Equinix Inc (EQIX) 2009 Q1 法說會逐字稿

Good afternoon, and welcome to the Equinix Q1, 2009 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 would like to turn the call over to Jason Starr, Sr., Director of Investor Relations. Sir, you may begin.

Good afternoon. Welcome to our Q1, 2009 results conference call. Before we get started, I would like to remind everyone that some of the statements that we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may affected by the risks we identified in today's press release, and those identified in our filings with the SEC, including our Form 10-K filed on February 26, 2009, and Form 10-Q, filed on October 24, 2008. Equinix assumes no obligation and does not intend to update our comment on forward-looking statements made on this call.

In addition, in light of regulation fair disclosure, it's Equinix's policy not to comment on its financial guidance during the quarter, unless it is done through an explicit public disclosure.

In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most comparably directly 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 would also like to remind you that we post important information about the Company on the investor relations page of our web site. We encourage you to check our web site regularly for the most current 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 will turn the call over to Steve.

Thanks, Jason. Great to have everyone on the call today, and thank you for joining us. We are excited to report a strong first quarter result across all three regions during a time when the economy continues to be challenged. Our revenues in the quarter were $199.2 million, which absorbed $1.1 million of negative currency impact from our guidance we provided on our last call. Our adjusted EBITDA in the quarter reflected the significant operating leverage of the model as we controlled expenses and delivered $91.4 million, well above the top end of guidance.

As we noted in the last call, we have a strong plan for growth in 2009, 23% at the midpoint of guidance, which we're maintaining after a solid first quarter. We also mentioned that in our plan we had the flexibility of built-in circuit breakers that we could trigger on our spending, should our results from the first quarter and visibility into the second quarter not develop as anticipated. With our first quarter results behind us, and continued strong pipeline, we're on our way to hitting the objectives of our plan and see no need to trigger any of these circuit breakers at this time.

Our sales organization around the globe has done a great job this quarter, in closing many of our late stage pipeline opportunities, but there are Q1 booking coming in above plan. Importantly, these deals have been completed within our targeted pricing ranges. We also saw a solid uptick in new customers won in the quarter which came in at 161. I should note that the bookings were somewhat back end loaded in the quarter, as we saw a significant pickup in the month of March.

Also, our team has worked well with our customers in providing them the flexibility to help adjust the challenges they face in this environment. Specifically, we work with certain customers to create a plan to ramp their installations into our IBXs over time. Again, a solid bookings quarter and at strong price points, but these factors will have some impact on the average book-to-bill intervals for our revenue, which is built into our guidance.

We are also doing a very good job of communicating the value of Equinix's network dense IBX's and the proximity to other customers within those IBXs. Our customers reduced both capital and operating expenses by deploying within our data centers. This all indicates that we are still benefiting from our unique value proposition, global reach, and a balance sheet strength as well as expansion strategy, which is capitalizing on strong demand for our services in a continued supply imbalance in our industry. As a result, it's quite clear to us that the opportunity to invest in our core business is still very attractive.

And while we remain quite frugal on the expense line, we also recognize that when this current environment improves, the investments we make today in our capacity, people, processes and systems will enable to be much better positioned than any of our competitors to serve the needs of our customers and prospects in the future. At a time when many are unable to make these types of investments, we believe our increasing scale on a worldwide basis, provides Equinix with a tremendous longer term competitive advantage. Let me ask Keith to summarize our Q1 results.

Thanks, Steve, and good afternoon. I'm pleased to provide you with our first quarter financial results, both measured against our expectations, and after assessing the impact of our foreign currencies on these results. Also, I will give you some color on the key trends as we look forward to Q2 and the rest of 2009. Addressing our key operating metrics for the quarter and the rest of year, let me first start with the revenues.

Our Q1 revenues were $199.2 million, a 4% quarter over quarter increase for the continued benefit of strong demand across all three of our regions. Europe revenues increased to $47.8 million, a 6% sequential improvement. While Asia-Pacific increased at $26.5 million, a 10% increase over the prior quarter. As Steve mentioned, we saw solid bookings performance across all three regions, yet the US revenues were impacted by a disproportionate amount of bookings in the last month of the quarter. This, coupled with a longer book-to-bill cycle, affected the quarter-over-quarter growth rate. Fluctuations in foreign currency exchange rate negatively impacted our Q1 revenue by $1.1 million, compared to the rates assumed in our Q1 guidance. Additionally, assuming the Q1 exchange rates were constant with the rates in effect in Q4, our quarterly revenues would have increased by $1.8 million to $201 million.

Looking forward, we expect the US dollar will continue to approximate 65% of our revenues, while the Euro and pound Sterling should approximate 14% and 9% of our revenues, respectively. As a reminder, all other currencies are individually 5% or less over our expected revenues, both for Q2 and 2009. For our Q2 and total year guidance, we are assuming exchange rate of $1.33 to the Euro and $1.45 to the pound.

Looking at churn. For Q1, our global MRR churn rate was 1.5%. For both Q2 and Q3, we expect the churn level to be at the top end of our target range of 2% per quarter. The Q2 and Q3 churn will provide us additional capacity in the Silicon Valley market. A market that we believe will be constrained in the latter half of the year. Also, we believe we will be able to substantially improve the revenues and margins attributed to the space that will be recovered.

Looking at gross profit and margins, the Company recognized gross profit of $87.4 million for the quarter. Our gross margins of about 44%. Our cash gross margins were 64%, slightly above our expectations for the quarter. The result of continued fiscal discipline related to our discretionary costs. During the quarter, we saw strong cash margins across all three of our regions, although Europe was impacted by the seasonal increase in utility rates, as expected. Also, as a reminder, European revenue model is different than the models in either the US or Asia Pacific regions, whereby for all intents and purposes, prior costs are passed through to the customer with a slight margin. The EU revenue -- sorry the EU region derives its profit objectives through co-location and other services.

Looking forward, we expect our Q2 and 2009 cash gross margins to range between 62% and 64%, consistent with our original expectations, despite our continued expansion activities in each of our regions and higher lease costs related to our LA-1 Phase II build.

Looking at revenue per sellable cabinet, we provided a summary table of this, and other key non-financial metrics, on our investor relations web site for each of the three regions by quarter. Starting on the Q2 earnings call, we will no longer report a blended revenue per cabinet for the organic business, being the US and Asia Pacific, and will instead will report revenue per sellable cabinet equivalents, or CABEs as we refer to it, for each of the three regions. This will avoid some of the impact of regional weighting and the currency fluctuations.

The weighted average price per CABE in the US was $1,858 versus $1,816 in the second quarter. A 2% quarter over quarter increase. In Asia Pacific, our weighted average per sellable CABE was $1,331, compared to $1,272 last quarter, an almost 5% quarter over quarter increase. This reflects the impact of strong pricing across the region, despite some unfavorable currency trends in Australia and Singapore, continued growth in the Asia Pacific interconnection services line, and strong revenue performance in our Hong Kong IBX.

With respect to Europe, our weighted average price per sellable was $886, compared to $858 last quarter. This rate reflects four key factors. One, lower interconnection revenues in Europe. Two, a basket of price points per sellable CABE over five countries. Three, a strengthening US dollar over the last six months. And four, par density per average cabinet with a pass through par revenue model in Europe. As previously mentioned, our short-term adjusted EBITDA margin objectives for the European region is 10 percentage points lower than the US. The 3% quarter-over-quarter improvement is in part due to continued supply constraints in our European markets.

Finally, one quick side note on the European revenues. European interconnection revenues declined to 3% of recurring revenues, which reflects the reclassification of certain bandwidth services to our managed infrastructure services revenue line.

Now, looking at SG&A, SG&A expenses for the quarter were $49.5 million. Cash SG&A expenses for the quarter were $35.9 million or 18% of revenues, better than our expectation, and another proof point that the Company continues to manage the discretionary spend over many of its key corporate lines,including headcount and professional service fees. Looking forward, we expect some of the Q1 SG&A savings to be spent over the remainder of the year, although we will continue to moderate our spending to ensure we meet our adjusted EBITDA margins for the year.

Moving on to net income, and adjusted EBITDA. For the quarter, we generated net income of $15.5 million, after recording an income tax provision of $11.6 million in the quarter. Basic and diluted earnings per share were $0.41 and $0.40, respectively. On a weighted average basis there was $37.9 million basic and $38.7 million diluted shares outstanding in the quarter. The diluted share count is substantially lower than the $43.8 million shares used to calculate the result in the fourth quarter. The reason for this is that our Q4 result included an $88 million tax benefit, which required us to include the 5.7 million shares attributed to our convertible debt in the diluted share count. With our Q1 earnings now normalized most of these shares are not included in our calculation as it would be considered anti-dilutive.

Looking at our income taxes, the effective income tax rate for the quarter is 42.9%, and we expect the effective income tax rate for the rest of the year will be in this range. Although the majority of the tax provision will be noncash, we do anticipate paying some cash taxes in 2009, such as the US, Federal, AMT, some California State tax, the result of a temporary suspension of California NOL utilization, and some cash taxes related to unsheltered profits in certain European subsidiaries. We continue to believe we'll not pay any meaningful cash tax in 2009 or 2010, and this may even extend into 2011.

Looking forward, once the Company is a full tax paying entity over all of our tax years jurisdictions, we expect to -- which we expect to occur in 2011 or later, we believe our effective tax rate will range between 35% and 40%.

Our adjusted EBITDA was $91.4 million for the quarter, including an approximate $500,000 negative impact from foreign currency fluctuations from our guidance rates. Adjusted EBITDA for the quarter on a constant currency basis versus Q4 would have been approximately $800,000 higher.

Turning to our balance sheet and cash flows, at the end of Q1, our unrestricted cash balances totaled $284 million, a $24 million decrease compared to the prior quarter, yet a higher balance than expected given our strong operating performance, excellent customer collection sand lower than planned capital expenditures. Also during the quarter, we liquidated approximately $34 million of accrued construction costs.

Looking forward ,we continue to believe 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. As was noted on previous calls, we placed some funds in the reserve primary fund, the money market fund that broke the buck in September of 2008. During the quarter, the reserve fund announced their intent to maintain $3.5 billion of assets to settle their legal obligations and claims. As a result, we adjusted the net anticipated recovery to $0.917 per $1 of investment. Because of this decision, the Company recorded an additional loss of $2.7 million related to this asset. This loss is reported in the other income and expense line on the income statement. As of last Friday, the remaining balance outstanding related to this asset is $897,000 on our balance sheet.

Next, moving on to some comments on cash flows. First, our net cash generated from operating activity was $86.7 million for the quarter, a 14% increase over the prior quarter, and a 95% correlation to our adjusted EBITDA. The Company continues to remain highly focused on cash collection activity in each of our three regions, ultimately reducing our global DSO metric by four days to 27 days this quarter. We also continue to manage the outflow of cash related to our vendor obligations. Looking forward to Q2 and the rest of 2008, we anticipate we'll continue to generate strong operating cash flows consistent with our expected adjusted EBITDA performance.

Cash used from investing activities was $77.9 million for the quarter. Our capital expenditures were lower than expected at $75 million, due to design delays related to our L.A. -1 phase two expansion, and permitting delays related to our Par- 3 project. In both cases, we have not changed our estimated cost of construction. Cash used from financing activities was $3.6 million for the quarter, including the pay down of $8.2 million related to our debt facilities. For the year, we continue to expect to repay term debt and capital lease obligations totaling approximately $55 million. As mentioned on the last call, we still intend to extend the 2010 maturity date of our $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 our end of quarter leverage rations, annualizing our Q1 adjusted EBITDA, our gross leverage ratio was 3.3 times or 2.6 times on a net basis, and currently lower than our planned range of three to four times adjusted EBITDA on a net basis.

Finally, with respect to our equity balances outstanding, we had approximately 37.9 million shares of common stock outstanding at the end of Q1. This number excludes the 5.7 million shares related to our convertible debt, and the 3.8 million shares related to our employee stock plans and other warrants. Let me turn the call back to Steve.

Thanks, Keith. I would like to now provide you a brief update on activities in each of our three operating regions. In the US market, we saw a rebound in our bookings, which landed just above our expectations for the quarter. We saw an excess of 80% of these bookings come from our existing customer base, and an increase in total new customers added in the quarter. Our sales cycles remain longer than historical rates, but have started to stabilize, and the conversion rate of the later stage pipeline is improving. The overall pipeline is also very healthy ,with good coverage for our second quarter targets.

US revenues for the quarter were slightly impacted from lower Q4 bookings, back end loaded Q1 bookings, as well as the installation ramps we outlined earlier. Cash gross margin and adjusted EBITDA margins remain very strong at 69% and 50%, respectively. Pricing across cabinets, power and cross connects are holding steady. With our interconnection business in the US, we are now up to 23,150 cross connects and added 35 new 10 gig ports to our Equinix exchange platform.

Expansion plans in New York, LA, and downtown Chicago remain on schedule, which is important as we are constrained in all three of these markets. And, of course, Dallas still has limited capacity, but remains one of our top IBXs for interconnection.

Lastly, in the US from a vertical industry perspective, we are continuing to see strength in bookings from the network segment, with double digit growth sequentially. Within the financial services industry, we are also continuing to experience strong demand from the electronic trading venues to be able to connect to exchanges of all asset classes at the lowest possible latency. And we believe that Equinix will continue to be the supplier of choice for these firms, due to our network neutrality and density, strong operating performance and growing industry knowledge and relationships. The US team continues to execute well on all fronts as we continue to navigate through this difficult environment.

In Europe, we had a fast start to Q1, with solid growth in both our MRR and adjusted EBITDA, while bookings came in above planned. Overall, ur pipeline looks strong, with good coverage for our Q2 booking target. I should note that this booking success has us facing some capacity constraints in half of our markets, particularly in Paris and Amsterdam. So our expansions there will be important for our 2009 plans as they come online later this year.

Cross regional deal flow into this region from the U.S. and Asia continue to grow and accounted for approximately 16% of our bookings, again highlighting the advantage that Equinix has in serving global customers. We are also making very good progress with the diversity of revenue by industry vertical, now with approximately 30% in both the network and enterprise segments, financial services were 28% of revenue, and digital media at 11%. Our interconnections strategy in Europe is taking hold.

We have completed a baseline audit of our cross connects and have just under 6900 billing at this time, which is up 36% year-over-year as electronic trading and Internet peering continue to grow in our customer base. In addition, customers signed up for four new Equinix exchange ports in Europe this quarter for a total of 75. This number excludes just under 40 ports sold with the independent exchanges who have partnered with us.

Keep in mind that the nature of these partnerships limits our interconnection revenue for these ports, yet still delivers a great deal of value to our customers, and the network density in our European data centers. Our outlook in Europe remains optimistic for the remainder of 2009, and we will continue to invest in this region behind the leadership team that's executing very well. And, oh, by the way, the team just received recognition today as the best Pan- European data center operator at the data center Europe 2009 conference.

In the Asia Pacific region, our financial performance was ahead of our expectations with revenues improving 10% sequentially. We saw a very strong performance in cash gross margins and adjusted EBITDA due to the higher fill rates in our IBXs and good management of resources and expenditures. We had another good quarter of bookings and low churn despite inventory constraints in Singapore and Hong Kong. We expect these constraints to be alleviated when the expansion projects in these markets open in the third quarter, which will add almost 1,000 cabinets in the region.

Our customer base continues to be balanced between all four of our industry verticals in this region, but the network density increasing and digital media segment seeing the highest growth in the quarter.

Just some notes on Asia interconnection. Interconnection remains constant at 9% of MRR with 18 new peering ports and approximately 10,800 build cross connects in total. Finally, the business outlook for us in this region remains solid for the remainder of 2009, as market demand for carrier neutral data center space continues to outstrip supply.

So now let's take a look at our expectations for the second quarter and the rest of 2009. First, as you know, we have a number of expansions that are scheduled to come online in the later half of the year. As in prior years, the planned delivery of this capacity plays a role in our second half revenues. In addition, the back end nature of our first quarter bookings will have an impact on the timing of recognized revenue. A full quarter's value of this revenue will not be seen until the third quarter. And, of course, we will continue to watch this economy and the impact that it has on our customers' buying decisions and/or financial stability. Any of these factors may affect where we land in our guidance range.

With this color on how I see the year unfolding, we are maintaining our expectations for 2009 revenues to be in the range of $855 million to $875 million on a constant currency basis. We expect cash gross margins to range between 62% and 63%. Cash SG&A is expected to be in the range of $160 million to $170 million or 19% at the midpoint. We are tightening our adjusted EBITDA expectations to $370 million to $385 million, with the midpoint up slightly to $377.5 million. Our 2009 CapEx guidance is also unchanged at $325 million to $375 million, of with approximately $60 million is expected for ongoing CapEx. This range includes up to $90 million in unannounced expansion CapEx. We will provide more color on this at our analyst day in a few weeks.

For the second quarter, revenues are expected to be in the range of $206 million to $210 million. Cash gross margins for the quarter are expected to range between 63% and 64%. Cash SG&A is expected to be approximately $39 million. Adjusted EBITDA is expected to be in the range of $92 million to $94 million. Total CapEx for the quarter is expected to be between $110 million and $120 million, which includes approximately $20 million in ongoing CapEx. So as you can see, a great start to the year with our first quarter results.

In addition, our leading indicators and business fundamentals remain strong, even in the face of the continued economic downturn. As you know, we reset our priorities last fall with a flexible 2009 plan to face the new reality, and are executing on both our top and bottom line objectives. Historically, great companies have excelled in tough times, and in tough times, customers increasingly turn to great companies. This is the reason we will continue to invest in our core business in a disciplined and measured way. We believe the combination of favorable industry trends, our unique operating model and the capacity to serve our customers on a global basis will continue to provide us sustainable differentiation throughout 2009 and beyond. We're looking forward to discussing this further at our investor analyst day early next month where we'll have the opportunity to provide you deeper insights into our future direction. So with that, Mary, I'd like to open it up for some questions.

Thank you. We will now begin the question-and-answer session. (Operator instructions). And our first question comes from Jonathan Atkin with RBC capital. Sir, your line is open.

Yes. Thanks for taking the question. I've got one clarification on churn. Keith mentioned that churn may be picking up in Silicon Valley, and if you could maybe qualify some of the factors behind that and what sorts of customers are leaving. And then with respect to the pricing commentary, is spot pricing pretty much stabilizing or would you still characterize it as maybe increasing in some of your regions, and from a competitive standpoint, is a Delta between your pricing and those of your competitors staying the same, or is that contracting or expanding somewhere else? Thanks.

Let me at least take first one on churn, and then either Steve or I will take the one on pricing. Churn, not inconsistent with what we said in the past, there are a few large installations in our IBX's. And in one case, there is going to be a churn related to one of our Silicon Valley properties. It's an old legacy account. I don't want to talk specifically who it is, but they will be churning out over the Q2, Q3 period, and that's going to allow us to reclaim the space and basically give us the advantage of getting space back in what will be a very constrained market.

And then two, the price points that this particular company was at was extremely low and, arguably, one of the lowest price points we have in our customer portfolio. And as such, once we replace that revenue, we expect to see a meaningful uptick in revenue coming out of that particular IBX.

But overall when we look at churn, again, I want everybody to be clear. We are still talking about 2% per quarter, whether it's Q2 or Q3, and, that takes into consideration some of the early stage companies. As we have said in the past, particularly in Silicon Valley, there's a lot of venture-backed companies here, and with venture-backed companies, we anticipate slightly higher churn in Q2 and Q3, and we reflected that our guidance numbers. Hopefully that answers your questions. For the year, I think we are still in the 8% range, and that is consistent with our guidance.

Jonathan, I think we caught the second part of your question this is Steve. I would say it's safe to say in this type of environment that the rate of pricing increases is probably moderating, but for us, it's holding pretty firm, as we mentioned around the world. And I would tell you that we are managing that pretty tightly. As we told you, we are being very flexible with our customers in terms of ramps and helping to make decisions to get -- to start installing in our IBXs. So that will have an effect in terms of what I'm mentioning in terms of bookings late in the quarter and then the ramping of that revenue.

But in general, our team has done a very, very good job of holding pricing and we are selling value. We are not rushing to cut prices. We are selling value and we're selling cost justification, which is a very critical shift for us in this kind of market.

I would like to add one point. Steve and I on a very regular basis talk about this in the public -- in our public venues. Our general view of the Company and with the management team, we take the position that we are not willing to trade off price for volume. We would rather be very judicious, particularly given the number of constrained markets we have and how we deploy our capital. We are not going to rush to replace -- replace capacity with lower pricing deals. So we'll continue to focus on that as we go forward through 2009.

Okay. And then on margins, is there any notably different trend that you are expecting across the regions in terms of the margins, or is it going to be kind of a similar trend line in each of the three areas?

Well, we are certainly making large investment in our European market. We are making a meaningful investment in Asia as well. So when you look at the margin profile, the US is between 50% and 51% today. We are thinking of our long-term margin -- I'm referring to adjusted EBITDA. That margin profile, we are already well into the zip code or higher than the original zip code which was 35% to 40%. So I think you will continue to see the benefit of us expanding in the -- sorry, selling more capacity in the US market and so our margins should improve because you are operating off a fairly fixed base.

Where I think you can get the benefit is certainly on the European market as we continue to deliver more capacity. We think that the margin profile should get up into the 40% range to start with, and then when you look at Asia Pacific, I mean they have done just an absolutely stellar job and they are up around 45% adjusted EBITDA margins today. They need some more capacity. They will leverage off that invested base.

So I would think that you are going to see margins continue to operate favorably with the one caveat, we are introducing a number of new expansions this year and with that, is going to come incremental costs, not to mention some of the investments we are making in our IT infrastructure and also in our marketing area.

When we look at all of that together, we are still very comfortable in maintaining our guidance range of 62% to 64% on the cash gross margin line, and you have a pretty good idea of what we are guiding you to on the EBITDA line at a midpoint of $375 million of adjusted EBITDA this year off a midpoint revenue of $865 million.

And then real quick on enterprise, it's a fairly broad category, as you define it. The system integrator and reseller portion of the pie, is that becoming a bigger piece of the pie relatively ,or smaller or is that holding steady?

I would say it is holding steady, Jonathan. We did see in the bookings this quarter a couple percentage increase in enterprise activity, but generally, we are running on a worldwide basis about 36% of the revenue for the Company, MR for the Company in that space, versus roughly 27% network and I think it's 19% in finance and 18% in content, digital media.

But these parts within enterprise as well holding steady?

Yes, the reseller stuff is active. We've got some activity in each of the regions. I would say the color on that is pretty steady. It's not up or down in the quarter.

Thank you very much.

And our next question comes from Michael Rollins with Citi Investment.

Hi, good afternoon.

Hi, Mike.

Just have a few questions for you. The first question I had was if you could talk about the -- when you look at the possibility for new builds in constrained markets, can you tell us about what you are thinking about these day, and how you are looking at it ,nd if your decision points have changed, given the tougher economic backdrop.

The second question I had for you is if you look at the co-location revenue in a domestic business, it looks like the revenue per cabinet per month came up about 12.5% year-over-year, and I'm wondering what percentage of that you would appropriate to power density versus price increases.

And then the final question I had, is if you could just talk a little bit about the interconnection trends, particularly in the US, the volume versus the revenue, and how we should think about interconnection revenue going forward. Thanks.

Sure. Let me start with that and Keith, you can add some color. On the constrained market decisions. No change at all in the type of returns we are looking for, Mike. We are still following the same fill rate analysis. We are looking at competitive analysis. We are studying fill rate much closer now as you might expect, but we are still meeting on a regular basis every two weeks. We look at all markets around the world. We are paying particular attention to the network dense downtown markets, because that's where most of our network and the financial services activity, because the latency demands are interested in space. So we have a much tighter microscope on these decisions now, and most of those are the constrained markets.

But I would tell you in terms of returns and in terms of decision criteria, nothing has changed. So we are attacking the constrained markets in same manner. Let me give you my view on interconnection, and Keith can add you some color and give you some insight on the revenue per cab in the US, but on the interconnections in the US, we're going to grow it in the other two regions, as you know. So we have stated objectives in Asia and Europe to grow the interconnection. It's on a smaller scale. It's a little bit easier task relative to the U.S. Historically, as you know, in the US, the reason it's primarily slipping is because the rate of growth in the co-lo business, the scale is starting to set in and the rate of growth is starting to outweigh the growth and the interconnection.

We are still focusing on the cross connects and on the ports on the switch. We still have programs and initiatives, incentives for the sales force to focus on. So there's no let up in our focus on that part of the business. It's merely tied to the size of the growth and the co-lo part of the business. It's just starting to scale past.

Just continuing on with sort of Steve's comments there, I think it's also important to note that when you look at our interconnection growth rate, there's a number of key markets in what we call our core downtown centers that we are at our capacity in, such as, you know, Dallas is an example, L.A. is another example. Chicago, which is our more higher dens interconnection activity, and for all of these reasons you are seeing co-location run at a faster clip than you are on a faster connection than you are on the interconnection revenue line. So overall, still a lot of focus. We are driving the ecosystems, and certainly teams focused on continuing to grow that particular line, both on the revenue and a per unit basis.

The other thing you brought up was power and pricing per cabinet. When we -- when you think about, again, our overall service offerings, we have co-location which is space and power, we have interconnection and managed infrastructure services. And each market is slightly different, but roughly 95% of our revenue occurs, as you know, 5% in this month, it's actually 4% of our revenues non-recurring. So when you take the recurring revenue and break the total down, it's north of 80%, 81%, 82% on a co-location. Roughly 50% of that is power.

And so certainly as customers continue to grow with us, particularly at -- when you look in the US side of the equation, they are going to buy more power per average unit than they are in the other markets, both within Asia and Europe, and that's a general statement, because any one customer could have a different deployment.

Because of that, power revenue is going to be an increasing piece of revenue per cabinet. Now the 12% growth that you referred to on a year-on-year basis, I think it's best to describe that we as a business are looking for a 3% to 5% annual price increase and the rest, therefore, is going to come from our service offerings, more cross connects per average cabinet, and more power per average cabinet and that gets to the point that you are trying to address.

Higher density will affect that too. So as we do higher density deployment, that will affect it, Mike. But one last thought on the interconnect, see if we answered your question here. I think Keith and I and the rest of the leadership team expect as we continue to deploy more and more of the electronic trading platforms, over time we expect to see more cross connects and we think that will start to impact in a positive way, the interconnection line.

And just a follow-up with two questions on what you described. So, first on the interconnection piece, just to finish up, yUS revenue sequentially down a little bit but the volumes were up. Is there something going on in terms of the mix of the business that we should be thinking about, and is this an area, so if you had to say this is a growing revenue, a stable revenue or shrinking revenue, with interconnection in the US, how would you describe that? I'm sorry, it's three questions. And then the third question, I want to follow up on.

When you talk about the 3% to 5% annual price increases, so even in this current pricing environment in the competitive environment, do you -- is that your expectation, that pricing on a per cabinet for colo should grow on average 3% to 5% over time? Thanks.

So answering your last question first, yes, we still generally believe we can get 3% to 5% pricing on our average cabinets. You are seeing the growth. And certainly when you look across the regions, we continue to see that we have the opportunity to command a higher price point. We are being disciplined as an organization, as a sales organization, and it is about driving value into the equation. And so we are comfortable in doing that.

And very much to my earlier point, when we had -- when we had this customer churn that we were going to experience over Q2 and Q3, we are going to be able to raise -- we are going to be able to raise the revenue attributed to that environment, and it is a fairly meaningful environment ,by over 100%. And so when you look at that, and you add that to the equation, these are the things that we continue to benefit from and we think we can get our averages up 3% to 5%.

I'm not sure I understood the added interconnect question, other than are we continuing to be focused on both exchange and selling cross connects and the answer is, you know we did the repricing on exchange. We described that to you. And that has taken hold. We are upgrading to 10 gig at a pretty strong pace, and so we are seeing an uplift there. That's part of answer. And as I mentioned earlier, we are going to start seeing the positive benefit of deploying matching engines around the world and as members need to connect to these engines. But I think that's still out in front of us in terms of a big number.

Thanks very much.

Thanks, Mike.

And our next question comes from Mark Kelleher with Brigantine Advisors. Sir, your line is open.

Hi, Mark.

Could you talk to the degree to which you are capacity constrained in the US. You ticked up to 81% capacity utilization, and how much is that affecting your growth? And can you confirm that we are looking at 1100 cabinets for New York, four coming on in the June quarter and 800 more in LA. And just to to tie on to that, do the design delays that you were talking about in L.A. push out the builds at all there?

Yes, the capacity constraints, Mark, are still in really four of the six markets. It's in Chicago, particularly downtown Chicago. It's Dallas, as I mentioned, LA and New York. So those are the four markets. And you just said it's just under 1100 cabs we are bringing on, and towards the end of April, Phase II of New York, which we'll start to address the New York capacity constraints. We are still aiming at -- call it late July for the L.A. for 800 cabs, and that will come in to play at that time. We mentioned we are bringing a couple hundred cabs on in Q3 in downtown Chicago and doing some work in downtown L.A. that will bring more capacity on.

The timing will work well for us. Our inventory is low there now. Our fill rate is pretty high, and so we are managing it very, very closely. We are in a restricted -- we call it internally restricted state. We are very, very select in who we put into those centers.

So the design delays you mentioned in L.A., they are not affecting any timing issues?

No.

That's our L.A. -1 Phase II, and it's really a Q4 deployment. And because of that, there is very little revenue that would be attributed to this particular year. Having said that, we want to get it up and running as quickly as possible so we can start affect revenue in 2010, but no meaningful impact for 2009.

And I think if you combine this capacity in the US, as well as the other two regions, you will see that we put ourselves in a better position to start ramping revenue in the second half of the year.

Great. Thanks.

Thanks.

And our next question comes from Chris Larsen with Piper Jaffray. Sir, your line is open.

Hey, and thanks for taking my question. A couple of things. The obvious is that sales expenses were down sequentially. Is that really just a function of bookings coming in the second half of the quarter or the tail end of the quarter ,and we should see a little bit of a ramp in sales expenses into Q2 as those customers come online? And then Steve, was there -- the delay in bookings, is that really more of an economic issue? And then I have another one in terms of, we noticed a lot of carriers out there had sort of incompletely funded some facilities, and are you seeing any of those half finished facilities for sale that would suit you, should the capital be available to buy them?

Yes, Chris. On the first question on the sales expense, part of it is tied to later quarter bookings, and so you didn't have as much activity in the first two months in terms of commissions, et cetera. I think as Keith and I mentioned before, the big branding push in the last couple of quarters, we did not have in this quarter. So that spoke for a big part of that drop down in sales expenses.

On the carrier front, it's not just carriers. We actually have seen less than a handful of -- I wouldn't call them distressed, but partially built out centers and we have looked at a couple around the world. We haven't seen anything yet that meets our requirements, but it's safe to say that there's been a couple that popped up last quarter and we looked at one this quarter. So they are our there. Nothing, though, that meets the demand and,, the requirements we look for in these types of centers. So nothing on the horizon for us on that front. And your second question, Chris?

Yes, the delay in bookings, the back half of the first quarter, was that -- is that attributed to the economy or --

Yes. I mean, partially. It's -- we had had a soft Q4, as you know and so I think a lot of decision makers certainly with new customers and some existing, but predominantly with new customers, were waiting until they got out of the gate further in January, some of that slipped to February. And I think we started to see confidence show up back with decision makers back in March, and so we had had a pretty big step up in the month of March.

I wouldn't tell you that we have seen a trend here, but we feel good about what the pipeline is showing us, and we feel good about some of the decisions that weren't made in the fourth quarter that did get made in the first quarter.

So there's a lot of positive signals here, but we are early days into this thing, and like I said, we landed where we wanted to land because of the good first quarter, but it was very heavily back loaded and that's just -- yes, you have to tie some of that -- what's going on in the market.

Yes. All right. Thanks a lost. Great.

Thanks, Chris.

And our next question comes from Greg Mesniaeff with Needham & Company. Sir, your line is open.

Yes, thank you. I'm wondering if you can give us some color on your potential for additional leverage in the SG&A line in Europe, or alternatively put, how do you see your expense profile evolving in that market?

Certainly when we go back a year and a half ago, when we acquired the asset, we recognized that it was not going to be a synergistic opportunity for us. We would have to invest heavily because it was a staging ground for something much bigger than what we acquired. Because of that, we have continued to make meaningful investments in the SG&A line and Europe, and for that matter, in the US as well. And probably less so in Asia Pacific.

As we look forward, given the opportunities and the amount of growth that we are experiencing in the European market that you would continue to see us make incremental investments. As such, I would expect, and it is embedded in our guidance, that SG&A is going to continue to increase.

We guided 160 to 170 for the year. When you annualize our Q1, you are basically about 144, and so from that perspective, it gives you a sense that we will continue to make investments across many of our markets, but in particular, Europe.

Thank you, and then did you disclose any 10% or greater customers?

We have no customers greater than 4%.

Thank you.

And our next question comes from Srinvas Anantha with Oppenheimer.

Thank you, a couple of questions. I know there's clearly demand supply and imbalance that's there in the market, and that seems to be helping the pricing. But the credit markets seem to be opening up slightly in the margin here. Do you see,decreased competitive builds in some of your markets, and if that were the case,would there be an impact in customer decision making cycles, especially with enterprises who seem to be having different type of a sales cycle compared with your Internet services and network service providers?

Well, it's safe to say we don't see any big change in the -- we know where all the competitive builds are going on in each of our markets. So we have very good intelligence, public data intelligence that tells us what is going on there. I would tell you that we are still hearing and seeing signs of our -- of people in this business having a difficult time to access capital which I think is still -- is given - providing constraints in the market. I think with our self-funding position, it puts us in a really good spot to communicate to our customers where we are building and we are building on their behalf.

And so I think in general, there's no surprises in terms of supply, demand imbalance. We know -- we know the factors across all 18 markets that we're in, and there's no new shifts. Some markets are more competitive than others. We know that. Price pressure in that market probably shows up a little bit more. We see that in the pipeline. But in general, no big change quarter to quarter in terms of new build activity that's causing us any pain.

And if I could just add on something in addition to what Steve said. Recognizing that people might have access to capital, you can't count on that, number one. And then number two, the lead time to put up a new asset is still fairly substantial. The long lead items, such as generators, that has obviously much been shorter today than it used to be. Still, all that said will take you a good 12 months to 18 months to put up an asset. From our perspective, if someone goes in and raises capital, we will not see any competitive threat against that asset probably well into 2010 now, if not a bit later.

And Keith, when I'm looking at European revenue, I think last quarter, European revenues decline sequentially and it was due to currency fluctuations, but let let's say we were to adjust for revenues for the currency, it appears that European revenues grew at the slowest rate in 1Q. Is there something going on there, or it is just more timing related here?

There's a couple things. Number one, when you look at Q4 revenues, you have to adjust -- it actually grew Q4 over Q3 11%, okay? And then when you look at the impact on currency, the majority of that currency impact is in the European market. Pounds Sterling deteriorated roughly 8% between Q4 and in our average rates in Q1. The European market is growing at a very nice clip.

Our slowest growth was actually in the US and in the US, again, Steve sort of hit it a number of times, but it is about a delayed booking. There's our flexibility with the customer and the fact that we are constrained in a number of markets, and we desperately need some of these assets to come online, such as New York core phase two asset that come online so that we can continue to sell. It's not just about selling. It's about taking that booking and turning it into a revenue dollar.

Got it. And Keith, with respect to interconnection pricing, I know last quarter, you mentioned, for some of these, there was a little bit of repricing of your customer base. Are we through with that completely? And, what do you see the pricing trend for the gig ports going forward?

Well -- no, we are not through it, you can see it reflected in the US interconnection revenues. We are getting through it and the Company continues to operate with the view that we want to continue to execute against the ecosystems. So our general view is whether it's between whether it's the cross connects or the ports. We want to continue to sell.

Our general view is we are at in the market price points across all of our service offerings and the interconnection revenue line. And we think we can continue to execute against that. But we have to -- we have to get through this repricing phase and our sales organization is working hard with the customers to make that happen.

So it's safe to say, Keith, that the data on new ports and upgrades to 10 gig is still very strong. I don't know how you categorize whether we are in the early stages or middle stages, but we're still in the middle of this thing. We still have plenty of runway left here.

What's interesting, is if you look at our bandwidth traffic, we have the ability -- we are up at 300 gigabits in the US, where last quarter we were roughly 255 gigabits. So the value that Steve alluded to early on that we're creating for our customers, irrespective of where the price points are and the amount of revenue we are generating from interconnection, is certainly translating into continued growth and obviously very favorable margins in our business.

Okay. And one last question, I know, Steve when we previously asked you guys about potentially diversifying your revenue, I know you guys have talked about just focusing on co-location. That's pretty much it. But now with the great of growth moderating, has your thinking process changed with respect to potential diverse service and demand services.

No. I can tell you as far as I know, there's nobody working on a managed services agenda here. We are very, very focused on our core competence, which is co-location, interconnection and we are expanding that deeper into the current ecosystems. We are looking for another ecosystem. We are pushing hard on the interconnection space, and there's plenty of demand. There's plenty of upside and plenty of work for us to do in our core space.

Thanks, guys.

Thank you.

And our next question comes from Winston Lynn with Goldman Sachs. Sir, your line is open.

Hello.

Hi, Winston.

Thanks for taking the question. In terms of pricing, what type of premium are you getting now relative to your peer new data center space coming online and has that spread increased over the last quarter?. What about the legacy data centers that have the more mature interconnect offerings, how big is the premium, and how has that changed?

Good questions. Our general view is it's tough for us to compare ourselves against our competitors because we don't generally know their price point. We hear anecdotally through our customers and industry groups. But our general view is we are 20%, 30%, and in some cases 40% more expensive than our peers, and we continue to maintain that. Again, we don't want to trade off -- trade off volume for price, and I think that in some cases our competitors have done that. All that said, we want to continue to be a premium price provider. We offer the services and the reliability to do that, and it really is about value. So hopefully that addresses your point, at least on a price point basis. And Winston, what was the second question?

Pardon.

Sorry, carry on. What was your second question.

Just comparing the kind of premium you get in the new data center space versus the legacy centers with the more mature interconnect offerings.

I think any time you think about a more -- the higher the interconnection, the more margin there is to offer. So our primary sites, what we call rich interconnection sites which is Silicon Valley ones and Chicago ones and the like, the premium is generally more attractive than what I just alluded to, because there is the scarcity of supply. And so from that perspective, we are able to generate a higher margin off that space, versus a large sort of rural build like we do out in the Chicagos or the El Segundos, where we don't actually have the same density of networks. So we do get -- we enjoy a higher premium in those markets than we do in the larger footprints in the rural markets, the suburban markets.

Okay. And CapEx, is there a potential to get discounts from your equipment vendors that could help drive down the cost of expansions for 2009.

Absolutely. We as a Company, when we originally looked at our guidance, we reduced the amount of CapEx, and part of it was because of exchange rates and part of it was due to pricing. In both cases, when you think about the announced project that we have today, it's $285 million, that's what we have announced thus far relative to the guidance range that we talked. And a lot of that originally -- when we give our first guidance back in October, we probably took that down, as I think back today, $35 million, $40 million. Part of it came from as I said exchange, because the currencies dropped dramatically in Europe and we were funding it from here. And part of it did come from the price points that we were able to renegotiate contracts and get better pricing in a number of our markets.

Great. Thanks.

Great. Thank you.

Thanks, Winston.

And our next question comes from Chad Bartley with Pacific Crest. Sir, your line is open.

Great. Thank you very much. First question, you seem to stress the point that timing around planned expansions will impact bookings and revenue recognition. I'm just curious if the current environment is presenting more challenges and more risks around those plans, and getting them done on time. And then the second question is, just on gross adds, that seems to be a strong number given the environment. Was that in line with your expectations or was that also a surprise for you? Thanks.

On the gross adds front, Chad, no. We knew, as we talked to you guys last quarter, that we softened with new customers making decisions as they finished out their 2008 year, and were trying to put their 2009 budgets to go and they really could wait a month or two. A lot of these decisions now, quite frankly, have gone up to sea level.

So there's no question that there's a softness in decision making internally with these companies, and we have got to push a little bit harder. And we are working harder around the world to get deals done, there's no question. It wasn't a great surprise, because we just kind of hunkered down and a lot of these deals that we thought were very close to being decided in the fourth quarter got decided in the first quarter. I don't think it's any more sophisticated than that. And your first question, Chad, was?

I'm just curious if you -- you, I think, -- two or three times you talked about your planned expansions and how that will impact bookings and rev recognitions, I curious if it's more difficult now or is pretty much status quo.

In terms of getting these things opened on time and on budget?

Absolutely, yes.

No. No. The challenges we faced recently are permitting related in a couple of markets, so they are things that are sort of out of our control. But no, we have not had any challenges in terms of the team executing, getting these executing, getting these things open on time and on budget. So that's not holding us back.

The timing comment was tied to where we told you guys these things were opening up and the fact that we are in restricted status right now. We are very selective on who we can put in until we have more capacity. So as soon as that capacity opens up, we can start to push more volume into it.

Got it. That's helpful. Thanks very much.

And our last question is from Richard Fetyko with Merriman.

Good evening, guys.

Hi, Richard.

Just a follow-up on that question. I think you mentioned that some of these new customers are coming on with, perhaps somewhat modified contracts in terms of their fill rates, or how quickly they will fill in the space that they are contracting, and therefore how you will be able -- the timing of billing. Could you elaborate on that. Are you just being a little more flexible with some of the new customers in terms of the time period that you require them to fill in the space. Is that what you mean?

Yes, we refer to these as ramps. We have been doing it for a long time. It's a -- it's a technique or tool the sales team has to get deals closed, and it helps us be flexible at a time when a customer is having a tough time predicting how quickly they want to ramp up their installs. So it's not a new thing we have been doing.

I would just tell you in this quarter, since we were so back end loaded in March. It looks like it was -- when you look at the data, that we were a little bit more ramped than we normally are. We are delayed on when we can start billing, and that's the impact to that. But it's just the nature of the sales cycle now. It's the nature of the decisions are a bit tougher and we have to be more flexible with certain customers.

Got it. And I understand. The reason behind the legacy customer who is leaving the Silicon Valley data center. What reasons can you give us that -- the customer is leaving for? Were you trying to push some price increases that just didn't go through that with that customer? Or were there other reasons? What are they doing in replacement of your Silicon Valley data center.

There are two things, the customer is looking at the build some of their own capacity and looking to reduce their costs. And for those two reasons, they have made a decision to relocate.

Got it. And then in the US you mentioned that you are somewhat --

Sorry, Richard. One of the things Jason was just reminding me. I still want to be clear, there is still a very good customer of ours and they are in multiple sites with us. It was a large server footprint that we will be relocating, and it typically is a footprint that we otherwise might not have taken. It is a legacy account that dates back six years.

Given what's going on in the Company's environment, they have made a decision that they will consolidate into their own locations and for that reason, they are going to churn out. Overall, I still feel very good, and they are going to be a very large peering customer with us as we move forward.

It's safe to say, we will have no problem filling that space up as Keith alluded to earlier, also because of the network density and the location of that site.

Yes. Sure. Silicon Valley is a pretty hot location. So, I guess, that just kind of made me -- it prompted a couple of other questions in terms of -- so you are saying that the customer is in multiple sites and they are consolidating those multiple sites into their own location, so they are leaving from not just Silicon Valley data center, but other sites as well.

No, I don't know what they are doing at other sites. I can't speak of what they might be doing with some of our competitors.

Oh, okay.

What I can tell you is they are going to maintain a number of locations with us and, in fact, the same customer is going to build a new facility -- a new deployment with us in one of our non-US markets. So these things happen all the time.

It just of size that we want to make sure that we telegraph and it's going to cause us to be around the 2 percentage range on the quarterly churn in Q2 and Q3. This is, again, a very good customer. It's very similar to the discussion point we had a number of years ago about our Google churn.

They are still a very good customer of ours, Google and this other customer I'm referring to today is going to continue to be a very good customer with us, and grow in multiple markets, just not in this particular market with us. They are going to stay in our Silicon Valley one property, but they are going to relocate out of another Silicon Valley property.

Got it.

It's like he said, it's a server farm. It's a big deployment that was deployed years ago that probably today we wouldn't even entertain taking. It's actually a good thing for us.

Got it. Sounds like you didn't mean to dwell on it. You mentioned in the US you are somewhat capacity constrained, a good and bad problem. Did you feel like you have missed any opportunities in some of those constrained -- capacity constrained data centers that you couldn't fulfill because of the requirement for, large contiguous space in some of these RFPs.

Sure. Fair to say, we see competitive installations on a regular basis in some of these markets where we haven't had capacity. That's just the nature of this business.

Got it. Okay, guys. Thanks.

Thanks.

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

Thank you.