Equinix Inc (EQIX) 2006 Q4 法說會逐字稿

Hello and welcome to the Q4 2006 and Year-End Review 2006 Results 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.

Thanks, Jacquie. Good afternoon, and welcome to our Q4 and year-ended 2006 Results Conference Call. Before we get started, I would like to remind everyone that some of the statements 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 November 1, 2006. Equinix assumes no obligation and does not intend to update forward-looking statements made on this 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. Although I expect most of you have moved on to 2007, to begin I think it makes sense to quickly recap 2006 and another great quarter, which has provided a strong exit rate to the year, positioning us for another year of solid growth. As you saw in today's release, revenues on a pro forma basis were 288.1 million, a 30% increase over the prior year. I should note here that revenues on a GAAP basis were 286.9 million.

This includes a nonrecurring revenue adjustment of 1.2 million, which is a result of our adoption of SAB 108. This was a new ruling issued this September, which impacted our treatment of installation revenues. In short, historically, we've treated installation charges less than $1,000 as in-period revenue, while amounts larger than this have been spread over approximately 24 months to reflect the ongoing relationship with the customer.

This covers the true-up of this past treatment to now recognize all installation charges consistently. Our Q4 result was 81 million on a pro forma basis, ahead of our expectations, and a 10% increase in revenue sequentially. The GAAP result is 79.8 million.

Our EBITDA in the fourth quarter was 30.3 million, a 21% increase sequentially, which brought the full year to 102.1 million, or a 46% increase over last year. This was supported by cash gross margins of 63% for the fourth quarter and 61% for the entire year. We ended the year with 1,290 customers, including the addition of the Chicago Mercantile Exchange, Netflix, Network Appliance, and Timex, with 81 new ads in the quarter. 18 of these were new FX customers, reflecting our momentum there.

So another solid year for Equinix and a great fourth quarter. But as I look back over the year outside of financial results, some important objectives were accomplished that we feel were essential to our plan for '07 and beyond. Perhaps most significant is the progress we've made in our expansion strategy. We brought three new IBXs online in '06 and as the equinization phase of our expansion winds down, we've now moved on to greenfield builds.

The equinization phase has been important in demonstrating our ability to bring new centers to market, while our trajectory in these bookings and growth from these specific centers has exceeded our expectations. For example, we expect our Chicago expansion, opened last May, to largely be booked this quarter. Our L.A. expansion is ahead of plan, already generating cash in the fourth quarter. We've had a smooth transition in the Silicon Valley where our third IBX there is expected to be fully booked this quarter, while our fourth site, which opened in the third quarter of '06, has been taking our new customer installations in the Valley and is now approximately 40% reserved.

Confidence gained in our momentum and execution through this equinization phase was essential in our decision to pull the trigger on the more significant investments required in greenfield builds. I am pleased to report our D.C. fourth site or first main field has begun initial installation of new customers as the building is commissioned this month. Demand has been strong as approximately half of this IBX is either booked or reserved in our pipeline.

So we're quite pleased with our expansion execution as this much needed capacity gives us an even stronger market position. We believe the expansion engine we've created is a competitive differentiator as we bring capacity to market ahead of other potential builds that may be out there.

Beyond expansion, the Company accomplished a great deal at an operating level in '06. From a sales and marketing standpoint, we booked more new business than any prior year. Of course, this then touches every area of the Company and demands that we scale to our larger opportunity. For example, our IBX operations team successfully installed this level of bookings while also delivering six [lines] of reliability across our centers.

And just to highlight, our IBX Ops Team now manages approximately 10,000 scheduled events in a month. This is installing a cross-connect or a power circuit or a new customer implementation, or simply a Smart Hands task in response to a customer service request. Our teams are scaling well as we manage our growth.

Then, as we've noted on prior calls, we also launched a new IT platform, which like many IT projects has had its range of challenges and we still work through some today. But this has been a big step in building the transaction platform necessary to support the size of our opportunity. So as we leave '06, as in past years, we have strong business momentum, coupled now with our expansion track record and a greater scale in our ability to execute. This is a great launching point into the new year and beyond.

So before turning it over to Keith to cover the specifics on the quarter, I would like to mention some of our recent announcements. So as you saw today, we made an important move in the Silicon Valley to take ownership of our core IBX in this market. Much as we saw an opportunity in Northern Virginia to acquire a campus there, which is one of the leading network interconnection points on the Internet today, we've now made a similar move with our core peering IBX in San Jose, while this could provide optionality on future expansion in--excuse me.

In other announcements, last month we acquired a new center in Tokyo. This will bring us an additional 740 sellable cabinets, doubling our Tokyo footprint. What's also very interesting about this site is that this is the touchdown point for VSNL's Trans-Pacific cable. This brings added value to our network and interconnection business model. And also supporting this acquisition, Tokyo delivers our strongest price point in the Asia region, comparable to leading U.S. markets.

While we're on the topic of Asia, as I mentioned on the last call, we've seen a new level of success in Singapore, and we see an opportunity for incremental investment in our growth there to expand into adjacent space in the building we're in. And just as an aside on Asia, our team there hit another new high in MRR bookings for the quarter.

So let me stop there for now and hand it over to Keith to take you through the specifics of the quarter. And then, I'll come back and talk about how we see '07 unfolding.

Thanks, Peter, and good afternoon. I am pleased to provide you with our fourth quarter and 2006 annual results along with some additional color regarding these results and the trends as we look into 2007.

So let me first start with our revenues. Our Q4 revenues came in at 79.8 million, an increase of 8% over the previous quarter, and up 29% compared to last--same quarter last year. Although taking out the impact of the SAB 108 adjustment, pro forma revenues in the quarter were actually 81 million, a 10% sequential increase over the prior quarter. For the year, our revenues were 286.9 million, a 30% increase, or 288.1 million when eliminating the impact of the noted adjustment.

Our favorable revenue performance was the result of strong booking activity in each of the four quarters during the year. With respect to Q4 revenues, apart from the continued strong bookings in the quarter, we benefited from increased revenues attributed to our newly opened IBXs. U.S. revenues represented 86% of our total revenues.

One last note, contributing significantly to our 2006 success was 10 million in revenues from our 2006 [IBA] expansion.

Recurring revenues in the quarter were 76.4 million, a sequential 6.5 million increase, or 9% over the previous quarter, our largest quarter-over-quarter dollar increase to date and a 31% increase over the same quarter last year. Nonrecurring revenues for the quarter were 3.4 million, derived primarily from insulation fees and professional services, although we did recognize approximately 350,000 in nonrecurring revenues related to a sale of equipment for a large customer install in Singapore.

Also affecting nonrecurring revenue in the quarter was the 1.2 million SAB 108 adjustment. Annual nonrecurring revenues were 13.8 million, or about 5% of revenues.

In Q4, our cabinet turn was 3.3% and our MRR turn was 3.6%, both slight increases over the prior quarter, and reflects the completion of our 2006 sales optimization efforts. On an annual basis, our churn was consistent with our guidance at about 1% per month despite our fairly aggressive efforts to optimize the performance in each of our fully occupied and networked [indiscernible] IBX centers. As we look forward, we expect our proactive churn to be less than the 2006 levels.

Moving on to gross profit and margins. The Company recognized pro forma gross profit of 30.6 million for the quarter or 38%, compared to 24.6 million for the previous quarter and 20.1 million for the same quarter last year. Our cash gross margins for the year were 61%, representing a 75% flow through on incremental revenues. This result included about 2.1 million of cost attributed to our New York and Chicago expansion IBXs, another pre-opening cost attributed to our greenfield expansion IBX in the D.C. market.

These incremental Q4 costs were partly offset by the seasonal benefits derived from the anticipated quarter-over-quarter reduction in utility rates over Q3, plus the expected Q4 reduction in our FICA costs. Looking to Q1, apart from the annual reset--pardon me--apart from the annual reset of our FICA costs, we expect to incur higher utilities expense and we will absorb additional expenses related to our newly acquired Tokyo IBX.

On a same IBX basis, cash gross margin--sorry, pardon me. Our same IBX cash gross margin, which excludes the revenues and costs from our three recently opened IBXs and the greenfield project, was 67% for the quarter and 65% for the year. This shows that our operating--that we're operating within the scope of our long-term operating plan with anticipated cash gross margins in the 65 to 70% range.

On to utilization rates. At the end of Q4, our ending quarter in weighted average cabinets billing were approximately 17,400 and 17,200, respectively, versus about 16,200 cabinets billing last quarter. On a weighted average basis, approximately 55% of our cabinets were billing during the quarter. And at quarter-end, 56% of our cabinets were billing. Breaking down the weighted average utilization on a regional basis, our U.S. number was 52% utilized and Asia was about 72% utilized with the majority of the remaining Asia capacity available in our Sydney IBX.

One last note as it relates to cabinet utilization levels. Moving forward, we want to begin reporting a saleable cabinet metric. Historically, we gave you the total potential cabinets that could be sold as planned in the original designs of the IBXs. As such, the saleable cabinet capacity at the end of 2006 is approximately 24,000 cabinets.

Moving forward, we will no longer discuss the theoretical cabinet capacity and will solely refer to saleable cabinet capacity at a percent utilized of that capacity. Looking at revenue per cabinet on a weighted average basis, our average monthly recurring revenue per cabinet increased to 1,492, up 1.2% over our Q3 level of 14.75, and up over 7% compared to last year. As we look into 2007, we expect to continue our price increase program, raising prices on average 3 to 5% on the install base, and expect our current selling prices for our new customers to increase closer to 10% over last year's level.

On a regional basis, our weighted average price per cabinet in the U.S. was 1,577, up from 1,559 last quarter. In Asia Pacific, this result was 1,141 per cabinet, up from 1,110 last quarter.

Moving to SG&A, SG&A expenses for the quarter, including stock-based compensation expense of 6.4 million were 28.1 million. SG&A expenses for the year were 104.7 million, including 27.5 million of stock-based compensation expense. We ended the year with 616 employees, 356 which are assigned to the SG&A line, a 7% increase over the prior year. Our cash SG&A expenses were 20.4 million for the quarter, a 1.3 million increase over the prior quarter, and up from last year's level of 14.8 million.

Cash SG&A for the year was 73.9 million. For the quarter, we had greater than expected costs related to our variable sales and corporate compensation plan totaling 2.8 million, and a higher [out of sight] professional service cost related to the enhancement to our corporate IT platform. These additional costs were offset in part by the lower than anticipated spending on the stock option investigation in the quarter.

The total stock option investigation costs for 2006 total 1.7 million, below our 2.7 million estimate, as anticipated costs related to our potential 409A tax matter are not expected to materialize.

Moving on to EBITDA, our EBITDA was 30.3 million for the quarter, a 74% flow through sequentially on incremental revenues. Annual EBITDA was 102.1 million, or approximately 48% flow through for the year. EBITDA for the year includes higher costs related to our variable compensation plans, 2.1 million of costs attributed to our 2007 expansion project, and about 1.7 million of costs attributed to our stock option investigation.

I am pleased to report that we had a net income of 9.1 million for the quarter. Although an important milestone to achieve, we benefited from the sale of our Honolulu IBX and recognized a gain of 9.6 million. This is offset in part by the 1.2 million change in accounting policy attributed to SAB 108.

Excluding these two one-offs in the quarter, we had positive net income of 643,000 for the entire quarter. Given our 2007 expansion initiatives, including our 150 million in new financings, we will not maintain positive net income in 2007. For the year, our net loss was 6.4 million, or $0.22 per share. For the year, stock-based compensation expense was 30.8 million. Depreciation, amortization, and accretion was 76.3 million, and we had a 1.5 million restructuring charge.

Looking forward, we expect our 2007 net loss will approximate 21 million, including stock-based compensation expenses. We expect stock-based compensation expense to increase to about 40 million in 2007, despite less dilution related to our employee stock plans in '07. The primary driver of this increase relates to our current stock price that is higher than last year's stock price, yet the Company still has a high volatility rate when valuing its stock plan activity.

Before turning to the balance sheet, let me discuss both income taxes and interest expense. With respect to income taxes, taking into consideration our tax deduction benefits attributed to our stock activity and our active construction projects, we do--we did not pay any meaningful cash tax in 2006, and in fact, recorded a book tax recovery in our income statement. This related to the release of a valuation allowance on our deferred tax asset in Singapore.

Entering 2007, we have available NOLs in the U.S. to offset future taxable income of approximately 79 million, and 100 million for our foreign jurisdictions. Looking forward, we do not expect to pay any meaningful cash tax in either 2007 or 2008. With respect to interest expense, we recorded 14.9 million in 2006. It's worth noting that a portion of our 2006, and as we look into 2007, a portion of this interest expense will be capitalized into our expansion projects.

Turning to our balance sheet, we ended the year with unrestricted cash balances of 156.5 million. As a reminder, at the end of 2006, we increased our mortgage for our D.C. area campus 200 million, a 40 million increase. And as announced yesterday, we closed our 110 million Chicago expansion financing. Under terms of this financing, we will draw proceeds under the facility consistent with our cash spending. We expect to be fully drawn under this facility by the end of 2007. This will bring our total gross net outstanding, excluding the convertible debentures to about 304 million, or about 2x levered against the midpoint of our EBITDA guidance for '07.

CapEx in the quarter was 59.4 million, of which 8.9 million was ongoing and 50.5 million was for expansion CapEx. On an annual basis, our total CapEx was 162.3 million, of which 31.2 million was ongoing and 131.1 million was for expansion CapEx, less than we originally expected to incur during 2006. Included in our ongoing CapEx for the year was approximately 10 million for one-off projects like IT--like our IT upgrades, our 10-gig expansion, and power and cooling enhancements. A large majority of the remaining ongoing CapEx was attributed to success based customer installation whereby the customer reimburses Equinix for these costs in the form of installation charges and we recognize this revenue over an estimated term of about 24 months.

Next, moving on to our operating cash flows. The net cash generated from operating activities in the quarter was 26.3 million, an improvement of 5.7 million over the prior quarter and 7.8 million over the same quarter last year. As a result, operating cash flow--sorry. As a result, our operating cash flow exit rate is now greater than 100 million. For the year, we generated operating cash flow of 75.9 million, including the impact of 12.8 million in restructuring charge payments, 1.7 million of stock option investigation costs, and greater than expected variable compensation costs.

We expect our 2007 operating cash flows to increase over 2006 levels driven by higher operating profits, yet offset in part by some higher interest expenses. Cash used in--used from investing activities was 45.1 million for the quarter, and 155 million for the year, including net proceeds of 9.5 million for the sale of our Honolulu IBX.

Cash generated from investing--sorry--from financing activities was 8.8 million, primarily attributed to proceeds from our employee stock plans, although offset by debt payments throughout the quarter. Looking into 2007, we expect to draw down the full 110 million under the announced Chicago financing, plus we anticipate about 20 to 30 million in proceeds from our employee stock plans.

Finally, with respect to our equity balances outstanding, we had approximately 29.5 million shares of common stock outstanding. This number excludes 2.2 million shares related to the convertible debentures and 3.5 million shares related to employee stock plans and other warrants, the majority of which vest over the next two to four years.

So let me turn the call back to Peter.

Thanks, Keith. Now, let's talk a little bit about how we see results unfolding under the--over the course of 2007. First, as you saw in the fourth quarter, our revenue momentum remained strong. As Keith noted, we had our best ever actual dollar quarter-over-quarter growth, while our bookings in the quarter were consistent with some of our best ever results.

Looking into our pipeline and considering the success of last year's expansion efforts, we're excited about the growth opportunity now presented by our continued expansion investments. As Keith noted, at this point in time, we're at our highest utilization to date at approximately 56%, and again, we guide to 75 to 80% as a fair utilization target across out existing footprint. This translates into what's roughly a 72% net utilization of our capacity.

So our planned greenfield openings, coupled with expansion now taking place in Asia, are poised to make important contributions to our future growth. As we think about these in '07, we anticipate strong contribution from our first greenfield in the D.C. market. As noted earlier, this center is approximately 50% booked or reserved as we've begun to install our initial customers.

As we look at our other two greenfields in Chicago and New York and the planned expansions in Asia, these will have some contribution to '07 results, but will be most meaningful to continuing our growth into 2008. As an update on the Chicago and New York builds, we have been projecting third quarter openings for these centers and have our team and contractors driving hard on their delivery. Based on current project schedules, it appears that these expansions will likely open in the late September or early October timeframe.

For those of you that have been following these builds, you'll note that this is the backend of our Q3 objective for these sites. These are complex builds and as they've progressed, we've gained more clarity on our expectation for timing and project costs. For example, we're increasing our expectation on project costs for both Chicago and New York by 10 million each, or a total of 175 and 95 million, respectively.

The majority of this increase is related to an opportunity to improve on our design. Specifically, we've moved to a more centralized cooling infrastructure, installing large chiller plants instead of a more traditional approach to deploying refrigeration units spread across the data center's floor. This is a much more efficient and less costly approach to operating data centers of our size and scale. We expect this to significantly improve our utility costs, reducing power required for cooling these centers.

As these centers come in later this year, our momentum likely means we have a window of time where we'll largely be full in these four markets. We have contemplated this in our guidance, yet much as we saw in Chicago last year, we anticipate pent-up demand will provide a nice launch of these centers upon opening. I should also note that our strong start to the year and the momentum across all our markets has allowed us to lift our revenue guidance.

So with this in mind, let's go to an update on our planned capital for expansion in 2007. We're raising our expansion CapEx from a range of 225 to 245 million, as we announced in our Tokyo press release. This will now be 280 to 300 million in expansion CapEx. So let me break that out for you, so you can clearly understand the change here.

First, we shifted 25 million of expansion CapEx into 2007 from what we expected to spend on our Chicago and New York builds in 2006. This is related to the project's timing. Second, as previously mentioned, we've increased total billed costs for Chicago and New York by 10 million each, which will now result in approximately 240 million in expenditures related to 2007 in the completion of these centers.

The remaining spend this year to complete our D.C. greenfield is approximately 6 million. Third, and as noted earlier, we're moving forward with an incremental expansion in Singapore, which will provide an additional 450 cabinets in that market. This will entail an additional 12 million in expansion CapEx in support of the strong momentum we've seen in Asia. So in total at the midpoint, this would be 292 million. So we are now placing our anticipated capital expenditures for expansion really to be a range of $280 to $300 million.

We feel this is an appropriate range that allows for a variability in project contingencies, capitalized portions of our financing, and we also include the first four quarters of capital in support of initial customer installations, IBA--or for example, cages and cabinets in what we track as new IBXs.

So understanding our current expansion plan, we thought it might also be helpful to outline what this really means to our long-term opportunity. As these expansions come online this year at our current pricing, we're now increasing our global revenue capacity to be in the range of 580 to 600 million. So this is what we expect the expansion capital we've outlined for 2007 to deliver for us.

Beyond expansion CapEx, let's provide a full view on capital expenditures for the year. We're increasing ongoing CapEx from 30 to 36 million. This number is comprised of three elements. First, capital at the corporate level as we continue to scale the business.

Second, capital associated with the maintenance of equipment and infrastructure in our same IBX centers, which would also include any upgrade or augmentation to benefit the efficiency or quality of infrastructure like power and cooling.

Third, approximately half of this capital is success based related to the installation of new customers and growth in our exchange service and interconnection between centers, which is largely offset on a cash basis by our installation charges.

Finally, we announced the agreement to acquire our original Silicon Valley IBX for 65 million. Of course, our expectation is to finance this and recapture the majority of this expenditure.

So now, let's take a look at other elements of our guidance for 2007, and then the first quarter. We're raising revenues to now be in the range of 354 to 364 million, which increases our midpoint by $2 million. We expect cash gross margins to be 59 to 61%. This includes approximately 9 million in net costs attributable to our expansion activities in the year. Cash SG&A will be in the range of 78 to 80 million, or 22% of our revenue at the midpoint. We are increasing our EBITDA expectations to now be in a range of 134 to 139 million.

For the first quarter, revenues are expected to be in the range of 84 to 85 million. Cash gross margins for the quarter are expected to be 61%. Cash SG&A is expected to be approximately 20 million. EBITDA for the quarter is expected to be in the range of 31 to 32 million, and similar to last year, reflects added costs in the quarter, as well as a reset in costs, such as like in other seasonal fluctuations.

Total CapEx for the quarter is expected to be between 55 and 60 million, which includes 15 million of ongoing capital expenditures, and 40 to 45 million in expansion CapEx in support of our new centers.

So I hope that provided a good view of what we expect over the course of 2007. Clearly, there's a lot going on, but we're poised for another exciting year of growth.

So Operator, let's take questions.

Thank you. (Operator Instructions.) Our first question is from Jonathan Atkin with RBC Capital Markets.

Yes. A couple of questions. First of all, at what rate was the Silicon Valley IBX center acquired? And then, the higher SG&A that you referenced, I'm just kind of wondering what the nature of that was. Is it higher variable sales compensation, meaning that's going to kind of roll forward into future quarters? And then, finally, the portion of the sequential revenue increase, I'm wondering how much of that came from repricing versus expanded or new contracts with existing customers. Thanks.

Great, Jonathan. Dealing with the first one, the Silicon Valley purchase is basically--when we look forward at what we call our pending rate increase, we were--we acquired this asset in excess of an eight cap rate. So clearly, given sort of today's current trends on what people are paying for assets, we thought that was a competitive price and consistent with what we wanted to accomplish. As it relates to our spending on the SG&A line, you're right. A good portion of it was variable compensation. It was related to, one, the sales compensation. The team did better than we anticipated, not only for the quarter, but as it related to the entire year. And those additional costs were reflected in Q4.

In addition, we increased our corporate compensation plan, our bonus plan for our--for the employee pool in Q4, and that was reflected in the number as well - roughly $1 million of that increase. And also, as I mentioned in my comments, we did put roughly another $500,000 in professional fees attributed to our IT platform that we incurred in the quarter. And so, that's where you got the increase.

As we look forward on the revenue--I'm sorry, as we look forward at least on those expenses, we did look at the sales compensation plan. We did a rewrite of the plan in 2006 and it was a very successful plan, not only for the Company, but also for the sales organization. As we look forward to 2007, we're looking at the plan and we've made some minor adjustments. But we--I would tell you that we would not expect the same level of sales compensation in 2007 as we did in 2006. At least on--and then on the corporate level, we plan roughly the same level of corporate bonus for the employee pool between 2006 and 2007.

And then, the last comment on revenues, again, the majority of our revenues is coming from organic growth. Peter and I have been on the road for a while and the things that we have talked about, it's tough for us to [split out] the exact numbers. But we are increasing our--basically, we're trying to increase our prices 3 to 5% per year for the install base. But it is fair in 2006--what we have said publicly is if a new customer came on in 2006 relative to prices they paid in 2005, you would see a 20%-plus increase in prices between the two years. And so, a lot of our growth came with our new booking activity at these higher price points.

Thank you. And then, just quick follow-ups. What's the sense you're getting of new capacity either under construction or coming online from some of the major teleco competitors in the U.S. or elsewhere? And then, if you could also give us an update on the CEO search and any other ongoing changes or realignments at other levels of management.

Sure. Definitive announcements of new supply coming online, certainly [Sabis] has come forward with that one, and I think in four markets, not at our scale, of course. And certainly, they're pursing their managed services model of virtual computing opportunity within those. Outside of that, certainly we've heard discussion about potential AT&T builds and Verizon builds, but there aren't any definitive announcements to really size those. But you can expect in time that some level of supplies would be there. Of course, both of those companies are also pursuing a managed services direction in their business, versus the interconnection model that we're after.

And the second question. Oh, on the CEO search, we have begun and have met candidates. But nothing really to report beyond that at this point.

Thanks very much.

Sure.

Thank you. Our next question is from Jonathan Schildkraut with Jefferies.

Thank you for taking the question.

Hi, Jonathan.

Hey, guys. I've just a couple of housekeeping items and then some more direct questions. But can I get an update on cross-connects and gigi ports and 10-gigi ports?

Current cross-connects--well, we had gross adds of 594, Jonathan, so we're at 14,855 in total. And then, total ports are at 406. We sold 25 at a gross level, actually--so I guess that's a net 17 in the quarter. And three new 10-gig ports were sold. Actually, one of them to [YouTube].

All right. Great. Could you--and maybe this is a question for Keith. There's been a lot of expansion that's been out there announced--some of the cabinet capacities on those new data centers turned out to be somewhat more than we initially anticipated. You've added 740 cabinets for Tokyo and now 450 for Singapore. Can we walk through the timing of--and the magnitude of the cabinets that are going to be added to your inventory number? And I understand now we're talking about available for sale cabinets, so I'll keep that in mind.

Okay. So as we announced, we have five primary you might call expansion projects going on in 2007, in addition to the one that we announced in Sydney in 2006. But the D.C. project--it's roughly 1,700 cabinets and basically, as Peter alluded to, we are going to start accepting customers in February. And that's the 1,700 cabinet number.

In Chicago, on the first phase, it's in the sort of September/October timeframe. In fact, Chicago and New York are both in the September/October timeframe. Chicago will come out with initial cabinets 2,500 and New York will come out with initial cabinets in phase one with 1,700 cabinets. So those three are consistent with what was historically said at 5,900 cabinets added.

Then Tokyo in Q4, roughly 740 cabinets, and Singapore Q3 sort of opening this phase will bring on another 450 cabinets. In total, it's 7,090 cabinets will be introduced to the market in 2007.

All right. Fantastic. If you could give us a little color on why the CapEx slipped from one year to the other. Also, I understand that the projects in New York and Chicago are looking a little different than they were initially. But was there a specific reason or was it just a timing of payments issue?

Well, the payments are tied to work being done, Jonathan. So certainly, timing of payments could have an impact, if we were very specific right at the end of the year. But largely, it's just as work is completed then that generates the payment for it. So some of these things took place at just different times than the original anticipation of--again, very complex, big projects. And as those project plans play out, timing can vary.

Okay. . Thank you very much for taking the questions.

Thanks, Jonathan.

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

Hi. Good afternoon. Just a couple questions for you. First, just in terms of when you talk about the cap rate of 11% for the property that you purchased, what does that mean in terms of rent expense savings for 2008? The second question is I was curious if you could just break out between domestic and international on the cabinets and recurring revenue.

The third question, and last question, is when you talk about the MRR, and you gave the updated domestic number, the new builds for 2007--do you still anticipate a premium to what the current level is because of the power requirements? And if you could put some numbers around that, that would be really helpful. Thanks.

Okay, Mike. Let me deal at least with the first question, and then, either I or PVC will deal with your other two. But the first one, it wasn't a cap rate of 11%. It was an 8 cap. So when we look at that relative to, again, the market, as you can--we sort of value today at roughly 6.5 cap, to give you a sense of people who are asset heavy and what they would pay for an asset. So that's roughly what we would be paying on a prospective basis as we looked at our pending [ramp] increases.

But moreover, as announced today in the press release, we're not yet adjusting anything on EBITDA. EBITDA is going to be in the sort of the $2 to $2.5 million range of savings when we actually acquire the asset. But because it's going to be a phase--or potentially a phased acquisition through 2007 up to November, I think it's late November of 2007, we're not yet assuming that we're going to get any EBITDA pick up, if you will. As we proceed through the closing of the transaction, we then will update the EBITDA number to reflect any benefit that we will have.

Having said that, the one thing that will offset the rent expense is that we [indiscernible] the price that we're paying for the asset there will be slightly higher real property taxes associated with the asset. So that's something that we will also sort of itemize as we update guidance in one of our future calls.

As it related to--and I want to make sure I understand the question correctly, Mike. But as it related to the cabinet capacity that's coming on, 5,900 of those cabinets that we're bringing on are coming for the U.S. market, of course. And then, we've got 1,190 cabinets that are going to be coming from the U.S.--sorry, from the--coming into the Asia market. So I hope that's what--I answered your question correctly there.

Actually, on that question, really what I was looking for is on the ending cabinet just for the quarter, if you could break that between domestic and international. And then, also in the recurring revenue for the quarter, break that out between domestic and international, that would be great.

Yes. I certainly can do that. So the number at least in the Asia--the Asian market is roughly 3,300. And then, 14,100 on the--in the U.S. market. But at least that gives you a picture of what the cabinets are per market. As we break down recurring revenues in each of the markets, the U.S. in Q4 is going to be about 65.6 million of recurring revenues in Q4. Asia's going to be about 10.8 million in recurring revenues in Q4.

That's great. Thank you.

Okay, Mike. Oh, Mike, I think you had one more question just about pricing levels in the greenfield centers. And, yes, we will have different price points. And actually our initial deals in those centers are seeing pricing in the 1,800 to 2,200 range per cabinet in our returns there. So as you track us going forward, obviously, the historical sites are going to be in the average price that we've offered from a cabinet standpoint. But as we start tracking the new sites, we're going to see this higher price point.

Is that--when you talked about the price increases for 2007 over 2006 for new customers. Was that price levels for greenfields factored into that percentage?

No. That was more on the current install base or new customers in the current centers. Greenfields will have their own price point.

Thank you.

Thank you, sir. Our next question is from Chris Larsen with Credit Suisse.

Hi. Thanks.

Hey, Chris.

Two questions. Good evening.

Good evening.

The first--.

Hey, Chris, we're having trouble hearing you a little bit. If you--.

Sure. Is that better?

Oh, there you go. Perfect. Yes, great. Thank you.

So if we go back to the Silicon Valley purchase, in addition to the capital savings, the economics there, does it give you additional capacity to expand that facility? Now that you own it is there land there included in that sale that you could expand that? And second--.

--Oh, I'm sorry. I didn't realize you had a follow-up. Go ahead.

No, go ahead. I'll ask it after you answer that one.

Sure. Yes. In fact, there is additional land there that gives us a lot of flexibility--well, up to nine acres, really. But--so certainly, there's ample expansion room that is option for the future. Keep in mind, we also have some room for expansion in our Santa Clara site. So it will depend on demand and what our opportunity is. But the Santa Clara facility we acquired some time ago from Sprint has some headroom to build out more cabinets there as well.

So we're just well positioned in the Valley for future growth now.

Excellent. Second question, if I look at the number of cross-connects in ports and divide that by the number of ending racks, the actual number of ports or cross-connects per rack actually went down sequentially. And that's a number that's been going up sequentially since I've got data--back to 1Q '04. And the--and I'm just wondering is that because you added so many racks in this quarter or is there something new that's going on there? Or if you could just talk to maybe that number that I'm coming up with.

Sure. Well, I'll give you some first thoughts on it. I haven't looked at it specifically that way this quarter. But it could be a timing thing. Often we'll do a cabinet installation for a customer and all of their cross connects have not run as yet. So maybe in the quarter that may have an impact in it. And certainly, we did have a lot of cabinet adds in the quarter. It was a very good quarter for that. So timing and that factor with the installations that took place for those customers could have an impact there.

But I don't know if Keith has any more color or granularity to it.

The other thing I would say, Chris, certainly I agree with what PVC said. When you look at the revenues attributed to our interconnect inactivity in the quarter, on the U.S. side, we saw interconnection revenue grow at a faster rate than overall revenues and just under 12%. Where on the Asia side, where we're really trying to emphasis more interconnection activity in those IBXs, we grew just under 17% quarter over quarter.

So certainly, directionally, we feel the revenue and the growth rates are going the right way. But I think if you look at that one-off type of calculation, sometimes it can get skewed just by what comes in in cabinets and cross connects in the quarter. But we're still trending towards that 20% as a percentage of revenue basis.

And Chris, this is Margie. The one thing I would to that is the one thing we are not counting in force, which we're going to start doing next quarter, are the billing [indiscernible] in Asia. Today we really haven't had a good critical mass there of [indiscernible] billing. And so, we're going to start including that next quarter. So you'll see a bump and we'll break that out so you'll see it. But I think that will also kind of help us out.

Great. As a follow-on with that, is it possible that maybe some people are switching from a cross-connect to a port where they--instead of having three cross-connects are saying well, let me get on your 10-gig port and I'll just connect all three of those clients that I was connecting to through the port. Is that--?

--Yes. We see actually a lot of going back and forth. I mean if you haven't--for instance, if you have a customer today who has let's say two 1-gig ports and they were using cross-connects for the rest of their peering to the people in the center, once 10-gig goes into a center and actually we just put 10-gig into Dallas last week, just as an update, then you'll see people kind of migrate back to a 10-gig port. Because once you get above two or three one-gig ports, it gets a little operationally challenging.

So you see that. You also see though for policy reasons, customers who will go private between two entities just because from a policy perspective, that's the way they want to do it. They don't want to be on a public fabric. They want to do it privately. So for lots of different reasons, you see people peering, both privately and publicly, and they go back and forth. So you'll see plenty of that.

Thanks, Margie. One last question. I missed you when you said the churn rate. Could I get that number again?

Yes. That was 3.3% on a cabinet basis and 3.6% on an MRR basis.

Thank you.

Thank you, sir. Our next question is from Tom Watts. You may begin.

Could you just comment also on--Margie, you mentioned that you just rolled 10-gig into Texas. Where are we in terms of 10-gig deployment? And also, what sort of--what's the range of pricing we're seeing per port basis across the data centers? And is there any other good way to measure traffic--the number of people connect to those?

Yes. So with the installation of Dallas, we are now complete in all of our markets in the U.S. And we're starting to look at Asia once we get some real traffic going there. We're very pleased with the pricing in terms of what we're getting on 10-gig. So it's up to $15,000 a port per month for that service depending on who the customer is and what kind of volume they're pushing.

And then, currently, one of the things we're starting to look at is the traffic overall on a per port basis. So we're going to start looking at that as a new metric. But just so you know, we're in excess of 120 gigs now on the platform across the U.S., which has seen some exceptional growth since the introduction of 10 gigs.

And have you looked at all how many customers are in more than one of your data centers?

Yes. So it's approximately 40% are in multiple data centers today.

And what's typically the decision driving people to be a multiple data center? Is it primarily for peering or redundancy?

Yes. It depends. I mean, if you're a peering customer, clearly, and you want to peer with the European networks, for example, you're going to want to be on the East Coast. And if you want to peer with the Asian networks, you're probably going to be on the West Coast. So that drives some of that. But in addition, on the enterprise side, you see a lot of business continuity, disaster recovery, Sarbanes, all of those things, pushing people to be in multiple locations.

And we--as you can imagine, we encourage that. Single points of failure in mission critical data centers is not a good idea.

Okay. And then, just finally, you get asked this question frequently. But are there any updates on Europe and are there signs that that market is improving or that there would be benefits to--for you to participate there more directly?

No real update on any plans on our end, Tom. The market is improving. I think price points are improving over there. Actually, London is a market that is somewhat supply constrained right now. I do see builds coming out of a couple of the players there. But no clear pathway, again, for all the reasons we've talked about in the past.

Okay. Thanks very much.

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

Thanks. Most of my questions have been asked. But let me look out a little further. You're going to spend $300 million to support a revenue level of 580 to 600 million. You're not building way ahead of demand. You've got customers waiting to come in. You've got these facilities booked ahead. As we go into 2008 or as we end 2007, should we be looking for a like or for a similar CapEx into 2008? Is 300 million what you need to keep ahead of your revenue?

No [indiscernible]. Notice a number of these centers are coming online at the end of the year and will contribute to '08 growth. So certainly, that positions us well for '08. And as we said, incremental expansions in a number of these key markets can come cheaper and more quickly and are more closely tied to demand that's out there.

All that said, I think we're always going to continue to listen to our customers, look at demand, and just determine our expansion and committed capital as we see it warranted. And with the type of returns we still are feeling very good about in the builds we're doing today. As long as we can continue to produce those, we wouldn't be afraid of deploying more capital with the demand out there.

And so far, you're not seeing--I know this kind of touches on a question that was asked earlier. But you're not seeing additional capacity have any impact or the possibility of impact where customers are thinking of other data centers that might come on line. Not seeing any of that in the pricing right now?

No, no.

Okay, great. Congratulations. Nice quarter. Nice year.

Thank you very much.

And we have time for one last question from Jonathan Schildkraut with Jefferies.

Hi.

Hello, again.

Hello, again. I just wanted to know if Margie can tell me when Apple is going to go to a peering platform.

Jonathan, now.

Okay. Well then, my other questions have been asked and answered.

Clearly, we would highly encourage that, Jonathan. And they are a customer today, so we'll give you an update on that as it progresses.

Thank you.

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

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