Equinix Inc (EQIX) 2008 Q1 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 Q1 2008 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 27, 2008. Equinix assumes no obligation and does not intend to update forward-looking statements made on this call.

In addition, we'll provide non-GAAP measures on today's conference call. We provide a measure -- 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, and Keith Taylor, Equinix's Chief Financial Officer. Margie Backaus, Equinix's Chief Business Officer, will not join us today due to an important family matter

At this time, I'll turn the call over to Steve.

Thank you, Jason. Let me begin today by announcing another outstanding result for the Equinix team in the first quarter of 2008. We significantly exceeded our expectations for revenues and EBITDA with record booking results across all regions. As concerns on the economy heightened, we mentioned on our previous call that we were increasing the frequency of our reviews on all leading indicators and frankly offered what we stated could be conservative guidance for 2008.

As you saw in today's release, this proved to be the case as the trends witnessed in 2007 continued in the first quarter of 2008 and we still see strong demand and pipeline. We continue to focus on day to day execution while maintaining our momentum to drive business towards our objective of generating over $1 billion in revenues, which could occur as soon as the year 2010.

We expect the call today to be concise with primary focus on Q1 results. We will also provide a brief update on our expansion plans by region, our global integration initiatives, as well as expectations for the remainder of the year.

So, let me hit the highlights. Total revenue for the Company was $158.2 million. This represents a 14% increase sequentially and an 86% increase over last year, which of course also includes our European acquisitions. I should also note in this number we did receive a one-off benefit from a $1.4 million reversal of a sales allowance reserve for one of our customers in Europe.

Our cash gross margins were 61%. This was a great result and ahead of our expectations. Of course, this was due in part to stronger revenues and also a managed pace in hiring and cost containment. An important note, exclusive of our European operations, our cash gross margins were 65%, which is within our long-term operating plan.

EBITDA came in at $62.3 million, a 78% flow through on incremental revenues. We closed 160 new customers in the quarter of which 52 were in Europe and 41 in Asia. We ended the quarter with just under 2000 customers. In the US we had very strong bookings with over 85% coming from our existing customers. We also saw a great mix of bookings and a nice blend of smaller to moderate sized deployments. We saw continuous success in the financial services sector, including one significant order from a current customer now deploying with us in Chicago. We also saw 16 new financial exchange customers with a robust pipeline heading into Q2.

In our Asia-Pacific operations, we've seen continued strength as well with record bookings in this region. The pipeline remains strong and we are still seeing price increases on incremental bookings. As an aside, I recently announced third phase of the Singapore expansion is now 100% reserved, six months before it is scheduled to open.

Our team in Europe continues to deliver very strong results. Geo bookings and integration activities are all ahead of plan. Some of our wins in the quarter included Chi-X, D.E. Shaw, CD Networks, BSNL, Qwest, and Madison Tyler. Additionally, we saw ten cross regional deals won in Europe, further highlighting the synergies of our global solution.

We're beginning to see a better mix of smaller deployments with a greater focus on interconnection across the region. Also, as expected we announced a new relationship with the Amsterdam Internet Exchange or the AMS-IX, which is the world's largest single metro area Internet exchange in which they've agreed to establish a point of presence in our Amsterdam one IBX center scheduled to open mid-2008.

Also as you may have seen in this announcement earlier today, both Guy Willner and Christophe du Buchet, the founders of IXEurope, have decided to step away from the day to day responsibilities of managing the European business. Both Guy and Christophe will still be involved in a non-executive capacity on the European Board through March of 2009. I'd like to thank both of them for their leadership during the past nine years in building a first-rate team and a leading platform in Europe. Additionally, their leadership since the closing of this transaction has put us in a position to exceed the 2008 operating plan for Europe.

I'm pleased to announce that Eric Schwartz, our current Chief Development Officer responsible for strategy and global expansion will assume the duties of President of our European business. As some of you may know, Eric joined us almost 2 years ago with a very strong background including prior roles at McKinsey, Trammell Crow, and most recently BellSouth. Most importantly, Eric led the acquisition of IXEurope and has also been the executive in charge of all integration efforts to date.

In his new role, Eric and his family will be moving to London this quarter. As a result, we expect a very smooth transition given the relationships he has built over the past year with the entire European leadership team. And it goes without saying, the team in Europe as a whole has performed above our expectations, and is quickly becoming an integral part of the fabric of the Equinix culture.

So let me stop there and turn it over to Keith to provide some further insights into our financials.

Thanks, Steve, and good afternoon. I'm pleased to provide you with our first quarter results with some additional perspective on the quarter and the rest of the year.

So, let me first start with revenues. As Steve mentioned our Q1 revenues grew 14.1% over prior quarter to $158.2 million, clearly much stronger than our initial expectations. We're at 11% quarter over quarter, based on two discrete adjustments affecting our European operations in Q4 of last year and Q1 of this year. I'll discuss both of these matters in a moment.

As we said last quarter, we thought our guidance could prove to be conservative. Yet our revenues came in even higher than these expectations, the result of very strong bookings activity in the quarter, continuing short installation intervals, and favorable currency trends across our markets.

Our European revenues were $40.8 million, including a $1.4 million one-off benefit related to the reversal of a Q4 sales allowance reserve and $1.4 million of revenues attributed to the Virtu acquisition, resulting in a quarter over quarter increase of 27.5%. Adjusting our growth rate in Europe for these two items, European revenues increased 14% over the prior quarter. The European and Asia-Pacific currency benefit affecting the revenues for the quarter when compared to the exchange rate, the rates used for guidance was approximately $1 million for the quarter.

Now looking specifically at the US IBXs that opened in 2007. Demand and, in particular, booking activity was strong in all of these markets and the pricing trends remain consistent with our expectations. The revenues attributed to our new Washington DC IBX exited the quarter at almost 20% greater than the prior quarter or about $30 million of annualized revenues while our revenues from our Chicago and New York expansion IBXs have ramped greater than greater than $3 million of rev gains in the quarter, or approximately $16 million when annualized off our March exit rate.

We expect our Chicago and New York revenues to continue to accelerate in Q2, consistent with our strong bookings level - levels in these markets and, in fact, our New York four IBX center, after only five months of operation is now generating positive operating cash and we expect our Chicago three IBX to accomplish this milestone by the end of Q2, both ahead of schedule.

As we look forward into Q2 we continue to see a very strong pipeline across all of our regions and expect our pricing objectives to remain intact.

Looking at churn, our MRR and cabinet churn for the quarter was approximately 2.1% and 1.6% respectively and in line with our expectations for 2008 churn of approximately 8%.

Next, moving on to gross profit and margins. The Company recognized gross profit of $63.7 million for the quarter, gross margins of about 40%. Our cash gross margins were 61%, greater than our expectations, primarily due to stronger than expected revenues in all three regions and lower than expected utilities expense.

US cash gross margins increased to 67% in the quarter, primarily the result of strong revenue growth, coupled with lower utility consumption, and better than forecasted real property tax costs. Finally, our European cash gross margins were also higher than planned due to the reversal of the sales allowance reserve. Looking forward to Q2 and Q3, our utilities expense will increase consistent with prior years to reflect the higher seasonal summer rates.

Now looking at sellable cabinet capacity and utilization levels, excluding the capacity from Europe. Our net sellable cabinet capacity increased to 30,300 in the quarter, which reflects the new cabinets from the opening of the Singapore expansion phase and adjusts for a reduction of 300 sellable cabinets across our US markets, which reflects the sale of a number of high priority cabinet deployments.

At the end of Q1, approximately 23,500 cabinets or about 78% of our sellable cabinets were billing, a significant increase of 1500 cabinets in the quarter. Breaking down the details by region, our US sellable cabinets billing in the quarter are approximated 18,900 while Asia-Pacific sellable cabinets billing total 4600, both regions, at approximately 78% of their available capacity.

On a weighted average basis, our net sellable cabinets billing during the quarter was 23,300 or 77% of which 18,700 were in the US and 4600 in Asia-Pacific. For remodeling purposes, we expect to have 33,450 net sellable cabinets in our US and Asia-Pacific capacity by the end of Q2.

Looking at revenue per cabinet on a weighted average basis, organically our average monthly recurring revenue per sellable cabinet increased to $1603 from $1581 last quarter or up about 7% compared to last year. This reflects continued strong growth in our interconnection services and the favorable pricing attributed to our higher power cabinets sold in the quarter.

On a regional basis, our weighted average price per sellable cabinet in the US was $1693 versus $1681 in the prior quarter. In Asia-Pacific, our weighted average price per sellable cabinet was $1230, an increase over the prior quarter level of $1179, despite the sale of the EMS service offering in Q4 reflecting continued growth in our interconnection services and strong stock prices in each of our Asia-Pacific markets.

Now looking at SG&A expenses. SG&A expenses for the quarter were $49.7 million including stock-based compensation and depreciation and amortization expenses of $11.4 million and $4.1 million, respectively. Cash SG&A was $34.2 million in the quarter or about 21.6% of revenues. Cash SG&A costs were as expected and looking forward we expect cash SG&A to remain somewhat flat throughout the year, excluding the impact of costs related to our branding and IT projects. As we look forward, cash SG&A as a percentage of revenue will decrease throughout 2008 to approximately 20% of revenues in Q4.

Moving on to net income and EBITDA. For the quarter, we generated net income of $5.4 million which includes a net loss of $1.1 million attributed to the Virtu acquisition. These strong results reflect the stronger than expected revenue performance coupled with focused cost management over our discretionary spending lines.

Looking forward, recognizing that our net results may fluctuate due to the timing of depreciation and amortization expenses as we complete our construction projects, we believe we will continue to generate positive net income in Q2 and for the year.

Our EBITDA was $62.3 million for the quarter, a 32% quarter over quarter increase and included $10.8 million of EBITDA in Europe. This also includes an EBITDA loss of a $641,000 related to the Virtu acquisition.

Turning to our balance sheet and cash flows, by the end of Q1, our restricted cash balances totaled $325.5 million. Further, to give you some comfort on the quality of the cash balances, we have the majority of our unrestricted cash balances invested in money market and deposit accounts, corporate bonds, government agencies, and commercial paper. None of our cash is invested in auction rate securities.

This cash balance, along with our expected operating cash flows, and the drawdown of additional debt from Europe and Asia financings will fully fund our announced expansion plans, including any capital expenditures to expand our New York four Phase II project, which is in -- sorry. Which is currently in the design phase.

Under the current year's operating plan, including the announced expansion, and updated views on our working capital management, we expect our unrestricted cash balance to be in excess of $250 million at the end of 2008.

Next, moving to our operating cash flows, our net cash generated from operating activities was $63.1 million for the quarter, a significant improvement over the prior quarter, and more reflective of the expected correlation to our EBITDA results. During the quarter, we increased our focus on accounts receivable in each of our three regions, resulting in strong collection and in approving global DSO metric in the quarter.

Looking at the remainder of the year, we expect our cash flows from operating activities to continue to scale with the growth of our EBITDA, recognizing the cash paid on the interest on the majority of our convertible debt in Q2 and Q4 of each year.

Cash from investing activities was $165.1 million for the quarter. During the quarter, we spent $125.6 million on capital expenditures and we reduced our accrued property and equipment balance by $3.1 million while investing $23.2 million for the purchase of Virtu.

Finally, the cash collateralized layers of credit after we elected to terminate our Silicon Valley Bank line of credit. Cash generated from financing activities was $4.6 million for the quarter, primarily derived from the drawdown of $41.9 million of funds from our European and Asia-Pacific financing lines, $7.2 million of proceeds from our employee stock plans, offset in part by $4.5 million use of funds to re-create debt and other financing activities.

Looking at Q2, we anticipate raising an additional locally denominated debt approximating $20 million US to fund our Hong Kong expansion, an expected draw down on the majority of this facility during the latter half of the year.

Finally, with respect to our equity balances outstanding, we had approximately 36.8 million shares of common stock outstanding. This number excludes the 6 million shares related to our convertible debt and the 3.9 million shares related to our employee stock plans and other warrants.

So, let me turn the call back to Steve.

I'd like to now provide a brief update on our ongoing expansion strategies, which has proven to be critical to our ability to meet the increased demand that we have seen across all regions over the past several quarters.

In the US market, our Silicon Valley two and DC five expansions are still on schedule for mid and end Q2 2008 openings respectively. Our LA four expansion is still targeted for a Q2 2009 opening. As Keith noted, our three Greenfields opened in 2007, ahead of our initial expectations, particularly in New York where we're finishing up our design for phase II.

While this isn't complete yet, we want to provide you with an early view into this project, which we estimate will be somewhere in the range of $80 million to $90 million in expansion CapEx. We will provide you with final details on this project when the design is completed, but I should point out that this has not been included in our 2008 CapEx guidance. Yet, even if it were, our plan would still be fully funded.

In Europe, we opened our two expansions in Q1 in both Paris and Frankfurt. As previously mentioned, the expansion in Paris is already fully booked, and the third phase is still expected to open this quarter. I'm pleased to report that our recently opened expansion in Frankfurt is now also fully booked and, as a result, we have initiated a new phase there. When complete, this is expected to yield approximately 840 cabinet equivalents. Total capital investment is expected to be $36 million of which $20 million will be incurred in 2008 and the remainder in 2009. Initial cabinets from this project will be available for Q3 of 2008. Our remaining projects in Amsterdam and London remain on track.

Finally, in Asia-Pacific, we opened the second phases in Singapore in early January, and Tokyo in early April. In Singapore, Phase III is still on schedule for Q4 2008. As previously mentioned, it's already fully reserved. Our Hong Kong-Sidney expansions, announced last quarter, are still on target for their openings with a recent scope adjustment for cooling in our design in Sydney that will result in an increase of $5 million, which we now expect to be $34 million in total CapEx.

As a reminder, we have posted an expansion tracking sheet on the Investor Relations page of the Equinix website to help you model these.

And finally, with all the momentum we have in the business today, we're also continuing to invest in key initiatives that will enable us to more effectively operate globally. First, we are making solid progress on developing a future state IT plan that will serve as a practical and pragmatic roadmap for the increased standardization of our strategy, processes, and systems globally. Second, we are also investing in an initiative to create a global Equinix brand and unify the Company around a shared mission and vision. This is primarily aimed at raising the awareness and alignment of our core differentiation of protecting and connecting the world's most valued IT assets across all three of our operating regions.

Finally, we're starting to see some early synergies with our go to market initiatives, our account management product and pricing integration, as well as customer care. As an example, in the first quarter, we saw several of our most meaningful wins require deployment in all three of our regions. All three of these initiatives are continuing to enhance our global scale and reach as we continue to drive our market leadership.

Now let's take a look at what all this means for the rest of 2008. As you saw in today's release, we're lifting our annual guidance. We now expect revenues to be in the range of $685 million to $700 million, which lifts the midpoint of our range by $35 million from our previous expectations. As you analyze this number, let me provide some color to our thinking.

Clearly, this reflects a great deal of momentum in the business and the impact of an outstanding first quarter. As we look at the latter half of the year. There are a couple of factors we're taking into account as we offer this guidance.

First, we are still being mindful of the economic environment that we're operating in. Second, the accelerated momentum of the business in the first quarter has increased the fill rate of certain IBXs and presents some pressure on our availability of inventory in the later half of the year. As you can imagine, we're very excited about the state of the business today.

We expect cash gross margins to be approximately 60% to 61%. Cash SG&A will be approximately $143 million. This contemplates additional investments in our team and the global branding of IT initiatives previously mentioned. We are increasing or EBITDA expectations to now be in the range of $270 million to $280 million, an increase of $21 million at the midpoint. We are increasing our 2008 CapEx guidance to $365 million to $380 million of which $60 million is for ongoing CapEx.

Now for the second quarter. Revenues are expected to be in the range of $169 million to $171 million. Cash gross margins for the quarter are expected to be approximately 60% to 61%. SG&A is expected to be approximately $37 million. EBITDA is expected to be in the range of $65 million to $68 million. Total CapEx for the quarter is expected to be between $100 million in $110 million, which includes approximately $80 million to $90 million in expansion CapEx.

With our first quarter results behind us and the increase in guidance, you can clearly see that we're off to a great start in 2008. And while we are mindful of the current economic environment, we continue to see a strong opportunity in front of us. We will remain focused on the needs of their customers, driving our expansion strategy, and achieving our financial objectives.

Thanks again for joining us today and we will now take some questions. So, I'll turn it over to you, Lisa.

Thank you. (OPERATOR INSTRUCTIONS) Please stand by while the questions register. Our first question comes from Jonathan Schildkraut with Jefferies.

Good evening. Thank you for taking the question. Congratulations, also, on a great quarter. A couple of questions here. First, I just wanted to start with the guidance that you provided, updated. I was wondering if there were specific geographies or products that were driving that update in guidance? Was there something more in Europe or Asia or was it kind of broad-based in nature?

Yes, Jonathan, as I said sort of in my remarks, we saw a strong uplift in all of our key markets. I'd say the majority of our key markets across all three regions. The bottom line is, all three regions had an uptick in activity that was greater than our expectations.

Okay. Are you finding that you are winning in different types of deals than - that you have -- than in prior years? Or are you finding that you're still kind of winning for the interconnection piece, but you're seeing more competition for - in a large scale Colo? I'm just trying to get a sense of how the competitive market has evolved for the last 12 or 15 months.

Yes, Jonathan. This is Steve. We are starting to closely measure win rate now, which has given us some insights into what's happening market by market. We're in excess of 80% win rate across the board here. When we see - and we're competing in certain - certain markets, pricing would be a critical factor, capacity will obviously be a critical factor, but the trends differ a little bit by region but generally, we're winning for the same kinds of reasons. Network density, the great reliability that we present, the service excellence that we have historically. So, we very rarely lose because of that. It's normally driven around price where we are not willing to come down below a certain level or we just don't have capacity in that market.

Okay, great. A couple of housekeeping items for you, Keith. You gave the cabinets in use or billing rather at the end of the quarter by US and the Asia-Pacific market. Last quarter, I think the Company was trying to give us some background on how we might think about available for sale cabinets in some of the geographies. Maybe if you could give us the US and the Asia-Pacific and kind of where you are in Europe?

Yes, just to give you a sense, as I said, billing at roughly 78% of our - roughly 78% billed. By the end of Q2, we should have about 33,450 cabinets of capacity available, and so when you look at the map, sort of Q1 entering, we had 30,100 cabinets in the US. So you can get a sense of the amount of capacity we still have available.

I think as it relates to our European operations, we have tried to limit the amount of disclosure. We have certainly given the announcement that Steve mentioned today with Eric moving over to Europe, we are going to spend a lot more time as we integrate our Oracle applications and get - and hopefully get a much better number for you going forward, but at this point we are reticent to give anything on the European operations on a capacity basis.

Okay, just one last question. In terms of having more than $250 million in cash on the books at year end, is there a bait assumption in there that you will continue to see cash flows from options and employee options being exercised?

I certainly think there's some level of - when the stock started trading down, we certainly clearly saw that number drop off quite dramatically. There is some activity, as I mentioned, relating to employee options and restricted shares, but overall, I think as you go through time and I'll take you to the next two years, you're going to see that number drop off fairly dramatically.

Great. At what level do you think you'd restart your 10B5 plan?

Are you talking about me specifically?

The firm.

I was the only one that canceled my 10B5.

Oh, it was just you. Alright. I thought it was the firm. Thank you.

Your next question comes from Jonathan Atkin with RBC Capital Markets.

Yes. Good afternoon. One question for Keith and then a couple of other questions. First of all, just on the housekeeping front, if you could repeat what you indicated on the MRR and cabinet churn? I missed that. And then with respect to the new business that you're seeing, the new logos, what's the trend in terms of number of cabinets and amount to cross connect activity compared to your existing base?

Let me deal with the housekeeping matter. MRR in cabinet churn is 2.1% and 1.6% respectively.

Okay.

And then, Jonathan, could you just repeat that - the second part of your question, please?

Yes, both for the US as well as across the other regions, what trends are you seeing in terms of the typical size of your new customers? What's the footprint that they're taking initially in terms of number of cabinets and the amount of cross connects that they're taking?

Yes. This is Steve. The deployments, as I mentioned in my comments, have - particularly in Europe we're starting to downsize to small and midsized, moderate sized deployments and the uptick in cross connect activity will start to take place as we start to work with that team to push the interconnection agenda. In the US and Asia markets, we are looking for a good mix of Colo and interconnection and where we can and, again, it varies deal by deal, but the smaller footprints, I'd say 10 to 20, 30 cabinet kind of footprints are in the sweet spot. There are some bigger. There are some smaller, but that's kind of what we like to look for in terms of cabinets.

And Jonathan, if I could just pile on to what Steve said, one of the things that was interesting this quarter, this was the largest sequential quarter over quarter increase in the number of cross connects that we sold. And so that certainly tells us that we are continuing to get strong interconnection activity across not only the new customer adds, but our existing customer base.

Jonathan, this is Jason here just to give you little color. One of the things I found interesting, when you look at the incremental cross connects in the US, a fairly decent sized chunk of that came out of sites like Chicago one and two where we've touched on how it's essentially at its capacity. Yet we still continue to drive cross connects out of the financial sector. The other comment I was going to make is when you look at the bookings in the US, it's pretty consistent with the revenue segments we have, with the network segments and digital media really driving the growth, but still pretty good strength as we mentioned in the financial segment as well.

Thanks for piling on there. And then on the maybe new investment opportunities as we look beyond 2008, what's the pipeline looking like in terms of opportunities either in new regions or expansions in existing locations that might have an impact on 2009 CapEx?

Yes, we will stay focused primarily in core markets. As you all know, we're looking at secondary markets and new markets all the time, but what you should expect from us is a focus on core markets across the same segments that we've been focused on in the past -- network content, digital media, financial services, and enterprise, and again, as I just mentioned, looking for a good blend and mix between Colo and interconnections. So, we are incenting our sales force that way. That's how we're going to market and I would say more of the same.

And then finally, spot pricing, I think you mentioned in Asia-Pacific, that is going up. Is that equally the case in Europe and the US or is that kind of stable?

Certainly we are seeing it go up in the Asian markets. We're seeing strong performance in our UK and other markets in Europe. But for the US, pricing directionally hasn't changed. We're shooting for a blended basis for $1650 per cabinet based on the guidance we've given everybody to the $1 million target on the revenue line. I think that's still a trend that we want to shoot for, recognizing that, again, as a Company, we don't assume perpetual price increases year-over-year. Although we do, we are looking at sort of 3% to 5% pricing increases where we can increase that back to the customer.

Thank you very much.

Our next question comes from Sri Anantha with Oppenheimer.

Thanks, guys, for taking my question - couple of questions. Keith, I know you mentioned some of the growth, especially in 1Q. Looking back at your guidance and looking back at the contribution from Europe, what specifically drove the strong contribution in Europe? Were there any large customer wins? Or was there a large percentage of cabinets coming on line? Could you give us some details? Because if I remember, my sense was when you gave us the guidance, the contributions from Europe was going to be more like $37 million to $38 million, but it looks like it came in on $14 million right now.

We originally anticipated that in 2008, $150 million to $160 million on the European revenue line. There is a couple of things. Clearly, we are benefiting from stronger currency. The other thing we benefit in Q1 from was that $1.4 million reserve reversal that we called out there, but overall, you're seeing good growth across the markets where they have capacity. As Steve's alluded to, there are a number of markets that we are either building in or have just recently finished completing the build and they're reaching capacity levels very early in their introductions and that's putting some pressure across some of our markets, but overall, I'll tell you, as a whole in Europe we are seeing great momentum across the available markets and the price points are consistent with what we were expecting.

Which means, I guess, as you look into 2008 guidance, then the contribution from Europe should be higher than the $150 million to $160 million.

On an absolute dollar basis, it certainly will be larger, but relative to the total revenue base I think it's going to be roughly consistent with the distribution across our three regions. Pardon me.

Got it. Looking at your --

-- US, and then sort of one- third between Asia and Europe, and then when you break down non-US it's roughly two-thirds EU and one-third Asia.

Got it. When I'm looking at your guidance for 2Q and for the remainder of 2008, assuming that the RPUs are going to increase steadily, it looks like most of the growth is going to come from higher uptake on volume growth. Am I assuming that correctly here?

I think it's going to be a combination of all -- we're selling -- we're selling our cabinets in our new sites at a much higher price point than our old sites or that will meet the cumulative average that we're providing you today. So, we are going to get it both from volume and we're going to get it to some degree from price.

Got it. Alright, guys, thanks so much.

Thank you.

Our next question comes from Mark Kelleher with Canaccord Adams

Hi, guys. Nice quarter.

Thanks, Mark.

Thanks, Mark.

I wanted to go back to one of the comments you made about the fill rates having increased at the beginning of the year. Perhaps putting pressure on inventories at the back of the year. You're 78% utilized, the Silicon Valley and DC five facilities will take some of the pressure off, but could you get into a situation where you're out of inventory by the end of the year?

Yes, there are a couple of markets where the bookings pays and the fill rates have gone up as we mentioned, a little bit faster than we predicted - quite a bit faster than we predicted and, yes, that will put some pressure on us in those markets, but weren't moving as fast as we can on future phases to address that, but there will be a couple of markets in the US market that will be under some level of pressure for capacity. We've got seven new openings happening here in the second quarter that heightened that. So, we're managing ourselves through that, but there's a lot of activity going on here now as we look at 12 of the 18 markets we've got capacity going.

Mark, the other thing, Jason alluded to this, despite the fact that we might have some capacity constraints in some of our markets, Dallas as being an example of something we had over the last few years, LA could be something that we see going forward. We still have the opportunity to continue to sell power and cross connects if we run out of physical capacity. So, that still is an opportunity for us, but it really just has to - the comment that Steve said, it really is more about making sure that you realize there's a lot of moving pieces here and we're being very judicious in how we manage our guidance going forward, taking into consideration that all markets aren't going to rise and fall at the same time, and so we have to be mindful that we could run out of capacity in a market that we have a very rich trend in today.

Good comes out of that. We actually have a pretty good amount of cross-selling going on from one market to the other with the sales force and one market can actually sell into alternate markets. So, it's a lot of moving pieces but is pretty well-balanced.

Okay. Great. Thanks.

Our next question comes from Colby Synesael with Merriman.

Great. Thank you for taking my question. Actually, I have two of them. The first one has to do with your cash balance. You're talking about how you guys are having to expand as you start to run out of capacity potentially in some markets. What's the minimum cash balance that you would be comfortable with? I think you mentioned you'd be about $250 million by the end of the year.

And my second question is a little bit more broad. When you look at the competition you guys were expecting in some of your markets at the beginning of the here, relative to where we are now, is that less or more? And what I'm getting at is with the current economy, are you seeing that some of your competitors aren't necessarily able to get the capital that they need to build up their own facilities? And as a result, maybe some concern about an overbuild isn't actually taking place?

Why don't I take the first question, Colby, and then I'll differ to Steve on the second one? So, as I said, at the end of this year, I anticipate, given the working capital and some of the construction in progress that we will have relating to LA and maybe some other projects that the $250 million -- we should have $250 million of cash, in excess of $250 million of cash. I think this will be well factored, and I've said it for fairly long period of time, I think $100 million of unrestricted cash on our balance sheet is appropriate. But recognizing as we go forward, the amount of cash that this business is generating is certainly going to find any incremental expansions that we see today - you know what? If you can moderate the expansion throughout a fairly consistent period and you manage inventory well, I think it's fair to say that we are almost at an inflection point where we are fully self-funding.

Having said that, we are also very mindful that at the end of the year we have some working capital to pay down and we have some debt that'll be coming due in 2009 and beyond. So we want to be very -- I would say we want to have a lot of -- a fair amount of liquidity to manage our affairs when we go through these tough economic times, because access to capital, as you're aware, is somewhat restricted and we want to make sure that we raise capital under our terms versus more restrictive terms that you see today.

And on the competitive part of the question, Colby, we are absolutely seeing early signs of capital constrained, not only from a customer perspective, but from a competitor perspective, as you asked. So we do have - there are reasons why companies are making decisions to come to this model, because they're avoiding the capital expense, and we certainly see ourselves in a good position in key markets where our primary competition is unable to step up to the future installment, the future path that a customer needs, not only for immediate delivery, but future deliveries.

So, access to capital is a real issue in the current market conditions. There's no question about it.

Are you guys actually then winning some customers that may have thought about building their own facility or expanding one of their own facilities and as a result of the current market conditions are actually deciding to go with you guys?

Oh, for sure. That would probably be the same for - go up the stack. I'm sure that the hosting folks are seeing that. I know the big outsourcing folks are seeing that. But we are absolutely seeing that capital constraint is a -- it always has been and it's heighted the driver of decision to come to this model, no question.

Thank you.

Our next question comes from Michael Rollins with Citigroup.

Hi, good afternoon.

Hi, Michael.

Hey, Michael.

Hi. The MRR per cabinet, you talked about some of the constraints that you are seeing potentially in inventory later this year. As you think about managing volume mix for customers in terms of interconnection and so forth, as you think about the potential for price escalation, is there just an overall number that we should think about in terms of maybe over the next year or two years how much you can increase the MRR per cabinet in what we'll call the heritage portfolio? The US plus Europe - plus Asia. If you take just those two. Is there a number or a range that we should be thinking about in terms of what you target as a Company?

And then I guess just a second question is, as you look out in terms of generating potentially free cash flow at some point in the future, as you indicated, you'll be self-funding potentially. How do you think about share repurchases versus the investments in new centers and expansions? If you talk about that as well, that would be great. Thanks.

Okay, so let me deal with the first question, Michael. We deal with the heritage sites. So basically, the original IBXs. We've done a very good job as a Company of trying to stratify the customer base and get the higher interconnection rich customers into those sites. So we've already got fairly good price points. I think as you look at it on a go forward basis, it's fair to say that - and recognizing they're in, our customers tend to be relatively sticky and so they don't move. It's reasonable to assume a 3% to 5% price increase, but I would also remind you, this is the higher interconnection rich customers and we feel that those are the customers that on average are paying more per cabinet than maybe a large enterprise customer, and that's to reflect that, as you can appreciate, our costs are going up annually. And so passing on some of that cost increase to our customer is an appropriate.

Keith, it's probably safe to say too that some of the customers we've had for a long time. We intend to have for longer-term - long-term relationships are quite meaningful to us. So, we are going to be judicious about the price increase strategy.

Correct.

And then on the second question?

Sorry, Michael. The second question you had was really about the point in time that we have - that we are self-funding. We have excess cash on our balance sheet. We are still in the high-growth phase. Certainly, the Company's view is it is more appropriate to do a stock repurchase with any excess capital assuming we are not going to deploy into the business than it is to do a dividend under a scenario where it's high-growth. And I think all of our investors would expect that that's what we'd do if we had excess capital. Repurchase some stock. It really is too early to guide to that. Clearly, we are in a very good position. It is early in 2008 and we are also very mindful of what could happen to the back end of this year. So, we are continuing to be somewhat conservative. So, I don't want to tip our hand in any direction right now of what might happen in 2009 or 2010.

Can I just follow up on that? Do you look at, for example, take a market like Secaucus, New York metro market and to the extent that that starts to hit the point at which -- and you actually talked before about potentially considering an expansion in that market. I think you mentioned it on the last call. If you look at what that would cost and with the returns would be, do you weigh that against how you view potential for share repurchase and can you talk about whether you weigh some of those factors as you look at deploying new money into new business versus cash repatriation?

I think it's a very good question, Michael. Clearly, when our stock traded down to 57 this year, those are the type of questions that we do have to ask ourselves. Is it better to repurchase stock versus expanding the business? In a scenario where we believe the Company's undervalued or being undervalued? But certainly as we continue to trend up and we continue to expand the business with the return profile that we are looking at, I would argue that we are probably better suited to continue to take that money and deploy it back into the business, but it is something that we consider and our preference certainly would be to, as we look forward, and we have the cash flow generating capacity to fund our future to expansion and have excess cash. That's the point to the extent that you need to delever some of the more dilutive instruments that we have in the marketplace or buy back stock.

Thanks for taking my questions.

Thanks, Michael.

Our next question comes from Rod Ratliffwith Stanford Group.

Thanks very much. Can you hear me okay?

Yes, we can, Rod.

Thank you. Very, very nice quarter. Nice upside to prize there. Most everything's been asked and answered. Keith, speaking of engineering on the balance sheet, a couple of your mortgages are up there in terms of the interest that's due on them or the interest that they bear. Is there any plan at all to possibly refinance some of that money at a lower rate?

Rod, so the only mortgage that we have out there today is the - is the mortgage on our Ashburn property. It is a fixed rate of 8% for 20 years. There's yield maintenance through 10 years and it is fairly prohibitive to actually try and take out that facility. It does not mean that we wouldn't under the right set of circumstances. So, I would tell you today, it is a little bit expensive. When we did the deal we thought - and over the last two, three quarters we thought it was pretty cheap money, but certainly with the base rate dropping as it has, it has become a little bit more expensive today.

I think in the long run it's going to be an appropriate financing mechanism for us. And as we go forward, and the capital markets open back up. In fact, I see that the mortgage financing might be an even more appropriate source of capital going forward on encumbered assets such as Silicon Valley or Los Angeles or, for that matter, Chicago when we have the ability to pay back that construction loan.

Is it - other than FX, is there any particular industry verticals that could be singled out for her notable strength?

Again in the recent quarter, probably network and content, our digital media segments. We saw strength across all four financial services and the FX stuff that we talked about in the past and we are still seeing great opportunity there. We've got a high-growth rate, we've got a lot of activity, we are focused on the right part of that's business. It's pretty complex global ecosystem, but we are pretty well positioned to address the high bandwidth needs, the latency needs, and the proximity needs that we see in that segment. So, we are very, very focused on that.

Okay. And just one last off the cuff comment. I've got to say, on behalf of some of the clients, if you guys started buying stock back, I think it would send the wrong message. In lieu of financing internally funded growth, I've got to tell you, you started buying stock back, you'd be chasing it downhill.

Yes. Thanks for that. Thanks for the feedback, Rod. I appreciate it.

Thanks Rod.

Bye.

Our next question comes from Jurgan Usman with Wachovia.

Thank you very much. Good quarter, guys, congratulations.

Thanks, Jurgan.

I have a couple of questions. First of all, is any change in the mix of our vertical segments? Have you seen -- kind of piggybacking on the previous question here. Have you seen any sign of strength or weakness in any of the verticals?

No. Pretty straight - strength across the board. I think, if you're trying to unravel the financial services segment with that question, we really haven't seen any degradation at all with our current customer base in any of the segments. The new stuff, the new wins have come across all segments that we are pursuing. Its a very good balance.

Okay, and then the second one is, obviously, you raised guidance twice already in the back of - kind of a slow down here, which seems to suggest that obviously you guys are being conservative again this quarter with your new guidance?

One of the things that would raise guidance quite substantially coming into this new year and certainly in this quarter we raised it again. We really try to -- we're still wise to what's going on in the broader economy. We're also recognizing that we have a number of builds. We certainly have a number of assets that could become capacity constrained and we have a number of assets that we are currently building out and we are sensitive to the timing of when do we deliver them. So, we are wise to that as well, but I can tell you that overall we feel we've got very good guidance our there. We've broadened the range to up to $700 million, and we think that was a meaningful step up when you look at what we are offering in Q2 for our guidance and I don't want to tell you anymore than that, but clearly, the Company is - we really have been trying to - to try and get closer to our guidance ranges. But the overall environment has really provided us an opportunity to exceed. On a go forward basis, I like to think that we could always do that, but our preference is to try and give you better guidance going forward.

Okay. And the next one, could you maybe let us know a little bit on your data DSO trends?

Yes. I did mention in my remarks, our DSO trends on a global basis have basically improved. In the US we are relatively low in the low 30 days still and then in both Asia and in Europe, we saw our trends improve quite dramatically. So overall, the Company's in the low 30 days on a blended basis.

And when it comes to bad debts, we have seen a modest increase in our bad debt expense, but nothing that's outside of our expectations or outside of our budget levels.

Is it below 2%, safe to say?

Bad debt is much lower than that. Again, we as a Company have a philosophy, because are DSO's are so low, you can't have bad debt and bad revenue in the same quarter. So, by the time we close a quarter, we have fairly good visibility on who's going to pay and who's not going to pay and to the extent that we see a customer at risk, we're going to back out the revenues. So, it never gets to bad debt before - it never gets to bad debt. It becomes bad revenue and you never see it in our results.

Right. And then just one last question. Can you maybe provide me with the expected number of sellable cabinets as it stands right now for Q3 and Q4 this year?

What I'd like to do, if I may, we've actually put something on our website dealing with the new expansions and the capacity. I'd like to defer you, if I could, to that, to our Investor Relations website. You'll see all the capacity that's coming on in the quarters that we think it's available.

Alright, thank you very much, guys.

Thanks, Jurgan.

Our next question comes from Tom Watts with Cowen and Company.

Hi, everyone.

Hi, Tom.

I have a couple of questions. One, I talked to several other providers who - one who recently instituted a 5% price increase for some of their existing space and another that actually instituted a 10% price increase based on the strength of demand and load of supply, particularly in some markets. Your suggestions on pricing suggested that you are pricing higher powered space higher and more of a CPI. Is there an opportunity to take advantage of the shortages right now and lift prices more aggressively?

Tom, it's a question that we've received in a number of cases and certainly from some of our investors directly, but generally speaking, our response to that is that we think we are premium pricing the market today. I don't dispute the fact that some of our peers may be increasing their prices 5% or 10%, but it's off a much lower base. We are premium price. We're getting higher prices than we think anybody else is getting in the marketplace today. What's probably more relevant is that we are in the service business. We know we can make it very difficult for some of our customers if we wanted to, but we want to continue to foster long-term relationships and the way that we address that is managing the price increases consistent with CPI or a little bit above that to reflect some higher costing trends.

And then just a second question then. In terms of the industry verticals that your new orders are coming from, have you seen any shift in that? And particularly has there been any effect from the financial services vertical, positive or negative?

Tom, we haven't seen any shift really at all. In this particular quarter, we had a bigger jump in network and content companies than we've had in the past. But we had strong performances from the financial services and the enterprise segments. So we are pretty steady across all four segments and really have not seen any degradation of the financial services.

Okay, and then a final question, I saw one survey recently of enterprise IT executives, that 69% were going to run out of power in their existing facilities by the end of 2010. We've also seen some other space coming online with 200 watts per spare square foot. Even expandable up to 300. Have you seen demand for going to those types of power levels? And how flexible is - I think most of your builds now are about 150 watts per square foot. How flexible are you to increase power levels even further?

Pretty flexible. I think today in some of our sites, we're deploying in different configurations. It could be two, four, six, up to eight in some cases. We've gone higher, isolated deployments, but there's no question that there is - call it a data center obsolescence issue over the next two to five years where the power and cooling issues are surfacing to customers across the board.

As long as the Internet keeps growing at the pace it's growing and we keep seeing this next-generation infrastructure, whether its storage arrays or high-end blades or the high-end routers that are being deployed, we are going to be faced with this power and cooling challenge, which is at the heart of this power density configuration that were pushing to. So, there is no question that that's a key driver out there today. There's lots of old data centers becoming more and more are obsolete or pieces are becoming obsolete which is seeding the demand curve for us.

Jason here, just chiming in, but if you look at some of these data centers that enterprise built in the 80s and 90s, they didn't factor that in. So, we had a fairly high quality power and cooling design to begin with. But as some of these folks are filling up, their data centers are running out of power, given the environment just in general as they embrace outsourcing collocation and all the value that we have in our offering, that could drive demand because they don't have to build their own data centers. Plus, they get the value of all of our operational quality and the number of networks that we have under the same roof.

Okay, thanks a lot.

Thanks Tom.

Our next question comes from Manny Recareywith Kaufman Brothers.

Thanks. Looks like questions of been answered. I just have one follow-up. You were talking about being self-funding, reaching free cash flow. Can you give us a little bit kind of the timing of that? Is it something like 2009 or is it beyond that that we're looking at reaching that level?

Manny, we didn't really give a timeline, but it's fair to say as we look into 2009, the only meaningful CapEx that we've disclosed at this point where we're going to spend capital dollars is our LA four property. And given that scenario, obviously we could be in a situation where we generate meaningful cash flow in 2009. But also back to Steve's comments, we are reaching - there's going to be some potential capacity constraints and as we go through each of our markets and analyze, do we want to continue to expand? There could be some decisions that we have to make in 2009, where we deploy additional capital.

So, I don't want to give you - I don't give you a date. A date or a time. Clearly, it's going to be dependent on what we see in front of us. The other thing that I think we've been looking at very seriously, as we've been designing the second phase of our New York four - New York four property and that has the potential to increase our capital needs in 2008 and potentially a bit in 2009. So under those scenarios, it's a bit early to give you any concrete timeline. But 2009 is looking like a year of greater opportunity for us.

Okay. Thanks.

Thanks, Manny.

Our next question comes from Greg Mesniaeff of Needham.

Yes, thank you. I just had a quick question on pricing. I was wondering if you could compare the recent pricing trends you've seen in your European operations versus US in terms of price increases?

Yes. Greg, this is Steve. You'd have to go into each market to get down to the real answer to that. And we are seeing in both the Paris market and the Frankfurt market, a good step up in pricing trends. As you know, and we've stated in the past, our London markets has been at the high end of the pricing spectrum so we're staying pretty solid there. But we are starting to see a pretty good lift in Europe and the German and French market. Amsterdam - it's too early to tell, and then in Switzerland, it's a smaller operation, and it's also been towards the higher end, towards the London market. But in the US, I don't know. There's a general trend. I don't know. Again, you go by market by market.

I think that with the US being just a little bit more mature, Steve and Greg, we saw basically a year-over-year growth rate auto blended basis, which takes into consideration volume, price, and service on 7% year-over-year. I think what's more relevant, if you compare the momentum in Asia to that of Europe, we're seeing great upticks on our spot prices in our Hong Kong market or Singapore market, and to a lesser extent, our Tokyo market. And the Australian market is just steady as they go. So, overall, we are seeing more consistent trends in our non-US markets, because the US has been at a higher price point fairly consistently over the last few years. So, that's how I'd probably guide you, but overall, we are seeing all three regions in positive territory.

Got you. And also, given the weakness of the dollar, are you seeing any anomalies in your customer profiles in the US, maybe some of your European customers moving some activity here?

I wouldn't say we've seen any meaningful change. I don't think at this point, at least for what we offer, is changing the buying pattern. But as a Company, certainly with a third of our business being non-US, we'll benefit from that on a go forward basis, assuming a consistent exchange rate across those key currencies.

Thank you.

Thanks.

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

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