Equinix Inc (EQIX) 2008 Q4 法說會逐字稿

Good afternoon. Welcome to the Equinix Q4 2008 results call. All lines will be able to listen only until we open for questions. Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time.

I'd like to turn the call over to Jason Starr, Senior Director of Investor Relations. Sir, you may begin.

Good afternoon. Welcome to our Q4 and full year 2008 results conference call.

Before we get started, I would like to remind everyone that some of the statements we'll be making today are forward-looking in nature, and involve risks and uncertainties. Actual results may vary significantly from those statement, and may be affected by the risks we have identified in today's press release, and those identified in our filings with the SEC, including our Form 10-K file on February 27th, 2008, and Form 10-Q filed October 24th, 2008. Equinix assumes no obligation, and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of regulation fair disclosure, it is Equinix's ocean policy not to comment on its financial guidance during the quarter, unless it is done through an explicit public disclosure.

In addition, we'll provide non-GAAP measures on today's conference call. We provided a reconciliation of those measures to the most directly comparable GAAP, and a list of the reasons why the Company uses these measures, in today's press release on the Equinix Investor Relations page at www.equinix.com. We'd also like to remind you that we post important information about the Company on the Investor Relations page of our website. We encourage you to check our website regularly for the most current available information.

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

Thank you, Jason. I'd like to welcome everyone on the call today, and let's get started.

Equinix delivered another year of very strong growth and operating results, despite a challenging economic environment in 2008. Even with this global slowdown, our customers are continuing to demand our services across all three regions. We are continuing to capitalize on this favorable demand with ongoing expansion in over half of our markets, in an increasingly constrained supply environment. The business fundamentals underpinning our 2009 plan continue to be solid in terms of pipeline, churn, and collections with our customers. Yet we remain realistic about the poor state of the economy, with flexibility in 2009, that includes a reduced level of bookings expectations, rigorous financial forecasting, continued aggressive management of our costs, and most importantly, as you know, an expansion plan that remains fully funded. I will provide additional insights into our operating assumptions for the full year later in the call.

But before we get into the results, I'd like to share a few key insights about our business and our position in the market. Of course, this may be a reminder for many of our long-term investors, but I feel it's appropriate to reinforce these attributes of our business during these challenging times. First, we have good visibility and predictability with the 95% recurring revenue base, and a high fixed cost structure, and strong diversification by customer, geography and industry. Second, our unique value proposition provides high levels of operational reliability and network density on a global basis, which in turn enables us to continue to win new customers and retain existing ones at a greater rate than our competitors. Third, we believe that our continued disciplined investment in our longer-term growth and sale will provide us differentiation and an important competitive advantage with key customers in critical markets, while still generating the strong financial results and returns you've come to expect from Equinix. Finally, the defensive attributes of our business model, particularly the critical mass of networks and the limited access to capital in today's environment, provide an important competitive barrier to entry for the foreseeable future. We believe that all of this, coupled with our stable financial position and strong operating cash flows, will help us emerge from this economic downturn as a stronger Company, with a larger share of the market.

So now let's jump into the results, and then I'll turn it over to Keith for some additional insight on the financials. Total revenue for the Company was $704.7 million for 2008, representing 68% growth year-over-year or 38% organically. Our Q4 revenue was $190.7 million or 37% over the same quarter last year. Cash gross margins were 62% for 2008 and 65% for the quarter. This continued improvement is a good indicator that we are starting to see the investments in our scale paying off. Or adjusted EBITDA results for 2008 were $292.5 million, representing 88% year-over-year growth and 62% organically. To provide you a sense of how we think about the cash flow attributes of this business, if you compare our adjusted EBITDA of $292.5 million to our ongoing capital expenditures of $67.5 million, the difference is what we consider to be the discretionary piece of our cash flow, which we could use to fund our expansion investments.

I'm pleased to report Equinix's first full year of generated net income, which includes a $104.5 million net income tax benefit. Excluding this benefit, our net income for the year would have been $27.1 million. Equinix finished the year with 2,272 customers, including 110 new customers closed in the quarter. In the U.S. market, our overall demand in this region remains strong, with the size of our pipeline in the later stages of the sale cycle as high as it has historically been. Yet, despite the size of this pipeline, and in this economy, we did see slowdown in decision making, particularly from new customers, as the fourth quarter progressed. To frame this for you, our bookings in the quarter were more reflective of our early 2007 bookings levels, but again the number of deals and MMR in the overall pipeline looks more like mid-2008.

Our expansion plans in the U.S. remain on schedule for the second phase of New York-4, and we have shifted our scheduled opening of our LA-4 IBX to mid-Q3, due to further delays in the permitting process, as you saw -- and as you saw on our release today, we are doing two augmentations of our existing LA-1 and Chicago-2 IBXs, for an additional 700 sellable cabinets in these important interconnection hubs. We also operated our U.S. IBXs at over [six 9s] availability across all markets in 2008, with over half at 100% availability. Clearly, this is a proof point of the quality and the expertise of our U.S. IBX operations team. This type of reliability has a direct correlation to our customer satisfaction scores in this region, again at historical highs. A particular highlight in the U.S. is that in the fourth quarter both our cash gross margins and adjusted EBITDA margins achieved the top end of our long-term objectives of 69% and 07% respectively.

In our European market, our financial performance beat our expectations for the quarter and the year, despite the unfavorable impact of currency fluctuations. Our capacity for growth in this region is generally good in all markets, with expansion activity in London, Paris, Amsterdam and Frankfurt, all of which are on track at this time. Many of our competitors also continue to expand, but with much smaller projects, leaving us in a better position for growth. As an example, in the Netherlands, despite being a new entrant in the Amsterdam market, our first phase of this project is largely sold out with predominantly local customers. This validates our expectation that having quality inventory in a market where competitors were dark positions us to gain important market share.

Across the region, our customer base continues to be balanced between financials and enterprise, with a growing focus on the network and content verticals. As a matter of fact, cross-region sales with CDNs and other key customers are increasing our internet orientation in Europe. This peering business is still in the early stages, but we are seeing clear traction in Amsterdam, Paris and London. Additionally in Europe, we saw average pricing increase in the mid-teens over the course of 2008. We expect this trend to continue to increase going forward, due to the ongoing renewals and customer expansion, but not necessarily at this rate.

As we completed the acquisition of IX Europe, we saw an opportunity to bring the Equinix brand and operating strength to Europe. By all accounts, this has taken hold. Overall reliability was an excess of [five 9s] due to some very targeted operations improvement plans and increased staffing in 2008. Our CapEx in 2008 involved investments in almost every IBX to address single points of failure and increase overall reliability. So in summary, in Europe, our general outlook remains optimistic. As a matter of fact, our 2009 plan has us investing roughly a third of our announced expansion capital into this region. Given limited competitive new supply and customer capital constraints in building their own data centers, we believe this will position us well for 2009.

Shifting over to our Asia Pacific region, the fourth quarter capped off another great year of growth. On a full year basis, we saw a 48% increase in revenue and an 81% increase in adjusted EBITDA. We added over 1,700 cabinets into our capacity in 2008, a 31% increase year-over-year. Following this '08 expansion activity, I'm pleased to announce that we just opened our newest IBX in Sydney, Australia, adding approximately 650 sellable cabinets, of which 20% are already booked. The construction of our second IBX in Singapore is well underway, and the first phase is still on schedule for the third quarter of 2009. This is important, as Singapore-1 has surpassed a 90% occupancy rate. In our recently opened Hong Kong expansion, we have also experienced a high fill rate, which is now nearing full capacity. As a result, we are doing an additional phase of expansion in this IBX, which we expect to add approximately 200 sellable cabinets when it opens early in the fourth quarter. Lastly, our overall customer satisfaction rates in this region are up 2 percentage points, while our customer loyalty rating increased almost 10 points. We have seen a significant improvement in our uptime stats in this region for 2008. In fact, all of our IBXs there operated at 100% uptime in the fourth quarter, a nice execution proof point by our team in Asia. So as you can see, good progress across all three regions.

A final highlight of note for 2008, inside of our financial services vertical we made significant progress with the electronic trading communities. Our results in 2008 have been very strong, with a 120% increase in bookings, and several new customers in the U.S., U.K., Germany, Singapore, Hong Kong and Japan, with exchanges, sell side, buy side, and the technology utilities. Some of the wins this year included Dow Jones, NASDAQ OMX, CVOE, [ShyEx] and Direct Edge, which brings our total count of financial exchange customers to well over 300 globally.

More importantly, we are starting to see multi-region deployments of these platforms in access nodes in some of our key international markets, which reflect our advantage, as Equinix is the only colocation provider present in the top ten global financial centers. Our customers and prospects in this vertical continue to embrace the neutral marketplace concept, as their requirements for proximity, bandwidth and uptime accelerate across all asset classes. We strongly believe that the trends to reduce risk, decrease trading costs, handle surge capacity, and provide more endpoints, play directly into our global scale and reach to deliver the capacity that meets their needs.

So I'll stop there and turn it over to Keith to provide some additional color on these results, and some added commentary on our financials. Over to you, Keith.

Thanks, Steve. Good afternoon.

I'm pleased to provide you with our fourth quarter financial results, with insight into the quarter's performance, both against our expectations, and after assessing the impact of foreign currency on these results. Also I'll give you some color on the key trends as we look ahead to Q1 and the rest of 2009, including the effect of certain accounting adjustments that we'll have on our future results.

There are three meaningful accounting changes that will affect our results in 2009 and beyond, as follows. Number one, deferred tax assets and release of the deferred tax valuation allowance against these assets; the treatment of our 2012 convertible debt, and how the embedded derivative attributed to this debt gets bifurcated and allocated between equity and debt on the balance sheet; and the reversal of our LA seventh floor restructuring reserve. I will discuss these later, but first, let me address our key operating performance metrics for the year and quarter, starting with revenues.

As Steve mentioned, our 2008 revenues were $704.7 million, including $177.5 million of revenues from Europe. Revenues excluding Europe were $527.2 million, a 38% increase over the prior year, and up greater than $145 million year-over-year. Organically, this reflects the sixth straight year of 30% or greater growth on the top line, and the largest absolute dollar growth over our ten years of operations. Our Q4 revenues grew 4% over the prior quarter to $190.7 million, consistent with our expectations.

Relative to the FX rates used to for our Q4 guidance, there was no meaningful foreign currency impact on revenues for the quarter, although as you can appreciate there was great variability during the quarter. On a cost and currency basis, assuming we kept our currencies constant with the average rates in effect during Q3, our Q4 revenues would have been $198.8 million or 8% greater than our Q3 reported revenues. As a reminder, we do not hedge revenues. Sizing our expected 2009 revenues by currency, U.S. dollar revenues should approximate 69% of 2009 total revenues, while the Euro and the pound sterling should approximate 14% and 8% of 2009 total revenues respectively. All other currencies are individually 5% or less of our expected revenues for for both Q1 and 2009. Last point here; we have assumed for current guidance purposes a 1.33 dollar to the Euro, and a 1.45 dollar to the pound.

Looking at churn, for the year both our MMR and cabinet churn rates were approximately 8%. We expect both our Q1 and 2009 churn to remain consistent with our targeted level of 2% per quarter or about 8% per year.

Next, moving to gross profit and margins. The Company recognized gross profit of $290 million for the year, or gross margins of about 41%. Our cash gross margins were 62%, consistent with our expectations. For the quarter, the Company recognized gross profit of $82.4 million, or gross margins of about 43%. Our cash gross-margins were 65%, ahead of our expectations. U.S. cash gross margins were 69% for the quarter. During the quarter, we saw our gross margin improve across all three regions.

Looking forward, we expect our cash gross margins to range between 62% and 63%. This reflects our expected strong operating performance, offset in part by the incremental costs related to our expansion activities in each of our regions throughout the year. This will include [rent and cam] expenses related to our newly-announced LA-1 phase 2 build, costs that were previously applied to our restructuring reserve on the balance sheet, while reducing our adjusted EBITDA by approximately $2.3 million in 2009. As noted above, the remaining accrued restructuring reserve is estimated at $5.7 million, effective from the date that we made the decision, will be reversed into the income statement in Q1. To be clear, the change in accounting treatment will have no incremental effect on our cash flows, but will positively impact net income in Q1.

Looking at revenue per cabinet on a weighted average basis, excluding Europe our average monthly recurring revenue per sellable cabinet increased to $1,698 from $1,654 last quarter, up 7% compared to last year. Consistent with our operating plans, we continue to book higher-powered cabinets to meet our customer's expectations, and address the technology shift for more power dense cabinets. However, power capacity allocated to these cabinets may be purchased by the customer over an extended period of time. For the higher-powered cabinets, we target between $1,800 and $2,200 per cabinet, a level that is currently being attained.

On a regional basis, our weighed average price per sellable cabinet in the U.S. $1,816 versus $1,756 in the prior quarter, a 3.4% quarter-over-quarter increase, and within the range we just noted. In Asia Pacific, our weighted average price per sellable cabinet was $1,272 compared to $1,254 last quarter. This reflected the impact of strong pricing across the region. Also, the Asia Pacific MMR per cabinet metric continues to benefit from strong regional interconnection growth. With respect to Europe, our price levels remained consistent with the prior quarter in each of our markets. Europe interconnection revenues remained at 4% of their recurring revenues.

Now looking at SG&A. SG&A expenses for the year were $213.5 million. Cash SG&A expenses for the year were $147.5 million. For the quarter, SG&A expenses were $55.5 million, and cash SG&A expenses were $40.4 million, a 12% increase over the prior quarter. As we look forward into 2009, SG&A as a percentage of revenues should range between 19% and 20%.

Moving on to net income and adjusted EBITDA. For the year, we generated net income of $131.5 million, including a net tax benefit of $104.5 million, which is primarily related to our U.S. and Australia operations. Excluding the net tax benefit realized in Q4, we generated approximately $27.1 million of net income. As I mentioned in my opening comments, the release of the deferred tax asset evaluation allowances will have a meaningful impact on the complexity of our tax matters on a go-forward basis. But before we get into the details, let me first start with our view on cash income taxes.

We continue to believe there will not be any meaningful cash tax in 2009 or 2010, and this may even extend into 2011. Now, with respect to the tax benefit realized during the quarter, the Company historically provided a full valuation allowance against the majority of our deferred tax assets. Recognition of any tax benefits related to our historical NOLs or our temporary tax differences may not be realizable. During Q4, given the strong U.S. and Australian net income in the quarter, the Company reached an important milestone, whereby U.S. and Australian net income on a cumulative basis was or turned positive over the past three years. And given the likelihood that we'll continue to generate both U.S. and Australia net income in 2009, the Company released its valuation allowances against these deferred tax assets. This benefit is reflected in the income taxes line on the income statement. Going forward, as a result of this decision the Company will commence the recording of income tax expense at the expected effect of blended tax rates.

Our adjusted EBITDA was $292.5 million for the year, including Europe adjusted EBITDA of $51.1 million, an 88% year-over-year increase. For the quarter adjusted EBITDA was $84.1 million, a 79% increase compared to the same quarter last year, and 9% over the prior quarter. Adjusted EBITDA for the quarter on a constant currency basis versus Q3 would have been approximately $3 million higher.

Turning to our balance sheet and the cash flows. At the end of Q4, our unrestricted cash balances totaled $307.9 million, a $22.3 million decrease compared to the prior quarter. Although our cash balance is greater than expected due to strong operating results, strong customer collections, and greater than anticipated accrued construction costs, we do expect that our cash balance will decrease over the first half of the year as we settle our outstanding construction obligations. It is important to note, as we start the year we anticipate that our current cash balances, coupled with the expected 2009 operating cash flows, will fully fund all of our announced expansion projects, and still enable us to exit 2009 with over $200 million in unrestricted cash.

One final note related to our cash balances, and the funds we placed in the reserve primary fund, the money market fund that broke the buck in September. As of today, we have received about 80% of the approximate $50 million in cash we had in this fund, after reflecting a loss on investment of $1.5 million in Q3. The remaining $9.3 million outstanding is expected to be repaid to the Company in 2009.

Next, moving on to our operating cash flows. Our net cash generated from operating activities was $268.1 million for the year, a 122% increase over the prior year and a 92% correlation to our adjusted EBITDA. For the quarter, our net cash generated from operating activities was 75.7 million, a 21% increase over the prior quarter. The Company continues to remain highly focused on cash collection activities in each of our three regions, leaving our global DSO metric at 31 days for the quarter, consistent with Q3. It is important to note that our allowance for bad debt increased throughout 2008, a reflection of a tougher economic environment and conforming our EU region to our U.S. accounting policies. We continue to manage the outflow of cash related to our vendor obligations.

Looking forward to Q1 and the rest of 2009, we anticipate we'll continue to generate strong operating cash flows consistent with the expected adjusted EBITDA performance. Cash use for investing activities was $492.2 million for the year, compared to $1 billion last year. During the quarter, cash use from investing activities was $133.5 million, an increase over the prior quarter level of $85.2 million, primarily the result of higher capital expenditures totaling $165.6 million, offset in part by an increase in our accrued construction balance of $31.4 million. Cash generated from financing activities was $143.7 million for the year, primarily derived from the drawdown of proceeds from our European and Asia Pacific financing lines. For the quarter, cash generated from financing activities was $30.7 million, somewhat consistent with the prior quarter level of $26.4 million.

Looking forward, the Company will continue to review its financing strategies, particularly for its foreign entities. To the extent possible, the raising of local debt to fund local expansion projects remains our preference. Specifically related to the U.S., the Company is working with a local bank to replace its operating line of credit. To the extent any line of credit is approve, we expect to use part of this facility to replace our cash-collateralized letters of credit. Additionally, we expect to repay term debt and capital leases totaling $50 million and $52 million in 2009 and 2010, respectively.

A few final notes on our outstanding debt balances. As many of you are aware, we have a convertible debt instrument that can be settled in cash at the Company's choosing. This only applies to our 2.5% 2012 convertibles, totaling $250 million, and not our 3% 2014 convertible debt. The 2012 convertible debt, consistent with the new accounting guidelines, will be bifurcated between debt and equity. As a result, effective January 1st, 2009, we will adjust this outstanding balance by the value of the embedded derivative, and allocate this amount into the equity section of our balance sheet. The net adjustment will approximate $37.5 million. This debt discount will accrete to the noncash interest expense line on the income statement through April 15th, 2012, about $10 million of which will be recorded in 2009, thereby increasing our net interest expense for the year. Regardless of the accounting treatment, consistent with our initial intentions, the Company plans to repay this $250 million debt instrument with cash in 2012. Additionally, as we mentioned on the last call, it is our intention to extend the 2010 maturity date of the $110 million Chicago IBX construction loan, as provided for in the terms of the loan agreement, by two 12-month extensions; bringing the final maturity date to 2012.

Looking at the quarter end leverage ratios, annualizing our Q4 adjusted EBITDA, our gross leverage ratio is 3.6 times, or 2.7 times on a net basis. At the midpoint of our 2009 adjusted EBITDA guidance, we expect our leverage ratios gross and net to range between 2 and 3 times.

Finally, with respect to our equity balances outstanding, we added approximately 37.7 million shares of common stock outstanding at the end of 2008. This number excludes 5.7 million shares related to our convertible debt, and 3.3 million shares related to employee stock plans and other warrants.

Let me now turn the call back to Steve.

Thanks, Keith.

Results like this in these kinds of market conditions speak volumes about the quality of our people and execution with our customers. My hat's off to the entire Equinix team worldwide.

Let's now shift the discussion to our 2009 plan, and share with you how we intend to operate in this recessionary economy. As we've mentioned, we have built what we believe to be a very flexible and realistic operating plan with the following key assumptions.

Number one, as the broader economy continues to contract, we've slowed down our bookings assumptions to factor in some level of softness in the decision making that we now expect to experience in this tough environment. As mentioned earlier, we experienced some slowdown in the past quarter. But our overall '08 exit rate on revenue and adjusted EBITDA are a strong foundation to support solid growth in 2009.

Number two, we also increased our MRR churn assumptions on an absolute basis by approximately 10%. And with the increased scale of the business, this is still expected to be within our targeted range of 2% per quarter, or roughly 8% on annual basis.

Just to note, as you'll see in a moment as I cover our '09 guidance, the midpoint of revenues implies just under 23% annual growth. Of course, this is a different growth rate than we have experienced over the past six years, but still in excess of market growth rates, and sensible in the current environment.

Number three, on the CapEx front our $325 million to $375 million plan includes approximately $285 million of announced expansion and ongoing CapEx, and includes the three expansions we announced today. There is also approximately $40 to $90 million in our guidance for potential expansion projects that we are contemplating but have not yet committed to. Said differently, our CapEx guidance can still absorb incremental expansion announcements up to $90 million without requiring us to increase our capital guidance. As we deliver on Q1, and have better visibility into Q2 bookings, additional expansion decisions will be made. Yet, just to note, this also is a built-in circuit breaker should the first half of the year not develop as anticipated.

Number four, similar to most other companies in this environment, we are also managing operating costs very tightly. Our '09 hiring plan targets the second half of the year, with essential hires requiring CEO and CFO approval in the first and second quarters. All other discretionary spending has been tightened down, as we watch the year unfold. As as you'll note in today's guidance, these efforts have supported a continued, strong and unchanged adjusted EBITDA expectation in 2009.

All that said, we intend to keep investing in our core business in order to expand our global scale, as we are still targeting a $1 billion revenue expectation in 2010. To support a $1 billion business, it is critically important that we continue to invest in key areas such as the alignment of our global sales force to leverage the advantage of our worldwide footprint; building a robust and scalable IT infrastructure; continuing to create value through interconnection; and lastly, ensuring IBX quality and consistency for our customers' experience worldwide. Combined with these key assumptions and initiatives, we will continue to provide a sharp focus on our leading indicators, financial forecasting, and of course our operational reliability for our customers.

So now let's take a look at our updated guidance for 2009 and the first quarter. In this environment, providing guidance presents a little bigger challenge; however, we think it is important to continue to share with you our visibility into the remainder of the year, and be as transparent as possible, even in these uncertain times. Of course, this guidance is representative of our best thinking at this point, and we'll continue to update you on our quarterly calls as the year unfolds.

For the full year, we expect revenues to be in the range of $855 million to $875 million. This is a reduction of $16 million at the midpoint from our originally issued guidance on our last call in late October. This reflects our lower expectations in bookings, as mentioned earlier, and just over $3 million in net impact from our original currency assumptions. We expect cash gross margins to be approximately 63%. Cash SG&A will be approximately $160 million to $170 million. We are leaving our adjusted EBITDA expectations unchanged at $365 to $385 million, with a midpoint at $375 million. This is a clear statement of the strength of the operating leverage in this business model, and our tight cost management.

Our 2009 CapEx guidance is also unchanged at $325 million to $375 million, of which approximately $60 million is expected for ongoing CapEx. Now for the first quarter, revenues are expected to be in the range of $198 million to $200 million. Cash gross margins for the quarter are expected to be approximately 63%. Cash SG&A is expected to be approximately $40 million. Adjusted EBITDA is expected to be in the range of $86 million to $88 million. Total CapEx for the quarter is expected to be between $100 million and $110 million, which includes approximately $20 million in ongoing CapEx.

So as you can see, this guidance points to still another year of strong top and bottom line growth, with continued investments in our longer-term opportunity. Frankly, I feel very good about our prospects in 2009. For all the reasons I've mentioned on today's call, and the fact that we have a seasoned leadership team, many of whom were here during the last economic downturn, provide me great comfort that we'll effectively navigate through this challenging environment, and also extend our market leadership position.

So with that, operator, I'll turn it back to you and we'll take some questions.

(Operator Instructions). Our first question comes from Jonathan Atkin with RBC Capital Markets.

Questions probably mainly for Steve. You indicated a slowdown in decision making as 4Q progressed, and I think you said that was mainly with new logos rather than existing customers, but I just wanted to clarify that. Were there any particular regions or industry verticals where you saw that, or was this pretty much across-the-board? And anything you have seen year-to-date since quarter end that indicates a change in that pace?

Jonathan, as I did say in the remarks it was with new customers. Our existing growth this quarter was actually at the top end of the range we typically give you folks, in the 50% to 80% range. So we actually had very strong existing bookings growth. The softness was in new customer logos. Quite frankly, it was tied up in what I would just refer to as uncertainty, with a lot of these new customers trying to make a decision. So a lot of that pipeline -- a lot of the decisions are still in the pipeline today, so they just shifted to the next quarter. We expect over time, once they get comfortable with their '09 budgets, that we'll start to see some of this flushed in the pipeline.

Anything that you would do potentially, in terms of changing your pricing terms, that you think would have an impact on possibly reaccelerating that pace, or is it simply just the decision cycle at the customer that's the bottleneck?

Yes, I think it is predominantly, Jonathan, the decision cycle. But in these kinds of times we are having conversations with many customers, and as we have said in the past, we'll provide as much flexibility as possible with our customers to do the right thing on a long-term basis. But there is no additional pressure here that we are feeling in terms of that kind of environment. These decisions are really tied up in -- they want to get the budgets nailed down, they want to get their feet underneath them as they get into '09, and like I said I think we'll see some of these decisions being made. For example in Asia, it is a lot of small decisions with new customers, and we think many of those will start to show up here as we progress through the quarter.

And then a follow-up on churn, and then briefly on Europe. On churn, just wondering of the different elements that drive that, it can be repricing, competitive factors, or it could be downsizing or consolidation of the customer. Of those drivers or others, any kind of changes that you have seen in the last several months?

Not really. You know, the scale of the business is growing, as I said, and I think as Keith and I both said, we are still expecting and have built into the '09 plan a 2% per quarter and an 8% on an annual basis, so that's what we've modeled in. Keith, I don't know if you have any other thoughts on that?

Jonathan, I would just say, you know, the Q4 churn also relates to some optimization that we have been talking about for the last two or three earnings calls. A lot of that came through in our Q4 numbers.

So the relative contributions of those different drivers is roughly the same, there is nothing kind of moving up or down markedly?

There is nothing -- there is no meaningful change in any one direction.

Then in Europe, what do you see as the prospects for driving a greater mix of interconnection revenues, given the success that Steve talked about in the contents and network verticals?

Well, Keith -- Jonathan, I would tell you we are off to a great start in Europe. As we've mentioned in the previous calls, we've got the infrastructure set up in all the countries, we are starting to see the peering activity take place, we are getting great traction with the electronic trading communities on a global basis, so that's happening from a cross-connect standpoint. We are on track. We feel really good about what's going on with the Europe team, and they are really starting to focus beyond just enterprise and financials.

There is one other thing I'd like to add to Steve, and I forgot to jump in there. I think when you asked earlier about the question on pricing, it is very important, I think, that you take away, and the other listeners take away the fact that pricing can be as flexible as we want to make it. But the fact of the matter is, we've got an industry that is constrained with capacity. We as a Company are constrained with capacity in a number of key markets where nobody else is building. And so when we think about pricing, certainly we are in a different economic environment today, but given the fact that there is little supply in the marketplace, we certainly think that plays well into our position going forward.

Thank you. And then finally, public sector, governments, still not a focus, I'm assuming there is no change in your thought process there?

To say it is not a focus is probably not a fair statement. As you probably know, Jonathan, we do have government business around the world, and many of our resellers tend to pull government installations in also. So it is not a targeted focus in terms of a vertical, but we have plenty of government customers deployed around the world.

Great. Thank you very much.

Our next question comes from Jonathan Schildkraut with Jefferies.

Good evening.

Hey, Jonathan.

Hello. A couple of questions here, some housekeeping and some more strategic. Keith, you talked about showing kind of a fully-loaded tax rate, or at least as it applies to the U.S. and the Australia business. Considering that 65% of your revenues come out of the U.S., what should we be using? Somewhere in the high 20s?

I think for an effective GAAP tax rate, I think you are going to be closer to the 35% range. Again, because the predominance of our net income is coming from the U.S. today.

Great.

The just the sheer size of the U.S. So there's two aspects there, again, the size of the U.S., and then the value of the net income. Then, the places that we have preferential tax rates, again no to surprise to I think anybody on the phone, it will be -- it is going to be Singapore and it's going to be Hong Kong.

Great. A couple of questions on Europe. Revenues contracted quarter-over-quarter; what happened here? Was this just primarily currency headwinds? Maybe if you could quantify the currency headwinds as it applies just to Europe, that would be helpful. Additionally, I see that there is a managed infrastructure line that I don't know if I have seen before, and it was up 20% quarter-over-quarter in Europe. I was wondering if you could give us a little bit more detail there?

I think you said -- very properly, you bring out the European matter. If we adjust for the currency impact, I think as everybody knows, the impact of the sterling in Q4 was a very dramatic movement, and for that matter the Euro, but the Euro was a little bit more stable. Had we not seen the sterling depreciate so quickly, the average rates that we used for the quarter close would have had us increasing on a neutral basis 11% quarter-over-quarter, so substantial growth. So the growth that you saw in Asia, we are seeing the same equivalent growth rate on a fundamental local basis in Europe as well, 11%.

Great. And the managed infrastructure?

Are you talking specifically on -- sorry, I didn't get that, was it Asia or --

No, specifically in Europe it was up 20% quarter-over-quarter, and that's despite the fact that you did have some challenges from a currency perspective, and I was wondering if you would tell us if this is something beyond the traditional managed services that you offer, which are quite limited as I understand them, or if there is something else in this line? Again, why you had such a big acceleration?

Yes, it fluctuates quarter-to-quarter. In fact what we do, sometimes we sell -- we buy and sell equipment on behalf of our customers. Although I don't have it specifically in the talk, I think that's what's creating this variance between the two quarters, the fact that we actually did sell a little bit more equipment in Q4 than Q3.

Great. Finally, the share counts seemed to go up here. We do know that you have some convertible debt that you were going to try to force conversion on. I'm wondering if you had any success in that, either in the fourth quarter in the first quarter up till now? If so, what impact that had on either your balance sheet or share counts?

I'll take this. So there is two things. If you look at just the sheer number -- the absolute numbers of shares outstanding at the end of the year, it did go up slightly. In November, when the stock was under a tremendous amount of pressure, there was a discretionary election of people who are holding our February '09 2.5% bonds to convert $13 million of them. Our outstanding balance, thus, on those bonds is $19 million to date. So we saw some impact from that. We saw very little impact, as you'll see from our cash flow statement and employee stock plans.

If you then get into the GAAP side of the financial statements, you do see our diluted share count increase very substantially, and that's because of the net income that we generated from the net tax benefit. That's what drove the diluted share count up so substantially, because you are now including many items that you previously did not include. Also -- it also is affected by employee stock plans that are in the money, and then some more complex calculations for EPS.

Great. And you know, something that you break out in your 10-Q is some of those add backs as you get from a basic EPS to diluted EPS. Do you have an aggregate number in the quarter of what it was? Because when I did the calculation, it seemed to be somewhere around $4 million, and that just seemed awfully high relative to expectations?

We'll be filing our 10-Q in the very near term.

And your 10-K.

Pardon me, our 10-K. And because -- there will be a lot of detail that will help you calculate that. But on the surface it is a complex calculation that does take into consideration the number of activities, not just shares anymore, and -- because you have to tax effect it. It is not something I think that we want to spend a lot of energy on right now, Jonathan. So if you wouldn't mind, let's wait until the 10-K comes out and we'll get some more detail broken out on that number.

Absolutely. Finally, can you just take us through some of the trends, the interconnect trends rather, in the Asia Pacific have been very strong for a while now. If you could kind of let us know what's going on there? Also, who are the customers that are kind of the core to really driving the growth in interconnect? Is it carriers? Is it financial institutions, is it content and internet guys? Thank you.

Particularly in Asia, Jonathan?

Correct.

Yes, we are continuing to scale the Asia business. I think it is still between 9% and 10% of total revenue now. So they had another good quarter of pushing on cross-connects and ports. So -- and the companies that we are dealing with are the same folks that we are dealing with in the U.S. You know, it is -- in the financial services space, it is the FX that is going to start driving cross-connect activity as we get these matching engines deployed and these access pops. So they'll going to pull in their members. CDN deployment around the world is also driving some of that. It is ultimately the connection back to the networks, where most of the activity is coming from.

Jonathan, it's Jason. A couple of other things. We just launched the exchange in Hong Kong, so that's a new offering for us there. What was interesting is we have seen a significant increase in the bandwidth that is being exchanged over the switch, so again that's an offering that is targeted more at the content providers and the -- more of the broadband networks, but seeing traction there. One of the things that's been really good for us as well is just the success in Singapore, if -- we are the only major carrier, neutral provider, so again, building some traction in that market as well.

Thank you.

Our next question comes from Mark Kelleher with Canaccord Adams.

Hi guys.

Hey, mark.

Could you just tell us where you stand with capacity utilization in the U.S.?

Sure. Today, the simplest way to think about it, in our Chicago market we probably have the biggest inventory capacity available. That's mostly out in Elk Grove. We are a little compressed downtown. In Dallas we are pretty tight, as many of you know. Down to a very restricted status in Dallas. A little bit of opportunity there based on the back of some churn we had there in Q3. D.C. we are in good shape. We have planned capacity in D.C. for the foreseeable future, I'd call it out to four quarters' worth of visibility for the full year.

In L.A. and the downtown market, we are compressed. That's why we made the announcement we did today, so we'll have some relief there. Then with our L.A. El Segundo facility, once that comes online we'll pick up. So we are pretty compressed and in a restricted manner in the L.A. market. New York, with the second phase coming on board, we will be fine there, but we are pretty tight in the initial phase, and we are in a restricted status in that market, also. Silicon Valley, we are in good shape.

So would it be fair to say that even though you are a taking a more cautious stand a little bit on the revenue line, that hasn't affected your build plans in the U.S., correct? You haven't pulled your build plans back at all?

No. That's a correct statement.

Okay.

Just -- again, Mark, just so we are clear here. Steve said we are constrained in a number of our key markets here, and L.A. and New York we're already under construction, they are substantially constructed today. So we have not changed anything other than what we changed in L.A. at the past quarter. So our general view is we have to continue to expand to create opportunity for ourselves, and fill the demand that we see in our pipeline. That coupled with the fact that we are not seeing a lot of competitive builds going on in the U.S. So for all of these reasons, we are managing our construction build, as Steve said earlier on, and squeezing the projects and the phases, and pushing the capital into as many regions as possible, and as many markers as possible, but still making that dedicated investment.

So if we look at '09 over '08 at your total footprint, call it cabinets, for instance, what would the growth rate be, 2009 over 2008?

Mark, we've got a -- that expansion sheet is posted on the website, but if you look the -- just the increase from '08 to '09 was roughly 15%. This is more of a global statement. Remember, a lot of the capacity in the U.S. came online in '07 and '08, with the Chicago, the New York-4 phase 1, as well as D.C.-4 and 5. So, plenty of capacity coming online. But in a lot of these markets, as both Steve and Keith mentioned, having capacity has been the biggest challenge in most of those markets.

Mark, I think it is also important to remember what I said, and Keith kind of I think hit it, too, is that we are still booking at an early 2007 rate, which is at a pretty healthy pace. The pipeline is actually as strong as it has been in all of '08, the middle of '08, I don't -- you can pick any time you want. So we're -- the pipeline is very strong.

The uncertainty and the delay in the decisions really sits in later stages of the pipeline. So call it 60% to 90% probability. We've got a very healthy coverage in that pipeline. It is just mostly new logos on waiting on making a decision. So we are still booking at a very healthy clip, and we have a pipeline that's as big as it has been in the later stages, really in the history of the Company.

Okay. That's very helpful. Thanks.

Thanks, Mark.

Our next question comes from Michael Bowen with Piper Jaffray.

Thank you. Good evening, or I guess good afternoon for you. A couple questions here. The MRR in the U.S. was much, much stronger than we had expected, so I'm trying to reconcile your commentary with regard to pipeline being similar to mid '08 levels. Am I thinking about this the right way, that -- I think you just said the pipeline continues to get stronger, but what makes up that pipeline, with regard to some of the new logos, is a lot more uncertain. So am I thinking about it the right way, that while MRR was strong in '08, the reason you brought your revenue down is because you think you are kind of going back to a level of mid-'08, and that's why you are bringing that down?

I think it is basically an accurate statement. But to just put a point on this, we did see some softness in these decisions, so I would just call it uncertainty with decision makers. It did slow down, and I'd say pretty much across most of our markets, with new customers. Existing was pretty flat. It was down -- there was a little softness in one or two markets. Out here, you could say that the startups and some of the Web 2.0 companies, certainly after the Sequoia memo went out, kind of held back and didn't make a decision. So there are plenty of examples like that.

But generally, we are just seeing softness in new decisions, new companies that haven't either colo'd before, or bringing it from an in-source solution. Still sitting in the pipeline; still sitting in late-stage 60% to 90% probability, and our job is to go execute, and close these deals. And that level, I don't -- we don't know how long that softness will remain with us. We saw it in November. It showed up in mid to late November. It stayed with us in December. It's -- early January it looks the same, so it just a matter of time, again, to push these through to pick us back up to the pace we have been running at the last five or six quarters. Again, this is still running at a pace that's in the -- you know, we'll call it 22%, 23%, 24% growth rate kind of pace.

Mike, I would just say, in furtherance to what Steve said, it is important to note that when you look at the guidance that we've given, we're -- the guidance reflects the booking activity at this level. To the extent that booking activity is more reflective of 2008, then changes will have to be made. But right now we are reflecting the guidance, taking into consideration, as Steve said, the 2007 level of bookings.

The other thing I think is important to note, that was your entry point, was that price per cabinet has increased, for the spread consistent with -- if you look at the inventory that we are selling today, it is all high-densely populated cabinets. Because of that, customers are buying more services per average cabinet. So it is very consistent with what we would expect, because that's really all of the remaining inventory. Okay?

Okay. Then a couple other things. Am I reading -- you know, the expansion grid that you have on your website, I thought Sydney, too, was going to open up in Q4 of '08. Did I hear you correctly that it opened in this first quarter?

Correct, yes. It was late Q4, and with the holidays in Sydney and with a couple of customer requirements, we decided to delay it until just recently. So it is open for business now, and already 20% booked.

Was there anything in that opening, the fact that it was a little later than you might have expected, anything that was significant, and anything that might translate to other data centers that you are opening up?

Not at all. This was just an isolated decision in that market. We had -- we are pretty constrained there, but we had enough capacity to carry us for an extra month through the holiday season, and then get it opened up, and it is opened and full blast ahead.

Okay. And then last question, we all know about how high your fixed cost structure is, and you know, obviously your expansion plans are fully funded. You stated you are not slowing down your builds, and other such things. So obviously you have kept your EBITDA absolute guidance the same. What are the levers, given that you do have a very fixed cost structure, what are the levers then that you can push to -- which effectively will bring up margins if you come into the revenue guidance now that's slightly reduced?

Clearly -- what the levers to put the margin up, right, is the question, Michael or --

I mean if the guidance is correct, then basically your EBITDA margins will be up from what you had originally guided to. So I'm just curious as to what levers are you pushing on on the cost structure which is highly fixed that can get you there?

I think it is fair to note, over the last few years -- really for the last three years we have been making substantial investments in our SG&A. So when we came into 2009, we had the ability -- we anticipated that we were going to continue to make substantial investments. We have gone after, of course, the obvious discretionary things. As said on the last call, no matter where an employee flies in the world today, they're actually flying economy. That's one example. So our T&E expenses have been decreased. Discretionary spend across all of our markets has been decreased.

And then to reflect the lesser bookings, and the activity in the IBX is, of course, our head count plans, as we reduce our head counts, we can ebb and flow with our head counts in the operation line. Then we have also taken the opportunity to defer some of our hires until the latter part of the year. So we have done a lot around the discretionary lines. Clearly, our view is that despite the adjustment to the revenue line, we as a Company -- we still have the ability to manage our costs very, very effectively. Not only on the CapEx line that Steve alluded to earlier on, but still on the operating line as well. And so we have the flexibility as we adjusted for things to take some costs out and still deliver a very strong EBITDA number, which will of course generate higher margins.

I think it would be fair to say, too, just to punctuate what you are saying, is that I think what you are seeing here, Michael, is the effect of the operating leverage. It's starting to show up, too, in these campuses, certainly in the U.S., and for that matter across the world, where we have stayed very focused in these core markets, and we're building out these campuses, and the operating leverage is starting to show up.

Okay. Thank you very much.

Our next question comes from Gary Powell with Wachovia.

Hi. Good evening, everybody. Thank you for taking the questions.

Sure.

I had just more of a bigger picture question on the economy. Can you talk about what kind of correlation that you typically see between employment levels at your customers and leasing demand? I know there is not going to be an exact answer to this, but just as a very rough example, let's say you had a customer that added, call it 100 cabinets, in 2008, and they just cut their workforce by, call it, 10%. Is there a way that you could see how you would expect that to flow through into their demand trends into 2009?

Pretty tough to do, Gary, but let's take an example. A Company is cutting head count, there's plenty of them out there doing that today. You really have to go peel the onion back, and find what kind of applications they are running with us. It is probably hard to correlate with head count going down. You know, in some cases the CIO of that organization is trying to cut costs, so they are taking labor down -- he or she has got a portion of that labor takeout that the Company's doing. One opportunity, they may be able to save costs by deploying in a colo model versus an in-source model. So you could see the flip side of the equation also. So I think it is really, case by case, very hard to correlate labor going down in a Company, and whether or not that's going to affect run rate and how many cabinets they are buying from us. I don't -- pretty tough to do.

Okay, fair enough.I had to try on that one. On a different topic, looking at your reported metrics, I see IT cabinet utilization at about 81%. Obviously, I see your plans on the website to go from 54,000 cabinets to 62,000 cabinets by 2010. Can you just talk about your utilization in terms of power consumption? Like how much capacity -- how much power capacity do you have today? How much of that is utilized? And what your 2010 bill plans get you to?

I think the correlation between fiscal capacity and infrastructure capacity is relatively consistent, so I don't think there is any meaningful change. But clearly by introducing more capacity, particularly in some of our larger centers where we are doing full builds, we are certainly going to create more infrastructure and more effective inventory for ourselves. Take for example the London market, with our London-5 asset.

So right now, I guess, the key takeaway is that we are at high utilization across a number of our key markets but we are introducing -- we are building more than half of our locations. As a result, we're going to create that capacity for ourselves, and probably more infrastructure capacity than physical capacity as we look forward into the back end of '09 and '10.

Okay. Thanks. One then one last question, just touching on Mike's point. Contribution margins in the U.S. were up pretty sharply, came in at about 79% in Q4. Can you talk about what's driving that improvement, and how we should think about that trend going forward for the rest of 2009?

I'll start. Part of the input to the margin going up is we're running in, as Keith said earlier, a very cost-controlled environment, and so that's feeding into it. We have delayed some of the labor, some of the new hires to later in the year. Keith and I are being very, very judicious about new heads coming in. But as I said, at the same time we are making investments, but part of it is the operating leverage, part of it is managing costs very tightly.

The one other thing that was evidence in Q4 relative to Q3, as you recall there is a lot of seasonality in our power costs in the U.S., and as a result the cost typically remained flat to go down slightly between Q3 and Q4, and we have seen that trend for a number of years now. Because of that, as Steve and I mentioned earlier on, there was a large customer who churned out in Q3/Q4, who was in two sites, that was a very high power consumer. And so because of all these reasons, our utility expense went down relative -- on an absolute dollar basis relative to revenues, and so that obviously impacted us favorably. But bottom line is, it is between the utilities and then just our management of discretionary spend that has benefited us, and then the leveragability of our model as we continue to drive revenues into this model.

Okay, great. Thank you very much.

Our next question comes from Michael Rollins with Citi Investment Research.

Good afternoon. Just a few questions. First if you can just clarify, I know you talked about it earlier, but the specific FX impact that you are seeing on a dollar basis for 1Q '09 and the full year '09? The second question is, can you quantify a little bit more of the power costs that you were talking about as it affected the gross margin in the fourth quarter? It just seems like as you are looking to go from 4Q to 1Q, based on the midpoint of your revenue guidance, you are looking for a very high amount of incremental costs relative to incremental revenue. And even in significant build cycles, you haven't seen that kind of uptick in costs. So I'm curious just to try to better understand that push to gross margins down to the 63 from the roughly 65 in the quarter?

And just a final question, if I could throw it out there. Can you give us an update in terms of what the revenue capacity in dollars for Europe? And the total company, based on the current bills that you have announced, and based on the current pricing that you have out there in the market? Thanks.

Thanks. Let me take at at least a couple of them. First one, when we look at currency relative to the guidance rate that we use off our Q3 results, the net income tax -- sorry, the net FX impact for 2009 off the guidance was not that significant. Where we we are taking a substantial hit of course is in the sterling. But that's being offset by an effective pickup in Euro and yen and the like, so the impact is about $3 million, so not that substantial. As it relates to the cost profile in Q4 going to Q1, consistent with many -- all of our prior years, there is a substantial uptick in the employer-based costs for payroll, and so we're going to absorb that in Q1, and that always has a little bit of a negative impact, number one.

Number two, as I mentioned in my comments, as it relates to Los Angeles property, there is going to be an incremental $2.3 million of costs, EBITDA-affecting costs, that will come into the business plan related to the L.A.-1 phase 2 property, and so we are going to take the impact of that.

Number three, we will be making a fairly substantial investment, and we've talked about this for a while, in our IT infrastructure, and so we're making investments in that, and of course there's a lot of new heads coming on to the payroll. So when you look at -- I don't have the number off the cuff right now, but I think we are up about 50 heads at the of Q3 versus the end of Q2. We're going to, of course, absorb the full quarterly impact of that, as well. So between all of these things, you know, you have now got a higher cost model in Q1 relative to Q4. I just want to make sure -- Mike, does that answer your question at least on the first two?

Yes, that helps. Also on the FX impact, that $3 million, is that all going to in the first quarter? Or is that $3 million going to be more spread over the year? How do we think about that $3 million revenue impact?

That is for the whole year, Mike, that is for the whole year, at least for the rates that we are using. As I said, I was using a $1.33 Euro and a $1.45 pound. Clearly, today it is different, but as you know the variability these days is all over the place. So we'll put a stake in the ground, and those are the rates that we're going to use. The effect in Q1 is roughly $500,000.

Okay. Thank you. That helps.

Then, I just want to make sure that we get the overall revenue capacity. I'm not so sure we have the European thing in front of us, but we still -- when we look at total capacity available today, we are in the 1 - you know, greater then 1.1 -- we call it the $1.1 billion to $1.2 billion of revenue opportunity. That's relatively consistent with what was said previously. The rates that in effect today, both on an install base, and then the revenue that we stated publicly on what we think we can achieve from these new builds. We can double back at some point with you on just what the revenue opportunity is in Europe.

One real quick thing on Europe, this is probably two or three quarters ago when we said there was roughly $245 million to $275 million of revenue capacity in Europe. That excluded, we now have since then the Paris-3 expansion and London. So we can get back to you on that. But just to kind of give you a ballpark, it would be north of that $245 million to $275 range.

Just another question on pricing. I think in terms of the number of questions that we get is, what is your expectation for how you're going to control pricing over time? You talked a little bit about that in some prior questions. But I guess what I'm always curious about is, as you think about the pricing environment, can you talk about the experience in the older data centers, you know, '04, '05 and beforehand, and what you are seeing in those markets versus what you are seeing in some of the new builds, with respect to the higher power density that you were talking about, and that $1,800 to $2,200 range. Can you give us a flavor for what you are seeing, sort of a segmentation in terms of pricing behavior that you are able to pass through to customers, depending on which of the tranches they fall into? And how to think about maybe long-term revenue growth? You know, if a data center is tight on capacity or restricted, ultimately what kind of revenue growth should a restricted center, in just percentage terms, over time be able to grow at? Thanks.

Hey, Mike, it's Jason here. I'll chime in real quick on a couple things. When you really stratify the original build that Equinix did, this is typically the Silicon Valley ones, the L.A. ones, et cetera, those are really effectively the peering hubs. What's interesting about those is in the U.S., we've said 19% of our interconnection revenue -- 19% of our revenues is interconnection in the U.S, but in a lot of those legacy sites, you've had a layering in at 25%, 30%, sometimes upwards of 40%. What that does is help drive the revenue in some of those particular sites.

And as we mentioned earlier, in the new sites we are building to a much higher power capacity, so you are getting more in the $1,800 to $2,200 range. You may not get as much interconnection in every market, but you are getting more colo and power as part of that. Effectively, when a site is full, one of the targets we put out there is you can see increases in the low to mid digits. But again, it's -- in the older sites that have been full, it is also being layered in with incremental pricing and the interconnection services that roll in.

So answering the other part of your question, I think it is important from our perspective, we think that in a full site, between the ability to get price increases, annual escalators, to sell more cross-connects and power circuits to the extent that is available in a given site, I think it is reasonable to assume a 3% to 5% annual increase. I think that is reasonable. So if you take a full IBX, I mean this is what we like about our model, the reinvestment rate in CapEx is extremely low in our business, and once you fill that data center and you put it over there, and then you find ways to optimize the data center, as you would expect. So 3% to 5% is what is a reasonable number, I think, if you are using them for modeling purposes.

The other thing, again I'm not sure which direction you are taking it from, and maybe I'll ask you this or maybe I'll just make the comment here. Are you worried about us achieving our EBITDA, or do you think our EBITDA is not high enough relative to our revenue guidance? Not knowing where you're going to take it, at least I think it is important to note, when you -- if you take the midpoint of our Q1 EBITDA guidance and you annualize it, clearly you are almost at a $350 million EBITDA line for 2009. So I don't know if that's giving you comfort or giving you pause, so I'll leave it there.

I think the questions I asked are just sort of trying to better understand, at least on the pricing perspective. I just had a think about older centers versus newer centers, and try to understand if you are seeing a difference in the behavior, which I think you described a little bit of what you are seeing in each. It is a question that we get, because I think the -- one of the big questions is over time, as your business or certain centers in your business mature, how should we think about what they look like? And whether you can grow revenue in a center with lower power density to a similar degree over time as a center with higher power density? So I think those are some of the questions that we get about your business model.

Let me address that, then, specifically. It is very important that we realize, when you look at our customer base, we stratified our customer base a number of years ago. Starting in 2006, we started to optimize and migrate customers into better suited IBXs. So those who are more network-centric, interconnection-rich, they went into, typically, the IBX number 1. Then more higher-powered sites, we moved other customers who were more power sensitive. We have taken advantage of that in many ways. And so when you look at the margin profile and the revenue profile in either case, the customers in both cases have the ability to continue to grow. If it is an interconnection building, they're going to buy more cross-connects, they're going to probably buy more power circuits, and we'll also be able to increase our revenue from a pricing escalation basis.

When you look at the more power dense sites, customers are typically taking much more power on an average cabinet, and as a result that's driving our price up as well. The benefit of that is, as long as we can continue to tether all the buildings together, or back to what we call the primary IBX, customers will still be able to take advantage of that. So it might not be as interconnection-rich, but yet it still remains highly profitable.

The last thing I think I want to leave you with here, because pricing is something I think is important, is that the Company will continue to maintain its flexibility around pricing. I've said it a number of times in the investment calls -- meetings that we've had. Our general view is, this is a difficult economic environment. Steve said it, and he said all the things that we need to do. But we as a Company will remain flexible to manage through these economic times. If a customer -- a prospective customer comes to us from a price perspective, there is a certain level that we have flexibility to adjust to, but there are certain deals that we are just not going to do. As long -- if it is an existing customer who needs some price flexibility, our general view is we're willing do that if it makes sense, if it was a specific customer, but there has to be something on the other side, there has to be more term, there has to be other -- other ways to share, if you will, the burden of these economic times.

Thank you.

The next question comes from Mike McCormack with JPMorgan.

Hey guys, thanks. A couple of things. Just on the U.S. and Asia monthly recurring revenue churn, it seemed like it spiked up a little bit. Can you just give us some of the dynamics around that? And secondly, Keith, I think you were talking about some of the negotiations with current customers, but are you seeing more widespread discussions or negotiations around terms and conditions, whether it's escalated terms et cetera?

Let me take the latter one first. Again, there is not a lot of discussions right now with customers, but it was more a point to address Mike's comment. I think when we look at our customers, we are looking for more term today, and some of our customers are looking for more term from us. As a matter of fact, there is a number of key accounts who have asked us to extend their current contract because they recognize there's a tremendous under-supply in some of our key markets, and because of that, they want to make sure that they not only have existing capacity in our facilities, but in some cases they are looking at taking additional capacity as well. So term is certainly something that we look to.

Price escalators, when we look at our sales commission plans, there are things that are very important to the Company. One is getting term, and the other thing is making sure that we have price escalators. The reason that we have price escalators is no surprise to anybody. We have a relatively fixed cost model; but whether it is rent or it is the human capital, two of our largest components of our costs line, they go up on an annual basis. Equally, so do our power costs. Our power costs have been increasing on a fairly steady basis. We have the ability in some cases to pass that on to the customer. In other cases, we don't have the ability to pass it on to a customer.

So again, we are flexible in looking at working with the customer, but we have to recognize every customer discussion is unique, and different customers have different hot buttons; some people are more focused on interconnection, some are more focused on space and term, and others are focused on power. And so we will try to continue to maintain that flexibility for the customer.

And Keith, I think Mike, on the churn thing, I'm not sure what you are looking at, but the churn is well within the 2% quarterly percentages that we're running the business by, in both U.S. and Asia. So I'm not sure what you are looking at, but the churn has not spiked. It is up a little --

The monthly recurring, I think it was 2.4, which is a little bit higher than I think the previous few quarters or so?

It does ebb and flow at times, but there is nothing from our perspective, that -- when we looked at the averages for the year and then we looked at our MRR turn, so irrespective to cabinet, what is happening on MRR, it was actually -- MRR was well below the 2%. So things happen in any given quarter or any given month, but this is not nothing that should cause you concern or, on the flip side from the MRR perspective, something that you should model lower. Our general view is 2% is a reasonable number. Please use that for your models.

Keith, you talked about power costs earlier. Obviously, we have seen a pretty significant downdraft in oil prices. Is there a meaningful lift to EBITDA from that, when you are baking in the 2009 guidance?

No there is not, actually. In fact, in many of our markets, our costs have gone up substantially. There is a number of unregulated markets, and we have signed -- typically what we try and do is mitigate against future exposure. But there is a number of markets that have -- are unregulated. Our Dallas market, our New Jersey market and our Chicago market. I'm speaking specifically of the U.S., because it is a fairly large component. Our costs have increased double digits in all three of those markets. But there is not necessarily a direct correlation to what goes on with the price of oil. In some cases it is gas-fired plants, in some cases it is oil-fired.

I guess the key take away here is the relationship between what happens at the gas pump or what happens on price per barrel of oil does not necessarily find its into the market at the same point that we would expect. So because of that, as it ebbs and flows, and because we go through sort of the public utility commissions, they are the ones who ultimately mandate where the price points are going to go. So it is fair to say just because the price of a barrel of oil went down, that has not had an impact on us. In fact, our costs have gone up double digits in all three markets that I just announced.

It is partly because rates have been down for too long, and we all that the public utilities are having to find ways to build incremental capacity, and that is building more plants. They need to fund that, and that is going to be through price increases, and we've absorbed that. It depends, some customers we pass it on to, and other customers, depending on again the specific aspects of a customer, we don't pass it on to. So that's something that hopefully gives you a little bit more information on power.

Great. Thank you, guys.

Our next question comes from on Sri Anantha with Oppenheimer.

Thank you. Steve, in your comments you talked about gross -- delays in bookings, and that partly contributed to a modest change in your guidance. Relative to your expectations, I think at the end of January when we talked about this guidance, could you talk about maybe if you can quantify what your booking assumptions were then, and what are you assuming today?

I think when we saw you, I think in was in Phoenix, we -- Keith and I mentioned to you guys that we built a churn expectation into the '09 plan and a bookings reduction percentage into the plan. It has roughly shifted with this new guidance 2 percentage points, is where it's shifted over, now that we have looked at actuals in December and had a good look into the January bookings, and the uncertainty that we described.

Okay. Second, Keith, what kind of pricing assumptions are you making for 2009? And are there any markets that you guys are seeing any kind of a pricing pressure today, or is it broadly looking, you know, pricing is relatively stable? I know you talked about there is a little bit of an overcapacity or something like that in the Chicago market? Thanks.

I think pricing -- our general view is pricing is consistent and stable. Some markets it tends to be a little bit stronger than other markets. Again, we are [reaching] to find markets around the globe today. So our general view is that it is a stable environment.

When we deal with it from a modeling perspective for 2009, we build our plans on, practically, a booking assumption. There has been no change in our list prices to our sales organization. We have to go into every account, like they have in the past, and it is negotiation-specific for that customer. So right now there is no assumed price decrease in any of our plans for 2009. It is about -- it's a volume issue less than a price issue. We are assuming the volume, as Steve said, is more akin to what we saw in 2007, less about what we saw in 2008.

A good reminder for everybody on the phone, when you look at 2008, when we started 2008 we thought it was a $605 million to $625 million revenue opportunity for '08. Clearly with the numbers that we've put up, that's a substantial increase from what we originally thought. You can see that was reflected on booking activity, again supporting the fact that there was limited amount of supply in many of our given markets. As we go back to 2009, we are making the assumption that 2007 was a more rational booking level.

It's probably safe to say, too, Sri, that to Keith's point, in markets where space is going to be constrained and demand is still very high, utilizations are going to go up in those markets, and at a macro level you're going to be able to maintain pricing power. But then, again, it varies market to market.

Got it. Keith, one just quick clarification on an earlier comment about Europe revenues, which I think have declined sequentially now. You said partly it is because of currency, but absent currency you are saying the (inaudible) portion of the European revenues would have grown 11% sequentially in [4Q]?

That is correct. So it tells you how much -- remember, the lion's share of our revenue is really Euro, is Swiss Franc and sterling. But our biggest IBX operation is in the U.K., a sterling had a dramatic fall-off in the quarter, and certainly through the quarter at different times, I don't know if you are aware of this, but sterling went below $1.30 -- I think it was roughly $1.30 anyway, at one point. When we started the quarter it was $1.63. So a fairly substantial swing in the quarter.

As a result, when you take -- when you affect it from an FX neutral basis, or said differently, again, looking at Q4 with the average rates that we used for Q3, it would have been an 11% quarter-over-quarter increase.

If you use the same thing, $1.28 and $1.62, it would have been an 11% sequential increase?

That is correct. The Euro was roughly flat -- roughly flat during the quarter. It was really sterling. I'm just trying to -- I don't don't have it right at the cuff here, I'm just trying to see if I have it. I don't have it with me right now, but that is the calculation that we shared internally with our team here.

The flip side of that is that you can appreciate, then, our CapEx investments have -- at this exchange rate, have decreased fairly meaningfully as well.

One last question. Steve, I know you have seen a couple quarters of slower decision making. Has anything changed like within the past month or so? I know you talked about until January people are delaying decisions. Has anything changed after January, or is it still the same? And let's say if we see another 2% decline in volumes, should we assume that your revenue is going to be another $16 million lower at the midpoint?

I don't think we have made that connection yet as a team, and I think it is fair to say, guys, that we are all hands down with the sales force around the world to go help work with them to help customers make decisions. We are just completely focused on executing right now. So I would tell you that we feel optimistic about things settling down with these customers. We have already seen some of the delayed decisions in the fourth quarter already get flushed in the first quarter, so there's good signs, there's good activity. Like I said, the pipeline is very strong in the later stages, and normally that moves.

The big uncertainty, the big unknown, is with these new customers, will they make a decision now in the next couple of months? That's hard to predict at this point. So that's why we built the plan as realistic and as flexible as we possibly can.

Great. Thanks a lot.

Our last question comes from Manny Recarey with Kaufman Brothers.

Thank you. Two quick questions. You talked about the supply constraint that's out there. Are there any particular geographic areas or markets that are more constrained than others?

From our inventory, Manny?

More from a market perspective ? I guess you end up seeing better pricing holding up, just due to the supply being more

Yes, I'd say we've seen some builds slow down or get stopped in certain markets, like in the Silicon Valley and in the D.C. area, in and around -- call it our peer group space. It certainly has an effect on capacity between the retail and wholesale business.

I'd say it is pretty tight still in Hong Kong. We have plenty of opportunity there, but it is a very, very tight market. Tokyo has got plenty of room. Singapore we are building, but Singapore's market is upside-down, so I think it is fair to say that there is a bit of an unknown there, but we have very strong demand in that market.

If you go to Europe, probably the biggest pressure point would be London -- I would say London or Paris. But again, we are making investments there. Amsterdam, we are a new entrant into the market, and so -- there are a couple of other players building there but that's a very tight market.

Okay. Thanks. And then just to try to get at the slowdown in decisions by the new customers, is it more just kind of a financial decision or is it kind of a decision whether they want to outsource and colocate or keep it in-sourced? Are you getting a feeling either way?

Oh, yes. We have cases in both camps. We are seeing decisions -- customers that can just afford to wait a month or two or three before they make a decision. They're going to be up against a wall at some point on the mission-critical stuff that they're tee'd up with us. We have other customers that -- the first-time outsourcing decision, and their CEO and CFO are scrutinizing every decision that the CIO or Head of Technology is making. So we are seeing every flavor.

But we are working through them all one at a time. A lot of these folks, on the types of applications they are trying to deploy, since it is mission-critical stuff ,will have to make a decision at some point. I think we are just working as closely with them as possible to help them get to that decision.

Okay. Thanks.

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

Thank you. That concludes the Q4 2008 results conference call for Equinix. You may disconnect at this time.