Equinix Inc (EQIX) 2010 Q2 法說會逐字稿

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

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

Good afternoon and welcome to our Q2 2010 results conference call. Before we get started I would like to remind everyone that some of the statements we'll be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identify in today's press release and those identified in our filings with the SEC including our Form 10-K filed on February 22, 2010, and Form 10-Q filed on April 28, 2010. Equinix assumes no obligation and does not intend to updated 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 nonGAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of reasons why the Company uses these measures in today's press release on the Equinix Investor Relations page at www.equinix.com. For today's call we posted a presentation on our website to help guide our discussion and we'd also like to remind you that we provide important information about the Company here as well. We encourage to you check this regularly for the most information-- most current information available.

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 the interests of wrapping this call up in one hour, we'd like to ask these analysts to limit any follow on questions to just one. At this time I'll turn the call over to Steve.

Thank you, Jason. Good afternoon and thanks for joining the call today. I'm pleased to announce that Equinix delivered another quarter of strong financial results with revenues coming in on target and adjusted EBITDA coming in above expectations. Importantly, both results were able to absorb the currency headwinds we experienced throughout the quarter. This is our thirtieth consecutive quarter of revenue and adjusted EBITDA growth and a strong proof point of the exceptional visibility we have into this-- our financial model and the track record of strong execution.

Highlights of the quarter include record gross bookings in all three regions as we expected with the scaling of our growth plan in 2010 with the highest ever outbound bookings for US-based multinationals deploying critical infrastructure into both Europe and Asia, demonstrating the strength of our global services delivery platform. We also had strong interconnection growth across all three regions with a significant pickup in cross connects, exchange ports and traffic on our switches.

All construction projects are on schedule and on budget to deliver needed capacity throughout the remainder of 2010 and into next year. With our history of disciplined investments in expansions, we find ourselves in a very good position in terms of available capacity in the majority of our markets. From a vertical market perspective we experienced the highest bookings we've had in the last six quarters in the electronic trading ecosystem. We also added 20 networks in key metros to take our count now to over 595 globally. And finally, we added 20 new cloud customers and continue to see both public and private cloud deployment across all regions. On the operational front our teams across the globe are delivering extremely high levels of reliability within our IBXs and exceeding service level objectives for our customers.

Lastly, our integration of Switch and Data is ahead of schedule on several key milestones, which I will provide more detail on shortly. I will also provide you with information that illustrates the importance of our expansion strategy and a breakout of the strong financial results and return on investment we've experienced over the last several years. Let me pause here and turn it over to Keith who will review our financial results and regional trends in the quarter. So over to you, Keith.

Great. Thanks, Steve, and good afternoon to everyone on the call. I'm pleased to provide you with a review of our second quarter results as well as a snapshot of progress in each of our three regional segments. So starting on slide five and from the presentation that we posted today, as you can see global Q2 revenues were $296.1 million, a 19% quarter-over-quarter increase and up 39% over the same quarter last year. This includes approximately $37.6 million of revenues from Switch and Data for the two months starting May 1 and is in line with our expectations. Due to the strengthening of the US dollar throughout the quarter, total revenues were negatively impacted by $3.4 million in FX compared to our guidance and $5 million when you compare it to the average rates reported in Q1. With the recent movement in some of the FX reporting currencies we've adjusted Q3 and Q4 guidance rates to a $1.30 to the Euro and $1.40 [sing] to the US dollar. We've left the pound unchanged at $1.56 to the pound. Collectively this has a negative translation effect of about $4 million on our updated 2010 revenue guidance. Also with the Switch and Data acquisition we've updated the global revenue breakdown by currency. Euro and pound represent 13% and 7% of global revenues respectively and the same dollar represents about 5% of global revenues.

As Steve mentioned, bookings in the quarter were solid in all three regions, representing our strongest organic gross bookings quarter with particular strength in Europe and Asia. Organic MRR churn for the quarter came in at 2.2% and in line-- sorry, in line with our expected range of 1.5% to 2.5% per quarter. The Company recognized gross profit of $133.5 million for the quarter or gross profit margin of 45%. Cash gross margins came in ahead of expectations at 65%, the result of lower than expected utility and salaries expense coupled with a slightly higher local currency revenue performance. SG&A expenses for the quarter were $83.1 million. Cash SG&A expenses were less than expected at $60 million, the result of slower hiring and lower than planned IT spending. Additionally, the integration of Switch and Data is progressing ahead of schedule creating higher than expected synergies in 2010, Steve will expand on this later.

This all translated into higher than expected adjusted EBITDA which came in at $132.2 million, representing a margin of 45% and about 300 basis points greater than our expectations. This result also absorbed an additional $1.3 million in negative impact from FX compared to the rates used for our Q2 guidance. On a constant currency basis using the average rates and effect in Q1 our adjusted EBITDA would have been $134 million.

Our net income and EPS decreased sequentially to a loss of $2.3 million, or $0.05 per share, from income of $14.2 million, or $0.36 per share. A large part of this decrease is due from costs in the Switch and Data transaction. First, we absorbed $5.8 million of acquisition costs in the quarter to complete the transaction. Additionally we incurred $4.4 million of restructuring costs in the quarter primarily related to severance from employee redundancies. Also in the quarter we incurred $1.2 million of integration costs, primarily from consulting and IT related expenditures. Lastly, Q2 recognized full effect of interest expense related to our $750 million high-yield financing which closed at the end of the first quarter, this added about $10 million of incremental expense in Q2 over Q1. Looking ahead we expect additional integration and restructuring costs over the next three quarters, but acquisition-related costs are predominantly finished.

Now I'd like to provide a quick review of the regional results in the quarter including a bit of color on our nonfinancial metrics. So please turn to slide six. North America results were strong with revenues just above our expectations higher than expected gross margins at 68% and adjusted EBITDA of $89.5 million. The sales team generated strong bookings including the record outbound activity to EU and AP from the digital media, financial and network verticals, further demonstrating the value of our global scale and reach. As expected, organic US cabinets billing increased by over 600 cabinets to 24,200, a result of strong bookings at the end of Q1, the early opening of phase III of New York4 and improved bookings into our Chicago3 and LA4 IBXs. We expect the cabinet billing trend to continue into Q3. Switch and Data assets saw an increase of over 200 cabinets billing driven mostly by demand from the digital and media and network verticals. Overall North America pricing remains firm across both the organic and the Switch and Data footprint.

As we said on our last call there are several differences between Equinix and Switch and Data financial and nonfinancial metrics including how we measure IBX utilization, how we calculate MRR per cabinet equivalents, gross and net bookings, churn and cross connect unit counts. As are you aware we've already transitioned Switch and Data to our methodology of calculating adjusted EBITDA but we're still in the process of standardizing the other metrics and expect to complete this during Q4. We're also taking this opportunity to review conformity of all metrics on a global basis. Any changes in metrics, and/or methodologies will be communicated during our Q4 earnings call.

In the US by saw strong bookings from the financial services industry into our Chicago and New York campuses. With the launch of several execution venues in our New York4 IBX, we're starting to see noticeable increase in deployments and cross connects from other customers. We seek to connect to these matching engines or access nodes highlighting the magnetic effect of this ecosystem. This also contributed to nearly 1,200 new cross connects installed this quarter with additional growth in our Chicago and DC campuses. North American interconnection revenues post acquisition increased to 19% of our recurring revenues from 17% on our organic basis.

Looking at Europe, please turn to slide seven. Europe had an extremely strong quarter with revenues up 3% sequentially or 10% on a constant currency basis. Adjusted EBITDA decreased 4% in the quarter in part due to the negative $1.6 million from FX I mentioned earlier. Also as a reminder, Q1 benefited from a $1.2 million accrual release. Absent these two items, adjusted EBITDA would have increased 8% to $25.5 million in the quarter. We achieved record bookings in Europe with 85 new customers including several meaningful deployments in the enterprise and digital media verticals and solid interest in our London5, our Paris3 , our Frankfort4 IBX expansions. Demand in Paris has been very strong this year with higher than normal booking velocity putting us in the early stages of reviewing expansion in this market.

During the quarter additional capacity was added in a number of markets increasing our salable cabinets by approximately 3000. This includes our Munich3 asset that we reported on our expansion tracking sheet today. Equally you'll see a significant increase in our net billing cabinets in the quarter, reflecting substantial growth orders from a number of our global system integrators and enterprises. Also, our new Dusseldorf2 IBX is 100% occupied with a global system integrator. Average price per sellable cabinet equivalent decreased reflecting the weaker euro and pound in the quarter. Overall unit pricing in local currencies remain firm for space and interconnection services.

Our Frankfort2 IBX, the largest site in our global footprint, will serve as DeutscheBorse's main data center for its matching engines allowing their customers to directly connect to their infrastructure. This is another example of a strategic and magnetic win in the electronic trading, reinforcing our strength in servicing the needs of this important ecosystem globally. Finally, as you look at headline news related to many EU economies, we're fortunate to be doing business in the countries that appear to be more economically stable with good secular growth trends and continued demand for our services.

And now looking at Asia-Pacific, please refer to slide eight. In Asia-Pacific the revenues were just above plan and up 7% sequentially and on a constant currency basis. Adjusted EBITDA was $18.7 million, up 5% in Q2 when excluding the $700,000 accrual reversal in Q1. Demand has remained solid in this region resulting in our strongest booking since 2008. We added 42 new customers in the quarter driven by strong network, IT, cloud services demand as well as a large US based digital and media deployment. Our expansion in Hong Kong opened in June and phase II of our Singapore2 IBX is expected to open in Q3. Also with the two regional IBX expansions announced and slated for delivery in 2011 being City3 and Singapore2 phase III, our capacity situation continues to improve in the region. However, we may face some capacity constraints in Sydney and Tokyo by year end given the noticeable increase in the pipeline and demand in these markets.

Cabinets billing increased by greater than 300 sequentially with overall unit pricing steady. MRR per cab increased 3% sequentially and 15% year-over-year, partly due to higher powered cabinet installations in our new IBXs, an increase in interconnection activity across the install base and stronger operating currencies compared to the US dollar. Interconnection in the region continues to grow and represents almost 11% of Asia-Pacific recurring revenues. We added over 900 cross connects with strong demand in Singapore. There was significant increase in our exchange traffic over the switches representing over 70% growth year-over-year and 20% sequentially to over 60 gigabits per second. From a macro perspective the economies in Asia-Pacific remain largely unscathed from the European credit crisis and continue to demonstrate strong growth, particularly in Singapore. Also in the quarter we completed our $200 million financing in the region.

Now looking at a cab table and the debt maturity profile on slide nine. Balance sheet post Switch and Data acquisition has had a number of notable changes since the prior quarter. First, unrestricted cash balances decreased from $1.2 billion to $722 million. The significant change reflects $154 million paid to Switch and Data shareholders to fund the cash portion of the purchase price and the repayment of $140 million to eliminate their outstanding term debt and equipment financing line. Additionally, we fully repaid our EUCIT and (inaudible) bank debt, totaling about $130 million. Our total debt now stands at just over $2 billion with approximately half of that comprised of convertible debt. Our blended cash interest rate approximates 5.8%. This represents net debt of approximately 2.7 times our Q2 annualized adjusted EBITDA and below the three to four times net leverage we feel reasonable in our business. More importantly we have eliminated a significant amount of fully secured inflexible debt facilities allowing the Company to pursue as needed a more flexible and less costly alternative.

Over the next few years our objective to drive down our cost of capital using debt oriented instruments in order to maximize the return for our shareholders. Last point on the slide is that the debt maturity levels over the next few years are very manageable from both a principle and an interest perspective. Looking forward to 2012, we intend to settle our $250 million 2.5% convertible debt in cash, thereby avoiding roughly 2.2 million shares of dilution. With that let me turn it back to

Thanks, Keith. Now if you turn to slide ten, I'd like to review our progress with the Switch and Data integration. As I mentioned earlier we are ahead of schedule and have been able to accelerate the timing to realize the initial cost synergies for 2010. Overall the integration is proceeding very well with key milestones in place and a final objective to have full quote to cash integration completed by Q2 2011. First let me say that the cultural [limit] between our employees has been a bright spot in the integration. In particular we've been impressed with the operational excellence and customer focus across the Switch and Data team. We've obviously had to make some tough decisions in achieving our synergy targets, yet we're bringing a very strong team into the Equinix fold. We are on track to achieve the $20 million cost synergies previously outlined and have moved aggressively towards this goal. During our call in May, we indicated our target was to realize half of these by the end of 2010. We are pleased to report that we now expect 75% of these synergies to be recognized by the end of the year. As a result, 2010 synergies are expected to exceed integration costs by $4 million, a $6 million swing in our favor compared to our earlier expectations. And one other financial benefit I wanted to mention is that we now believe that the NOLs to be realized from Switch and Data are likely greater than originally planned and will further extend the timeframe until Equinix pays significant cash taxes in the US.

Shifting gears to revenue synergies, we've established a strong foundation for driving revenue across the integrated platform. We've had early success with 12 cross entity deals and also saw orders for new cabinets and interconnection services across 29 of the 34 former Switch and Data sites. We're also seeing the number of deals in the pipeline increase monthly with activities starting to show up in Atlanta, Bergen County, Dallas, New York City, Seattle, Silicon Valley and Toronto. Additionally, we see early signs of cross regional deal flow from Switch and Data's customers expressing interest in our global platform in both Europe and Asia. The sales organizations have been completely integrated with full cost synergies already achieved in the sales function. So we now have the sales teams focused on revenue synergies by driving bookings and growing key accounts. Overall customer feedback has been positive in particular with networks, strategic accounts and the electronic trading venues many of which see the benefits of dealing with a single global provider.

One of the primary strategic drivers for this acquisition was our ability to efficiently enter 16 new markets and extend our platform in North America. An important market is Atlanta where the first phase of our flagship IBX, which we refer to as Atlanta1, is now scheduled to open next month. This will add an initial 400 cabinets to our capacity and another 1000 cabinets in phase II, now slated to open in Q1 of 2011. Our pipeline for this new IBX is growing with strong interest from many of our top networks and well known enterprise customers. We also have several small expansions underway in New York City, Silicon Valley and Toronto and are selectively upgrading and tethering key sites.

The combination of the Equinix and Switch and Data assets extends our IBX footprint to 35 markets where customers can leverage our network dense facilities to gain close proximity to their customers. This is at the core of our global service delivery platform as depicted on slide 11. This platform is comprised of 89 network neutral IBXs with over six million gross square feet of data center space in a majority of the world's most important business centers. Equinix's critical mass of networks combined with our unique interconnection and exchange services enable our customers to reduce costs, improve application performance and enhance their end user experience.

Finally when you couple all of this with our vertical communities of common interest, there is a network effect that occurs within our IBXs leading to a rich marketplace for buyers and sellers of network services, financial instruments, as well as IT and cloud-based services. The net result is that our focus on creating and growing industry specific ecosystems worldwide provides us with an important competitive advantage and an effective barrier to entry. So as we discussed on several occasions, our business isn't just about building data centers, this specialization is an important differentiator and very difficult to replicate.

The global platform provides reliability and low latency to allow our customers to more effectively deploy their mission-critical applications. This unique proposition underscores the importance of our expansions and continued investment in critical capacity for the growth of these ecosystems. For example, in our financial services vertical, especially in electronic trading, companies are increasingly moving to a globally distributed and locally hub design. What that means is that they must locate their infrastructure where they have access to the right networks with the ability to cross connect to other companies within their business ecosystem. A great example of this is the DeutscheBorse win that Keith mentioned earlier.

Given the importance and capital intensity of investing in this global service platform, I would like to now provide more detail on the rational of our expansion strategy which is outlined on slide 12. We launched our expansion strategy at the end of 2003 at a time when we were capacity constrained due to demand for Internet peering within our facilities. Subsequently even stronger secular forces emerged including the growth of electronic trading, internet video, mobile data and recently IT services in cloud computing which created more significant customer demand. As a result, we made the decision in 2007 to accelerate our investments in an effort to capitalize on these market trends including extending our reach into Europe and expanding our capacity further in Asia. In addition to the strategic reasons for these investments, there were obvious strong financial returns that drove our decisions. As we've outlined in the past, we target IRRs of 30% to 40% for expansion investments. We also have had an objective to generate in excess of 20% returns on invested capital.

Slide 12 also provides a good snapshot of the unit economics of our data center expansions which drive these return targets. A general rule of thumb is that for every $2 of expansion capital invested we seek to generate $1 of annual revenue. As the data center reaches its capacity, typically within two to four years, it is capable of generating over 65% cash gross margins with low ongoing maintenance capital requirements.

Now turning to slide 13. Since 2007 both our organic and inorganic expansion efforts have effectively increased our globe capacity by 85% and have increased our revenue capacity by 95%. This represents just over $1.8 billion of potential revenue in our long-term operating plan, which assumes we fill up our announced net sellable capacity to approximately 95% utilization levels at current pricing. Even with this significant increase in capacity, our global utilization rate is still 74% pointing to consistent, predictable and strong demand. As we bring in new IBX online we incur a meaningful amount of incremental costs in the form of both OpEx and CapEx which creates a drag on our overall financial results until we reach approximately 10% to 20% utilization. As we absorb these costs, the true performance of our underlying business is diluted. So our goal in providing this level of detail, which many of you have asked for, is to highlight the true performance of our existing IBX portfolio.

What you see on slide 14 is a snapshot of the operating performance of all US IBXs open between 1999 and Q2 of 2009, essentially a same-store view of our data centers. This analysis excludes any of the assets opened over the past 12 months which are still in the early stages of ramping. We've invested just over $1.4 billion in these IBXs. The revenue produced from these in Q2 on an annualized basis is approximately $612 million with $460 million of cash gross profit, or 75% cash gross margins. Our Q2 ongoing capital investments associated with these, again annualized, was approximately $28 million or 5% of revenue. All of this translates into a 33% unlevered return on our original investment and excludes any terminal value.

This highlights the strong financial results these investments are providing Equinix every quarter. The revenue, cash gross margins and ongoing CapEx are all within the ranges we've outlined over the past several years as part of our long-term operating plan. Importantly these assets have been in service for a combined average life of just over six years with an average utilization level of 84%. So there's still room for growth and incremental returns.

Since many of you have asked about the demand for and growth of our legacy IBXs, the last point on slide 14 is a separate analysis of Q2 2010 revenue growth year-over-year from our first eight IBXs in the US, all of which were built prior to 2003. Combined these locations are approximately 90% utilized and experienced year-over-year revenue growth of nearly 6% in Q2. We continue to have strong demand for these facilities due to to their network density and the number of network and paring applications within them, and we believe that these assets have at least another ten to 15 years of useful life due to our customer optimization efforts and the significant preventative and predictive maintenance programs that we have in place.

So let's now shift a little more color on our ongoing CapEx on slide 15. Here we have provided a historical view of ongoing CapEx as well as a breakout of investments for 2010, many of which were in support of our growth, and as you can see on the chart caused a significant increase from prior year's results. I'd like to take a quick minute to review these. Our ongoing CapEx for 2010 includes $30 million or 2.5% of revenues for investments in maintenance CapEx and also investments in eliminating single points of failure in certain locations. This maintenance CapEx has declined as a percentage of revenues over this time. There's also $40 million in capital for customer installations, which is largely paid for by our customers in the form of nonrecurring revenue fees. We also estimate approximately $20 million will be allocated for ongoing capital needs for Switch and Data in 2010, which is a $10 million reduction from our previous expectations.

Finally, there are additional investments within our ongoing CapEx that are directed at making us more efficient and help scale our infrastructure to drive growth. This includes $10 million for IT systems and infrastructure as well as $10 million allocated for new product innovations. This reflects a reduction of $10 million from previous expectations as we focus on Switch and Data product integration, launch the carrier Ethernet exchange and our global portal.

Finally, if you turn to slide 16, you will see a breakout of the discretionary free cash flow embedded in our business. We define this metric as cash flow from operations minus ongoing CapEx, which effectively strips out expansion investments. As our revenues and cash flow grow we expect to see our discretionary free cash flow margins improve over time. Given the demand and strong returns I've outlined today, it's very clear that we have had a great opportunity over the years to prudently reinvest this cash flow to grow the business, reinforce our competitive position, meet our customers needs and importantly generate exceptional returns for our shareholders.

Let's now shift so slide 17 for an update on our guidance. We expect our 2010 revenues to be in the range of $1,225 million to $1,235 million, which reflects $4 million in negative currency impact that Keith mentioned earlier. We expect cash gross margins to be approximately 64%. Cash SG&A is now expected to be approximately $250 million. We are increasing our targets for adjusted EBITDA, and now expect it to range between $535 million and $540 million, an increase of $2.5 million at the midpoint from previous expectations. And this also absorbs approximately $2 million in negative currency translation. Shifting to CapEx, we expect this to now range between $530 million to $580 million in 2010, of which approximately $420 million to $470 million is for expansion CapEx and approximately $110 million for ongoing CapEx.

For the third quarter revenues are expected to be in the range of $335 million to $338 million. Cash gross margins are expected to be approximately 63% to 64% and also reflect the increase in seasonal rates we experienced in our power costs. Cash SG&A is expected to be approximately $75 million. Adjusted EBITDA is expected to be in the range of $136 million to $139 million. Total CapEx is expected to be between $185 million to $210 million, which includes approximately $45 million in ongoing CapEx.

With two solid quarters behind us, 2010 is shaping up to be another great year for Equinix. We are executing well and converting the key elements of our strategy into success. You can expect that our team will remain very focused on deepening penetration of our key ecosystems, launching our new products, strengthening our global account management and completing the full integration of Switch and Data. Even with the strong market fundamentals that we continue to experience, we recognize that there is still uncertainty in this economy. We will remain very disciplined on closely tracking demand, pipeline, pricing, bookings, churn and utilization levels as we determine our capital allocation plan going forward. As we shared today, this formula has served us well in the past and will continue to be at the core of our decision making as we extend our market leading position around the world. With that, I'll turn it over to Sharon for some questions.

Thank you, we'll now begin the question -and-answer session. (Operator Instructions) Our first question comes from Chris Larsen of Piper Jaffray. Go ahead, sir, your line is open.

Thanks, and thanks for all the detail in the slides. I'm going to ask two questions and I apologize. First of all, in Europe can you talk a little bit about if you saw any slowdown in May in terms of order sales? It looks like maybe that may have picked up in June but we had heard some slowdowns there and that there was actually a lengthening of the distance from when a customer would initiate to sign to install and if you've seen any difference in that if that's accelerated, improved or worsened?

And then, Steve, can you talk a little bit how, I mean you did a great job laying out all the capital demands, particularly for this year, but how you're going to balance growth versus free cash flow into 2011 and 2012 or beyond and how you think about that? Thanks.

Sure, Chris. Keith, do you want to start on this?

I'll take the first question. So on the European-- on activity, I think that there's a couple of interesting points certainly when you look at my comments. First and foremost you saw that we added a lot of new capacity in Europe in the quarter and-- but you also saw there was a lot of installations, although it be a lot of it's at quarter end, billing cabinets in the quarter. So I would tell you what we're seeing in Europe is a lot of momentum both from the local market but equally so from the other markets or the other regions selling into Europe, particularly the US. It had a record activity of selling activity from US-based companies into the European theater. So from our perspective we didn't see any meaningful slowdown in the May period of these sitting here at the Corporate office.

And on the second question, Chris, I think it'll-- the decision on the free cash flow and growth will hover around the flexibility that I just described around our capital allocation plans. I think we're going to study very closely fill rates, demand, pricing, pipeline, bookings, all the things I mentioned and remain very data driven in our decisions and then manage ourselves. So our goal as a Company is to as long as the demand is there, and we're achieving the fill rates that we've been experiencing, we want to avoid going dark as we call it internally in a market. So we're doing a very good job across the 35 metros in the three regions tracking our fill rates and making predictions just as we just announced the next phase in Singapore is a good example of this, where 75% bookings are full in the first phase in Singapore today. Phase II has an extremely high fill rate coming at us. So as we look down the calendar we see that we're going to have to bring phase III on at a time when we know we're getting ready to fill up phase II. So that's the way we're running the business. The return profile has not changed at all. The numbers I just laid out on the chart is exactly the discipline we're managing to, and I would tell you it's just more of the same.

Great. That's real helpful, thank you.

Our next question is from Jonathan Atkin of RBC Capital Markets. Go ahead, sir, your line is open.

Yes, a couple of questions. I'm wondering how you might characterize the competitive environment in terms of pricing behavior by your peers and particularly in markets or regions where there's a lot of supply coming online? And then I'm curious with regard to deal sizes on balance as you add more capacity and it still looks like your long-term revenue target implies a fairly ambitious revenue ramp. Are you doing larger deal sizes on average than you were say two years ago?

Sure, Jonathan. Let me start. Keith can probably add a little color there, too. On the competitive front it does vary by metro, by market. I would tell you in the US the statement you made is we're seeing a little bit of that in the LA market. And I think because of the demand-- or the competitive supply that we see in Phoenix and Vegas and also in the LA market, so there are certain markets where certain pressure-- pricing pressure and pricing behaviors are going to change, but that's not terribly different than what we've experienced over several quarters. And so in certain markets we're going to get some pricing pressure on certain deals. If it's a strategic deal and it's a magnetic deal for us, we'll get more aggressive. If it's not, we're going to let it go and whether it goes to a competitive retail or a wholesale business, so be it. We're maintaining the discipline on the floors and ceilings we have on our pricing and the sales force is staying very, very disciplined on price. So I wouldn't tell you it's in very many markets, it's in a couple of places and on a couple of deals where we're seeing this as you called it pricing behavior get a little goofy.

In terms of deal sizes, as we open up a new phase or a new IBX in particular, we tend to follow the same formula that we've done in the past. We'll put -- if we have an anchor that's magnetic like or that's at-- that's going to get it jump started for us in the right vertical, we will tend to do a larger deal that's anchor like to get the IBX jump started. But in general, when a deal gets to a certain size, call it 250, 300, 400 KW of power, call it a quarter to a half a megawatt of power, it tends to get more crowded in terms of competition. And if it is a strategic deal, we might hang in there for a while. If it's not, we're going to let it go to the wholesale or to the competitors. I don't know, Keith, if you add anything to that?

And Jonathan, I-- just a couple other quick comments on it. I think what we sort of are seeing and you ask really what's going on over the last couple of years, I think number one, our customers, we're still winning a lot of business from our install base. So although we announced this quarter we added roughly 190 new customers, roughly 80% of our quarterly growth came from the install base again. So it tends to be companies who are continuing to grow with us and not- is not always that size. I would say the remaining 20% sometimes can have a little bit larger size to it because it's initial deployment, but absent that, you're really seeing a lot of follow-on business from our install base. And that's why I would tend to tell you it's probably a little bit of the same, we haven't seen much change over the last few years.

If I can follow up briefly on the slide where you give the first eight US IBXs and the 6% annual revenue growth, what portion of that price increase is, or that pricing lift, is selling additional cross connects versus raising rating rates?

Well certainly there's an element of raising rates in some of our install base but a lot of it you've got to appreciate as we build the density and sort of the strategic discipline around these IBXs, we are looking for more cross connects, so certainly that's an element of it. But the second piece is customers as they change their infrastructure, it will bring in more power and then of course there's some circumstances where we do modify pricing either as defined in the contract or because the customers perhaps not at market for that -- not at the market rates for that given IBX or that given area.

And lastly on the churn in looking into the second half, is there any kind of swing factors that would cause it to be kind of at the upper end of that range that you mentioned 1.5% to 2.5% or the lower end in any of your regions?

Yes I would say overall, and we look at this on a global basis, we are very comfortable in the rages that we have. We recognize there are some deployments that are of a little bit larger size that we are looking at that might churn out, or a portion of it might churn out, but that's why we basically broaden the range to give us the ability to sort of size it for you saying that we'll think will always be in one end or one size of the range versus the other. But overall right now I'm not-- I wouldn't be able to tell you anything specific that we're seeing, but we do feel comfortable at roughly on average 2% per quarter as we average it over the year. And that's sort of something we've said over the last many years, so we just want to give you a broader range in any given quarter for the --

Thank you.

Thanks.

Our next question comes from Michael Rollins of Citi Investment Research. Go ahead, sir, your line is open.

Hi, good afternoon. Thanks for taking the questions. A couple things. First, I was wondering if you can give us a sense a little bit more about pro forma Switch and Data so that one month at the beginning of the quarter if you can give us some sense of maybe how Switch did on revenue and EBITDA and anything else specific there that makes it easier for us to understand the correct sequentials between 2Q and 3Q?

The second question I had was if you could talk a little bit about CapEx. So within your CapEx guidance in the past you've had some room of unannounced projects. Can you give us an update as to what that variance might be currently.

And then just a final question, if you can give us more of an update of booking activity in the US and maybe a little bit more of what you're seeing as you're turning on some new centers late in 2Q and 3Q? Thanks.

Okay. (Inaudible). So let me take the first two and then Steve will take the third one. As it relates to Switch and data, there's a little bit of noise as you can appreciate for a couple of reasons. Number one, we've change the methodology in which we record and book accounts relative to what Switch and Data had done in the past. We also wiped out their deferred installation on April 30, so effectively their starting different. But if I actually had to pro forma it, it's been relatively steady in the quarter. So if you took the $37.6 million that we reported for May and June, it'd be fair to say if you just put that into full quarter, that's going to be roughly what you would get for Switch and Data on a full quarterly basis. The other thing I think is important to note there is that we talked about 200 incremental cabinets associated with the Switch and Data assets. As Steve alluded to the fact we're starting to see now that we've sort of reorganized the sales organization we're starting to see renewed momentum. We haven't seen a meaningful influence yet in the numbers that were reported but I think what you're going to see on a go forward basis more momentum into the Switch and Data assets. So that deals with that.

The second question that you had was on CapEx. With the guidance we offered, there's a number of small expansions that we're doing both in Europe and in the US that we typically don't announce, they're too small, but overall when we look at the unutilized capital we're roughly somewhere between $20 million and $30 million right now. And so last quarter we were roughly $50 million, now we're at $20 million or $30 million. So that's what you see as the unallocated in that bucket of $535 million to $580 million.

And Mike, on the booking activity in the US, it's obviously gotten a little more complex with the integration of Switch and Data, but what I would tell you is that as you heard me mention we had a record gross bookings quarter in the US and the highest outbound deal flow from multinationals going to Asia and Europe. I don't know if Keith mentioned it or not, but we did I think about 89 new logos, about 67 of those were organic and about 22 from Switch and Data. And about 82% of the base was from existing growth on the base, so pretty steady in terms of that. So the job in front of us now is the sales force has been completely integrated. As I mentioned all synergies, cost synergies, are out of the sales force so they're completely focused on coverage of the North America market and growing bookings and obviously as part of that as we built the bookings plan for this year, bookings are built on a larger plan this year than they were last year obviously, and the team is on track to hit those numbers. So I'm very, very happy with what the US -- the North America team is doing, feel very good about the second half, they had a great second quarter. Second quarters have been good for us in North America historically, but we feel very good about the second half of the year.

And just to follow up, you talked about the opportunity to build out more ecosystems and you've highlighted in the past and on this call the success you've had in financials. Can you talk about maybe some of the traction you're seeing in other ecosystems and are there some tangible numbers that investors should be thinking about in trying to track that progress for you guys?

Yes, well let me give you just a couple of sound bites and Jarrett's sitting here with us, he might be able to add a couple of things. I don't know how tangible we're going to be able to get around things like cloud and IT systems. Let me start there, though. First of all in the back of the electronic trading, let me start with electronic trading. I think we put a press release out this quarter that gave you guys some sense of the order magnitude of what we've started to assemble in that ecosystem, and it is continuing to grow globally. You saw some of the announcements this quarter. Just in New York alone where upwards of 20 matching ends deployed in that market. And so we're accumulating mass and as you heard Keith mention, members are starting to come in and connect to these [match agains] and these nodes and we're starting to see the cross connects starting to go up. It's exactly what we predicted. So we're very targeted on who we want to go after next around the world, so that ecosystem is shaping up very nicely. The peering ecosystem continues to grow, and that's the hub of all of these other ecosystems that they sit on top of.

The next area that we're starting to get a lot of traction, we probably can't provide a lot of quantification today, but it's around mobile data. And I would tell you that we're starting to accumulate some of the key nodes from key mobile players that again in the same manner as we are in the electronic trading, once you get a key node or a key aggregation point other members have to come in and connect to it. And in this case around mobile data, it's going to be the wireless carriers that need to come in and connect to it. So that's starting to shape up and move in the right direction. We're not sure yet if there's anything that would look like an ecosystem inside the cloud but we do know that we're accumulating public and private cloud deployments at a pretty-- at a very strong pace as we think about just the build up of that business. So we're dealing with hundreds of these deployments now across many, many markets and we're looking horizontally at key applications with these cloud deployments that we think we can start to think about creating ecosystem like growth. But , Jarrett I don't know if

Yes, just a quick build on that on the peering side, the gaming guys are coming in, leveraging the peering infrastructure, the mobile guys are using that, and the cloud guys. So again they're building on these ecosystems and the platforms and we'll see how far it goes with each of these communities.

Thanks very much.

Thanks, Mike.

Thanks, Michael.

Your next question comes from Mike McCormack of JPMorgan. Go ahead, sir, your line is open.

Hi, guys, thanks. Yes, just obviously a pretty strong recovery in the billing cabinets here in the US. Can you give us a sense for sort of breaking down the improvement there between increased sellable capacity versus, you say you're pretty stable on price, but any promotional activity in the marketplace? And then any internal change whether it's your sales force organization that improved those adds as well? Thanks.

Yes, Mike, I would tell you not a big change. I think we explained fairly well last quarter why we saw a flatness and it was-- we knew it was going to be a one quarter anomaly and as you see with the results now, with the late bookings in Q1 and the slow ramp up getting out of the gate in Q1 was part of that cause. So decision makers today are well into the calendar year and we're seeing a lot more decisions being made. So I think our sale-- deal velocity I would tell is starting to pick up in North America. We're starting to make decisions quicker. When you have capacity coming on like we have in New York and New York 4 and how hot that market is, that's a big help for us to get that going. But I would tell you from a disciplined standpoint, from a commission or incentive or we haven't really done anything else, but we've been completely consumed with getting the Switch and Data sales force integrated. And I would tell you now that team is like I said all the costs take out is behind them in that function in the Company, they are completely focused on cross-selling the global platform globally and just getting bookings and pipeline coverage is good. So I like where we are with the North America team. They're doing a very, very good job.

Yes, Steve, I guess I was just sort of looking at the third quarter cabinet builds coming online and the significant numbers. I'm just trying to get a read through on whether or not that relationship should be driving some more of the growth?

Yes, Mike, Keith here. I think certainly that will help drive some of the growth, particularly as you think about Silicon Valley5, it's a much needed asset or DC6, again, it opened up, we announced that today. That's a very important asset for us. But more so is giving us capacity as we exit 2010 and we look into 2011. But I think it's across the board. I said in, at least in my piece, I think the trend from a net billing perspective is going to-- you're going to see the same trend in Q3 as you saw in Q2. And the only other thing I'd like to supplement what Steve said, the one area that we had put a little bit of focus on that you probably are aware and we've been quite public about it, is our Chicago3 and LA4 asset. Our Chicago3 asset is doing extremely well now. The teams we are incenting them to sell into that one with a little bit more commission and they're doing a good job. But we're also getting the right customers to go into those right IBXs, so we're making some good -- we're improving in the Chicago3. And in LA4 we're starting to get some traction. So overall I feel really good about where we are and I think you'll continue to see our billing activity increase.

Great thanks, guys.

Thanks, Mike.

Our next question comes from Mark Kelleher of Brigantine Advisors. Go ahead, sir, your line is open.

Great, thanks for taking the questions. Just a couple of quick things. In the US in your six traditional cities, have you been able to bring Switch and Data assets online to address some of the capacity constraints in those cities or is it really two different customers, two different markets and those stay completely separate?

Well there is some overlap, for example in New York and I would-- with Bergen County's assets, it brings more capacity on obviously in that New York metro, New York/New Jersey metro, and we'll sell different types of accounts into those two assets. But we're tethering and connecting in the overlap markets where it makes sense. In the Silicon Valley we're doing the same thing with the [pack] assets and with our SV1 assets. In Dallas we were actually co-located in the info mart and by the end of November I think we'll have dark fiber laid there and we'll have complete connectivity. IBXLinx will be leveraged in other cities. So yes, where we're overlapped in particular Silicon Valley, New York and Dallas, we-- it's part of the capital plans, it's in motion, and it's part of the plan. Jarrett anything else?

Yes, just (inaudible) Steve I do think we have different spec sheets, so you can actually get a little bit different flavor. I think we mentioned that on the last call, so if we need a certain type of inventory closer and I think Bergen and our NY4 facility are good examples, you can get a different product. And where you need to be close to the ecosystem you have it, where certain applications might fit into Bergen. So it really gives us some great flexibility as well in the market.

All right. And could you give us just a quick update on the Ethernet exchange, how that's going?

Yes just to build on that, I think we had 24 original development partners that were part of our initial launch back in April. They're moving now to commercial agreements. We've now added four additional commercial deals. We just started selling that the last 45 days. We have a great pipeline, so we'll be announcing some momentum on that. I think you'll see some appreciable folks are still just putting the initial traffic and the test and you'll see that ramp up over the course of the year as we are building an ecosystem from the bottom up, and again we're targeting 20 folks. We know who they are who already provide Ethernet services and are customers of ours. So we just-- we're building out this momentum now we're globally.

Okay. Thanks.

Our next question comes from David Barden of Bank of America. Go ahead, sir, your line is open.

Hi, guys, thanks for taking the question. I just wanted to talk about the guidance just real quick. If I take the full year guidance and I back out your third quarter midpoint to Q1 Q, it looks like you're guiding to about $151 million of EBITDA for the fourth quarter and that's a $13 million sequential increase quarter-to-quarter. And if that maintained all the way through 2011, we'd be looking at a $730 million 2011 EBITDA number. Right now street consensus is about $660 million. That implies a $6 million sequential EBITDA growth number next year. I know there is a question earlier about balancing growth and CapEx, but could you talk a little bit about the differences between growing $13 million sequential EBITDA in fourth quarter and any reasons why it would slow all the way down maybe to $6 million a quarter for all the quarters in next year? Thanks.

It's a very good question, David. First and foremost, I think if you look at the guidance that we offered for 2010, clearly there is some timing. And so when you look at the seasonal impact at par coming into our Q3 numbers, that relieves itself in Q4 and so you get the benefit of that. But also our spending, we know exactly what we're spending on and so we ebb and flow a little bit. Our timing has been a little off this year in the quarters on how we're spending our dollars and so we've got a little bit more spending in Q3 than we would have in Q4. But if when you look at actually the exit rate, I mean when you do the math, you can see that we're exiting at a very high rate of EBITDA in 2010 as we look into 2011. So I'm not going to tell you what the number is for 2011 that we are thinking about right now, but certainly as you get a good sense of acceleration that we see as a Company exiting 2010 into 2011, and I think it positions us very well from a margin perspective.

I appreciate that. And if I could just do one follow up in the tradition of keeping to one question. Would just be on the Switch and Data merger you guys have focused a lot on the cost synergies. There wasn't really a lot of talk about revenue synergies at the time. I was wondering if you guys could kind of maybe elaborate a little bit on if you've seen any cross-selling opportunity from one sales force to the other base and vice versa, and if there's something incremental that could be extracted from that aspect of the merger? Thanks.

Well as I mentioned earlier, David, we are completely focused now on the revenue synergies in terms of the sales force. So in terms of quantifying revenue synergies right now, way too early. We do have cross deal flow in the pipeline. We've got deal flow from Switch and Data's customers now looking into Asia and Europe. We've got the sales forces cross-selling into both assets. They're all part of one team today, the organization is completely finished in sales, so the structure all the way up to the sales leader in North America has been in place for weeks now. So I would tell you that it's all hands down right now to get absolutely focused on these 50 whatever four or five assets we have in the North America region with the combined sales force. So generally we're call it almost 2X feet on the street in North America now with the combined Switch and Data and growth of the organic Equinix sales force, so we have high expectations of this team to continue to sell into all the assets and we'll expect that we'll start to attack that utilization level that we picked up with Switch and Data.

All right, guys, great. Thank you very much. Good luck.

Thank you.

Our next question comes from Michael Bowen of Guggenheim Securities. Go ahead, sir, your line is open.

Okay, thank you for taking the question. I guess I wanted to hit a little bit of the third quarter versus 4Qish again because I'm, like David I'm going through the numbers and I think you said in the third quarter there's a $4 million FX impact and I think you said that was revenue, so assuming EBITDA is somewhere near half of that, I'm still a little confused as to what's driving the not much of a step up in adjusted EBITDA for third quarter but then a pretty big increase in the fourth quarter. So I want to-- I want you to drill down into that a little bit more for me if you could. Also in the US one of your competitors has talked about renewal business contracts having quite a bit of pressure with regard to pricing and margins and I wanted to find out if you guys can give us an idea of how much of your US business right now are renewals, how much might be coming up for renewal versus brand new contracts? Thank you.

Okay. Let me take the first two questions and Steve will take the last one on renewals. I think it's important to note when I talked about the $4 million, I was talking about for the entire year. With the new guidance that we have in place with the current exchange rates I offered today, it has an impact of taking our total year revenues down $4 million.

Okay.

So I wanted to be clear on that. So the real issue of when we talked about EBITDA, which is of course you know where our revenues are going to go, you basically-- we've given you Q3, we've given you total year so you know what Q4 is going to be, and then comes into the costing model. And what's real important here is Q3 historically and from a seasonal perspective we pay higher rates per kilowatt hour for power and power is a very big component of our cost structure. We pay more in Q3 than any other quarter. Our power costs are going to go up roughly $5 million quarter-over-quarter because of rates based on what we're seeing today. That-- a lot of that almost gets fully abated in Q4. And because of that you get the anomalies of what goes on in your exit rate versus Q3 and that's probably the largest piece. But in addition there's some discreet costs that we're spending money on at the corporate level in Q3 that we don't think will be there in Q4. And for those reasons that's why you get basically a fairly large step up in Q3 to Q4.

Okay. Thank you.

On the second part of that question, Michael, I would tell you that I don't have a percentage for you on what percentage of our business is going through renewals second half of the year or what we've been through the first half of the year. But we are renewing with two to three-year contracts you can imagine how much renewal activity we're doing quarterly. But in certain deals where there's pricing pressure on renewals to move to cheaper co-lo or wholesale co-lo for certain applications that's going on has been going on for a long time. For our core business, for the key applications that need to stay around the network density, a different issue. I think it's steady as she goes. But certainly in-- tied up within the churn percentages that Keith talked about we've got constant renewal discussions going on and pricing pressure in certain places where mature customers tend to figure out that they can keep key stuff with us or other retail folks where they've got-- where they mission-critical or network dense applications and if it's not, they can move it to a wholesale or cheaper co-lo. But again that's been going on for years and years and years, it's all tied up into this 2% average quarterly churn we talk about and there's no real change in that venue, if you will.

And thank you for that. Just very quickly also on the European revenue per [cab e] obviously it was the only area that was weak, North America and Asia-Pacific being strong sequentially. I am sorry if I missed it, but can you tell us or repeat what you said about where you think that might be going, what caused the sequential reduction there in the MRR?

Yes. There's two things. The currency, obviously currency has dropped dramatically and then of course we're taking local currencies and we're converting it into US dollars, so that's the first piece. And then secondly, the back end influence of our large installations and so the timing effect in the quarter. I want you to walk away from a unit local currency perspective pricing unit pricing is firm. There's nothing that's really happening. In fact what we're doing is we're selling more interconnection in that market and that's a trend we would expect to continue which should over the shorter to medium term increase our price points.

Unfortunately in June and July the euro is doing better so that should help as well.

Well you got to look at averages, and then we don't report on the spot from a P&L perspective.

All right guys, thank you.

Our next question comes from Jonathan Schildkraut of Evercore. Go ahead, sir, your line is open.

Thank you for squeezing me in. Most of my questions have been asked and answered, so I have one strategic question for you. Steve, you highlighted during your comments that at certain deal sizes in terms of megawatts that it was a more competitive landscape and sometimes you were walking way from those transactions. And what we see when we kind of analyze kind of retail to wholesale or retail to the sweet space business is kind of that half a megawatt as a break point between the costs inside a more let's call it managed data center and one which is truly a sweets business. But from our perspective when we look at the success factors in that sweet space business, it includes scale, cost of capital, relationships, all the things that Equinix has. Ultimately it would seem that you guys would be in a fairly good position to move into that market given your relationships and again scale and cost of capital and the margins in that business from the competitors that are out there are also quite good relative to yours. Is that something that you would look at or consider?

Well, I think your assumption, Jonathan, about the sizes of the deal is kind of where we've operated historically, and as I mentioned on the previous question, we are starting to see and I would think it's from a combination of the private equity that's coming into the space that's building more wholesale like data center space or acquiring it's putting a little more pressure on the REITs and the wholesale players. So we see in some deals we see them coming down into the 250, 300 KW range, below that half a megawatt range, so there's-- I wouldn't say it's across the board trend, but we're starting to see them dip into little bit smaller deals. So, yes there's pricing pressure there and yes we lots of times walk away with it if it's a strategic customer we might get a little more aggressive. Are we thinking about figuring out how to get into that space today, no, we don't really need to. I mean we've got the capacity today and with our strategic customers we can accommodate that the way we run the business today. So we're very comfortable today with staying focused on these ecosystems and continuing to grow them and occasionally do an anchor, anchor like deal, and then on strategic deals where we want to try to maintain it, we've got the capacity to do that, and I think Keith colored a couple of markets where we have the ability to do that.

All right, excellent. And very nice job on the integration. Thank you.

Our final question comes from Simon Flannery of Morgan Stanley. Go ahead, sir, your line is open.

Hi, guys. Nice results on the bookings. I guess the question is you mentioned that I think 29 of the 34 sites for Switch and Data we're seeing new orders. For those five sites that didn't see any new orders, I guess what's sort of the plan there to restart that or would you consider anything strategic for those assets? Thanks.

Very-- Simon, very low available capacity and if you were to go look at these specific sites, and I think if you were to go back in history and talk to the Switch and Data team you'd see that there was not a lot of activity on these sites historically either. But we're looking at all 34, the new integrated sales team is going to look at capacity across every market, and you guys should expect that as we have in our own six core markets we'll now have the same discipline in going after all 34 of these data centers and 22 markets I should say in North America. But it's not -- it's just a rounding error when you're talking about the five that we didn't sell anything into.

Okay. Thanks, Steve, I forgot to say this is Edward Katz calling for Simon.

I'm sorry, Edward. Thanks.

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

You may now disconnect your lines.