Equinix Inc (EQIX) 2004 Q1 法說會逐字稿

Hello and welcome to the Q1 2004 Conference Call. This call is being recorded for replay purposes. Today's presentation will be in a listen-only format. Following the presentation, there will be a question-and-answer session and instructions will be given if you wish to ask a question at that time. I would now like to introduce the host of today's conference Mr. Jason Starr, Director of Investor Relations. Sir, you may begin.

Good afternoon and welcome to Equinix's first-quarter results conference call. Before we get started, I would like to remind everyone that some of the statements that we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our report on Form 10-K filed on March 5, 2004.

In addition, we will provide non-GAAP measures on today's conference call. We provided 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 and on the Equinix Investor Relations page at www.equinix.com.

With us today are Peter Van Camp, Equinix's Chief Executive Officer; Renee Lanam, Equinix's Chief Financial Officer; and Keith Taylor, Equinix's Vice President of Finance and Chief Accounting Officer. At this time, I will turn the call over to Peter.

Thanks, Jason. Thanks everyone for joining the call today. Good to be talking with you all again. As you saw in today's release, 2004 began with a very solid quarter for the Company. This reflects strong execution by the team and just more proof of the tremendous operating leverage in our business. Frankly, the results speak for themselves, but let me hit the highlights.

Total revenue for the Company was 36.8 million, an 11% increase over Q4. EBITDA for the quarter was 5.7 million, up over 82% from the previous quarter. We are also free cash flow positive at 1.4 million for the quarter. And keep in mind, this is true even with the capital we deployed into our Santa Clara property.

We raised $86 million through the sale of convertible subordinated debentures. With this, we cleaned up the remainder of our senior notes and credit facility, dropping our effective annual interest burden from 10% to 2.5%. The extinguishments of this debt as well as the Crosslink conversion announced today did have an impact on the net income line, which Renee will detail in a moment.

Equinix closed 82 new customers in the first quarter. Interesting wins include AMF, Burrelle's Information Services, Cisco, Misys Banking Systems, Postini, Tommy Hilfiger and Viacom. Of note, in the network sector, our customer count now stands at over 190 as we added Bellsouth, FLAG telecom and MCI Worldcom Asia.

We saw over 50% of our existing customers order new services including expansion orders in the quarter from Amazon, Boeing, Electronic Arts, IBM, Telecom Italia and Ticketmaster and the WeatherBug. This also includes the US Government and Yahoo!. We ended the quarter with approximately 775 customers.

By the way, a number of these wins from new and existing customers occurred in Asia including Akamai, Cisco, Electronic Arts, Gomez and Viacom. As you can see, our momentum remained strong providing us a high degree of confidence in our outlook of 35% revenue growth for this year.

Within this momentum, we are beginning to recognize some interesting developments that are worthy of note. As we mentioned last quarter, we’ve been seeing an increasing number of first time outsource deployments and new enterprise applications enter our bookings and pipeline. First take a take a hard look at this, so I’d like to share some of what we found.

If you look at our bookings from new customers within the first quarter, approximately 65% of this represented either new applications or outsourcing from internal data centers. If we look back to Q4, this number was roughly the same. As the primary driver of our bookings in '03's overall performance was share shift away from other services providers, it would appear that the sources of our new customers is changing. Perhaps we are also seeing a leading indicator of increased market growth.

Now, just to provide a little more color on what these customers are doing in our centers. First, as you may have followed in some of your (ph) press, our focus on the financial sector has seen some real success. Our financial exchange or FX Service, which we launched in Q4 enabling direct interconnection between electronic trading platforms and partners has led to 17 new customers since its launch. These include some of the leading futures exchanges such as NASDAQ Liffe markets, and Euronext Liffe, and also includes Clearing Corp as a customer. Beyond this specific service staff, we have also seen a number of web-enabled enterprise applications from other financial institutions.

Second, in Asia, an application we have seen has been enterprise deployment of the corporate BPN for its global reach. Of course, our network neutral model, enables the most flexible and redundant solution when deploying the corporate WAN and remote applications. We are seeing this across a number of multinationals ranging from major manufacturers to service companies.

Now, let me move on to another development in the quarter. We took over a facility from Sprint to help serve our growth in the key Silicon Valley market. Just to give you an update there, our Equinization of this facility is nearly complete. We are now fully staffed with 24/7 support and security, while systems have been upgraded to meet Equinix's standards. Customer agreements have been transitioned and lastly we are offering connectivity between our Santa Clara and San Jose IBX to enable customers to have access to the over 50 networks available in San Jose, as well as the GigE Exchange service and Equinix Direct. As expected, this facility reached cash flow break even in the quarter.

As we said, we have had a lot of success in Silicon Valley, so we are very pleased with our position there. Similarly, our Ashburn, Virginia IBX has also seen significant growth. As we announced earlier today, we have entered into an agreement to expand our footprint in this market by 95,000 square feet. This facility originally build out at a later stage for Exodus, but never occupied, rated well against our standards for infrastructure and reliability. Importantly, the power capacity was a significant factor in our evaluation.

Lastly, this facility is adjacent our existing IBX in Ashburn allowing us to easily offer immediate access to the over 100 networks already installed there. This center adds 2,500 cabinets to our capacity in that market and increases our total cabinet capacity by more than 11% with a limited CapEx requirement. Now, just as a frame of reference had we built this building it would have cost something in the neighborhood of $70 million in upfront CapEx.

As took place with the Santa Clara building, we will be Equinizing the facility over the coming months targeting customer deployment in November of this year. Unlike Santa Clara, there are no customers in place in the facility. However, we have already begun conversation with a number of our significant customers for potential deployment. I should also note lease commencements coincide with this target date.

So, we are driving towards a similar time frame to cash flow breakeven that being 1-2 quarters from lease commencement date as we saw in Santa Clara.

So, we are quite pleased to have been able to expand our northern Virginia market and our head room for growth there while we are very excited to have been able to acquire this specific building as it was absolutely the best fit for us in northern Virginia.

As we mentioned on our last quarter's call, selective acquisitions in key markets such as this can make a great deal of sense.

Now before I turn the call over to Renee, I would like to provide a little color on some specific [inner] results.

First we were quite pleased with our gross margins. As we had said in our last call, the impact of a full quarter of the new building in Santa Clara had us setting guidance at a slight decline to a range of 40-42%. Even if we exclude contract settlements in the quarter, gross margins were 44%. It was great to see this over performance.

I should note that our pricing and margins continue to be strong and continue to prove the flow through impact of incremental revenues that you all expect. We expect this to remain true around all segments of our customers. Just as a side note, we have received some questions about margins of late, particularly in the government sector, and just to confirm these are in line with the rest of our business.

Consistent with margin objectives and as we mentioned on the last call, we continue to proactively move away from below margin bandwidth deals in our business. This hasn’t been a significant percentage of our total revenues; however, the elimination of the revenue associated with these deals represented just over 1 million of revenue churn in Q1 with particular impact in Asia. We have largely managed through this effort and will be largely complete in Q2, which is included in our guidance.

As many of you track our average MRR per cabinet, this bandwidth churn has had an impact. Again, as I noted above this was meaningful in Asia while there was another factor in our result there that I should note. In support of our partner, IBM, we completed an initiated billing on a dedicated deployment, which supports one of their large outsourcing deals in Singapore. Although, this has a nice margin contribution due to the nature of this type of dedicated deployment, it was quite different and we will see a full quarter’s impact of this in Q2. Of course, this has no impact on U.S. MRR per cabinet, which was up solidly quarter-over-quarter.

Now in addition, there are other factors that may affect MRR per cabinet including the timing of large customer deployments, terminations, or even implementations that ramp over time and delay the installation of services such as additional power and cross connect.

Due to these factors and actually based on feedback from a number of you, we are moving to measuring MRR per cabinet on a weighted average basis. This is a weighted averages basis of a number of cabinets billing in the quarter, which we feel will give you a much more meaningful look at our average MRR over time.

So let me stop there now. I’d like to turn it over Renee to drill down into more of the specifics and then I’ll come back to provide financial guidance for the second quarter and rest of the year.

Thanks, Peter. Well Q1 was another strong quarter for Equinix and the stage is set for us to have another great year. There were a couple of key events in the quarter that I’ll provide a fair amount of detail on, specifically the early repayment of our existing debt, and the conversion of the Crosslink convertible notes. We view both of these events as positive for Equinix, as they significantly reduce our interest expense and further strengthen our balance sheet. I’ll provide specific details on them and their impact on our results as I go through the numbers.

One thing I would like to comment on, however, before moving on to our quarter results is our February convertible debt offering. We were very pleased with the pricing and the terms of this offering as it finalized a 2.5-year balance sheet restructuring effort. The new debt, which now constitutes Equinix’s only cash interest pay debt bears interest at a very low rate of 2.5% per year and converts into 2.2 million shares and an effective price of $39.50 per share.

As a result of this offering Equinix is able to repay all of its existing cash paid debt. Debt; which had an average interest rate of about 10% or 4 times that of the new debt. This will save us approximately 10 million in interest, which would have otherwise been paid over the next four years. All of these savings will go straight to our bottom line.

Among the debt repaid following this offering was Equinix’s senior secured credit facility. By repaying that facility in full, Equinix was able to eliminate the covenants and restrictions of this facility. To get this facility behind us is a major milestone for Equinix.

This convertible debt financing proved to be a good move for Equinix, long-term and importantly has provided us with a strong new sales tool, one of the best balance sheets in the industry.

Moving on to our results for the quarter, I’ll walk through the numbers on both a cash and non-cash basis. This is consistent with prior calls and will give you a broader understanding of the performance of the business on a cash basis.

As a reminder, our non-cash costs include depreciation, amortization, accretion, stock-based comp, and non-cash interest expenses. Attached to our press release and posted on our website behind our GAAP P&L statement is a non-GAAP cash based statement.

Starting with revenues, Q1 revenue was 36.8 million that’s 11% over the previous quarter and up 45% over the same quarter last year. The heart of our business our recurring revenues was 34.5 million, a sequential 9% increase from the previous quarter and a 43% increase over the same quarter of last year.

Recurring revenues, meaning revenues for co-location, interconnection and managed services that we collect every month as a result of long-term customer contracts, represented 94% of total revenues for the quarter. Non-recurring revenues for the quarter were 2.3 million, up from 1.7 million in the previous quarter. Of our total non-recurring revenues in the quarter, 1.6 million were from installation fees and professional services. The remainder just under 700,000 was from customer settlement.

Breaking out our revenues by region, 87% of our revenues came from our U.S. centers while the remaining 13% was derived from our Asia-Pacific centers. Revenues from our U.S. centers were 32 million, up 14% from the previous quarter and up 50% from the same quarter last year.

Revenues from our Asia-Pacific centers were 4.8 million, down just over $200,000 from the previous quarter. This decrease was the result of the elimination of a pre-merger bandwidth resale contract that we inherited through the acquisition of iSTT. As this contract has lower than targeted margins, this contract was terminated consistent with our initiative to reduce our low-margin bandwidth retail business. After this termination, revenues from our Asia-Pacific centers were up quarter-over-quarter, 11% and 33% over the same quarter last year.

One customer IBM, represented 13% of our Q1 revenues. Though this number is declining on a quarterly basis. IBM continues to grow with us, just not as fast as the rest of our business. No other customers accounted for more than 5% of our revenues.

Moving on to churn, which we measure in the form of cabinet lost, we have 3.1% churn in the quarter, which is in line with our continuing guidance of about 3% a quarter.

Onto cost of revenues, total cost of revenues for the quarter was 33.8 million, a 4% increase over the previous quarter and a 10% increase over the same quarter last year. This increase is primarily a result of the additional cost attributed to our new Santa Clara IBX. Cash cost of revenues for the quarter was $20.2 million, up from 19 million the previous quarter and up from 17 million the same quarter last year.

On a regional basis, total cost of revenues in our U.S. IBX centers was 29.5 million. Our Asia-Pacific cost of revenue was 4.3 million. US cash cost of revenues for the quarter was 16.7 million, up from 15.2 million the previous quarter. Again, this reflects the increased cost associated with our new Santa Clara IBX as Q1 was the first full quarter to carry the cost of this center.

Cash cost of revenues for our Asia-Pacific IBX centers was 3.5 million, a 9% reduction over the previous quarter and a 15% reduction over the same quarter last year. This decrease is a result of our declining cost in bandwidth from term contracts as well as our continued effort to reduce costs in that market.

Moving on to cash gross profit. For the quarter, our cash gross profit margins increased to 45%, up from 43% the previous quarter and up from 33% the same quarter last year.

On utilization rates, at the end of Q1, we had approximately 22,000 cabinets. Our new Ashburn center will add another 2,500 cabinets taking out total capacity to approximately 24,500 cabinets. Following the acquisition of our new Ashburn center, approximately 80% of our cabinets will exists in our US centers with the remaining 20% located in Asia-Pacific. At the end of Q1, approximately 9,400 cabinets or about 43% of our total cabinets were billing.

If you include the cabinets to be added to our capacity as a result of the new Ashburn center, which is now under lease, but not occupied, we would have ended the quarter with the utilization rate of about 38%.

On this call and going forward, we will start providing additional details on our utilization rates, specifically we will provide utilization rates on a weighted average basis. What this means is that we will calculate the utilization rate or the number of cabinets billings taking into account when in a quarter a cabinet started billing. This will take out some of the anomalies that Peter mentioned when a large numbers of cabinets start billing or are terminated late in the quarter.

For Q1, our weighted average utilization rate was 41%. Again, meaning that on average we had 41% cabinets billing in the quarter. Calculating average monthly recurring revenue or MRR per cabinet using the weighted average utilization rate, our MRR per cabinet for the quarter was approximately $1,300. This is consistent with our long-term financial model objective of $1,300 average MRR per billing cabinet.

To provide an apples-to-apples comparison to previous quarters methodology, we're not taking into account when the cabinet started billing, but just looking at the utilization rate at the end of the quarter you can divide our recurring revenue for the quarter, 34.5 million, by the number of cabinets billing at the end of the quarter, again, which was approximately 9,400. What this translates to for Q1 is average MRR per cabinet of $1,210. This compares to last quarter's average MRR of $1,290.

What this decrease reflects is that there were a number of cabinets that started billing late in the quarter. As a result, our exit utilization rate artificially diluted our true average MRR per cabinet in the quarter. As Peter mentioned, this also reflects the reduction of bandwidth revenue as well as the specific dedicated deployment for IBM in Singapore.

Just to be clear, this decrease is not the result of pricing trending down. We are seeing prices stabilize and in some markets we are seeing prices increase. In the U.S., for instance, we saw our average MRR go up from 1,353 last quarter to 1,385 this quarter.

Moving on to SG&A expenses, our SG&A expenses were 12.9 million for the quarter, a 3% decrease over the previous quarter and an 18% decrease from the same quarter last year. Cash SG&A expenses for the quarter were 10.9 million, essentially the same as the previous quarter and a 5% decrease from the same quarter last year.

We continue to be very pleased with the stability of our SG&A spending as we believe it most clearly demonstrates the fixed cost nature of this business. The fact that we were able to hold cost constant quarter-over-quarter is even more meaningful given that we incurred additional cost in the quarter related to our due diligence efforts on the new Ashburn center and most significantly, our efforts related to compliance with the Sarbanes-Oxley initiative.

On a regional basis, cash SG&A for our U.S. operations was $8.6 million for the quarter, a 3% increase over the previous quarter and a 6% decrease over the same quarter last year.

For Asia-Pacific, our cash SG&A for the quarter was 2.3 million, a 13% decrease over the previous quarter and consistent with the levels in the same quarter last year. For those of you tracking us on a EBITDA basis, we are 5.7 million EBITDA positive for the quarter, an 82% increase over the previous quarter and an $8.7 million improvement over the same quarter last year. This rapid increase in EBITDA demonstrates the powerful flow-through story of this business on incremental revenues.

On a regional basis for the quarter, U.S. was EBITDA positive 6.7 million, up from 4.6 million last quarter. Asia-Pacific was negative 1 million, an improvement of more than 32% over the previous quarter as we continue to drive this portion of our business EBITDA breakeven.

With respect to interest, interest expense in the quarter was $4.1 million compared to $5.2 million in the previous quarter. In addition, as a result of the early repayment of our existing debt in the quarter as well as the conversion of the convertible notes issued to Crosslink, we had a 16.2 million loss on debt extinguishment and conversion in the quarter. Of this 16.2 million loss, 13.7 million was non-cash and the remainder 2.5 million was cash.

In order to understand these expenses, let me provide some additional color. First, with respect to the repayment of our existing debt. When this debt was issued, we incurred debt issuance and debt discount costs that consistent with GAAP were being amortized over the life of the debt. On the segments (ph) repaid early, we accelerated in the quarter 6.1 million. For the entire amount remaining -- for the entire remaining amount of the debt issuance cost, that has not yet been amortized. The entire $6.1 million amount was a non-cash charge.

In addition, when we redeemed our outstanding senior notes, we paid 106.5% of the face amount of these notes. The 6.5% premium we paid to redeem these notes was included in our loss on debt extinguishment and was a cash charge along with approximately $500,000 of other transaction costs incurred resulting in a total cash charge of 2.5 million.

Lastly, in the quarter, Crosslink Capital converted their convertible secured notes into 2.5 million shares of common stock. Because these notes redeemed issued at a discount, they were being carried on our balance sheet net of this discount. This discount was being accreted over the life of the debt up to the face value of the note. Upon conversion, we accelerated in the quarter 7.6 million for the remaining amount of the debt discount that had not yet accreted. This entire 7.6 million amount was a non-cash charge.

The common shares of the notes converted into were unregistered shares. Today, we filed an S3 registration statement in order to register these shares and allow them to be freely tradable.

Going forward, we expect our total interest expense to be reduced to approximately 2-2.5 million per quarter. Quarterly cash interest expense will be about $550,000. The remainder will be primarily non-cash interest expense on STT's outstanding convertible secured notes.

Translating all this to our net loss for the quarter on a total company basis, we had a net loss for the quarter of $30.1 million or $2 a share. Excluding the loss on debt extinguishment and conversion, we had a net loss for the quarter of $13.9 million or 92 cents a share, a 38% improvement over the previous quarter and a 69% improvement over the same quarter of last year. On a cash basis, we had net income of $1.7 million.

Turning to our balance sheet, as of March 31, we had 88.6 million of cash, cash equivalents, and short-term investments. Our company-wide DSOs were once again below the 30 day level for the quarter as we continue to experience extremely strong cash collection.

CAPEX for the quarter was 4.9 million. Something we’ll start doing on this call is breaking out our CAPEX into two buckets. These buckets will be one, capital deployed for normal ongoing CAPEX at our existing centers and corporate headquarters what we call ongoing CAPEX.

And two, capital required for expansion what we call expansion CAPEX.

With respect to the first bucket; ongoing CAPEX, these are expenses incurred in maintaining our existing business, such as replacing batteries or circuit panels at our IBXs, purchasing cabinet and cage materials to support customer installation, and capital to support corporate needs.

It’s important to note that upwards of 20% or more of the CAPEX in this bucket is fully paid for by customers in the form of non-recurring installation fees. The 14 centers today, we expect to spend approximately 10 million a year on this type of capital, again with customers paying at least 2 million of this upfront. Of this 10 million for ongoing CAPEX, we spent approximately 1.8 million in Q1.

The second bucket of CAPEX, expansion CAPEX, includes additional capital required to expand our cabinet capacity either for a new center or for expansion of an existing center in order to increase our total number of available cabinets. When we acquire a new center or expand an existing center, we’ll provide specific guidance on our expected CAPEX for that expansion.

For instance, when we acquired our new Santa Clara IBX, we stated that we expected to spend about 3-5 million in CAPEX. For the new Ashburn building, we expect to spend an additional 5 million of CAPEX in 2004 and another 5-7 million in 2005. This means for 2004, we expect to spend approximately 10 million in expansion CAPEX 3.1 million was spent Q1.

Next, moving on to our statement of cash flows. Our net cash generated from operating activities was 6.5 million. Net cash used in investing activities for the quarter was 5.1 million primarily related to 4.9 million of CAPEX in the quarter plus the reduction of $200,000 in our accrued property and equipment balance as we neared completion on our new Santa Clara center.

Once again Equinix was free cash flow positive for the quarter, generating 1.4 million of free cash flow. This is the third straight quarter we have been free cash flow positive.

Our net cash generated from financing activities in the quarter was 14.3 million. This is primarily the result of the net proceeds from our convertible debt offering offset by the repayment on our existing debt.

Finally, with respect to our equity capital structure, as of March 31, we had 18.1 million shares of common stock outstanding. Assuming conversion of our preferred stock as well as the outstanding convertible notes held by STC and the warrant associated with those notes, we would have had 24.6 million shares outstanding.

This concludes my prepared remarks. Let me now turn the call back to Peter.

Thanks for the full report, Renee. Now let me offer our view on the outlook for the Company for the full year and next quarter.

First for the year, we are increasing the lower end of the range of our revenue guidance to 156 million setting a new range at 156-162 putting a mid-point at 159 or year-over-year growth of 35%.

Cash gross margin for the total year will range between 45-50%. Cash SG&A and expenses will range between 42-44 million.

We continue to expect EBITDA to be in the range of 30-35 million for the year while CAPEX will be approximately 20 million. This includes an estimated 10 million of expansion CAPEX for our Santa Clara and our new Ashburn IBX.

Despite the increase in CAPEX for these expansion centers. The interest savings created through our convertible debenture offering continues to support a free cash flow expectation in excess of 10 million for the year.

Moving on to second quarter guidance, we expect revenues to range between 38-39 million with no expectation of customer settlements. Our cash gross margins for the quarter are expected to be between 45-46%. Cash SG&A expenses will range between 10-11 million. We expect EBITDA to be between 6.5-7.5 million for the quarter. CAPEX for the quarter will be approximately 5 million.

So quickly in closing, obviously we are pleased with the Company’s results as they certainly provide confidence in our full year plan.

Operator, let's open it up for questions.

Thank you, sir. Participants wishing to ask a question, simply press “*” “1” on your phone keypad. You will be prompted to record your name for punctuation purposes. To cancel your question, you will press “*” “2”. Once again to ask a question please press”*” “1” on your touchtone telephone keypad.

One moment as questions register please. And our first question comes from Tom Watts of SG Cowen.

Good afternoon. Actually, this is Jonathan in for Tom. I got a few questions, I am wondering a little bit about CAPEX going forward and I do appreciate the break out of normal ongoing CAPEX from expansion CAPEX. If you could kind of give us a view as to where normal CAPEX could be kind of on an ongoing basis and what your views are for expansion?

Additionally I am wondering if you could explain a little more about the new Ashburn facility just in relation to how you guys picked up the Santa Clara facility with the assumption of the leasing. Was it similar to that? Thank you.

Sure. First on the CAPEX, I just think you'll see from our deployment and current footprint and an ongoing CAPEX of $10 million. So that is pretty consistent with anything we’ve talked about historically.

And then as you’re seeing it break out for Santa Clara and Ashburn approximately 5 million each has been what the CAPEX expectation for those two facilities has been, so that’s the full impact for the year.

And Jonathan, just on your question about the Ashburn lease, it is similar to how we structured the new Sprint facility. We took an operating lease and did not purchase the [inaudible].

Great. Did you guys get rid of the restricted cash also?

What restricted cash are you talking about there, Jonathan?

Yes at the end of last year, you had some restricted cash.

Jonathan, there is just a little bit of restricted cash left on the balance sheet, but not much left.

I think that’s just some of the deposits we have on some of the existing centers. Still, that would just remain in place.

Okay. All right. Great and I also love the fact that you guys are given the weighted average utilization. Thanks a lot guys.

Sure. Hope that's helpful.

Thank you. And our next question comes from Tom Watts of SG Cowen.

Hi, this is Tom also.

Hey, Tom.

I got dropped here, so the Jonathan stepped in for me, but I managed to reconnect.

I think, we hit most of the issues. One I just wanted to say, with Savas (ph) having closed their acquisition of the Cable & Wireless assets, did you change -- give any changes in the market environment? And is there -- are there any other changes on the competitive front?

No other changes outside of Savas, but we now have seen them in some of our sales activity. Whereas, you know, clearly when Cable & Wireless was unresolved, they had more or less evaporated the market, so we are seeing them out there now.

And are they are pricing much more competitively?

I don’t have any specific comments it's all pretty new to us, but maybe, another quarter will give us an indication.

Okay. And then finally, just on the Equinix Direct, the new product there, is that something you would view as substantially revenue potential down the road, did I understand you are actually getting a share of bandwidth revenues that are sold through that?

Yeah. That’s how it works, I would call it a just a managed bandwidth capability, but on us, which would all these network reside, we are able to direct and settle bandwidth usage across the switch. We have actually patented the technology there, so you know, it’s a great value added add for our customers, but you know, it’s a nice additional service stream, but I don’t think you will see it as a significant percentage of our revenues overall.

Thanks very much.

Thank you, and out next question comes from Vik Grover of Needham and Company.

Hi, guys. How are you doing?

Good. Vic, how are you?

I was actually hoping that Renee could just repeat all of her remarks again.

Well, first question is for Peter, you said, you are seeing signs of a rebound in demand, instead of share shift you are seeing customers order more rapidly; can you give us a little more insight into what pieces of your business or what segments of your customer base are ordering more than others? Are they the web Companies? I mean, judging by the portals and dotcom stock prices these days, it would seem like they’ve got to be spending more. Or are you seeing the Fortune 500 step up?

And then as a follow-up question, I guess, for Renee, if you look at the incremental EBITDA margins, I get about 70%, now some of that was driven by your selling and marketing expense controls, but even if I assume that that was flat, there was 55%, how sustainable is that number and when do you guys think you will need to staff up further to drive growth in your sales organization?

Vik, I will grab the first one on the just new revenue sources, certainly the enterprise is the most evident in our bookings and pipeline now that wasn’t as prevalent before.

And so -- some of these are pretty major concerns, I did talk about the Asia deployments of just remote server infrastructure for remote applications as well as the corporate WAN going over there.

So, everybody from just a mainstream smokestack manufacturing-like Company to just a more technically-oriented enterprises are showing up. Of course, in the web space, we have always seen solid penetration there and anybody who is either doing infrastructure, of course, like an Akamai who is providing infrastructure services to those that are -- well, Postini is another interesting new win we have in that regard.

So, in generally -- generally I think the tide’s rising around all segments, but the enterprise is the newest element from a penetration standpoint.

Okay.

And Vik, on the SG&A line, we do think it is sustainable because, you know, it’s a 95% recurring revenue business and so a lot of that is locked and loaded every quarter. We just don’t seen the SG&A increasing very much quarter-over-quarter at all.

Well, when you talk about half of your orders coming from existing customers, how does that flow through? Are they calling you up and saying, "Hey, we want to do more business," or do you have internal reps that are going out and finding the incremental order?

Well both forms. We actually, you know, through our customer service team and even out helpdesk, customers can order more cross-connects or even additional cabinets that way. So, every quarter we have got a segment of that, although it's small compared to what the direct sales force is doing and so the direct sales force will be involved in a current customer application, perhaps, they’re moving to another centre to get to the networks there or disaster recovery and backup. So, the sales force is involved in a lot of the new customer orders.

Thanks a lot guys, great quarter.

Thanks.

Thank you and our next question comes from Andy Schroepfer of Tier I Research.

Hey guys, congratulations, this is a phenomenal quarter.

Thank you, Andy.

Thanks Andy,

Yeah, let's see, a couple just nuts and bolts questions. If you can give me the every quarter [aspirin] update on Secaucus, any update there?

Well, if you are looking for breakeven, it's over that.

It worked.

Yes, it works. That’s the good centre for us.

Is that one mega order like you had in Singapore or you just got a lot of --

No, no, I think that’s the beauty of it. Although it has, obviously, with us -- our financial focus and some of the enterprise applications we have seen, that’s been a good contributor in New York.

NASDAQ. And what would you say is the best market in the U.S. and the best market in AP for the quarter?

AP, I would say, our best market is Tokyo. We are seeing -- obviously, as we serve multinationals, the whole theme of making Asia easy, certainly a lot of U.S. Companies have a high influence there and we are doing particularly well there.

And then in the US, our 3 most successful markets with Ashburn now -- excuse me with, I'd say, New York closing in or San Jose, Virginia, Chicago, and now momentum in New York, those markets are doing real well.

Andrew Schroepfer On the government side, I know you guys are having some traction there. Since you addressed the fact that margins are the same, is it fair to assume that the deals there are all on the larger end of your average scale still?

No, we do have one agency who has got a pretty big deal with us. But other agencies are smaller deals. So, it probably looks like the rest of our customer set.

Does that looks like an opportunity where you would have a formal government sales team or is that how you already structure it?

Well, yeah, we have already structured specific focus there from a management and sales team standpoint. Depending on how we do, we might size it differently over time, but right now it seems like it's working pretty well.

And just in terms of customer perception, would you say there is any meaningful differences in the last 6 months as you, kind of, completed the balance sheet restructuring, any meaningful difference in the way customers are looking at you in terms of just a much higher stature or higher professional, higher capable Company, have you noticed the difference in the way customers are treating you and looking at you?

A big absolutely to that one. It’s just I think, Renee even mentioned in her script that it's become a sales tool and it's just kind of nice to say that we have one of the strongest, if not the strongest, balance sheet in the business.

So, clearly that has been meaningful and even though the start of what happened at the beginning of '03 as we got the first major step of our restructuring down, we just saw a continual better booking quarter over quarter over quarter and so, you know, bookings have been -- are as strong as they have ever been in the Company’s history and I think that was a big factor.

Excellent. And how has headcount changed in AP since you did the acquisition?

Well since the acquisition it’s been reduced dramatically because, obviously there were two Companies involved there; two separate headquarters obviously, there is a regional headquarters versus the Company’s headquarter. So I haven’t looked at those numbers in a while but it was certainly reduced dramatically there.

How many are in AP now?

About 125ish, 130.

Total for the Company at the end of the quarter?

440.

Ah so, well keep up the great work. It’s just phenomenal, good job.

Thanks, Andy.

Thank you. And our next question comes from Mitch Perkman (ph.) of Apex Capital (ph.).

Hey Peter, how are you?

Hi Mitch, how are you?

Question, the 34.5 million of recurring revenue -- can you break that down for me by co-location and interconnections, are you still doing that?

We will do it in the 10-Q. I think it’s pretty consistent with previous quarters, where you’ve got just over 70% of it is going to be the co-location, interconnections about just under 20% and the rest is managed services.

Okay, so that’s being – that’s kind of consistent.

Yeah.

Yeah.

Okay, and when you talk about CAPEX going up because primarily from expansion CAPEX, correct am I to understand that total CAPEX for you is going to run around 20 million including ongoing and expansion CAPEX?

Yeah, that’s correct, Mitch.

Okay, but part of that you get back from the customers so what -- I assume that’s for the expansion CAPEX right?

No, it is CAPEX. We are getting that back from the customer. We will do what a particular build for a customer. I may need some help from Renee or Keith here. But we will do a specific build for customer where we will be putting out cash and getting that back. But within -- that 20 million, we won't see that coming back from the customer.

Okay. So, that’s a net number even after any kind of reimbursements?

No. That’s a gross number, so from that, so for instance, our ongoing CAPEX number, Mitch, is the 10 million?

Right.

Of that we typically see somewhere north of 20% being reimbursed.

And where does that show up? Is that in the P&L under services or is that flow through some other way?

That’s in the NR or the non-recurring revenue, that's when you see our installation revenues.

I see, okay.

That’s where is it.

Okay, okay. Also, how long are your NOLs effective for, how long are we going to go before not paying any taxes or before paying taxes?

I think on the last call, we gave some visibility on this tax issue. For the most part, we have the acquisition of STT back at the end of '02. The NOLs were effectively wiped out at that point. We have the NOLs from last year and I think the guidance we gave on the last call was for '04, we expected to have taxes -- income tax of about $500,000 for the year.

Okay but do you start paying taxes in '05 or '06 or how much longer?

I don’t know. I think, the guidance we gave before was related to '05, we are confident we are not going to be taxable, you know lot of it depends on what the stock does because you get the deduction as the stock increases on your stock options out there. So the only tax we are expecting in '05 as well is just AMT of I think about the same amount the $500,000.

Okay, alright.

It is something we obviously are very focused on continued (ph) advantage.

Okay, lets see. One other question. Are there any kind of issues with respect to the amount that the Singapore Company owns of Equinix that might limit your ability to sell to our government?

No, actually we can give you just a little color on that. We didn’t receive even a review around that, around our transaction, but certainly these are the Singapore folks, STT were the ones who have acquired [inaudible] crossing but there was a very significant study about that because of such a large U.S. asset there and they have got full clearance about that at that acquisition. So no concerns in that regard.

Okay. Great. Thanks. That’s all I have.

Thanks.

Thank you. And we have time for one more question and the next person on our list is Bill Calvert (ph.) of Lehman Brothers.

Congratulations on the great quarter. Could you just give us a little bit of color on the new business front in terms of maybe the number, I know, you can't discuss the specific names, but just in terms of activities the inquires you are getting and maybe the potential size of customers and also if you are using any new customers, in your year assumptions?

Well every quarter we are seeing a set of new customers that, you know, its pretty consistent of late in the range with this quarter. We had 82 new ones this quarter, so you know, at any given time in our guidance in our just view into the future, the visibility of the pipeline and then bringing those customers on board plays an important part, so they are there of course with the strong bookings we get out of the internal base, through their expansion that gives us an even higher level of confidence on just how much growth we are going to see going forward.

So, you know, great visibility in the model as we have always said, so you always want to be bringing in these new customers every quarter that then you gives you a bigger base that, then which obviously with half of that base already new services its just increasing the growth opportunity. That was kind of a broad answer, was there a specific question you have [inaudible].

If the level of new business activity any significantly greater than it was maybe a year ago or some thing like that.

Well absolutely greater than a year ago. And as I think I said a while ago, on one of the other questions. We just saw our new customer bookings increase quarter-over-quarter through out last year and lot of this I am sure was related to trust in the financials of the Company as well, but everything from our business model to I think a little momentum coming into our market a number of contributing factors there. So the Company is enjoying the best bookings that we’ve seen frankly in our entire history since we got started in '98.

Thank you very much.

Great. Well thank you all.

This concludes our conference call today. Thank you for joining us.

Thank you participants. You may disconnect at this time. This does conclude today's conference call.