Earnings Call Transcript - EQIX Q2 2020

Operator, Operator

Good afternoon and welcome to the Equinix Second Quarter Earnings Conference Call. All lines will be able to listen-only until we open for questions. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'd now like to turn the call over to Katrina Rymill, Vice President of Investor Relations. You may begin.

Katrina Rymill, Vice President of Investor Relations

Good afternoon, and welcome to today's conference call. Before we get started, I'd like to remind everyone that some of the statements we'll be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be identified 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 21, 2020 and 10-Q filed on May 7, 2020. 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's Equinix's policy not to comment on its financial guidance during the quarter, unless it is done through an explicit public disclosure. In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix IR page at www.equinix.com. We have made available on the IR page of our Website a presentation designed to accompany this discussion along with certain supplemental financial information and other data. We'd also like to remind you that we post important information about Equinix on the IR page from time to time and encourage you to check our Website regularly for the most current available information. With us today are Charles Meyers, Equinix's CEO and President; and Keith Taylor, Chief Financial Officer. Following our prepared remarks, we'll be taking questions from sell-side analysts. In the interest of wrapping this call within an hour, we'd like to ask these analysts to limit any follow on questions to just one. At this time, I'll turn the call over to Charles.

Charles Meyers, CEO and President

Thank you, Katrina. Good afternoon and welcome to our second quarter earnings call. As we all continue to navigate various health, economic and social changes occurring in our world, our key priorities remain clear: focusing on the health, safety, and well-being of our colleagues, customers, and communities, and enabling our customers to respond effectively to the increased urgency of digital transformation as a critical business priority and a driving force in the global economy. Even in the face of an uncertain macro environment created by the global pandemic, the Equinix business continues to perform well, and our relevance in enabling digital business and connectivity remains a core tenet of customer purchasing decisions. In Q2, we delivered the third-best gross bookings in our history driven by a record quarter in the Americas, continued strength in channel bookings, robust interconnection performance, and a high volume of small deals. Our expanding go-to-market engine continues to fuel the business generating over 4200 deals in the quarter across more than 3000 customers. The importance of our global reach continues to shine as our customers scale and expand across the globe, leveraging our platform across 56 metros in 26 countries. We're continuing to increase the scope of customer deployments, and customers operating in all three regions now represent 62% of revenue, up 1% quarter-over-quarter. Our organic expansions continue, opening Hamburg this quarter and adding Bordeaux as a strategic subsea landing location in support of a key hyperscale. We're using disciplined M&A as a tool to enter new markets and scale our platform. On June 1, we announced our intent to acquire 13 Bell Canada data centers, expanding our coverage in Canada to a national platform and unlocking opportunities for global corporations to capture growth and innovation in the Canadian market. This acquisition, which is expected to be immediately accretive upon closing in Q4, reflects Equinix's continued commitment to executing platform-enhancing acquisitions on financially attractive terms. Before we get into the detailed quarter results, I want to share a few thoughts on our commitment to social change and our continued work to build a culture and community that can have a meaningful sustainable impact on the future of our society. Recent events in the U.S. have triggered outrage and an outpouring of emotions around the world. We have actively tapped into this energy, fostering a rich and inclusive dialogue on the topics of equity and social justice, with a focus on improving our collective understanding of each other and creating a commitment to action, which is imperative to moving us forward positively as individuals, as a company, and as a society. While still early in our journey, our vision remains clear for Equinix: to be a culture where every employee, every day can truly say 'I'm safe, I belong, and I matter.' For our workforce at all levels to better reflect and represent the communities in which we operate. We acknowledge that we have work to do in achieving this vision but are fully committed to demonstrating measurable, enduring progress against a multi-year strategy and continue to believe that our culture remains a key competitive differentiator. Our approach includes traditional aspects such as diversity targets, bias training and mitigation, community planning programs, and employee mobilization. But we also believe that lasting change will only happen by pushing ourselves even further in our pursuit of becoming a truly equitable and global organization. Our objective is to continue to make our culture a critical competitive advantage, seeking to engage every leader and every employee at Equinix and integrating diversity, inclusion, and belonging into every aspect of how we run the business. As a company, we will continue to put in the work and reaffirm our commitment to cultivating a workplace in a society that embraces and vigorously defends equality and diversity. Now turning to our results, as depicted on Slide 3, revenues for the second quarter were $1.47 billion, up 8% year-over-year. Adjusted EBITDA was up 9% year-over-year and AFFO was again meaningfully ahead of our expectations. Interconnection revenues continue to over-index substantially, growing 16% year-over-year, reflecting the important role of interconnection in digital transformation and highlighting our clear market leadership in this area. Unit volume was fueled by growth in provision capacity to support increased traffic and solid new product performance reflecting our ability to meet the evolving connectivity requirements of hybrid and multi-cloud architectures. These growth rates are all normalized on a constant currency basis. We now have over 378,000 interconnections and we continue to see healthy expansion of our dynamic ecosystems across the globe. In Q2, we added an incremental 8000 interconnects driven by streaming, video conferencing, enterprise cloud connectivity, and investments in local aggregation to support work from home. Internet exchange had one of its best quarters ever, with peak traffic up 44% year-over-year as the peering community augmented capacity for video conferencing, gaming, and over-the-top video replacing headroom that had been exhausted by COVID-related traffic growth. ECX Fabric also had a great quarter, eclipsing 2200 participants and demonstrating robust multi-cloud adoption, particularly from network providers, with one-third of them scaling bandwidth to five or more clouds. We're also making good progress in integrating the packet business with strong new logo engagement and continue go-to-market integration as we work to deliver on our vision for Platform Equinix to underpin the foundational infrastructure for today's digital leaders. We're also strengthening Equinix's leadership position in the cloud ecosystem through the expansion of our hyperscale strategy, allowing us to service both retail and large footprint in key markets. While maximizing the efficiency of our balance sheet through our partnership with GIC. We're seeing strong customer demand in our initial xScale JV in Europe and will soon expand this JV to include our seventh asset, Paris 9. This facility is slated to open early next year. It is immediately proximate to our market-leading Paris campus and is already 100% pre-leased to a major hyperscaler. We're also tracking to close our new xScale JV in Japan with GIC in Q4, adding new locations in Osaka and Tokyo. Now, let me cover highlights from our verticals. Our network vertical achieved record bookings driven by robust reseller activity and network expansion to support traffic growth. Expansions included Colt, a global telecom provider adding capacity at the interconnected edge to support increasing user demand, as well as Vocus Communications, an Australian specialty fiber and network solution provider deploying infrastructure to increase scale and improve end-user experience. Our financial services vertical had second highest bookings with strengthened global financial and insurance firms as they accelerate digital transformation. New wins and expansions included a leading Nordic insurance company leveraging hybrid multi-cloud and distributed data and Galileo Financial Technologies, a payment solutions platform rearchitecting their network and securely connecting the ecosystem partners. Our content digital media vertical also saw solid bookings with particular strength in gaming and video, driven by the spike in demand for indoor entertainment. New wins and expansions included IOTA, a leading audience technology platform, looking to expand their footprint to serve the ad tech industry, and Moody's, leveraging ECX Fabric to rearchitect their network and multi-cloud access for increased performance. Our cloud and IT vertical also showed strong bookings led by the infrastructure and software sub-segments, with continued momentum in cloud adoption. We continue to extend our market-leading cloud density, adding 10 cloud on-ramps this quarter alone, as cloud providers expand services into new metros including Bogota and Mexico City. New wins and expansions included Cisco extending service capabilities to additional regions to support new product offerings and security and client demand for Cisco WebEx communication solutions, and BMC Software, a leading platform provider of digital workflow solutions, deploying infrastructure to support their expanding customer base across the region. Our enterprise vertical saw solid bookings and broad-based demand with particular growth in business and professional services, government, and energy, despite some COVID-related friction. COVID continues to shift enterprise spending patterns resulting in increased demand for various cloud-based services including telephony, messaging, and conferencing. New enterprise wins include a Swedish engineering company optimizing its global network to provide optimal employee experience; the global spirits distributor that switched from building its own on-premise data centers to Equinix to support rapid deployment, as well as Fung Group, a global leader in supply chain solutions leveraging ECX Fabric to digitize its supply chain ecosystem. Our channel program had a record quarter, accounting for over 30% of bookings and delivering great productivity from this go-to-market vector. The channel program continues to be a new logo engine for the company generating over 60% of all new logos. We had great wins with reseller and alliance partners including Orange Business, Cisco, AT&T, Microsoft, and Dell, across a wide range of industry segments, with projects focused on both digital transformation and COVID-19 response. New channel businesses in the quarter included notable wins with AT&T, for a global insurer transitioning from on-premise data centers to a hybrid multi-cloud solution to enhance elasticity and performance, and Vodafone for a premier global energy company supporting their adoption of SD WAN and hybrid multi-cloud enabling. Now, let me turn the call over to Keith to cover the results for the quarter.

Keith Taylor, Chief Financial Officer

Thanks, Charles, and good afternoon to everyone. It's nice to speak with you again. Charles and I hope you and your families are doing well and staying safe. With respect to Equinix, the business continues to perform well. Q2 revenues, adjusted EBITDA, AFFO, and AFFO per share were ahead of expectations despite disruptions experienced by our customers, our suppliers, our partners, and employees over the past few months. In the quarter, we had significant gross PAG and net bookings including very strong net positive pricing actions. Interconnection activity was very healthy, both at the physical and virtual level. We're making solid progress across our new edge services products. Our performance against our key operating metrics was again positive, including solid increases in our MRR per cabinet and global cabinet metrics. For the quarter, we're tracking against our expectations on COVID-19 related impacts and costs. As expected, there are certain cost trends going both directions and we will continue to make the appropriate adjustments to our forecast as needed. Achieving an investment-grade rating now from each of our three credit rating agencies after Moody's May upgrade has proven to be a highly strategic and valuable milestone, enabling us to access the debt capital markets expeditiously while broadening the investor base and tightening the credit spreads on issued debt. This is particularly important during times of great volatility and disruption like today. In June, we refinanced $2.6 billion of high yield debt at a blended interest rate of 2.07%, the lowest interest rate ever achieved by any triple BBB-minus rated issuer. Interest savings on an annualized basis will approximate $50 million, and these savings more effectively offset the dilution associated with the $1.27 billion equity raise in May. We have an active construction pipeline with 29 projects underway across 20 markets in 14 countries, and we continue to work closely with our suppliers and partners to deliver capacity as close to the target date as possible. Now let me cover the quarterly highlights and note that the growth rates in the section are on a normalized and constant currency basis. As depicted on Slide 4, global Q2 revenues were $1.47 billion, up 8% over the same quarter last year. This is our 70th consecutive quarter of revenue growth and includes a $3 million net FX benefit when compared to our prior guidance rates. We've seen positive momentum in the first half of the year driven by strong net bookings and price increases resulting in a healthy recurring revenue uplift but lighter than planned non-recurring revenues due to the timing of custom work and decreased smart hand revenues. Global Q2 adjusted EBITDA was $720 million or 49% of revenues, up 6% compared to the prior quarter and up 9% over the same quarter last year due to strong operating performance and favorable revenue mix, including a $1 million net FX benefit when compared to our prior guidance range. Global Q2 AFFO was $558 million above our expectations on a constant currency basis, largely the result of strong operating performance. We continue to manage the business in support of our AFFO per share goals. Turning to our retail highlights, whose full results are covered on Slides 5 through 7. EMEA and APAC were the fastest MRR growing regions on a year-over-year normalized basis at 16% and 10%, respectively, followed by the Americas region at 3%. The Americas region saw record gross bookings but healthy pricing and strong exports to the other two regions in the quarter. The Americas growth rate was partially muted by our decision to waive certain smart hand fees and the timing of planned churn. We expect the Americas growth rate to step up in the second half of the year. We also completed the integration of the Mexico assets and won several key internationally based magnets into our network and cloud verticals as customers start to leverage the value of the Equinix platform in our Mexico markets. Our EMEA region saw strong bookings in the quarter, particularly across a number of smaller and emerging markets including Dublin and Madrid. Paris continues to perform well, and our market networks are seeing an increase in demand and tightening of supply. A broad build-out addition across the region remains active. Interconnection was substantially up on a year-over-year basis driven by volume and pricing initiatives, and billing cabinets stepped up in the quarter. Finally, the Asia Pacific region saw another very strong quarter for bookings, including a record into our Japan markets, and the region enjoyed solid exports particularly into EMEA. APAC interconnection had a strong quarter with many providers scaling network connections for future growth with higher than average net adds and cross connects and inter-metro connections. Now looking at our capital structure, please refer to Slide 8. We continue to increase our operating and strategic flexibility through the management of our balance sheet and capital allocation decisions. Pro forma for the debt refinancing activities, we approximately $2.7 billion of unrestricted cash and investments on the balance sheet. Our total liquidity, including our available revolving line of credit of almost $5 billion. We will use this liquidity alongside our capital and balance sheet initiatives to opportunistically expand the business, both organically and inorganically, as we work to maximize long-term shareholder value creation including the benefit of the $1.7 billion equity transaction completed in May. Our net debt leverage ratio decreased approximately 3.3x in Q2 annualized adjusted EBITDA well within our target leverage range. Turning to Slide 9 for quarterly capital expenditures, they were approximately $482 million, including recurring CapEx of $30 million. We had seven openings in Amsterdam, Chicago, Dallas, Hamburg, Hong Kong, Toronto, and Washington, DC. This included the opening of Dallas 11, a new IBX completed on the Infomart Dallas campus, which is an interconnection epicenter and a major hub for the southern U.S. We announced four new expansion projects, the majority of these projects to be developed on owned land being Bordeaux, Hong Kong, Milan, and Warsaw. We continue to expand our ownership acquiring land for development in both Frankfurt and Manchester markets. For the year, we now expect capital expenditures to increase by approximately $150 million, which reflects the anticipated timing of the closing of the Japan joint venture with GIC. Once this transaction closes, GIC's portion of the capital expenditure spent prior to the close date will be reimbursed to Equinix in an amount that is expected to range between $150 million and $200 million, including certain pre-existing current costs. Revenues from owned assets are currently 55%, a metric that we anticipate will increase over the next 18 months. Our capital investments deliver strong returns, as shown on Slide 10, where 148 stabilized assets increased recurring revenues by 6% year-over-year on a constant currency basis. These stabilized assets are collectively 84% utilized and generate a 28% cash-on-cash return on the gross PP&E invested. Please refer to Slides 11 through 15 for our summary of 2020 guidance and bridges. Starting with revenues, we expect to deliver an 8% to 9% growth rate for 2020, a reflection of the continued momentum in the business and includes a net FX benefit of $23 million compared to our prior guidance range. Non-recurring revenues are expected to remain at these levels for the rest of the year. MRR churn is expected to remain in our targeted range of 2% to 2.5% per quarter for the remainder of the year. We expect 2020 adjusted EBITDA margins of approximately 48% excluding integration costs as a result of strong operating leverage in the business including the revenue mix, offset in part by the anticipated investments on go-to-market and profit organizations and higher than initially planned severance and benefit costs. We expect to incur $20 million of integration costs in 2020 for the integration of our various acquisitions. When raising our 2020 AFFO, which is expected to now grow between 14% and 18% compared to the previous year. For 2020, we expect AFFO per share to grow between 8% and 12% including the effects of the capital market activities completed in Q2. So, let me stop here and turn the call back to Charles.

Charles Meyers, CEO and President

Thanks, Keith. We're delighted with our Q2 results and are pleased with the continued outperformance of the business a result of our focus on providing customers distinctive and durable value as they embrace digital transformation. Our impact for customers and the financial results that follow are a reflection of the dedication, flexibility, and ingenuity of our teams. Over the course of Q2, we like many others had to rapidly adapt our business, adjusting our go-to-market motion of the current realities, evolving operating procedures while maintaining our exceptional service reliability and executing on highly attractive equity and debt deals to enhance liquidity and drive AFFO. Customers remain at the center of everything we do and our customer satisfaction rating moved up over the last two quarters to its highest score in the last three years. While we are delighted with how the business is performing, we fully recognize the strain, the shifting challenges and the continued uncertainty we are all facing and as such, we will remain diligent and closely monitoring market dynamics and further adapting our business as appropriate through the back half of the year. The secular drivers of demand for digital infrastructure have never been stronger. We believe that Equinix is uniquely positioned to execute on the expanding opportunity presented by the accelerating importance of digital transformation and the shift to hybrid and multi-cloud as the architecture of choice. We remain steadfastly focused on evolving our platform to respond to this unparalleled market opportunity, investing to drive top-line growth, leveraging our operating scale to fuel the AFFO per share growth to our investors, and delivering a positive impact to our many stakeholders as we continue to build an enduring and sustainable culture and business. So let me stop there and open it up for questions.

Operator, Operator

Thank you. Our first question comes from Tim Long with Barclays. Your line is open.

Tim Long, Analyst

Wanted to start off with a smaller, newer piece of business with Packet if I could. Sounds like it's moving along pretty well, just curious if you can give us an update on how you're moving along with features and the sales force and the channel with the ability to sell the new products? And maybe just a little color with the business that you're doing now, if you can give us a sense maybe what kind of customers or applications are being sought out by those to take on this new business for you? Thank you.

Charles Meyers, CEO and President

Sure, Tim. Thanks. It's Charles. I think it's important to provide some context around the acquisition of Packet. As we've discussed in previous calls, this acquisition allows us to adapt to our customers' changing consumption patterns regarding how they access the value of the Equinix platform. We are integrating the bare metal service from Packet with the one we were developing organically. This presents a significant opportunity for us to meet these evolving needs. The integration is progressing well, and we have established a coordinated roadmap for a unified offering. We've blended some team members from Equinix into the sales team, creating additional support for our larger sales force during these early days. Most of the customer activity is currently with digitally native companies that Packet has served, but we are beginning to see more interest from large enterprise clients and service providers in the Packet offerings. We're optimistic about the direction we're headed, though it is still early. Internally, we have focused on delivering physical infrastructure and software speed, which has become a key theme for us and resonates with our customers. Our product roadmap is now well aligned, and our engineering teams are working on delivering a complete set of enterprise features for the bare metal offering in the coming quarters. The go-to-market strategy is still in the early stages but is gaining good momentum in the pipeline.

Tim Long, Analyst

Okay. In fact, the precursor to a quick follow up you talked about pricing looks like Europe and Asia saw pretty good MRR per cabinet, ASP growth, could you just give us a little highlight on why you're seeing better pricing there. I'm done. Thank you.

Charles Meyers, CEO and President

Sure. The key to pricing for us is really continuing targeted discipline in our sales targeting. We've talked about that for many years now, right, delivering the targeting the right customers with the right use cases into the right IBX locations. I think we're really doing that well in terms of adapting or delivering against the use cases that are really important to customers right now in terms of hybrid multi-cloud implementations, rearchitecting distributed security, and a number of things that are really highly featured, and I think their digital transformation plans. When you're doing that, I think you're able to deliver outsized value and therefore get solid pricing. We're seeing that show up in our yields. If you look at the way our quarter was composed in terms of bookings, we talked about 4200 deals across 3000 customers, that means we're doing a lot of deals, more sort of small to mid-size deals, interconnection oriented, ecosystem centric and that really helps us on the pricing front. In Europe in particular, we're also seeing the effects now as a result of the interconnection pricing adjustments that we've made. I think those have gone really well; obviously, generally customers don't jump up and applaud when you raise pricing on your services. But our team has done a really good job of articulating the value that people are getting from interconnection. I also think we've been very measured and appropriate about how we phased those implementations and the price implementations and working with customers. So far, it's gone well, and we're starting to really see that roll through in the impact on the EMEA numbers in particular.

Operator, Operator

Thank you. Our next question comes from Jon Atkin with RBC. Your line is open.

Jon Atkin, Analyst

Thanks very much. Two questions. First one probably for Keith. I'm just interested in kind of the medium-term margin puts and takes as we think about where you are in Asia Pac now comfortably past the 50% margin threshold. What are the factors to kind of think about at a corporate level for you getting towards those levels over the next several years? And then I have a follow-up on xScale. Thanks.

Keith Taylor, Chief Financial Officer

Yes, Jon. Overall, regarding margins, as we mentioned in our prepared remarks, we are very satisfied with our current position. The pricing actions have positively impacted us, which is reflected in our gross profit, EBITDA, and AFFO margins. However, there are several developments within the business. One key point we want to emphasize is our commitment to investing in our go-to-market and product organization. This relates back to our discussion about Packet, highlighting where we can further enhance profitability. I think Q2 performance was not atypical, as it resulted from various factors, including a favorable revenue mix, where non-recurring revenue decreased while recurring revenue increased. We expect this positive shift to continue throughout the year. Additionally, we aim to keep investing in the business and are confident in meeting our expectations. Referring back to our June 18 Analysts Day, we believe we can achieve EBITDA margins of 50% or more, which is a genuine goal for us. We are maintaining the right discipline and approach while focusing on future business growth. We see significant opportunities, not just in our current assets, but also in those we are acquiring, such as Bell Canada. We will persist in making these investments while simultaneously seeking ways to enhance profitability without compromising our growth initiatives.

Jon Atkin, Analyst

And then I don't know, Charles, if you would have anything to add to that. But my second question was just on xScale. I think there have been, maybe some management changes one or two, maybe getting a commentary on that. And it kind of milestones around future JV financings? And then, if you could maybe provide a little bit of color or reminder on the fee structure that you've secured in these agreements, so we can kind of understand more of the impact on AFFO?

Charles Meyers, CEO and President

Sure, Jon. Yes, maybe I'll make just a couple of reiterate, a couple of comments on the margin side and just again say I think we're seeing, as we've talked about the past, we're continuing to try to look at driving operating leverage in the business. I think we're being successful in doing that. Again, we're seeing some positive benefits associated with mix of business, mix shift. Again, that's balanced against the reality that we want to continue to position ourselves to take advantage of what we think is a really big growth opportunity in front of us as hybrid and multi-cloud really plays out. We will continue to invest in the business and that will be both on the CapEx side and the OpEx side, which I think will be a bit of a moderating factor on the margins. But I think we can continue kind of up and to the right in terms of over the long haul. Relative to xScale, things continue to really go well, in that overall, we did have some adjustments. Jim Smith has made the decision to step down from his role as Managing Director of the program but does remain as an advisor to the initiative. We've asked Krupal Raval, who's been on the xScale team now for a period of time and incredible background, and we've asked him to step into the MD role. He's done that and really kept the continuity with the team that he has recruited in there. I think it's incredibly strong, very experienced and is really starting to hit their stride. So it's going well, we've talked about in the script that we are probably likely adding or very soon adding the Paris 9 asset that is 100% pre-leased to hyperscaler. We continue to see good customer interest in pipeline on the other facilities. The JV in Japan has now been announced; we're working towards closing that later in the year. We're looking at additional JV beyond that, so good momentum overall. Relative to the fees, maybe I'll let Keith comment quickly on how that's structured and impact on the business.

Keith Taylor, Chief Financial Officer

Sure. So, Jon, just as it relates to the fees, there's really full and primary fees. So put aside the equity ownership right now. We're treating the businesses both looks like the Japanese JV will be an equity-oriented investment likewise, the initial media JV. The way it works is, there's basically an asset management fee, a facilities fee, a development fee, and a sales and marketing fee. When you break those down, some are recurring revenue, some are non-recurring, and then the benefit we get from the profitability created by the joint venture that comes in below the line through income from an affiliated entity. That's how the fee structure works right now; still pretty early on, as you know, because we've just got the first two assets up. Charles alluded to Paris 9 and having that 100% pre-leased. We’re actively engaged across a number of other assets, both in development and also in the marketing of those assets across the platform. We're pretty excited about the performance that a group is going to have in taking a leadership role in this entity, so great progress today.

Operator, Operator

Thank you. Our next question comes from Colby Synesael of Cowen. Your line is open.

Colby Synesael, Analyst

Last quarter, you mentioned a potential $0 to $50 million headwind to revenue guidance for COVID-19. I am curious about the headwind or impact during the second quarter and whether you believe you will remain within that $0 to $50 range. Additionally, it would be helpful if you could provide more specificity on this. Also, your Americas growth fell short of our expectations, and that seemed to be one of the weaker areas of the quarter. I understand Keith noted the smart hand wave fees had a $3 million impact. Regarding churn, both cabinet and interconnect numbers increased, yet revenue decreased, which appears to indicate a pricing issue. I'm seeking clarification on this. Finally, your prior guidance for organic growth was 7% to 9%, which you have now adjusted to 8% to 9%. It seems that the only change in your guidance relates to FX, so I am wondering about the source of that additional 1% leading to 8% growth. Thank you.

Keith Taylor, Chief Financial Officer

Charles, should I take the first part? I want to ensure we’re organized since we're in different locations. First, I want to express our excitement, Colby, about the business performance in the second quarter. We initially set a guidance range from $0 to $50 million. For this quarter, we exceeded the upper limit of that range, giving us considerable flexibility for the second half of the year. We opted to maintain our guidance, adjusting only for currency, similar to Charles's approach last quarter. Our focus will be on holding our AFFO stable, targeting a midpoint while acknowledging the uncertainties that remain, not necessarily in our business but in how external factors impact our results. There are no specific headwinds, but we are making some adjustments. We have larger bad debt reserves than we planned, which was anticipated. Our travel and entertainment costs are low, nearly nonexistent, yet our salary and benefits costs have risen due to less attrition and reduced paid time off. We're successfully recruiting the staff we aimed to hire, though salaries are slightly higher. You mentioned that the Americas performance was flat this quarter, and you're correct about the $3 million in smart hand fees, as well as the significant impact from the Brazilian currency with its unhedged effects and non-recurring revenues. Analyzing pricing, the MRR per cabinet has remained relatively stable quarter-over-quarter. We are pleased with our progress, noting strong pricing, good gross bookings, and overall momentum. However, the timing of churn, smart hands, and non-recurring impacts from Brazil are influencing our results. This highlights the advantage of our diverse global assets, which means we experience ongoing fluctuations; currently, currency trends are moving in our favor. While we may be more vulnerable to weaker currencies in the Americas, we are seeing improvements in Asia and Europe. I’ll pause here for you, Charles, to add anything or clarify if needed.

Charles Meyers, CEO and President

No. I mean, I think again, on the $0 to $50. Obviously, we saw the smart hands impacts across the regions in the quarter as well as, a fairly meaningful impact on our custom MRR. So, the MRR was meaningfully impacted. I think we had a strong recurring revenue quarter; bookings were solid. We are seeing some level of friction still out there. However, as our results imply, the team powered through that and had a good quarter but we have to two sort of big step up quarters remaining in front of us in the back half the year. Plus I think it’s a very uncertain environment still in terms of sort of second wave, if you will on COVID and the implications of that and how the protracted economic impacts are going to begin to affect companies, etc. We felt like it was prudent to maintain the revenue guidance and just book the FX impacts into there. So that’s where we landed.

Operator, Operator

Thank you. Our next question comes from Frank Louthan with Raymond James. Your line is open.

Frank Louthan, Analyst

So talk to us a little bit about more in the Americas. We've talked in the past about what's going on with the Verizon space and how that's going and talk just a little bit about that. And then, follow up thoughts on inorganic growth for the remainder of the year; and they've already done one deal clearing not shying away. What are your thoughts on those opportunities? Thanks.

Charles Meyers, CEO and President

Yes, it's been quite some time since we've integrated these aspects. We view them as an integral part of the platform now. Although it's challenging to measure fully, we are observing good usage, and we’ve made investments in some of the assets. We had some impressive deals this quarter in Miami and Culpeper, and we're making significant progress with some key assets there. Overall, we expect the Americas business to achieve around a 5% growth rate in the latter half of the year, supported by a strong quarter in bookings. After addressing some issues with the Verizon portfolio, we see a more stable outlook for the second half of the year in the Americas. Regarding inorganic growth, there are still many opportunities available. Our strategy remains unchanged: we have historically utilized M&A for market entry, scaling, capturing strategic interconnection assets, and now for capability enhancements as we plan for the future of platform Equinix. We’re focused on several potential new market entries. The recent Canadian deal allowed us to expand our presence in that market. One reason for pursuing the equity deal was to ensure we maintain flexibility on the balance sheet for growth opportunities as they arise.

Operator, Operator

Thank you. Our next question comes from Michael Rollins of Citi. Your line is open.

Michael Rollins, Analyst

I was curious if you could delve a bit more into what you're seeing out of the enterprise vertical in terms of the ability for them to make decisions and the growing interest that they're managing teams been describing that you're seeing for hybrid cloud architectures. Thanks.

Charles Meyers, CEO and President

Sure. Thanks, Mike. Yes, I think we're noticing a few things. Firstly, there have been some delays in decision-making on projects, meaning things are pushed further back in the pipeline. However, this has been somewhat balanced by a growing awareness of digital transformation, which we've heard from cloud providers and others in related fields. Companies that were better prepared have progressed further in their digital strategies and are managing to weather the storm more effectively. This realization leads many businesses, even those facing challenges, to acknowledge the need to invest in their future and in digital infrastructure. We're encountering a mix of situations; while some new projects are being delayed for various reasons, including longer site visits, we are starting to resume site tours by appointment, allowing progress to restart. In terms of acquiring new clients, we're seeing a decline compared to pre-COVID levels, but we are focusing more on larger accounts with bigger budgets. Overall, the prevailing trend is an increased commitment to digital, with companies still recognizing the need for private infrastructure that will likely be smaller than current setups. However, they want to ensure that what remains is close to the cloud and delivers improved performance and economics. We believe Equinix is well-equipped to meet that demand.

Operator, Operator

Thank you. Our next question comes from Matthew Niknam with Deutsche Bank. Your line is open.

Matthew Niknam, Analyst

Just to if I could, first go back to the last question in terms of sale cycles, any notable delays during the quarter that you'd call out that may have deferred some bookings into the third quarter? And then secondly, on the competitive front, if you can talk about the competitive backdrop in Europe, whether you've seen any changes in the landscape in recent months after some of the recent M&A, larger scale M&A in the region. Thanks.

Keith Taylor, Chief Financial Officer

Sure. As I said, yes, we have obviously got a very sort of deep command in the pipeline in terms of deals that are in there. We did, there were certainly some opportunities we had originally as targeted to close this quarter that pushed out, but that's the case every quarter. There are some of those, and some of those would be chalked up to COVID-related delays and decision-making. But on balance, when you look at it, you see our third-best gross bookings for quarter ever, record in the Americas. Obviously we've been able to sort of power through some of that and still deliver strong overall bookings results. There's some of that. What we are seeing, I think quite encouragingly is that those are just delays, they're not cancellations of projects. At this point, we think it's just a matter of when we're going to bring those opportunities in. So on balance, I think feeling very good and feel like the team has really rallied and delivered an exceptional quarter, considering the broader circumstances we face. In terms of the competitive backdrop, I would say, not a meaningful change. I feel like particularly in, I know, relative to commenting on the post interaction, digital combination in Europe and the impact there. I'd say it's still very much seems to be in a digestion phase. Customers are now working to sort of figure out what that means for them. Employees at those companies are trying to or now that company are trying to figure out what it means for them. We’re trying to stay focused and deliver and execute effectively while that digestion occurs. I think the performance of our business in EMEA sort of speaks for itself in the quarter. We continue to, as I've always said, Interaction was always a very credible competitor for us in Europe, and I expect they will continue to be one, but we are right now, I think we're seeing the digestion period and we're trying to take advantage of that while it exists.

Operator, Operator

Thank you. Our next question comes from Simon Flannery of Morgan Stanley. Your line is open.

Simon Flannery, Analyst

Can you provide an update on the xScale project returns, considering you have started leasing and have more clarity on the pipeline and economics? Additionally, regarding enterprise renewals, what pricing are you seeing? You've been optimistic about pricing overall, but there seems to be pressure on IT budgets. Are you noticing any customers seeking relief during their renewal process? Thank you.

Charles Meyers, CEO and President

Sure. I can say that regarding xScale and return expectations, we see benefits from both fees and development returns, which contribute positively to our overall returns. I believe this will help us maintain returns in the double digits. However, there is some pressure on returns due to a competitive pricing environment, especially as companies aggressively pursue hyperscale business. This has created some downward pressure. That said, the return profile remains attractive for us and our partners. I believe we can achieve this with limited resources from our balance sheet, which we prefer to allocate to higher-returning retail operations. There is some downward pressure on returns, and it will be interesting to see if that continues. Keith noted that in certain markets, supply is tightening, which generally helps improve pricing. Still, we are dealing with powerful hyperscale customers who are seeking the best available terms, leading to some downward pressure. Regarding enterprise renewals, we see that companies are figuring out how to effectively use Equinix in their long-term hybrid multi-cloud strategies. This might lead to downsizing certain elements as they transition applications to the cloud, while still focusing on maintaining their private infrastructure in Equinix facilities close to the cloud. Customers are willing to renew at rates we consider attractive, delivering significant value for them. We do observe some fluctuations due to the annual escalators built into our contracts. When a renewal occurs, it could potentially place us above market rates for a contract with annual escalators, resulting in some price fluctuations. However, this is all part of our overall model, which continues to show positive net pricing actions that reflect the value we provide to our customers.

Operator, Operator

Thank you. Our next question comes from Jordan Sadler of KeyBanc. Your line is open.

Jordan Sadler, Analyst

So, just wanted to come back to xScale one more time. It does sound like you characterized the overall bookings solid and seeing maybe a little bit of friction because we talked to maybe overall enterprise. Is that also, that characterization pertains to the xScale business as well, and was Paris 9 leased during the quarter?

Charles Meyers, CEO and President

Yes. I believe the situation is somewhat different. We are focusing on a much smaller group of customers. When examining the xScale dynamics, it concerns the expansion timing of hyperscalers and how it aligns with the necessary capacity. Looking at hyperscalers, the performance and results of some companies heavily focusing on this area tend to vary widely. Their quarterly outcomes can fluctuate significantly depending on the timing of sales and bookings and the phase of hyperscalers' expansion cycles. I feel the dynamics here are different. We completed the lease for Paris 9 during the quarter, which we are very pleased about, and we have a robust pipeline. However, these deals are typically larger and more complex, resulting in longer sales cycles, leading to more variable quarterly results.

Operator, Operator

Thank you. And then just as a follow-up, I think you touched on interconnection pricing in Europe, the adjustment that you've made there, where are you in the rollout of those adjustments and what sort of the magnitude of that pricing adjustment?

Charles Meyers, CEO and President

We are making good progress. I expect that we will continue to see those adjustments reflected in our results over the next year. We aim to be fair and balanced without being overly aggressive in our approach, focusing on what we believe is reasonable for our customers. A significant portion of these adjustments has already started to show up in our results. However, there is still work to be done, and I anticipate that the pace will slow down in the coming quarters. As for the magnitude, I don't recall the exact percentage increase, but it was significant and is evident in our results. In Europe, interconnection pricing remains considerably lower than in the Americas, and I don't foresee us reaching parity there. Nonetheless, we are progressing towards a pricing structure that better reflects the value provided to our customers.

Operator, Operator

Thank you. Our next question comes from Nick Del Deo with MoffettNathanson. Your line is open.

Nick Del Deo, Analyst

First, Keith, I want to drill down a little bit more on the EBITDA, which was pretty meaningful. I think you suggested it was a function of revenue mix. You said you expect those mixed benefits to continue, but your guidance implies lower EBITDA in dollar terms the next couple of quarters relative to Q2 and margins that are quite a bit lower. Was there anything else besides the mix shift that we should be bearing on in like power costs or anything along those lines?

Keith Taylor, Chief Financial Officer

Overall, but when we look at the second quarter specifically, we made a comment about price increases across the board. Number one was good to see ramping; most of that was really focused in the EMEA region. Offsetting that was non-recurring revenue; you saw the step down to roughly 4.8% of our revenue in non-recurring. So that comes into different margin profiles. You got the benefit of those two things happening. Revenues were roughly at the high end of our guidance range on a currency-neutral basis, but the mix is favorable. You saw the benefit of that going to the EBITDA. Additionally, we also saw some moderation in our utility consumption until we got some benefit attached to that, particularly in some of the markets; Singapore is one I will refer to, those making concession due to the current climate. Those concessions come through in a couple of different fashions, it’s tax abatements, it is rent abatement, in some cases, salary adjustments that are not allocated and the company was the recipient of certain dollars from the Singaporean government as an example. We're on top of our numbers, I think the look forward is, as Charles alluded to, it is giving us the flexibility to look at the next two quarters, invest in the places that we need to and that’s why you see revenues moving up nicely. We're also keeping the cost model at roughly 48% pre-integration costs; that gives you a sense that we’re still spending in the areas go-to-market, new product. The other thing I referred to in one of my prior remarks, salaries and benefits are going up inside the business and that's not because that was something of an implication coming out of the pandemic; less people are taking vacation in that, and how it gets represented in the financials something that we want to certainly encourage people to do more and more time off. There's also just the timing of our hiring because when you're getting the full quarterization of the hiring, we had a record hiring quarter in Q2, 400 net adds to the business, that quarter and that's going to run through the following quarters. Lastly, I would say there's some seasonality built into our spent recurring CapEx for Q4 more specifically, and that's why you see the impact coming through our guide on the AFFO as well. Overall, we look at it on an annual basis; we allocated dollars appropriately, some of it's just a little bit more front-loaded than originally anticipated, and you'll get the full quarterization impact of it.

Charles Meyers, CEO and President

Yes. I want to emphasize the salary and benefits aspect, as we are experiencing lower attrition. This is likely due to concerns about the pandemic, but it also reflects the enthusiasm people have for our company culture and the opportunities ahead. We're proceeding with our hiring plans in both sales and product technology because we see significant potential. However, this means we have higher costs on our books, and we're adjusting our hiring pace accordingly. Even if we maintain our targeted number of employees, higher attrition means it takes time to rehire, which keeps staffing levels a bit lower. We are noticing some of this effect, and I believe it is influencing our performance in the latter half of the year.

Nick Del Deo, Analyst

Okay, got it. That's great detail. And maybe one quick one on ECX Fabric. I think earlier this year you dropped a node into a partner facility in Belgium. Since the first, when you've done like that. Any initial insights into how that's going or updates as to whether we'll see more deals like that?

Charles Meyers, CEO and President

Still very early days; we have not seen it. I think it’s obviously happened right in the teeth of the pandemic. I think it's probably still too early to tell there. I would say that I think that more broadly speaking, are thinking about how we want to extend the utility and the reach of ECX Fabric, both within our facilities as we continue to do our build-outs, align the ECX Fabric closely with our packet offering to make a more powerful edge offering in our own facilities. I think also look to potentially position that as something that could be deployed in non-Equinix facilities. So I don't know that it would look exactly like what we did in Belgium, but I do think the notion that we would be looking at extending the reach of the ECX Fabric and ensuring that the ability to use the ECX Fabric as a way to plug back in from a bit of a further edge back into the ecosystem, particularly the cloud ecosystem, is something that we are absolutely actively looking at. So I do think that's something that we'll be continuing to monitor and look at how to do that over time.

Operator, Operator

Thank you. And our last question comes from Brett Feldman of Goldman Sachs. Your line is open.

Brett Feldman, Analyst

I just want to clarify that you've mentioned an expectation for improved revenue growth in the Americas for the second half of the year, with last quarter's projections indicating growth could reach around 5% or possibly even higher by the fourth quarter. I believe that expectation is still reflected in your outlook based on your comments. Can you confirm that you are still aiming for that 5%? Furthermore, regardless of whether it's 5% or more, it appears the growth is on an upward trend, and I want to understand the sources of that momentum, specifically whether it's stemming from Monthly Recurring Revenue or non-recurring revenue. If it is driven by MRR, it could indicate strong growth potential going into 2021 as well.

Charles Meyers, CEO and President

Keith, you want to take that?

Keith Taylor, Chief Financial Officer

I will take that, Charles. The reference that Charles already said earlier on but in my prepared remarks said the second half of the year and Q3 looks like the quarter that we will achieve that step-up. It goes back to your comments; we saw good pricing, we saw record bookings. We still see some element of churn inside the Americas business for the next few quarters. That said, when we calibrate across the remaining part of the year, we firmly believe that between the pricing and the momentum of the business, including a strong pipeline, you should see a step-up in the growth rates. From our perspective, it would carry on into 2021. So early to give guidance on that, but there's no reason why we wouldn't see that momentum continue.

Katrina Rymill, Vice President of Investor Relations

That concludes our Q2 call. Thank you for joining us.

Operator, Operator

Thank you for your participation in today's conference. Please disconnect at this time.