Equinix Inc (EQIX) 2010 Q1 法說會逐字稿

Good afternoon everyone. Thank you for standing by. Welcome to the Equinix conference call. All lines will be able to listen only until we open for questions. Also, today's conference is being recorded. (Operator instructions) I'd like to turn the call over to Jason Starr, Senior Director of investor relations. Sir, you may begin.

Welcome to the Q1 conference call. Some of the statements are forward-looking in nature and involve risks and uncertainties. Actual results may be affected by the risks we identified in today's press release and in our filings with the SEC, including our form 10-K filed on February 22, 2010. Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call.

In addition in light of regulation fair disclosure, it is Equinix's policy not to comment on it's financial guidance during the quarter unless it is done through an explicit public disclosure. In addition, we'll provide non GAAP measure on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reason 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 we post important information on the Investor Relations page of our website. We encourage you to check our website regularly for the most current, available information. With us are Steve Smith, Equinix Chief Executive Officer and President, Keith Taylor, Equinix Chief Financial Officer, and Jarrett Appleby, Equinix Chief Marketing Officer. Following our prepared remarks, we'll be taking questions from sell side analysts. In the interest of wrapping this call up in one hour We'd like the analysts to limit follow on questions to just one we'd like to ask these analysts to limit any follow on questions to just one. At this time, we'll turn the call over to Steve.

Thank you Jason and thanks everyone for joining us on the call today. I'm pleased to report that Equinix delivered a very solid first quarter result with strong global performance. Both our financial and operational key performance indicators continue to improve on a sequential basis. Reflecting momentum in our business globally and a healthier market environment compared to last year. Financially, our revenues in the quarter were $248.6 million, just above the high end of our range and up 25% year-over-year. And our margins came in even stronger with cash gross margins at 66% and adjusted EBITDA margins at 47%, both above our expectations. A customer demand supported another solid bookings quarter. With particular strength in our European region, we saw continued success with outbound deal flow from US multinationals. Demonstrating the value of our unique global proposition. Most importantly, our pipeline remains strong with many deals in the later stages of our sale cycle, providing us good visibility for our overall goals for the year.

On the operational front, our IBX reliability Metrics in all three regions were as high as we've experienced in several quarters, indicating that our deep focus and continued investment in eliminating single points of failure and enhancing our predictive and preventive maintenance procedures are paying off. As we've often said, our operational reliability is the number one reason our customers select us. We believe there is a direct relationship between this operational excellence and historical and future growth rates as well as our market leading position. With these kinds of financial and operational results early in the year, we're well positioned to execute on our 2010 plan. And in a recurring revenue model, there's nothing more important that getting off to a quick start in the first quarter.

Shifting the discussion to a longer term view, as we mentioned on our last call, we've begun to operate within a three year rolling plan that supports our longer term opportunity. Which as a reminder, we believe to be in excess of $2 billion in annual revenues. The key elements of this plan will continue to be our investments and our capacity and scaling our team to be able to operate more effectively on a global basis while deepening our penetration into our key ecosystems. All of which collectively provide us the differentiation and competitive advantage that Equinix and our customers enjoy. I'll touch on the importance of these investments later on in the call. But Let me take a moment to update you on our expansion plans.

As we announced tody, we have made the decision to proceed with additional expansions in our Dallas and Amsterdam markets. Also, since our last call, we opened our London five IBX and we expect our Zurich four IBX to become operational in the coming days. As a reminder, and as listed on our expansion tracking sheet, we also have projects under way in New York, Silicon Valley, Washington, D.C. , Frankfort, Hong Kong, and Singapore. We're excited to have this added capacity underway to continue to address the high demand we see in these markets. With the completion of these, we expect to be in a very good position from a capacity standpoint in the majority of our markets through 2011.

Of course, also in the quarter, we completed a very successful financing, raising $750 million of senior unsecured notes at 8 and 1/8%. These funds will support our continued expansion efforts and provide us the opportunity to better manage our capital structure. As you may be aware, we recently used $105 million of proceeds to repay our Chicago construction loan at a 4% discount. And we intend to repay our European financing by the end of the month. This financing also provides additional funds for the proposed Switch and Data acquisition which we estimate will require about $300 million in cash obligations. The excess proceeds along with the cash on the balance sheet, provide us with a great deal of operating and strategic flexibility, a key advantage during this period of industry growth.

As a quick update on our Switch and Data transaction and as we previously mentioned, Equinix and Switch and Data received second request for information from the department of justice in connection with the antitrust review of this transaction. We have both complied with the information request and are now in discussions with the DOJ relating to the review of the transaction. We re-reiterate our prior expectation of closing this transaction in the second quarter. So, clearly our team has been extremely productive over the past three months. But let me stop here and turn the call over to Keith to walk you through the Q1 results. Over to

Great, thanks Steve and good afternoon to everyone on the call. So getting right into it, I'll start with the revenues. Our Q1 revenues were $248.6 million. A 3% quarter over quarter increaser consistent with expectations and up 25% over the same quarter last year. The US dollar remained volatile during the quarter, resulting in a net FX benefit of 1 million when compared against the Q1 guidance rates. A negative $4 million impact when using the average rates from the prior quarter.

US revenues increased $148.5 million, a 3% increase compared to the last quarter. Consistent with expectations reflecting higher churn experience in the last two quarters of 2009. Some capacity constraints in our US market as well as some delayed billings in the quarter. European revenues were $64.2 million in the quarter, flat with the prior quarter the result of a weakening Euro and pound in the quarter. Although using the same average rates that we used in the prior quarter, EU revenues would have been $68 million, a 5% increase quarter over quarter. Also, EU revenues were impacted by the debooking of power in our German market related to large content customer that we expect to fully churn during the latter half of the year. Although this is offset, in part, by $900,000 in equipment resale revenue in the quarter.

Asia-Pacific revenues increased to $35.9million in the quarter, a 7% increase over the prior quarter driven by continued bookings performance in the region, strong interconnection revenue and a slight increase in the operating currencies versus the US dollar. As we look forward, we expect the US dollar denominated revenues to approximate 60% of total revenue. While we expect 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. We continue to use a $1.36 to the Euro $1.56 to the pound and $1.42 Sing dollar to the US dollar for exchange rates for both Q2 and the rest of 2010 guidance.

Looking at churn, for Q1 our global MRR and cabinet churn was lower than expected and came in at 1.6%. Looking forward, we expect churn to fluctuate from quarter to quarter throughout the remainder of the year ranging from approximately 1.5% to 2.5%. For the year, we still expect our churn to approximate an average of 2% per quarter. Separately, we've adjusted our Q4 2009 MRR and cabinet churn metric increasing the originally reported MRR churn from 1.5% to 2.2% and decreasing the cabinet from 2.5% to 2.3%. The change in the MRR churn metric reflects increased churn pursuant customer contract that terminated on December 31, despite the fact that we recognized revenue for these contracts for the entire quarter.

Separately, I wanted to briefly discuss out net cabinet ads, the billing this quarter. Despite our revenue growth and strong bookings trends across all three regions, the US experienced a poor incremental net cabinet billings metric in the quarter, both on a quarter end and on a weighted average basis against these expectations. This result was created by higher churn occurring at the end of both Q3 and Q4 of 2009 and with the majority of the US regions Q1 bookings occurring in the last month of the quarter. It muted the underlying performance of this metric. Said differently, we have a healthy backlog of bookings that will turn into billing, billing cabinets, ends revenues and Q2 in the rest of the year. This result is partially affected by our lack or limited inventory in some of the key markets, including New York, whereby our booked incremental sales have yet to convert in to billing cabinet as we've not yet opened the New York board phase three expansion.

Next, moving on to gross profit and margins. The Company recognized gross profit $115.6 million for the quarter. Our gross margins up 46%. Although, as a reminder, we recorded a favorable $4.2 million out of period depreciation adjustment in Europe in the fourth quarter. Excluding this adjustment, the gross margin in both Q4 last year and Q1 this year would have been 46%. More importantly, our cash gross margins increased to 66% in the quarter, better than our expectations. In the US, our cash gross margins remained at 70% in the quarter, in part due to slower than expected hiring. Having said that, many of the plant hires were made in the later stage of the quarter and we expect them to impact the gross margins for the remainder of 2010. Europe cash gross margins were 56% for the quarter, a 3% improvement over the prior quarter, the result of a decrease in the lower margin power revenues in Germany, related to the large content company I mentioned earlier.

Asia-Pacific cash flows margins increased to 65% from 62% in the prior quarter consistent with our expectations, primarily related to the timing of our repairs and maintenance programs over the last two quarters. Weighted average price per cab in the US increased to $2023 versus $2004 in the prior quarter, a 1% quarter over quarter increase and up greater than 9% year-over-year. Consistent with comments in the prior quarters, overall pricing remains stable and we expect this trend to continue. As a reminder, the increase we've seen in this metric is more driven by an increase in power and interconnection services for average salable unit versus an increase in spart pricing across our service offerings. In Asia-Pacific our weighted average price per sellable CapEx was $1543 compared to $1541 last quarter. Essentially flat quarter over quarter and reflects increased billings in the Singapore market, where our average MRR per sellable cab is below the average MRR for the region. With respect to Europe, our weighted average price per sellable cab decreased $1135 compared to $1157 last quarter. A 2% decline over the prior quarter primarily related to a five plus percentage point weakening of the local against the US dollar.

Now looking at our SG&A. SG&A expenses for the quarter were $62.6 million. Cash SG&A expenses for the quarter were $46.3 million or about 19% of revenues, consistent with our expectations. Looking forward, the Company will continue to manage its discretionary spend prudently. Although I do expect continued investment in key corporate growth initiatives, including increasing the size and effectiveness of our sales force, continued investment in our new product innovation efforts, and investment in our information technology projects to scale our business to better support our longer term growth opportunity.

Looking at net income and adjusted EBITDA. For the quarter we generated net income of $14.2 million after recording an $8.7 million income tax provision. During the quarter we recognized a $3.4 million gain attributed to the distribution from the reserve fund and an amount that was written off in 2008 and 2009. Also, we recognized a $4 million gain on debt extinguishment related to our Chicago construction loan. These gains were off set by a loss of $7.4 million on our interest rate swaps on both the Chicago construction loan and our European loan facility. A loan we intend to repay by the end of April.

Looking at our tax provision, we believe it will range between 35% and 40%. We expect cash taxes in 2010 to approximate 10%. We continue to believe we'll not pay any meaningful cash tax until potentially 2012, primarily due to our strong N.O.L. position. Out adjusted EBITDA was $117.3 million for the quarter, including an approximate $500,000 benefit from foreign currency fluctuation compared to our guidance rate and a negative $1.5 million impact versus the average rates in effect in Q4. Also during the quarter, we recognized a $1.9 million expense reversal, which favorable impacted adjusted EBITDA, primarily from the reversal of a portion of our 2009 bonus accrual and a portion of the accrued 2009 sales recognition program.

Turning to our balance sheet and cash flows, at the end of Q1 our un-restricted cash balances totaled $1.185 billion, which reflects the proceeds from our $750 million senior unsecured notes offering which closed in the quarter. Our DSO remains low at 27 days. Next moving on to comments on the cash flows, first our net cash generated from operating activities was $99.8 million for the quarter, a 21% increase over the prior quarter. Primarily the result of strong operating performance, positive working capital management, and no semiannual interest payment on a convertible debt during the quarter. Looking forward, the interest on our senior unsecured notes will be paid on a semiannual base March 1 and September 1 of each year. Where as interest on our convertible debt will be paid in Q2 and Q4 of the calendar year. Again,similar to 2009, we experienced a strong correlation between our adjusted EBITDA and operating cash flows of 85% of the quarter.

Cash used in investing activities, excluding short and long term cash investments was $143.8 million for the quarter, primarily attributed to our net investment in capital expenditures. As we mentioned last quarter, we started reporting CapEx on a cash basis, more consistent with the amount of CapEx disclosed on the cash flow statement as opposed to the movements on the balance sheet. Cash generated in financing activities was $629.8 million for the quarter, primarily derived from the net proceeds from the issuance of our senior unsecured notes in March, offset in part by the $105.5 million pay down of our Chicago construction loan. Also, as we mentioned in the last during this call, we plan to assess our financing options. Although we have completed a very important US financing, we're still in the process of syndicating our planned $170 million Asia-Pacific multi-currency term facility. In our European region we anticipate we'll pay down our existing facility by the end of the month. P We'll continue to focus on optimizing our capital structure. And as part of this objective, we'll look to maintain the greatest degree of operating flexibility given our growth opportunity while also attempting to drive down our weighted after cost to capital on an after-tax basis. So at this point, let me turn the call back to Steve.

Thanks, Keith. So, let's shift our focus back now to a brief update on some of the trends we saw in the quarter in our three operating regions. In the US, we saw, a sequential increase in our bookings, with our second best outbounds booking result to Europe and Asia and still very balanced across all our of key verticals. We also had 77 new customer adds, which is the most we've seen since Q3 of 2008. Our pipeline remains healthy with particular strength in the network ecosystems. As well as a pickup in the social media and cloud sectors. Some notable wins in incremental orders from the cloud sector included IPsoft, GoGrid, Teleo, Trend Micro and Zoho. From a cabinet capacity and utilization perspective,the US is at 80% utilization with approximately 5400 sellable cabinets remaining in our inventory. And close to half of these are preassigned against later stage opportunity in our pipeline.

Depending on our win rate from these, we could face some temporary capacity constraints in the middle of the year in three of our six markets. Which highlights the importance of bringing on the new capacity in this region, as I discussed earlier. Shifting to the European market, we continue to see meaningful growth here. Though this success has been masked by the currency head winds, as Keith described. The team here delivered a strong bookings result and as mentioned earlier won several cross regional deals from the US. These inbound deals represent an important competitive advantage in this market.

Our pipeline is stable heading into Q2 and our expansion portfolio has us well positioned to capture this future expected growth through 2011. The team is still focused on developing our customer ecosystems, yet we continue to see very strong demand from the enterprise sector as well. And finally, in Asia-Pacific, we also had another strong bookings result with a good mix of local and inbound opportunities. We Saw a Number of New Wins In the Financial Vermicle, Including the Bank of China International, (inaudible) Flow Investing, Ipc, Tora Trading. We also had wins from a couple of notable US based internet firms. Additionally, we had record bookings in both Sydney and Tokyo markets. Though this success has us now looking at some inventory constraints in these two markets, which we expect to address from the short term. In fact, our utilization rate in this region increased from 79% to 85%. Though as you can see, our expansions in Singapore and Hong Kong are well timed. We are also seeing the pipeline develop for our recent entry into the Shanghai market with a few deals already in the advanced stage of our pipeline. But before I provide you an update on our guidance, since many of you have asked, I'd like to spend a couple more minutes to explain the importance or further developing our ecosystems with our increased investments in capital and SG&A this year.

As we have emphasized over the last 12 to 18 months, at the core of our strategy, is our focus to deepen our penetration on key customer ecosystems by leveraging over 410 networks now deployed across our global footprint. There are three factors that underpin or reinforce our value proposition in developing these ecosystems. The first, is the fact that we have global reach. This enables us to reach networks, to help networks expand to key markets globally, as we have deployed our IBX's in the major telecommunications hubs such as Amsterdam, London, New York, and Singapore. We provide interconnection opportunities between networks in these different geographies which is important as many need to partner or interconnect with other to expand their global reach. Importantly, globalization is not just a requirement for networks. It is a requirement for all of our target ecosystems. And as such, enterprises, cloud, and financial services companies, increasingly require global network connectivity for better reach, lower latency, and optimization.

And our 51 IBX and partner data centers in 19 global markets, create a global service delivery platform for our customers to launch their mission critical IT infrastructure and achieve improved application performance. Our interconnection services depth is the second factor why our services are important for our customers. We provide a wide range of interconnection solutions such as cross connects, fiber connectivity, IP, and now ethernet exchange services, all of which when layered in with the numerous networks, that have installed in our IBXs worldwide, enable our customers to quickly and cost effectively exchange data traffic amongst each other. These services provide value to not only to carriers, but are also gaining traction with other vertical ecosystems in our IBXs. Our content enterprise customers are redefining their global architecture to support the significant growth occurring due to video distribution over the internet and to support mobile applications. Financial services firms are deploying infrastructure for closer proximity to key trading partners in support of the global shift to electronic trading.

Cloud companies, are leveraging are global platform for high availability data center services, network connectivity choice, lower latency and improved application performance for their service office. Our new carrier ethernet exchange is yet another important example of Equinix's efforts to innovate our interconnection services to provide our customers with added value.

This exchange, which enables carrier ethernet providers to broaden their reach for ethernet services, was launched earlier this month. Ultimately, this improved reach will also benefit enterprise companies who increasingly prefer ethernet for its security, scalability, and class of service capabilities. The third factor is that Equinix has created a compelling marketplace environment for these ecosystems to exist. Equinix's value proposition isn't just about building out large amounts of data center space; it's also about enabling our customers to generate revenue and improve business performance. To further support this, our team is in the process of developing a window into this marketplace with the development of a new global customer portal. This portal will make it easier for our customers to view and procure the full breadth of services available from the many network and it service providers in our IBXs. We also expect this to result in an increase in interconnection services from these transactions.

Important to note, while 85% of the cross connects installed within our IBX's today are between a network and another entity, 15% occur between non-networking companies. This means content, cloud, financial, and enterprises are interconnecting amongst themselves for direct connectivity and improved performance. We view this as a significant and growing trend that we're enabling within the Equinix marketplace. Applications such as electronic trading, mashups, social media, APP stores, and mobile data are all critical communities of interest attracted to our model because of the reduction of latency and the ability to have closer proximity to key partners. Ultimately, this will be another important factor in driving out future growth and success.

As the landscape for IP architectures and business models continues to evolve, it's also easy to imagine why a cloud software provider needs to connect to a cloud computing service provider. Or why an enterprise or a financial customer might need to connect to both. So, clearly we're excited about the ecosystems that we're developing. (Inaudible) competitively on a global basis. This is a key reason we continue to make our many investments in our expansion, systems, and people to grow these. So, let me stop there and provide you with a quick update on our expectations for the year and for the second quarter. And, as a reminder, this guidance does not reflect any Switch and Data's 2010 expected results as our proposed acquisition has not closed. We will provide an update on our integration plans and view of the combined companies following the closing of this transaction.

We expect 2010 revenues to be in the range of $1.065 billion and $1.080 billion, a $10 million increase at the midpoint of this range from prior expectations. We expect cash gross margins to range between 64% to 65%. Cash SG&A is now expected to range between $210 to $220 million, an increase of $5 million at the midpoint of the range. We expect our adjusted EBITDA to range between $470 to $480 million, an increase over $5 million at the midpoint from previous expectations. Shifting to CapEx, we expect this to now range between $450 to $510 million in 2010 of which approximately $350 to $410 million is for expansion CapEx. This updated range reflects the expansion projects for Dallas and Amsterdam, that were announced today, it also includes up to $50 million for other 2010 projects that aren't ready to be announced. We will continue to provide updates on these expansions and any other incremental projects we may consider.

For the second quarter, revenues are expected to be in the range of $258 to $260 million. Cash gross margins are expected to be approximately 65%. SG&A is expected to be approximately $55 million and reflects our continued hiring plans across the organization. And while this is an increase from our Q1 results, it is important to note that those results also benefited from $1.9 million of accruals that Keith mentioned earlier and also from the timing of many of the hires that were made late in the first quarter. Adjusted EBITDA is expected to be in the range of $113 to $115 million and reflect the added SG&A investments we've outlined. Total CapEx for the quarter is expected to be between $140 to $170 million, which includes approximately $30 million in ongoing CapEx.

So, in conclusion, I'd like to leave you with some final thoughts before we take some questions. With our first quarter results, Equinix is well positioned to meet 2010 objectives. Secondly, our current pace of investment is roughly, in roughly half of our markets will help us alleviate some of the space constraints we expect to encounter due to our fill rates as the year unfolds. And lastly, it's important to keep in mind that the investments we're making today, are important in our ability to effectively scale this Company, reinforce our competitive position, and to support our future growth opportunity. So, with that, Michelle, I'd like to turn it over to you for some questions.

(Operator instructions) Than you, our first question comes from David Barden.

Thank you for taking the question. I guess I'd like to start with just Steve on the Switch and Data merger. Probably more than any other topic we end up talking about now is why the DOJ is taking so long for this deal. Are they contemplating divestitures? If they are, does that mean you'd like to recut the deal? Or does the deal have less value to Equinix? Could you kind of talk about the state of this transaction, your commitment to it, and what has taken the DOJ so long to review this?

Yes David, our start start out tell you that our commitment to it has not changed at all. We are completely committed to it. It has been a long five months. There's not a lot else that Keith and I can add to what I've discussed so far. We are focused on a Q2 close. The DOJ is doing their diligence and we've complied. And at this point all we can share with you is that we're still aimed at a Q2 close.

David, what I'd just say also just to further what Steve said, the one thing we have in the agreement though, is the provision, we have a provision in the agreement that, about divestitures or whatever. Ultimately, the Company gets to choose what it wants to do. For our shareholders. So there's a lot of flexibility in the transaction, in the definitive agreement, how it provides for that issue.

And I guess if I could just follow up on that with my one follow up. If, for what ever reason, in the overlap markets, which appear to be the most competitive, markets like L.A. and D.C., there were divestitures required. Is there something about a smaller transaction that has any significantly less strategic value to Equinix than a larger transaction?

David, we just cannot comment on that right now, unfortunately. You guys just have to accept the fact that we've complied with all the requirements. We've done that here recently. And we're just -- we're still aiming at a Q2 close. There just isn't any more color we can provide you guys unfortunately.

Alright, thanks guys, appreciate it.

You bet.

Our next question is from Robert Dezego.

Hello, guys, how are you? If you could talk a little bit about what maybe some of your larger customers in your pipeline are telling you about their near term and long term spending plans, and how can we get comfortable with the pipeline that you're seeing will actually be converted into installs in this environment? And the follow-up to that is, actually follow up right now is, on pricing power how long do you expect to see the strength in pricing? And are you seeing any competitors or new entrance that are getting more aggressive on price in any of your markets?

Let me start, Robert. Keith can add in here. The pipeline, as I stated in my comments, is still very robust across all of the regions. So, there's no change in pipeline, consistency, conversion rates, stages of deals and later stages of the pipeline. So, there's just no change in the pipeline. The pipeline is very, very healthy. So, like any environment -- and I would tell you the environment today is much better than a year ago. And certainly better -- getting better every quarter. So, our first quarters normally are not historically as robust as our second and third quarters in terms of bookings. And part of that is tied to the fact that the companies are coming out of the gate in the fourth quarter and their getting their budgets finalized in the first quarter. We do our sales kickoffs in the first quarter.

We do our Presidents club recognition for the top performers from the previous year in that quarter. So there's a lot of activity that goes on in that first quarter that all kind of weighs in on the performance. But all that said, it still with a very, very good quarter for bookings. We do expect it to continue to pick up as we go into Q2. We've had a fast start early in Q2. So I would tell you that, good signals, good signs on the pipeline. Pricing, Keith, you want to make (inaudible).

I say on pricing power and just our confidence around the conversion, certainly you see our confidence in the guidance we've delivered. Clearly, when you look at the guidance and take into consideration how we started the year with a $20 million hit because of currency. You get a sense on how much momentum we believe there is in the business. Tie that back also to what Steve said earlier on and we said in the last call was making a meaningful investment in the sales force and our ability to convert business and what ultimately that's going to do is those people become more productive. It's going to drive more opportunity into our pipeline. It's going to allow us to close more. And the fact of the matter, we anticipate it should drive an increase in bookings. Not so much in 2010 but certainly as we look to 2011 and 2012 and that's the foundation of the three year operating plan that Steve historically alluded to.

Robert, the only other thing I probably should have mentioned, in just the color of what we're seeing from our customers across our verticals. I would tell you that there's three or four big trends that continue to come up in all our conversations with our customers. And it's that the great internet buildup continues. So, internet traffic is at the heart of all our conversations with our customers. I think the ethernet launch that we've put ourselves into is at the heart of a lot of networking conversations we're having. The cloud is taking off. So, you want to look at any metric or any sizing of the cloud.

There's no question in our pipeline, we're starting to see a tremendous pickup in private and public cloud deployments in our pipeline and we're converting at a very quick pace. And the last area that's active and getting more active. Is global mobile data. And I think you're going to see us getting more and more active in that space as the devices we carry around continue to require lots of infrastructure underneath them to make all this mobile data that's moving around operate. So, I tell you, the trends are positive. The trends are consistent amongst most of the verticals.

Okay, great. Thanks, and on the competitive environment as far as newer entrance or anyone getting aggressive?

I tell you that happens metro by metro and we occasionally see that. There's nothing new this quarter that we haven't seen in the past. There's agressive competitors on certain deals, and we're holding our strategy pretty steady. We're not going to go below a threshold. Our sales force is very disciplined. Keith and I, as I've mentioned many times, look at any deal that has to go outside of the range we give to our sales forces. We just don't have to do that very often. That's a signal to us that the sales teams are holding pretty steady with the pricing that Keith talked about. So, nothing on the competitive front other than there's more capital coming into the market. It's mostly aimed in the whole sail space. We're not seeing a lot of differences in our space in terms of our primary competitors.

Thank you very much.

Chris Larsen your line is open.

Thanks, I might throw away my first question on a question regarding Switch. But is the 30 day clock, does that still exist with the second round of questions? And then going back to the fundamentals, can you talk a little bit about how you balance the lower paying, less profitable, large customers and turning them out and particularly here, you look at Europe, the spot market is much closer to the US than your average revenue would imply. And just sort of think about how you look at the European market and slowly shifting some of those large, low ARPU customers into many small higher ARPU customers.

Well, let me start, Chris. And maybe Jarrett and Keith, you guys can add some perspective here. I would tell you that managing the life cycle of our customers that start small or medium and become large is a big part of our everyday life in this Company and getting more and more important to us. We do have customers that are growing. And the ones that are strategic, to the heart of any ecosystem, we will tend to do extra things to try to maintain them and maintain key applications that are requiring the network. We're still not interested in big server farm deployments. But I would tell you, with some of these big customers, Chris,if they're in an ecosystem and they're magnetic in any form or fashion, we are going to work hard to retain them and keep a long term relationship.

You'll see us do some unique things. You guys won't see us. But we'll do some unique things that will help us maintain these customers. There will be other customers that over time, that deployed a lot of stuff with us, that not relevant to the network density, and they're pushing down the lower price points and it looks like it's going toward a whole sale or remodel, and we'll not compete for it. We'll let it go.

I think what's important, Chris, is the fact that if you look back a few years ago, there's some large content companies that you know we've talked about in the past, they've moved some of their larger footprints out to their own data centers, but their keeping more of their network assets inside Equinix. I like how Steve said it, it really is about

management on the life cycle of the customer. And I think it's important to realize when you think about our customers and IBM being sort of our largest customer at roughly 4% of our revenues, it's not just one large deployment. It's numbers of deployments in each market over a number of markets and regions of the world. And you have much greater diversity in that customer base than one would otherwise think. I think it's important to realize that the way we think about large deployments,

Steve is spot on, about there's some customers who eventually could grow out of us. Their size gets too big, not only for our perspective, but for their perspective, on a cost model. But there's a -- there's not that many of them inside the Equinix facilities, particularly in the

And just to close on that. I think we're having very candid discussions on global architecture. We're at the table talking about the trends, very frank discussions with our largest strategic. We're uniquely positioned to have those discussions of architecture and distributed environment for that And distributed environment for that. A lot different discussion than we might have had a year or so ago. All of us would love to give you more color. We're in compliance with the DOJ and we're aimed at a Q2 close and that's all we can share with you.

Totally fair, I thought I'd just try.

You bet.

Ilya Grozovsky has a question.

Hello, thanks, guys. Can you talk a little bit about the churn. How this -- did it come down across the board or specific regions where you saw the churn do something unique?

It did come down across the board. Each market is unique in the ebbs and flows. To get to that result, the US has to have lower churn because it represents a large piece of the business. Overall, the churn is at a very reasonable level right now.

As we looked, we talked about the fact that it will ebb and flow. I mentioned, at least in my piece, that in Germany there is a large content customer that we acquired in an (inaudible) many, many years ago before (inaudible) Europe. And they'll own infrastructure at some point. And that's what we're really talking about. Not a lot of margin involved so it's not a big issue. You'll see it reflected in our cap and metrics and you'll see it reflected in our MRR and metrics. It really doesn't have a meaningful impact on the business.

Okay, thank you.

No problem.

Our next question comes from Frank Louthan

Great, thanks. Can you give us a little more update on the Chinese operation. You said you closed in Singapore. Can you give us an idea of where that is? And just wanted to and also to follow up on what you said 5400 cabinets left in the US. Is that what you said? If you can comment on that trend. Where is that relative to prior quarters, As far as a capacity standpoint? And how doing that's going to trend for the rest of the year?

Let's start with the 5400 cabinets. I think, that's, I forget what it was last quarter. It might have been a little bit more capacity than that. That's a pretty standard -- if you look at that cabinet capacity across each of the six impacts, there's no big change or surprises there. Half of those cabinets are preassigned, meaning, in our pipeline, we've dedicated space to certain customers. And we obviously have to go close them.

As I mentioned in my remarks, depending on what the win rate looks like, we could start filling some of these things up and we'll have capacity constraints by midyear. So, all of that is built into the timing of the new capacity coming on. But, unfortunately, we are restricted in a couple of markets in the US and that makes it tough. Second part of you question or first part of you question, Frank.

In Shanghai, we are actually opening next month. We announced the relationship, Shanghai Data Solutions. We're in the process of building out again our IBX within that partner site. And we announced it. We're preselling it. And it should go operational next month. So, we're in that process of building and launching that product.

Basically, Frank, we took space with a partner. We did a lot of research, we announced this last quarter. But we're very, very close on some deals now to go in and take that space. My guess is we'll take more space on as we fill up the initial commitment. Ultimately, our desire there is, if this partnership works out is to move that towards a larger partnership that could look like a joint venture some day. Some of the other leaders have been over there a couple of times. It's a very good team. It's a very good Company. They show well. And I think we'll have a lot of multinational traffic that will eventually start to go in there. We have quite a bit of demand interested in going to mainland China.

Okay, great, thank you.

Our next question comes from Gray Powell.

Hello, guys. Thanks for taking the question. Just had a couple. What kind of bookings assumptions relative to 2009 are embedded in your 2010 revenue guidance? And my follow up, can you talk about the pricing environment in general and whether or not you're seeing disparity in demand for new facilities with higher power densities versus older facilities? Thanks.

If you look at the expectation for 2010, our bookings number is clearly higher than what we set for 2009. It is a meaningful step up. Because you know we don't disclose our bookings, but it's north of 15% increased bookings. In many way, for those who I've already spoken to, sort of in investor meetings, you think about the absolute dollar amount of revenue in 2010 relative to the absolute dollar increase we saw in 2009. There is a meaningful step up in the revenue. So from our perspective when you look at a FX neutral basis, we do expect to sell more business in 2010 than 2009. And as we look forward in time with the investment in the sales force, we expect that to increase in 2011 and 2012 as well.

Great. On the pricing environment if I understood your question correctly, gray, on HPD type requirements versus going into older centers, it really does depend on metro by metro or market by market if you will, what the pricing environment looks like. Keith mentioned pricing is pretty darn stable across our marketplace. I think what we're seeing pricing improvement is more volume, more interconnection coming into a cabinet, or if it does shift to HPD, I think you're seeing improvement in pricing.

Generally, we're just holding pretty steady with the current pricing that's out there today and negotiating off of that. And like I said earlier, we're just not seeing any meaningful change. Our sales team is doing a good job staying within the bands that we guide them by. There's no undue pressure or anything that's going on that's goofy. Occasionally, we'll see a deal that looks out of whack, strategic to us whether we stay in the game.

Okay, thank you very much.

You bet.

Simon Flannery, your line is open.

Okay, thank you very much. Good afternoon. On the capital spending, you've guided to about $300 million for the first half and the midpoint of the full year is $480. So does that imply that we'll see quite a step down in Q3, Q4 from the first half run rate or I think you'd referred to potential additional projects you might be looking at? You also said this should see you through 2011 on your expansion plan you have cabinets basically flat, 2011, versus 2010. How are you thinking about potentially adding capacity in 2011 or is that going to be a spending year given the capacity you're at this year?

Simon, let me start and Steve can jump in. When you look at the CapEx the projects that we announced last year, like D.C. six, Silicon Valley five, certainly New York four phase three and then you think about the other projects, a lot of it is front end loaded. When you look at the amount of investment in the first half of the year and some of these projects opening up in the third quarter, the end of the third quarter. You get a senses the a little more front ended than back loaded. We're reserving our right to look at additional opportunities and markets where we could run into additional capacity constraints. And a Steve alluded to a couple of them in Asia-Pacific.

What we're really trying to do, none of them will be of the size we're talking about with Silicon Valley five and what we'll continue to do is just make sure we add capacity in as many markets as we can to sell across our customer base. And that's ultimately what we're trying to accomplish. It's a little early to give you guidance on 2011. Our sense is that we're going to continue to sell. And as I said and Steve has alluded to, we expect to sell more business through the back end of this year and into 2011 and sort of the front end. It's going to cause us to pay close attention to what capacity we have and where we have it. And the team is well disciplined around managing and assessing that as each month goes by and that forces them to decide how to introduce new capacity.

Simon, the only thing I'd add is that as we've mentioned many times, we have a very good process going now where the global team meets monthly. And we look at competition and fill rates and when we're out of space. So a lot of this depends on the pipeline. A lot of it depends on the pipeline and on win rates and fill rates. And our philosophy here is to avoid being dark in any of these markets. As long as the demand is there and the return profile is where it is. And we haven't shifted those metrics at all. We're still making decisions on new builds. All those competitive issues you'd expect us to look at. Keith and I and the rest of the leadership team will continue to review cases and make decisions based on not being out of space in a market where there's demand.

I'd like to add one thing. Probably this is an appropriate place to talk about it. One of the things the amount of investment the Company has been making and looking at the revenue opportunity of $1.5 billion or greater right now we've announced. The drag effect, the cost that we've introduced to the model in 2010 is $38 million of lease costs. All these costs that come into the model. And the question is how much revenue can we generate out of all these new builds we have in the US , Europe, and Asia, to offset the incremental cost. What we're saying is that we would absorb $38 million of cost. And that gives you a sense of the order of magnitude that this Company has been investing over the sort of the short term. And recognizing that we do fully anticipate that it is very important, once we get these new assets available, that we are going to fill them up with the right profile. And let me leave you with

Thank you.

Mike Rollins has a question.

Hi, good morning or good afternoon, long day. Real quick, on the FX side could you give us an update what's in the Q2 and 2010 guidance in terms of FX dilution. And as time has gone on and the portfolio has become larger, I think it's been tougher to track 12 month and 24 month penetration or utilization rates in your data centers. Can you give us a sense if look at the class of centers that you added in the second half of '08 or the ones in the first half of '09, where that would sit in terms of utilization to try to gauges how quickly you're filling your centers. Thanks.

Let me deal with the FX first and we're going to digest the second question. On the FX keep it constant with the guidance we used coming off the Q4 earnings call. The guidance for Q1 we're held that flat for Q2 and the rest of the year. So we're using -- I've got to pull out -- [ Overlapping Speakers ] Represents 31% of our foreign denominated balances. So, Mike, we don't expect any dilution through the remaining part of the year. If you look at Q1, we saw modest improvement relative to guidance rates. $1 million off the revenue line. $500,000 on the EBITDA line.

We're just going to hold that flat for the rest of the year at this stage. We recognize that we're slightly off spot price. But there's a lot of volatility in the euro and the sterling. Let's use that rate on a go forward basis. The back end of Q2 we'll make a decision whether it's an appropriate assumption to make.

Does that mean in a sense that the FX dilution for 2010 would be more like $16 million for the year versus the original anticipation of $22 million?

No. It is the $22 million. We said $20 million last quarter. We've now refined our numbers, what you don't see is the quarter end rates or the averages within the quarter. If we apply it in our model basically it translates into A $22 million hit to us based on the revenue expectations we otherwise had when we started the year. It's a fairly sizable dilution, but the majority of that was reflected in our initial guidance for 2010.

Okay.

and Mike, let me start on the second part of the question if I understood it correctly. How does it vary and what kind of trends? on all of our IBXs, the fill rates are on plan with a couple of exceptions. And even Chicago three that we talked about before that I think you guys knew it was such a big build and there was capacity downtown Chicago and Elk Grove. Is now back up to where we wanted it to be. We kind of, when you put folks the sales force on these things, on the newer ones, it's just too early. In L.A. and Chicago, we brought on capacity. There's pipeline there, there's activity there and it's too early to tell whether or not the utilization rates are on the track they've been in the past or not. We don't have any red flags on any that we're trying to get back on plan.

Maybe to ask it a different way, if you look at the centers that you're building and have built over the last 12 months, when you want to get to that 100% or 90% utilization point, how much years is that in you planning cycle? Is it like a three year? Five year fill? How should we think about the pace of fill on average for your centers?

I think if you take out the anomalies L.A .four, Chicago three. We're looking at filling up the physical capacity within roughly a two year period. And then usually incremental to that a power tail. We the customers will not fully procure for up to a five year period. That's what we're planning, from a modeling perspective. When you tie that back -- one of the things we do and Steve alluded to the real estate expansion strategy. Making sure how are they doing and hold them accountable for that. And eight out of 10 of those that we referred to are at or better than the targeted rates that we had set for ourselves. We measure that as revenue and of course, cash flow or EBITDA. And that gives you a sense. When we look at Chicago three and L.A. four and a few years ago in Tokyo two.

Despite the fact off the expectations, we want them to continue to maintain pricing discipline. Cash is out the door. There's nothing you can do make sure you don't do a bad deal to try and increase the occupancy. So we've been very disciplined around making sure we have the right deal in the right market with the right customer. And that's been the mainstay of the folks. Don't do the dumb deals. And that will pay dividends in the long term.

Thanks, that's very helpful.

Thanks, Mike.

Srinivas Anantha has a question.

Thank you and good evening. Steve, I had a question about these ecosystems. Could your just give us an update on the ethernet and a little color on what the customer uptake has been so far. That would be helpful. And also you talked about the cloud ecosystem. As you build these ecosystems, as your customers become really successful, do you think or they become large enough, clearly we are hearing that there are certain customers that are migrating to like an Amazon cloud and where the hosting is completely taken away under their control. Thank you.

I can tell you the ethernet launch went off without a hitch. We launched -- we're doing it in phases. We've announced five markets to kick this off. In the middle of contract negotiations. We're above internal targets. And what else would you add?

We brought eight customers in the development program we announced in October. Last week we announced 24 partners. There are 90 ethernet, 90 providers who already do ethernet. They're not on the switch. So we're leveraging our existing relationships and helping them solve this problem in a many to many environment. Not big dollars this year. We're focused on bringing those new network players to the table.

All that's focused on adding more emphasis into the interconnection space and providing the value I talked about today in my prepared remarks. The second thing on cloud, depending on who you want to believe, certainly the size of the market and the pace at which people are looking for cloud, we want to be as much as we can. We're accumulating in the hundreds of deployments of cloud providers around the world, the hosting guys, the managed service folks, the infrastructure platform, the softwares, service folks, there's a lot of activity. A general manager and a team focused on this. Sales forces are focused on this. And we're accumulating some of the primary public and private deployments. And once you get a key magnetic deployment like the one you mentioned. Other people want to come in. It's at the core of our strategy. And you're going to continue to hear more and more success.

I just wanted to -- just to touch on the other thing you said about the size and where you're hearing people moving or their migrating. I think what's important to realize, in both cases there are customers who are going to get to a size where they're going to have to make their decisions. What's really important is going back to what -- we want the network asset sitting inside our IBXs. People need large amounts of space. That's the component they're going to outsource to another provider. That's not really where Equinix is going to play. We're going to focus on that core piece. And then when you talk about people pushing stuff to cloud, it goes back to Steve's comment, you have to recognize a lot of those cloud providers sit inside Equinix validates our model. A number of customers using that tells me that plays into two of the three verticals that we have a real strong hand in.

I appreciate the color, Steve and Keith And what was the cabinet churn in US this quarter?

Cabinet churn in the low 400s.

Thank you so much.

Our final question comes from Jonathan Schildkraut.

Thanks for squeezing me in, guys. A lot of good questions today as well as color in the commentary. Two questions, first. How do you deal with stranded capacity? I know your talk about capacity constraints in certain markets. And some customers churn and new customers come in. Stranded capacity in certain data centers. I was wondering if that's an issue and if so how you deal with it. Secondly, you've talked a lot about making investments on the sales team and something you've discussed for two calls in a row. I'm wondering if included in that conversation is turnover or upgrading of sales folks. And have you seen turnover this year in line. We had heard reports that there was a little bit more turnover in the sales team. Thank you.

Let me deal with the first question then and I'll punt it over to Steve. On stranded capacity. If you look to our older data centers, we migrated from physical to sellable units. A number of years back we addressed the issue of stranded capacity. And we lost about 25% of the physical space for the older data centers. As you look today, there is an ebbing and flowing of depending how a customer deploys their infrastructure into our capacities.

Our numbers will continue to move up and down. Our inventory capacity that number is going to continue to move around to address. to move around to address. might draw 4K W. And focused on inventory management. Looking at a per IBX basis and how the inventory and engineer around different deployments. And that's why I think it's something that we're well ahead of in addressing for our industry and particularly for our Company.

And Jonathan, before I get into that I want to correct something I said earlier. The cab churn was low 500s. Jonathan, on the US around the sales investment, there has been a couple of turnovers. But measure it in voluntary and involuntary. The couple of people that have left have been because of performance issues. But there is a big focus on sales investment in the Company in general. And we just feel at the time when the demand is still in our favor and we're not having to create as much demand as we have in the past, now is the time to invest, to focus on these ecosystems. Get them deeper into conversations that Jarrett talked about with our customers. Architectural conversations with our customers. And that's going to require training.

We're raising the bar. We want to go deeper in the organizations. And also more feet on the street because of the bookings targets that Keith talked about earlier. So everything is going to get bigger. We're just getting ahead of the curve now and making the investment.

Great, thanks so much for taking the questions.

You bet. This concludes our conference call today. Thanks for joining us.