Equinix, Inc. Q4 2009 Earnings Call Transcript

| About: Equinix, Inc. (EQIX)

Equinix, Inc. (NASDAQ:EQIX)

Q4 2009 Earnings Call

February 10, 2010 5:30 pm ET


Jason Starr – Senior Director of Investor Relations

Stephen M. Smith – President, Chief Executive Officer & Director

Keith D. Taylor – Chief Financial Officer

Jarrett Appleby – Chief Marketing Officer


David Barden – Bank of America Merrill Lynch

Chris Larsen – Piper Jaffray

Simon Flannery – Morgan Stanley

Srinivas Anantha – Oppenheimer & Co.

Jonathan Schildkraut – Jefferies & Company

Michael Rollins – Citigroup

Jonathan Atkin – RBC Capital Markets

Colby Synesael – Kaufman Brothers


Welcome to the Equinix Q4 conference call. All lines will be able to be on listen only and we will open up for questions. Also, today’s conference is being recorded. If you have any objections you may disconnect at this time. I’d like to turn the call over to Jason Starr, Senior Director of Investor Relations.

Jason Starr

Welcome to our Q4 and fiscal year 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 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 26, 2009 and Form 10Q filed on October 26, 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 implicit 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; Keith Taylor, Equinix’s Chief Financial Officer; and Jarrett Appleby, Equinix’s Chief Marketing Officer.

Following our prepared remarks we’ll be taking questions from sales side analyst. In the interest of wrapping this call up in one hour we would like to ask these analysts to limit any follow on questions to just one. At this time I’ll turn the call over to Steve.

Stephen M. Smith

I’m pleased to report that Equinix delivered strong results in the fourth quarter with annual revenue growth of 25% and adjusted EBITDA growth of 40% which finishes off another outstanding year of top and bottom line growth, well ahead of industry rates. We’re very proud of these operating results especially when we consider the challenging economic environment that most companies faced worldwide in 2009.

Given the uncertain economic outlook at this time last year we laid out a plan that provided us with maximum flexibility to scale our discretionary investments up or down as required by market conditions. As part of this flexibility we managed our business very aggressively to focus on the new reality at the time with an earn it before you spend it mindset. Of course, this also contributed to our strong over performance in 2009’s adjusted EBITDA result.

As the year unfolded and the demand for our services remained strong, we made an important decision to continue to invest in the core of our business to better position us to capitalize on our longer term opportunity. As many competitors were constrained in their ability to invest in their growth, we’ve now gained an important competitive advantage. This decision enabled us to make significant progress on several important growth initiatives in 2009 beyond just achieving our key financial objectives.

First, we continued the expansion of 14 of our 18 markets where we have been experiencing significant capacity constraints with over $300 million in expansion cap ex this past year. With today’s announcements we still have expansions underway in eight markets while we’re actively reviewing several others. By the close of 2010 these efforts will have expanded our cabinet capacity by approximately 60% since the end of 2007 for a total of over five million gross square feet of datacenter space, the largest co-location footprint in the world.

Second, as we evolve the organization to operate globally in support of our long term growth opportunity, we hired almost 200 new employees, largely in the second half of the year. This was nearly a 17% increase year-over-year. Supporting the effectiveness of this organization, our investments included a continued focus on global systems, process improvement and the implementation of standard policies. This will enable a more consistent customer experience with Equinix across all three regions.

Third, we made several targeted investments to enhance our operational reliability and efficiency to eliminate single points of failure in certain IVXs. According to our recent annual customer satisfaction survey, operation reliability still remains the most important factor in our customers’ evaluation when selecting Equinix. We receive very high marks annually from our customers in how we differentiate ourselves from our competition in this area which is the primary reason why 91% of our customers are likely to recommend Equinix to a friend or a colleague.

Finally, we announced the acquisition of Switch and Data in late October to expand our scale and reach across the US market. As a quick update we received approval of the transaction from the Switch and Data shareholders at the end of last month. As you may be aware, we did receive a second request for information from the Department of Justification in connection with their antitrust review in early January.

Both Equinix and Switch and Data are working hard to meet the DOJ’s request but this does take time. Once we achieve substantial compliance with this, the DOJ will generally have 30 days to complete their review. As Previously announced Equinix currently expects to close the transaction in the second quarter.

Equally as important as all four of these investments we have continued to deepen our focus on penetration of key customer ecosystems. In the network ecosystem we announced an important initiative in 2009 for the development of our Ethernet exchange offering. This product is a layer two switch product to enable carrier Ethernet providers to establish interconnection agreements among each other in a one to many fashion.

As Ethernet service delivery becomes essentially for network service providers as well as enterprise customers, we expect this to enhance our value and opportunity within the network ecosystem. Our early experience has shown a great deal of customer interest in this initiative with over 12 trial agreements already signed including Abovenet, Level 3, Reliance Globalcom and PCCW to mention a few, within our operability testing underway for an expected Q2 launch date.

Complementing our efforts in the network ecosystem, we have also begun to see traction with some recent wins in the mobility segment including Syniverse, Global and one other notable global multisite win was Research In Motion, the maker of Blackberry Smartphones. We anticipate seeing further traction in this segment with these wins in our upcoming attendance at Mobile World Conference and CTIA Wireless.

In the financial vertical we saw a significant increase in demand for our services with continued growth from our electronic trading communities including key wins from Barclays, Boston Options Exchange, International Securities Exchange, JP Morgan and UPS Global Management. We now have over 430 customers in this vertical with over 80 deployed in multiple regions. We’ve seen accelerating growth in this ecosystem in all three regions and annual contract value has increased 39% year-over-year.

With the ongoing shift to electronic trading of multiple asset classes we believe that we’re in the early stages of growth in this ecosystem. Our accumulation of key magnetic customers and service providers and the value of our global position in the top 12 financial markets positions us well to be the provider of choice to many of these customers and enable us to rapidly expand the Equinix EFX ecosystem.

Finally, we’re seeing a meaningful increase in demand from cloud computing based service providers in our bookings and pipeline. We think the cloud represents a create opportunity for Equinix to develop a new interconnection rich ecosystem for systems integrators, managed service providers and the infrastructure platform and software as a service providers and of course the enterprises that they support.

As a proof point over the past couple of years, we have actually accumulated over 120 customers globally that have deployed critical infrastructure in support of both public and private cloud offerings. Some of the more recent wins include Amazon, Citrix Online, IPsoft, [Telayo] and Zinga. Joining other well known providers such as IBM and SalesForce.com and IBXs. Many of these individual clouds will be able to be reached directly via our interconnection services and from the networks that intersect within our IBXs. Simply put, we have a tremendous opportunity to connect the world’s clouds through Equinix.

All of our efforts in broadening these ecosystems leveraged the critical mass of our over 360 networks deployed across our footprint worldwide. Adding to the network affect we see within our data centers which ultimately reinforces the significant and strategically sustainable value of our service to our customers. As you can see, not only did the Equinix team deliver on its commitments to the market for 2009, these investments and our focus and progress in key ecosystems now have us very well positioned with a great deal of momentum to continue to build on our marketing leading position.

We still have a lot of work to do on all fronts here and our investments will continue in 2010 with the same discipline as we lay the foundation to support a long term opportunity that we believe to be in excess of $2 billion. I’ll provide additional details on 2010 and beyond with some quick regional updates later on the call but I’d like to now ask Keith to review our results for the quarter and the fiscal year 2009.

Keith D. Taylor

I’m pleased to provide you with our fourth quarter financial results, some highlights for the full year and provide you some insights in to our expectations for Q1 and the rest of 2010. Let me first state though that we continue to see signs of economic improvement although we’ll remain focused on our key leading indicators for the coming year to ensure we don’t over commit our resources. We’ll continue to be disciplined about our expansion decisions making appropriate investments in the areas that form the foundation of our future growth; that is our people primarily in sales, marketing and operations, our systems driving towards a global single instance of ORACLE and operations investing in the IBX operational reliability.

With that as a backdrop let me get to the quarter and first discuss revenues. Our Q4 revenues were $242.6 million, a 7% quarter-over-quarter increase and up 27% over the same quarter last year reflecting strong sale performance across each of our three regions. The US dollar remained volatile during Q4 resulting in an fx benefit of $900,000 as we compare to the Q4 guidance rates or a $2.6 million benefit using the average rates in affect during the prior quarter.

US revenues increased $144.5 million a 6% increase compared to last quarter reflecting strong bookings and revenue related to the delayed billings from some of the negotiate customer agreements that we entered in to during the first half of the year. European revenues increased to $64.5 million in the quarter a 6% sequential improvement, partially the result of growth in our power revenues and a stronger EU operating currency compared to the US dollar.

Asia Pacific revenues increased to $33.6 million in the quarter, a 10% increase over the prior quarter driven by continued strong interconnection revenue growth and stronger operating currencies. For the year, revenues were $882.5 million, a 25% increase over the prior year. As we look forward, we expect the US dollar denominated revenues to approximately 60% of total revenues while we expect the Euro and Pound denominated revenues to approximate 16% and 10% of total revenues respectively. In Asia Pacific we expect our Singapore revenues to approximately 5% of total revenues.

Obviously there’s been some meaningful movement in our operating currencies over the past few weeks and while difficult to predict for either Q1 or 2010 we have assumed a $1.36 dollar to the Euro, a $1.56 dollar to the Pound and a $1.42 Sing Dollar to the US dollar for our exchange rates. As a reminder, we do not hedge our revenues.

Now, looking at churn; for Q4 our global MMR churn was lower than we expected and came in at 1.5% while our cabinet turn was slightly above our expectations at 2.5%. These results were due primarily due to two large managed service provider deployments in Europe, one that moved their infrastructure in to their own datacenter and the other resulted from the loss of our customer’s customer. In both cases these deployments were legacy IX Europe business that was priced at lower rates which will allow the UK to continue to increase the price on the replacement business.

Looking forward, we anticipate Q1 and 2010 churn levels to approximate a 2% per quarter targeted levels. Next moving on to gross profit and margins; the company recognized gross profit of $115.5 million for the quarter. Our gross margins of about 48% which included the $3.3 million out of period depreciation adjustment period in our European region related to the correction of the estimated useful life of certain assets. Excluding this adjustment our gross margins would have been 46%, a one percentage point improvement over the prior quarter.

Our cash gross margins were 65% for the quarter, better than our expectations. In the US our cash gross margins improved to 70% and reflect lower seasonal utility rates, slower than expected hiring and favorable tax recoveries. Europe cash gross margins were 53%, a 1% decline in the quarter, the result of an increase in lower margin power revenues and higher seasonal utility rates. Asia Pacific cash gross margins declined to 62% from 65% in the quarter, the result of increased repairs and maintenance expense and an increase in utility costs. For the year, our gross profit was $399 million or gross margins of 45% and our cash gross profit was $568 million or cash gross margins of 64%.

The weighted average price per saleable cabinet in the US increased to $2,004 versus $1,910 in the prior year quarter up 5% quarter-over-quarter increase and up greater than 10% year-over-year. Our average US price per saleable cabinet improved due to lower price cabinet deployment that churned out of Silicon Valley during Q2 and Q3 and higher priced cabinet sales over the past few quarters consistent with or newly constructed IBXs. In Asia Pacific our weighted average price per saleable cabinet was $1,541 compared to $1,437 last quarter, 7% quarter-over-quarter increase, the result of increased interconnection revenues and stronger operating currencies against the US dollar.

With respect to Europe our weighted average price per saleable [Cab-E] increased to $1,057 compared to $1,016 last quarter. This improvement reflects three key trends in Europe: first, increase power revenues in Germany; second, a growth in our interconnection revenues line; and third a weaker average US dollar in the quarter.

Now, looking at our SG&A; SG&A expenses for the quarter was $60.9 million. Cash SG&A expenses for the quarter were $45.4 million or 19% of revenues a two percentage point increase over the prior quarter and consistent with our expectations that we’d see increased spending in the fourth quarter.

Going forward, the company will continue to manage its discretionary spend while selectively investing in key corporate initiatives such as increasing the size of the sales force and improved sales and efficiency and effectiveness, new product innovation, increased investment in our information technology initiatives including our global customer portal and our ERP systems and investing in additional technical staff to support the efforts to increase the operational reliability of our IBXs on a global basis.

Moving on to net income and adjusted EBITDA, for the quarter we generated net income of $17.7 after recording a $9.7 million income tax provision. For the year, our net income was $69.4 million after recording a $39.6 million income tax provision. Looking specifically at our income taxes, our effective income tax rate increased to 35% this quarter from 28% last quarter despite a discreet $5.2 million tax benefit from the release of a UK subsidiary tax valuation allowance.

Looking forward to 2010, we believe our tax provision will approximate 40% and as a reminder, although the majority of our tax provision will be non-cash, we do anticipate paying some cash taxes in 2010. We continue to believe we’ll not pay any meaningful cash tax until potentially 2012 primarily due to our strong NOL position.

Our adjusted EBITDA was $111.7 million for the quarter including an approximate $400,000 benefit from foreign currency fluctuations compared to our guidance rate, an $800,000 benefit versus the average rates in effect in Q3. For the year our adjusted EBITDA was $408.6 million, a 40% increase over the prior year.

Turning to our balance sheet and cash flows, at the end of Q4 our unrestricted cash balance totaled $604.4 million, a $23 million decrease over the prior quarter. We continue to benefit from strong operating performance including strong customer collections as our global DSOs decreased to 24 days and lower than expected cash payments related to our capital expenditures.

Looking at Q1 we’ll continue to focus on managing our working capital positions. On a separate note, last month the company received a $3.4 million distribution from the reserve fund, an amount we had written off in 2008 and 2009. As a result, we’ll recognize a gain attributed to this payment in the other income and expense line of the income statement in Q1.

Next moving on to some comments on cash flow, first our net cash generated from operating activities was $82.5 million for the quarter, a 23% decrease over the prior quarter primarily the result of our semiannual interest payment on our convertible debt of $18.1 million. For the fiscal year 2009 we generated $355.5 million of operating cash flows an 87% correlation to our adjusted EBITDA line.

Cash used in investing activities excluding short and long term cash investments was $101.6 million for the quarter primarily attributed to our net investment in capital expenditures. During the quarter and going forward we’re changing our format for reporting cap ex in the cash flow statement to better align the capital expenditures with the net cash out flow in investing activity. As a result, we will no longer report both gross cap ex and then the net changes in our accrued cap ex and liability account. Instead, we’ll just report one single net capital expenditure in the quarter and onwards.

For the year, our net capital expenditures were $369.5 million or $388.4 million under the old method of reporting. Cash used in financing activities was $2.9 million for the quarter primarily derived from the net proceeds from our employee equity plans offset by payments on our term debt and capital leases.

Looking forward we’re going to assess our opportunity to refinance our existing debt facilities. Hopefully without using equity or an equity linked structure. Although we have not finalized the next steps we’re going to review each of our debt facilities in Europe, Asia Pacific and the US to determine what is the optimum structure given the opportunity in front of us. As part of this initiative we’ll look to maintain the greatest degree of flexibility while attempting to drive down our weighted average cost of capital on an after tax basis.

Finally, with respect to our equity balances outstanding, we had approximately 39.3 million shares of common stock outstanding at the end of Q4. This number excludes 8.4 million shares related to our convertible debt, a large portion of which we intend to settle with cash and 3.1 million shares related to employee stock plan and other warrants.

I’ll turn the call back to Steve.

Stephen M. Smith

Let’s now shift our discussion to a quick review of some highlights and business trends that we saw in each of the three operating regions during the fourth quarter. In the US market, bookings were balanced across all vertical segments with the strongest quarter of outbound bookings to Europe and Asia that we’ve ever had. Overall, the pipeline remains very strong and actually increased in a couple of our key markets like New York, Chicago and the Mid Atlantic region.

Our interconnection product count continues to grow with particular strength in DC and New York reflecting momentum in the network and financial ecosystems. On the inventory front, we have recently opened our expansions in downtown LA and Chicago and have projects underway in New York, DC and Silicon Valley to address the capacity constraints we expect to experience in these markets during the middle part of 2010. Lastly, in the Dallas market we’re evaluating options to address our constraints here as well.

Overall, we’re not seeing any significant exchanges to the competitive landscape with pricing remaining firm for cabinets, power and interconnection. Finally, the length of some of our contracts are starting to go out past our two to three year historical average. In fact, we signed a 10 year contract with a Fortune 100 customer in Q4.

Shifting to the European market, we saw strong top line growth with our strongest bookings quarter for the year offset in part by the two churns that Keith mentioned. Our bookings were comprised of a good mix of local and global deals with particular strength in enterprise and the financial services segments. We added a total of 44 new customers in the quarter.

Our global scale and reach is definitely differentiating us from our competition when we look at the quantity of cross regional deals that we are closing which is ultimately improving our market share in this region. Interconnection remains at 3% of total MRR with cross connections now approach 8,800 and we are experiencing a meaningful pickup in exchange ports with our partners and our own exchange in Paris.

We are very well positioned in terms of inventory in this region as we opened our previously announced expansions in Geneva and Frankfurt. We took over the lease of a previously built out datacenter in Dusseldorf, our second datacenter in that market and we also just announced an additional expansion on our Frankfurt 2 campus. This leaves our only real constraint in Zurich which will be elevated when Zurich 4 opens in early Q2 2010. We have good momentum in Amsterdam as well and are already planning our next step in that market. So in general we know our next move in every market across Europe.

Looking forward, the market as a whole shows continued growth in this region. Our pipeline in each country remains strong and [insurance] is consistent with the other regions at approximately 2%. All of our traditional segments, network, financial and enterprise continue to grow and we are starting to see positive impact from Cloud deployments by US providers expanding to Europe.

Finally, in the Asia Pacific region, the fourth quarter capped off an outstanding year across all key financial and operating metrics. Booking in the quarter exceeded the plan with 44 new customer and the pipeline there remains strong. No new inventory was added in Q4 and our overall utilization increased to 79%. So we are facing some capacity constraints in this region but as we mentioned last quarter we’re doing a small expansion in Hong Kong that will yield 500 cabinets in the third quarter and due to the strength we’ve seen in Singapore we’ve started construction on the second phase of our Singapore 2 IBX which is expected to yield approximately 1,000 additional cabinets with a $30 million investment. We expect this to open sometime in the third quarter as well.

A final note in this region, we’re excited to announce that we have made a decision to enter the Shanghai market through a partnership with a local firm named Shanghai Data Solutions. This agreement will allow Equinix to resell capacity in their datacenter to our multinational customers who have a requirement to have a presence in this market. We’ve selected a great partner to enter this new market and have high confidence that we will be successful executing this opportunity.

Now, in closing I would like to provide you with our initial views on 2010 and the first quarter. As we have not yet closed the Switch and Data transaction we have excluded any assumptions about their 2010 results in these numbers. As we touched on earlier Equinix continues to see a tremendous growth opportunity in front of us as we build a company capable of generating over $2 billion in annual revenue over time.

In contemplating the magnitude of this opportunity in the shorter term, our management team with the board’s support has begun to execute off a three year rolling operating plan. In pursuit of this in 2010 we are making some important investments towards this plan. To maintain strong growth rates on the scale of the business today an increase in gross bookings annually will be an element of this three year plan.

To support this, in 2010 we will be expanding the size of the sales and marketing teams around the world to increase our market coverage and deepen our ecosystems on key prospects and targets. Further in support of the ecosystem strategy, we are increasing our product investments such as the roll out of Ethernet exchange to expand our interconnection services and finally we will continue to invest in the systems and processes to support our global service proposition.

All three of these investments are reflected in our 2010 SG&A guidance. Also within this three year operating plan we will continue to invest in expanding our capacity. This entails additional IBX staffing, lease commitments for expansions and investments in operational efficiency to support this level of growth and all reflected in our cost of revenues for 2010.

Having said all this let me now provide you with our 2010 guidance. We expect our 2010 revenues to be in a range of $1,050,000 to $1,075,000 or just over 20% growth at the midpoint. With the currency rates Keith indicated earlier this range absorbs just over $20 million in headwinds compared to the average rates used for guidance on last quarter’s call. We expect cash gross margins to be approximately 64%. Cash SG&A will be in the range of $200 to $220 million for the year. We expect our adjusted EBITDA to range between $460 to $480 million.

Shifting to cap ex, we expect this to range between $400 and $500 million in 2010 of which approximately $300 to $400 million is for expansion cap ex and $100 million is for ongoing cap ex. Our expansion cap ex reflects approximately $290 million in expansions already announced. It also includes up to $110 million for several other products that we are actively evaluating but which we are not ready to announce as the project plans and budgets are not yet complete. We will of course keep you apprised of their progress or any additional projects we may consider. Our ongoing cap ex guidance includes approximately $15 million for maintenance, $40 million for customer installations and $45 million for investments in corporate IT systems, new product development and investments in eliminating single points of failure.

For the first quarter, revenues are expected to be in the range of $245 to $247 million. Cash gross margins for the quarter are expected to be approximately 64%. Cash SG&A is expected to be approximately $46 million. Adjusted EBITDA is expected to be in the range of $110 to $112 million. Total cap ex for the quarter is expected to be between $110 and $130 million which includes approximately $20 million in ongoing cap ex.

As the market continues to recover, we find ourselves very well positioned and at an interesting intersection of an improving economy, an increasing corporate IT spending environment, continued Internet growth, the development of cloud computing, increasing demand for our low latency solutions from our customers and all in the context of an undersupplied and space constrained marketplace. All of these trends have been driving our growth and tilting the playing field in our direction the past several years given our unique business model.

Given the combined annual growth rates of all of these trends over the next several years, you can expect us to continue to grow and invest in this business with the same level of discipline and expected returns we have always had. I’ve just recently returned from our three regional 2010 kick off events and I can honestly say that our team around the global is as motivated about our strategy as they have ever been. More importantly, the Equinix team is real excited about executing on our 2010 plan.

With that Operator I will now turn it back over to you for some questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from David Barden – Bank of America Merrill Lynch.

David Barden – Bank of America Merrill Lynch

I guess two if I could, the first one was just following up maybe Steve on the comments you made about the $110 million of the cap ex is kind of earmarked for projects that you haven’t really solidified yet, presumably new capacity builds that would impact 2011 expansion and growth. If you could clarify or confirm that, that would be helpful. The second, on the sequential monthly revenue per cabinet improvement can you kind of speak specifically to the relative impact to the pricing dynamics versus mix shifts within the demand profile from more advanced space, etc.

Stephen M. Smith

Let me start off with the first part of that and maybe Keith could address the pricing issue on that. The $110 cap ex that we signaled is made up of three buckets, $15 million for maintenance cap ex – is that the question you were asking David?

David Barden – Bank of America Merrill Lynch

No, you made a comment about roughly $100 million of cap ex related to projects that you weren’t ready to discuss yet and presumably that was going to be new builds related to 2011. I just wanted some clarification.

Stephen M. Smith

I’m sorry I thought you were referring to the $110. So the $110 that’s for other projects, that other activity that we have going on internally that we run through our internal review process, take to our board before we take it externally to the market. So there are several markets where we are watching the fill rates and we’re tracking the pipeline and all the stuff that we track in those markets and then when we make a decision to proceed based on fill rate analysis and when we think we’ll go dark or restricted, we make a decision, we run it through the internal gauntlet and then we kick it externally.

David Barden – Bank of America Merrill Lynch

So that would explain if the market was kind of expecting $400 million cap ex, you’re looking at $400 to $500 million and the reason why we don’t see it on the build plans is because we just haven’t solidified it yet?

Stephen M. Smith

Correct. On that piece that is a correct statement.

Keith D. Taylor

On pricing David, hopefully what is happening is if you think about pricing and I call it on a spot basis with our service offering, pricing is remaining firm and stable, that is what we like to say with our investors and the people on the call today. So from that perspective, you’re not seeing any meaningful increase from a price point perspective other than customers are buying more products and services per average unit of measure today than they have in the past.

Certainly as we’ve got higher powered cabinets today in all of our newer builds, customers are buying more power than they did in the past. So we typically think about 3% to 5% price increases on an annual basis but part of that and in addition to that part of it is customers are buying more products and services so incremental cross connect or additional power circuit and that’s one of the key drivers in our growth, particularly in the US.


Your next question comes from Chris Larsen – Piper Jaffray.

Chris Larsen – Piper Jaffray

Just a quick clarification, as I look at the guidance midpoint suggest EBITDA is relatively flat but revenues is up and I just want to clarify that is the extra or the incremental costs from the new facilities that you’re bringing on right now that you announced today before they get any revenues? Then secondly, Steve you mentioned something about cloud and I think there is a lot of investor concern that the cloud is going to have some sort of a negative impact on you. Are you seeing any comments from the customers on the enterprise side, “Hey look we’re going to start using somebody’s external cloud as a way to blunt our datacenter demand in the long term?” Or, any sort of pushback so far from your customers like that?

Stephen M. Smith

Let me address the cloud piece first Chris. It is a good question but we’re positioning ourselves right now to be kind of the home of the cloud so for managed service providers the platform and the software guys and the infrastructure guys that are all deploying cloud, private and public deployments, we’re targeting several of these players to deploy their infrastructure with us and then provision the cloud offerings out of our datacenters. So, I think we’re very, very well positioned.

Quite frankly, after we’ve done an inventory Chris of everything that we’ve accumulated here over the past several quarters, it’s quite amazing how many cloud deployments that we’ve had in the past that were not necessarily referred to as cloud but certainly today we’re accumulating at a pretty high pace, people that need infrastructure that don’t have the infrastructure internally to provide the cloud services. I think we’ll as we were for a lot of the peering networks, we’re going to be a home, kind of the on and off ramps to a lot of the cloud as it continues to be deployed.

Keith D. Taylor

So Chris just on the first point that you had asked when you look at EBITDA from a margin perspective or if you look at it just on an absolute dollar basis quarter-over-quarter we’re relatively flat. There are two reasons for that, number one similar to what we’ve seen in all prior years, Q1 you have all the annual resets of all the employer taxes and of course we have a bigger employee base today than we’ve had before so we’re going to feel the impact of that in Q1, what we refer to as the FICA rates and Medicare, less Medicare but more FICA.

The second piece is as Steve alluded to we have certainly a number of new employees with the company and a lot of those employees were hired during the second half of the year so you’re not going to feel the full annual impact of that in 2010. Of course, some of that you’re going to feel it immediately in sort of the Q1, for those that were hired in Q4, you’re going to feel the full quarterly impact of that. So for those two reasons, that’s why you’re effectively seeing flat quarter-over-quarter EBITDA despite the revenue growth.

Then the other thing I would like to just say relative to the comments I made and Steve discussed as well, the company is investing very heavily in the initiatives that we talked about, sales and marketing and operations on new product innovation and so between those two, it’s $15 million in the SG&A line and roughly $15 million in the cost of revenue line. Between those two points you’re effectively impacting annual margins by roughly 2% to 2.5% from an EBITDA perspective. But, we absolutely think it is the right thing to do for the business.


Your next question comes from Simon Flannery – Morgan Stanley.

Simon Flannery – Morgan Stanley

You mentioned on the call about contract length extending out for some of your new business that you’re signing. Can you give us a little more color on that? Is that initiated by the customer or is that something you’re looking at? And, how do you think about the trade off getting your pricing flexibility every two or three years versus getting more revenue certainty? Then also if you could just review the comments around churn dipping down in Q4 but returning back to the sort of 2% level in Q1. What were the specifics around that delta?

Stephen M. Smith

Simon on contract lengths we are incenting the sales force globally to look for with key customers longer term contracts. That’s not with any customer but generally for customers that are key parts of ecosystems or key magnetic type customers we have incented the sales force to look for long term contracts. Obviously, as you point out there is going to be a trade off so if you’re asking a customer for a longer term, they’re going to look for something in return so there is some of that that obviously goes on but for certain key customers we’re willing to make those bets.

The sales force does a very good job with ceilings and floors and managing within that and as I’ve said in the past, Keith and I just do not have to look at very many deals out of the sales force that have to go outside of the boundaries that we hold them within. We’re managing that very well. We do want to look for more term in certain cases but in other cases we’ll have the one to two to three year contracts and they will provide us the opportunity to renegotiate and in some cases increase price where appropriate and in other cases not. So we’re going to see all flavors on the contract length but it’s working really well for us.

Keith D. Taylor

On the churns, there’s two things, in Q4 we saw basically a reduction in MMR churn, part of that is just timing issues you can appreciate and so we ebb and flow in each quarter. What we wanted to do was recognize that we had lower churn in Q4 but as we plan and look forward we want to go back to sort of guiding yourselves so you and the rest of the people on the call so we think 2% is a reasonable churn and it’s for a couple of reasons.

Predominately we don’t lose customers to our competitors, we typically lose customers to consolidation or to the end source they have financial difficulties and we just think that’s a reasonable level to expect for the business as we look forward. So we’ll continue to update you as we always do and if we see something on the horizon that would alter the decision either higher or lower than that we’ll guide you to that as well.


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

Srinivas Anantha – Oppenheimer & Co.

Steve, in your prepared remarks you mentioned the bookings and the pipeline, I think in the past at least you quantified the percentage of bookings growth. Is that a metric that you can give this quarter? Then also, apart from financial which are the other verticals that you are experiencing strong demand?

Stephen M. Smith

I’m not sure we’ve ever quantified the bookings growth. We tend to collar whether it’s a record booking. We’ve had some of that in the past. To be quite frank, the way to think about bookings right now is it’s remaining strong across all regions and primarily strong across financial and network. We’re seeing good uptick in enterprise as I mentioned. The one area that I would tell you in this last quarter if you were to look quarter-on-quarter where it fell down a little bit was in the digital media segment, not a surprise when you consider some of the players that are in that digital media segment but, not a big drop off but it really fluctuations quarter-to-quarter.

So, pretty flat experience across the three verticals with as I mentioned in my remarks best growth in the financial services, a pickup in cloud and a good pickup in key enterprises as I think about the quarter. The pipeline still remains strong, it’s the highest pipeline we’ve ever had in the US and probably the key thing if you missed it in the remarks was that we’re doing lots of cross border deals so we have probably had the most cross region deals this quarter than we’ve had in the history of being global, in excess of 50 deals.

We’ve been in the high 30s and low 40s in each quarter, deals that are deployed in multiple regions, it just continues to step up each quarter which is a great signal for us because it signals that we’re differentiating globally and customers are deploying with us in multiple metros on a deal.

Srinivas Anantha – Oppenheimer & Co.

Keith one question, on ARPU you said the pricing was pretty firm, if I’m looking at the ARPU growth this quarter which his double digits at least in North America, how much of that is actually coming from customers moving to higher power density cabinets as opposed to folks just raising the underlying cabinets pricing?

Keith D. Taylor

We haven’t really been raising the underlying cabinet pricing. Clearly, our sales organization negotiates with every single customer on every contract and pricing has remained firm when you look at it on service offering perspective. So a lot of the growth is really coming from the fact that we are selling , we had a very strong quarter from the interconnection perspective so certainly that interconnection unit is not attached to a specific cabinet per say so that certainly helped number one.

Then number two, as you’ve aptly pointed out the asset that we sell today, we have an expectation, they are four and five KW per cabinet asset and so we expect pricing to be in the $1,800 to $2,200 price range and so it only makes sense as you add more and more revenue and opportunity that you’re going to start trending towards that expectation. So it is customers buying more product and services per average unit of measure.

Stephen M. Smith

I just want to point out that in the US we’re actually in the middle of that range today in the fourth quarter so I think the range we’ve been bracketing that about, that Keith and I have been talking about we’re right in the sweet spot today of the US market.


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

Jonathan Schildkraut – Jefferies & Company

A couple of questions, first in terms of the sales force expansion and the headcount that you’re going to add, is this going to come along maybe with a little bit of restructuring around the sales effort? Are these people going to be vertically focused, geographically focused? And, how might you alter your sales effort? Is this about again expanding your reach? Secondly, it seems like you might have changed the accounting for your recurring revenues? As I looked through the historical numbers I wonder if we might get a little more color there?

Stephen M. Smith

On the sales force side you’re exactly right. Let me give you a little bit of color so people have perspective on this. We’ve got to be one of the unique companies that are approaching a billion in revenue with somewhere sub 75 around the world of sales people. So as we put together a three year operating plan with the board and our management team and we looked at the scale of this business and how much gross bookings we need to do Jonathan as we think about the next three years, we need more feet on the street.

So we made a conscious decision to add and I’m going to directionally color it somewhere just under 40 heads around the world as part of this 2010 plan. They will be vertically focused. We have been vertically focused for most of 2009. I think if you caught the theme of the message today we’re getting very, very ecosystem/vertically focused in terms of how we’re going to market so we’re going to be paying a lot of attention to targets, key next prospects in an ecosystem.

We know who we have, we know who we still want to get and the marketing organization under Jarrett’s direction has gotten very granular to get very targeted and prospected so we’re going to go after a lot more new logos this year. We know who adds density to these ecosystems and that’s the primary focus so you hit the nail on the head.

Keith D. Taylor

Jonathan on the second question that you had, we have gone through in Q4 a reclassification effort between non-recurring revenue and recurring revenue. This is ultimately what happened, so we have changed just so you know what is being reported this quarter and any of the other reporting metrics in our public disclosure you will see that we’ve now restated it to reflect this change in classification and you’ll also see in our 10K which we’ll file over the next coming weeks.

But ultimately what we did is we have a sales allowance we’ve basically said that we reserve against the customer and [inaudible] was a perfect example of that last year where we actually took a full provision against revenue. When we put that reserve we put it up on the balance sheet, any changes to that reserve we were applying to the non-recurring revenue because it was sort of ebbing and flowing with the decisions we made.

In consultation with PWC it was better suited to actually marry it up against the revenue in the recurring section so net revenue didn’t change, all we did was take that reserve now and we’re now allocating it in to the recurring section of the income statement versus the non-recurring. So we’ve gone back and effectively reclassified it for all of the prior periods to reflect that change in classification.

Jonathan Schildkraut – Jefferies & Company

Not to throw any more work on Jason’s desk but is it possible that we might get four quarters of historical data put up on the website?

Keith D. Taylor

We’ll put something up on the website for everybody. We actually have something that will highlight it all and it’s very synched and we’ll put that up in the coming days.


Your next question comes from Michael Rollins – Citigroup.

Michael Rollins – Citigroup

Just a couple of questions, the first is if you can talk, I think Keith you started to talk about this at the beginning of the Q and A period about the pickup in the ongoing cap ex and if you can break that down I think you were going to give some segments of maintenance versus other pieces. Then, how should we think about this number going forward in terms of what a good maintenance cap ex or ongoing cap ex is for Equinix?

Then just the other question just thinking conceptually about SG&A, if I look at it annualized the first quarter it’s like $184 million, if you look at the guidance for the year of $200 to $220 it’s kind of suggesting like a $16 to $32 million pickup over the course of the year depending on what you pay these 40 people it’s a piece of it. Can we talk a little bit more about how to think about this incremental investments in other buckets of where it goes and what kind of revenue augmentation can you get for that over time? What do you think the pay back is for this investment?

Keith D. Taylor

Let me deal with cap ex first and then Steve and I will tag team the second question. First, on ongoing cap ex, realistically we expect it over the longer period of time to be 5% of revenues, that’s what we think. That 5% typically relates to both success based cap ex and then sort of very specific cap ex. So what we’ve done this year is we’ve made some very substantial – we’re highlighting what we think are going to be some very substantial investments.

First and foremost we said we think roughly $15 million of cap ex out of this $100 million will be in true maintenance cap ex so we’re doing something to the IBX to deal with a maintenance issue. Then we’ve said $40 million will be success based, that’s basically customer installations and the customers pay us for that as you know so a we book more we expect that number will continue to grow.

But ultimately as I said, that’s a net neutral cash flow item because the customer do pay us for it and we recognize it ratably over a deferred installation period. The bigger piece that we’ve highlighted this time that we haven’t highlighted before was really what we call single points of failure, IT systems and new product innovation. So that’s a $45 million bucket and if I could break that down for you we’re going to spend roughly $10 million on our EPR solutions. It’s basically going to single global instance, it’s developing global customer portal and doing a lot of things like that around our IT platforms and that’s where Brian will be working with Jarrett to make sure we have a good robust system to deal with the product side of the equation, the customer side of the equation and then allow us to operate more efficiently as a business. That’s a $10 million investment this year.

Then we’ve earmarked up to $25 million in new product innovation and that’s really touches on the Ethernet sort of solution and Jarrett’s here so we can probably defer to Jarrett on some of the discussion there but ultimately that’s a big investment that not only the team wants to invest in, we think it’s right for the business, that the board wanted to invest. The last piece of the bucket is effectively what we call single points of failure.

When we do operational reliability reviews when we’re hiring some of these staff members we’re figuring out that we have a single point of failure and some you could probably call it maintenance if you want. In fact, what it is, is we’re augmenting an IBX because we see a point of failure and most of that money is going to be directed towards Europe and so that’s the fourth bucket.

I think we probably captured everything that you’re looking for Mike on that and let me just stop there and pause for a second and see if there’s any follow on questions for Jarrett or Steve relating to new product innovation?

Michael Rollins – Citigroup

Well, if you want to go in to more details just maybe about some of the initiatives that you’re working on it would be great to learn more.

Jarrett Appleby

In terms of some of the key opportunities that Keith mentioned Ethernet, switch fabric, it’s deploying much like we did on the peering community seven or eight years ago. It’s deploying out on a global basis. We announced starting in four markets with the partners and we’re going to go deeper with a second quarter launch and the associated portal and tools associated with that so you’re going to see investments like that. Those tools will be used by network folks, financial services company and the cloud providers. Again, it’s building out the product platform and scaling that on a global basis over the course of the year. Those are the key investments that I think we’re talking about here.

Stephen M. Smith

I think on the last question just to size it for you Michael, we told you that we hired right around 200 people last year. In the plan this year call it in the order of magnitude of 250 to 260. We’ll manage that through the year and so in that there’s as we’ve mentioned here a couple of times, sales and marketing operational people. Just on the sales thing, I think your question was have you guys figured out the return on investment on the sales people. As you know, it will take months to hire these people.

Let’s just take the US for example, I think we’re hiring 16 or 17 more in the US. It’s to get better coverage, to get more prospects covered, to get more targeted in these key ecosystems. Depending on when they’re hired, when they get on board, the productivity of these guys can take anywhere from six to nine months. Is there a model built that shows the productivity of this thing? You bet, it’s all built in to the numbers we’ve given you today. But, I don’t know if I can crisply net out by region or by headcount what that productivity is going to look like.

We know based on the number of feet on the street we have today we’re not covering the market for the number of opportunities that are passing around the market. We’re missing lots of stuff. So just in order to hit the gross bookings target that we built in to the three year plan, we know we need more feet on the street just based on baking in to quota percentages and productivity of the current sales force. It’s a pretty safe bet that you can feel comfortable that we know what the heck we’re doing in terms of how many to hire, when to hire them and when they’re going to start returning benefit to the company.

Keith D. Taylor

Mike, if I could just say one other thing to what Steve said, certainly at the CITI conference one of the questions you asked or you pointed out, you suggested that the 2010 plan looked more like back ended plan if you were looking at the plan in the S4 that we had filed on the Switch and Data transaction. So a lot of what you’ve heard Steve talk about and he also mentioned it in his script is basically it’s a three year rolling plan and we do expect to increase the amount of activity that goes through the systems and the productivity of the team and how much activity is in the business.

Because of that, you need a larger sales organization and for all of those reasons that’s why you’re seeing us make the investment today. It is a sizeable investment and again, just to clarify for everybody on the phone, we’re looking at roughly $15 million in the cost of revenue line and roughly $15 million on the SG&A line that’s incremental to our standard growth year-over-year, that’s discreet to these four initiatives that we’ve really talked about.

Stephen M. Smith

Mike, the only thing that I would add that I probably should have stated and it was kind of teased out by Jonathan in the previous question is we will be hiring these sales executives as subject matter experts by vertical. So we expect the productivity of these folks to be quicker than just hiring a generic sales person. So I think we’re going to see good return pretty quickly on these folks.

Michael Rollins – Citigroup

If I could just throw in one other follow up which his were there any one time benefits or transitory items in the pickup in non-recurring revenue during the quarter?

Keith D. Taylor

It was relatively flat quarter-over-quarter Mike. So there was nothing that was out of the ordinary. We didn’t have any equipment sales or things like that in the quarter of any size anyway.


Your next question comes from Jonathan Atkin – RBC Capital Markets.

Jonathan Atkin – RBC Capital Markets

Two quick questions, one I’m curious Keith mentioned seeing signs of improving economy, I’m wondering if that’s manifesting itself in any notable trend in terms of the book to install intervals? Then on international the Shanghai project, I’m wondering if that might be a model for how you would consider entering other international markets?

Stephen M. Smith

On the improving economy I would tell you quarter-to-quarter I would tell you the book-to-build interval is pretty flat. We are tracking that as one of our key indicators. No meaningful change quarter-on-quarter so I would tell you we’re managing ramps and free months and all the rest of the stuff pretty tightly and we’ve seen that really start to tail off here as we’ve gotten through the year so we’re pretty comfortable with where we are in book-to-build interval and again we’re checking it pretty closely.

On the Shanghai, certainly in emerging markets it’s a great model. We’ve been studying the Shanghai market for some time now. We know the size of the market, we know how many datacenters are there, we know the utilization of the current datacenters, we’ve combed through a couple of key players, we’ve spent time with the partner that we’ve selected. They’ve visited us here, Keith and I and other several executives have visited them there, we’ve done due diligence.

It’s a great market as you guys know to get started. There’s really only three primarily telcos in that market. China Telecom alone is roughly 74% to 75% of the market, China Unicom and China Mobile, they’re all connected in to this datacenter that we’re going to be dealing with. A very large market, lack of carrier neutral suppliers in this market, not a lot of high quality datacenters in this market, not a lot of expertise in this business so we’ll partner with these guys.

We’ll bring our brand, we’ll bring our customers, we’ll bring our expertise to the market. We’ll start small, we’ll fill that cabinet capacity up and we’ll grab another chunk. Ultimately this could lead to a larger relationship. So certainly in an emerging market this is probably the model we will follow.

Jonathan Atkin – RBC Capital Markets

The margin profile, how might that look?

Stephen M. Smith

I would tell you it is going to be very similar to what we experience in the Singapore market today.


Your last question comes from Colby Synesael – Kaufman Brothers.

Colby Synesael – Kaufman Brothers

Just one real quick question, you mentioned I think in your prepared remarks that you had some revenue come from delayed billings during the quarter. Basically I think things that you delayed from the first half of the year. I’m wondering if you could break that out and whether or not that’s non-recurring. Then second, I was wondering if you could talk about the competitive landscape, particularly as you look at regional providers whether or not you’re seeing new competitor or new facilities and whether or not you’ve seen an impact from them in terms of winning or losing business?

Keith D. Taylor

I’ll take the first one and then I’ll push the second one to Steve. What I refer to at least in my prepared comments, what I was referring to was that in the beginning part of the year, the first half of the year, we were using all sorts of selling techniques to bring in business and in some cases we had delayed billing and/or what we call ramps which basically the customer gets a ramp in to their commitment over a period of time.

We had alluded to the fact that by Q4 all that we had negotiated would actually start billing in the quarter and all I was trying to do was allude to the fact that we’ve now got the benefit of some of these items billing. So it’s not a one off it’s a recurring bill, it’s sitting in our recurring revenue and it’s something that you’ll see going forward and as Steve said we’re certainly monitoring our additional or our future ramps and delayed bills but as a practical matter it’s not going to be as significant as we’ve seen in the past I believe anyway.

Stephen M. Smith

Colby I would tell you on the competitive front, no meaningful change from what we’ve been reporting in the past. There certainly is a pickup in point solutions in certain markets where our datacenter in a market or two whether it’s privately backed or whatever the source is, we are starting to see more builds. The wholesalers still continue to build so the REITs are continuing to make decisions but in general we’re not seeing any new competitive threats in any particular metro or even certainly no pan European, pan Asian or across US markets that is different than anything we’ve faced the last several quarters. It has picked up there is no question about it but again it’s in point solutions, small, very small builds that we’ve watched.

Colby Synesael – Kaufman Brothers

If I could just add a quick follow up to that, some of these providers I understand actually build fiber based connections from their facilities to your facilities and their marketing pitch is that they can get the same access to the inter connects in your facility and give that to their customers at a cheaper price. Is that a long term risk to you guys or do you find that as something you’d like to continue to do.

Stephen M. Smith

Well, we’ve enabled it in some cases historically and it’s really only in a couple of markets where that type of situation exists in any meaningful way. So is it a long term threat to us? No, I think the way we contract and the way we build our relationships with the folks that are capable of doing that, we know what’s going on and I think part of it is it’s part of the ecosystem so as long as you’re going to be in these ecosystems some of that stuff is going to take place and it’s all part of the larger landscape. Jarrett I don’t know if you’d have anything to add to that?

Jarrett Appleby

It happens to be larger footprint deals that wanted to have their [inaudible] to systems and some of it we enable because they want either a larger footprint but still need our capability so no long term threat. In some ways we embrace it.

Stephen M. Smith

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


Thank you for everyone’s participation. You may disconnect at this time.

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