Equinix Inc (EQIX) 2004 Q3 法說會逐字稿

Hello, and welcome to the Q3 2004 conference call. This call is being recorded for replay purposes. Today's presentation would be in a listen-only format. Following this presentation, there will be a question-and-answer sessions. Instructions will be given if you would like to ask a question at that time.

I would now like to introduce today's host for today's conference call, Mr. Jason Starr, director of investor relations. Sir, you may begin.

Good morning, and welcome to Equinix's third quarter results conference call. Before we get started, I would like to remind everyone that some of the statements that we'll be making today are forward-looking in nature, and involve risks and uncertainties. Actual results may vary significantly from those statements, and may be affected by the risks we identify in today's press release and those identified in our filings with the SEC, including our quarterly report of Form 10-Q, filed on August the 2nd, 2004.

In addition, we'll provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures, and a list of the reasons why the Company uses these measures in today's press release, 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 Office. At this time I'll turn the call over to Peter.

Thanks, Jason. Good morning, everyone. It certainly is early out here on the West Coast. We thought we might try this in response to a number of requests we've had from investors back East. My apologies to those of you out here, and we'll see how this goes.

As I imagine most of you on the call this morning have seen our press release, the third quarter was another great one for Equinix. Third quarter momentum and metrics were all in line with the success we've been seeing this year. So I'd like to just quickly hit a few of the highlights and turn it over to Renee to cover the underlying specifics. Then I'll come back to focus on what we see evolving over the course of next year. So let's get to the Q3 highlights here.

Total revenue for the Company was $42.4 million. This represents a 57 percent increase over same quarter last year, and an 8 percent increase over Q2. EBITDA was $10.1 million, which compares to $1.4 million the same quarter last year, a 34 percent increase over Q2.

Cash gross margins were 51 percent, up strongly over Q2's margins of 48. We had another great bookings quarter, and matched our best-ever 87 in new customers, including Bank of Nova Scotia, Force 10, Korea Telecom, Sony Corporate, and Tower Insurance. We complemented the new accounts with strong orders from the base, as current customers contributed approximately 80 percent of our new booked MRR. We ended the quarter with 896 customers.

One other important highlight, our Asian operations demonstrated we're on target for our year-end objective of EBITDA break-even in Asia. Now, I would ask Phil Koen why he couldn't have sold just one more customer to put EBITDA over the top for the quarter, but I should note there were some one-time events that benefited this result, yet clearly a sign of great progress in Asia.

With those highlights, let me turn it over to Renee again to cover the specifics for the quarter, and then I'll come back to provide some color on our growth and outlook for the remainder of '04 and into '05.

Thanks, Peter. As I go through our results, consistent with past calls, I will provide our results on both a cash and a non-cash basis. As a reminder, our non-cash costs include depreciation, amortization, accretion, docked base comp and non-cash interest expense. Attached to our press release, and posted on our website, behind our GAAP P&L statement is a non-GAAP cash-based P&L statement.

Starting with revenues, as Peter mentioned, Q3 revenue was $42.4 million, up nearly 8 percent over the previous quarter, and up 37 percent over the same quarter of last year. The core of our business, our recurring revenues, was $40.1 million, a sequential 7 percent increase from the previous quarter, and a 41 percent increase over the same quarter last year.

Recurring revenues, meaning revenues for co-location, interconnection and managed services that we collect every month, represented 94 percent of total revenues for the quarter. Non-recurring revenues for the quarter were $2.4 million, and were derived primarily from installation fees and professional services. This included a small one-time settlement of approximately $100,000. This compares to a $2.2 million of non-recurring revenues the pervious quarter.

Breaking out the revenues between U.S. and Asia, approximately 87 percent of our revenues came from our U.S. centers, while the remaining 13 percent was derived from our centers in the Asia-Pacific region. Revenues from our U.S. centers were $36.8 million, up 8 percent from last quarter. Revenues from our Asia-Pacific centers were $5.7 million, up 6 percent quarter over quarter.

One customer, IBM, represented 13 percent of our Q3 revenues. This is down from 14 percent last quarter. Though this percentage has been declining slightly on a quarterly basis, IBM continues to grow with us each quarter in terms of actual dollars, just not as fast on a percentage basis as the rest of our business.

No other customer accounted for more than 5 percent of our revenues.

Now moving on to churn. As a reminder, we calculate churn two ways, cabinet churn and monthly recurring revenue, or MRR churn. It is important to point out that cabinet churn and MRR churn will not necessarily coincide each quarter, as MRR churn includes all services provided, while cabinet churn only relates to the loss of the cabinet. With respect to cabinet churn, again, we calculate this based on the number of cabinets returned to us by our customers in the quarter as a percentage of the total cabinet booked at the beginning of the quarter. In Q3 we had less than 1 percent cabinet churn for the entire quarter. With respect to MRR churn, again, we calculate this based on the amount of MRR churned in the quarter as a percentage of total MRR booked at the beginning of the quarter. In Q3, we had just under 3 percent MRR churn for the entire quarter, or 1 percent per month. Going forward, we continue to believe that churn, both on a cabinet basis and an MRR basis, will approximate less than 1 percent per month, or less than 3 percent per quarter.

Moving on to gross profit and cash gross margins, the Company recognized a gross profit of $8.1 million for the quarter, compared to a gross profit of $5.3 million the previous quarter, and a gross loss of $2.4 million for the same quarter last year. For the quarter, gross profit margins improved to 19 percent from 13 percent the prior quarter.

With respect to cash gross margins, they increased to 51 percent from 48 percent last quarter, and 36 percent the same quarter last year. On a regional basis, U.S. cash gross margins increased sequentially to 53 percent from 51 percent the prior quarter, while our Asia-Pacific cash gross margin increased to 39 percent from 29 percent prior quarter.

On utilization rates, we had approximately 24,500 cabinets for sale, including the cabinets that are expected to come online from our recently acquired Ashburn center. As noted in last quarter's call, following the acquisition of this building, approximately 80 percent of our cabinets are in the U.S., with the remaining 20 percent in Asia-Pacific. At the end of Q3, approximately 10,750 cabinets, or about 44 percent of our total cabinets, were billing. This compares to 10,100 cabinets or 41 percent that were billing at the end of the previous quarter.

On a regional basis, our U.S. centers had approximately 8,400 cabinets billing, or 43 percent at the end of the quarter, while our Asia-Pacific centers had approximately 2,350 cabinets billing, or approximately 47 percent at the end of the quarter.

Breaking out utilization on a weighted average basis, meaning calculating the utilization rate taking into account when in the quarter cabinets started billing, our utilization rate was approximately 43 percent, or about 10,500 cabinets billing on average in the quarter.

Looking at average revenue per cabinet on a weighted average basis for the quarter, our average monthly recurring revenue per cabinet increased to $1,270 from $1,254 in the previous quarter. This upward trend is one that we anticipated after absorbing the full impact of the IBM Singapore deployment in Q2. On a regional basis, revenue per cabinet on a weighted average basis was $1,418 in the U.S., and $752 in Asia.

If you're still tracking our average revenue per cabinet by simply dividing the recurring revenues for the quarter by the number of cabinets billing at the end of the quarter, you will see a total average monthly recurring revenue quarter over quarter increase slightly to $1,242 from last year's $1,241.

As a reminder, these metrics, while important, can fluctuate during a given quarter due to a large customer deployment or termination that happened at the end of the period. Again, with respect to pricing, overall we continue to see pricing remain stable.

Moving on to SG&A expenses, our SG&A expenses were $12.7 million for the quarter, a 2 percent increase over the previous quarter, and a 7 percent increase over the same quarter last year. Cash SG&A expenses for the quarter were $11.7 million, a 4 percent increase over the previous quarter, and a 19 percent increase over the same quarter last year. This increase primarily relates to a charge for costs related to the liquidation of Legacy Subsidiaries in Europe, as well as additional sales comp from increased bookings. Additionally, the Company continues to incur additional costs related to our Sarbanes-Oxley compliance initiative, as this initiative continues to impose additional costs on Equinix as a public company, both in the form of outside professional fees for auditors and other Sarbanes advisors, as well as internal costs as teams throughout the organization are being required to devote a substantial amount of time on this initiative.

Moving on to other metrics, for those of you tracking us on an EBITDA basis, we were $10.1 million EBITDA positive for the quarter, a 34 percent increase over the previous quarter, and an $8.7 million improvement over the same quarter last year. This result represented a flow-through rate on incremental revenues to the EBITDA line in excess of 80 percent in a quarter.

On a regional basis, the U.S. operations were EBITDA positive, $10.1 million, up from $8.4 million positive last quarter, or an increase of 21 percent. As Peter mentioned earlier, Asia-Pacific was ahead of schedule and largely breaks even for the quarter at -$28,000, a 97 percent improvement over the previous quarter.

Please note, however, that Q3 did include some non-recurring settlements and adjustments without which Asia-Pacific would have had an EBITDA loss of approximately $180,000.

We continue to expect the Asia-Pacific region to meet its EBITDA break-even target by year's end.

Our net loss for the quarter on a total company basis was $6.6 million, or 36 cents a share. This is a 28 percent improvement over the prior quarter, and a 66 percent improvement over the same quarter last year.

On a cash basis, we had cash net income of $9.7 million, a $2.5 million improvement over the prior quarter.

Turning to our balance sheet, as of September 30th, we had $98.8 million of cash, cash equivalents and investments. This is a $6.4 million increase over the previous quarter, led by a strong 23 percent quarter-over-quarter improvement in our operating cash flows. Our company-wide GSOs 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 $7.6 million. Consistent with last fall, we will break out our CapEx into two buckets. The first bucket is ongoing CapEx, which is capital deployed for normal ongoing CapEx needs at our existing centers, such as cabinet and cage materials to support customer installation, much of which is reimbursed to us by our customers in the form of installation fees, as well as things as circuit panels and electrical installations, and capital to support corporate headquarters.

The second bucket is expansion CapEx, which is capital deployed to expand our cabinet capacity for additional revenue growth in existing and newly-acquired facilities, such as our new Ashburn building.

During the quarter, ongoing CapEx was $2.5 million. Expansion CapEx was $3.6 million, primarily attributable to the Ashburn expansion. An additional $1.5 million was spent in Q3 for the custom U.S. government expansion order we discussed on our last call, which is now three-fourths complete. Again, the U.S. government reimburses us directly for these costs in the form of installation revenue.

Next, moving on to statement of cash flows, our net cash generated from operating activities was $10.9 million. This represents a quarter-over-quarter increase of $2 million. Net cash used in investing activities for the quarter was $5.5 million, primarily related to $7.6 million of CapEx in the quarter, offset by $2.1 million increase in our accrued property and equipment balance related to our new Ashburn IBX build-out. This translates to a $5.4 million free cash flow in the quarter, and represents a $2.1 million improvement over the previous quarter.

Our net cash generated from financing activities in the quarter was $1 million.

Finally, with respect to our equity capital structure, as of September 30th, we had approximately 18.4 million shares of common stock outstanding. Assuming conversion of our preferred stock, as well as the outstanding convertible notes held by STT and the picked notes and warrants associated with those notes, we would have had about 25.4 million shares outstanding. I'd like to point out that after 12/31/04, Equinix has the right to convert 95 percent of the convertible notes held by STT upon conditions, including if the closing price of our common stocks exceeds $32.12 per share for 30 consecutive trading days, and if the registration statement for the underlying shares is declared effective by the SEC.

Given the stock's performance, we will be filing a registration statement in the next few weeks in expectation of being able to force this conversion. Given that these notes are picking at a rate of 14 percent, we do firmly believe that it is in our stockholders' best interests to convert these notes as soon as possible. By converting these notes at the end of Q1 2005, we would be able to avoid further picking on these notes, which would save the Company and its stockholders from the issuance of an additional 1.8 million shares that would have otherwise been issued through the remaining term of the convertible note.

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

Thanks, Renee. Obviously another solid quarter which shapes '04 as quite a year for us.

Let me tie out the full year and for the sake of just time on this call I will let everyone do the quick math to break out Q4. To summarize, full-year revenue is expected to be in the range of $162.5 million to $163.5 million, which at the midpoint is an increase of $1.5 million from last quarter's call, and a 38 percent growth year over year.

EBITDA for the year is expected to be between 34.5 and 35.5 million. Cash gross margins are expected to be approximately 49 percent. This includes our new Ashburn expansion coming on line in the quarter. Cash SG&A is expected to increase to a range of $44.5 million to $45.5 million, up a million from the midpoint provided on our last call, primarily due to the cost related to liquidation of the Legacy Subsidiaries from Europe, as Renee note; also, additional sales compensation as a result of increased bookings and expenses from our Sarbanes-Oxley efforts.

CapEx is expected to be in line with previous guidance of $22 to $23 million, including approximately $10 million CapEx and $2 million to expand an existing U.S. government project, as noted on our last call.

So of course with just a quarter left ahead of us in '04, the visibility we always speak to begins to give us a fair amount of insight into '05. So let's talk about out outlook for next year, and then I'd like to provide some color on the trends and our efforts planned to support this.

Let's begin by looking at growth. As you may have seen in the morning' press release, we are projecting revenue to range between $200 and $210 million. Clearly we're targeting another year of continued momentum and strong growth. As these numbers once again will outpace any published view of the market opportunity, it's worth some time to highlight the factors that support this.

First, the ones you're all aware of, the recurring nature of our revenues and how with low churn this sets up a solid base to build as we exit '04. Q4 bookings and backlog, which when installed will build over the course of next year; and, finally, new customers added in '05 and the continued strong contribution to the existing customer base to new booked MRR. As noted earlier, approximately 80 percent of new booked MRR came from our installed based in the third quarter. Of course, 87 new accounts and a strong pipeline will further expand this base for future quarters.

Second, our execution is still essential in our efforts. We continue to see our opportunity expanding, particularly in the enterprise sector. In fact, enterprise recurring revenue has grown 50 percent year over year. As we always pointed to the leading content and network companies as key names in our customer base, let me just give you a sense of some of the enterprise customers that have joined us in the past year. AT Kearney, General Mills, Goldman Sachs, J. Walter Thompson, Merrill Lynch, Sony, Tommy Hilfilger, Trammel Crow and Washington Mutual are just a few.

Networked and IP-based applications will continue to expand in the enterprise, and as that happens we see this as an important opportunity that has already shown itself to fit well within our network-neutral model.

To accelerate our growth in the enterprise segment, we will specifically invest in sales and marketing resource in support of this. This will include a vertical marketing effort, as we've seen great success from the release of FX, our service bundle targeting the financial sector, we believe we can replicate this across a number of other verticals.

Clearly we recognize enterprise as an important growth sector for Equinix in '05. What's also interesting about these customers is that they have a broader set of needs compared to our traditional base of network and content customers. We will continue to take a hard look at opportunities for us to provide other service stats to these customers in the future.

Third, we expect the industry environment we operate in to continue to benefit us. Key competitors are still trying to find a footing in this business, while we feel our focus and ability to execute remains unmatched. As we mentioned briefly on our last call, our neutral model and the fact that so many networks are already deployed in our facilities has created a number of interesting conversations of the resell nature with key industry players. As noted on the last call, we had just become the preferred co-lo provider for Sprint. In the third quarter we saw wins from our relationships with Sprint and as well as Qwest and Internap. In addition, we've completed a reseller agreement with AboveNet, as their metro fiber connectivity sits in five U.S. markets with us today. Again, we are a perfect fit for their sales team to offer our services to their customers.

So, to net it out for '05, we believe our growth will be driven by the inherent nature of our recurring revenue model, strong customer base contribution, continued new customer acquisition, particularly in the enterprise segment, all taking place in a market environment that continues to benefit us. In fact, we believe the pathway has developed for Equinix to pursue the market leadership position in this business. And as at team, we're committed to it.

As we said in the past, and in pursuit of market leadership, we do believe there are still smart opportunities to expand our headroom for growth. We will move quickly in certain markets as attractive deals may not always exist. Of course any moves in '05 will increment our expectation for capital expenditures. Yet, just to draw comfort around the value of investments like this, I thought it might be worthwhile to just take you through the rationale around our Ashburn expansion.

Let's just look at some of the numbers here. First, the building itself, current capacity in the building supports approximately 2,500 cabinets of new inventory. Of course, as we've guided in the past, we model the business around an 80 percent long-term utilization or 2,000 cabinets in this case. If you take our current U.S. average of $1,400 per cabinet, this would translate to a monthly revenue expectation of $2.8 million in the long-term model. Now, as most of you understand, the bulk of our costs in running an IBX relate to rent, people and power. As we now have a lot of experience across our markets, we provided guidance that cash gross margins in our long-term model would exceed 65 percent. So this is expected to generate approximately $1.8 million in cash gross profit per month, at an 80 percent utilization level.

So as we look at a building capable of generating over $20 million of annual contribution, largely falling to the EBITDA line, and with only a $10 to $12 million investment in expansion CapEx, deals such as this make tremendous sense to us, as we don't believe that spending a significant amount of CapEx for new builds is attractive while these types of opportunities exist. Granted, we need to fill this building, yet it's our customer demand and momentum that's driving these acquisitions.

We should also remind everyone there's some operational burn until break even that should be considered with the CapEx. This will impact our flow-through percentage in the near term, which I'll outline in a moment, but at our more mature facilities, such as the existing Ashburn or San Jose IBXs have proven, achieving these attractive returns and cash flows is something we feel very good about.

So now let's take a specific look at guidance for '05. Of course again revenues are expected to be in the range of $200 to $210 million. Cash gross margins are expected to be between 52 and 54 percent. Cash SG&A is expected to range from $48 to $50 million, which includes additional investments in our sales and marketing effort, along with additional resources in IT that will support the scaling of the Company as well as maintaining our Sarbanes-Oxley compliance.

EBITDA is expected to range from $56 to $61 million, which includes a full-year impact of approximately $6 million of additional costs of revenues from our new Ashburn expansion. I should note that these numbers represent a EBITDA flow-through of 56 percent, which doesn't absorb the full-year impact of the Ashburn expansion. Excluding this, our EBITDA flow-through would have been approximately 70 percent.

CapEx is expected to be between 18 and $22 million, consisting of $13 to $15 million of ongoing CapEx and $5 to $7 million of expansion CapEx for the remaining build-out of our latest facility in Ashburn. Free cash flow is expected to be greater than $36 million.

As a number of you have asked, we are expecting to become net-income positive by the fourth quarter of 2005. This excludes the impact of mandatory expenses of stock options. However, this time line would be accelerated by at least a quarter upon the conversion of STT's convertible secured notes in '05, provided that stock trades at $32.12 for 30 consecutive days.

So, as you might guess, we are very excited about where the Company sits. We truly do see this pathway to market leadership, and with continued strong execution and making the right investments to win, we look forward to driving Equinix towards this goal in 2005.

So that's it for the prepared comments, operator. We can turn it over to questions.

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS.)

Tom Watts, S.G. Cowen.

Very nice results from the quarter. I just wanted to clarify a little bit on the pre-cash flow profile and the closer margins. I think you said that $5 to $7 million of expansion CapEx for '05 was just for Ashburn. And that implies that if you were to find other opportunities like that to expand that we would see CapEx on top of that. In what range do you think about that? And also, and parallel on the EBITDA margin side, are we going to see particularly operating expenses in the $6 million range for each incremental data center we would get? And does that suggest that longer term we should look at flow-through margins in the lower range, like in the 50s as opposed to 70s?

Just probably the last part of your question first, Tom. I mean, the flow-through is all about timing, right? And so although the impact of Ashburn on a full year is a 6 percent flow-through for the year, as we're past the first couple of quarters, the flow-through percentage here again just very strong. So any time we'll do one of these buildings of course as you might guess it does kind of reset the cost base and then flow-through picks up again to be very, very attractive. Not that 56 percent is bad, by the way.

I don't have specific numbers on CapEx for other buildings. You know, each of these deals will be different obviously. But you know I think we're going to continue to be very smart about the right buildings and the best proposition for you when we do those. I think as we've been public before, you know, the markets that we'll consider opportunities are still strong ones, like Chicago is one that we've noted in the past. We've had great momentum there. We still have some headroom to grow, but obviously that's one that's on our radar screen to focus on. And then the Silicon Valley just continues to do very well for us. And so, you know, at least to give you some sense of sizing, those are two areas that we think about in the '05 timeframe. So maybe that helps a little bit at least.

Okay, and just a second question and then I'll turn it over. On the acquisition front, in the past you've talked about possibly returning to Europe. Any updates what the market looks like there, and opportunities? And are there any other network-neutral operations in the U.S. that could be attractive, where you would be acquiring operating companies as opposed to just real estate?

Well, again, I wouldn't give you any comment specifically on any acquisition opportunity or plans there. You know, I will say we continue to look at Europe. I know you've heard that point from me before, but it's an ongoing active project, and we'll continue to look at it. And when we feel the right time, with the right deal of course for investors would take place, we could possibly enter Europe. But, again, no comment beyond that.

Michael Rollins, Smith Barney.

A couple of questions. First, in the 10-Q you typically provided segment revenue of interconnection, I think managed services and then what's left for the recurring service revenue. Do you by chance have that on you ahead of the Q? And then the second question is could you describe -- you've been marketing I think a wider array of GigE and expanding the GigE exchange sort of off-networked to some of the facilities in New York, for example. Can you talk about how that's going and how you see those products benefiting revenue in the third quarter?

Sure, Mike. In today's press release I think there's a break-out for you on the percentage of revenue coming from our interconnection services. There's about 20 percent in the quarter. So you should have that data there in the press release. Also, I think the break-out on cross-connects, et cetera, will be there for you.

And, Mike, when you break it down by region, roughly 95 percent of the interconnection revenue comes from the U.S., with the remaining 5 percent in Asia.

And do you have managed services, by any chance?

Again, on the managed services side, roughly 80 percent of it comes from Asia and 20 percent of it comes from the U.S.

What was the total for managed services?

Total managed services would be in the range of $2.7 million for the quarter.

And just in terms of the products themselves, beyond the volume numbers that are in the release, are you seeing progress and interest in extending the fabric of the GigE sort of off the Equinix network? And how does that continue to evolve over time as you get more customers taking the service?

Well, we've actually had five new customers come into the building in New York at 111 Eighth, so we feel pretty good about that. As I said on the last call, these are going to be specific opportunities in individual markets. But that feels good so far. But if you look at one switch, you know, I wouldn't be changing guidance around that specific opportunity. And we may do more around it, but I think overall it supports our just success in interconnection business. And you know currently there we've got 140 different customers that are on our exchange switches today. We're talking about 42 gigs of traffic across the switches. So that whole area continues to be a strong contributing area to growth. But you know I think the 111 Eighth project is just a complement to that overall momentum there.

And if I could just follow up with one last question. I realize your churn rate is fairly low in the U.S. to start with, but if you were to analyze customers that take the cross-connects or the GigE versus customers that don't, do you see even a further difference in retention to those that take the products?

Well, I guess that's fair -- logically that's fair. But retention of customers has been so strong across the customer base that to break out any trends differently between one and the other would be tough to do. I mean, as we've said in the past, if we've lost the customer it's either the application itself has changed or it's a -- you know, maybe a financially less healthy company that has just pulled back. But the reality is we just don't seem to lose customers for any competitive reasons, and as a result I don't think you're going to a see much different trend in the number of cross-connects. Logically I agree with you though, it's because of all the interconnection that's going to keep people sticky.

Vik Grover, Needham and Company.

Great quarter. I haven't talked to you guys in a while. I guess just two questions. A lot have already been asked and answered. Are there any areas of the market that are running out of space? For example, we're hearing that London is getting a little tight in terms of some prime real estate for co-location. Is there any -- can you confirm that? And are there any areas in the U.S. where it looks like the supply-demand might be becoming somewhat of an issue?

And I guess another question is you talked about new customer booked revenue, 50 percent was derived from new customers outsourcing applications for the first time. I was hoping maybe you could elaborate a little more on that. Maybe if you can't name customers, maybe you can name sectors, or what are these customers saying if this is the first time they've ever outsourced their data center needs or the like? Thanks.

Sure. You know, on the first question, one comment on London, because I don't have the full depth of understanding there. But I will tell you we were very pleased to get our Ashburn, Virginia facility, because as I look at that market, you know, that's one that certainly didn't have a lot of opportunity beyond that building. There were other interested parties in that building. So we feel good about picking up a building of that size and scale and the headroom to grow there.

From a new customer acquisition standpoint, obviously we've talked about the enterprise. Clearly the financial sector continues to be very strong with us, and our FS product particularly in Chicago as more people who want to interconnect to the financial exchange have come on board. Don't have an exact count offhand, but I know we signed a number of new customers in that specific one. But then beyond that it's across a number of different markets that we see people coming on board, you know everything from manufacturing to the service sector to insurance. And so, you know, again I believe that's just a good sign of more network and IP-based applications coming to the forefront. And again the neutral model just at a base level from business continuity having network diversity to the increased impact of just being able to acquire bandwidth at a best market rate, or even peering for anybody who's driving any significant volume.

You know, maybe a great trend we'll hopefully continue to see was our relationship with Sony as we are calling Sony Corporate this quarter a new account for us. Of course we've been doing business with Sony Online for a while, because Sony Online has obviously been a big peering customer for all their online gaming. But you know that relationship has been a good one, yet we've proven ourselves through that relationship. And what's interesting to me now is that Sony has recognized across the corporation that doing more network-based applications and co-location being an important part of how they address that, we now want a deal with Sony that is about serving Sony across the divisions -- some very unrelated to peering or consumer content for the Internet.

Okay, I guess one other question: Can this model be taken effectively to smaller markets, or do local and regional markets -- you know, I guess maybe the tier 2, tier 3 market -- will those be dominated by CLEX or ILEX or local carriers that will then interconnect with your facilities at major hubs?

Or for the enterprise opportunity, and even regional guides geographically that might be in other markets, network neutrality is still extremely valuable. The one thing about second tier markets or other markets there is that you don't have the opportunity to create the level of concentration of networks that you do in these markets that we sit in today. You know, back to the early vision of the Company, the markets we're in clearly represent key points of IT intersection on all the major backbones and where access networks pick it up. So you won't see the level of network customers in other markets, but there is clearly a wide net, and as the enterprise continues to pick up momentum in doing network applications, a lot of those guys will be closer to their headquarters and network diversity alone is a great deal of value versus only having access to a CLEX network or a carrier's network who might be in that location. Neutrality is still extremely important, and we see that in our enterprise momentum right now.

Thanks a lot guys, great quarter.

Andrew Schroepfer, Tier One Research.

Congratulations, you guys, another great one. Absolutely, so it's said on the partnership side it looks like you're having a number of opportunities on large-scale potential reseller relationships with big-name players. Is there a formal program you have in place for reselling or a leader for that group in those opportunities?

Well, we just recently defined that, and we've done it through the sales channel, and of course we've had a very focused team on the networks themselves, and they kind of picked that up. But we've now seen that this is a good solid opportunity for us that we want to put the right expertise in it and the level of focus in it everyday. So even as I talked about some of the team investments we're making as we go into '05, we'll be making sure we have the right level of resource on these reseller relationships.

And you've mentioned Qwest. Is that potentially a strategic relationship, or is that more tactical with what you've done to date?

That one was more tactical with what we've done to date. It was just a great example though, is because you know our team is out in the field next to all these reps, and as a lot of these guys who have been in this business have kind of either shrunk their focus on it, or gotten out of it entirely, these relationships at the field level are in play, and that generates activity, and we just again see more of that coming as well. So anywhere we see an opportunity to obviously mine a lot of return, we will look to put a formal structured reseller relationship in place.

All right. It would be Qwest's smartest thing to do, would be to partner with you guys. So let's see next one --

Why don't you give them a call?

Weekly.

Let's see, on new services, you seem to be more suggestive about adding more services. So maybe give us what your criteria is on what you would look to roll out first. Is it services for a particular customer set, a particular region, or a particular margin profile? Any thoughts on how you're going to look at what you're going to roll out first?

Well, it, and just to even draft off of some of what we already have in place in Asia, these will be the basic functions about managing a website, or even just the IT infrastructure that an enterprise customer may put in place for us. And you know as we're looking at it, Andy, clearly this network customer base, as well as these content guys who have been the sweet spot for us, they just had obviously all the best engineers, obviously the best expertise to manage their environment. But as you branch out from that, you know the basic things that -- it just make sense to share our expertise, and you know our resource, are where we'll focus. So it's again managing the basic things of security, storage backup, monitoring the site -- kind of the bread and butter of running an environment that will take some of the load off of an enterprise customer, and obviously give them better economics, because they can share a central set of resources like ours. So those will be the areas that we'll look hard at as we bring more and more of these enterprise customers on board.

Now, what I will say is that we still don't want to be, you know, the application guy that's managing Oracle and SAP and PeopleSoft and those things. You know, I don't want to get into IBM space and where that piece of the business is going. We feel like guys like IBM will be better at that than us for sure.

And two other things. One, if you can just confirm on European opportunities, you do not have an exclusive with interaction, do you?

No, that's correct, not exclusive.

And do you have anything formal with any other players, then?

Nothing formal, no.

Okay. And then finally, on Ashburn II, can you say what part of your '05 revenue guidance you're planning on from Ashburn II and just confirm when you're expecting to have first revenue?

No, probably not. I don't want to start breaking out all the buildings, Andy.

You're assuming a contribution from Ashburn that's more than 0 in '05?

Well, I'll give you that for sure.

And is it in '04 that you'll generate any revenue there?

Unlikely. It won't be material, if it does.

Sounds good. Thanks a lot, guys. And tell Phil great job in Asia too.

I will do that.

Hampton Adams, IRG.

Just two questions. First, could you just clarify the whole STT conversion issue? Should we assume if you guys do do this transaction that we'll need to add 7 million shares in the first quarter, and any other impacts as we go out into the future?

And then the other question would be on the vertical market opportunities. You guys have done a great job in the financial sector, but you've mentioned other verticals. Could you give us just sort of a f eel for when you can see some benefit from those efforts in other vertical markets?

Look, Renee is pulling out the specific cap table right now. I'll let her field that, and go ahead and take the second question first.

The one right off the bat intriguing to me is just digital media distribution. You know, we're starting to see more software companies and things of that nature as customers, but also whether it be music, video, any of these guys that are out there, you know, this has been a sweet spot for obviously the content distribution guys. But what's interesting about it, just like it plays in our centers today for other applications, peering is the best economic and best-performing solution for that kind of opportunity. And so that's one right out of the gate that we'll spend a lot of time in. But then other areas such as travel, we even see in retail we begin to pick up as a target area where we're seeing customers. Yet we've have no focused, formal plan around it. So clearly vertical marketing is about just leveraging current success in applications we have, but also targeting the best ones that fit our business profile. So those are just some right out of the gate that are on the list.

And how long before you think you'll see some success in those areas? I mean, just to understand how fast it takes, how long it takes to develop the growth of markets?

Well, I won't give you a prediction. Our thinking is in our guidance next year though.

Okay, and then the STT?

Yeah, let me see if I can just give you some color on that. So we've got the 18.4 million outstanding today. The number that I gave which assumes conversion, that's conversion of both the preferred stock that they have, which is already registered -- it's been registered for some time, about 1.9 million shares; and then the remainder is the shares that would be converted if we hit that $32.12, which if you take the shares from the preferred and the conversion, and there's the warrants that were issued with those conversion notes, take everything all in, you do get that 7 million share count. But of that part of it is on the preferred shares that were registered, like I said, early last year.

Okay, and that would be by the end of the first quarter of '05?

Yes. Well, as soon as -- for the remaining piece of it, as soon as we can hit that $32.12 for 30 trading days.

But again how much picks does that eliminates?

That eliminates 14 percent picks, so if we do convert those by the end of Q1, it will save us about 1.8 million of shares that would otherwise be issued. That's why we're interested in converting those.

Chris Gueston, Morgan Stanley.

Quick question. It would seem to me, as you say, that pricing is, I think Renee stated as stable the idea that you probably have some decent sized renewals upcoming. Number one, what is the percentage, if you are able to break that out, of the customers either size wise or just numerically that are up for renewal in the next year or two? And what type of I guess it would seem to me that maybe some of those were booked when pricing wasn't so stable. So are you seeing benefits from those renewals, and do you have any anecdotal or stories thereof?

Well, as we set our task, contracts had typically been two to three years, actually historically we've seen them longer than three years, and that was you know our thinking early on. But as this revenue has been sticky, as we've also said, we've been pushing to shorter contracts in the near term that we've put in place with people. But that would give you an assumption about a third of our contracts will be coming due in the current year. And so that probably increases over time as we shorten terms with people.

You know, I would say we target in these contracts, like we've said in the past, price increases of 3 to 5 percent as they come due. And so across that third of business, that would be our goal, and depending on the circumstance and so forth. But that would give you a general sense of that third of the customer base coming due in '05.

One follow on just hypothetically. If companies after a good quarter pop some bubbly, have a little champagne, what do you do now that you're reporting in the morning?

Well, nothing for now, but we may do that in front of another Red Sox win, tonight, Chris.

Thank you very much for joining us today. This concludes our conference call, and we'll talk to you next quarter.

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