Equinix Inc (EQIX) 2012 Q2 法說會逐字稿

Good afternoon and welcome to the Equinix conference call. All lines will be able to listen only until we open 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'd 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 10K filed on February 24, 2012, and form 10-Q filed on April 27, 2012. 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's Equinix's policy not to comment on its financial guidance during the quarter, unless it is done through an exclusive public disclosure.

In addition, we will provide non-GAAP measures on today's conference call. We will 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; 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 ask those analysts to limit any follow-on questions to just one. At this time, I'll turn the call over to Steve.

Thank you, Katrina. Good afternoon, and welcome to our second quarter earnings call. I am pleased to report that Equinix delivered another quarter of strong financial results and we made solid progress against our operating goals in the first half of 2012.

As shown on slide 3, revenues were $466.3 million, up 3% quarter-over-quarter, and 18% over the same quarter last year. Adjusted EBITDA was $222.1 million for the quarter, up 22% over the same quarter last year. Our results demonstrate a focus on disciplined execution striking an appropriate balance between revenue growth, margin expansion, and attractive returns on invested capital. We are executing on our strategy of building network-density in key metros, deepening our ecosystems, and inter-connection across our five verticals, and expanding our global reach. Our global platform continues to be a unique competitive advantage for Equinix. Today, 58% of our revenue comes from customers deployed across multiple regions, and revenues from companies who are deployed in all three regions increased by 34% over the last year.

With more applications benefiting from a distributed architecture, we see an attractive opportunity to help our customers expand their deployments into multiple regions across our global footprint. Specifically, we have an increasing number of customers in Europe and North America who view Asia as a critical market for expansion. To enhance our ability to meet demand from these customers this quarter we acquired Asia Tone for $230.5 million, making Equinix the market leader in Hong Kong, strengthening our position in Singapore, and establishing a significant presence in mainland China. Equinix gains a total of six data centers and one disaster recovery center which includes two existing data centers in Shanghai plus a third under construction. This world class data center is expected to open in Q3 this year, and we are already seeing a significant pipeline from customers looking to extend their footprint into mainland China. Having just returned from Shanghai, I believe our strong local operating team, combined with this impressive facility, will give customers full confidence to expand with Platform Equinix into this critical market.

Similarly, in Europe we are using M&A to build network density in this region. Network density is the foundation upon which we build and support robust global ecosystems. As announced earlier this month, we completed the acquisition of ancotel, one of Europe's leading carrier neutral colocation providers for $86 million. With ancotel, Equinix increases its network customer base from 700 to 900, considerably expanding our network density, include a broad mix of networks from western and eastern Europe. Equinix now operates over 220,000 net sellable square feet of data center capacity across four data centers in the Frankfurt market, one of the world's busiest data hubs. Ancotel also adds over 6,000 cross-connects, bringing the total number of cross-connects across Platform Equinix to approximately 110,000. Ancotel is a powerful addition to our European business, and delivers significant value to our global offering.

In the second half of this year we will open several flagship data centers, providing additional inventory in key markets to satisfy our growing deal funnel and support the growth of our ecosystem. In Europe, we will open Amsterdam 3 located in the Amsterdam science park, one of the most carrier-dense locations in Europe, as well as Paris 4, which will be tethered to our highly networked Paris campus. In the US we have two important new builds. NY5, which is located next to NY4, will provide critical inventory for the financial ecosystem, and Miami 3, located in Boca Raton near several major fiber-optic cable landing stations, and the lowest latency route to Brazil. These data centers are in addition to the phase builds we will be opening in existing sites across all three regions. In addition to growing our platform and increasing network density, we have launched a handful of efforts over the last year aimed at expanding operating margins and improving capital efficiency.

On the demand side, we have implemented several mechanisms aimed at carefully managing our existing customer mix and assessing new deals in terms of size, power density, target vertical, and interconnection profile. These efforts are delivering strong results in terms of revenue yield per cabinet and overall price stability, and are allowing us to fully realize the benefits of our ecosystem strategy. On the supply side, we have broadly implemented our IBX optimization program in the Americas, and are actively incorporating elements into both EMEA and Asia-Pacific. Through this program, we rigorously evaluate our facilities with a focus on balancing space and power utilization, increasing energy efficiency and identifying ways to add sellable capacity with limited incremental investment.

Over the past year we have generated substantial energy savings, significantly improved our customer mix, and increased our sellable inventory by over 2,000 cabinets, including 700 this quarter, giving us more than $50 million of incremental revenue potential with very little additional capital expenditure. Our intention is to remain disciplined around our ecosystem-driven strategy, and IBX optimization is an important component of that. Applying the strategy to both new customer acquisitions as well as renewals is proving to be the right balance to enhance our returns. As we saw this quarter, this program may result in a temporary increase in churn, which is more than offset by margin improvements as we resell capacity at market rates.

As an example around renewals, this quarter we negotiated with a top digital media customer to embark on a multi-quarter plan to further optimize their multi-tiered architecture. This deal will allow us to retain the high-value elements of their deployment and preserve the majority of their high margin interconnection revenue, while transitioning out of the larger footprint applications that are not well aligned with the Equinix value proposition. This proactive effort will allow us to dramatically improve profitability with this customer, and importantly, will free up inventory in critical sites such as 1118 in New York, enabling us to satisfy demand for other high-value applications. In this specific instance, once the capacity is resold we expect operating profit to improve by more than $1 million per month, nearly a full point increase in gross margin for the Americas business.

We believe this level of operating discipline is critical to our long-term success and central to our ability to manage the business effectively through an increasingly dynamic market. We are executing with discipline and focus and remain on target to generate positive adjusted free cash flow in 2013, and over $3 billion in annual revenue by 2015. Let me stop here and turn it over to Keith to review the financials for the quarter.

Great, thanks, Steve. Good afternoon to everyone on the call. I am pleased to provide you with additional detail on the second quarter, and as a reminder, with the exception of our consolidated financial results, all of the other metrics will exclude the impact of ALOG.

So, I want to start on slide 4 today from our financial presentation posted. Our Q2 financial results and key operating metrics closed very strongly. Global Q2 revenues $466.3 million, a 3% quarter-over-quarter increase, and up 18% over the same quarter last year. Our favorable performance was meaningfully offset by the negative currency trends across most of our operating currencies, reducing revenues by $3.9 million when compared to the average rates used in Q3 and $3 million when compared to our FX guidance rates.

On an FX neutral basis, our Q2 revenues increased 4% over the prior quarter and up 22% over the same quarter last year. Pricing per cabinet equivalent remains firm across each of our regions. Global cash gross profit for the quarter was $320 million, or cash gross margin of 69%, higher than our expectation in part due to lower utility costs. Our cash gross profit increased 3% over the prior quarter and up 24% on a year-over-year basis. Looking forward, we expect our Q3 cash gross profit margin to decrease slightly, largely due to higher seasonal utility prices. We expect our net utilities expense to increase by approximately $7 million over Q2.

Global cash SG&A expenses were $98 million for the quarter, slightly below our guidance due to slower than anticipated hiring, lower spending on advertising and promotion, and less than expected spend on our global IT projects. Global adjusted EBITDA was $222.1 million for the quarter, a 48% EBITDA margin or a 3% improvement over the prior quarter and up 22% over the same quarter last year. Adjusted EBITDA reflects strong revenue performance, continued strong gross profit margins, and lower than planned SG&A spending. On a normalized basis, taking out the net one-off benefits realized this quarter, our global adjusted EBITDA would have been $2 million lower, or a normalized adjusted EBITDA margin of 47%.

Global net income was $36.4 million for the quarter, a 19% improvement over the same quarter last year, the result of our strong operating performance and lower net interest expense. Fully diluted earnings per share was $0.73, which includes the following. First, the dilution from 623,000 shares issued to partially settle our 2.5% convertible notes in April. And second, given the dilutive treatment of our 3% convertible debt, diluted EPS also includes 2.9 million shares attributed to this debt as if it had been converted in the quarter.

Looking forward, given the number of IBX openings in Q3, our depreciation expense will increase by approximately $14 million over Q2. Also, given the pay down of the Asia-Pacific financing in July, we expect to write off the remaining debt issuance cost on the balance sheet attributed to this debt, which approximates $5 million. And finally, due to the closing of the ancotel and Asia Tone acquisitions in Q3 we expect to incur approximately $2 million of acquisition costs in the quarter.

Now, looking at global MRR churn. Global MRR churn increased to 3.2% this quarter, higher than our targeted range in part due to the IBX optimization efforts that Steve outlined earlier. This churn allowed us to recover capacity in a number of highly desirable IBXs and we expect to resell this space over the next few quarters. Looking forward over the second half of the year, we expect our MRR churn to moderate down to between 2.4% and 2.8%. It is our expectation that continued discipline around deal mix and pricing will improve our operating model in terms of pricing and margin. It will increase our return on capital and it will lower our future churn risk.

So, on this subject, I want to leave you with two key takeaways. First, global net booking activity is ahead of plan on a year-to-date basis, and we have a healthy backlog from the prior quarter's activity driving the increase to our guidance. And second, despite the higher churn levels which are fully contemplated in our guidance, we continue to deliver strong sequential performance across our key operating metrics, that being revenues, gross margin, and MRR per cabinet.

So, moving on. Looking forward the US dollar exchange rates used for Q3 and the remainder of 2012 guidance have been updated to $1.21 to the euro, $1.55 to the pound, and Singapore, SGD1.27 to the US dollar. Our updated global revenue breakdown by currency for the euro and pound is 12% and 8% respectively. And the $3.00 to $4.00 represents about 6% of our global revenues.

Now, touching on the tax area. As discussed on the prior earnings call and at our analyst day, we are continuing to look seriously at a global tax strategy, which includes assessing the feasibility and applicability of Equinix converting to the rate structure. We continue to proceed with the due diligence and assessment of this structure. But at this point we are still not able to update you on certainty and timing of this project.

Turning to slide 5. I now would like to start reviewing the regional results, so let's begin with the Americas. Americas revenues grew 3% quarter-over-quarter to $297.1 million. Cash flow margins increased to 71%. Adjusted EBITDA was $145.5 million, an increase of 6% over the last quarter and up 19% over the same quarter last year. Americas adjusted EBITDA margin was 49% for the quarter. This region also absorbs all the corporate costs, including our global business system initiatives. Net cabinet billing increased by approximately 1,000 in the quarter.

Deal size and overall pricing trended positively compared to the prior quarters as we target small to mid-size deployments where performance matters. Americas' interconnection revenue continues represents approximately 20% of the region's recurring revenues, and we added a healthy increase of approximately 1,600 cross-connects in the quarter. Our ALOG asset continues to perform well. In fact, ahead of plan at the local currency level and is gaining momentum.

Our growing deal funnel is driven by strong local and international demand in part due to the Olympics and World Cup planning as well as multinational expansion into the largest economy in South America. In support of this demand we are building a second facility in Rio de Janeiro which while proceeding with the second phase of our Sao Paolo 2 IBX. Both of these expansions are expected to open in Q1 of 2013. Also, we're proceeding with a third phase of our Chicago 3 build. Chicago is a key bookings engine for North America, and the sales team has successfully positioned our Chicago suburb campus with customers looking for geographic diversity in North America.

Now, looking at EMEA, please turn to slide 6. EMEA had a strong quarter an performed ahead of plan and we expect the region will perform above planned expectations for the rest of the year. Despite the continued negative economic backdrop, revenues were $102.7 million, up 1% sequentially and 5% on a normalized and constant currency basis, benefiting from new and strategic installations as well as strong import activity. Adjusted EBITDA decreased to $45.2 million, or an adjusted EBITDA margin of 44%, a decrease due to the on-off benefits in Q1. Normalized and on a constant currency basis, our adjusted EBITDA improved 4% over the prior quarter and is up 41% compared to the same quarter last year.

EMEA added over 900 cross-connects in the quarter, and interconnection revenues remain at 4% of the region's recurring revenues. EMEA's cabinet billing decreased over the prior quarter, largely due to the termination of contracted space related to a large legacy digital media customer. The prior component of this deployment churned over a number of quarters ending in 2011, yet the billing cabinets churned this quarter, which drove the 4% increase in EMEA MMR per cabinet. Including this one churn, our net cabinet additions would have been 600, in line with past quarters.

I am now looking at Asia-Pacific. Please refer to slide 7. Asia-Pacific revenues improved 6% sequentially, or 7% on a constant currency basis with record gross bookings driven by cloud, content, financial, and network segments, including large in-bound deals from both the Americas and the EMEA regions. Adjusted EBITDA was $31.4 million, up 5% quarter-over-quarter, and up 34% over the same quarter last year on an FX neutral basis. Overall, pricing remains firm in all of our Asia-Pacific markets and pipeline to the new Shanghai expansion is healthy. Cabinet billing increased by over 500 from the prior quarter and we added greater than 800 cross-connects this quarter. Interconnection revenues continue to represent 12% of the region's recurring revenues.

I am now looking at the balance sheet data, please refer to slide 8. Our unrestricted cash and investment balance was $823 million at the end of the quarter. This quarter we increased our liquidity position through the completion of a newly negotiated five-year, $200 million term loan and $550 million revolving line of credit. This new senior credit facility enhances our liquidity position while substantially lowering our negative carry associated with this increase in flexibility. In July we completed the acquisition of both ancotel and Asia Tone, reducing our pro forma cash balance to approximately $500 million. Looking at the liability side of the balance sheet, we ended the quarter with gross debt at $2.9 billion, or net debt of $2.1 billion, about 2.3 times our Q2 annualized adjusted EBITDA. Subsequent to quarter end our net debt balance increased to $2.4 billion.

Now looking at slide 9. Our Q2 operating cash flow increased $194.8 million. A 55% increase over the prior quarter and up 39% over the same quarter last year. This substantial quarter-over-quarter increase was largely due to the Q1 payout of our 2011 corporate bonus and a large shift in our working capital balances. Our discretionary free cash flow was $157.2 million. We now expect 2012 discretionary free cash flow to range between $520 million and $540 million.

Now, looking at capital expenditures, please refer to slide 10. For the quarter, capital expenditures were $196.5 million lower than expected and largely due to the timing of cash payments to our contractors, but also the Americas region had a larger than planned savings on a number of key construction projects. Ongoing capital expenditures were $37.5 million.

Now turning to slide 11. The operating performance of the 24 North America IBX and expansion projects that have been open for more than one year continue to perform well. Currently, these projects are 85% utilized and are generating a 33% cash on cash return on the gross PP&E invested. Our [eight oldest] IBXs grew 9% year-over-year as customers continue to buy additional power, cross-connect, and space as it becomes available through our optimization initiatives. At this point let me turn it back to Steve.

Thanks, Keith.

Now, I would like to provide an update on 2012 guidance outlined on slide 12. For the third quarter of 2012, we expect revenues to be in the range of $492 million to $498 million which includes absorbing about $4 million of negative currency headwinds. Q3 guidance also includes $13 million to $15 million of revenue attributed to the Asia Tone and ancotel acquisitions which closed in July. Cash gross margins are expected to range between 67% and 68%. Cash SG&A expenses are expected to range between $110 million and $115 million.

Adjusted EBITDA is expected to be between $220 million and $222 million, which includes $4 million to $6 million of EBITDA contribution from Asia Tone and ancotel, and $2 million of negative currency headwinds. Capital Expenditures are expected to range between $240 million and $260 million, and include expected CapEx for Asia Tone and ancotel. This also includes approximately $30 million of ongoing capital expenditures. For the full year of 2012 we are raising total revenues to be greater than $1.92 billion, including approximately $30 million of revenue attributed to the Asia Tone and ancotel acquisitions, and absorbing approximately $18 million of negative foreign currency headwinds compared to our previous annual guidance rate.

Total year cash gross margins are expected to be 68%. Cash SG&A expenses are expected to range between $420 million and $430 million. We are raising adjusted EBITDA guidance for the year to be greater than $880 million, which includes approximately $10 million of adjusted EBITDA attributed to the Asia Tone and ancotel acquisitions, and also absorbs $8 million of negative currency headwinds. We are tightening our total CapEx guidance for 2012 at a range of $740 million to $800 million, which includes expected CapEx of $30 million from Asia Tone and ancotel. This also includes $135 million of ongoing capital expenditures.

In closing, we continue to focus on strengthening our business model by putting the right customers with the right applications into the right assets. By targeting customers that value network density, reliability, application performance, ecosystem access, and global reach, we continue to deliver strong results across all three operating regions. So, at this time I would like to open it up for questions. So, Jared, I will turn it back over to you.

Thank you.

(Operator Instructions)

Sterling Auty.

Yes, thanks. Hi, guys. Given the moves that you have made in Asia, I am curious why you want to continue to expand in the region. How full do you feel your portfolio is now? And, how much do you need to fill through acquisition from here to capitalize on this strategy?

Are you referring to the Asia region, Sterling?

That's correct.

Yes. Well, we got activity going in all three regions, as you are aware. So, if you look at the deal expansion sheet you will see that we continue to have capacity coming on in all the core markets. The decision to go into -- to do the Asia Tone deal was primarily driven by the opportunity to get ourselves deeper into mainland China.

We pick up a very solid operating team. We pick up four assets in that market. Two existing ones, a disaster recovery center and a brand-new build, as I said, that will be opening in Q3. This was an emerging market decision. There are a couple of other emerging markets we are looking at.

But, in this part of the world our customer demand from Europe and Americas into the Asian markets is in the core markets. But, as well the demand has definitely picked up for mainland China. This is customer-driven, demand-driven, and the decision, we think, is going to play very well for us because the pipeline is developing even before we have opened up.

It's extremely strong. I just came back from a trip there last week. It will be one of the most impressive data centers in mainland China. The team we picked up on the ground is outstanding. The pipeline is extremely strong.

All right. And, one follow-up question. You have talked for a couple of quarters now about the increasing density and increased power needs by customers. I am curious, which of the geographies are you seeing that playing the biggest benefit to your numbers and to your outlook?

Probably in the Americas? Charles, do you have a thought on that?

I think that the -- I think power density requirements are less geographically specific as they are vertically specific. One of the great things about the nature of our business is because we have broad coverage across a range of verticals, we are able to mix business. As we talked about in terms of deal discipline, one of the things we are doing is really looking hard at the front end on how to balance power density in a way that really provides maximum return for the facilities.

As you are aware, in some cases we have power utilization lagging space utilization. And, that's a great opportunity for us to focus, for example, on content in digital media where we tend to see higher densities per cabinet in order to sop up some of that power and provide greater returns on invested capital. So, I think it's less regionally specific and more vertically specific. It really depends -- our ability to exercise the leverage depends on the balance between space and power utilization.

Great. Thank you.

David Barden.

Hey, guys. Tanks for taking the questions. So, Keith, obviously, another month since the analyst day has gone by. You still are I dotting and T crossing on the research you want to do for the re-conversion process.

Can you talk a little bit about, though, how much time can really go by before you have to make a decision? And then, in order to get in a position to do what you want to do, presuming you want to do it by January 1, 2014, it feels like after six months we should be getting closer to a conclusion.

And then, second, if I could, just I remember last year we spent a lot of time talking about the headwind costs of the additional 60% sales force growth that you guys brought on board. But, obviously, even net of currency headwinds and factoring all that in the guidance seems to suggest that the actual business will actually slow down in terms of organic growth in the second half versus what you've done in the first half.

Theoretically, with these higher productivity salespeople, 60% growth year-on-year, I would expect we would actually see accelerating growth in the second half of the year. Could you talk about reconciling guidance and this much larger sales force as it becomes more productive in the second half? Thanks.

Great, both good questions. I think, first and foremost, when you look at the region -- we've really tried to let of course yourself, David, plus the investing community know that this reset discussion is a very -- a lot of work has to go into it. There is a lot of complexities. A lot more complexities than people would think.

And, you don't have to go very far to look at some of the other companies that have gone out there and disclosed some of the issues that they've had to confront. All that said, we think it does takes quarters, and not months. And, because of that, we are still, we're doing a lot of hard work, as I said. You met Brandy and Katherine at the analyst day.

They are working heads down with a bunch of advisors to help us think through a lot of these key issues. I would like to tell you, certainly, as the passage of time or as time passes, clearly we get closer and closer to a decision. But, at this point we are not ready to give you a specific date bought there are some things we are still chasing down.

Hopefully, over the not too distant future, we will give you more clarity. That deals with that question. I think the second thing I'm going to tag team with Charles. I think it's important to note, I think you should think about our business, and Steve talked a lot about it.

The focus around deal discipline and looking at the right customer with the right application going to the right data center and making sure that we look to the mid -- small to mid-sized deals that really depend on performance. That causes us to really think about how we build out our facilities and what type of booking activity we have.

All that said, when you look at the first half of the year and then you look at the second half of the year -- and I want to take out ancotel and Asia Tone, because again, as you know, they just closed. We have given you directional guidance on that. If you go back and you look at just the organic business, the currency impact is not insignificant, as you know.

It's $18 million on the top line, it's $8 million on the EBITDA line relative to our prior guidance. As you look at this quarter, as you look at Q3, and I'll take that as an example, its' very -- when you start to take out the one-offs and you look at our guidance range, quite frankly, we're running at roughly the same level of growth quarter-over-quarter, and that's Q3 growth over Q2 versus Q2 growth over Q1.

And then, for the latter part, the last quarter of the year as we have done historically, we are giving you just a greater than. I know we are pinning ourselves a little bit into the guidance range. But, it is a greater than. We fully anticipate we can deliver on those numbers. Yet at the same time we are being somewhat cautious about our European business given the economic backdrop.

Again, I want to remind everybody what I said, when I think about Europe it did very well for the first half of the year. We think they are going to continue to perform above plan. But, we also want to remain very cautious about what they can do and cannot do. And so, we're maintaining a little bit of that cautiousness in our guidance ranges.

Anything else?

No, I guess I would add a couple things. This is Charles. Again, the underlying fuel obviously for the revenue growth is net bookings. I think we're continuing to work both sides of that. In terms of on the gross booking side we are seeing improvement in productivity.

In fact, this quarter we've got the -- we said we have seen the greatest increase in new rep productivity since we began the sales force expansion in early 2011. So, good signs there. We have pockets of over performance. Pockets of under performance.

In general, we are seeing up and to the right. But, we're also balancing that against our desire to maintain, continue to maintain strong deal discipline. Then on the churn side we are continuing to make good decisions there that we think are in the best of long-term interest of the company.

And, will drive the performance over the long-term. We talked about some of those in the script. To the extent we have some of those opportunities that drive long-term margin expansion, we will take advantage of them. We think that the guidance represents a prudent look at what we would expect over the next quarter or two.

All right. Guys, thanks. Good quarter.

Thank you.

Jonathan Atkin.

On Brazil, I was interested with the expansions that you announced are you planning to continue the existing mix of manage versus colo? Or will it be weighted towards one of the other segments going forward? Domestically, for your business suites offer, I wonder if you can update us on whether you plan to expand that to additional geographies beyond Virginia? And, how much of that product is there left to sell in Virginia? Thanks.

Sure, thanks, Jon. Relative to Brazil, actually, I would expect that we're going to see some shift, some slight shift towards a little bit more colo. I think it's still a very healthy managed service business. But, because of the outbound business from the Equinix pipeline, which we are beginning to see accelerate, those customers are more typically colo type buyers.

Although, we do believe that once we get them in we have a substantive opportunity to upsell them into managed services in the ALOG asset and in the Brazil region. So, probably some slight shift in the near term towards colo. But, we think, again, that I will represent an opportunity for managed service expansion.

And, both deliver strong returns. So, we feel very good about both of these expansions. Relative to the business suites asset, as you noted -- as you noticed in the last quarter we triggered our phase 2 expansion early. And so, we've definitely seen strong demand.

We still do have inventory available. But, we see a very healthy pipeline of opportunities to fill that. It is a key mechanism for us to use as we look at the evolution of customers to multi-tier architectures. And, we found that that plays very well.

Customers who have currently may have deployments in core IBXs that we essentially moved to high-value network modes in the core campuses and moved some of their larger footprint applications into suites, we think that plays particularly well in Ashburn. And so, we'll continue to invest in that product consistent with the demand we see.

And then, finally, the slide that shows the first eight -- or lists the performance of the eight IBXs. I think you had 9% year-on-year revenue growth, which is consistent with what you put up prior quarters. I was wondering how much of that lift is from repricing versus selling additional cross connects or other services?

Yes. Jon, it's predominantly, as I said, selling more cross-connects and more power. To the extent we have the ability to sell more space, I think there is the opportunity to get a little bit of a price lift there. Overall, it's predominantly due to more services that are being added to that mix.

Yes. The other thing is that in those assets, one of the things that fueled continued growth in there is our program -- one of the elements of the IBX optimization program is to continue to look at capacity -- ways to free up or augment capacity in those. And, take underutilized power and monetize it more effectively. That represents continued upside in those core assets.

Thank you.

James Breen.

Thanks. I just had a question about the competitive environment now that we are a year past the Terremark and Savvis deals. Has the supply for data center space changed at all now that those organizations or part of a large organization?

It would have seemed when they were independent that a lot of their focus was on top-line growth. Which was directly tied into building out. Now, the focus may be a little bit different inside those larger organizations. Thanks.

Charles, you probably have a deeper point of view on that. But, I would tell you, anecdotally, at the top as we watch these two, they are very busy integrating these two assets. And, they are completely consumed with shifting the core Telco assets with the new managed service cloud capability that they acquired with those two companies.

So, I don't think there is any big difference in competitive supply. We haven't seen any new supply come on that's changing the dynamics of our pipeline, of our bookings rate in the critical markets. But, I don't know if there is anything you would add to that, Charles?

I would not say there is any substantive shifts in the competitive dynamics in the market. In fact, I would actually say that those two companies generally, I think, are often synergistic with us in the marketplace. They tend to sell at a higher layer in services.

I think they target slightly different customer sets and application sets than we do. So, I have not seen what I would consider to be a substantive shift, particularly as it relates to those two companies. One thing that is happening, I think there is some customer reaction to the Terremark and after the Americas ownership situation with Verizon.

We think that represents some opportunity for us in the new Miami 3 asset and have seen a strong funnel for network providers wanting to gain access to that facility. But then, we also continue to work closely with Verizon as a partner and customer. And, are winning business with them on a global basis.

So, nothing specific relative to those two that I think are really impacting the competitive situation. And, candidly, in the Americas I think we continue to have just an extraordinary competitive position relative to the rest of the field. Again, because of our global footprint and the really performance-sensitive sections of the market that we are focused on.

Thanks. And then, just one follow-up. In Brazil, as you add those data centers there, can you just talk about any differences between the US market versus Europe versus Latin America in terms of siting the projects, power availability, and so forth?

There is definitely some uniqueness to site selection in various markets across the world. But, I think we have a team that has got broad experience with that. For example, in Brazil security concerns as to siting a location are a factor that aren't necessarily considered in other places. We consider that carefully as we made those selections.

Power availability and the quality and reliability and availability of power is absolutely something that comes into play. But, again, I think we've -- we feel very good about the site selection we made for the new Rio facility. And, in the case of the Sao Paul 2 facility in Tambore, that really is a strong environment right now for data center demand in Brazil and we're seeing that in the strength of the funnel.

Great. Thanks a lot.

Michael Rollins.

Oh, thanks, just a few questions. First, if you could just talk about the tally for CapEx for next year. Do you look at all the pending projects that will be completed in '13? What's that total for the CapEx, at least so far, that's slated for 2013? Secondly, Keith, I was just wondering if you can clarify, you guys have been good about updating your guidance each quarter for the moves in currency. And, I feel like at time we lose sight of what the total FX is on the full year.

Because right now we are thinking about it in your guidelines relative to what you gave in the prior period. But, can you actually help us take a step back and give us a sense of what the total FX dilution is for the year, just to put that into perspective? And then, finally, can you give us some details by segment, vertical segment, and maybe where you saw strength or changes in the environment for bookings? Thanks.

Yes, okay. Let me take the first one. CapEx, we'll probably have to come back to that one. We haven't actually calculated that right now. Clearly, as you know, the way that we report CapEx is on a cash basis. We are still pretty comfortable.

As you know, we've tightened the raise on CapEx to $740 million to $800 million. That includes $30 million of CapEx for ancotel and Asia Tone. I think we are going to be fine within that range. So, my expectation is that because the majority of that will be spent in 2012. As I look forward to 2013, there is probably -- again, we can get a little bit more accurate on this maybe the next time around.

There is probably $200 million or less of CapEx that is already earmarked for 2013. So, it gives you a sense. Right now we continue to look at projects. There is a lot of different things on the white board and we will update that on the next call. I can now take you to the currency and I'll pass it off to Steve or Charles.

Currency is very interesting. As you know, relative to the very first time that we offered guidance, the shift in guidance that we have hit, or absorbed is $42 million on the top line and $18 million in the EBITDA line, since we delivered our first set of guidance to you in October. So, a meaningful movement that we feel we're absorbing and recognizing that we continue to perform well.

So, from our perspective, we'll continue to update you on our performance on a year-over-year basis as needed. Certainly on a sequential quarter-over-quarter. And then, on a change relative to the guidance range that we are using. I think it gives you a good sense of our, if you will, our currency neutral performance quarter to quarter and year-over-year.

And then, on the vertical bookings in the quarter, Mike, heaviest for us was in cloud and IT services, which was about 26% of the bookings in the quarter. Followed closely by network, which is still very, very strong for us, which is about 25% of the bookings in the quarter. The networks, not surprising, I guess, with all the network stuff going on.

They're upgrading their networks, their infrastructure, we are winning service aggregation nodes, there is a lot of mobility expansion infrastructure that we are seeing, cloud stuff is coming at us from them. Network is still very, very strong for us around the world. And then, followed by those two, financial services and content digital media were both about 18% of the bookings each. And then, enterprise was about 13% of the bookings in the quarter.

Enterprise is, actually, in certain pockets because of the cloud we're benefiting from the cloud-enabled enterprise strategy. And, they are starting to embrace hybrid cloud infrastructure deployments. So, we are seeing an uptick there. Predominantly in the healthcare and business and professional services sub-segments. So, we are pretty balanced.

Thanks. That's very helpful.

Scott Goldman.

Hi, good afternoon, guys. A couple questions. I guess, first, maybe Steve you could talk a little bit about ancotel bringing on a lot of network-density in Europe. And, how you can leverage that with your existing base over there. But, perhaps more importantly, does this help change the equation at all in terms of your ability to get a higher contribution from cross-connects?

Not just from bringing on the cross-connects that they have already, but in terms of your ability to charge for cross-connects? Secondly, maybe just to touch on the last question on the vertical side, maybe you could expand a little bit in terms of enterprise. You have talked at the analysts today about how that's an underpenetrated and big opportunity.

I think the level of bookings you talked about probably exceeds your revenue exposure there if I'm correct. Maybe talk about your strategy to attack that more aggressively? And, on the cloud side how the partnerships, if you can give us any update in terms of the partnerships you have signed and whether or not they have been able to bring in incremental revenue for you.

Yes, two good question. Let me start, and I think Charles can probably give some color on the second piece of that. On the ancotel acquisition, the primary rationale for us in Europe was to increase our network-density which for our core value proposition all the ecosystem activity and inter-connection, as you all know, sits on top of a good choice around network-density.

This is one data center, it's about a 23,000 square foot facility. Very dense. 400 networks in there. 200 are actually new networks to us from 63 different countries. It's a diverse network base. As I mentioned, we did pick up about 6,000 new physical cross-connects. They have got a -- this is very similar to a meeting room in the US

They have got a virtual meeting room product that's very complimentary to our interconnection portfolio. And, this supports circuit based pairing and active ethernet exchange activity. They have another 9,000 virtual cross-connects that's not included in the cross-connect count. We have got to go get our hands around that business.

But generally speaking, this puts us in a very strong position in Germany to leverage the ecosystem focus on top of this density. Choice provides all kinds of opportunity for opix takeout, for performance enhancement, etc, when you are thinking about ecosystem. That was the primary driver for this transaction. And, I think coming from an enterprise standpoint --.

Yes, building on the vertical question, I think that you're right. So, either the 13% was the smallest contribution from our verticals. It is in fact over indexed relative to our current revenue in that segment. That's obviously a good sign. And so, I think it demonstrates that we're building some momentum. A couple things are happening at the enterprise.

One, we have identified a few horizontal application sets, particularly around WAN optimization and the performance of people's -- the economic performance of their WAN, that we think is -- are gaining some momentum. And then, also, our success in cloud is essentially an increasing returns effect. We are seeing great success with cloud service providers who -- it's in many respects, obvious why service providers resonate with Equinix, particularly for revenue facing applications.

We think what that is doing is will eventually promote a cloud-enabled enterprise story where they are using hybrid clouds, private, public hybrid clouds as a fundamental part of their enterprise infrastructure. And, we're beginning to see the early signs of that. And, we think that represents great potential for us over the long haul at enterprise.

Okay. Thanks, guys.

Gray Powell.

Great, thanks for taking the questions. I just had a couple. Maybe I missed this in the prepared remarks, but can you just -- can you help us quantify the impact to recurring revenue from the heightened churn that you are seeing? In the past, you guys have been able to sell forfeited space at a pretty decent premium, can you help us quantify that premium?

Well, on the second question, relative to -- I think that the optimization efforts clearly involve us taking business that is typically being -- that is typically under-market today and most typically associated with application sets that are less performance sensitive and optimizing that out and then getting into market rates. And, we clearly enjoy a nice price point in the marketplace because of the value we deliver on those higher performance.

So, it's really a matter of how much of a premium we get versus what was in there depends on, one, what was in there previously and how it was priced and what we replace it with. In some places, as indicated by the optimization we outlined in the script, that can be very substantial.

In this case, we believe it has the potential to expand operating margins in the Americas region by a full point. That's the story there. And then, in terms of the revenue headwinds, it's fully contemplated within the guidance that we provided.

And, yes, it does have some near-term impacts. But, typically we are able to resell capacity quite quickly into, because typically these are into high-demand assets with high levels of fill. So, for example, a couple of our large churn events that we've seen in the last few quarters are either already refilled or have ample opportunity in the final to refill those in the next quarter.

Got it, okay. That's helpful. And then, I just wanted to switch topics. If I look at your same-store sales disclosure for the US business, it appears that gross margins are already at or above your long-term targets. Do you think your long-term margin targets are conservative? Is there a point where you would have to think about increasing your L top?

Again, a lot of times we're -- if you step back to the analyst day, one of the things we really talked about was bending the cost curve. And, a couple of things that we are looking at is, first and foremost, is developing systems and process that makes it a lot easier for not only our customers to do business with Equinix, but our Equinix employees easier to do business with Equinix.

In both cases, what you're trying to do is take the frictional cost out of the equation. We think we are going to do a good job on that and we will continue to make that investment. As you know, it's a $30 million to $35 million investment. At least this portion of it.

The second piece is we have done a real good job at managing the utility spend. There is a lot of reason that that has happened. Partly -- how we negotiate with our contractors is partly the infrastructure we have put in and the efficiency programs that we have in place. When you look at those two costs and at the highest level, headcount costs, if we can do what we think we can do from a system perspective, it will allow us to bend that cost curve on a per-head basis over time.

All that leads me to is suggest that over a period of time we think we'll continue to see margin improvement. And, that margin improvement will come in both areas of the income statement both on the gross profit side and also in the amount of cash spend that we see on the SG&A side. And, will allows us, probably over time, to see some margin expansion.

All right. Got it. Thank you, very much.

Jonathan Schildkraut.

Great. Thanks for taking the questions. I have gotten so used to hearing about record bookings from you guys every quarter. We didn't here about it this quarter.

Understandably, given the economic environment. Some of your competitors have reported extending sales cycles. I was wondering if you might give us color in terms of your booking levels? And, any kind of impact you might have seen from macro in the last three months? Thanks.

Yes, that's a good question, Jonathan. We have got rising gross booking targets as you would imagine as we continue to grow the company. But, funny enough you should ask. It was our second highest gross bookings quarter in our history.

I guess we just decided not to throw that into the script. It was a very, very good gross booking target quarter for us. And, also the net bookings are ahead of plan, as you heard Keith or Charles mention. Also, our cross border bookings are still very, very strong.

Predominantly, Charles' business pushing it out to Asia and Europe, multi-national's that are still continuing to buy in those two regions. Heavily from cloud and content digital media companies. So, the bookings engine is working very well. The productivity, as Charles talked about, is up and to the right.

And, the -- we're grooming the reps that aren't performing. We are running it just under a couple hundred reps around the world, quota carrying reps, that all are selling Platform Equinix. Growth in revenues sold was 34% up in all three regions year-on-year. So, it's working.

The sales productivity is happening. And, we're, as Charles said, we are managing, and Eric and Samuel they are doing the same thing in Europe and Asia. Our deal discipline and our pipeline inspection on a weekly, monthly, quarterly cadence is at a whole new level. And, that is helping us. We're very, very focused on getting the right applications into the right assets.

Jon, to directly answer the question in terms of are we seeing -- at least in the Americas we are not seeing what I would consider to be any kind of effects of macroeconomic uncertainty or anything like that. Our actual funnel coverage, if you look at our 2 and 3 quarter funnel coverage we are actually more robust than we have ever been.

I think we did have a quarter where we, I think, pulled -- had a very strong quarter and pulled a fair amount out of a funnel. Which probably led to the not continuous records. But, nonetheless, we delivered strong performance. Continue to see coverage levels high.

Are not seeing extended sales cycles. They feel the same as they have been. So, no real ill effects from what we can tell in the Americas business. And, I think the broader global business is performing similarly given that we tend to operate in the strongest economic centers.

The only caution we would add to that is what Keith mentioned is in Europe, we're our eyes open. We have to watch the markets in the second half given the broader issues. But, that team is doing we well and executing well, as Keith said. And, they are ahead of plan. We feel good about the overall plan.

Super, and if I could get one housekeeping item. Keith, I was wondering if you could give me the RP basket numbers and the NOL number as of the end of the quarter?

There's no change in the NOL position. And, the RP basket, I have not calculated this quarter. But, clearly it was more net income. Add roughly 50% of the net income to the basket plus the stock option exercised in the quarter and it will give you a sense of what that RP basket is. I apologize that I had not calculated it before this call.

All right, thank you.

Okay.

Simon Flannery.

Thank you, very much. Two quick ones. Keith, you mentioned in your commentary about SG&A benefiting from better numbers on IT advertising and hiring. How much of that is something that will be ongoing savings?

And, how much was just timing between Q2 and Q3? And then, at the analyst day you talked about future data center builds. You would like to own more of your data centers than leasing them. Can you just give us an update on your thoughts there? Thanks.

Sure, good questions, Simon. Certainly, if you look at the SG&A spend and you look at our performance year-to-date, we have done better than we anticipated. We have done better than we had guided to. Certainly some of the costs are moving into Q3 and the rest of the year.

But, there is an element that isn't. Hence, that's why we rose -- we raised our guidance by $10 million this quarter over what we had last quarter. And so, just to remember, our EBITDA we're raising it basically because we're keeping revenues -- the ancotel and Asia Tone out of it, we are keeping revenues at greater than 18%, 19%.

And so, when you then look at EBITDA, we're saying it is greater than $880 million. Take off $10 million for ancotel and Asia Tone it's greater than $870 million. That's a $10 million uplift and we are absorbing $8 million of currency. It's fair to say that some of the costs are going to be -- are permanent.

And, some, of course, are going to be temporary. We are going to continue to focus on our spend and try to marry it up as much as possible throughout the rest of the year. It will come in chunks at times. And, we will update you on the next earnings call with that.

Great.

When you think about then the acquisition of our assets, we are going to continue to look at it. We think it's a prudent thing to do as a business. Again, there is no meaningful update at this stage.

There is a number of assets that are out there that are -- potentially could be acquired. But, we will have to take it on a periodic basis. And, give you an update when we are closer to realizing any decisions around that area.

Great, thank you.

Great. That concludes our Q2 call. Thank you for joining us.

That does conclude today's conference. Thank you for participating. You may disconnect your lines at this time.