- we're still going to deliver, roughly, 46%-plus on EBITDA margin line in 2012. And so we're comfortable that margins will continue to creep up over time, as we could get to scale, and as we leverage off investments we've made over the last few years. And just sort of put that in perspective, as a company with targeted roughly 50% adjusted EBITDA margins. And that's something that we still have our sights set on.

Operator

Our next question comes from Mike Rollins.

Michael Rollins - Citigroup Inc, Research Division

I was wondering if you guys have explored the possibilities of converting part or all of your business into a REIT structure, and if you can give us an update in terms of how you're looking at that possibility.

Keith D. Taylor

Thanks for the question. We sort of expected that we're going to get that question from the field here. First and foremost, I think it's very important to note that my responsibility, one of my key responsibilities for 2012 is really to look at this, this possibility of turning or becoming a REIT over some period of time. We have to look at that very seriously in 2012. It's consistent with sort of our prior expectations that if you consume all of your NOLs in the 2013, 2014, or in some cases maybe even 2015 time frame, you have to really back up and figure out when do you start thinking about how to roll that out. So first and foremost, I'd tell you we are thinking about it very seriously. We're also thinking about other tax funding initiatives even as we walk and review this particular issue. And one we referred to not long ago with the Luxembourg HoldCo Structure that we're using for Europe. That all said, though, I think it's important I make a couple of comments. Number one, we're absolutely committed to shareholder return. And recognizing that, that there are some potential benefits attached, and I said potential benefits attached to the REIT, is something we have to look at very, very seriously. But also we are aware there are some structural issues, there are some considerations, and clearly there are some trade-offs. So taking all of that into consideration, we are going to put some energy towards this initiative this year, and will continue to update you on a quarterly basis as we progress through this serious and detailed review.

Michael Rollins - Citigroup Inc, Research Division

Keith, if I could follow up, 2 questions on that. The first part is, have you given some thought to what the AFFO number, what it looked like last year, for example, in the reported financials, or what the guidance would infer for this year? And then you mentioned about the commitment to shareholder returns. As you look at the buyback, the $100 million, or roughly $90 million or $100 million that you gave in 4Q, that was a significant step forward in the pace of the buyback relative to what the initial program was set at. So how do you look at buying back shares, is it just sort of smoothing it out over time to hit your commitment, you look at that more opportunistically depending on where the share price is? If you can give us a little flavor of how you look at distributing some of those returns to shareholders.

Keith D. Taylor

Sure. Well, I think to address the first question on AFFO. I think a great surrogate for us is really discretionary free cash flow, and we presented that in our slides today, and certainly it's $9-plus when you look at fiscal year '11. If you look at the last quarter, it's roughly $3 AFFO -- I'm sorry, discretionary free cash flow per share. And as we look forward, we expect to see that grow. And we said we can see it grow upwards of $11, $10 to $11 next year, being 2012. So it's really a number that is sizable and we would expect that it will continue to grow with the success for our business. In many ways it's going to grow with the EBITDA line. The EBITDA is such a great cash surrogate for us from an operating cash flow perspective. When we get into sort of shareholder value topics such as the share repurchase, we saw an opportunity, quite frankly, in Q4. As you know, we announced in mid to late November the approval of the program as supported by our Board. And we went through a very volatile time, and we took that as an opportunity to acquire where we could meaningful amounts of our stock, roughly 870,000 shares. And that sort of takes our sort of year-end sort of stock number down to about 46.7 million shares outstanding. As we look forward, we're going to look at what is the best and highest use of our cash. And certainly, we have the approval to acquire us shares, up to $250 million worth of share repurchase. So we're going to look at the opportunities that present themselves. And as we look forward in time, we will focus on the best and highest use of our cash recognizing that our overall objective as a company, both as I said and as Steve alluded to in his comments, is to drive our shareholder value. And our commitment is to the shareholder. We've also attached it, as you know, to our compensation plan for 2012. So we see that as another way to indicate to the shareholders, we are going to very much focus on value-creation for the shareholders.

Operator

Our next question comes from David Barden.

David W. Barden - BofA Merrill Lynch, Research Division

If I could just ask 2 related questions. One, Keith, on the guidance. I seem to ask this one quite a bit. But if I'm annualizing the fourth quarter EBITDA, obviously you guys have raised EBITDA guidance adjusting for currencies to 857 or better. But even if I look at the annualized fourth quarter and that 857 number, what it suggests is that EBITDA is going to grow sequentially every quarter around $7 million. Now that's obviously roughly 2/3 of how faster we're growing in most of 2011, even normalizing for ALOG and onetime items. And then, we have got the entire cost structure of a larger sales force already embedded in the fourth quarter number. And presumably having a 60% larger sales force is going to give us some tailwinds at the top line and then to profitability for the rest of '12. So can you kind of walk us through how this much larger sales force, with the cost structure already embedded in, is going to lead to slower sequential EBITDA growth in '12 than we saw in '11?

Keith D. Taylor

Good. Great question, David. So why don't I take the first part, and then I'm going to pass it to Steve. Certainly when we look at the guidance we've offered both in Q1 and for 2012, we have considered, of course, our exit rates, our run rates and all that. I think it's important to note, number one, when you look into 2012, it's very early in the new year. And because it's early in the new year, we're taking position, we're just going to continue with the greater than story that we've done in the past. It works very well for 2011, and we would expect that to hold true for 2012 as well. That all said, as Steve mentioned, we're absorbing $15 million of FX headwinds. Because of that, we are basically from where we were last quarter to where we are today, the same number, the same results of the local level is greater than $1.885 million. So we are stepping it up. And then as we look at the quarter-over-quarter stuff, again, it's just very early the year. We're coming off a good strong quarter. We want to make sure that we continue to deliver. There's a lot of expectations that have been set for the team. That, in addition to the fact we're absorbing not only some capital cost that Steve alluded to for our high-key program, on the flip side there is a fairly meaningful number of operating expenses that will be attached to that same project. And that number is going to be, roughly, another $10 million-plus. And so when you look at that discrete project and what we're committing plus the FX currency, we feel at this stage of the game we've given you good -- we've given you a fair guidance. Now recognizing, we're only about 9 weeks away from updating our guidance because we will do that on the first quarter call. But right now, we feel very good about the numbers we've delivered. And as we did in 2011 and we have the same expectation for 2012, that we're going to continue to execute well and prove that we can deliver a strong operating performance for the business.

Stephen M. Smith

And David, I'd add a couple other comments just to color sales productivity a little bit because I think it's a very good question with the investment we've made. As you heard in our script, and I think Charles mentioned, we are very, very disciplined in how we're growing the type of customers we're bringing into these IBXs. So we are focused on value propositions and value aware customers. We're deadly focus on ecosystems and interconnection. So the sweet spot of the deals that we're pushing and approving are in this 10 to 30, 40 cabinet-type size, that these first 2 tiers of the architecture that I described today. So we fully expect to get higher-quality bookings, and that will drive firm to stable pricing that we're seeing. And that's where we're focused. And that's what we've asked the sales leadership to drive towards. So from a sales productivity standpoint, we're very happy with where we are. We're completing the verticalization of the sales force around our 5 go-to-market industry verticals. And we're seeing the bookings come in the way we want it. The pipeline is very strong. We're seeing, as we mentioned today, very good strength in network and financial. It's a little bit slower in the enterprise, and we knew that because the enterprise was made up of several other big industry verticals. And so we're learning where to go penetrate there. We're seeing success in a couple of segments, but there's more work to be done there. We have our global account teams all set up across major global networks, big global platform players and our key financial global folks. So we're making -- we're going higher and deeper in the big global accounts. The channel partnerships are starting to step up. We've announced 3 publicly, there'll be more to come as the year unfolds. We have our compliance go-to-market relationship with the company called Carpathia in the government circles and some enterprise customers. We're going to market with Amazon with the AWS Direct Connect. And we're also going to market with Rackspace with the OpenStack and cloud builder offer. So there's quite a bit going on there. Our sales engine is selling the global footprint, so whatever market the salespeople are in, they're selling the global footprint, which is working very good. So productivity, net-net, is up into the right, and it's ramping at the pace that we thought it would, but we're very focused on this, on a certain-sized deals. And as Keith and I said many times to the whole audience, we could grow this company a heck of a lot faster than we are today, but we're aiming this thing at ecosystem, higher-quality bookings, very disciplined in the type of deals that we're allowing into the IBXs. And that's where -- that's where the focus is. So we are achieving the balance we want with the type of bookings.

David W. Barden - BofA Merrill Lynch, Research Division

Great color. Super appreciate it. One last housekeeping item, if I could quickly, Keith. I think you said that there was a onetime expense out in Asia that impacted comps there. Could you elaborate?

Keith D. Taylor

There's actually -- unfortunately wasn't just a one-off. There are certainly, there are some one-offs, but there is a higher repairs and maintenance that we brought into the quarter into Q4. There was some incremental power cost, and that's why you see the cash gross margin line down a little bit, partly due to settlement agreement that we had with one of the providers there. And then there's just some discrete accruals that we made in the market in that region. Again, it gets impacted a little bit more by the size of the region relative to the other 2 regions. But overall, we expect them to get back to their traditional EBITDA trends, that region I'm referring to.

Operator

Our next question comes from Sterling Auty.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Two questions. Just elaborating, Steve, on the move with the cloud, you talk about going market with Amazon and Racks. How much of that movement in the cloud into data centers is going to come through that public cloud through vendors like that versus private cloud initiatives where you may see companies coming directly to implement their own private cloud directly in Equinix facilities?

Stephen M. Smith

Let me just -- we're obviously looking at all of the above. And our cloud business this past year grew to roughly 24% of our revenue for the company, so it's been very high growth for us. And we're seeing private cloud, public cloud, I mentioned we have 300-plus pure-play cloud providers that are operating in our IBXs and re-selling out to the world. There's another 500 IT service, managed service hosting companies that are offering cloud access. So we have a lot of activity going on here. The Direct Connect example you point to is just one example of a alternative method for CIOs to get a higher secure, avoid the Internet-type connection inside of our IBXs. And there are several other players that are also -- that we're talking today about Direct Connect activity. But I don't know if Charles or Jarrett, you have anything to add what you're seeing...

Charles Meyers

No, I don't know that I'll be able to put my finger on a specific breakdown in between the public and private. In fact, what we're seeing is that the people are very much going to this hybrid infrastructure which we talked about in the script, which is interconnecting the public cloud services for particular loads that are well served by that. I mean, particularly, those that are highly variable. But over time, as they fill up VMs, it really make sense oftentimes for them to move that into OEM infrastructure. And then they're also extending that into private cloud to access cloud-based services of various sorts. So this sort of evolution towards hybrid cloud infrastructure is aggressively happening. And again, I think serves us, it really serves as well as an enabler, fundamental enabler of cloud computing.

Sterling P. Auty - JP Morgan Chase & Co, Research Division

Okay. And the follow-up, Steve, you mentioned a service aggregation point, I think in Europe with AMS3 that you're landing one of those as super pops. Do you, at this point, have some early visibility on the type of customer that wants to get into that aggregation point? Will it be a consistent contract, meaning will the type of customer and the type of contract that you have for that type of arrangement be similar to what you typically have, or is it going to be anything special about that deployment in particular?

Jarrett Appleby

Yes, this is Jarrett. It's a good question. I think really what you're going to see is, first of all, it started with the content players who are really leveraging the AWS infrastructure. But it is our typical business. They come in to take advantage of public Internet access and then Direct Connect. What's happening now is enterprises are using private networks, particularly Ethernet access into the cloud. So what you'll see is, we're seeing this evolution and it's exactly -- it started with public cloud infrastructure using our Internet exchanges. It then leveraged our Direct Connect offerings, which we're doing in multiple markets around the world. We're seeing natural cloud hubs form in about 12 to 15 markets, and that's growing. And then you're seeing an evolution to private networking, and particularly Ethernet, and that's why we've been talking about Ethernet the last year, that still allow you to directly connect from outside the data centers from an enterprise standpoint. And that opens up the market to the cloud-enabled enterprise as we call it, that community.

Operator

Our next question comes from Tim Horan.

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Keith, is there -- there's some debate out there whether or not you can even become a REIT. I guess, in your mind, is there any debate, and what do you think would be the biggest structural hurdle to that? I just had a big quick follow-up in operating expenses, too.

Keith D. Taylor

Yes. Well, Tim, I think there's always a debate on what are the pros and cons. And clearly we, as a company, are going, as we've said, focus on driving as much shareholder value, irrespective of whether or not we can become a REIT or not, a lot of work to do. The complexity, typically, will revolve around the amount of interconnection services that we provide as a company. And obviously, you've seen with our announcements today the success that we're having in that particular revenue line. And then the other piece, of course, is in the international. And you've got to take all of that into consideration as you develop what one refers to as a taxable REIT subsidiary. So the company's highly focused on it. I think like anything, you got to review it. You've got understand it and appreciate not only the sort of benefits but also the complexity and then just make a decision. But I made a personal commitment to Steve that someday we're going to engage in very thoroughly in 2012, and we're already actually working at looking at the analyses. And we'll continue to update you, and that's the best we can offer right now.

Timothy K. Horan - Oppenheimer & Co. Inc., Research Division

Great. And then just on the operating expenses. Any more color on utility expense declines in the quarter, and is this an ongoing trend, and what enable that?

Keith D. Taylor

Again, utilities, typical -- it's what you typically see in Q4 relative to Q3, there are some seasonal impact that comes out of -- particularly in the North American region when you look from Q3 to Q4. So that will be one thing that you tend to pay higher price points per unit in the Americas in the Q3. And then you, of course, you've got the step-down in Q4. So that has, unfortunately, a natural way of representing itself in our financials. And also this quarter we did get the benefit of some utility rebates based on the programs that we have entered into with our local providers. But overall, I would tell you that utility as a sort of a percent -- utility cost, pardon me, as a percent of our revenues, should always -- it's going to ebb and flow. It's typically been in the range of 12% to 14% of our revenue line. And we're going to continue to look at it from that perspective. But the one other comment I would make is that we are making investments, and part of the reason why you saw our ongoing CapEx go up in 2011 is the fact that we're making investments in the data center that will, hopefully, drive greater efficiency into the data center or the IBX. And over time that will enhance our ability to deliver higher returns.

Operator

Our next question comes from Colby Synesael.

Colby Synesael - Cowen and Company, LLC, Research Division

I have 2 questions. First off, on the CapEx. If we look at the first quarter guidance, and it was obviously rounded up to the course of the year. It would imply that you're looking for a somewhat linear CapEx over the course of the year. Is that the case or do you think it could be more front-end loaded, in other words potentially a big jump in the second quarter and then maybe kind of tails off by the time we get to the fourth quarter? And then the other question had to do with the partners in that strategy, you talked about how you're focused more on that this year and you mentioned Carpathia, AWS and Rackspace as examples that you've recently signed. Is there going to be a revenue opportunity at some point for you? In other words, will there ever be a point that when you look at it strategically, where you could actually be reselling their services, and actually there might be some type of revenue-share opportunity? Or is this really just to sell more of your co-location services?

Keith D. Taylor

Good question. I'm going to take the first one, Colby, and then I'm going to pass it off. I think when you look at CapEx, it looks like it's going to be ratable at least by the guidance we've given you. That's probably not going to be the case. I think it's going to be generally more front-end loaded, all else being equal. Something that we'll continue to update you on, on a quarterly basis. But we would expect, certainly, the first 3 quarters of the year to take the majority of the burden. And so because of that, I would say that your -- the last quarter of the year is probably going to be the least significant from a CapEx perspective. But we're obviously looking -- we measure CapEx now, as you know, on a cash basis, and we're going to continue to review it and make sure we're sort of -- we're planning it well, so we can guide you as effectively as we can. And right now, I tell you, the first quarter is more, it's numerical coincidence that it adds a quarter of our total year's guidance.

Jarrett Appleby

And Colby, this is Jarrett again. I think, really, what we're seeing is an opportunity, one, we've identified a group of partners that really helped the value from platform-enabled services, particularly for the enterprise. A lot of the enterprise want bundled solutions. And we have identified a group of partners with the sales organization to go target, particularly around private, public cloud offerings, a cloud brokering capability, a cloud management capability and a security. So think of them as platform enabled services that are part of our portfolio that we can sell. And we get our traditional cabinets and interconnection business, are also able to start monetizing with them, they're incenting us to sell those kinds of solutions as well. So it is an enhancement of our value prop and a total solution that we're now positioning to the enterprises to make it easier to buy Platform Equinix.

Colby Synesael - Cowen and Company, LLC, Research Division

All right. But you don't envision a point where you're training yourselves for as to actually sell some of those cloud-hosting services?

Jarrett Appleby

We actually kicked off at our sales kickoff to educate them and position, not re-sell but sell side by side, more sell with a partner.

Operator

Our final question comes from Jonathan Schildkraut.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Great. Just one housekeeping item and then maybe if we could dive into some more strategic stuff. Keith, could you tell us where the RP basket stood at the end of the year?

Keith D. Taylor

Yes, it's going to be -- it's just slightly up above over what we announced in the last quarter. So last quarter was roughly $191 million, so by now we're estimating it's just in and around the $200 million range, Jonathan. Again, it's roughly 50% of the C&I plus the equity, so it will be between $200 million and $210 million at the end of the year, roughly in that range, and that's what we're estimating.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

All right. I was wondering if we could talk about DC10. You have talked a lot about delivering hybrid architectures, addressing what really is a growing opportunity to match up dedicated and shared infrastructure. DC10, you've announced one customer win, and today, you talked a bit about investing a little bit more into that facility. I was wondering if you can spend, or maybe Charles could spend a little time telling us what's going on down there and what you're seeing, and maybe a little bit more color.

Charles Meyers

Thanks, Jonathan, this is Charles. So yes, we are delivering Phase 1 of DC10 this quarter. We've already presold several deals into that facility, and we're seeing a very strong funnel. So strong, in fact, that as you know, that we already announced -- approved and announced today our Phase 2 build. And I think, overall, what we're seeing is the customer response there really strongly validates our hypothesis behind that investment. And we're seeing strong demand from these customers with the multi-tiered architecture requirement, and customers who really want to maintain a comprehensive relationship with an infrastructure partner like us. And so again, it's not for everybody. I think it's a compliment to what we deliver for our ecosystem-focused customers. And again, those that have that kind of multi-tiered architecture requirement and want the premium service delivery that Equinix provides, it's a great fit for them. We're seeing real strong momentum in the market.

Katrina Rymill

That concludes our Q4 call. Thank you for joining us.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

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