Jul 25, 2007
TRANSCRIPT SPONSOR
Executives
Jason Starr - Director of IR Stephen M. Smith - President and CEO Keith D.
Taylor - CFO Margie Backaus - Chief Business Officer
Analysts
Jonathan Schildkraut - Jefferies & Company Chris Larsen - Credit Suisse First Boston Mike Rollins - Citigroup Manuel Recarey - Kaufman Brothers Tom Watts - Cowen & Company Rodney Ratliff - Stanford Group Company
Operator
Hello and welcome to the conference call. This call is being recorded for replay purposes.
Today's presentation will be in a listen-only format. Following the presentation, there will be a question and answer session.
Instructions will be given if you would like to ask a question at that time. I would now like to introduce the host of today's conference Mr.
Jason Starr, Director of Investor Relations. Sir, you may begin.
Jason Starr - Director of Investor Relations
Good afternoon and welcome to our Q2 2007 results conference call. Before we get started, I would like to remind everyone that some of the statements that we will be making today are forward-looking in nature and involve risks and uncertainties.
Actual results may vary significantly from those statements and maybe effected by the risk we identify in today's press release and those identified in our filings with the SEC, including our Form 10-K filed on February 28, 2007 and Form 10-Q filed on May 2, 2007. Equinix assumes no obligation and does not intend to update forward-looking statements made on this call.
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 and the list of the reasons why the company uses these measures in today's press release and on the Equinix Investor Relations page at www.equinix.com.
With us today are Steve Smith, Equinix's Chief Executive Officer and President; Keith Taylor, Equinix's Chief Financial Officer; and Margie Backaus, Equinix's Chief Business Officer. At this time, I will turn the call over to Steve.
Stephen M. Smith - President and Chief Executive Officer
Thank you Jason. Great to have everyone on the call today.
And as you can probably see by our results, we've got a great quarter by any standard. The biggest event of the quarter was our announcement of our intention to acquire IXEurope.
As you may have seen last week, we increased our total offer to 270 million pounds sterling plus the assumption of debt. Our original announcement of our intention to acquire IXEurope attracted an unsolicited approach by another party which clearly reflects the value of this company.
With the increased offer, we received hard irrevocables from their two largest share and the Board of Directors, which represents approximately 67% of the existing shares to vote favor of this acquisition, which we expect to close in the mid September timeframe. As we stated in June, IXEurope is our preferred platform and leadership team for our entry in to Europe.
Equinix will become the only global provider of carrier-neutral colocation services with over 30 data centers in 9 countries and 17 markets. This revised announcement also enables both organizations to focus on key transition activities and minimizes the risk of further distraction through the targeted close date.
So, we are real excited about this combination and the growth synergy that creates. Although the amount of information we can disclose before closings remains limited, we plan to provide you with our longer term expectations for this business as soon as practical.
As far as the business itself is concerned, as we stated on the last call, we intend to do minimal integration of this company. IXEurope's business is running very well and the integration will primarily focused on accounting, compliance, and importantly, ensuring customers from both companies have access to a global seamless offering as soon as possible.
In the mean time, I would like to focus the rest of this call on Equinix's second quarter results. I will quickly discuss the highlights of this quarter and then turn it over to Keith to give more detailed review of those results.
Total revenue for the company was $91.8 million, which represents a 34% increase over the same quarter last year and an 8% increase over Q1 '07. Record bookings we saw in Q1 translated directly into this overperformance, as well as the accelerated installations and some of the larger deployments within this.
This included $2 million in revenues from our new DC4 IBX, which is now cash flow positive, as expected. Cash gross margins were 63% and EBITDA came in at $35.3 million, both above our expectations.
Equinix closed 96 new customers in the quarter ending with 1373 customers. The key wins included Bachtel, Cohen & Steers, Telmex, US Cellular and Kodak, Japan.
We had a very strong quarter from a booking standpoint exceeding our Q1 performance. As you know, we don't report bookings, but just to give you a sense of the strength we are seeing in the market, total Q2 MRR bookings were up by approximately 20% sequentially.
Of course, this is driving the increase in our annual guidance, which I will touch on later in the call. Within this, we saw over 85% comer from our existing customer base, including add-on business from Fox Interactive, YouTube, Nokia Siemens, and Disney Buena Vista.
Also, our pipeline remains extremely strong as we begin selling into our new expansion centers. Our interconnection services represented 20% of our recurring revenues and we saw a continued strong performance in Asia-Pacific in this area.
As many of you track the individual services here, we ended the quarter with 16,514 cross-connects, 501 ports on the exchange, 63 of which are in Asia-Pacific and 71 of these ports are 10 gig. We've now closed on our purchases of the new LA expansion site for $49 million, which occurred at the end of June, as well as our flagship IBX in Silicon Valley for $65 million, which closed in early July.
Finally, you may have seen an announcement earlier this week that Chris Paisley has joined our Board of Directors as our Audit Committee Chair. Chris was formerly CFO of 3Com and joined effective July 19.
We feel very fortunate to have attracted such a highly seasoned audit chair who has served in that role for 10 of the 17 public and private boards he's been a member of. We're very excited to have Chris join our team.
So, clearly, we've had a lot going on. And the business remains strong as we continued our focus on executing our 2007 plan and preparing for 2008.
So, let me stop there and turn it over to Keith. And I'll come back with an update on our expansion initiatives and our 2007 expectations.
Over to you, Keith.
Keith D. Taylor - Chief Financial Officer
Thanks Steve. Good afternoon.
I pleased to provide you with the second quarter results and some additional perspective on the quarter's performance. In discussing the quarter and any of my forward-looking statements, I've not taken into consideration the effect of IXEurope acquisition.
So, let me get right into it. As Steve mentioned, our Q2 revenues came in at $91.8 million, an almost 8% increase over the previous quarter and up over 34% compared to the same quarter last year.
Our US revenues were 85% of the total revenues and recurring revenues increased to 96% of our total revenues. During the quarter, revenues were favorably impacted by possibly $775,000 in unbilled power services related to prior periods, offset in part by a $200,000 customer credit related to as disputed billing.
Revenues were well above our expectations for the quarter. We've benefited from accelerated installations related to our strong bookings in the prior quarter and we've experienced better than expected in-quarter activity.
Also, we continue to enjoy a favorable pricing environment as we've increased list prices on most of our service offerings while continuing to move customer contracts to market rates. Finally, our Asia markets continue to show strength in quarter, in particular Sydney and Hong Kong.
Revenues attributed to our 3/2006 US expansions and the Tokyo expansion totaled $9.4 million in the quarter, while our recently opened DC4 IBX generated revenues of $2 million in the quarter, about an 8 fold increase over Q1. Recurring revenues in the quarter were $87.9 million, a sequential 9% increase over the previous quarter and a 35% increase over the same quarter last year.
In absolute dollar terms, this was the highest quarter-over-quarter increase we've ever experienced at $7 million. Non-recurring revenues for the quarter were $3.9 million.
Looking at churn, as expected, our Q2 cabinet and MRR churn was lower than our Q1 results at 2.3% and 2.1% respectively, with Asia-Pacific contributing greater than 50% of this churn. Looking forward, we expect Q3 quarterly churn to approximate Q2 levels and the churn for the year should be within our targeted range of 1% per month or 12% for the total year.
Moving on to gross profit and gross margins. The company recognized gross profit of $36.2 million for the quarter or 39% compared to $32.3 million the quarter and $23 million for the same quarter last year.
Our cash gross margins were 63%, up from 62% in Q1 and just above our expectations. Our same IBX cash gross margin, which excludes revenues and costs from recently opened IBXs and expansion projects, was 68%, a clear indication that we are now operating in the range of our long-term planned objectives of 65% to 70% cash gross margin.
Of note here, each of our operating IBXs including the recently opened DC4 and Silicon Valley 4 IBXs are generating positive cash gross margins. Moving to Q3, it should be noted that both our Chicago 2 and our LA3 IBXs will move to the same IBX status as they've now been open for four full quarters.
Now as a remainder and as we have seen over the past several years, our cost of revenues were increased in Q3 due to the seasonally high utility costs associated with the cooling of our IBXs in the summer months. Utility costs were expected to increase to about 14% of revenues in the third quarter, effectively a 1 to 2 percentage point increase over the prior quarter.
This seasonal trend typically reverses in the fourth quarter. Also, we expect to open four new IBX expansions in late Q3 and Q4...
pardon me, in late Q3 and Q4, which will increase both our cash and non-cash costs, including of course depreciation and amortization. Now, looking at sellable cabinet capacity and utilization levels, our net sellable cabinet capacity decreased slightly to 24,900 as we modified some of our large cage configuration that churned in Q1 to better meet change in customer needs, including increasing our DC prior distribution capabilities.
At the end of Q2, approximately 19,200 cabinets or about 77% of our sellable cabinets were billing. On a weighted average basis, approximately 18,900 cabinets or 76% of our sellable cabinets were billing.
Breaking down the details by region, the US sellable cabinets billing were about 15,500 or 76%, and the Asia sellable cabinets billing were 3,700 or about 80%. As a remainder, our Q2 utilization level excludes the additional capacity from our announced expansions in the latter half of 2007, including the 200 cabinet augmentation in our New York 2 IBX.
At the end of the year, we expect our sellable cabinet capacity to be approximately 31,000 cabinets. Looking at revenue per cabinet on a weighted average basis, our average monthly recurring revenue for sellable cabinet increased to $1,532, up 2% over the prior quarter level of $1,498 and up over 6% compared to last year.
While this was clearly a strong result, we feel it's important to recognize that this metric, although a good indicator of pricing trends, can both positively and negatively be affected by the timing of large installations or churn within a quarter, as well as affected by the delayed installation interval of non-cabinet services attached to any particular cabinet deployment. This implication was clearly evident as we analyze the average Q1 MRR per cabinet metric.
Overall, we continue to be pleased with our pricing and the competitive environment. As we look forward, we expect Q3 pricing to be consistent with Q2 levels as we install some large customer deployments in the third quarter.
On a regional basis, our weighted average price per sellable cabinet in the US was $1,632, which was up 3% from the prior quarter at $1,578. In Asia-Pacific, our weighted average price per sellable cabinet was $1,119, a decrease over the prior quarter level of $1,169 as a result of a large anticipated churn in the Tokyo market.
As noted in the past, the Tokyo MRR per cabinet is the highest... pardon me, is the highest in the AP region.
Interconnection revenue in Asia grew 19% sequentially, another strong result there. SG&A expenses for the quarter, including stock-based compensation expense of $9 million were $33.4 million.
Our cash SG&A expenses were $22.8 million for the quarter, a 10% increase over the prior quarter and a 29% increase over the same quarter last year. This Q2 increase was primarily due to a $1.4 million charge attributed to a negotiated tax filling agreement with a former employee, an increased variable sales compensation costs derived from our strong bookings activity.
Moving on to net income and EBITDA, we generated net income in the quarter of $1.2 million or about $0.04 per share on a basic and diluted basis. This result was primary attributed to a better than expected income from operations in the quarter as revenues...
sorry, as revenues were stronger than expected and lower than expected net interest expense in the quarter. Our EBITDA was $35.3 million for the quarter and slightly above our revised expectations.
Turning to our balance sheet, at the end of Q2, our unrestricted cash balances totaled $324 million after taking into account the $49 million purchase of the LA4 building, CapEx in the quarter was $139.8 million. Breaking down the details, our expansion CapEx for our new expansion centers was $129.6 million, while our ongoing CapEx was $10.2 million.
At the end of Q2, our Chicago and New York expansion properties were about 75% and 60% complete respectively. Next moving to our operating cash flows, our net cash generated from operating activities increased to $38.1 million, up from $20.1 million the previous quarter and $16.1 million the same quarter a year ago.
This strong result reflects stronger than expected operating performance, coupled with better working capital management. In particular, our cash collection activities were significant in the quarter resulting in a minor increase in accounts receivable balance despite the strong quarter-over-quarter revenue growth.
Our DSO metrics continues to remain below the 30-day level. Cash used from investing activities was $157.4 million for the quarter related CapEx spending of $139.8 million, the purchase of our Ford [ph] LA property for $49 million and offset by an increase in our accrued property and equipment balance of $31.4 million.
Lastly, our cash generated from financing activities was $50.5 million for the quarter, primarily related to an additional draw down under the Chicago financing of $44.7 million and $6.9 million of proceeds from our employee stock plans. The total amount drawn under the $110 million construction loan is $69.3 million at the end of Q2.
So, now let me turn it back to Steve.
Stephen M. Smith - President and Chief Executive Officer
Thanks Keith. I'd like to now take a moment to give you an update on our expansion activities.
They are going on in seven about 10 markets. We remain on track or ahead of schedule with the four projects anticipated to open in 2007 -- Chicago, New York, Singapore, and Tokyo.
In Chicago, we expect a late September, October opening date. Based on the strong pipeline for this new IBX, we now have the flexibility to assess whether an anchor tenant makes sense here.
In New York, we are now targeting a late October-November open date, and are very confident that one or perhaps two anchor customers will be signed well in advance of opening. In Singapore, I am please to report we've just opened the first phase of our expansion there ahead of schedule and we've already begun installing customers, including a very large anchor deployment by Yahoo!.
The first phase of this expansion is 450 cabinets and the second phase is expected to have approximately 450 additional cabinets later in the year for a total of 900 cabinets. Finally, in Tokyo, we are also ahead schedule there and are now accelerating the timeframe to open an initial face in August, which we had originally targeted for the fourth quarter.
You will see in our CapEx guidance we are shifting approximately $10 million in CapEx for this project to 2008, which is when we will open the second phase. Finally, we are not making any adjustments to the total CapEx estimated for any of these projects with a minor adjustment in Singapore.
Shifting to 2008, as you know, we have already announced three expansions we expect to open in Washington DC, Silicon Valley, and Los Angeles. In DC, we have begun work on our DC 5 Greenfield and now expert a Q2 opening versus earlier expectations of late Q1.
In Silicon Valley, our build-out within our SV2 location is currently in the design phase and is still expected open in Q2. In Los Angeles, we continue to see strong demand from our digital media clients.
In fact, a significant portion of the increase in our bookings this quarter was directly attributable to our success in the LA3 IBX. This success coupled with a strong growth in web-based video was the driver for our recently announced expansion in this market.
We've just closed the transaction to purchase the building there, which is 216,000 square feet and can support an estimated 3000 cabinets. The first phase of this project is expected to be approximately 1700 cabinets, and while we are only in the early design phase of this project, we want to provide you with the preliminary estimate of the expansion CapEx required for this.
At this time, we anticipate this to be somewhere in the range of $95 million to $115 million. One of the factors in this range is the evaluation of investments we would make now to lower the overall operating costs of the center in the long run.
An example is a possible substation augmentation, which would lower the unit cost of power. As a ballpark CapEx estimate, we expect approximately 20% of the CapEx for LA4 to hit in 2007 and the balance to hit in 2008.
As we progress in this project, we will update our CapEx guidance for the cost attributed to the overall project. The overall acceleration in demand is clearly demonstrated in our record bookings, our quarterly results, and the increased annual guidance.
Many of you continue to ask about 2008 CapEx. Although we are not providing specific numbers, we remain confident that even with the accelerated demand we are experiencing, we continue to expect that 2007 will be our peak year for expansion CapEx.
Based on the new capacity announced for 2008, we now expect to have revenue capacity in the range of approximately $690 million to $720 million, or a mid-point of approximately $705 million. Specifically, these numbers exclude additional Greenfields, second phase expansions, and the IXEurope acquisition.
Now, let's take a look at our updated guidance for 2007 and then the third quarter. We are raising revenues to now be in the range of $373 million to $377 million, which places the midpoint of $375 million, an increase of $12 million from previous expectations and representing just over 30% annual growth.
We expect cash gross margins to be in the range of 61% to 62%. Cash SG&A will be approximately $88 million or just over 23% of revenues at the mid-point.
This increase is primarily attributable to an increase in expected variable compensation from the acceleration in our business and the negotiated tax line that Keith discussed. We are increasing our EBITDA expectations to know be in the range of $141 million to $143 million.
our 2007 CapEx guidance is now $380 million to $390 million, of which $340 million to $350 million is for our expansion activities, which reflects the $10 million shift into 2008 for the Tokyo expansion and approximately $40 million in ongoing CapEx. Again, this number excludes any 2007 CapEx for LA build-out.
We will provide a more specific estimate and timing for project completion once we have completed our initial design. Let me shift to the third quarter.
For the third quarter, revenues are expected to be in the range of $96.5 million to $97.5 million. Cash gross margins for the quarter are expected to be approximately 61%.
Cash SG&A is expected to range between $22 million and $23 million. EBITDA is expected to be in the range of $36 million and $37 million.
Total CapEx for the quarter is expected to be between $100 million and $105 million, which includes approximately $90 million in expansion CapEx. So, with that, you can clearly see the acceleration in our momentum that we spoke about on our Q1 results call.
The business is as strong as we have ever seen it. And now that I have had over three months' time to assess the business model, the senior leadership team and our market sales and operational readiness have landed right where I suspected.
No change to the business model, with the continued focus on colocation and interconnection. No changes in the senior leadership team are anticipated, you can expect continued stability with the experienced leadership team that many of you know well.
And lastly, we are going to continue our sharp focus on our employees, service excellence to our customers and our day-to-day execution, with particular emphasis on successfully opening our new expansions and strengthening our strategic positioning globally with the successful integration of IXEurope. With that, we will open it up for some questions and I will turn over to you, Mike.
Question And Answer
Operator
[Operator Instructions]. Our first question comes from Jonathan Schildkraut with Jefferies.
Jonathan Schildkraut - Jefferies & Company
Good afternoon.
Stephen M. Smith - President and Chief Executive Officer
Hi Jonathan.
Jonathan Schildkraut - Jefferies & Company
Thanks for taking the questions. I have a couple of questions, the first is if you could talk a little bit more about the Tokyo churn as well as the interconnect revenues in Asia-Pacific market going up 19% quarter-over-quarter and then if could couple that with the two phase build-out, what are the cabinets in each of those phases?
Keith D. Taylor - Chief Financial Officer
Okay, Jon, what I'll do is that I'll take at least the first part of the question, talk about the churn and then I'll pass it to Margie just on the overall interconnection theme in that market. But there was a large financial institution in the Tokyo market.
As I mentioned sort of in the my script, there was an anticipated churn, we negotiated with them two years ago, and we knew that this would be coming out in this particular quarter, in Q2. And again, given the fact that we are constrained in the Tokyo market, it was something that not only did we anticipate, that was something that we were looking forward to.
As a reminder, our Tokyo market drives the high MRR per cabinet out of all our IBXs, not only in the Asia marketplace, but also in the U.S. And so, this was something that was thought of as a very favorable result.
Interconnection, do you want to touch that one?
Margie Backaus - Chief Business Officer
Yes, Jonathan, our interconnection in Asia has kind of good time, and we are actually having our Tokyo Peering Forum today, which we've great attendance at. But overall, we continue to see the number of trial participants that we had on the Tokyo switch continue to convert over to paying customers.
So, out of the total core count of 501, 63 of those were in AP and in addition to that, we're now starting people to see ramp up on 10 gig in Asia as well. So, content distribution customers, we had a couple of those convert to 10 gig in Asia as well.
So we continue to see real strength there. So, I think it's a real good new story.
Stephen M. Smith - President and Chief Executive Officer
And so your last question, Jonathan, was just on the CapEx attributed to the expansion. As you know, we're going to spend between $25 million and $30 million on that project.
What I have done to sort of better optimize the... basically the construction effort, it's broken down into phases.
And so although the first phase is accelerating and opening up in sort of the August timeframe, the second phase, when you sort of couple... the second phase then gives us the latitude to push some of the CapEx out into 2008.
But having said that, with Phase I plus the capacity that we have on the existing Tokyo IBX, it gives us sufficient capacity in the market to support the customer demand.
Margie Backaus - Chief Business Officer
I am sorry, one thing I'll add to that, Jonathan, is we just did a really in-depth actually last weak with view of all the demand in Tokyo, and kind of what we're seeing there and it is really phenomenally strong. And I'm pretty tough on like demand analysis.
So, it was really very good in terms of kind of the big opportunities we have there and so bringing in the Tokyo capacity early, I think, is a really good new story.
Jonathan Schildkraut - Jefferies & Company
We had 740 cabinets, I think, coming on in Tokyo in total. Is that still the number just spread out over two phases or has the number gone up?
Keith D. Taylor - Chief Financial Officer
It's still going to be 740 cabinets, Jonathan.
Jonathan Schildkraut - Jefferies & Company
Alright. That actually brings up another question, as we head into the third quarter here, should we be thinking about any market as capacity-constrained?
Obviously, you are brining on 200 cabinets in Secaucus. I am wondering if those are kind of available for sale yet, or if they come on over the course of the quarter, and maybe if you can comment on available capacity in Chicago?
Keith D. Taylor - Chief Financial Officer
Okay. Certainly in some of the markets, we will be constrained recognizing that obviously we've had great momentum in Q1, and certainly with our Q2 bookings.
And so from a revenue perspective, I don't think per se you are going to... you'll feel that in the Q3 results.
But we are going to be constrained in Chicago market pending the delivery of the Chicago 3 building. We are of course constrained in the Dallas market, but the scenario that we have not yet chosen to make up for their investment.
And of course, the New York market pending the delivery of our New York 4 building, we are going to be constrained to that market, recognizing we are bringing on 200 cabinets this quarter, this coming quarter being Q3, but we believe that we are going to be able to sort of meet customer demand for those 200 cabinets relatively quickly. So, I think in all three of those markets we will be somewhat constrained.
When I look to the Asia market, again, with sufficient capacity in Tokyo, Singapore with their expansion coming online, and Australia with their recent augmentation, we feel we have sufficient capacity in each of those markets. And Hong Kong although is reaching more critical level, there is no update in that particular market.
Jonathan Schildkraut - Jefferies & Company
Great. I will circle back in the queue for some more questions.
Thank you.
Keith D. Taylor - Chief Financial Officer
Thank you.
Operator
Our next question comes from Chris Larsen with Credit Suisse.
Chris Larsen - Credit Suisse First Boston
Hi, thank you. Clarifications for Keith, first, could you give me again the quarter ending racks?
Was the 18,800 or the 19,200 was the quarter ending?
Keith D. Taylor - Chief Financial Officer
I see there is a little bit of an inconsistency between our press release, but on a net... the end of the quarter was 19,200; on a weighted average basis, it was 18,900.
Chris Larsen - Credit Suisse First Boston
Thank you. And then I also just want to confirm the revised numbers do not include IXEurope and you'd expect those revised estimates when that deal closes perhaps on third quarter --?
Keith D. Taylor - Chief Financial Officer
That's correct and as you know, we are anticipating that deal to closes, as Steve mentioned, in mid-September and then once that's done, we will... as we look to our Q3 earnings call, we will certainly give an update on the acquisition and give you some clarity on what the go forward business would look like.
Chris Larsen - Credit Suisse First Boston
Okay, thanks. Keith, is there an impact to operating cash flow from the purchase of Silicon Valley or was that capitalized that lease that you are --?
Keith D. Taylor - Chief Financial Officer
That's a good question, Chris. No, the operating lease was..
it was flowing through operating result. It was treated, of course as an operating lease and therefore flowing through operating results and affecting EBITDA.
So, we are going to get a benefit on a total year basis of roughly about $2.2 million to $2.4 million related to the lease, but that's going to be offset by roughly $1 million in taxes. So, net benefit on a quarterly basis is going to be about $300,000 at this stage.
Chris Larsen - Credit Suisse First Boston
Okay, great, thanks. And then I had couple of questions, well, operation maybe more for Margie.
The 365 main had an unfortunate incident, I guess, yesterday, do you expect to see some pickup from some of those customers that are going to say, look, we want the six-nine's reliability? And then maybe you could quantify, you said that the number of your contracts are still below market.
How much is still below market and how far below market are those contracts?
Margie Backaus - Chief Business Officer
Yes, so, let me talk about the first one. It's funny when I saw that happen yesterday.
You guys saw we just announced Netflix, and Netflix is one of the ones that were down in 365 Main yesterday. So, yes, we are starting to see some movement.
So, the six-nine's reliability, as I talked to a number of press people yesterday afternoon, is significant and you guys [ph] probably talked to the press around this morning, there are some fairly frustrating customers. So, we will see what we pick up around that.
We do have availability in Silicon Valley. So I think that there is plenty to be gained there.
Secondly, on the contract, I will say that there are a number. I would say, however, we have touched a fair amount on the base at this point as it relates to bringing them up to market rate.
So you will continue to see some uplift in the overall MRR as we continue to feather through some of these price increases. But you won't see a big fork life upgrade in terms of what we've done over the past 18 months in getting some of these price increases out to customers.
Chris Larsen - Credit Suisse First Boston
Alright, thanks a whole lot. I appreciate it.
Stephen M. Smith - President and Chief Executive Officer
Thanks Chris.
Operator
Our next question comes from Michael Rollins with Citigroup.
Mike Rollins - Citigroup
Hi, good afternoon.
Margie Backaus - Chief Business Officer
Hi Mike.
Stephen M. Smith - President and Chief Executive Officer
Hi, Mike.
Mike Rollins - Citigroup
Just a couple of questions. And forgive me if you gave this out, what was the ending customer count?
[Multiple Speakers]
Mike Rollins - Citigroup
And then the second question I had is are you doing anything different or are you examining the potential of longer term contracts with escalators in them? And if you can talk about how the process is signing up customers is the same or different today versus a year ago as you are redoing the older outdated contracts?
The last question I had, if I could just throw one other in, in places like Chicago where you have been out of capacity to sell for the last few months, how does that change if at all the fill rate when Chicago opens? Does that help accelerate going from zero to significant cash flow positive or some greater utilization rate than if you were selling the capacity on a smoother basis over the last, call it, six months?
Thanks.
Stephen M. Smith - President and Chief Executive Officer
Sure, Mike. I'll start out.
The customer count was 1,373, as I mentioned. And on the contractual side, as I think we have mentioned previously, we are looking at longer term contracts.
I think our average contract now is in the two year range and we have been incenting and the sales force is looking for longer term arrangements with price escalation built into them, so it can protect against power etc. So, yes, we have been looking for that with good receptivity from customers.
So I think we'll start building a longer term backlog of customer kind of length of contract here as we go forward. And on the Chicago fill rate, may be Margie could you answer that.
Margie Backaus - Chief Business Officer
Yes, a couple of things. One thing I just want to make clear, Mike, to make sure we are on the same page here is even though we say we are dark in the market, we saw a fairly good clip of growth in cross-connects in Chicago.
So, even though we are dark from the space perspective, we continue to see nice amounts of revenue flow through those centers that we consider "fall" at people order more cross-connects, especially in that market given it's an FX market. That being said, I think the really good news about both New York and Chicago, I was actually looking yesterday at kind of what the high point in the reserve rate are starting to look like for those centers.
The good news is given the value proposition to customers around FX and some of these other kind of proximity trading advantages we are seeing, customers are waiting. So what you will see is a nice backlog of customers, nice reserve rate of customers as those two centers come to market.
So we are starting to sign customers to-date with those markets. And we are right in the zone, customers typically start signing within a four to five-month periods is where they can get out and actually see what they are buying.
So, now you will start too see those reserve rates kind of climb a little bit.
Mike Rollins - Citigroup
Thanks for taking my questions.
Margie Backaus - Chief Business Officer
Thanks Mike.
Operator
Our next question comes from Manny Recarey with Kaufman Brothers.
Stephen M. Smith - President and Chief Executive Officer
Hi Manny.
Manuel Recarey - Kaufman Brothers
Hi, how are you guys doing? Thanks.
Just one question, just trying to understand the guidance a little bit and the revenue is going to increase $4 million to $5 million, but your OpEx is going to be kind of like flat or could even be down a little bit. Can you explain the dynamics of what's going on there?
Stephen M. Smith - President and Chief Executive Officer
Manny, are you referring to the total year or the given quarter?
Manuel Recarey - Kaufman Brothers
No, I am sorry, the third quarter.
Keith D. Taylor - Chief Financial Officer
Okay. So a couple of things.
So, clearly as you can see, our revenues are going up or taking up to midpoint of $97 million for Q3. And what you have also probably noticed now is that despite the fact that we had 63% cash gross margins in Q2, we are actually suggesting that's going to go down to about 61% in Q3 as a result of the couple of things, number one, as I mentioned, we have seasonal fluctuations in our pricing related to utility costs and that's going to add about $1.7 million we estimate today in incremental costs in Q3 over Q2.
In addition, we are going to... in the latter part of Q3, we are going to be hiring staff for the new expansion projects.
And so that cost is going to start pushing through the operating line. So as a result, despite the fact that we are growing the revenue line, we are investing in the cost of revenue line.
And then our SG&A, as we layer in some of the staffing that were not hired in Q2 and will be pushed into Q3 results in us just taking our EBITDA guidance up on a relatively small amount.
Manuel Recarey - Kaufman Brothers
I certainly understand what's going on with the cost of goods, just it's maybe my math is wrong, but for the second quarter, your SG&A was like $22.8 million and now you are... you just said you are going to be hiring people which makes sense because you are expanding adding new data centers, but your SG&A guidance is $22 million to $23 million.
Keith D. Taylor - Chief Financial Officer
Yes, Manny. So the delta one, that is, as you'll remember, we recorded a $1.4 million charge in Q2 related to the negotiated settlement.
And as a result, that's not going to of course recur for Q3. So basically when you take that out and then you invest in the staff, you basically are able to keep your cost flat quarter-over-quarter.
Manuel Recarey - Kaufman Brothers
Thank you.
Stephen M. Smith - President and Chief Executive Officer
Thanks.
Operator
Our next question comes from Thomas Watts with Cowen & Company.
Tom Watts - Cowen & Company
Hey guys
Stephen M. Smith - President and Chief Executive Officer
Hi Tom.
Keith D. Taylor - Chief Financial Officer
Hi Tom.
Margie Backaus - Chief Business Officer
Hi Tom.
Tom Watts - Cowen & Company
Just focusing a little bit more on some of the pricing issues, I know you had talked a little bit by getting anchor tenants for several of the new facilities. And I know, Margie, you previously said you are talking about migrating away from the anchor tenant concept or at least giving discounted prices for anchor tenants.
So, could you just clarify that a bit.
Margie Backaus - Chief Business Officer
Sure. Yes, so for anchor tenants and what we said, what Steve mentioned in his script was that we are evaluating whether or not we will take anchor tenants in Chicago.
I think as we continue to see really good uplift from our FX base there, we are going take a look whether or not we want to do that frankly. In New York, it's a little bit different situation and we will see one, probably two anchor tenants, one of those probably being a strategic anchor tenant as opposed to an anchor tenant for just volume purposes.
So we are being very thoughtful about it. I think it's...
from a Chicago perspective it's important because we want to make sure that we can continue to serve that FX base as both of our Chicago one and two sites are full and customers continue to get the benefit... even though they are out a bit, they continue to get the benefit of that near zero second...
millisecond delay there. So I think that's important.
And again, I think it will be good for us in New York when ultimately you guys see who some of these anchor tenants are, I think you will see they are pretty strategic to our growth there.
Tom Watts - Cowen & Company
Okay. And could you just comment on what strategic would mean to them, does that mean that they are going to drive other customers into there?
Margie Backaus - Chief Business Officer
Yes, they will be magnets, caller magnets.
Stephen M. Smith - President and Chief Executive Officer
I think the other good news probably about that Tom is that I think historically here an anchor tenant will take up 15% to 20% of the capacity in that IBX and it's really good situation to not have to do that and be able to get multiple clients that can still fill that return that we are looking for.
Tom Watts - Cowen & Company
Okay. And I know there was a previous question on pricing, but you have indicated pricing as generally stable.
And I'd say, on the same data center basis, excluding higher power build-outs, does that suggest that you are seeing prices overall flattening in the market that we are not seeing sort of annual price increases? I know that's what SAVVIS had indicated on their call.
Margie Backaus - Chief Business Officer
No. I would just say no to that.
First of all, you are seeing us continue to raise prices to the current base. We are getting very good prices in our new high power density IBXs.
So, we saw a little bit of that in DC4, but as I look at kind of the pipeline for New York and Chicago, we are seeing very good pricing there as well. So I think those are very strong results and then new customers coming in, I think it was just the MRR up year-over-year with 6%.
So I would say pricing in general given the competitive environment we are seeing and the value proposition to customers remains very strong. I would not say it's flattening.
Tom Watts - Cowen & Company
Okay. And then just finally, AT&T commented on the growth opportunities they saw in this sector and the number of data centers that they are building.
Are you seeing them in your specific markets and to what extent are they pre-marketing spaces well prior to construction?
Margie Backaus - Chief Business Officer
I think everybody who is building right now has pre-marketing space, but don't forget both SAVVIS and AT&T are selling to a different customer, right? So they're selling to the customer who want end to end managed services etc., a little bit different as you are well aware than the customer that would naturally come to us.
But I can tell you the demand across, I think, all of the markets whether it's wholesale for the REITs [ph], managed services or kind of more pure colocation with the interconnection model, it's very, very strong. So all of those are rising, but I can tell you with then...
and let me just give you a thought of interesting step this quarter. When I looked inside our new customers that were signed, of course, those 96 customers that were signed this quarter, almost 79% of those customers were coming in for the first time; either coming in from in-sourced applications outside or new to colo.
So I think that's a pretty good indicator that the growth we are seeing, especially in our new customer base is coming from people that are brand new to that. So we are getting a disproportionate share of that.
Tom Watts - Cowen & Company
Excellent. Margie, thanks.
Margie Backaus - Chief Business Officer
Sure.
Operator
Our next question comes from Rod Ratliff with Stanford Group.
Rodney Ratliff - Stanford Group Company
Very nice quarter guys, very nice.
Stephen M. Smith - President and Chief Executive Officer
Thanks Rod.
Rodney Ratliff - Stanford Group Company
Margie, I think you might have touched on it a little bit on the conference call back at the beginning of July surrounding the IXE acquisition, but just given the demand in APAC for interconnect services, do you think that there is probably ultimately really robust opportunity to layer that on to the operations that you are going to purchasing in Europe?
Margie Backaus - Chief Business Officer
Let me split out interconnection and peering in the European market and contrast it just for a minute with Asia.
Rodney Ratliff - Stanford Group Company
Okay.
Margie Backaus - Chief Business Officer
So when you saw in Asia which is why I think we are seeing a nice uplift there is you saw some of the peering sites and other things over there where fairly small amount necessarily state-of-the-art kind of peering sites etc. What you see in Europe, however, is very different, right?
So the LINX, the AMSIX, the DICIX, all of the big peering sites over there are very advanced customers, like them they are non-profit consortiums, their service is very good, they've implemented 10 gig. So in terms of the overall service to customers, it looks different.
So I think what you'll see from us over time is we do see good opportunities to do some interesting things with inter-connection in Europe that will most likely be around things like FX where we've seen, as you know, great uplift in the US with that. They also have a very nice FX base.
So being able to put customers London, Frankfurt, New York, Chicago is a very strong value proposition. So I think that's one place we will see some good interconnection.
I think we will be working with the established peering points over there to see how we can help them with their growth and use them as a magnet to bring in for future interconnection opportunities in our center. So I think as I said on the call in July, I don't want to kind oversell this at this point because it really is a very established market over there as it relates to the peering points.
But we do see some nice opportunity to kind of move on with... excuse me, change the game a little bit with interconnection in Europe.
Rodney Ratliff - Stanford Group Company
Does the regulatory environment in Europe enter into the equation at all? Is it any tighter or how would you characterize that?
Margie Backaus - Chief Business Officer
I am sorry, I missed the first part of your question.
Rodney Ratliff - Stanford Group Company
The regulatory environment.
Margie Backaus - Chief Business Officer
Oh, yes.
Rodney Ratliff - Stanford Group Company
In Europe.
Margie Backaus - Chief Business Officer
Yes, no, that's... so kind of interestingly enough, interconnection in Europe has been driven not by regulatory reasons per se, but by customers.
So the consortiums that exist on the peering side and the traditional pricing on the interconnection, as many of you guys know, interconnections to our version of a cross connect in Europe or any of the European players is typically 10%... priced at 10% or less of what our prices are here.
And that's driven more by just kind of how that industry has evolved in Europe, more than anything else. It's not really a regulatory issue.
So I think the really good news is here, is that both IXEurope and Equinix share a really nice customer base around some of these customers that we look to do this with, and with our relationships with the big content guys here and the uplift of customers that have taken a real interest in moving to Europe with us, we've got a really good kind of backlog of customers to start moving to a different interconnection model. But I will just caution you I think that will take some time.
Rodney Ratliff - Stanford Group Company
Okay, thank you.
Margie Backaus - Chief Business Officer
Sure.
Operator
Our final question comes from Jonathan Schildkraut from Jefferies.
Jonathan Schildkraut - Jefferies & Company
Thanks again. This is a question for Keith.
Keith, I am looking at your guidance for the year and for the following quarter. And just to kind of get you down to your net income numbers, it looks like there will limited growth in the D&A side in the next quarter, but we would see start to really kind of scale up as we exited the year.
Does that sound right?
Keith D. Taylor - Chief Financial Officer
That's correct. In the end, that's the one number that we don't give, but to give you a sense for D&A, it will be...
for total year will be just under $97 million.
Jonathan Schildkraut - Jefferies & Company
Thanks a lot.
Keith D. Taylor - Chief Financial Officer
Thanks Jonathan.
Margie Backaus - Chief Business Officer
Thank you.
Stephen M. Smith - President and Chief Executive Officer
And this concludes our conference call for today. Thank you very much for joining us.
Operator
Thank you for participating in today's conference call. You may now disconnect.