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Equinix (NASDAQ:EQIX)

Q4 2010 Earnings Call

February 09, 2011 5:30 pm ET

Executives

Stephen Smith - Chief Executive Officer, President, Director and Member of Stock Award Committee

Katrina Rymill - Director of Investor Relations

Keith Taylor - Chief Financial Officer and Principal Accounting Officer

Analysts

Colby Synesael - Merriman Curhan Ford

Jonathan Schildkraut - Evercore Partners Inc.

Mark Kelleher - Dougherty & Company LLC

Frank Louthan - Raymond James & Associates

James Ratcliffe - Barclays Capital

Jonathan Atkin - RBC Capital Markets, LLC

Michael Rollins - Citigroup Inc

Scott Goldman - Bear Stearns

David Barden

Operator

Good afternoon, and welcome to the Equinix Conference Call. [Operator Instructions] I'd like to turn the call over to Keith Taylor, Equinix's Chief Financial Officer. Sir, you may begin.

Keith Taylor

Thank you, and welcome to everybody on the call today. Before we get started on the call, I'd like to take a moment to introduce our Investor Relations team, which has now doubled. Joining me today is Katrina Rymill, our new Vice President of Investor Relations, who recently joined us from CyberSource. Also with us today is Jason Starr, our Senior Director of Investor Relations. And with that, I'm going to pass it over to Katrina.

Katrina Rymill

Thank you, Keith. Good afternoon, and welcome to today's conference call. Before we get started, I'd like to remind everyone that some of the statements we will be making today are forward-looking in nature and involve risks and uncertainties. Actual results may vary significantly from those statements, and maybe affected by the risks we identified in today's press release and those identified in our filings with the SEC, including our most recent Form 10-K, filed on February 22, 2010, and most recent Form 10-Q, filed on October 29, 2010. 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 exclusive public disclosure. In addition, we will provide non-GAAP measures on today's conference call. We provide a reconciliation of those measures to the most directly comparable GAAP measures in a list of the reasons why the company's uses these measures in today's press release on the Equinix Investor Relations page at www.equinix.com.

We would also like to remind you that we post important information about Equinix on the Investor Relations page of our website. We encourage you to check our website for the most current available information. With us today are Steve Smith, Equinix's CEO and President; Keith Taylor, Chief Financial Officer; and Jarrett Appleby, Chief Marketing Officer. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of wrapping this call up in an hour, we would like to ask these analysts to limit any follow-up questions to one. At this time, I will turn the call over to Steve.

Stephen Smith

Thank you, Katrina. Good afternoon. I'd like to welcome everyone to our fourth quarter earnings call. I'm pleased to report that Equinix delivered strong financial results in the fourth quarter. Revenue was up 42% over the same quarter last year, which includes revenue from our acquisition of Switch and Data, and up 18% organically over the same period. Bookings during the quarter were solid across all three regions and the pipeline remains very healthy as we enter 2011. We also had strong interconnection growth, with a significant pickup in cross-connects, exchange ports and traffic on our switches. Our business has continued to perform extremely well, which clearly demonstrates the strength of the Equinix value proposition to customers across all of our industry vertical. For the year, revenue grew 38% and adjusted EBITDA increased 33%, finishing off another outstanding year of top and bottom line growth. In 2010, we invested approximately $465 million in 29 IBX expansion projects globally. We expanded organic cabinet capacity by 19%, and with the Switch and Data assets, we now have well over 6 million gross square feet of data center space, the largest co-location footprint in the world.

Total traffic in our Equinix exchange offerings surpassed the one terabit per second milestone and continues to grow at a rapid rate as it becomes a key exchange for Internet traffic for our customers. The Equinix operations team has managed our IBXs to over 6 million of availability across a global platform, which was a direct result of the investments we made in operation reliability in 2010. And finally, we've made good progress on Switch and Data cost synergies and are building revenue momentum, with strong bookings in a growing pipeline. We expect this asset to be fully integrated, including all systems work, by Q2 this year.

As we look forward into 2011 and as highlighted on Slide 4, there are several trends that will continue to drive our growth. Mobile usage is skyrocketing, with mobile traffic predicted to double every year through 2014. IP traffic growth is expected to quadruple over the same time period, which is driving the continuation of the great Internet build out. Video and real-time applications are expected to grow five times over this period and are very legacy-sensitive. Additionally, there's a massive shift to virtualization and cloud computing, which is driving public and private cloud nodes into our data centers. We're at the intersection of all of these trends, and mission-critical applications are being deployed at Equinix because of our network density, operation reliability and global footprint. Equinix continues to win in our markets as highly interconnected premium data center space continues to be in high demand around the world. We expect demand to be strong in 2011, and we will invest in the business to capitalize on our long-term opportunity. We are out-investing and out-executing our competitors, and our success is about targeting the right customers and the right applications that favor our value proposition. Now let me turn it over to Keith to walk you through the results for the quarter.

Keith Taylor

Thanks, Steve. I'm pleased to provide you with a review of our fourth quarter results, including an update of our regional performance. So starting with Slide 5 from the presentation that we posted today. Global Q4 revenues were $345.2 million, a 5% quarter-over-quarter increase and up 42% over the same quarter last year, above the top end of our guidance range. This includes a $3.3 million increase in our non-recurring revenues, primarily related to a strategic customer installation in Germany and approximately $57.9 million of revenues from Switch and Data. Organically, revenues for the quarter increased 18% over the prior year. Gross bookings in the quarter were solid in all three regions, with particular strength in North America. For the year, total revenues increased over last year by 38% to $1.22 billion. Organically, total year revenues increased 21% to $1.067 billion. Foreign currencies were volatile in the quarter, primarily due to the sovereign debt issues across Europe. For the quarter, we had a negative revenue impact of about $1 million compared to our guidance rates and a positive benefit of $5.1 million when compared to the average rates used in Q3. Recent movement in our key FX operating currencies with adjusted Q1 guidance rates to $1.63 to euro, $1.58 to the pound and SGD 1.30 to the U.S. dollar. Our updated global revenue breakdown by currency for the euro and pound is 14% and 8% respectively. The Singapore dollar continues to represent about 5% of our revenues.

With respect to pricing, simply, it remains stable across our markets. As we noted on the prior calls, we initiated a project to conform and standardize certain key reporting metrics across each of our regions, and this includes the standardization of the Switch and Data metrics. The overall project is well underway. In Q4, we had particular emphasis on the churn metrics. For the fourth quarter, MRR churn was 2.5%, on target with our guidance expectations for the quarter. To be clear, we define MRR churn as a reduction in MRR attributed to our customer termination agreement and net pricing actions during the quarter divided by MRR at the beginning part of the quarter. Looking forward into 2011, we believe churn will improve over 2010 and return to pre-2010 levels of approximately 2% per quarter. Cash gross margins came in at 64% in the quarter. More utilities expense were offset by expansion drag in the Europe and Asia-Pacific regions. For the quarter, the net cost attributed to the expansion drag totaled $3.7 million or $12.5 million for the entire year. Cash and SG&A expenses were less than expected at $70.8 million, primarily due to slower-than-anticipated hiring. Adjusted EBITDA was $148.9 million for the quarter or an adjusted EBITDA margin of 43%, ahead of our expectations. This reflects better-than-expected revenue performance and lower-than-planned SG&A spending, although this also reflects higher cost of revenues related to the cost for goods for resale in Germany.

On a constant-currency basis, using the average rates in effect in Q3, our adjusted EBITDA would've been $2.1 million lower. Total year adjusted EBITDA was $544.8 million, a 33% increase over last year. Adjusted EBITDA margins were 45%, above the guidance levels provided at the beginning part of the year. Operating income was $195 million for the year, including $19 million of acquisition and restructuring costs. Our net income improved 23% over last quarter as we generated net income of $13.8 million or $0.29 per share on a diluted basis. This includes about $5.4 million of costs related to the early repayment of our Ashburn mortgage and a $7.3 million income tax benefit related to the release of valuation allowances in both the Singapore and German subsidiaries.

And one last global comment. We believe we'll not pay any meaningful cash tax until 2013 or potentially beyond, primarily due to an increase in our estimated scheduled NOL balance to greater than $500 million by the end of 2010. This meaningful increase is attributed to the Switch and Data acquisition and the federal stimulus programs.

Now I'd like to provide a quick review of the regional results in the quarter, including a bit of color on the non-financial metrics. So please, turn to Slide 6. North American revenues grew 2.5% quarter-over-quarter. Cash gross margins were 67%, in line with the prior quarter. Adjusted EBITDA was $102.5 million, a quarter-over-quarter increase of 5%. Organic U.S. cabinets billing increased by over 900 cabinets to 25,800, the largest quarterly increase in seven quarters. Cabinets billing related to the Switch and Data assets were slightly down in the quarter, whereby incremental cabinets billing were offset by our expected churn. Pricing remains firm in North America and continues to be at our targeted ranges. Despite a strong gross bookings in the quarter, our sales pipeline increased as key differentiators continues to drive our high win rate. During the fourth quarter, we added 105 customers across North America, our third consecutive quarter of customer add growth.

During the fourth quarter, we saw a meaningful increase in North American interconnection activity. Our organic cross-connect increased by 1,534. North American interconnection revenues, including Switch and Data, increased to just over 21% of recurring revenues. Switch and Data added over 540 cross-connects in the quarter.

Now let me give you an update on Switch and Data. Bookings in the fourth quarter were solid and we added 38 new customers, which is the second highest in the past eight quarters. We continue to make progress integrating our sales teams and educating them on Platform Equinix. This will allow them to position the Switch and Data assets to capture more applications. As previously noted, the integration is on track, and we are on target to be fully integrated by Q2 of 2011. Switch and Data adjusted EBITDA margin improved to 46% from pre-acquisition levels of 35%, an important proof point of our success in driving cost synergies from the acquisition. Over the past three quarters, we made investments in several of the Switch and Data facilities and are upgrading key sites to increase connectivity, redundancy and customer amenities. We continue to see strong bookings in the Switch and Data assets at a healthy pipeline. In fact, given that we've already closed our January books, cabinets billing, specific to the Switch and Data assets, increased by greater than 200 in the month, and we saw a meaningful step-up in revenues. Simply put, we anticipate an increase in Switch and Data revenues in Q1.

Looking at Europe, please turn to Slide 7. Europe had a strong quarter with revenues up 8% sequentially, up 4% on a constant-currency basis. Adjusted EBITDA decreased slightly to $27.7 million, offset in part by expansion costs, an increase in professional fees and a discrete increase in an employee benefit expense. Our investment in capacity and additional sales personnel has paid off as we saw strong bookings across Europe. During the quarter, our net billing cabinets increased by over 1,000, reflecting our strong bookings performance and the installation of a large footprint in Germany, replacing the churn we experienced in Germany over the prior two quarters. As mentioned previously, we expect to fully replace the revenue attributed to the Germany churn by Q2 of 2011 as the customer ramps its various deployments over the first quarter. Europe's average price per sellable cabinet equivalent increased by 3%, although unit pricing in local currencies remains firm for space and interconnection services. Interconnection revenues continue to increase, approaching 4% of EU recurring revenues. We added 1,250 cross-connects, with particular strength in our London and Swiss markets. In addition to our previously announced global expansions, we are announcing two new expansions in Europe, Amsterdam 2 Phase II and London 5 Phase II. Based on the strong demand and the early results from our Amsterdam 2 Phase I asset, we're proceeding with the second and final phase in Amsterdam. For London, we started construction of the second phase of our London 5 IBX, and we're continuing to grow our financial ecosystem, with deals such as Bloomberg, and we're adding customers across our financial enterprise and network vertical segments in the London market. Additionally, Germany remains a very strong market and economy. In our Frankfurt market, we're seeing growth in our financial vertical with non-banking customers, as well as positive activity in the cloud and IT services vertical. We continue to monitor our opportunities for expansion in this market. Separately, we elected to acquire Amsterdam 1 and 2 buildings at the end of 2010 for $14.9 million. We believe these assets are strategic.

And now looking at Asia-Pacific, please refer to Slide 8. In Asia-Pacific, revenues improved 9% sequentially and 4% on a constant-currency basis. Adjusted EBITDA was $18.7 million, down about 4% sequentially, impacted by incremental lease costs in Hong Kong and other expansion costs across the Asia-Pacific footprint. We added 59 new customers in the quarter, driven by strong financial cloud and IT services. Singapore now has the second-highest number of networks of any of our markets, only behind our Washington, D.C. campus. Cabinets billing increased by greater than 250 sequentially, with overall unit pricing steady. MRR per cabinet increased 6% sequentially and 15% year-over-year, largely due to currency. Overall, book utilization increased to 86%, highlighting the importance of our expansions that are currently underway in our core markets. Interconnection revenues in the region continues to grow and represents 11% of Asia-Pacific's recurring revenues. We added 725 cross-connects in the quarter.

Now looking at the balance sheet data on Slide 9. Our cash and investment balance approximates $593 million, a decrease over the prior quarter due to the repayment of our Ashburn mortgage, the purchase of our Amsterdam 1 and 2 assets and the payment of costs related to our construction projects. Looking on the liability side of the balance sheet, our total debt now stands at $2 billion, with approximately half of that comprised of convertible debt. During the year, we repaid $558 million of debt to create flexibility around our capital structure. Our blended cash interest rate approximates 5.8% and our current leverage ratio is roughly 2.4x Q4 annualized adjusted EBITDA.

Looking at Slide 10. As we have historically said, the cash flow attributes of the business are extremely strong. Our operating cash flow increased to $122.9 million for the quarter, an 8% increase over the prior quarter's $113.3 million. On a total year basis, we generated $393 million of operating cash flow or about 72% of our adjusted EBITDA. Our discretionary free cash flow for 2010 was $278 million, our Q4 annualized discretionary free cash flow was $362 million, an improving trend. We anticipate that our discretionary free cash flow will continue to trend upwards, consistent with the guidance details. We currently estimate our 2011 discretionary free cash flow to be $400 million or greater.

And finally, looking at Slide 11. Our ongoing capital expenditures for 2010 were $114.6 million, an increase over our prior guidance as a result of increased FX rates in Europe and Asia-Pacific and increased operational activity at year end. We continue to expect ongoing capital expenditures, which includes maintenance CapEx and CapEx allocated to single points of failure to trend to 5% of revenues. For the quarter, our total Q4 CapEx was $143.4 million, bringing our total year capital expenditures to $579.4 million, consistent with the top end of our guidance range. Now let me turn the call back to Steve.

Stephen Smith

Thanks a lot, Keith. Let me now shift gears and cover some of the key elements of our go-forward strategy and an outlook for 2011. In our 12th year in business, we are at an inflection point in terms of scale and reach, our vertical orientation and the overall customer value being achieved in our ecosystem. We crossed over the $1 billion mark in revenue in 2010 and expanded our global reach to 11 countries and 35 markets around the world. With our critical mass of customers and global footprint, we are uniquely positioned to capture market demand. As depicted on Slide 12, our next wave of growth and differentiation will be driven by five strategic elements, which will capitalize on the secular drivers underpinning the demand we continue to experience. The first is that we will continue to expand our global reach and scale. Our long-term goal is to build an unrivaled global data center footprint to power the interconnected world. This could take us to new markets, such as Latin America, Eastern Europe, the Middle East and emerging markets in Asia.

Second, we will continue to look for ways to improve our customers' business performance through increase interconnection inside our IBXs. Our focus on interconnection led to a record 12,773 cross-connects added for the year, a 27% organic growth rate. The Switch and Data cross-connects actually grew 78% to nearly 84,000. This is an important proof point of the success of our strategy. Network choice facilities competitive advantage, proximity to partners and suppliers improves performance and cross-connects accelerate deployment and reduce costs. Our vision is to become the interconnection point for the world's leading businesses.

Third, our strategy is to deepen existing ecosystems and grow new ones, leveraging our innovative business and traffic exchanges. For example, we intend to facilitate more electronic trading and help drive the growth in cloud and mobility. An example of this is in our Financial Services segment, which is our fastest-growing industry vertical and includes the electronic trading ecosystem. We saw gross bookings in this vertical increase 60% over the same quarter last year. We are at a tipping point where we see meaningful traction and now serve 55 exchanges and trading venues around the world, including eight of the top 11 exchanges. Our presence in the top 15 financial markets, combined with our network-dense data centers, makes us an appealing location for a very diverse electronic trading community across the globe. They are attracted to Equinix because of their ability to directly connect to each other and to top network service providers. And in spite of competition, we are seeing acceleration in this business. As these commercial exchanges ramp up and as their members connect, we've seen a significant increase in interconnectivity. We view the number and diversity of cross-connects as a key measure of ecosystem value. Financial services cross-connects to other financial services companies grew by 93% year-over-year in the fourth quarter. As we look at growing new ecosystems, we continue to see success in our cloud and IT services vertical. Today, we have amassed over 200 cloud providers, in excess of 300 IT service providers across Platform Equinix. New cloud deployments in this quarter includes Citrix Online, OpSource and RightNow Technologies. This vertical offers a broad set of application and infrastructure services to both enterprise and consumer customers. Cloud and IT service companies are increasingly connecting to each other as well as connecting to other vertical segments such as financial services, content and digital media and enterprise. Gross bookings in this vertical increased 35% annually as Software- and Infrastructure-as-a-Service companies, managed service providers and systems integrators are increasingly leveraging Platform Equinix for advanced service delivery to create more business value for their businesses and for their customers.

A third ecosystem gaining traction is mobility. As more data is delivered over wireless networks to smartphones, tablets and laptops, four of the top five U.S. smartphone platforms and three of the top five mobile OEMs are deployed at Equinix who access partners and networks to deliver advanced communications solutions for mobile end users. Next-generation mobile networks utilize Equinix to take advantage of mobile backhaul solutions, as well as peering on the Equinix Internet Exchange to gain access to popular mobile content, applications and social networking sites.

The fourth element of our strategy is to expand our vertical go-to-market plan. There are several dimensions of this part of our strategy, including focusing on applications that value our differentiation around interconnection, global footprint and our operation reliability. It also includes investing in our sales engine across all three regions to expand our market coverage and better align with our global accounts. We believe it is our sales force that is going to be a key leverage in the success of our strategy. We are increasing the quota-bearing sales force by 30% to 40% in 2011, as well as developing indirect channel opportunities. Our goal is to deepen our knowledge so we can sell to customers at a business and application level, rather than just selling data center space power.

And the fifth and final element of our strategy is to continue making investments in our global products, processes and systems in order to operate consistently around the world. Our global footprint is of significant value to many of our customers as they deploy across multiple metros, countries and regions, as highlighted by the fact that 56% of our revenues come from customers deployed in multiple countries. Multi-national customers want a single service level, global pricing and a global contract. Our goal is to deliver more consistent customer experience with Equinix across all regions because we see this as an important competitive differentiator.

Now let's move onto our 2011 guidance. For the first quarter of 2011, we expect revenues to be in the range of $354 million to $356 million. Cash gross margins are expected to be 64%. Cash SG&A expenses are expected to be $75 million. Adjusted EBITDA is expected to be between $151 million and $153 million. Capital expenditures are expected to be $185 million, comprised of approximately $25 million of ongoing capital expenditures and $160 million of expansion capital expenditures. For the full year of 2011, we are leaving total revenue expectation at greater than $1.5 billion or over 23% growth. Total year cash gross margins are expected to be 65%. Cash SG&A expenses are expected to be approximately $300 million. Adjusted EBITDA for the year is expected to be greater than $675 million.

Shifting now to 2011 capital expenditures. The announcement of the next phases of expansion in our Amsterdam and London IBXs, we now expect to utilize over half of the $100 million in unallocated expansion capital as outlined in our Q3 call, bringing our announced expansion capital to just over $250 million. With our momentum and our ecosystem strategy and as we look at fill rates into 2012, we are evaluating deploying additional expansion capital in both Europe and North America for 2012 growth, which would affect the overall capital plan for this year. As a result, we are raising our expected expansion capital to a range of $300 million to $400 million, and we expect the ongoing CapEx to remain at approximately $100 million. This brings our total CapEx guidance for 2011 to a range of $400 million to $500 million. In closing, we are thrilled to be entering the next chapter of the Equinix journey as we cross the $1 billion revenue threshold, and work to scale the business with prudent investment. Our goal is to become more technology- and application-savvy, and we want to target the right businesses and build those relationships. We have built a plan for 2011 that has us growing our company over 20% again. We are driving this business towards $2 billion in revenues, capable of generating 50% adjusted EBITDA margins with strong operating cash flows. As we grow, our global footprint becomes more valuable to our ecosystems, and we are fortunate that we are at a time when the demand and the trends in the market are pushing a lot of opportunity to us. So let me stop there and turn it back to you, Lisa, and open it up for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jonathan Schildkraut with Evercore.

Jonathan Schildkraut - Evercore Partners Inc.

Steve and Keith, I was wondering if you talk about some of the MRR action going on in the U.S. It looks like you came in a little bit coupled with some pretty strong performance in terms of cabinet adds. You also noted that Switch and Data cabinets had come down in the fourth quarter, but you were seeing some increase in demand in the first quarter. And I was wondering if you'd change your pricing strategy at all as it applies to the U.S. or the Switch and Data assets in particular?

Keith Taylor

I think, first and foremost, when we look in North America as a whole, we'd tell you that pricing remains firm. We're not doing anything specific to get more activity into Switch and Data assets. In fact, the buildings that we're selling into in the Switch and Data are the ones that are quite constrained and it happens to be the markets, like downtown New York, Palo Alto, Boston and Toronto. So it gives you a sense that where we're winning our business tends to be in very strong markets for us. It's fair to say, though, depending on what market you're going to, if you look at the Nashville market, it has a different pricing structure than that of a New York or a Silicon Valley. So there's nothing abnormal about what we're doing from a pricing perspective. And so how that translates into our overall metric? Strictly North America, if you look at organically or if you look at specifically, Switch and Data, the fact that we added a lot of cabinets this quarter, as you can see, organically it's well over 900. And because of that 900, as you can appreciate, like anything, there was a meaningful step-up in what we've seen previously. And because that comes with a lot of installation and it takes time for people to procure power and enter into interconnection activities, it can have a dilutive effect on an overall pricing. I think we've been very clear with the market over the last few quarters that we're happy where our price is, we think it's firm, we get a very good return based on the price points that we're at today. And so there's nothing abnormal about what's going on from a pricing perspective.

Operator

Our next question comes from Jonathan Atkin with RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets, LLC

I'm interested in the trends you're seeing in the size of the average customer deployments and what implications that might have for pricing. Additionally, I didn't hear this, maybe the mix of incremental revenues from existing versus new customers? And when you do add customers from your existing base or add revenues from your existing base, is the pricing comparable to what new logos are paying or is it different?

Stephen Smith

Let me start, and Keith can add a little bit here. But the trends, just for the average size deals, really haven't changed at all, Jonathan. We're still aimed because of the ecosystem focus on small- to medium-sized deployments. And that's where the sweet spot is for the company. We're still obviously seeing opportunities for larger deals. And if it's tied to an ecosystem and it's viewed as a magnetic strategic type of deployment, we'll find ourselves competing for that business. But in general, across the footprint, across all regions, we're getting very sharp in going after the ecosystem focus-type accounts. And that's where the energy is for the company. Between existing and new, I think the quarter was fairly standard, 75% on existing. So it came down a bit. We've been bouncing around the high-70s, low-80s. So it came down a little bit, a little bit more new logo focus. And I would tell you that's a little bit from the connection we have with creating market demand. So we've got a lot of activity going on in these verticals, where we know who we have and we know who we still want to go get. So there's pretty good activity going on today for targeting the next network, the next financial electronic trading venue. So we're getting very sharp in determining who we're going to go after. So I would expect the new logos will continue to grow.

Jonathan Atkin - RBC Capital Markets, LLC

And the pricing, is there any notable difference between what the existing versus new logos pay?

Keith Taylor

I mean, absolutely no. I mean, again, I would just tell you pricing is firm. As we've said before, Jonathan, as you can appreciate that each customer negotiation is separate and unique, and we price in a spectrum. And some will be higher than others, but it's not specific to a new customer or what-have-you. It depends on where the customer's deploying and how that factors into our return model.

Jonathan Atkin - RBC Capital Markets, LLC

And then finally, in Asia and Europe, I'm wondering what the kind of operational or region-specific factors might have been to explain the margin trends in each of those regions?

Keith Taylor

Well, the margin trend is really quite simple. As I mentioned, there's $3.7 million of cost going through the Q4 numbers and $12.5 million for the entire year, but a lot of emphasis in Q4 in Asia and Europe related to expansions. And of course, when you embed the cost and you have no revenue attached to it, it's going to be dilutive for a period of time. But it's fair to say, once those assets become operational and we start to fill them up, we're going to get back to our traditional margin levels. But it's the dilutive effect of growing the business and recognizing this is a big investment that we're making in Asia-Pacific. It's in all four core markets in our Asia-Pacific business. And because of that, it's very sizable and it's our smallest region, as you can appreciate, so it can have a very dilutive effect. As it relates to Europe, there's three primary factors, as I mentioned. There's the expansion drag, clearly. There's the discrete employee benefit matter that we had to attend to in Q4, and I don't want to be more specific than that, but it was roughly $700,000. And we've got that in the quarter. And then we have basically the seasonal rate impact in advance, our utilities. We have a higher pricing structure in the winter months in the European market. And so because of that, it dilutes basically the margins in Q4 and then the first half of Q1. So there's nothing outside of the norm, and our margins will get back to their traditional levels.

Operator

Our next question comes from James Ratcliffe with Barclays Capital.

James Ratcliffe - Barclays Capital

Could you give us a little more color on what you've seen in terms of development in market or in terms of opportunities between, say, the time of your analyst day and now that's really driving you to view the opportunity? Is it more attractive in justifying the additional CapEx spend this year?

Stephen Smith

James, since that point, we -- and I think we've been pretty clear on this. We review fill rates on a cadence here that's pretty steady throughout the year. And after the analyst day, towards the end of the year, as Keith and I and the rest of executives were putting together the 2011 plan, we had another deep-dive review into our fill rates. So the combination of a very strong exit rate in the fourth quarter, a look at the end of the year into fill rates going forward, and we can project fill rates out quite a distance. So we can look beyond a year or we can look into the following year. That's why we're talking about this affecting 2012. And as you guys know, depending whether it's a next phase or a new build, we have to have that kind of headlight on these decisions. But the bottom line is our fill rates, our bookings, our pipeline, the robustness of our pipeline, the demand in those markets and our intelligence of the competitive builds in those markets suggest to us that we have opportunity for more growth. And so you should expect that we'll remain very disciplined on how we do this, on the capital allocation, as well as the return thresholds. There's no change in how we're attacking or making these decisions. Even to the point where we have standing mechanisms now in the regions. And as global and the committee that our board houses that reviews these decisions, we have three sets of filters that to go through before we even make a capital decision. So it's a pretty rigorous process. So you can feel comfortable that we have very good visibility and feel very confident about this decision.

Operator

Our next question comes from Mark Kelleher with Dougherty & Company.

Mark Kelleher - Dougherty & Company LLC

I was just wondering about the churn. You're looking for that to go from 2.5% back to your historical levels around 2.0%. What gives you the visibility of that? And maybe you can give us more color on the trends you're seeing there in terms of competition affecting that churn?

Keith Taylor

I think, first and foremost, going through the rigor of conforming our metrics, in particular this one, we did a deep dive, and we looked at all of the different factors that could affect churn. What's probably most importantly, we -- as Steve and I came off our annual review of the 2011 budget exercise in the Asian market and the European market and certainly in North America, the team did a pretty deep dive on what they thought was the explosion points to churn. And based on that, those factors, and looking at what we could accomplish, it became clear to us that we saw more of an anomaly in the 2010 time period. And because of that, we feel comfortable now taking our numbers to the approximate 2% per quarter, or the 8% per year. And so it really was just a comfort around knowing that we're attacking it, we're looking at where we have opportunities to work with our customers, look for ways to mitigate churn and just recognizing that we feel that there is a couple of sizable churns last year that we talked about quite publicly. It's fair to say we don't see anything of similar size like that today in our markets. And I think I mentioned, and Steve was just able to tell me one other thing, we were also looking at the account reviews. We're doing our account-by-account reviews, and we get comfort as a business that can step back and look at how do we create value in working with the customers. I just think today, we're getting smarter and smarter about the type of customer we're bringing in, recognizing as we’ve churned in the past. A lot of that, as we talked about, is bifurcated churn where it takes their last legacy-sensitive stuff, moves it to a different service provider and keep the more critical applications with us. So we've absorbed a lot of that over the last sort of six quarters, and I just think we're in a much better spot today than we were a year ago.

Operator

Our next question comes from David Barden with Bank of America Merrill Lynch.

David Barden

I guess, just a first one, Keith, I think a lot of visibility on volumes and obviously a lot of top-down growth and obviously strength in bookings and such. And you can tell from the questions that people are really kind of zeroed in on this idea that somehow, all this volume has to come from price changes or that there's a risk of price changes. And people are constantly looking for that evidence, and one of these things that people, I think, are going to grab on to, as was mentioned earlier, this kind of downtick in North America Monthly Recurring Revenue per cabinet. Could you make a stronger statement about what you think Monthly Recurring Revenue per cabinet is going to do in North America to kind of square with your view that pricing is stable? And I guess, the second question would be kind of just doing the math, looking at your fourth quarter revenue number, multiplying it by four and assuming that the churn rate kind of falls, maybe to halfway to 2%, that gets you another $45 million of revenue. That gets you to about $1.45 billion in total revenue for the year. And that's not even selling anything really new for the year, which we know you're kind of on track to do. So it kind of feels like we're teeing up a pretty conservative baseline with a $1.5 billion revenue. Is there something wrong with the math that I'm kind of outlining there?

Keith Taylor

I think a very good question, David. I think, first, let me deal with pricing. And we've been pretty clear over the last three quarters. If you looked at price point, whether we do it on a sort of period-end calculation or we give you a new calculation, or that was a new calculation we give you this month on this call or on a weighted-average basis, North American pricing trend between $2,026 and $2,069. And so we're playing in a zip code with a very large base of customers today. We've always been very clear that we think $1,800 to $2,200 per cabinet is a reasonable amount that you should expect based on our selling capacity. There's certainly going to be accounts that will be below that and there will certainly be accounts that are well above that. It is the averages that we're playing with. And so I'm just telling you that this thing's going to bump around for the foreseeable future. But I think the trend is that as long as we're focused as a company on getting the right customers and the right IBXs with the right application, our price point should continue to be firm. Now as I said before, if you look at any specific market, you try to compare a Nashville or a St. Louis to a D.C. or a New York or a Silicon Valley, the price points are going to be different. It's clear that the market price point in those markets will be lower. And so if we sell into a lower-costing market, then that will have a dilutive effect as well. And as long as we are clear with you that pricing remains firm and we're getting what we want, I don't think you should have any concern about the price trends. And we'll continue to be very clear about that, and where we can, we'll identify or isolate things that might affect our prices going up or down over the next few quarters. Second question, just on our trends, Steve and I have been very clear, certainly, when we met people one-on-one or in sort of the larger conferences, that we're making large investment in the organization this year. We're investing very heavily in sales organization, our commissionable sales people, they're going to increase to 30% to 40% this year. And that's not going to have a meaningful effect, if you will, on revenues related to 2011. So what it does do, if we do our job right and we get productive sales people in the seats, our general view is we're going to sell more in 2012 than we did in 2011. And likewise today, I'd tell you that we anticipate selling more in 2011 than we did in 2010. And because of that, you should see a ramping effect through the year. At each quarter, you should see revenues continue to ramp. And we have the cumulative effect of that, where it would get you to a number that we feel very comfortable with. And right now, we are leaving it at greater than $1.5 billion.

Operator

Our next question comes from Jason Armstrong with Goldman Sachs.

Scott Goldman - Bear Stearns

Scott Goldman on for Jason. One, just on capital spending expectations in the first quarter, a little bit higher than where we were. And if you kind of take the low end of your guidance range, you're almost spending half of the full year in the first quarter. So maybe you can kind of talk about what some of the drivers are, whether that's the one in Amsterdam expansions that you announced today? And then secondly, hoping we could explore a little bit further on the hiring plans. You've mentioned a couple of times plans to expand the sales force by about 30% to 40%. Maybe you can give a little more detail in terms of where these hirings are going to take place? How should we think about the timing? And I guess, kind of a follow-up to David's question there, do you feel as though you're constrained and that's really why you have too many opportunities coming in and you just don't have the sales force to be able to tackle that? Or just really more about expanding the opportunity sort of on a go-forward basis from a sales perspective?

Keith Taylor

Let me take the first one, and Steve will take the second one. I think CapEx, simply put, yes, it looks a little bit front-end loaded. But there's a couple of things. As you know, when we report CapEx now, we're doing it on a cash basis. And although -- and so what you're seeing is there's roughly $90 million sitting on our balance sheet that was accrued through 12/31. Of course, we anticipate a fair bit of that is going to liquidate over the first quarter. But probably more importantly, our Asia-Pacific assets, we've been constructing in that market for a period of time. And we've got four relatively large builds going on in Asia-Pacific, and that's more front-end loaded. Our sense is that it is a big number, but we anticipate that a lot of that CapEx will get spent accordingly. And to the extent it doesn't, I'll be quite open. If it doesn't, it's likely it will just move into Q2. But it's our best guess right now on how we think the cash flow is going to move through the quarter.

Stephen Smith

Scott, on the second part of the question, as Keith noted, we are going to increase our selling engine capacity here by 30% to 40%. We started the journey at the end of last year. We actually did a couple of things. We hired a specialized search firm to help us find the type of talent that we're looking for, and we've been very, very successful with that. So we're right square in the middle of actually making offers and hiring. And I expect that the majority of that will be done by the end of the first quarter. So we've got a heavy load in front of us the next two months. There'll be some slippage to that. And then the second thing we did is we hired one of the -- we benchmarked the top three training firms in the world and we picked one, and we had them going for four to five months now around the entire globe with sales training tools, methodologies, techniques. And we're just bringing a common look and feel to how we're going to market. But the driver for this, as Keith noted, is with the size of the company today -- and I think most of you, we've been very clear that we've been running with 120 to 125 salespeople around the world. And we're going to increase that by 30%, 40% just to be able to cover the market, be able to better align with global accounts, as I said. And we're organizing them by industry vertical, so we're going to be very ecosystem-focused. We're going to get much sharper on bringing a business and application conversation with our Platform Equinix offering to our customers versus just selling in that market. We're going to be selling the whole global platform. All of these costs are embedded in our guidance. So this is all baked in, has been baked in. And as Keith noted, the size of the gross bookings required, as you look for in '12, '13 and '14, just gets bigger as this thing heads towards $2 billion. And it's a little bit of math, but we're going to cover our accounts much, much stronger. So it'll be a big lever for us. This, we believe, will be one of the prime differentiators of this company going forward. We're going to have one of the best sales engines in our market for sure.

Scott Goldman - Bear Stearns

How long do you think it typically takes a new salesperson coming on to kind of reach full productivity within your platform?

Stephen Smith

Historically, probably eight, nine months. We think we put some things in place that could accelerate that. And Keith and I and the leadership team are hopeful that because of the talent we're hiring, they're coming out of the industry verticals, so they have a Rolodex, they know the game that we're in. I think we can pull that forward to a six-month kind of a window is what we're aiming at.

Operator

Our next question comes from Colby Synesael with Cowen and Company.

Colby Synesael - Merriman Curhan Ford

I want to talk about margins. You talked about in your guidance having, I think, 64% gross margin in the first quarter but ending the year at 65%. Now just curious how you think we'd get there? Because obviously, with the additional sales force, there should be, I would assume, a cost associated with that. And obviously, you have other data centers that you're going to be building up throughout the course of the year. And then the final thing is you typically have some seasonality in the third quarter. So what gives you the confidence that we're actually going to see the margins at 65% for the full year? And then the other thing, just going back to the guidance question, in the past, you actually have put on a firm range. And clearly, you do have some serious visibility. I think, Steve, you mentioned that you guys already have some pretty good understanding of what your fill rates are going to be for a long time. And obviously, in the first quarter, you're giving us guidance range of just $2 million for both revenue and EBITDA. What's preventing you from giving us a range for the full year like you've done in the past?

Keith Taylor

From a margin perspective, 64% growing to 65%. First and foremost, the sales force is going to go in the SG&A line, so it's not going to dilute that line. And part of the reason we think we can get there, we're absorbing a lot of costs as you depreciate all the new leases, all of the new employees. So quite frankly, if you look at that incremental activity, our margins will be improving quite meaningfully as we go throughout the year because we're going to grow our overall margins to 65%, but we're absorbing the cost of these expanding assets. Our confidence is that the majority of our costs, as you can appreciate, are fixed. But the one we have to deal with is really the variable component, which is utilities. And the company's working real hard to look at how that impacts us over the year, recognizing there's some seasonality. Just for me to say that we have confidence on that line, Sam Kapoor, who runs our North American operations and has a global mandate as well, he's very good at managing the cost and managing the operating performance of the assets. And because of that, we're confident we can get to 65% plus.

Stephen Smith

And I think, Colby, on the second question on the fill rates, if I understood the question correctly. Our visibility on the fill rates and the expenditure of this capital is really going to affect us in 2012 and beyond. As Keith and I have said, we're in pretty good shape with capacity in North America and Europe as we look into this year. But the expansion capital that we've outlined today is based on the fill rate analysis that we've seen going forward.

Colby Synesael - Merriman Curhan Ford

Well, I think my question is more to do with your guidance and the fact that you have such high visibility. So obviously, for the first quarter, you're giving us guidance of just a $2 million range for both revenue and EBITDA. In the past, you've actually put on a little bit more of a specific range for the forward year and the first quarter. Yet this time, you're kind of keeping it open. Just curious, why, considering you have so much visibility into the business that you're not being more finite with your guidance for the year?

Keith Taylor

In the end, we think this provides us a little bit more flexibility. We want to get a little bit further down the road, if you will, in 2011 before we give you a refined guidance. But clearly, we have the visibility because we've closed our January books, as I said, or the near-closing of January books. So we have a good idea of what's happening in Q1. So we feel very good about that. And quite frankly, we have very high expectations for the team this year, both from how they're going to spend the dollars and cents and how much revenue we're going to generate. And we just want a little bit more visibility. And we're going to have an earnings call in roughly two months for now, and we can probably give you more visibility that point in time if we feel it's appropriate.

Operator

Our next question comes from Michael Rollins with Citi.

Michael Rollins - Citigroup Inc

Just a few on the revenue line. The first question was you highlighted, I think, it was from Germany, about $3.3 million in non-recurring revenue from the installation. Is that something that was really just a one quarter item? Or is it something because it's an installation-related revenue, it will recur? The second part of that was just trying to understand the margin implications. And I have a follow-up on recurring revenue after that.

Keith Taylor

As I said and again, I don't want to get too specific because we're not permitted to really talk about the specific customer. But it's fair to say there's a large installation in Germany. As part of that, in the German market, and particularly in Frankfurt, we sometimes do what we call goods for resale. It's at the request of the customer. In this case, you're right that our overall non-recurring went up over $3.3 million, but the specific goods for resale in Germany in Q4 was $2.9 million. And the implications of that in breaking that out is that typically will not -- we always have some goods for resale in some part of our business around the world. But this was a little bit larger. And secondly, the margin is typically only about 10%. It's more facilitation for the customer, it's not something that we really want to spend a lot of our energy in. And because of that, it can be very dilutive on our margin profile if we don't get a break it out. So we felt it was very important in this case to break that out. And so going forward, you'll see a little bit of what we call goods for resale. But again, that's not a big piece of our business. Most of our non-recurring comes from what we call deferred installation costs. It's revenue that we recognize over a period of two to three years, and that's what typically goes through that non-recurring line.

Michael Rollins - Citigroup Inc

And I just had another question on the recurring revenue side. I'm just trying to think conceptually about the third quarter versus the fourth quarter. And if I look at the recurring revenue growth in the third quarter, it was about $13.6 million. If I look at the growth in the fourth quarter, it was about $11.6 million. And I think about what was different about the fourth quarter than the third quarter. And the fourth quarter had a bigger FX spend. It had lower MRR churn and it had higher cabinet adds with an ending utilization that was higher for the overall portfolio. So were there certain factors that delayed or impacted the ability for recurring revenue to grow as good, if not better, than what happened in the third quarter?

Keith Taylor

So there's a couple of things that are going on. Clearly, as I mentioned, if you just look at the end of period cabinet adds, I think we're getting -- that's basically going to be forward revenue that we're getting, even the one in Germany that I referred to. We're not going to get the full run rate until Q2 of 2011 on that revenue. But they have installed the cabinets, and we're ramping up into it. So that's part of it. You're getting the dilutive impact of adding the cabinets without getting the full benefit of revenue yet. So that's certainly part of it. The other thing that we've absorbed, as you're aware, we had to address the churn impacts that we had in Q2 and Q3. And so we've felt the full impact of that now in our Q4 results and as we're starting into Q1. And then I guess, the third thing that I'll just tell you is that we've got a lot of activity. And so what I call the book-to-bill interval, so the time that we book contracts until we recognize revenue. The trend lines are positive, but there's a fair bit in what I would call our backlog that has yet to be billable. And so for all of those reasons, you sometimes can get anomalies. So I wouldn't overanalyze it at this point. It's a trend that you should pay attention to and we'll be paying attention to. But that's what's really going on.

Operator

And our final question comes from Frank Louthan with Raymond James.

Frank Louthan - Raymond James & Associates

The building in Europe, you talked about, you had a large customer that churned there and you'd said that you had already had that leased out at some decent rates. Is that related to that customer of that specific facility? Or should we look for that to continue to ramp up the ARPU in Europe as we move to the back half of the year?

Keith Taylor

There's two fairly large things going on. There's a large, what I call, installation or that special one-off that we dealt with in Frankfurt. Equally so in Frankfurt, there's the replacement of a large churn, and that's what is ramping up over into Q2 of this year. And so you're getting impacted by two things. You're seeing the investment in the non-recurring and you're seeing the customer install, but there's not a lot of revenue attached to it yet. And then equally, you're ramping up into this other large deployment, which is a large integrator who's got multiple deployments for customers in the German market. And so you'll get the benefit of that going forward in time.

Frank Louthan - Raymond James & Associates

And are there any facilities of maybe smaller facilities for Switch and Data that you would be considering selling this year? Or have you decided to keep all those facilities?

Stephen Smith

At this point, Frank, there is no activity to do that. We're really focused on making all these assets work. It's not to say that at some point, we won't cross that line and plan to divest. But today, I would tell you guys to think about we're going to make these assets work. A lot of these Tier 2 markets are becoming very attractive for us. We have a lot of customers that are deploying in multiple cities, close to their users, close to the edge of the network. So we still have time to play that out. We have all the focus and momentum focused on revenue synergies now. And so we're going to keep pushing hard into those Tier 2 markets.

Keith Taylor

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

Operator

Thank you. That does conclude today's conference, and you may disconnect at this time.

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