Equinix Inc (EQIX) 2012 Q1 法說會逐字稿

Good afternoon and welcome to 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 would like to turn the 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 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 24, 2012 and Form 10-Q filed on October 28, 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 Regulation Fair Disclosure, it is Equinix's policy not to comment on its financial guidance during the call 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 through 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; 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 within an hour, we would like to ask these analysts to limit any follow-on questions to one.

At this time, I will turn the call over to Steve.

Thank you, Katrina. Good afternoon and welcome to our first-quarter earnings call.

I am pleased to report that Equinix delivered strong financial results in the first quarter and a great start to 2012. As shown on slide 3, revenues were $452.2 million, up 5% quarter-over-quarter, and 25% over the same quarter last year. Adjusted EBITDA was $215.2 million for the quarter, up 29% over the same quarter last year. We continue to see growth through high-value deployments where application performance and reliability matter, resulting in record bookings in all three operating regions this quarter.

Our focus on creating digital ecosystems and the corresponding vertical alignment of our sales force is reflected in our market momentum, particularly in the network and cloud segments. By targeting customer applications that fully leverage the advantage of Platform Equinix, we continue to see a very favorable deal mix and healthy pricing environment. The breadth of our global platform remains a unique competitive advantage. And this quarter we exported record bookings across regional boundaries. Currently 59% of our monthly recurring revenues come from customers deployed across multiple countries, reinforcing the value of our global platform.

As the Internet continues to scale, the global data center market remains as dynamic as ever. Trends such as mobility, cloud computing, data management, and social media are at the heart of this shift. There are more people interacting with data than ever before. And the world's effective capacity to exchange information through telecommunications network is predicted to reach approximately 670 exabytes annually in 2013. These global trends are forcing architecture decisions that place network dense data centers at the heart of mulit-tiered architecture deployments. Our network-dense IBX is at the intersection of these business and technology trends, as a solution to both cost and performance challenges.

As we continue to accumulate private, public and hybrid cloud deployments across Platform Equinix, we are creating a marketplace for buyers and sellers of cloud services to transact. Equinix IBXs are important locations for our cloud and SaaS customers to host their services and gain access to customers and partners across our platform. Similarly, CIOs of major corporations see Equinix IBXs as critical points to access cloud vendors to optimize application performance, while maintaining security and reliability for their architecture.

Equinix's goal is to assist customers, both cloud vendors and users, to leverage the cloud seamlessly The vertical ecosystems being performed inside Equinix underscore these trends and point to a vibrant, ever-changing digital economy. The financial services industry is undergoing historic transformation. Deregulation and globalization have spawned a global community of financial institutions connecting to share data and transact across our entire platform of data centers.

Bloomberg is deployed in seven Equinix markets where they are connecting directly to the most important trading infrastructure around the world, to insure critical information is available in real-time for the trading community. Increasingly, this industry is also looking to private cloud services for fast, secure and reliable transactions, which is fueling the growth of interconnection between our cloud and financial ecosystems.

Other industries are undergoing similar changes as CIOs architect their infrastructure to incorporate mobility, cloud and advanced data analytics to ensure quality real-time transactions. This quarter, one of the world's largest logistics company selected Platform Equinix to more efficiently manage its delivery services system, which is at the heart of their business success. The digital supply chain has transformed how companies sell, price, produce and deliver products and services. And Equinix data centers are where businesses meet to fulfill the requirements of this new economy.

As a complement to the growth in our ecosystems, we are also in the early stages of developing a program to ensure best-of-breed solutions are available to customers who are looking for a simple way to deploy infrastructure, and buy other services in our data centers. Many enterprise customers seek bundled solutions, and service providers inside of our data centers are eager to gain access to our diverse customer base. We're focused on cloud solutions such as hybrid cloud, security and storage as a service. Customers have access to many providers including Amazon, Carpathia, Citrix, Nirvanix, RightScale and Tier 3, just to name a few. And we continue to evaluate ways to work with other providers to help them deliver easy-to-deploy products and services to our entire customer base.

Let me stop here and turn it over to Keith to review the financials for the quarter.

Thanks, Stephen. Good afternoon to everyone on the call today.

I'm pleased to provide you with additional details on our first-quarter results. And with the exception of the consolidated financial results, all other key metrics exclude the impact of ALOG.

So, starting on slide 4 from our presentation posted today. Our Q1 financial results were better than expectation in each of the three regions, with particular strength in the Americas. Global Q1 revenue were $452.2 million, a 5% quarter-over-quarter increase, and up 25% over the same quarter last year. This healthy increase was in part due to a $2.8 million early termination fee negotiated with a customer in the UK. Our quarterly revenues were slightly impacted by the negative currency trends in the quarter, reducing revenues by $500,000 when compared to the average rates used in Q4, or $600,000 when compared to the FX rates from our guidance.

Our pricing across each of the regions remained firm, both on an MR per cabinet basis, and on a unit pricing basis. Global MR churn was approximately 2.4%, a slight increase over the prior quarter, yet within our targeted range of 1.5% to 2.5% per quarter. This quarter's churn reflects the renewed focus on IBX optimization, as we work to maximize our return on invested capital across our asset base. The UK churn previously denoted is a great example of our IBX optimization efforts. Our customer is paying us to downsize their footprint of unused space. Consistent with our strategy, we have already resold a portion of the space at higher prices to support the deployment of a large US bank's critical trading platform. This is what we consider to be positive churn.

The benefits of this strategy are clear to us. It will improve our pricing and margins. It will recapture inventory in our most critical IBXs and will improve our ROIC. Given this strategy we expect our MRR churn metric to fluctuate throughout the remainder of 2012. In particular, in Q2 we expect to see slightly elevated churn, all contemplated within our guidance.

Global cash gross profit for the quarter was $311.6 million, or cash gross margins of 69%. Higher than our initial expectations, in part due to stronger-than-expected revenues, better-than-planned lease costs and tax savings, and a favorable settlement with one of our general contractors in the EU region. Our cash gross profit increased 8% over the prior quarter, and 30% over the same quarter last year, despite a level of expansion currently underway in each of our regions. Looking forward we expect our cash gross profit to decrease slightly due to the higher seasonal utility rates.

Global cash SG&A expenses were $96.5 million for the quarter, slightly higher than our guidance. Largely due to $4.6 million in costs related to our global IT initiatives. And approximately $2.9 million of increased expense related to the annual reset of the employer paid FICA and other related costs. Looking forward, we expect our cash SG&A expenses to increase over Q1 as we continue to invest in our global IT initiatives and other key projects.

Global adjusted EBITDA was $215.2 million for the quarter, a 40% EBITDA margin, or a 90% improvement over the prior quarter and up 29% over the same quarter last year. Our adjusted EBITDA margin reflects strong revenue performance and a higher the expected cash gross profit margin, offset by slightly higher than planned SG&A. On a normalized basis, taking into net one-off benefits for this quarter, our global adjusted EBITDA would have been $211.5 million, or a 47% normalized EBITDA margin rate.

Global net income was $34.5 million for the quarter, a 37% improvement over the same quarter last year, the result of our strong operating performance. Fully diluted earnings per share was $0.71, which included the dilutive impact of 2.9 million shares from our 3% convertible debt. Next quarter we expect our depreciation and amortization expense to increase by approximately $4 million, due to expansion openings.

Looking forward, the US dollar exchange rates used for Q2 and 2012 guidance remains unchanged at $1.31 for the euro, $1.58 to the pound, and Singapore 1.25 to the US dollar. Our updated global revenue breakdown by currency for the euro and pound is 13.8% and 8%, respectfully. And the Singapore dollar represents about 6%. The largest currency impact on our forward guidance both for Q2 and the rest of the year is the weakening Australian dollar, Brazilian real, and Japanese yen.

Now, before I go into the regions, I want to quickly discuss our position on tax. First, for the quarter, our effective book tax rate was approximately 29%. Our current analog position remains at approximately $450 million of federal NOLs, which should take us into 2014, or even possibly 2015, before we pay any meaningful federal cash taxes. As discussed on the prior earnings call, we are taking a serious look at our global tax strategies, which includes assessing the feasibility and the applicability of Equinix converting into a REIT structure. We have engaged advisors and commenced diligence to assess this tax structure. While we consider this ongoing assessment to be very important for our global tax strategy, we want you to know that we will continue to focus on profitably growing our Business in both our core and non-core markets.

Now, given the status of our assessment, at this time we're not able to provide you with any additional update on certainty or timing. And on a related note, included in our SG&A guidance is an incremental $2 million of anticipated spend for the initial cost of the REIT analysis for 2012.

So, turning to slide 5, I would like to review the regional results starting with Americas. Americas revenues grew 4% quarter over quarter to $288.1 million. Cash gross margins increased to 71%. Adjusted EBITDA was $137.8 million, an increase of 4% over the last quarter and up 21% over the same quarter last year. Americas adjusted EBITDA margin was 48% for the quarter, which also absorbed the higher costs related to the corporate functions including the IT initiatives. Net cabinets billing increased by $940 million in the quarter, a meaningful increase over the prior quarter.

The Americas sales force had a record bookings in Q1 with especially strong performance in network, content and digital media, and cloud and IT services verticals. Also, the Americas region exported a record level of deal volume to both EMEA and AP regions this quarter. Overall deal size and pricing continued to trend very positively across the verticals. And appropriately reflect our effort to target interconnection-rich customers.

On a separate note, our ALOG asset performed well in the quarter and continues to maintain a strong sales funnel. For the quarter, ALOG's revenues increased 8% over the prior quarter's $18.7 million, despite the weakening Brazilian currency. During the quarter, Americas interconnection revenue, excluding ALOG, continued to perform well. And we had a healthy increase of about 1,500 cross connects in the quarter. Americas interconnection revenue continues to represent approximately 20% of the region's recurring revenues.

Also, during Q1 we opened our DC-10 business suites offerings, and have already sold greater than 60% of the capacity. Our success to date allowed us to proceed with the second phase of this project, as we announced on the last earnings call. We continue to be optimistic about this offering in the DC market.

Also today, we announced the construction of a new IBX for the greater Miami market. Our new Miami 3 facility, located in Boca Raton, is the home to several major fiber optic cable landing stations. And provides the lowest latency route to Brazil, allowing Equinix to meet the increasing customer demands for the South American market. We are also expanding our New York 7 asset in addition to our planned opening of New York 5 in Q3 this year.

Now looking at EMEA, please turn to slide 6. EMEA had a strong quarter with record bookings, with particular strength in the UK and Germany markets, despite the continued negative economic backdrop. Revenues were up 6% sequentially, or 8% on a constant currency basis, driven by strong bookings and the one-off customer termination fee. Adjusted EBITDA increased to $46.9 million, or adjusted EBITDA margin of 46%, an 18% improvement over the prior quarter, and up 53% compared to the same quarter last year.

Part are the region's success is attributed to the one-off benefits in revenues and cost of revenues previously discussed. Our normalized EBITDA in the region would have been 42% this quarter. The region's net billing cabinets increased by 490, and we added greater than 1,000 cross connects this quarter. Interconnection revenues continue to be 4% of the region's recurring revenues.

The EMEA business continues to perform well. And I'd also like to highlight the recent momentum in the Swiss market. As previously announced, the Swiss stock exchange deployed into one of our core Zurich assets. This strategic win, along with focus on network and secure data centers in Switzerland provided us the opportunity to build a fifth data center in Zurich, as well as further expand our Geneva 2 IBX. The new Zurich site will be connected by a fiber ring to the Zurich campus, offering direct connectivity to greater than 75 carriers. The Zurich 5 build complements our other strategic builds in Amsterdam, Frankfurt, London, Paris. All expected to open in the second half of this year.

And now looking at Asia-Pacific, please refer to slide 7. Asia-Pacific revenues improved 7% sequentially, or 6% on a constant currency basis with strong net bookings across each of our countries. Asia-Pacific also benefited from large impound deals from both the Americas and EMEA regions. Adjusted EBITDA was $30.5 million, up 20% quarter over quarter, partly due to one-off expansions in Q4. And up 32% over the same quarter last year. We continue to see our Hong Kong business gain traction in the financial vertical, which allowed us to build the second phase of our Hong Kong IBX, which will open up later this quarter.

Cabinets billing increased by almost 200 over the prior quarter. And unit pricing remains steady despite a weakening currency environment in Australia and Japan. Asia-Pacific also had a greater than 700 cross connections a quarter, and interconnection revenues continue to represent 12% of the region's recurring revenues.

And now looking at the balance sheet, please refer to slide 8. Our unrestricted cash and investment balance at quarter end was $1.1 billion, reflecting our strong operating performance in the quarter. Subsequent to quarter end we cash settled the principal value of our 2.5%, $250 million convertible debt, thereby reducing our cash balance to approximately $830 million on a pro forma basis. We continue to implement shareholder friendly actions. By the end of Q1, we also repurchased a total of approximately 1 million shares for $100 million. Both the share repurchase and the debt repayment reduced our outstanding share county, or avoided incremental dilution, of 2.6 million shares.

Looking at the liability side of the balance sheet, we ended the quarter with gross debt of $3.08 billion in debt. Subsequent to quarter end our gross debt balance reduced to $2.83 billion, or about 3.4 times our Q1 annualized adjusted EBITDA. Our net debt leverage of roughly 2.4 times Q1 annualized EBITDA.

Now, looking at slide 9. Our Q1 operating cash flow was $126 million, and our discretionary free cash flow was $82.9 million, or $1.77 per share based on our basic weighted average share count in the quarter, up 42%, and a 7% decrease over the prior quarter and the same quarter last year, largely due to the seasonal change in our working capital. In Q1 we saw a net decrease in accounts payable and accrued expenses, and a net increase in accounts receivable. This total change was approximately $102 million. I continue to expect our 2012 discretionary free cash flow to range between $500 million and $540 million, or approximately range between $10 and $11 per share.

Looking at capital expenditures, please refer to slide 10. For the quarter CapEx was $145.5 million, below expectations largely due to the timing of cash payments. Our expansion projects remain on time and on budget. Ongoing capital expenditures were $43.1 million, higher than the initial guidance, and reflect an increase in installation and success-based projects, and additional spending on IBX optimization projects.

Now turning to slide 11. The operating performance of our 23 North America IBX and expansion projects that have been open for more than one year have continued to perform well. Currently, these projects are 85% utilized and generate a 33% cash-on-cash return on the gross PP&E invested. For our eight oldest US IBXs, revenues grew 10% year-over-year, as customers continue to buy additional power and cross connect, as well as space as it becomes available through our optimization initiatives. This shows the continuing value of our network density and ecosystems, the longevity and economic life of our assets, and the importance of these assets to the infrastructure of the Internet.

So now let me turn the call back to Steve.

Thanks, Keith.

Now I would like to provide a deeper view into our Asia-Pacific region, and then close out with an update of our 2012 guidance. Asia-Pacific is the fastest-growing region for Equinix, and an area of tremendous potential for us. Emerging market customers are growing in importance, while multinationals continue to invest in this region because of its growing economy, economic stability and strong foreign reserves. And they are accelerating their deployments of Internet infrastructure to support their products and services.

If you turn to slide 12, you can see that over the last four years revenues have grown at a 39% compounded annual growth rate. EBITDA margins have improved from 29% in 2007 to 46% in 2011. And interconnection has grown to become a meaningful component of the recurring revenue.

Platform Equinix is the only premium brands with a Pan-Asian offering, and multinationals such as IBM, Fujitsu, British Telecom and many others are expanding into the Asia-Pacific markets, as shown on slide 13. Over 30% of the top 500 global companies are headquartered in Asia, and as the economy develops, we will work to bring these Asia-based multinationals to the other regions that we serve.

Turning to slide 14. Each of our five markets has unique market dynamics. In Singapore, telecom deregulation and government initiatives have established this market as the business and telecom hub of Asia Pacific, creating a tremendous opportunity for telecommunications firms. Our Singapore market is a well-known pairing hub that has grown to over 170 networks, with the largest number of cross connects in Asia-Pacific. Recently, Amazon Web Services deployed their direct connect offering in our Singapore data center to capture the growing demand in this market for private and hybrid cloud services.

AWS Direct Connect is also deployed in Tokyo, another market where cloud services are in high demand. With 43 networks and direct access to several transpacific and intra-Asia-Pacific submarine systems, our Tokyo campus is one of the most connected in the country. We also host the three top Japanese Internet exchanges, including our own. We have seen renewed momentum in Tokyo this year, driven by multinationals selling into Japan, as well as from the growth of the electronic trading ecosystem, where we recently won several magnet customers.

The semi market is also experiencing strong growth in financial services, with wins including Chi-X Australia. In April 2011 Chi-X Australia deployed its matching engine in our Sydney data center where the financial services ecosystem was starting to form. Since that time, the number of financial service customers deployed in Sydney has increased by 60%, with the majority of these new firms, including Bloomberg and ASX, joining to connect to Chi-X. This speaks to the Equinix value proposition and the importance of proactively helping customers engage with their digital ecosystem to extract highest possible business value.

In Hong Kong, the financial ecosystem is also thriving inside Equinix with customers such as Bloomberg, [Adrian & Amerel] Clearing, as well as the Hong Kong Mercantile Exchange, a critical magnet customer in that market. Hong Kong is also the main entry point into China. In Shanghai we have a partnership with Shanghai Data Solution for a small footprint, which has shown strong demand for multinational customers looking to expand in this high-growth market. As one of the fastest-growing co-location markets in the world, China is the most requested market for Equinix customers looking to expand globally. And, we are evaluating opportunities to expand further in this key market.

Slide 15 outlines our 2012 guidance. For the second quarter of 2012 we expect revenues to be in the range of $466 million to $468 million, which includes absorbing about $3 million of currency headwinds. Cash gross margins are expected to approximate 68%. Cash SG&A expenses are expected to range between $100 million and $104 million. Adjusted EBITDA is expected to be between $212 million and $214 million, a 3% quarter-over-quarter increase on a normalized FX neutral base.

Capital expenditures are expected to range between $240 million and $260 million, including approximately $40 million of ongoing capital expenditures. For the full year of 2012 we are raising our revenue expectation to greater than $1.89 billion, or greater than 18% growth on a year-over-year basis, which includes roughly $9 million of currency headwinds relative to the guidance rates provided on our last call.

Total year cash gross margins are expected to be 67%. Cash SG&A expenses are expected to range between $390 million and $420 million. We are raising expected adjusted EBITDA for the year to be greater than $860 million, which includes a $10 million increase from the global IT initiatives and the REIT feasibility analysis, and roughly $4 million of currency headwinds to the prior guidance range. We are maintaining our total CapEx guidance for 2012 at a range of $700 million to $800 million, which includes $135 million of ongoing capital expenditure.

So, in closing, as you can see, we are off to a very good start in 2012. Both the external secular trends and our internal operating metrics point to another year of strong and predictable growth. Our rigorous focus on building interconnected ecosystems is providing more differentiation for Equinix, while cementing our identity as the interconnection platform for leading businesses worldwide. Strong performance in all three regions with on-time and on-budget execution of our capital plan, and all-time high operational reliability have us very well-positioned with our customers and prospects to them integrate the digital economy this year and in the future.

So at this time I would like to stop there and open it up for questions. So, Amber, I will turn it back over to you.

(Operator Instructions) Michael Rollins, Citi.

Two questions, actually. First, with respect to the sales force, can you give us an update to the quota-bearing salespeople at the end of the quarter versus the end of last year? And describe how those incremental salespeople are contributing to the bookings environment. Is it a half a contribution, a full contribution? How to think about that pacing?

And then separately, if I could just follow up, you mentioned the process of hiring advisors to consider the whole REIT structure. As part of that, is the management and board going through a deeper strategic review? And if so, are there a range of topics you could describe to us that you guys are considering as you go through that? Thanks.

Sure, Mike. I will start out and take the first one on the sales force. And maybe Charles can supplement with the biggest region activity in the US. But just to size it for you, we're just under 200 sales reps around the world. Call it 100 Americas, 65-ish or so in Europe, and then around 27, 28 in Asia. So that's the quota-carrying sales force. And in general the productivity per rep is up across the region. So certainly we're measuring it both in the tenured reps and the untenured reps. But it is definitely moving up into the right mix, moving in the right direction.

At the same time, we're adding complexity to what we're selling with the partnerships, et cetera. And we're arming the sales force to go to the market vertically. So they are learning how to speak in an industry vertical. And so that is all part of the mix. But we are very happy with where it's progressing. And, Charles, maybe a comment or two.

Obviously, given the strong bookings performance in the quarter we feel very good about the continued evolution of the sales team. As Steve said, we are seeing strong up and to the right trend and the right productivity, and saw healthy increases in productivity, both on tenured and new reps in Q1. Based on the success of our network in financial services sales team, we actually made a decision to fully vertically align the Americas team. And we believe that will continue to drive productivity throughout 2012. Overall pipeline is solid, coverage is good.

And to answer your question directly, the new reps are not yet fully productive. As we said, we are ramping them to productivity, but I think we should continue to see, on a per rep basis, increased productivity as we continue to mature the reps through their learning process. But, overall we are very pleased with the progress.

And Mike, on the second question, I'll say it, it's a great question. I think how I would like to frame it today is, first and foremost, it is to look at our global tax strategy. And as a text to my comments, my prepared remarks, is really also about making sure that we focus on growth. I think in tandem those are the two most important things to take away from today.

Having said all that, the first step really is to think about the feasibility of the REIT structure. Can we do it? And then of course then you'd also think, if you can do it, should we do it, and ultimately how do you execute against it. And clearly it's the execution part which, as part of this process, of course, senior management and the board will be very active in. But right now let me just say we are in the feasibility side of the review.

Thanks very much.

Scott Goldman, Goldman Sachs.

Just a couple. First, Keith, maybe you could talk a little bit about the revenue growth as you think about it exiting 2012. We're just looking through the numbers and what you have for Q2 guidance. You're going to be growing the first half of the year and slightly over 20%. Yet the back half guidance, using full-year numbers, would imply probably 14%, 15% revenue growth. So just wondering how you think about revenue growth as you exit 2012.

And then, second, maybe you could talk a little bit about capital spend. You've announced a number of expansions since even the last call. And a couple more today on your tracking sheet. So maybe you could talk to us a little bit about how much remains unallocated, if anything, on the original CapEx guidance that you put out? Thanks.

Let me first start and, if you will, normalize Q1. Because I think it's important to understand what it ultimately is. And if you actually step back, Q1, taking out the one-offs, is roughly $448.5 million. So that's the first thing to start with. When you then go to the guidance we delivered, it was $467 million at midpoint. If you add the $3 million in currency, you're roughly at $470 million. If you look at that $470 million relative to $448 million, you are growing your revenues quarter over quarter just under 5%, 4.8% So, those are the guidance rates.

So as we continue to move through the year, we expect to continue to scale the business. The guidance we are delivering today is a greater than, as we've always said. We like to give you the greater than. It gives us a little more flexibility. But suffice to say, as you get to back end of the year, we are going to exit with a relatively large number when you think about the guidance that we've delivered.

But, more importantly, the second half of the year has more currency embedded in it. As Steve said, there's $9 million of currency, which could be quite dilutive to the business and the exit rates. So principally said, we feel good about the direction we are going. We think Q2 is a good number to anchor off of. And as we continue to run the business and scale, and as Charles alluded to, drive the reps to broader productivity, we think that we can continue to grow at a healthy way.

When it comes to the CapEx side of the equation, the nice thing is, what we said last year was we deployed in the second half of last year and we're quoting through to this year. We really wanted to give you our best thoughts on what guidance would be. I recognize it's a relatively large range. It's $700 million to $800 million. But that guidance contemplated, of course, some of the projects that we've announced.

So we're not modifying our guidance. Right now we feel very good about the mid range of that guidance. And as we continue to review projects, we will adjust accordingly. But at this point, at this stage of the game we feel very good about the annual guidance that we are delivering.

Okay. Just a follow-up to that. Do you think that if you were to go out and announce any further expansions that could see some capacity come on in late '12 or 2013, that could necessitate having to increase that guidance? Or do you feel as though there may still be some capacity in there if you're thinking about the mid-point right now?

Certainly you have a little bit more capacity, if we so chose to utilize it. Suffice to say it's unlikely, unless it's a relatively small project that you could construct something and bring it online this year at this stage. It's not to say -- there's certainly all the small projects, smaller than the 400 cabinets that we put on the expansion tracking sheet, that was working.

Charles is going through an extensive exercise as he looks at his asset pool and decides where can he optimize, where can he augment, where can he recapture. And sometimes that requires us making some small, discrete investments in CapEx. But that's all contemplated in the numbers we are giving you. So I feel very good, again, about the guidance we've delivered. At this point I would tell you I can't see going above the top end of the range. And right now we feel very comfortable in the mid point of the range.

Great, thanks a lot, Keith.

Frank Louthan, Raymond James.

Great, thank you. Looking at the project there for some of the underutilized space, and expecting churn to be up a little bit, how long will it take to complete that exercise? And then, what's the revenue opportunity here if you see similar success from the first quarter?

And then, second question, what's more the long-term outlook for the exposure you want in China? Are you going to stay with Hong Kong and Shanghai for a while or should we look for expansion into other Chinese markets, as well?

Let me take the first part of the churn, and then I'm going to pass it to Charles who will give you a more region review of what's going on. When you think about the churn in and of itself, to the extent that we can recapture term, like we talked about in the UK. Then there is other examples last year where we recaptured space in Frankfurt and Munich from a large content company where basically it was a lot of revenue churn per se, but it had no impact to our margins. It as actually margin eroding. By replacing that capacity, it allowed us to see our profitability go up.

No different in this circumstance in the UK instances where the customer was not fully utilizing the space. And is in one of our critical assets. As I said, London is one of the ones out in Slough. We were able to recapture some of that space from the customer. It allowed them to reduce their burn. They give us payment to offset some of that contractual commitment. And then we turned around and sold it to a US [bracket] firm and they're going to put their trading platform inside that asset.

Again, it's highly focused on going after the right ecosystem. And we like to think, and you've heard me say it before publicly, it's the right customer, going in the right IBX, with the right application. And if we can continue to do that, we're willing to tolerate higher churn from that perspective. But recognizing that we got to backfill it with more valuable customers. And so let me just pass it to Charles at this point.

Yes, Keith, I think you covered a lot of the key points. Churn has been a significant area of focus for us for the past 18 months or so. We're were very pleased with the progress. As Keith said, as I've often said to folks out there on the road, the best long-term way to mitigate churn is to ensure that we're putting the right customers with the right applications in the right assets. And I believe our targeting and our deal discipline to do that are now firmly in place.

We have churn of various types and all those create some level of revenue headwind. But frankly, I think our level of what we would consider to be bad churn is very manageable and well inside of our targeted ranges. And on the good churn side, there is churn that we embrace and candidly often catalyze as part of a very disciplined renewal process. And part of the moving customers to multi-tiered architectures. And when we do that, we think we dramatically improve the overall productivity of our assets.

That's one lever, and then we have a number of others. I think in you question you asked how long that would continue. I think we have continued opportunity to optimize our asses We see an imbalance between space utilization and power utilization in some of our key assets. We're investing in space projects where we can, to sop up some of that at very high IRRs. And we're continuing to work on that. I think if you look at slide 11 of the deck you will see that our ability to continue to squeeze better performance out of our mature assets continues to be there.

And, Frank, on your second question on China. As I mentioned in my prepared remarks, we are currently evaluating opportunities to expand our presence in Shanghai. And ultimately we would be interested in Beijing and possibly other provinces over time. But Shanghai probably, to get started, would be of high interest because we've tested that market with a partner in the market, Has been a very good partner. And we've done very well there. On a small footprint but we've done very well.

But as I stated, the demand for our customers that want to go international, particularly in Asia-Pacific, is very high in Shanghai. Our brand, our reliability, reputation, is very strong in China. We have plenty of opportunities. And I would just tell you to stay tuned.

Okay, great. Thank you.

James Breen, William Blair.

Just two questions. One with respect to CapEx, as you look at the breakdown that you provided in the slides. It seems like CapEx is moving up in the US and down in EMEA and Asia. Can you just give us color in terms of what your thoughts are there? And also, you make note that the continuing maintenance CapEx levels are around 7%, coming down to 5%. Do those differ considerably across the different regions right now given the different growth stages the regions are in?

And then, secondly on Asia-Pacific, you'd mentioned that 12% of MRR are cross connects now. Do you see that going to that 20% level that you are in, in the US? And will that help drive profitability in that region? Thanks.

Just dealing then with the first part of the question on spend. Clearly, they're point specific. It depends on the markets. We're always looking at the opportunities in front of us. We've spent a lot of energy as a company looking at our fill rate.s And so, sometimes one region will be more heavily weighted than another region, no different last year. When you look at Asia-Pacific we spent more than 100% of revenues on our growth, on our capital expansion initiatives.

This year we didn't have to make the same level of investment, although we are continuing to invest quite heavily as a percent of revenue for the Asia-Pacific market. Europe, there is a lot of spend that took place last year and we are continuing to invest this year.

When you think about the opportunity, they are facts and circumstances specific, based on the fill rate and the opportunity we have in a given market. And so I don't get overly concerned of percentages at any point in time because we continue to look at each of our assets. And as Charles alluded to, and as we as an organization are focusing on, we're just trying to maximize that opportunity that's in front of us. So hopefully that addresses your question vis-a-vis the regional breakdown.

And I think on your second question, James, in Asia-Pacific, we don't have a stated goal that's in that range. Today it operates, in this quarter it was 12% of monthly recurring revenue. Versus 20% in the Americas. And 4% in Europe. The worldwide percentage as a percent of recurring revenue is around 15%. We obviously are focused on interconnected ecosystems so we're trying to drive that number up.

The Asia-Pacific team has made tremendous progress over the last three or four years in doing that. But the specific answer to your question is we'd love to see it go to 20% but that's not a stated goal for the Company. But it will continue to move up. We're absolutely focused on it.

And, James, if I could just add one other thing to Steve's comment. I think it's also important to recognize that certainly we like to think that interconnection revenues as a percent of revenue will go up. But you have too also recognize that there is a tremendous benefit to the pull through that hits the other lines. And so some markets in some regions have a different pricing structure that we have in the US.

And so, from our perspective, as long as we can continue to get that right customer with the right asset inside our data centers, they're going to be willing to pay an appropriate amount for that capacity. And that overall will drive the right returns on an overall basis. So again, it's an important metric but you shouldn't look at it just on a one-side basis because there's real benefits on the other lines, as well.

Okay, great, thank you very much.

Gray Powell, Wells Fargo.

Just had a couple quick ones. Can you give us a sense as to the growth rate that each of your key verticals, those being IP and cloud, financial services, network and enterprise? And then can you talk about initiatives to improve momentum in your enterprise verticals? It just seems like with the growth that you're having, your cloud ecosystem, that there could be some sort of a pull-through there with enterprise customers. Thanks.

We really are digging deep into enabling enterprises to take advantage of the cloud. But on the growth rates, I can give you color of the bookings this quarter. It will give you a sense of how they fell. Roughly 26% of the bookings in the first quarter were tied to networks.

So we're seeing great focus and growth with the networks either ethernet and LTE and all the new services they are rolling out. So they are upgrading and we are benefiting from that. About 22% of the bookings was from cloud. So we continue to see very good upside in deployments of public, private and hybrid cloud nodes.

Financial was roughly 18%. And that was a little bit lower than what that is as a percentage of revenue. But we have a very strong pipeline as we look to the end of the year. So that's very cyclical. Content digital media companies were roughly 24%. And I would say the color underneath that is tied to the big global platform players who are deploying cloud-like nodes and infrastructure all over the world, and we are benefiting from that. And then enterprise is roughly 10% of bookings in the first quarter.

But we are very focused on enterprise. Most of the historic go-to-market for us has been with network, cloud, financial and content digital media. We haven't really focused on enterprise per se, except for a little bit in Europe and in some markets. But we are staring at it pretty hard now. We're seeing some good positive signs in healthcare. We're seeing some good positive signs in business and professional services. And Charles, you probably can give them a little more color.

Yes, I can give a little more color on Steve's comments and then particularly address the enterprise question and the pull-through to the cloud. The bookings can be a little bit deceptive at times. What I would tell you is that right now, I think, in the business we are seeing real strength in the network space, just to continue the network density. And the platform that we built continues to have momentum.

Real momentum in cloud, as well. And, as some of the other areas can be a little lumpier. But cloud is certainly an area of strength right now. And as you noted, I think that it has the very strong potential to precede strength in the enterprise. Meaning, we talked a lot about the cloud-enabled enterprise as a specific area where we're seeing demand for Platform Equinix, and particularly on a global basis.

And I think that's going to continue to be the case, as virtually every enterprise CIO is right now tackling what are we doing to really leverage the cloud, looking at public, private, hybrid cloud architectures. And Equinix is really the home for that.

Got it, that is very helpful. Thank you very much.

Colby Synesael, Cowen.

First question, I just want to talk about the partnerships. I'm curious how you are going to be balancing out the best-of-breed strategy versus staying neutral. So, for example, when you start to partner with NAWS, or Rackspace, for that matter, what's the risk that you're actually going to be pushing away other companies that actually compete against those guys, and may feel that you are now perhaps more aligning yourself with them?

And also, is the value of these partnerships really just that it's making your facilities more sticky? Or is there an actual revenue opportunity tied to some of these partnerships? And then I have a follow-up after that. Thanks.

Most of the activity Charles is driving in the Americas or emanating the partnerships out of, mostly US-based relationships that end up going global. But generally the way we are thinking about partnerships is we're just trying to make it easier for our customers to do business inside of our IBXs. So, as I've mentioned, and Keith mentioned multiple times, we're creating this marketplace inside these IBXs so that customers can see each other. We've made that much easier with a tool.

We're taking it up to the next level now where we can help them enable solutions. Many of these customers are coming to us and asking us to sell with them, co-develop with them, bring best-of-breed solutions to customers. So we are framing all that now. There is some revenue share opportunity. So there's been a handful of announcements that you have seen that we made, mostly generated out of the US that will port to international. And again, it is to facilitate ease of doing business and connecting buyers and sellers inside of our marketplace.

One thing I think you guys clearly understand, Platform Equinix at its heart is inherently a digital marketplace. We've invested heavily in our marketplace capability in improving the ability for customers to gain business value from their participation in our vertical ecosystems.

The partner program really just builds on that foundation. In certain of our verticals, particularly enterprise, we see the need for our sales teams to position Platform Equinix as part of a bundled solution that's more directly responsive to the customer need. As Steve indicated, really an ease of doing business with Equinix.

To answer you question, since we're not looking to move up the stack ourselves, partners are a key avenue for us. We are all about providing choice. We do not view it as contrary to our position, inherent position of neutrality. But rather providing a complete choice set for our customers. We are eager to have the full range of service providers in our facilities that customers may want. We are going to work with best-of-breed players that have value to deliver to our customers.

And then to also directly answer your other question in terms of the economic model, it is primarily about ensuring that Platform Equinix gets pull-through by being placed into a relevant business context for our customers. That's the primary economic model. In certain cases where that's less clear, we may employ other economic models and arrangements but primarily it's about creating the pull-through and creating the stickiness of the solution long term.

Just a real quick follow-up. Keith, there's been talk from quarter to quarter about some customers being below market and effectively either getting them to move up to market prices or actually pushing them out in churn and then going and reselling that space.

Is there still a decent amount of situations like we saw in Frankfurt where you actually will have that opportunity to push customers out if they're not willing to move up to market prices and therefore see a nice immediate improvement, call it over a quarter or two, just when you resell that space in terms of both revenue and margins? Or is that largely behind us at this point?

There's certainly a lot of opportunity out there. It's not always about below market. In some cases, it's about under-utilizing the capacity. Again, I refer back to the UK example. For the customer, they had taken down too much capacity. We wanted some of the capacity. It was a perfect arrangement between the two parties. It was mutually beneficial. We got some one-off benefit out of it but we also got the capacity back to sell to a higher-value customer.

It goes very much to what Charles has been talking about in his business. And how the other two regions feel. It's about creating an environment where it becomes more sticky, more interconnection rich, and there's more value that's created from that incremental deployment.

Can you tell us what the delta is between actual utilized space that we see in the numbers and metrics that you provide versus actually being used by the customer?

We don't have that data, Colby. But suffice it to say, there is the opportunity out there. We made reference to it. Clearly there's more opportunity in front of us as we continue to look at our assets and how to optimize them. We want to continue to make some enhancement, where appropriate, to recapture space. And bring in balance more power, power with the space, the space available. And we're going to continue to do that. And we'll continue to update you, certainly as each quarter goes by.

But suffice it to say we feel very good about what we have in front of us. Obviously the guidance that you see that we placed for Q2 and beyond, it gives us a very good sense that we can continue to scale the business, we can absorb a little bit more churn that we originally had forecast. It's good for the business and it's good for the investor

And Colby, managed churn is not our only avenue available to us in that regard. As we said, being able to consume underutilized power, for example, in facilities, being able to free up space and marry it with power to get additional inventory at very low CapEx rates. There's a number of levers available to us to continue to improve the productivity of the asset beyond just the manage churn opportunity.

Jonathan Schildkraut, Evercore.

One housekeeping question and then a couple strategics, if I may. Keith, I was wondering if you might update us on the RP basket?

Yes, I certainly can do that. The RP basket at the end of Q1 we're estimating to be roughly $150 million under the 8.125% facility. And there's roughly $500 million under the 7% facility. So it gives you a sense. So we'll consumer roughly $100 million of the basket. Through Q1, we're roughly $252 million total capacity.

All right, great. So two questions here on the strategic side. You now have DC-10 opened up for a little while. And Equinix seems to be well situated for really an evolution in the way that customers are using data center space. Charles, you've said a couple of times, private, public, hybrid cloud. And so, it's been our perspective that this is going to be a very important paradigm shift over time.

So I was wondering if you might give us a little bit more color on what's going on in the data center. If there are hybrid private/public cloud, if it's being integrated with Amazon Web Services. I'd love to learn a little bit more about how that data center is evolving. And the second strategic question just has a little bit more to do with the M&A environment.

Clearly there are a number of assets that are currently available. Some domestically, Canada, Germany, globally. You guys have done a great job of being able to really leverage your global footprint in order to drive demand from one region to another. Are you looking at the M&A environment as a way to complement your current assets and growth?

I'll take the first part on DC-10 and hand it back over to Steve or Keith on the M&A side. We concur that there is a shift going on in terms of how people are thinking about utilizing data center infrastructure and the DC-10 asset was part of trying to exploit that. We've talked a lot about multi-tiered architectures, and those multi-tiered architectures do play into this public, private, hybrid cloud environment.

To directly answer your question, absolutely, there are people that are actively providing cloud services, and public-private-hybrid cloud services out of DC-10. And most often integrating those with a footprint in the core Ashburn IBX facility which is obviously very heavily interconnected, and taking advantage of the network density that lives there.

It is aligned with AWS and being able to gain access to the public cloud. And then move loads and using partners, for example, like RightScale to move loads across public cloud options. And then use the connectivity that's inherent in the Ashburn facility, whether that be ethernet or other methods of connectivity to create private cloud. So that's all playing together. DC-10 is a very targeted asset for us. We're not trying to be all things to all people. But it is, in fact, a way for us to really allow that multi-tiered architecture to take place for our customers.

Jonathan, I think on the M&A question, probably the simplest way to think about Equinix going forward, at least in the short- to mid-term, is that it will facilitate new market entry for us. Particularly in the emerging markets where current customers are showing signs of interest. It was behind the Brazil decision It certainly was behind our decision a couple years ago to get into Amsterdam.

If we can find a partner or an asset that's building the newest data center in that market, that's always attractive to us. But as Keith and I, and Charles has probably voiced this a little bit on the road, China, India, Middle East, Eastern Europe, all these places are still of interest. It's all driven by customer demand market data that suggests this business model would do very well with first mover status.

Some of these bigger markets now are starting to show signs, and we're being attracted by people in those markets to find a way in there. It's mostly aimed on bolt-on type decisions versus any big scale decisions. We feel like we're in very good shape in the Americas. In Europe we are quickly becoming, we are investing more that the prime competitors there and we're very happy with where we are in Europe. And in Asia there's lots of opportunities, as we talked about today.

Great, thanks for answering those questions. And I know that you have the analysts day coming up in June. It would be super to hear maybe from one of those customers in DC-10 who has really taken advantage of that hybrid architecture. Thank you.

David Barden, Bank of America.

A couple quick ones as we wrap it up, if I could. Just the bigger question, maybe Steve. Obviously we're seeing the meat of the integration happen now between the Verizons and the Terremarks and the CenturyLinks and the Savvis's. It's not clear that they're necessarily outperforming their historical run rate. If you could talk a little about if you've got any advantage on the competitive landscape of the margin, it would be great.

And then just two quickies. Keith, on buyback, could you talk a little bit about the pacing slow down? You had the headroom in the quarter on the RP basket but you didn't use it. If you could talk a little bit about pacing. And then lastly, just to wrap it up. Going back to where we started, Keith, on the advisor and what you've hired them to do. Is part of this process getting an IRS private letter ruling? Is part of the feasibility study the need to get the IRS's input in this process? Thanks.

I think it's still playing itself out. Both of those examples you quoted are both customers of Equinix, continue to be customers of Equinix. Are continuing to grow in our pipeline. For example, the Boca Raton asset that we just announced today is a pretty well positioned asset as an alternative to the South American market.

But generally they are in our pipeline as customers. We also see them competitively, predominantly in the US. So we haven't seen a big change in the landscape. I think it's still shaking out in terms of the integration and how those companies are operationalizing these things. But no big new news, I don't think. Charles, have you seen anything?

No. I think that in many respects there are complementary ways that we are working together in the marketplace,. There are areas of some potential overlap. There is concern on the part of customers about whether or not their new ownership implies a change in their posture relative to network neutrality. And so on the margin perhaps provide us an avenue to have a discussion with the customer about Equinix as their preferred choice. But I wouldn't say there has been any dramatic shift either way in the market.

Got it.

And then, David, just on the other two questions. First taking the question on the RP basket capacity. Certainly as you think about how we are looking at our priority, first and foremost it's going to be about profitable growth. And we're going to continue to invest in the things that are available to us. Secondly, we are going to focus on those bolt-on acquisitions that Steve referred to. Clearly that's going to be an important aspect to it.

We have said historically that we want to do things on an equity-lite basis and avoid equity as much as we can. And so, to the extent that we do acquisitions, we really would like to be using cash to create value for the shareholder. And then, thirdly, obviously is going to be focusing on continued shareholder return. And so we are going to continue to evaluate on an ongoing basis and it continues to remain a focus for us.

So switching gears to your question on the private letter ruling, like anything, first and foremost, it is about feasibility. Private letter rulings, I think that would be more in the back end of the assessments, the advisors are on many complex issues. And it's probably a little early to talk about private letter rulings.

Never too early, Keith but I appreciate the input. Thanks.

That concludes our Q1 call. Thank you for joining us.