Equinix Inc (EQIX) 2010 Q3 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 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 today's conference call. Before we get started, I would like to remind everyone that some of the statements that we will be making today are forward-looking in nature and involve risks and uncertainties . Actual results may vary significantly from those statements and maybe 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 August 4, 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 its financial guidance during the quarter unless it is done through an explicit public disclosure.

In addition, we'll provide non-GAAp measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the Company uses these measures in today's press release on the Equinix Investor Relations page at www.Equinix.com. 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 will be taking questions from analysts. In the interest of wrapping this call up in one hour, we would like to ask these analysts to limit any follow-on question to one. At this time I'll turn the call over to

Thank you, Jason. I'd like to welcome everyone to today's call. Keith and I are pleased to have the opportunity to review our complete results for the third quarter. We believe these results are indicative of the continued strength of the fundamentals of our business.

Today, we are going to move quickly to a review of our third quarter results across all three regions including switch and data as well as the overall position of the business. Once Keith is finished, I will take some time to review the quality of our customer mix and the strength of our value proposition, the stability of our overall pricing, trends underlying our churn, our go-to-market strategy, and finally our plans to accelerate revenues from our switch and data assets. We will also provide you guidance for the remainder of 2010 and our initial view on 2011. Now, let me turn it over to Keith to walk you through the results for the quarter.

Thanks, Steve, and good afternoon to everyone on the call today. I'm pleased to provide you with a review of our third quarter results including an update of our regional performance. In the presentation today, I'd like you to refer to slide four. Global Q3 revenues were $330.3 million, a 12% quarter-over-quarter increase and up 45% over the same quarter last year. This includes approximately $57.5 million of revenues for switch and data. Organically revenues increased 6% over the prior quarter.

Due to the weakening of the US dollar throughout the quarter, total revenues benefited by $3 million in FX compared to the average rates used in Q2, though we had no meaningful uplift when compared with the currency rates used with the guidance provided on our Q2 earnings call. With the recent movement in our key FX operating currencies, we have adjusted our Q4 guidance $1.38 to the euro, $1.31 to the US dollar, and we left the pound unchanged at $1.56. Our updated global revenue breakdown by currency for euro and pound is 14% and 8% respectively. The Singapore dollar continues to represent 5% of our global revenues.

Gross bookings in the quarter were solid in all three regions with particular strength in North America. Offsetting North America bookings in part with higher MRR churn. For the quarter the global MRR churn was approximately 2.9%. This metric includes the additional churn items we outlined on our October 5th call as well as the churn we discussed on prior calls related to the Frankfurt and Los Angeles markets. We expect Q4 churn to approximate 2.5% for the quarter.

The Company recognized gross profit of $144.9 million for the quarter for our gross profit margin of 44% including a higher depreciation expense attributed to our expansion projects and the switch and data assets. Cash gross margins came in ahead of expectations at 65%, the result of lower than forecast utility expense and a lower than planned salaries and benefits expense. SG&A expenses for the quarter were $89.8 million. Cash SG&A expenses were less than expected at $67.3 million, the result of slower hiring and lower than planned IT spending. Additionally, the cost integration of the switch and data asset continues to progress ahead of schedule creating a higher than expected cost synergy in 2010.

All this translated into higher than expected adjusted EBITDA, which came in at $146.5 million, representing a margin of 44%, about three margin points better than our expectations. On a constant currency basis using the average rates in effect in Q2, our adjusted EBITDA would have been $1.2 million lower. Our net income and EPS improved substantially over the prior quarter's net loss as we generated net income of $11.2 million or $0.24 a share in the quarter despite $11 million of incremental depreciation and amortization expenses. And one last comment, looking forward, we continue to believe we will not pay any meaningful cash tax until potentially 2013 or beyond, primarily due to our strong NOL position. We will continue to look for ways to mitigate the paying of cash tax both today and as we look forward.

Now, I'd like to provide a quick review of the regional results in the quarter including a bit of color on the non-financial metrics so please look to slide five. North America revenues were consistent with our updated expectations growing 12% quarter-over-quarter or about 2% on an organic basis. Cash gross margins were higher than expected at 67%, a one percentage decrease over the prior quarter after taking into consideration the higher summer utility rates. North America organic cash gross margins were 70%, whereas switch and data cash gross margins were 57%. Adjusted EBITDA was $97.9 million, a quarter-over-quarter increase of 9% or 44% over the same quarter last year. As mentioned already, the integration of switch and data from a cost perspective is ahead of schedule.

We noted last quarter that we expect 75% of the cost synergies to be recognized by year end. We now believe we will see greater than 85% in the same time frame. Also our cost synergies will outpace our integration costs by $5 million, a $1 million improvement. Our total defined cost synergies will now approximate $21 million. In North America we saw strong bookings from the financial services vertical into our New York campus. We saw increased activity in our network vertical's mobility ecosystem with orders in multiple sites, as well as an increased activity related to the enterprise vertical. Importantly, our pipeline of opportunity has continued to increase reflecting momentum across each of our verticals.

In the quarter we added 83 customers across the North America footprint. As expected, organic US cabinets billing increased by over 600 cabinets to 24,800, a result of strong bookings in Q2 with continued strong bookings in our Chicago 3 IBX. At the end of Q3 our Chicago 3 IBX was 60% utilized and 85% booked or preassigned. Additionally, the space related to our Los Angeles churn has been partially resold. At the end of the -- at the quarter end our LA3 and LA4 assets on a combined basis are 67% booked or preassigned. We expect the overall cabinet billing trend to continue into Q4.

Cabinets billing related to switch and data assets were essentially flat in the quarter, whereby incremental cabinet billings were offset by expected churn. Of note at the end of Q3 there were four large deals signed into the switch and data - - Seattle and North Bergen assets. As previously mentioned, we expect the switch and data assets to exit the year with higher revenues, increased bookings, and a strong pipeline. Overall, North America pricing remains firm across both the organic and the switch and data footprint and our sales pipeline is strong. During the third quarter, we saw a meaningful increase in North America interconnection activity.

Our organic cross connects increased by 1,658 with particular growth in New York and the Washington D.C. market. North America interconnection revenues including switch and data remained at 20% of our current revenues. Switch and data added over 300 cross connects in the quarter. Our port activity continues to scale with 68 new 10 gig port added in the quarter including 22 in the switch and data locations. There was a significant increase in exchange traffic on our switches representing over 8% growth quarter-over-quarter to greater than 600 gigabits per second.

Also important to note, (inaudible) global metric, our customers' provision capacity on our exchange offering continues to increase with total provision capacity hitting 6.5 terabytes with a course increase in port usage. As we discussed on our Q2 results call, there are several differences between Equinix and the switch and data operating metrics including how we measure IBX utilization, how we calculate MRR per cabinet equivalence, how we define gross and net bookings and how churn impacts these metrics, and how to quantify the cross connect unit counts. We're still in the process of standardizing these and other metrics. As I previously mentioned, we are also taking this opportunity to conform all metrics on a global basis, and we expect to complete this project in Q4. Any changes in metrics or methodologies will be communicated during our Q4 earnings call. This includes updating our historical churn metric.

Looking at Europe, please turn to slide six. Europe had an extremely strong quarter with revenues up 10% sequentially or 7% on a constant currency basis. Adjusted EBITDA increased to 29.1 million, a 21% increase over the prior quarter in part due to stronger operating currencies. We continue to see strong bookings in Europe with 63 new customers added including several meaningful deployments in the financial and verticals this quarter. We had solid interest in our Amsterdam, Frankfurt and London IBXs and continued to scale our Paris business and our decision to expand the Paris 3 IBX.

During the quarter, our net billing cabinets were in line with the previous quarter, which largely attributed to the churn of the large digital media deployment we discussed over the last two quarters. This pace has already been resold and the revenue attributed to this new customer, which includes an interesting cloud application will come in over the next few quarters enabling us to surpass the lost revenue by Q2 of next year. More importantly, it's very much considered positive churn as our gross margins have improved meaningfully in the German IBX and the region as a whole.

Europe's average price per saleable cabinet equivalent increased reflecting stronger European operating currencies compared to the US dollar. Overall unit pricing and local currencies remains firm for space and interconnection services, although at times we may be effected by the mix and volume of activity in our eight diverse markets. Interconnection revenues continue to increase approaching 4% of EU recurring revenues. We added over 900 cross connects with additions in each of our markets and we are particularly strong in London and Paris.

Now looking at Asia-Pacific. I refer you to slide seven. In Asia-Pacific revenues improved 10% sequentially and 7% on a constant currency basis. Consistent with our expectations. Adjusted EBITDA was 19.5 million, up about 4% in Q3 and reflect income rental expansion costs related to our new city 3 lease and costs attributed to our Shanghai partner center. Demand has remained solid in the region resulting in strong gross bookings in Singapore, Sydney and Tokyo, offset in part by anticipated churn in Hong Kong.

We added 55 new customers in the quarter driven by strong network, IT and cloud services demand from large US based service providers. The second expansion of our Singapore two IBX opened in September providing an additional 1,000 cabinets of inventory in one of our strongest performing markets. Also we have four regional IBX expansions slated for delivery in 2011. Hong Kong 2, Singapore 2 phase 3, our city 3 and our Tokyo 3 asset. As mentioned in the last quarterly call, our capacity situation continues to improve in the region, however, we may face some constraints in Sydney and Tokyo by year end given the noticeable increase in pipeline and demand for these markets.

Cabinet billings increased by greater than 150 sequentially with overall unit pricing steady. MRR per cabinet increased 1% sequentially and 11% year-over-year partly due to higher part 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 revenues in the region continues to grow and represents 11% of Asia-Pacific's recurring revenues. We added almost 900 cross connects with strong demand in Singapore. There was significant increase in exchange traffic on our switches representing over 15% growth quarter-over-quarter to over 70 gigabits per second.

Now looking at the balance sheet on slide eight. First, unrestricted cash balances decreased slightly over the quarter from $722 million to $715 million. Yet better than our expectations. Increasingly irrelevant to the level of operating cash flow generated by the Company to offset our investing activities. We continue to manage our working capital favorably. Our DSO decreased by one day to 32 days in the quarter. Looking at the liability side of the balance sheet. Our total debt now stands at just over $2.1 billion with approximately half of this comprised of convertible debt. Our blended cash interest rate approximates 5.8%. This represents net debt of approximately 2.4 times Q3 annualized adjusted EBITDA. Separately our crude profiting equipment line increased in the quarter reflecting our expansion activities.

Looking at slide nine. As was historically said, the cash flow attributes of the business are extremely strong. For the quarter, our net cash generated from operating activities was greater than $113 million, a meaningful increase over the $57 million in the prior quarter, and incorporates over -- and incorporates our higher cash interest related to our high yield debt financing. On a year-to-date basis, we have generated $270 million of operating cash flows. Given this trend on our operating cash flows, our discretionary free cash flow on a year-to-date basis is $188 million. We're factoring in our weighted average shares outstanding, it would translate into approximately $4.37 of discretionary cash per share. Also of note, our Q3 annualized discretionary cash flow approximates $290 million. An improving trend despite the higher cash interest costs. We anticipate that our discretionary free cash flow will continue to trend upwards consistent with the guidance details that we have provided today and Steve will discuss shortly.

The one final point. So much of my comments last quarter, we want to continue to eliminate our fully secured and flexible debt facilities allowing the Company to pursue as needed more flexible and less costly financing alternatives. We are actively looking at all alternatives and will be assessing options over the next few months. Our objective will be to drive down the cost of capital using debt oriented instruments and simultaneously look for opportunities to augment returns for our shareholders. So with that, let me turn the call back to Steve.

Thanks, Keith. As I noted earlier, I'm going to start by discussing our customer mix and associated value proposition by application. Customers select Equinix for a variety of reasons, it can range from revenue acceleration, capital and operating cost reduction, improved application performance, network connectivity, and operation reliability. Today, we segment our customers -- our customer base into four industry verticals, which includes networks, content and digital media, financial services, and enterprises as depicted on slide 10.

The slide also provides a breakout of the diversification of our revenues by customer products, region, and of course by vertical. Within these verticals we have developed strong ecosystems, which are natural magnets that create a very unique concentration of customers. We put a strong emphasis on building ecosystems where customers gain significant benefits where their proximity and ability to interconnect with each other. We have established highly successful network and electronic trading ecosystems, and we see continued growth opportunities in these markets. In addition, cloud and mobility are new ecosystems that have begun to drive increase traffic and form attractive communities within our data centers due to the concentration of customers that we have already accumulated.

We saw a record increase of over 3,800 cross connects added in the quarter and this is another proof point of the success of our ecosystem strategy. Separately, there have always been and will continue to be applications run by customers inside our data centers that require high levels of operation reliability, choice of networks, security, our unique IBX design, and geographic reach, which is also summed up in the Equinix brands, our service quality, and the people delivering it. As we have said if the past, we continue to see our customer survey results indicate that operation reliability is the most important attribute of why customers choose Equinix. This is why we continue to invest in the quality and reliability of our global operations.

These customers are at Equinix for a good reason. They recognize our strong brand, our reputation for operational excellence and our unique global footprint. In addition, many of our global customers value having one provider who meets their multi-site and multi-country requirements in planning their long-term strategy. Although not necessarily differentiated as a part of a core ecosystem, these customers see strong value from our offerings and this is not an area where we experience high churn. We expect to see continued growth in this segment of our customer base.

Let me now turn to our pricing strategy. The objective of our pricing strategy is to achieve a blend of MRR per cabinet across our over 3,700 customers to generate the return goals we have set for our expansion capital. This quarter we saw our weighted average MRR per cabinet increase in all three regions, and there are two important factors supporting this trend. First, unit pricing remains firm. Second, we are driving growth in MRR per cabinet through an increased volume of services such as power circuits and importantly cross connects. This underscores the value of our ecosystem focus.

Another critical element of our pricing strategy is maintaining discipline throughout our efforts to achieve our MRR per cabinet targets. From time to time we may adjust price to acquire or maintain strategic customers who are critical to an ecosystem. Our criteria for making these decisions include securing longer-term contracts, increasing volume of business, or extending a customer's presence to new markets. It's not about growing at any price. We view this type of targeted strategy simply as good business as it strengthens our ecosystems and attracts additional customers. This concept is an important part of our go-to-market strategy, which I will discuss in further detail in just a moment.

Let's now shift gears and cover churn. As Keith noted, we saw churn of approximately 2.9% in the third quarter, which was higher than our historical run rate. Circumstances may contribute to our churn number exceeding our targeted range in any given quarter. As an example that we have shared over time, we have seen a number of digital media customers shift to a multi-tiered architecture, bifurcating their deployments between Equinix and other alternatives.

These customers have kept their critical applications that require low latency and high performance at Equinix while moving their other less network dependent applications either in house or to a lower priced wholesale provider. Typically when a deployment of this type churns out, we have been successful in reselling this capacity at a higher price point, which improves margins and may defer expansion capital decisions, but can generate a short-term revenue headwind. From time to time there may be some volatility with churn, but our solid and diverse portfolio of customers inherently mitigate the risk of an excessive churn percentage as no customer represents more than 2% of our revenues.

Before I get into the details of our go-to-market strategy, it's important to note that we continue to experience strong demand across all of our industry verticals; and we believe we have a significant opportunity for growth in our targeted ecosystems. Additionally, we expect growth from customers outside of these ecosystems who demand high quality data center services on a global basis. We are executing on a go-to-market strategy that will make us a more unique formidable competitor in the broader market. Our focus on driving growth across our industry verticals and ecosystems has been evolving over the years, but our objective of deepening our penetration into these ecosystems has never changed. Our network and digital media ecosystems have been at the foundation of this strategy since the Company was founded.

More recently our electronic trading ecosystem has been a big driver of success and we are in the early days of developing additional ecosystems in areas such as mobility and cloud. As we look at the strategy for 2011, we will continue to make investments in our sales and marketing engine to target the right customers and the right applications from the growing demand in our space. This will include expanding our sales force around the world, increasing our coverage and focus on global accounts, and applications that clearly take advantage of our network density and global platform.

Now, let me give you an update on switch and data. Since closing the transaction six months ago, the overall integration has gone well, and we are ahead of our target to achieve cost synergies and improve overall margins. Candidly, however, we underestimated the time frames to fully integrate our sales engines. This translated to lost momentum with customers and employees and has taken time to address. Our focus has now shifted to regaining the revenue momentum.

As we identify the shortfall in the switch and data bookings we set in motion several corrective actions. First, we are accelerating our effort to define a common sales process and train the existing Equinix sales teams on the proper positioning of the switch and data assets. Second, we have identified specific market applications that are best suited to the switch and data sites and have adjusted our product strategy accordingly. Third, we are increasing sales coverage by adding sales reps in select markets and have augmented our inside sales capability.

We now have clear accountability for covering the 16 new switch and data markets at the sales rep and leadership levels. We've already begun to see the impact of these actions with stronger pipeline and bookings across the switch and data sites in late Q3 including an increasing number of cross entity deals. And on a last note, we still expect full integration of these sales processes and associated systems to be completed by the end of Q1, 2011. We remain confident in the strategic rationale and the benefit that switch and data brings to our global platform and the expected returns of this acquisition remain intact.

Now let's shift to slide 11 for an update on our 2010 guidance and our initial view of 2011. We expect our 2010 revenues to be in the range of $1.216 billion to $1.218 billion. This reflects an organic growth rate of approximately 21% over 2009. We expect cash gross margins to be approximately 65%. Cash SG&A is expected to be approximately $250 million. We are increasing our targets per adjusted EBITDA to be approximately $542 million.

Shifting to CapEx, we expect this to now range between $560 million to 580 million in 2010, of which approximately $450 million to $470 million is for expansion CapEx and approximately $110 million for ongoing CapEx. Shifting to our initial view on 2011, similar to last year at this time, we want to give you an indication of where we are heading directionally in the coming year. On our Q4 call in February, we will provide a more detailed view of our expectations for the year. We currently expect our revenues to be in excess of $1.5 billion, which assumes the currency rates that Keith outlined earlier.

Adjusted EBITDA is expected to be in excess of $675 million. Capital expenditures for 2011 are expected to be approximately $400 million including expansion and ongoing CapEx. Year-over-year reduction spend reflects the meaningful investments that we have made in our capacity over the last 18 months. As a final note on our expansion capital and it's depicted on slide 12, our investments over the course of this year have put us in a good position across our global footprint as we enter 2011. Although global utilization remains strong at 73%, we have capacity in place or soon to be completed, which will provide inventory for our planned 2011 growth.

In total, we expect to add approximately 10% to our capacity next year including an additional expansion phase in our Paris 3 IBX. I would also like to emphasize that there will be no change to our disciplined approach to expansion decisions and targeted returns. Our expansion is directly related to our planned growth and tightly linked to our go-to-market pricing strategies as we pursue the right customers with the right applications in support of our desired returns.

In closing, I'd like to reiterate our confidence in our business model, strategy, and position as a global leader. As you are all well aware, the secular drivers that include growth of the network and video traffic, the shift towards electronic trading, mobility, as well as cloud computing line up extremely well to provide the demand to deliver on our stated three to five year objective of $2 billion in revenues capable of generating 50% adjusted EBITDA margins with strong operating cash flows. So let me stop there, Barb and turn it over to you for -- to see what questions we might have generated here.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Frank Louthan with Raymond James.

Great. Thanks for the question. Can you give us an idea of how much more of the -- I mean, you went through some detail in the opportunity in Frankfurt and where you have seen some of that churn, and can you give us an idea of how much more of that type of business that you have that you think might be churning off over the next 12 months and what sort of the revenue upside is? You're saying the margins are improved and you can be able to get that back. Can you give us an idea of how undermarket that particular project was?

Frank, let me start and Keith can add some points here. First of all, I think it's probably important that we define how churn gets caused in our business. It typically can come from three areas as we look at it. We can have consolidations inside of one of our customers where there might be an acquisition, and it could cause one of the two companies to churn. We have also experienced customer financial distress in the past, typically with smaller customers.

As I indicated in my remarks today, bifurcation with large digital media content companies is what we are experiencing mostly underneath the churn we are seeing today. So it is coming from larger digital media type clients, and that's what we experienced in Frankfurt and LA as Keith described in Q3. As we told you, we have projected a Q4 churn forecast, and we will conform these metrics and methodologies as we get to the Q4 call between both organizations switch and Equinix. So I think we will get that lined up for you as we get into the end of the quarter.

All this is contemplated in the $1.5 billion revenue guidance that we have just given you. So the way to look at this thing is it's all been contemplated underneath the guidance that we've directionally given you. Keith, I don't know if you want to add anything.

Frank, what I also would add, as we go through our formal planning cycle, what we typically do is spend with every country and every region and particularly the US or a number of regions, we go through the top ten lists and decide where -- get assessment of where we think our exposures are . Generally speaking, as Steve said, I think we are fully contemplated some level of churn with these type of customers and others. It's embedded in our guidance. But I think more importantly, it's fair to say that when that typically occurs, we are able to get more profit out of the transaction.

So without -- I'm sensitive to disclosing too much on the Frankfurt one but I do want to knock out one home. As I said, we will surpass the revenue. So we will get more revenue out of the space that we sold, and it was a meaningful churn in the Frankfurt IBX but it is being fully -- it has been fully resold. And the profit attached to that, which is probably the most important part and as they thought about profit, it was about contribution margin at one point, we think about it as profit is many multiples of what was already in that space. So from our perspective, we just think of this as -- although recognizing there is some revenue headwind as Steve alluded to, it is highly profitable for us to replace some of that

Great. Thank you. And I appreciate the color on what you've done with the switch and data sales force, which seems to be a big issue for investors to focus on, but where -- can you give us an idea of how quickly you think those efforts are going to start to have some traction? Are you still seeing the revenue momentum sliding a bit at switch and data, has it stabilized? Are you moving it back forward again? Can you give us some color on that?

Yes, I ca, Frank. As I mentioned in my comments, we are seeing a stronger pipeline and we did experience an uplift in bookings exiting Q3 including those four deals that Keith talked about that went into a couple of those key assets. So we will start seeing the pickup now; and quite frankly, as I mentioned we just lost momentum during the integration so it is refocused. The four things I talked about, the focus on verticals, the sales processes, increasing sales coverage, all these things I talked about and the focus in these 16 new sites that we picked up, there is clear accountability and focus on all of these activities. And I do expect we'll start seeing the shift of the focus we have in cost synergies now shift to revenue synergies and we will start to experience an uplift.

And our next question comes from Jon Atkin from RBC Capital Markets.

Yes. Good afternoon. In your second quarter presentation, you gave a review of same-store trends. You referenced the US IBXs that had opened prior to 3Q '09, and I was wondering if there's any kind of update as to how that group of data centers is trending in terms of revenue and cash gross profit? And then a second question on capacity expansion. Wondering if you could maybe discuss qualitatively some of the markets in each of your regions where you look to expand capacity that go beyond what you updated in the tracking sheet.

Okay. Let me take the first one, Jon. If you could just -- I want to make sure I clearly understand the question you asked about same stores. Could you just rephrase that for me, please?

Yes. There's a slide that you gave on the prior call about the revenue and the cash gross profit that's generated by the IBXs that had opened prior to Q3 '09.

Yes.

And you had given a growth rate associated with that as well, I believe and I wondered if there's an update for 3Q.

There's two things. First and foremost, those assets continue to perform extremely well for us. So there's no, I would say general change in what we are thinking and how it performed so that's number one. I think what's most important, I sort of alluded to it in my comments, the assets that were performing less than we had originally anticipated, which was our Chicago 3 and LA4 asset. Chicago 3 has really picked up momentum in that market as we are performing well.

As I said, we are 85% booked or preassigned and the El Segundo market, which includes our LA3 and LA4 asset, which is different than our downtown market, I combined the two assets and saw that as 67% booked or preassigned. So the momentum we are seeing in some of the -- even the newer sites is really picking up. So overall you're seeing the cash flow generation machine of this business is accelerating, and we have done a real good job over the last few quarters seeing that executing in the slides that were presented last time and today.

And Jon on the second part of your question, outside of the update and the expansion capacity sheet that we put out today, there isn't anything else that we announced other than the Paris 3 activity today. So there's basically eight projects that are ongoing into 2011. There are in the US - - Atlanta, Silicon Valley and Dallas. There's activity going on in all four markets in Asia and then the Paris 3 is the only activity going in Europe. So those are the things that are announced today.

So where would you be from a utilization standpoint if you hit your 2011 revenue guidance, approximately?

Let me put it a different way. As Steve alluded to, we are 73% utilized today. We're adding 10% more inventory, and just by looking at that chart you can see roughly the number of cabinets that we are adding. It's fair to say you can do the math. We don't want to give you a percentage utilization today because it's going to be market dependent and also region dependent. But it's fair to say that in a number of markets, we have sufficient inventory to deal with the demand for the 2011 target.

And then, lastly, if you could just talk about the nature of the churn that you saw in Hong Kong as well as the switch and data.

Yes. So the Hong Kong churn was typical churn. When we went through the budgeting exercise for 2010, we do that in sort of the last quarter of the year prior. The team had already identified a customer that was going to be relocating. We are in the middle, as you know, of an expansion and we weren't able to fulfill their needs with their capacity at that point in time and so they looked elsewhere.

But clearly as you know, we have announced our Hong Kong 2 phase 1 build and we have some more capacity that came on in Q4 -- late Q3 and Q4. And that's going to sort out that particular issue for us. And switch and data was actually, it was just frankly, it was just cleaning up some legacy -- some legacy issues with customers. They were aware of it and so we just absorbed it into the churn, and clearly with a smaller base it reflects -- it reflects a little bit differently and their, if you will, their volume versus our volume and so it's roughly a flat quarter for them.

Largely in line with previous quarters, the churn with switch and data.

Yes.

And our next question comes from David Barden with Bank of America.

Hey, guys. Thanks for taking the question. I guess two if I could. First, you know, if I look at the $675 million EBITDA guidance, $400 million of CapEx, and about $140 million of interest expenses and no taxes for the next three years, your stock price now in the 70s; with the free cash flow that you guys are now anticipating generating in 2011, are you guys ready to talk about really getting in there and buying back the stock or really trying to return some of the value that got lost in the last few weeks through the generation of cash that you're anticipating? If you could kind of talk about that.

And then the second is just again, Keith if you could talk a little bit about -- one of the reasons why there's so much uncertainty is just that there's a real lack of visibility on our side of the fence with respect to which customers are going to churn and when and why do you have such conviction that it's only going to be 2.5% and not 4.5%? And why do you think pricing can stay firm when all this new capital is coming into the business? Could you talk about your conviction level in your churn and price assumptions and where does that conviction come from at this stage of the game? Thanks.

Good questions, David. I think let me deal with the first one concerning basically the cash position that you've identified. Certainly we have cash on our balance sheet. Certainly as we present it today, it puts us in a very favorable position for next year with the discretionary free cash flow or even free cash flow. And it's fair to say as a company we are always looking at our strategic alternatives, which also include share repurchases or anything else. So as Company it's not lost about our ability to influence decisions whether it's around share repurchase, whether it's keeping more cash on the balance sheet, or whether it's continuing to grow the business. And we are going to do what we think is best for the organization given the facts in front of us. I also would note, we do have a high yield indenture, as I think many of you are aware of, and so we also have the limitations attached to that. Taking all that into consideration, we do have the wherewithal and flexibility to do as we think is needed to create shareholder -- or augment shareholder value where appropriate.

I'll take the second part of that, David. Visibility in the customer churn, I would tell you that there was obviously some confusion raised on the last call about our portion of our customer base that was turned into an expectation that that part of our customer base could churn, and I want to clarify that these customers are here for a good reason as I described in my script today. They're focussed on operation reliability, they come to us for network choice, they like the global footprint, they like our designs, they are avoiding CapEx, they're driving OpEx reduction.

It's simply good business and it is not an area that we are experiencing significant churn. So they value the premium level of our service, and in the quality and the global footprint is a key competitive advantages for us. That part of our business we are not concerned or trying to predict any increase or spike in churn. We confused the way we described this last time and it's -- because that part of our business isn't necessarily tied to an ecosystem, I don't want you to be confused that it's part of the business that's going to churn.

I want to be clear on that today. In terms of predicting the churn, we get visibility obviously as we have told you guys, as we come to the year end planning exercise and customers will start to give us that as we close the plan out for the year and we build it off that base. And that's how we start to build the customers that are in renewal phase for the coming year.

David I would just add on a couple more comments to what Steve said. Certainly by announcing 3,800 cross connects this quarter and the real focus in developing our ecosystems, they tend to -- regeneration of these ecosystems and these opportunities certainly support the price points that we are trying to attain as a business and get returns that we expect. And so as we create that and we bring more magnets in, it creates more value for us. So not only do we see it from a volume perspective, we also see it from a profitability perspective.

And the comments that Steve has made and I have made is that the gross bookings in this business continue to be extremely strong across all three regions. So the markets that we are going after and the business that we are seeking I think is being demonstrated in our growth on a gross bookings basis, recognizing the comments Steve's made around churn. So we feel pretty confident about that, but also more in is the pipeline remains extremely strong. And that's where we get our confidence we can continue to scale this business at the right price points.

Pardon me, barb. The last comment that David asked --

Pricing.

David, I think on the pricing, you hit, Keith, but I think it's important to emphasize if you -- if you pick it up in our prepared remarks today is that we are absolutely focused on the interconnection part of this business and the ecosystems and driving -- driving more growth, more focus in those verticals; and we think that's going to help us hold up the firmness in our pricing.

Thank you. And our next question comes from Mike Rollins with Citi Investments.

Hi, thanks for taking my questions. Just a couple. One is I was wondering if you could explain -- I didn't hear it in the opening comments, on the restructuring charge that you guys took. Can you just explain a little bit more the background of that issue and if there is anything to glean from that and if it effects the lease that I think you've committed to in Secaucus for potential further expansion?

The second question I had is if you could talk a little bit more about financial exchanges. There's been, I think, more questions about what some of the magnetic financial exchanges could do over time in terms of creating their own exchanges, and in some respects becoming a competitor. And if you can talk a little bit about that issue and how you view it over time, that would be great. Thanks.

Great. Mike, why don't I take the first one and then I'm going to push the second question to Steve. So the restructuring that I was referring to -- or we referred to in our financial statements relates to our New York 2 asset. And for those who have gone to the site, there is the IBX that we have and then adjacent to that is what we call the At Last building. It is a piece of building that we had sublet to a vendor and we have done that for the 10 years that we have had the asset.

When we went to build New York 4 a number of years back, we decided it was cheaper to invest in our New York 4 build than to build an adjacent IBX to our New York 2 IBX. And so what we decided to was to actually abandon the lease and write it off for book purposes. So the restructuring charge you see today is adjusting our assumption. The subtenant of that space has given us notice that they are going to be vacating the space in January, and because of that we adjusted our assumption. It does not mean that we cannot go back and sublease it to somebody else, but we have had to make the accounting determination at this point that we would increase our restructuring charge to reflect the fact that we do not have subtenant income and that's all that is.

And, Mike, on the second part of your question on the financial exchanges, we are making great progress around the world in that ecosystem. We are deploying now across nine markets, I think it's three in each of the regions of the world. And we have accumulated well over 50 of these exchanges in trading platforms, plus multiple access notes behind that. So there's a great base that we have established there. That's where a lot of the cross connects are coming in behind that.

There's still -- many of these venues are still deploying with us today. In particular, if you're asking about the New York Stock Exchange or NASDAQ in New York or the CME in Chicago, watching those closely, well aware of what's gone on there, no real impact in the New York business right now in terms of those two competitors in that market. We do expect the CME, when they declare they've moved their matching engine to their new data center, that they'll leave an access note in that downtown location at 350 Cermak. There's lots of other venues we have connected into that footprint there, so we are -- we feel very good about where we are and we're continuing to grow in multiple markets around the world.

Thanks very much.

The next question comes from Simon Flannery with Morgan Stanley.

Thanks very much. Good afternoon. On the EBITDA guidance for 2010, there's not much change between Q3 and Q4 EBITDA. Can you just walk us through the puts and takes there, utility expense should come down; but I think you talked about some sales force additions and any other kind of increases that we might be seeing on the expense line and in Q4?

And then on the 2011 CapEx guidance, previously you have given a range for CapEx. You gave us a spot number of $400 million. Is that going to be a hard number or is that subject to change depending on the sort of demand environment that you see? And is that sort of consistent with where you might have been two or three months ago, or have you dialed that number back a little bit in light of what happened at switch and data and so forth? Thanks .

Simon, just dealing with the questions. First on EBITDA, certainly as you recognize, relative to our initial guidance in Q3, we thought we would do top end of the range, 139 and then we revised it on the October 5th call to greater than $140 million of EBITDA. We came in at $146.5 million. So there's a number of things going on. Number one, just the time of expanses. There's certainly the investment that we want to make in the sales area. So those are things that are basically -- it's just the expectation that there's going to be some expenses in Q4 that were not there in Q3.

In addition, you're very right about the utility expense. It tends to moderate and flat line when we go into Q4. So what we're seeing is there's some incremental repairs in maintenance. As we come to the back end of the year, we have some higher repairs in maintenance than we typically do. For all those reasons right now we are guiding you to effectively a flat EBITDA quarter recognizing it's roughly a $542 million EBITDA line.

When it comes to CapEx, we did give you a spot number this time. Historically we have given ranges, but what we wanted to do was we wanted to focus you on a number. We recognize that there's a number of projects that we have announced out there. We have given you the CapEx number attached to those projects.

It gives you a sense of where we are -- where it can take the business. But also recognizing as we -- as the Company -- as we can continue to perform, we can -- we can make -- we can change that number. But right now it's a number that we wanted the investor base to lock onto. And then as we have always said, as more information comes to light or if we outperform and -- at the right price points and fill it up with the right volume, then we can always change that number. But it is making sure that the market is aware that we have a spot number out there, and we are very much focused on delivering that and more changes as appropriate.

The only thing I would add to that is that it's based on the investments I mentioned that we have made over the last 18 months has put us in a good position. That's the baseline of our buildup to that decision. Not from recent events, it's more focused on the significant investments we have made over the last 18 months. We are in a good capacity situation across almost all our markets with a couple of exceptions as Keith has mentioned.

Great. That's very helpful. Thanks.

And our next question comes from Jonathan Schildkraut with Jefferies & Company.

Great. Thank you for taking the questions. Another follow-up here on the CapEx question for next year. In the past I've heard the Company talk about level of committed to capital for 2011. And looking at the expansion tracking sheet, which is very helpful, it's not clear how much of what you're out there for 2011 expansions will be spent this year versus next year. So maybe if you could give us a sense out of the $300 million that you're pointing to for expansion, what is committed to out of that group? And then separately, in the past the Company has given some color about the value of the global footprint directing us in terms of number of deals or percentage of revenue, new booked MRR that you were able to leverage out of, say, your North American footprint into some of the other markets like Europe and Asia; and I was wondering if you could give us some color along those lines. Thank you

So, Jonathan, I'll take the first one and pass the second one to Steve. When it comes to CapEx, clearly there are different ways to look at it. There is what we have announced, and so if we use what is announced relative to what is committed, you're sort of in the two -- sort of the $200 million to $300 million range and that would include roughly -- a significant amount of ongoing CapEx as well.

If you look at truly what is committed, there's going to be something much lesser than that. But right now we basically think that we have the potential upside of probably at the top end of the range $100 million additional projects. And it's fair to say that's something that we are going to continue to refine and update you on. I'm not sure if there will be any further update when we go to the November 11th Analyst Day; but certainly by the time we get to Q4, we will give you a much clearer idea on what the CapEx is. And part of the challenge as you know now is we measure our CapEx on a cash flow basis versus an accrual basis. It really depends on what we spend and where. So we will continue to update you on that one.

Great. Now just to make sure I understand what you're saying, out of the $400 million number that you put out there, call it $200 million to $300 million-ish is based on stuff that's announced plus ongoing; and the $100 million you noted was kind of the stuff that may not be yet kind of tied to anything that's announced?

That is correct.

Thank you.

Jonathan, on the second part of your question on the value of the global. Let me give you a couple of data points just to update you guys. We have historically been running in the 30 to 40 inter regional deals per quarter. This past quarter we actually did over 60 inter regional deals, meaning cross region deals. So that still tells us that we have got a lot of activity from multi-nationals, predominately US multi-nationals deploying globally, but it is going always. We actually have now over half of our revenue from our customers that is deployed in at least two countries. So as we continue to think about the globalness of this business, we are -- feel very good about the demand we are seeing in terms of companies that are deploying in multiple sites, multiple countries, and this footprint is very attractive to them. So we are just continuing to see signs of that. So we will continue to push business across the pond all three ways as we go forward.

All right. Great. Thank you.

And our next question comes from Chris Larsen from Piper Jaffray.

Hi and thank you for taking the question. A couple questions. First of all, I thought you had said on the last call that there was some trepidation on some customers to go into the switch and data, or at least begin billing in the switch and data facilities until they had the physical connections to some of your others facilities. I wonder if you could give us an update on that? If I actually did hear that right and if that's the case, how long -- how that process is going?

Secondly, wondering, Keith if you have a target leverage in mind and where you think the Company is sort of optimally leveraged. And then third, just some -- two housekeeping things. What was the NOL at the end of the period? And then how are you going to present the Shanghai partner metrics? Are they going to just show up as cabinets billed in Asia-Pac? Thanks.

Chris, this is Jarrett speaking here. Just in terms of the tethering, I think we announced that we tethered -- in our New York campuses together, we have tethered Silicon Valley and Dallas. The only outstanding facility was Atlanta and we actually have it interconnected, but we have not run fiber strand. We are in the process of doing that and that will be up in 30 days. So Atlanta just opened and that's the one market that we needed to complete the amount of capacity we needed. So I think we have again, a plan for switch and data to build on the momentum on these new markets.

Great. And was there a sense from customers that they really wanted to wait for that -- for those physical connections and that -- that could have been one of the sticking points and now we should start to see a little improved momentum just on that alone?

In the Atlanta market, it's early for us. It's a new site. It typically takes a little while to ramp up. But yes, we have some good interest in Atlanta with the network density that we have there now.

Great.

Chris, on the other questions on leverage, I think we still feel we maintain three to four times net leverage is appropriate. Is it optimal? That's tough to say at this point, but certainly you get a sense that we have the potential to raise our debt capacity under that scenario whether we have the indenture or not. Today we are 2.4 times net levered on our Q3 LQA basis, so that would be one thing. I think there's the opportunity to put more leverage on the books and still maintain our leverage expectations.

From an NOL perspective, we just filed our tax returns. I don't actually have that number but certainly on the November 11th Analyst Day I wanted to spend -- I probably want to spend a little bit more time just on sort of our tax -- not tax planning but our tax view points. So that's something I will update the listeners to, so if you're at the Analyst Day, you'll get it live. And then the Shanghai partnership. The way that we are going to account for that is actually on a net revenue basis so we are going to -- the business that we book and the cost that we incur -- or excuse me, the revenue that -- we are going to actually report it on a net basis. So we are not going to really identify any cabinets attached to that and recognizing this as a relatively small, small investment. But there's a partnership investment and a first step into the China market or the broader China market. We'll continue to just keep you updated on that one but nothing -- it's not meaningful, it's certainly not material and something at this point that we are not going to break out.

Thanks. And look forward to the Analyst Day as well as seeing you at our conference. Thank you.

Great. Thank you very much.

And our last question comes from Colby Synesael from Cowen & Company.

Thanks for getting me in. I wanted to ask you, can you compare Europe and Asia to the US in terms of where you think we are in the growth cycle for the business? Then also my second question is, on the call when you did the preannouncement, you mentioned that you're moving from a demand fulfillment model to a demand creation model; and I was wondering if you can give us more color on what exactly that meant? Thanks.

Sure. This is Steve. Let me start with the second piece, Colby. We have had a lot of activity going on in our go-to-market activities in the Company. The first thing that I want to be clear on today that everybody understands, there's very strong demand across all our verticals, across all three regions.

So we are -- we are getting much more focused on targeting the right customer with the right applications. Applications matter when it comes to which deployments we want to put into these data centers. So we have got initiatives underway now to go deeper into our current network and financial ecosystems. We are going to start getting more vertically oriented in content, mobile, and cloud. We are going to stay very focused on interconnection. And then we are going to increase our focus on global accounts as I mentioned; and that's the primary focus of the chief sales officer function, and we will give you more color on that at Analyst Day.

So it is targeted within the demand that is coming at us today. And it will help us get focused more vertically beyond where we have been in the past around networks and in the financial services. And then the first part of the question on EU versus --

Well, yes, I was just trying to get a better sense of how far along we are. Obviously if we look back in the US two, three years ago, we saw pretty strong growth that's coming down a little bit. Just curious where you think we are if you had to compare Europe and Asia to the US in terms of the life cycle or the growth cycle for those regions.

Yes, well, part of it is driven by scale, Colby. We are starting to get to a point now of the law of large numbers in the US market. We are growing much faster in Asia. Our fastest growth is in Asia. Europe is the second fastest growth and then US behind that. So part of it's scale driven.

Part of it is the maturity of the interconnection market in the US market versus those other two markets. But generally, we are -- because we are global and because we are leveraging and because we are getting to a common consistent experience for our customers, we are going to start -- we are going to start leveraging these multi-nationals in a bigger way than any of our competition will be able to do. So the markets are different, the metros within each region are different. The pace of growth is a little different, but that's the benefit we have. We had a lot of diversity. Some markets are growing faster than others; but generally, that's kind of how they break out and that's how we build up our models. It's the fastest growth in Asia, followed by Europe, followed by US, which is starting to get to the law of large numbers.

Thanks.

Thank you, Colby.

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

And thank you for your participation today. Please disconnect your lines at this time.