Equinix Inc (EQIX) 2011 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 you have any objections, please disconnect at this time. I'd like to turn our call over to Katrina Rymill, VP of IR. 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 may be affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K filed on February 25, 2011 and Form 10-Q filed on July 29, 2011. 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 regulations of 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 will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the Company uses these measures in today's press release on the Equinix Investor Relations page at www.equinix.com.

We would also like to remind you that we post important information about Equinix on the Investor Relations page of our website. We encourage you to check our website regularly for the most current available information. With us today are Steve Smith, Equinix's CEO and President, Keith Taylor, Chief Financial Officer, Darren Appleby, Chief Marketing Officer and Charles Meyers, President of the Americas. Following our prepared remarks, we will be taking questions from sell side analysts. In the interest of wrapping this call up in an hour, we would like to like to ask these analysts to limit any follow-on questions to one. At this time, I would like to turn the call over to Steve Smith.

Thank you, Katrina. Good afternoon, and welcome to our third quarter earnings call. I'm pleased to report that Equinix delivered strong financial results driven by a global adoption of Platform Equinix. Revenue was $417.6 million, up 6% quarter over quarter and 26% over the same quarter last year. Adjusted EBITDA was $191.6 million for the quarter, up 31% over the same quarter last year. Net income was $20.3 million for the quarter, up 81% over the same quarter last year. We continue to see healthy demand for the Equinix value proposition which is delivering another year of solid growth in 2011.

We feel good about the current trajectory of the business. Strong market growth in mobile data, video, IP traffic, storage and cloud commuting are driving higher demand for data center services, and we are well positioned to accelerate the commercial growth of all of these trends. As a result pricing remains firm, and we continue to achieve record quarterly bookings and significantly increase the number of cabinets built. Churn also remains in our targeted range. At the heart of our success is Platform Equinix Platform Equinix includes data center services with network choice global presence in key markets across 5 continents and strategic vertical eco systems.

I would like to outline the strength of Platform Equinix by highlighting three important proof points from our third quarter results. The first is inner connection. This quarter we added over 3,700 cross-connects, or over 10,000 year to date. We saw traffic on our Internet exchange grow over 20% to nearly 1.3 terabytes per second. As members of our vertical ecosystems enjoy the benefits of being located in close proximity to one another, Equinix benefits by adding new customers and pulling through additional sales of cross-connects. Customers are also attracted to our data centers to leverage access to now over 680 networks. We also have 94,000 cross-connects deployed globally, positioning us as the inner connect platform for leading businesses worldwide.

A second proof point is the significant increase in global deployment. Customers are relying on Platform Equinix to quickly deploy their infrastructure around the globe. Year to date cross-border sales grew 83% year-over-year with a strong uptick in leading digital media and financial companies using our platform for key access nodes. Today over 58% of our revenues come from customers deployed in multiple countries, up from 54% the previous year. No other competitor can deliver the value customers derive from our global footprint.

And the third proof point is our success in extending Platform Equinix. This year we moved into Brazil to our investment in ALOG. In addition to the success in ALOG's core business, the number of Equinix customers seeking to deploy into Brazil has grown significantly. There are now over 60 opportunities in our pipeline, and we have already closed several, including a high-growth cloud provider and a leading provider of financial market data. New customers for ALOG highlighted that being part of Equinix was a key factor in their decision. This is proof that we have pent up customer demand to extend Platform Equinix can toke high-growth markets.

As you may have seen earlier this week, we launched the Equinix Marketplace, which is the latest enhancement to Platform Equinix. Marketplace was created to make it easier for customers to conduct business with each other, whether it's buying network connectivity, establishing InterConnections among ecosystem partners, or providing our customers with access to a rich range of cloud-based services. For the first time, Equinix customers will be able to see in one place what services and partners are available in each of our 99 IBXs which is extremely valuable as ecosystems grow and InterConnections among members become critical for success in the digital economy. Equinix has enabled connections between customers for many years. But with Marketplace, is substantially easier to see the partners, suppliers and customers present in every IBX. By creating a custom profile or storefront in the Equinix Marketplace, such as those depicted on slide 4, sellers of services can drive revenue by promoting their products to other members of Platform Equinix. Buyers, on the other hand, can quickly locate desired services and target data center locations from various suppliers.

Examples of companies initially participating in the Equinix Marketplace include AboveNet, Bloomberg, Go Grid, [Thinaverse], Verizon and many more. Slide number 5 shows the value Platform Equinix brings to each of our industry verticals. Networks can now tap into the estimated $5 billion market for communication services inside our IBXs by selling to other Equinix customers. This shifts their data center spend from a cost center to a revenue center.

Finance companies view us as a financial exchange center because of the optimal access to trading platforms, and cloud providers are using our site to scale into mew markets, drive revenue and optimize performance. We believe marketplace can be especially powerful for companies who want to access the cloud. Today companies can reach over 275 pure play cloud vendors and 525 IT service providers via Platform Equinix to seamlessly deploy their infrastructure. An important example of this is Amazon web services direct connect, which is now available in our DC metro and silicon valley IBXs. Customers can establish a secure private network by connecting directly to AWS, which can dramatically reduce latency and network cost and provide more consistent network performance than using the Internet. We already have our first orders for the service, and AWS is planning to expand into Los Angeles, London, Tokyo and Singapore over the next several months. We expect continued momentum with this cloud hub strategy.

CIOs are concerned with running their mission critical data over the open Internet to access the cloud, and I believe Equinix can radically change how cloud users access infrastructure with our direct-connect model. Now we would like to spend a minute outlining our competitive landscape and target market. We see a continuing segmentation of the data centers services market into high value data centers and those more focused on larger footprint co-locations. Equinix has established itself as the leading provider of high-value data centers through the strength of our ecosystems, the reach of our global footprint and quality of our centers with unmatched reliability. With regard to larger footprint, data centers this type of offering is not a substitute for our highly differentiated IBXs and this is not central to our core strategy. In fact, many of our largest and most strategic customers require a multi-tiered architecture to achieve their goals, which means that high-value data center services can be augmented with wholesale co-locations that is primarily designed for large server farm deployments. We are very selective about working with companies that place value on the core advantages of Platform Equinix which include our network density, the application performance, the direct ecosystem access, global reach, and our mission-critical reliability. Our go to market model is focused on identifying verticals and ecosystems where these requirements really resonate. Let me stop here and turn it over to Keith to review the financials for the quarter.

Great, thanks, Steve, and good afternoon to everyone on the call. I'm pleased to provide you with a review of our third quarter results including an update on the regional performance including results from ALOG for the quarter. With the exception of financial results, all other metrics exclude the impact of ALOG. Starting on slide 6 of our presentation posted today, our financial results for Q3 were ahead of our expectations across all three regions with particular strength in the Americas. Global Q3 revenues were $417.6 million including approximately $17.9 million attributed to ALOG. A 6% quarter over quarter increase and up 26% over the same quarter last year.

Q3 revenues on an organic basis increased 5% over Q2, above the top end of our guidance range. Our strong revenue performance was partially offset by the volatility of our operating currencies in the quarter. The negative currency head winds were $1 million when compared to the average rates used in Q2, or $1.2 million compared to our FX guidance rates, of which $700,000 was attributed to the weakening of the Brazilian real. Our revenue strength, both for the quarter and year to date, was driven by strong bookings activity. Pricing per cabinet equivalent remains firm across each of our regions, and our bookings backlog remains healthy. Global MRR churn, including switch and data, but excluding ALOG was approximately 2%, within our targeted range. We expect global MRR churn to remain at or below 2% for Q4. Global cash gross profit for the quarter was $273 million, or cash gross margins of 65%. Another strong quarter and year to date performance, global cash gross profit is on target to surpass the $1 billion level for the year.

Global cash SG&A expenses were $81.4 million for the quarter, below our expectations, primarily due to lower than lower than anticipated spending across many of our SG&A lines including slower than expected hiring, a consistent theme throughout the past several quarters. As we look to Q4 we do expect to see an increase in cash SG&A spending primarily related to the full quarterly impact of sales and marketing initiatives and IT projects. Global adjusted EBITDA was $191.6 million for the quarter, including about $4.6 million attributed to ALOG. Our adjusted EBITDA margin was 46% and reflects a negative FX impact of $500,000 for the quarter when compared to either the average rates in Q2 or FX guidance rates. Our global net income was $20.3 million. Net income reflects an increase in interest expense of approximately $13 million related to $750 million high yield financing in July, as well as increased appreciation and amortization expenses from our recently opened IBX or expansion projects.

Earnings per share for the quarter was $0.20 on a diluted basis which includes an approximate $11 million adjustment due to the marked to market movement of the redeemable interest in ALOGs that we do not own. The largest contributor to this adjustment is the weakening of the Brazilian real. The liability will continue to get marked to market over the anticipated three-year put/call period. This accounting treatment for the ALOG acquisition, in all likelihood will continue to be volatile. Each quarter we'll update you on the movement of this liability and how it affected EPS. Absent this adjustment, our diluted EPS would have been $0.42.

Looking forward, the US dollar exchange rates used for Q4 at a preliminary 2012 guidance was $1.37 to the euro, $1.57 to the pound, and seeing $1.28 to the US dollar. Our updated global revenue breakdown by currency for the euro and pound is 13% and 8% respectively, and the Singapore dollar represents about 6%. Turning to slide 7, I'd like to review our regional results in the quarter, starting with the Americas. Americas revenues grew 6% quarter over quarter to $268.9 million including $17.9 million from ALOG. Past gross margins were steady at 68%. Adjusted EBITDA was $127.5 million including $4.6 million attributed to ALOG, a quarter over quarter increase of 4%.

Americas' adjusted EBITDA continues to scale driven by strong revenue growth, lower than expected SG&A spending, but offset in part by higher seasonal utility costs in the quarter. Including the diluted impact from LOG, Americas' adjusted EBITDA would have been 41% for the quarter. Americas account billing increased by greater than $1,600, driven by strong quarterly bookings and conversion of Q2 backlog to billable cabinets. Our record Q3 bookings are a result of improved from our expanded sales organization. Also, the Americas sales force had its highest level of in-region and out of region bookings ever, another prove point as to the value Platform Equinix. In particular, the network vertical experienced meaningful growth as carriers continued to upgrade their next-generation technology to meet the new and ever-increasing demands placed on their networks.

We also experienced strong demand in the financial services vertical. Our digital media and content verticals scaled nicely in the quarter with the Americas region exporting sizable opportunities into both EMEA and Asia Pacific. During the quarter, cross-connect to the Americas increased by over1, 700, and inter connection revenues represent 19% of our region's recurring revenue.

We had two new expansion projects underway in the Americas, Seattle and Dallas. The new data center is being built in the Seattle metro area to meet the demands for the network cloud content and digital media providers. As a major IP traffic distribution point to Asia, our customers see this market as an important location for improving application performance. Also, we're proceeding with the second phase of our Dallas 3 IBX as a result of the continued demand in this market.

Looking at EMEA, please turn to slide 8. EMEA had record bookings in the quarter, in part due to the import deals to the Americas as well as the strength in the financial vertical despite the negative economic backdrop of this region. Revenues were up 4% sequentially and 5% on a constant currency basis. Adjusted EBITDA increased to $38 million, or an adjusted EBITDA margin of 41%, a 90% improvement over the prior quarter. The region's net billing cabinets increase by approximately 1,300, reflecting strong bookings performance across many of our markets and verticals.

EMEA net bookings increased 39% over the prior quarter, in part due to strong gross bookings, as well as lower regional churn. We added over 1,000 cross-connects, which is up from last quarter. InterConnection revenues increased 8% quarter over quarter and remain at 4% of the region's recurring revenue. Our top EMEA market in the quarter was London, driven by success with the financial community, including the recent relocation of the BATS trading platform to our LD 4, LD 5 campus in Slough. Our sites are increasingly serving as multi asset trading environments covering equity, fixed income, currency and derivative platforms. Also, we successfully installed our first customer into our newly opened business continuity site in Milan, Italy.

And now looking at Asia Pacific, please refer to slide 9. Asia Pacific region, despite the economic challenges in the Tokyo market, generated strong results for the quarter with revenues improving 8% sequentially, or 7% on a constant currency basis. Singapore and Sydney performed extremely well over the quarter, and the sales pipeline in these markets continues to grow. Adjusted EBITDA was $26.1 million, a 9% increase over the prior quarter.

Cabinets billing increased by approximately $260 over the prior quarter, and unit pricing remains steady. MRR per cabinet increased 1% on a quarter over quarter basis and up 11% year-over-year, largely due to increased InterConnection revenues and favorable currency trends. InterConnection revenues in the region increased 10% quarter over quarter and represent 12% of the recurring revenues. During the quarter, Asia Pacific had 900 cross-connects.

Now looking at the balance sheet data, please refer to slide 10. Our unrestricted cash and investments balance increased over the prior quarter to approximately $1.2 billion, largely due to the recent high-yield financing. We also announced the completion of $150 million revolving line of credit, an operating line that will be primarily used to support our letters of credit and lease deposit requirements. Today we're very well positioned from a liquidity perspective and expect to use a portion of our unrestricted funds to cash settle our 2012 convertible debt, thereby avoiding 2.2 shares of dilution. Additionally, we have sufficient remaining capital to fund future organic and inorganic growth opportunities such as bolt-on acquisitions. Our DSO remains low at 32 days, a slight decrease over the prior quarter. Looking at the liability side of the balance sheet at our quarter end gross debt of approximately $3.1 billion. Our Q3 net debt leverage ratio is approximately 2.5 times our Q3 annualized adjusted EBITDA. Our overall cash cost of borrowing rate is approximately 6.15%.

Now looking at slide 11, cash flow attributes of the business continue to be very positive and track nicely to our adjusted EBITDA metric. This quarter we generated operating cash flows of $142 million, a result of strong operating results. Our Q3 discretionary free cash flow was approximately $115 million, a 26% increase over the prior quarter and better than expected. We expect our 2011 discretionary free cash flow to range between $420 million and $440 million. On a separate note, with respect to income taxes, our expectations have not changed since the last earnings call. We do not expect to pay any meaningful cash taxes until 2014 or later.

Looking at capital expenditures, refer to slide 12. For the quarter, our capital expenditures were $132 million, below our guidance levels, primarily due to the timing of cash payments to our contractors. Ongoing capital expenditures were consistent with our expectation of that $27 million. For the year, we expect CapEx to approximate $645 million to $665 million, including $115 million, that's $115 million of ongoing capital expenditures. As a result of this investment, for the year we expect to increase our saleable inventory by 6% with another 9,150 cabinets to be delivered in 2012. Additionally, we've funded many corporate and product initiatives including Equinix Marketplace and ethernet exchange.

And finally, consistent with the last quarter, I would like to update you on the operating performance of our 21 North American IBX and expansion project that have been opened for more than one year. As a reminder, we target 10-year IRRs of 30% to 40% on a pretax basis.

Turning to slide 13, which was updated to reflect the current same-IBX performance for these projects, you'll see that we're generating 32% cash on cash returns on the gross PP&E invested at a utilization rate of 84%. Also, it's important to know that our 8th longest operating sites are 90% utilized and have generated year over year revenue growth of 8%. This underpins our belief that we can continue to generate additional revenue and profit from these IBXs through the sale of incremental InterConnection services, power services and price increases. We will continue to assess how to best allocate our capital, although to the extent we believe we can achieve these financial results, it's important that we continue to invest in this form of profitable growth while continuing to look for other ways to enhance shareholder value. Let me turn it back to Steve.

Thanks, Keith. Now, let's move to slide 14 for our 2011 and initial 2012 guidance. For the full year 2011, we expect total revenue to be greater than $1.6 billion and greater than 31% year-over-year growth rate including $45 million to $50 million in revenues from ALOG and approximately $7 million of currency head winds absorbed in Q4. Total year cash gross margins are expected to range between 65% and 66%. Cash SG&A expenses are expected to approximate $320 million. Adjusted EBITDA is expected to be greater than $730 million and includes approximately $12 million in contribution from ALOG. We are maintaining our total CapEx guidance for 2011 at range of $645 million to $665 million. CapEx guidance is split between expansion capital in a range of $530 million to $550 million and ongoing CapEx of approximately $15 million.

Shifting to 2012, I want to provide you with a directional view using current exchange rates of what we believe we can accomplish next year. On our Q Q4 earnings call in February, we'll provide you a more detailed update on our views for the year. Currently, we expect our 2012 revenues to be greater than $1.87 billion at the currency rates that Keith outlined earlier. This includes roughly $27 million of currency head winds relative to guidance raised provided on our last call. Adjusted EBITDA is expected to be greater than $850 million. This includes roughly $10 million of currency head winds to the prior guidance range. It is also our expectation that we can continue to improve our EBITDA margins over the next few years.

We see strong demand across the globe and will invest with discipline to capture these profitable opportunities. We are on a trajectory to surpass our 2013 plan objective of over $2 billion in revenue and have set a new goal in our planning horizon of greater than $3 billon in revenue by 2015. We recognize these are volatile times from a macroeconomic and market perspective, and despite these uncertainties, the technology trends that are driving our business do remain robust, and Equinix is still a strong growth story. Since roughly 95% of our revenues are recurring in nature, this continues to provide high visibility into our operating model. We have over $1 billion in cash and investments on our balance sheet, giving us the strategic and operational flexibility to make capital investments at the right time. Based on our current analysis, we expect 2012 capital expenditures to be in the range of $700 million to $800 million, including expansion and ongoing CapEx to support the strength of demand and our plan to achieve over $3 billion in revenue by 2015. Our 2012 CapEx, we have in implied expenditure of approximately $500 million related to already announced expansions which includes $120 million of ongoing capital expenditures. I want to emphasize that there will be no change to our disciplined approach to expansions on any incremental projects above the $500 million, and we are confident that we will continue to achieve our targeted returns.

So in closing, our long-term growth objectives are underpinned by a world-class organization focused on disciplined growth, supported by processes and systems to scale world wide and a capital allocation strategy that maximizes shareholder value. Equinix will remain laser focused on developing digital ecosystems that create value for our customers who place a premium on network density and require low latency to achieve high application performance and gain a competitive advantage for their business. Let me stop here, and let's open it up to questions. So, I will turn it back over to you, Jackie.

(Operator Instructions) First question comes from Michael Rollins of Citi.

Hi, good afternoon, and thanks for taking my question. Just curious if you could focus a little bit more on the 2012 CapEx guidance, specifically the -- for the new centers and new facilities. In terms of the confidence that you have with the economic backdrop, particularly in some of the international markets, can you talk about some of the conviction, maybe some of the tools you've used to gauge the appropriate amount of investments to make? Is there some sort of backlog, early commitments that you have? A little bit more insight maybe into some of the projects that you've got flagged now for next year. Thanks.

Yes, sure Mike, let me start and then Keith can add a few comments. I guess first thing I would tell everybody on the call is that of the $500 million that we've announced, roughly 65% of that is aimed at phase 2 projects in current campuses. So, the campuses that we're already in, we have very good intelligence, we know the pipeline, we know the bookings, we know the fill rates, we know the competitive builds. So, we have very good intelligence. So, about 65% of that $500 million is aimed at phase 2 projects on same campuses.

There's another roughly 30% that I would call new sites in various established markets. And so the second component of that capital today that we've already announced is aimed at -- 30% of it is aimed at new sites, but in established markets where, again, we have very good intelligence. We understand the fill rates, we understand the competitive positioning, so call it roughly 95%. We have very good intelligence, same level of discipline we've been doing for years, and that leaves about 5% of this capital inside that $500 million that's aimed at what we would call new market development. So, that's the first point I guess I would make to -- just on tax. There is no change, Mike, in how we're making these decisions. We have a three-gate system, how we make decisions here. We start in the regions, then we have a corporate review, and then we have a subcommittee of the board that finally approves every CapEx decision that we make. So, we have a very thorough process. We look at the same amount of data, same return profiles for every decision that we make. Keith, would you add?

Yes, so Mike, let me take it one step further. When Steve was referring to the 65%/30% and 5%, that is actually -- that's over the entire CapEx base of $700 million to $800 million. But what's probably most important here is -- Steve alluded to the fact that we go after the same economic returns, so when I can take you back to 21 projects, specifically in North America that drive 32% cash on cash return and have effectively 75% cash gross profit, that's the type of investment we want to continue to make. Having said all of that, Steve alludes to the fact that we launched the Equinix Marketplace this week. When you think about Platform Equinix and you think about all the favorable trends we see not only in our pipeline, but our backlog, and recognizing we're targeting the right applications and the right locations, we're looking at all the multi tier architectures to make sure we've got the right level of customer commitment into our data centers. It drives a lot more comfort in the stickiness of the revenue.

And over time, quite frankly, we should see our volume continue to grow from a gross bookings perspective, and it is our expectation that you will see churn continue to moderate downwards over time. And so from those perspectives, I think it's real important that you understand the confidence that not only Steve and I have with the rest of the senior management team, but the regional presidents and the operating mechanism in those regions. Feel very comfortable about their ability to deliver strong, strong performance against these investment decisions.

And, Keith, if I could just follow up. So, thinking just about discretionary free cash flow, if you're guiding this year -- I don't think you changed your discretionary free cash flow guidance of $420 million to $440 million, and presumably, is it fair to say that the EBITDA growth for next year in the guidance is $120 million? So, is it fair to say discretionary free cash flow for next year should be like a $540 million to $560 million number?

Well, we give you a greater than. Again, recognizing that we're giving you guidance for next year on the Q3 call, we're giving ourselves a little bit more flexibility with the greater than, both on the revenue and EBITDA line. But looking at Q4, we guided -- pardon me, for 2011 we guided you to greater than $730 million, and next quarter -- or next year we're guiding to greater than $850 million. That is an incremental $120 million of EBITDA. And so from our perspective, there's some implications, Mike, as you can appreciate, on the timing of interest expense. But putting that aside for a moment, directionally, that's exactly what should happen. You should see a meaningful step-up in discretionary free cash flow.

So, I think the crux of the question then is, if discretionary free cash flow can be at least $540 million for next year, and you're trying to maintain net debt leverage of 3 times, so you're growing EBITDA by $120 million, $120 million times 3 is $360 million, plus $540 million is $900 million. Your growth CapEx for next year on the guidance right now, if we take the high end of the range, would be $680 million. How are you thinking about that excess $220 million of cash flow that presumably you could invest in the business while maintaining financial leverage at a net debt to EBITDA ratio of 3 times?

It's a great question. First, as you know, we're going to set ourselves up to take out convertible debt in or around April 15 of next year. Assuming you don't have any incremental leverage on the books, at that point in time, basically you are going to use roughly $250 million, all else being equal to take that debt out. You also to have appreciate that we want to have some level of strategic and operational flexibility with the cash that we have in our balance sheet to look at, as we refer to, bolt-on acquisitions. As a Company, we have been active, we will continue to be active, and so we want to certainly have some flexibility around that. But as step forward, recognizing we have some limitations, as you can appreciate, with our high yield -- our first high yield instrument with the restricted payment basket, we don't have a lot, if you will, flexibility to date. Or next year around how you deal with restricted payments, but as you look through time, I think we're well positioned as a Company to, of course, put more leverage on the books as we scale EBITDA. But we also have the ability to look at how we manage the distribution of capital to enhance shareholder value. And so these are things that are very much top of mind in the Company, and it's something that we will continue to focus on very acutely over the near term -- near to medium term.

Thanks very much.

Thank you. And our next question will come from Chris Larsen of Piper Jaffray. Your line is open.

Hi, thanks. A couple of quick clarifications. Keith, you mentioned that SG&A was lower due to less hiring. I'm wondering if you can just talk a little bit about why you might have felt the need to hire less, or was it availability of the right candidates or because of the economic situation, you're getting candidates at a lower pay scale? And then noticed that MRR per cabinet was down in Europe. Was that -- how much of that was due to FX, and is there anything else -- I've already gotten a handful of questions, is that something to be worried about, or were those customers coming in at slightly lower densities or? You gave positive comments around that, so if I could just ask on that.

Yes, let me take hiring first, and then I'll go on to the other question. Hiring, we added roughly 120 net hires this quarter, as you know. We put a lot of emphasis around the sales organization,, as we said last quarter. For all intents and purposes, we're near the completion of that. We're now -- the people are on staff, if you will, but we weren't fully, if you will, accounting for their salary and benefits because those were only for part of the quarter. So, that was one of the comments.

Number two, when you look at the ability to hire, particularly in the technical field, it is taking a little bit longer. And we have very high expectation of -- for our employees, and as a Company, we just haven't been able to hire quite as many people as we anticipated. But having said all of that, we still have the same level of ambition to put right staffing in the operating centers to make sure we run them to the level -- that we run them with the reliability and the confidence that people place on Equinix. So, that will be something that we'll continue to work on. And that's part of the reason that you will see why our spending will continue to be up. But equally so, we're also investing in the IT area, we're investing in what we call our global operations, which is basically credibility, the force that basically manages the electrical, the mechanical, the architectural of our data centers, and we'll continue to make investments in that area. That's what we're really accomplishing.

Then we have the seasonal impact on our annual audit and stuff like that, that goes through Q4. Hence the uplift, if you will, on SG&A in Q4. When I go to -- when I deal with questions on pricing in Europe, there's a couple things. Number 1, we -- currency is certainly impacting us. If you look at, whether it's the swiss franc, the euro or the GB -- sorry, the British pound, all of them had an impact. We're reporting this in local -- sorry, in US currency, so that's one thing.

The other thing I think is important to note, and we sort of alluded to it, but there's a number of -- there's some fairly sizable, what we call power drawn that left the organization that had no profit attached to it. So, what it did was effectively reduce the amount of revenue attached to the average unit, but it had no margin attached to it. And that happened in the German market, and we experienced in Q1, Q2 and Q3. And so for all those reasons, plus we have a lot of installs associated with the recent activity, it's adjusted the price per unit slightly. I will tell you, though, our view as a Company, we are -- that is -- that metric that we showed you today is not something that we're concerned about. We have a good handle on what's causing it, and the operation and performance of the business and our ability to get the pricing leads back is consistent with our needs.

And then, I think I asked you this on the last quarter, but interest rates continue to fall. You've talked a little bit in the past about opportunities to buy some of the land under your buildings. Can you maybe give us an update on where you are in that status, in that progress? Really, I guess following a little bit on Mike's question and your net leverage. Yes, certainly we do have -- let me just step back for a sec, Chris. There's two ways to look at it. There's just raw land out there where we can build our own assets on top of, certainly we'll continue to look at that as an advantage-- a strategic advantage. Then there's the buildings of the land that we already operate. Some are leased and treated as operating leases. Some are treated as capital leases. Some of the ones that look like capital leases effectively had -- that's part of what you call the sort of the financing debt or the secure debt you see in our balance sheet. I think there's opportunities in discrete markets or discrete buildings that we will continue to review, but we want to make sure economically it's a wise decision on how to deploy the capital. And it's something we will continue to look at, but there's nothing to announce at this stage other than to let you know that's something we're actively reviewing and we'll see where the opportunities present themselves, but we just don't want to do a bad deal. Thanks a lot. That's very helpful.

Thank you, and our next question comes from Simon Flannery of Morgan Stanley. Your line is open.

Thank you very much, good evening. Keeping on the CapEx theme, a couple of things. First, on the stuff that's not allocated to specific projects right now, how firm is that spending in your mind? Is this stuff that we could see announced in the next couple months, or is it still some way away? You obviously just announced Seattle, relative to the guidance you gave this time last year. And tied to that is maybe a little bit more color on macro, a lot of different things going on around the world. You talked about Tokyo and obviously, there's a lot of concern in Europe. Are you seeing any change in behavior? Customers may be postponing decisions or just taking a little bit longer in general? It looks like from your CapEx guidance and from your backlog commentary that really things are still very robust, but any sort of read you have on that would be very helpful. Thanks.

Yes, Simon. This is Steve. Let me start out with that. So, level of firmness, it's the $700 million, $800 million at this point is our best intelligence, it's our best thinking. And it will unfold over the year, because as you all know, we do quarterly fill rate analysis, and on the back of that, we make decisions every quarter. So, the cadence is not changed. We do -- we gather intelligence quarter by quarter. We do a fill rate analysis. We come in region by region, and we make decisions. So, that will unfold as the year unfolds above the $500 million that's already been announced.

And then in terms of -- we've got to ask Charles to join us today. He might be able to give you some color on the Americas. But generally in Europe, the way to think about Europe is that the euro zone sovereign debt banking issues have not affected our business today, so the quarter, that Keith reported, was very solid in Europe, and we're not feeling the effect of that. In Asia, in all markets we're very strong. The only exception, as Keith pointed to, is in Tokyo, and it has nothing to do with the macroeconomic issues. It has everything to do with the earthquake, and we're a little soft in Tokyo. Our team in Asia is telling us that it could be that way for a quarter or two.

But the great thing about the diversity of our markets and business, it's not pulling us down. So, we're very focused. And actually, I think I mentioned on the last call, a lot of the market in Tokyo is taking a look at Osaka. We are also doing that, so we'll continue to monitor the Tokyo market as it unfolds, but lots of customers have held off on making decisions inbound and in the country. But Charles, how about some color?

A couple comments I'd make relative to the health and trajectory of the business in the Americas. As Keith noted, we actually continue to see our new sales resources ramp to productivity actually ahead of our plan, with particular strength in a couple of our key verticals where they're actually coming up to speed a little faster than what our models would have called for. And we're also, as the numbers showed, that we're seeing really strong global deployment demand. So, from both -- for in Americas and then exporting portions of those externally.

So -- and then people implementing these multi-tiered architecture, all of which is derived from really strong secular trends behind the business, and that's strong Internet growth, mobility, video, social media, all things that are continuing to drive those deployments for our customers. As a result, I think that on the CapEx question, we're really looking at that vast majority of that going into markets where we have very well established demand and are essential projecting inventory additions just to meet up with where we see inventories. So, if you look at our Americas business overall, it's just a -- this is very much an at-scale version of what I think you can expect from Equinix. We have, in 2011, we have roughly in the neighborhood of $500 million in EBITDA, and that includes fully absorbing all of our corporate overhead. You take out of that the roughly $220 million in CapEx that we had, which includes our maintenance CapEx, and you get about a $280 million of cash being thrown off by the business. That can absorb the entire corporate interest burden about $170 million and still have more than $110 million left over in free cash flow. So, that's just a view of what I think you can look at as these businesses reach scale, and we continue to feel very good about the overall trajectory of the Americas business.

That's helpful, thanks.

I would add one thing to that. As you think about going out to 2015, Charles and his team is also looking at double-digit growth on top of this at-scale business. And so Keith and I, for the rest of the business and the rest of the leadership team, are very focused at continuing to invest in Asia and Europe to drive it towards the same level of scale someday. So, that's at the heart of the decisions we're making here.

Thanks.

Thank you. And our next question comes from Jonathan Schildkraut from Ever core. Your line is open.

Great. A couple of housekeeping items and then something a little more strategic. I was wondering if you could repeat, Keith, currency assumptions for 4Q and then what the expected currency head wind was. I'd also like to get where the RPM basket stands.

Sure. So, from a currency perspective, the breakdown is basically 13.8 and approximately 6 between the euro, the pound and the Singapore dollar. And so right now we're using -- I'm sorry, let me just -- right now we're using $1.37 euro, $1.57 pound, and a $1.28 Sing dollar. So, when you think about that and the impact it has, if you look at Q4 relative to Q3, it's going to have roughly a $7 million impact on revenue. If you just -- said differently, if you just add that back to basically the greater than guidance that we give you, or the implied guidance for Q4, you're adding roughly 4% quarter over quarter growth. Then if you look on the bottom line on a EBITDA basis, you've got add back roughly $3 million of currency, and that's -- in Q4. So, we're being diluted by that as well.

And that gets to you roughly a greater than 192 number from an EBITDA perspective for this quarter. And then as you take that exchange rate, those exchange rates into next year, there's roughly $27 million on the top line and $10 million on the bottom line. And we're looking at currencies all this week, as you can appreciate, Jonathan. The currency was better yesterday, then it fell off today. We're using these rates because we don't really have any better view of what it should be. At least now you can anchor off those, and if the move is one direction or the other, you get a sense of at least where we're going, so feel good about that.

Much appreciated. The restricted payments basket, where does it stand?

Yes, the arch basket today is roughly -- it's a detailed calculation, but today at the end of Q3, roughly $191 million.

Great. All right, so as I look out strategically at what you guys are talking about, maybe reaching $3 billion in 2015, I guess what I realize is that embedded in those projections is potentially acquisitions, but if not, an acceleration in organic revenue generation. Every year we look at the annualized exit rates and see how much revenue, new revenue you generate on top of that exit rate. And while 2011 is the best year that I can remember, and 2012's guidance initially implies similar levels of organic revenue generation, when I do the math for $3 billion by 2015, the numbers have to actually accelerate off these levels. And so I was wondering if you might give us some context to think about what your perspective is on the growth rates of the Company.

We'll tag-team this one, Jonathan. Clearly, our expectations are that we believe, given what we see in front of us and the analysis we do with the vertical leads and the senior management team here is that we can continue to scale the business faster than we have before. And I'm talking about in absolute dollar terms, not specifically growth rates, because the law of larger numbers.

Understood.

And partly because -- why we feel that is the investment we're making in our sales organization and all the tangential investments around sales and sales productivity that Charles alluded to. But also when you think about the marketing investment and the success of what we call Platform Equinix and the Equinix Marketplace, all of these things lead us to a view that when we think about performance of the secular trends and how we can be -- we can influence that going forward, we get very comfortable that we can scale the business faster than we have in the past. And recognizing that comes generally with some CapEx. It's normally looking at what I call inorganic opportunities.

Clearly, that's something you could add on, but there will be some new markets that we would attach to that. And of that $3 billion, just to size it for you, we're thinking of roughly 5% of that could be in markets that we're not in today. And Steve alluded to the Osaka market, as an example. So, that should hopefully give you a sense. Steve or Charles, you want to jump in?

I would add one thing, Jonathan. It's a good question. I think one of the principals, as we build our plans for the future with our board is that we want to continue to grow this. We believe we can grow this thing as fast as we want, but we're very disciplined about to type of growth we want to bring in, as we've been clear about. And we want to grow at or above market growth rates. So, we could debate all day long how fast our market is growing or the ancillary markets, but we tend to shoehorn our plans into making sure we're gaining share, and we believe we are, based on our intelligence market by market.

So generally, that's how we build the plan. We think we're doing that as we're aiming in the future. The investments you hear about today are not aimed at 2012, they're aimed at the growth of this business out through 2015. So, we feel pretty darn good about it, and our trends, our secular macro trends are very, very strong.

Steve, if you could dive a little deeper in terms of some of the areas of growth, and you guys have discovered some new ecosystems over the last several quarters which have contributed to your growth. You've added some new talent in different areas on the sales force that have given you accelerated growth in existing verticals. Do you reach a point of maturation from an InterConnect perspective or from a saturation perspective within a vertical, or do you continue to see growth in some of your more historic growth engines?

Well, that's very good question, also. It starts for with us the networks. And we hub all the vertical and ecosystems off the back of the network. So, when we say we go from 675 to 680 networks in a quarter, we're very focused on who the next target networks are, and we want to get the tier 1 networks deeper into more markets. We have very robust global account plans to do that, and then on top of that, all the industry vertical sit and the ecosystems sit, which take advantage of those networks. And so our whole focus is to go deeper into the current ecosystems, which are around our network pairing, our digital media stuff, as well as the electronic trading.

Now mobility and cloud are the two new areas that we are right at the intersection of and believe we are well positioned to help frame an ecosystem, communities of interest, and we're well on the way to do that with the platforms we're bringing in. We're very focused on these global platform winners. There's probably going to be a dozen big winners. We're very targeted on who we want to get in and how many locations we want to get them in. So, it's vertically oriented, we have subject matter experts, we have solution architects, we have people that are skilled in these verticals, and that's been underpinning the sales time we've been doing, and we're going to continue to go deeper on that. Jarrett, I don't know if you --

Just to bring it home, we have over 275 cloud plays. There are natural cloud hubs. We're at the center of that. Marketplace is a great enabler for that, and we're up now over 100 pure play mobility providers in distributed marketplaces. These are two very high-growth opportunities for us (inaudible).

This is Charles. I would add one point, and that is cloud service providers are a very natural fit for our value proposition. They tend to be revenue facing, they tend to be highly distributed. They tend to be performance sensitive and they tend to be global in nature. And so as we look at those opportunities in our funnel, we get a high win rate and very firm pricing because of the value delivered to the customer. So, that's a big area of emphasis for us.

Thank you for taking the questions.

Thank you. Our next question comes from David Barden of Bank of America. Your line is open.

Hey, guys, thanks for taking the questions. I guess two, if I could. First, obviously, there's been a lot of optimism about the demand picture and the CapEx. Keith, I guess it's -- the opportunity to put you on the spot, which is, obviously the low end of your full-year guidance implies that EBITDA is going to go down $2 million in the fourth quarter. I doubt that, that's really going to happen. But even if it did, getting to your minimum next year guidance would suggest about a $6 million sequential EBITDA growth over the course of the year. Year to date, if you exclude one-time items and currencies and whatnot, your growth has been actually averaging about $10 million.

And so with a 60% larger sales force and the new space that you're building off the back of $600 million in CapEx this year, I guess, how do you explain a baseline expectation that's about half as fast in terms of growth next year as it is this year? And then, Steve, if I could just ask you a little bit about the consolidation we've seen in the industry to this point in time. With respect to the CapEx, are you seeing a window of opportunity as we've got a lot of decision makers get removed from the marketplace. Instead of Savvis and Century Link making independent decisions, or Terremark and Verizon making independent build decisions, they're coming together, they're harmonizing their plans, they're probably looking to spend fewer dollars rather than more dollars. Is this creating a big window of opportunity for you to kind of be the guy that's there first with the capacity? Thanks.

Great questions, David. Let me take the first one and then pass over to Steve. As I mentioned with of one of the other callers, just that $3 million of FX impacting Q4, if you add that basically just to the greater than, you get at or slightly above what our EBITDA was for Q3. Recognizing though that we do have a greater than, and I think most people on the phone understand that we as a Company want to continue to be somewhat conservative, but we also want to make sure we're driving the right decision and get the right timing and recognizing we're not even in a budgeting exercise. We're starting that next month. We're going to go through a fairly robust budgeting exercise, much deeper than what we've done to get to where we are today, and then we can start to give you more detail on the fourth quarter call.

But we are giving you a greater than today, and it's a step up. It's a step up in absolutes, but I recognize on a sequential basis it's not quite as robust as we did this year. Currency does have a little bit to play with it here, but we're also making continued investments in some important areas. We envision making some investments in some important areas, which we'll share more with you on the Q4 call, that can effect the EBITDA line. Recognizing, as Steve said, we want to see improving EBITDA margins. That is the objective that this team has set for itself, and we want to continue to work towards that. So hopefully, that gives you enough, and let me just pass it over to Steve.

Yes David, on the consolidation question, we probably are looking at it in two buckets. One, the general primary IT services players, the two you mentioned. In our mind, it reinforces our position as the only global network neutral provider out there with a very unique value proposition, it just separates us. And yes, does it position us for more opportunity, and we believe we're positioning ourselves to take advantage of that. But on a more macro level, I believe our team here thinks that it's a sign of the strength of the market, and I think it's good for the long-term health of our customers and the long-term health of the market. So, both of those acquirers and acquireees are customers of Equinix and will continue -- are now continuing to grow with us, so it's an interesting situation.

We're also watching it on the financial side. As you all know, there's several financial exchange potential consolidations, but again, we don't -- we view that as generally positive. It doesn't reduce the need for -- or the economic benefit that's being done in these carrier neutral, vendor neutral sites versus a captive model, a captive exchange model. So, I think in all cases, we see benefit. And historically, we have seen benefit out of consolidations. So, it isn't an area that we're concerned about losing customers or share, and we're very close to all the customers that are participating in, in these consolidation conversations.

Thanks, guys.

-- is relative to our win. We're down in the field, win rate, one of the things that drives our win rate is simply customers who need to feel confidence that the capacity available to them to expand is going to be there, and that's what I think this represents, that opportunity for us as we continue to invest, and that's one of the big reasons why customers are choosing Equinix.

Perfect, thanks, guys.

Thank you. Our next question comes from Clay Moran from Benchmark.

Thanks, good afternoon. Two questions. One on the quarter, the third quarter. The managed infrastructure revenue was higher than we had expected. Just wondering if that was what you had expected in your guidance, and was that bump up essentially all due to ALOG? And should the importance of managed infrastructure continue to grow? And then secondly, if you could just give us a sense for your plans in China.

Okay. Let me take the first one. So, with managed infrastructure, we're taking -- this is the first quarter where we have the full quarterly impact of the ALOG asset, where as last quarter it was only for two of the three months. And so it's not inconsistent with what we expected. We did give guidance for the ALOG asset on the last call, and we were -- we said $18 million to $20 million of revenue. We came in at $17.9 million, but they absorbed -- that includes $700,000 of currency head winds. So, they're right in our guidance bucket, if you will. And so there's no meaningful change there.

And then in mainland China, we've had great momentum over the last four or five months in the relationship -- the partnership we have at Shanghai. It is, I would call it a top priority for us to figure out how to continue to position ourselves not only deeper into Shanghai, but into Beijing. There are, as you all know, several large Internet companies that are starting to export into the US and European markets. We are going to position ourselves to take advantage of that and have some resource in mainland China to start to build those relationships and discuss Platform Equinix. So, we're thinking about from the both sides. Top of the list for us for sure.

And that partnership, are you a minority equity owner of the company, or how does that partnership work?

No, the current relationship we have is a current local provider that we have a -- we took down space with them, and we're reselling it with them to our customers around the world. So, it's a go to market partnership.

Is that -- but is the former something would you consider doing to expand in a greater way in China to actually be an owner, or is that not on the table?

I think all options are on the table. We're looking at organic growth, inorganic growth. The BRIC countries. As we all know, for this business model, a lot of the companies have been focused on the BRIC countries for many years. For our business model now in Brazil, with the play we made there, China, Russia, India, they're at the top of the list for us in terms of potential places where we can enact this business model and bring the same positive benefits we brought to Europe and to the Americas. So, we're looking at all options.

Okay, thank you.

Thank you. And our final question comes from Robert Dezego from SunTrust Robinson Humphrey.

Thanks for sneaking me in here. Could you talk about some of the assumptions you made for competitive builds in some of the markets where you're investing in 2012, and maybe where you see pricing moving, specifically in areas where there's maybe more or less new capacity? And the second question would be, are you seeing any change in the type of churn that you're seeing, i.e. what kind of deployments are actually leaving your data center now and that 2% churn number versus the kind of deployments that were leaving say a year ago or two years ago? Thank you.

Charles, why don't you take that, because I think it's more prominent in the US market, what's going on between wholesale and retail?

Yes, I think in terms of -- in all of our investment decisions, whether those be wholly new builds or extensions or our existing campuses, the competitive environment and what we see on the horizon in terms of other builds is always part of the calculus.

What I will tell you, however, is that the vast majority of the supply coming onto the market we view as relatively undifferentiated large footprint supply. It is simply not substitutable for our core IBX value proposition. And so we highlighted that in the script, and that's definitely what we continue to see. And associated with that, in answer to your other question, is pricing remains very firm. We think the value proposition is strong, and as a result, both our deal mix from small, medium and large size deals, we remain firm in pricing across all three of those deal sizes and the mix is favorable. So, we see strong demand in the market relative to that.

Thank you.

Oh, and on the churn side, yes, I'm sorry. Relative to churn I think that we are -- we continue to see a good trajectory and trend in our churn line overall. I think that's driven by a couple of factors. Very rigorous qualification on the front end, which is we're getting the right applications on the right assets. We do see some, what I would consider to be positive churn, which is us simply working with customers to implement multi tiered architectures where a portion of their architecture may in fact be better suited to a wholesale footprint or something outside of the Equinix facility. And as we work through some of those, we continue to retain very high value business and quite frequently free up capacity that we can sell at a higher price point to other customers. That's the churn dynamic that we face today, and we've been very pleased with the progress. We always see -- there's always the prospect of some lumpiness in churn, but overall, the trajectory and nature of that churn in our view is very positive.

Okay. And you haven't seen any kind of difference in the customers that are actually -- like what kind of deployments are actually leaving the data center?

Again, I think it's when they have a multi tiered architecture, and that third tear is something they may want to deploy elsewhere, and that can happen in content and in other verticals as well.

Great. Thanks for taking the questions.

That concludes our Q3 call. Thank you for joining us.

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