InterXion Holding N.V. (INXN) CEO David Ruberg on Q3 2018 Results - Earnings Call Transcript

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About: InterXion Holding N.V. (INXN)
by: SA Transcripts

InterXion Holding N.V. (NYSE:INXN) Q3 2018 Results Earnings Conference Call November 1, 2018 8:30 AM ET

Executives

Jim Huseby - IR

David Ruberg - Vice Chairman and CEO

Richard Rowson - VP, Finance

Giuliano Di Vitantonio - Chief Marketing and Strategy Officer

John Doherty - CFO

Analysts

Michael Rollins - Citi

Colby Synesael - Cowen and Company

Jonathan Atkin - RBC Capital Markets

Erik Rasmussen - Stifel

James Breen - William Blair

Robert Gutman - Guggenheim Securities

Jennifer Fritzsche - Wells Fargo

Operator

Ladies and gentlemen, thank you for standing by, and welcome to today’s Q3 2018 Results Conference Call. [Operator Instructions] And I also must advise you that this webcast being recorded today, Thursday, the 1st of November, 2018.

And now I would like to hand over the webcast over to presenter today, Mr. Jim Huseby. Thank you. Please go ahead, sir.

Jim Huseby

Thank you, operator. Hello, everybody, and welcome to InterXion’s Third Quarter 2018 Earnings Conference Call. I’m joined by David Ruberg, InterXion’s Vice Chairman and CEO; Richard Rowson, our Vice President of Finance; Giuliano Di Vitantonio, our Chief Marketing and Strategy Officer; and John Doherty, our newly appointed Chief Financial Officer. To accompany our prepared remarks, we’ve prepared a slide deck, which is available on the Investor Relations page of our website at investors.interxion.com.

Also before we get started, I’d like to remind everybody that some of the statements we will be making today are forward-looking in nature and involves risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today’s press release and those identified in our filings with the SEC. We assume no obligation, and do not intend to update or comment on forward-looking statements made on this call.

In addition, we will provide non-IFRS measures on today’s conference call. We provide a reconciliation of those measures to the most directly comparable IFRS measure in today’s press release, which is posted on our Investor Relations page at investors.interxion.com. We’d also like to remind you that we post important information about InterXion on our website at InterXion.com and on social media sites such as LinkedIn and Twitter. Following our prepared remarks, we will be taking questions over the phone. Now I’m pleased to hand the call over to InterXion’s CEO, David Ruberg. David?

David Ruberg

Thank you, Jim, and welcome to our third quarter 2018 earnings call. Before we get started, I would like to welcome John Doherty to the company. This today is his first day with InterXion. I also want to thank Richard Rowson for the tremendous job he did as the interim CFO for the past 10 months as we conducted the CFO search. Richard will lead us through the discussion of financial results in the call today. Please turn to Slide 4.

During the third quarter, InterXion continue to benefit from favorable demand trends, primarily from cloud platforms resulting in a strong financial results. At the same time, we remain focused on operational execution, adding capacity in key markets to lay the foundations for continued growth in the future. Consistent with recent quarters, cloud and content platforms remain particularly active in adding to their computer capacity and network nodes in a number of our locations.

Q3 was another active quarter, highlights include a 14% year-over-year increase in total revenue, all of which was organic. A 15% year-over-year increase in recurring revenue, a 17% year-over-year increase in adjusted EBITDA, representing a Q3 adjusted EBITDA margin of 46.3%. Equipped space increased by 7,700 square meters as several projects were brought forward and completed late in the quarter.

Expansions were completed in five different countries in Q3. Installations surpassed 5,000 square meters of new revenue-generating space. Bookings in Q3 were strong, and the sales pipeline continues to reflect solid demand. Pricing remained stabled and churn remain within our historical ranges. We completed a bond tap of our 4.75% notes, raising over €200 million. And after the quarter, we announced additional capacity expansions in Amsterdam and Marseille.

Please turn to Slide 5. As indicated before, revenue in Q3 came in at €142 million, up 14% from last year and 2% sequentially. Recurring revenue in nearly €135 million, represented 95% of total revenue and was 15% higher than last year. Adjusted EBITDA was nearly €66 million in Q3, an increase of 70% year-over-year and 4% sequentially. Richard will talk in more detail about these numbers later in the call.

Please turn to Slide 6. We added 7,700 square meters of equipped space in the third quarter, and we ended the period at 140,300 square meters. We also installed 5,000 square meters of revenue-generating space led by Amsterdam, Marseille and Vienna. We ended Q3 with 111,200 square meters of revenue-generating space, resulting in the overall utilization of 79%. Recurring constant revenue continued to grow faster than recurring revenue, contributing over 6% of total revenue in Q3.

Please turn to Slide 7. The record amount of new capacity added in the third quarter was driven by projects completing earlier than announced as we pulled some delivery dates forward slightly to accommodate customer requests for early access. We have now opened 15,400 square meters of new capacity so far during 2018, which exceeds the amount of new capacity we’ve added in any prior full year. In addition, we have over 38,000 square meters of new capacity under construction, including our most recently announced new data centers Frankfurt 15 and Marseille 3. This represents an increase of over 25% compared to the level of equipped space at the end of Q3. The expansion activity remains broad based with current projects in 11 of our 13 cities, including all 6 cities in the Big 4 countries and in 5 of the 7 Rest of Europe countries. In the 2 remaining countries, Belgium and Ireland, additional capacity was opened earlier this year.

All of this activity is taking place in response to ongoing healthy demand from across our customer base. Many of you may be familiar with CBRE’s quarterly advances of European data center market, and their most recent publication forecast record European colocation capacity take-up in 2018, and continuing strong take-up in 2019. Our own discussions with our major customers are consistent with these forecasts. Indeed, we are also seeing growing demand in certain Tier 2 European markets alongside the Big 4.

In addition to ongoing expansion projects, we continue to acquire additional land for future data center builds. Last week, we completed the purchase of land in Zurich, where we’ve also secured the requisite power. And we are in negotiations to expand our land bank in other locations.

Our financial track record is a product of consistent and careful execution, especially with respect to capacity expansion. The presence of clear lines of sight to customer demand, in many cases to specific deals, together with returns consistent with historical levels remain primary considerations for our capital allocation. Our highly connected data centers in communities of interest remain a significantly differentiated value proposition for our customers.

Please turn to Slide 8. Q3 was another very good quarter with revenue growth across the board along with strong bookings. In line with previous quarters, over 90% of bookings came from the existing customer base. At the same time, we continue to add new customers at a healthy rate and have seen deals across the size spectrum. The strength of our communities underpinned by the mix of customers. Of the 2,000 plus customers, around 20% comprise platforms, over 30% are connectivity providers and almost 50% are enterprises. This diversity is the foundation of our success.

In Q3, we continue to see the same demands that we’ve seen in previous quarters. The growth of platforms accelerate, while growth from connectivity and enterprise remain stable. As a result, the distribution of revenue by business segment, which is depicted on this slide, continues to slowly tilt towards platforms. The trusted relationships that we have established with our largest customers are the product of many years of experience of successfully working together and are leading to enhanced line of sight to future deployments.

As a consequence, we’re receiving a greater flow of orders within commencement dates that are more than 12 months out and more reservations for future deployments with us. Notably, deals with these customers in some cases are characterized by larger footprints and longer-contract terms, yet pricing remains stable.

Within the platforms segment, across B2B and B2C platforms, we are also starting to see greater diversity in terms of size, logos and geographical distribution. The steady growth in the Connectivity segment is another indication of the virtuous cycle that exists between platforms and growth in data traffic. The demand we have experienced from connectivity providers is evenly spread across most of our locations, with particular strength in Frankfurt and Marseille. Connectivity growth in Frankfurt has been the strongest among the European colocation markets. The increased presence of the platforms in our Frankfurt community, both B2B and B2C, continues to attract a significant number of incremental PoPs by connectivity providers seeking to capture share of the substantial traffic originating in our campuses.

Traffic is the currency with which we measure the strength of our communities, and is an approximate indicator of the prospects for the continued long-term profitable growth of our business. The Enterprise segment continues to develop as expected, with customers gradually ramping up their cloud migration plans and becoming increasingly familiar with the important role that colocation can potentially play in their IT architecture modernization process. They are adding new customers both with direct-enterprise engagements, such as Société Générale, and indirect appointments through systems integrators, such as Fujitsu. The indirect path to enterprise customers all provide IT service providers is particularly important because of the central role that they play in importing and implementing enterprise these strategies. A region where these models have the most areas is Europe, and Europe is the Nordics, where we are -- we have built strong relationships with established European system integrators such as NNIT and Avery. These customers -- these companies are customers of ours who host a wide range of enterprises in their data centers. After their initial employee deployments with interaction, they have grown by adding new enterprises to their own customer base, in turn leading to sizable increases in capacity contracted with us.

I would now like to turn the call over to Richard.

Richard Rowson

Thank you, David. I’m pleased to report that InterXion delivered yet another very good quarter, characterized by solid execution and a continuation of our pattern of consistent midteens growth. As previously mentioned, during the quarter we executed well received bond taps that raised an additional €204 million of capital following the broader refinancing we completed in the second quarter, which together positioned us to continue this growth. Total revenue in Q3 came in at €142.2 million, up 14% compared to Q3 2017 and a 2% sequential increase. This revenue growth was entirely organic and currency movements have momentary impact on total revenue by the year-over-year or sequentially. Recurring revenue in Q3 was €134.8 million, representing a 15% year-over-year increase and a 2% sequential increase. ARPU during Q3 was €413, reflecting a strong quarter for new installations, many of which occurred toward the end of the period. Recurring revenue represented 95% of total revenue in Q3, again consistent with the rate we typically report.

Nonrecurring revenue in Q3 was €7.4 million, up 3% year-over-year and up 5% sequentially, reflecting the ongoing high levels of customer installations. Cost of sales was €55.9 million in Q3, up 13% year-over-year and up 4% sequentially, resulting in gross profit of €86.3 million, a 15% increase year-over-year and 1% sequentially.

The gross profit margin for the quarter was 60.7%. Sales and marketing costs were €8.7 million in Q3, up 6% year-over-year and down 9% sequentially. This decrease was primarily a function of the phasing of marketing activities and expenditures between quarters. Other G&A costs were €11.8 million in the quarter, up 12% year-over-year and down 2% sequentially, reflecting lower professional fees in the quarter.

At 8.3% of revenue, other G&A costs remained within our expected range of 8% to 9% of revenue. Adjusted EBITDA at €65.8 million increased 17% year-over-year and was up 4% sequentially, representing an adjusted EBITDA margin of 46.3%, an increase of 120 basis points year-over-year and 60 basis points sequentially. The Q3 depreciation and amortization expense came in at €32.9 million, an 18% increase year-over-year, remaining consistent with the increase in our depreciable asset-based resulting from the ongoing investments in our data centers. The finance expense in Q3 was €11.7 million, essentially flat compared to the prior quarter, excluding the onetime charges we incurred in Q2 related to the refinancing that was completed in June. The Q3 income tax expense was €4.4 million, equivalent to an effective tax rate of 29%, which continues to be elevated by the impact of non-deductible share based payments charges. Our OTM cash tax rate was 32%, consistent with the prior quarter reflecting the impact of the Q2 refinancing, while the cash tax rate for Q3 was 26%.

Net income was €10.9 million in Q3, up 16% year-over-year and 23% sequentially, after adjusting for the onetime charge of €11.2 million relating to the June refinancing. Adjusted net income in Q3 was €11.6 million, up 16% year-over-year and up 31% sequentially. Adjusted earnings per share were €0.16 on a diluted share count of EUR 72.1 million -- 72.1 million shares up 16% compared to Q3 2017 and up 31% versus last quarter.

Looking ahead to the fourth quarter, we expect ARPU to be within the range of €412 to €414 based on the timing of new customer installations. As is by now well understood, the operating metric has been specific to the pace and timing of new customer installations. Periods of higher activity will see greater initial dilution impact, which will be partially offset by continued growth in recurring revenue from higher energy consumption and increased density of cross-connects from established customer deployments. Cross-connect revenue will be approximately 6% of total revenue for the year, non-recurring revenue should again be about 5% of total revenue. Sales and marketing costs should be consistent with the year-to-date percentages of revenue, while other G&A costs should remain within our typical range of 8% to 9% of total revenue.

Please turn to Slide 11. Strong growth in InterXion’s Big 4 markets continued with Q4 -- Q3 revenues of €93.6 million, up 16% year-over-year and 2% sequentially. Adjusted EBITDA and the Big 4 was €51.8 million in the quarter, a year-over-year increase of 19% and a sequential increase of 1%.

The resultant adjusted EBITDA margin of 55.4% represents a year-on-year increase of 170 basis points. Germany and France were again the stand out performance in the Big four segment. Our rest of Europe segment delivered solid performance with third quarter revenue at €48.6 million, up 11% year-over-year and up 3% sequentially, led by Austria, Denmark and Switzerland.

On a constant currency basis, revenue was up 12% year-over-year and 2% sequentially. Adjusted EBITDA in the segment came in at €28.7 million, up 11% year-over-year and 6% sequentially. The rest of Europe segment posted a strong adjusted EBITDA margin of 59%.

Please turn to Slide 12. International continues to respond to the strong demand across our footprint, while strategically deploying capital to add capacity. Capital expenditures, including intangibles, totaled €103.2 million during Q3, so 97% or €99.7 million was deployed on expansion and upgrade projects, while €3.5 million was spent on maintenance and other and intangibles. Year to date, we’ve invested €320 million in capital expenditures. While we are investing across our entire footprint, 78% of third quarter capital expenditure was allocated to the Big 4 markets where we currently have our largest projects.

Please turn to Slide 13. In September, InterXion completed a bond tap for an additional €200 million under our existing 4.75% senior unsecured notes that were issued in the June refinancing.

The offering was priced at €103 million and after expenses we added net proceeds of €204 million. InterXion’s credit metrics remain solid with net leverage of 4.1 times, up marginally from Q2, while our blended cost of debt is 5%.

Cash ROGIC, which is our measure of return on gross invested capital, was 10% for the last 12 months, unchanged from the prior two quarters. InterXion ended Q3 with €289.9 million in cash and cash equivalents, up from €133.6 million at the end of Q2. In addition to the cash raised from the bond tap, we generated €60.9 million from operations in Q3 and had €200 million available from our undrawn revolving credit facility. This amounts to nearly €0.5 billion of unfavorable liquidity and together with a steady growing discretionary free cash flow from our existing data centers, gives us the liquidity to support our customer driven expansion plans.

As a reminder, we’ll announce expansion projects are fully funded.

Please turn to slide 14. At the end of Q3 2018, our group of 37 fully built out data centers with 91,500 square meters of equipped space continued to generate strong and stable cash returns of 23% over the last 12 months with a gross margin of 67%. As we have discussed on previous calls, the revenue returned to the single data center would typically grow for a number of years after the site is essentially full from the space perspective. The combination of the annual escalators and customers increasing their energy consumption, rack power densities and the number of cross-connects per rack and the drivers of the 8% LTM recurring revenue growth seen for this group of data centers.

And with that, I would now like to turn the call back to David.

David Ruberg

Thank you, Richard. As previewed on earlier calls, today we’re going to discuss some of the emerging trends that are shaping the IT industry. The advanced technologies such as real-time analytics, artificial intelligence, the Internet of Things and virtual reality are paving the way to a new wave of applications that present incremental opportunity for highly-connected data centers.

Through discussions with our customers, we continue to gain significant insight as to how these emerging trends may impact our business model. By understanding our customers’ requirements, not only have we been able to differentiate our company and sustain its growth, but we’ve also been able to gain insights into future activity.

The visual depicted here shows at a very high level, the journey that most IT organizations have embarked on. The first step in this journey, driven primarily by cost efficiency and risk mitigation considerations, consists of rationalization of legacy IT infrastructures, which often leads to selective IT outsourcing. This is a step that most mature enterprises have already taken. The second step is the migration to the cloud, either private or public or increasingly a combination of the two. Potential business benefits here include further cost reductions, flexibility, the option to shift the investments from CapEx to OpEx and better employee productivity.

One of the key outcomes of a properly executed cloud migration strategy is a placement of workloads dictated by total cost of ownership and performance rather than by the geographical constraints of existing IT assets. The third step is digital transformation, whereby enterprises are embracing new and advanced technologies to stay competitive, adjust new market opportunities and be more innovative.

All types of companies are on this journey. And those further along are the ones labeled Born Digital. These are people not saddled with legacy IT infrastructures. Cloud platforms and digital media platforms, for instance, have had the advantage of being creating with next generation infrastructures to be highly scalable and flexible. These companies are visionaries or early adapters in the use of disruptive technologies to offer new services and differentiate themselves in the marketplace. By understanding what they are doing today, [Technical Difficulty] iterations of determining the optimum placement on the workloads and network capabilities. This applies across on-premises, the public cloud and colocation environments. They now have the deep understanding of how their network topology impacts critical quality of service parameters, such as application respond time and service delivery economics. This is the reason behind the choice to place mission-critical network and compute nodes in carrier and cloud neutral data centers where latency and cost can be optimized. Our major customers are telling us that there is emerging trend in favor of placing greater intelligence at the edge of these architectures, to enable the processing and analysis of data in close proximity to end users or to the connected objects that are generating and receiving data. Many new application generate an incredible large amount of data, which has to be aggregated, transferred, processed, filtered and analyzed so that key insights and decisions can be sent back to the relevant devices and people. And data traffic is the currency of interconnectivity, and the more data it is generated to the edge, the more value customers will see in carrying cloud into data centers. We refer to this opportunity as colocated edge. The drivers that are shaping the colocated edge are complementary to those shaping colocated hybrid cloud, which is concentrated with centralized data processing and highly-connected locations for mission critical applications. In fact, the development of the edge will drive more traffic to the colocated hybrid cloud.

A key question that we’re often asked is what would be the size of the appropriate at the edge when it dodge and becomes as mainstream as cloud is starting to be. In our view, there will be applications that will require micro edges and others that will run a micro data center in connected objects like cards. But the experience with the B2C platform today shows that the vast majority of edge applications will require the exchange of large amount of traffic and carry neutral data centers. These locations will be the natural evolution of today’s interconnection hubs, with a combination of large data centers and highly connected Tier 1 locations and increasing number of midsize data centers in Tier 2 locations. The main digital media platforms provide primary evidence of how colocated hybrid and colocated edge are additive opportunities even today. For example, some of the major video applications today run the centralized hybrid cloud environment. The content is then distributed to end-users through cash notes at the edge, which increasingly drive demand for network nodes and at the colocated edge. This trend has been a driver behind some of the growth that we’ve seen with BDC platform across our markets. And this type of demand is only destined to accelerate with the rise of user-generated video and introduction of new technologies like virtual reality that will dramatically increase the amount of data created in exchange. Another technology that require combination of colocated hybrid and colocated edge is artificial intelligence. For instance, such applications as industrial automation are based on the collection of large amounts of data at the edge and intensive data-processing and cloud based computing facilities. These technologies are already being widely introduced by the leading platform providers and will be spreading to enterprises in the future. The early adopters of these technologies are reshaping the value chains of traditional enterprise’s segments such as consumer retail, transportation, hospitality and retail banking. As the incumbents and new entrants embrace digital services, the adoption of these technologies will become mainstream and data traffic will continue to grow. We are not suggesting that all enterprises will be fully digital in the future, but the successful ones will naturally bring to brick-and-mortar components with the digital components to offer a seamless experience to their customers. This creates future, further and additive opportunities for interaction.

Please turn to slide 18. Today we are reaffirming our previously announced full year financial guidance for revenue, adjusted EBITDA and capital expenditures. To be specific, for the full year 2018, we’re expecting revenue to be in the range of €553 million to €569 million. We expect adjusted EBITDA to be in the range of €250 million to €260 million, and we expect to invest between €425 million and €450 million in capital expenditures this year.

Before opening up the call to Q&A, I would like to express my thanks to all of our employees across the company for their continued commitment and customer focus. The continued success of this company is the product of their hard work. I would also like to thank our shareholders and bondholders for their continued support for InterXion. Now let me hand the call back to the operator to begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question over the phone comes from the line of Michael Rollins. Please go ahead.

Michael Rollins

Two, if I could. First, could you talk about the development deal that you’re getting on this -- or that you expect to get on this larger pipeline of development that you outlined over the last few quarters. And then second, can you talk about the pre-leasing trends that you’re seeing, maybe give us a little color of the sources of that pre-leasing activity?

David Ruberg

Mike, the returns that we expect to get in the future are consistent with the returns that we have gotten in the past. And as far as the pre-leasing, as we tried to indicate, although for the 2 latest builds we do not have signed contracts for these 2 builds. But we feel very comfortable with initiating these builds, because we are in detailed conversations with multiple existing customers who are already in these campuses and are looking for expansionary capacity that is near to where they currently are. Alright?

Michael Rollins

And just maybe one last follow-up. Just on that pre-leasing, what kind of customer verticals are you seeing from pre-leasing? Is it just from cloud or are you seeing it diversify into cloud and enterprise and the networks.

Richard Rowson

They’re digitally on label . The pre -leasing comes from mainly from the platform segment, but all sub segments within the platform segment. So not just cloud but also digital media and within digital media, different companies like content providers, social media and gaming. So variety -- primarily within the platform segment, variety holding in terms of global and sub-segments within the platform segment.

David Ruberg

And to follow -- add on to that. In addition, once people know -- the connectivity providers in particular -- that these conversations are going on, we also begin to see their interest as well.

Operator

And your next question comes from the line of Colby Synesael.

Colby Synesael

Also wanted to go back to pre-leasing to see if you could give some more color. So you mentioned 38,000 square meters are under construction. I was curious if you could actually tell us the percent of that, that is pre-leased. I think in the past you’ve given us some color on that. And then also, you mentioned strong bookings, I’m just curious how that might compare to the bookings that you’ve seen in the first half of ‘18, just to get a sense if we’re seeing an acceleration or it’s more of a consistent look from what we saw maybe in the first two quarters of the year?

David Ruberg

Colby, the bookings that we’ve seen over the last 6 or 7 quarters -- 7 or 8 quarters are pretty consistent. Ebbs and flows a little bit one quarter to the other, deals come in maybe after the quarter. But overall, the demand is pretty consistent. And as far as your first question, I’m not sure that I have an answer off the top of my head, we’ll have to get back with you.

Colby Synesael

Okay, that’s fine. And maybe I’ll just then -- ask one more then. So you’re in the 13 markets today. How important is it to potentially go into new markets. So as you start to look into other parts of your -- perhaps even other continents. Is that aspect of the strategy growing? And I guess to that point, how might the addition of John to the management team potentially support that?

David Ruberg

I’ll answer the second question. I’m not sure that we hired John just to help us to go into new cities. But we did hire John because of his overall background experience in a lot of areas. As far as your first question, we continue to look at opportunities primarily driven by our customers where we look at the characteristics, where we can deploy capital that is primarily highly-connected data center when the markets are mature enough to require that, and we can look and get the returns that we’re looking for. So we are constantly looking at new opportunities, new cities.

Giuliano Di Vitantonio

Colby, an example of that is run, when we discussed that in the past, where we’ve run an experimental pilot, market pilot for the last couple of years, to really get a deep insight into type of demand that is going to that city and Italy in general. And at some point we will make determination of if and when it will make sense for us to officially land in that city. But being there, running this pilot with a partner gives us insight that we wouldn’t get just by reading market reports.

Operator

And the next question comes from the line of Jonathan Atkin.

Jonathan Atkin

So I was interested in just trends that you’re seeing in hybrid cloud where companies are placing their own IT mix to public clouds. And you mentioned some examples in the Nordics that are sort of the latest theme around systems integrators. I wondered if you could sort of comment on differences in Continental Europe. Any differing trends by country where you may be seeing that happen more than others? And then the other question I had was around as you expand within your existing countries and metros, any thoughts, sort of big picture, around the desirability of entering the second submarket within a metro in which you already are present in order to maybe get too advanced within a given market rather than just market in your existing campuses.

Giuliano Di Vitantonio

Jon, I’ll take the first and Dave will take the second. In terms of the trends by country, I will say two things. First of all, the adoption of hybrid cloud follows the same pattern as the migration to the cloud. So I think in the past, we mentioned that, that pattern in Europe start in the UK, then close to Northern Europe, primarily Netherlands and the Nordics. And then it goes more into mainland Europe, Central Europe, Germany, then that countries. Then Southern Europe is probably the last to integrate those trends. So we’ve seen exactly the same thing in terms of hybrid cloud. And when it comes to your point by the IT service providers, of course, that’s our primary way of engaging with the customers for two reasons.

First of all, because it gives us more scale, we can reach more customers without having to increase our footprint, sales footprint, the marketing footprint. And second, they are really the key players advising the customers of what that architecture, that hybrid architecture should look like. And so they are the best place to advise the co-location place in their architecture. That’s the reason why we focus so much on the IT service providers.

David Ruberg

And Jonathan, back to your first question. I’m not sure having multiple locations in a city gives you multiple cracks at the opportunity. In a number of cities we are in multiple locations, but they are all highly connected. The value of what we do, and we sometimes call it extended campus, is that anybody in any one of our facilities, we make it look like they are in all of our facilities. So our approach to this is to constantly be looking for those opportunities where we can find reasonable space and power that allows us to connect it so that whether it’s an extended campus, right next to campus or a citywide campus, they all look the same.

Jonathan Atkin

And then lastly, just thoughts on interconnect business and opportunities. Do see opportunities for growth through partnering more actively with some of the SD-WAN providers. Is that something that you think affects you in any way?

Giuliano Di Vitantonio

Yes. So as SD-WAN is one of the emerging technologies that is, let me say, disrupting a little bit the Connectivity segment. And of course, we work both incumbents in that segment that are having their own plan for rollout SD-WANs with their existing customers. But we’re also in touch and working with some of the emerging players that are more specialized in SD-WAN. And of course in the cities, in all the cities since we have this very strong connectivity community, both incumbent and emerging players are interested in coming to those cities and deploy those technologies in our interconnection hubs. So yes, that is something we are monitoring, we are working with them. And in some cases, we have seen some of the deployment.

Operator

And your next question comes from the line of Erik Rasmussen. Your line is now open. Please go ahead.

Erik Rasmussen

First, just in terms of kind of the strength in cloud and it seems like some of these projects are developing faster than expected. Would that change your sort of how you see growth over the next couple of years in terms of the different verticals or are you still tracking to the key trends that you’ve outlined in the past?

David Ruberg

There were a lot of qualifiers in there. Basically, we are really focused on our long-term strategy, which is the colocated hybrid cloud. It appears to be developing at approximately the rate and pace and locations that we anticipated. We haven’t really changed our approach over the last couple of years, nor do we expect to change it. And I think unless you want to add something to that, Giuliano ?

Giuliano Di Vitantonio

No. I think you covered it pretty well.

Erik Rasmussen

No, I think you called it pretty well.

David Ruberg

So Erik, I think it’s -- even given the puts and takes of this quarter versus that quarter, our long-term vision seems to be pretty correct. And as we said, a lot of this comes from the very good, healthy supportive relationship with our long-term customers, our strategic customers who are sharing a lot with us, giving us insight. And the fact that we do pay attention to what people really need, not necessarily they tell us what they want. And that has been one of the cornerstones of the success of this company.

Giuliano Di Vitantonio

And Erik, I will add something. To the diversity David emphasized in the prepared remarks. In terms of the number of customers that we have from different segments, that’s it how we look at that. We had that diversity because we know that different points in time there will be different segments that will grow more or less, and having coverage of all those segments and the strength of the community of adding all the segments together that’s what gives us also line of sight to future growth on the back of those communities.

Erik Rasmussen

And maybe just on the competitive front. There’s obviously been a lot of activity from the U.S. public data center providers, and it’s been in their announcements for expansion plans. Are you seeing any impact and are you seeing any more regions that might be developing more quickly than you’d expected based on some of that activity we’ve just recently seen?

David Ruberg

They are here because the opportunity is here. And I don’t think it’s developed any differently than we expected it. One think you do have to put in perspective, and I think someone mentioned this, there was more uptick this year in Northern Virginia than in all of Europe. Europe is approximately the same size as United States in GDP, approximately the same size in population, and one can expect it will probably be the same penetration and require the same amount of capital from the platform providers that they do in the United States. If you’ve got one area in United States that did more this year in uptake than all of Europe that gives you some idea of what the future might look like in Europe. And since there are fewer providers in Europe than there are in the United States, I don’t think any of us will go wanting. Our issue is not how big can we grow and how fast can we grow, it’s how profitability can we grow, and we are focused on this colocated hybrid cloud, not just take any customer any size. Okay?

Operator

And your next question comes from the line of James Breen.

James Breen

Just a couple on the development side. As you’re installing some of this new space. Has there been any change in how quickly you go from the day 1 getting revenue on these spaces installed this quarter, to getting to that low to mid-80s utilization rate but it basically implies the data center is full. Wondered if those trends have changed at all? And in line with that, the revenue transferring the data center, whether it’s around server technology, whatever. Have we seen any changes in power utilization and how the power is ramped up and how it will ramp up over time?

David Ruberg

If I look at it from a high level, no. But every one of these installations is a little bit different. So in -- we had 1 or 2 customers or 2 or 3 customers that really wanted early access, and if they took 10 square meters they absolutely needed and it was going to be in the middle of Q4, they needed 1 square meter, I’m giving you lots of examples in Q3. So each one of these customers, platforms and enterprise, they all have different installations. The power is creeping up a little, but not that much. So overall, it’s pretty much consistent with what we’ve seen.

James Breen

Great. And have you had any discussions around GDPR? And as I have gone through. You’ve had a lot discussions around some of the architecture that somebody is probably using now, and has that changed at all?

David Ruberg

Okay. We’re in Europe, which means every third word is about GDPR. And again, I’m not sure that everybody has really figured out what the implementation means. But in general, the sense that we’re getting is most of these countries are going to want to see the data that originates within the country to stay within the company, whether it would be for the GDPR of reasons or I want a tax application reason or whatever it is. And so that will lead to a more distributed deployment of the platforms than you probably see in the United States. And of course, we’re all for that given that we’re in most of the major cities in Europe. But I think that will be the natural consequence of it. Okay? we’ll take our next question.

Operator

And your next question Sarah comes from the line of Robert Gutman. Your line is now open. Please go ahead.

Robert Gutman

Could you just review the impact of installation timing. In the third quarter we’ve seen a large and very back-end weighted on MRR and EBITDA margin. And what it looks like in the fourth quarter, based on the expected timing. Notably, the EBITDA margin was significantly higher despite the high expansion. So I just wondered if you could reconcile that.

David Ruberg

I’m going to take the first part on revenue and I’m going to let Richard answer the EBITDA. There are more moving parts here than just that. Again, the installation -- a lot of the space that was scheduled to come online in Q3 came on right at the end. And then there was some additional space that we pulled forward from Q4 into Q3, and you can see the numbers if you look at in our appendix for Q2 and Q3 of these presentations. So that had an impact -- adverse impact on our ARPU. So that’s the first step. And the comments on EBITDA?

Richard Rowson

Yes. And definitely on that it’s going on ARPU. I think it’s worth noting that pricing remains stable. So the impact on ARPU is a timing impact in the quarter. We talked about adjusted EBITDA margins. And you noted that Q-on-Q and also year-over-year, we saw improvement in our EBITDA margins both on the group level and we saw improvements in the two segments as well. So there are obviously numbers of things that go on, puts and takes in the quarter that impacted adjusted EBITDA. But what we saw with this space coming on later in the quarter we will see significant expansion drag going through the negatively impacted EBITDA margin.

Robert Gutman

And the outlook for the year calls for the MRR similar -- a range similar to what we just saw in the third quarter. What about margins in terms of expansion drag?

Richard Rowson

I mean obviously, we’ve given guidance for the full year. We’re not going to give quarterly guidance. But you’ll see that there is going to be a reasonable chunk of space coming also in the fourth quarter.

Operator

And your next question comes from the line of [indiscernible].

Unidentified Analyst

I wanted to touch on Asian demand, as you’re seeing more traffic from Middle East and Asia through your Marseille facility. And I was just wondering what’s the level of Asian companies in your tenant mix right now, and should we expect that to go higher over time?

David Ruberg

Okay. Well first of all, we’re seeing more than the Asian traffic and interest in more than just Marseille. We’re seeing it in Frankfurt, we’re seeing it in Paris and we’re seeing it in Marseille. And yes, by Asia, there’s no real Asia -- there is 4, 5 different Asias. But the one that most people focus on are the Chinese. And we already have Tencent by doing Ali Baba. And it’s simply a matter of them installing being successful from the business standpoint and continuing to grow with us. So do you have anything you want to add?

Giuliano Di Vitantonio

Yes, the contribution from the Asian customers that’s steadily increased for several years now. So we continue to see that trend alongside, of course, the increase of the North American customers. And as David mentioned, the main platforms from China are with us. But also all -- I would say all the main connectivity providers are with us in multiple cities, especially the 3 that David mentioned. So both segments are contributing very significantly. And also in many cases, they bring in and they’re acting ICSP IT service provider capacity, they bring enterprises directly from China as well. So we have seen the full lengths from Asian customers.

David Ruberg

I am not announcing anything since China mobile or China telecom and others have already announced this. But there will be a significant change if it happens the way they’ve currently announced it in the piece cable, which is the Chinese cable with all of the Chinese partners in it, which is approximately [80 to 120 terabits] of capacity is scheduled to land in Marseille, in our data center in the third or fourth quarter of 2019. So that is a significant potential uplift in opportunity if in fact it happens in that time frame.

Unidentified Analyst

And maybe just one follow-up. Investment grade rating, is that something you guys would pursue? Or how do you think about that?

David Ruberg

And reducing our cost of capital is something we’re always pursuing. So ...

Unidentified Analyst

So I guess the question, what are the barriers to get to that level for you guys?

David Ruberg

We are a co-location provider, not a wholesale provider. I think our leverage is fine, I think the ratio of the amount of space that we get from those assets that we own is fine. I think where we might have an issue, maybe with the rating agencies, is the…

Giuliano Di Vitantonio

It’s really on part terms of our contract. So you’ll see the wholesale guys have reasonably long-term contracts and reasonably long on edge part terms, where ours are traditionally shorter.

David Ruberg

But improving significantly. So it’s a matter of educating, our customers have excellent quality ratings, they have extremely low churn rates. So it’s simply a matter of educating the rating agencies, and that’s why John is here.

Richard Rowson

That is one of the reasons.

Unidentified Analyst

How do you think the cost of debt would change if you had investment grade today? I’m just curious.

John Doherty

It would go lower.

David Ruberg

Look at the cost for digital royalty trust. I mean they have assets that trade from Europe just like we do from euro standpoint. So it’s at least 50 to 75 or 100 basis points lower.

Operator

And the next question comes from the line of Jennifer Fritzsche. Your line is now open. Please go ahead.

Jennifer Fritzsche

David, if I can ask on the competition, I know it’s been asked before. But you said that, I think your exact quote was, "They’re here because the opportunity is here." Can you discuss the long pole in the tent in your up visit land or power? Or how do you see that? Because it seems like to me it’s land but I hear others say the opposite.

David Ruberg

I don’t think it’s land, it’s highly connected land. And power eventually can be resolved. Given what we are focused on, it is extremely important to be located in areas that are highly connected, that have the potential to be connected. I can find a lot of land in the mirror here, and maybe some power. But that’s not where most of our customers want to be. So I think the differentiator is to -- and by the way, in addition to finding that land it’s being next to a campus that is highly connected so that people can access not only to three carriers, or 10 carriers but the 50 to 100 ISPs that people need that they’re going to be web oriented dealing with their customers. So I think that’s the real issue.

Jennifer Fritzsche

And do you got the sense there’s a strong understanding of that by the customers you are talking to?

David Ruberg

Absolutely.

Jim Huseby

Okay, that concludes our conference call for today. I want to thank everybody for joining us today. We’ll be seeing you out on the road, and look forward to our fourth quarter earnings call back in the middle of February or March. Thanks. You may now disconnect.

Operator

Thank you. And that concludes our conference for today. Thank you all for participating, you may now disconnect.