Equinix Inc (EQIX) 2007 Q2 法說會逐字稿

Hello and welcome to the conference call. This call is being recorded for replay purposes. Today's presentation will be in a listen-only format. Following the presentation there will be a question and answer session. Instructions will be given if you'd like to ask a question at that time. 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 2007 results conference call. Before we get started I would like to remind everyone that some of the statements that we'll be making today are forward looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our Form 10K filed on February 28, 2007 and Form 10Q filed on May 2, 2007.

Equinix assumes no obligation and does not intend to update forward-looking statements made on this call. In addition, we will provide non GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release and on the Equinix Investor Relations page at www.Equinix.com.

With us today are Steve Smith, Equinix's Chief Executive Officer and President; Steve Taylor, Equinix's Chief Financial Officer; and Margie Backaus, Equinix's Chief Business Officer. At this time, I'll turn the call over to Steve.

Thank you, Jason. It's great to have everyone on the call today and as you can probably see by our results, we've had a great quarter by any standard. The biggest event of the quarter was our announcements of our intention to acquire IXEurope. As you may have seen last week, we increased our total offer to GBP270 million plus the assumption of debt. Our original announcement of our intention to acquire IXEurope attracted an unsolicited approach from another party which clearly reflects the value of this company.

With the increased offer, we received hard irrevocables from their two large shareholders and their Board of Directors, which represents approximately 67% of the existing shares to vote in favor of this acquisition, which we expect to close in the mid-September timeframe.

As we stated in June, IXEurope is our preferred platform and leadership team for our entry into Europe. Equinix will become the only global provider of carrier neutral collocation services with over 30 data centers in nine countries and 17 markets.

This revised announcement also enables both organizations to focus on key transition activities and minimizes the risk of further distraction through the targeted close date. We are real excited about this combination and the growth synergies it creates. Although the amount of information we can disclose before closing remains limited, we plan to provide you with our longer term expectations for this business as soon as practical.

As far as the business itself is concerned as we stated on the last call, we intend to do minimal integration of this company. IXEurope's business is running very well and the integration will primary focus on accounting, compliance and importantly ensuring customers from both companies have access to a global seamless offering as soon as possible.

In the meantime, I'd like to focus the rest of this call on Equinix's second quarter results. I'll quickly discuss the highlights of this quarter and then turn it over to Keith to get more detailed review of those results.

Total revenue for the company was $91.8 million, which represents a 34% increase over the same quarter last year and an 8% increase over Q1 '07. The record bookings we saw in Q1 translated directly into this over performance, as well as the accelerated installations of some of the larger deployments within this. This included $2 million in revenues from our new DC4 IBX which is now cash flow positive as expected.

Cash gross margins were 63% and EBITDA came in at $35.3 million, both above our expectations. Equinix closed 96 new customers in the quarter ending with 1,373 customers. Key wins included Bechtel, Cohen and Steers, Telmex, U.S. Cellular and Kodak Japan.

We had a very strong quarter from a booking standpoint, exceeding our Q1 performance. As you know, we don't report bookings, but just to give you a sense of the strength we're seeing in the market, total Q2 MRR bookings were up by approximately 20% sequentially. Of course, this is driving the increase in our annual guidance, which I will touch on later in the call.

Within this, we saw over 85% come from our existing customer base, including add-on business from Fox Interactive, YouTube, Nokia/Siemens and Disney Buena Vista. Also, our pipeline remains extremely strong as we begin selling into our new expansion centers.

Our interconnection services represented 20% of our recurring revenues and we saw continued strong performance in Asia-Pacific in this area. As many of you track the individual services here, we ended the quarter with 16,514 cross connects, 501 ports on the exchange, 63 of which are in Asia Pacific and 71 of these ports are 10 gig.

We've now closed on our purchases of the new L.A. expansion site for $49 million, which occurred at the end of June, as well as our flagship IBX in Silicon Valley for $65 million, which closed in early July.

Finally, you may have seen an announcement earlier this week that Chris Paisley has joined our Board of Directors as our Audit Committee Chair. Chris was formally CFO of 3Com and joined effective July 19. We feel very fortunate to have attracted such a highly seasoned Audit Chair who has served in that role for 10 of the 17 public and private Boards he's been a member of. We are very excited to have Chris join our team.

So clearly we have a lot going on and the business remains strong as we continued our focus on executing our 2007 plan and preparing for 2008. So let me stop there and turn it over to Keith and I'll come back with an update on our expansion initiatives and our 2007 expectations. Over to you, Keith.

Thanks, Steve. Good afternoon. I'm pleased to provide you with the second quarter results and some additional perspective on the quarter's performance. In discussing the quarter and any of my forward looking statements, I've not taken into consideration the effect of the IXEurope acquisition. So let me get right into it.

As Steve mentioned, our Q2 revenues came in at $91.8 million, an almost 8% increase over the previous quarter and up over 34% compared to the same quarter last year. Our U.S. revenues were 85% of the total revenues and recurring revenues increased to 96% of our total revenues. During the quarter, revenues were favorably affected by approximately $775,000 in unbilled power services related to prior periods, also in part by a $200,000 customer credit related to a disputed billing.

Revenues were well above our expectations for the quarter. We benefited from accelerated installations related to our strong bookings in the prior quarter and we experienced better than expected in quarter activity. Also, we continue to enjoy a favorable pricing environment as we've increased list prices on most of our service offerings, while continuing to move customer contracts to market rate.

Finally, our Asia markets continue to show strength in the quarter, in particular Sydney and Hong Kong. Revenues attributed to our three 2006 U.S. expansions and the Tokyo expansion totaled $9.4 million in the quarter, while our recently opened DC4 IBX generated revenues of $2 million in the quarter, about an eight-fold increase over Q1.

Recurring revenues in the quarter were $87.9 million, a sequential 9% increase over the previous quarter and a 35% increase over the same quarter last year. In absolute dollar terms, this was the highest quarter over quarter increase we've ever experienced at $7 million.

Non recurring revenues for the quarter were $3.9 million. Looking at churn. As expected, our Q2 cabinet and MMR churn was lower than our Q1 results at 2.3% and 2.1% respectively, with Asia Pacific contributing greater than 50% of this churn. Looking forward, we expect Q3 quarterly churn to approximately Q2 levels and the churn for the year should be within our targeted range of 1% per month or 12% for the total year.

Moving on to gross profit and gross margins. The Company recognized gross profit of $36.2 million for the quarter or 39% compared to $32.3 million in the previous quarter and $23 million for the same quarter last year. Our cash gross margins were 63%, up from 62% in Q1 and just above our expectations. Our same IBX cash gross margin which excludes revenues and costs from recently opened IBXs and expansion projects were 68%, a clear indication of our now operating in the range of our long term plan objectives of 65% to 70% cash gross margin.

Of note here, each of our operating IBXs, including the recently operated DC4 in Silicon Valley for our IBXs, are generating positive cash gross margin. Moving to Q3, it should be noted that both our Chicago 2 and our LA3 IBXs will move to same IBX status as they've now been open for four full quarters.

Now as a reminder and as we've seen over the past several years, our cost of revenues will increase in Q3 due to the seasonally high utility costs associated with the cooling of our IBXs in the summer months. Utility costs are expected to increase about 14% of revenues in the third quarter, effectively a 1% to 2% point increase over the prior quarter. This seasonal trend typically reverses in the fourth quarter. Also, we expect to open four new IBX expansions in late Q3 and Q4 which will increase both our cash and non cash costs, including of course depreciation and amortization.

Now looking at saleable cabinet capacity and utilization levels. Our net salable cabinet capacity decreased slightly to 24,900 as we modified some of our large cage configuration that churned in Q1 to better meet changing customer needs including increasing our DC power distribution capabilities. At the end of Q2, approximately 19,200 cabinets or about 77% of our saleable cabinets were billing. On a weighted average basis, approximately 18,900 cabinets or 76% of our saleable cabinets were billing.

Breaking down the details by region, the U.S. saleable cabinets billing were about 15,500 or 76% and the Asia sellable cabinets billing were 3,700 or about 80%. As a reminder, our Q2 utilization level excludes the additional capacity from our announced expansions in the latter half of 2007, including the 200 cabinet augmentation in our New York 2 IBX. At the end of the year, we expect our saleable cabinet capacity to be approximately 31,000 cabinets.

Looking at revenue per cabinet on a weighted average basis, our average monthly revenue for salable cabinet increased to 1,532, up 2% over the prior quarter level of 1,498 and over 6% compared to last year. While this was clearly a strong result, we feel it's important to recognize that this metric, although a good indicator of pricing trends can both positively and negatively be affected by this timing of large installation or churn within a quarter, as well as affected by the delayed installation interval of non-cabinet services attached to any particular cabinet deployment. This implication was clearly evident as we analyzed the average Q1 MRR per cabinet metric.

Overall, we continue to be pleased with our pricing and the competitive environment. As we look forward, we expect Q3 pricing to be consistent with Q2 levels as we install some large customer deployments in the third quarter.

On a regional basis, our weighted average price per saleable cabinet in the U.S. was 1,632, which was up 3% from the prior quarter at 1,578. In Asia Pacific, our weighted average price per salable cabinet was $1,119, a decrease over the prior quarter level of $1,169 as a result of a large anticipated churn in the Tokyo market. As noted in the past, the Tokyo MRR per cabinet is the highest in the AP region. Interconnection revenue in Asia grew 19% sequentially, another strong result there.

SG&A expenses for the quarter, including stock based compensation expense of $9 million, were $33.4 million. Our cash SG&A expenses was $22.8 million for the quarter, a 10% increase over the prior quarter and a 29% increase over the same quarter last year. This Q2 increase was primarily due to a $1.4 million charge attributed to a negotiated tax filing agreement with a former employee, and increased variable sales compensation cost derived from our strong bookings activity.

Moving on to net income and EBITDA. We generated net income in the quarter of $1.2 million or about $0.04 per share on a basic and diluted basis. This result was primarily attributed to a better than expected income from operations in the quarter as revenues were stronger than expected and lower than expected net interest expense in the quarter. Our EBITDA was $35.3 million for the quarter and slightly above our revised expectations.

Turning to our balance sheet at the end of Q2, our unrestricted cash balance totaled $324 million. After taking into account the $49 million purchase of the LA4 building. CapEx in the quarter was $139.8 million. Breaking down the details, our expansion CapEx for our new expansion centers was $129.6 million. Our ongoing CapEx was $10.2 million. At the end of Q2, our Chicago and New York expansion properties were about 75% and 60% complete respectively.

Next, moving to our operating cash flows. Our net cash generated from operating activities increased to $38.1 million, up from $20.1 million in the previous quarter and $16.1 million in the same quarter a year ago. This strong result reflects stronger than expected operating performance coupled with better working capital management. In particular, our cash collection activities were significant in the quarter resulting in a minor increase in accounts receivable balance despite the strong quarter over quarter revenue growth. Our DSO metric continues to remain below the 30 day levels.

Cash used from investing activities was $157.4 million for the quarter related to CapEx spending of $139.8 million, the purchase of our LA property for $49 million and offset by an increase in our accrued property and equipment balance of $31.4 million.

Lastly, our cash generated from financing activities was $50.5 million for the quarter, primarily related to an additional drawdown under the Chicago financing of $44.7 million and $6.9 million of proceeds from our employee stock plan. The total amount drawn under the $110 million construction loan is $69.3 million at the end of Q2. So now let me turn back to Steve.

Thanks, Keith. I'd like to now take a moment to give you an update on our expansion activities that are going on in seven of our 10 markets. We remain on track or ahead of schedule with the four projects anticipated to open in 2007; Chicago, New York, Singapore and Tokyo.

In Chicago, we expect a late September/October opening date. Based on the strong pipeline for this new IBX, we now have the flexibility to assess whether an anchor tenant makes sense there. In New York, we are now targeting a late October/November open date and are very confident that one or perhaps two anchor customers will be signed well in advance of opening.

In Singapore, I'm pleased to report we've just opened the first phase of our expansion there ahead of schedule and we've already begun installing customers, including a very large anchor deployment by Yahoo. The first phase of this expansion is 450 cabinets and the second phase is expected to add approximately 450 additional cabinets later in the year for a total of 900 cabinets.

Finally, in Tokyo, we're also ahead of schedule there and are now accelerating the timeframe to open an initial phase in August, which we had originally targeted for the fourth quarter. You'll see in our CapEx guidance we are shifting approximately $10 million in CapEx for this project to 2008 which is when we will open the second phase.

Finally, we are not making any adjustments to the total CapEx estimated for any of these projects, with a minor adjustment in Singapore.

Shifting to 2008, as you know we've already announced three expansions we expect to open in Washington, DC, Silicon Valley and Los Angeles. In DC, we have begun work on our DC5 green field and now expect a Q2 opening versus earlier expectations of late Q1.

In Silicon Valley, our build out within our SV2 location is currently in the design phase and is still expected to open in Q2. In Los Angeles, we continue to see strong demand from our digital media clients. In fact, a significant portion of the increase in our bookings this quarter was directly attributable to our success in the LA3 IBX. This success, coupled with the strong growth in Web based video, was the driver for our recently announced expansion in this market. We've just closed the transaction to purchase the building there, which is 216,000 square feet and can support an estimated 3,000 cabinets.

The first phase of this project is expected to be approximately 1,700 cabinets. And while we are only in the early design phase of this project, we want to provide you with a preliminary estimate of the expansion CapEx required for this. At this time, we anticipate this to be somewhere in the range of $95 million to $115 million.

One of the factors in this range is the evaluation of investments we would make now to lower the overall operating costs of the center in the long run. An example is a possible substation augmentation which would lower the unit cost of power. As a ballpark CapEx estimate, we expect approximately 20% of the CapEx for LA4 to hit in 2007 and the balance to hit in 2008. As we progress in this project, we will update our CapEx guidance for the costs attributed to the overall project.

The overall acceleration and demand is clearly demonstrated in our record bookings, our quarterly results and the increased annual guidance. Many of you continue to ask about 2008 CapEx. Although we're not providing specific numbers, we remain confident that even with the accelerated demand we are experiencing, we continue to expect that 2007 will be our peak year for expansion CapEx.

Based on the new capacity announced for 2008, we now expect to have revenue capacity in the range of approximately $690 million to $720 million for a midpoint of approximately $705 million. Specifically, these numbers exclude additional green fields, second phase expansions and the IXEurope acquisition.

So now let's take a look at our updated guidance for 2007 and then the third quarter. We're raising revenues to now be in the range of $373 million to $377 million, which places the midpoint at $375 million, an increase of $12 million from previous expectations and representing just over 30% annual growth. We expect cash gross margins to be in the range of 61% to 62%.

Cash SG&A will be approximately $88 million or just over 23% of revenues at the midpoint. This increase is primarily attributable to an increase in expected variable compensation from the acceleration in our business and the negotiated tax line that Keith discussed.

We're increasing our EBITDA expectations to now be in the range of $141 million to $143 million. Our 2007 CapEx guidance is now $380 million to $390 million, of which $340 million to $350 million is for our expansion activities, which reflects the $10 million shift into 2008 for the Tokyo expansion and approximately $40 million in ongoing CapEx. Again, this number excludes any 2007 CapEx for LA build out. We'll provide a more specific estimate and timing for project completion once we've completed our initial design.

Let me shift to the third quarter. For the third quarter, revenues are expected to be in the range of $96.5 million to $97.5 million. Cash gross margins for the quarter are expected to be approximately 61%. Cash SG&A is expected to range between $22 million and $23 million. EBITDA is expected to be in the range of $36 million and $37 million. Total CapEx for the quarter is expected to be between $100 million and $105 million, which includes approximately $90 million in expansion CapEx.

With that, you can clearly see the acceleration in our momentum that we spoke about in our Q1 results call. The business is as strong as we've ever seen it. And now that I've had over three months' time to assess the business model, the senior leadership team and our market sales and operational readiness, I've landed right where I suspected. No change to the business model with a continued focus on collocation and interconnection. No changes in the senior leadership team are anticipated. You can expect continued stability with the experienced leadership team that many of you know well.

And lastly, we're going to continue a sharp focus on our employees, service excellence to our customers and our day to day execution, with particular emphasis on successfully opening our new expansions and strengthening our strategic position globally with the successful integration of IXEurope.

With that, we'll open it up for some questions and I'll turn it over to you, Mike.

(Operator instructions). Our first question comes from Jonathan Schildkraut with Jefferies.

Good afternoon. Thanks for taking the questions. I have a couple of questions. The first is if you could talk a little bit more about the Tokyo churn as well as the interconnect revenues in the Asia Pacific market going up 19% quarter over quarter. And then if you could couple that with the two-phase build out. What are the cabinet adds in each of those phases?

Okay, Jonathan, what I'll do is I'll take at least the first part of the question and talk about the churn and then I'll pass it to Margie just on the overall interconnection theme in that market.

There's was large financial institution in the Tokyo market, as I mentioned in my script. It was an anticipated churn and we negotiated with them two years ago and we knew this would be coming out in this particular quarter in Q2. Again, given the fact that we're constrained in the Tokyo market, it was something that not only did we anticipate, but it was something that we were looking forward to.

As a reminder, our Tokyo market drives the high MRR per cabinet out of all of our IBXs, not only in the Asia marketplace but also in the U.S. This was something that was thought of as a very favorable result. Interconnection. Do you want to touch that one?

Jonathan, our interconnection in Asia is kind of good timing. We're actually having our Tokyo peering forum today which we have great attendance at. Overall, we continue to see the number of trial participants that we had on the Tokyo switch continue to convert over to paying customers. So out of the total port count of 501, 63 of those were in AP. And in addition to that we're now starting people to ramp up on 10 gig in Asia as well. So content distribution customers, we had a couple of those convert to 10 gig in Asia as well so we continue to see real strength there. I think it's a real good news story.

Your last question, Jonathan was just on the CapEx attributed to the expansion. As you know we're going to spend between $25 million and $30 million on that project. What I've done to sort of better optimize basically the construction effort is broke it down into phases. Although the first phase is accelerating and opening up in the August timeframe, the second phase then gives us the latitude to push some of the CapEx out into 2008. But having said that, with phase one plus the capacity that we have on the existing Tokyo IBX it gives us sufficient capacity in the market to support the customer demand.

Sorry. One thing I'll add to that, Jonathan, is we just did a really in depth -- actually that last week -- a review of all the demand in Tokyo and kind of what we're seeing there. It is really phenomenally strong. You know I'm pretty tough on like demand analysis. It's really very good in terms of the big opportunities we have there and bringing in the Tokyo capacity early I think is a really good news story.

We had 740 cabinets, I think, coming on in Tokyo in total. Is that still the number just spread out over two phases or has the number gone up?

It's still going to be 740 cabinets, Jonathan.

That actually brings up another question. As we head into the third quarter here, should we be thinking about any market capacity constraint? Obviously, you're bringing on 200 cabinets in Secaucus. I'm wondering if those are available for sale yet or if they come on over the course of the quarter. Maybe if you can comment on available capacity in Chicago.

Okay. Certainly in some of the markets we will be constrained. Recognizing that obviously we have had great momentum in Q1 and certainly our Q2 bookings and so from a revenue perspective I don't think per se you'll feel that in the Q3 results. But we are going to be constrained in the Chicago market pending the delivery of the Chicago 3 building. We are, of course, constrained in the Dallas market with a scenario that we have not yet chosen to make further investment in. And of course, in the New York market pending the delivery of our New York 4 building we're going be constrained in that market recognizing we are bringing on 200 cabinets this quarter; this coming quarter being Q3. But we believe that we're going to be able to meet customer demand for those 200 cabinets relatively quickly. I think in all three of those markets we'll be somewhat constrained. When I look to the Asia market, again it has got sufficient capacity in Tokyo. Singapore with their expansion coming online and Australia with the recent augmentation, we feel we have sufficient capacity in each of those markets. In Hong Kong, although it's reaching a more critical level, there's no update in that particular market.

Great. I'll circle back in the queue for some more questions. Thank you.

Our next question comes from Chris Larsen with Credit Suisse.

Hi. Thank you. Just a clarification from Keith and Steve. First, could you give me again the quarter ending racks? Was the 18,800 or the 19,200 was at quarter end there? I just want to [multiple speakers).

I see there's a little bit of an inconsistency between our press release, but the end of quarter was 19,200. On our weighted average basis it was that 18,900.

Thank you. And then I also just want to confirm the revised numbers do not include IXEurope. You'd expect those revised estimates when that deal closes, perhaps --?

That is correct. As you know we're anticipating that deal to close as Steve mentioned in mid-September and once that's done we will -- as we look to our Q3 earnings call we'll certainly give an update on the acquisition and give you some clarity on what the go-forward business would look like.

Thanks. Keith, is there an impact to operating cash flow from the purchase of the Silicon Valley or was that capitalized, that lease that you were --?

That's a good question, Chris. The operating lease was going through operating results. We treated it, of course, as an operating lease, therefore it is going through operating results and affecting EBITDA. So we're going to get a benefit on a total year basis of roughly about $2.2 million to $2.4 million related to the lease. But that's going to be offset by roughly $1 million in taxes. So net benefit on a quarterly basis is going to be about $300,000 at this stage.

Great. Thanks. Then I had a couple of questions, a little operation, maybe more for Margie. The 365 Main had an unfortunate incident, I guess, yesterday. Do you expect to see some pickup from some of those customers that are going to say, look we want the six-nine's reliability? And then maybe you could quantify -- you said that a number of your contracts are still below market. How much is still below market and how far below market are those contracts?

Let me talk about the first one. It's funny when I saw that happen yesterday you guys saw we just announced NetFlix. NetFlix was one of the ones that were down in 365 Main yesterday. We're starting to see some movement. The six-nine's reliability, as I talked to a number of press people yesterday afternoon, is significant. And you guys probably saw some press around it this morning. There are some fairly frustrated customers. We'll see what we pick up around that. We do have availability in Silicon Valley, so I think there's plenty to be gained there.

Secondly, on the contracts, I will say that there are a number. I would say, however, we've touched a fair amount of the base at this point as it relates to bringing them up to market rate. So you'll continue to see some uplift in the overall MRR as we continue to feather through some of these price increases, but you won't see a big forklift upgrade in terms of what we've done over the past 18 months in getting some of these price increases out to customers.

Thanks a whole lot. I appreciate it.

Our next question comes from Michael Rollins with Citigroup.

Hi. Good afternoon. Just a couple questions and forgive me if you gave this out. What was the ending customer count?

13 -- let me retrieve what I said earlier. (multiple speakers).

We'll get you that one, Mike.

Then the second question I had is are you doing anything different or are you examining the potential of longer term contracts with escalators in them?. And if you could talk about how the process of signing up customers is the same or different today versus a year ago as you're redoing the older outdated contracts.

The last question I had if I can just throw one other in, in places like Chicago where you've been out of capacity to sell for the last few months, how does that change, if at all, the fill rate when Chicago opens? Does that help accelerate going from zero to significant cash flow positive or some greater utilization rate than if you were selling the capacity on a smoother basis over the last six months? Thanks.

Sure, Mike. I'll start out. The customer count was 1,373 as I mentioned. And on the contractual side, as I think we've mentioned previously we are looking at longer term contracts. I think our average contract now is in the two year range. We have been incenting and the sales force is looking for longer term arrangements with price escalation built into them so we can protect against power, etc. So, yes, we have been looking for that with good receptivity from customers. I think we'll start building on a longer term backlog of customer length of contract as we go forward. And on the Chicago fill rate, maybe Margie could answer that.

A couple things. One thing I just want to make clear, Mike, to make sure we're all on the same page here is even though we say we're "dark in a market" we saw a fairly good clip of growth in cross connects in Chicago. So even the word "dark" from a space perspective, we continue to see nice amounts of revenue flow through those centers that we consider "full" as people order more cross connects, especially in that market given it's an FX market.

That being said, I think the really good news about both New York and Chicago, I was actually looking yesterday at kind of what the pipeline and the reserve rates are starting to look like for those centers. The good news is given the value proposition to customers around FX and some of these other proximity trading advantages we're seeing, customers are waiting. So what you will see is a nice backlog of customers, a nice reserve rate of customers as those two centers come to market.

So we are starting to sign customers today for those markets. We're right in the zone. Customers typically start signing within a four to five month period is where they can get out in their hard hats and actually see what they're buying. So now you'll start to see those reserve rates crank up a little bit.

Thanks for taking my questions.

Our next question comes from Manny Recarey with Kaufman Brothers.

Hi. How are you guys doing? One question just trying to understand the guidance a little bit. The revenue is going to increase $4 million to $5 million, but your OpEx is going to be flat or it could even be down a little bit. Can you explain the dynamics of what's going on there?

Manny, are you're referring to the total year or the given quarter?

I'm sorry, the third quarter.

Okay. A couple things. So clearly as you can see our revenues are going up. We are taking it up to the midpoint of $97 million for Q3. And what you've also probably notice now is that despite the fact that we had 63% cash gross margins in Q2, we're actually suggesting that's going to go down to about 61% in Q3 as a result of a couple things. Number one as I mentioned we have seasonal fluctuation in our pricing related to utility costs and that's going to add about $1.7 million we estimate today in incremental costs in Q3 over Q2.

In addition, in the latter part of Q3, we're going to be hiring staff for the new expansion projects and so that cost is going to start pushing through the operating line. So as a result, despite the fact there we're growing the revenue line, we are investing in the cost of revenue line and then our SG&A as we layer in some of the staffing that were not hired in Q2 and will be pushed into Q3 results; just taking our EBITDA guidance up on a relatively small amount.

I certainly understand what's going on in the cost of goods. Maybe my math is wrong, but for the second quarter your SG&A was like $22.8 million? And now you just said you're going to be hiring people which makes sense because you're expanding and adding a new data centers, but your cash SG&A guidance is $22 million to $23 million.

Yes, Manny. So the delta on that is as you'll remember, we recorded a $1.4 million charge in Q2 related to an negotiated settlement. And as a result that's not going to recur in Q3. Basically, when you take that out and you invest in the staff, you basically are able to keep your costs flat quarter over quarter.

Thank you.

Our next question comes from Thomas Watts with Cowen & Company.

Hi guys. Just to focus a little bit more on the pricing issues. I know you talked a little bit about getting anchor tenants for several of the new facilities. And I know, Margie, you previous said you were talking about migrating away from the anchor tenant concept or at least getting discounted prices for anchor tenants. Can you just clarify that a bit?

Sure. Anchor tenants and what we said -- what Steve mentioned in his script was that we are evaluating whether or not we'll take anchor tenants in Chicago. I think as we continue to see a really good uplift from our FX base there, we're going to take a look at whether or not we want to do that, frankly.

In New York, it's a little bit different situation. We'll see one, probably two anchor tenants. One of those probably being a strategic anchor tenant as opposed to an anchor tenant for just volume purposes. So we're being very thoughtful about it. I think from a Chicago perspective, it's important because we want to make sure that we can continue to serve that FX base as both of our Chicago 1 and 2 sites are full and customers continue to get the benefit -- even though they are out a bit, they continue to get the benefit of that near zero second/millisecond delay there. I think that's important.

Again, I think it will be good for us in New York when ultimately you guys see who some of these anchor tenants are. I think you'll see they're pretty strategic to our growth there.

Could you comment on what strategic would mean? Does that mean that they're going to drive other customers into there?

Yes. It will be a magnet; call it a magnet.

The good news part about that, Tom, is I think historically here an anchor tenant would take up 15% to 20% of the capacity in that IBX. And it's a really good situation to not have to do that and be able to get multiple clients that can still fill that return we're looking for.

Okay. I know there was a previous question on pricing, but you've indicated pricing is generally stable. I'll say on the same data center basis excluding higher power build outs. Does that suggest that you're seeing prices overall flattening in the market, that we're not seeing the sort of annual price increases? I know that it's what Savvis had indicated that on their call.

No. I would just say no to that. First of all, you're seeing us continue to raise prices to the current base. We're getting very good prices in our new high powered density IBXs, so we saw a little bit of that in DC4, but as I look at the pipeline for New York and Chicago, we're seeing very good pricing there as well. So I think those are very strong results. And then new customers coming in, I think it was up -- just the MRR up year over year was 6%. I would say pricing in general given the competitive environment we're seeing and the value proposition to customers remains very strong. I would not say it's flattening.

Okay. And then just finally, AT&T commented on the growth opportunities based on this sector and the number of data centers that they're building. Are you seeing them in your specific markets and to what extent are they pre-marketing space as well prior to construction?

I think everybody who's building right now in pre-marketing space. But don't forget both Savvis and AT&T are selling to a different customer so they're selling to the customers who want end to end managed services, et cetera. A little bit different as you're well aware than the customer that would naturally come to us.

But I can tell you the demand across, I think, all of the markets, whether it's wholesale for the REITs, managed services or kind of more pure collocation with the interconnection model is very, very strong. So all boats are rising.

But I can tell you within -- let me just give you I thought an interesting stat this quarter. When I looked inside our new customers that were signed this quarter, so it was 96 customers that were signed this quarter, almost 79% of those customers were coming in for the first time, either coming in from in source applications outside or new to colo. I think that's a pretty good indicator though the growth we're seeing especially in our new customer base is coming from people that are brand new to this and we're getting a disproportionate share of that.

Excellent. Margie, thanks.

Our next question comes from Rod Ratliff with Stanford Group.

Very nice quarter, guys; very nice. Margie, I think you might have touched on it a little bit on the conference call back at the beginning of July surrounding the IXE acquisition, but just given the demand in APAC for interconnect services, do you think that there's probably ultimately a really robust opportunity to layer that on to the operations that you're going to be purchasing in Europe?

Let me split out interconnection and peering in the European market and contrast it just for a minute with Asia. What you saw in Asia, which is why I think we're seeing a nice uplift there, is you saw some of the peering sites and other things over there were fairly small, not necessarily state of the art kind of peering sites, et cetera. What you see in Europe, however, is very different so the Winks, the AM6s, the [D-kicks], all of the big peering sites over there are very advanced. Customers like them. They are non profit consortiums. Their service is very good. They have implemented 10 gig.

In terms of the overall service to customers it looks different. I think what you'll see from us over time is we do see good opportunities to do some interesting things with interconnection in Europe that will most likely be around things like FX, where we've seen, as you know, great uplift in the U.S. with that. They also have a very nice FX base. So being able to put customers -- London, Frankfurt, New York, Chicago is a very strong value proposition. So I think that's one place where you'll see some good interconnection.

I think we'll be working with the established peering points over there to see how we can help them with their growth and use them as a magnet to bring in for future interconnection opportunities in our centers. I think as I said on the call in July, I don't want to oversell this at this point because it really is a very established marketplace over there as it relates to the peering points, but we do see some nice opportunity to kind of move on with our -- or excuse me, change the game a little bit with interconnection in Europe.

Does the regulatory environment in Europe enter into the equation at all? Is it any tighter or how would you characterize that?

I'm sorry; I missed the first part of your question.

The regulatory environment in Europe.

Interestingly enough, interconnection in Europe has been driven not by regulatory reasons per se, but by customers. So the consortiums that exist on the peering side and the traditional pricing on an interconnection, as many of you guys know interconnection, so our version of a cross connect in Europe or any of the European players is typically priced at 10% or less of what our prices are here. That's driven more by how that industry has evolved in Europe more than anything else. It's not really a regulatory issue.

I think the really good news here is that both IXEurope and Equinix share a really nice customer base around some of these customers that will look to do this with and with our relationships with the big content guys here and the uplift that customers that have taken a real interest in moving to Europe with us, we've got really good backlog of customers to start moving to a different interaction model. But I'll just caution you; I think that will take some time.

Okay. Thank you.

Our final question comes from Jonathan Schildkraut from Jefferies.

Thanks, again. This question is for Keith. Keith, I'm looking at your guidance for the year and for the following quarter and just to kind of get you down to your net income numbers, it looks like there'd be limited growth on the D&A side in the next quarter, but we would see -- start to really kind of scale up as we exited the year. Does that sound right?

That is correct. In the end that's the one number that we don't give, but to give you a sense for what we think D&A will be for total year, it will be just under $97 million.

Thanks a lot.

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

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