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Edited Transcript of CONE earnings conference call or presentation 20-Feb-20 4:00pm GMT

Q4 2019 CyrusOne Inc Earnings Call

Carrollton Mar 2, 2020 (Thomson StreetEvents) -- Edited Transcript of CyrusOne Inc earnings conference call or presentation Thursday, February 20, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Diane M. Morefield

CyrusOne Inc. - Executive VP & CFO

* Michael Schafer

CyrusOne Inc. - VP, Capital Markets & IR

* Venkatesh Durvasula;President and CEO

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Conference Call Participants

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* Ahmed Sami Badri

Crédit Suisse AG, Research Division - Senior Analyst

* Aryeh Klein

BMO Capital Markets Equity Research - Analyst

* Colby Alexander Synesael

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* David Anthony Guarino

Green Street Advisors, LLC, Research Division - Senior Equity Research Associate

* Eric Thomas Luebchow

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Erik Peter Rasmussen

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Frank Garrett Louthan

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Jonathan Michael Petersen

Jefferies LLC, Research Division - SVP & Equity Analyst

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Michael J. Funk

BofA Merrill Lynch, Research Division - VP

* Nicholas Ralph Del Deo

MoffettNathanson LLC - Analyst

* Simon William Flannery

Morgan Stanley, Research Division - MD

* Yong Choe

JP Morgan Chase & Co, Research Division - VP in Equity Research

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Presentation

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Operator [1]

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Good day and welcome to the CyrusOne LLC Fourth Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Michael Schafer, Vice President, Capital Markets and Investor Relations. Please go ahead.

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Michael Schafer, CyrusOne Inc. - VP, Capital Markets & IR [2]

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Thank you, Sean. Good morning, everyone, and welcome to CyrusOne's Fourth Quarter 2019 Earnings Call. Today, I am joined by Tesh Durvasula, President and CEO; and Diane Morefield, CFO.

Before we begin, I would like to remind you that our fourth quarter earnings release, along with the fourth quarter financial tables, are available on the Investor Relations section of our website at cyrusone.com.

I would also like to remind you that comments made on today's call, and some of the responses to your questions, deal with forward-looking statements related to CyrusOne and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are detailed in the company's filings with the SEC, which you may access on the SEC's website or on cyrusone.com. We undertake no obligation to revise these statements following the date of this conference call, except as required by law.

In addition, some of the company's remarks this morning contain non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the Investors section of the company's website.

I would now like to turn the call over to our President and CEO, Tesh Durvasula.

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Venkatesh Durvasula;President and CEO, [3]

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Thanks, Michael. Good morning, everyone, and welcome to CyrusOne's Fourth Quarter Earnings Call.

As we announced this morning, our longtime CEO and my good friend and mentor, Gary Wojtaszek, is separating from CyrusOne. Let me pause for a moment. Words cannot describe Gary's contributions and accomplishments for this company. He has had a tremendous vision in building Cyrus, taking it public over 7 years and expanding it globally to become the third-largest data center REIT. On behalf of our Board of Directors and the entire CyrusOne family and team, we thank Gary for the company and culture he proudly created.

Also, I'm both humbled and incredibly excited to take the role of President and CEO on an interim basis. I'm fully focused on continuing to execute on our strategic vision.

We had outstanding financial results in 2019 and a number of significant accomplishments that put us in a very good position as we begin 2020. Beginning with Slides 4 and 5. We closed out the year with strong financial performance, including high revenue, adjusted EBITDA and FFO per share growth. The $105 million in leasing for the year was diversified across markets and product types. We had significant contributions from Europe and enterprises, and the $52 million backlog derisks our 2020 outlook while also contributing to our 2021 growth.

We delivered nearly 100 megawatts of capacity in 2019, including nearly 30 megawatts in Europe. And we recently executed an agreement to acquire land in Frankfurt to support our growth in what has been our strongest European market. Our year-end development pipeline of 92 megawatts includes projects in both U.S. and Europe and is nearly 50% pre-leased.

We significantly decreased interest expense by refinancing our U.S. bonds in the investment-grade market. And in January, we closed our inaugural euro offering. We also raised $200 million in equity, including $100 million in forward equity, to fund 2020 requirements.

Turning to Slide 6. The average pricing on the $13 million in annualized revenue signed in Q4 was $226 per kilowatt, which is our third-highest pricing quarter since going public. Consistent with the trend in recent quarters, the leasing again was very diversified with significant contributions from enterprises, and we added 3 new Fortune 1000 logos.

As of year-end, our late-stage sales funnel was up approximately 7% compared to Q3 '19 after having declined in each of the prior 2 quarters. Furthermore, since January 1, we have been -- we have seen increased activity across all markets, which is a really positive sign as we head into the new year.

For the full year, we signed 61 megawatts totaling $105 million of annualized revenue, above the $80 million to $100 million that we guided to at the beginning of the year. Pricing for the year was $142 per kilowatt, up 15% compared to 2018, driven primarily by the customer mix. The weighted average lease term was approximately 7 years and the average annual escalation was nearly 2.5%. Europe accounted for 36% of the revenue signed. The enterprises represented nearly 50%, with sub-500 kW deals contributing significantly.

Moving to Slide 7. Our interconnection revenue grew 20% in the fourth quarter, which I believe is still the fastest-growing interconnection business in the industry by a fairly wide margin. We have mentioned that there has been a change in the network topology. The hyperscalers are creating tremendous value around their compute and storage nodes. Since building these scale data centers is our core competency, we will continue to benefit from this trend in the coming years. We signed $10 million in annualized GAAP revenue for the year, implying continued strong growth in 2020. As of the end of the year, we had more than 22,000 cross-connects across the portfolio.

Just about every quarter, we show key portfolio metrics, as we have done here. While the credit quality of our customer base has been very high for a long time, particularly compared to other REITs, the metrics have continued to improve. Nearly 80% of our revenue is from Fortune 1000 customers, and the weighted average remaining lease term of our top 20 customers is 5.5 years. 76% of the portfolio now includes escalation, which is up approximately 10 percentage points from a year ago.

Turning to Slide 8. As you know, I have had the privilege of leading the European team in operations for the past 18 months, and that business continues to perform very well. Fourth quarter annualized revenue of $87 million was up 80% compared to the prior year, and adjusted EBITDA growth was nearly 95%. As we anticipated, demand in Europe has been robust, particularly for larger-footprint deals. For the full year, we signed $38 million in annualized revenue, implying continued strong growth in 2020.

We have projects underway in Frankfurt, London, Amsterdam and Dublin. And our future footprint taking into account these projects is nearly 150 megawatts, which will represent nearly 20% of our overall portfolio. We also have sites under control that would allow us to deliver an additional 210 megawatts, giving us a total prospective capacity of over 350 megawatts. This will position us as one of the largest data center portfolios in Europe.

Moving to Slide 9. Let me pause again. The coronavirus that has impacted the region is a horrible development. We wish all of our friends at GDS health and safety as they deal with this crisis. Regardless of those events, GDS continues to grow rapidly. Even though they're a much bigger company now, EBITDA has grown over 60% in the third quarter, and their backlog represents growth of 76% compared to their existing footprint. We leased another 2 megawatts with a Chinese hyperscaler in the fourth quarter and have leased nearly 27 megawatts in total as a direct result of our unique partnership with GDS.

Our remaining investment is currently valued at nearly $140 million, which is almost 40% higher than our original $100 million investment. And as you may recall, we monetized an additional $200 million early last year. Their share price has risen by nearly 5x since our initial investment almost 2.5 years ago.

ODATA is also growing quickly, and their Latin America footprint now consists of more than 80 megawatts, including one of the largest data center campuses in Brazil. This is up from 12 megawatts at the time of our original investment 16 months ago. They had tremendous leasing success, particularly in the U.S. hyperscale companies, given their ability to deliver large-scale builds. Also, there is significant upside to our $16 million investment as they continue to expand in Latin America.

Slide 10. Slide 10 summarizes key steps we have taken to position the company to continue to grow as efficiently as possible while improving profitability. We have powered shell and land across our key markets in both the U.S. and Europe. Our speed to market in building out data halls continues to provide a competitive advantage to meet rising customer demand. We continue to be very focused on our cost structure and have been proactive in identifying opportunities to create efficiencies.

While it was very difficult, the recent actions to rightsize our workforce enhances our margins, and our full year 2020 guidance midpoint is 0.5 percentage point higher than our 2019 margin. With continued growth, particularly in the business -- as the business scales in Europe, we anticipate further margin expansion. We also have a very strong balance sheet with significant capacity to support our growth.

Slide 11. Slide 11 summarizes some of our key accomplishments for the year. We are now one of the -- just a handful of REITs that have a $1 billion in revenue, an international footprint and investment-grade credit ratings. The secular demand trends that have driven growth for CyrusOne and the industry are expected to continue in the coming years: Data is continuing to grow at very high rates, enterprises are outsourcing their data centers to third-party providers and companies are migrating applications to the cloud as part of a hybrid solution.

As we continue to scale and expand our platform, which currently spans 4 continents, inclusive of our partnerships, we are positioning the company to maximize this opportunity, particularly as our customers further reduce the number of suppliers they rely on over time.

In closing, 2019 played out pretty much in line with how we thought it would, with leasing volumes down from the record levels we saw in 2018. We have been laser-focused on ensuring the company is best positioned to grow efficiently and profitably while maintaining maximum flexibility to capitalize on opportunities. As mentioned earlier, on the demand front, we are very encouraged at what we've been hearing recently from our discussions with our customers and by what we've been observing in the marketplace. We remain very excited about Europe, and now you can see why we made those investments in those markets. With our current development, plus the additional capacity that we can bring online, we expect to do very well in the coming years.

While our growth will be slower in 2020, adjusting for some onetime items in the fourth quarter, which Di will cover, we expect to generate attractive FFO per share growth relative to most other REITs. We are very bullish on the business over the next 5 to 10 years and have a strong balance sheet to fund our growth. We believe we offer one of the most compelling investment propositions, and we have the opportunity to create significant value for our shareholders given the underlying fundamentals, our capabilities and our position in the marketplace.

I will now turn the call over to Diane, who will provide more color on our financial performance for the quarter and discuss our guidance for 2020. Thank you, everyone. Di?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [4]

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Thanks, Tesh. Good morning, everyone. I, too, would just like to take a minute to recognize Gary for his amazing vision in leading CyrusOne since its inception. It was a pleasure, and quite frankly a lot of fun, to be his CFO partner since joining the company in 2016. I now look forward to partnering with Tesh in the future.

As Tesh mentioned, we are very pleased with our 2019 results and achieved a number of key strategic objectives. As Slide 13 shows, in the fourth quarter, we maintained high growth rates across our -- all of our key financial metrics. Churn was low at 0.7%, and our full year churn finished at 4.4% and was our second-lowest annual total since our IPO. For this year, we do expect churn to be in the 5% to 7% range. And as is our practice, in addition to terminations, we also include the impact of rate reduction in our total churn metric.

Turning to Slide 14. NOI growth grew 15% on an adjusted basis, and the margin was essentially flat year-over-year. Adjusted EBITDA grew in line with NOI, and the increase in normalized FFO was driven primarily by the increase in adjusted EBITDA and lower interest expense.

Slide 15 shows the market-level revenue contribution, which is relatively balanced across the portfolio. Our European portfolio is up nearly 50% compared to the end of 2018 and the revenue contribution from these markets will increase as pre-leased development projects are put in service. The percentage leased for the stabilized properties was down slightly year-over-year but remains at a healthy 88% despite an 11% increase in capacity.

Slide 16 shows our development pipeline as of the end of 2019, with nearly 100 megawatts of capacity expected to be delivered this year. The construction pipeline is slightly weighted towards our 4 European markets, and the overall pipeline is nearly 50% pre-leased on a square footage basis, with significant sales pipeline activity currently in these markets.

On completion of these projects, the size of our footprint will be 20% bigger with more than 4.5 million colocation square feet. We also have nearly 1 million square feet of powered shell under development across 7 markets, both domestically and internationally. And combined with our existing powered shell, this gives us nearly 3 million square feet of shell capacity, positioning us to deliver data halls quickly in response to the demand from our customers.

Slide 17 provides a snapshot of our balance sheet as of the end of the year. And as you can see, our credit metrics remain strong. We have been active in the bond market over the last few months, which I'll discuss shortly. Our leverage remains low at 5x, including the impact of the forward, providing us ample room to fund our development pipeline with debt. In addition, we had $1.25 billion of available liquidity as of year-end.

We issued approximately $105 million of equity under our ATM program in the fourth quarter, and we have the additional $100 million available pursuant to a forward sale under the ATM, which can be drawn anytime through November as needed, to fund our development and manage our leverage.

Slide 18 recaps our recent inaugural investment-grade dollar and euro offering. Late last year, we issued $600 million of 2.9% 5-year notes and $600 million of 3.45% 10-year notes to refinance our previously outstanding $1.2 billion of bonds. As a result of the offering, we decreased the blended coupon by approximately 200 basis points.

Additionally, last month we issued EUR 500 million of 1.45% 7-year notes. Proceeds were used to settle cross-currency swaps, repay euro-denominated revolver borrowings and fund continued development in Europe. As a result of the offering, we have smoothed out and extended our maturity schedule. On a pro forma basis, inclusive of the impact of the euro offering, our year-end weighted average remaining debt term increased to nearly 6 years, and the weighted average interest rate on our debt decreased approximately 2.4%.

Our percentage of fixed rate debt is now nearly 70%, up approximately 15 percentage points from the end of the third quarter, significantly decreasing our exposure to floating rate interest.

As I mentioned on last quarter's call, we also plan to recast our credit facility in the coming months in order to renegotiate terms to current market and extend the tenor. This will further reduce our 2023 maturities, decrease our weighted average interest rate and extend the weighted average remaining term on all of our debt.

Moving to Slide 19. Our backlog as of the end of the year was approximately $52 million. The estimated commencement timing for a few large deals signed in the third quarter has been pushed back, and there is a much more significant proportion of revenue expected to commence in the second half of the year. This shift reduces the full year revenue impact in 2020 but will have a very positive impact on next year's growth rate.

Slide 20 shows our initial outlook for the year. The guidance midpoints for revenue and adjusted EBITDA each reflect a 6% increase compared to 2019 results. Based on these midpoints, the implied adjusted EBITDA margin is 52.7%, 0.5 percentage point higher than the 2019 adjusted EBITDA margin. We expect that the margin in the second half of the year will be slightly higher than the margin in the first half of the year as a result of revenue growth with no material incremental overhead. We expect normalized FFO per share to grow in line with revenue and adjusted EBITDA, with the guidance midpoint representing a 5% increase.

As you update your models, there are a few fourth quarter items I want to highlight for your consideration. First, we received approximately $5 million in lease termination fees. And also a property tax accrual was reversed, resulting in a nonrecurring expense reduction of approximately $2 million. Adjusting the fourth quarter for these items, our 2020 normalized FFO per share guidance midpoint would represent a 7% increase over 2019.

Additionally, we only had a partial quarter impact associated with the 1.6 million shares of common stock that were issued, and we will issue an additional 1.6 million shares this year when we draw down the $100 million in proceeds associated with the forward sale. Finally, although we realize -- we will realize interest expense savings following the refinancing of our U.S. bonds, but keep in mind that those savings are partially offset by the application of a lower weighted average interest rate in our capitalized interest calculation.

In closing, 2019 was really a great year for us, and we are well positioned as we begin 2020 with a very healthy and improving sales funnel, capacity across all our key markets, a strong balance sheet with substantial liquidity, and forward equity to fund development requirements.

We appreciate everyone participating on our call. We are going to open the call for questions. And given the announcements of our earnings last night and the announcements this morning, we are limiting our call to 1 hour, as we always do. (Operator Instructions)

With that, operator, please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Erik Rasmussen with Stifel.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [2]

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Just on your guidance. Towards the end of your prepared remarks, you talked about timing of a few large deals being pushed back. Obviously, 5.5% on the top line was a little bit of a surprise, but what sort of impact is that having?

And then just also talking about demand in general in hyperscale. Are we still sort of being pretty conservative in expectations for hyperscale leasing, especially in the U.S. markets?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [3]

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Sure. Thanks, Erik. I'll let Tesh address demand from the hyperscalers. But if you compare our third quarter backlog commencement and then our fourth quarter disclosure that we just put out last night, you will see that there were -- there was a pushback. And most of those deals that got pushed back more from the first half of the year and into the third and fourth quarter, are European construction projects. It just takes longer to develop in Europe, and I think we might have been a bit optimistic of when those would commence when we initially put them in backlog. So that's the largest portion. But as you know, as revenue recognition gets pushed back it affects our 2020 revenue growth, but will be a full year impact in 2021.

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Venkatesh Durvasula;President and CEO, [4]

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Erik, Tesh here. Yes. So I think the -- just to follow up on the -- on Di's comment, we have definitely seen -- having spent the last 18 months over there, we saw a lot of movement in the markets in terms of construction and zoning and lots of people making different commentary on what you can and cannot do. So we've done really well in working through those environmental situations across Europe, but we just -- we need to push some of these things out a little bit.

On the overall demand at hyperscalers, I think it's right when you said it's still a conservative outlook. We've seen some more activity, like I said in my comments early in the year, around some bigger footprints that are being talked about. But as we know, these things can take months, quarters, sometimes years to actually get fulfilled. Even though we're dealing with the world's greatest companies, they don't always act at the speed we want them to act at. And so -- but we have seen -- we've seen some -- like I said, early in the year, we've seen some bigger-sized footprints being requested across some of our key markets.

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Operator [5]

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Our next question will come from Frank Louthan with Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [6]

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So Tesh, the sales effort has been a little weaker since you moved out of that role, and going forward for this year, clearly down a bit. What do you plan to do to kind of revive that and now you have a little bit more operational control?

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Venkatesh Durvasula;President and CEO, [7]

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Well, Frank, I've been commercial since I was born. So I think that we're looking forward to a 2020 that has some really interesting announcements. Like I said earlier in our comments, we've seen some interesting pickup in some of the hyperscale stuff. But more importantly, we've seen it across all of our markets and all of our customer types.

So I think both enterprises -- what always made or separated, I think, Cyrus from a lot of our competitors and what we've been able to do is the way we go -- the way we attack all of the Fortune 1000. The hyperscalers were, just happened to be bigger -- Fortune 1000s that just bought bigger chunks. Whether you're an insurance company, a pharmaceutical, a financial services company, we treat them all with the same kind of care and feeding. So I'm expecting for us to be able to continue that in 2020.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [8]

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Does that imply that the range of guidance is conservative?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [9]

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Well, the range of guidance is where we feel we're going to be able to execute this year.

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Operator [10]

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Our next question will come from Simon Flannery with Morgan Stanley.

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Simon William Flannery, Morgan Stanley, Research Division - MD [11]

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Tesh, congratulations on the new role. I wonder if you could share a little bit with -- I know there's a search ongoing. But in your interim role, what are the priorities that the Board has set out for you? And your priorities -- and particularly as it regards any strategic options?

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Venkatesh Durvasula;President and CEO, [12]

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Sure. So Simon, thank you. You're the first one to say congratulations. I really appreciate that. Second, I look forward to seeing you again in -- at your conference.

But in terms of -- our strategy is the same. The Board has asked me to execute what we've started. The foundational elements that Gary put in place are sound. And it's our opportunity, me and the team, to continue to grow on that opportunity. We talked about how excited we are about Europe. I think that will continue to be a major theme as we execute in 2020. And that's the way I think about it.

In terms of the interim status, I think it's common for all Boards in this type of a transition to want to conduct a search, but I think you know that I'm a candidate for that. So we'll put up a good fight for it.

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Operator [13]

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Our next question will come from Sami Badri with Crédit Suisse.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [14]

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Also, Tesh, congratulations. That makes me the second person to congratulate you on this conference call.

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Venkatesh Durvasula;President and CEO, [15]

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Thank you. Thank you.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [16]

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Now I wanted to focus in on Texas. And I see that your under development capacity is at 9 megawatts. And historically, major cloud providers and other internet companies have actually come in and taken large capacity at a time. And obviously, CyrusOne has done very well.

Is there a reason why the under development capacity in Texas from where we're standing today is relatively low? Is this a read across into where demand is flowing into? Is it going into LatAm and maybe Arizona, Vegas instead of Texas? Or maybe you could just give us more color on why the under development is relatively low to where a market like Texas should be.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [17]

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Yes. No, we have a fully built out data hall in Allen, but it's not showing under development because that data hall is finished. So we have inventory in Allen. We've also completed the last 2 data halls in Carrollton. And there are still -- it's not a lot, but I think a couple of megawatts available in Carrollton.

So once it's not in the active development and is finished, it goes into CIP. So we definitely have adequate inventory. And in Allen, I think in total, we can build out like 6 or 7 data halls and we've only built out 1. So we have plenty of capacity for hyperscale, between actual inventory and shell, in the Dallas market.

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Operator [18]

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Our next question will come from Nick Del Deo with MoffettNathanson.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [19]

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Congratulations, Tesh.

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Venkatesh Durvasula;President and CEO, [20]

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Thanks, Nick.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [21]

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In the past, you guys have been a little skeptical of JVs, and I think in part because you said investors wanted too much development (technical difficulty) [upside]. And obviously, Digital has recently sold some stabilized assets at pretty appealing cap rates. Has the market for stabilized facilities shifted such that asset sales or JVs might make more sense than they once did?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [22]

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Yes. Look, we've talked about JVs, and some of us at the company come from a REIT background where we've done JVs at other places. So I think if the right opportunity -- or particularly for a stabilized, came up, we're always going to consider that. We just haven't had anything to announce to date. So it's nothing we would -- it's certainly something we would consider and not rule out.

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Operator [23]

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Our next question will come from Eric Luebchow with Wells Fargo.

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Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [24]

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Congrats, Tesh. I just wanted to check in on the European demand environment since you've spent a lot of time over there. It seemed fairly concentrated in Frankfurt this year. But maybe you could give us an outlook on what the leasing environment will look like in 2020, in terms of what kind of deal size requirements we're seeing.

And in addition, are there any other markets in Europe where you might want to establish a footprint? I believe Paris was one where you had indicated some interest.

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Venkatesh Durvasula;President and CEO, [25]

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Well, thanks, Eric. Appreciate the question. Europe has been tremendous for us. I think, like we said -- like I said in my comments, 36% and $38 million. It really was a -- we did much better there than I think we even anticipated when we walked in.

I think there's 2 things for us in particular. One, we -- as you recall, we kind of got delayed with the regulatory filings. And so we had to wait to get our team kind of -- and our brand out there and our momentum and do what we do really well. After the full year got going, then there was a challenge with Brexit in one market. Hail, Boris. Now we seem to have got that solved. And let's see if we -- it will -- that will take care of some more activity in London.

But Frankfurt has been extremely strong. We've got a lot of interest in Amsterdam and Dublin. So all 4 markets right now are coming together nicely. And it just takes so long to do stuff, that I think our patience and our speed -- and that -- those sound like they're on the opposite sides of the spectrum, but it's our ability to kind of deliver our product once we get the permits, but our patience to work through all of the issues that you need to work through. And there are individual issues with each market have -- I think are going to pay off really well in 2020.

In terms of new markets, I think those are right. I think out of the traditional flat markets, we -- Paris is not on our -- we don't have Paris. So that might be a nice thing to look at in the future. We've seen some activity in Zurich. We've had some customers ask us about some -- Madrid and Warsaw. But I think at the end of the day, we've got plenty in our portfolio. And if we focus on that, we'll be -- we'll do just fine.

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Operator [26]

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Our next question will come from Richard Choe with JPMorgan.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [27]

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I just kind of wanted to go through the guidance again. You talked about how things are back-end loaded. But in terms of the pipeline and development, both the development is still aggressive and you talked positively about the pipeline. How should we think about the exiting growth rate as we go through the year? I think the lease termination might make for a tough comp. But overall, going from this 5.5%, 6%, do you think we can return to double digits going into next year and exiting 2020?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [28]

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Well, thanks, Richard, for asking for 2021 guidance, but we're just in 2020.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [29]

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Why not?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [30]

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Yes, yes. Right. Just trying to get through the day, actually. But that's why I kind of gave some of the bridge. For the ending fourth quarter NFFO, the lease term fees are probably worth about $0.04. That property tax accrual that we reduced -- or reversed, rather, was a couple of cents. And then it's probably another full $0.01 impact when we -- if you would have assumed the equity, the $105 million of equity, was out the whole quarter. So there was a number of things that, on the margin, inflated fourth quarter. So going into the year, if you back those out, it would be a lower run rate.

But again, back to -- if you look at the backlog table that's in supplemental, there's some significant backlog coming on in the last half of the year, which really will be a benefit to 2021. And a lot of the development table, again, particularly in Europe, is back-ended. As well as -- and I want to point out, San Antonio hasn't shown up on our development table yet -- but -- I'm sorry, thanks for the correction, Tom. I meant Santa Clara has not shown up on the development table because right now, it's just basically moving dirt. But once the actual shell starts coming on the ground, out of the ground, that will be on the development table. But it's a, definitely end of the year delivery of the shell and any build-out data hall if we have any pre-leasing.

So you combine all those factors, it really does point certainly to a healthier 2021 regarding more like full year revenue recognition from a lot of these developments.

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Operator [31]

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Our next question will come from Colby Synesael with Cowen & Company.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [32]

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Congratulations, Tesh. Hopefully, it's a permanent appointment.

Secondly, I guess my question, last year, you had suggested that you still expect $20 million to $25 million in quarterly leasing, and you did the $105 million for the full year. Just curious what the guidance -- or what your expectations are for 2020, and if that's what's assumed in the 2020 revenue guidance?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [33]

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Yes. Again, we kind of got locked into that guidance number but don't really guide to quarterly leasing. We're just saying over sort of 4-year averages. As was evident last year, we have -- leasing is lumpy. And it's larger if we do some large cloud deals, and more muted when it's more enterprise. But yes, over the course of the last 4 quarters, it's definitely averaged in that $20 million to...

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [34]

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Well, Let me ask it differently, then. Do you think, based on the commentary, Tesh, that you made, that you're seeing an uptick in demand or at least conversations already now in the first quarter of '20. Based on what you're seeing, would you guys expect to see greater leasing in 2020 versus 2019?

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Venkatesh Durvasula;President and CEO, [35]

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Yes, like I said -- well, first, Colby, thank you. Appreciate the congratulations and the well wishes towards permanent.

Colby, like I said, just because there's interest, which I believe that was really nice to see it coming out of the year, they don't always operate at the same time line we do. So my guess is some of these things can take quarters and some of them are going to take years to get done, especially as they get bigger. And if they're in Europe, they can even be more complicated when you think about all the unique laws around different markets that you have to accommodate for, especially something that's bigger and multiyear and just generally larger.

So like I said, we're really happy about the new interest, but we're not ready to comment on when it's going to translate to 2020 yet.

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Operator [36]

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Our next question will come from Michael Funk with Bank of America.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [37]

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One for you, Tesh. And once again, congratulations on the new role.

Just want to go to the comments from the 8-K earlier this year talking about a more prolonged downturn in hyperscale. Some of your comments in the call, where I think you were referring to kind of hyperscale in the past tense. Just wondering if your strategic vision is more of a repositioning of the sales force towards enterprise, less hyperscale customers in 2020, 2021. And if that's potentially maybe what we're seeing here in the leasing as well as the revenue guide as well.

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Venkatesh Durvasula;President and CEO, [38]

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Thanks, Michael, for the question and the well wishes.

Yes, so we always had a strong enterprise sales force. It's what we pride ourselves on. Whether it was oil and energy or large financial services, we've always been focused on that. And if you look at -- if you kind of look back on 2019, like I said in my comments, if it weren't for strong enterprise demand and our ability to sell into the enterprise market across multiple markets, we would not have had that $100 million year.

So we're going to continue to focus on that and always have focused on it. Like I said, we're probably the ones -- I don't know anyone else who reports Fortune 1000 logos. We're the ones who constantly talk about that. It's something that we pride ourselves on. It's a metric that our sales force takes great pride in. And they've done a great job of having success in that.

In terms of hyperscale, it's so difficult to determine when that is going to start getting back up. I mean 2018 was such a big year for everybody globally, that to hit those types of levels again might not happen right away. But like I said in my comments, we have seen some really good activity and interest around many of our key markets. We've seen some really good activity and interest in our European markets specifically. So I feel what we did and what the company did to expand into Europe in '17, '18 and then operating there all of '19, I think, was exactly what we needed to do from a strategic vision perspective. And I think we'll be able to do well in both hyperscale and enterprise long term.

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Operator [39]

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Our next question will come from David Guarino with Green Street Advisors.

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David Anthony Guarino, Green Street Advisors, LLC, Research Division - Senior Equity Research Associate [40]

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A question for you on the full year churn guidance that's elevated. Is that -- maybe you can give a breakdown on if that's being driven more by tenant departures or rent roll-downs? And then if that's maybe occurring in one particular market, that would be great.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [41]

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Churn is -- generally, the trend is every year, roughly half comes from just nonrenewals and about half from rent reduction. So I don't think the trend this year will be materially different than that. We do, do -- first of all, we have an account management team that all they work on is renewals that are coming due over the next 12- to 18-month period. And we do bottoms-up if we are aware of specific customers that will be churning in some manner.

The other thing is just reduced space and power. Like they say, a customer, but if they're not fully utilizing their space and power, they may, on the margin, reduce it. So we're always in front of all of our customers. And particularly, again this account management team is in front of all the renewals that are coming up. And again, based on that bottoms-up, we feel we'll be in the 5% to 7% range again this year, and probably roughly half again nonrenewals and some type of rate reduction.

The other thing, though, and we've talked about this before and it's true. At times, we'll do a rate reduction, but actually it's because they're going to take space at another data center and/or some other concession that we're willing to give a break on rate, if there's additional business associated with the overall negotiation.

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Operator [42]

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Our next question will come from Jon Petersen with Jefferies.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - SVP & Equity Analyst [43]

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I feel like it's getting maybe a little cliché, but I'll say congratulations, anyway, Tesh. Glad to see that you're still part of the CyrusOne team.

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Venkatesh Durvasula;President and CEO, [44]

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Thanks. I appreciate it.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - SVP & Equity Analyst [45]

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I just have a bit of a housekeeping question on G&A. Obviously, you guys announced the workforce reductions, and I assume there was going to be some severance costs associated with that. And now I assume there will be some related to Gary. Can you give us some indication on the timing and amount that we should expect throughout the year?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [46]

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Well, any severance -- anything that's pure severance cost doesn't -- it gets added back to NFFO, which is common at all the REITs. So that wouldn't affect the run rate SG&A. Run rate SG&A, we do -- will be going down this year compared to last year as a result of the reduction in force that we took earlier this year. The agreements for both Gary and Tesh will be filed as an 8-K some time in the next 48 hours, basically.

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Operator [47]

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Our next question will come from Jordan Sadler with KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [48]

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I guess, Tesh, I do want to offer congratulations on the position but also really on the ability to step up on a moment's notice for a call like this, your first public company CEO speaking gig on a quarterly call. So congrats on that.

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Venkatesh Durvasula;President and CEO, [49]

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Thank you.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [50]

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Well, we -- I mean, Jordan, to be fair, me and Schafer really prepped him a lot...

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Venkatesh Durvasula;President and CEO, [51]

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Oh, here we go.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [52]

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Well, I was going to say most of the credit was probably due to Di here.

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Venkatesh Durvasula;President and CEO, [53]

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A lot of scaffolding here around this.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [54]

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My question really is, what's going on here? Gary is leaving. Tesh, you were leaving a month ago, now you're staying. There's speculation that there's renewed M&A talks. Can you guys maybe give us a little bit more color on what's going on here? And why Gary wouldn't be on this call?

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Venkatesh Durvasula;President and CEO, [55]

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Sure. So let me parse that out into all of those questions individually. First, thank you. We really appreciate that, and it was a team effort. So we've been -- we worked very hard last night to make sure that we got ready for you guys.

In terms of Gary, Gary and the Board came to a mutual decision, and that's between Gary and the Board.

On me. I was fulfilling all of my duties and had lots of transition duties between now. And if you read the original release, it was -- I was also going to be on board to consult through basically midway through the year, I think July 1. So I was still here, if you will. It wasn't like I was -- so it was easy -- I think it was an easy pick. I think -- my mom thinks it was an easy pick for the Board. So it was really nice that the Board...

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [56]

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Is she listening to the call?

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Venkatesh Durvasula;President and CEO, [57]

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Yes. That the Board saw it the same way. And so that made sense.

I mean and then from -- just to continue on that perspective. Been here 8 years, been alongside Gary for -- since the IPO. Have started in 2 markets; expanded across North America; spent the last 14, 18 months in Europe, expanding across Europe and globally and internationally. So in terms of understanding both what we do as a business and was involved in 3 out of the 4 acquisitions. So when you think about what we've done as a business, who our customers are, what we're trying to do with our strategy, I think it made sense that I was chosen.

In terms of -- I think the last question was market speculation and what was going on. And we -- you know that we don't comment on market speculation or rumors.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [58]

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Well, I guess last quarter, it seemed like -- I mean, this has been going on for a couple of quarters now. And I think last quarter, it was -- I think Gary said, the company is not for sale or at least not running a process. Can you confirm that?

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Venkatesh Durvasula;President and CEO, [59]

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I can definitely confirm that if you look at the transcript from last quarter he said that, yes.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [60]

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You're not dismissing a process at this point.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [61]

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We don't comment on market speculation or rumors.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [62]

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Okay. Well, done, Di. Sorry.

I think I had to ask it, I think it was the elephant in the room. So apologies, but this is what everybody wants to know. So I appreciate you guys taking a minute with me.

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Venkatesh Durvasula;President and CEO, [63]

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Absolutely.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [64]

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You're welcome.

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Operator [65]

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Our next question will come from Ari Klein with BMO Capital Markets.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [66]

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Congrats again, Tesh.

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Venkatesh Durvasula;President and CEO, [67]

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Thank you.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [68]

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Can you maybe talk a little bit about the 12% headcount reduction that was announced around a month ago, and how that juxtaposes with your vision for growth of the company? And is there any sense that maybe you actually need to increase investments in sales and marketing to potentially increase the leasing momentum?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [69]

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Let me address the reduction in force first, and then Tesh can take it from there. But it was really -- it was a rightsizing. And the company had come off double-digit growth. We clearly were working on our '22 plan and knew it was going to be in line with the guidance that we just provided last night and today. And so with slower growth, we probably were a little bit over our skis on our total headcount. And so on the margin, we did the reduction of roughly 12%. But we're still well-staffed to run the business, to continue to grow. Again, Tesh can address the sales force.

But look, all companies from time to time go through a rightsizing. We've all worked at companies that do it, and it's a pretty common thing. We had never had to do it at CyrusOne, so that's always painful. But we feel we're really in good shape now with our headcount and to continue to be able to grow and support the business.

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Venkatesh Durvasula;President and CEO, [70]

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Yes, Ari. Thanks for the question. So we had already started shifting the sales force several years ago, like 3.5, 4 years ago, where we had a focused hyperscale division, cloud division. We created West Coast offices, and at the time when our furthest West Coast presence from a data center perspective was Phoenix.

So we had already done all of the heavy lifting on that front, like I said, 3.5, 4 years ago. And since then, it's just making sure that we've got the other markets covered. And the most important market now would be Europe. We've had -- when we took over, there was effectively one salesperson in the organization in the European -- in the legacy business. Since then, we've added people. And that funnel is now contributing to about 40%, almost more than 40% of the overall funnel for the business.

So I see that you've got -- now we've got a really good balance of people in North America and in our up-and-coming market, Europe. We've got coverage. We'll have a full year of operations. A lot of those people did not come on January 1, 2019, they came on in April, May and June. So we're going to get a full year of productivity out of them, with a full year of prospecting, full year of marketing and getting our name out there.

So -- and with the footprint that we have that we're building and have the capability of building, I think we've got a really good message for both enterprises and hyperscalers who are looking for North American and Europe capacity.

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Operator [71]

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This will conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Tesh Durvasula for any closing remarks.

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Venkatesh Durvasula;President and CEO, [72]

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Thank you, everyone. As a maiden voyage, it was really nice. And to quote some advice I got, "Avoid the icebergs." So I think we did that. So have a nice day, everyone. We'll look forward to the follow-up calls.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [73]

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Thank you.

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Operator [74]

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The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.