Equinix Inc (EQIX) 2007 Q3 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 would 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 Q3 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 August, 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; 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 Steve.

Thank you, Jason. It's great to have everyone on the call today and thanks for joining us. As many of you know this has been an important quarter for Equinix on the execution front as we completed our acquisition of IXEurope, raising $750 million to finance this acquisition and fund our announced expansion plan through 2008. At the same time we posted very strong quarterly results across the board. On today's call we'll be providing an update on our entry into Europe and as many of you have seen in a separate release today, we announced further expansion in Paris and Sydney. We'll also give you some color into our most recent expansion in Chicago which I'm pleased to say has officially opened on schedule and on budget earlier this month and also a brief update on our other expansions.

Finally, we've had a number of important customary advisory meeting recently with some of our enterprise and peering customers and I'd like to share some real-time feedback as many of you ask about the trends that we're seeing in the marketplace.

I'll discuss each of these in detail in a moment but first let me hit some of the highlights of the quarter before I turn it over to Keith.

Total revenue for the Company was $103.8 million which included $5.5 million contributed from 17 days of operations from Equinix Europe. Organically, our revenue grew 33% over the same quarter last year and 7% sequentially. Cash gross margins came in at 61% and were 62% organically which was slightly ahead of our original expectations. EBITDA was $40.6 million in the quarter including $1 million from Europe organically representing 66% incremental flow through from our Q2 results. The Company also generated $4.1 million of net income in the quarter.

In the U.S. and Asia, Equinix closed 83 new customers; key wins included Athena Capital Management, Aloha Airlines, Bloomberg, Classmates Media, Move Networks, Sesame Workshop, and Westfield Properties. We saw just under 80% of our bookings come from our install base. Our pipeline remains extremely strong with another record bookings quarter. Importantly, we've seen our investments in our systems and processes start to pay off as we've seen our book to bill interval improve by over 50%.

We ended the quarter with just over 1,800 customers of which 392 were in Europe. Our Interconnection business continues to do well, especially in Asia where we continue to see double-digit growth. At the end of Q3 we had 17,295 Cross Connects in the U.S. On our public peering fabric or Equinix eXchange we had 606 ports sold which includes 83 in Asia-Pacific, 68 ports in Europe and we ended the quarter with 77 ten gig ports over all. The aggregate traffic on the public peering service is now approximately 180 gigs which represents 80% traffic growth year over year. As a reminder this does not include the tremendous amount of traffic that is being passed over private Cross Connections. As an aside, we expect our global Interconnection revenue percentage to decline to roughly 15% to 16% next quarter as we reflect a full quarter's results from Europe.

With that I'll hand it over to Keith who will walk you through our results as well as provide you some additional insight into the acquisition of IXEurope and the financing transaction. Over to you, Keith.

Thanks, Steve, and good afternoon. I'm pleased to provide you with our third quarter results, by all measures, a strong quarter for the Company. Also, I'll provide some perspective on our recent acquisition of IXEurope and the related financing activities to fund the purchase.

As Steve mentioned, our Q3 revenues came at $103.8 million an almost 13% increase over the previous quarter and up 41% compared to the same quarter last year when including the $5.5 million of revenues from Europe. Our U.S. revenues were 81% of total revenues with Asia-Pacific and Europe revenues at 14% and 5% respectively. Occurring revenues in the quarter were $99.3 million or 96% of total revenues. These results reflect the strong booking activity over the first three quarters of the year.

Looking at y our revenue performance from our recently opened IBX in the Washington D.C. market. Demand is strong and the pricing trends consistent with our expectations. Revenues in this IBX have effectively doubled over the quarter, increasing from $2 million in Q2 to $3.8 million in Q3.

Finally as we look forward into Q4 and 2008, we continue to see a very strong pipeline across all of our available market and in line with our pricing objectives.

Moving to churn. Our Q3 MMR and cabinet churn was approximately 1.8% and 1.6% respectively, below our targeting 3% threshold for the quarter and consistent with our views that we would trend down over the year. Looking at our churn assumptions for the year, we now believe both MMR and cabinet churn will range between 9% and 10%, below the 12% annual target. And as we look into 2008, we expect annual churn to drop to approximately 8%.

Moving on to gross profit and margins. The Company recognized gross profit of $40.9 million for the quarter. Our gross margin of 39% consistent with the previous quarter and up from the $24.6 million for the same quarter last year. Our cash gross margins were 61%, consistent with our expectation as compared to 63% in Q2. On a same IBX basis, the metric we will cease to report starting in Q4, our cash gross margins were 65%. The Q3 results reflect the anticipated effect of higher seasonal utilities associated with the cooling of IBXs in the summer months and the incremental costs associated with the opening of initial phases of our expansion project in both Singapore and Tokyo.

Looking into Q4, we expect our cash gross margin to range between 61% and 62% even as we absorb the initial operating costs attributed to our newly opened Chicago 3 IBX, our soon to be open New York 4 IBX and as we assimilate our full first quarter of European operations.

Now looking at sellable cabinet capacity and utilization levels. As a reminder, our Q3 utilization levels exclude the additional 4,200 cabinets we'll be adding to our capacity from Chicago and New York expansion projects in Q4 and a capacity for Europe. Our net sellable cabinet capacity increased to 25,800 in the quarter which reflects the new cabinets from the initial phase of our Singapore and Tokyo expansions. By the end of Q3, approximately 20.500 cabinets or just over 79% of our sellable cabinets were billing, a significant net increase of 1,300 cabinets in the quarter.

Breaking down the details by region, cabinets billing in the U.S. were about 16,500 or 81% of capacity. And in Asia there were about 4,000 of 73% of capacity. On a weighted average basis our net sellable cabinets billing during the quarter was 20,100 of which 16,200 were in the U.S. and 3,900 in Asia.

Looking at our European operations, we currently measure our capacity in square meters with net sellable capacity of approximately 34,400 square meters or about 370,000 square feet at the end of the quarter. This capacity excludes the current expansion activity in London, Frankfort and Paris which will increase the sellable capacity to 45,400 square meters or about 489,000 square feet.

Looking at revenue per cabinet on a weighted average basis organically, our average monthly recurring revenue per sellable cabinet increased to $1,564, up 2.1% over the prior quarter level of $1,532 and up 6% compared to last year.

On a regional basis, our weighted average price per sellable cabinet in the U.S. was $1,661 which was up 1.8% from the prior quarter at $1,632. In Asia-Pacific our weighted average price per sellable cabinet was $1,160, an increase over the prior quarter level of $1,119 as Asia Interconnection activity continues to be strong with double-digit growth.

As we look forward into Q4, it is our intention to sell our non-strategic e-mail messaging service in Singapore for approximately $1.6 million. Once this transaction is completed, it will effectively reduce the Asia MMR per cabinet metric by approximately $60 per cabinet and will impact our global MMR per cabinet metric by about $10 per cabinet.

Now looking at SG&A. SG&A expenses for the quarter were $34.8 million including stock-based compensation expense of $9.6 million. Europe SG&A expenses for the 17 day period approximated $2 million including $349,000 of stock-based compensation expense. Our cash SG&A expenses were $22.9 million for the quarter including $1.4 million of SG&A from Europe and was consistent with the prior quarter level of $22.8 million and a 20% increase over the same quarter last year.

Moving on to net income and EBITDA. For the quarter we generated net income of $4.1 million as we experienced stronger than expected growth in revenues coupled with lower discretionary spending on the cost of revenue line. In addition our SG&A spending was lighter than expected due to slower than planned hiring. Our net interest expense was also lower than planned.

We recognize certain foreign currency gains, the largest component of which was attributed to the hedge we put in place on the acquisition of IXEurope. The foreign currency gain was largely offset by the write-off of costs related to our Citibank bridge facility after we successfully completed our permanent financing in September. On a year to date basis, we have net income of $885,000.

As we look forward into Q4 we expect to revert to a net loss as we start to depreciate our Chicago and New York IBXs as they become operational in the quarter. We incur higher net interest expense due to an increase in our gross debt obligations along with interest being capitalized on our construction projects and we begin to amortize our intangible asset and absorb the full quarter impact of non-cash costs attributed to the IXEurope acquisition.

Also, on a separate note, as we look forward, approximately one-third of our revenues will be denominated in currencies other than U.S. dollars. As such we're increasingly more susceptible to movement in these currencies against the U.S. dollar. We're currently assessing our currency hedging strategies to mitigate or reduce this exposure yet we recognize we may be exposed to untimely fluctuations against the U.S. dollar.

To the extent relevant, we will report the impact of currencies on our results. And lastly, as some of you have seen, the FASB hsd been considering the accounting related to convertible debt with cash settlement features. One of our convertible debt instruments has a cash settlement feature and given this structure, it may cause the Company to bifurcate the convertible debt and cause us to increase the amount of non-cash interest expense. We'll update you further on this matter as we see it unfold. Our EBITDA was $40.6 million for the quarter, above our revised expectations. EBITDA for Europe for the 17 day period was $1 million.

Turning to our balance sheet, at the end of Q3, our unrestricted cash balances totaled $436.4 million including the net proceeds from our financing in September offset by the acquisition of IXEurope. This cash balance along with our expected operating cash flows in 2008 will fund or announce the expansion project.

Next, moving to our operating cash flows. Our net cash generated from operating activities increased to $48.7 million up from $38.1 million the previous quarter and $20.7 million the same quarter a year ago. We continue to benefit from the management of our working capital balances although we expect this trend to reverse in Q4 as we fund the outstanding liabilities.

Our DSO metric continues to remain strong at 32 days. Cash used from investing activities was $718.2 million for the quarter which reflects the $542 million acquisition of IXEurope, approximately $89 million of capital expenditures including $2.7 million from Europe, $65 million to purchase our flagship IBX in Silicon Valley and adjacent land and the reduction of our accrued property and equipment balance of $24 million. Cash generated from financing activities was $783.2 million for the quarter and primarily relates the net proceeds of $724.4 million from the financing in the quarter. $49.5 million of proceeds from the draw down of funds from both our Chicago and Asia financing lines and $10.4 million of proceeds from our employee stock plans. The total amount -- I'm sorry. The total amount of debt drawn under a $110 million Chicago construction loan is $93.7 million by the end of Q3.

Finally, with respect to our equity balances outstanding we had approximately 36.3 million shares of common stock outstanding which includes the 4.2 million from our recent equity offering. This number excludes the 6 million shares related to convertible debt, the 3.7 million shares related to employee stock plans and other warrants, the majority of which vest over the next two to four years.

So now let me turn the call back to Steve.

Thanks, Keith. When we announced our acquisition of IXEurope we outlined a strong case for our entry into Europe. Now that we're a month and a half into this, we're even more confident of the strength of the market momentum, the favorable supply and demand and balances on a country by country basis and the improving pricing trends. Through the first nine months of the year the region is ahead of our expectations and they had another outstanding bookings quarter. With the strong bookings and solid pipeline, we are increasing our revenue guidance range in 2008 for Europe. It's clear that demand across the European region remains strong. One example, the second expansion phase of our Paris 2 data center which we're opening in November is already 90% booked. As a result, today we announced a third phase there which will be 2,900 square meters or just over 31,000 square feet and will be available for customer installs in the second quarter of 2008. We're investing approximately EUR12 million or $17 million U.S. dollars in CapEx for this project and expect it to exceed our targeted IRR of 40%.

So to summarize our expansions in Europe, we have four projects that are under development, two phases in Paris 2, an expansion in Frankfurt 2 due in Q1 of 2008 and the second phase of London 4 which is expected to open in the third quarter of 2008. In total, these projects represent an increase of approximately 120,000 square feet for an investment of $70 to $75 million U.S.

As we have mentioned on previous occasions, we continue to look at additional market opportunities in this region to respond to our customer demand. We'll provide additional details and further insights into this important market as well as other details on Europe at our analyst day next week but please, let me just give a quick update on our integration activities to date.

As we stated, our initial activities will be primarily centered around a go to market strategy including global account management, branding, customer care, and the alignment of our products and pricing as appropriate. And as expected, we're starting to see cross-border opportunities show up in our pipeline, particularly in the financial services industry. In addition, as you saw in our results, we have completed the reconciliation of the European financials and the U.S. GAAP and are now working to standardize our respective operating metrics. I personally couldn't be more pleased with the early results we're seeing from this acquisition as well as the teamwork and collaboration I've witness as we've jointly begun planning for 2008.

So let me switch gears to the U.S. As I mentioned our new IBX in Chicago opened on October 5 and we are now installing customers. We had our opening event for this last week. This is a magnificent state of the art IBS where we've incorporated our years of experience in building and operating these centers. We believe this one is one of the highest quality and most energy efficient data centers in the U.S. I'd like to congratulate the team who brought this in on time and on budget, especially given the scale of this project.

Just over 20% of the 2,500 cabinets that are available for sale in this IBX are either booked or reserved. With the installation of these cabinets and given the strength of the pipeline in this market we expect this IBX to be cash flow positive ahead of schedule. Keep in mind this is our largest build at 2,500 cabinets and does not include an anchor tenant. Notable wins here include Internap, Deutsche Borse, and Level(3) and we continue to see very strong momentum in this pipeline.

In the New York market, our Greenfield build remains on schedule for customer installs in the mid-November timeframe and bookings momentum here is well ahead of expectations. We'll be providing additional specifics on our progress as we get closer to the opening date.

Just a quick update on our other U.S. expansions. Our Silicon Valley expansion and our fifth IBX in our D.C. market are still on track for Q2 2008 openings and our fourth IBX in L.A. is still scheduled for customer installs in Q4 2008.

Moving now to Asia, as you saw today, we announced a new IBX build in Sydney. This 31,000 square foot build will be adjacent to our current site and have 650 high powered density cabinets and will be available for customer installs in Q4 2008. We expect CapEx for this build to be approximately $29 million U.S. and in line with our targeted IRRs. And of course as we've reported, we've opened initial phases of our Singapore and Tokyo expansion in early Q3 and we're seeing strong results in both markets.

Over the past few weeks we've held several important customers forums with our network content and enterprise customers to discuss key trends they're seeing in the marketplace including virtualization, next generation hardware, and future power requirements.

First, something that many of you has asked about is virtualization and its influence on our business model. We spend a fair amount of time talking about this. Our customers do see a benefit to it; however, they pointed out it's very dependent on the type of applications and in many cases the mission critical nature of what they often deploy in our IBXs are not prime candidates for virtualization.

Whether it be customers with networking applications such as peering , server load balancing, or storage requirements used by our content companies or even latency sensitive applications where financial institutions are intentionally managing to low levels of server utilization to absorb their peak period, our conclusions here is that it is predominantly an enterprise IT phenomenon to consolidate and maximize the efficiency of their hardware infrastructure investment. Certainly it's a trend that we'll continue to watch but one we expect will have limited impact on our future growth.

Also in these meetings, we explored the trends continuing to drive high power requirements on a per cabinet basis. Bottom line, power requirements continue to grow significantly as there is no let up in demand of next generation hardware showing up in our IBXs globally. As recently published, this has been validated by industry sources such a Gartner and the Uptime Institute who point to an invisible crisis happening in data centers around the world.

As companies realize that legacy data centers will no longer handle future power and cooling requirements, they are faced with mounting capital and operating expenses to replace these centers. In fact, many companies expect to spend as much on power and cooling as they will on hardware infrastructure over the next five years. Of course, this crisis is a driver of our demand as it generates more need per outsourcing as a solution to the expenditures incurred in building and running data centers. As we respond to this increased demand, we are accelerating our plans to incorporate innovative power and cooling design as well as responsible, green approaches. We plan on discussing these plans next week at our investor day.

Now I'd like to wrap up this call with a quick update on our expectations for 2007 and 2008. We're increasing our expectations for revenue in 2007 to be $416 to $417.5 million. Organically we expect revenues to increase to $378 to $379.5 million which represents approximately a 32% growth rate from our 2006 results. We're increasing our expectations for EBITDA which is now expected to range between $153 to $154 million which raises the midpoint of our expectations by $3.5 million. Our CapEx guidance is still expected to range between $405 and $415 million of which $359 to $369 million is for expansion and approximately $46 million is in ongoing CapEx. This reflects additional ongoing capital expenditures in Europe.

Turning now to 2008, we are raising our expectations for revenues now to be in the range of $625 to $640 million including $150 to $160 million from Europe. EBITDA is expected to range from $240 to $250 million including $42 to $50 million anticipated from Europe. This number includes investments we intend to make in Europe to scale the team in order to take advantage of the larger opportunity we see in 2008 and beyond.

Turning now to CapEx, we expect a total $300 to $310 million to be invested in 2008. This includes $45 million for ongoing CapEx of which $15 million is allocated for Europe. Expansion CapEx is expected to be in the range of $255 to $265 million of which $50 million is designated for Europe.

So in closing, as we look into 2008, the business has never been stronger. With the solid market fundamentals combined with our strong execution, we see 2008 as the year to break away from our competition and solidify our market leadership position with our customers on a global basis.

We'd now be happy to take your questions. Lisa, I'd like to turn it over to

(OPERATOR INSTRUCTIONS) Our first question comes from Jonathan Schildkraut with Jefferies.

Wow.

Hi, Jonathan, how are you?

Hi, guys. Great quarter. A couple of questions. Mostly on the housekeeping side and then a couple of strategic questions. Could you give us the recurring and non-recurring revenue break out in Europe?

What I'd tell you right now, Jonathan, sort of the break down because we are going through what do you call it? Reconciliation of the IFRS to the U.S. GAAP. The Breakdown is roughly 95%, 5% between recurring, non-recurring.

Fair enough. Okay. It looks like you're dropping your margin assumptions for Europe in 2008. Is there anything going on there or is it just the additional Paris expansion?

Sorry, Jonathan, could you repeat that question, please?

I'm sorry, Keith. Based on the revised guidance it looks like you took down your EBITDA margin assumption for the European operations in 2008 and I was wondering if that was a reflection of the further expansion that you guys announced today or if there was something else?

Certainly, Jonathan. Part of it relates to the additional expansion that we're going to be making in Paris. Part of it also relates to the fact that we are -- we're estimating that we're going to spend $10 million incremental in scaling the organization over 2008. That's going to be -- we're going to be making a fairly meaningful investment in human capital, sites, and processes and systems.

Great. If you could briefly describe the competitive environment in Europe relative to the U.S. particularly as it applies to some of the network densities that appears from a number of announcements you've put out as well as our conversations with IXEurope prior to the acquisition that in general those data centers have mid to high teens number of networks in each one of their data centers. In the U.S. Equinix tends to have a hundred or so networks in its data centers. Has that changed the dynamic in which you approach customers and have you seen an impact in trying to sell some of your U.S. customers into the European market?

Jonathan, this is Steve. Not yet. And the handoff we see happening today is mostly aimed at multinational customers that are not constricted by the number of carriers in these centers. So we don't -- because it's enterprise focused today in Europe with most of their business it hasn't been as big an effect. Now as you get into more content related global companies and some of the other network intensive applications that we'll take on then I think we'll start seeing a different kind of a mix and probably more of a challenge. But not effective to date. Margie?

Yes, Jonathan, I think you're right about that, the numbers you stated. Mid to high teens depending on the site. Again, you don't need as many because don't forgetting they're not peering, right? Because these pull on the multinational enterprise side. That's also correct but what I will tell you is the carriers that are in those centers in Europe are the right carriers. They're the right carriers for our U.S. people that want to go there. So around the FX service and some of the things where we're seeing some of the cross-border opportunities, it's not so much about the number of carriers, it's about the quality of carriers. So we feel good about that. If you're an FX guy and you're using BT Radiance or Yipes or one of those guys, that's who they want to see in those centers and that's who's there.

Great. Final question here. Recently one of your competitors kind of announced that they were going to roll out of some of their older leases underlying their data centers, some with lower power specifications that may become too antiquated to even sell on a per co-location basis. Could you bring us up to date as to the status of your portfolio of data centers I guess particularly in the U.S., how you feel about the power levels on a -- call it the next five year basis or maybe even ten years out and what you do to manage your customers' power consumption within your data center portfolio?

Sure, Jonathan, I guess the way we think about the useful life of our legacy data centers, there's a couple of factors. First of all, I think the quality of the original design of our centers with rate ceilings and overhead cooling, et cetera, has given us a position of a more efficient cooling ratio than most other organizations in this business. So that's point number one and I think that's a big factor.

Our peering hubs, as you know, is predominantly networking gear. They require less power than server farms so that's a factor. The space we took out can be replaced with DC power to augment this network here. That's another factor. We actually have a waiting list today on these legacy centers. So I'm not sure the competitor intelligence you're getting about that. Our case for our legacy centers, we actually have a waiting list across the board to get into these centers. A lot of these data centers we did acquire at a later stage so the Exodus, Verio, Abovenet type assets that we acquired, we acquired the later stage assets which are a little higher end assets in terms of the power and cooling capability.

The last thing I guess I think about on this front is we have a group of professional engineers that spend the majority of their time every day looking at the investments around things like heat exchangers, air economizers, DC power augmentation, et cetera. I'm not so sure our competitors have that same level of investment in engineers that come to work every day focused on these types of things.

Jonathan, I would just follow-up with one other point. What is very relevant about our legacy data centers, they are achieving in aggregate the type of returns that we initially modeled in our initial business plans which is crash course margin, 65% to 70% or higher on an aggregate basis and every single IBX that we have is generating positive cash not to mention the fact that we firmly believe as a Company, I've said it publicly, that the economic life of our assets we believe will extend well beyond the depreciable life of these assets and that's because we originally amortized our assets over the initial lease term and our view is the assets have a life extension much greater than that.

And then, Jonathan, just to answer the second part of your question about how we actually manage them, it's a good question because we've actually just spent the last 18 to 24 months putting in something we call branched circuit monitoring in all of our legacy centers that literally measures down to the draw level of every circuit in every single IBX so that we are able to maximize the power and how we manage it in each individual center. So in real time we know exactly what's going on at a circuit level with every single customer in those legacy centers and are really able to take a look at what customers are doing and how best to manage it. So we've gotten very sophisticated and spent a fair amount of money doing that. So we feel really good about the data we have.

Okay. Thanks a lot. We'll see you in New York next week.

Thanks, Jonathan.

Thanks, Jonathan.

Our next question comes from Jonathan Atkin with RBC Capital. Your line is open.

Thank you. Couple of marketing related questions. You mentioned the cross-border sales opportunities. Are there other sectors that show promise besides financial services? And then more broadly can you maybe contrast the growth drivers that you're seeing in Europe versus the U.S. versus Asia?

The sectors, I'll start out. Margie can provide some estimates. The sectors do cross. I mentioned that the financial services industry seems to be the one that's at the height in our pipeline now. But we're going to see as I mentioned earlier, more multinational companies across multiple segments that are going to be interested in global solutions where we're servicing them in Asia or U.S. and they want to go to Europe with us. So as the pipeline is forming now we're going to see multiple segments addressed. But I think the biggest push we've seen so far is with financial services.

And your second question?

Yes. Just more broadly, the growth drivers, how do the growth drivers differ by region?

There's -- I'd say the trends are generally the same at a top level whether you look at industry, you look at the growth of the internet, terabytes per day growth on the internet or shipments of servers, blades around the world. Anything trend you want to look at, you're generally looking at the similar trends across all continents and for us it drives the space power cooling and Interconnection parts of our business mix. So I don't know if I'd -- there's a little bit of difference in some of the smaller markets but in general the big trends that we're seeing today that are driving this, this high powered density equipment that's driving the power and cooling stuff is a prime driver for us. As you guys, most of you know, it's tough to have a conversation today with a buyer that doesn't want to talk about power and cooling as one of the first two things out of the gate.

Yes. I think the other thing I would add that's kind of interesting from a driver perspective is, whereas you think consumer broadband adoption in some of those would be a big growth driver in the U.S. that's also a big driver in Asia but really how the market has developed in Asia and Europe to address that kind of peering opportunity is different. So where we talk about double-digit increases we're seeing on the Interconnection side in Asia, that trend is a big growth trend in Asia but we're really on the cusp of beginning to see the growth in the way we address it. And that will also be true in Europe over time. So even though the growth drivers are the same, we're at a little bit of a different inflection point in the other two regions outside the U.S. as it relates to the sophistication of how that opportunity is captured.

Keith mentioned process and system investments as well human capital in Europe which is causing the EBITDA guidance to go up less than the revenue guidance. Can you go into a little bit more detail on what's involved there?

Yes, Jonathan. What I'd tell you is overall, as you know, the acquisition closed on September 14. We're spending a lot of time with our colleagues in Europe and looking at what size of investment when you can make -- what I can generally tell you is similar to what we experienced in the U.S. a number of years back where we basically -- we were going to double the size of the U.S. operations, we really took the investment in the sort of SG&A lineup is no different here. The European team sees a great opportunity in front of them. When we're out on the road, in the investor road, we talked about the size of their current footprint and how much revenue you can generate. That was $200 to $220 million. Clearly with the announcement today on Paris and with other opportunities we see, we get comfort that we need to make an investment that will allow us to scale this business for the next level of investment.

And then finally, perhaps for Steve, any updated thoughts on the government sector?

No. Nothing. I mean, we still look at it opportunistically. We've got opportunities in our pipeline but it's on a more selective basis.

Thank you.

Our next question comes from Rod Ratliff with Stanford Group. Your line is open.

Thank you. Very nice execution on the quarter, guys.

Thanks, Rod.

One housekeeping question. If you would, Keith, would you repeat the European floor space stats for me?

Yes. I will. Sorry. I put my notes away. So on a European basis, we have today roughly 34,400 square meters of space or about 370,000 square feet. When we complete the build out of the Paris that we announced -- including what we announced today in Paris, it's 45,400 square meters or about 489,000 square feet. We're using, just for everybody's benefit a 10.76 conversion ratio between square meter and square foot.

Thank you.

Great.

Our next question comes from Michael Rollins: with Citigroup. Your line is open.

Hi. Good afternoon.

Hi.

Hi, Mike.

Couple questions. First, when you gave your guidance, I think the date was on September 14. Your long-term goal for international or I should say for Europe. Excuse me. It was $200 to $220 million. What square feet or meters was that based on and now that you've announced some additional expansions, can you give us an update on what that revenue opportunity is? And then the second question I had was if you look at some of the changes in your guidance, you've actually now upped guidance I think each of the last three months or maybe three of the last four months. I'm curious what's changing in the pipeline that you're seeing to create some of these upward revisions so quickly. It tends to be a pretty visible business from what I understand in terms of the sales process. So is it better pricing? Is it just better fill rates in the centers? Or are the new centers really just picking up faster than you expected? Thanks.

I'll start on the second part of that question, Mike. It is driven by pipeline demand. As you heard me mention, we had another record quarter on booking. So we're seeing the demand fill into the pipeline and the new centers are obviously helping us. So the rate, the uptake in our new centers is a big factor in this equation. Quite frankly, the demand that we're seeing across all these markets is just the key driver. And it's causing the fill rates to go up and it's causing us to be able to get the bookings to record levels. So that's what drives booking, as you well know. As long as we're in this mode of setting record bookings, we're going to continue to drive, we're going to continue to get these kind of results.

The other thing I'd add, Mike, and I think Keith will address the other question, is Steve mentioned it in a script but the book to bill cycles that we're seeing are also being very helpful. So all those big investments we made over the last 18 months in systems and processing in the U.S. are starting to pay dividends as that revenue is coming in sooner and we're really starting to see the fruits of that labor pay off here.

Michael, going back to your first question, as I mentioned, I'm going to talk about it just on a square meter basis. We, in the original plan that sized the investment opportunity or -- sorry, the business plan opportunity at $200 to $220 million, it was approximately 42,900 square meters. Or said differently, it did not include the announcement we made today on Paris. So it included Frankfurt, the Frankfurt to Paris and the London phase two expansions. It also takes into consideration certainly they have, they have a book to bill interval as well or backlog. So when you take all that into consideration it gives us the comfort that we at current prices get into that range of $200 to $220 off that and that current investment.

And if I could just follow up on that are there other options that you have on existing properties to expand without, call it dramatic investments? So if you look at whether it's in Germany, some of the campus there, or some other market, what's left in terms of existing build off of existing centers that you have in Europe?

A good example, Mike, would be in Frankfurt where we're today going to be built out at about 8,000 square meters total of build out and there's another 23,500 I think of square meters potential build out on that campus. In square feet it's a 500,000 square feet campus and just under that in the size of the facility. So there's plenty of room to build out in Frankfurt on that campus, in that building. So we have a very good situation there. You know the U.S. situation quite well on the campuses. We're going to follow the same campus environment strategy in Europe that we've been doing in the U.S. That will also give us uplift and leverage as we continue to build out on these campuses and leverage the staff that's in these places.

And if I could trouble you for one other question, just on the cash balance. So your footprint's grown substantially with the acquisitions but still has your cash balance. So is there an opportunity as you look to '08 or '09 and maybe the analysts say you'll give some perspectives on maybe free cash flow goals. But is there an opportunity to see some of that cash come back to shareholders?

It certainly is a lot, a lot of cash on the balance sheet as of the end of the quarter, Michael. There is a fair bit as you know of commitment out there sitting on balance sheet with the accrued liabilities and the accrued construction and we'll fund those liabilities in Q4. But as we look forward, we still have a fairly meaningful commitment given the announcements that were made in the capital that you see as targeting or guiding you to for 2008. Clearly, from our perspective, we believe the cash flow attributes in this business are extremely attractive and we think we have the ability if we wanted to, to substantially deleverage the business as we move through time or alternatively which is more attractive to the shareholder is probably have the ability to repatriate the cash whether it be in the form of a dividend or a stock buy back. But I don't think -- it's clearly not going to be 2008, 2009 is -- we're just not there yet to see what we have in front of us. But I think just in general terms we like what we see in front of us and I think it's going to give us the opportunity or the flexibility to do that at some point in the future.

Thank you.

Our next question comes from Mark Kelleherwith Canaccord Adams. Your line is open.

Thanks. A couple quick questions going into Q4 on the cabinet capacity that you're expecting to add. We've got 2,500 cabinets in Chicago, 1,700 in New York, 740 from Tokyo, 450 from Singapore. Did I get them all? Does that take you to the 31,000 that you're still looking for? Are you still looking for?

31,000. That's right, Mark.

Jason here. I'm sorry, Mark, there's a quick stub for Singapore and Tokyo where we have partial phases that opened. So if you look at Singapore with 900 cabinets in total, not all of those are available in '08. It's a partial build. And the same thing's true of Tokyo.

But your 31,000 is correct.

Yes. And then kind of going with that, Margie talked about the billing cycle improving. Can you tell us what that book to bill cycle is? How long does it take between when you book them to when you can recognize revenue?

It's now down to a 15 day range. It was up in excess of 40 days and the investment this team has made here has really started to pay off here and several other areas too. But that's the noticeable one because of the impact here. It's in excess of 50% improvement here.

Mark, just recognizing that clearly our configuration, the way we certainly talk to the investor base on this, every customer relationship we have is somewhat unique and clearly some of the larger investments, the book to bill interval is extended because of the amount of infrastructure they're putting into their IBX is meaningful. But as a general theme, as Steve said, that 15 day ratio -- 15 day period is accurate. But I don't want you to think that every transaction would be at 15 days because in some cases it can extend months if not quarters.

Yes. That's on average.

But it would be fair to assume that a lot of those cabinets that are coming on line in the fourth quarter can be billable by the end of the fourth quarter?

Correct.

Can be revenue by the end of the fourth quarter.

Mark, just on that, I want to make sure you're clear. When we -- we've historically said when we think about our forward guidance, we have a very high confidence in what we think is already if you will, in the bag. But recognizing, Q4 between the time frame that you actually book it and you go through the contract period, you book it, and you ultimately get to billing, typically we don't see -- it's more meaningful today than in the past but it shouldn't have meaningful impact on Q4. It really will have a meaningful impact on Q1. But recognizing that we are seeing a reduction in that book to bill interval. So it's more so today than it was in the past.

Okay. And the capacity that you have at lower than market rates. Is there still a meaningful or is there a meaningful portion that is still available for repricing at higher levels?

I would say nothing meaningful. There certainly will be an odd account here and there. But overall, we feel that we've moved to market a number of our customers who are meaningful below market rates.

The only thing I'm going to add on that is as we've said in the past, we've worked with many of our customers to feather those increases over time. So you'll continue to see them kind -- we've kind of gone to the base and had the hard conversation in some cases but as those price increases go in, in some cases we've staggered them based on customer's budget needs and other things. So you'll see them feather in. But as Keith said, I think the majority of those are done.

And the market rates have plateaued? Would that be a fair statement or are they still moving up?

I think what we've historically said, Mark, is that we're certainly very comfortable with the rates that we're getting today. We believe we're a premium price relative to our competitors in the marketplace. But probably what's more relevant, despite the fact that we're getting good rates, I'll tell you that our customers are continually buying more services per cabinet and that's what's driving our MMR up. It's not because we're increasing our prices every single quarter, quarter after quarter. It's the fact that we're delivering more services per cabinet and that we've had the ability to move our price points up this year in 2007.

Okay. Great. Thanks. Great quarter.

Thanks, Mark.

Our next question comes from Chris Larsen with Credit Suisse. Your line is open.

Hi. Thank you. Keith, a couple quick ones. Did you say you were going to be making the shift in Europe from meters squared over to racks and we'll get that conversion at some point? And secondly, on the FASB accounting change with the converts. Is that purely an accounting change, the disaggregating or are you going to actually have to go back out into the market to do something there? And another quick one, I hope, you mentioned next year you're going to spend $10 million integrating and re-boosting IXEurope. Can you give us a sense for what's built into the fourth quarter spend in terms of IXEurope for stuff like that? And then I actually have a question on an operating basis. Sorry.

Let me start with the easy one. On the square meters to cabinet, it's fair to say that when we talk about the business in Europe relative to the U.S., we do sell on a different perspective and so they do sell in square meters and they sell suites. So we're certainly going to look at integrating our metrics as much as possible but I can't tell you a day that we'll absolutely convert meters to cabinets. What we really want to do is give you a sense of what their utilization level is regardless of what metric that they have and in trying to give you a sense on what the upside potential is. So that's what I'd tell you there. I just -- we are looking at it. We're looking at integrating all of our operating metrics as I think Steven mentioned in his script.

The second one as related to the FASB FSP on convertible debt. I don't -- we don't have to go back out to the market. It really is just forcing us to break down sort of the equity component of a convertible debt instrument and move some of the debt into the equity section and then accrete interest. So if you have a non-cash interest expense hitting your P&L over the maturity of this instrument, but it's something that we would do, just basically book accounting and it won't have any relevance on our economics returns.

And the last piece was on the $10 million that you had alluded to. Certainly we're looking at starting to scale the team up in Q4. I don't have a good number for you yet on what the Q4 investment will be but in order to size it for you it's going to be certainly north of $1 million in the quarter. The other meaningful cost in Q4 that's having some impact on the flow through is the introduction of two new IBXs into operational status in Q4 both in New York and Chicago and we're absorbing almost an incremental $2 million of cost contributing to those two IBXs.

Thanks. That's really helpful. And then on an operating basis, we have comment by two of your competitors, SAVIS and off to the side a little bit, Level(3). SAVIS is saying that they're having trouble filling yet you guys are actually saying churn in coming down. Maybe it's more of an operating basis and they're not hitting the numbers as well as you guys are. But maybe you could give us an idea of why you think churn is coming down and you feel comfortable saying that it's going to come down in 2008? And then Level(3) is making a comment that they're willing to accept customers into their data centers on anyone's network. Are customers -- are you seeing that out in the marketplace that customers are buying into that or is that really not having any sort of effect in the customers that you're competing for?

Let me take the first one and then I'll pass the second one to Steve and Margie. As it relates to churn, there's a couple things that are driving churn clearly over the last -- effectively almost two years we went through a scenario where we were optimizing our IBXs, we were moving some of our customers to more market rates or giving them at least the opportunity to move to market rates or move out of a given IBX or migrate them to one of our new IBXs. Clearly that effected our churn rates over the last couple years. We saw that basically come to some level of conclusion at the end of Q1 where we had -- we sort of got to the end of our optimization effort. As a result, I think you're seeing now -- you're seeing more on a steady state basis where churn just isn't as significant as it once was and the fact that a lot of our growth is coming from our install base. As Steven alluded to, 80% or almost 80% again this quarter of our new bookings came from our install base. And so with that size of investment coming from the base, it's just unlikely that you're going to see any meaningful churn. You always see them, I would say managing their infrastructure here and there but overall we just don't see any meaningful churn over the next quarter and certainly as we look into 2008. And you also get clearly the benefit of larger numbers. We're a much bigger Company in 2008 than we are in 2007 and so with some degree of comfort we can take our churn levels down to that 2% range per quarter of 8% per year.

Chris, the other thing -- this is Steve. Margie probably has some info. As I'd mentioned, we just had some customer forums with some of our biggest customers across our segments and we heard a consistent theme from all of them that reliability, responsiveness, and service excellence are big differentiators every day and so whether it's a legacy center or a new IBX, it almost becomes irrelevant if we're delivering the kind of service they're expecting from us and we're responsive and we're reliable, at the end of the day, wins relationships and deals. I think we separate ourselves, whether it's legacy or new, by just delivering every day.

And Chris, just to speak to the Level(3) opportunity or the Level(3) comment specifically, we don't see them competing for our customers in terms of the deals we're in, for sure. And just remember how they're doing that and what the value proposition is for customers. So Level(3) can get you to another network but you're going to use the local loop to get there, you're going to use one of their metro services to get there. And inside Equinix you can get to anybody you want to for $250 including Level(3) and everybody else that they bought for $250 across the room with no chance of a local loop issue or anything else. So it's a different value proposition. We certainly would see in the business us walking in the door that the network neutral model is a very strong model. So I think they're right about that. It's just actually how you execute that, the value proposition for customers. We believe in Equinix it's stronger.

Thanks. That's really helpful and it sounds like you guys are still under-pricing, Margie.

I'll keep that in mind, Chris. Thanks a lot.

Our next question comes from Greg Mesniaeffwith Needham. Your line is now open.

Yes. Thank you. I was wondering if I could explore the pricing environment a little closer, particularly -- you've clearly benefited in the U.S. market over the last few quarters from large marquee customers vacated a portion of their cabinet space and you being able to effectively re-rent that to smaller customers at higher price points. And I'm wondering how that trend is shaping up these days?

Hi, Greg. This is Steve. I'll give you -- of course you know in Europe and Asia you've got to go country by country, almost city by city in some cases. But let me just give you a couple data points. In the U.S., as you know, we did increase prices in March of 2007 up about 11% on caps, adjusted the sales compensation to line up for that and we've seen results in the order of magnitude on a quarter on quarter basis of about a 1.8% MR per cabinet increase in pricing and on a year on year basis, about a 6% increase on MR per cab. Pipeline's very strong so another indicator in the U.S. and I think we've alluded to in the past that our high powered density cabs, we're looking for a range of 1,800 to 2,200 fully loaded. So there's a couple of data points for you in the U.S.

If you go to Europe, quite different. In London, pricing is up due to the tight supply in London. Today's pricing is we think in the order of magnitude of three times what it was just over the last 2.5 years for cabinets and power. Germany, you'd see lots of capacity and more supply coming on board. In our Frankfurt market, we do see prices rising but less than London and I call it low double-digit growth in pricing in the German market. In France, market is tightening so the supply demand from a supply demand standpoint is definitely tightening. That's why we're making the decisions we are in Paris. We're getting higher rates in each of the new sequential phases there. So that's a positive sign for us in Paris. And prices there have basically doubled since the 2005 timeframe. Switzerland we're seeing higher prices there than most countries across Europe with the exception of the U.K. On a general data point in AP, I'd tell you that we're seeing just over 2% quarter on quarter price increases on an MR per cabinet basis and at about a 5% on a year in year. So those are the kind of trends we're seeing across the markets.

Great. That's very helpful. Thank you.

Our next question comes from Manny Recarey with Kaufman Brothers. Your line is now open.

Thanks. Just two quick questions. I missed -- what's the total number of billable cabinets at the quarter end? And then the second question is your results exceeded the guidance that you gave in sort of the mid to latter part of September. I was just kind of curious what drove that? Anything in particular? Is it just strong demand?

Answering your first question, it was 20,500 cabinets billing at the end of the quarter and then on a weighted average basis it was 20,100.

Then as it relates to the question on the guidance that we give prior to our financing in September. Clearly, when we closed Europe on September 14, we were using the best information that we had, recognizing that the European operations are managed on an IFRS basis versus U.S. GAAP and one of the largest components of that is that under IFRS, you actually recognize all of your non-recurring revenue up front whereas under U.S. GAAP we defer and amortize it over the relationship with the customer.

And so, taking all that into consideration, we estimated at the time we thought Europe would do about $4 million of revenue. And as you can see by the results, they came in at roughly $5.5 million of revenue. So that was a significant driver. As a general theme, we as a Company, we're always -- we provide guidance and we are -- we've historically been a -- we shoot for the midpoint and if we do a little bit better we get to the top end of the range. In this case we're just bumping because the book to bill interval we're bumping above the top end of the range. But historically and as we look forward we still want to manage it -- manage between the mid point of our ranges and we think that's a fair number to target as you look forward.

Okay. Great. Thank you.

Our final question comes from Jennifer Adams with Cowen. I'm sorry. Your line is open.

Congratulations on a very strong quarter. Looking at your CapEx, I know '07 and '08 have been years of build out and expansion but if you could give a little bit more flavor on how you're thinking about future years as you expect CapEx to stabilize, perhaps as a percent of revenue or in absolute dollars? And how we should think about that going forward? Thanks.

I think as a general theme, Jennifer, first -- thank you for your comment. As a general theme, we as a Company think that on a steady state basis we would spend 5% to 6% of revenues on CapEx. Clearly as we see opportunities we're going to invest our capital with outsized returns, we want to do that on behalf of our shareholders. But today we continue, we've invested a lot in '07. We're also putting a fairly large commitment down for '08. And as we look forward, we're going to look at each market and each transaction as we see the market unfolding in that given geography. But overall, our theme is that we don't want to give you any sense of where we're going to be in 2009 or 2010 yet because we just don't know. But it's fair to say that on a general basis our ongoing CapEx will be in the 5% to 6% range of revenues.

Great. Thanks a lot.

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

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