Equinix Inc (EQIX) 2005 Q1 法說會逐字稿

Hello and welcome to the Q1 2005 conference call. (Operator instructions) I would now like to introduce the host of today's conference, Mr. Jason Starr, Director of Investor Relations. Sir, you may begin.

Thank you. 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 Form 10-K filed on March 10th, 2005.

In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the Company uses these measures in today's press release and on the Equinix Investor Relations page at www.Equinix.com. Additionally, in the next few days we will be posting a spreadsheet that discloses and tracks these and other metrics on a current and historical basis.

With us today are Peter Van Camp, Equinix's Chief Executive Officer, and Keith Taylor, Equinix’s Vice President of Finance and Chief Accounting Officer. Keith will be reporting our financial results today. Renee Lanam, Equinix's Chief Financial Officer, is currently attending Harvard’s Advanced Management Program. At this time, I will turn the call over to Peter.

Thank you, Jason. Let me quickly set the highlights and then I will turn it over to Keith for the detailed review. First, revenue for the quarter was $48.7m. We are excited by this result, as it represents the largest actual dollar quarter over quarter increase the Company has seen. Many of you probably saw in today’s press release, we expect a similar level of growth in Q2 as well.

Our Q1 bookings were very strong, delivering 75 new customers including American Home Mortgage, Frye, Con Edison, [Equon], Tyco, XM Radio, Virginia Hospital, New York Magazine, and Options Express, as well as significant additional key customers such as [Okami], Electronic Arts, Shutter Fly, Ticket Master and Goldman Sachs. Again, the installed base reliably produced almost 70 percent of our new bookings in the quarter.

As a side note, we recently had a customer appreciation event in all of our centers in recognition of our eclipsing the 1,000 customer mark.

EBITDA for the quarter was $14.3m. Free cash flow was $9.2m, which was bolstered by our strong operating cash flows in the quarter. These results outpaced our guidance, however I should note some of the investments in our growth, our team and ongoing CapEx moved into the second quarter, which benefited these results but do remain in our operating plan.

We opened a new Silicon Valley IBX and I am pleased to report both the Silicon Valley and our new Washington D.C. centers are now producing revenue with strong bookings and pipeline. As we said on the last call, a growing competency of ours is the ability to acquire equinize and market new centers. This has materialized in a big way in Washington D.C. and the Silicon Valley. In the quarter, we were successful in signing significant deployments with new and current customers in both of these centers, including XM Radio, Neighbor Care, the SEC, and IBM.

Of course, these successful expansions speak to our ability to execute. Just one other example, I would like to congratulate the team that has been focused on our successful Sarbanes-Oxley compliance effort for what amounts now to almost two years. As this was such a significant task, I just wanted to publicly recognize and congratulate this team for what they have accomplished.

At this time, I would like to turn it over to Keith Taylor to take us through the detail of results in the quarter, and then I will come back and talk more about our momentum and the trends we are seeing in the business.

Thanks, Peter. Good afternoon. Let me first start by saying we are very pleased to report the numbers for this quarter. We saw solid performance across all of our key metrics. Our revenues grew to a record level. Our contract bookings were at our highest levels and the backlog remains extremely strong.

On the spending side, our costs and revenue grew on a measured basis, while our SG&A spending grew less than expected due to slower than anticipated new hire plans. All of this translated into better than expected EBITDA for the quarter. In summary, we couldn’t be more pleased with our results for this quarter.

Now before getting into the specifics, based on feedback from many of you, and in the interest of time, I will focus today’s discussion on key results related to the quarter’s performance, as opposed to reading all of our results. For those needing information previously provided on our earnings calls, we have expanded the disclosures attached to the press release issued today and will post a summary of all of our key metrics on our IR website in the coming days. This will contain all of the statistics both on a cash and non-cash basis and include our non-GAAP cash-based income statement.

Additionally, given our recent expansions in both the Washington D.C. and Silicon Valley market, we will break out some of the key numbers on a same IBX vs. new IBX basis. We define same IBX as an IBX that has been available for customer installations for at least four full quarters. This will allow you to more accurately assess the performance of our business without the short-term burden of the incremental costs attributed to these new facilities.

Now getting to our results, and starting with revenues. Q1 revenues came in at $41.7m, up over 8 percent over the previous quarter, and upgraded in 32 percent over the same quarter last year. This represented a sequential dollar increase of $3.7m, our largest organic increase since our inception.

We have several large deployments in the second half of the quarter which contributed for this record result. On a same IBX basis, revenues were $48.5m. Revenues from our two new IBXs were just over $200,000 for the quarter. We expect our new IBX revenues to grow substantially next quarter.

A core of our business, our recurring revenues, was $45.9m, a sequential 8 percent increase over the previous quarter, and a 33 percent increase over the same quarter last year. Most importantly, our recurring revenues increased by $3.3m in the quarter, which is a new high in organic, absolute dollar growth.

As I noted, we had a large number of deployments in the latter half of the quarter which will contribute to a similar strong growth result in our MRR for Q2. As with any recurring revenue model, it is important to come out of the gates with strong revenue results, as it increases our confidence in achieving our revenue objectives for the rest of the year.

Non-recurring revenues for the quarter were $2.8m and were derived from installation fees and professional services. This compared to $2.4m of non-recurring revenues the previous quarter, and a 19 percent increase over the prior year.

Now moving on to churn. As a reminder, we calculate churn two ways; cabinet churn and MRR churn. In Q1, our cabinet churn was 1.5 percent for the entire quarter, while our MRR churn came in at 1.7 percent. As a reminder, we calculate MRR churn based on the amount of MRR churned in the quarter as a percentage of total MRR booked at the beginning of the quarter. Going forward, we continue to believe that churn will approximate 1 percent per month, or about 3 percent per quarter.

Moving on to gross profit and cash gross margins. The Company recognized a gross profit of $11.8m for the quarter, compared to $10.3m in the previous quarter, and $3m in the same quarter last year. Our cash gross margin increased to 55 percent, up from 53 percent last quarter and 45 percent in the same quarter last year. The cash margins were better than expected as only a portion of our intended investment in new staff was completed in the quarter. Also, some of our other IBX operating costs came in at the low end of our anticipated ranges. Consistent with the treatment of our new Washington D.C. IBX, our new Silicon Valley IBX will allocate a majority of its costs between the building and equipment. The equipment will be capitalized utilizing an incremental borrowing rate of 8.5 percent and depreciated over the useful life of the asset. The building component, unlike the Washington D.C. lease, will be treated as an operating lease and expands randomly over the lease term.

Given the capital treatment for equipment related to our new Silicon Valley IBX, our EBITDA results for the year should improve by $1.6m, although we will increase the amount of debt on our balance sheet. On a go forward basis as we continue to expand our footprint, we believe that a portion of any new IBX center will be treated as a capital commitment vs. an operating expenditure.

Onto utilization rates. At the end of Q1 we opened our new Silicon Valley center which increased our cabinet capacity to approximately 26,100 cabinets. This is a slight decrease over our previously estimated number, as we have adjusted the cabinet capacity to reflect current and anticipated customer configurations. At the end of Q1, approximately 11,700 cabinets, or about 45 percent of our total cabinets, were billing. This compares to 11,100 cabinets that were billing at the end of the previous quarter.

Breaking out utilization on a weighted average basis, meaning calculating utilization, taking into account when in a quarter a cabinet started billing, our utilization rate was approximately 45 percent or 11,400 cabinets billing on average in the quarter.

Looking at revenue per cabinet on a weighted average basis, our average monthly recurring revenue per cabinet increased to $1,339 per cabinet from $1,292 per cabinet, a 4 percent improvement over the previous quarter.

On a regional basis, revenue per cabinet on a weighted average basis was $1,458 per cabinet in the U.S. and $878 per cabinet in Asia. These results reinforce our belief that pricing remains strong. We continue to believe that high quality data center capacity is tightening and pricing is firming in our key markets. We expect this metric to remain flat next quarter as we absorb the impact of some large deployments in our new centers at the end of Q1.

I should also note, and Peter will discuss in a moment, that customers are utilizing more power in their configuration, which would also play a factor in our average revenue per cabinet metric.

So let’s move on to SG&A expenses. SG&A expenses in the quarter were $15.3m, a 17 percent increase over the previous quarter and a 19 percent increase over the same quarter last year. As previously disclosed, the board of directors approved a restricted stock grant for the executive team, with debt being tied directly to stock appreciation targets. As a result, the Company recorded a charge of $2.3m in the quarter. Going forward, the quarterly charge related to this grant will vary, depending on stock performance.

Our cash SG&A expenses came in better than our expectations at $12.4m, a 6 percent increase over the previous quarter and a 13 percent increase over the same quarter last year. Contributing to this favorable result was slower than expected hiring in our corporate departments. As Peter mentioned, though, we still plan on making these investments. In addition, the annual salary adjustments will combine with our continued hiring plan as we set our guidance for second quarter.

On an EBITDA basis, the performance outpaced our expectations at $14.3m, a 16 percent increase sequentially. For the quarter, this result represented a flow through rate on incremental revenues, and an EBITDA line of 53 percent, including the incremental cost impact from our two new IBXs. Keeping in mind that we are investing our future growth and excluding the impact from our new IBXs, EBITDA would have been $14.9m.

On a regional basis, the U.S. generated positive EBITDA of $14m and Asia generated positive EBITDA of $290,000. From a tax perspective and consistent with our discussion on the last call, our income tax provision is largely attributed to alternative minimum taxes. The cash component of our income tax will be largely offset by NOL carry forwards, plus the benefit derived from our stock option deductions. We continue to believe that cash income tax will not be greater than $500,000 in either 2005 or 2006.

With respect to interest expense, as most of you are aware, we converted 95 percent of STT’s convertible secured notes or CF-10s and eliminated the 14 percent non-cash interest expense related to this converted amount. And as previously mentioned, a portion of the leases for our new IBX centers are being treated as either capital leases or financing arrangements. As a result, cash interest expense on these new IBX centers will approximate $1.1m per quarter throughout the rest of the year.

Our net loss for the quarter was $5.8m, or 26 cents per share which includes the $2.3m charge for the restricted stock as noted earlier. Excluding the impact of this charge, our net loss per share would be 16 cents. On a cash basis, our cash net income improved to $12.9m, a 9 percent increase over the prior quarter.

Turning to our balance sheet, at the end of Q1 our cash, cash equivalents and investments totaled just over $118m. This was a $10m improvement over the prior quarter. Our GSO level continues to operate at below the 30-day level. Also, CapEx for the quarter was $5.5m. Our expansion CapEx for our new centers was $3.3m while our ongoing CapEx was $2.2m.

Moving to the cash flow statement. Our net cash generated from operating activities was $15.4m. This represents a quarter over quarter increase of 4.8m or 45 percent. The largest driver of this great result was strong operating performance in the quarter. Net cash used in investing activities for the quarter was $6.2m, primarily related to $5.5m of CapEx and the liquidation of $643,000 of accrued property and equipment. This translates into a $9.2m of free cash flow in the quarter and represents a $3.1m improvement over the previous quarter. Our net cash generated from financing activities in the quarter was $1.1m.

Finally, with respect to our equity capital structure at the end of the quarter, we had 23.6m shares of common stock outstanding, which includes the $4.1m shares issued to SGT in the quarter for their 95 percent conversion. Assuming the conversion of SGT’s remaining holdings, we would have approximately 26.6m shares outstanding at the end of Q1. This number excludes the 2.2m shares related to our convertible subordinated debentures and the 5m shares related to employee stock plans and other warrants, the maturity of which will go past over the next two to four years.

Let me turn the call back over to Peter.

Thank you, Keith. Now let’s talk about the increasing momentum I had mentioned earlier. We are seeing more substantiation of our market leadership position as we continue to outpace market growth. Q1 growth of 32 percent year-over-year was 4-5X the industry rates. Both our Internet and Enterprise customer segments are contributing to this growth and continue to do well.

We continue to really own the network and content segments that comprise today’s Internet. This is seen in our installed base growth while we continue to add new customers in content and digital media, which includes XM Radio, New York Magazine and The Mania, a large gaming company deploying in our Hong Kong center and working with Sony to support their opportunity in China.

While Equinix has been consistently strong in the content and Internet sectors, we are seeing increasing recognition of our brand with Enterprise customers, as evidenced by the fact that 61 percent of new customer bookings came from this sector this quarter. Where once our sales force was challenged to even get to the table in an Enterprise deal, many Enterprises are now calling us.

There are some key trends we see driving this Enterprise success. Increased web-enabled applications for one; business continuity is another and now compliance issues are showing up, whether they be corporate or we have seen some interesting new health care wins tied to HIPA compliance.

Our momentum in both the Internet and Enterprise segments is what is driving our ability to gain a disproportionate share of market growth. This has been important for our new Silicon Valley and Washington, D.C. expansions. We are seeing a great deal of interest in these new buildings. Not only did we add some strong anchor customers in the quarter, we see a strong pipeline ahead. In fact, the overall sales pipeline is the strongest I’ve seen.

Opening these new centers has been important to serving this pipeline and providing a smooth growth path in two key markets. The strength of the current pipeline supports the opportunity to further expand as we see utilization levels climbing in a number of markets. We continue to be a growth story, with a core competency in smartly expanding our capacity.

An aspect of this is deeply understanding the markets we serve. For instance, we are approaching capacity in Dallas, yet we don’t see demand driving in urgency to expand in that market. Well as I said before, Chicago is a great opportunity for us and in fact there are other key markets in the United States where our current utilization and pipeline can support expansion opportunities in the future.

Now I would like to turn to an issue that has emerged with a growing importance in our industry, that being power. As Blade Server installations and other high power density devices have become more prevalent, the issue of power and the required cooling have now become extremely important to this industry. In fact, power is becoming a meaningful utilization measure of the data center, which is just as important – if not become more so – than cabinets. So now we’ve become cognizant of this in measuring the capacity and overall returns in our long-term operating model.

With this in mind, we continue to see significant upside for growth from our existing footprint. While we anticipate revenues in the long-term model to support this, and should range between $320-340m. I should also note we have already begun to address the increasing demand for power in our pricing, whether it be a new opportunity or a renewal, as the customer has a large power requirement our pricing now reflects the incremental utilization of our capacity.

So we are getting very smart about this issue. In fact, we feel we understand it better than anyone. As we’ve seen in recent quarters, our ability to effectively design solutions and help customers to manage their high power density requirements has been valuable in a number of the deals we’ve won. I also see it as an important factor in our strong pipeline. Effective power management in our customer installations has become another core competency for us. We win competitively on this issue.

Now let’s talk about next quarter and add some more color to the outlook for the year. For the second quarter, we expect to see revenues in the range of $51.5-52.5m. We expect cash gross margin to be in the range of 52-53 percent which will include the full cost from our new Silicon Valley IBX. Cash SG&A expenses are expected to be in the range of $12.5m to $13.5m. We expect EBITDA in the second quarter to be in the range of $14-15m which will include layering in our remaining investments in our business as we outlined earlier. CapEx in the quarter will be in the range of $9-10m which includes $5-6m for expansion CapEx.

As we look at the full year, we are lifting the lower end of our range for revenue, which we expect to now range between $209-215m which raise the midpoint by $2m. Cash gross margins are expected to be between 53-56 percent. Cash SG&A is expected to range from $51-53m. This is up slightly due to anticipated increases in our corporate incentive plans and sales compensation for over-performance.

We are tightening the range in EBITDA, now expected to be $61-65m. Included in our visibility here is the benefit of the first quarter result and the accounting treatment of our new Silicon Valley lease, offset by the incremental SG&A I had mentioned. CapEx is expected to be between $23-27m consisting of $13-15m of ongoing and $10-12m of expansion CapEx. Free cash flow is expected to be greater than $30m.

As you can see, the business remains robust and on track for another great year of growth. Operator, let’s open it up for questions.

Thank you. (Operator instructions) Our first question comes from Tom Watts with SG Cowen.

Congratulations on another good quarter.

Hi, Tom.

One housekeeping question. You say the income taxes for the remainder of the year would be what number?

Cash income taxes, so Tom, just to be clear, cash, the income tax provision it will fluctuate throughout the year. $500,000 for this quarter. The cash taxes we estimate to be under $500,000 for the entire year.

And how will the reported taxes vary?

It will depend on sort of the tax provision calculated as we analyze our effective tax rate throughout the remaining part of the year. So it will be recorded on a quarterly basis.

Okay, good. And in terms of looking at the expansion opportunities, you said you were continuing to look for specific opportunities, certainly in the cities where you are in. As you look at those, what sort of revenue delay or say if you bought a data center today, how quickly would you typically be seeing the revenue? And on the data centers you’ve added, how fast do you think you will be getting those to EBITDA breakeven?

Well on the first part of the question, expansions, when we’ve actually done a deal for a new center we have typically seen about six months where we’ve gone in and Equinixed, as we like to say, getting it to our design to start on board and capture customers.

Now in the past, I don’t have the specifics in front of me, in some of these cases we have actually negotiated lease expenses and the incurring of any costs were towards the opening of the center. So between announcing the deal and when we actually anticipate cost ramping up, it could vary.

But I will say what has been exciting about the two buildings we have just added was how quickly we saw demand and interest and now how quickly we have seen revenue come on board. Granted not a big number, last quarter it was only $200,000 between the two centers, but the pipeline and the tenants we’ve booked are going to show up as installations in the next quarter and we will see nice revenues actually showing for the first full quarter.

So all that said, between announcing a deal, six months of it is necessary to Equinize but you could anticipate a shorter window to when we are actually incurring costs and ramping up revenue. Even our breakeven, I don’t have any guidance for these buildings, but we will certainly report that as a part of our expansion story and same-store coverage in the future. It is going to move pretty quickly. I do remember from our Santa Claire IBX it was cash flow positive in somewhere about a quarter to four months.

That’s great.

Tom, I will say just one other thing further on what Peter said. In the end, we also look – EBITDA is a very different metric than of course the cash flow, and as Peter alluded to, we usually negotiate lease arrangements whereby we don’t see an outflow of capital for a period of time. But for GAAP purposes, we might have to incur expense even though we are not paying the cash. So you can see a departure between cash flow and EBITDA, but typically that is very, very cash as Peter said.

That’s great. Just a final question, you mentioned delays in hiring people on the SG&A side. Also, it looks like CapEx is being pushed a little bit later in the year than we had expected. Is there anything specific behind these delays?

No, not really. I know when people insist on head count in a budget and you plan for it, it always seems to take a little longer to actually get people on board, and I think that is all we are really seeing here. The timing of CapEx investments is always just related to billed projects or when we actually deploy more ongoing CapEx but it is all about project plans and those issues. I wouldn’t read anything into it.

Great, thanks very much.

Thank you, sir. Our next question is from Michael Rollins with Smith Barney.

Hi, it is Mike Rollins.

Hey Mike, how are you?

Good, how are you doing?

All right.

I just had a few questions for you. First on the cash flow statement, there is a line in there called repayment of debt facilities and capital lease obligations. Does that line start to reflect the cash cost associated with the capital leases that you are booking? So to some extent, that ongoing cost of the business?

The second question that I had was you gave a cable, I guess page 6 of my release, which goes to collocation, interconnection, managed infrastructure. I was wondering if you just had those numbers on a domestic basis as opposed to a total basis? Thanks.

Okay, Michael. If I could just ask a question of clarification on the revenue breakdown, are you wanting absolute dollars or percentage of revenue?

Dollars would be great, just so it is comparable with the table that you have.

You only want it on a domestic basis?

On a domestic-only basis, that would be great.

Okay, so why don’t we take that one first. So in Q1 when you break down a collocation it represents roughly 72 percent of the total recurring revenue, or $30.1m. Interconnection is 21 percent of the recurring revenue, and $9m. Managed infrastructure service is $629,000 for the quarter, or roughly 1 percent of the MRR.

Addressing your question on the cash flow statement, you are absolutely right. When it comes to the cash flow statement as it relates to these capital leases you will see an ongoing charge related to the pay down of that debt facility, or those debt facilities and that will be consistently tied over the life of the leases.

Okay, great. And just an operations question, have you been adding to your sales force or will you be adding to your sales force and in what verticals are you likely to focus on next?

Actually, we did add to the sales force and even some channel sales resources as well, we talked about that on a prior call, Mike, and they are starting to ramp up. There are a few head count remaining to fill in sales which was a part of what we talked about earlier, so we are bolstering that team and I am sure that is showing up in the pipeline as well. Onto the second half of the question was verticals themselves, actually verticals have continued to produce well for us, particularly in the financial one, we saw four new FX customers in our Chicago IBX last quarter and the government sector continues to perform real well, so I think we’ve got an increase of about $1.5m in annual contract value in the quarter alone coming from those. So I think our combined contract value on an annual basis for those sectors is at about 16.5.

So that has been going very well. Right now, we have hired a head of vertical marketing and we are doing a deep dive into both the customer base and the sectors that make the most sense to this. One obvious one that we may have foreshadowed before, but a great place we are starting has been in digital media. Clearly the downloading of various digital media from music to video, et cetera, is a wonderful peering opportunity that supports both the exchange part of the business, you know this interconnection revenue, as well as collocation.

So that is a place we have already seen great success, customers that have been on board already whether it be an Adobe or Macromedia, et cetera, we now expect to just continue to see more development in that area.

Thanks a lot.

Thank you, sir. Our next question comes from Jon Schildkraut – Jefferies.

Hi guys, great quarter.

Thank you, Jon.

I have a couple of questions. I would like to talk a little bit about pricing in general. We’ve seen, at about this time last year, you started talking about increasing the prices on certain contract renewals for ports and things like that. We’ve seen a pretty nice increase in the monthly recurring revenue per cabinet, consistently over the last four or five quarters. I am wondering if we’ve seen most of those price increases make it into the existing customer base or if we should continue to see those price increases roll through?

I think you will continue to see it. I think as we noted before, contracts will turn over on a staggered basis, so as appropriate we’ve looked at the right pricing at those points in time, so this blends in over time in the customer base. A typical contract is still two years, but a lot of legacy contracts were longer than that so it takes time for that to roll in as appropriate.

Great. I also have a question about the chart that Mike was alluding to earlier with the collocation interconnection and managed infrastructure broken out. I think this is the first time that I have seen this chart. I was wondering, we see that managed infrastructure services grew over 14 percent quarter over quarter but only 22 percent year-over-year. I am wondering if you are selling an increased amount of managed services, if there has been an effort to sell those services in the centers?

Well not U.S. specific. The factor here you are seeing is traction in Asia, and as we talked about before the business model, part of this was what we acquired, but we saw an opportunity to expand on it. The team has been doing a good job in offering additional services in the centers to Asia. Of course in the United States, with relationships with IBM and other large system integrators are doing a great job in the managed services sector. We are remaining neutral on this issue in the United States.

But in Asia, we are seeing some good traction in it. This is particularly helpful also when we see a lot of multinationals as they go to that Asian market, they need a little bit more help in region, and it provides an opportunity to do it. So I think the most influence on that number is probably coming from Asia.

Great, and just one last question. I didn’t see a number for cross connections or ports this quarter.

Let me take a look here. I think cross connects were up 695 cross connects in the quarter, we are at 9,700. If you look at a growth rate, that is 35 percent year-over-year. Then we sold 344 new ports – or we are at 344 total ports in the quarter, which is up 22 percent. So there is a difference in that growth rate there, but I think we have seen some large customers move to direct cross-connect in the way they are managing their peering. Just kind of grooming their infrastructure in the centers in their connections.

All right. Thanks a lot, guys. Great quarter.

Thank you.

Thank you, sir. Our next question comes from Hampton Adams with Independent Research Group.

Hi, guys. Congratulations on the quarter also. A couple of questions here. First off, can you tell us just some details on IBM and how big they were in the quarter? And given their weakness that they talked about in their quarter late in the quarter, did you have any impact there or do you expect any impact there? That would be the first question.

Well, we have been outgrowing, I would say, at least our relationship with IBM overall. I think they were 12 percent in the quarter itself and so that percentage has reduced over time with it if you were to look back into prior quarters. Now I would say that they have opportunity in the Silicon Valley just as we do, and so as I noted that we saw an expansion with IBM into our new IBX there.

Okay. Second question would be, you mentioned that last quarter you turned off a customer by your choice at the end of the quarter because you thought you could get better pricing from other customers. Any kind of color on how that is going and what you have been able to do with that space?

Well yes. I mean, you will see anchor relationships when a building opens up, over time we need to get more aligned with fair market pricing for the business. And so a move like that has been very helpful. At a macro level, it is showing up in our average return per cabinet, as you can see this quarter.

I don’t have a specific number on just the relationship or the actual replacement of that specific capacity, but I think that macro trend indicates the reasoning behind that move.

Okay. And then a question on Asia, the operating margin came in, I think it is 4 percent for Asia which continues to improve there. Is there any kind of feel for how high that could get? I can’t imagine it gets as high as your domestic business, but any kind of targets there?

You are right, it won’t get as high as the domestic business, our interconnection business and those aspects of the U.S. are stronger for sure, but Keith, the actual number would be what?

It would be about 25 percent, that would be the target we are shooting for, Hampton.

That’s great. Last question, just on the share count, I was expecting share count to go a little higher, maybe it was the timing of when you did the transaction. But what share count are you expecting for Q2?

Typically speaking, of course now you have to absorb the STT 5.1m shares for the entire quarter, that was in there on a weighted average basis. So when you look at our growth over the next quarter, you see natural creep through option expense – excuse me, stock options and some warrant conversions. You will see it grow $300,000-500,000 per quarter absent any meaningful equity issue.

The other thing I want to go back, Hampton, and make sure we clarify one point. When we refer to Asia and their operating profit, we are referring to their EBITDA.

Right, right. Perfect. Thank you, guys.

Thank you. Your next question comes from Andy Schroepfer with Tier One Research.

Hi, great job, but I know [inaudible] get you to the EBITDA target so quickly. Let’s start out with, I am curious as to any changes – I haven’t asked this question in a couple of quarters – but as the customer starts out with the deployment with you and they make their second uptick, are they more apt to stay in the same center with the expansion or are they benefiting from your other locations? Has there been any change in that trend, any more value in having more collocations

I think if you look across the customer base there is more value and you are seeing more people expanding in second centers. Often there is an east coast and west coast aspect of this for sure, particularly with large customers.

The newer customers you are adding, say for this quarter for example, I don't know if you gave a statement, how many of them are first time outsourcers vs. people that are adding to existing outsource strategy?

Actually we didn't say it, but we do track that. Actually of the new customers, 89 percent were new applications or outsourcing. So, I think as you think about the size of the market, Andy, and research that, I do still feel here we are seeing a trend for more applications. And some of it, I spent a little time in the actual script talking about power and I think as we see new customers and Blade Servers coming in, there is an indication to me of technology refresh and certainly new application being deployed as a part of that.

Great answer. Related to not the specific customer that left last quarter, but just in general for your major customers, how many of them are having discussions with you about the price point in general? I guess it is becoming cost advantageous for them to consider going to their own large data center deployment? [Sarcoma] has a job search out for a head of data center construction. Are you having any new dialogues with customers about that, having to get them recommitted to spending huge amounts on large deployments with you or is that not an issue?

I think we see and you see it in our installed base, just a lot of growth and everybody is still seeing a growth in our customer installations, but we have always had the scenario where customers are in sourced in some component of their infrastructure and then outsourced in another.

And obviously, a moment ago we talked about being deployed in different centers, obviously business continuity is a factor in this. But a big factor for us in this is also to get the other networks for the peering aspect when it is a content layer. So, there are a lot of different drivers but I think you will just continue to see like so many of our largest customers, there will be a combination of in source management with outsource management and across this top 10 list of content providers who are our customers today that kind of flows in all of it.

Great. Well everyone that asks us, we tell them to stay with you guys. So final question for you. Obviously, it has been my perspective when you gave guidance for first quarter last time, it looked like a big number and I said if you hit that you are probably sandbagging for the year, so just to be blunt, I saw that you raised the lower end of guidance, which is great. What chance is there that you are guys are hooking a lot of business and seeing upside? I don't know how you can answer that, but I believe you guys have lot more power, given the way you turned in the first quarter.

Any comments about the way bookings are coming in? Are you getting lot of bookings at the end of quarter is that make you not want to raise the top end but it is still looking really good on the recurring stack up basis?

Well, two notes. I have already said one, Andy. I will just say it again. The pipeline is as strong as I have seen it. Yet I am not going to read our guidance again, so that is what you can look out for now.

Sounds, good. Keep up the good work everybody.

Thank you.

Thank you, sir. We have time for one more question. Dick Rover with Thomas Weisel Partners, you may begin.

Hi guys, good quarter.

Thanks, Dick.

Everything has basically been asked, but maybe I could just follow up on a couple of things. I mean, you’ve got about half of your growth from existing customers, I guess Andy was just talking about it. That's been the percentage I think for the last several quarters. How sustainable is that? Looking at your pipeline now, which you said is a record pipeline, should we look at that as kind of the same percentage? How sustainable, how much can existing customers keep ordering?

And a follow-up question, I read a couple of articles and confirmed it with some operators over in London, the pricing is getting pretty tight over there. What markets in the U.S. or Asia are getting tight that we can think about? I guess you are already answering it by taking over some centers there in Santa Clara and D.C., but what are kind of the markets where supply and demand are not necessarily – they are getting closer to equilibrium or supply is not enough to meet demand?

Well first on sustainability of bookings from the installed base, the number actually this past quarter was 70 percent.

70 percent. I misheard you. Okay.

Yes, and so it just continues to support our growth of course. Now we don't report actual bookings but just a note, because I know this question has come up from investors and so forth, 75 new customers is a good number this quarter, but the overall thing to look at is just what really the size of orders is and whether they be new customers or installed base. The real driver of our growth is the actual size of those orders themselves and not as meaningful, in any given quarter, the number of new customers. So anyways –

You say 70 percent of the growth was from existing customers but in the press release 47 percent placed new orders?

That is just an account. We are now at over 1,000 customers, right? So, out of that 1,000 customers, 470 ordered more stock.

And it drove 70 percent of the incremental growth.

70 percent of incremental orders. So, they get in with this, they install with this. It may be more interconnection, it is expansion of the footprint because their applications are growing, all those things are important to our growth.

And then key markets, as we said, Chicago is one that looks very attractive to us. Actually L.A. has begun to show great progress and we see strong utilization in our center down there and it is a market we will look at in the future. As we said before, Ashburn, Virginia is very strong and the Silicon Valley is still very strong and we have seen this in the bookings into our Lundy center. So, the key markets we serve and the largest cities we serve are doing quite well for us.

Asia, that market as well as Europe has still got a number of suppliers in it. We haven't seen the same impact of supply coming off the market as we have in the United States, but there is definitely a tightening of supply in the U.S.

All right, thanks a lot guys.

Sure thing.

Thank you. I would like to hand the conference back to Jason Starr. Sir.

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

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