Equinix Inc (EQIX) 2006 Q1 法說會逐字稿

Hello, and welcome to the Q1 2006 Conference Call. This call is being recorded for replay purposes. (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.

Good afternoon, and welcome to our Q1 2006 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 identified in today's press release and those identified in our filings with the SEC, including our Form 10-K filed on March 16, 2006, and Form 10-Q, filed on October 26, 2005.

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, Keith Taylor, Equinix's Chief Financial Officer, and Margie Backaus, Equinix's Chief Business Officer. At this time, I'll turn the call over to Peter.

Thanks, Jason. Welcome everybody. '06 is off to a strong start. Let me hit the highlights and then I'll turn it over to Keith to detail the results and I'll be back shortly with an update on our expansions and more about the drivers of our growth. So just the highlights. First quarter revenues were 64.9 million, ahead of plan and up 5% over the previous quarter, or 33% year-over-year.

EBITDA in the first quarter was approximately 5%, up sequentially, and 59% year-over-year to 22.8 million. Our cash gross margins in the quarter were 61%, reflecting the strong operating leverage of our business model. We closed 61 new customers bringing our total customers at the end of the quarter to 1,164. Some of these included McGraw Hill, YouTube, and Expedia's Trip Advisor with expansion orders from customers such as Akamai, Fortis, IBM, Sony, and Salesforce.com. These contributed to another great bookings quarter. Again, we saw well over 50% of our new bookings coming from our installed base. Demand remains high for our current centers while we have a robust pipeline for our soon-to-be opened new ones in Chicago, L.A., and the Silicon Valley.

Lastly, I'd like to note the build-out of these IBXs remains on track. As they're nearing completion, we now expect to actually install our first customers within the second quarter. These expansions and our continued execution across the business have us well-positioned for another great year in '06.

So I'll stop there and turn it over to Keith.

Thanks, Peter. Good afternoon. After another strong quarter of financial performance, I'm pleased to provide you with our first quarter results. Let me first start with revenues.

Our Q1 revenues came in at 64.9 million, an increase of 5% over the previous quarter, and up 33% over the same quarter last year. This result was ahead of expectations and reflected strong growth in our core offerings. Our U.S. revenues represented 86% of the total revenues.

Recurring revenues were 61.8 million, a sequential 6% increase over the previous quarter and a 35% increase over the same quarter last year. Non-recurring revenues for the quarter were 3.1 million, derived primarily from installation fees and professional services.

In Q1, our cabinet churn was 2.4% and our NRR churn was 3.3%. Both our cabinet and NRR churn reflect the impact of our IBX and customer optimization strategies that were discussed on the last earnings call, as well as the impact of one larger lower margin customer that churned at the end of the quarter. For those interested, this customer was not IBM. The majority of the churn was reflected in our more highly utilized centers where the demand for our colocation and interconnection services allows us to better optimize the performance of those IBXs.

Moving on to gross profit and cash gross margins. The Company recognized a gross profit of 21.5 million for the quarter, compared to 20.1 million the previous quarter, and 11.8 million in the same quarter last year. The gross profit reflects the impact of additional expansion costs in the quarter related to our three soon-to-be open IBX centers, as well as an additional $758,000 in stock-based compensation expense. There was no stock-based comp expense affecting gross profit last quarter.

Our cash gross margins increased to 61%, up from 59% last quarter and 55% in the same quarter last year. This better-than-expected result was primarily derived by a lower-than-planned utility expense as we benefited from certain capital improvement projects, allowing us to write our IBXs more efficiently. And also, our customers had lower variable utility consumption. This resulted--this result represented a significant flow through from incremental revenue and continues to demonstrate the tremendous operational leverage of our financial model.

Cash expansion costs, again referring to the three unopened expansion IBXs, were 1.6 million in the quarter. Looking forward, we believe Q2 cash gross margins will approximate 60% as we recognize the full quarterly cost of our expansion IBXs.

On to utilization rates. At the end of Q1, our operational cabinet capacity was approximately 26,000, excluding about 4,900 cabinets we expect to add in the U.S. in 2006. This is a slight cabinet capacity reduction in Asia as we modified our IBX configuration to support smaller targeted customers in one of our key markets.

At the end of Q1, approximately 14,750 cabinets, or about 57% of our cabinets, were billing, an increase from the 14,100 cabinets billing over the previous quarter.

Breaking out utilization on a weighted average basis, meaning calculating the utilization rate taking into account when in the quarter a cabinet started billing, our utilization rate was just under 56%, or about 14,500 cabinets billing on average in the quarter, with the U.S. at about 50%--pardon me--U.S. at about 55% utilized and Asia at about 59% utilized. The weighted average utilization rate, when you consider the 4,900 cabinets coming online in the next few months, will decrease to about 47%.

As Peter noted on a previous earnings call, in addition to cabinet capacity, we also look at capacity of our power and cooling infrastructure to ensure we can support the needs of our installed base. The utilization of power and cooling continues to track well with our goal of utilizing 75 to 80% of our available cabinets.

Looking at revenue per cabinet on a weighted average basis, our average monthly recurring revenue per cabinet increased to $1,414, up 1.7% over Q4's 1,390, and up almost 6% over last year. On a regional basis, our weighted average price per cabinet in the U.S. was 1,531, up from 1,498 last quarter. This reflects the benefits derived from our customer optimization strategy, include--pardon me--including improved pricing in all of our U.S. markets. In Asia Pacific, this result was $956 per cabinet, essentially flat over the prior quarter.

As we look forward, we anticipate Q2 pricing will remain flat to slightly up, reflecting strong demand for power and interconnection services for each cabinet, although this will be partially offset with some large customer installations as we open our new centers in the quarter.

On to SG&A expenses. SG&A expenses for the quarter, including stock-based compensation expense of 7 million, were $24.3 million. Commencing in Q1, we started to expand the cost of our equity-based compensation plan, including stock options, restricted stock, and employee stock purchase plans. The Q1 charge, although lower than originally modeled, reflects the estimated charge we expect to incur per quarter for the remainder of the year.

Our cash SG&A expenses in the quarter were 16.8 million, an increase of 13% sequentially and 35% year-over-year. As discussed in the last earnings call, we expected our total FICA cost to be higher than Q4. Our quarter-over-quarter increase was approximately $1 million. This was due to seasonal factors and increased employee stock option activity in the quarter. Also, as previously noted, we continue to scale the organization to support our growth objectives. And finally, consistent with the strong booking activity, we increased our variable compensation plan to reflect the strong results.

Moving to EBITDA. EBITDA for the quarter was 22.8 million and represents the flow-through rate on incremental revenues of 33%. EBITDA in the U.S. was 21.6 million and EBITDA in Asia was 1.2 million, a slight decline over the prior quarter due to a one-time employment tax charge in Singapore.

Our net loss for the quarter was 5.1 million, or $0.18 per share. Excluding stock-based compensation, we would have had net income of $2.7 million in the quarter.

Turning to our balance sheet, our unrestricted cash balances total 162.2 million and reflects the Q1 repayment of $30 million drawn under the Silicon Valley bank line. CapEx for the quarter was 26.6 million. Our expansion CapEx for our new centers was 19.7 million, while our ongoing CapEx was 6.9 million.

Now moving to the statement of cash flows. Our net cash generated from operating activities was 12.8 million. This represents a quarter-over-quarter decrease of 5.8 million, primarily attributed to the movement in working capital. Net cash used in investing activities for the quarter was 24.1 million, primarily related to capital expenditures for our expansion centers in Chicago, L.A., and the Silicon Valley. As a result, our free cash flow was negative 11.3 million in the quarter. Free cash flow, excluding expansion CapEx, was a positive 8.4 million.

Our net cash used in financing activities in the quarter was 15.5 million, primarily related to the 30 million Silicon Valley bank debt repayment, offset by approximately 15 million in proceeds from equity compensation plans.

Finally, with respect to our equity capital structure, we had approximately 28.6 million shares of common stock outstanding at the end of the quarter. This number excludes 2.2 million shares related to the convertible debentures and 4.3 million shares related to employee stock plans and other warrants, the majority of which vest over the next two to four years.

I will turn the call back to Peter.

Thanks, Keith. So again, a good start to '06. And as I noticed in the highlights, demand remained strong. This should provide solid support for objectives over the rest of the year.

So now, let me outline a little bit more on our expansion efforts. In Chicago, where we're adding 1,100 cabinets to our capacity, the pipeline reflects a strong backlog of new customers for our expansion in that market. Many of these customers represent the continued success of our financial exchange, which promises strong interconnection value creation. This is providing confidence that the best returns for this expansion will exclude any anchor tenant type customer.

In Los Angeles, a significantly larger new IBX, we're adding another 2,000 cabinets to our inventory there. With the size of this IBX, our plan in L.A. is to open with an anchor tenant in place, which will benefit the timeline to cash flow breakeven.

In the Silicon Valley, we continue to see strong bookings and installations in this center that we added in Q1 of last year. This was the expansion at that time. With visibility in the pipeline, we project that this IBX will be approaching its capacity from a bookings level sometime later this summer. This is approximately 18 months after its opening.

Our upcoming expansion in the Valley positions us there for a smooth transition for customer growth in this important market. So again, we're feeling good about our progress and our planned IBX openings and their ability to contribute to our '06 objectives.

In other expansion efforts, of course, we discussed our [Ashburn] greenfield and the associated economics of this on the last call. This IBX is teed up for continued growth in this very strategic market. We've made significant progress in our plan to bring that expansion online in the first quarter of 2007. Work's already begun on site, and the long lead time items, such as generators and cooling infrastructure, are now on order.

With these expansions on track, now let's just talk a little bit more on the demand that's fueling these and really what it means to our business. As noted earlier, we had another great bookings quarter with visibility of a strong pipeline for the second quarter. In support of this, we recently saw Tier One Research increase their growth estimates for the colocation market overall, while the Gartner Group has issued a report on the tightness of available supply in the key markets we serve. With this demand out there, we're trying to be very thoughtful about how we manage our growth in the face of it.

For example, we talked about customer optimization on our last call, and Keith noted this again in our discussion of churn. As a reminder, when we see high utilization levels in current IBXs, we're being very careful to ensure we're prioritizing remaining capacity for the installed customers there, particularly those gaining the most value from our business model. An example would be the networks of the key content providers who are peering and generating interconnection in these centers. We're also limiting sales to any new customers into these centers to again support our installed base growth.

These factors can contribute to the overall number of new customers we add in a given quarter, but as we said in the past, the new customer numbers are interesting, but not necessarily indicative of our full momentum.

This is also reflected in our pricing strategy. As customer agreements come due in these centers, we have strong justification for adjusting lower priced contracts that may have been struck at times when the market was in a state of oversupply. Clearly, if the customer gained the benefits of our interconnection model, the value is justified for today's market rate. In a situation where that may not be the case, a customer may explore other alternatives. Of course, to reflect this, we're guiding you to look at churn to be more in line with the 3% number that we've historically suggested you model, versus our actual result in 2005.

We're also trying to be smart and prioritize our growth in new customer acquisition efforts, as anyone who has followed us over under--over time understands, our business model--excuse me--our business proposition is about serving networked or interconnected applications. Our 200-plus network customers are in the IBX to interconnect with each other, while our leading Internet content and services companies are there to connect and peer with the other networks or each other. And the enterprise customers we seek are focused toward network or Web-enabled applications in key verticals, such as the Financial Exchange, where interconnection is an important aspect for the value received from Equinix.

Another vertical or growth in our demand that's really fueling this core business model and has gotten a lot of attention of late is digital media. As the Internet's focus has turned towards distribution of music, video, or gaming, Equinix plays an important role at the center of this. Our customers represent the entire value chain within it -- content creation, content distribution, and even the advertising support for its revenue model. This is a very network and interconnected community; the largest cable and DSL networks delivering to the eyeballs.

All of the major content distribution networks pushing it to the edge. The right medias or double-clicks of the world that serve ads for the companies creating the content, such as a MovieLink, MySpace, the BBC, or Akimbo, and an exciting new one for us, YouTube, which is just installed in two IBXs connected to our peering switch and Equinix Direct. This is a very interconnection-rich customer set that really gains significantly value from our model and we're the most natural place for them to be.

So strong demand for our interconnection value, yet I should also note, there's a fairly significant demand out there for support of the large corporate data center requirement, something different than our core business model. This has been driven in the past by increased power and cooling requirements of today's server implementations. We're also being mindful of this demand as we build our business. We have actually turned down a number of opportunities that had significant requirements in terms of number of cabinets or total power required. Perhaps nice revenue, but as we think about our strategy and the defensibility of our business over time, we don't want to build it on raw colocation.

Our strategic differentiation and competitive advantage is about the networks and interconnection. That said, demand for the next generation corporate data center may present an interesting role in our expansion strategy. For example, as we look at our potential new Chicago greenfield, an approach there may be to include a side-by-side build-out of a customer's corporate requirement with our IBX to share in the capital required and de-risk that expansion.

Again, I don't see this as a core business, but now that we're completing due diligence on this building, we're looking hard at it as it may be the best means to deliver our best structure and economics for this one. We plan to provide an update on our thinking here at the upcoming analyst day scheduled for May 17 in New York.

So now let's go to the guidance for next quarter and the remainder of the year. Revenue for the quarter is expected to be 67.5 to 68.5 million. Cash gross margins are expected to be approximately 60%. Cash SG&A is expected to be approximately 16.5 million. EBITDA is expected to range between 24 and 25 million. CapEx in the quarter is expected to be 30 to 35 million with 20 to 25 expected in expansion CapEx.

For the full year, we anticipate revenue to be between 280 and 286 million, raising the midpoint for the year by $3 million. We expect cash gross margins to be 58 to 60%. This will absorb the teams in three new centers at full strength for the second half of the year, as well as increase utilities for these centers and the summer seasonality across all IBXs.

Cash SG&A will be approximately 64 million for the full year. EBITDA will be in the range of 100 to 105 million, lifting the mid-point by 2.5 million.

We now expect CapEx for the year to be 100 to 105 million. Ongoing CapEx will be approximately 25 million, which does represent an increase of 5 million over guidance given on last quarter's call. Projects included in this increase are primarily success based. These are comprised of the acceleration of installations, including our 10-gig switch, and the augmentation of power in certain IBXs. And as Keith alluded to, we recently also made some investment in our power efficiency by enhancing the cooling infrastructure in a few key centers, which benefits overall utility costs. This has already contributed to the strong result we saw in cash gross margin for the first quarter.

Expansion CapEx remains at 75 to 80 million, supporting the completion of our three new centers soon to be online, and includes 40 million of '06 expenditures for the new Ashburn greenfield.

Our adjusted free cash flow will be a negative 5 million to a negative 10 million. Absent any expansion CapEx, this guidance would have been a positive 70 to $75 million for the year.

So thanks, everyone, for joining the call. As you can see, another solid start to the year. And once again, strong momentum for Equinix. So hopefully, we'll see all of you on May 17 at our analyst meeting in New York where we'll take a deeper dive into the business and our future expansion plans.

So again, thanks. Operator, let's open it up for questions.

Thank you, sir. (Operator Instructions.) Our first question comes from Tom Watts with Cowen and Company. You may begin.

Congratulations, Peter, on the great quarter.

Hey, Tom. Thanks.

I wanted to look just a little bit at capacity and capacity utilization. You mentioned your--in terms of your shift away from the straight colo to a more interconnection oriented business. What sort of corporate-wide capacity utilization do you think that you can get to? Would we be looking at 70 to 75%? And in relation to that, you mentioned sort of the downsizing of total capacity based on the Asian reconfiguration. Was that related to power and could we see downsizing of available capacity at other data centers?

Sure. Yes. A couple of points there, Tom. One is that I wouldn't really call this a shift towards interconnection. Clearly, we've had anchor tenants in the past. We've had some large more (indiscernible) colo-like installations, but some of these have been the larger churns we've seen. So clearly, in all our sales efforts and the customers we're targeting, we're thinking interconnection is the priority in what we seek to build this business.

Then I think the other question was I think of just--about utilization overall and we continue to feel very good about 75 to 80% of the footprint from a total capacity standpoint being usable for our customers. Asia was a small instance in one particular center that could have supported more capacity with, again, large colo users maybe in that. But we've just kind of right-sized its configuration to be more in line with the objectives of the business. But again, 75 to 80% utilization is the goal.

Okay. And you've mentioned in the past your goal of having enough capacity to get to 500 million in revenues. Have you--well, what--and I think you said you're at 400 now. Has your view changed at all in terms of the amount of capacity needed to get that $500 million, and what sort of incremental capital investment do you think we're going to need to get there?

Yes. I mean, we're not giving any guidance on additional capital, but even clearly with the Ashburn build we aren't at the 500 million yet. Being fair, 500 million is a good target to scale this company to and that is clearly in our strategy even on the SG&A line. But we do see a lot of demand out there, and we'll continue to be building towards that 500 million, but we'll also be assessing opportunity over time, if it makes sense to go beyond that, at the returns we seek.

And just to give comfort here, we've been very disciplined I think in any of our expansion strategy. We look very hard at the demand in a given market. And the thing I'm thrilled about - just one little note that you may have picked up in the just overall comments there - this new center that we've brought on board in Northern Virginia--or excuse me, in the Silicon Valley. But this holds true for really how fast we're seeing the new center show up in Northern Virginia. Whereas we've guided in the past for a new center maybe we'll get to breakeven in a 12 to 18 standpoint, we're seeing our two most recent expansions somewhere in the 18 month timeline to be at a high utilization level, to be close to the 75 to 80%.

So again, just trying to stress that our expansion strategy will be about supporting demand we see, and obviously, we've given you past objectives from an IRRs and return standpoint in the 40% range.

Sure. Well, again, congratulations on a great quarter.

Thanks.

And thanks very much.

Thank you. Our next question comes from Jonathan Schildkraut with Jefferies. You may begin.

Hi, guys. Great quarter.

Hey, John.

And a question. I actually have a couple of questions. The first is more of a data point. Keith mentioned something about cabinets and churn at the beginning of the call. And I kind of cut out for that, and I was wondering if he might repeat that.

Yes. Sorry about that, Jonathan. So what I was basically saying that basically cabinet churn is approximately 2.4% and NNR churn is up 3.3% for the quarter. And I also just went on to say that we did experience one larger lower margin customer churning out in the quarter and I just sort of iterated because we've had some questions in the past that that was not IBM who churned out.

All right, great. All right. In terms of the maintenance CapEx, it looks like based on your guidance that the maintenance or the ongoing rather CapEx will drop off in the back half of the year. Is that due to the conclusion of some of these projects that you mentioned - the augmentation of power and the 10-gig switch?

That's absolutely right, Jonathan. In the end, as Peter mentioned, we're really seeing an acceleration of our activities. And as a result, we're needing to put this success-based CapEx in the front-end versus more evenly disbursed over the year.

Great. So does that mean as we look out to 2007 and beyond, the ongoing CapEx absent these projects would be around 20 million or 20 to 25 - still in that same range?

I mean, there is nothing to suggest that we would be any higher than that for ongoing CapEx to be honest. As you know, the real sort of variable component is going to be the expansion CapEx. Again, I--sort of I draw back the fact that it was success-based. If we continue to have the same successes early next year as we've experienced this year, we would probably need to invest some more in some of the exchange CapEx that we've been investing in.

Great. My last question has to do with the rising oil prices. If the Company could comment on how rising oil prices impacts, first of all how, you turn around and then sell power to your customers potentially. Will it impact the margin for you or is there a mechanism in place to make sure that as the Company has higher energy costs that those are then passed on?

Well, I'll take that one, Jonathan. Yes. We build into our agreements the ability to adjust power pricing according to the changes we might experience in the underlying cost of our business. So we provide that in just how we structure our normal agreement. That said, there is margin based in the pricing. We charge on a per circuit basis. So conceptually, we would even gain in a percentage return standpoint because that number is going up. But the right protections are in there. You also have a great deal of visibility in advance of these changes coming. These are rate cases with the utilities and certainly have visibility to it and chances to plan for it.

All right, great. One more question. You mentioned that in the existing facilities that you felt that 75 to 80% was the utilization levels you're shooting for. Just a point of clarification as to the greenfield build in Washington, D.C. Is that still a 100% capacity fill situation?

Yes. I mean, obviously, we haven't built that into our capacity numbers yet, but as we said on the last call, because we're building that with the power and cooling infrastructure with today's requirement in mind, we'll be giving an actual usable cabinet number on that building, as we outlined before. So as we bring these greenfields on board, I don't know whether we're giving you two numbers or how best to manage just your overall modeling. But we'll certainly give you enough color to make sure you're accurate.

Great. Thank you for taking the questions.

Sure.

Thank you. Our next question comes from Erik Zamkoff with Morgan Joseph. You may begin.

Good afternoon. Congrats on a very nice quarter. I was wondering if you could dig into the power and cooling issue a little deeper, and how you feel you stand versus your competitors. And if you can give us some insight into how you price for that and insure yourself against that with your customers, i.e., how do you prevent a customer from renting a rack with Box A and then deciding a year later he wants to put in Box B that takes the place of the power?

Yes. Well, first, the power issue is something we saw coming quite some time ago. Speaking to other competitors may be difficult in terms of how they've seen it internally. Certainly don't have a view into that. But we started recognizing this really quite some time ago. And I feel very good about the team that's focused on it everyday and just really how much notice they've given us from a management standpoint to make sure we contemplated it.

Clearly, our customer optimization strategy kind of came out of some of that work. Clearly, as we look at our new centers it came out of some of that work. So we feel very good about it and we do track it in really a dashboard on an almost weekly basis that I get a look at to see how we're doing against the 75 to 80% target. Because there's a little thing we measure - we call it creep - that I think you alluded to. Box A in a center at one point in time may mean a technology refresh at another point in time that would mean that customer is getting more power.

So we're very careful about what that means to our business. And these are the trends we're watching very carefully. Part of our CapEx this year is in implementing circuit monitoring so we have visibility right down to the circuit level of everybody's draw. And in new agreements we're even defining power caps. We're basically pulling the customers in with us so that they're managing to an expected use of the resource. And that gives us more ability to stay in front of this.

So net-net, there's a lot of cycle spend to ensure that (a) we're doing the best job we can for our customers and as their environments migrate to new technology, and (b) we're also very cognizant of what it means to our overall opportunity, and really, that 70 to 80% guidance we gave you for the long-term.

Can you also - one last follow-up - give us an update on progress with the partnership with New Star and just in general how you see the peering business evolving?

The partnership with New Star still goes fine. The speed with which VoIP peering is embraced is something that will be very significant. We've got our data in place. We've got initial customers running well between us. And so, we're doing a lot of marketing and evangelizing the solution. But nothing that's moving the needle as yet that I would comment on. We do have Margie on the call today. I'm looking over at her, if there is anything she wanted to add.

Yes. I think what I would add is we were recently at the big VoIP show a couple of weeks ago here in Silicon Valley. And I think with Google Talk and Yahoo and all of these guys and the big cable guys starting to make some moves, we're very encouraged by what we're going to see the second half of the year as it relates to people putting in trials. I think where you're going to see a bigger boom is as people start to put this in their budget for next year. I think that's--some of the things that customers are talking about is a lot of what they're having to look at for hardware wasn't necessarily in their budget. So we'll see some trials at the end of the year and then some further growth I think next year.

As it relates to peering overall, I think what Peter covered in the digital media space has really been driving 10-gig. So people like Limelight and Akamai and others really push in a lot of traffic through digital media as we see video rollout. Peter also talked about YouTube - a great new video application we're seeing - got on the switch immediately upon installation in two sites. So those things are really pushing gig overall. We've got 23 10-gig [indiscernible] we've sold, which is more than double what we thought we'd have at this point. Lots of nice new upgrades from [FSE] to [GGE] and up to 10-gig. We saw actually nine upgrades in the quarter for a total port count of 368. So we're really happy with the way the peering business is going. I think a lot of that has to do with kind of the strides in digital media.

Thanks.

Thank you. Our next question is from Mark Kelleher with Canaccord Adams. You may begin.

Thanks. Let me add my congratulations as well. You said that there is going to be about 4,900 new cabinets this year. Is there any way you can give us an indication of how many you think might come online this quarter?

Actually, this quarter--you're talking about second quarter?

Right.

We would anticipate that both Chicago and L.A. are open with initial customers installing. So that's--as I said on the call, that's 2,000 in L.A. and 1,100 in Chicago.

Okay, great. And this just to the point of clarification, back to the 75 to 80% of footprint usable. That's 75 to 80% of the 26,000 cabinets.

You got it.

So at 14,700 of the usable your utilization rate is up around 71%, something like that, 75?

Yes, it sounds like you--I haven't done the math on that, but that sounds about right. Yes. Keith is nodding.

Okay. I just wanted to see that. And then, just one numbers question. Would it be possible to break out the stock comp by line item?

Which line items are--?

The SG&A.

Gross margin and SG&A or--?

Yes. The SG&A--take the stock comp out of the SG&A and the R&D.

There's 758,000 of stock comp in the cost of revenue line, and there's 7 million in the SG&A line. You want it broken down between sales and (multiple speakers) million in sales and marketing and 5.1 million in G&A.

Great. Thanks a lot.

Very good. Thanks.

Thank you. Our next question comes from [Andy Schroeper] with Tier One Research. You may begin.

Hi, guys. Congratulations. I wanted to see if you had any updates on any additional vertical markets where you're looking to put an exchange together for? And then, I've got two others.

Yes, I think from--we're really just putting a lot of concentration in digital media, which with L.A. open and that being such a big center. 60% of kind of what we see as a digital media opportunity exists in that market. So I think that's really exciting. Continuing to push on FX I think. Chicago has been great. But as of late, we've seen some real interest in extending FX to New York, which has been really good as well. So that's really where we're concentrating our efforts. It's just a phenomenal amount of growth in those two.

So outside of that we want to make sure we capture what we can in those two and don't get too far afield.

The second, just to make sure I am clear. I understand you are trying to find the right type of customer to take the right type of services with the best margin, which is the right strategy. Are you at--can you confirm your confidence that you're not going to be at risk of turning away business from customers (technical difficulty)

Sorry, Andy. We had some interference there. Would you --?

(multiple speakers) sorry for being on an airplane. I'm trying to talk over the lady. Can you hear me okay? She'll be done in a second. I was just asking about--I want to make sure that you're comfortable that you're not going to be turning away any business from customers that you're already scaled up with where you're already the key provider of colo and interconnection to--can you make a statement about your confidence that you won't be at risk of turning away any business from those type of customers with your available capacity?

Well, being fair, we're certainly prioritizing around our installed base and certainly a high focus on the core business model in that thinking. A current center may have a fairly significant customer in it, but as it's reached a high utilization level we're talking about then deployment of the future needs of that customer in the adjacent expansion that may be coming up, such as a Chicago or an L.A., et cetera. So it does require some more complexity and just some planning with the customer to ensure future growth.

So that's in there. So we feel good about our response and support of the customer optimization strategy. And sometimes I think people hear a lot in that, and it's, oh, it's all about churn. Well, that's not the case. It's certainly being a lot more proactive in our planning and making the resource available for the key customers because there is certainly more demand than supply in the market.

Yes. Maybe a final one. Do you have any comments you could make on the number of customers that might be in the pipeline that--or maybe you colo somewhere else, but you want to buy ports on your exchanges by connecting it through a [indiscernible] link or whatever it might be.

Well, just historically I don't think we've had any changes there. Historically, we're seeing a lot of our very good peering customers actually be using us as a key peering hub, but may not have their primary colocation with us. And a great example is an AOL. We've talked about them in the past. They're in five or six centers with us where it's really all about peering. Yahoo does have one large footprint with us, yet they're scattered to again six centers with us. We're managing their peering.

So it's very common for the network piece of an application to be our customer while they're insourcing their raw colocation aspects of their implementation.

We have--just to add to that, we have installed a few remote people coming in so they don't have any cabinets with us, which is great margin revenue for us. But I can tell you, we look very closely at those opportunities and there's a fair amount of restrictions to make sure somebody is not taking advantage of our asset there and they're using it for what we're selling. So we take a close look at all of those opportunities. But yes, we are starting to see a little bit of that, especially in places like Dallas where we are full.

Thank you. Our next question comes from Mike Rollins with Citigroup. You may begin.

Hi. Good afternoon.

Hey, Mike.

A couple of quick questions for you. One, I was just curious if you could give us the latest cross connect number. And also, just give us the non-recurring revenue by just breaking that up between the international and domestic. Those are two housekeeping things. And then, if I could just ask you a couple of strategic questions. First of all, as you think about you move past 2006 and you think about '07, '08, and '09, what's your best guess as to how quickly you could expand the supply of cabinets? Like how quickly you can turn around, build new capacity, and expand basically your overall square footage capacity.

And then, the second question was just on pricing. I thought I heard you guys talk about flat pricing sequentially, but I wasn't sure if you were referring to Asia specifically, U.S. specifically, or both. On the--not pricing, I guess. The more NRR is what you were talking about. Thanks a lot.

Sure thing. Well, just let me get the last one first just on pricing. We were talking about Asia was largely flat sequentially quarter-over-quarter from an average NRR per cabinet. So we saw about 7% increase over time--or overall. Then, back to the cross connect number - 13,094 was the cross connect count at the end of the year--or, excuse me, at the end of the quarter. This was up from 11,976 or just over 9% for the quarter. And NRR, did you get that question, Keith?

Yes. So--Mike, so the NRR is broken down roughly 2.6 million in the U.S. and roughly $500,000 in Asia. I just want to clarify just a point that Pete made that when we look at pricing, we talked about a 1.7% increase quarter-over-quarter overall. The Asia NR per cabinet was essentially flat. It was actually down $6 quarter-over-quarter, whereas we saw growth from the U.S. side. Okay.

And then, just in terms of just a broader strategic question. On an annual basis, as you look out the next couple of years, how quickly do you think you can grow overall cabinet capacity in your footprint?

Well, this falls in line with the expansion strategy that we've historically done. The first thing that happens is when we get to a 50% utilization level, we take a real hard look at what the demand in that market would be and we'll be reacting to that. But we're also very cognizant of the fact that now, if it's a greenfield, we've got a 12 to 18-month horizon for when you would bring that capacity online.

It wasn't long ago we announced the Ashburn greenfield build. So we're targeting right now just first quarter of '07, so largely that's going to be in that window of 12 to 18 months, probably the lower end of the range, which is the good news because there's a lot of demand in that market. But that's how we have to look at it. And so, you can think about a build of 12 to 18 months.

Thank you.

Thank you, sir. Our next question comes from Ari Moses with Kaufman Brothers. You may begin.

Hey, guys. Good afternoon. Most have been asked and answered. Just one thing I wanted to follow-up on. You had a pretty good quarter average in terms of added cabinet billing. In looking at the build of these new facilities, I think you touched upon you have a strong pipeline of customers for these new facilities. My understanding was that you were in many cases going to the new customers and saying, hey, instead of deploying in an old facility we'd rather hold you off for a new facility.

Is--did that in any way impact it and would this cabinet billing number have been stronger? Or did you actually take some customers, push them out, so that we may see kind of a bump up in second or third quarter as current customers who are coming to you then come online in the new facilities?

That's very fair. That's very fair. And we do expect that. The strong pipeline we see has a number of customers that are looking at those new centers right now. And in fact, even some of the pipeline is wait-listed for the current centers where we're doing utilization; the highly utilized ones where some of this optimization has taken place and churn has taken place. We have customers in reserve interested in those centers as that capacity becomes available. These installations are pretty complex, so there may be a lag between when it churns and those guys are installed in that space. But demand is certainly there, and sometimes our build is constrained in just how quickly those cabinets come online.

In thinking about the value [prop-up] for a customer going to a new facility versus the old ones, obviously, you talked about one of the advantages in the new facilities that you--well, not necessarily the new ones coming online, but at least the ones that you'd be building. So this may be a next year question. The revenue per cabinet is going to be higher, but because of power and cooling you're going to basically have more of a one to one ratio between a cabinet and a space that a customer takes.

Is that part of the model in which you might tell a customer, hey, the revenue you have to pay us on a given--on a monthly basis may be lower for you, the customer, for that single cabinet, but for you, Equinix, you may actually benefit because you're getting additional space to sell more customers into the space. Is that the right way to think about it? Is that--?

I'm sorry. I'm not sure I followed what you were presenting there, Ari. I mean, ultimately, what we're saying here is you're going to consume the fair resource allocated of power for what that cabinet will require. And so, there's a higher price point to it. Now, in the pricing per cabinet, both power and the utilization of the cabinet are included in that. So what we've done historically as somebody has had a higher density demand for power is to actually charge them for incremental cabinets because they've consumed more of the design of that building or more of the resource.

So it's just getting it more aligned to a single specific cabinet than what they're buying from us. But their overall cost of doing business is very similar.

Okay.

Does that make sense?

Yes, that makes a lot of sense. With the new facilities that you're building out - the three coming online this year - those are not going to have the roughly 100% utilization capacity as the D.C. one will, correct? That's specific for your new build?

Yes. These were great acquisitions for us because they--we've called them distressed assets in being able to cheaply pick up that capital. But again, they were already built data centers designed for just what the historic power and cooling requirements were. So they kind of fit the similar pricing and just utilization models that we've been in. These new ones will be configured at approximately--well, more than two times the power per cabinet from a design standpoint.

Okay. Great, thanks.

Thank you. Our next question is from Greg Mesniaff with Needham and Company. You may begin.

Thank you. I just have one small housekeeping question. Do you guys pass on the seasonality of electrical rates directly to your customers, or do you smooth that out as part of what you resell to them?

It's smoothed in there. See that seasonality is really showing up in the cooling of the data center, not specifically in their draw from us. So that's kind of the cost of doing business.

Got you. Okay, thanks.

Thank you. Our next question comes from Jonathan Schildkraut with Jefferies. You may begin.

Sorry to circle around on you guys. What would churn have been without--on a cabinet basis without the large customer disconnecting?

It would have dropped roughly 1 percentage point, Jonathan.

Okay, thank you.

Thank you, sir. Our next question comes from Dan Golden with Tier One Research. You may begin.

Great quarter, guys.

Thanks, Dan.

A couple of quick questions. First, some competitors are looking at things like submetering their colocation tenants in order to sort of pass through some of the utility costs. Is that something you guys have considered in your new facilities either through actual submeters or through sophisticated power management systems?

No. We aren't considering that. I mean, we're building in the management of power and just our accountability to deliver it into the cost of the circuit, not doing a metered approach.

Okay. My next question relates to the D.C. area, the Ashburn area, colocation market. Right now, there's a couple of facilities there. Obviously, you're building another facility coming online in Q1. What does the utilization of the existing facilities look like? I'm asking this in consideration that in Chicago you have a full facility. You have another one coming out very quickly. You have the same thing in some of your other regions. But in D.C., there's a bit more of a lag. And how much of a concern is this to you and what is the current utilization looking like?

Well, the utilization, as I said in the comments earlier to one of the other questions, certainly we're seeing a great ramp in the revenue line of the new center that we opened that actually came online in December of '04. And so, that one has seen great response. There is obviously still some room for growth in that center and we continue to support it. But I guess I would say that in first quarter of '07, we certainly will [want] more capacity at that time. So that's obviously when the new Ashburn greenfield will come online.

Great. And one last question just to follow-up on some of the questions about pricing and price increases. As you have customers whose contracts are coming up, for a typical customer what kind of price increases are you able to generally negotiate for your existing customers as they sign new contracts?

Sure. Well, and [indiscernible], existing steady-state customers, the thing we've tried to guide everybody to on an ongoing basis has been 3 to 5%. Clearly, as you look at the results in just our average return per cabinet, we've been outperforming that number. Actually, we have looked at that and overall it's been about 7% that we've gained in price increases to date. Now sometimes you'll have somebody that's far greater than that and that's contributing to the average because this might have been a deal done at peak of oversupply in a very competitive market and we were looking to either get an anchor tenant or just support the utilization of a given center.

So those guys will see a larger increase. But overall, we're not gouging customers. This is a service business. We've also gotten a premium on an ongoing basis for our business model. So that 3 to 5% for the general population, again, we're overperforming that right now because of some old contracts.

Thanks. And again, great quarter.

Thank you.

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

Thanks, everybody.

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