UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
September 30, 2011 For the quarterly period ended September 30, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-31293
EQUINIX, INC.
(Exact name of registrant as specified in its charter)
Delaware | 77-0487526 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
One Lagoon Drive, Fourth Floor, Redwood City, California 94065
(Address of principal executive offices, including ZIP code)
(650) 598-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes x No ¨ and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ |
Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrants Common Stock as of September 30, 2011 was 47,409,736.
EQUINIX, INC.
INDEX
2
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
(in thousands)
September 30, 2011 |
December 31, 2010 |
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(unaudited) | ||||||||
Assets | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 370,523 | $ | 442,841 | ||||
Short-term investments |
700,246 | 147,192 | ||||||
Accounts receivable, net |
144,185 | 116,358 | ||||||
Other current assets |
115,344 | 71,657 | ||||||
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|
|
|
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Total current assets |
1,330,298 | 778,048 | ||||||
Long-term investments |
99,419 | 2,806 | ||||||
Property, plant and equipment, net |
3,122,094 | 2,650,953 | ||||||
Goodwill |
867,280 | 774,365 | ||||||
Intangible assets, net |
153,505 | 150,945 | ||||||
Other assets |
158,091 | 90,892 | ||||||
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|
|
|
|||||
Total assets |
$ | 5,730,687 | $ | 4,448,009 | ||||
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|
|
|
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Liabilities and Stockholders Equity | ||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 181,093 | $ | 145,854 | ||||
Accrued property, plant and equipment |
90,181 | 91,667 | ||||||
Current portion of capital lease and other financing obligations |
11,367 | 7,988 | ||||||
Current portion of loans payable |
74,652 | 19,978 | ||||||
Current portion of convertible debt |
243,176 | | ||||||
Other current liabilities |
55,687 | 52,628 | ||||||
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|
|
|
|||||
Total current liabilities |
656,156 | 318,115 | ||||||
Capital lease and other financing obligations, less current portion |
376,848 | 253,945 | ||||||
Loans payable, less current portion |
161,984 | 100,337 | ||||||
Convertible debt, less current portion |
691,520 | 916,337 | ||||||
Senior notes |
1,500,000 | 750,000 | ||||||
Other liabilities |
253,300 | 228,760 | ||||||
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|
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Total liabilities |
3,639,808 | 2,567,494 | ||||||
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|
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Redeemable non-controlling interests (Note 1) |
66,372 | | ||||||
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|
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Commitments and contingencies (Note 10) |
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Stockholders equity: |
||||||||
Common stock |
47 | 46 | ||||||
Additional paid-in capital |
2,417,781 | 2,341,586 | ||||||
Accumulated other comprehensive loss |
(120,416 | ) | (112,018 | ) | ||||
Accumulated deficit |
(272,905 | ) | (349,099 | ) | ||||
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|
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Total stockholders equity |
2,024,507 | 1,880,515 | ||||||
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Total liabilities, redeemable non-controlling interests and stockholders equity |
$ | 5,730,687 | $ | 4,448,009 | ||||
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|
See accompanying notes to condensed consolidated financial statements
3
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three months
ended September 30, |
Nine months
ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(unaudited) | ||||||||||||||||
Revenues |
$ | 417,601 | $ | 330,347 | $ | 1,175,530 | $ | 875,090 | ||||||||
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|
|
|
|
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|
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Costs and operating expenses: |
||||||||||||||||
Cost of revenues |
228,153 | 185,476 | 638,301 | 481,108 | ||||||||||||
Sales and marketing |
43,070 | 31,205 | 113,769 | 79,586 | ||||||||||||
General and administrative |
65,976 | 58,640 | 194,258 | 155,961 | ||||||||||||
Restructuring charges |
1,587 | 1,886 | 2,186 | 6,243 | ||||||||||||
Acquisition costs |
699 | 1,114 | 2,729 | 11,957 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total costs and operating expenses |
339,485 | 278,321 | 951,243 | 734,855 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Income from operations |
78,116 | 52,026 | 224,287 | 140,235 | ||||||||||||
Interest income |
679 | 310 | 1,526 | 1,307 | ||||||||||||
Interest expense |
(51,114 | ) | (38,363 | ) | (126,152 | ) | (101,653 | ) | ||||||||
Other-than-temporary impairment recovery on investments |
| 206 | | 3,626 | ||||||||||||
Loss on debt extinguishment and interest rate swaps, net |
| | | (4,831 | ) | |||||||||||
Other income (expense) |
(1,694 | ) | 1,654 | 1,438 | 193 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
25,987 | 15,833 | 101,099 | 38,877 | ||||||||||||
Income tax expense |
(5,348 | ) | (4,637 | ) | (24,582 | ) | (15,756 | ) | ||||||||
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|
|
|
|
|
|
|||||||||
Net income |
20,639 | 11,196 | 76,517 | 23,121 | ||||||||||||
Net income attributable to redeemable non-controlling interests |
(320 | ) | | (323 | ) | | ||||||||||
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Net income attributable to Equinix. |
$ | 20,319 | $ | 11,196 | $ | 76,194 | $ | 23,121 | ||||||||
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Earnings per share attributable to Equinix, after adjustments related to redeemable non-controlling interests (Note 3): |
||||||||||||||||
Basic earnings per share |
$ | 0.21 | $ | 0.24 | $ | 1.40 | $ | 0.54 | ||||||||
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|
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Weighted-average shares |
47,202 | 45,745 | 46,861 | 42,961 | ||||||||||||
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Diluted earnings per share |
$ | 0.20 | $ | 0.24 | $ | 1.37 | $ | 0.53 | ||||||||
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Weighted-average shares |
47,943 | 46,676 | 47,694 | 44,040 | ||||||||||||
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See accompanying notes to condensed consolidated financial statements
4
Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine months
ended September 30, |
||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 76,517 | $ | 23,121 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
240,096 | 175,359 | ||||||
Stock-based compensation |
53,060 | 50,020 | ||||||
Restructuring charges |
2,186 | 6,243 | ||||||
Amortization of intangible assets |
14,207 | 9,378 | ||||||
Amortization of debt issuance costs and debt discounts |
23,816 | 19,403 | ||||||
Accretion of asset retirement obligation and accrued restructuring charges |
3,473 | 2,501 | ||||||
Loss on debt extinguishment and interest rate swaps, net |
| 4,831 | ||||||
Provision for allowance for doubtful accounts |
3,609 | 1,454 | ||||||
Other items |
1,933 | 903 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(26,299 | ) | (38,486 | ) | ||||
Other assets |
(7,217 | ) | 12,717 | |||||
Accounts payable and accrued expenses |
(9,492 | ) | 16,047 | |||||
Other liabilities |
24,099 | (13,510 | ) | |||||
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|
|
|
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Net cash provided by operating activities |
399,988 | 269,981 | ||||||
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|
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Cash flows from investing activities: |
||||||||
Purchases of investments |
(1,027,855 | ) | (599,845 | ) | ||||
Sales of investments |
104,800 | 24,778 | ||||||
Maturities of investments |
274,620 | 506,811 | ||||||
Purchase of Switch and Data, net of cash acquired |
| (113,289 | ) | |||||
Purchase of ALOG, net of cash acquired |
(41,954 | ) | | |||||
Purchase of Paris 4 IBX property |
(14,951 | ) | | |||||
Purchase of Frankfurt IBX property |
(9,042 | ) | | |||||
Purchases of property, plant and equipment |
(495,515 | ) | (436,046 | ) | ||||
Increase in restricted cash |
(95,932 | ) | (1,160 | ) | ||||
Release of restricted cash |
1,000 | 244 | ||||||
Other investing activities |
10 | | ||||||
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Net cash used in investing activities |
(1,304,819 | ) | (618,507 | ) | ||||
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Cash flows from financing activities: |
||||||||
Proceeds from employee equity awards |
35,704 | 36,179 | ||||||
Proceeds from senior notes |
750,000 | 750,000 | ||||||
Proceeds from loans payable |
90,635 | 115,811 | ||||||
Repayment of capital lease and other financing obligations |
(7,404 | ) | (14,114 | ) | ||||
Repayment of mortgage and loans payable |
(21,273 | ) | (469,077 | ) | ||||
Debt issuance costs |
(15,551 | ) | (23,124 | ) | ||||
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Net cash provided by financing activities |
832,111 | 395,675 | ||||||
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Effect of foreign currency exchange rates on cash and cash equivalents |
402 | (4,056 | ) | |||||
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Net increase (decrease) in cash and cash equivalents |
(72,318 | ) | 43,093 | |||||
Cash and cash equivalents at beginning of period |
442,841 | 346,056 | ||||||
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Cash and cash equivalents at end of period |
$ | 370,523 | $ | 389,149 | ||||
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Supplemental cash flow information: |
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Cash paid for taxes |
$ | 7,172 | $ | 3,129 | ||||
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Cash paid for interest |
$ | 100,283 | $ | 70,772 | ||||
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See accompanying notes to condensed consolidated financial statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Equinix, Inc. (Equinix or the Company) and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state the financial position and the results of operations for the interim periods presented. The condensed consolidated balance sheet data at December 31, 2010 has been derived from audited consolidated financial statements at that date. The consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (SEC), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles in the United States of America. For further information, refer to the Consolidated Financial Statements and Notes thereto included in Equinixs Form 10-K as filed with the SEC on February 25, 2011. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.
Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Equinix and its subsidiaries, including the operations of ALOG Data Centers do Brasil S.A. and its subsidiaries (ALOG) from April 25, 2011 (see Note 2) and Switch & Data Facilities Company, Inc. (Switch and Data) from April 30, 2010. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the consolidated financial statement presentation as of and for the three and nine months ended September 30, 2011.
Income Taxes
The Companys effective tax rates were 24.3% and 40.5% for the nine months ended September 30, 2011 and 2010, respectively. During the nine months ended September 30, 2011, the Companys unrecognized tax benefits increased by approximately $21,557,000 due to the ALOG Acquisition. A portion of these unrecognized tax benefits served to reduce the deferred tax assets acquired from the ALOG Acquisition.
Stock-Based Compensation
In February and March 2011, the Compensation Committee and the Stock Award Committee of the Board of Directors approved the issuance of an aggregate of 706,270 shares of restricted stock units to certain employees, including executive officers, pursuant to the 2000 Equity Incentive Plan as part of the Companys annual refresh program. These equity awards are subject to vesting provisions and had an average fair value per share on the dates of the grant of $85.64. Compensation expense related to these awards is expected to be amortized over a weighted-average period of 3.2 years.
6
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In July 2011, ALOG, in which the Company has an indirect controlling interest (see Note 2), granted 885,840 stock options to purchase common shares of ALOG to certain of ALOGs employees (the ALOG Stock Options). The ALOG Stock Options are accounted for as liability-classified awards under the accounting standard for share-based payments and will be re-measured each reporting period prospectively until the underlying shares are settled. Under certain circumstances, the ALOG Stock Options are eligible for net cash settlement by the stock option holders. The ALOG Stock Options vest annually and have a vesting period of 4 years. The average fair value per share of the ALOG Stock Options on the date of the grant was approximately $2.50, which was computed using the Black-Scholes model with assumptions as follows:
Average exercise price |
$ | 8.34 | ||
Expected life (years) |
2.75 | |||
Dividend yield |
0 | % | ||
Volatility |
55 | % | ||
Risk-free interest rate |
12.9 | % |
The following table presents, by operating expense category, the Companys stock-based compensation expense recognized in the Companys condensed consolidated statement of operations (in thousands):
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cost of revenues |
$ | 1,573 | $ | 1,619 | $ | 4,417 | $ | 4,957 | ||||||||
Sales and marketing |
4,153 | 3,627 | 10,629 | 10,316 | ||||||||||||
General and administrative |
13,481 | 11,704 | 38,014 | 34,747 | ||||||||||||
Restructuring charges |
| (3 | ) | | 1,488 | |||||||||||
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$ | 19,207 | $ | 16,947 | $ | 53,060 | $ | 51,508 | |||||||||
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Redeemable Non-Controlling Interests
The following table provides a summary of the activities of the Companys redeemable non-controlling interests (in thousands):
Balance at December 31, 2010 |
$ | | ||
ALOG Acquisition (see Note 2) |
66,777 | |||
Net income attributable to redeemable non-controlling interests |
323 | |||
Foreign currency loss attributable to redeemable non-controlling interests |
(9,096 | ) | ||
Change in redemption value of non-controlling interests |
10,639 | |||
Impact of foreign currency exchange |
(2,271 | ) | ||
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|||
Balance at September 30, 2011 |
$ | 66,372 | ||
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Recent Accounting Pronouncements
In September 2011, the FASB issued Accounting Standards Update (ASU) 2011-08, Testing Goodwill for Impairment. This ASU provides companies with the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if a company concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. If the carrying value of a reporting unit exceeds its fair value, then a company is required to perform the second step of the two-step goodwill impairment test. This guidance is effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements, if any, and whether to early adopt this standard.
7
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. This ASU is intended to increase the prominence of other comprehensive income in financial statements by presenting the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders equity. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance; therefore, adoption of the new guidance in the first quarter of fiscal 2012 will not have any impact on the Companys consolidated financial position, results of operations or cash flows.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs), which amends ASC 820, Fair Value Measurement. ASU 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or IFRSs. ASU 2011-14 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-14 clarifies the FASB's intent about the application of existing fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively; therefore, the Company will adopt ASU 2011-04 in its first quarter of fiscal 2012. The Company does not expect the adoption of ASU 2011-04 to have a material impact on its consolidated financial statements.
2. Business Combination
ALOG Acquisition
On April 25, 2011 (the Acquisition Date), Zion RJ Participações S.A. (Zion), a Brazilian joint-stock company controlled by a wholly-owned subsidiary of the Company and co-owned by RW Brasil Fundo de Investimento em Participações, a subsidiary of Riverwood Capital L.P. (Riverwood), completed the acquisition of approximately 90% of the outstanding capital stock of ALOG. As a result, the Company acquired an approximate 53% indirect, controlling equity interest in ALOG (the ALOG Acquisition). The Company paid a total of approximately 82,194,000 Brazilian reais in cash on the closing date, or approximately $51,723,000, to purchase the ALOG capital stock. An additional 36,000,000 Brazilian reais, or approximately $20,000,000, is payable by Zion in April 2013, subject to reduction for any post-closing balance sheet adjustments and any claims for indemnification (the Contingent Consideration). The Companys portion of the Contingent Consideration is 19,080,000 Brazilian reais, or approximately $11,000,000. ALOG operates three data centers in Brazil and is headquartered in Rio de Janeiro. ALOG will continue to operate under the ALOG trade name. There were no historical transactions between Equinix, Riverwood, Zion and ALOG.
Beginning in April 2014 and ending in May 2016, Equinix will have the right to purchase all of Riverwood's interest in Zion at a price equal to the greater of (i) its then current fair market value and (ii) a net purchase price that implies a compounded internal rate of return in U.S. dollars ("IRR") for Riverwood's investment of 12%. If Equinix exercises its right to purchase Riverwood's shares, Equinix also will have the right, and under certain circumstances may be required, to purchase the remaining approximate 10% of shares of ALOG that Zion does not own, which are held by ALOG management (collectively, the Call Options). If Equinix purchases all of Riverwoods interest in Zion at a price equal to its then current fair market value, the purchase price of the remaining approximate 10% of shares that are held by ALOG management will be equal to its then current fair market value. If Equinix purchases all of Riverwoods interest in Zion at a net purchase price that implies an IRR for Riverwoods investment of 12%, the purchase price per share of the remaining approximate 10% of shares that are held by ALOG management will be equal to the greater of (i) 50% of the purchase price per share of capital stock of ALOG in the ALOG Acquisition and (ii) a purchase price per share that implies an IRR equal to the sum of the IRR implied by the fair market value of the capital stock of ALOG plus 2%, declining over time.
Also beginning in April 2014 and ending in May 2016, Riverwood will have the right to require Equinix to purchase all of Riverwood's interests in Zion at a price equal to the greater of (i) its then current fair market value and (ii) a net purchase price that implies an IRR for Riverwood's investment of 8%, declining over time. If Riverwood exercises its right to require Equinix to purchase Riverwood's shares, Equinix will have the right, and under certain circumstances may be required, to purchase the remaining approximate 10% of shares of ALOG that Zion does not own, which are held by ALOG management (collectively, the Put Options). If Equinix purchases all of Riverwoods interest in Zion at a price equal to its then current fair market value, the purchase price of the remaining approximate 10% of shares that are held by ALOG management will be equal to its then current fair market value. If Equinix purchases all of Riverwoods interest in Zion at a net purchase price that implies an IRR for Riverwoods investment of 8%, declining over time, the purchase price per share of the remaining approximate 10% of shares that are held by ALOG management will be equal to the greater of (i) 50% of the purchase price per share of capital stock of ALOG in the ALOG Acquisition and (ii) a purchase price per share that implies an IRR equal to the sum of the IRR implied by the fair market value of the capital stock of ALOG plus 2%, declining over time.
8
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As the Company has an approximate 53% indirect controlling equity interest in ALOG, it began consolidating the results of ALOGs operations on the Acquisition Date. Upon consolidation, all amounts pertaining to the approximate 10% of ALOG that Zion does not own, as well as Riverwoods interest in ALOG and Zion, are reported as redeemable non-controlling interests in the Companys consolidated financial statements. The Company incurred acquisition costs of $678,000 and $2,307,000, respectively, for the three and nine months ended September 30, 2011 related to ALOG, which were included in the consolidated statements of operations.
Purchase Price Allocation
The ALOG Acquisition was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price was allocated to ALOGs net tangible and intangible assets based upon their fair value as of the Acquisition Date. Based upon the purchase price and the valuation of ALOG, the preliminary purchase price allocation was as follows (in thousands):
Cash and cash equivalents |
$ | 9,769 | ||
Accounts receivable |
6,756 | |||
Prepaid expense and other current assets |
575 | |||
Property, plant and equipment |
52,542 | |||
Goodwill |
104,799 | |||
Intangible assets |
19,295 | |||
Other non-current assets |
6,987 | |||
|
|
|||
Total assets acquired |
200,723 | |||
Accounts payable and accrued expenses |
(49,965 | ) | ||
Debt |
(25,669 | ) | ||
Other current liabilities |
(4,643 | ) | ||
Other non-current liabilities |
(1,946 | ) | ||
Redeemable non-controlling interests |
(66,777 | ) | ||
|
|
|||
Net assets acquired |
$ | 51,723 | ||
|
|
The Companys preliminary purchase price includes the Companys current estimate of the fair value of the Contingent Consideration. The Company continues to evaluate certain assets and liabilities related to the ALOG Acquisition. Additional information, which existed as of the Acquisition Date but was unknown to the Company at that time, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the Acquisition Date. Changes to the assets and liabilities recorded may result in a corresponding adjustment to goodwill.
The following table presents certain information on the acquired identifiable intangible assets (dollars in thousands):
Intangible assets |
Fair value | Estimated useful lives (years) |
Weighted- average estimated useful lives (years) | |||||
Customer contracts |
$17,093 | 5 7 | 5.9 | |||||
Other |
2,202 | 3 6 | 4.3 |
The fair value of customer contracts was estimated by applying an income approach. The fair value was determined by calculating the present value of estimated future operating cash flows generated from exisiting customers less costs to realize the revenue. The Company applied a discount rate of approximately 15.6%, which reflects the nature of the asset as it relates to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer contracts include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value of the other acquired identifiable intangible assets were estimated by applying an income or cost approach as appropriate. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.
9
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company determined the fair value of the loans payable assumed in the ALOG Acquisition by estimating ALOGs debt rating and reviewed market data with a similar debt rating and other characteristics of the debt, including the maturity date and security type. The Company determined that the book value approximated the fair value as of the Acquisition Date.
The Company determined the fair value of the redeemable non-controlling interests assumed in the ALOG Acquisition based on the consideration transferred, which included the values ascribed to the Call Options and Put Options. The Company will record an adjustment each reporting period to these redeemable non-controlling interests such that the carrying value of the redeemable non-controlling interests equals the greater of fair value or a minimum IRR as outlined in the Put Options.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill is attributable to the workforce of ALOG and the significant synergies expected to arise after the ALOG Acquisition. A portion of the goodwill is expected to be deductible for local tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the ALOG Acquisition is attributable to the Companys Americas reportable segment (see Note 12) and reporting unit (see Note 4).
The consolidated financial statements of the Company include the operations of ALOG from April 25, 2011 through September 30, 2011 for the three and nine months ended September 30, 2011. The following table sets forth the results of operations of ALOG which were included in the Companys consolidated statements of operations (in thousands):
Three months ended | Nine months ended | |||||||
September 30, 2011 | ||||||||
Revenues |
$ | 17,858 | $ | 29,582 | ||||
Net income |
807 | 804 |
The ALOG Acquisition was not material to the Companys consolidated balance sheets and results of operations; therefore, the Company does not present unaudited pro forma combined consolidated financial information.
3. Earnings Per Share
The Company computes its earnings per share (EPS) using the two-class method as prescribed by the accounting standard for earnings per share. The two-class method is an earnings allocation method for computing EPS when an entitys capital structure includes either two or more classes of common stock or includes common stock and participating securities. The two-class method calculates EPS based on distributed earnings (i.e., adjustments to redeemable non-controlling interests) and undistributed earnings. Undistributed losses are not allocated to participating securities under the two-class method unless the participating security has a contractual obligation to share in losses on a basis that is objectively determinable. Common shares of ALOG and Zion are considered participating securities in which the Company has indirect controlling equity interests.
10
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table sets forth the computation of basic and diluted earnings per share attributable to the Company for the periods presented (in thousands, except per share amounts):
Three months ended September 30, |
Nine months
ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 20,639 | $ | 11,196 | $ | 76,517 | $ | 23,121 | ||||||||
Adjustments attributable to redeemable non-controlling interests |
(10,959 | ) | | (10,962 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to Equinix, basic and diluted |
$ | 9,680 | $ | 11,196 | $ | 65,555 | $ | 23,121 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average shares used to compute basic earnings per share |
47,202 | 45,745 | 46,861 | 42,961 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Effect of dilutive securities: |
||||||||||||||||
Employee equity awards |
741 | 931 | 833 | 1,079 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average shares used to compute diluted earnings per share |
47,943 | 46,676 | 47,694 | 44,040 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per share attributable to Equinix: |
||||||||||||||||
Basic |
$ | 0.21 | $ | 0.24 | $ | 1.40 | $ | 0.54 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
$ | 0.20 | $ | 0.24 | $ | 1.37 | $ | 0.53 | ||||||||
|
|
|
|
|
|
|
|
The following table sets forth weighted-average outstanding potential shares of common stock that are not included in the diluted earnings per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):
Three months ended September 30, |
Nine months
ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Shares reserved for conversion of 2.50% convertible subordinated notes |
2,232 | 2,232 | 2,232 | 2,232 | ||||||||||||
Shares reserved for conversion of 3.00% convertible subordinated notes |
2,945 | 2,945 | 2,945 | 2,945 | ||||||||||||
Shares reserved for conversion of 4.75% convertible subordinated notes |
4,433 | 4,433 | 4,433 | 4,433 | ||||||||||||
Common stock related to employee equity awards |
685 | 667 | 657 | 933 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
10,295 | 10,277 | 10,267 | 10,543 | |||||||||||||
|
|
|
|
|
|
|
|
11
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
4. Balance Sheet Components
Cash, Cash Equivalents and Short-Term and Long-Term Investments
Cash, cash equivalents and short-term and long-term investments consisted of the following as of (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Cash and cash equivalents: |
||||||||
Cash |
$ | 81,432 | $ | 85,297 | ||||
Cash equivalents: |
||||||||
Money markets |
285,891 | 110,563 | ||||||
U.S. government securities |
| 246,981 | ||||||
U.S. government agencies securities |
3,200 | | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
370,523 | 442,841 | ||||||
|
|
|
|
|||||
Marketable securities: |
||||||||
U.S. government securities |
622,699 | 144,976 | ||||||
U.S. government agencies securities |
117,555 | | ||||||
Corporate bonds |
43,463 | 2,645 | ||||||
Certificates of deposit |
7,859 | | ||||||
Foreign government securities |
7,348 | | ||||||
Asset-backed securities |
741 | 2,377 | ||||||
|
|
|
|
|||||
Total marketable securities |
799,665 | 149,998 | ||||||
|
|
|
|
|||||
Total cash, cash equivalents and short-term and long-term investments |
$ | 1,170,188 | $ | 592,839 | ||||
|
|
|
|
The following table summarizes the fair value and gross unrealized gains and losses related to the Companys short-term and long-term investments in marketable securities designated as available-for-sale securities as of (in thousands):
September 30, 2011 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
U.S. government securities |
$ | 622,722 | $ | 41 | $ | (64 | ) | $ | 622,699 | |||||||
U.S. government agencies securities |
117,600 | 99 | (144 | ) | 117,555 | |||||||||||
Corporate bonds |
43,538 | 9 | (84 | ) | 43,463 | |||||||||||
Certificates of deposit |
7,859 | | | 7,859 | ||||||||||||
Foreign government securities |
7,358 | | (10 | ) | 7,348 | |||||||||||
Asset-backed securities |
720 | 21 | | 741 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 799,797 | $ | 170 | $ | (302 | ) | $ | 799,665 | |||||||
|
|
|
|
|
|
|
|
December 31, 2010 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
U.S. government securities |
$ | 144,972 | $ | 4 | $ | | $ | 144,976 | ||||||||
Corporate bonds |
2,632 | 13 | | 2,645 | ||||||||||||
Asset-backed securities |
2,266 | 112 | (1 | ) | 2,377 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 149,870 | $ | 129 | $ | (1 | ) | $ | 149,998 | |||||||
|
|
|
|
|
|
|
|
12
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of September 30, 2011 and December 31, 2010, cash equivalents included investments which were readily convertible to cash and had original maturity dates of 90 days or less. The maturities of securities classified as short-term investments were one year or less as of September 30, 2011 and December 31, 2010. The maturities of securities classified as long-term investments were greater than one year and less than three years as of September 30, 2011 and December 31, 2010.
While certain marketable securities carry unrealized losses, the Company expects that it will receive both principal and interest according to the stated terms of each of the securities and that the decline in market value is primarily due to changes in the interest rate environment from the time the securities were purchased as compared to interest rates at September 30, 2011.
The following table summarizes the fair value and gross unrealized losses related to 66 available-for-sale securities with an aggregate cost basis of $147,838,000, aggregated by type of investment and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2011 (in thousands):
Securities in a loss position for less than 12 months |
Securities in a loss position for 12 months or more |
|||||||||||||||
Fair value | Gross unrealized losses |
Fair value | Gross unrealized losses |
|||||||||||||
U.S. government securities |
$ | 49,936 | $ | (64 | ) | $ | | $ | | |||||||
U.S. government agencies securities |
65,260 | (144 | ) | | | |||||||||||
Corporate bonds |
27,020 | (84 | ) | | | |||||||||||
Foreign government securities |
5,320 | (10 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 147,536 | $ | (302 | ) | $ | | $ | | ||||||||
|
|
|
|
|
|
|
|
While the Company does not believe it holds investments that are other-than-temporarily impaired and believes that the Companys investments will mature at par as of September 30, 2011, the Companys investments are subject to the currently adverse market conditions. If market conditions were to deteriorate, the Company could sustain other-than-temporary impairments to its investment portfolio which could result in additional realized losses being recorded in interest income, net or securities markets could become inactive which could affect the liquidity of the Companys investments.
Accounts Receivable
Accounts receivables, net, consisted of the following as of (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Accounts receivable |
$ | 249,339 | $ | 210,919 | ||||
Unearned revenue |
(100,670 | ) | (90,753 | ) | ||||
Allowance for doubtful accounts |
(4,484 | ) | (3,808 | ) | ||||
|
|
|
|
|||||
$ | 144,185 | $ | 116,358 | |||||
|
|
|
|
Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The Company generally invoices its customers at the end of a calendar month for services to be provided the following month. Accordingly, unearned revenue consists of pre-billing for services that have not yet been provided, but which have been billed to customers in advance in accordance with the terms of their contract.
13
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Other Current Assets
Other current assets consisted of the following as of (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Restricted cash, current |
$ | 57,015 | $ | | ||||
Deferred tax assets, net |
20,274 | 38,696 | ||||||
Prepaid expenses |
19,656 | 17,810 | ||||||
Taxes receivable |
11,551 | 6,857 | ||||||
Other receivables |
1,680 | 4,779 | ||||||
Foreign currency forward contract receivable |
381 | | ||||||
Other current assets |
4,787 | 3,515 | ||||||
|
|
|
|
|||||
$ | 115,344 | $ | 71,657 | |||||
|
|
|
|
Restricted cash, current has increased as a result of the Paris 4 IBX Financing (see Note 9).
Property, Plant and Equipment, Net
Property, plant and equipment consisted of the following as of (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
IBX plant and machinery |
$ | 1,788,389 | $ | 1,524,559 | ||||
Leasehold improvements |
947,323 | 826,540 | ||||||
Buildings |
525,768 | 395,752 | ||||||
IBX equipment |
344,178 | 263,995 | ||||||
Site improvements |
313,086 | 307,933 | ||||||
Computer equipment and software |
130,244 | 114,263 | ||||||
Land |
92,092 | 89,312 | ||||||
Furniture and fixtures |
17,628 | 15,602 | ||||||
Construction in progress |
199,565 | 128,535 | ||||||
|
|
|
|
|||||
4,358,273 | 3,666,491 | |||||||
Less accumulated depreciation |
(1,236,179 | ) | (1,015,538 | ) | ||||
|
|
|
|
|||||
$ | 3,122,094 | $ | 2,650,953 | |||||
|
|
|
|
Leasehold improvements, IBX plant and machinery, computer equipment and software and buildings recorded under capital leases aggregated $128,312,000 and $117,289,000 at September 30, 2011 and December 31, 2010, respectively. Amortization on the assets recorded under capital leases is included in depreciation expense and accumulated depreciation on such assets totaled $31,300,000 and $29,235,000 as of September 30, 2011 and December 31, 2010, respectively.
14
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Goodwill and Intangible Assets
Goodwill and intangible assets, net, consisted of the following as of (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Goodwill: |
||||||||
Americas |
$ | 497,107 | $ | 408,730 | ||||
EMEA |
350,264 | 345,486 | ||||||
Asia-Pacific |
19,909 | 20,149 | ||||||
|
|
|
|
|||||
$ | 867,280 | $ | 774,365 | |||||
|
|
|
|
|||||
Intangible assets: |
||||||||
Intangible asset customer contracts |
$ | 171,577 | $ | 156,621 | ||||
Intangible asset favorable leases |
18,207 | 18,285 | ||||||
Intangible asset others |
5,336 | 3,483 | ||||||
|
|
|
|
|||||
195,120 | 178,389 | |||||||
Accumulated amortization |
(41,615 | ) | (27,444 | ) | ||||
|
|
|
|
|||||
$ | 153,505 | $ | 150,945 | |||||
|
|
|
|
Changes in the carrying amount of goodwill by geographic regions are as follows (in thousands):
Americas | EMEA | Asia-Pacific | Total | |||||||||||||
Balance at December 31, 2010 |
$ | 408,730 | $ | 345,486 | $ | 20,149 | $ | 774,365 | ||||||||
ALOG acquisition (see Note 2) |
104,799 | | | 104,799 | ||||||||||||
Impact of foreign currency exchange |
(16,422 | ) | 4,778 | (240 | ) | (11,404 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at September 30, 2011 |
$ | 497,107 | $ | 350,264 | $ | 19,909 | $ | 867,280 | ||||||||
|
|
|
|
|
|
|
|
The Companys goodwill and intangible assets in EMEA (see Note 12), denominated in British pounds and Euros, goodwill in Asia-Pacific, denominated in Singapore dollars, and certain goodwill and intangibles in Americas, denominated in Canadian dollars and Brazilian reais, are subject to foreign currency fluctuations. The Companys foreign currency translation gains and losses, including goodwill and intangibles, are a component of other comprehensive income and loss.
Changes in the gross book value of intangible assets by geographic regions are as follows (in thousands):
Americas | EMEA | Total | ||||||||||
Intangible assets, gross at December 31, 2010 |
$ | 118,439 | $ | 59,950 | $ | 178,389 | ||||||
ALOG acquisition (see Note 2) |
19,295 | | 19,295 | |||||||||
Impact of foreign currency exchange |
(3,383 | ) | 819 | (2,564 | ) | |||||||
|
|
|
|
|
|
|||||||
Intangible assets, gross at September 30, 2011 |
$ | 134,351 | $ | 60,769 | $ | 195,120 | ||||||
|
|
|
|
|
|
15
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the three and nine months ended September 30, 2011, the Company recorded amortization expense of $5,043,000 and $14,207,000, respectively, associated with its intangible assets. For the three and nine months ended September 30, 2010, the Company recorded amortization expense of $4,357,000 and $9,378,000, respectively, associated with its intangible assets. The Companys estimated future amortization expense related to these intangibles is as follows (in thousands):
Year ending: |
||||
2011 (three months remaining) |
$ | 4,859 | ||
2012 |
19,436 | |||
2013 |
19,389 | |||
2014 |
19,024 | |||
2015 |
18,558 | |||
Thereafter |
72,239 | |||
|
|
|||
Total |
$ | 153,505 | ||
|
|
Other Assets
Other assets consisted of the following (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Restricted cash, non-current |
$ | 37,255 | $ | 4,309 | ||||
Debt issuance costs, net |
43,627 | 34,066 | ||||||
Deposits |
31,918 | 24,604 | ||||||
Prepaid expenses, non-current |
20,333 | 9,597 | ||||||
Deferred tax assets, net |
19,446 | 16,955 | ||||||
Other assets, non-current |
5,512 | 1,361 | ||||||
|
|
|
|
|||||
$ | 158,091 | $ | 90,892 | |||||
|
|
|
|
Restricted cash, non-current has increased primarily as a result of the Paris 4 IBX Financing (see Note 9).
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Accounts payable |
$ | 21,521 | $ | 12,585 | ||||
Accrued compensation and benefits |
53,192 | 53,259 | ||||||
Accrued taxes |
34,594 | 15,707 | ||||||
Accrued interest |
32,704 | 25,456 | ||||||
Accrued utilities and security |
18,613 | 18,346 | ||||||
Accrued repairs and maintenance |
3,385 | 2,894 | ||||||
Accrued professional fees |
2,945 | 3,786 | ||||||
Accrued other |
14,139 | 13,821 | ||||||
|
|
|
|
|||||
$ | 181,093 | $ | 145,854 | |||||
|
|
|
|
16
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Deferred installation revenue |
$ | 34,913 | $ | 31,149 | ||||
Customer deposits |
11,251 | 12,624 | ||||||
Deferred recurring revenue |
3,201 | 2,349 | ||||||
Accrued restructuring charges |
2,751 | 3,089 | ||||||
Deferred rent |
1,548 | 585 | ||||||
Deferred tax liabilities |
993 | 993 | ||||||
Foreign currency forward contract payable |
275 | 58 | ||||||
Asset retirement obligations |
363 | 445 | ||||||
Other current liabilities |
392 | 1,336 | ||||||
|
|
|
|
|||||
$ | 55,687 | $ | 52,628 | |||||
|
|
|
|
Other Liabilities
Other liabilities consisted of the following (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Deferred tax liabilities, net |
$ | 93,678 | $ | 103,717 | ||||
Asset retirement obligations, non-current |
55,010 | 46,322 | ||||||
Deferred rent, non-current |
46,938 | 43,705 | ||||||
Deferred installation revenue, non-current |
23,207 | 19,488 | ||||||
Accrued taxes, non-current |
16,020 | | ||||||
Deferred recurring revenue, non-current |
5,904 | 4,897 | ||||||
Customer deposits, non-current |
5,660 | 4,206 | ||||||
Accrued restructuring charges, non-current |
4,478 | 3,952 | ||||||
Other liabilities |
2,405 | 2,473 | ||||||
|
|
|
|
|||||
$ | 253,300 | $ | 228,760 | |||||
|
|
|
|
The Company currently leases the majority of its IBX data centers and certain equipment under non-cancelable operating lease agreements expiring through 2035. The IBX data center lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company has negotiated some rent expense abatement periods for certain leases to better match the phased build-out of its centers. The Company accounts for such abatements and increasing base rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent.
5. Derivatives and Hedging Activities
The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of the foreign currency-denominated assets and liabilities change. Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date.
The Company has not designated the foreign currency forward contracts as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these contracts are included in other income (expense), net, along with those foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the three and nine months ended September 30, 2011 and 2010.
17
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table sets forth the Companys net gain (loss), which is reflected in other income (expense) on the accompanying condensed consolidated statement of operations, in connection with its foreign currency forward contracts (in thousands):
Three months ended September 30, |
Nine months
ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net gain (loss) |
$ | 1,397 | $ | (1,677 | ) | $ | 163 | $ | 19 |
6. Fair Value Measurements
The Companys financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 were as follows (in thousands):
Fair value as of September 30, 2011 |
Fair value measurement using | |||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Assets: |
||||||||||||||||
U.S. government obligations |
$ | 622,699 | $ | | $ | 622,699 | $ | | ||||||||
U.S. government agency obligations |
120,755 | | 120,755 | | ||||||||||||
Cash and money markets |
367,323 | 367,323 | | | ||||||||||||
Corporate bonds |
43,463 | | 43,463 | | ||||||||||||
Certificates of deposit |
7,859 | 7,859 | | | ||||||||||||
Foreign government securities |
7,348 | | 7,348 | | ||||||||||||
Asset-backed securities |
741 | | 741 | | ||||||||||||
Foreign currency forward contracts (1) |
381 | | 381 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,170,569 | $ | 375,182 | $ | 795,387 | $ | | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Foreign currency forward contracts (1) |
$ | 275 | $ | | $ | 275 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
|
(1) | Amounts are included within other current assets and other current liabilities in the Companys accompanying condensed consolidated balance sheets. |
Cash, Cash Equivalents and Investments. The fair value of the Company's investments in available-for-sale money market funds approximates their face value. Such instruments are included in cash equivalents. These instruments include available-for-sale debt investments related to the Company's investments in the securities of other public companies, governmental units and other agencies. The fair value of these investments is based on the quoted market price of the underlying shares. Fair value estimates are made as of a specific point in time based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors.
The Company considers each category of investments held to be an asset group. The asset groups held at September 30, 2011 were primarily U.S. government securities, cash and money market funds, corporate bonds, certificate of deposits and foreign government securities. The Companys fair value assessment includes an evaluation by each of these securities available-for-sale, all of which continue to be classified within Level 2 of the fair value hierarchy. The types of instruments valued based on other observable inputs include available-for-sale debt investments in other public companies, governmental units and other agencies. Such instruments are generally classified within Level 2 of the fair value hierarchy.
18
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company uses the specific identification method in computing realized gains or losses. Short-term and long-term investments are classified as available-for-sale and are carried at fair value based on quoted market prices with unrealized gains and losses reported in stockholders equity as a component of other comprehensive income or loss, net of any related tax effect. The Company reviews its investment portfolio quarterly to determine if any securities may be other-than-temporarily impaired due to increased credit risk, changes in industry or sector of a certain instrument or ratings downgrades over an extended period of time. The Company determined that these quoted market prices qualify as Level 1 and Level 2.
Derivative Assets and Liabilities. For foreign currency derivatives, the Company uses forward contract and option valuation models employing market observable inputs, such as spot currency rates, time value and option volatilities with adjustments made to these values utilizing the credit default swap rates of our foreign exchange trading counterparties. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit risk valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2011, the Company had assessed the significance of the impact of the credit risk valuation adjustments on the overall valuation of its derivative positions and had determined that the credit risk valuation adjustments were not significant to the overall valuation of its derivatives. Therefore, they are categorized as Level 2.
During the three and nine months ended September 30, 2011, the Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis.
7. Related Party Transactions
The Company has several significant stockholders and other related parties that are also customers and/or vendors. The Companys activity of related party transactions was as follows (in thousands):
Three months
ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 6,608 | $ | 5,758 | $ | 19,388 | $ | 16,792 | ||||||||
Costs and services |
915 | 1,840 | 2,709 | 2,649 |
As of September 30, | ||||||||
2011 | 2010 | |||||||
Accounts receivable |
$ | 5,271 | $ | 4,397 | ||||
Accounts payable |
461 | 246 |
In connection with the ALOG Acquisition, the Company acquired a lease for one of the Brazilian IBX data centers in which the lessor is a member of ALOG management. This lease contains an option to purchase the underlying property for fair market value on the date of purchase. The Company accounts for this lease as a financing obligation as a result of structural building work pursuant to the accounting standard for lessees involvement in asset construction. As of September 30, 2011, the Company had a financing obligation liability totaling approximately $4,576,000 related to this lease on its balance sheet. This amount is considered a related party liability, which is not reflected in the related party data presented above.
19
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
8. Capital Lease and Other Financing Obligations
Hong Kong 2 IBX Lease
In August 2010, an indirect wholly-owned subsidiary of the Company entered into a lease agreement for rental of space which will be used for its second IBX data center in Hong Kong. Additionally, in December 2010, the Company entered into a license agreement with the same Landlord to obtain the right to make structural changes to the leased space (the Hong Kong 2 IBX Lease). The Hong Kong 2 IBX Lease has a term of 12 years and a total cumulative rent obligation of approximately $40,447,000. Pursuant to the accounting standard for lessees involvement in asset construction, the Company is now considered the owner of the leased space during the construction phase due to the structural work that the Company is now undertaking, which commenced in January 2011. As a result, in January 2011, the Company recorded a building asset and a related financing obligation liability totaling approximately $38,036,000 (using the exchange rate as of September 30, 2011).
New York 5 IBX Lease
In May 2011, the Company entered into a lease amendment for two buildings that the Company will develop and ultimately convert into its eighth IBX data center in the New York metro area (the NY 5 IBX Expansion Project and the NY 5 Lease Amendment). Under the NY 5 Lease Amendment, the Company exercised its first five year renewal option available in the original lease agreement, which was entered into in April 2010. The NY 5 Lease Amendment has a remaining term of 16.7 years and a total cumulative remaining rent obligation of approximately $41,168,000 commencing May 2011. The Company began the specified construction for one of the two buildings in June 2011. Pursuant to the accounting standard for lessees involvement in asset construction, the Company is considered the owner of the building during the construction phase due to the structural building work that the Company is undertaking. As a result, the Company will be recording a building asset during the construction period and a related financing liability (the NY 5 IBX Building Financing), while the underlying land will be considered an operating lease. The building is expected to be completed during the second half of 2012. In connection with the NY 5 IBX Building Financing, the Company recorded a building asset totaling approximately $11,541,000 and a corresponding financing obligation liability totaling approximately $12,244,000 as of September 30, 2011. The other building is being accounted for as a capital lease.
DC 10 Lease
In December 2010, the Company entered into a lease for a building that the Company and the landlord will jointly develop to meet the Companys needs and which the Company will ultimately convert into its 10th IBX data center in the Washington, D.C. metro area (the DC 10 IBX Expansion Project and the DC 10 Lease). The DC 10 Lease has a term of 12 years commencing from the date the landlord delivers the completed building to the Company, which is expected to occur in the fourth quarter of 2011. Monthly payments under the DC 10 Lease are expected to commence six months after the date the landlord delivers the completed building to the Company and will be made through the end of the lease term at an effective interest rate of 11.1%. The DC 10 Lease has a total cumulative rent obligation of approximately $27,752,000. The landlord began construction of the building to the Companys specifications in May 2011. Pursuant to the accounting standard for lessees involvement in asset construction, the Company is considered the owner of the building during the construction phase due to the building work that the landlord and the Company is undertaking. As a result, the Company will be recording a building asset during the construction period and a related financing liability (the DC 10 IBX Building Financing), while the underlying land will be considered an operating lease. In connection with the DC 10 IBX Building Financing, the Company recorded a building asset totaling approximately $11,304,000 and a corresponding financing obligation liability totaling approximately $11,514,000, representing the estimated percentage-of-completion of the building as of September 30, 2011.
20
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Singapore 1 IBX Lease
In March 2011, the Company entered into a lease amendment to add space to its currently existing IBX data center in Singapore (the Singapore IBX Expansion Project and the Singapore 1 IBX Lease). The Company exercised an option to convert part of the space within the Singapore IBX Expansion project to meet the Companys needs. The Singapore 1 IBX Lease has a remaining term of 6.1 years and a total cumulative remaining rent obligation of approximately $15,374,000 (using the exchange rate as of September 30, 2011) commencing in April 2011. The Company began construction in July 2011. Pursuant to the accounting standard for lessees involvement in asset construction, the Company is considered the owner of the building during the construction phase due to the building work that the Company is undertaking. As a result, the Company recorded a building asset during the construction period and a related financing liability (the Singapore 1 IBX Building Financing). In connection with the Singapore 1 IBX Building Financing, in July 2011, the Company recorded a building asset and a corresponding financing obligation liability totaling approximately $43,358,000 (using the exchange rate as of September 30, 2011).
Maturities of Capital Lease and Other Financing Obligations
The Companys capital lease and other financing obligations are summarized as follows (dollars in thousands):
As of September 30, 2011 | ||||||||||||
Capital lease obligations |
Other financing obligations |
Total | ||||||||||
2011 (three months remaining) |
$ | 4,685 | $ | 4,757 | $ | 9,442 | ||||||
2012 |
18,368 | 20,999 | 39,367 | |||||||||
2013 |
18,008 | 22,039 | 40,047 | |||||||||
2014 |
18,602 | 22,956 | 41,558 | |||||||||
2015 |
18,978 | 23,926 | 42,904 | |||||||||
Thereafter |
139,270 | 192,688 | 331,958 | |||||||||
|
|
|
|
|
|
|||||||
Total minimum lease payments |
217,911 | 287,365 | 505,276 | |||||||||
Plus amount representing residual property value |
| 195,618 | 195,618 | |||||||||
Less estimated building costs |
| (4,521 | ) | (4,521 | ) | |||||||
Less amount representing interest |
(81,625 | ) | (226,533 | ) | (308,158 | ) | ||||||
|
|
|
|
|
|
|||||||
Present value of net minimum lease payments |
136,286 | 251,929 | 388,215 | |||||||||
Less current portion |
(7,981 | ) | (3,386 | ) | (11,367 | ) | ||||||
|
|
|
|
|
|
|||||||
$ | 128,305 | $ | 248,543 | $ | 376,848 | |||||||
|
|
|
|
|
|
9. Debt Facilities
Loans Payable
The Companys loans payable consisted of the following (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
New Asia-Pacific financing |
$ | 184,844 | $ | 120,315 | ||||
Paris 4 IBX financing |
40,054 | | ||||||
ALOG debt |
11,738 | | ||||||
|
|
|
|
|||||
236,636 | 120,315 | |||||||
Less current portion of principal |
(74,652 | ) | (19,978 | ) | ||||
|
|
|
|
|||||
$ | 161,984 | $ | 100,337 | |||||
|
|
|
|
21
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Senior Revolving Credit Line
In September 2011, the Company entered into a $150,000,000 senior unsecured revolving credit facility (the Senior Revolving Credit Line) with a group of lenders (the Lenders). The Senior Revolving Credit Line replaced the Companys $25,000,000 revolving credit facility with Bank of America (the Bank of America Revolving Credit Line). As a result, the outstanding letters of credit issued under the Bank of America Revolving Credit Line were all transferred into the Senior Revolving Credit Line. The Company may use the Senior Revolving Credit Line for working capital, capital expenditures, issuance of letters of credit, general corporate purposes and to refinance a portion of the Companys existing debt obligations. The Senior Revolving Credit Line has a five-year term and allows the Company to borrow, repay and re-borrow over the term. The Senior Revolving Credit Line provides a sublimit for the issuance of letters of credit of up to $100,000,000 and a sublimit for swing line borrowings of up to $25,000,000. Borrowings under the Senior Revolving Credit Line carry an interest rate of US$ LIBOR plus an applicable margin ranging from 1.25% to 1.75% per annum, which varies as a function of the Companys senior leverage ratio. The Company is also subject to a quarterly non-utilization fee ranging from 0.30% to 0.40% per annum, the pricing of which will also vary as a function of the Companys senior leverage ratio. Additionally, the Company may increase the size of the Senior Revolving Credit Line at its election by up to $100,000,000, subject to approval by the Lenders and based on current market conditions. The Senior Revolving Credit Line contains several financial covenants, which the Company must comply with quarterly, including a leverage ratio, fixed charge coverage ratio and a minimum net worth covenant. As of September 30, 2011, the Company was in compliance with all financial covenants associated with the Senior Revolving Credit Line.
As of September 30, 2011, the Companys cost of borrowing under the Senior Revolving Credit Line was 1.99% per annum. As of September 30, 2011, the Company had 14 irrevocable letters of credit totaling $18,960,000 issued and outstanding under the Senior Revolving Credit Line. As a result, the amount available to borrow was $131,040,000 as of September 30, 2011.
Paris 4 IBX Financing
In March 2011, the Company entered into two agreements with two unrelated parties to purchase and develop a building that will ultimately become the Companys fourth IBX data center in the Paris metro area. The first agreement allowed the Company the right to purchase the property for a total fee of approximately $20,160,000, payable to a company that held exclusive rights (including power rights) to the property and was already in the process of developing the property into a data center and will now, instead, become the anchor tenant in the Paris 4 IBX data center once it is open for business. The second agreement was entered into with the developer of the property and allowed the Company to take immediate title to the building and associated land and also requires the developer to construct the data center to the Companys specifications and deliver the completed data center to the Company in July 2012 for a total fee of approximately $101,725,000. Both agreements include extended payment terms. The Company made payments under both agreements totaling approximately $35,687,000 in March 2011 and the remaining payments due totaling approximately $86,197,000 are payable on various dates through March 2013 (the Paris 4 IBX Financing). Of the amounts paid or payable under the Paris 4 IBX Financing, a total of approximately $14,951,000 was allocated to land and building assets, $3,444,000 was allocated to a deferred charge, which will be netted against revenue associated with the anchor tenant of the Paris 4 IBX data center over the term of the customer contract, and the remainder totaling $103,490,000 was or will be allocated to construction costs inclusive of interest charges. The Company has imputed an interest rate of 5.90% per annum on the Paris 4 IBX Financing as of September 30, 2011. The Company will record additional construction costs and increase the Paris 4 IBX Financing liability over the course of the construction period. The Paris 4 IBX Financing also required the Company to post approximately $89,676,000 of cash into a restricted cash account to ensure liquidity for the developer during the construction period. As a result, the Companys restricted cash balances (both current and non-current) have increased (refer to Other Current Assets and Other Assets in Note 4).
22
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Senior Notes
The Companys senior notes consisted of the following (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
8.125% senior notes due 2018 |
$ | 750,000 | $ | 750,000 | ||||
7.00% senior notes due 2021 |
750,000 | | ||||||
|
|
|
|
|||||
1,500,000 | 750,000 | |||||||
|
|
|
|
7.00% Senior Notes
In July 2011, the Company issued $750,000,000 aggregate principal amount of 7.00% Senior Notes due July 15, 2021 (the 7.00% Senior Notes). Interest is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2012.
The 7.00% Senior Notes are governed by an indenture dated July 6, 2011 between the Company, as issuer, and U.S. Bank National Association, as trustee (the 7.00% Senior Notes Indenture). The 7.00% Senior Notes Indenture contains covenants that limit the Companys ability and the ability of its subsidiaries to, among other things:
| incur additional debt; |
| pay dividends or make other restricted payments; |
| purchase, redeem or retire capital stock or subordinated debt; |
| make asset sales; |
| enter into transactions with affiliates; |
| incur liens; |
| enter into sale-leaseback transactions; |
| provide subsidiary guarantees; |
| make investments; and |
| merge or consolidate with any other person. |
Each of these restrictions has a number of important qualifications and exceptions. The 7.00% Senior Notes are unsecured and rank equal in right of payment to the Companys existing or future senior debt and senior in right of payment to the Companys existing and future subordinated debt including the Companys convertible debt. The 7.00% Senior Notes are effectively junior to any of the Companys existing and future secured indebtedness and any secured indebtedness of its subsidiaries. The 7.00% Senior Notes are also structurally subordinated to all debt and other liabilities (including trade payables) of the Companys subsidiaries and will continue to be subordinated to the extent that these subsidiaries do not guarantee the 7.00% Senior Notes in the future.
23
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At any time prior to July 15, 2014, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 7.00% Senior Notes outstanding under the 7.00% Senior Notes Indenture, at a redemption price equal to 107.000% of the principal amount of the 7.00% Senior Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings, provided that (i) at least 65% of the aggregate principal amount of the 7.00% Senior Notes issued under the 7.00% Senior Notes Indenture remains outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur within 90 days of the date of the closing of such equity offerings. On or after July 15, 2016, the Company may redeem all or a part of the 7.00% Senior Notes, on any one or more occasions, at the redemption prices set forth below plus accrued and unpaid interest thereon, if any, up to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on July 15 of the years indicated below:
Redemption price of the Senior Notes | ||
2016 |
103.500% | |
2017 |
102.333% | |
2018 |
101.167% | |
2019 and thereafter |
100.000% |
In addition, at any time prior to July 15, 2016, the Company may also redeem all or a part of the 7.00% Senior Notes at a redemption price equal to 100% of the principal amount of the 7.00% Senior Notes redeemed plus applicable premium (the Applicable Premium) and accrued and unpaid interest, if any, to, but not including, the date of redemption (the Redemption Date). The Applicable Premium means the greater of:
| 1.0% of the principal amount of the 7.00% Senior Notes to be redeemed; and |
| the excess of: (a) the present value at such redemption date of (i) the redemption price of the 7.00% Senior Notes to be redeemed at July 15, 2016 as shown in the above table, plus (ii) all required interest payments due on these 7.00% Senior Notes through July 15, 2016 (excluding accrued but unpaid interest, if any, to, but not including the redemption date), computed using a discount rate equal to the yield to maturity as of the redemption date of the United States Treasury securities with a constant maturity most nearly equal to the period from the redemption date to July 15, 2016, plus 0.50%; over (b) the principal amount of the 7.00% Senior Notes to be redeemed. |
Upon a change in control, the Company will be required to make an offer to purchase each holders 7.00% Senior Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase.
Debt issuance costs related to the 7.00% Senior Notes, net of amortization, were $13,927,000 as of September 30, 2011.
Convertible Debt
The Companys convertible debt consisted of the following (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
2.50% convertible subordinated notes due April 2012 |
$ | 250,000 | $ | 250,000 | ||||
3.00% convertible subordinated notes due October 2014 |
395,986 | 395,986 | ||||||
4.75% convertible subordinated notes due June 2016 |
373,750 | 373,750 | ||||||
|
|
|
|
|||||
1,019,736 | 1,019,736 | |||||||
Less amount representing debt discount |
(85,040 | ) | (103,399 | ) | ||||
|
|
|
|
|||||
934,696 | 916,337 | |||||||
Less current portion |
(243,176 | ) | | |||||
|
|
|
|
|||||
$ | 691,520 | $ | 916,337 | |||||
|
|
|
|
24
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Maturities of Debt Facilities
The following table sets forth maturities of the Companys debt, including loans payable, senior notes and convertible debt, as of September 30, 2011 (in thousands):
Year ending: |
||||
2011 (three months remaining) |
$ | 1,546 | ||
2012 |
317,207 | |||
2013 |
63,339 | |||
2014 |
460,444 | |||
2015 |
33,257 | |||
Thereafter |
1,795,539 | |||
|
|
|||
$ | 2,671,332 | |||
|
|
Fair Value of Debt Facilities
The following table sets forth the estimated fair values of the Companys loans payable, senior notes and convertible debt, including current maturities, as of (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Loans payable |
$ | 244,827 | $ | 126,958 | ||||
Senior notes |
1,520,802 | 816,270 | ||||||
Convertible debt |
1,019,348 | 995,012 |
Interest Charges
The following table sets forth total interest costs incurred and total interest costs capitalized for the periods presented (in thousands):
Three months ended September 30, |
Nine months
ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest expense |
$ | 51,114 | $ | 38,363 | $ | 126,152 | $ | 101,653 | ||||||||
Interest capitalized |
3,325 | 2,010 | 9,266 | 8,746 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest charges incurred |
$ | 54,439 | $ | 40,373 | $ | 135,418 | $ | 110,399 | ||||||||
|
|
|
|
|
|
|
|
10. Commitments and Contingencies
Legal Matters
IPO Litigation
On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against the Company, certain of its officers and directors (the Individual Defendants), and several investment banks that were underwriters of the Companys initial public offering (the Underwriter Defendants). The cases were filed in the United States District Court for the Southern District of New York. Similar lawsuits were filed against approximately 300 other issuers and related parties. These lawsuits have been coordinated before a single judge. The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 against the Company and the Individual Defendants. The plaintiffs have since dismissed the Individual Defendants without prejudice. The suits allege that the Underwriter Defendants agreed to allocate stock in the Companys initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for the Companys initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. On February 19, 2003, the court dismissed the Section 10(b) claim against the Company, but denied the motion to dismiss the Section 11 claim.
25
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The parties in the approximately 300 coordinated cases, including the parties in the Equinix case, reached a settlement. It provides for releases of existing claims and claims that could have been asserted relating to the conduct alleged to be wrongful from the class of investors participating in the settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Equinix. On October 6, 2009, the Court granted final approval to the settlement. The settlement approval was appealed to the United States Court of Appeals for the Second Circuit. One appeal was dismissed and the second appeal was remanded to the district court to determine if the appellant is a class member with standing to appeal. The district court ruled that the appellant is not a class member with standing to appeal. The appellant has filed with the United States Court of Appeals for the Second Circuit a notice of appeal of the district court opinion that he is not a class member.
Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows. The Company intends to continue to defend the action vigorously if the settlement does not survive the remaining appeal.
The Company believes that while an unfavorable outcome to this litigation is reasonably possible, a range of potential loss cannot be determined at this time. The Company has not accrued any amounts in connection with this legal matter as of September 30, 2011 as the Company concluded that an unfavorable outcome is not probable.
Pihana Litigation
On August 22, 2008, a complaint was filed against Equinix, certain former officers and directors of Pihana Pacific, Inc. (Pihana), certain investors in Pihana, and others. The lawsuit was filed in the First Circuit Court of the State of Hawaii, and arises out of December 2002 agreements pursuant to which Equinix merged Pihana and i-STT (a subsidiary of Singapore Technologies Telemedia Pte Ltd) into the Internet exchange services business of Equinix. Plaintiffs, who were allegedly holders of Pihana common stock, allege that their rights as shareholders were violated, and the transaction was effectuated improperly, by Pihana's majority shareholders, officers and directors, with the alleged assistance of Equinix and others. Among other things, plaintiffs contend that they effectively had a right to block the transaction, that this supposed right was disregarded, and that they improperly received no consideration when the deal was completed. The complaint seeks to recover unspecified punitive damages, equitable relief, fees and costs, and compensatory damages in an amount that plaintiffs allegedly believe may be all or a substantial portion of the approximately $725,000,000 value of Equinix held by Defendants (a group that includes more than 30 individuals and entities). An amended complaint, which added new plaintiffs (other alleged holders of Pihana common stock) but is otherwise substantially similar to the original pleading, was filed on September 29, 2008 (the Amended Complaint). On October 13, 2008, a complaint was filed in a separate action by another purported holder of Pihana common stock, naming the same defendants and asserting substantially similar allegations as the August 22, 2008 and September 29, 2008 pleadings. On December 12, 2008, the court entered a stipulated order, which consolidated the two actions under one case number and set January 22, 2009 as the last day for Defendants to move to dismiss or otherwise respond to the Amended Complaint, the operative complaint in this case. On January 22, 2009, motions to dismiss the Amended Complaint were filed by Equinix and other Defendants. On April 24, 2009, plaintiffs filed a Second Amended Complaint (SAC) to correct the naming of certain parties. The SAC is otherwise substantively identical to the Amended Complaint, and all motions to dismiss the Amended Complaint have been treated as responsive to the SAC. On September 1, 2009, the Court heard Defendants motions to dismiss the SAC and ruled at the hearing that all claims against all Defendants are time-barred. The Court also considered whether there were further independent grounds for dismissing the claims, and supplemental briefing was submitted with respect to claims against one defendant and plaintiffs renewed request for further leave to amend. On March 23, 2010, the Court entered final Orders granting the motions to dismiss as to all Defendants and issued a minute Order denying plaintiffs renewed request for further leave to amend. On May 21, 2010, plaintiffs filed a Notice of Appeal, and plaintiffs appeal is currently pending before the Hawaii Supreme Court. In January 2011, one group of co-defendants (Morgan Stanley and certain persons and entities affiliated with it) entered into a separate settlement with plaintiffs. The trial court determined that the settlement was made in good faith in accordance with Hawaii statutory law, and certain non-settling defendants (including Equinix) filed an appeal from that order before the Intermediate Court of Appeals. That appeal has been stayed pending resolution of plaintiffs appeal before the Hawaii Supreme Court. The Company believes that plaintiffs claims and alleged damages are without merit and it intends to continue to defend the litigation vigorously.
26
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.
The Company believes that while an unfavorable outcome to this litigation is reasonably possible, a range of potential loss cannot be determined at this time. The Company has not accrued any amounts in connection with this legal matter as of September 30, 2011 as the Company concluded that an unfavorable outcome is not probable.
Alleged Class Action and Shareholder Derivative Actions
On March 4, 2011, an alleged class action entitled Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., et al., No. CV-11-1016-SC, was filed in the United States District Court for the Northern District of California, against Equinix and two of its officers. The suit asserts purported claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for allegedly misleading statements regarding the Companys business and financial results. The suit is purportedly brought on behalf of purchasers of the Companys common stock between July 29, 2010 and October 5, 2010, and seeks compensatory damages, fees and costs. Defendants have not yet responded to the claims in this action.
On March 8, 2011, an alleged shareholder derivative action entitled Rikos v. Equinix, Inc., et al., No. CGC-11-508940, was filed in California Superior Court, County of San Francisco, against Equinix (as a nominal defendant), the members of the Companys board of directors, and two of its officers. The suit is based on allegations similar to those in the federal securities class action and, allegedly on the Companys behalf, asserts purported state law causes of action against the individual defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The suit seeks, among other things, compensatory and treble damages, restitution and other equitable relief, and fees and costs. Defendants have not yet responded to the claims in this action.
On May 20, 2011, an alleged shareholder derivative action entitled Stopa v. Clontz, et al., No. CV-11-2467-SC was filed in the United States District Court for the Northern District of California, purportedly on behalf of the Company, against the members of the Companys board of directors. The suit is based on allegations similar to those in the federal securities class action and the state court derivative action, and asserts causes of action against the individual defendants for breach of fiduciary duty for allegedly disseminating false and misleading information, breach of fiduciary duty for allegedly failing to maintain internal controls, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets. On June 10, 2011, the court signed an order relating this case to the federal securities class action. Defendants have not yet responded to the claims in this action.
Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of these matters. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.
27
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company believes that while an unfavorable outcome to this litigation is reasonably possible, a range of potential loss cannot be determined at this time. The Company has not accrued any amounts in connection with this legal matter as of September 30, 2011 as the Company concluded that an unfavorable outcome is not probable.
Other Purchase Commitments
Primarily as a result of the Companys various IBX expansion projects, as of September 30, 2011, the Company was contractually committed for $221,305,000 of unaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided, in connection with the work necessary to open these IBX centers and make them available to customers for installation. In addition, the Company had numerous other, non-capital purchase commitments in place as of September 30, 2011, such as commitments to purchase power in select locations through the remainder of 2011 and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of 2011 and thereafter. Such other miscellaneous purchase commitments totaled $99,309,000 as of September 30, 2011.
11. Other Comprehensive Income and Loss
The components of other comprehensive income (loss) are as follows (in thousands):
Three months ended September 30, |
Nine months
ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 20,639 | $ | 11,196 | $ | 76,517 | $ | 23,121 | ||||||||
Unrealized loss on available for sale securities, net of tax of $17, $1, $1 and $123, respectively |
(241 | ) | (3 | ) | (267 | ) | (185 | ) | ||||||||
Unrealized gain on interest rate swaps, net of tax of $0, $0, $0 and $3,469, respectively |
| | | 4,933 | ||||||||||||
Foreign currency translation gain (loss) |
(88,659 | ) | 61,292 | (17,227 | ) | (10,831 | ) | |||||||||
|
|
|
|
|
|
|
|
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Comprehensive income (loss), net of tax |
(68,261 | ) | 72,485 | 59,023 | 17,038 | |||||||||||
Net income, net of tax, attributable to redeemable non-controlling interests |
(320 | ) | | (323 | ) | | ||||||||||
Other comprehensive loss, net of tax, attributable to redeemable non-controlling interests |
10,163 | | 9,096 | | ||||||||||||
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Comprehensive income (loss), net of tax, attributable to Equinix |
$ | (58,418 | ) | $ | 72,485 | $ | 67,796 | $ | 17,038 | |||||||
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|
|
Changes in foreign currencies, particularly the British pound and Euro, can have a significant impact to the Companys consolidated balance sheets (as evidenced above in the Companys foreign currency translation gain or loss), as well as its consolidated results of operations, as amounts in foreign currencies are generally translating into more U.S. dollars when the U.S. dollar weakens or less U.S. dollars when the U.S. dollar strengthens. During the three months ended September 30, 2011, the U.S. dollar strengthened against certain of the currencies of the foreign countries in which the Company operates. This has significantly impacted the Companys condensed consolidated balance sheets (as evidenced in the Companys foreign currency translation loss in this period), as well as its condensed consolidated statements of operations as amounts denominated in foreign currencies are generally translating into less U.S. dollars. To the extent that the U.S. dollar weakens or strengthens in future periods, this will continue to impact the Companys consolidated financial statements including the amount of revenue that the Company reports in future periods.
12. Segment Information
During the nine months ended September 30, 2011, the Company changed its reportable segments as a result of the incorporation of legal entities in South America and the Middle East. The Companys prior North America segment was re-designated as the Americas segment, which includes both North and South America, and the Europe segment was re-designated as the Europe, Middle East and Africa (EMEA) segment. The change in reportable segments did not impact the Companys prior periods segment disclosures. While the Company has a single line of business, which is the design, build-out and operation of IBX data centers, it has determined that it has three reportable segments comprised of its Americas, EMEA and Asia-Pacific geographic regions. The Companys chief operating decision-maker evaluates performance, makes operating decisions and allocates resources based on the Companys revenue and adjusted EBITDA performance both on a consolidated basis and based on these three geographic regions.
28
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company provides the following segment disclosures as follows (in thousands):
Three months
ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total revenues: |
||||||||||||||||
Americas |
$ | 268,854 | $ | 215,325 | $ | 755,270 | $ | 555,527 | ||||||||
EMEA |
92,324 | 72,794 | 262,974 | 203,042 | ||||||||||||
Asia-Pacific |
56,423 | 42,228 | 157,286 | 116,521 | ||||||||||||
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|
|
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|||||||||
$ | 417,601 | $ | 330,347 | $ | 1,175,530 | $ | 875,090 | |||||||||
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|
|||||||||
Total depreciation and amortization: |
||||||||||||||||
Americas |
$ | 57,610 | $ | 50,414 | $ | 166,780 | $ | 120,822 | ||||||||
EMEA |
19,187 | 15,232 | 54,223 | 43,186 | ||||||||||||
Asia-Pacific |
13,949 | 7,652 | 33,300 | 20,729 | ||||||||||||
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$ | 90,749 | $ | 73,298 | $ | 254,303 | $ | 184,737 | |||||||||
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Income from operations: |
||||||||||||||||
Americas |
$ | 51,659 | $ | 31,921 | $ | 148,050 | $ | 84,051 | ||||||||
EMEA |
16,305 | 10,258 | 41,954 | 26,251 | ||||||||||||
Asia-Pacific |
10,152 | 9,847 | 34,283 | 29,933 | ||||||||||||
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$ | 78,116 | $ | 52,026 | $ | 224,287 | $ | 140,235 | |||||||||
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Capital expenditures: |
||||||||||||||||
Americas |
$ | 52,849 | (1) | $ | 75,508 | $ | 176,575 | (1) | $ | 372,555 | (2) | |||||
EMEA |
33,475 | 33,447 | 172,098 | 111,672 | ||||||||||||
Asia-Pacific |
45,201 | 34,986 | 212,789 | 65,108 | ||||||||||||
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|||||||||
$ | 131,525 | $ | 143,941 | $ | 561,462 | $ | 549,335 | |||||||||
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|
(1) | Includes the purchase price for the ALOG Acquisition, net of cash acquired, which totaled $41,954,000. |
(2) | Includes the purchase price for the Switch and Data Acquisition, net of cash acquired, which totaled $113,289,000. |
The Companys long-lived assets are located in the following geographic areas as of (in thousands):
September 30, 2011 |
December 31, 2010 |
|||||||
Americas |
$ | 1,834,565 | $ | 1,764,630 | ||||
EMEA |
746,217 | 596,609 | ||||||
Asia-Pacific |
541,312 | 289,714 | ||||||
|
|
|
|
|||||
$ | 3,122,094 | $ | 2,650,953 | |||||
|
|
|
|
29
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Revenue information on a services basis is as follows (in thousands):
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Colocation |
$ | 312,900 | $ | 257,295 | $ | 895,221 | $ | 690,974 | ||||||||
Interconnection |
59,256 | 48,837 | 170,516 | 119,011 | ||||||||||||
Managed infrastructure |
24,383 | 7,805 | 49,951 | 22,400 | ||||||||||||
Rental |
812 | 790 | 2,100 | 1,695 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Recurring revenues |
397,351 | 314,727 | 1,117,788 | 834,080 | ||||||||||||
Non-recurring revenues |
20,250 | 15,620 | 57,742 | 41,010 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 417,601 | $ | 330,347 | $ | 1,175,530 | $ | 875,090 | |||||||||
|
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|
|
|
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|
|
No single customer accounted for 10% or greater of the Companys revenues for the three and nine months ended September 30, 2011 and 2010. No single customer accounted for 10% or greater of the Companys gross accounts receivable as of September 30, 2011 and December 31, 2010.
13. Restructuring Charges
Switch and Data Restructuring Charge
During the nine months ended September 30, 2011, the Company recorded restructuring charges related to one-time termination benefits, primarily comprised of severance, attributed to certain Switch and Data employees as presented below (in thousands):
Accrued restructuring charge as of December 31, 2010 (1) |
$ | 1,035 | ||
Severance-related expenses (2) |
392 | |||
Cash payments |
(1,066 | ) | ||
|
|
|||
Accrued restructuring charge as of September 30, 2011(1) |
$ | 361 | ||
|
|
(1) | Included within other current liabilities. |
(2) | Included in the consolidated statements of operations as a restructuring charge. |
2004 Restructuring Charge
A summary of the activity in the 2004 accrued restructuring charge associated with estimated lease exit costs from December 31, 2010 to September 30, 2011 is outlined as follows (in thousands):
Accrued restructuring charge as of December 31, 2010 |
$ | 6,006 | ||
Accretion expense |
275 | |||
Restructuring charge adjustment (1) |
1,794 | |||
Cash payments |
(1,207 | ) | ||
|
|
|||
Accrued restructuring charge as of September 30, 2011 |
6,868 | |||
|
|
|||
Less current portion |
(2,390 | ) | ||
|
|
|||
$ | 4,478 | |||
|
|
(1) | Recorded during the three months ended September 30, 2011 as a result of revised sublease assumptions on the Companys excess space in the New York metro area. |
30
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As the Company currently has no plans to enter into a lease termination with the landlord associated with the excess space lease in the New York metro area, the Company has reflected its accrued restructuring liability as both a current and non-current liability. The Company reports accrued restructuring charges within other current liabilities and other liabilities on the accompanying consolidated balance sheets as of September 30, 2011 and December 31, 2010. The Company is contractually committed to this excess space lease through 2015.
14. Subsequent Events
In October 2011, the Company entered into a lease for land and a building that the Company and the landlord will jointly develop to meet the Companys needs and which the Company will ultimately convert into an IBX data center in the Seattle, Washington metro area (the Seattle 3 Lease). The Seattle 3 Lease has a fixed term of 15 years, with options to renew, and a total cumulative rent obligation of approximately $110,000,000, exclusive of renewal periods. Rental payments on the Seattle 3 Lease will commence when several conditions primarily related to the completion of the construction on the building have been met by the landlord, which is estimated to be in 2013. The landlord began modifying the building structure to the Companys specifications in October 2011.
31
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words believes, anticipates, plans, expects, intends and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in Liquidity and Capital Resources below and Risk Factors in Item 1A of Part II of this Quarterly Report on Form 10-Q. All forward-looking statements in this document are based on information available to us as of the date of this Report and we assume no obligation to update any such forward-looking statements.
Our managements discussion and analysis of financial condition and results of operations is intended to assist readers in understanding our financial information from our managements perspective and is presented as follows:
| Overview |
| Results of Operations |
| Non-GAAP Financial Measures |
| Liquidity and Capital Resources |
| Contractual Obligations and Off-Balance-Sheet Arrangements |
| Critical Accounting Policies and Estimates |
| Recent Accounting Pronouncements |
On April 25, 2011, as more fully described in Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, Zion RJ Participações S.A., referred to as Zion, a Brazilian joint-stock company controlled by our wholly-owned subsidiary and co-owned by RW Brasil Fundo de Investimento em Participações, a subsidiary of Riverwood Capital L.P., referred to as Riverwood, completed the acquisition of approximately 90% of the outstanding capital stock of ALOG Data Centers do Brasil S.A. and its subsidiaries, referred to as ALOG, which resulted in Equinix acquiring an indirect, controlling interest in ALOG of approximately 53%. This transaction is referred to as the ALOG acquisition.
In July 2011, we issued $750.0 million aggregate principal amount of 7.00% senior notes due July 15, 2021, which is referred to as the 7.00% senior notes offering. We intend to use the net proceeds from the 7.00% senior notes offering for general corporate purposes, including the funding of our expansion activities, and the repayment of our 2.50% convertible subordinated notes due April 15, 2012.
Overview
Equinix provides global data center services that protect and connect the worlds most valued information assets. Global enterprises, financial services companies, and content and network service providers rely upon Equinixs leading insight and data centers in 38 markets around the world for the safeguarding of their critical IT equipment and the ability to directly connect to the networks that enable todays information-driven economy. Equinix offers the following data center services: premium data center colocation, interconnection and exchange services, and outsourced IT infrastructure services. As of September 30, 2011, we operated or had partner IBX data centers in the Atlanta, Boston, Buffalo, Chicago, Cleveland, Dallas, Denver, Detroit, Indianapolis, Los Angeles, Miami, Nashville, New York, Philadelphia, Phoenix, Pittsburgh, Rio De Janeiro, Sao Paulo, Seattle, Silicon Valley, St. Louis, Tampa, Toronto, Washington, D.C. metro areas in the Americas region; France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom in the Europe, Middle East, Africa (EMEA) region; and Australia, Hong Kong, Japan, China and Singapore in the Asia-Pacific region.
32
We leverage our global data centers in 38 markets around the world as a global service delivery platform which serves more than 90% of the worlds Internet routes and allows our customers to increase information and application delivery performance while significantly reducing costs. Based on our global delivery platform and the quality of our IBX data centers, we believe we have established a critical mass of customers. As more customers locate in our IBX data centers, it benefits their suppliers and business partners to colocate as well in order to gain the full economic and performance benefits of our services. These partners, in turn, pull in their business partners, creating a marketplace for their services. Our global delivery platform enables scalable, reliable and cost-effective colocation, interconnection and traffic exchange thus lowering overall cost and increasing flexibility. Our focused business model is based on our critical mass of customers and the resulting marketplace effect. This global delivery platform, combined with our strong financial position, continues to drive new customer growth and bookings as we drive scale into our global business.
Historically, our market has been served by large telecommunications carriers who have bundled their telecommunications products and services with their colocation offerings. The data center services market landscape has evolved to include cloud computing/utility providers, application hosting providers and systems integrators, managed infrastructure hosting providers and colocation providers with over 350 companies providing data center services in the United States alone. Each of these data center services providers can bundle various colocation, interconnection and network services, and outsourced IT infrastructure services. We are able to offer our customers a global platform that supports global reach to 12 countries, proven operational reliability, improved application performance and network choice, and a highly scalable set of services.
Excluding the ALOG acquisition, our customer count increased to 4,633 as of September 30, 2011 versus 4,151 as of September 30, 2010, an increase of 12%. This increase was due to organic growth in our business. Our utilization rate represents the percentage of our cabinet space billing versus net sellable cabinet space available taking into account power limitations. Excluding the impact of the ALOG acquisition, our utilization rate increased to 81% as of September 30, 2011 versus approximately 73% as of September 30, 2010; however, excluding the impact of our IBX data center expansion projects that have been open for less than four full quarters, our utilization rate would have increased to approximately 86% as of September 30, 2011. Our utilization rate varies from market to market among our IBX data centers across the Americas, EMEA and Asia-Pacific regions. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market it may limit our ability for growth in that market. We perform demand studies on an ongoing basis to determine if future expansion is warranted in a market. In addition, power and cooling requirements for most customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally do not control the amount of power our customers draw from installed circuits, we have negotiated power consumption limitations with certain of our high power demand customers. This increased power consumption has driven the requirement to build out our new IBX data centers to support power and cooling needs twice that of previous IBX data centers. We could face power limitations in our centers even though we may have additional physical cabinet capacity available within a specific IBX data center. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows.
Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and service offerings. As was the case with our recent expansions and acquisitions, our expansion criteria will be dependent on a number of factors such as demand from new and existing customers, quality of the design, power capacity, access to networks, capacity availability in the current market location, amount of incremental investment required by us in the targeted property, lead-time to break-even and in-place customers. Like our recent expansions and acquisitions, the right combination of these factors may be attractive to us. Depending on the circumstances, these transactions may require additional capital expenditures funded by upfront cash payments or through long-term financing arrangements, in order to bring these properties up to Equinix standards. Property expansion may be in the form of purchases of real property, long-term leasing arrangements or acquisitions. Future purchases, construction or acquisitions may be completed by us or with partners or potential customers to minimize the outlay of cash, which can be significant.
33
Our business is based on a recurring revenue model comprised of colocation, interconnection and managed infrastructure services. We consider these services recurring as our customers are generally billed on a fixed and recurring basis each month for the duration of their contract, which is generally one to three years in length. Our recurring revenues have comprised more than 90% of our total revenues during the past three years. In addition, during the past three years, in any given quarter, greater than half of our monthly recurring revenue bookings came from existing customers, contributing to our revenue growth.
Our non-recurring revenues are primarily comprised of installation services related to a customers initial deployment and professional services that we perform. These services are considered to be non-recurring as they are billed typically once and upon completion of the installation or professional services work performed. The majority of these non-recurring revenues are typically billed on the first invoice distributed to the customer in connection with their initial installation. However, revenues from installation services are deferred and recognized ratably over the longer of the term of the related contract or expected life of the services. Additionally, revenue from contract settlements, when a customer wishes to terminate their contract early, is generally recognized on a cash basis, when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future.
Our Americas revenues are derived primarily from colocation and interconnection services while our EMEA and Asia-Pacific revenues are derived primarily from colocation and managed infrastructure services.
The largest components of our cost of revenues are depreciation, rental payments related to our leased IBX data centers, utility costs, including electricity and bandwidth, IBX data center employees salaries and benefits, including stock-based compensation, repairs and maintenance, supplies and equipment and security services. A substantial majority of our cost of revenues is fixed in nature and should not vary significantly from period to period, unless we expand our existing IBX data centers or open or acquire new IBX data centers. However, there are certain costs which are considered more variable in nature, including utilities and supplies, that are directly related to growth in our existing and new customer base. We expect the cost of our utilities, specifically electricity, will increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth in consumption by the customer. In addition, the cost of electricity is generally higher in the summer months as compared to other times of the year. To the extent we incur increased utility costs, such increased costs could materially impact our financial condition, results of operations and cash flows. Furthermore, to the extent we incur increased electricity costs as a result of either climate change policies or the physical effects of climate change, such increased costs could materially impact our financial condition, results of operations and cash flows.
Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, including stock-based compensation, sales commissions, marketing programs, public relations, promotional materials and travel, as well as bad debt expense and amortization of customer contract intangible assets.
General and administrative expenses consist primarily of salaries and related expenses, including stock-based compensation, accounting, legal and other professional service fees, and other general corporate expenses such as our corporate regional headquarters office leases and some depreciation expense.
34
Due to our recurring revenue model, and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth, we expect our cost of revenues, sales and marketing expenses and general and administrative expenses to decline as a percentage of revenue over time, although we expect each of them to grow in absolute dollars in connection with our growth. This is evident in the trends noted below in our discussion on our results of operations. However, for cost of revenues, this trend may periodically be impacted when a large expansion project opens or is acquired and before it starts generating any meaningful revenue. Furthermore, in relation to cost of revenues, we note that the Americas region has a lower cost of revenues as a percentage of revenue than either EMEA or Asia-Pacific. This is due to both the increased scale and maturity of the Americas region compared to either EMEA or Asia-Pacific, as well as a higher cost structure outside of Americas, particularly in EMEA. While we expect all three regions to continue to see lower cost of revenues as a percentage of revenues in future periods, we expect the trend of Americas having the lowest cost of revenues as a percentage of revenue and EMEA having the highest to continue. As a result, to the extent that revenue growth outside Americas grows in greater proportion than revenue growth in Americas, our overall cost of revenues as a percentage of revenues may increase in future periods. Sales and marketing expenses and general and administrative expenses may also periodically increase as a percentage of revenue as we continue to scale our operations to support our growth.
Constant Currency Presentation
Our revenues and certain operating expenses (cost of revenues, sales and marketing and general and administrative expenses) from our international operations have represented and will continue to represent a significant portion of our total revenues and certain operating expenses. As a result, our revenues and certain operating expenses have been and will continue to be affected by changes in the U.S. dollar against major international currencies such as the Brazilian reais, British pound, Canadian dollar, Euro, Swiss franc, Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present period-over-period percentage changes in our revenues and certain operating expenses on a constant currency basis in addition to the historical amounts as reported. Presenting constant currency results of operations is a non-GAAP financial measure and is not meant to be considered in isolation or as an alternative to GAAP results of operations. However, we have presented this non-GAAP financial measure to provide investors with an additional tool to evaluate our operating results. To present this information, our current and comparative prior period revenues and certain operating expenses from entities reporting in currencies other than the U.S. dollar are converted into U.S. dollars at constant exchange rates rather than the actual exchange rates in effect during the respective periods (i.e. average rates in effect for the three months ended September 30, 2010 are used as exchange rates for the three months ended September 30, 2011 when comparing the three months ended September 30, 2011 with the three months ended September 30, 2010 and average rates in effect for the nine months ended September 30, 2010 are used as exchange rates for the nine months ended September 30, 2011 when comparing the nine months ended September 30, 2011 with the nine months ended September 30, 2010).
Results of Operations
Our results of operations for the three months and nine months ended September 30, 2011 include the operations of ALOG from April 25, 2011. Our results of operations for the three months and nine months ended September 30, 2011 and 2010 include the operations of Switch & Data Facilities Company, Inc., which is referred to as Switch and Data, from May 1, 2010.
35
Three Months Ended September 30, 2011 and 2010
Revenues. Our revenues were generated from the following revenue classifications and geographic regions (dollars in thousands):
Three months ended September 30, | % Change | |||||||||||||||||||||||
2011 | % | 2010 | % | Actual | Constant currency |
|||||||||||||||||||
Americas: |
||||||||||||||||||||||||
Recurring revenues |
$ | 259,265 | 62 | % | $ | 208,096 | 63 | % | 25 | % | 25 | % | ||||||||||||
Non-recurring revenues |
9,589 | 2 | % | 7,229 | 2 | % | 33 | % | 33 | % | ||||||||||||||
|
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|
|
|||||||||||||||||
268,854 | 64 | % | 215,325 | 65 | % | 25 | % | 25 | % | |||||||||||||||
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EMEA: |
||||||||||||||||||||||||
Recurring revenues |
85,108 | 20 | % | 66,279 | 20 | % | 28 | % | 19 | % | ||||||||||||||
Non-recurring revenues |
7,216 | 2 | % | 6,515 | 2 | % | 11 | % | 2 | % | ||||||||||||||
|
|
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|
|
|||||||||||||||||
92,324 | 22 | % | 72,794 | 22 | % | 27 | % | 17 | % | |||||||||||||||
|
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|
|
|||||||||||||||||
Asia-Pacific: |
||||||||||||||||||||||||
Recurring revenues |
52,978 | 13 | % | 40,352 | 12 | % | 31 | % | 19 | % | ||||||||||||||
Non-recurring revenues |
3,445 | 1 | % | 1,876 | 1 | % | 84 | % | 69 | % | ||||||||||||||
|
|
|
|
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|
|
|
|||||||||||||||||
56,423 | 14 | % | 42,228 | 13 | % | 34 | % | 22 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total: |
||||||||||||||||||||||||
Recurring revenues |
397,351 | 95 | % | 314,727 | 95 | % | 26 | % | 23 | % | ||||||||||||||
Non-recurring revenues |
20,250 | 5 | % | 15,620 | 5 | % | 30 | % | 24 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 417,601 | 100 | % | $ | 330,347 | 100 | % | 26 | % | 23 | % | |||||||||||||
|
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|
|
Americas Revenues. The increase in our Americas revenues was primarily due to (i) $17.9 million of incremental revenues from the impact of the ALOG acquisition and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers, including $2.8 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas and Silicon Valley metro areas. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Chicago, Dallas, New York, Seattle and Washington, D.C. metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
EMEA Revenues. During the three months ended September 30, 2011, our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 35% of the regional revenues. During the three months ended September 30, 2010, our revenues from Germany, the largest revenue contributor in the EMEA region for the period, represented approximately 36% of the regional revenues. Our EMEA revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the three months ended September 30, 2011, we recorded approximately $7.7 million of revenue from our recently-opened IBX data center expansions in the Amsterdam, London and Paris metro areas. During the three months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended September 30, 2010, resulting in approximately $7.0 million of favorable foreign currency impact to our EMEA revenues during the three months ended September 30, 2011 on a constant currency basis. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Amsterdam, Frankfurt and Paris metro areas, which are expected to open during the remainder of 2011 and 2012. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
36
Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 39% and 38%, respectively, of the regional revenues for the three months ended September 30, 2011 and 2010. Our Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the three months ended September 30, 2011, we recorded approximately $4.2 million of revenue generated from our IBX data center expansions in the Hong Kong, Singapore, Sydney and Tokyo metro areas. During the three months ended September 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the three months ended September 30, 2010, resulting in approximately $5.1 million of favorable foreign currency impact to our Asia-Pacific revenues during the three months ended September 30, 2011 on a constant currency basis. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and the additional IBX data center expansion currently taking place in the Hong Kong metro area which is expected to open during the remainder of 2011. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers contracts.
Cost of Revenues. Our cost of revenues was split among the following geographic regions (dollars in thousands):
Three months ended September 30, | % Change | |||||||||||||||||||||||
2011 | % | 2010 | % | Actual | Constant currency |
|||||||||||||||||||
Americas |
$ | 138,121 | 61 | % | $ | 118,572 | 64 | % | 16 | % | 16 | % | ||||||||||||
EMEA |
54,839 | 24 | % | 43,722 | 24 | % | 25 | % | 15 | % | ||||||||||||||
Asia-Pacific |
35,193 | 15 | % | 23,182 | 12 | % | 52 | % | 38 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 228,153 | 100 | % | $ | 185,476 | 100 | % | 23 | % | 19 | % | ||||||||||||
|
|
|
|
|
|
|
|
Three months
ended September 30, |
||||||||
2011 | 2010 | |||||||
Cost of revenues as a percentage of revenues: |
||||||||
Americas |
51 | % | 55 | % | ||||
EMEA |
59 | % | 60 | % | ||||
Asia-Pacific |
62 | % | 55 | % | ||||
Total |
55 | % | 56 | % |
Americas Cost of Revenues. Our Americas cost of revenues for the three months ended September 30, 2011 and 2010 included $49.2 million and $44.1 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to both our organic IBX data center expansion activity and the ALOG acquisition. Excluding depreciation expense, the increase in our Americas cost of revenues was primarily due to (i) $9.3 million of incremental cost of revenues resulting from the ALOG acquisition and (ii) incremental costs associated with our organic expansion projects and revenue growth, such as $2.7 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth and $1.6 million of higher compensation expense, including general salaries, bonuses and headcount growth (497 Americas cost of revenues employees as of September 30, 2011 versus 481 as of September 30, 2010). We expect Americas cost of revenues to increase as we continue to grow our business.
37
EMEA Cost of Revenues. EMEA cost of revenues for the three months ended September 30, 2011 and 2010 included $17.5 million and $13.7 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in EMEA cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $2.4 million in utility costs arising from increased customer installations and revenues attributed to customer growth and (ii) $1.2 million of higher compensation expense, including general salaries, bonuses and headcount growth (273 EMEA cost of revenues employees as of September 30, 2011 versus 230 as of September 30, 2010). During the three months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended September 30, 2010, resulting in approximately $4.6 million of unfavorable foreign currency impact to our EMEA cost of revenues during the three months ended September 30, 2011 on a constant currency basis. We expect EMEA cost of revenues to increase as we continue to grow our business.
Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the three months ended September 30, 2011 and 2010 included $13.5 million and $7.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) $2.6 million in higher utility costs and (ii) an increase of $1.2 million of rent and facility costs. During the three months ended September 30, 2011, the U.S. dollar was generally weaker relative to Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the three months ended September 30, 2010, resulting in approximately $3.2 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the three months ended September 30, 2011 on a constant currency basis. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.
Sales and Marketing Expenses. Our sales and marketing expenses were split among the following geographic regions (dollars in thousands):
Three months ended September 30, | % Change | |||||||||||||||||||||||
2011 | % | 2010 | % | Actual | Constant currency |
|||||||||||||||||||
Americas |
$ | 29,126 | 67 | % | $ | 21,251 | 68 | % | 37 | % | 37 | % | ||||||||||||
EMEA |
9,329 | 22 | % | 6,253 | 20 | % | 49 | % | 39 | % | ||||||||||||||
Asia-Pacific |
4,615 | 11 | % | 3,701 | 12 | % | 25 | % | 14 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 43,070 | 100 | % | $ | 31,205 | 100 | % | 38 | % | 35 | % | ||||||||||||
|
|
|
|
|
|
|
|
Three months
ended September 30, |
||||||||
2011 | 2010 | |||||||
Sales and marketing expenses as a percentage of revenues: |
||||||||
Americas |
11 | % | 10 | % | ||||
EMEA |
10 | % | 9 | % | ||||
Asia-Pacific |
8 | % | 9 | % | ||||
Total |
10 | % | 9 | % |
Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to (i) $2.8 million of incremental sales and marketing expenses from the ALOG acquisition and (ii) $5.3 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (221 Americas sales and marketing employees as of September 30, 2011 versus 182 as of September 30, 2010). We have been investing in our Americas sales and marketing initiatives to further increase our revenue and we anticipate this increased investment will continue over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues are expected to continue to increase. In the long-term, we generally expect Americas sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.
38
EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to an increase of $1.7 million in compensation costs, including sales compensation, general salaries, bonuses and headcount growth (108 EMEA sales and marketing employees as of September 30, 2011 versus 75 as of September 30, 2010) and higher professional services from various consulting projects to support our growth. During the three months ended September 30, 2011, the impact of foreign currency fluctuations to our EMEA sales and marketing expenses was not significant on a constant currency basis. We intend to invest further in our EMEA sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our EMEA sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect EMEA sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.
Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (70 Asia-Pacific sales and marketing employees as of September 30, 2011 versus 56 as of September 30, 2010). For the three months ended September 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant on a constant currency basis. We intend to invest further in our Asia-Pacific sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our Asia-Pacific sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.
General and Administrative Expenses. Our general and administrative expenses were split among the following geographic regions (dollars in thousands):
Three months ended September 30, | % Change | |||||||||||||||||||||||
2011 | % | 2010 | % | Actual | Constant currency |
|||||||||||||||||||
Americas |
$ | 47,684 | 72 | % | $ | 41,346 | 71 | % | 15 | % | 15 | % | ||||||||||||
EMEA |
11,851 | 18 | % | 11,796 | 20 | % | | (6 | %) | |||||||||||||||
Asia-Pacific |
6,441 | 10 | % | 5,498 | 9 | % | 17 | % | 10 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 65,976 | 100 | % | $ | 58,640 | 100 | % | 13 | % | 11 | % | ||||||||||||
|
|
|
|
|
|
|
|
Three months
ended September 30, |
||||||||
2011 | 2010 | |||||||
General and administrative expenses as a percentage of revenues: |
||||||||
Americas |
18 | % | 19 | % | ||||
EMEA |
13 | % | 16 | % | ||||
Asia-Pacific |
11 | % | 13 | % | ||||
Total |
16 | % | 18 | % |
Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to (i) $2.2 million of incremental general and administrative expenses from the ALOG acquisition, (ii) $2.4 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (565 Americas general and administrative employees as of September 30, 2011 versus 491 as of September 30, 2010), and (iii) $1.4 million of higher depreciation expense as a result of our ongoing efforts to support our growth, such as investments in systems. Over the course of the past year, we have been investing in our Americas general and administrative functions to scale this region effectively for growth, which has included taking on additional office space to accommodate our headcount growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including further investment in our back office systems; however, as a percentage of revenues, we generally expect them to decrease.
39
EMEA General and Administrative Expenses. Our EMEA general and administrative expenses did not change significantly during the three months ended September 30, 2011 compared to the three months ended September 30, 2010. For the three months ended September 30, 2011, the impact of foreign currency fluctuations to our EMEA general and administrative expenses was not significant on a constant currency basis. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.
Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to higher compensation costs, including general salaries, bonuses and headcount growth (153 Asia-Pacific general and administrative employees as of September 30, 2011 versus 120 as of September 30, 2010). For the three months ended September 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant on a constant currency basis. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.
Restructuring Charges. During the three months ended September 30, 2011, we recorded restructuring charges totaling $1.6 million primarily related to revised sublease assumptions on our excess leased space in the New York metro area. Our excess space lease in the New York metro area remains abandoned and continues to carry a restructuring charge. During the three months ended September 30, 2010, we recorded restructuring charges totaling $1.9 million primarily related to one-time termination benefits attributed to certain Switch and Data employees.
Acquisition Costs. During the three months ended September 30, 2011, we recorded acquisition costs totaling $699,000 primarily related to the ALOG acquisition. During the three months ended September 30, 2010, we recorded acquisition costs totaling $1.1 million primarily related to our EMEA region.
Interest Income. Interest income increased to $679,000 for the three months ended September 30, 2011 from $310,000 for the three months ended September 30, 2010. The increase was primarily due to higher yields and higher invested balances as a result of the proceeds from the 7.00% senior notes offering in July 2011. The average yield for the three months ended September 30, 2011 was 0.25% versus 0.17% for the three months ended September 30, 2010. We generally expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries and from the utilization of cash to finance our expansion activities.
Interest Expense. Interest expense for the three months ended September 30, 2011 and 2010 was $51.1 million and $38.4 million, respectively. The increase in interest expense was primarily due to our $750.0 million 7.00% senior notes offering in July 2011. During the three months ended September 30, 2011 and 2010, we capitalized $3.3 million and $2.0 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we recognize the full impact of our $750.0 million 7.00% senior notes partially offset by repayment of debt. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering, which is approximately $53.9 million annually. We may incur additional indebtedness to support our growth, resulting in further interest expense.
40
Other-Than-Temporary Impairment Recovery On Investments . During the three months ended September 30, 2011, no other-than-temporary impairment recovery on investments was recorded. During the three months ended September 30, 2010, we recorded a $206,000 other-than-temporary impairment recovery on investments due to an additional distribution from one of our money market accounts we had previously written down during 2008 and 2009.
Other Income (Expense). For the three months ended September 30, 2011, we recorded $1.7 million of other expense primarily due to foreign currency exchange losses during the period. For the three months ended September 30, 2010, we recorded $1.7 million of other income, primarily due to foreign currency exchange gains during the period.
Income Taxes. For the three months ended September 30, 2011 and 2010, we recorded $5.3 million and $4.6 million of income tax expenses, respectively. Our effective tax rates were 20.6% and 29.3%, respectively, for the three months ended September 30, 2011 and 2010. The lower effective tax rate for the three months ended September 30, 2011 was primarily due to discrete tax benefits. We will reassess our valuation allowance related to our foreign operations in the future, which may result in discrete quarterly benefits and a reduction of our valuation allowance. The cash taxes for 2011 and 2010 are primarily for state income taxes and foreign income taxes.
Nine Months Ended September 30, 2011 and 2010
Revenues. Our revenues were generated from the following revenue classifications and geographic regions (dollars in thousands):
Nine months ended September 30, | % Change | |||||||||||||||||||||||
2011 | % | 2010 | % | Actual | Constant currency |
|||||||||||||||||||
Americas: |
||||||||||||||||||||||||
Recurring revenues |
$ | 727,853 | 62 | % | $ | 536,307 | 61 | % | 36 | % | 36 | % | ||||||||||||
Non-recurring revenues |
27,417 | 2 | % | 19,220 | 2 | % | 43 | % | 43 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
755,270 | 64 | % | 555,527 | 63 | % | 36 | % | 36 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
EMEA: |
||||||||||||||||||||||||
Recurring revenues |
240,942 | 21 | % | 186,388 | 21 | % | 29 | % | 21 | % | ||||||||||||||
Non-recurring revenues |
22,032 | 2 | % | 16,654 | 2 | % | 32 | % | 24 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
262,974 | 23 | % | 203,042 | 23 | % | 30 | % | 21 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Asia-Pacific: |
||||||||||||||||||||||||
Recurring revenues |
148,993 | 12 | % | 111,385 | 13 | % | 34 | % | 21 | % | ||||||||||||||
Non-recurring revenues |
8,293 | 1 | % | 5,136 | 1 | % | 61 | % | 50 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
157,286 | 13 | % | 116,521 | 14 | % | 35 | % | 23 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total: |
||||||||||||||||||||||||
Recurring revenues |
1,117,788 | 95 | % | 834,080 | 95 | % | 34 | % | 30 | % | ||||||||||||||
Non-recurring revenues |
57,742 | 5 | % | 41,010 | 5 | % | 41 | % | 36 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 1,175,530 | 100 | % | $ | 875,090 | 100 | % | 34 | % | 31 | % | |||||||||||||
|
|
|
|
|
|
|
|
Americas Revenues. The increase in our Americas revenues was primarily due to (i) $121.0 million of incremental revenue from the impact of the Switch and Data acquisition and the ALOG acquisition and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers, including $4.9 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas and Silicon Valley metro areas. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Chicago, Dallas, New York, Seattle and Washington, D.C. metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
41
EMEA Revenues. During the nine months ended September 30, 2011, our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 34% of the regional revenues. During the nine months ended September 30, 2010, our revenues from Germany, the largest revenue contributor in the EMEA region for the period, represented approximately 36% of the regional revenues. Our EMEA revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the nine months ended September 30, 2011, we recorded approximately $20.2 million of revenue from our recently-opened IBX data center expansions in the Amsterdam, London and Paris metro areas. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the nine months ended September 30, 2010, resulting in approximately $17.3 million of favorable foreign currency impact to our EMEA revenues during the nine months ended September 30, 2011 on a constant currency basis. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in the recently-opened BX data center expansions and additional IBX data center expansions currently taking place in the Amsterdam, Frankfurt and Paris metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 40% and 37%, respectively, of the regional revenues for the nine months ended September 30, 2011 and 2010. Our Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the nine months ended September 30, 2011, we recorded approximately $6.5 million of revenue generated from our IBX data center expansions in the Hong Kong, Singapore, Sydney and Tokyo metro areas. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the nine months ended September 30, 2010, resulting in approximately $14.5 million of favorable foreign currency impact to our Asia-Pacific revenues during the nine months ended September 30, 2011 on a constant currency basis. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and the additional IBX data center expansion currently taking place in the Hong Kong metro area which is expected to open during the remainder of 2011. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers contracts.
Cost of Revenues. Our cost of revenues was split among the following geographic regions (dollars in thousands):
Nine months ended September 30, | % Change | |||||||||||||||||||||||
2011 | % | 2010 | % | Actual | Constant currency |
|||||||||||||||||||
Americas |
$ | 388,175 | 61 | % | $ | 291,061 | 60 | % | 33 | % | n/a | |||||||||||||
EMEA |
157,983 | 25 | % | 127,232 | 27 | % | 24 | % | 15 | % | ||||||||||||||
Asia-Pacific |
92,143 | 14 | % | 62,815 | 13 | % | 47 | % | 33 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 638,301 | 100 | % | $ | 481,108 | 100 | % | 33 | % | 29 | % | ||||||||||||
|
|
|
|
|
|
|
|
42
Nine months
ended September 30, |
||||||||
2011 | 2010 | |||||||
Cost of revenues as a percentage of revenues: |
||||||||
Americas |
51 | % | 52 | % | ||||
EMEA |
60 | % | 63 | % | ||||
Asia-Pacific |
59 | % | 54 | % | ||||
Total |
54 | % | 55 | % |
Americas Cost of Revenues. Our Americas cost of revenues for the nine months ended September 30, 2011 and 2010 included $142.7 million and $107.5 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to both our organic IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in Americas cost of revenues included $55.7 million of incremental cost of revenues resulting from the Switch and Data acquisition and the ALOG acquisition. In addition, excluding the impact of the Switch and Data acquisition and the ALOG acquisition, we incurred incremental costs associated with our organic expansion projects and revenue growth, such as $4.1 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth. We expect Americas cost of revenues to increase as we continue to grow our business.
EMEA Cost of Revenues. EMEA cost of revenues for the nine months ended September 30, 2011 and 2010 included $49.1 million and $38.8 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in EMEA cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $6.9 million in utility costs arising from increased customer installations and revenues attributed to customer growth, (ii) $4.3 million of higher compensation expense, including general salaries, bonuses and headcount growth (273 EMEA cost of revenues employees as of September 30, 2011 versus 230 as of September 30, 2010) and (iii) a general increase of $4.9 million among numerous cost categories, such as professional fees for various consulting projects, repair and maintenance costs and rent and facility costs incurred to support our revenue growth. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the nine months ended September 30, 2010, resulting in approximately $11.1 million of unfavorable foreign currency impact to our EMEA cost of revenues during the nine months ended September 30, 2011 on a constant currency basis. We expect EMEA cost of revenues to increase as we continue to grow our business.
Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the nine months ended September 30, 2011 and 2010 included $32.1 million and $20.1 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) $6.6 million in higher utility costs, (ii) an increase of $5.2 million of rent and facility costs, (iii) $2.0 million of higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (148 Asia-Pacific cost of revenues employees as of September 30, 2011 versus 99 as of September 30, 2010) and (iv) $1.2 million of higher professional services related to various consulting projects to support our growth. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the nine months ended September 30, 2010, resulting in approximately $8.4 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the nine months ended September 30, 2011 on a constant currency basis. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.
43
Sales and Marketing Expenses. Our sales and marketing expenses were split among the following geographic regions (dollars in thousands):
Nine months ended September 30, | % Change | |||||||||||||||||||||||
2011 | % | 2010 | % | Actual | Constant currency |
|||||||||||||||||||
Americas |
$ | 74,620 | 66 | % | $ | 52,709 | 66 | % | 42 | % | n/a | |||||||||||||
EMEA |
26,466 | 23 | % | 17,159 | 22 | % | 54 | % | 44 | % | ||||||||||||||
Asia-Pacific |
12,683 | 11 | % | 9,718 | 12 | % | 31 | % | 21 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 113,769 | 100 | % | $ | 79,586 | 100 | % | 43 | % | 40 | % | ||||||||||||
|
|
|
|
|
|
|
|
Nine months
ended September 30, |
||||||||
2011 | 2010 | |||||||
Sales and marketing expenses as a percentage of revenues: |
||||||||
Americas |
10 | % | 9 | % | ||||
EMEA |
10 | % | 8 | % | ||||
Asia-Pacific |
8 | % | 8 | % | ||||
Total |
10 | % | 9 | % |
Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses included (i) $4.2 million of incremental sales and marketing expenses resulting from the ALOG acquisition, (ii) $11.6 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (221 Americas sales and marketing employees as of September 30, 2011 versus 182 as of September 30, 2010), (iii) $2.2 million of higher bad debt expense, which is partially due to the revenue growth as discussed above and partially due to the growth in the Americas collection team that has initiated additional collection efforts and procedures, and (iv) $1.5 million of higher recruiting costs. We have been investing in our Americas sales and marketing initiatives to further increase our revenue and we anticipate this increased investment will continue over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues have increased and are expected to continue to increase. In the long-term, we generally expect Americas sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.
EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to (i) $6.1 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (108 EMEA sales and marketing employees as of September 30, 2011 versus 75 as of September 30, 2010) and $1.3 million of higher professional fees to support our growth. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the nine months ended September 30, 2010, resulting in approximately $1.7 million of unfavorable foreign currency impact to our EMEA sales and marketing expenses during the nine months ended September 30, 2011 on a constant currency basis. We intend to invest further in our EMEA sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our EMEA sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect EMEA sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.
Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $1.9 million of higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (70 Asia-Pacific sales and marketing employees as of September 30, 2011 versus 56 as of September 30, 2010). For the nine months ended September 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant on a constant currency basis. We intend to invest further in our Asia-Pacific sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our Asia-Pacific sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.
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General and Administrative Expenses. Our general and administrative expenses were split among the following geographic regions (dollars in thousands):
Nine months ended September 30, | % Change | |||||||||||||||||||||||
2011 | % | 2010 | % | Actual | Constant currency |
|||||||||||||||||||
Americas |
$ | 139,640 | 72 | % | $ | 110,271 | 71 | % | 27 | % | n/a | |||||||||||||
EMEA |
36,557 | 19 | % | 31,635 | 20 | % | 16 | % | 8 | % | ||||||||||||||
Asia-Pacific |
18,061 | 9 | % | 14,055 | 9 | % | 29 | % | 19 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 194,258 | 100 | % | $ | 155,961 | 100 | % | 25 | % | 22 | % | ||||||||||||
|
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|
|
|
|
Nine months
ended September 30, |
||||||||
2011 | 2010 | |||||||
General and administrative expenses as a percentage of revenues: |
||||||||
Americas |
18 | % | 20 | % | ||||
EMEA |
14 | % | 16 | % | ||||
Asia-Pacific |
11 | % | 12 | % | ||||
Total |
17 | % | 18 | % |
Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses included (i) $3.8 million of incremental general and administrative expenses resulting from the ALOG acquisition, (ii) $15.6 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (565 Americas general and administrative employees as of September 30, 2011 versus 491 as of September 30, 2010), and (iii) $6.0 million of higher depreciation expense as a result of our ongoing efforts to support our growth, such as investments in systems. Over the course of the past year, we have been investing in our Americas general and administrative functions to scale this region effectively for growth, which has included taking on additional office space to accommodate our headcount growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including further investment in our back office systems; however, as a percentage of revenues, we generally expect them to decrease.
EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to (i) $2.9 million of higher compensation costs, including general salaries, bonuses and headcount growth (171 EMEA general and administrative employees as of September 30, 2011 versus 154 as of September 30, 2010) and (ii) $1.7 million of higher professional fees related to various consulting projects to support our growth. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the nine months ended September 30, 2010, resulting in approximately $2.3 million of unfavorable foreign currency impact to our EMEA general and administrative expenses during the nine months ended September 30, 2011 on a constant currency basis. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.
45
Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to $2.7 million of higher compensation costs, including general salaries, bonuses and headcount growth (153 Asia-Pacific general and administrative employees as of September 30, 2011 versus 120 as of September 30, 2010). During the nine months ended September 30, 20141, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the nine months ended September 30, 2010, resulting in approximately $1.4 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the nine months ended September 30, 2011 on a constant currency basis. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.
Restructuring Charges. During the nine months ended September 30, 2011, we recorded restructuring charges totaling $2.2 million primarily related to revised sublease assumptions on our excess leased space in the New York metro area. Our excess space lease in the New York metro area remains abandoned and continues to carry a restructuring charge. During the nine months ended September 30, 2010, we recorded restructuring charges totaling $6.2 million primarily related to one-time termination benefits attributed to certain Switch and Data employees.
Acquisition Costs. During the nine months ended September 30, 2011, we recorded acquisition costs totaling $2.7 million primarily related to the ALOG acquisition. During the nine months ended September 30, 2010, we recorded acquisition costs totaling $12.0 million primarily related to the Switch and Data acquisition. Our acquisition costs primarily relate to our Americas geographic region.
Interest Income. Interest income increased to $1.5 million for the nine months ended September 30, 2011 from $1.3 million for the nine months ended September 30, 2010. Interest income increased primarily due to higher yields. The average yield for the nine months ended September 30, 2011 was 0.35% versus 0.19% for the nine months ended September 30, 2010. We generally expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries, and from the utilization of cash to finance our expansion activities.
Interest Expense. Interest expense increased to $126.2 million for the nine months ended September 30, 2011 from $101.7 million for the nine months ended September 30, 2010. This increase in interest expense was primarily due to the impact of our $750.0 million 7.00% senior notes offering, additional financings such as capital lease and other financing obligations to support our expansion projects and additional advances from our new Asia-Pacific financing. During the nine months ended September 30, 2011 and 2010, we capitalized $9.3 million and $8.7 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering, which is approximately $53.9 million annually. We may incur additional indebtedness to support our growth, resulting in further interest expense.
Other-Than-Temporary Impairment Recovery On Investments. During the nine months ended September 30, 2011, no other-than-temporary impairment recovery on investments was recorded. During the nine months ended September 30, 2010, we recorded a $3.6 million other-than-temporary impairment recovery on investments due to an additional distribution from one of our money market accounts we had previously written down during 2008 and 2009.
Loss on debt extinguishment and interest rate swaps, net. During the nine months ended September 30, 2011, no loss on debt extinguishment and interest rate swaps, net was recorded. During the nine months ended September 30, 2010, we recorded a $4.8 million loss on debt extinguishment and interest rate swaps, net, which is comprised of (i) a net gain of $2.7 million representing principal discount/premium and the write-off of related debt issuance costs and (ii) a loss of $7.5 million primarily from the termination of an interest rate swap associated with the Chicago IBX financing as a result of repaying and terminating the Chicago IBX financing in March 2010 and the write-off of interest rate swaps associated with the European financing due to such interest rate swaps no longer being effective hedges as a result of repaying and terminating the European financing in April 2010.
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Other Income (Expense). For the nine months ended September 30, 2011 and 2010, we recorded $1.4 million and $193,000, respectively, of other income, primarily due to foreign currency exchange gains during the period.
Income Taxes. For the nine months ended September 30, 2011 and 2010, we recorded $24.6 million and $15.8 million of income tax expenses, respectively. Our effective tax rates were 24.3% and 40.5% for the nine months ended September 30, 2011 and 2010, respectively. The lower effective tax rate for the nine months ended September 30, 2011 was primarily due to increased foreign losses benefited in 2011 and discrete tax benefits. We will continue to reassess our valuation allowance related to our foreign operations in the future, which may result in a further reduction of our valuation allowance. The cash taxes for 2011 and 2010 are primarily for state income taxes and foreign income taxes.
Non-GAAP Financial Measures
We provide all information required in accordance with generally accepted accounting principles (GAAP), but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. Accordingly, we use non-GAAP financial measures, primarily adjusted EBITDA, to evaluate our operations. We also use adjusted EBITDA as a metric in the determination of employees annual bonuses and vesting of restricted stock units that have both a service and performance condition. In presenting adjusted EBITDA, we exclude certain items that we believe are not good indicators of our current or future operating performance. These items are depreciation, amortization, accretion of asset retirement obligations and accrued restructuring charges, stock-based compensation, restructuring charges and acquisition costs. Legislative and regulatory requirements encourage the use of and emphasis on GAAP financial metrics and require companies to explain why non-GAAP financial metrics are relevant to management and investors. We exclude these items in order for our lenders, investors, and industry analysts, who review and report on us, to better evaluate our operating performance and cash spending levels relative to our industry sector and competitors.
For example, we exclude depreciation expense as these charges primarily relate to the initial construction costs of our IBX data centers and do not reflect our current or future cash spending levels to support our business. Our IBX data centers are long-lived assets, and have an economic life greater than 10 years. The construction costs of our IBX data centers do not recur and future capital expenditures remain minor relative to our initial investment. This is a trend we expect to continue. In addition, depreciation is also based on the estimated useful lives of our IBX data centers. These estimates could vary from actual performance of the asset, are based on historical costs incurred to build out our IBX data centers, and are not indicative of current or expected future capital expenditures. Therefore, we exclude depreciation from our operating results when evaluating our operations.
In addition, in presenting the non-GAAP financial measures, we exclude amortization expense related to certain intangible assets, as it represents a cost that may not recur and is not a good indicator of our current or future operating performance. We exclude accretion expense, both as it relates to asset retirement obligations as well as accrued restructuring charge liabilities, as these expenses represent costs which we believe are not meaningful in evaluating our current operations. We exclude stock-based compensation expense as it primarily represents expense attributed to equity awards that have no current or future cash obligations. As such, we, and many investors and analysts, exclude this stock-based compensation expense when assessing the cash generating performance of our operations. We also exclude restructuring charges from our non-GAAP financial measures. The restructuring charges relate to our decisions to exit leases for excess space adjacent to several of our IBX data centers, which we did not intend to build out or our decision to reverse such restructuring charges, or severance charges related to the Switch and Data acquisition. Finally, we also exclude acquisition costs from our non-GAAP financial measures. The acquisition costs relate to costs we incur in connection with business combinations. Management believes such items as restructuring charges and acquisition costs are non-core transactions; however, these types of costs will or may occur in future periods.
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Our management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. However, we have presented such non-GAAP financial measures to provide investors with an additional tool to evaluate our operating results in a manner that focuses on what management believes to be our core, ongoing business operations. We believe that the inclusion of this non-GAAP financial measure provides consistency and comparability with past reports and provides a better understanding of the overall performance of the business and its ability to perform in subsequent periods. We believe that if we did not provide such non-GAAP financial information, investors would not have all the necessary data to analyze Equinix effectively.
Investors should note, however, that the non-GAAP financial measures used by us may not be the same non-GAAP financial measures, and may not be calculated in the same manner, as that of other companies. In addition, whenever we use non-GAAP financial measures, we provide a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure.
We define adjusted EBITDA as income or loss from operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges and acquisition costs as presented below (dollars in thousands):
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Income from operations |
$ | 78,116 | $ | 52,026 | $ | 224,287 | $ | 140,235 | ||||||||
Depreciation, amortization and accretion expense |
92,019 | 74,485 | 257,970 | 187,433 | ||||||||||||
Stock-based compensation expense |
19,207 | 16,950 | 53,060 | 50,020 | ||||||||||||
Restructuring charges |
1,587 | 1,886 | 2,186 | 6,243 | ||||||||||||
Acquisitions costs |
699 | 1,114 | 2,729 | 11,957 | ||||||||||||
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Adjusted EBITDA |
$ | 191,628 | $ | 146,461 | $ | 540,232 | $ | 395,888 | ||||||||
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The geographic split of our adjusted EBITDA is presented below (dollars in thousands):
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Americas: |
||||||||||||||||
Income from operations |
$ | 51,659 | $ | 31,921 | $ | 148,050 | $ | 84,051 | ||||||||
Depreciation, amortization and accretion expense |
58,414 | 51,108 | 169,142 | 122,363 | ||||||||||||
Stock-based compensation expense |
15,176 | 12,683 | 41,545 | 37,346 | ||||||||||||
Restructuring charges |
1,587 | 1,886 | 2,186 | 6,243 | ||||||||||||
Acquisitions costs |
677 | 349 | 2,599 | 11,192 | ||||||||||||
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Adjusted EBITDA |
$ | 127,513 | $ | 97,947 | $ | 363,522 | $ | 261,195 | ||||||||
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EMEA: |
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Income from operations |
$ | 16,305 | $ | 10,258 | $ | 41,954 | $ | 26,251 | ||||||||
Depreciation, amortization and accretion expense |
19,354 | 15,531 | 54,710 | 43,752 | ||||||||||||
Stock-based compensation expense |
2,308 | 2,502 | 6,750 | 7,183 | ||||||||||||
Acquisitions costs |
| 765 | 14 | 765 | ||||||||||||
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Adjusted EBITDA |
$ | 37,967 | $ | 29,056 | $ | 103,428 | $ | 77,951 | ||||||||
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Asia-Pacific: |
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Income from operations |
$ | 10,152 | $ | 9,847 | $ | 34,283 | $ | 29,933 | ||||||||
Depreciation, amortization and accretion expense |
14,251 | 7,846 | 34,118 | 21,318 | ||||||||||||
Stock-based compensation expense |
1,723 | 1,765 | 4,765 | 5,491 | ||||||||||||
Acquisitions costs |
22 | | 116 | | ||||||||||||
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Adjusted EBITDA |
$ | 26,148 | $ | 19,458 | $ | 73,282 | $ | 56,742 | ||||||||
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Our adjusted EBITDA results have improved each year and in each region due to the improved operating results discussed earlier in Results of Operations, as well as the nature of our business model consisting of a recurring revenue stream and a cost structure which has a large base that is fixed in nature that is also discussed earlier in Overview. We believe that our adjusted EBITDA results will continue to improve in future periods as we continue to grow our business.
Liquidity and Capital Resources
As of September 30, 2011, our total indebtedness was comprised of (i) convertible debt principal totaling $1.0 billion from our 2.50% convertible subordinated notes (gross of discount), our 3.00% convertible subordinated notes, and our 4.75% convertible subordinated notes (gross of discount) and (ii) non-convertible debt and financing obligations totaling $2.1 billion consisting of (a) $1.5 billion of principal from our 8.125% and 7.00% senior notes, (b) $236.7 million of principal from our loans payable and (c) $388.2 million from our capital lease and other financing obligations.
We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of the current portion of our debt due, and to complete our publicly-announced expansion projects. As of September 30, 2011, we had $1.2 billion of cash, cash equivalents and short-term and long-term investments. Besides our investment portfolio and any further financing activities we may pursue, customer collections are our primary source of cash. While we believe we have a strong customer base and have continued to experience relatively strong collections, if the current market conditions were to deteriorate, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, all of which could have a material adverse effect on our liquidity.
49
As of September 30, 2011, we had a total of approximately $135.7 million of additional liquidity available to us, consisting of (i) approximately $131.0 million under the $150.0 million senior revolving credit facility and (ii) approximately $4.7 million under the new Asia-Pacific financing. While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and to complete our publicly-announced IBX expansion plans, we may pursue additional expansion opportunities, primarily the build-out of new IBX data centers, in certain of our existing markets which are at or near capacity within the next year, as well as potential acquisitions. While we will be able to fund these expansion plans with our existing resources, additional financing, either debt or equity, may be required to pursue certain new or unannounced additional expansion plans. However, if current market conditions were to deteriorate, we may be unable to secure additional financing or any such additional financing may only be available to us on unfavorable terms. An inability to pursue additional expansion opportunities will have a material adverse effect on our ability to maintain our desired level of revenue growth in future periods.
Sources and Uses of Cash
Nine Months Ended September 30, |
||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Net cash provided by operating activities |
$ | 399,988 | $ | 269,981 | ||||
Net cash used in investing activities |
(1,304,809 | ) | (618,507 | ) | ||||
Net cash provided by financing activities |
832,111 | 395,675 |
Operating Activities. The increase in net cash provided by operating activities was primarily due to improved operating results and improved collections of accounts receivable and growth in customer installations, which increases deferred installation revenue. Although customer collections improved in the nine months ended September 30, 2011 as compared to September 30, 2010, customer collections can vary widely from quarter to quarter. It is not uncommon for some large customer receivables that were anticipated to be collected in one quarter to slip to the next quarter. For example, some large customer receivables that were anticipated to be collected in September 2011 were instead collected in October 2011, which negatively impacted cash flows from operating activities for the nine months ended September 30, 2011. However, overall, customer collections remain relatively strong. We expect that we will continue to generate cash from our operating activities during the remainder of 2011 and beyond.
Investing Activities. The increase in net cash used in investing activities was primarily due to higher purchases of investments from the proceeds of our 7.00% senior notes offering and an increase in restricted cash. For the foreseeable future, we expect that our IBX expansion construction activity will increase somewhat compared to our current spending levels. However, if the opportunity to expand is greater than planned and we have sufficient funding to increase the expansion opportunities available to us.
Financing Activities. Lower net cash provided by financing activities for the nine months ended September 30, 2010 was primarily due to repayment of our debt facilities, including the Chicago IBX financing, the European financing, the Asia-Pacific financing, the Singapore financing and the Netherlands financing; however, the Asia-Pacific financing and the Singapore financing were replaced by the new Asia-Pacific financing. We expect that our financing activities will consist primarily of the repayment of our debt for the fourth quarter.
Debt Obligations
7.00% Senior Notes. In July 2011, we issued $750.0 million aggregate principal amount of 7.00% senior notes due July 15, 2021, which are referred to as the 7.00% senior notes. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2012.
50
The 7.00% senior notes are unsecured and rank equal in right of payment to our existing or future senior debt and senior in right of payment to our existing and future subordinated debt. The 7.00% senior notes are effectively junior to any of our existing and future secured indebtedness and any indebtedness of our subsidiaries. The 7.00% senior notes are also structurally subordinated to all debt and other liabilities (including trade payables) of our subsidiaries and will continue to be subordinated to the extent that these subsidiaries do not guarantee the 7.00% senior notes in the future.
The 7.00% Senior Notes are governed by an indenture which contains covenants that limit the Companys ability and the ability of its subsidiaries to, among other things:
| incur additional debt; |
| pay dividends or make other restricted payments; |
| purchase, redeem or retire capital stock or subordinated debt; |
| make asset sales; |
| enter into transactions with affiliates; |
| incur liens; |
| enter into sale-leaseback transactions; |
| provide subsidiary guarantees; |
| make investments; and |
| merge or consolidate with any other person. |
At any time prior to July 15, 2014, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 7.00% senior notes outstanding at a redemption price equal to 107.000% of the principal amount of the 7.00% senior notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings, provided that (i) at least 65% of the aggregate principal amount of the 7.00% senior notes issued remains outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur within 90 days of the date of the closing of such equity offerings. On or after July 15, 2016, we may redeem all or a part of the 7.00% senior notes, on any one or more occasions, at the redemption prices set forth below plus accrued and unpaid interest thereon, if any, up to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on July 15 of the years indicated below:
Redemption price of the Senior Notes | ||
2016 |
103.500% | |
2017 |
102.333% | |
2018 |
101.167% | |
2019 and thereafter |
100.000% |
In addition, at any time prior to July 15, 2016, we may also redeem all or a part of the 7.00% senior notes at a redemption price equal to 100% of the principal amount of the 7.00% senior notes redeemed plus applicable premium, which is referred to as the applicable premium, and accrued and unpaid interest, if any, to, but not including, the date of redemption, which is referred to as the redemption date. The applicable premium means the greater of:
| 1.0% of the principal amount of the 7.00% senior notes to be redeemed; and |
| the excess of: (a) the present value at such redemption date of (i) the redemption price of the 7.00% senior notes to be redeemed at July 15, 2016 as shown in the above table, plus (ii) all required interest payments due on these 7.00% senior notes through July 15, 2016 (excluding accrued but unpaid interest, if any, to, but not including the redemption date), computed using a discount rate equal to the yield to maturity as of the redemption date of the United States Treasury securities with a constant maturity most nearly equal to the period from the redemption date to July 15, 2016, plus 0.50%; over (b) the principal amount of the 7.00% senior notes to be redeemed. |
Upon a change in control, we will be required to make an offer to purchase each holders 7.00% senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase.
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Debt issuance costs related to the 7.00% senior notes, net of amortization, were $13.9 million as of September 30, 2011.
Senior Revolving Credit Line. In September 2011, we entered into a $150.0 million senior unsecured revolving credit facility with a group of lenders, which is referred to as the lenders. This transaction is referred to as the senior revolving credit line. The senior revolving credit line replaced our $25.0 million credit facility with Bank of America, which is referred to as the $25.0 million Bank of America revolving credit line. As a result, the outstanding letters of credit issued under the $25.0 million Bank of America revolving credit line were all transferred to the senior revolving credit line. We may use the senior revolving credit line for working capital, capital expenditures, issuance of letters of credit, general corporate purposes and to refinance a portion of our existing debt obligations. The senior revolving credit line has a five-year term and allows us to borrow, repay and re-borrow over the term. The senior revolving credit line provides a sublimit for the issuance of letters of credit of up to $100.0 million and a sublimit for swing line borrowings of up to $25.0 million. Borrowings under the senior revolving credit line carry an interest rate of US$ LIBOR plus an applicable margin ranging from 1.25% to 1.75% per annum, which varies as a function of our senior leverage ratio. We are also subject to a quarterly non-utilization fee ranging from 0.30% to 0.40% per annum, pricing of which will also vary as a function of our senior leverage ratio. Additionally, we may increase the size of the senior revolving credit line at our election by up to $100.0 million, subject to approval by the lenders and based on current market conditions. The senior revolving credit line contains several financial covenants, which we must comply with quarterly, including a leverage ratio, fixed charge coverage ratio and a minimum net worth covenant. As of September 30, 2011, our cost of borrowing under the senior revolving credit line was 1.99% per annum. As of September 30, 2011, we had 14 irrevocable letters of credit totaling approximately $19.0 million issued and outstanding under the senior revolving credit line. As a result, the amount available to borrow was $131.0 million as of September 30, 2011.
Paris 4 IBX Financing. In March 2011, we entered into two agreements with two unrelated parties to purchase and develop a building that will ultimately become our fourth IBX data center in the Paris metro area. The first agreement allowed us the right to purchase the property for a total fee of approximately $20.2 million, payable to a company that held exclusive rights (including power rights) to the property and was already in the process of developing the property into a data center and will now, instead, become the anchor tenant in the Paris 4 IBX data center once it is open for business. The second agreement was entered into with the developer of the property and allowed us to take immediate title to the building and associated land and also requires the developer to construct the data center to our specifications and deliver the completed data center to us in July 2012 for a total fee of approximately $101.7 million. Both agreements include extended payment terms. We made payments under both agreements totaling approximately $35.7 million in March 2011 and the remaining payments due totaling approximately $86.2 million are payable on various dates through March 2013, which is referred to as the Paris 4 IBX financing. Of the amounts paid or payable under the Paris 4 IBX financing, a total of $15.0 million was allocated to land and building assets, $3.4 million was allocated to a deferred charge, which will be netted against revenue associated with the anchor tenant of the Paris 4 IBX data center over the term of the customer contract, and the remainder totaling $103.5 million was or will be allocated to construction costs inclusive of interest charges. We have imputed an interest rate of 5.90% per annum on the Paris 4 IBX financing as of September 30, 2011, a total of $40.1 million was outstanding under the Paris 4 IBX financing. We will record additional construction costs and increase the Paris 4 IBX financing liability over the course of the construction period. The Paris 4 IBX financing also required us to post approximately $89.7 million of cash into a restricted cash account to ensure liquidity for the developer during the construction period.
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Contractual Obligations and Off-Balance-Sheet Arrangements
We lease a majority of our IBX centers and certain equipment under non-cancelable lease agreements expiring through 2035. The following represents our debt maturities, financings, leases and other contractual commitments as of September 30, 2011 (in thousands):
2011 (3 months) |
2012 | 2013 | 2014 | 2015 | Thereafter | Total | ||||||||||||||||||||||
Convertible debt (1) |
$ | | $ | 250,000 | $ | | $ | 395,98 |