Equinix Inc (EQIX) 2009 Q4 法說會逐字稿

Good afternoon and welcome to the Equinix Q4 conference call. All lines will be on listen-only and we will open up for questions. Also, today's conference is being recorded. If you have any objections, you may 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 and welcome to our Q4 and fiscal year 2009 results conference call. Before we get started, I would like to remind everyone that some of the statements we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may very significantly from those statements and may be affected by the risks we identified in today's press release and those identified in the filings with the SEC, including our 10-K filed on February 26, 2009 and Form 10-Q filed October 26, 2009. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements on this call.

In addition, in light of regulation fair disclosure, it is Equinix's policy not to comment on the financial guidance during the quarter unless it is done through 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 directly comparable GAAP measures 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; Keith Taylor, Equinix's Chief Financial Officer; and Jarrett Appleby, Equinix's Chief Marketing Officer. Following our prepared remarks, we'll be taking questions from sell-side analysts. In interests of wrapping this call in one hour, we ask these analysts to limit follow-up questions to one. At this time, I will turn the call over to Steve.

Thank you, Jason, and thank you all for joining us on the call. I'm pleased to report that Equinix delivered strong results in the fourth quarter, with annual revenue growth of 25% and adjusted EBITDA of 40%, which finishes off another outstanding year of top and bottom line growth well ahead of industry rates. We're very proud of these operating results, especially when we consider the challenging economic environment that most companies faced worldwide in 2009. Given the uncertain economic outlook at this time last year, we laid out a plan that provided us with maximum flexibility to scale our discretionary investments up or down as required by market conditions. As part of this flexibility, we managed our business very aggressively to focus on the new reality at the time, with the earn it before you spend it mindset. Of course, this also contributed to our strong overperformance of 2009 adjusted EBITDA results.

As the year unfolded and the demand for our services remained strong, we made an important decision to continue investing in the core of our business to better position us to capitalize on longer term opportunity. As many competitors were constrained in their ability to invest in their growth, we now have gained an important competitive advantage. This decision enabled us to make significant progress on certain growth initiatives in 2009, beyond just achieving our key financial objectives.

First, we continue expansion in 14 of our 18 markets, where we had been experiencing significant capacity constraints, with over $300 million in expansion CapEx this past year. And with today's announcements, we still have expansions underway in eight markets, while we're actively reviewing several others. By the close of 2010, these efforts will have expanded our cabinet capacity by approximately 60% since the end of 2007 for a total of over 5 million gross square feet of data center space, the largest colocation footprint in the world.

Second is we have all the organization to operate globally in support of our long term growth opportunity. We hired almost 200 employees largely in the second half of the year. This was nearly a 17% increase year-over-year. Supporting the effectiveness of this organization, our investments included a continued focus on global systems, process improvement, and the implementation of standard policies. This will enable a more consistent customer experience with Equinix across all three regions.

Third, we made several targeted investments to enhance our operational reliability and efficiency to eliminate single points of failure in certain IBXs. According to our recent annual customer satisfaction survey, operational reliability remains the most important factor in our customers' evaluation in selecting Equinix. We received high marks annually from our customers in how we differentiate ourselves from our competition in this area, which is a primary reason why 91% of our customers are likely to recommend Equinix to a friend or a colleague.

Finally, we announced the acquisition of Switch & Data in October to expand our scale and reach across the US market. As a quick update, we received approval of the transaction from the Switch & Data shareholders at the end of last month. As you may be aware, we did receive a second request for information from the Department of Justice in connection with our antitrust review in early January. Both Equinix and Switch & Data are working hard to meet the DOJ's request, but this does take time. Once we achieve substantial compliance with this, the DOJ will generally have 30 days to complete the review. As previously announced, Equinix currently expects to close the transaction in the second quarter.

Equally as important as all four of these investments, we have continued to deepen our focus and penetration of key customer ecosystems. In the network ecosystem, we announced an important initiative in 2009 for the development of our ethernet exchange offering. This product is a layer two switch fabric to enable carrier ethernet providers to establish interconnection agreements among each other in a one to many fashion. As ethernet service delivery becomes essential for network service providers as well as enterprise customers, we expect this to enhance our value and opportunity within the network ecosystem. Our early experience has shown a great deal of customer interest in this initiative, with over 12 trial agreements already signed, including AboveNet, Level 3, Reliance Globalcom, and PCCW, to mention a few, with interoperability testing underway for an expected Q2 launch date. Complementing our efforts in the network ecosystem, we have also begun to see traction with some recent wins in the mobility segment including Syniverse, [Global], and one other notable global multi-seg win with Research In Motion, the maker of Blackberry SmartPhones. We anticipate seeing further traction in this segment with these wins and our upcoming attendance at Mobile World Congress and CTIA Wireless.

In the financial vertical, we saw significant increase in demand for our services, with continued growth from our electronic trading communities including key wins from Barclays, Boston Options Exchange, International Securities Exchange, JPMorgan, and UPS Global Management. We now have over 430 customers in this vertical with over 80 deployed in multiple regions. We've seen accelerating growth in this ecosystem in all three regions and annual contract value has increased 39% year-over-year. With the ongoing shift to electronic trading of multiple asset classes, we believe we're in the early stages of growth in this ecosystem. Our accumulation of key magnetic customers and service providers and the value of our global position in the top 12 financial markets positions us well to be the provider of choice to many of these customers and enable us to rapidly expand the Equinix EFX ecosystem.

Finally, we're seeing a meaningful increase in demand from cloud computing based service providers in our bookings and pipeline. We think the cloud represents a great opportunity for Equinix to develop a new interconnection-rich ecosystem for systems integrators, managed service providers, and the infrastructure platform and software as a service providers and, of course, the enterprises they support. As a proof point, over the past couple of years we have actually accumulated over 120 customers globally that have deployed critical infrastructure in support of both public and private cloud offerings. Some of the more recent wins include Amazon, Citrix Online, IPsoft, Taleo, and [Zenga], joining other well known providers such as IBM and salesforce.com and other IBXs. Many of these individual clouds will be able to be reached directly via our interconnection services from the networks that intersect within our IBXs. Simply put, we have a tremendous opportunity to connect the world's clouds through Equinix.

All of our efforts in broadening these ecosystems levers the critical mass of our over 360 networks deployed across our footprint worldwide, adding to the network effect we see within our data centers, which ultimately reinforces the significant and strategically sustainable value of our service to our customers. As you can see, not only did the Equinix team deliver on commitments to the market for 2009, but these investments and our focus and progress in key ecosystems, now have us very well positioned with a great deal of momentum to continue to build on our market leading position. We still have a lot of work to do on all frontiers, and our investments will continue in 2010, with the same discipline as we led the foundation to support a long-term opportunity that we believe in excess of $2 billion.

I'll provide additional detail on 2010 and beyond with some quick regional updates later on the call, but I'd like to now ask Keith to review results in the quarter and fiscal year 2009. Over to you, Keith.

Great, and thanks, Steve. Good afternoon to everyone on the call. I'm pleased to provide you with the fourth quarter financial results,some highlights for the full year, and provide you some insight into our expectations for the Q1 and the rest of 2010. Let me first state, though, that we continue to see signs of economic improvement, although we'll remain focused on our key leading indicators for the coming year to ensure we don't overcommit our resources. We'll continue to be disciplined about our expansion decisions, making appropriate investments in the areas that form the foundation of our future growth -- that is our people, primarily in sales, marketing, and operations; our system, driving towards a global single instance of Oracle; and operations investing in the IBX operational reliability. So with that as a backdrop, let me get to the quarter and first discuss revenues.

Our Q4 revenues were $242.6 million, a 7% quarter-over-quarter increase and up 27% over the same quarter last year, reflecting strong sales performance across each of our three regions. The US dollar remained volatile during Q4, resulting in an FX benefit of $900,000 as we compared to the Q4 guidance range. We're at $2.6 million benefit using the average rates in effect during the prior quarter. US revenues increased $144.5 million, a 6% increase compared to the last quarter, reflecting strong bookings and revenue related to the delayed billings from some of the negotiated customer agreements that we entered into during the first half of the year. European revenues increased to $64.5 million in the quarter as 6% sequential improvement, partially the result of growth in our power revenues and a stronger EU operating currency compared to the US dollar. Asia-Pacific revenues increased to $33.6 million in the quarter, a 10% increase over the prior quarter, driven by continued strong interconnection revenue growth and stronger operating currencies. For the year, revenues were $882.5 million, a 25% increase over the prior year. As we look forward, we expect the US dollar denominated revenues to approximate 60% of total revenues, while we expect the Euro and pound denominated revenues to approximate 16% and 10% of total revenues respectively. In Asia-Pacific, we expect our Singapore revenues to approximate 5% of total revenues. Obviously, there has been some meaningful movement in our operating currencies over the past few weeks, and while it is difficult to predict for either Q1 or 2010, we have assumed $1.36 to the Euro, $1.56 to the pound, and SGD1.42 to the US dollar for exchange rates. As a reminder, we do not hedge our revenues.

Now looking at churn. For Q4, our global MRR churn was lower than we expected and came in at 1.5%, while our cabinet churn was slightly above our expectations of 2.5%. These results were primarily due to two large mounted service provider deployments in Europe, one that moved their infrastructure into their own data center and the other resulted from a loss of our customer's customer. In both cases, these deployments were legacy IX Europe business that was priced at lower rates, which will allow the UK team to increase the price on the replacement business. Looking forward, we anticipate Q1 and 2010 churn levels to approximate our 2% per quarter targeted levels.

Next moving on to gross profit and margins. The company recognized gross profit of $115.5 million for the quarter. Our gross margin of about 48%, which included a $3.3 million out of period depreciation adjustment in our European region, related to the correction of estimated useful life of certain assets. Excluding this adjustment, our gross margin would have been 46%, a 1 percentage point improvement over the prior quarter.

Our cash gross margins were 65% for the quarter, better than our expectations. In the US, our cash gross margins improved to 70% and reflect lower seasonal utility rates, slower than expected hiring, and favorable tax recoveries. Europe cash gross margins were 53%, a 1% decline in the quarter, the result of an increase in lower margin power revenues and higher seasonal utility rates. Asia-Pacific cash gross margins declined to 62% from 65% in the quarter, the result of increased repairs and maintenance expense and an increase in utility costs. For the year, our gross profit was $399 million, our gross margins are 45%, and our cash gross profit was $568 million, or cash gross margins of 64%.

The weighted average price per salable [cab-E] in the US increased to $2,004 versus $1,910 in the prior quarter, a 5% quarter-over-quarter increase and up greater than 10% year-over-year. Our average US price per salable cab-E improved due to lower priced cabinet deployment that churned out of Silicon Valley in Q2 and Q3 and higher priced cabinet sales over the past few quarters, consistent with our newly constructed IBXs. In Asia-Pacific, our weighted average price for salable cab-E was $1,541 compared to $1,437 last quarter. At 7% quarter-over-quarter increase, the result of increasing interconnection revenues, and stronger operating currencies against the US dollar.

With respect to Europe, our weighted average price per salable cab-E increased to $1,157 compared to $1,116 last quarter. This improvement reflects three key trends in Europe. First, increased power revenues in Germany. Second, a growth in our interconnection revenues line. Third, a weaker average US dollar in the quarter.

Now looking at our SG&A. SG&A expenses for the quarter were $60.9 million. Cash SG&A expenses for the quarter were $45.4 million or 19% of revenues, a 2 percentage point increase over the prior quarter and consistent with our expectations that we would see increased spending in the fourth quarter. Going forward, the company will continue to manage its discretionary spend while selectively investing in key corporate initiatives such as increasing the size of the sales force and improved sales efficiency and effectiveness, new product innovation, increased investment in our information technology initiatives including our global customer portal and our ERP systems, and investing in additional technical staff to support the efforts to increase the operational reliability of our IBXs on a global basis.

Moving on to net income and adjusted EBITDA. For the quarter, we generated net income of $17.7 million after recording a $9.7 million income tax provision. For the year, our net income was $69.4 million after recording a $39.6 million income tax provision. Looking specifically at our income taxes, our effective income tax rate increased to 35% this quarter from 28% last quarter, despite a discrete $5.2 million tax benefit from the release of our UK subsidiary tax valuation allowance. Looking forward to 2010, we believe our tax provision will approximate 40%, and as a reminder, although the majority of our tax provision will be non-cash, we do anticipate paying some cash taxes in 2010. We continue to believe we'll not pay any meaningful cash tax until potentially 2012, primarily due to our strong NOL position. Our adjusted EBITDA was $111.7 million for the quarter, including an approximate $400,000 benefit from foreign currency fluctuations compared to our guidance rate, and $800,000 benefit versus the average rates in effect in Q3. For the year our adjusted EBITDA was $408.6 million, a 40% increase over the prior year.

Turning to our balance sheet and cash flows. At the end of Q4, our unrestricted cash balances totaled $604.4 million, a $23 million decrease over the prior quarter. We continue to benefit from strong operating performance, including strong customer collections, as our global DSOs decreased to 24 days and lower than expected cash payments related to our capital expenditures. Looking at Q1, we'll continue to focus on managing our working capital positions. On a separate note, last month the company received a $3.4 million distribution from the reserve fund, an amount that we had written off in 2008 and 2009. As a result, we'll recognize a gain attributed to this payment in the other income and expense line of the income statement in Q1.

Next moving on to some comments on cash flow. First, our net cash generated from operating activities were $82.5 million for the quarter, a 23% decrease over the prior quarter, primarily the result of our semi-annual interest payment on our convertible debt of $18.1 million. For the fiscal year 2009, we generated $355.5 million of operating cash flows, an 87% correlation to our adjusted EBITDA line. Cash used in investing activities, excluding short and long term cash investments, was $101.6 million for the quarter, primarily attributed to our net investment in capital expenditures. During the quarter, and going forward, we changed our format for reporting CapEx in the cash flow statement to better align the capital expenditures with the net cash outflow and the investing activity. As a result, we will no longer report both gross CapEx and the net change in our accrued CapEx, to liability cap. Instead, we'll report one single net capital expenditure in the quarter and onwards. For the year, our net expenditures were $369.5 million or $388.4 million under the old method of reporting. Cash used in financing activities was $2.9 million for the quarter, primarily derived from the net proceeds from our employee equity plan, offset by payments on our term debt and capital leases.

Looking forward, we're going to assess our opportunity to refinance our existing debt facilities, preferably without using equity or an equity linked structure. Although we have not finalized the next steps, we're going to review each of our debt facilities in Europe, Asia-Pacific, and the US to determine what is the optimum structure given the opportunity in front of us. As part of this initiative, we'll look to maintain the greatest degree of flexibility while attempting to drive down our weighted average cost of capital on aftertax basis.

Finally, with respect to our equity balances outstanding we had approximately 39.3 million shares of common stock outstanding at the end of Q4. This number excludes 8.4 million shares related to our convertible debt, a large portion of which we intend to settle with cash, and 3.1 million shares related to employee stock plan and another awards. I will turn the call back to Steve.

Thanks, Keith. Let's now shift our discussion to a quick review of some highlights and business trends we saw in each of the three operating regions during the fourth quarter. In the US market, bookings were balanced across all vertical segments, with the strongest quarter of outbound bookings to Europe and Asia we've ever had. Overall, the pipeline remains very strong and actually increased in a couple of our key markets like New York, Chicago, and the mid-Atlantic regions. Our interconnection product count continues to grow, with particular strength in DC and New York, reflecting momentum in the network and financial ecosystems. On the inventory front, we recently opened our expansions in downtown LA and Chicago, and have projects underway in New York, DC, and Silicon Valley to address the capacity constraints we expect to experience in these markets during the middle part of 2010. And, lastly, in the Dallas market, we're evaluating options to address our constraints there as well. Overall we're not seeing any significant changes to the competitive landscape, with pricing remaining firm for cabinets, power and interconnection. Finally, the length of some of our contracts are starting to go out past our two to three year historical average. In fact, we signed a 10 year contract with a Fortune 100 customer in Q4.

Shifting to the European market, we saw strong top line growth with our strongest bookings quarter for the year, offset in part by the two churns Keith mentioned. Our bookings were comprised of a good mix of local and global deals, with particular strength in enterprise and financial services segments and we added a total of 44 new customers in the quarter. Our global scale and reach is definitely differentiating us from our competition when we look at the quantity of cross-regional deals that we are closing, which is ultimately improving our market share in this region. Interconnection remains at 3% of total MRR, with cross-connects approaching 8,800, and we're experiencing a meaningful pickup in exchange ports with our partners with our own exchange in Paris. We are very well positioned in terms of inventory in this region as we opened our previously announced expansions in Geneva and Frankfurt. We took over the leaf of a previously built data center in Dusseldorf, our second data center in that market, and announced an additional expansion on our Frankfurt 2 campus. This leaves our only real estate real constraint in Zurich, which will alleviated when Zurich 4 opens in early Q2, in 2010. We have good momentum in Amsterdam as well and are already planning our next step in that market. In general, we know our next move in every market across Europe. Looking forward, the market as a whole shows continued growth in this region. Our pipeline in each country remains strong, and churn is consistent with the other regions at approximately 2%. All of our traditional segments -- network, financial, and enterprise -- continue to grow and we are start to grow, and we are starting to see positive impact from cloud deployments by US providers expanding to Europe.

And finally, in the Asia-Pacific region, the fourth quarter capped off an outstanding year across all key financial and operating metrics. Bookings in the quarter exceeded the plan with 44 new customers and the pipeline there remains strong. No new inventory was added in Q4 and our overall utilization increased to 79%. We are facing some capacity constraints in this region, but as we mentioned last quarter, we're doing a small expansion in Hong Kong that will yield 500 cabinets in the third quarter, and due to the strength we've seen in Singapore, we've started construction on the second phase of our Singapore 2 IBX, which is expected to yield approximately 1,000 additional cabinets with a $30 million investment. We expect this to open sometime in the third quarter as well. And a final note in this region, we're excited to announce we made a decision to enter the Shanghai market through a partnership with a local firm named Shanghai Data Solutions. This agreement will allow Equinix to resell capacity in their data center to our multi-national customers who have a requirement to have a presence in this market. We selected a great partner to enter this new market and have high confidence we will be successful executing on this opportunity.

So now in closing, I'd like to provide you our initial views on 2010 and the first quarter. As we have not yet closed the Switch & Data transaction, we have excluded any assumptions about their 2010 results in these numbers. As we touched on earlier, Equinix continues to see a tremendous growth opportunity in front of us as we build a company capable of generating over $2 billion in annual revenue over time. In contemplating the magnitude of this opportunity in the shorter term, our management team with the Board's support has begun to execute off a three-year rolling operating plan. In pursuit of this in 2010, we are making some important investments towards this plan. To maintain strong growth rates on the scale of the business today, an increase in gross bookings annually will be an element of this three-year plan. To support this, in 2010, we will be expanding the size of the sales and marketing teams around the world to increase market coverage and deepen our ecosystem focus on key prospects and targets. Further in support of the ecosystem strategy, we are increasing our product investments, such as the rollout of ethernet exchange to expand our interconnection services. Finally, we will continue to invest in the systems and processes to support our global service proposition. All three of these investments are reflected in our 2010 SG&A guidance. Also within this three-year operating plan, we will continue to invest in expanding our capacity. This entails additional IBX staffing, lease commitments for expansions and investments in operational efficiency to support this level of growth, and all reflected in our cost of revenues for 2010.

Having said all this, let me now provide you with our 2010 guidance. We expect our 2010 revenues to be in the range of $1.050 billion to $1.075 billion, or just over 20% growth at the midpoint. With the currency rates Keith indicated earlier, this range absorbs just over $20 million in headwinds compared to the average rates used for guidance on the last quarter's call. We expect cash gross margins to be approximately 64%. Cash SG&A will be in the range of $200 million to $220 million for the year. We expect our adjusted EBITDA to range between $460 million to $480 million.

Shifting to CapEx, we expect this to range between $400 million to $500 million in 2010, of which approximately $300 million to $400 million is for expansion CapEx and $100 million is for ongoing CapEx. Our expansion CapEx reflects approximately $290 million in expansions already announced. It also includes up to $110 million for several other projects that we are actively evaluating, for which we are not ready to announce the project plans and budgets are not yet complete. We will, of course, keep you apprised of their progress or any additional projects we may consider. Our ongoing CapEx guidance includes approximately $15 million for maintenance CapEx, $40 million for customer installations, and $45 million for investments in corporate IP systems, new product development, and investments in eliminating single points of failure.

For the first quarter, revenues are expected to be in the range of $245 million to $247 million. Cash gross margins for the quarter are expected to be approximately 64%. Cash SG&A is expected to be approximately $46 million. Adjusted EBITDA is expected to be in the range of $110 million to $112 million. Total CapEx for the quarter is expected to be between $110 million to $130 million, which includes approximately $20 million in ongoing CapEx.

As the market continues to recover, we find ourselves very well positioned and at an interesting intersection of an improving economy, an increasing corporate IT spending environment, continued internet growth, the development of cloud computing, increasing demand for our low latency solutions from our customers, and all in the context of an undersupplied and space constrained marketplace. All of these trends have been driving our growth and tilting the playing field in our direction the past several years, given our unique business model. Given the combined annual growth rates of all of these trends over the next several years, you can expect us to continue to grow and invest in this business with the same level of discipline and expected returns we have always had. I've just recently returned from our three regional 2010 kick-off event, and I can honestly say that our team around the globe is motivated about our strategy as they have ever been. More importantly, the Equinix team is really excited about executing on our 2010 plan.

So with that, Bobbie, I'll now turn it back over to you for some questions.

(Operator Instructions). Our first question comes from Mr. David Barden, your line is open.

Thanks, guys, for taking the question. Two, if I could. The first one was just following up, maybe, Steve, on the comments you made about the $110 million of the CapEx is earmarked for projects that you haven't really solidified yet, presumably new capacity builds that would impact 2011, expansion and growth. And if you could clarify or confirm that, that would be helpful. And, second, just on the sequential monthly revenue for cabinet improvement, could you speak specifically to the relative impacts of the pricing dynamic versus mix-shifts within the demand profile from the more advanced space, et cetera?

Sure, David. Let me start off with the first part of that, maybe Keith could address the pricing issue on that. The $110 million CapEx we signaled is made up of three buckets. $15 million for maintenance CapEx -- is that the question you're asking?

No, maybe it was you made a comment about -- roughly $100 million of CapEx related to projects that you weren't ready to discuss yet, and presumably that was going to be new builds related to 2011.

Sorry, sorry, I thought you were referring to the $110 million that I referred about later. So the $110 million -- that's for other projects. That is other activity that we have going on internally that we run through our internal review process, take to our board, before we take externally to the market. And so there are several markets where we're watching the fill rates and we're tracking the pipeline and all of the stuff that we track in those markets. And then when we make a decision to proceed based on fill rate analysis and when we think we'll go dark or restricted, we make a decision. We run it through the internal gauntlet. And then we take it external.

And that would expand if the market is expecting $400 million CapEx, you're looking at $400 million to $500 million, and the reason we don't see it on the build plans is just because we haven't solidified it yet.

Correct, on that piece that is a correct statement. And on the pricing mix shift.

Pricing, David, ultimately what is happening if you think about pricing, I call it on a spot basis with our service offering, pricing is remaining firm, stable. That is what we like to say with our investors and people on the call today. So from that perspective, you're not seeing any meaningful increase from a price point perspective other than customers are buying more products and services for average unit of measure today than they have in the past. Certainly as we have higher-powered cabinets today in all of our newer builds, customers are buying more power than they did in the past. We typically think 3% to 5% price increases on annual basis, but part of that, and in addition to that, part of that is customers are buying more products and services. So incremental price connect for additional power circuits, and that is one of the key drivers in our growth, particularly in the US.

Great. Okay. Guys, thanks.

Thank you.

Our next question comes from Chris Larsen, your line is open.

Quick clarification, as I look at the guidance midpoint suggests, even with relatively flat revenues up, I just want to clarify that is the extra or incremental costs from the new facilities you're bringing on right now that you announced today before they get any revenues. And then, secondly, Steve, you mentioned something about cloud. I think there is a lot of investor concern that the cloud is going to have some negative impact on you. Are you seeing any comments from the customers on the enterprise side saying, hey, look, we're going to start using some of these external cloud as a way to blunt our data center demand in the long term? Any push-back so far from your customers like that?

No. Let me address the cloud piece first, Chris. It is a good question, but we're positioning ourselves right now to be the home of the cloud. So for [net] service providers, the platform and software guys and infrastructure guys that are all deploying cloud, public and private deployments -- we're targeting several of these players to deploy their infrastructure with us and then provision the cloud offerings out of our data centers. So I think we're very, very well positioned. Quite frankly, after we have done an inventory of everything we have accumulated here over the past several quarters, it is quite amazing how many cloud deployments that we've had in the past that are not necessarily referred to as cloud, but certainly today we're accumulating at a pretty high pace. People that need infrastructure that don't have the infrastructure internally to provide the cloud services. So I think we'll be, as we were for a lot of the peering networks, we're going to be a home -- the on and off ramps to a lot of the cloud as it continues to be deployed.

And so, Chris, just on the first point that you had asked, when you look at EBITDA from a margin perspective, or if you look at it at absent dollar basis, quarter-over-quarter relatively flat. There is two reasons for that. Number one, similar to what we've seen in all prior years, Q1 you have the annual reset of all the employer taxes and we have a bigger employee today base than we had before. So we'll feel the impact of that in Q1, what we refer to as FICA rates and Medicare -- less Medicare, more FICA. The second piece is, as Steve alluded to, we have internally a number of new employees with the company, and a lot of those employees were hired during the second half of the year. So you're not going to feel the full annual impact of that in 2010. Of course, some of that you're going to feel it immediately in Q1. For those who are hired in Q4, you are going to feel the full quarterly impact for that. For those two reasons that is why you're effectively seeing flat quarter-over-quarter EBITDA despite the revenue growth.

And then the other thing I would just like to say, relative to the comments I made and Steve has discussed as well, the company is investing heavily in the initiatives that we'll talk about, sales and marketing, operations, a new product innovation. Between those two is $15 million in the SG&A line and roughly $15 million in the cost of revenues line, and between those two points, you're effectively impacting annual margins by roughly 2% to 2.5% from an EBITDA perspective. But we think it is absolutely the right thing to do for the business.

Thank you, appreciate it.

Our next question comes from Simon Flannery. Your line is open.

Okay. Thanks very much. You mentioned on the call about contract length extending out for some of your new business that you're signing. Can you just give us a bit more color on that? Is that initiated by the customer, or is that something that you're looking at, and how are you thinking about the trade off between getting pricing flexibility every two or three years versus getting more revenue certainty? And if you can review comments around churn dipping down in Q4, but returning back to the 2% in Q1. What were the specifics around that delta? Thanks.

Simon, on contract lengths we are incenting the sales force globally to look for with key customers longer-term contracts -- that is not with any customer, but generally for customers that are key parts of ecosystems or key magnetic type customers, we have incented the sales force to look for long term contracts. As you pointed out, there is going to be a trade-off. If you ask our customer for longer term, they will ask for something in return. There is some of that, that obviously goes on. For certain key customers, we're willing to make those bets, and the sales force does a very good job with ceilings and floors and managing within that. As I've said in the past Keith and I do not have to look at many deals out of the sales force that have to go outside of the boundaries that we hold them within. We're managing that very well. We do want to look for more term in certain cases. But in other cases we'll have the one to two to three year contracts and they will provide the opportunity to renegotiate and in some cases increase price where appropriate and in other cases not. So we're going to see all flavors in the contract length. But it is working very well for us. On the churn, Keith?

On the churn, Simon, so there is two things. So in Q4 we saw reduction in MRR churn. Part of that is just timing issue, that you can appreciate. So we ebb and flow in each quarter. So what we wanted to do is recognize we had lower churn in Q4. But as we plan to look forward, we want to go back to guiding yourselves -- you and the rest of the people on the call, so we think 2% is a reasonable churn, and it is for a couple of reasons. Predominantly we don't lose customers to our competitors, we typically lose customers to consolidation or the end source of they have financial difficulties, and we think that is a reasonable level to expect for the business as we look forward. So we'll continue to update you as we always do. And if we see something on the horizon that would alter the decision, either higher or lower than that, we'll guide to you that, as well.

Great. Thank you.

Our next question comes from Srini Anantha, your line is open.

Thank you and good evening. Steve, in your prepared remarks you mentioned the bookings and the pipeline. I think in the past, at least you quantified the percentage of bookings growth -- is that a metric that you can give this quarter? And also, apart from financials, we saw the other verticals that you experience strong demand. Thank you.

I'm not sure we ever quantified the bookings growth. We tend to call it whether it's a record booking, we've had some of that in the past. To be quite frank, the way to think about bookings right now it is remaining strong across all regions and primarily strong across financial and network. We're seeing good uptick in enterprises as I mentioned. The one area in this last quarter, if you were to look quarter on quarter, where it fell down a little bit was in the digital media segment. Not a surprise when you consider some of the players that are in that digital media segment. But not a big drop-off. But it really fluctuates quarter to quarter. So pretty flat experience across the three verticals with, as I mentioned in my remarks, best growth in the financial services, big pick up in cloud, and a good pickup in key enterprises as I think about the quarter. Pipeline still remains strong. Highest pipeline we've ever had in the US. And probably the key thing, if you nest it in the remarks, is that we're doing lots of cross-border deals. So we have probably had the most cross-region deals this quarter than we've had in the history of being global -- in excess of 50 deals. We've been in the high 30s and low 40s in each quarter, deals that are deployed in multiple regions. It just continues to step up each quarter, which is a great signal for us because it signals that we're differentiating ourselves globally and customers are deploying with us in multiple metros on a deal.

Thanks for the detail, Steve. And, Keith, one question -- on ARPUs you said the pricing was pretty firm. If you -- if I'm looking at the ARPU growth this quarter, which is double-digit at least in North America, how much of that is actually coming from customers moving to higher-powered density cabinets as opposed to folks just raising the underlying cabinet pricing? Thank you.

So we haven't really been raising the underlying cabinet pricing. Clearly our sales organization negotiates with every single customer on every contract, and pricing remains firm when you look at it on a service offering perspective. So a lot of the growth is coming from the fact that we're selling. We had a very strong quarter from an interconnection perspective. So certainly that interconnection unit is not attached to any particular cabinet per se. That helped, number one. Number two, as you aptly pointed out -- the asset that we sell today, we have an expectation. They're are four and five KW per cabinet assets and so we expect pricing to be in the $1,800 to $2,200 price range, and so it only makes sense as you add more and more revenue and opportunity that you're going to start trending toward that expectation. So it is customers buying more product and service per average unit of measure.

It is important to point out in the US we're actually in the middle of that range today, in the fourth quarter. So I think the range we've been bracketing around, that Keith and I have been talking about -- we're in the sweet spot of that today in the US market.

Our next question comes from Jonathan Schildkraut. Your line is open.

Great, couple of questions. First, in terms of the salesforce expansion and headcount you're going to add, is this going to come along with maybe a little bit of restructuring around the sales effort? Are these people going to be vertically focused, geographically focused, and just to -- how might you alter your sales effort as -- is about again about expanding your reach? And, secondly, it seems like you might have changed the accounting for your recurring revenues as I look through the historical numbers. I was wondering if I might get a little more color there?

I'll let Keith handle that, Jonathan. Thanks for the question. On the sales force side, you're exactly right. Let me give you a little bit of color so people have perspective on this. We've got to be one of the unique companies that are approaching $1 billion in revenue with somewhere sub 75 around the world of sales people. And so as we put together a three-year operating plan with the Board and our Management team, and we look at the scale of this business and how much gross bookings we need to do, Jonathan, as we think about the next three years, we need more feet on the street. We made a conscious decision to add, and I'm going to directionally color it just somewhere under 40 heads around the world as part of this 2010 plan. They will be vertically focused. We have been vertically focused for most of 2009. I think if you caught the theme of the message today, we're getting very ecosystem/vertically focused in terms of how we're going to market. We're paying a lot of attention to targets, key next prospects in an ecosystem. We know who we have. We know who we still want to get, and the marketing organization under Jarrett's direction has gotten granular to get very targeted and prospected. So we're going to go after a lot more new logos this year. We know who adds density to these ecosystems, and that is the primary focus. So you hit the nail on the head.

Jonathan, on the second question that you had, we have gone through in Q4 reclassification effort between non-recurring revenue and recurring revenue, and this is what happened. So we have changed, just so you know, what is being reported in is quarter and any of the other reporting metrics in our disclosure you will see we restated it to reflect this change in classification. And you will see in our 10-K which we'll file in the coming weeks. Ultimately what we did was when we have a sales allowances, [it basically] says we reserve against a customer. SearchMe was a perfect example of that last year, where we took a full provision against revenue. When we put that reserve, we put it up on the balance sheet. Any changes to that reserve we were applying to the non-recurring revenue because it was ebbing and flowing with the decisions we made. In consultation with PWC it was better suited to marry it up against the revenue in the recurring section. So that revenue didn't change. All we did was take that reserve now and now allocating it to the reserve section of the income statement versus the non-recurring. And so we've gone back and effectively reclassified it for all of the prior periods to reflect that change in classification.

Not to throw any more work onto Jason's desk, but is it possible we might get four quarters of historical data put up on the website?

We'll put something up on the website for everybody. We actually have something that would highlight it all, and it is very succinct and we'll put that up in the coming days.

Thank you for taking the questions.

Thanks, Jonathan.

Next question comes from Michael Rollins, your line is open.

Hi, good afternoon. Just a couple of questions. The first is, if you could talk I think, Keith, you started talking about this at the beginning of the Q&A period about the pickup in the ongoing CapEx. If you could break that down, I think you were going to give some segments of maintenance versus other pieces. How should we think about this number going forward in terms of what a good maintenance CapEx or ongoing CapEx is for Equinix?

Just the other question, thinking conceptually about SG&A, if I look at it I think annualized in the first quarter, $184 million, if you look at the guidance for the year of $200 million to $220 million. It is suggesting a $16 million to $32 million pickup during the course of the year. Depending what you pay these 40 people it's a piece of it. Can you talk a little bit more about how to think about this incremental investment in other buckets of where it goes? And what kind of revenue augmentation can you get for that over time? What is the pay-back for this investment? Thanks.

Let me deal with CapEx first and then Steve and I will tag team the second question. First in ongoing CapEx, realistically we expect that over the longer period of time to be 5% of revenue. That 5% typically relates to both (inaudible) CapEx and then very specific CapEx. So what we've done this year is we've made some very substantial highlights what we think are going to be some very substantial investments. First and foremost, we said $15 million of CapEx out of this $100 million will be in true maintenance CapEx. So we're doing something to the IBX to deal with the maintenance issue. And then we've said $40 million will be success-based. That's basically customer installations and the customers pay us for that, as you know. As we book more we expect that number will continue to grow. Ultimately, as I said, that is a net neutral cash flow item, because customers do pay it for us and we recognize it ratably over the deferred installation period.

The bigger piece we've highlighted this time that we haven't highlighted before is what we call single points of failure IT systems and new product innovation. That is a $45 million bucket. If I can break that down for you, we will spend roughly $10 million on our ERP solutions, basically going to single global instance, developing global customer portal, and doing a lot of things like that around our IT platforms. That is where Brian Lillie will be working with Jarrett to make sure we have good robust systems to deal with the product side of the equation, the customer side of the equation, and allow us to operate more efficiently as a business. That's a $10 million investment this year. We've earmarked up to $25 million in new product innovation and that really goes -- touches on the ethernet solution, and Jarrett is here and we can defer to Jarrett here on some of the discussions. That's a big investment that not only the team wants to invest in, we think it is right for the business, but the Board wants to invest in.

The last piece of the bucket is effectively what we call single points of failure. When we do operational reliability reviews, when we hire some of these staff members, we're figuring out we have a single point of failure. And some you could probably call it maintenance if you want, and in fact what it is it is something we're augmenting in IBX because we see a point of failure, and most of that money will be directed towards Europe. So that's the fourth bucket. We probably capture everything that you're looking for on that, Mike, and let me just stop there and pause for a second and see if you want -- if there is any follow-on questions for Jarrett and Steve related to new product innovation.

If you want to go into more details on issues that you are working on, it would be great to learn more.

This is Jarrett. In terms of key opportunities, Keith mentioned ethernet and switch fabric. It's deploying much like we did on the peering community, seven to eight years ago -- it is deploying that on a global basis. We announced starting in four markets with the partners and we'll go deeper with the second quarter launch and the associated portal and tools associated with that. You will see investments like that, and those tools will be used by network folks, financial services company, and the cloud providers. Again, it is building out the product platform and scaling that on a global basis over the course of the year. So those are the key investments that I think that we're talking about here.

Okay. And I think on the last question, just to size it for you, Michael, we told you that we hired right around 200 people last year. In the plan this year, it's in the call it in the order of magnitude of 250 to 260. We'll manage that through the year. And so in that there is, as we've mentioned here a couple of times, sales, marketing operational people, just on the sales thing I think your question is have you guys figured out the return on investment on salespeople. As you know, it will take months to hire these people. Let's just take the US for example. I think we're hiring 16 or 17 more in the US, to get better coverage, to get more prospects covered, to get more targeted in these key ecosystems. Depending on when they are hired and when they get on board and the productivity of these guys, it can take anywhere from six to nine months. Is there a model built to show the productivity of this thing? You bet. It's all built into the numbers we've given you today. I don't know if I can crisply net out by region or by headcount what that productivity will look like. We know based on the number of feet on the street we have today, we're not covering the market for the number of opportunities that we -- that are passing around the market. We're missing a lot of stuff. In order to hit the gross bookings target we built into the three-year plan, we know we need more feet on the street, just based on backing into quota percentages and productivity of the current salesforce. So it is a pretty safe bet that we -- that you ought to feel comfortable we know what we're doing, in terms of how many to hire, when to hire and when they will start returning benefit to the company.

Mike, if I can say one other thing, referring to what Steve said, certainly at the city conference, one of the questions you asked and pointed out -- you suggested that the 2010 plan looked more like a backended plan if you were looking at the plan in the S4, the Switch & Data transaction. So a lot of what you heard Steve talk about and he also mentioned it in the script that basically it is a three-year rolling plan and we do expect to increase the amount of activity that goes through the systems and the productivity of the team, and how much activity is in the business. And because of that, you need more sales -- larger sales organization, and for all of those reasons, that's why you're seeing us making the investment today. So it is a sizable investment and, again, just to clarify for everybody on the phone, we're looking at $15 million in the cost of revenue line and roughly $15 million on the SG&A line. This is incremental to our standard growth year-over-year. That is discrete to these four initiatives we talked about.

Mike, I should have added and it was teased out by Jonathan in the previous questions, we'll be hiring these sales and subject matter experts by vertical. We expect the productivity of these folks will be quicker than hiring a generic salesperson. We will see good return quickly on these folks.

If I can throw in one other follow-up, which is -- any other one-time benefits or transitory benefits in the pickup in non-recurring revenue during the quarter?

Relatively flat quarter-over-quarter, Mike. So there was nothing that was out of the ordinary. We didn't have any equipment sales or things like that in the quarter, of any size anyway.

Thanks for the details.

Thank you.

Our next question comes from Jonathan Atkin, your line is open.

Two quick questions. One, I'm curious, Keith mentioned seeing signs of improving the economy. I'm wondering if that is manifesting itself in any notable trend in terms of book to install intervals? And then on international, the Shanghai project, I'm wondering whether that might be a model for how you would consider entering other international markets? Thanks.

Jonathan, this is Steve. On improving economy, I would say quarter to quarter, the book-to-bill interval is pretty flat. We are tracking that as one of our key indicators, no meaningful change quarter on quarter. I would tell you we're managing ramps in three months and all of the rest of the stuff pretty tightly, and we've seen that really start to tail off here as we got through the year. So we're pretty comfortable with where we're in book-to-bill interval and we're tracking it closely. On the Shanghai, certainly an emerging market -- it is a great model. We have been studying the Shanghai market for some time now. We know the size of the market. We know how many data centers are there. We know the utilization of the current data centers. We combed through a couple of key players. We spent time with the partner that we selected. They visited us here, Keith and I and several other executives visited them there. We have done due diligence. It is a great market as you guys know to get started. There's really only three primary telcos in that market. China Telecom owns roughly 74% to 75% of the market, China Unicom, and China mobile -- they're all connected into this data center that we're going to be dealing with. Very large market. Lack of carrier-neutral opportunity in this -- suppliers in this market. Not a lot of high quality data center in this market. Not a lot of expertise in this business. So we'll partner with these guys. We'll bring our brands. We'll bring our customers. We'll bring our expertise to the market. We'll start small. We'll fill that cabinet capacity up and grab another chunk. Ultimately this can lead to a larger relationship. Certainly in an emerging market, this is the model we will follow.

The margin profile -- how might that look?

I would tell you it's going to be very similar with what we experience in the Singapore market today.

Thanks very much.

At a good price point for us.

Thank you.

Thanks for the questions.

All right. Thank you and our last question comes from Colby Synesael. Your line is open.

Thanks. You mentioned I think in your prepared remarks that you had some revenue come from delayed billings during the quarter, basically I think things you got from the first half of the year. I was wondering if you could break that out in whether that is non-recurring? Second, I wonder if you could talk about the competitive landscape, particularly as you look at regional providers, whether or not you are seeing new competitors or new facilities and whether or not you've seen impact from them in terms of winning or losing business. Thanks.

I'll take the first one and push the second one to Steve. So what I referred to at least in my prepared comments, what I was referring to is in the beginning part of the year, first half of the year, we were using all sorts of selling techniques to bring in business. And in some cases we had delayed billing and what we call ramps, which basically the customer gets a ramp into the commitment over a period of time. And we add alluded to the fact that by Q4, all that we had negotiated would actually start billing in the quarter, and all I was trying to do was allude to the fact that we got the benefit of some of these items billing. It is not a one off. It's recurring. It is a recurring bill sitting in our recurring revenue and something you'll see going forward. As Steve said, we are monitoring our additional and future ramps and delayed bills. But as a practical matter, it is not going to be as significant as what we've seen in the past, I believe, anyway.

Colby, I would tell you, on the competitive front, no meaningful change in what we've been reporting in the past. There certainly is a pickup in point solutions in certain markets where our data center in a market or two is, whether it is privately backed or whatever the source is, we are starting to see more builds. The wholesalers are still continuing to build. So the REITs are continuing to make decisions. But in general we're not seeing any new competitive threats in any particular metro or even certainly no pan-European, pan-Asian, or across US market threat that is different than anything we've faced during the past several quarters. So it has picked up. There is no question about it. But, again, it is in point solutions small. Very small builds that we've watched.

And if I could add a quick follow-up to that. Some of these providers I understand build fiber based connections from their facilities to your facilities and their marketing pitch is that they can give that same access to the interconnects in your facilities and give that to their customers at a cheaper price. Is that a long-term risk to you guys or is that something you would like to continue to do?

We have enabled it in some cases historically, and it is only in a couple of markets where that type of situation exists in any meaningful way. So is it a long term threat to us? No. I think the way we contract and the way we build relationships with the folks that are capable of doing that, we know what's going on and I think -- part of this is part of the ecosystem. So as long as you're going to be in these ecosystems, some of that stuff is going to take place and it is all part of the larger landscape. Jarrett, I don't know if you have --

It has to be larger equipment deals they want to tether in, and some of it we enable because we want either a larger footprint or -- but still meet our capabilities. So no long-term ramification.

Thank you.

You bet.

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

Thank you for everyone's participation. You may disconnect at this time.