Equinix Inc (EQIX) 2006 Q2 法說會逐字稿

Hello, and welcome to the Q2 2006 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.

Good afternoon, and welcome to our Q2 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 uncertainty. 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 May 3, 2006. Equinix assumes no obligation and does not intend to update forward-looking statements made on this call.

Additionally, as previously announced, the Audit Committee's independent review of the Company's historical option granting packages is ongoing. There can be no assurance that the result of the investigation will not result in a change to or restatement of financial results provided by the Company for this, or any historical period, or that the Company's Form 10-Q for the quarter ended June 30, 2006, will be timely filed. Due to this investigation, we will provide only select results on today's conference call.

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. Good afternoon everyone. Let me start today by saying that our business continues to perform well. However, as you saw in today's press release, we're unable at this point to share the full quarter's results with you. As you are aware, we asked our Audit Committee to conduct an independent review of our past stock option granting process. Good progress has been made and, although we can't provide assurances on the timing of its completion, our objective is to file our second quarter 10-Q within the time permitted by the SEC guidelines, which could include a five-day extension as allowed by the SEC.

However, as previously announced, we've also responded to inquiries from the SEC and the Attorney General's offices on this. Given the widespread nature of this issue, we anticipate this will remain an open ongoing matter for some time, as we don't yet have clarity on how long their process will take or its ultimate resolution. Thanks for your patience as we continue to work through this.

Today on the call, we plan to provide key metrics on our business. Keith will take you through these. However, we're unable to provide any detailed GAAP or non-GAAP financial numbers, such as EBITDA, for the second quarter, but we do intend to issue full results for the quarter as soon as practical. I do believe, however, that most of the folks on the call understand the metrics we'll cover well enough to get a good sense of our overall performance in the quarter.

Also on the call, we'd like to provide a greater understanding of our expansion plan over the next few years, which includes a deeper review of our planned investments and our overall revenue headroom for future growth. So, let me hit some of the highlights, and then I'll turn it over to Keith.

Total revenue for the Company was $68.5 million. This represents a 31% increase over the same quarter last year and a 6% increase sequentially. Again, we're not reporting EBITDA at this time, but I would like to provide a little color here. You can see that revenue came in at the high point of our expectations, but I would advise you to not drop all of this success to the EBITDA line, as this will be offset by additional expenditures to date related to the review of our option practice. To size this with -- we believe this represents an unplanned expenditure of approximately $500,000 since the independent review began at the mid-point of the second quarter.

I'd also note some increased sales commissions were incurred following a strong bookings quarter. Moving on to bookings, I'm pleased to report that we set a new high. As we outlined at our Analyst Day, our pipeline anticipated strong bookings, which supports the steeper actual dollar growth line expected in the second half of the year. This expectation was also based on on-time openings of our new sites in Chicago and Los Angeles. So I'm see -- I'm pleased to see a strong bookings quarter come in as we planned.

Within these bookings, we saw 63 new customers taking us to a total of 1,189, and again, more than 50% of our bookings came from the existing installed base. A last note on bookings, Asia also hit a new high as we see strength in that region, particularly in Tokyo.

In addition to the new centers opening in Chicago and L.A., yesterday we announced the opening of our fourth IBX in the Silicon Valley, which we are already selling in to. And today, we announced additional details on our planned expansion in the New York market. We'll discuss this in more depth later on the call. And a quick note on our Chicago greenfield build, we've seen significant interest from several top-tier, commercial banks for the project financing for this build. We expect to close this soon for 60% of the project at approximately 8%.

So, let me turn it over to Keith.

Thanks, Peter and good afternoon.

Before I review our results, I'd like to remind everyone that we announced in our press release today that the Audit Committee has reached a preliminary conclusion that the actual measurement date pursuant of our stock option grant issued in the past differ from the recorded grant date. Accordingly, the Company believes it will record additional non-cash, stock-based compensation expense, but it is not yet able to determine the amount of the charges or the resultant tax and accounting impact of these actions, or which period, if any, would require restatement. Therefore, Equinix is not in a position to announce detailed financial results for the second quarter. Once the stock option investigation is complete, we will be providing full quarterly financial statements in a subsequent press release as well as file our Form 10-Q.

Having said that, I'm pleased to provide you with our selected second quarter results. From a financial perspective, the key take-away from today's call is that the Company's financial performance remains strong and in line with our expectations.

Our Q2 revenues came in at $68.5 million, an increase of 6% over the previous quarter, and up 31% over the same quarter last year. Our U.S. revenues were 86% of total revenues. Recurring revenues were $65.1 million, a sequential 5% increase over the previous quarter and a 32% increase over the same quarter last year.

As Peter mentioned, Q2 was our largest MRR bookings quarter to date. We had strong sales activity coming from newly opened IBX's in Chicago and Los Angeles with revenues of $358,000, despite only being open for half the quarter. With strong bookings to date in these locations, we expect the new IBX's revenues to continue to accelerate in the coming quarters, consistent with the experiences realized in other regionally opened IBX's.

We still expect Chicago -- sorry, pardon me, we still expect our Chicago expansion and now also our Los Angeles expansion to be operating cash flow positive by the end of the year. For those of you tracking our new versus same IBX's, these are now the only new IBX's producing revenue at this point, as our third Silicon Valley IBX is now considered same IBX for reporting purposes.

As Peter will comment on the business outlook discussion, we expect revenues will continue to grow nicely into Q3, both on a total and a recurring basis. And we expect to see an even more meaningful step up in our Q4 revenues given the backlog of book revenues at the end of this quarter as well as the continued strong sales pipeline.

Non-recurring revenues for the quarter were $3.4 million, derived primarily from installation fees and professional services.

Looking at churn -- in Q2, our cabinet churn was 1.9% and our MRR churn was 2.4%, a decline over the prior quarter. Looking forward though, we expect Q3 churn to be slightly higher than Q2, albeit below the 3% targeted level.

Looking at utilization rates -- it the end of Q2, our operational cabinet capacity was approximately 29,100 which reflects the additional 3,100 cabinets added from our Chicago and L.A. expansions. At the end of Q2, approximately 15,400 cabinets, or about 53% of our total cabinets were billing, an increase from the 14,750 billing cabinets 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 52%, or about 15,100 cabinets billing on average in the quarter. Breaking down the weighted average utilization on a regional basis, the U.S. was at about 50% and Asia was at about 66% utilized.

Looking at revenue per cabinet on a weighted average basis, our average monthly recurring revenue per cabinet increased to $1,442, up 2% over Q1 level of $1,414, and up about 6% over last year. We continue to enjoy the benefits of an under-supplied market as prices remain strong and our price increases are coming in, on average, at the high end of our 3% to 5% targeted range. In addition, we continue to see an increasing level of power services being purchased per cabinet. Moving forward, we anticipate that Q3 MRR per cabinet will continue to experience good momentum, as we benefit from the demand for our high quality colocation services.

On a regional basis, our weighted average price per cabinet in the U.S. was $1,543, up from $1,531 last quarter. In Asia, the result was $1,036 per cabinet, an 8% increase over the prior quarter as interconnection services in Asia increased sequentially 19% to 588,000, while colocation and managed services continue to grow in that market as well.

As a reminder, with 1,800 cabinets from our recently opened Silicon Valley IBX, our total cabinet capacity now stands at approximately 31,000 cabinets, of which we believe approximately 75% to 80% can be sold.

Turning to our balance sheet, our unrestricted cash balances totaled $147.9 million. Although our cash balance continues to fluctuate on a monthly basis, in part due to the timing of our capital expansion project, and the movements in our working capital balances attributed to these capital projects, we expect to have an unrestricted cash balance at year-end of approximately $120 to $130 million.

CapEx for the quarter was $39.4 million including the purchase of our expansion property in Chicago. Breaking out the details, our expansion CapEx for our new centers was $20.8 million. The purchase of the Chicago property was $9.8 million, and the ongoing CapEx was $8.9 million.

Looking forward, we anticipate we'll spend an incremental $5 million on ongoing CapEx than originally planned as we increase our success -- pardon me, our success base CapEx such as cabinet and cage installations attributed to greater customer installation in which the revenue will be earned over the life of the customer relationship. In addition, CapEx increase was attributed to equipment expenditures to support the accelerated demand for our IBX metro link and about $2 million for our customer-facing web portal to extend our service quality effort and complete the first phase of the significant upgrade of our corporate IT platform.

Next, moving onto our operating cash flows -- our net cash generated from operating activities was $16.1 million, including about $6 million of negative working capital movements, primarily attributed to an increase in our accounts receivable balance. Almost half of the AR increase was attributed to the timing of one large customer payment that was received in the first week of July.

Finally, with respect to our equity balances outstanding, we had $28.8 million shares of common stock outstanding at quarter end. So let me turn the call back over to Peter.

Thanks, Keith. As I said earlier we'd like to take some time on the call to outline our longer term expansion strategy. Within this, we've gotten a lot of questions of late on the industry as a whole and who's building and why.

Really, we see three types of players building data centers right now. First, as you may have seen more press recently on a number of the largest content providers, such as Google and Microsoft, they've announced significant new builds to service their own long-term growth requirements. These companies have the scale, capital, and strategic willingness to do this, as it gives them added control in responding to the significant demand they alone generate. Yet the value these companies gain at Equinix for their critical peering and interconnection requirements is a strong reason for them to remain Equinix customers as well.

A second category would be real estate-focused companies,or REITs, such as the Digital Reality Trust, Rockwood Capital, or a DuPont Fabros, who have acquired or are building large data centers primarily targeting large users or wholesale deployments. These firms serve a healthy demand generated by companies that require significantly larger footprints in a single site that is typically suited to our model. In fact, some of the REITs are also landlords for a few of our IBX's. In short, both of these categories are addressing a need that's different from our primary target.

Then a third category, which we would place ourself in, is comprised of service providers. This includes competitors such as an AT&T or a [Sabbath]. We all predominately serve retail customers with typically smaller footprints and a more sophisticated requirement. These customers' networking strategies also come into play in their deployment and their buying decisions. Of course, we all understand the difference in our neutral network strategy versus these providers who very much want to bundle their bandwidth and managed services as a part of the overall solution.

Now, their utilization rates are running high, but to-date, we haven't seen any significant expansion announcements from them. We've clearly been the most aggressive in expanding to respond to the demand we've seen. Now, there is some level of overlap in these models. One example may be one of our anchor tenants as we bring cash flow forward in a new build. We also believe that it makes sense for a Google or Microsoft to manage their larger service -- server deployments in their own data center, while they continue to use Equinix as the important hub for interconnecting to the networks that reach their end users.

Today's market demand is driving success in all three categories and we expect this to continue. Looking at our business, this is reflected in the quarter's record bookings. I was really pleased to see this great result particularly without any single deal or anchor tenant driving the successful bookings in the quarter.

So now, let's talk about our expansion strategy near-term and really how we see it unfolding over the next couple of years. First, with the opening of our fourth Silicon Valley center, we've now completed our '06 plan in terms of center openings. The three new centers added in '06 brought us 4,900 cabinets, positioning us for another year of solid growth with needed capacity in key markets.

As we begin to think about 2007 openings, in addition to our already announced D.C. and Chicago greenfields, let's look at today's new announcement regarding our plans in New York. Subject to due diligence and final lease terms, we've identified a building in very close proximity to our original Secaucus IBX, which will allow for direct cross connects between the two centers. It's a very well constructed, newer building of approximately 330,000 square feet with a number of characteristics to support our new higher power density design.

As with our other greenfield builds, we will take a phased approach to this expansion, with the first phase supporting approximately 1,600 to 1,800 sellable cabinets at a higher power density with an anticipated capital investment in the range of $75 to $85 million providing an annual revenue capacity of approximately $40 million at the mid-point. We anticipate this would include a large enterprise anchor deployment similar to our plan in Chicago. This building already -- this building adds to already announced plans for Northern Virginia. Our demand remains very strong in that market and we have accelerated our target opening to early 2007.

Also, we've just kicked off the project in Chicago for a greenfield build there, which is scheduled to open in third quarter of next year. As noted earlier, we are particularly pleased with the interest level from major commercial banks in support of the financing of a key build for us, and it's certainly in line with the terms we've been targeting. Of course, all in, Equinix is making a significant investment in solidifying its market leadership position and future growth.

So let me even give you a little more color on what we've done here. Certainly, we've addressed our near-term needs for expansion in our key markets. Yet at the same time, we've created a long-term platform for future growth as demand warrants. This is important to understand. Many of you have asked how you should think about capital expenditures beyond this phase of our expansion. We've now taken steps in our most important markets, perhaps at some additional investment now, to support our ability to expand incrementally at smaller per unit costs in the future. We now have the properties under control in our four most important markets to accomplish this -- Northern Virginia, Chicago, New York, and the Silicon Valley.

For example, in Northern Virginia, we acquired our campus in Ashburn, which provided the ability to do our first greenfield adjacent to our current IBX, while also gaining additional options for incremental expansion on the same campus, again as demand warrants. In Chicago, we acquired the building and land to support our next phase of growth there. In building out this site, the initial investment of $50 million secured the land, building, fiber, and power to support the near-term expansion. Yet this investment also secured the optionality to increase, incrementally on that site at a far less cost per unit.

In New York, the site we've targeted enables the next phase of our growth with, again, the flexibility for incremental expansion there. In the Silicon Valley, we've just opened our newest center, which gives us head room in this important market for the next couple of years, while we also have the flexibility to expand further in the Silicon Valley by building out the raw space that already exists in the Santa Clara Center we originally acquired from Sprint.

So as we've done in the past, I thought we'd framework our revenue capacity. As a refresher, with the three centers opened this year, we've brought a revenue headroom to a range of $390 to $410 million and a cabinet capacity of approximately 31,000. As we said in the past, the IBX's that house these cabinets can support utilization levels of 75% to 80% which translates into approximately 24,000 net sellable cabinets at the mid-point of that range.

As we look at our greenfield builds opening in 2007, these are designed to support a level of 2x the power and cooling capacity of our original IBX's on a per cabinet basis. As a result, we will be reporting sellable cabinets in these new IBX's, which again we're modeling at a higher target price point, due to this higher design spec. Our Ashburn build will have 1,700 sellable cabinets or approximately $40 million in revenue capacity. In Chicago, our first phase, which has just begun, will yield 2,500 sellable cabinets or approximately $55 million in revenue capacity. As discussed, our expectation in New York would be to yield approximately 1,700 sellable cabinets at mid-point for approximately $40 million in revenue capacity. This will total 30,000 sellable cabinets across all IBX's and will place us at a total revenue capacity of $525 to $545 million.

So in delivering this capacity, let me take a minute to just outline our latest view on expansion CapEx for this year and into '07. For expansion CapEx in '06, we would anticipate spending $150 to $155 million, which now includes an initial $5 million for our New York build. I should also note that we're bringing forward the majority of cost of the D.C. greenfield into 2006. This increase is largely offset by a shift of our Chicago expansion CapEx into 2007.

To be clear, our total CapEx for these projects hasn't changed. It's just some offsetting shifts in timing. Then the balance of these builds will be $190 million to be reflected in the expansion CapEx in 2007. Again, with this platform in place, we're now positioned for future expansion in these markets to be more incremental in nature. To provide some more here, we would expect future expansions to range between $30 and $50 million. For example, a second phase in Chicago would be approximately $30 million or a next move on our campus in Virginia would be approximately $45 million. Just one other note on this, incremental expansions can also be brought online in a much shorter timeframe, which allows us to more closely link our investment decisions to demand visibility of competitive dynamics.

Importantly, with this platform in place, and the investments made in '06 and '07, we see a return to meaningful free cash flow in 2008, even including any incremental expansions that may make sense.

So, now let's talk about nearer term expectations. While the Audit Committee completes its review, we'll only be providing limited guidance at this point. More specifics will follow as this process is completed and we file our full second quarter results. In the meantime, our expectation for annual revenues remain unchanged $280 to $286 million with an expectation of $72 to $73 million in Q3 revenues. For '06 EBITDA, we're adjusting the range to the $100 to $104 million. Previously, the high-end of the range was $105 million, but we're making this adjustment and leaving the range a bit wider to support cost associated with our stock options review and incremental lease costs for our New York expansion.

Just another note, as you think about EBITDA in the latter half of the year, also keep in mind that utility costs typically run higher during the summer months, while this normalizes in Q4. Also, as we saw last year, Q4 is typically a favorable quarter in other cash operating costs. So the net is to expect the strongest EBITDA performance to happen in the fourth quarter as was the case last year.

As previously mentioned, our expansion CapEx will be $150 to $155 million for the year. Ongoing CapEx will be approximately $30 million which reflects the investments that Keith mentioned. This brings total CapEx to $180 in a range to $185 million, or an incremental $10 million over guidance provided at our Analyst Day. And this is split evenly between expansion and ongoing.

So this concludes our prepared comments. Again, thanks for your patience on the limited report today yet I believe we've provided enough to demonstrate that our strong execution and momentum continue. While I'm excited to share our long-range plans and how well positioned we are to expand on our market leadership. Thanks, Operator.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question comes in from Jonathan Schildkraut with Jefferies. You may begin.

Hey guys. Thanks for taking the question. Actually, I have a couple here. If you could talk a little bit about the expense on the audit. I know that, Peter, you mentioned about $500,000 so far. What is the Company thinking that they're going to spend in total on the internal audit? Additionally, if you could give us an estimate as to the lease costs associated with the New York City site, that would be very helpful.

Sure. Well, just quickly, on the New York site, the lease anticipated this year would be a million dollars, Jonathan.

Yep.

But as I said, since this process is still open, we kind of just left the EBITDA guidance range a little wider. I don't know if you'd look back to last year, we narrowed it a little bit as compared to the width of the range right now. And we aren't really sizing the added costs as yet beyond what we see in this range of gudiances out there.

Okay. Great. I guess, I got one more question on your demands model. And, at the Analyst Day, the Company presented a very detailed analysis of demand models, kind of going city-by-city, market-by-market. Today, as we talk about the possible build outs of the Googles and Microsofts of the world, which are already tenants in Equinix's IBX's, do your demand models take into an account a possible attrition of some of their footprint while recognizing that they'll probably want to keep a piece of their interconnection-rich footprint within the data center?

Yes, I think we've been very thoughtful about that one, Jonathan, and really, our long-term view of this is their peering and interconnection needs, as we look at it, certainly not building these centers or basing our demand thinking around their large footprint.

Great. Just one final question on new Chicago and L.A. data centers. Just taking the comments made by management during the course of the call, and doing some back of the envelope work, I come up with 150 cabinets added between those two facilities in the six weeks in which they were in operation in the second quarter. I'm wondering if those -- if the deployments that were going on in those data centers tended to roll into, at least in terms of cabinet adds, into this current quarter or whether this was a decent track record or track rate for us to use?

Yes, Jonathan -- Keith. In the end, what I'll tell you is there's certainly some cabinets that were in the sort of net cabinet additions for this quarter. But clearly what we saw was the momentum was exiting the quarter. So we have some limited cabinet performance, yet we don't realize the full benefit of a quarterly revenue attributed to those cabinets.

Moving forward as you look into Q3 and beyond, that's where, as we've said previously, we've had great momentum in this marketplace, particularly in Chicago and with the MySpace in L.A. And so I think as we move forward, we'll give you a little bit more clarity on that on the Q3 call.

All right. But, you know, the Company has said, best bookings quarter ever. You talk about momentum. You're increasing your ongoing CapEx by $5 million, which is directly tied to cabinet and cage installations for customers, yet you've maintained your revenue guidance. Can you give me some color here, Keith?

Well, Jonathan, I'll wade in first and let Keith offer any more. One note, we expected some strong bookings for sure, and some of the timing of this is meaningful and it's just an installation related. Unfortunately those costs get spread out over the life of the contract, so you don't always see those show up in your current revenue run rate. But the steepest actual dollar growth that I think we've been guiding everyone to is for the fourth quarter. And, I think you will see all the benefit of all that momentum showing up in a wonderful exit rate as we set up the year in this recurring revenue stream for '07.

Thanks a lot for taking those questions.

Sure.

Thank you, sir. Our next question comes from Mark Kelleher with Canaccord Adams. You may begin.

Thanks. I wanted to talk a little bit about Chicago. You said last quarter that there was so much demand there that you sort of had a waitlist and there were customers trying to get in. You've added some new capacity there. Can you just tell us how the demand parameters in Chicago have changed? And then, sort of related to that, it sounded like you said you pushed some investment in Chicago off to next year. Can you kind of wrap that --?

Yes. First question -- demand hasn't changed in Chicago at all. We did say that we saw $385,000, I think it was roundly, of revenue that we saw in that quarter, but the install cycle of getting it in, getting it running, and then getting it billing, it was actually not a big number on the surface. But really it was a strong number based on where we were, and in fact opened both centers at the mid-point of the quarter. So it just takes time to get revenue in and ramp just the physical process of installation. So demand's very strong, and in fact, that center has done very well in terms of its bookings and contributed to that high bookings we talked about in the quarter. It's just getting all that installed, and certainly it has impact in third quarter and beyond.

Then the other question?

So did you -- were you saying that you pushed off in Chicago --

Oh yes -- in Chicago, these are just timing as much as anything, a construction in progress. Just as you refine your project plan and expect certain things to happen, anything from a generator being delivered to when a specific component of the project gets done, it can affect how the construction in progress accounting works and how it rolls out. Now clearly, we are seeing continued strong demand in Ashburn, and we're just slightly moving that build up a little forward and expecting the majority of that expense in Northern Virginia kind of to move forward in '06. But that largely got offset because Chicago, as we looked at the project plan there, we moved the accounting of that CapEx really into '07 by our current expectation.

Okay. And then just one quick housekeeping. Can you tell us the exact date that the 10-Q is due?

Well, it's always due on the 9th --

-- August 9 is the targeted date for accelerated filers. And then you have a potential five day extension period if you file a [12-V-25]. So 14th technically would be the final date, Mark.

Okay. Thanks a lot.

Thanks.

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

Hi. Good afternoon. I was hoping you could give us potentially some direction or guidance in terms of revenue per rack. I know that you've been pretty limited with guidance, but I was hoping we could get that number. And then in terms of capital spending intensity this year versus next year, any shot of getting a direction in terms of, do you expect CapEx next year to be higher or lower than this year?

Erik, let me just sort of deal with the first housekeeping matter on just the revenue per cabinet, as we refer to it. Our cabinet price point went up to $1,442 this quarter. That's an MRR per cabinet increase of 2% over the prior quarter and that's broken down on a regional basis. The U.S. was $1,543 per cabinet and Asia was $1,036 per cabinet. So again, that sort of deals with your first question.

The second question, as Peter alluded to in this call, expansion CapEx for next year is roughly $190 million, and then again that's just limited guidance on what we think is expansion. We still have to put numbers out there as it relates to any ongoing capital commitments.

Got you. And then can you give us some color on the peering exchange and some of the developments this quarter and how you see the momentum of that business continuing going forward?

Well, one thing that was pleasing to see just from continued progress in our rollout, we did get 10 Gig up now in New York in the quarter and we just continue to see a great deal of interest about 10 Gig. Also, the other which related to some of the CapEx from an ongoing standpoint we saw, is just an uplift in metro interconnection, which all eventually points into the interconnection number. But from remote sites or expansion sites, we just saw additional orders to support connectivity over to the original sites where obviously our peering switch is and all the networks reside. So just good demand there.

I'm looking right now just to see if there's any specific numbers. Actually, we're now at 13,752 cross connects, that was up 5% -- 378 interconnection ports as well. That's a net gain of 10 there. And another interesting point, which we're really pleased to see in the quarter -- actually, I was over in Tokyo. We ran a peering forum in Japan and just got a great response out of the just Internet community in Japan. I think we had 120 different folks at that peering forum, and we've just seen some nice up tick. I'm looking towards Keith for a number, just a percentage.

19%.

19% increase in our interconnection revenue in Asia. So we're just seeing more interest and more support of the model over there which is just very encouraging about our Asia business.

Thank you.

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

Hi. Good afternoon.

Hi, Ari.

Couple of things I just wanted to hit on. One, I was wondering if you can kind of just give an update on your efforts. I know you talked earlier in the year about some active repricing where you were going back to certain customers and basically telling them to -- that they were too far below market, and you had to push them up and how that's been trending. And how that may have tied in to some of these expansion facilities to the cabinet adds in the quarter. My understanding had been that you were kind of actively also pushing out some cabinet adds into the second half as you rolled these new centers on. I wanted to know if that is kind of what you've been doing and still part of the trend and if that is what will contribute to the fourth quarter strength that you've been -- or backlog you've been talking about. And then one follow-up after that, if I may.

Okay. Well, just first on the price increase question. We've certainly been pleased with the continued movement of the MRR per cabinet that we've seen and Keith covered, actually. We've always guided people -- we're looking 3% to 5% is how we're seeing these contracts rolling. We've been performing at the high end of that range for sure in terms of what the price increase has produced. So just good progress on that front, as I think Keith had noted as well.

Then, I wasn't quite clear on that latter half of that question; pushing cabinets into the latter half of the year?

Well, the understanding was that as you were waiting for some of these new centers to come on, you were actively delaying some deployments and telling customers that, when centers come on, they'll go into new centers rather than use up additional capacity in existing centers and as such, there may have been some delay in adding cabinets. Obviously, the 650 at the end of the quarter was certainly a great number. I was just curious if we're going to -- if we really will see a swing up from that in the back half due to, I guess what you called earlier, a backlog.

Yeah. I'll let Keith offer any more specificity about it. But certainly we expect to see an uptake in cabinet adds in the latter half of the year.

Ari, I think if you look at just the guidance that we've offered in Q3 and then the total year, if you look at the mid-point, I think one of the things that's really important to communicate out there is that a mid-point of $72.5 million next quarter in revenue, and if we do mid-point, I'm just using my mid-points right now, $283 million for total year, you're going to see basically a $77.5 million Q4 number. That's a $5 million incremental increase in revenue and basically MRR quarter-over-quarter. And the message that I think we'd like to leave is that is that's probably our best quarter even in incremental MRR.

And Peter alluded to it earlier on; it sets us up, albeit maybe not increasing our ranges right now, not increasing our ranges on a revenue basis for the year, but it sets us up that our exit rates are quite healthy, and as a result, that's where we're getting the confidence. We're getting the price increases that we want. We're getting the booking activity, but we're also managing a little on the downside, and that's where we have the sales optimization that we've talked about. And that's affecting us a little bit, and as a result, as we give forward guidance, we're also being mindful of what we're trying to do to optimize performance of each of our IBX's.

Okay. Great. And just one kind of high-level follow up. If I understand from the discussion from the first half of the call correctly, with this New York announcement, this -- sounds like this is really the last large planned deployment. You know, obviously for the last six, nine months you've been kind of forecasting where you might go next with the next facility and that was just a question of details. It sounds like New York is the last big one planned and beyond that you will have additional expansion capability in your four -- in the four major markets you talked about but you don't - you're not currently guiding us that you have immediate plans to build any of those, it will just be there as needed. Is that -- am I understanding correctly?

Yeah. And thanks, Ari for even restating that. I think that was the key message we wanted to get across on the call, that we've now got, with these key expansions we're doing and in the key markets, just a great platform that allows an incremental expansion, as it makes sense to from a demand standpoint. But to us, it's been worth it to spend a little bit more getting this platform in place and then getting a much more incremental in nature expansion CapEx number out there with the flexibility to, even on a leap-time to build standpoint, to be very responsive to the demand we're seeing, competitive dynamic. It just makes us more just-in-time in our business, which we're excited about.

And with the detail that Margie had given back on the Analyst Day as far as the demand in the market, is the, these phase one's of these various projects, is what you are currently have planned to build enough to meet that demand or is there going to be incremental needed to meet just the demand that you're already seeing?

Well, the demand analysis did set this all. But with this demand analysis you do as much work as you can, but you only get a few years of visibility, and we only really trust a few years of visibility here. So, in fairness, there could be continued demand as we start to fill up this new Secaucus or new New York market location, and we'll make that decision at that time, but it will be much more incremental in nature. And it will only be done if, in fact, we see demand at that point in time. So from our current visibility horizon, this is what we need.

Got it. Great. Thanks guys.

Thanks, Ari.

Thank you. Our next question is from Michael Rollins with Citigroup. You may begin.

Hi. Good afternoon guys.

Hey, Mike.

Just a few questions for you. Do you want me to give them to you all at once or do you want me to go question-by-question and then get your answer? It's whatever's convenient for you guys.

One at a time's probably easier.

Okay. The first question I have is the disclosures that you made around the stock option inquiry. Is there anything else that we should try to understand from those disclosures? Is it just a matter now of figuring out what are the potential expenses and P&L impacts or is there something else that you guys are trying to determine through the investigation? Are there other things that you're trying to piece together still as you use the, whatever it is, the remaining time of your inquiry before you disclose the full set of information?

Well, I guess, and maybe I'm reading into your question here, Mike, but certainly the disclosures we outlined today is the most we can say with where we are in the process. With the exception of maybe one thing I'll add as you asked that question. It is an independent review being led by the Audit Committee but -- and I think this has come from other investors as well -- my visibility into this process to date doesn't present any reason that we would have management changes here, and so just to get that out there for you because that question has come up.

And then the second question I had is, when you talk about the sales optimization process, I think you've referenced that a couple of times. Can you talk a little bit more about what you're doing in some centers and then how it's specifically, maybe in some examples, has led or you believe it will lead to better performance from those centers over the next twelve months?

Well, it leads to better performance because there are either price point issues or issues of customers that we don't see as really needing us for the key value we have. Clearly interconnection, clearly the ability to use the peering infrastructure and the way you get content and applications to reach end users is our highest value customer. That's the customer we're going to have for a long time, extremely sticky. So as the business has been built over time, we have had lower price, kind of colo only customers that when you look at it, there's really the trade off of having that customer versus really still a great need, and clearly the Internet's growth in digital media is driving more requests for interconnection, or just the value of being in our center versus a different service provider. So we just want to make sure we're optimizing that and that helps certainly our revenue per cabinet and that's really the biggest point of optimization.

If someone's in a raw colo situation also, they aren't necessarily going to see the value and pay the price. So we have certainly, in some of our price increases, forced some of this optimization and we're fine with that.

And then did you break out the number of cabinets that you got domestically versus international?

No. We can get that for you, Mike. Yes, let me just get that for you.

But one of the things while I'm looking for that, as Peter mentioned on the optimization, that's partly why you see, sort of with the success in our bookings, you see, maybe not the step-up you're expecting, but one of the things that's very interesting to know, and even though I said it earlier on is that from Q2 to Q3, at mid-point, you're roughly up $4 million incremental increase in revenue, which is one of our highest. And then as you move into Q4, again at mid-point, you're seeing another sequential increase in revenue that -- not saying it will be the highest but it certainly looks at the high-end of what we've ever recognized on a sequential, quarter-over-quarter growth. So certainly that's something that we benefit from.

The other thing that's important is that, as we continue to sort of analyze our churn, when we talk about churn in percentages because the base is getting bigger, when we refer to a 2.4% or 1.9% churn, you do have a bigger base that you're dealing with. And so as we optimize out, we really, pardon me, we really sort of dealt with some of the issues in Q1, Q2 and as we look forward into Q3 where we are really optimizing out some of the customers and working to get more higher profile, higher paying customers into our facilities.

And then just on breaking out the details for you, it's roughly 12,400 cabinets in the U.S. billing and 3,000 cabinets in Asia billing at the end of the quarter.

Great. And then the last question is just on the balance sheet. So, you've announced or described your capital spending expectations. You've talked about leverage before. Do you see other uses for cash flow for leverage over the next 12 months either investing in your own stock or taking down maybe some of what would be the debt balance? So therefore, rather than funding growth with borrowing, funding it with cash or maybe even some form of repatriation. How should we think about the use of leverage in your balance sheet and therefore the use of cash over time? Thanks.

Good questions, Mike. In the end, when we look at basically at our balance sheet and how we want to use it, certainly we have a fair bit of unrestricted cash today. As you also know, we have the Silicon Valley Bank line of credit. It's a $50 million line. And then, as we've announced, we're working closely with some commercial banks to put some financing in place for the Chicago property. As we move forward and we look at some of our other expansions, I think we've got the option here whereby we have the ability to maybe raise more debt and fund some of the capital with some debt. But we also have the capacity to fund a lot of it from our own internal sources.

I think what we need to do is get down the road a little bit further to see where the market goes, see what additional investment we make before we make a decision on any repatriation of capital, whether it's in the form of a dividend or in the repurchase of shares. But certainly it's something we are aware of and it's something that we think about as we think of our debt capacity. I guess the message that we left at the analyst day is that we're willing to take a certain -- put a certain amount of leverage on the books of the Company but given where we are today, we have the stock option investigation underway, we have to determine how we raise capital or do we need to raise any capital or whether it's going to be sort of asset specific. So until we get a little bit more clarity on where we can go with our financing opportunities, I just -- I would rather defer that type of discussion in a more formalistic way until Q3 or the end of the year.

Thank you.

Thanks.

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

Thank you. Great quarter. Two quick questions. First, can you repeat the cross connects number for quarter two? And the second question is, in terms of data centers, is the door now more or less closed on acquiring data centers from other companies? I realize there's only a few Equinix quality data centers floating around out there but, one example is the Sterling Facility in Phoenix, recently picked up by Digital Reality. So, now are you guys on a firm path of greenfield builds or are you still open to doing some acquisitions?

We're looking at the greenfield builds we've described and then obviously incremental expansions around them, Dan. I mean, the reason we went to greenfield was seeing a limited opportunity for quality centers being available. So as that dried up on us -- now granted Phoenix is another market but as our models stay consistent here to expanding around these key network hubs and their connection points, we just don't see that kind of an answer in an acquired building from someone else.

And your question on the cross connects again, we're at 13,752 and that was up 5%.

Thank you.

Thank you. Our next question comes from Rod Ratliff with Stanford Group. You may begin.

Thank you. Everything's pretty much been asked and answered. I only have one question left, and I apologize for asking you to be redundant, but would you repeat -- I think you gave figures earlier, Keith, on expectations for expansion CapEx versus ongoing CapEx for '07. Would you repeat that?

Yeah. The expansion CapEx for '07, right now we believe is roughly in the $190 million range. And we still have not yet given anything on ongoing CapEx for 2007 but anticipate similar to probably the prior years. If things go well, we'll be giving guidance for '07 at the end of -- on our Q3 earnings call.

Great. Thanks, Keith.

Yeah.

Thank you, sir. We have time for one last question from Jonathan Schildkraut with Jefferies and Company. You may begin sir.

Hey guys. Thanks for taking the second round here.

Sure.

Just one quick question on the 10 Gigabit Ethernet Exchange. I'm wondering how many data centers that's now rolled out into and last quarter you gave us some color on the number of ports that were 10 Gigabit. If you can do that again it'd be really appreciated.

Sure, Jon. This is Margie. It's now rolled out to four markets, and so we're excited about that. And I actually don't have the 10 Gigabit port count with me. I'm looking for it as we speak. But we are really happy in the quarter with the up tick we got in new 10 Gig ports sold in the quarter and we continue to far exceed plan on that in terms of what we expected.

All right. Thank you very much.

Thank you. That concludes the question and answer session.

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