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Equinix Inc (NASDAQ:EQIX)
Q4 2018 Earnings Conference Call
February 13, 2019, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Equinix fourth quarter earnings conference call. All lines will be in a listen-only mode until we open for questions. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I will now turn the call over to your host, Miss Katrina Rymill, Vice President of Investor Relations. You may begin.

Katrina Rymill -- Vice President of Investor Relations

Thank you 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 affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed on February 26th, 2018 and 10-Q filed on November 2nd, 2018.

Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of regulation fair disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure. In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix 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 financial information and other data. We'd also like to remind you that we post important information about Equinix in the IR page from time to time and encourage you to check our website regularly for the most currently 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 up in an hour, we'd like to ask these analysts to limit any follow-up questions to just one.

At this time, I'll turn the call over to Charles.

Charles Meyers -- President and Chief Executive Officer

Thanks, Kat. Good afternoon, everybody and welcome to our fourth quarter earnings call. We had a great end to the year, delivering our 64th consecutive quarter revenue growth and eclipsing a key milestone with over $5 billion in revenue for the year. The opportunity for Equinix is as compelling as ever, as digital transformation is reshaping virtually every industry across the global. Digital and the infrastructure that fuels it have emerged as board-level issues and this digital imperative is transcending the macroeconomic volatility we see in the market.

Customers are thinking differently about how they interact with their customers and every element of their supply chain. And the major tech trends, whether it be AI, IoT, big data, or 5G are all amplifying this digital tailwind. In the wake of this digital transformation wave, a clear architecture of choice has emerged for our customers. That architecture is global, highly distributed, hybrid, and multi-cloud.

And for a variety of reasons, customers are increasingly looking to locate this infrastructure at Equinix, leveraging our interconnected digital edge to achieve performance, security, compliance, flexibility, and total cost of ownership benefits that can only be supported by the physics of proximity and the economics of aggregation. These compelling advantages are translating into strong performance in the business and give us solid momentum as we enter 2019 and beyond.

To build on this momentum, we're investing to expand our unmatched global reach with 36 projects across 25 markets, adding new markets such as Hamburg, Muscat, and Seoul. We are committed to designing, building, and operating our data centers with high-energy efficiency and environmental sustainability. In 2018, we sourced clean and renewable energy across 90% of our global platform and we remain committed to our long-term goal of achieving 100%.

We're extending our portfolio of interconnection offerings, while building on our traditional interconnection portfolio with our market-leading ECX fabric. We've developed a roadmap for a number of compelling new services for the year ahead. We're continuing to cultivate high-value ecosystems and will scale well past the 10,000 participants currently on our platform and we're standing behind those ecosystems with our 20-year track record of service excellence.

We remain focused on the six priorities I outlined last quarter, including expanding our go to market engine, evolving our portfolio partners and products, and delivering on our hit strategy, all while remaining steadfast in our commitment to deliver against the revenue, margin expansion, and AFFO per share targets laid out at our last analyst day.

We ended the year with a very strong fourth quarter, delivering record gross and net bookings, which sets us up nicely for a good start to 2019. As depicted on slide three, revenues for the full year were $5.1 billion, up 9% year over year. Adjusted EBITDA was up 7% year over year, and AFFO was meaningfully ahead of our expectations. These growth rates are all on normalized and constant currency basis.

Interconnection revenues continue to outpace colocation, growing 12% year over year and multi-deployment metrics increased across the board, with robust cross-quarter bookings driven by continued strength in both cloud and enterprise. Today, over 60% of our recurring revenues comes from customers deployed across all three regions and 86% from customers deployed across multiple metros.

Our hyperscale initiative continues to enjoy significant momentum and will allow us to capture strategic large footprint deployments from select customers while mitigating strain on our balance sheet by employing off balance sheet structures. We're seeing strong success with the initial capacity we've brought to market and our customer pipeline is robust. Our Paris 8 asset is more than 60% pre-leased and with our London 10 facility, we have pre-sold 20 megawatts of capacity to key hyperscale customers with an average contract tenure of greater than 11 years.

We also have several other projects in development, including Tokyo 12, our first dedicated hyperscale project in APAC and have secured land across a number of other high-demand metros, including Amsterdam and Frankfurt. Our discussions with financing partners are progressing well and we expect to have our first JV executed in the coming months with a compelling collection of assets.

We expect the JV structure to have minimal impact on our P&L and other core metrics in 2019 as we continue to ramp up the initiative. We look forward to providing additional details when we announce the transaction.

Shifting to interconnection, we have the most comprehensive global interconnection platform, now comprising over 333,000 physical and virtual interconnections, over four times more than any competitor. In Q4, we added an incremental 8,800 interconnections, including 1,800 virtual connections and are adding more per quarter than other providers do annually. Software-defined networking is acting as a technology catalyst for our interconnection value prop, reducing the friction for buyers and creating a thriving environment that is driving demand across all our interconnection offerings.

Customers using virtual connections are also our highest users of physical connections, showcasing the complementary nature of our portfolio. For our internet exchange platform, revenues, ports, and traffic were all up due to strong global demand and new market growth in EMEA and Brazil. IXP traffic surpassed 10 terabytes per second for the first time and was up 8% quarter over quarter.

Now, let me cover some highlights from our verticals. Our network vertical had its second-highest bookings, led by EMEA and fueled in part by continued strength in NSP resale to enterprise customers, with our leading network density and over half our sites along coastal locations, we'll also continue to win new subsea cable opportunities and have been selected in more than 25 subsea cable projects over the last few years.

Wins this quarter included the Curie subsea cable landing station in LA4, Google's first private subsea cable, connecting Los Angeles and Chile, as well as Crosslake Fiber, connecting the major financial metros of Toronto and New York under Lake Ontario.

Our financial services vertical also saw its second-highest bookings, led by insurance and banking as well as strong new logo performance as firms embraced digital transformation. Expansions included a top-ten global asset manager rearchitecting their network and securely connecting across seven metros as well as a top 15 multinational insurance company, leveraging hybrid multi-cloud and distributed data in Singapore and Hong Kong.

In content and digital media, we saw record bookings led by EMEA and strength in the publishing and gaming sub-segments. Customer expansions included Roblox, Tencent, Thompson, as well as Fastly, a global cloud edge platform that has been upgrading to 100 Gb to support continued demand of mobile users across 23 IBXs.

Our cloud and IT vertical also delivered recording bookings led by the software subsegment as the cloud continues to diversify. Expansions included StackPath, a leading provider of edge cloud services, deploying infrastructure across 21 metros as well as British ERP SaaS provider expanding to support customer demand for cloud services at the edge.

The enterprise vertical was a full one-third of total bookings in 2018 continues to be our fastest-growing vertical, with bookings in Q4 led by the energy, healthcare, and retail sub-segments. New wins included a global grocer transforming their network for a cloud-first strategy, a Fortune 100 global chemical company rearchitecting their network to transform IT delivery, and a top automotive parts manufacturer leveraging the ecosystem partners via ECX.

Channel sales continue to represent a critical lever for expanding our market reach, delivering our third consecutive quarter with over 20% of bookings and accounting for half of our new logos, driven by solid performance across all partner types. We are very pleased with our channel progress and continue to build predictable and repeatable deal flow.

In 2018, the channel drove over 4,000 deals, a great indication of the significant velocity of our retail selling engine. New channel wins this quarter included a joint win with Verizon for a high-performance semiconductor manufacturer, launching new dev test infrastructure to support the engineering community as well as a partner win with CBRE for a US regional bank using platform Equinix to lower their total cost of ownership and improve user experience across their 1,700 branches.

Now, let me turn the call over to Keith to cover the results for the quarter.

Keith D. Taylor -- Chief Financial Officer

Great. Thanks, Charles. Good afternoon to everyone. As we put a wrap on 2018, it's great to end the year with our financial results beating guidance across every one of our core metrics. As Charles highlighted revenues eclipsed another key threshold, ending the year at greater than $5 billion, a 9% year over year growth rate. AFFO per share was $20.69, a great result showing how we're driving value at the share level and tracking ahead of our key operating metric as said at the June 2018 analyst day.

For the fourth quarter, we had extremely strong bookings across each of our regions including our record and EMEA while both America and APAC regions had their second-best bookings performance to date. Our bookings spanned across more than 3,000 customers with a quarter of them buying across multiple metros, highlighting the unique diversity of our retail colocation business. Simply, we're seeing more cross-region, more multi-metro deals than at any other time in our history, a reflecting of the strength of our platform and the scale of our global footprint.

We had net positive pricing actions again this quarter, highlighting the continued strength of a differentiated value proposition. Our sales pipeline remains high and we have a significant number of new Fortune 500 prospects and we have a very active expansion pipeline with over 36 projects under way and we're expanding our interconnected digital edge to 55 metros by the end of 2019, effectively twice the number of metros compared to our next largest competitor.

Next, I'll cover the quarterly highlights. Note that all growth rates in this section are on a normalized and constant currency basis. As depicted on slide four, global Q4 revenues were $1.31 billion, up 8% over the same quarter last year and above the top end of our guidance range. Q4 revenues net of our FX hedges including a $2 million negative currency impact when compared to both the Q3 average and the guidance FX rates.

Global Q4 adjusted EBITDA was $617 million, up 5% over the same quarter last year and better than our expectations due to revenue flow through and lower integration costs. Our Q4 adjusted EBITDA performance net of our FX hedges had a $1 million negative impact when compared to both our Q3 average and guidance FX rates. Global Q4 AFFO was $414 million, including seasonally high recurring capital expenditures, better than expected, largely due to lower income tax expense in the quarter.

Despite the lower income taxes in Q4, as we look forward, we expect our earnings in non-US entities to increase, which as a result will increase our cash income tax cost as reflected in our guidance. Q4, global MRR churn was 2.1%, better than our expectations. For 2019, we expect MRR churn to average between 2% and 2.5% per quarter.

Turning to the regional highlights, whose full results are covered on slides five through seven -- APAC and EMEA were the fastest-growing regions at 15% and 11% respectively on a year over year normalized MRR basis, followed by the Americas region at 5%. The Americas region had a strong finish to the year, better than expected bookings, increased cross-border deals and lower churn.

Net cross-connect stepped up nicely, the best net adds in two years that count as billing rebounded to. The Verizon assets had their best gross quarterly bookings performance since we acquired the assets, in part due to the newly open capacity. Verizon assets, as expected, absorbed higher MRR churn in the quarter. We expect these assets to return to growth in 2019.

EMEA had a record quarter led by Dutch and German businesses. We continue to expand with about half of our global construction activity in the region weighted toward the flat markets. As mentioned last quarter, we're seeing higher utility prices across many of our EMEA metros. This cost increase is partially offset by our utility hedges, which will roll off over the coming quarters and reset at market rates. These higher costs, as reflected in our guidance, are the result of higher unit prices, increased utility taxes, and increased consumption from our customers.

Asia Pacific delivered solid bookings across each of the core metros. Cabinet billings more than doubled compared to the four-quarter average driven by cloud and content deployments. MRR per cabinet moved down, the results of significant new cabinet deployments and the impact of the Metronode acquisition.

Turning to our interconnection activity, net adds were at the high-end of the range for both physical and virtual connections. The Americas and Asia Pacific interconnection revenues were 23% and 14%, respectively, while EMEA was 9% of recurring revenues. From a total company perspective, interconnection revenues were 17% of total recurring revenues.

Now, looking at capital structure, please refer to slide eight. Our unrestricted cash balance is approximately $610 million, a decrease over the prior quarter due to our capital expenditures and the quarterly cash dividend. Our net debt leverage ratio was 4.4 times our Q4 annualized adjusted EBITDA.

We also exercised the remaining portion of our inaugural ATM program in the quarter raising $114 million. As we've discussed previously, we remain steadfastly committed to driving long-term shareholder value and will continue to fund the business primarily through strong operating results but also accessing the capital markets with a desire to unlock significant value which includes becoming investment grade-rated company.

Turning to slide nine for the quarter, capital expenditures were approximately $680 million, including a recurring CapEx of $70 million. We opened 6 expansions across five markets in the quarter, adding about 8,000 cabinets. We announced 12 new expansions, including our Dallas 11 build, which will be adjacent to our Infomart Dallas asset, effectively creating a new and significant campus to support the strategic market.

Revenues from owned assets stepped up to 54%, a meaningful increase over the prior quarter largely due to the conversion of our strategic New York 4, 5, and 6 assets to owned facilities as we entered into a long-term ground lease with our landlord, similar to the Slough campus in our London market. This decision will increase our operating flexibility for future developments while securing the assets over the long-term, particularly given the importance of this financial campus.

We also purchased our Zurich 5 facility as well as land for development in Frankfurt, Hamburg, Lisbon, Osaka, and Rio De Janeiro. All of our real estate activities will help increase the level of revenues from owned assets, a key metric to support our investment-grade aspirations.

Our capital investments are delivering strong returns, as shown on slide 10. Our 130 stabilized assets grew revenues 2% year over year on a constant currency basis, largely driven by increase in colocation and interconnection revenues, while continuing to absorb the headwinds we discussed last quarter. These stabilized assets are collectively 84% utilized and generate a 30% cash on cash return on the gross PP&E invested.

And finally, please refer to slides 11 through 16 for our summary of 2019 guidance and bridges. Also note that we've adopted the new leasing standard, ASC 842, the impact of which is highlighted on slide 12.

Starting with revenues, we expect to deliver a 9% to 10% growth rate for 2019. We expect to start the year with a significant increase in recurring revenues in Q1, largely due to our strong Q4 bookings performance. For the full year, we expect to deliver the largest annual absolute dollar increase in our history, the results of continued strong operating performance and a healthy pipeline.

We expect 2019 adjusted EBITDA margins to be 47.7%, excluding integration costs, the results of strong operating leverage in the business offset by significant expansion activities, including new markets, higher EMEA utilities expense, and the new leasing accounting standard. Also, we expect to incur $15 million of integration costs in 2019 to finalize the integration of our various acquisitions.

2019 AFFO is expected to grow 10% to 13% compared to the previous year. For 2019, we expect AFFO per share to grow 8% to 11% excluding financings. Including capital market activities and taking into consideration market conditions and timing, we expect AFFO per share to be greater than 8% consistent with our AFFO per share growth target as discussed at the June 2018 analyst day. And we expect our 2019 cash dividends to increase approximately $800 million, a 10% increase over the prior year and an 8% increase on a per share basis.

So, let me stop there and I'll turn it back to Charles.

Charles Meyers -- President and Chief Executive Officer

Thanks, Keith. In closing, we continue to build our market leadership and cement our position as the trusted center of a cloud-first world. Our reach, scale, and innovative product portfolio puts us in a great position to build on a business model that is substantially and durably differentiated from our peers.

The market remains in the early innings of the digital transformation journey and our accelerating ability to both land and expand customers along that journey make us confident that we are playing the best hand in the business. We're excited about the road ahead an we look forward to updating you on our progress throughout the year.

So, let me stop here and open it up for questions.

Questions and Answers:

Operator

We will now begin our formal question and answer session. If you would like to ask a question, please unmute your phone, press *1, record your first and last name. The first question is coming from Phil Curick, JP Morgan. Your line is open.

Richard -- JP Morgan -- Analyst

Hi, I just wanted to follow-up -- sorry, this is Richard -- a lot of your development is in EMEA and Asia with the big development in the Americas coming in Dallas in mid-20. It seems like in terms of your pipeline and commencements, do you feel like you have enough capacity in the United States right now and you don't have to focus on it and you can spend more capital in EMEA and Asia and balance that growth rate?

Two, do you expect the Verizon assets to ramp through the year or will it be lumpy? Following along with all this, your leverage is at 4-4 versus the 3 to 4 target. Do you feel like you need to use a new ATM to fund it or will you grow into it as the business expands? Thank you.

Charles Meyers -- President and Chief Executive Officer

Okay. There was a lot there, Richard. Why don't we start with the development, the profile of our development portfolio. Actually, I think pretty much what you're seeing is that the development profile is following the growth rates. We're in a period now of some pretty significant growth activity in EMEA, have continued to see very strong bookings and growth out of the EMEA region, so we're getting through, I think, a lump of that investment, which will position us extremely well and we continue to expand our market leadership in EMEA.

APAC continues to be a very important region for us in the world and I think you're going to see us continue to invest meaningfully there. In the Americas, as you noted, we're going to start the journey to building out Infomart as a campus and I think that's going to be a big opportunity for us.

The growth rate is slower. We have made meaningful investments in some key assets in the Americas and feel very well-positioned to continue to feed the bookings engine there. I think what you're seeing is a profile that one, runs a little bit in waves and two, maps to the region to region growth profile of the business.

The second piece was on Verizon. I think the business to some degree is always a little bit lumpy. I think we have worked our way to the bulk of the lumpier turn and I think we're seeing those assets stabilize. When you add in the fact that we've added capacity into some of the new markets where we believe there's strong demand like NOTA and Houston and Culpepper, we feel good about that, returning to growth and we hope that will regress positively throughout the year.

Then the last piece was on leverage. So, I'll let Keith comment on that.

Keith D. Taylor -- Chief Financial Officer

So, the last quarter, we did bump up to 4.4 times our annualized Q4 adjusted EBITDA. As we look forward, our goal is to get within 3 to 4 times net leverage range. We're going to accomplish that in many different ways. The easiest way to do that is continue to drive growth on the top line with the strong operating leverage and by sheer growth, it will naturally de-lever the business.

Simultaneous of that is we continue to look for ways to raise capital, we're always going to take a balanced view, of course, between the ATM program and whether or not we try to secure any incremental debt. That's also going to help us de-lever, particularly as it relates to the ATM program.

Then overall collectively, I think it's important to elaborate. We have an aspiration to become an investment grade-rated company. We think it's worth 75 to 90 basis points on the $10 billion of debt. So, add a multiple onto that, it's a meaningful amount of value that we can create for our shareholders over a relatively short period of time.

If we work really well to grow the topline, show the operating leverage and bring our debt balance into the target range, something that we've certainly shared with the credit rating agencies and with many of our investors over the years. This is an area of high-focus for us and we'll continue to have aspirations to get to investment grade and so, we're going to work hard at doing that in 2019.

Richard -- JP Morgan -- Analyst

Great. Thank you.

Operator

The next question is coming from Jordan Sadler, KeyBanc Capital Markets. Your line is open.

Jordan Sadler -- KeyBanc Capital Markets -- Managing Director

Thank you. Can you provide a little bit of granularity on the 2019 revenue growth? I think interconnection revenue growth slowed to about 10% year over year in the fourth quarter versus maybe 18% for the full year. Do you expect this driver to stabilize in 4Q or at the 4Q pace in '19 or will it reaccelerate alongside the increase cross-connect volume you've booked in the fourth quarter.

And then second, what is the year-end leverage target, just following up on Richard's question here that's embedded in the 2019 guide. I kind of noticed that interest expense for the full-year guide looks like it's down somewhat from the full-year 2019 interest expense and in the face of rising rates, it seems like maybe you're getting some savings either from lower leverage in issuance or maybe from some other area. Could you maybe shed some light? Thanks.

Charles Meyers -- President and Chief Executive Officer

Thanks, Jordan. I'll let Keith take the second part of that. As to the interconnection business, we feel like this was really a tremendous quarter and demonstrates the continued strength in the interconnection business. We were at the top end of our range in physical interconnections and now we've started to report the virtual interconnections with another 1,800 on top of that. So, we really feel terrific about the interconnection value proposition and about the value that our customers are getting for that.

In terms of the growth rate, it was 10% as reported, normalized to 12%. So, I think it moves around a little bit depending on some factors, but we feel like that is going to continue to outpace our colocation business and it is obviously a very attractive business for us in terms of continuing to drive the overall financial performance.

There are a few areas, I think, that represent upside opportunities for us. One, I think we've kind of begun the process of more normalizing pricing in EMEA on interconnection, which is something we have talked about since the Telecity transaction. I think there's opportunity there. I think we're continuing to see an evolution in terms of percentage of revenue that is interconnection-based in the other two regions, continuing to move positively. The performance in terms of volumes of interconnection in the Americas portfolio continues to be strong as well.

So, I would expect that that is -- again, it's not going to be at that previous 18% level, but I think we're going to see very strong interconnection growth in the business.

Keith D. Taylor -- Chief Financial Officer

Let me take the second part of the question. First and foremost, in the prepared remarks, one of the things we've stated is we're highly focused on delivering growth on an AFFO per share basis, irrespective of our financing, we're going to deliver an AFFO per share growth of 8% or greater. I wanted to highlight that number one.

Number two, as I said, there's a lot of value in getting back into the investment grade window. We're working hard with our rating agencies and some of our advisors to execute against that strategy. We think there's no better place to create substantial one-off value right out of the gate than getting to investment grade. It's an area of high focus for us.

As it relates to your specific questions on what we want to target, let me just say that we are looking at all alternatives. Of course, it's very dependent on market conditions, quantity, pricing, timing, source of capital. So, sufficed to say, we as a company are going to look at all avenues to make sure that we can execute and maximize our shareholder value.

As it relates specifically to interest rate, as a company, no surprise to you, we work very hard to drive down our interest rate cost. Over the years, as you probably have noted, that we've been able to take our average cost, sort of the $10 billion of debt, it's a notch above 4% for a non-investment graded company, but we've also recently done a cross-currency swap with one of our debt loads. As a result, we're able to shave off some incremental costs into 2019 to the benefit of everybody. You can see that reflected in the net interest expense.

So, again, as a company, we're going to continue to drive down as much as possible our cost of capital. I was noting the other day, I think it was worth noting when you look at the flatness of the yield curve, when you're one month our or 30 years out, you're dealing with a 50-basis point span, we're not overly concerned that interest rates are going to rise up significantly over the near term and so, we'll continue to manage ourselves and maximize the value that we can contribute to our shareholders.

Operator

The next question is coming from Jon Atkin of RBC. Your line is open.

Jonathan Atkin -- RBC Capital Markets -- Managing Director

Thanks. Question about HIT -- I wonder if you could share some parameters or thoughts around build costs now that you're further along in the projects -- so, basically, financing considerations aside, what you're thinking about in terms of build costs, updated costs there, resiliency level, density versus other wholesale products on the market as well as pricing versus comparable products?

And then I was interested in just on the network side, you've got obviously a bump-up in the Americas cross-connect trend. Maybe elaborate a little more about what's driving that. Then as you network your IBXs together and cities together even more so, anything you're seeing in terms of customer adoption? Thanks.

Charles Meyers -- President and Chief Executive Officer

Sure. Thanks, Jonathan. HIT -- again, we feel very good about the progress there, making excellent progress against all legs of the stool, the demand side, the supply side, and the financing side. In terms of build cost, that's going to vary significantly market by market. What I would tell you is we're very confident that we can build in line with the best in the market in terms of -- because of our sourcing leverage and our engineering capabilities, etc.

So, we think that that is -- we're going to continue to be able to do that. Obviously, I think that is going to be meaningfully below our retail build cost, just given the nature of those facilities. But we think we're going to be very much at parody with others in terms of our ability to build at the right price points.

In terms of pricing, we've seen fairly stable pricing across the market. So, we feel like supply and demand are still, despite a lot of investment in the market are relatively balanced across the globe. We tend to be focused on the high-demand markets where we have visibility to pipeline and access to customers that we think is somewhat advantaged. So, we continue to believe that we're going to be able to deliver kind of in line with or maybe slightly above market as we deliver a more comprehensive value proposition for those customers.

But as we've said, we do believe that the hyperscale market is going to be very competitive. We think it's going to generate attractive but more challenged returns than our retail business, which is exactly why we're pursuing it the way we are, so that we can minimize our balance sheet exposure to that market, but still have the strategic value delivering that product to our key customers. So, that's what I would say relative to HIT.

In terms of the cross-connect trend, particularly in the Americas, we did see that tick up nicely. The thing that I watch most closely is the gross in terms of are we continuing to really drive gross adds, which to me tells me people are resonating with the value proposition and wanting to continue to consume the product. That continued to be very strong. What I think we saw on the other side of it is that our churn was lower this quarter and I think that was partially due to a bit of a breather on the 10 to 100 Gb migration.

And that's probably driven by the fact that some of the larger players have moratoriums in their network in the latter part of the year and that probably gave us a little bit of pause on that. We unfortunately don't think that's a permanent pause, but we do think that will taper off over the course of the year. What you're seeing, I think, is a glimpse of what's possible given the strength of our gross adds. So, again, we feel super confident and positive about the overall interconnection business. That's a little bit of the dynamic we saw in the Americas this quarter.

Jonathan Atkin -- RBC Capital Markets -- Managing Director

Just on strategic products, you got the encryption product and can you maybe talk a little bit about how that's trending and other things you're making progress on?

Charles Meyers -- President and Chief Executive Officer

Sure. SmartKey is going great. We've got a ton of customers in trial on that service as well as a number of new customers added over the last quarter. It's not going to be a material differentiator and adder to the overall story, but it is -- for us, it was a way of demonstrating that we could continue to bring new value-added products that really differentiate our position as a trusted party in assisting customers with their digital transformation. We do think it will be additive to the overall growth story, but it's not going to be a huge offering.

But we do think there are others sort of around the corner in terms of continuing to expand the feature set and reach of our ECX fabric, which now is becoming a meaningful contributor to our interconnection business as well we've talked publicly about having our NFD Marketplace product -- that's not really a product name, but we're working toward finalizing what the actual go to market names will be for these offerings.

But they are already from a functional perspective in advance pilot stages with customers and we think those things can be over time meaningful contributors as we get attached rates on top of cabinets that are already deployed. That's one example. Then there are others that we're working through that we begin to give you visibility to in the next few quarters.

Operator

The next question is coming from Ari Klein, BMO Capital Markets. Your line is open.

Ari Klein -- BMO Capital Markets -- Analyst

Thank you. It seems like you're making a lot of good progress on HIT, but the JV search is taking a little bit longer than expected. Can you provide a bit more color there? Then what kind of contribution from HIT are you embedding in 2019 guidance?

Charles Meyers -- President and Chief Executive Officer

Sure. It's not the search itself that's taking long. Believe me, those folks found us pretty fast in terms of wanting to have a discussion about what we were doing. So, we've already had initial dialogue with those and begun to filter through the ones that we think are most philosophically aligned with Equinix as partners.

What has taken a bit longer is just the complexity of this from the standpoint of tax and legal structuring and accounting and various other things. So, as I think I mentioned this last time, those are some of the things that perhaps we underestimate at some level in terms of our ability to get this thing finally executed and off the ground.

The good news is the demand side of the business is progressing in terms of building pipeline, sort of independent of that or in parallel with that, I guess I would say. In addition, the supply side in terms of sourcing land and making sure that we're positioned for the JV to really be effective in ramping quickly once established are all moving in parallel. So, the team has done a phenomenal job. Our tax-free accounting teams have literally been head's down trying to get this done.

I think we're, as I said, I think we're going to have this done in the coming months. We're going to shortlist down to a very small set of players that we think are most, as I said, most philosophically aligned with us and have the kind of reach and capabilities that we would want to see in a partner. And we think that will happen in the next couple of months.

Ari Klein -- BMO Capital Markets -- Analyst

Then same-store revenue growth was 2% this quarter, similar to last quarter, can you maybe provide that number ex-Verizon and then what do you think that number will look like in 2019?

Charles Meyers -- President and Chief Executive Officer

You're right, a little light again this quarter. As we dig into the underlying drivers, you really see a number of factors at work, one of them you mentioned, which is Verizon and that's having a meaningful sort of suppressant effect on that metric. It is also a bit of a tough compare still. So, we're going to need to lap that compare, but the last fourth quarter had some elevated NRR in our stabilized assets. So, we think that once you normalize for Verizon and some of that tough compare, you're probably looking at another 150 to 200 BIPS.

So, a normalized same-store number would be in the 3.5% to 4% range. It's also being impacted a little bit as I mentioned last time by us, actively managing customer migrations out of a select set of sites that are in the stabilized portfolio. So, all together, we're keeping a close eye on that, but we expect it will probably persist a bit toward the lower end of our historical range, even on a normalized basis for a period of time.

Operator

The next question is coming from Colby Synesael, Cowen & Company. Your line is open.

Colby Synesael -- Cowen & Company -- Managing Director

Great. Thank you. Just on that last question, I think last quarter, there was an expectation that would improve as early as this quarter and that didn't happen, then when I look at your organic growth for 2019, you're expecting 8% to 9% versus the 9% you did in '18, yet you are now expecting Verizon to be a growth driver. I think there was an expectation that could be the same, if not slightly higher. I'm hoping you could give a little more into that.

Then on interconnect pricing, can you just talk about what your strategy is there, particularly for some of your network partners and for those specifically who are potentially connecting customers from other data centers into your facility and what you could potentially do to monetize that in a more efficient way? Thanks.

Charles Meyers -- President and Chief Executive Officer

On the growth picture, we provide that range. I think we're going to continue to drive hard in terms of continuing to drive business. I do think the stabilized asset growth being where it is is somewhat of a contributor. I think that is driven by not only those factors, but these things are publish more temporal in nature. But I think what you're seeing a really a continued transition phase of the business to really this trusted center of the cloud-first world mindset in terms of the types of deployment, the level of interconnection we're going to see.

Those are a bit longer sales cycle, but once landed, I think they tend to deliver very attractive cab yields and levels of interconnection. So, I think the growth profile of the business has continued upside opportunity, both as some of those underlying headwinds subsist or subside. I do think that we're trying to be appropriately conservative about the pace at which Verizon returns to growth throughout the year, but that's, I think, the overall dynamic.

We feel very good about the overall growth profile of the business and what it's going to look like over the next several years. We think, as I said, particularly as we add new services and look at the potential to add a tax rate to existing deployments, but that's going to be a multi-year process.

Operator

The next question is coming from Sami Badri, Credit Suisse. Your line is open.

Sami Badri -- Credit Suisse -- Analyst

Hi, thank you for the question. You gave us a good amount of context on your prepared remarks regarding virtual cross-connects and the traction you're seeing there in your business. Could you just give us some color on how billing rates differ between the virtual connections and the physical connections since you did make the comment that your big customers using physical connections are also opting into virtual connections? Can you give us any color on how we should be thinking about that as we project out your model.

Charles Meyers -- President and Chief Executive Officer

Sure. It's interesting because we get the question a lot and I think the way I summarize it is actually, the unit economics are not radically different between the two. As we look at how people consume on the virtual fabric, typically they buy a port. Sometimes they can buy that as a full buyout port or they can buy virtual circuits individually onto the port.

When we look at it in terms of our average unit price per connection from customers when you take into account the port price as well as virtual circuit price, which is on a unit basis meaningfully lower than a cross-connect, but as you look at them right now, there's not a huge gap. Both are good.

The cost of goods on a switched fabric is slightly higher for sure than it is just a basic physical cross-connect, which has very low cost of goods, but what we're seeing is that the way we are pricing them and the way customers are using them does not represent dramatically different economic profile across those.

And to your point, we are seeing them as very complementary. Generally, it is not, "Oh, I was using a physical cross-connect and now I'm going to use a virtual cross-connect." It is, "Hey, I have a range of use cases, physical cross-connect is very appropriate for me in certain instances," particularly with large and repeatable traffic flows.

Then virtual cross-connects are really substantially better in an environment that is more dynamic where people need to be turning up and down capacity or moving workflows or traffic between endpoints. Then of course, you augment that with IX. We have many of our more complex customers who use across the entire portfolio.

So, they have a lot of layer three traffic that they're appearing through the fabric and then as they see traffic being exchanged with peers in high volumes, they strip that off to cross-connects, then when they want private interconnection to a cloud, for example, they might use a cross-connect in a direct connect way directly to Amazon or they would use the ECX fabric and express route to get to Azure.

It's really a very diverse portfolio that tends to serve complex needs of customers extremely well. Again, we're not seeing a dramatic difference in terms of the overall economic profile and return on capital we see across the interconnection portfolio.

Sami Badri -- Credit Suisse -- Analyst

The second question I what percentage of revenues are currently coming in from the channel versus direct to customer?

Charles Meyers -- President and Chief Executive Officer

We had said about 20% of our bookings. We have not sized the actual revenue, but we did talk about I think we had our third consecutive quarter of north of 20% of bookings. And oh, by the way, it generates more than half of our total new logo volume. It gives you a real insight into the fact that one of the things driving my optimism about the future of Equinix is what I think is a really massive increase in the total addressable market. I think it is meaningful larger than what we provided in our last analyst day or our last couple of analyst days.

I think that is being driven by a really substantially larger enterprise market opportunity than we had previously given credit to. Our optimism about that is being fueled by real feedback from our customers and real implementation of use cases. These are not just theories. These are 4,000 deals that are flowing through the channel. What you realize is that this opens up the addressable market into hundreds of thousands of addressable customers. When we can't get to them, we're going to add to our go to market engine this year, but let me tell you. We're not going to reach all those customers.

So, the way to reach them is through the channel. So, we have now really gotten our sales teams' heads wrapped around working with partners as a key way to reach those customers and they're really -- I think they've gotten over the initial reluctance of thinking that somebody was about to steal their account. Now, they're working very effectively with channel partners and we're seeing great channel partners like AT&T and Orange Business and those kinds of folks really driving significant volumes for us.

And then also sell with activity with our cloud partners, whether that's Microsoft, Amazon, Google, others, where we're seeing their customers say, "We need a hybrid cloud solution. We want to engage with Equinix," and we're often being brought into those. Cisco is another one. Their secure Agile Exchange is really seeing tremendous traction with large customers. We partnered with them on some very big enterprise wins. I'm super excited about what's going on with the channel and more than 20% of our bookings, I expect that number to go north from there.

Operator

The next question is coming from Erik Rasmussen of Stifel. Your line is open.

Erik Rasmussen -- Stifel -- Analyst

Maybe just circling back, Charles, on the comments you just made, it was kind of what I was thinking -- the enterprise segment, it sounds like you're seeing a change in behavior and it seems to be more of a sense of urgency. Would you support that sort of commentary? Also, does that support their move toward implementing these hybrid architectures?

Charles Meyers -- President and Chief Executive Officer

Yeah. Absolutely. I would say yes but, right? Yes, I see a sense of urgency. Yes, I see a clear sense of consensus emerging around the architecture of choice being hybrid and multi-cloud, but what I also see is a very deliberate sense of action and timing. These are careful people with jobs that require them to be careful. So, I think they are moving. They are figuring out which workloads they can use to test that architecture. They are absolutely embracing cloud but also embracing it in a very measured way. That's why we're seeing longer sales cycles, for sure, and we're seeing average deal sizes being smaller.

So, that's why I think we would love it if these were translating immediately substantial inflection points or changes in slope on our growth rates. I don't think that's not yet happening but I also think when you look at our land and expand activity, as people get more comfortable and as they increase their pace of deployment in these hybrid architectures, I think that's when we're really going to bear the fruit from our efforts.

So, I think the answer is yes, there is a sense of urgency. They increasingly see us as relevant to solving their problem. They're engaging with us, but longer sales cycle, smaller deal sizes. So, we're going to have to work through that in terms of how that translates in our overall financials. I feel very good about the business and what the long-term opportunity looks like our ability to continue to really be relevant to them.

Erik Rasmussen -- Stifel -- Analyst

Maybe just as my follow-up, back to Verizon, you previously talked about building capacity in five markets, but in 2019, is there anything else that you would see that maybe you could make further investments that could potentially get some growth or turn that growth faster into Verizon or maybe see a better return on that investment?

Charles Meyers -- President and Chief Executive Officer

One, it's been a damn good return on that investment. I think we're super excited about the return that we saw and the level of value creation and accretion that came from the Verizon transaction. So, super happy about that. I think it seems like our time here has been dominated more by the fact that we saw elevated churn and flat growth from those, but again, we made the investments where we believed the field rates and utilization levels warranted that.

After the Americas -- I was just down at that facility, terrific group of people, excited about serving customers as part of Equinix. We think the federal business is going to continue to be an opportunity. That's an area where investment could yield outsized results. I met with the team that's doing that, an amazing group of people, really energized about what they're doing. We talked about Denver, Bogotá. We're making those investments. I do think we've made the investments we think are key to driving the engine right now and we're going to watch it carefully in the coming quarters.

Operator

The next question is coming from Mike Rollins of Citi. Your line is open.

Michael Rollins -- Citi -- Analyst

Thanks for taking the questions. I'm curious if you could discuss the longer-term opportunity for margins. If you could give us a bridge in terms of how the company looks at building some operating leverage with the investments that have been made over the last few years.

Charles Meyers -- President and Chief Executive Officer

I fully expect to be talking about that on the call to some degree. Frankly, I would have loved to have had us on this call saying here's the margin expansion we're going to deliver in '19. We didn't do that. That's disappointing to you and probably some level to us as well. I think it's important to put the guide into the appropriate context. At analyst day, we talked about our long-term margin aspirations and shared our view we could hit the 50% target sometime in that timeframe between now and 2023.

That was based on the assumption we continue to drive operating leverage in the business, which we're doing at a very meaningful level. It also took into account our need to invest in key elements of the business. We talked about that go to market expansion, continued product and service investments. Those are really the key areas as well as overcoming some of the increased level of expansion drag. It should be no surprise to anybody if you just plot our profile of our CapEx spend, it came up substantially.

That turns into new projects and new cabinets that it takes time to fill. In some cases, particularly if those were first phases, that creates some meaningful expansion drag. When you look at those factors, we believe we can overcome that and still deliver in margin expansion. The new things that came at us were the 30 BIPs and then also more significantly the utilities cost. One thing to really understand, utilities flow through our business in a very different way than most of our wholesale competitors, for example, who pass through power.

So, the impact of the increased utility expense has really chewed up what we had hoped to deliver in terms of dropped to the bottom line margin expansion. That was a very long answer to the question, but we continue to believe the 50% margin target is achievable. I think we're going to have to look at whether or not the utility impacts moderate over time. Then we'll also grow through hopefully our expansion drag. If the business continues to be as robust as it is, we're going to continue to invest behind it. I think the margin target of 50% is still achievable. It's a question, I think, of timeline if we continue to get hit by the utility impacts.

Keith D. Taylor -- Chief Financial Officer

Mike, let me just add one other thing -- the expansion drag, we track that every year. We recognize that we're always in the business of expanding, but what was different this year relative to prior years is the size and scale, what Charles and I refer to there are 36 projects under way of size and many other smaller projects around the world. But in addition, we're going to a number of new markets. But the drag just for expansion is 50 basis points this year.

When you take that into context, you're going to get the benefit of that further down the road and you've got to absorb it this year. We're going to bear fruit from these investments. The second thing is that as we guide to an EBITDA this year, there's roughly a 20-basis point delta. Charles referred to utilizes as one example.

That's roughly 80 basis points. Expansion drag is 50 basis points. The new lease accounting is 30 basis points. As we look through the year, you should expect us, all else being equal, that margins will continue to improve throughout the year. Q1 is always seasonally soft because of some seasonal costs, but as we get the back end of the year, I think you'd see us more exiting the year at a higher-margin profile than what we exited in 2018.

Operator

Our last question is from Brett Feldman of Goldman Sachs. Your line is open.

Brett Feldman -- Goldman Sachs -- Managing Director

Thanks for squeezing me in. During the discussion of the work you're doing to form the JV, you made a point that once you have this in place, everyone will have a chance to see how great this asset portfolio is or could be. I actually wanted to get some understanding of that statement. It sounded like there might be some considerable degree of asset in the JV when it's originally formed. I know you have talked about maybe putting in some of your existing assets like Paris 8. I'm curious as you've had discussions, you realize there may be more of your existing assets that would be appropriate for the venture.

Also, are the JV partners you're talking to really primarily passive financial partners or have you discovered they may have assets they can contribute to this JV so it might be more of an operating vehicle than we would have guessed. Once it's up and running, are you capitalizing primarily to be a business you grow organically or do you see it as an M&A vehicle, meaning there could be assets in the past you wouldn't have wanted to own because they didn't align with your IDX model but maybe now there's a different approach you can take to M&A. Thanks.

Charles Meyers -- President and Chief Executive Officer

I'll try to tackle some of them and Keith can jump in and help me. In terms of the assets that might go into the JV, I won't go too far in terms of getting out over my skis, but I would simply say that yes, there are assets that we believe are appropriate to include in the JV. Those assets have some level of existing either pre-leasing and/or stabilization already, making them very attractive parts of a portfolio. So, in fact, we believe that might also represent an opportunity at some point during the year for us to repatriate capital back into the Equinix system.

So, we're excited about that. We think it's a really compelling story. That is the feedback we are getting from partners. In terms of partner types, I would say simply that we want good financial partners who are philosophically aligned with what we want to accomplish and ones that understand strategically what we're trying to accomplish, understand that proximity to the Equinix ecosystem in interconnectedness to it is important. So, we'll be attracting and working with those types of partners.

Then as to whether the vehicle would in itself act as something that would drive other transactions, I don't know over time. I think that's something that's certainly not on our radar right now. We are fully consumed with getting a JV structure agreed upon and how decision making would proceed with a partner and what the assets would look like and how we can start meeting customer needs. That's what we're really focused on. That's a little bit more color. Anything else in there to add, Keith?

Keith D. Taylor -- Chief Financial Officer

One of the things I want to highlight -- it's really important for us, we want to keep this off balance sheet. So, recognizing there's the partnership, there's the arrangement on the ownership, but there's also the fee structuring. As Charles alluded to, there's a lot of complexity behind the organization of this JV structure and this is the initial -- this is the first of what we think could be many and as a result, we've got to be mindful of avoiding consolidation simultaneously dealing with the complexity around tax.

So, we're looking forward to spending more time talking to everybody about this. As you can tell by Charles' tone, he's excited. We're excited. We're making great progress. Stay tuned.

Katrina Rymill -- Vice President of Investor Relations

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

Operator

This will conclude today's conference. All parties may disconnect at this time.

Duration: 64 minutes

Call participants:

Katrina Rymill -- Vice President of Investor Relations

Charles Meyers -- President and Chief Executive Officer

Keith D. Taylor -- Chief Financial Officer

Richard -- JP Morgan -- Analyst

Jordan Sadler -- KeyBanc Capital Markets -- Managing Director

Jonathan Atkin -- RBC Capital Markets -- Managing Director

Ari Klein -- BMO Capital Markets -- Analyst

Colby Synesael -- Cowen & Company -- Managing Director

Sami Badri -- Credit Suisse -- Analyst

Erik Rasmussen -- Stifel -- Analyst

Michael Rollins -- Citi -- Analyst

Brett Feldman -- Goldman Sachs -- Managing Director

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