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Equinix, Inc. (NASDAQ:EQIX)

Q4 2008 Earnings Call

February 11, 2009 5:30 pm ET

Executives

Jason Starr – Investor Relations

Stephen M. Smith – President, Chief Executive Officer

Keith D. Taylor – Chief Financial Officer

Analysts

Jonathan Atkin - RBC Capital Markets

Jonathan Schildkraut - Jefferies & Company

Mark Kelleher - Canaccord Adams

Michael Bowen - Piper Jaffray

Gray Powell - Wachovia Securities

Michael Rollins - Citi Investment Research

Michael McCormack - J.P. Morgan

Srinivas Anantha - Oppenheimer & Co.

Manuel Recarey - Kaufman Brothers

Operator

Good afternoon and welcome to Equinix Q4 2008 results call. (Operator Instructions)

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

Jason Starr

Good afternoon and welcome to our Q4 and full year 2008 results conference call.

Before we get started I would like to remind everyone that some of the statements that we'll be making today are forward-looking in nature and involve risks and uncertainty. Actual results may very 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 Form 10K filed on February 27, 2008 and Form 10-Q filed on October 24, 2008.

Equinix assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of regulation fair disclosure, it is Equinix's policy not to comment on its financial guidance during the quarter unless it is done through an explicit public disclosure.

In addition, we'll provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures and a list of the reasons why the company uses these measures in today's press release on the Equinix Investor Relations page at www.Equinix.com.

We would also like to remind you that we post important information about the company 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 Chief Executive Officer and President, and Keith Taylor, Equinix's Chief Financial Officer.

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

Stephen M. Smith

Thank you, Jason. I'd like to welcome everyone on the call today and let's get started.

Equinix delivered another year of very strong growth and operating results despite a challenging economic environment in 2008. Even with this global slowdown, our customers are continuing to demand our services across all three regions. We are continuing to capitalize on this favorable demand with ongoing expansion in over half of our markets in an increasingly constrained supply environment.

The business fundamentals underpinning our 2009 plan continue to be solid in terms of pipeline, churn and collections with our customers, yet we remain realistic about the poor state of the economy with flexibility in 2009 that includes a reduced level of bookings expectations, rigorous financial forecasting, continued aggressive management of our costs, and most importantly, as you know, an expansion plan that remains fully funded.

I will provide additional insights into our operating assumptions for the full year later in the call, but before we get into the results, I'd like to share a few key insights about our business and our position in the market. Of course this may be a reminder for many of our long-term investors, but I feel it's important to reinforce these attributes of our business during these challenging times.

First, we have good visibility and predictability with a 95% recurring revenue base and a high fixed cost structure and strong diversification by customer, geography and industry.

Second, our unique value proposition provides high levels of operational reliability and network density on a global basis, which in turn enables us to continue to win new customers and retain existing ones at a greater rate than our competitors.

Third, we believe that our continued disciplined investment in our longer-term growth and scale will provide us differentiation and an important competitive advantage with key customers in critical markets while still generating the strong financial results and returns you've come to expect from Equinix.

And finally, the defensive attributes of our business model, particularly the critical mass of networks and the limited access to capital in today's environment, provide an important competitive barrier to entry for the foreseeable future.

We believe that all of this, coupled with our stable financial position and strong operating cash flows, will help us emerge from this economic downturn as a stronger company with a larger share of market.

So now let's jump into the results and then I'll turn it over to Keith for some additional insights on the financials.

Total revenue for the company was $704.7 million for 2008, representing 68% growth year-over-year or 38% organically. Our Q4 revenue was $190.7 million or 37% over the same quarter last year. Cash gross margins were 62% for 2008 and 65% for the quarter. This continued improvement is a good indicator that we are starting to see the investments in our scale paying off.

Our adjusted EBITDA results for 2008 were $292.5 million, representing 88% year-over-year growth and 62% organically.

To provide you a sense of how we think about the cash flow attributes of this business, if you compare our adjusted EBITDA of $292.5 million to our ongoing capital expenditures of $67.5 million, the difference is what we consider to be the discretionary piece of our cash flow which we could use to fund our expansion investments.

I'm pleased to report Equinix's first full year of generating net income, which includes a $104.5 million net income tax benefit. Excluding this benefit, our net income for the year would have been $27.1 million.

Equinix finished the year with 2,272 customers, increasing 110 new customers closed in the quarter.

In the U.S. market, our overall demand in this region remains strong, with the size of our pipeline in the later stages of the sales cycle as high as it's historically been. Yet, despite the size of this pipeline and in this economy, we did see slowdown in decision-making, particularly from new customers, as the fourth quarter progressed.

To frame this for you, our bookings in the quarter were more reflective of our early 2007 bookings levels, but again, the number of deals and MRR in the overall pipeline looks more like mid2008.

Our expansion plans in the U.S. remain on schedule for the second phase of New York 4 and we have shifted our scheduled opening of our LA 4 IBX to mid-Q3 due to further delays in the permitting process. And as you saw in our release today, we are doing two augmentations of our existing LA 1 and Chicago 2 IBXs for an additional 700 sellable cabinets in these important interconnection hubs.

We also operated our U.S. IBXs at over 6 [times] availability across all markets in 2008, with over half at 100% availability. Clearly this is a proof point of the quality and the expertise of our U.S. IBX operations team. This type of reliability has a direct correlation to our customer satisfaction scores in this region, again, at historical highs.

Of particular highlight in the U.S. is that in the fourth quarter both our cash gross margins and adjusted EBITDA margins achieved the top end of our long-term objectives of 69% and 50%, respectively.

In our European market our financial performance beat our expectations for the quarter and the year, despite the unfavorable impact of currency fluctuations. Our capacity for growth in this region is generally good in all markets, with expansion activity in London, Paris, Amsterdam and Frankfort, all of which are on track at this time. Many of our competitors also continue to expand, but with much smaller projects, leaving us better positioned for growth.

As an example, in The Netherlands, despite being a new entrant in the Amsterdam market, our first phase of this project is largely sold out with predominantly local customers. This validates our expectation that having quality inventory in a market where competitors were dark positioned us to gain important market share.

Across the region, our customer base continues to be balanced between financials and enterprise, with a growing focus on the networking content verticals. As a matter of fact, cross-region sales with CDNs and other key customers are increasing our Internet orientation in Europe. This pairing business is still in the early stages, but we are seeing clear traction in Amsterdam, Paris and London. Additionally in Europe, we saw average pricing increase in the mid-teens over the course of 2008. We expect this trend to continue to increase going forward due to the ongoing renewals and customer expansion, but not necessarily at this rate.

As we completed the acquisition of IXEurope, we saw an opportunity to bring the Equinix brand and operating strength to Europe. By all accounts this has taken hold. Overall reliability was in excess of 59s due to some very targeted operations and improvement plans and increased staffing in 2008. Our CapEx in 2008 involved investments in almost every IBX to address single points of failure and increase overall reliability.

So in summary, in Europe our general outlook remains optimistic. As a matter of fact, our 2009 plan has us investing roughly a third of our announced expansion capital into this region. Given limited competitive new supply and customer capital constraints in building their own data centers, we believe this will position us for 2009.

Shifting over to our Asia-Pacific region, the fourth quarter capped off another great year of growth. On a full year basis, we saw a 48% increase in revenue and an 81% increase in adjusted EBITDA. We added over 1,700 cabinets into our capacity in 2008, a 31% increase year-over-year. Following this '08 expansion activity, I'm pleased to announce that we just opened our newest IBX in Sydney, Australia, adding approximately 650 sellable cabinets, of which 20% are already booked.

The construction of our second IBX in Singapore is well under way, and the first phase is still on schedule for the third quarter of 2009. This is important as Singapore 1 has surpassed a 90% occupancy rate.

In our recently opened Hong Kong expansion we've also experienced a high fill rate, which is now nearing fully capacity. As a result, we are doing an additional phase of expansion in this IBX in which we expect to add approximately 200 sellable cabinets when it opens early in the fourth quarter.

Lastly, our overall customer satisfaction rates in this region are up 2 percentage points, while our customer loyalty rating increased almost 10 points. We've seen a significant improvement in our uptime staffs in this region for 2008. In fact, all of our IBXs are operating at 100% uptime in the fourth quarter, a nice execution proof point by our team in Asia.

So as you can see, good progress across all three regions.

A final highlight of note for 2008, inside of our financial services vertical we made significant progress with the electronic trading communities. Our results in 2008 have been very strong, with a 120% increase in bookings and several new customers in the U.S., U.K., Germany, Singapore, Hong Kong and Japan, with exchanges, sell side, buy side and the technology utilities. Some of the wins this year included Dow Jones, NASDAQ OMX, CBOE, [SHIEX] and DirectEdge, which brings our total count of financial exchange customers to well over 300 globally.

More importantly, we're starting to see multi-region deployments of these platforms and access nodes in some of our key international markets, which reflects our advantage as Equinix is the only colocation provider present in the Top 10 global financial centers. Our customers and prospects in this vertical continue to embrace the neutral marketplace concept as their requirements for proximity, bandwidth and uptime accelerated across all asset classes. We strongly believe that the trends to reduce risk, decrease trading costs, handle surge capacity and provide more end points played directly into our global scale and reach to deliver the capacity that meets their needs.

So I'll stop there and turn it over to Keith to provide some additional color on these results and some added commentary on our financials. Over to you, Keith.

Keith D. Taylor

Thanks, Steve, and good afternoon. I'm pleased to provide you with our fourth quarter financial results, with insight into the quarter's performance both against our expectations and after assessing the impact of foreign currency on these results. Also I'll give you some color on the key trends as we look ahead to Q1 and the rest of 2009, including the effect of certain accounting adjustments that will have on our future results.

There are three meaningful accounting changes that will affect our results in 2009 and beyond, as follows - number one, the deferred tax assets and the release of the deferred tax valuation allowance against these assets; the treatment of our 2012 convertible debt and how the embedded derivative attributed to this debt gets bifurcated and allocated between equity and debt on the balance sheet, and the reversal of our L.A. seventh floor restructuring reserve. I will discuss these later, but first let me address our key operating performance metrics for the year and quarter, starting with revenues.

As Steve mentioned, our 2008 revenues were $704.7 million, including $177.5 million of revenues from Europe. Revenues excluding Europe were $527.2 million, a 38% increase over the prior year and up greater than $145 million year-over-year. Organically this reflects the sixth straight year of 30% or greater growth on the top line and the largest absolute dollar growth over our 10 years of operations. Our Q4 revenues grew 4% over the prior quarter to $190.7 million, consistent with our expectations.

Relative to the FX rates used for our Q4 guidance, there was no meaningful foreign currency impact on revenues for the quarter although, as you can appreciate, there was great variability during the quarter. On a constant currency basis, assuming we kept our currencies constant with the average rates in effect during Q3, our Q4 revenues would have been $198.8 million or 8% greater than our Q3 reported revenues. As a reminder, we do not hedge revenues.

Sizing our expected 2009 revenues by currency, U.S. dollar revenues should approximate 65% of 2009 total revenues, while the euro and the pound sterling should approximate 14% and 8% of 2009 total revenues, respectively. All other currencies are individually 5% or less of our expected revenues for both Q1 and 2009. Last point here - we've assumed for current guidance purposes $1.33 to the euro and $1.45 to the pound.

Looking at churn, for the year both our MRR and cabinet churn rates were approximately 8%. We expect both our Q1 and 2009 churn to remain consistent with our targeted level of 2% per quarter or about 8% per year.

Next, moving to gross profit and margins, the company recognized gross profit of $290 million for the year or gross margins of about 41%. Our cash gross margins were 62%, consistent with our expectations. For the quarter the company recognized gross profit of $82.4 million or gross margins of about 43%. Our cash gross margins were 65%, ahead of our expectations. U.S. cash gross margins were 69% for the quarter. During the quarter we saw our gross margin improve across all three regions.

Looking forward we expect our cash gross margins to range between 62% and 63%. This reflects our expected strong operating performance, offset in part by the incremental cost related to our expansion activities in each of our regions throughout the year. This will include rent and cabinet expenses related to our newly announced L.A. 1 Phase 2 build, costs that were previously applied to our restructuring reserve on the balance sheet, while reducing our adjusted EBITDA by approximately $2.3 million in 2009.

As noted above, the remaining accrued restructuring reserve, estimated at $5.7 million, effective from the date that we made the decision will be reversed into the income statement in Q1. To be clear, the change in accounting treatment will have no incremental effect on our cash flows, but will positively impact net income in Q1.

Looking at revenue per cabinet on a weighted average basis, excluding Europe our average monthly recurring revenue per sellable cabinet increased to $1,698 from $1,654 last quarter, up 7% compared to last year.

Consistent with our operating plans, we continue to book higher part cabinets to meet our customers' expectations and address the technology shift for more power-dense cabinets. However, power capacity allocated to these cabinets may be purchased by the customer over an extended period of time. For the higher-part cabinets, we target between $1,800 and $2,200 per cabinet, a level that is currently being attained.

On a regional basis our weighted average price per sellable cabinet in the U.S. was $1,816 versus $1,756 in the prior quarter, up 3.4% quarter-over-quarter increase and within the range we just noted. In Asia-Pacific our weighted average price per sellable cabinet was $1,272 compared to $1,254 last quarter. This reflects the impact of strong pricing across the region. Also, the Asia-Pacific MR per cabinet metric continues to benefit from strong regional interconnection growth. With respect to Europe, our price levels remain consistent with the prior quarter in each of our markets. Europe interconnection revenues remain at 4% of their recurring revenues.

Now looking at SG&A, SG&A expenses for the year were $213.5 million. Cash SG&A expenses for the year were $147.5 million. For the quarter, SG&A expenses were $55.5 million and cash SG&A expenses were $40.4 million, a 12% increase over the prior quarter. As we look forward into 2009, SG&A as a percentage of revenues should range between 19% and 20%.

Moving on to net income and adjusted EBITDA, for the year we generated net income of $131.5 million, including a net tax benefit of $104.5 million, which is primarily related to our U.S. and Australia operations. Excluding the net tax benefit realized in Q4, we generated approximately $27.1 million of net income.

As I mentioned in my opening comments, the release of the deferred tax asset valuation allowances will have a meaningful impact on the complexity of our tax matters on a go forward basis. But before we get into the details, let me first start with our view on cash income taxes. We continue to believe we'll not pay any meaningful cash tax in 2009 or 2010, and this may even extend to 2011.

Now, with respect to the tax benefit realized during the quarter, the company historically provided a full valuation allowance against the majority of our deferred tax assets, recognizing that any tax benefits related to our historical NOLs or our temporary tax differences may not be realizable.

During Q4, given the strong U.S. and Australian net income in the quarter, the company reached an important milestone whereby U.S. and Australian net income on a cumulative basis was or turned positive over the past three years. And given the likelihood that we'll continue to generate both U.S. and Australian net income in 2009, the company released its valuation allowances against these deferred tax assets. This benefit is reflected in the income taxes line on the income statement. Going forward, as a result of this decision the company will commence the recording of income tax expense at the expected effective blended tax rates.

Our adjusted EBITDA was $292.5 million for the year, including Europe adjusted EBITDA of $51.1 million, an 88% year-over-year increase. For the quarter, adjusted EBITDA was $84.1 million, a 79% increase compared to the same quarter last year and up 9% over the prior quarter. Adjusted EBITDA for the quarter on a constant currency basis versus Q3 would have been approximately $3 million higher.

Turning to our balance sheet and the cash flows, at the end of Q4 our unrestricted cash balances totaled $307.9 million, a $22.3 million decrease compared to the prior quarter. Although our cash balance is greater than expected due to strong operating results, strong customer collection, and greater than anticipated accrued construction costs, we do expect that our cash balance will decrease over the first half of the year as we settle our outstanding construction obligations. It is important to note as we start the year we anticipate that our current cash balances, coupled with expected 2009 operating cash flows, will fully fund all of our announced expansion projects and still enable us to exit 2009 with over $200 million in unrestricted cash.

One final note related to our cash balances and the funds we placed in the Reserve Primary Fund, the money market fund that broke the buck in September. As of today we've received about 80% of the approximate $50 million in cash we had in this fund after reflecting a loss on investment of $1.5 million in Q3. The remaining $9.3 million outstanding is expected to be repaid to the company in 2009.

Next, moving on to our operating cash flows, our net cash generated from operating activities was $268.1 million for the year, a 122% increase over the prior year and a 92% correlation to our adjusted EBITDA. For the quarter, our net cash generated from operating activities was $75.7 million, a 21% increase over the prior quarter. The company continues to remain highly focused on cash collection activities in each of our three regions, leaving our global DSO metric at 31 days for the quarter, consistent with Q3.

It's important to note that our allowance for bad debt increased throughout 2008, a reflection of a tougher economic environment and conforming our EU region to our U.S. accounting policies. We continue to manage the outflow of cash related to our vendor obligations. Looking forward to Q1 and the rest of 2009, we anticipate we'll continue to generate strong operating cash flows consistent with the expected adjusted EBITDA performance.

Cash used for investing activities was $492.2 million for the year compared to $1 billion last year. During the quarter, cash used from investing activities was $133.5 million, an increase over the prior quarter level of $85.2 million, primarily the result of higher capital expenditures totaling $165.6 million, offset in part by an increase in our accrued construction balance of $31.4 million.

Cash generated from financing activities was $143.7 million for the year, primarily derived from the drawdown of proceeds from our European and Asia-Pacific financing lines. For the quarter, cash generated from financing activities was $30.7 million, somewhat consistent with our prior quarter level of $26.4 million.

Looking forward, the company will continue to review its financing strategies, particularly for its foreign entities. To the extent possible, the raising of local debt to fund local expansion projects remains our preference. Specifically related to the U.S., the company's working with a local bank to replace its operating line of credit. To the extent any line of credit is approved, we expect to use part of this facility to replace our cash collateralized letters of credit. Additionally, we expect to repay term debt and capital leases totaling $50 million and $52 million in 2009 and 2010, respectively.

And a few final notes on our outstanding debt balances. As many of you are aware, we have a convertible debt instrument that can be settled in cash at the company's choosing. This only applies to our 2.5% 2012 convertibles totaling $250 million and not our 3% 2014 convertible debt. The 2012 convertible debt, consistent with the new accounting guidelines, will be bifurcated between debt and equity.

As a result, effective January 1, 2009 we will adjust this outstanding balance by the value of the embedded derivative and allocate this amount in the equity section of our balance sheet. The net adjustment will approximate $37.5 million. This debt discount will accrete to the non-cash interest expense line on the income statement through April 15, 2012, about $10 million of which will be recorded in 2009, thereby increasing our net interest expense for the year. Regardless of the accounting treatment, consistent with our initial intentions, the company plans to repay this $250 million debt instrument with cash in 2012.

Additionally, as we mentioned on the last call, it is our intention to extend the 2010 maturity date of the $110 million Chicago IBX construction loan as provided for in the terms of the loan agreement by two 12-month extensions, bringing the final maturity date to 2012.

Looking at the quarter end leverage ratios, annualizing our Q4 adjusted EBITDA our gross leverage ratio is 3.6 times or 2.7 times on a net basis. At the midpoint of our 2009 adjusted EBITDA guidance we expect our leverage ratios, gross and net, to range between 2 and 3 times.

Finally, with respect to our equity balances outstanding, we had approximately 37.7 million shares of common stock outstanding at the end of 2008. This number excludes 5.7 million shares related to our convertible debt and 3.3 million shares related to employee stock plans and other warrants.

Let me now turn the call back to Steve.

Stephen M. Smith

Thanks, Keith.

Results like this in these kinds of market conditions speak volumes about the quality of our people and execution with our customers. My hat's off to the entire Equinix team worldwide.

Let's now shift the discussion to our 2009 plan and share with you how we intend to operate in this recessionary economy.

As we've mentioned, we have built what we believe to be a very flexible and realistic operating plan with the following key assumptions:

Number one, as the broader economy continues to contract, we've slowed down our bookings assumptions to factor in some level of softness in the decision-making that we now expect to experience in this type of environment. As mentioned earlier, we experienced some slowdown in the past quarter, but our overall '08 exit rate on revenue and adjusted EBITDA are a strong foundation to support solid growth in 2009.

Number two, we've also increased our MRR churn assumptions on an absolute basis by approximately 10%, and with the increased scale of the business, this is still expected to be within our targeted range of 2% per quarter or roughly 8% on an annual basis. Just to note, as you'll see in a moment as I cover our '09 guidance, the midpoint of revenues implies just under 23% annual growth. Of course, this is a different growth rate than we've experienced over the past six years, but still in excess of market growth rates and sensible in the current environment.

Number three, on the CapEx front our $325 to $375 million plan includes approximately $285 million of announced expansion and ongoing CapEx and includes the three expansions we announced today. There's also approximately $40 to $90 million in our guidance for potential expansion projects that we're contemplating but have not yet committed to. Said differently, our CapEx guidance can still absorb incremental expansion announcements up to $90 million without requiring us to increase our capital guidance.

As we deliver on Q1 and have better visibility into Q2 bookings, additional expansion decisions will be made; yet, just to note, this also is a built-in circuit breaker should the first half of the year not develop as anticipated.

Number four, similar to most other companies in this environment, we are also managing operating costs very tightly. Our '09 hiring plan targets the second half of the year, with essential hires requiring CEO and CFO approval in the first and second quarters. All other discretionary spending has been tightened down as we watch the year unfold. As you'll note in today's guidance, these efforts have supported a continued strong and unchanged adjusted EBITDA expectation in 2009.

All that said, we intend to keep investing in our core business in order to expand our global scale as we are still targeting a $1 billion revenue expectation in 2010. To support a billion dollar business, it is critically important that we continue to invest in key areas such as the alignment of our global sales force to leverage the advantage of our worldwide footprint, building a robust and scalable IT infrastructure, continuing to create value through interconnection, and lastly, ensuring IBX quality and consistency for our customers' experience worldwide. Combined with these key assumptions and initiatives, we will continue to provide a sharp focus on our leading indicators, financial forecasting and, of course, our operational reliability for our customers.

So now let's take a look at our updated guidance for 2009 and the first quarter. In this environment, providing guidance presents a little bigger challenge. However, we think it's important to continue to share with you our visibility into the remainder of the year and be as transparent as possible, even in these uncertain times. Of course, this guidance is representative of our best thinking at this point, and we will continue to update you on our quarterly calls as the year unfolds.

For the full year we expect revenues to be in the range of $855 to $875 million. This is a reduction of $16 million at the midpoint from our originally issued guidance on our last call in late October. This reflects our lower expectations in bookings as mentioned earlier and just over $3 million in net impact from our original currency assumptions.

We expect cash gross margins to be approximately 63%. Cash SG&A will be approximately $160 to $170 million.

We're leaving our adjusted EBITDA expectations unchanged at $365 to $385 million, with a midpoint at $375 million. This is a clear statement of the strength of the operating leverage in this business model and our tight cost management.

Our 2009 CapEx guidance is also unchanged at $325 to $375 million, of which approximately $60 million is expected for ongoing CapEx.

Now for the first quarter, revenues are expected to be in the range of $198 to $200 million. Cash gross margins for the quarter are expected to be approximately 63%. Cash SG&A is expected to be approximately $40 million. Adjusted EBITDA is expected to be in the range of $86 to $88 million. Total CapEx for the quarter is expected to be between $100 and $110 million, which includes approximately $20 million in ongoing CapEx.

So as you can see, this guidance points to still another year of strong top and bottom line growth, with continued investments in our longer-term opportunity. Frankly, I feel very good about our prospects in 2009. For all the reasons I've mentioned on today's call and the fact that we have a seasoned leadership team, many of whom were here during the last economic downturn, provide me great comfort that we will effectively navigate through this challenging environment and also extend our market leadership position.

So with that, [Roy], I'll turn it back to you and we'll take some questions.

Question-and-Answer Session

Operator

Your first question comes from Jonathan Atkin - RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets

You indicated a slowdown in decision-making as 4Q progressed, and I think you said that was mainly with new logos rather than existing customers, but I just wanted to clarify that. Were there any particular regions on industry verticals where you saw that or was this pretty much across the board? And anything you've seen year to date since quarter end that indicates a change in that pace?

Stephen M. Smith

Yes, Jonathan, as I did say in the remarks, it was with new customers. Our existing growth this quarter was actually at the top end of the range we typically give you folks, in the 50% to 80% range, so we actually have very strong existing bookings growth. The softness was in new customer logos, and quite frankly it was tied up in what I would just refer to as uncertainty with a lot of these new customers trying to make a decision. So a lot of the decisions are still in the pipeline today, so they just shifted to the next quarter, and we expect over time, once they get comfortable with their '09 budgets, that we'll start to see some of this flush in the pipeline.

Jonathan Atkin - RBC Capital Markets

Anything that you would do potentially in terms of changing your pricing terms that you think would have an impact on possibly reaccelerating that pace or is it simply just the decision cycle at the customer that's the bottleneck?

Stephen M. Smith

Yes, I think it's predominantly, Jonathan, the decision cycle. But in these kinds of times we're having conversations with many customers and, as we've said in the past, we'll provide as much flexibility as possible with our customers to do the right thing on a long-term basis. But there's no additional pressure here that we're feeling in terms of that kind of environment.

These decisions are really tied up in they want to get the budgets nailed down, they want to get their feet underneath them as they get into '09, and like I said, I think we'll see some of these decisions being made. For example, in Asia it's a lot of small decisions with new customers and we think many of those will start to show up here as we progress through the quarter.

Jonathan Atkin - RBC Capital Markets

And then a follow up on churn and then briefly on Europe. On churn, I'm just wondering, of the different elements that drive that - you know, it can be repricing, competitive factors, or it could be downsizing or consolidation at the customer - of those drivers or others, any kind of changes that you've seen in the last several months?

Stephen M. Smith

Not really. The scale of the business in growing, as I said, and I think as Keith and I both said, we're still expecting and have built into the '09 plan a 2% per quarter and 8% on an annual basis, so that's what we've modeled in.

Keith, I don't know if you have any other thoughts.

Keith D. Taylor

Jonathan, I'd just say that Q4 churn also relates to some optimization that we've been talking about for the last two or three earnings calls. A lot of that came through in our Q4 numbers.

Jonathan Atkin - RBC Capital Markets

So the relative contributions of those different drivers is roughly the same; there's nothing kind of moving up or down markedly?

Keith D. Taylor

There's no meaningful change in any one direction.

Jonathan Atkin - RBC Capital Markets

And then in Europe, what do you see as the prospects for driving a greater mix of interconnection revenues given the success that Steve talked about in the content and network verticals.

Stephen M. Smith

Jonathan, I would tell you we're off to a great start in Europe. As we've mentioned in the previous calls, we've got the infrastructure set up in all the countries. We're starting to see the peering activity take place. We're getting great traction with the electronic trading communities on a global basis, so that's helping from a cross-connect standpoint. We're on track. We feel really good about what's going on with the European team and they're really starting to focus beyond just enterprise and financials.

Keith D. Taylor

And Jonathan, let me just - there's one other thing I wanted to add to Steve and I forgot to jump in there. I think when you asked earlier on about the question on pricing, it's very important, I think, that you take away and the other listeners on the phone take away the fact that pricing can be as flexible as we want to make it, but the fact of the matter is we've got an industry that is constrained with capacity. We as a company are constrained with capacity in a number of key markets where nobody else is building.

And so when we think about pricing, certainly we're in a different economic environment today, but given the fact that there is little supply in the marketplace, we certainly think that plays well into our position going forward.

Jonathan Atkin - RBC Capital Markets

And then finally, public sector, government still not a focus? I'm assuming there's no change in your thought process there?

Stephen M. Smith

Well, to say it's not a focus is probably not a fair statement. As you probably know, Jonathan, we do have government business around the world and many of our resellers tend to pull government installations in also, so it's not a targeted focus in terms of a vertical, but we have plenty of government customers deployed around the world.

Operator

Your next question comes from Jonathan Schildkraut - Jefferies & Company.

Jonathan Schildkraut - Jefferies & Company

A couple of questions here, some housekeeping and some more strategic. Keith, you talked about showing kind of a fully loaded tax rate or at least as it applies to the U.S. and the Australia business. Considering that 65% of your revenues come out of the U.S., what should we be using, somewhere in the high 20s?

Keith D. Taylor

I think for an effective GAAP tax rate I think you're going to be closer to the 35% range, again, because the predominance of our net income is coming from the U.S. today and just the sheer size of the U.S. So there's two aspects here again - the size of the U.S. and then the value of the net income. And then, you know, the places that we have preferential tax rates, again, no surprise to, I think, anybody on the phone, it's going to be Singapore and it's going to be Hong Kong.

Jonathan Schildkraut - Jefferies & Company

A couple of questions on year up. You know, revenues contracted quarter-over-quarter. What happened here? Was this just primarily currency headwinds? And maybe if you could quantify the currency headwind as it applied just to Europe, that would be helpful.

Additionally, I see that there's a managed infrastructure line that I don't know if I've seen before, and it was up 20% quarter-over-quarter in Europe and I was wondering if you could give us a little bit more detail there.

Keith D. Taylor

I think it's very appropriate that you bring up the European matter. If we adjust for the currency impact, I think, as everybody knows, the impact of the sterling in Q4, it was a very dramatic movement and, for that matter, euro, but euro was a little bit more stable. Had we not seen the sterling depreciate so quickly, the average rates that we used for the quarter close would have had us increasing on a neutral basis 11%quarter-over-quarter, so substantial growth. So the growth that you saw in Asia, we're seeing the same equivalent growth rate on a fundamental local basis in Europe as well, 11%.

Jonathan Schildkraut - Jefferies & Company

And the managed infrastructure?

Keith D. Taylor

Are you talking specifically? I'm sorry, I didn't - was that Asia?

Jonathan Schildkraut - Jefferies & Company

No, specifically in Europe. It was up 20% quarter-over-quarter and that's despite the fact that you did have some challenges from a currency perspective. I was wondering if you could tell us if this is something beyond the traditional managed services that you offer, which are quite limited as I understand them, or if there's something else in this line. And then again, why you had such a big acceleration.

Keith D. Taylor

Yes, it fluctuate quarter-over-quarter and in fact what we do do is sometimes we buy and sell equipment on behalf of our customers. Although I don't have specifically the top, I think that is what's creating this variance between the two quarters, the fact that we actually did sell a little bit more equipment in Q4 than Q3.

Jonathan Schildkraut - Jefferies & Company

Also, finally, the share count seemed to go up here. We do know that you have some convertible debt that you were going to try to force conversion on. I'm wondering if you had any success in that, either in the fourth quarter or in the first quarter up until now and, if so, what impact that had on either your balance sheet or share counts.

Keith D. Taylor

There's two things. If you look at just the absolute numbers of shares outstanding at the end of the year, it did go up slightly. In November, when the stock was under a tremendous amount of pressure, there was a discretionary election of people who were holding our February '09 2.5% bonds to convert $13 million of them. Our outstanding balances thus on those bonds, $19 million today. So we saw some impact from that. We saw very little impact, as you'll see from our cash flow statement from employee stock plans.

If you then get into the GAAP side of the financial statement, you do see our diluted share count increase very substantially and that's because of the net income that we generated from the net tax benefit. So that's what drove the diluted share count up so substantially, because you're now including many items that you previously did not include. It also was affected by employee stock plans that are in the money and then some more complex calculations for EPS.

Jonathan Schildkraut - Jefferies & Company

And something that you break out in your 10-Q is some of those add-backs that you get from a basic EPS to a diluted EPS. Do you have an aggregate number in the quarter, what it was, because when I did the calculation it seemed to be somewhere around $4 million and that just seemed awfully high relative to expectations.

Keith D. Taylor

We're going to be filing our 10-Q in the very near term.

Jonathan Schildkraut - Jefferies & Company

And your 10-K.

Keith D. Taylor

Pardon me, our 10-K. And there will be a lot of detail that will help you calculate that, but on the surface it's a very complex calculation that does take into consideration a number of activities, not just shares anymore. And because you have to tax effect it, it's not something I think that we want to spend a lot of energy on right now, Jonathan. So if you wouldn't mind, let's wait until the 10-K comes out and we'll get some more detail broken out on that number.

Jonathan Schildkraut - Jefferies & Company

Finally, could you just take us through some of the trends? The interconnect trends in the Asia-Pacific region have been very strong for awhile now and if you could kind of let us know what's going on there. Also, who are the customers that are kind of the core to really driving the growth in interconnect? Is it carriers? Is it financial institutions? Is it content and Internet guys?

Stephen M. Smith

Particularly is Asia, Jonathan?

Jonathan Schildkraut - Jefferies & Company

Correct.

Stephen M. Smith

We're continuing to scale the Asia business. I think it's still between 9% and 10% of total revenue now. They had another good quarter of pushing out cross-connects and ports. The companies that we're dealing with are the same folks that we're dealing with in the U.S. In the financial services space, it's the FX that's going to start driving cross-connect activity as we get these matching engines deployed and these access pops, so they're going to pull in their members. CDN deployment around the world is also driving some of that. And it's ultimately the connection back to the networks where most of the activity's coming from.

Jason Starr

A couple of other things. We just launched the exchange in Hong Kong, so that's a new offering for us there. What was interesting is we've seen a significant increase in the bandwidth that's being exchanged over the switch. So, again, that's an offering that's targeted more at the content providers and more of the broadband networks, but seeing some traction there.

And one of the things that's been really good for us as well is just the success in Singapore as we're really the only major carrier neutral provider. So, again, building some traction in that market as well.

Operator

Your next question comes from Mark Kelleher - Canaccord Adams.

Mark Kelleher - Canaccord Adams

Could you just tell us where you stand with capacity utilization in the U.S.?

Stephen M. Smith

Sure. Today, the simplest way to think about it:

In our Chicago market we probably have the biggest inventory capacity available and it's mostly out in Elk Grove; we're a little compressed downtown.

In Dallas we're pretty tight, as many of you know, and down to a very restricted status in Dallas; a little bit of opportunity there based on the back of some churn we had there in Q3.

D.C., we're in good shape. We have plenty of capacity in D.C. for the foreseeable future; I'd call it out to four quarters worth of visibility for the full year.

In L.A., in the downtown market we're compressed; that's why we made the announcement we did today, so we'll have some relief there. And then with our L.A. El Segundo facility, once that comes online we'll pick up, so we're pretty compressed in a restricted manner in the L.A. market.

New York, with the second phase coming on board we'll be fine there, but we're pretty tight in the initial phase and we're in a restricted status in that market also.

Silicon Valley we're in good shape.

Mark Kelleher - Canaccord Adams

So it'd be fair to say that even though you're taking a more cautious stand a little bit on the revenue line, that hasn't affected your build plans in the U.S., correct? You have pulled your build plans back at all.

Stephen M. Smith

No. That's a correct statement.

Keith D. Taylor

Just, you know, again, Mark, just so we're clear here. Steve said we're constrained in a number of our key markets here. In L.A. and New York we're already under construction; they're substantially constructed today. So we haven't changed anything other than what we changed in L.A. the past quarter. So our general view is we have to continue to expand to create opportunity for ourselves and fill the demand that we see in our pipeline.

That, coupled with the fact that we're not seeing a lot of competitive builds going on in the U.S., so for all of these reasons we are managing our construction build, as Steve said earlier, on squeezing the projects and the phases and pushing the capital into as many regions as possible and as many markets as possible, but still making that dedicated investment.

Mark Kelleher - Canaccord Adams

So if we look at 2009 over 2008 at your total footprint - call it cabinets, for instance  what would the growth rate be, 2009 over 2008?

Jason Starr

Mark, we've that expansion sheet is posted on the website, but if you'd look, just the increase from '08 to '09 was roughly 15%. This is more of a global statement.

Remember, a lot of the capacity in the U.S. came online in '07 and '08 with the Chicago, the New York 4 Phase 1, as well as D.C. 4 and 5. So plenty of capacity coming online, but in a lot of these markets, as both Steve and Keith mentioned, having capacity has been the biggest challenge in most of those markets.

Stephen M. Smith

Mark, I think it's also important to remember what I said and Keith kind of, I think, hit it, too. We're still booking at an early 2007 rate, which is at a pretty healthy pace. Pipeline is actually as strong as it's been in all of '08, middle of '08, pick any time you want. So the pipeline is very strong. The uncertainty and the delay in the decisions really sits in the later stages of the pipeline. So call it 60% to 90% probability we've got a very healthy coverage in that pipeline and it's just mostly in new logos waiting on making a decision.

So we're still booking at a very healthy clip and we have a pipeline that's as big as it's been in the later stages really in the history of the company.

Operator

Your next question comes from Michael Bowen - Piper Jaffray.

Michael Bowen - Piper Jaffray

The MRR in the U.S. was much, much stronger than we had expected so I'm trying to reconcile your commentary with regard to pipeline being similar to mid '08 levels. Am I thinking about this the right way? I think you just said the pipeline continues to get stronger, but what makes up that pipeline with regard to some of the new logos is a lot more uncertain. So am I thinking about it the right way, that while MRR was strong in '08, the reason you brought your revenue down is because you think you're kind of going back to a level of mid '08 and that's why you're bringing that down?

Stephen M. Smith

I think it's basically an accurate statement but, to just point a point on this, we did see some softness in these decisions, so I would just call it uncertainty with decision makers. And it did slow down in I'd say pretty much across most of our markets with new customers. Existing was pretty flat; there was a little softness in one or two markets. Out here you could say that the startups and some of the Web 2.0 companies, certainly after the Sequoia memo went out, kind of held back and didn't make decisions.

So there's [plenty of] examples of that, but generally we're just seeing softness in new decisions, new companies that haven't either co-lo'd before or bringing it from an in-source solution, still sitting in the pipeline, still sitting in late-stage 60% to 90% probability, and our job is to go execute and close these deals.

And at that level, we don't know now long that softness is going to remain with us; we saw it in November. It showed up in mid to late November. It stayed with us in December, and early January it looks the same. So it's just a matter of time, again, to push these through to pick us back up to the pace that we've been running at the last five or six quarters. Again, this is still running at a pace that's in the, call it, 22%, 23%, 24% growth rate kind of pace.

Keith D. Taylor

And Michael, I would just say, in furtherance of what Steve said, it is important to note that when you look at the guidance that we've given, the guidance reflects the booking activity at this level. To the extent that booking activity is more reflective of 2008, then changes will have to be made. But right now we're reflecting the guidance taking into consideration, as Steve said, the 2007 level of bookings.

And the other thing I think is important to note - it was your entry point - that price per cabinet has increased, but it's very consistent. If you look at the inventory that we're selling today, it's all high power, high densely populated cabinets. And because of that, customers are buying more services per average cabinet. So it's very consistent with what we would expect because that's really all of the remaining inventory.

Michael Bowen - Piper Jaffray

In reading the expansion of grid that you have on your website, I thought that Sydney 2 was going to open up in Q4 of '08. Did I hear you correctly that it opened in this first quarter?

Stephen M. Smith

Correct. It was late in Q4 and, with the holidays in Sydney and with a couple of customer requirements, we decided to delay it until just recently. So it's open for business now and already 20%booked.

Michael Bowen - Piper Jaffray

Was there anything in that opening, the fact that it was a little later than you might have might expected, anything that was significant and anything that might translate to other data centers that you're opening up?

Stephen M. Smith

Not at all. This was just an isolated decision. In that market, we're pretty constrained there, but we had enough capacity to carry us for an extra month through the holiday season and then get it opened up and it's open and full blast ahead.

Michael Bowen - Piper Jaffray

And then last question, we all know about how high your fixed cost structure is and obviously your expansion plans are fully funded and you stated you're not slowing down your builds and other such things, so obviously you've kept your EBITDA absolute guidance the same. What are the levers, given that you do have a very fixed cost structure, what are the levers, then, that you can push which effectively will bring up margins if you come into the revenue guidance now that's slightly reduced?

Stephen M. Smith

The levers to push the margin upright, is the question, Michael?

Michael Bowen - Piper Jaffray

If the guidance is correct, then basically your EBITDA margins are going to be up from what you had originally guided to. So I'm just curious as to what levers are you pushing on on the cost structure, which is highly fixed, that can get you there.

Keith D. Taylor

I think it's fair to note over the last two years - really, for the last three years - we've been making substantial investments in our SG&A. And so when we came into 2009 we anticipated that we're going to continue to make substantial investments. We've gone after, of course, the obvious discretionary things. I said on the last call no matter where an employee flies in the world today they're actually flying economy. That's one example. So our T&E expense have been decreased. Discretionary spend across all of our markets have been decreased.

And then to reflect the lesser bookings and the activity in the IBXs, of course, our headcount plans, our headcounts we can ebb and flow with our headcounts in the operation line. And then we've also taken the opportunity to defer some of our hires until the latter part of the year. So we've done a lot around discretionary line.

Clearly, our view is that despite the adjustment to the revenue line, we as a company, we still have the ability to manage our costs very, very effectively, not only on the CapEx line that Steve alluded to earlier on, but still on the operating line as well. And so we have the flexibility as we adjusted for things to take some costs out and still deliver a very strong EBITDA number, which will, of course, generate higher margins.

Stephen M. Smith

Keith, I think it'd be fair to say, too, just to punctuate what you're saying, I think what you're seeing her Michael is the effect of the operating leverage starting to show up, too, in these campuses, certainly in the U.S. and, for that matter, across the world, where we've stayed very focused in these core markets and we're building out these campuses and the operating leverage is starting to show up.

Operator

Your next question comes from Gray Powell - Wachovia Securities.

Gray Powell - Wachovia Securities

I had just more of a bigger picture question on the economy. Can you just talk about what kind of correlation that you typically see between employment levels at your customers and leasing demand? And I know there's not going to be an exact answer to this, but just as a very rough example, let's say you had a customer that added, call it 100 cabinets in 2008, and they just cut their workforce by, call it, 10%. Is there a way that you could see how you would expect that to flow through into their demand trends into 2009?

Stephen M. Smith

Pretty tough to do, Gray, but let's take an example. A company's cutting headcount - there's plenty of them out there doing that today - you've really got to go peel the onion back and find out what kind of applications they're running with us, and it probably is hard to correlate with headcount going down.

In some cases the CIO of that organization is trying to cut costs, so they're taking labor down if he or she's got a portion of that labor takeout that the company's doing. And one opportunity is that they may be able to save costs by deploying in a co-lo model versus an in-source model. So you could see the flip side of the equation also.

So I think it's really case by case; very hard to correlate labor going down in a company and whether or not that's going to affect their run rate of how many cabinets they're buying from us. Pretty tough to do.

Gray Powell - Wachovia Securities

So on a different topic, looking at your reported metrics I see cabinet utilization at about 81%. Obviously, I see your plans on the website to go from 54,000 cabinets to 62,000 cabinets by 2010. Can you just talk about your utilization in terms of power consumption? Like how much power capacity do you have today, how much of that's utilized and what you're 2010 build plans get you to?

Keith D. Taylor

I think the correlation between physical capacity and infrastructure capacity's relatively consistent, so I don't think there's any meaningful change. But clearly by introducing more capacity, particularly in some of our larger centers, where we're doing full builds, we are certainly going to create more infrastructure and more effective inventory for ourselves. Take, for example, the London market with our London 5 asset.

So right now, I guess, the key takeaway is that we are at high utilization across a number of our key markets, but we're building more than half of our locations and, as a result, we're going to create that capacity for ourselves and probably more infrastructure capacity than physical capacity as we look forward into the back end of '09 and '10.

Gray Powell - Wachovia Securities

And then one last question just touching on Mike's point, contribution margins in the U.S. were up pretty sharply - came in at about 79% in Q4. Can you talk about what's driving that improvement and how we should think about that trend going forward for the rest of 2009?

Stephen M. Smith

I'll start. Part of the input to the margin going up is we're running, as Keith said earlier, a very cost-controlled environment. And so that's feeding into it. We've delayed some of the labor, some of the new hires to later in the year. Keith and I are being very, very judicious about new heads coming in. But as I said, at the same time we're making investments.

But part of it's the operating leverage, part of it is managing costs very tightly.

Keith D. Taylor

And then the one other thing that was very evident in Q4 relative to Q3, as you recall there's a lot of seasonality in our power costs in the U.S. and as a result, the cost typically remains flat to down slightly between Q3 and Q4. And we've seen that trend for a number of years now.

And because of that, and as Steve and I mentioned earlier on, there was a very large customer who turned out in Q3 - Q4 who was in two sites that was a very high power consumer, and so, because of all of these reasons, our utility expense went down on an absolute dollar basis relative to revenues. And so that obviously impacted us favorably.

But the bottom line is it's between the utilities and then just our management of discretionary spend that's benefited us, and then the leveragability of our model as we continue to drive revenues into this model.

Operator

Your next question comes from Michael Rollins - Citi Investment Research.

Michael Rollins - Citi Investment Research

Just a few questions. First, if you could just clarify, I know you talked about it earlier, but the specific FX impact that you're seeing on a dollar basis for 1Q '09 and the full year '09.

The second question is can you quantify a little bit more of the power costs that you were talking about as it affected the gross margin in the fourth quarter? It just seems like as you're looking to go from 4Q to 1Q based on the midpoint of your revenue guidance, you're looking for a very high amount of incremental cost relative to the incremental revenue, and even in significant build cycles you haven't seen that kind of uptick in costs. And so I'm curious just to try to better understand that push to gross margins down to the 63% from the roughly 65% in the quarter.

And then just a final question, if I could throw it out there, can you give us an update in terms of what the revenue capacity is in dollars for Europe and the total company based on the current builds that you've announced and based on the current pricing that you have out there in the market?

Keith D. Taylor

First one, when we look at currency relative to the guidance rates that we use off our Q3 results, the net FX impact for 2009 off the guidance was not that significant. Where we were taking a substantial hit, of course, is in the sterling, but that's being offset by an effective pickup in euro, in yen, and the like, so the net impact is about $3 million, so not that substantial.

As it relates to the cost profile in Q4 going to Q1, consistent with all our prior years, there's a substantial uptick in basically the employer-based costs for payroll, and so we're going to absorb that in Q1. And that always has a little bit of a negative impact, number one.

Number two, there are, as I mentioned in my comments, as it relates to Los Angeles property there's going to be an incremental $2.3 million of costs, EBITDA-affecting costs, that will come into the business plan related to the L.A. 1 Phase 2 property. And so we're going to take the impact of that.

And then number three, we've been making a fairly substantial investment - we've talked about this for awhile - in our IT infrastructure, and so we're making investments in that. And of course there's a lot of new heads coming onto the payroll, so when you look at - I don't have the number off the cuff right now, but I think we're up about 50 head at the end of Q3 versus the end of Q2. We're going to, of course, absorb the full quarterly impact of that as well.

So between all of these things, you've now got a higher cost model in Q1 relative to Q4.

Mike, did that answer your question at least on the first two?

Michael Rollins - Citi Investment Research

Yes, that helps, although on the FX impact, the $3 million, is that all going to be in the first quarter or is that $3 million going to be more spread over the year? How do we think about that $3 million revenue impact?

Keith D. Taylor

That is for the whole year, Mike. That is for the whole year, at least at the rates that we are using. And as I said, I was using a $1.33 euro and a $1.45 pound. Clearly today it's different but, as you know, the variability these days is all over the place, so we've put a stake in the ground and those are the rates that we're going to use. The effect in Q1 is roughly $500,000.

Keith D. Taylor

And then I just want to make sure that we get the overall revenue capacity. I'm no so sure we have the European thing in front of us, but when we look at total capacity available today, we're in the greater than 1.1. We just call it the $1.1 to $1.2 billion of revenue opportunity. And that's relatively consistent with what we've said previously at the rates that are in effect today, both on an installed base and then the revenue that we've stated publicly on what we think we can achieve from these new builds. We can double back at some point with you on just what the revenue opportunity is in Europe.

Jason Starr

Real quickly on the Europe, this is probably two or three quarters ago, but we had said there was roughly $245 to $275 million of revenue capacity in Europe. That excluded - we announced since then the Paris 3 expansion in London. So we can get back to you on that, but just to kind of give you a ballpark it would be north of that $245 to $275 million range.

Michael Rollins - Citi Investment Research

Another question on pricing. I think in terms of the number of questions that we get is what is your expectation for how you're going to control pricing over time? You talked a little bit about that in some prior questions, but I guess what I'm also curious about, as you think about the pricing environment, can you talk about the experience in the older data centers - '04, '05 and beforehand  and what you're seeing in those markets versus what you're seeing in some of the new builds with respect to the higher power density that you were talking about, that $1,800 to $2,200 range. Can you give us a flavor for what you're seeing?

Is there sort of a segmentation in terms of pricing behavior that you're able to pass through to customers depending on which of the tranches they fall into and how to think about maybe long-term revenue growth? If a data center's tight on capacity or restricted, ultimately what kind of revenue growth should a restricted center in just percentage terms over time be able to grow at?

Jason Starr

When you really stratify the original build that Equinix did, this is typically the Silicon Valley ones, the L.A. ones, etc., those are really effectively the peering hubs. And what's interesting about those is in the U.S. we've said 19% of our revenue is interconnection in the U.S., but in a lot of those legacy sites you've had a layering in of 25%, 30%, sometimes upwards of 40%, and what that does is help drive the revenue in some of those particular sites.

And then as we mentioned earlier, in the new sites we're building to a much higher power capacity, so you're getting more in the $1,800 to $2,200 range. You may not get as much interconnection in every market, but you are getting more co-lo and power as part of that.

Effectively, when a site's full, one of the targets we put out there is you could see increases in the low to mid digits. But, again, in the older sites that have been full, it's also being layered in with incremental pricing and the interconnection services that roll in.

Keith D. Taylor

Answering the other part of your question, I think it's important from our perspective, we think that in a full site between the ability to get price increases, annual escalators, to sell more crossconnects and power circuits to the extent it's available in a given site, I think it is reasonable to assume a 3% to 5% annual increase. I think that is reasonable.

So if you take a full IBX, I mean, this is what we like about our model - the reinvestment rate in CapEx is extremely low in our business. And once you've built that data center, you put it over there, then you find ways to optimize the data center, as you would expect. So 3% to 5% is what is a reasonable number, I think, for using for modeling purposes.

The other thing - again, I'm not sure which direction you're taking it from and maybe I'll ask you this or maybe I'll just make a comment here - are you worried about us achieving our EBITDA or do you think that our EBITDA is not high enough relative to our revenue guidance? And not knowing where you're going to take it, at least I think it's important to know if you take the midpoint of our Q1 EBITDA guidance and you annualize it, clearly you're almost at a $350 million EBITDA line for 2009. So I don't know if that's giving you comfort or giving you pause, so I'll leave it there.

Michael Rollins - Citi Investment Research

I think the questions I'm asking are just sort of trying to better understand, at least on the pricing perspective, you just had to think about older centers versus newer centers and try to understand if you're seeing a difference in the behavior, which I think you described a little bit of what you're seeing in each. And it's a question that we get because I think one of the big questions is over time, as your business or certain centers in your business mature, how should we think about what they look like and whether you can grow revenue in a center with lower power density to a similar degree over time as a center with higher power density.

So I think those are some of the questions that we get about your business model.

Keith D. Taylor

Well, let me address that specifically. It's very important that we realize when you look at our customer base, we stratified our customer base a number of years ago. Starting in 2006, we started to optimize and migrate customers into better suited IBXs, so those who are more network centric, interconnection rich, they went into typically the IBX number one and the more higher powered, dense sites, we moved other customers who are more power sensitive.

We've taken advantage of that in many ways and so when you look at the margin profile and the revenue profile in either case the customers in both cases have the ability to continue to grow. If it's an interconnection building, they're going to buy more cross-connects, they're going to probably buy more power circuit, and we'll also be able to increase our revenue from a pricing escalation basis.

When you look at the more power dense sites, the customer's typically taking much more power on the average cabinet and as a result, that's driving our price up as well. And the benefit of that is as long as we can continue to tether all the buildings together or back to what we call the primary IBX, customers will still be able to take advantage of that. So it might not be as interconnection rich, but yet it still remains highly profitable.

The last thing I think I want to leave you with here, because pricing is something I think is very important, is that the company will continue mitigation its flexibility around pricing. I've said it a number of times in all the investment meetings that we've had. Our general view is this is a difficult economic environment. Steve said it; he's all the things that we need to do. But we as a company will remain flexible to manage through these economic times.

If a customer, prospective customer, comes to us from a price perspective, there's a certain level that we have flexibility to adjust to, but there's certain deals that we're just not going to do. If it's an existing customer who needs some price flexibility, our general view is we're willing to do that if it makes sense, if it was a specific customer, but there has to be something on the other side; there has to be more term, there has to be other ways to share, if you will, the burden of these economic times.

Operator

Your next question comes from Michael McCormack - J.P. Morgan.

Michael McCormack - J.P. Morgan

Just on the U.S. and Asia monthly recurring revenue churn, it seems like it spiked up a little bit. Can you just give us some of the dynamics around that?

And secondly, Keith, I think you were talking about some of the negotiations with current customers, but are you seeing more widespread discussions or negotiations around terms and conditions, whether it's escalators, terms, etc.?

Keith D. Taylor

Well, let me take the latter one first. There's not a lot of discussions right now with customers, but it was more a point to address Mike's comment.

I think when we look at our customers we are looking for more term today, and some of our customers are looking for more term from us. As a matter of fact, there's a number of key accounts who've asked us to extend their current contract because they recognize there's a tremendous undersupply in some of our key markets and because of that they want to make sure that they not only have existing capacity in our facilities, but in some cases they're looking at taking additional capacity as well. So term is certainly something that we look to.

Price escalators, when we look at our sales commission plan, there's things that are very important to the company - one is getting term and the other thing is making sure that we have price escalators. And the reason that we have price escalators - no surprise to anybody - we've got an ultimately fixed cost model, but whether it's rent or whether it's the human capital, two of our largest components of our cost line, they go up on an annual basis. Equally so do our power costs. Our power costs have been increasing on a fairly steady basis. We have the ability in some cases to pass that on to the customer; in other cases we don't have the ability to pass it on to a customer.

So again, we're very flexible in looking at working with the customer, but we have to recognize every customer discussion is unique and different customers have different hot buttons. Some people are more focused on interconnection, some are more focused on space and term, and others are focused on power, and so we'll try to continue to maintain that flexibility for the customer.

Stephen M. Smith

And I think, Mike, on the churn thing, I'm not sure what you're looking at, but the churn is well within the 2% quarterly percentages that we're running the business by in both U.S. and Asia. So I'm not sure what you're looking at, but the churn has not spiked. It's up a little.

Michael McCormack - J.P. Morgan

The [inaudible] I think it was 2.4, which is a little bit higher than I think the previous few quarters or so.

Keith D. Taylor

It does ebb and flow at times, but there's nothing from our perspective. When we looked at the averages for the year and then we looked at our MRR turns - so irrespective of the cabinet, what's happening in MRR - MRR was well below the 2%. So things happen in any give quarter or any given month, but this is nothing that should cause you concern or, on the flip side, from the MRR side, something that you should model, although our general view is 2% is a reasonable number and please use that for your models.

Michael McCormack - J.P. Morgan

Keith, you talked about power costs earlier. Obviously, we've seen a pretty significant downdraft in oil prices. Is there a meaningful lift to EBITDA from that when you're baking in the 2009 guidance?

Keith D. Taylor

No, there's not, actually. In fact, in many of our markets our costs have gone up substantially. There's a number of unregulated markets. Typically what we try and do is mitigate against future exposure, but there's a number of markets that are unregulated - our Dallas market, our New Jersey market and our Chicago market. And I'm speaking specifically of the U.S. because it is a fairly large component. Our costs have increased double digits in all three of those markets.

But there's not necessarily a direct correlation to what goes on with the price of oil. In some cases it's gas-fired plants, in some cases it's oil-fired, but I guess the key takeaway here is the relationship between what happens at the gas pump or what happens on a price-per-barrel of oil does not necessarily find its way into the market at the same point that we would expect. And so because of that, as it ebbs and flows and because we go through the public utility commissions, they're the ones who ultimately mandate where the price points are going to go.

So it's fair to say just because the price of a barrel of oil went down, that has not had an impact because in fact our costs have gone up double digits in all three markets that I just announced. And it's partly because rates have been down for too long and we all know that the public utilities are having to find ways to build incremental capacity and that's building more plants and they need to fund that and that's going to be through price increases and we've absorbed that. It depends. Some customers we pass it onto and other customers, depending on, again, the specific aspects of a customer, we don't pass it on to.

So that hopefully gives you a little bit of more information on power.

Operator

Your next question comes from Srinivas Anantha - Oppenheimer & Co.

Srinivas Anantha - Oppenheimer & Co.

Steve, in your comments you talked about delays in bookings and that partly contributed to a modest change in your guidance. Relative to your expectations, I think, at the end of January when we talked about this guidance, could you talk about maybe if you can quantify what your booking assumptions were then and what are you assuming today?

Stephen M. Smith

I think when we saw you in - I think it was in Phoenix - Keith and I mentioned to you guys that we had built a churn expectation into the '09 plan and a bookings reduction percentage into the plan, and it's roughly shifted, with this new guidance, 2 percentage points is where it's shifted over now that we've looked at actuals in December and had a good look into the January bookings and the uncertainty that we described.

Srinivas Anantha - Oppenheimer & Co.

And second, Keith, what kind of pricing assumptions are you making for 2009 and are there any markets that you guys are seeing any kind of pricing pressure today or is it broadly looking, you know, pricing is relatively stable? I know you talked about there is a little bit of over capacity or something like that in the Chicago market.

Keith D. Taylor

I think our general view is pricing is consistent and stable. In some markets it tends to be a little bit stronger than other markets. Again, we're in 18 defined markets around the globe today. So our general view is that it's a stable environment.

When we deal with it from a modeling perspective for 2009, we build our plans on, frankly, a booking assumption and there's been no change in our list prices to our sales organization. We have to go into every account like they have in the past and it's negotiation specific to that customer. And so right now there is no assumed price decrease in any of our plans for 2009.

It is a volume issue, less a price issue. We're assuming the volume, as Steve said, is more akin to what we saw in 2007, less about what we saw in 2008.

And a good reminder for everybody on the phone. When you look at 2008, when we started 2008 we thought it was a $605 to $625 million revenue opportunity for '08. Clearly, with the numbers that we've put, that's a substantial increase from what we originally thought and you can see that was reflected on booking activity, again supporting the fact that there's a limited amount of supply in many of our given markets.

As we go back to 2009, we are making the assumption that 2007's a more rational booking level.

Stephen M. Smith

It's probably safe to say, too, Sri, that, to Keith's point, in markets where space is going to be constrained and demand is still very high, utilization's going to go up in those markets and at a macro level you're going to be able to maintain pricing power. But then, again, it varies market to market.

Srinivas Anantha - Oppenheimer & Co.

And Keith, one just quick clarification on the earlier comment about Europe revenues, which I think have declined sequentially now. You said partly it's because of currency, but absent currency you're saying the [inaudible] portion of the European revenues would have grown to 11% sequentially in 4Q?

Keith D. Taylor

That is correct. So it tells you how much - remember, the lion's share of our revenue really is euro, Swiss franc and sterling, but our biggest IBX in operation is in the U.K., and sterling had a dramatic falloff in the quarter and certainly through the quarter. I don't know if you're aware of this, but sterling went below $1.30 - I think it was roughly $1.30 anyway at one point. When we started the quarter it was $1.63, so a fairly substantial swing in the quarter.

As a result, when you affect it from an FX neutral basis or, said differently, again, looking at Q4 with the average rates that we use for Q3, it would have been an 11% quarter-over-quarter increase.

Srinivas Anantha - Oppenheimer & Co.

If you used the same thing as $1.28 and $1.62, it would have been a [inaudible] sequential increase?

Keith D. Taylor

That is correct. Euro was roughly flat - roughly flat during the quarter. It was really sterling. I don't have it right at the cuff here. I'm just trying to see if I have it. I don't have it with me right now, but that is the calculation that we have shared internally with our team here.

The other thing is, obviously, the flip side of that is that you can appreciate, then, our CapEx investments at this exchange rate have decreased fairly meaningfully as well.

Srinivas Anantha - Oppenheimer & Co.

And Steve, now that you've seen a couple of quarters of slower decision-making, has anything changed like within the past month or so? I know you talked about until January people were delaying decisions. Has anything changed after January or is it still the same?

And let's say if we see another 2% decline in volume, should we assume that your revenue is going to be another $16 million lower at the midpoint?

Stephen M. Smith

I don't think we've made that connection yet as a team. And I think it's fair to say, guys, that we are all hands down with the sales force around the world to go help work with them to help customers make decisions. We're just completely focused on executing right now. So I would tell you that we feel pretty optimistic about things settling down with these customers.

We've already seen some of the delayed decisions in the fourth quarter already get flushed in the first quarter, so there's good signs, there's good activity. And like I said, the pipeline is very strong in the later stages and normally that moves. The big uncertainty and big unknown is with these new customers, will they make a decision now in the next couple of months and that's hard to predict at this point. So that's why we built the plan as realistic and as flexible as we possibly can.

Operator

Your last question comes from Manuel Recarey - Kaufman Brothers.

Manuel Recarey - Kaufman Brothers

You talked about the supply constraint that's out there. Is there any particular geographic areas or markets that are more constrained than others?

Stephen M. Smith

From our inventory, Manny?

Manuel Recarey - Kaufman Brothers

More from a market perspective where you'd see, I guess you'd end up seeing better pricing holding up just due to the supply being more constrained.

Stephen M. Smith

Yes, I'd say we've seen some builds slow down or get stopped in certain markets, like in the Silicon Valley and in the D.C. area, in and around call it our peer group space. It certainly has an effect on capacity between retail and wholesale business.

I'd say it's pretty tight still in Hong Kong. We have plenty of opportunity there, but it's a very, very tight market. Tokyo's got plenty of room. Singapore we're building, but Singapore's market is upside down, so I think it's fair to say that there's a bit of an unknown there. But we've got very strong demand in that market.

If you go to Europe, probably the biggest pressure point would be London, I would say, London or Paris. But again, we're making investments there. Amsterdam, we're a new entrant into the market and so there are a couple of other players building there, but that's a very tight market.

Manuel Recarey - Kaufman Brothers

And then just to try to get at the slowdown in decisions by the new customers, is it more just kind of a financial decision or is it kind of a decision whether they want to outsource and colocate or keep in in-source? Are you getting a feeling either way?

Stephen M. Smith

Oh, yes. Yes. We've got cases in both camps. So we're seeing decisions by customers that can just afford to wait a month or two or three before they make a decision. They're going to be up against a wall at some point on the mission critical stuff that they're teed up with us. We've got other customers that it's a first time outsourcing decision and their CEO and CFO are scrutinizing every decision that the CIO or head of technology's making. So we're seeing every flavor.

But we're kind of working through them all one at a time. And a lot of these folks, on the types of applications they're trying to deploy, since it's mission critical stuff, are going to have to make a decision at some point, and I think we're just working as closely with them as possible to help them get to that decision.

Jason Starr

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

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Source: Equinix, Inc. Q4 2008 Earnings Call Transcript
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