Earnings Call Transcript - EQIX Q4 2024

Operator, Operator

Good afternoon and welcome to the Equinix Fourth Quarter Earnings Conference Call. All lines will be able to listen-only until we open for questions. Today's conference is being recorded. If anyone has objections, please disconnect at this time. I would now like to turn the call over to Chip Newcom, Senior Director of Investor Relations. You may begin.

Chip Newcom, Senior Director of Investor Relations

Good afternoon and welcome to today's conference call. Before we get started, I would like to remind everyone that some of the statements that we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we've identified in today's press release, as well as those identified in our filings with the SEC, including our most recent Form 10-K filed February 12th, 2025. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of regulation fair disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter unless it's done to an explicit public disclosure. On today's conference call, we will provide non-GAAP measures. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor relations page at www.equinix.com. We've 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 would 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 Adaire Fox-Martin, Equinix's CEO and President, and Keith Taylor, Chief Financial Officer. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of wrapping this call up in one hour, we would like to ask these analysts to limit any follow-on questions to one. At this time, I'll turn the call over to Adaire.

Adaire Fox-Martin, CEO and President

Thank you, Chip. Good afternoon and warm welcome to our earnings call for the fourth quarter and full year 2024. Before we dive into the key figures, I wanted to take a moment to underscore that 2024 was a year in which we proved our ability to adapt and deliver in equally successful measure. Our performance not only demonstrates the strength, resilience, and consistency of our business, but also, and increasingly importantly, our ability to meet the future moments in the market. Our unique business model enables us to serve the full spectrum of our customers' connectivity and digital infrastructure requirements. This gives me great confidence as we continue to shape our organization to make the very most of the opportunity ahead. Now, turning to our results. We had an outstanding close to 2024. Revenues for the full year were $8.7 billion, up 8% year-over-year, an amazing 22 years of consecutive quarterly revenue growth. Adjusted EBITDA was $4.1 billion, a 160 basis point improvement in our margins year-over-year. AFFO per share, our lighthouse metric, grew 10% year-over-year. This performance is at the top end of our long-term expectations as we continue to compound value for our shareholders. These growth rates are all on a normalized and constant currency basis, excluding lower power costs passed through to our customers. Our as-reported numbers and outlook have been tempered by a significantly stronger U.S. dollar during Q4. Our team has focused on executing against all the variables within their control to deliver an exceptional quarter and strong outlook, highlighting the underlying health of our business and the scale of our opportunity. To give a sense of our accelerating pace of execution, in both Q4 and 2024, we delivered the best gross bookings performance in our 26-year history, with solid pricing dynamics and strong execution across all three regions. This translated to more than 16,200 deals across more than 6,000 customers in 2024. Supported by proactive demand shaping, putting in the right customer with the right workload in the right location, in 2024, we delivered record megawatts sold, including our best year ever for volumes sold in non-Tier 1 metros. Our channel program delivered nearly 30% of bookings and more than 50% of company new logos for the year, with wins across a wide range of industry segments and use cases. In our xScale business, during 2024, we leased approximately 150 megawatts of capacity and nearly tripled the investment capital of the program. Our best-in-class operations team delivered greater than five-nines of uptime for our customers. They also decreased our PUE by more than 6%, lowering operating costs by $18 million for 2024. This supports both our customers' efforts to green their digital infrastructure and enhances our operational efficiency. Now, as we look to 2025, it is clear that the pace of technological change has never been faster. At the same time, I strongly believe that the market opportunity and Equinix's relevance to that opportunity has never been greater. We are fortunate to host a diverse range of customer workloads within our data centers as we support their broad digital infrastructure needs, from networking and peering to capital market value creation, to hybrid multi-cloud architectures, and through the workloads driving artificial intelligence use cases and training. We remain confident that the continued democratization of and investment in AI represents a secular demand driver for our business. We continue to cultivate and win significant opportunities for both inferencing and training workloads as we cement Equinix as the place where private AI happens. In Q4, more than half of the volume of our top 25 deals was related to high-performance compute and AI workloads. Importantly, we are increasingly seeing a diversification of AI and machine learning use cases across healthcare, finance, transportation, and gaming. Recent wins in customer production use cases include Outrider Technologies, the leader in autonomous yard operations, who are deployed at Equinix to support AI-based training and inference workloads that maximize freight throughput and enhance safety in logistics yards. To seize the market opportunity, we are on a journey to simplify the path for our customers to consume digital infrastructure. Our focus is on three strategic moves: how we can; one, serve better; two, solve smarter; and three, build bolder. These critical priorities are already bearing fruit and we expect them to enable our accretive growth in 2025 and beyond. First, we are serving our customers better by enabling our customer-facing resources to execute with precision and velocity. We introduced automated quoting and capacity visualization tools, revised our compensation plans, and rolled out a more sophisticated approach to segmentation. These changes are part of our journey to accelerate value creation for customers as we nurture our opportunities into bookings and from bookings to revenue faster. It also means that we continually refine our cost-to-serve, whilst simultaneously improving the customer experience. Second, we are solving smarter for our customers. We are simplifying our product portfolio and working to make Equinix the easy button that manages the inherent complexity of hybrid multi-cloud and AI environments. We are prioritizing products that will continue to differentiate and extend the value of Equinix, particularly around our enduring value proposition of connectivity. This focus also resulted in our decision to end-of-sale Equinix Metal, so we can concentrate our development efforts on solutions core to interconnection. Finally, we are building bolder. Based on the demand signals we are seeing in the marketplace, we plan to build bigger data centers in fewer, larger phases, allowing us to optimally accommodate the full product continuum on our campuses across traditional retail, larger footprint retail, and xScale. This balanced approach should accelerate our delivery of sellable capacity, whilst allowing us to respond to our customers' needs as market dynamics, particularly those related to generative AI, continue to evolve at a rapid pace. No other provider in the market offers this unique combination of a data center product continuum with interconnection density at a global scale. Whilst we delivered record gross bookings in Q4, we could have delivered an even stronger bookings outcome if we had available capacity in our Tier 1 metros. By building bolder, our intent is to sprint towards this demand. More than 65% of our retail expansion is supporting capacity in major metros, and here, we have clear visibility into pipeline and fill rates. Now, pivoting to the operational highlights for the quarter. Our customers value our premium service and our global footprint. With two-thirds of our recurring revenues now generated by customers deployed in more than 10 IBXs, we continue to invest to build our network of data centers across the globe. We now have 62 major projects underway in 36 metros across 25 countries, including 16 xScale projects. This represents approximately 34,000 cabinets of retail and 165 megawatts of xScale capacity, which will be delivered through to the end of 2026. In November, we were pleased to announce our Singapore 6 build. This facility will provide 20 megawatts of capacity in one of APAC's fastest-growing digital economies. This month, we opened our first data center in Jakarta. This new Indonesian presence expands our reach to 74 metros across 35 countries. Our interconnected digital ecosystems continue to drive growth and customer value. We now have more than 482,000 total interconnections deployed on our industry-leading platform. We added an incremental 6,000 underlying interconnections in Q4. Interconnection revenue stepped up 9% year-over-year on a normalized and constant currency basis, now representing 19% of our recurring revenues. Equinix Fabric continues to over-index as customers increasingly adopt 25 and 50 gigabit per second circuits. Interconnection and ecosystem customer wins and use cases included payments processing company, WebPays, who is leveraging Fabric cloud router to connect to their key cloud partners and lower their networking costs. Zayo, the largest independent fiber provider in North America, is aggressively expanding its fiber infrastructure in key markets with Equinix, delivering on-demand, high-capacity connectivity to meet the growing demands of enterprise, and exponential bandwidth growth driven by AI. Our xScale portfolio continues to see strong overall demand as service providers expand to support their cloud and AI businesses. Since our last earnings call, we leased an incremental 31 megawatts across our Paris 12 and Paris 13 assets. Cumulative xScale leasing is now over 400 megawatts globally. Whilst our announced and completed projects are more than 85% leased and pre-leased, we have a strong funnel of additional xScale opportunities in 2025 as customers increasingly look to secure capacity for delivery dates in 2027 and beyond. We secured two new native cloud on-ramps this quarter in New York and Mexico City. We host more than twice the metros with multiple native cloud on-ramps as our nearest competitor. Native access to the cloud enables improved management of security, cost, control, and neutrality, especially for customers pursuing a hybrid and/or a multi-cloud strategy. Ease of connectivity and access to data stored in the cloud is a key requirement for inferencing use cases and training workloads. Our ability to deliver value for our customers and accretive growth for our shareholders in 2024 is a testament to the strength of our team and the quality of our differentiated business model. I'm proud of our performance and excited by the opportunity for our business in the year ahead. With that, I'll turn it over to Keith to cover the quarter's financials.

Keith Taylor, Chief Financial Officer

Thanks Adaire and good afternoon to everyone. As already noted by Adaire, we had a great end to the year. The Equinix team continued to deliver across all levels of the organization. For the full year, our record gross bookings and robust performance across each of our regions highlight the diversity and strength of our unrivaled go-to-market engine. We had solid net bookings and healthy net pricing actions, while our pipeline conversion improved throughout the year. We also celebrated our 10th year operating as a real estate investment trust, a meaningful milestone for the company. Over this 10-year period, our as-reported lighthouse metric AFFO per share has grown 10% on an annual compounded basis, while we also returned more than $9.3 billion of capital to our shareholders via our quarterly cash dividends. Our customer focus and differentiated business model and strong consistent execution has truly allowed us to create value over the past decade. And as highlighted by Adaire, we continue to see a very significant opportunity ahead and are positioning the business to drive accretive growth for the many years to come. Yes, this is a very exciting time. And our non-financial metrics continue to trend favorably as we completed the year. Our net cabinets billing stepped up by 2,200 in the quarter, driven by continued strong booking activity. Our backlog of cabinets sold, but not yet installed doubled over the last year, which, when combined with our 2025 operating plan goals, should drive continued performance of this core metric. Net underlying interconnection additions also showed a healthy step-up as the gross cross-connect activity was at its highest level in three years. Finally, our MRR per cabinet yield stepped up to $2,326 per cabinet, driven by net positive pricing actions and increasing power densities. So, simply put, we continue to drive value on both the topline and at the per-share level, while delivering meaningful operating leverage across the business. On the sustainability front, we're pleased to be recognized on CDP's prestigious Climate Change A List for the third consecutive year, while also rated AAA by MSCI for the first time. We consider our sustainability efforts to be a fundamental tenet of our business, which both supports the needs of our customers and drives operational efficiency, both very good for the business. And finally, as we look forward into 2025 and beyond, we plan to continue to adapt each of our organizations and our products and services to serve our customers better with greater efficiency. This includes the end-of-sale of our metal product offering, while realigning the organization to enable us to make investments in other key priority areas. Given the metal decision, we booked a $160 million impairment charge on specific assets related to metal. Separately, we recorded a one-off and discrete charge for the impairment of our Hong Kong 4 asset totaling $73 million. We also recorded a $31 million restructuring charge, primarily related to the reduction in force in the quarter. These decisions, although difficult at the time, are the right decisions for our business. They allow us to reprioritize where we invest, while also reducing the net drag on the business and improving our return on invested capital. Now, let me cover the highlights for the quarter as depicted on Slide 4. Note that all growth rates in this section are on a normalized and constant currency basis and exclude the impact of lower power cost passed through to our customers. Global Q4 revenues were $2.261 billion, up 7% over the same quarter last year and at the midpoint of our guidance range, with both solid recurring and non-recurring revenue growth across our regions, despite a portion of our xScale fees being deferred into Q1. Q4 revenues, net of our FX hedges, included a $22 million FX headwind when compared to our prior guidance rates, given the meaningful strengthening of the U.S. dollar in the fourth quarter. Global Q4 adjusted EBITDA was $1.021 billion or approximately 45% of revenues, up 9% over the same quarter last year and at the midpoint of our guidance range due to strong operating performance, though down sequentially due to planned timing of spend and xScale fee mix. Q4 adjusted EBITDA, net of our FX hedges, included a $9 million FX headwind when compared to our prior guidance rates. Global Q4 AFFO was $770 million, up 10% over the same quarter last year due to strong operating performance, offset by our seasonally higher recurring CapEx spend as expected. Q4 AFFO included a $2 million FX benefit when compared to our prior guidance rates. Global Q4 MRR churn was 2.5%, as planned, due to the previously discussed deferral of MRR churn from late September into early October. Normalized for this timing, churn would have been 2.2%. For the full year, our average quarterly churn was 2.2%, well placed in the lower half of our 2% to 2.5% quarterly guidance range. Turning to our regional highlights, whose full results are covered on Slides 5 through 7. On a year-over-year normalized basis, excluding the impact of lower power costs passed through to our customers, APAC was our fastest-growing region at 13%, followed by the Americas region at 8%. Our EMEA region grew 2% year-over-year, dampened by the significant xScale leasing activity in Q4 of 2023. Again, as noted earlier, xScale fees are inherently lumpy and can impact the quarter-over-quarter and year-over-year growth rates both at the consolidated and regional levels. The Americas region had a strong quarter with solid gross bookings as revenues for the region reached the $1 billion quarterly revenue threshold for the very first time. Also, our Americas team had strong sales across our global assets, achieving its best export quarter in two years. We saw particular strength in our Denver, Montreal, and Santiago markets, as well as continued momentum in our Tier 1 metros. Our EMEA business delivered record gross bookings and firm pricing, led by our flat metros with strong momentum also in Geneva, Istanbul, and Milan. In the quarter, we signed our first power purchase agreement in Italy with Neoen to support 53 megawatts of new solar projects. This agreement brings Equinix's total global renewable energy capacity under long-term contracts to greater than 1.2 gigawatts across 10 countries. And finally, the Asia-Pacific region had a great quarter with record gross bookings. We saw particular strength in both our Osaka and Tokyo markets as we continue to capture significant AI deployments from both domestic and international customers. We also saw strength in our Mumbai, Singapore, and Sydney markets. And now looking at the capital structure, please refer to Slide 8. Our 3.4 times net leverage continues to remain low, both in absolute and relative terms to our peers. As of year-end, we had cash and short-term investments of $3.6 billion on our balance sheet, due to record customer collections and our financing activity, which puts us in a solid funding position to meet our 2025 capital needs and sets us up for 2026. In the quarter, we issued 1.15 billion in senior green notes at a weighted average rate of 3.4%. Additionally, we repaid $1 billion of senior notes in the quarter and raised approximately $700 million of equity through our ATM program. We plan to continue to take a balanced and opportunistic approach to accessing the capital markets as and when the market conditions are favorable, to fund our future growth. Turning to Slide 9. For the quarter, capital expenditures were approximately $1 billion, including seasonally higher recurring CapEx of $115 million as planned. We opened three major projects since the last earnings call; Barcelona, Jakarta, and Rio de Janeiro. We also purchased land for development in Lagos and Paris. More than 85% of our current retail expansion spend is on our own land, our own buildings, with long-term ground leases. Our capital investments delivered strong returns, as shown on Slide 10. Our now 177 stabilized assets increased revenues by 3% year-over-year on both an as-reported and constant currency basis. Stabilized assets were collectively 83% utilized and generated a 27% cash-on-cash return on the gross PP&E invested. As a reminder, unlike prior years, we plan to update our stabilized asset summary on the Q1 earnings call. And finally, please refer to Slides 11 through 16 for our summary of 2025 guidance and bridges. Do note, all growth rates are on a normalized and constant currency basis. Starting with revenues. For the full year 2025, we expect topline growth of 7% to 8%. As noted, this is on a normalized and constant currency basis, which adjusts for the significant net impact of FX, but also lower power cost passed through to our customers and the end of sale of our metal product offering. And given our bookings momentum and our largest backlog in three years and timing of capacity additions across our major metros, our Q1 guidance assumes a $28 million step-up in recurring revenues, but continued healthy step-ups in recurring revenues over the course of the year. MRR churn is expected to remain within our targeted quarterly range of 2% to 2.5% per quarter. We expect 2025 adjusted EBITDA margins to be approximately 49%, a 190 basis point improvement over last year, due to strong operating leverage, targeted expense management efforts, and anticipated lower power prices. And like our revenues, we expect quarterly margins to step-up over the course of the year with a meaningful increase in Q2 margins over Q1, in part due to seasonality and second half adjusted EBITDA margins are expected to be at or near 50%. 2025 AFFO is expected to grow between 9% and 12% compared to the previous year and AFFO per share is expected to grow between 7% and 9% despite the sizable investment in warehouse capital to support our future growth into 2026, 2027, and beyond, and also the refinancing of debt maturing in the year. 2025 CapEx is expected to range between $3.2 billion and $3.5 billion, including approximately $200 million of on-balance sheet xScale spend, which we expect to be reimbursed as we transfer assets into our U.S. joint venture, and about $250 million of recurring CapEx spend. And finally, we're increasing our 2025 cash dividend on a per-share basis by 10% due to strong operating performance, our 10th consecutive year of dividend per share growth since our REIT conversion. The cash dividend will be approximately $1.8 billion, a 13% year-over-year increase, 100% of which is expected to be derived from operating performance.

Adaire Fox-Martin, CEO and President

Thank you, Keith. In closing, Q4 was a record quarter for Equinix in a year of record performance. 2024 demonstrated the enduring market demand for the services offered by Equinix, the execution excellence of our team in prosecuting that demand in service to our customers, and our continued drive to improve our profitability and our return to our shareholders. In 2025, we will double down on these qualities and further prime ourselves for growth. We will focus on the elements of our business that define our relevance and our differentiation in a rapidly evolving world; our product continuum, our global reach, our interconnection density, and our cloud connectivity. We will embrace the relentless pursuit of efficiency and effectiveness in all that we do. We will work to make it easy at Equinix for our customers and our partners so that we can deliver the greatest value and capture as much of the opportunity as possible, driving attractive revenue growth, expanding margins, and increasing profitability. With that, I'll stop here and open it up to questions.

Operator, Operator

Thank you. We will now begin our question-and-answer session. Our first question comes from Simon Flannery with Morgan Stanley. Your line is open.

Simon Flannery, Analyst

Thank you very much. Good afternoon. Adaire, good to hear the comments on the interest in artificial intelligence and inference. We had a lot of news in the recent weeks on DeepSeek and the implications for the industry, and it seems like there's a general sense that inference may be becoming more important relative to training and quicker. I'd love to get your perspective on that development and how you think about inference coming through your numbers in 2025, 2026, and beyond? And I think, Keith, you just mentioned briefly on the U.S. xScale JV. It'd be great to just get a little update since you've announced that project? Where do we stand in terms of identifying markets, build programs, and so forth? Thank you.

Adaire Fox-Martin, CEO and President

All right. Thank you so much for the question, Simon. Yes, it's been an interesting period of time. I think we've seen a step change in compute efficiency along the performance curve, and that is something that I expect to continue. We expect to see continued innovation in the sector across both training and inference, which we think is a net positive for the space. The drop in inferencing costs that's implied by the work released into the open-source market by DeepSeek, I think, will enable the economics of AI transformation to become a little bit more feasible for a broader set of organizations. And so that's why we feel that this will represent a circular demand driver for our business. As it relates to the actual workload characteristics and the role of inferencing and how that will play out, certainly, we believe that, within the next three years, 80% of apps and processes that operate within businesses will be infused with AI. And in fact, if our own business is an example of that, that is something that will be true for us too. You can see the absolute relevance of Equinix to this market opportunity. We are right in the demand center of this opportunity. And in Q4, as I mentioned in my remarks, 50% of the top 25 deals that we closed in Q4 were very much related to deals where high-performance compute associated with training workloads and inferencing requirements were very prevalent and present. And one of the things that I think plays very strongly into Equinix's value proposition is that it is very clear that the market will be multi-cloud. And that means that we will have data landing everywhere across all of these clouds. And then in addition to that data profile, there will also be apps and agents that land everywhere in order to process the information associated with the applications and underpinning capability that they are running. So, for us, this means that our interconnection density and that heritage of Equinix in connectivity is something that will be extremely important as these apps and agents bounce to and from wherever the data is located. We see that we have a wonderful opportunity to look at how we continue to make it easy at Equinix for our customers to deploy these technologies and how we have a pivotal role in abstracting some of this complexity through programmatic interfaces that will make it easier for our customers to deploy models, easier for our customers to access the APIs that will be key in this architecture, and easy for our customers to deploy and mount agents on globally deployed PoPs. So, we're very positive on the opportunity, very positive about the innovations that we continue to see. We know that this is a market where the innovations will continue to come and at a fast pace. And we believe that our position is one that is very balanced and appropriate towards actually encapsulating and garnering as much of that opportunity as possible. So, very excited about the potential here.

Keith Taylor, Chief Financial Officer

Let me capture the second question you asked and thank you for bringing it up. I want to share two aspects with you and the other listeners today: what's happening at the matrix site and what's going on in xScale. As mentioned in Adaire's prepared remarks, we currently have 16 xScale projects in progress. Importantly, about 87% of all projects that are either built or under construction have been presold or leased. This reflects the momentum we're experiencing, particularly regarding one-off fees and non-recurring charges like sales and marketing. Regarding the matrix, which is crucial to tripling our xScale business, we are actively developing the Hampton site, collaborating with utility and infrastructure providers to ensure power availability when needed. We are making significant forward investments in power and MEP equipment, aiming to have an asset operational by 2027. We're making good progress. Additionally, we are exploring three other sites in the United States and considering other locations outside the U.S. Overall, I believe we are advancing well. Lastly, I'd like to highlight that we've included approximately $40 million of additional operating expenses in our guidance to support the expansion of our xScale business. With new leadership from Tiffany and the necessary resources in place for a significant investment, this illustrates our commitment to the upcoming opportunities, especially as we transition into 2025 and plan ahead for 2026, 2027, and 2028.

Operator, Operator

Thank you. Our next question comes from Eric Luebchow with Wells Fargo. Your line is open.

Eric Luebchow, Analyst

Hi, thanks for taking the question. So, Adaire, I just wanted to touch back on the demand funnel that you talked about and the bookings momentum. Maybe you could talk a little bit about what your forward pipeline looks like today? And you mentioned in your prepared remarks pursuing kind of a larger end of the retail colocation spectrum or maybe small wholesale depending on the definition. Maybe you could talk about how your bookings have trended in that segment and what the pricing and returns may look like relative to your more core interconnection dense based retail business?

Adaire Fox-Martin, CEO and President

Thank you for the question. I had the opportunity to serve as both the Chief Revenue Officer and the CEO in the fourth quarter and into the first quarter. This allowed me to work closely with the team as they executed on our fourth quarter goals, resulting in record gross bookings. Notably, we experienced the highest volume of non-Tier 1 metros sold this year, and the fourth quarter was no exception. This trend is largely driven by tech service providers seeking large footprint capabilities to expand their businesses and services. It is essential that this capability is contiguous, and our team collaborates with customers to ensure that this demand-driven program is established early in the engagement. Regarding pricing, we are seeing positive progress, with strong demand for Equinix's products and services. We continue to observe pricing strength even in the Tier 2 scenarios we are targeting.

Eric Luebchow, Analyst

Great. And just one follow-up for me. Maybe you could just update us on what your current expectations are for this year. I know you had forecasted picking up in Q4 and you've gone through some grooming activity from the service providers throughout the last year. Any update on where you think that settles back to the kind of lower 2% end of the range on a sustainable basis? Thanks.

Adaire Fox-Martin, CEO and President

Yes. For Q4, our churn was 2.5%, influenced by the deferral of some churn from late September to early October. This placed our Q4 churn at the upper end of our expected range. Adjusting for this, our churn would have been 2.2%, which aligns with the average rate we expect for 2024. Looking ahead to 2025, we anticipate our churn will remain between 2% and 2.5% in terms of monthly recurring revenue, and we plan to manage it within that range. Churn is an inherent reality for any MRR business, and it's important to note that our definition of churn accounts for any decrease in products or services at the order line level. While a customer might increase their overall relationship with us in other locations or regions, we still recognize reductions in specific areas. We've examined the data related to churning customers and found that much of the churn is frictional, meaning customers are adapting their usage within our data centers rather than leaving entirely. This adaptability signifies the health of our platform as customers continue to grow with us, despite some frictional churn. Additionally, we've found that customers who utilize our interconnection services and who operate in multiple regions have a much lower likelihood of churning. Therefore, while we expect churn rates between 2% and 2.5% in 2025, we will focus on increasing interconnection rates through our sales processes to better manage churn in customer relationships. We are committed to monitoring these factors and aim to operate towards the lower end of our guidance for 2025.

Operator, Operator

Thank you. Our next question comes from Jonathan Atkin with RBC Capital Markets. Your line is open.

Jonathan Atkin, Analyst

Thanks. Two questions. One, I guess, on power management and the other on kind of headcount. On the first topic, in your older stabilized IBXs, I'm wondering how you're meeting the challenge of customers potentially drawing more power within the framework of their existing service agreements, and how does that affect your ability to meet SLAs and even take on new business within those buildings? And then I'll follow-up later on the headcount question.

Adaire Fox-Martin, CEO and President

Yes, I'll work through the power one and I'll ask Keith to add anything to ensure that I cover all of the topics here. One thing I would say is that, within the context of our business, Equinix has a 26-year history of managing power as an input and a valuable input into our data center environment. And we manage very carefully to a whole series of SLAs that we have with our customers in order to ensure that we are compliant to those SLAs. And as it relates to our stabilized assets, I am not aware of any issues around a power draw that would impact how our customers are executing in the context of those stabilized assets. Keith, is there anything that you would add to that piece?

Keith Taylor, Chief Financial Officer

Yes, Jon and maybe just follow-on the conversation. Part of it was in Adaire's prepared remarks that, no surprise to you, we also demand-shape based on the needs of the customer. And to the extent that there is a customer that is looking to increase meaningfully, where there's more inventory in the form of a cabinet and more energy in the form of power, you got to demand-shape it in the right place because, as Adaire says, we have a very detailed set of processes that allows the team to manage energy that's inside the four walls. That all said, it's also probably not a surprise to you or anybody else, one of the key modifiers to the compensation plan for VPs and above is the power efficiency initiative or PUE. And so we're always working to drive down the amount of energy that gets consumed through different operational exercises or new technology, different software packages and the like. And so the extent that capacity gets created through that, then we have the ability to sell it to the customer inside maybe an older asset. But suffice it to say, again, as Adaire said, look, we manage inventory from a number of different vectors. Again, no surprise whether it's the energy that is consumed, the cooling that is required and the location of that, and we appropriately adjust our inventory availability for IBX on that basis. And again, I would just say that you're going to put the right customer with the right application and the right needs into the right asset, and that's one of our core tenets in managing our inventory.

Adaire Fox-Martin, CEO and President

Thank you, Keith. And there was a second question on people?

Jonathan Atkin, Analyst

Yes, I would like to change the subject to expenses. For 2025, can you provide an overview of any SG&A, COGS, or OpEx that may not carry over into 2026? This could include costs related to your efficiency initiatives, IT, or other factors that might not repeat in 2026 and are part of your 2025 guidance.

Keith Taylor, Chief Financial Officer

I will address this, and then Adaire can join in as needed. It's essential to examine the business's progress both quarterly and from 2024 to 2025. This year, we expect to achieve an incremental margin improvement of around 190 basis points compared to 2024, with 30 basis points resulting from decreased power costs that our customers consume. Consequently, the reduction in power-related revenue leads to margin improvement, contrasting with what we saw in 2023. I expect power costs to continue to decline year-over-year, although customers are consuming more, the overall unit cost of electricity has been decreasing. Additionally, 160 basis points of operational improvement arises from several factors, including the impact of our reduction in force during the fourth quarter, which will affect our financial results in 2025 and into 2026 as we phase out our metal business that has been operating at a negative EBITDA trend, thereby enhancing our operational performance. I previously mentioned investing in our infrastructure, which is essential for future earnings, whether through capital expenditures or operating expenses. As more assets become operationally commercial, the costs we are currently incurring will lead to significant profit growth because we are investing in resources to support a much larger scale of operations. This investment is crucial as we aim to triple the size of our business. Therefore, these factors are critical to consider. Furthermore, regarding our quarter-over-quarter performance, particularly in Q4, we typically spend about $50 million quarterly on repairs and maintenance. In Q4 of 2024, we increased maintenance spending to $83 million to stay ahead of our needs, resulting in a $30 million reduction in Q1 as we return to the $50 million level. By the end of 2025, we will reassess the timing of costs. We may decide to accelerate or defer costs based on our situation. It’s important to note that in the first half of the year, we anticipate a notable increase in margins in Q2 compared to Q1, with expectations to maintain strong performance in the latter half of the year, nearing our 50% margin target. This reflects the operational efficiencies we are embedding within the business. We have yet to discuss the process and system changes, a key priority for Adaire and the team.

Jonathan Atkin, Analyst

Thank you very much.

Operator, Operator

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

Nick Del Deo, Analyst

Hi, thanks for taking my questions. First, I want to talk a bit about capacity constraints. I think a year ago, you talked about there being capacity constraints in some key markets that were crimping sales, and you opened facilities over the course of 2024 to address that. Adaire, you noted in your prepared remarks that bookings could have been better absent capacity constraints in some key markets. So, I guess, by when do you feel like you'll be ahead of the ball on this front and unconstrained from an inventory perspective across at least most of your key markets?

Adaire Fox-Martin, CEO and President

Yes, we are actively pursuing opportunities with determination. Part of our strategy involves addressing the capacity limitations we encounter in the market, which differ by region based on the Tier 1 metros affected. In the materials we shared, you'll find an expansion guide that outlines how much capacity we anticipate releasing in 2025 and how much will be added to our inventory throughout that year and beyond. There are instances where we have been unable to meet the contiguous capacity needs of a customer in a Tier 1 metro, but if we had that capacity available, we could have fulfilled that demand. In most situations, we managed to adjust demand or accommodate customers in smaller increments. We are definitely positioned at the heart of a highly competitive demand market right now. The ongoing indicators highlight the significance of our product offerings, solutions, and global reach. As I previously mentioned, our strategy focuses strongly on our retail portfolio and certain aspects of our xScale portfolio. Our primary objective is to create differentiated value for our retail campuses, and we aim to deliver retail capacity as efficiently as possible to satisfy customer demand. I shared in my prepared remarks that we currently have 62 major projects in progress. Our aim is to empower our design and construction teams to expedite this build cycle and bring substantial retail capacity to the market more quickly for our customers, especially in crucial areas. For example, within our retail pipeline, we have initiated a pipeline review process to identify opportunities for reducing the number of phases needed to deliver this capacity. As a result, projects like NY3, DC16, and LD4 have been accelerated by at least a year due to our focus on the demand opportunities we perceive and our commitment to providing that capacity to our customers. We will continue to concentrate on optimizing our efforts and engaging with our customers to meet their needs effectively.

Nick Del Deo, Analyst

Thank you, Adaire. Can I ask about the fiber market? There's a lot of demand and activity for fiber to support AI, including dark fiber wavelengths and new routes being built. You mentioned some successes with Zayo in your earlier remarks. Do you believe this activity will be significant enough to drive meaningful growth for the business in the upcoming years, considering that much of it will likely end at your facilities?

Adaire Fox-Martin, CEO and President

That's quite possible, and we're certainly seeing that with the Zayo partnership, the opportunity to support their journey. And again, I would just come back to the unique differentiation and value proposition of Equinix: global reach, densely interconnected and dense with network service providers. And these are all elements that will be crucially important as we look to capitalize on future opportunities.

Operator, Operator

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

Michael Rollins, Analyst

Thanks and good afternoon. Adaire, you mentioned earlier some of the work that you've done on segmentation. And so curious if you can give us an update as to where do you see Equinix being underpenetrated in certain key customer verticals? And if you can give us an update as you look at the 2025 guidance with respect to two paths. So, one path is as you look at constant currency revenue growth of 7% to 8% in the guide, how do you think about that in terms of expanding customers versus expanding customer spend? And then on the second path, how do you think about that in terms of the cabinet growth versus the pricing and MRR per cabinet expansion? Thanks.

Adaire Fox-Martin, CEO and President

Thanks Michael. I'm just jotting down the three elements of your question there to make sure that I address them. So, we undertook a very comprehensive segmentation exercise, looking at our customer base and looking at the customer base through a variety of different lenses. And the first output of our segmentation exercise is really to define where and how we best serve these customers, so with what kind of account coverage, what kind of account management, what kind of costs to serve. And that's really been the first focus of our segmentation exercise in terms of enhancing our operational efficiency and our operational effectiveness internally. That being said, it does give you an opportunity then to take your segmentation of your customers and look at it through the lens of the TAM, the total available TAM in the market, and to see where we are and how we are actually covering various different segments. We have a very balanced portfolio across the industry, so it would be hard to point to an industry where we don't have a representation. But I think that our reach into accounts that are smaller in terms of revenue turnover and might fall into that general business type category is harder. Our focus has very much been on enterprise customers. And that's really where your channel begins to play and that's really where you can have a digital sales motion in order to make that reach possible. So, I also mentioned in my prepared remarks that one of the things that we had done as a result of our implementation this year was to make some amendments to our compensation plans. And one of the amendments that we have made to our compensation plans is actually around net new name acquisition. So, how the team not only expands the footprint in an existing account but, to your point, enable us to actually expand the number of customers that Equinix serves. So, we should see an uptick in that number during the course of this year based on that focus. And then the last question was relevant to cabinets. Sorry, Mike, you might need just to remind me of that part of your question.

Keith Taylor, Chief Financial Officer

Yes, Michael, I'll start and Adaire can add later. First, it's essential to understand our year-over-year growth rate. There is some noise in the fourth quarter and the guidance, so let me clarify. In the fourth quarter, currency fluctuations impacted us significantly, with an effect of $22 million on our revenue. Additionally, we expected $22 million in non-recurring fees to close in Q4 that didn’t materialize, which would have pushed us to the upper end of our guidance. These will occur in Q1, and most of them have already happened. When considering the growth rate for 2025 compared to 2024, I want to explain how we arrived at the 7% to 8% growth. There’s an impact of $147 million due to foreign exchange rates, and opinions may vary on whether the dollar will remain strong this year. We have already taken into account $147 million in our guidance. Other adjustments include approximately $50 million in reduced power costs, $45 million from the impact of metal prices, and a $40 million reduction in fit-out costs in our xScale franchise due to the structure of our joint ventures. This context helps in understanding the business's performance. Despite these factors, we expect to see increased gross bookings driven by higher density, leading to improved monthly recurring revenue per cabinet. However, the exact number of cabinet additions is still uncertain. From my earlier comments, we believe we have good visibility into cabinet adds through 2025, although there may be some fluctuations from churn, which we will keep you informed about. Regarding pricing, we anticipate net positive pricing actions in 2025, contributing approximately 10% to our gross bookings. We project a 3% to 5% price growth on stabilized assets, influenced by both pricing as well as volume and additional cross-connects, as Adaire mentioned. Additionally, it's key to highlight that the difference between Q1 and Q4 shows a substantial $40 million decline due to currency impacts. Another $30 million is related to lower non-recurring fees, but with $20 million moving to future quarters, the net difference would have been $50 million. This illustrates the noise between Q4 and Q1 and its impact on the year. Overall, we are optimistic about our positioning, the inventory that will be available, and opportunities to increase sales as customer engagement grows. Our average deal sizes are increasing, and we are selling out core assets faster than expected, which indicates a need for us to expedite asset deployment despite market constraints.

Michael Rollins, Analyst

Thanks very much.

Operator, Operator

Thank you. Our last question comes from Jim Schneider with Goldman Sachs. Your line is open.

Jim Schneider, Analyst

Good afternoon and thanks for taking my question. I was wondering if you could sort of comment on the revenue trends, your underlying revenue decelerated by about 100 basis points last year, and you're guiding to another 50 basis point deceleration, if I'm not mistaken, 7% to 8% heading into 2025? I guess can you maybe comment on what the recurring revenue outlook is doing for 2025 all-in? And then what is your confidence level that you can actually reaccelerate that revenue growth over the course of the year? And what would be the drivers of that?

Adaire Fox-Martin, CEO and President

I'll take the first stab, and then I'll have perhaps Keith decompose some of the numbers for you. So, I think the guide that you see for 2025, that's very much in line with our performance from 2024. And implied in this guidance is a step-up, as you've mentioned, of recurring revenue growth over the course of the year, giving us a very implied strong exit into 2026. That recurring revenue growth step-up is circa $28 million in Q1, and then stepping up during the course of the year into a $40 million type category for our recurring revenue. So, I'm really very happy about that because this core recurring revenue element is a key element of our business and allows us to plan and consistently grow. As I mentioned already, I think we're very firmly in the center of demand and have a very strong backlog to support this revenue and continue to see this very clear and compelling signal from the market. So, we very much look forward to taking the gross bookings and the records that you've seen over the course of 2024, taking that and turning it into revenue as quickly as we possibly can in order to ensure that we have that strong exit out in 2026, and of course, doing that whilst we're delivering 190 basis points of margin expansion. So, not just stepping up on our recurring revenue, but delivering it in a profitable context. Keith, is there anything that you wanted to do on the mechanics of where that's at?

Keith Taylor, Chief Financial Officer

So, Jim, to summarize what Adaire mentioned, the growth is primarily coming from the recurring revenue line, while non-recurring revenues are expected to remain generally flat as we look towards 2025. All the growth is driven by recurring revenue. It's important to note, as Ralph and the construction teams are aware, that we need more inventory. If we had more inventory available in the fourth quarter, we could have achieved higher sales. Our backlog is nearly at an all-time high, and we must ensure we can continue to deliver capacity to the market, which enables us to maintain our growth.

Adaire Fox-Martin, CEO and President

Yes. So, in terms of some of the announcements that we've seen, obviously, this is a continued focus on the data center industry. And as I mentioned earlier, we're very central to that. So, we're very supportive of announcements like this because we feel that all boats can rise on that particular tide. In terms of how this relates to our own plans, we, of course, have seen from the hyperscalers' continued investment in their own CapEx stories from their recent earnings announcements. So, it doesn't seem that there is any desire to step away from this in the short-term. So, we feel that there is a lot of opportunity in the market for us to pursue. As we've mentioned already, we're at 85% leased and pre-leased on the projects that we have already in pipeline. Under xScale, looking across the Americas to find those next sites outside of the Hamptons, the one that we have begun to work and develop the site. So, we remain very focused on ensuring that we can capture as much of this opportunity as possible. The second phase or the second part of build bolder, because it is an and strategy, is focused on our xScale pipeline and how we execute against that pipeline and deliver that capacity as fast to the market.

Chip Newcom, Senior Director of Investor Relations

Thank you for joining our Q4 earnings call. This concludes our commentary.