Equinix Inc. (NASDAQ:EQIX)
Q2 2009 Earnings Call
July 22, 2009; 5:30 pm ET
Steve Smith - President and Chief Executive Officer
Keith Taylor - Chief Financial Officer
Jason Starr - Director of Investor Relations
Chris Larsen - Piper Jaffray
Michael McCormick - JP Morgan
Michael Rollins - Citi Investment Research
Jonathan Schildkraut - Jefferies
Simon Flannery – Morgan Stanley
Mark Kelleher - Brigantine Advisors
Winston Lin - Goldman Sachs
[Kolby Nezo - Koffin Brothers]
James Green - Thomas Weisel Partners
Jonathan Atkin - RBC Capital Markets
Good afternoon and welcome to the Equinix Q2, 2009 results call. (Operator Instructions)
I’d like to turn the call over to Jason Starr, Senior Director of Investor Relations. Sir, you may begin.
Good afternoon and welcome to our Q2, 2009 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 uncertainties.
Actual results may vary significantly from those statements and maybe affected by the risks we identified in today’s press release and those identified in our filings with the SEC, including our Form 10-K filed on February 26, 2009 and Form 10-Q filed on October 29, 2009.
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.
Thanks Jason. Thanks for participating in today’s call and good to have everyone with us. I’m pleased to report that Equinix delivered another solid quarter in 2009, and now that we have passed the mid point of the year our performance and outlook have increased our confidence in our ‘09 plan and the expectation of another strong year of growth.
Last quarter we talked about staying in the course with no need to trigger any circuit breakers in the flexible plan we have been executing against. As we enter the quarter we have begun to think more opportunistically about the second half of the year and 2010 as we have seen measurable strengthening and bookings in pipeline.
In fact we saw a new record bookings result in the U.S. and had a solid performance in both Europe and Asia, despite capacity constraints in several markets of those regions. Of course the ‘09 plan also had a high focus on the coastline, which combined with strengthening bookings and revenues has resulted in a significant over performance and adjusted EBITDA. I should point out this also reflects a delayed spending over the first half of the year as we watched our results unfold.
Additionally, as we have been reporting in the past few quarters we are still tracking our leading indicators such as customer demand, new supply, pricing, collections and churn very closely and they continue to signal to us that our opportunity for growth in our key markets remain strong despite the current economic difficulties.
Although we have seen some impact from the economy in our churn forecast, which we expect to increase to just over 2% for the next two quarters our sales pipeline has continued to increase and is now at an all time high.
As a result of our bookings momentum and this pipeline we continue to see a great opportunity to extend our leading market position by continuing to make very targeted investments and new expansions in key markets. Additional investments also in our systems and processes to operate globally and importantly we are scaling our bench strength in key sales, product and vertical marketing and operational areas.
As we begin to think about 2010 and beyond we still believe our strong market and financial position will enable us to emerge and even accelerate our market leadership when we get to the other side of these financially challenging times. The $ 314 million in capital raised in early June was an important step to provide us the added flexibility to pursue this opportunity while staying ahead of the future capacity constraints we expect to face from accelerating fill rates in key markets.
We’ll spend some more time in our expansion plans later on in our call, but I would like to now hand it over to Keith to hit the highlights on another great quarter, so over to you Keith.
Thanks Steve and good afternoon to everyone on the call. I’m pleased to provide you with our second quarter financial results with some color on the key trends as we look forward to Q3 and the rest of 2009, and I’ll start with the revenues.
Our Q2 revenues were $213.2 million, a 7% quarter-over-quarter increase reflecting both strong demand across all three of our regions and a weakening US dollar against our operating currencies. The company experienced strong bookings in each of our regions, better than our previously forecasted bookings for the quarter.
In the U.S. our booking strength was partially offset by an expected longer than average book-to-bill interval related to certain key customer wins during the first half of the year. A trend that will continue for the rest of the year, Europe revenues increased to $55.1 million in the quarter at 15% sequential improvement. The result of continued strong bookings higher than expected power revenues and stronger currencies compared to the US dollar.
Asia-Pacific revenues increased to $28.4, a 7 % increase over the prior quarter in part driven by higher currencies although partially offset by limited capacity both in our Hong Kong and Singapore markets. For the quarter the change in foreign currency exchange rates positively impacted our Q2 revenues by $3.2 million compared to the rates that we assumed for our Q2 guidance.
Also if we use the same average exchange rates in effect in Q1 our quarterly revenues would have been $ 209.7 million, the high end of our guidance range. Looking forward we continue to expect the US dollar denominated revenues to approximate 65% of total revenues while the Euro and Pound denominated revenue should approximate 15% and 9% of total revenues respectively.
For Q3 and the rest of 2009 we have assumed a $144 million to the euro and a $163 million to the pound. For the year we expect a fluctuation of exchange rates to positively impact our 2009 revenues by as much as $10 million or greater. This positive trend will be offset by the longer book-to-bill cycle I mentioned earlier increased MRR churn over the latter half of the year and limited capacity in certain of our markets.
Now looking at churn, for Q2 our global MRR and cabinet churn rate was 1.8% and 1.4% respectively although we do anticipate for Q3 and Q4 churn levels to be slightly higher than our ongoing targeted level of 2% per quarter, the result of higher and forecasted churn attributed to customers with financial difficulties, clearly a lagging indicator. The majority of the space recovered from these customers is expected to be resolved by the end of the year and at prices at or above our current average rate.
Next moving onto gross profit and margins, the company recognized gross profit of $94.6 million for the quarter, our gross margins of above 44%. Our cash gross margins increased to 65% slightly above our expectations for the quarter, the result of continued strong fiscal discipline related to our discretionary cost. During the quarter we continue to see strong cash gross margin across all three of our regions with Europe improving four margin points with 55%, the result of better than anticipated power margin.
As mentioned previously the European revenue model is different than the models in either the U.S. or Asia Pacific region whereby prior cost are passed through to the
customer at a negotiated rate as a result the margins can fluctuate meaningfully from quarter-to-quarter given the seasonal aspect of utility cost.
Looking forward we expect our Q3 and 2009 global cash gross margins to range between 63% and 64%, a slight improvement from our prior guidance levels despite continued expansion activities in each of our regions. During Q3, we expect higher Q3 seasonal utility rates in the U.S. to negatively impact our sequential cash gross margins by 1 to 1.5 margin points.
The weighted average price per Cab-E in the U.S. was 1893 versus 1858 in the prior quarter, an almost 2% quarter-over-quarter increase. In Asia-Pacific our weighted average price per sellable Cab-E was 1370 compared to 1331 last quarter, an almost 3% quarter-over-quarter increase. In both cases this reflects continued strong pricing across these two regions although Asia Pacific was partially benefited by the strength in currencies against the US dollar.
Additionally, this reflects continued discipline by our sales team to strive for strong pricing in the current market environment. With respect to Europe, our weighted average price per sellable Cab-E increased to $1009 compared to $994 adjusted last quarter. This improvement reflects two key factors, a higher than expected increase in power revenues in the quarter and a weakening US dollar. Absent these two factors EU pricing has remained firm over the quarter.
Now, looking at our SG&A. SG&A expenses for the quarter were $53.8 million. Cash SG&A expenses for the quarter were $38.5 million or 18% of revenues, slightly better than our expectations. The company continues to manage its discretionary spend across many of the key corporate lines, including headcount and professional services fees.
Looking forward we expect some of the first half SG&A savings to be spent over the remainder of the year, consistent with our prior message that allowed the team to flex their spending plans based on our first half performance. As a result we do expect to increase our SG&A spending during the second half of the year to support a larger investment in our information technology, product marketing and operation groups.
Now moving onto net income and adjusted EBITDA. For the quarter we generated net income of $17.4 million after recording an income tax provision of $11 million in the quarter, basic in the diluted earnings per share were $0.46 and $0.44 respectively.
Looking at our income taxes, the effective income tax rate for quarter reduced to 38.6% from $42.95 last quarter, the result of higher taxable profits and the taxing jurisdictions. Although the majority of the tax provision will be non-cash, we do anticipate paying some cash taxes in 2009, such as the U.S. federal AMT, and California state tax, the result of a temporary suspension of California NOL utilization.
Our adjusted EBITDA was $99.5 million for the quarter including an approximate $1.4 million positive impact from foreign currency fluctuations compared to our guidance rates. Adjusted EBITDA for the quarter on a constant currency basis versus few unraised would have been approximately $98 million.
Turning to our balance sheet and cash flows, at the end of Q2 our unrestricted cash balances totaled $603 million, an almost $320 million increase over the prior quarter of which $314 million related to the net proceeds from our convertible debt financing in June. Absent the debt financing the company generated net cash in the quarter. We continue to benefit from strong operating performance, excellent customer correlation with global DSO being less than 30 days and lower than plan capital expenditures.
Next moving onto some comments on cash flows; first our net cash generated from operating activities was $78.7 million for the quarter, a 9% decrease over the prior quarter and 79% correlations adjusted EBITDA. After taking into consideration the semi-annual interest paid in Q2. The company continues to remain highly focused on working capital management in each of our three regions.
Looking forward to Q3 and the rest of 2009 we anticipate, will continue to generate strong operating cash flows consistent with our expected adjusted EBITDA performance. Cash use from investing activities, excluding short and long term cash investments was $67.9 million for the quarter primarily attributed to our net investment and capital expenditures.
Looking to the second half of the year we expect to increase our capital investments in each of our three regions in part reflecting the under spend experience over the first two quarters of the year. Cash generated from financing activities was $301.3 million for the quarter primarily derived from the net proceeds of our debt offering and proceeds from employee equity plans. This was partially offset by payments on our term debt and capital leases.
Well, let me turn to the specifics on our debt financing. The company selected this form of capital raise as it provided us with the greatest degree of operating and the strategic flexibility, something we believe is highly important during these times while limiting the amount of cash outflow related to debt service. This debt facility is unsecured and subordinated. At the same time it was important to limit the level of equity dilution hence our decision to purchase the cap call simultaneously with the debt offering.
The cap call effectively increased our conversion price to $114.82 or a 60% premium to the closing price. We can settle this obligation in cash, shares or a combination of both. Given our desire to have a cash settlement feature embedded in the transaction we are required to bifurcate the proceeds between debt and equity and as a result approximately a $104 million of the gross proceeds were allocated the equity section of the balance sheet. Separately the cost of the cap call instruments were charged to additional paid in capital in the stockholders equity section of the balance sheet.
Finally, with respect to our equity balances outstanding we had approximately $38.6 million shares of common stock outstanding at the end of Q2. This number excludes the shares related to our convertible debt, a large portion of which we intend to settle with cash and 3.6 million shares related to our employee stock plans and other warrants.
So, with that I am going to turn it back to Steve.
Thanks Keith. I would like to now provide you some color from our original operations. In the U.S. market, we experienced a record bookings performance in the quarter, which eclipsed our previous record from Q2 2008.
Additionally our outbound multinational bookings to both Europe and Asia came it at an all time high with particular strength in our Amsterdam, London, Paris and Singapore markets. In fact we now have over 175 customers that are deployed in multiple regions with Equinix, an increase of over 100 customers since the end of Q3 2008, which is a solid proof point of the value of our global scale and reach.
The sales team in the U.S. did a terrific job this quarter in bringing us back inline with our 2008 booking rates while maintaining our pricing objectives despite the recessionary environment we are operating in. The financial services vertical continues to be a strong contributor to our success in this region with several large wins including our largest contract in our EFX ecosystem to date.
This success was a key reason in our decision to move forward with the third phase of our New York 4 IBX and also our Chicago 4 expansion announcement last week. We continue to extend this ecosystem of to many of our markets globally with critical deployments from key players within this vertical such as the Boston Options Exchange, Chicago Board of Options Exchange, Direct Edge, Fortis Clearing, the International Securities Exchange and JP Morgan. On a global basis, we now have over 375 financial customers with over 550 deployments worldwide.
Shifting to Europe, we continue to experience strong growth and the team there is on track to meet its revenue and adjusted EBITDA targets for the year. We continue to experience strong demand and firm pricing in Europe, where we do have some capacity constraints in a few key markets. These will be addressed by the four expansion projects currently underway, which are expected to open over the next several quarters.
The financial vertical continues to be our primary ecosystem driver in this region with several strategic wins booked in the quarter in Amsterdam, Frankfurt and London. Although, internet peering is still at work in progress, we’re seeing network density growing in all key sites. As you saw in an announcement today, we are able to capitalize on our first partially distressed datacenter asset in the Frankfurt market.
We’ve purchased a fully built out datacenter for just under $30 million and plan to invest up to $10 million in CapEx to recommission it. We expect to sign a blue chip anchor for this future IBX by the time it opens in Q4 of 2009. Supply in Frankfurt is getting tighter and our recently opened expansion in this market is already over 75% booked. So we believe this new capacity will be important in the coming quarters.
In Asia-Pacific, we had another good quarter with a slight increase in our bookings from the previous quarter and just ahead of plan despite significant capacity constraints in both Hong Kong and Singapore. We saw a particular strength in the network, enterprise and financial segments with a growing interest in our EFX offering. The pipeline here continues to be healthy with strong demand for our new expanses in Hong Kong and Singapore, which are expected to open later this quarter.
In fact Singapore has increasingly become the destination of choice for U.S. based multinationals and the density of networks, we have accumulated there is proving to be an important competitive advantage in that market. This is also helping to drive the continued growth of our interconnection offerings in the AP region, with Singapore now having the third largest number of cross connects in any of our markets globally.
Beyond our execution and our market position, we are benefiting from favorable secular trends, which we enjoy such as internet growth, broadband video, enterprise outsourcing, the continued shift to electronic trading and cloud computing, which is enabled by network interconnection.
This supports I believe that there is a great opportunity to invest and produce strong returns in our business. As recently announced, we’re making additional investments in Chicago, Frankfurt, New York and Zurich. With the decisions to invest in these markets, we now expect to see capital expenditures reach the high end of our range for 2009 guidance.
Additionally, we continue to see strong bookings in key markets such as Amsterdam, Hong Kong, Silicon Valley and Washington, D.C. We are tracking the fill rates in these markets and are actively reviewing expansion decisions to keep pace with the customer demand given the lead time to build new data centers. These expansions will be important for our future growth in the coming years and of course we will provide you updates as these plans evolve.
All of these decisions are being evaluated with the same rigorous level of analysis of supply, demand, pipeline and fill rate while targeting the same strong financial returns we have always pursued. We will also maintain the same prudence to assure that any of these expansions are part of a fully funded plan, utilizing our discretionary cash flow and our strong balance sheet.
So, I’d like to now provide you a quick update on our expectations for Q3 and the rest of the year. We now expect our 2009 revenues to be in the range of $860 million to $875 million. This reflects a combination of our bookings momentum and assumptions for currency, timing of forecasted churn and the book-to-bill intervals we discussed earlier on in this call.
We expect cash gross margins to range between 63% and 64% for the year. Cash SG&A is expected to be in the range of $160 million to $170 million. We’re raising our adjusted EBITDA expectations to range between $380 million and $390 million with the midpoint up $7.5 million.
As we pointed out in our release today, we’re reviewing accounting treatment of our recently signed lease for our Chicago-4 IBX shared suite and are excluding any cost associated from this in our annual and quarterly adjusted EBITDA expectation until that review is completed.
With the new expansions we’ve announced in Chicago, Frankfurt, New York and Zurich, we expect CapEx to approximate $375 million, which still includes approximately $60 million for ongoing CapEx.
For the third quarter, revenues are expected to be in the range of $221 million to 225 million. Cash gross margins for the quarter are expected to range between 63% and 64%. This reflects an estimated $4 million increase in seasonal utility cost as well as some incremental expansion cost. Cash SG&A is expected to be approximately $43 million. This is up by $4.5 million sequentially, which reflects additional headcount and merit increases, which had been delayed as we manage cost to the second half of the year.
Adjusted EBITDA is expected to be in the range of $96 million to $100 million, which absorbs the incremental cost I just noted. Total CapEx for the quarter is expected to be between $140 million and $150 million, which includes approximately $15 million of ongoing CapEx.
So in conclusion, we enter the second half of the year with confidence that we are well on our way to another year of strong growth and again in less than ideal market conditions. We’ll continue to stay vigilant in monitoring our operating environment with the improvement we’ve seen in the strength of our bookings and pipeline we believe we are very well positioned to grow share and separate ourselves from our competition.
As we’ve seen this economy has hampered many of our competitors ability to keep pace with industry demand and invest in new capacity. The expansion announcements we’ve discussed and continued to evaluate are a reflection of our momentum in financial strength and provide an opportunity to take advantage of difficult times and emerge as even a stronger market leader. This coupled with our unique global scale and reach is enabling Equinix to become the go to provider for mission critical data center services for the foreseeable future.
So, with that Beck, I’m going to turn it over to you and see what kind of questions we might have.
Your first question comes from Chris Larsen - Piper Jaffray.
Chris Larsen - Piper Jaffray
A couple of questions Keith, obviously you did that Big Cap raise and now your CapEx guidance is still sort of within or definitely within the original guidance you said, your EBITDA is exceeding your CapEx. Was this cap raise done really just to give yourselves more cash in terms of comfort zone? Or can we expect some more new facility builds within that.
Secondly, it doesn’t seem from any of your numbers, but I’d love to see if there’s something below the trend, anything incrementally worse from customers? I mean DSOs were up two days sequentially, but they’re actually down four days year-on-year. I mean, are we seeing anything that suggest and the health of any of your customers has gone any incrementally worse? Then, have you seen any churn from that large customer yet or will that all be in the third quarter? Thanks.
I think to deal with your first question first, certainly we raised the cap 01. We felt it was a very opportunistic sign to raise capital. So from our perspective that was clearly important recognizing the commitments that we’ve announced and some of the commitments that sit on our white boards. There are certainly, based on what we see today and the level of pipeline and growth, we get a sense that there’s a bigger opportunity in front of us here at Equinix.
So, for that very reason, we exercised the opportunity to raise capital when we thought we could. So from our perspective, we’ll continue to manage and certainly share with people on the phone and our investors, when we come to a new project or if there is no other project we’re certainly going to share that with you and we’ll reset our CapEx accordingly.
When it comes to your second question, I think it’s important to note both Steve’s comment and my comment that, we are going to see slightly higher churn in Q3 and Q4. Our DSOs were still below 30 days, as you noted 29 days versus 27 days last quarter that’s more in one market that we’re seeing a meaningful up tick, but having our churn, in my comments there is a couple of customers at the time that we offered our guidance last quarter, things have not gone well for a couple of customers and hence our churn is going to go up and that’s been reflected in the guidance numbers that we have shared with you.
I want to say though it is meaningfully across our base, the financial difficulties. I think there are select customers, where we talked about at the beginning of the year. There are some venture backed companies that are in some cases meaningful customers of ours. So, I think it’s important to know the some of those companies are not going to get funded and because of that there will be some failures and we’ll probably see a little bit more failure than we originally anticipated.
Again back to my comment, we fully intend to not only take that capacity and resell it by the end of the year. We’re going to sell it at or above the price points we were add today. So with the discipline of our sales team, strong pricing that we’re seeing in the market, and in particular Steve’s comment on the pipeline and the strength of the pipeline, we see it as a short term negative, long term positive. Again, it’s reflected in the guidance that we have in front of you today.
So, last question you had, just on the churn in Silicon Valley. A portion of the churn as we said, we thought it was going to be predominantly a Q2 churn. We started messaging, it would probably be split between Q2 and Q3 and that’s actually what’s happening, but for all intends and purposes we lost roughly 50% of that large Silicon Valley customer in Q2 and the rest of it should be gone by the end of Q3, and we’ve already started reselling that space with some very strong and positive oriented customers.
Chris, this is Steve. I think you can’t underestimate, what Keith is telling about particularly the trend that we signaled to you guys last quarter with this firm in the Valley. We’ll repurpose that space, which was low density type cabinets, now the high density cabinets, and we’ll resell that very quickly at much higher prices. So, with the constraints we have in this market not an issue at all for us. Actually, the sales team is as Keith said, has already begun to turn that over. So, we feel very, very confident. We’ll back fill it very quickly.
Your next question comes from Michael McCormack - JP Morgan.
Michael McCormick - JP Morgan
Just a couple of things, first on the full year guide based upon the tailing from FX. I’m just trying to get a sense. It looks like the FX makes stuff for basically the entire guidance increase. You’re saying both bookings in pipeline have seen improvement. Just trying to get a sense of what’s happening on the dynamic? Then secondly, a couple of your competitors have been successful in raising money as well, do you guys have any concern about the capacity in this environment?
Let me deal with your last question first. Certainly there is a little bit of capital coming into the market, if you look specifically at Terremark, they have a $420 million facility. As you know, the majority of that was really refinancing transaction for them.
Obviously, it was a good deal that the team over there did. It’s not giving them substantial capital to invest at the scale that we’re investing in and just reading their news as well, it looks like they will be investing more than enough of a capital and maybe a little bit here in Silicon Valley?
The benefit we have is we’re investing in a number of our markets in three regions of the world. So, I don’t feel that the industry and we the company are exposed to an oversupply. In fact, we still believe that supply is not keeping up with demand. So, hopefully that addresses that and I think there are a couple of other small financing, but again not of the magnitude that Terremark and Equinix have completed.
I would add to that, Mike on your question on a capacity in the markets. In 18 markets we’re making decisions and I think we’re now active in 10 markets building and you guys can look at that on the website on the sheet.
In those markets where we’ve made decisions, as I stated we have deep analysis on supply, on pricing, on competitive build, etc., and there really is nothing that has signaled that we do anything differently than react to our fill rate and our bookings in pipeline activity that we’ve been looking on. So we felt very confident that in the 10 markets we’re acting in that we’re not facing any kind of supply that is going to cause us to not go to the fill rate that we think we can go.
So Mike to addressing your first question, there is a couple of things. Certainly we know we have got the benefit of the tailwinds from currency and that we see that as a positive, because relative to last year we were getting a fairly substantial headwind with currency. So, again, we think we’re now sort of operating more in. I would say traditional trading levels at least for some of the currency. So there is a benefit that we’re surely taking for that.
Now, to offset that there is two things that we wanted to share with you and we have tried to color it a bit in our scripts here. Number one, the book-to-bill intervals are longer, and what we mean by that is basically the time that we book a customer to that time that we actually start generating revenue from billing that customer is extend it.
So when you without getting into the specifics on a customer-by-customer basis, when you think of some of the announcements we’ve made as of late and think about the complexities of some of these infrastructure deployments inside our facilities.
You could appreciate, how long it’s going to take for us to start recognize revenue attributed to some of those deals. So we wanted to make sure that people recognize that we have effectively sold out capacity, but we are not going to get the benefit of revenues attached to that for a period of time, and we are saying really the back end of the year.
Michael McCormick - JP Morgan
Keith, is that a majority of it complexity versus customer hesitant due to the economy.
It’s always complexity. Think about some of the focus on the EFX and some of the recent trading wins, our financial exchange wins that we’ve had to give you a sense of how complex on these installations are going to be.
Secondly, when you look at churn, we are telling you churn is going to be little higher in Q3 and Q4 and that’s sucking up some for our tailwind as well. In particular, there is a couple of, as I said, venture bad companies that have effectively hit the wall at full speed, and because of the not only have we fully reserved for them in Q2, against the revenues and AR, but we took obviously the impact of their contract out on the either latter two quarters of the year.
So, we have to absorb that, but going back to Steve’s comment and my comment, because of the pipeline and the momentum like anything short term negative long term positive, because these non-paying customers, we are going to replace them before the end of the year and we think we are going to be in a constrained environment in Silicon Valley before the end of the year and so it gives you sense that there is still great momentum in the plan, it’s just the timing and inflows and outflows of churn and book-to-bill intervals.
Your next question comes from Michael Rollins - Citi Investment Research.
Michael Rollins - Citi Investment Research
Just a question on the customer segmentation, as you look at the bookings and what you’re looking at in terms of the comments of the strength and bookings going forward, can you give us more definition in terms of what verticals might be stronger and then also at the same time on the churn front, are there certain verticals that are experiencing more churn or is it diversified. Thanks.
Yes, Mike I will take that. Let me give you some color by reason and then I will bring it up to worldwide. You guys know we bucket our bookings and our MR by four verticals, and I would tell you at a very high level, we have seen an uplift in the financial services, which includes our EFX ecosystem focused.
Much greater than any of the other verticals and I would tell you in this quarter Q2 both digital media and the financial services had a bit of an uptake, network was fairly flat on a worldwide basis quarter-to-quarter and enterprise and our reseller activity was fairly flat quarter-on-quarter, but that varies by region, if you go to Europe the enterprise businesses and reseller activities almost half the book to MR bookings in that quarter and the financial services is roughly a third.
If you go to the US markets it’s much more balanced, it’s roughly 36% enterprise reseller, its 30% financial, which is stepped up significantly, roughly 15 network and roughly 19 or 20 in the digital media and then in Asia it’s pretty balanced. Its network is the largest and then in the high teens, low 20’s are the other three segments.
So, generally at a very simple level, the financial services vertical has had a big step up for us predominantly driven by our FX ecosystem activity followed closely by digital media and then pretty flat quarter-on-quarter with the other two verticals.
Your next question comes from Jonathan Schildkraut - Jefferies
Jonathan Schildkraut - Jefferies
A couple of questions here, first on the guidance and then maybe a little on your capital structure, as I look into your guidance for the next two quarters, taking into account the two things that you have said today and some of the pricing actions we have seen over the front course of this year, it still feels like you have been a little conservative.
I’m guessing where the impact is going to be is that we would see and correct me if I am wrong here, is that Cabinet ads would be lower in the backend of the year are relative to this quarter because it seems like the Cabinet in this quarter were extraordinarily strong.
Yes, I don’t want to say that we are conservative. We certainly recognize the amount of moving pieces in a business plan at this point and again not trying to repeat myself Jonathan, I think it is real importance for the listeners to understand there is a lot of success in their business today.
Because of a few things that are moving around we are getting the benefit of course of currencies, but between the book-to-bill interval and between the churn, we are probably not going to see a lot of the strength that if you will the real positive that’s going on in the company took back end of the year and what that really says is it goes extremely well for the beginning of 2010.
Again I don’t want to, I am not promising, what we are going to do I just my sense is there is enough movement in the various revenue components that we think its fair guidance given what we see today and we will continue to update that as we move through the year.
Jonathan Schildkraut - Jefferies
Did you say that MRR churn was 1.8% and Cabinet churn was 1.4% and do I have that backwards?
Cabinet was 1.4% and MRR was 1.8% Jonathan.
Jonathan Schildkraut - Jefferies
So just in terms of looking then at the EBITDA guidance for the remainder of the year, already you have hit $190 million basic is the run rate here would get you to the bottom end of your guidance range and I guess, what we’re looking at is very conservative incremental margins, pretty much all of your incremental revenue growth it appears will be taken up by some of the cost initiatives you’ve been talking about working on in the back end of the year. Am I missing anything as a look at the expectations for the next six months?
Well, I think there’s a couple of thing. No, you’re not missing anything. I think it’s important to know that as we said, there is the seasonal impact which you’re aware of, the $4 million of utility, we see that every Q3 and we’ve seen it in over the last 6, 7, 8 years. So that’s basically sucking up meaningful piece of our revenue increase, but the second piece is, there was a lot of expansion that we’ve announced and incremental expansion cost that we’re going to absorb.
I can’t remember, Steve sized of it, it is a couple of million dollars plus over the next little while that we will absorb with no incremental revenue, but probably even more importantly I think, Steve’s comments were very sound and in talking about the fact that we’re going to invest very heavily in IT, very heavily in our marketing team because, we need to. We have under invested over the last few years and it’s going to position us extremely well for what we see in 2010 and beyond.
So there is a disproportion in the amount of investment going on not only in those two groups, but across the organization to scale this to a much larger company than we originally anticipated because, we see an opportunity that is greater than we originally thought.
Keith, I’d add that and I think I have said this Jonathan on my earlier points is that, I think you know we’re investing pretty heavily in the product lines and as I did mentioned, we extended the merits decision to the mid-point of the year and then what we’re going to now execute on that in the second half of the year, but we’re investing in vertical debts now, so we’re launching new products and as Keith said, there is a continued systems investment going on around the world to bring our systems up to next-generations.
So, there’s a fair amount of investment going on in the company to build operate globally. When you get to the scale of the customers we’re delivering to now globally, global SLAs, global MSAs, global pricing, there is a heck of a lot of work going on here to be able to deliver that, so there’s a significant amount of investment to enact that.
Jonathan Schildkraut - Jefferies
Just one final question, in terms of your capital structure, I know in the past, Keith you’ve indicated a three to four times leverage, something that you feel is that right amount of leverage on this business, and maybe I am not as conservative as a gentleman who asked this question about your plans for those dollars on a go forward basis, but based on what we see in your business.
The cash flows you’re generating, even if we got significantly more aggressive in terms of your expansion in early 2010, it still seems like you’re sitting on an extraordinary amount of cash and if you maintain a three to four times leverage that cash number is going to go up dramatically. Is the company now considering other options for that cash “share buybacks or dividend” and even if you don’t want to answer that question today, when might we hear from you on your plans?
Yes. So, there’s two things: First and foremost we did raise it, when you look at our net leverage we’re about 2.5 times net leverage today. Certainly, we have announced an increase in spend. There is a tone coming from Steve and I that basically says, that there is an opportunity, we think that’s going to greater, we’ve already told you, sort of the investor community as a whole, there is a number of markets that we are looking at, we talked about it on our analyst day.
We have not yet made any announcements on some of those markets, but it's fair to say that we think we’re going to be constrained in some of the big U.S. markets, what we announced today the New York-4 phase 3, but there’s other markets that we have to pay attention to as well and Silicon Valley is the one that comes to mind right away and then there’s of course the success that we’re having in DC. We’re out of capacity in Dallas, we’re building of course in LA right now and, we’re going to build in New York and Chicago.
So I feel pretty good about what we are doing, but there’s a number of unannounced projects. So, a lot of that excess capital as you might see it could be consumed relatively quickly. Having said all of that, we recognize that our EBITDA is extremely strong. We recognize as we look forward into 2010 based on the exit rates so we have from 2009 that we theoretically should generate a lot of operating cash flow that is linked to our adjusted EBITDA.
So because of that part of the reason of the capital raise was making sure that we had capital, that we are always going to be in a fully funded position, but we recognize depending on how you spend the capital you can run short of capital, because the investments or so high. So, this does not give you direct answer on why you think we might have excess capital, but our sense is that, we feel we’re well positioned as we look forward.
Now on the analyst day, we did talk a little bit about our leverage; we said this is a recurring revenue model, long term asset, great opportunity that theoretically the leverage should be higher on this asset. If we just run the business as we’re going to, we’ll have zero net leverage in 2012, we recognize that’s no way to run the business.
What the excess cash does do, is it's going to give us at some point the ability to maybe one day so a share buyback or maybe do a dividend or alternatively it’s going to give us the capacity later down the road and I said it in my comments that we want to make sure we can take out these convertible instruments with cash and avoid the dilution and so in a back handed way that’s really doing a share repurchase because we want to use our cash to pay back the debt and we have embedded these cash settlement features in our large structure, so hopefully that answers your question.
Jonathan Atkin - RBC Capital Markets
Well, not really because if you paid off that debt with cash instead of shares then you would become under leveraged based on your own analysis, but I get the point, I actually would love for you to spend just a minute more on the new Chicago facility and some of the least cost, just based on the information you put out in your release, you are spending just under $8 million a year whether it comes out of the capital or operating lease, translating, if the Cabinet it’s about $1100 of Cabinet.
In the past you guys have targeted a 40% IRR and incremental investments, that would imply that the pricing environment in Down Town, Chicago was quite strong and I was wondering if you employed the same IRR hurdles in this situation as you had in the past and then maybe talk a little bit about the accounting. Thanks.
I think it is fair to say that we see a lot of strength in the Chicago market specifically the Down Town market where we operated our EFX business. From our perspective we and Steve mentioned this in his prepared remarks; we are shooting for the same targeted returns under this model as we are with any of our other models and so high economic return for the investment we are making.
Now with that said, we are not using our capital, we are working with digital realty, and many ways we are using a lot of their capital to expand our footprint. That all said the reason we have chosen not to include anything in our guidance at this point, one is like an extremely complex accounting transaction because of what we are leasing and determining whether it’s operating capital or a hybrid structure.
We have had a few of those before, so we need to get valuations done and so the complexity is of that, but telling from a cash perspective, I think it's important to know that there is no effect of the beginning of 2010 if I’m correct here
So, because there is no cash outflow, no cash impact, we as a company one of the things that we do is different than many of the others out in the marketplace, we don’t adjust for deferred rent, we actually take the full impact of non-cash deferred rent into our EBITDA calculation, but there are a number of companies out in our industry that actually take out deferred rent.
So for that very reason we wanted to make sure we were clean with our EBITDA and certainly message at this point that EBITDA has not been adjusted for this because we don’t know what the treatment is going to be, but because we don’t take out deferred rent, it could have theoretically a non-cash EBITDA impact to our EBITDA.
Your next question comes from Simon Flannery - Morgan Stanley.
Simon Flannery – Morgan Stanley
The pricing is very strong, can you talk a little bit about are you seeing that fairly much across the board in terms of within the U.S. and the various markets or other particular markets where you are seeing a lot of pricing strength because of shortages and in terms of your customer or your sort of growth this quarter and as you expect the rest of the year, how much do you see coming from existing customers expanding with you and how much would you see coming from new customers and maybe you can just comment on the new customer count in the quarter and then finally anything you have to say on the interconnection trends would be great. Thank you.
Let me start out with the pricing and as you guys know it does vary by market, but I would tell you in the key critical network dense markets pricing is holding very firm and stable and as I think Keith or I mentioned we are seeing some sales cycles that are starting to stabilize and I think the durations of the sales cycles probably in this quarter remain a little bit longer than normal, but we are seeing pricing strengthened and quite frankly we are very targeted and very focused on key clients inside the key verticals that are feeding on our ecosystem.
So, the ecosystem focus is going to help that in terms of maintaining pricing. You get away from mission critical activity and you get to back office or non-mission critical type stuff where there is disaster recovery or testing or development type deployments then you’re going to get away from pricing strength. So, I would tell you across the critical markets and it even shows up in markets like Dallas where we have gone dark, we are foregoing pricing strength in market and competitors are getting because we don’t have a capacity. So, capacity still remains our number one issue.
In general the sales team is doing a very, very good job selling value, not dropping pricing for trading for volume and sticking by the framework we have in place for them. So, across the Board I would tell you pricing is pretty darn strong. Part of the driver to that is also utilization is continuing to go up, so from a macro standpoint around the world datacenter utilization continues to go up as we have seen quarter-by-quarter, which is also providing strength to pricing.
On the existing customer side, I think we were around 84% this quarter worldwide existing customer base. So, existing customers are very strong in terms of purchasing. If you look at our top 15 to 20 customers in each region, we see a majority of them continuing to grow with us and very few of them that are not.
So, a good signal from all three regions is that the top customers with very few exceptions. One or two and they’re tied into the companies that are in the business of building datacenters and have taken some of this volume back in house that’s been here for four or five years. Outside of those we’re seeing very, very good strength with existing customer.
New customer take up this quarter, I think the total new was roughly a 120, 425 new logos, they were brought in around the world. U.S. had the highest numbers, roughly 60, roughly 40 in Asia and roughly 25 in Europe. So its a pretty good mix, it has been higher in previous quarters, but generally we’re getting strong, strong buying patterns from our existing customer base and I think that’s what was driving the bookings and the pipeline momentum.
On the interconnection front, full speed ahead as an initiative for the company. In Asia we’re 9.5% to 10%, pushing up towards 10% now. Europe is still working hard to get the cross connect and exchange business embedded in all the countries. We’re making very good progress with network density as I mentioned.
In the U.S. now, it has flattened out and it has been flat the last couple of quarters on an actual dollar basis. We’re running about the same in the last two or three quarters, but I think you will see as these major deployments that we’re installing around the world with the FX and as these matching engine start to take hold and they start to get their members connecting. We expect to see the cross connect business to start to step up.
On the exchange front with our ports we’re still reprising, it will probably go on for the remainder of the second half of the year and we’ll see up tick and upgrading of ports in that front also. So I would tell you its all good news, most of the new product orientation we’re doing is all behind inter connection.
So all of the stuff that our new Chief Marketing Officer and his team are focused on is all behind the ecosystems and generating more cross connects more ports and more ways to sell the interconnection part of our business.
Simon, if I could just say one another thing. I think I want to make sure, I leave with this thought. Well, also part of the reason pricing is so strong. Customers are buying more products and services for an average cabinet.
Moreover, the metric that we use is MRR for cabinet or cabinet equivalent and so as we sell hired dent cabinets meaning more power and as Steve alluded to with more cross connect, then the average unit is going to go up on a per unit basis and pricing overall has remained firm across from the price point perspective. So I wanted to make sure that you are just aware of that particular structure in our metrics.
Your next question comes from Mark Kelleher - Brigantine Advisors.
Mark Kelleher - Brigantine Advisors
I want to talk a little bit about Europe. Europe is very strong in the quarter. The utilization rate seems even higher than the U.S. First of all on the utilization question, at what point are you going to be comfortable with the new capacity that’s coming online to bring that 85% down. Are you looking at some pricing leverage? Is there some churn that you might be able to get, maybe some positive churn from some customers to get some space back to alleviate that issue?
Then on the pricing, just kind of connected to the utilization, are the cross connects factored into the utilization rate or can you continue to generate revenue on top of an 85% utilization without adding cabinets by adding cross connects and that all ties into how much pricing you have and can you raise pricing in Europe? That’s all one question.
Let me start Mark and then Keith can add some comments here. As we mentioned in our script, we have four expansion projects going on in Europe, which will alleviate some of the pressure we have in the constraining markets. So in Paris, in London, in Amsterdam, in Germany, now with the recent announcement we will start to alleviate some of the constrains we have and that will help us certainly from a capacity standpoint.
One of the biggest things we’re trying to enact with our European team is to move from a primary focus on selling big suites, medium sized suites to better mix of Shared Colo with big deployments predominantly and historically had been around enterprises. So, the team over there is doing a nice job getting the interconnection part of the business into the value proposition, into how we communicate the customers.
So, we do expect to see that to start to pickup and drive past that 3% here overtime, but it’s going to take time, but all of the signs and all the work we’ve done today, we think is starting to show up.
So yes, I do believe that from European a standpoint we’re going to get a better mix of space and interconnection that’s going to help us alleviate the constraints we have today. The 85% that we’re setting at today is similar to Asia, it’s a little lower in the U.S. and all these announcements that we’ve signaled today are pointed at that these markets where we know we have the demand, and we know we have the pipeline, and we know we have a fill rate history that we can go attack that. So we feel pretty darn good about that.
Mark Kelleher - Brigantine Advisors
When you give us the capacity utilization rate of 85%, how do you factored in the fact you can sell additional services to existing cabinets? You can do more cross connect to existing cabinets.
We don’t really do that much. I mean it’s tough to develop different matrix for this, but we’re really talking about a physical footprint or a cabinet equivalent, but many times you are absolutely right there is more revenue opportunity certainly coming from the cross connect, but equally so coming from power, and in the end it takes a while for customers to ramp up, their deployment in over a period of quarters, and in some cases years, they will continue to invest in their infrastructure and take more and more power infrastructure as part of their service offering and so it doesn’t get well reflected.
What we are trying to do is a business, we are trying to give you a sense of what the revenue opportunity is for this business, and last quarter we told you there is roughly $1.25 billion of revenue opportunity. We have since announced incremental capacity and so obviously that number is greater today, and with that it gives you a sense of at least what we are charging for or charging forward towards as a total opportunity based on the capacity we have delivered.
Mark Kelleher - Brigantine Advisers
And including pricing in Europe, pricing increases?
We tend to be premium priced, but obviously also there is market conditions in a number of our markets that remember we are operating in eight different markets so there is uniqueness to each of our markets, but, like anything if you want you can moderate uptake based on your pricing decision.
We as a company we are disciplined to pricing, we think there is a fair price relative to the investments that we make and we recharge that as a business, but certainly if you wanted to see the demand go down dramatically you could put up fairly large price increase in place.
Our general view is we have this great opportunity to take share and grow the business and we are getting the returns that we expect. So, based on that, why not continue to invest versus trying to, if you will, govern the amount of momentum we have in our business plan.
We should be clear though Mark, there is not, I mean to be very specific to your question we have not instilled a price increase program in Europe, we are enacting a country-by-country as we deploy network dense stuff within our business or where with these ecosystems you tend to be able to hang up closer to list price and that’s the type of discipline we are enacting. So, cross connects were starting at a much lower point than we are in the U.S., but they are starting to going up we are starting to get traction.
So, that will happen over time, but there is not a plan. The margins are moving up by the scale and by the multinational business that we are pushing into Europe and by just Equinization of the business there.
Your next question comes from Winston Lin - Goldman Sachs.
Winston Lin - Goldman Sachs
Just wanted to go into Europe a bit since that draws the large part of the growth this quarter. You mentioned that increased power usage help revenues there, but that’s a pass-through thought. I would think that there is little margin benefit from it.
Could you just give a bit more color on the cost drivers to help this quarter, and then maybe just switch to the Silicon Valley space. Given that weakness venture capital backed companies and the trend for some of the Internet companies, what type of customers do you see picking up the space and how for long in the discussions are you?
Okay. Let me at least take the Equinix shows in my script. It is not necessarily a pass-through prior arrangement, and that’s why I actually was trying to be specific in my language in my script. It’s a negotiated rate. So, you pre-negotiate with the customer taking into consideration both the consumption and the cooling of the power on what that rate is going to be.
So, there is seasonality in utility cost in Europe, slightly different than what we experienced here in the U.S. and in particular California. So, there is a negotiated margin effectively in the prior, so it’s not directly a pass-through and so, we benefited from that, but we also benefited from more volume we sold more cabinets or billing today than they were in the last quarter and then you get the added benefit of what’s been going on with the currency.
Absent currency, you can take out roughly five bullet points, so you would be roughly 10% quarter-over-quarter. The benefit of that was really coming from power and then to increase volume. As it relates to BCs, I mean this is a typical issue that we always will experience are some companies whose funding will funding will dry up and decisions will be made whether or not somebody else will fund them.
There are some companies that we now see today that will not get funding and we, as I said we are not only taking the hit in Q2 for anything that we had on our books but we are fully taking that out of our business plan for Q3 and Q4, and there is a number of circumstances like that that’s muting basically some of the success we are having. Steve’s always very clear though we have a gross booking number, we have a churn number and we have a net booking number.
We are managing churn as best as we can, a lot of that is out of our control and we are driving the team to drive gross bookings as high as possible, so we have a net booking number that is consistent with our objectives, but there is a fair number of VC backs that will not make it, we know who they are, we reserve for them and we factor that into our capacity management.
Now, with that all said, there is a lot of great companies out there that are growing very substantially that are well funded, that are private and generating income and is generating positive revenue and generating positive cash and net income. Those are the type of companies that we are looking for to grow with in particular in the Valley and some other markets.
The only I would add Winston to Keith’s comments is that we try to do as much work as we can, there is probably a larger amount of private companies that are in the pipeline than the bookings numbers in the Silicon Valley because of the nature of the market out here, and we do as much work as we can to check the credibility of the company before we sign them up, but bookings in this last quarter, in Q2 in the Silicon Valley, were back to Q2 2008 levels, so that was a very good sign.
The mix of customers in the valley really hasn’t changed that much. Maybe in the software or service bucket, we’re seeing more activity there, but it’s still a lot of social Web 2.0 companies that’s video, a CDN driving growth. It’s those companies that you guys would expect would be in the Valley that are at the heart of the pipeline and the bookings.
The team in the Silicon Valley has done historically a very, very good job in doing a lot of transactions in our quarter. So our biggest challenge in the Valley is capacity, no question about it.
Your next question comes from [Kolby Nezo - Koffin Brothers].
[Kolby Nezo - Koffin Brothers]
I just wanted to follow up actually on the first question that was asked. You guys increased your CapEx guidance to the high end 375. Just wanted to make sure that basically is for all projects that’s already been announced. In other words, there is no more room left in there. So if we see a project or an expansion now, it’s a month from now that’s still included in the 375?
My next question has to deal with, just trying to quantify how big the market opportunity is? So financial services to their financial exchange obviously, have been a huge growth for you guys. When you try to figure out how long this is going to last? How many more customers are out that actually go after, maybe you can give us some parameters on that, so could you help get a better understanding of how long this significant growth is going to last? Thanks.
Yes, I’ll take the last question first. We think at this point now, [Kolby], we’re in the lower single digits of market share at a pretty rapid growth rate in the CFX ecosystem. So, there are literally thousands of these companies buy side, sell side technology companies in the space. We are very focused on large pops. We are very focused on matching engines. We are very focused on the magnets that will attract other members that want to come in and connect with them.
So, there are plenty of companies around the world, many of these companies are looking for multi-region deployment. So one of the advantages we have over most or all of our competitors is the fact that we can deploy them in the top ten financial cities around the world. I mean all top ten financial cities on the charts were deployed in. So that is a huge advantage and we’re very, very early in the stages we believe on enabling these companies.
With the push into electronic trading, our pipeline is just very, very solid with opportunities across probably today’s five or six markets, we think that will go to seven or eight and up to ten markets as the things starts to evolve; and on the CapEx Keith.
On the CapEx [Kolby], right now based on what we see today that on the projects that we’ve announced, we have fully consumed, we believe we will have fully consumed up to the top end of our range. So any incremental projects; we will be above the $375 million.
[Kolby Nezo - Koffin Brothers]
We’re obviously still six months left and based off of some of the comments during your prepared remarks, it sounds like there’s other markets you are still looking at. Is it fair to say then that, we’re going to see some more projects announced in the next six months and therefore CapEx would go above your current expectation?
Well, there is certainly more projects that we’re looking at. I think realistically, if we announce something, it will have some impact on 2009, but realistically it’s more likely to have an impact embedded in our 2010 guidance.
Your next question comes from James Green - Thomas Weisel Partners.
James Green - Thomas Weisel Partners
I was wondering, can you just talk a little bit about the different verticals and this quarter you talked about customer growth coming from existing customer base, but as you look across whether it’s carriers or content providers or enterprises, sort of where you’re seeing the growth coming from? Thanks.
Yes, from a booking standpoint James, or where our MMR is deployed today, either one or?
James Green - Thomas Weisel Partners
Either one is fine.
Yes, well let me give you a bookings, I hit that before, but the simplest way to think about the bookings and this has been pretty standard the last couple of quarters. The financial services vertical for us has got the highest growth, it was 29% on a worldwide basis of the bookings in this last quarter.
Network is still very strong, but its mostly existing customers with a couple of exceptions and Europe where we’re trying to add the number of networks that we’ve got deployed in our markets. So, Network was pretty flat quarter-on-quarter, call at 17%, 18% of the bookings.
Digital media in the U.S. picked up a little bit and in Asia picked up a little bit, it was roughly 16% that these are the content digital media companies and then, the biggest segment for us historically has been the enterprise and the resellers. So, the big systems integrators and the managed service providers. They are still pushing a lot of volume to us.
I think as we continue to see the cloud developed and we’re getting much more mature about how we’re looking at the resellers and the managed service providers. We want the ones that are moving their cloud offerings, are there offerings to the cloud compute model because, we want most of those clients in our data center, so that we can help them enact the enablement of the cloud.
So we’re pushing deeper into key resellers, key managed service providers that are trying to offer cloud compute and they don’t have the ability or the data center reliability or network density that we have and we’re focused on those. So, we expect we’ll see that to be pretty strong as we go forward here in the coming quarters.
James Green - Thomas Weisel Partners
I just have one other question with respect to build out and data center space, you obviously made a purchase this quarter of some space. As you look around these markets, are there spaces out there that you could jump on sort of immediately if you would needed to in order to expand and sort of the buy versus bill category, where is that leading right now in the market?
We’ve signaled to you guys that at the beginning of the year, late last year, we thought we might see more partially distressed or fully distressed properties and to be very honest with you, we’ve seen very few. I think if we looked that one or two, maybe three along the way and this is the first one that we’ve seen that we acted on that return metrics and that market was going to help us do the kind of business we need to do in the Frankfurt market, so I don’t know.
We haven’t looked at as many as we thought, certainly nowhere near like it was seven, eight years ago. Most of those properties have been collected up. This property was actually a datacenter in Frankfurt that was built by one of the players in the timeframe and had been set there empty for three to four years.
So that’s the reason we’re able to standard up very quickly. We’ll have this thing recommissioned in three months, there is a knock built out, there is a very highly end facility, so I don’t know. We don’t expect to see a lot more distress properties coming out as soon as we get through the second half of the year.
Your final question comes from Jonathan Atkin - RBC Capital Markets.
Jonathan Atkin - RBC Capital Markets
I wonder if you can comment a little bit more on interconnection. As a percentage of revenues, it’s moderated a bit in the last two, three quarters. Does that continue to moderate before it stabilizes or do you think it stabilizes and then starts to grow given some of your market push in some of the regions by vertical for network with customers?
Then I wanted to maybe if you could comment on some of the recent datacenter outages, there’s been more than a handful in a last several weeks including, you are not unaffected by that, but it seems to be pretty minor in your case, but do you see it necessary to change the nature of some of your maintenance CapEx given some of the recent outages. Then finally, on contracts duration, how is that trending, is it still sticking up a little bit?
Sure. Let me start and Keith you can add some color here. First question on the interconnection, Jonathan I think the simplest way to think about interconnection, we’re hoping and starting to stabilize and the plans are to all the energy and money we’re putting into product development and evolving vertical focus to really go deep with next generation products is all driven around interconnection.
So whether there’s going to be Ethernets, wide area network, cloud hubbing [ph], whatever area you want to pick, we’re looking at many of them. We’re going to start to drive deeper into these ecosystems. As I mentioned earlier, we expect the cross connect business to pickup on the back of the EFX ecosystems as members start to connect to the matching engines.
So we know that’s out in front of us and that just started to pickup particularly in the key financial markets around the world, but surprise to say you can expect Equinix is going to continue to drive interconnection, stabilize it in the U.S., drive it up north going bigger in Asia and in Europe. Its part of the plans, the leaders are held accountable for it. The marketing organization is building next generation products to get after it. It is part of the DNA here. So you should not expect to see a slip to put off the petal on interconnection at all.
On the datacenter outages there has been a couple, since we last spoke with everybody. We had a couple of power failures, one in Paris, one in Sydney. They were relatively minor. One unfortunately was due to human error made by an outside factory technician that was in doing routine maintenance on a UPS. I would tell you that Blue Cross analysis have been done, and corrective measures have been taken on that and again little or no impact to relationships with customers.
The other one was ended up being an improper factory setting on UPS, which is an unfortunate thing again, but corrective action has been taken, all the Blue Cross analysis has been done and you can expect that the learning from this has been shared and we don’t expect to see these kinds of things. So unfortunately, we had them they were corrected quickly, limited to no customer impact.
I would add that on that topic, one of the initiatives we have is a global initiative, what we’re driving consistency of how we design and operate these IVXs around the world. We are making very good progress. So it is a very good question.
In the bottom line, your question about maintenance CapEx is that we do not expect to see maintenance CapEx go up as a result of these. We have plenty of CapEx in the maintenance bucket, Keith I would say. This is more of a processed and people focused event that we believe we will be on top very quickly, when we have these kinds of incidents.
Last topic was contract length. Two to three years still Keith, we’re trying to drive them up where appropriate certain verticals and certain customers, where we can we’re getting longer term contracts. I think we mentioned to you, Jonathan we haven’t sent to the sales force to look for longer term contracts and overtime we should start to see, length start to increase.
Jonathan Atkin - RBC Capital Markets
Finally, you talked about the second half up tick in both IT and marketing. On the marketing side, how much of that is headcount related versus other areas of marketing expense?
Most of it is headcount related. As we make this, as Keith and I as leadership team make decisions to launch into new product development. It will require network and portal developers. So, yes we’re right in the middle of making decisions in a couple of areas I mentioned to you about going down the path for new product development at a greater pace than we have in the past. So, there will be an impact to the headcount in the marketing function.
Jonathan Atkin - RBC Capital Markets
Then, in the assets of Frankfurt, you said there will be a committed anchor kind of that you expect to be able to announce would that be a new customer relationship or an existing customer elsewhere in your footprint and how much of that size would they take as a percentage of cabinets let’s say.
We don’t know it’s a big, it’s ultimately long term our large commitment for a large amount of space. Initially they’ll step into a sizeable commitment that certainly meets the requirements of an anchor client. It is an existing customer, but it’s a very, very large customer around the world and just in terms of the size of the business. So, it’s a Blue Chip, big brand name customer and we are thrilled to have them.
This concludes our conference call today. Thank you for joining us.
Thank you all for your participation. You may disconnect at this time.
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