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
|
For
the quarterly period ended September 30, 2008
OR
o
|
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.) |
301 Velocity Way, Fifth Floor, Foster
City, California 94404
(Address
of principal executive offices, including ZIP code)
(650)
513-7000
(Registrant’s
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
o and
(2) has been subject to such filing requirements for the past 90 days.
Yes x No o
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 o
Non-accelerated filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
number of shares outstanding of the registrant’s Common Stock as of September
30, 2008 was 37,349,752.
INDEX
|
|
Page No.
|
|
|
|
|
|
|
|
Item
1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
Item
2.
|
|
|
|
31 |
|
|
|
|
|
|
|
Item
3.
|
|
|
|
46 |
|
|
|
|
|
|
|
Item
4.
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
1.
|
|
|
|
48 |
|
|
|
|
|
|
|
Item
1A.
|
|
|
|
50 |
|
|
|
|
|
|
|
Item
2.
|
|
|
|
66 |
|
|
|
|
|
|
|
Item
3.
|
|
|
|
66 |
|
|
|
|
|
|
|
Item
4.
|
|
|
|
66 |
|
|
|
|
|
|
|
Item
5.
|
|
|
|
66 |
|
|
|
|
|
|
|
Item
6.
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
72 |
|
Condensed
Consolidated Balance Sheets
(in
thousands)
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
160,685 |
|
|
$ |
290,633 |
|
Short-term
investments
|
|
|
101,892 |
|
|
|
63,301 |
|
Accounts
receivable, net
|
|
|
62,376 |
|
|
|
60,089 |
|
Prepaids
and other current assets
|
|
|
17,701 |
|
|
|
12,738 |
|
Total
current assets
|
|
|
342,654 |
|
|
|
426,761 |
|
Long-term
investments
|
|
|
67,622 |
|
|
|
29,966 |
|
Property
and equipment, net
|
|
|
1,346,982 |
|
|
|
1,162,720 |
|
Goodwill
|
|
|
411,108 |
|
|
|
442,926 |
|
Intangible
assets, net
|
|
|
62,351 |
|
|
|
67,207 |
|
Debt
issuance costs, net
|
|
|
18,363 |
|
|
|
21,333 |
|
Other
assets
|
|
|
42,855 |
|
|
|
30,955 |
|
Total
assets
|
|
$ |
2,291,935 |
|
|
$ |
2,181,868 |
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
71,234 |
|
|
$ |
65,096 |
|
Accrued
property and equipment
|
|
|
56,537 |
|
|
|
76,504 |
|
Current
portion of capital lease and other financing obligations
|
|
|
3,986 |
|
|
|
3,808 |
|
Current
portion of mortgage and loans payable
|
|
|
41,486 |
|
|
|
16,581 |
|
Current
portion of convertible debt
|
|
|
32,250 |
|
|
|
|
|
Other
current liabilities
|
|
|
33,583 |
|
|
|
29,473 |
|
Total
current liabilities
|
|
|
239,076 |
|
|
|
191,462 |
|
Capital
lease and other financing obligations, less current
portion
|
|
|
95,095 |
|
|
|
93,604 |
|
Mortgage
and loans payable, less current portion
|
|
|
374,872 |
|
|
|
313,915 |
|
Convertible
debt, less current portion
|
|
|
645,986 |
|
|
|
678,236 |
|
Deferred
tax liabilities
|
|
|
21,785 |
|
|
|
25,955 |
|
Deferred
rent and other liabilities
|
|
|
77,871 |
|
|
|
64,264 |
|
Total
liabilities
|
|
|
1,454,685 |
|
|
|
1,367,436 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
37 |
|
|
|
37 |
|
Additional
paid-in capital
|
|
|
1,445,363 |
|
|
|
1,376,915 |
|
Accumulated
other comprehensive loss
|
|
|
(64,557 |
) |
|
|
(3,888 |
) |
Accumulated
deficit
|
|
|
(543,593 |
) |
|
|
(558,632 |
) |
Total
stockholders’ equity
|
|
|
837,250 |
|
|
|
814,432 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,291,935 |
|
|
$ |
2,181,868 |
|
See accompanying notes to condensed consolidated
financial statements
Condensed
Consolidated Statements of Operations
(in
thousands, except per share data)
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
183,735 |
|
|
$ |
103,782 |
|
|
$ |
513,997 |
|
|
$ |
280,728 |
|
Costs
and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
109,863 |
|
|
|
62,891 |
|
|
|
306,357 |
|
|
|
171,265 |
|
Sales
and marketing
|
|
|
16,009 |
|
|
|
9,630 |
|
|
|
46,650 |
|
|
|
27,602 |
|
General
and administrative
|
|
|
35,529 |
|
|
|
25,182 |
|
|
|
111,350 |
|
|
|
72,122 |
|
Restructuring
charges
|
|
|
799 |
|
|
|
― |
|
|
|
799 |
|
|
|
407 |
|
Total costs and operating expenses
|
|
|
162,200 |
|
|
|
97,703 |
|
|
|
465,156 |
|
|
|
271,396 |
|
Income
from operations
|
|
|
21,535 |
|
|
|
6,079 |
|
|
|
48,841 |
|
|
|
9,332 |
|
Interest
income
|
|
|
441 |
|
|
|
3,309 |
|
|
|
6,293 |
|
|
|
10,340 |
|
Interest
expense
|
|
|
(13,880 |
) |
|
|
(5,662 |
) |
|
|
(40,297 |
) |
|
|
(15,240 |
) |
Other
income (expense)
|
|
|
(520 |
) |
|
|
3,167 |
|
|
|
602 |
|
|
|
3,168 |
|
Loss on conversion and extinguishment of debt
|
|
|
― |
|
|
|
(2,554 |
) |
|
|
― |
|
|
|
(5,949 |
) |
Income before income taxes
|
|
|
7,576 |
|
|
|
4,339 |
|
|
|
15,439 |
|
|
|
1,651 |
|
Income
taxes
|
|
|
(187 |
) |
|
|
(215 |
) |
|
|
(400 |
) |
|
|
(766 |
) |
Net
income
|
|
$ |
7,389 |
|
|
$ |
4,124 |
|
|
$ |
15,039 |
|
|
$ |
885 |
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$ |
0.20 |
|
|
$ |
0.13 |
|
|
$ |
0.41 |
|
|
$ |
0.03 |
|
Weighted-average shares
|
|
|
36,972 |
|
|
|
31,683 |
|
|
|
36,608 |
|
|
|
30,845 |
|
Diluted
net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$ |
0.19 |
|
|
$ |
0.12 |
|
|
$ |
0.40 |
|
|
$ |
0.03 |
|
Weighted-average shares
|
|
|
37,932 |
|
|
|
33,112 |
|
|
|
37,731 |
|
|
|
32,339 |
|
See
accompanying notes to condensed consolidated financial
statements
Condensed
Consolidated Statements of Cash Flows
(in
thousands)
|
|
Nine
months ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
15,039 |
|
|
$ |
885 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
110,110 |
|
|
|
64,495 |
|
Stock-based compensation
|
|
|
41,951 |
|
|
|
31,032 |
|
Amortization of intangible assets
|
|
|
5,236 |
|
|
|
689 |
|
Amortization of debt issuance costs
|
|
|
3,753 |
|
|
|
1,985 |
|
Accretion of asset retirement obligation and accrued restructuring
charges
|
|
|
1,245 |
|
|
|
2,373 |
|
Restructuring charges
|
|
|
799 |
|
|
|
407 |
|
Gain on foreign currency hedge
|
|
|
|
|
|
|
(1,494 |
) |
Other items
|
|
|
285 |
|
|
|
(1,152 |
) |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,783 |
) |
|
|
(7,068 |
) |
Prepaids and other assets
|
|
|
(2,018 |
) |
|
|
(1,825 |
) |
Accounts payable and accrued expenses
|
|
|
5,015 |
|
|
|
23,079 |
|
Accrued restructuring charges
|
|
|
(2,034 |
) |
|
|
(10,100 |
) |
Other liabilities
|
|
|
15,665 |
|
|
|
2,833 |
|
Net
cash provided by operating activities
|
|
|
191,263 |
|
|
|
106,139 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of investments
|
|
|
(240,556 |
) |
|
|
(89,476 |
) |
Sales
of investments
|
|
|
71,141 |
|
|
|
100 |
|
Maturities
of investments
|
|
|
93,268 |
|
|
|
71,421 |
|
Purchase
of San Jose IBX property
|
|
|
|
|
|
|
(71,471 |
) |
Purchase
of Los Angeles IBX property
|
|
|
—
|
|
|
|
(49,059 |
) |
Purchase
of IXEurope, net of cash acquired
|
|
|
—
|
|
|
|
(541,729 |
) |
Purchase
of Virtu, net of cash acquired
|
|
|
(23,241 |
) |
|
|
—
|
|
Purchases
of other property and equipment
|
|
|
(305,546 |
) |
|
|
(295,809 |
) |
Change
in accrued property and equipment
|
|
|
(16,015 |
) |
|
|
23,940 |
|
Purchase
of restricted cash
|
|
|
(14,234 |
) |
|
|
(598 |
) |
Release
of restricted cash
|
|
|
333 |
|
|
|
—
|
|
Other
investing activities
|
|
|
—
|
|
|
|
1,475 |
|
Net
cash used in investing activities
|
|
|
(434,850 |
) |
|
|
(951,206 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from employee equity awards
|
|
|
26,087 |
|
|
|
27,568 |
|
Proceeds from issuance of common stock
|
|
|
—
|
|
|
|
339,946 |
|
Proceeds from convertible debt
|
|
|
—
|
|
|
|
645,986 |
|
Proceeds from loans payable
|
|
|
102,101 |
|
|
|
118,754 |
|
Repayment
of capital lease and other financing obligations
|
|
|
(2,874 |
) |
|
|
(1,445 |
) |
Repayment
of mortgage and loans payable
|
|
|
(11,456 |
) |
|
|
(1,573 |
) |
Debt
issuance costs
|
|
|
(908 |
) |
|
|
(22,224 |
) |
Net
cash provided by financing activities
|
|
|
112,950 |
|
|
|
1,107,012 |
|
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
|
|
689 |
|
|
|
(1,056 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(129,948 |
) |
|
|
260,889 |
|
Cash
and cash equivalents at beginning of period
|
|
|
290,633 |
|
|
|
82,563 |
|
Cash
and cash equivalents at end of period
|
|
$ |
160,685 |
|
|
$ |
343,452 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$ |
405 |
|
|
$ |
240 |
|
Cash paid for interest
|
|
$ |
35,486 |
|
|
$ |
16,130 |
|
See accompanying notes to condensed consolidated
financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1.
Basis of Presentation and Significant Accounting Policies
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 balance sheet
at December 31, 2007 has been derived from audited financial statements at that
date. The 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. For further
information, refer to the Consolidated Financial Statements and Notes thereto
included in Equinix’s Form 10-K as filed with the SEC on February 27, 2008.
Results for the interim periods are not necessarily indicative of results for
the entire fiscal year.
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Certain
amounts in the accompanying condensed consolidated financial statements have
been reclassified to conform to the condensed consolidated financial statement
presentation as of and for the three and nine months ended September 30,
2008.
Consolidation
and Foreign Currency Transactions
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Equinix and its subsidiaries, including the operations of IXEurope
from September 14, 2007 and Virtu from February 5, 2008 (see Note 2). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Foreign exchange gains or losses resulting from
foreign currency transactions, including intercompany foreign currency
transactions that are anticipated to be repaid within the foreseeable future,
are reported within other income (expense) on the Company’s accompanying
statements of operations.
Revenue
Recognition and Allowance for Doubtful Accounts
Equinix
derives more than 90% of its revenues from recurring revenue streams, consisting
primarily of (1) colocation services, such as the licensing of cabinet space and
power; (2) interconnection services, such as cross connects and Equinix Exchange
ports; (3) managed infrastructure services, such as Equinix Direct and bandwidth
and (4) other services consisting of rent. The remainder of the
Company’s revenues are from non-recurring revenue streams, such as from the
recognized portion of deferred installation revenues, professional services,
contract settlements and equipment sales. Revenues from recurring
revenue streams are generally billed monthly and recognized ratably over the
term of the contract, generally one to three years for Internet Business
Exchange (“IBX”) space customers. Non-recurring installation fees, although
generally paid in a lump sum upon installation, are deferred and recognized
ratably over the longer of the term of the related contract or expected life of
the installation. Professional service fees are recognized in the period in
which the services were provided and represent the culmination of a separate
earnings process as long as they meet the criteria for separate recognition
under EITF No. 00-21, “Revenue Arrangements with Multiple
Deliverables.” Revenue from bandwidth and equipment sales is
recognized on a gross basis in accordance with EITF No. 99-19, “Recording
Revenue as a Principal versus Net as an Agent”, primarily because the Company
acts as the principal in the transaction, takes title to products and services
and bears inventory and credit risk. To the extent the Company does
not meet the criteria for gross basis accounting for bandwidth and equipment
revenue, the Company records the revenue on a net basis. 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.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
Company occasionally guarantees certain service levels, such as uptime, as
outlined in individual customer contracts. To the extent that these service
levels are not achieved, the Company reduces revenue for any credits given to
the customer as a result. The Company generally has the ability to determine
such service level credits prior to the associated revenue being recognized, and
historically, these credits have generally not been significant. There were no
significant service level credits issued during the three and nine months ended
September 30, 2008 and 2007.
Revenue
is recognized only when the service has been provided and when there is
persuasive evidence of an arrangement, the fee is fixed or determinable and
collection of the receivable is reasonably assured. It is customary business
practice to obtain a signed master sales agreement and sales order prior to
recognizing revenue in an arrangement. Taxes collected from customers and
remitted to governmental authorities are reported on a net basis and are
excluded from revenue.
The
Company assesses collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
The Company generally does not request collateral from its customers although in
certain cases the Company obtains a security interest in a customer’s equipment
placed in its IBX centers or obtains a deposit. If the Company determines that
collection of a fee is not reasonably assured, the fee is deferred and revenue
is recognized at the time collection becomes reasonably assured, which is
generally upon receipt of cash. In addition, the Company also maintains an
allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments for which the Company had
expected to collect the revenues. If the financial condition of the Company’s
customers were to deteriorate or if they became insolvent, resulting in an
impairment of their ability to make payments, greater allowances for doubtful
accounts may be required. Management specifically analyzes accounts receivable
and current economic news and trends, historical bad debts, customer
concentrations, customer credit-worthiness and changes in customer payment terms
when evaluating revenue recognition and the adequacy of the Company’s
reserves. A specific bad debt reserve of up to the full amount of a
particular invoice value is provided for certain problematic customer
balances. An additional reserve is established for all other accounts
based on the age of the invoices and an analysis of historical credits issued.
Delinquent account balances are written-off after management has determined that
the likelihood of collection is not probable.
Net
Income per Share
The
Company computes net income per share in accordance with SFAS No. 128, “Earnings
per Share;” SEC Staff Accounting Bulletin (“SAB”) No. 98; EITF Issue 03-6,
“Participating Securities and the Two-Class Method Under FASB 128;” EITF Issue
04-8 “The Effect of Contingently Convertible Instruments on Diluted Earnings per
Share” and SFAS No. 123(R), “Share-Based Payment.” Basic net income (loss)
per share is computed using net income (loss) and the weighted-average number of
common shares outstanding. Diluted net income per share is computed using
net income, adjusted for interest expense as a result of the assumed conversion
of the Company’s Convertible Subordinated Debentures, 2.50% Convertible
Subordinated Notes and 3.00% Convertible Subordinated Notes, if dilutive, and
the weighted-average number of common shares outstanding plus any dilutive
potential common shares outstanding. Dilutive potential common shares include
the assumed exercise, vesting and issuance activity of employee equity awards
using the treasury stock method, as well as warrants and shares issuable upon
the conversion of the Convertible Subordinated Debentures, 2.50%
Convertible Subordinated Notes and 3.00% Convertible Subordinated
Notes.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
following table sets forth the computation of basic and diluted net income per
share for the periods presented (in thousands, except per share
amounts):
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic net income per share
|
|
$ |
7,389 |
|
|
$ |
4,124 |
|
|
$ |
15,039 |
|
|
$ |
885 |
|
Effect
of assumed conversion of convertible subordinated debentures and
notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Numerator for diluted net income per share
|
|
$ |
7,
389 |
|
|
$ |
4,124 |
|
|
$ |
15,
039 |
|
|
$ |
885 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares
|
|
|
37,268 |
|
|
|
32,142 |
|
|
|
36,975 |
|
|
|
31,305 |
|
Weighted-average
unvested restricted shares issued subject to forfeiture
|
|
|
(296 |
) |
|
|
(459 |
) |
|
|
(367 |
) |
|
|
(460 |
) |
Denominator for basic net income per share
|
|
|
36,972 |
|
|
|
31,683 |
|
|
|
36,608 |
|
|
|
30,845 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
subordinated debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
2.50%
convertible subordinated notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
3.00%
convertible subordinated notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Employee
equity awards
|
|
|
960 |
|
|
|
1,429 |
|
|
|
1,123 |
|
|
|
1,494 |
|
Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total dilutive potential shares
|
|
|
960 |
|
|
|
1,429 |
|
|
|
1,123 |
|
|
|
1,494 |
|
Denominator for diluted net income per share
|
|
|
37,932 |
|
|
|
33,112 |
|
|
|
37,731 |
|
|
|
32,339 |
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.20 |
|
|
$ |
0.13 |
|
|
$ |
0.41 |
|
|
$ |
0.03 |
|
Diluted
|
|
$ |
0.19 |
|
|
$ |
0.12 |
|
|
$ |
0.40 |
|
|
$ |
0.03 |
|
The
following table sets forth potential shares of common stock that are not
included in the diluted net income 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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
reserved for conversion of convertible subordinated
debentures
|
|
|
816 |
|
|
|
816 |
|
|
|
816 |
|
|
|
816 |
|
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 |
|
Common
stock warrants
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Common
stock related to employee equity awards
|
|
|
1,447 |
|
|
|
1,065 |
|
|
|
1,520 |
|
|
|
1,093 |
|
|
|
|
7,441 |
|
|
|
7,059 |
|
|
|
7,514 |
|
|
|
7,087 |
|
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the year in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that
includes the enactment date. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts that are expected more likely than
not to be realized in the future.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
Company recorded an additional deferred tax liability totaling $1,372,000 with
an increase to goodwill as a result of the Virtu Acquisition. The deferred tax
liability recognized is primarily attributable to the identifiable intangible
assets that were recorded for the purchase.
The
Company will continue to provide a valuation allowance for the net deferred tax
assets, other than the deferred tax assets associated with its Singapore and
Swiss subsidiaries, until it becomes more likely than not that the net deferred
tax assets will be realizable. For the three and nine months ended September 30,
2008, the Company recorded $187,000 and $400,000, respectively, of tax expense.
The tax benefit and expense recorded during the periods ended September 30, 2008
were primarily attributable to the Company’s foreign operations. For the three
and nine months ended September 30, 2007, the Company recorded a tax provision
of $215,000 and $766,000, respectively. The tax provision recorded in the
periods ended September 30, 2007 was primarily attributable to the Company’s
foreign operations. The tax provision for the nine months ended September 30,
2008 includes a tax benefit of $185,000 the Company recorded due to a tax
settlement with a state in which it operated. The Company did not record any
excess tax benefits associated with the stock options exercised by employees
during the three and nine months ended September 30, 2008 and 2007.
In
January 2007, the Company adopted the provisions of FIN 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), which clarifies the accounting for
uncertainty in income taxes recognized in the condensed consolidated financial
statements in accordance with FASB Statement No. 109, “Accounting for
Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The adoption
of FIN 48 resulted in no cumulative effect of a change in accounting principle
being recorded on the Company’s condensed consolidated financial statements
during the three months ended March 31, 2007. Prior to the adoption of FIN
48, the Company recorded liabilities related to uncertain income tax position
based upon SFAS No. 5, “Accounting for Contingencies.”
During
the three months ended March 31, 2008, the Company reached a final agreement
with a state in which it operated to close an appeal filed by the Company in
that state’s tax court. The Company filed the appeal in 2006 to contest the
decision made by the state auditor disallowing the refundable research and
capital goods credits. The executed closing settlement specified that the state
would credit the Company $357,000 plus interest, which was received. As a result
of the settlement, the total unrecognized tax benefits decreased by $1,373,000
in the nine months ended September 30, 2008. A majority of the unrecognized tax
benefits, if subsequently recognized, will affect the Company’s effective tax
rate at the time of recognition. The Company will continue to classify the
interest and penalties recognized in accordance with paragraphs 15 and 16,
respectively, of FIN 48 in the financial statements as income tax. The Company’s
income tax returns for all tax years remain open to examination by federal and
various state taxing authorities due to the Company’s Net Operating Loss (“NOL”)
carry-forward. In addition, the Company’s tax years of 2001 through 2007 also
remain open and subject to examination by local tax authorities in the foreign
jurisdictions in which the Company has major operations.
Construction
in Progress
Construction
in progress includes direct and indirect expenditures for the construction and
expansion of IBX centers and is stated at original cost. The Company has
contracted out substantially all of the construction and expansion efforts of
its IBX centers to independent contractors under construction contracts.
Construction in progress includes certain costs incurred under a construction
contract including project management services, engineering and schematic design
services, design development, construction services and other
construction-related fees and services. In addition, the Company has capitalized
certain interest costs during the construction phase. Once an IBX center or
expansion project becomes operational, these capitalized costs are allocated to
certain property and equipment categories and are depreciated at the appropriate
rates consistent with the estimated useful life of the underlying assets.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Interest
incurred is capitalized in accordance with SFAS No. 34, “Capitalization of
Interest Costs.” The following table sets forth total interest cost
incurred and total interest cost capitalized (in thousands):
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$ |
13,880 |
|
|
$ |
5,662 |
|
|
$ |
40,297 |
|
|
$ |
15,240 |
|
Interest
capitalized
|
|
|
1,490 |
|
|
|
2,974 |
|
|
|
4,684 |
|
|
|
6,120 |
|
Interest
charges incurred
|
|
$ |
15,370 |
|
|
$ |
8,636 |
|
|
$ |
44,981 |
|
|
$ |
21,360 |
|
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with SFAS
No. 123(R), “Share-Based Payment,” and related pronouncements
(“SFAS 123(R)”). Under the fair value recognition provisions of this statement,
stock-based compensation cost is measured at the grant date for all stock-based
awards made to employees and directors based on the fair value of the award and
is recognized as expense over the requisite service period, which is generally
the vesting period. SFAS 123(R) supersedes the Company’s previous
accounting under Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees,” (“APB 25”) for periods beginning in fiscal year
2006. Commencing in March 2008, the Company began granting restricted stock
units to its employees in lieu of stock options.
In
January 2008, the Compensation Committee of the Board of Directors approved the
issuance of an aggregate of 123,000 shares of restricted stock units to
executive officers pursuant to the 2000 Equity Incentive Plan. In addition, in
February 2008, the Stock Award Committee of the Board of Directors approved the
issuance of 308,267 restricted stock units to certain employees, excluding
executive officers, as part of the Company’s annual refresh program. All awards
are subject to vesting provisions. All such equity awards described in this
paragraph had a total fair value as of the date of grants, net of estimated
forfeitures, of $28,565,000, which is expected to be amortized over a
weighted-average period of 3.23 years.
During
the three months ended June 30, 2008, the Company entered into compromise
agreements with its two senior officers in Europe in connection with their
resignations and modified their outstanding stock awards. As a result, the
Company recorded an incremental stock-based compensation charge of $3,098,000
during the nine months ended September 30, 2008, which is included in general
and administrative expenses in the Company’s condensed consolidated statements
of operations.
The
following table presents, by operating expense, the Company’s stock-based
compensation expense recognized in the Company’s condensed consolidated
statement of operations (in thousands):
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
$ |
1,257 |
|
|
$ |
878 |
|
|
$ |
3,435 |
|
|
$ |
3,019 |
|
Sales
and marketing
|
|
|
2,367 |
|
|
|
2,049 |
|
|
|
7,421 |
|
|
|
6,440 |
|
General
and administrative
|
|
|
8,938 |
|
|
|
7,562 |
|
|
|
31,095 |
|
|
|
21,573 |
|
|
|
$ |
12,562 |
|
|
$ |
10,489 |
|
|
$ |
41,951 |
|
|
$ |
31,032 |
|
Goodwill
and Other Intangible Assets
Equinix
currently operates in one reportable segment, but has determined that it
operates in a number of reporting units for the purposes of SFAS No. 142, which
consists of the Company’s geographic operations in 1) the United States, 2)
Asia-Pacific and 3) Europe. As of September 30, 2008, the
Company
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
had
goodwill attributable to the Asia-Pacific reporting unit and the Europe
reporting unit. The Company performed its annual impairment review of the Europe
reporting unit as of August 31, 2008. The Company concluded that its goodwill
attributed to the Company’s Europe reporting unit was not impaired as the fair
value of its Europe reporting unit exceeded the carrying value of this reporting
unit, including goodwill. The recent market declines have not had an impact on
this determination. The primary methods used to determine the fair values for
SFAS No. 142 impairment purposes were the discounted cash flow and market
methods. The assumptions supporting the discounted cash flow method, including
the discount rate, which was assumed to be 9.5%, were determined using the
Company's best estimates as of the date of the impairment review. Impairment
assessment inherently involves judgment as to assumptions about expected future
cash flows and the impact of market conditions on those assumptions. Future
events and changing market conditions may impact the Company’s assumptions as to
prices, costs, growth rates or other factors that may result in changes in the
Company’s estimates of future cash flows. Although the Company believes the
assumptions it used in testing for impairment are reasonable, significant
changes in any one of the Company’s assumptions could produce a significantly
different result. The Company performs its annual impairment review of the
Asia-Pacific reporting unit in the fourth quarter; however, the Company has
noted no indications of impairment as of September 30, 2008.
Goodwill
and other intangible assets, net, consisted of the following (in
thousands):
|
|
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
Asia-Pacific
|
|
$ |
18,088 |
|
|
$ |
18,010 |
|
Europe
|
|
|
393,020 |
|
|
|
424,916 |
|
|
|
|
411,108 |
|
|
|
442,926 |
|
Other
intangibles:
|
|
|
|
|
|
|
|
|
Intangible
asset – customer contracts
|
|
|
69,084 |
|
|
|
69,209 |
|
Intangible
asset – leases
|
|
|
5,035 |
|
|
|
5,254 |
|
Intangible
asset – tradename
|
|
|
419 |
|
|
|
361 |
|
Intangible
asset – workforce
|
|
|
160 |
|
|
|
160 |
|
Intangible
asset – lease expenses
|
|
|
111 |
|
|
|
111 |
|
Intangible
asset – non-compete
|
|
|
65 |
|
|
|
― |
|
|
|
|
74,874 |
|
|
|
75,095 |
|
Accumulated
amortization
|
|
|
(12,523 |
) |
|
|
(7,888 |
) |
|
|
|
62,351 |
|
|
|
67,207 |
|
|
|
$ |
473,459 |
|
|
$ |
510,133 |
|
As a
result of the Virtu Acquisition, the Company recorded goodwill of $16,973,000
and intangible assets, comprised primarily of customer contracts, of
$7,195,000. The customer contracts intangible asset is being amortized
over an estimated useful life of 12 years. The Company’s goodwill and
intangible assets in Europe are assets denominated in British pounds and Euros
and goodwill in Asia-Pacific is denominated in Singapore dollars and are subject
to foreign currency fluctuations. The Company’s foreign currency translation
gains and losses, including goodwill and other intangibles, are a component of
other comprehensive income and loss.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
For the
three and nine months ended September 30, 2008, the Company recorded
amortization expense of $1,690,000 and $5,236,000, respectively. For the three
and nine months ended September 30, 2007, the Company recorded amortization
expense of $423,000 and $689,000, respectively. The Company expects to record
the following amortization expense during the remainder of 2008 and beyond (in
thousands):
Year ending:
|
|
|
|
2008 (three months
remaining)
|
|
$ |
1,726 |
|
2009
|
|
|
6,223 |
|
2010
|
|
|
6,188 |
|
2011
|
|
|
6,089 |
|
2012
|
|
|
6,071 |
|
2013 and
thereafter
|
|
|
36,054 |
|
Total
|
|
$ |
62,351 |
|
Derivatives
and Hedging Activities
The
Company follows SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended (“SFAS 133”), which requires the Company to recognize
all derivatives on the consolidated balance sheet at fair value. The
accounting for changes in the value of a derivative depends on whether the
contract is for trading purposes or has been designated and qualifies for hedge
accounting. In order to qualify for hedge accounting, a derivative must be
considered highly effective at reducing the risk associated with the exposure
being hedged. In order for a derivative to be designated as a hedge, there must
be documentation of the risk management objective and strategy, including
identification of the hedging instrument, the hedged item and the risk exposure,
and how effectiveness is to be assessed prospectively and
retrospectively.
To assess
effectiveness, the Company uses a regression analysis. The extent to which a
hedging instrument has been and is expected to continue to be effective at
achieving offsetting changes in cash flows is assessed and documented at least
quarterly. Any ineffectiveness is reported in current-period earnings. If it is
determined that a derivative is not highly effective at hedging the designated
exposure, hedge accounting is discontinued. For qualifying cash flow hedges, the
effective portion of the change in the fair value of the derivative is recorded
in other comprehensive income (loss) and recognized in the condensed
consolidated statements of operations when the hedged cash flows affect
earnings. The ineffective portions of cash flow hedges are immediately
recognized in earnings. If the hedge relationship is terminated, then the change
in fair value of the derivative recorded in other comprehensive income (loss) is
recognized when the cash flows that were hedged occur, consistent with the
original hedge strategy. For hedge relationships discontinued because the
forecasted transaction is not expected to occur according to the original
strategy, any related derivative amounts recorded in other comprehensive income
(loss) are immediately recognized in earnings.
Cash
Flow Hedges – Interest Rate Swaps
The
Company has variable-rate debt financing. These obligations expose
the Company to variability in interest payments and therefore fluctuations in
interest expense due to changes in interest rates. Interest rate swap
contracts are used in the Company's risk management activities in order to
minimize significant fluctuations in earnings that are caused by interest rate
volatility. Interest rate swaps involve the exchange of variable-rate
interest payments for fixed-rate interest payments based on the contractual
underlying notional amount. Gains and losses on the interest rate swaps that are
linked to the debt being hedged are expected to substantially offset this
variability in earnings.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
In May
2008, the Company entered into several interest rate swaps in order to minimize
variability related to its variable-rate Chicago IBX Financing and European
Financing (see Note 12 – Debt Facilities and Other Financing Obligations). The
Company also designated two existing interest rate swaps acquired in the
IXEurope Acquisition as effective cash flow hedge relationships with the
European Financing. Each of these hedge relationships were highly
effective at achieving offsetting changes in cash flows as of September 30, 2008
with an insignificant amount of ineffectiveness recorded in interest expense on
the accompanying condensed consolidated statements of operations. As of
September 30, 2008, the Company had the following interest rate swaps in place
(in thousands):
|
|
As
of September 30, 2008 |
|
|
Notional
Amount |
|
|
Fair Value1)
|
|
|
Loss (2) |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
European
Financing interest rate swaps |
|
$ |
113,710 |
|
|
$ |
(1,602 |
) |
|
$ |
(1,832 |
) |
Chicago
IBX Financing interest rate swap |
|
|
105,000 |
|
|
|
(513 |
) |
|
|
(513 |
) |
|
|
$ |
218,710 |
|
|
$ |
(2,115 |
) |
|
$ |
(2,345 |
) |
(1)
|
Included
in the condensed consolidated balance sheets within prepaids and other
current assets or deferred rent and other liabilities.
|
(2)
|
Included
in the condensed consolidated balance sheets within other comprehensive
income (loss).
|
Other
Derivatives – Foreign Currency Forward Contracts
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 SFAS 133. Gains and losses on these contracts are
included in other income (expense), net, along with those gains and losses of
the related hedged items. The Company entered into various foreign currency
forward contracts during the three months ended September 30,
2008. As of September 30, 2008, the Company recorded a net asset of
$2,944,000 representing the fair values of these foreign currency forward
contracts, which is recorded within prepaids and other current assets in the
accompanying condensed consolidated balance sheet.
Fair
Value Measurements
Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). This standard establishes a framework for measuring
fair value and expands disclosure about fair value measurements. The Company did
not elect to adopt fair value accounting for any assets or liabilities allowed
by SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). The adoption of SFAS 157 did not have a material
impact on the Company’s financial position, results of operations or operating
cash flow.
To
increase consistency and comparability in fair value measurements, SFAS 157
establishes a fair value hierarchy to prioritize the inputs used in valuation
techniques. There are three broad levels to the fair value hierarchy
of inputs to fair value (Level 1 being the highest priority and Level 3 being
the lowest priority) as follows:
·
|
Level
1: Observable inputs that reflect quoted prices (unadjusted) for identical
assets or liabilities in active
markets.
|
·
|
Level
2: Inputs reflect quoted prices for identical assets or liabilities in
markets that are not active; quoted prices for similar assets or
liabilities in active markets; inputs other than quoted prices that are
observable for the asset or the liability; or inputs that are derived
principally from or corroborated by observable market data by correlation
or other means.
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
·
|
Level
3: Unobservable inputs reflecting the Company's own assumptions
incorporated in valuation techniques used to determine fair
value. These assumptions are required to be consistent with
market participant assumptions that are reasonably
available.
|
The
Company measures and reports certain financial assets and liabilities at fair
value on a recurring basis, including its investments in money market funds and
available-for-sale debt investments in other public companies, governmental
units and other agencies and derivatives.
The
Company’s assets and liabilities measured at fair value at September 30, 2008
were as follows (in thousands):
|
|
Fair
value at September 30, 2008
|
|
Fair
value measurement using
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Assets: |
|
|
|
|
|
|
|
|
|
Money
market
|
|
$ |
41,538 |
|
$ |
41,538 |
|
$ |
― |
|
$ |
― |
|
Reserve
fund at cost
|
|
|
49,422 |
|
|
― |
|
|
― |
|
|
49,422 |
|
Commercial
paper
|
|
|
24,329 |
|
|
― |
|
|
24,329 |
|
|
― |
|
U.S.
government and agency obligations
|
|
|
123,625 |
|
|
― |
|
|
123,625 |
|
|
― |
|
Corporate
bonds
|
|
|
43,179 |
|
|
― |
|
|
43,179 |
|
|
― |
|
Asset-backed
securities
|
|
|
32,904 |
|
|
― |
|
|
32,904 |
|
|
― |
|
Certificates
of deposits
|
|
|
13,976 |
|
|
― |
|
|
13,976 |
|
|
― |
|
Other
securities
|
|
|
1,226 |
|
|
― |
|
|
1,226 |
|
|
― |
|
Derivative
assets (1)
|
|
|
3,004 |
|
|
― |
|
|
3,004 |
|
|
― |
|
|
|
$ |
333,203 |
|
$ |
41,538 |
|
$ |
242,243 |
|
$ |
49,422 |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities (2)
|
|
|
(2,174 |
) |
|
― |
|
|
(2,174 |
) |
|
― |
|
|
|
$ |
(2,174 |
) |
$ |
― |
|
$ |
(2,174 |
) |
$ |
― |
|
________________________
(1)
|
Included
in the condensed consolidated balance sheets within prepaids and other
current assets and other assets.
|
(2)
|
Included
in the condensed consolidated balance sheets within other current
liabilities and deferred rent and other
liabilities.
|
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 securities 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.
However, money market funds held by The Reserve Primary Fund (the “Reserve”),
whose carrying value of $50,949,000 was in excess of fair value, accordingly an
other-than-temporary impairment charge of $1,527,000 was recorded in September
2008 to reflect the adjusted cost of $49,422,000 (see Note 5). The
money market funds held in the Reserve, normally classified as Level 1
securities, were re-designated as Level 3 securities in September
2008. The impairment charge of $1,527,000 related to the Reserve is
reflected in interest income on the accompanying condensed consolidated
statements of operations.
Valuation
Methods
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.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
Company’s money market fund instruments are classified within Level 1 of the
fair value hierarchy because they are valued using quoted prices for identical
instruments in active markets. However, the Reserve experienced a decline in its
fair value as a result of its exposure to investments held in Lehman Brothers
Holdings, Inc. (“Lehman Brothers”) which filed for Chapter 11 bankruptcy
protection. The Company recorded a loss on its investments in the Reserve and
each of the individual securities which comprise the holdings in the Reserve
were further evaluated. The Company has re-designated its investment in the
Reserve from cash and cash equivalents to short-term investments at adjusted
cost (for further information, refer to Note 5). This re-designation is included
in purchases of investments in investing activities in the Company’s
accompanying condensed consolidated statements of cash flows. The Company
conducted its fair value assessment of the Reserve using Level 2 and Level 3
inputs. Management has reviewed the Reserve's underlying securities
portfolio which is substantially comprised of discount notes, certificates of
deposit and commercial paper issued by highly-rated institutions. The
Company has used a pricing service to assist in its review of fair value of the
underlying portfolio, which estimates fair value of some instruments using
proprietary models based on assumptions as to term, maturity dates, rates,
credit risk, etc. Normally, the Company would classify such an investment
within Level 2 of the fair value hierarchy. However, management also
evaluated the fair value of its unit interest in the Reserve itself, considering
risk of collection, timing and other factors. These assumptions are
inherently subjective and involve significant management judgment. As
a result, the Company has classified its holdings in the Reserve within Level 3
of the fair value hierarchy.
The
Company considers each category of investments held to be an asset group. The
asset groups held at September 30, 2008 were U.S. government and agency
securities, corporate notes, commercial paper and asset backed securities. The
Company’s fair value assessment includes an evaluation by each of these asset
groups, 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.
Short-Term and Long-Term Investments. The Company uses the specific
identification method in computing realized gains or losses. Except for the
Reserve, which is carried at its adjusted cost, 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. 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. In determining the fair value of the Company’s
interest rate swap derivatives, the Company uses the present value of expected
cash flows based on observable market interest rate curves and volatilities
commensurate with the term of each instrument and the credit valuation
adjustments to appropriately reflect both the Company’s own nonperformance risk
and the counterparty’s nonperformance risk. For foreign currency
derivatives, the Company’s approach is to use forward contract and option
valuation models employing market observable inputs, such as spot currency
rates, time value and option volatilities and adjust for the credit default swap
market. 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, 2008,
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.
2. Virtu
Acquisition
On
February 5, 2008, a wholly-owned subsidiary of the Company acquired all of the
issued and outstanding share capital of Virtu Secure Webservices B.V. (“Virtu”),
a provider of network-neutral data center services in the Netherlands, for a
cash payment of $23,345,000, including closing costs (the “Virtu
Acquisition”). Under the terms of the Virtu Acquisition, the Company
may also pay additional future contingent consideration, which will be payable
in the form of up to 20,000 shares of the Company’s common stock and cash of up
to 1,500,000 Euros, contingent upon meeting certain pre-determined future annual
operating targets from 2008 to 2011. Such contingent consideration, if paid,
will be recorded as additional goodwill. Virtu, a similar business to that of
the Company, operates data centers in the Netherlands,
supplementing the Company’s existing European operations. The combined company
predominantly operates under the Equinix name. The results of operations for
Virtu are insignificant; therefore, the Company does not present pro forma
combined results of operations.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
3. IBX
Acquisitions and Expansions
Paris
IBX Expansion Project
In
September 2008, the Company entered into a long-term lease for a new building
located adjacent to one of its existing Paris IBX centers. The lease, which is
an operating lease, commenced on October 1, 2008. Cumulative minimum monthly
payments under the lease total 44,568,000 Euros, or approximately $62,805,000.
Monthly payments under the lease commence in April 2009 and are payable through
September 2020.
Sydney
IBX Expansion Project
In
January 2008, the Company entered into a long-term lease for a new building
located adjacent to its existing Sydney IBX center and at the same time
terminated the existing lease for the Company’s original Sydney IBX center by
incorporating it into the new lease. The Company extended the original lease
term for an additional seven years in a single, revised lease agreement for both
buildings (collectively, the “Building"). Cumulative minimum payments
under this lease total 18,260,000 Australian dollars, or approximately
$14,500,000, of which 12,202,000 Australian dollars, or approximately
$9,700,000, is incremental to the previous lease. Payments are due monthly and
commenced in January 2008. As a result of the Company significantly
altering the Building’s footprint in order to meet the Company’s IBX center
needs, the Company followed the accounting provisions of EITF 97-10, “The Effect
of Lessee Involvement in Asset Construction” (“EITF 97-10”). Pursuant to
EITF 97-10, the Building is considered a financed asset (the "Sydney IBX
Building Financing") and subject to a ground lease for the underlying land,
which is considered an operating lease. Pursuant to the Sydney IBX Building
Financing, the Company recorded the Building asset and a corresponding financing
obligation liability totaling 5,805,000 Australian dollars (or approximately
$4,600,000) in January 2008. Monthly payments under the Sydney IBX Building
Financing, which commenced in January 2008, are payable through December 2022,
at an effective interest rate of approximately 7.90% per annum.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
IBX
Expansion Project Summary
The
following table sets forth approximate balances of total cumulative capital
expenditures, excluding cost of acquisition of land and building, if any,
incurred on the Company’s significant expansion projects which were underway as
of either of the following dates (in thousands):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
U.S.
Expansion Projects:
|
|
|
|
|
|
|
Washington,
D.C. Metro Area Fifth IBX Center Expansion
Project (DC5)
|
|
$ |
77,637 |
|
|
$ |
20,000 |
|
Silicon
Valley Metro Area IBX Expansion Project (SV2 Phase II)
|
|
|
38,931 |
|
|
|
25,283 |
|
Los
Angeles Metro Area IBX Expansion Project (LA4 Phase I)
|
|
|
23,424 |
|
|
|
4,321 |
|
New
York Metro Area IBX Expansion Project (NY4 Phase II))
|
|
|
18,526 |
|
|
|
― |
|
|
|
|
158,518 |
|
|
|
49,604 |
|
Asia-Pacific
Expansion Projects:
|
|
|
|
|
|
|
|
|
Tokyo
IBX Expansion Project (TY2)
|
|
|
26,894 |
|
|
|
16,600 |
|
Singapore
IBX Expansion Project (SG1 Expansion Phase II and III)
|
|
|
29,404 |
|
|
|
15,500 |
|
Sydney
IBX Expansion Project (SY2)
|
|
|
17,985 |
|
|
|
― |
|
Hong
Kong IBX Expansion Project (HK1 Phase II)
|
|
|
16,469 |
|
|
|
― |
|
|
|
|
90,752 |
|
|
|
32,100 |
|
Europe
Expansion Projects:
|
|
|
|
|
|
|
|
|
Paris
IBX Expansion Project (PA2 Phase II and III)
|
|
|
25,457 |
|
|
|
8,513 |
|
Frankfurt
IBX Expansion Project (FR2 Phase II(a) and II(b))
|
|
|
29,302 |
|
|
|
4,177 |
|
London
IBX Expansion Project (LD4 Phase II)
|
|
|
28,102 |
|
|
|
5,529 |
|
Amsterdam
IBX Expansion Project (AM1 Phase I)
|
|
|
9,453 |
|
|
|
― |
|
|
|
|
92,314 |
|
|
|
18,219 |
|
|
|
$ |
341,584 |
|
|
$ |
99,923 |
|
The
Company’s planned capital expenditures during the remainder of 2008 in
connection with the expansion efforts described above are
substantial. For further information, refer to “Other Purchase
Commitments” in Note 13.
4.
Related Party Transactions
The
Company has several significant stockholders, and other related parties, that
are also customers and/or vendors. For the three and nine months ended September
30, 2008, revenues recognized with these related parties were $6,662,000 and
$14,266,000, respectively. For the three and nine months ended September 30,
2007, revenues recognized with these related parties were $2,345,000 and
$6,322,000, respectively. As of September 30, 2008 and 2007, accounts receivable
with these related parties were $5,386,000 and $1,952,000,
respectively. For the three and nine months ended September 30, 2008,
costs and services procured with these related parties were $735,000 and
$2,250,000, respectively. For the three and nine months ended September 30,
2007, costs and services procured with these related parties were $284,000 and
$921,000, respectively. As of September 30, 2008 and 2007, accounts payable with
these related parties were $87,000 and $144,000, respectively.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
5.
Cash, Cash Equivalents and Short-Term and Long-Term
Investments
Cash,
cash equivalents and short-term and long-term investments consisted of the
following (in thousands):
|
|
September
30, 2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
|
|
Money
market
|
|
$ |
41,538 |
|
|
$ |
272,099 |
|
Reserve
fund at cost
|
|
|
49,422 |
|
|
|
― |
|
Commercial
paper
|
|
|
24,329 |
|
|
|
24,218 |
|
U.S.
government and agency obligations
|
|
|
123,625 |
|
|
|
32,801 |
|
Corporate
bonds
|
|
|
43,179 |
|
|
|
36,604 |
|
Asset-backed
securities
|
|
|
32,904 |
|
|
|
16,578 |
|
Certificates
of deposits
|
|
|
13,976 |
|
|
|
1,600 |
|
Other
securities
|
|
|
1,226 |
|
|
|
― |
|
Total
available-for-sale securities
|
|
|
330,199 |
|
|
|
383,900 |
|
Less
amounts classified as cash and cash equivalents
|
|
|
(160,685 |
) |
|
|
(290,633 |
) |
Total
securities classified as investments
|
|
|
169,514 |
|
|
|
93,267 |
|
Less
amounts classified as short-term investments
|
|
|
(101,892 |
) |
|
|
(63,301 |
) |
Total
market value of long-term investments
|
|
$ |
67,622 |
|
|
$ |
29,966 |
|
As of
September 30, 2008 and December 31, 2007, cash equivalents included investments
which were readily convertible to cash and had 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, 2008 and December 31, 2007. The maturities of
securities classified as long-term investments were greater than one year and
less than three years as of September 30, 2008 and December 31,
2007.
In the
period ended September 30, 2008, the Company recorded a $1,527,000 realized loss
resulting from its investments in the Reserve, a prime obligations money market
fund that suffered a decline in its Net Asset Value (“NAV”) of below $1 per
share when the Reserve valued its exposure to investments in Lehman Brothers at
zero value. The Reserve held investments in commercial paper and
short term-notes issued by Lehman Brothers, which filed for Chapter 11
bankruptcy protection in September 2008. This realized loss is included in
interest income in the Company’s accompanying condensed consolidated statements
of operations. The Company has issued a redemption notice to redeem in full all
of its holdings with the Reserve. As of September 30, 2008, the fair value of
the funds held by the Reserve totaled $49,422,000.
The
Company expects that distributions from the Reserve will occur over the
remaining 12 months as the investments held in the fund mature. The
Reserve has announced that this fund is in liquidation and they are currently
working with their auditors to determine an accurate distribution of their
account holdings. As of September 30, 2008, the Company has classified its
investment in the Reserve as a short-term investment on its condensed
consolidated balance sheet. This classification is based on the
Company’s internal assessment of each of the individual securities which make-up
the underlying portfolio holdings in the Reserve, which primarily consisted of
commercial paper and discount notes having maturity dates within the next 12
months. While the Company expects to receive substantially all of its current
holdings in the Reserve within the next 12 months, it is possible the Company
may encounter difficulties in receiving distributions given the current credit
market conditions. If market conditions were to deteriorate even further such
that the current fair value were not achievable, or if the Reserve is delayed in
its ability to accurately complete their account reconciliations, the Company
could realize additional losses in its holdings with the Reserve and
distributions could be further delayed.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
As of
September 30, 2008, the Company’s net unrealized gains (losses) on its
available-for-sale securities were comprised of the following (in
thousands):
|
|
Unrealized
gains
|
|
|
Unrealized
losses
|
|
|
Net
unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
— |
|
|
$ |
(30 |
) |
|
$ |
(30 |
) |
Short-term
investments
|
|
|
11 |
|
|
|
(336 |
) |
|
|
(325 |
) |
Long-term
investments
|
|
|
69 |
|
|
|
(486 |
) |
|
|
(418 |
) |
|
|
$ |
80 |
|
|
$ |
(852 |
) |
|
$ |
(773 |
) |
The
following table summarizes the fair value and gross unrealized losses related to
119 available-for-sale securities with an aggregate cost basis of $193,111,000,
aggregated by type of investment and length of time that individual securities
have been in continuous unrealized loss position, as of September 30, 2008 (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 loss
|
|
|
Fair
value
|
|
|
Gross
unrealized loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government & agency obligations
|
|
$ |
96,429 |
|
|
$ |
(120 |
) |
|
$ |
— |
|
|
$ |
— |
|
Commercial
paper
|
|
|
24,329 |
|
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
Corporate
bonds
|
|
|
29,931 |
|
|
|
(439 |
) |
|
|
— |
|
|
|
— |
|
Asset-backed
securities
|
|
|
27,594 |
|
|
|
(240 |
) |
|
|
— |
|
|
|
— |
|
Certificates
of deposit
|
|
|
13,976 |
|
|
|
(28 |
) |
|
|
— |
|
|
|
— |
|
|
|
$ |
192,259 |
|
|
$ |
(852 |
) |
|
$ |
— |
|
|
$ |
— |
|
While the
Company does not believe it holds investments that are other-than-temporarily
impaired, as of September 30, 2008, the Company’s investments are subject to the
currently adverse market conditions, which include constraints related to
liquidity. If market conditions continue to deteriorate and liquidity
constraints become even more pronounced, the Company could sustain further
other-than-temporary impairments to its investment portfolio which could result
in additional realized losses being recorded against net interest income or
securities markets could become inactive which could affect the liquidity of the
Company’s investments. As securities mature, the Company has reinvested the
proceeds in U.S. government securities, such as Treasury bills and Treasury
notes, of a short-term duration and lower yield. As a result, the Company
expects to recognize lower interest income in future periods.
6.
Accounts Receivable
Accounts
receivables, net, consisted of the following (in thousands):
|
|
September
30, 2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
112,610 |
|
|
$ |
98,141 |
|
Unearned
revenue
|
|
|
(48,797 |
) |
|
|
(37,606 |
) |
Allowance
for doubtful accounts
|
|
|
(1,437 |
) |
|
|
(446 |
) |
|
|
$ |
62,376 |
|
|
$ |
60,089 |
|
Trade
accounts receivable are recorded at the invoiced amount and generally do not
bear interest. Unearned revenue consists of pre-billing for services
that have not yet been provided, but which have been billed to customers ahead
of time in accordance with the terms of their contract. Accordingly,
the Company invoices
its customers at the end of a calendar month for services to be provided the
following month.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
7.
Prepaids and Other Current Assets
Prepaids
and other current assets consisted of the following (in thousands):
|
|
September 30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
$ |
10,229 |
|
|
$ |
6,979 |
|
Foreign
exchange forward contract receivables
|
|
|
2,944 |
|
|
|
— |
|
Taxes
receivable
|
|
|
2,295 |
|
|
|
3,437 |
|
Interest
rate swap receivables
|
|
|
60 |
|
|
|
— |
|
Other
current assets
|
|
|
2,173 |
|
|
|
2,322 |
|
|
|
$ |
17,701 |
|
|
$ |
12,738 |
|
8.
Property and Equipment
Property
and equipment consisted of the following (in thousands):
|
|
September
30, 2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
IBX
plant and machinery
|
|
$ |
629,825 |
|
|
$ |
503,755 |
|
Leasehold
improvements
|
|
|
539,079 |
|
|
|
481,409 |
|
Buildings
|
|
|
156,510 |
|
|
|
153,692 |
|
Site
improvements
|
|
|
149,061 |
|
|
|
96,041 |
|
IBX
equipment
|
|
|
138,306 |
|
|
|
128,423 |
|
Computer
equipment and software
|
|
|
69,429 |
|
|
|
60,881 |
|
Land
|
|
|
50,139 |
|
|
|
50,979 |
|
Furniture
and fixtures
|
|
|
8,128 |
|
|
|
5,698 |
|
Construction
in progress
|
|
|
170,174 |
|
|
|
133,501 |
|
|
|
|
1,910,651 |
|
|
|
1,614,379 |
|
Less
accumulated depreciation
|
|
|
(563,669 |
) |
|
|
(451,659 |
) |
|
|
$ |
1,346,982 |
|
|
$ |
1,162,720 |
|
Leasehold
improvements, IBX plant and machinery, computer equipment and software and
buildings recorded under capital leases aggregated $40,807,000 and $40,486,000
at September 30, 2008 and December 31, 2007, respectively. Amortization on the
assets recorded under capital leases is included in depreciation expense and
accumulated depreciation on such assets totaled $10,407,000 and $7,539,000 as of
September 30, 2008 and December 31, 2007, respectively.
As of
September 30, 2008 and December 31, 2007, the Company had accrued property and
equipment expenditures of $56,537,000 and $76,504,000, respectively. The
Company’s planned capital expenditures during the remainder of 2008 in
connection with recently acquired IBX properties and expansion efforts are
substantial. For further information, refer to “Other Purchase
Commitments” in Note 13.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
9. Accounts Payable and Accrued
Expenses
Accounts
payable and accrued expenses consisted of the following (in
thousands):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
11,797 |
|
|
$ |
14,816 |
|
Accrued
compensation and benefits
|
|
|
20,143 |
|
|
|
18,875 |
|
Accrued
utility and security
|
|
|
12,447 |
|
|
|
8,709 |
|
Accrued
interest
|
|
|
10,220 |
|
|
|
6,461 |
|
Accrued
taxes
|
|
|
7,643 |
|
|
|
6,925 |
|
Accrued
professional fees
|
|
|
2,024 |
|
|
|
2,094 |
|
Accrued
other
|
|
|
6,960 |
|
|
|
7,216 |
|
|
|
$ |
71,234 |
|
|
$ |
65,096 |
|
10.
Other Current Liabilities
Other
current liabilities consisted of the following (in thousands):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Deferred
installation revenue
|
|
$ |
20,432 |
|
|
$ |
16,295 |
|
Customer
deposits
|
|
|
5,609 |
|
|
|
4,643 |
|
Deferred
recurring revenue
|
|
|
3,483 |
|
|
|
3,811 |
|
Accrued
restructuring charges
|
|
|
3,172 |
|
|
|
3,973 |
|
Deferred
rent
|
|
|
409 |
|
|
|
400 |
|
Other
current liabilities
|
|
|
478 |
|
|
|
351 |
|
|
|
$ |
33,583 |
|
|
$ |
29,473 |
|
11.
Deferred Rent and Other Liabilities
Deferred
rent and other liabilities consisted of the following (in
thousands):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Deferred
rent, non-current
|
|
$ |
29,490 |
|
|
$ |
26,512 |
|
Deferred
installation revenue, non-current
|
|
|
14,526 |
|
|
|
10,241 |
|
Asset
retirement obligations
|
|
|
11,280 |
|
|
|
8,759 |
|
Accrued
restructuring charges, non-current
|
|
|
8,296 |
|
|
|
8,167 |
|
Customer
deposits, non-current
|
|
|
6,077 |
|
|
|
4,201 |
|
Deferred
recurring revenue, non-current
|
|
|
5,467 |
|
|
|
5,745 |
|
Interest
rate swap payables
|
|
|
2,174 |
|
|
|
— |
|
Other
liabilities
|
|
|
561 |
|
|
|
639 |
|
|
|
$ |
77,871 |
|
|
$ |
64,264 |
|
The
Company currently leases the majority of its IBX centers and certain equipment
under non-cancelable operating lease agreements expiring through 2027. The
centers’ 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 rent expense abatement periods for certain properties 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.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
12. Debt
Facilities and Other Financing Obligations
Chicago
IBX Financing
During
the nine months ended September 30, 2008, the Company received additional
advances under the Chicago IBX Financing totaling $4,379,000, bringing the
cumulative and final loan payable to $109,991,000. The loan payable under the
Chicago IBX Financing bears interest at a floating rate. As of September 30,
2008, the loan payable carried an approximate interest rate of 5.25% per
annum.
The loan
payable under the Chicago IBX Financing has a maturity date of January 31, 2010,
with options to extend for up to an additional two years, in one-year
increments, upon satisfaction of certain extension conditions. The Chicago IBX
Financing is collateralized by the assets of one of the Company’s Chicago IBX
centers.
In May 2008, the Company entered into an
interest rate swap agreement with one counterparty to hedge the interest
payments on a $105,000,000 notional amount of the Chicago IBX Financing, which
will mature in February 2011. Under the terms of the interest rate swap
transaction, the Company receives interest payments based on rolling one-month
LIBOR terms and pays interest at the fixed rate of 6.34%. The
Company’s disclosures on derivatives and fair value are contained in Note 1 –
Derivative and Hedging Activities and Fair Value Measurements.
Asia-Pacific
Financing
In
January 2008, the Asia-Pacific Financing was amended to enable the Company’s
subsidiary in Australia to borrow up to 32,000,000 Australian dollars, or
approximately $25,357,000, under the same general terms, amending the
Asia-Pacific Financing into an approximately $69,017,000 multi-currency credit
facility agreement. In June 2008, the Asia-Pacific Financing was further amended
to enable the Company’s subsidiary in Hong Kong to borrow up to 156,000,000 Hong
Kong dollars, or approximately $20,093,000, under the same general terms,
amending the Asia-Pacific Financing into an approximately $89,110,000
multi-currency credit facility agreement. Loans payable under the
Asia-Pacific Financing bear interest at floating rates.
Loans
payable under the Asia-Pacific Financing have a final maturity date of June
2012. The Asia-Pacific Financing is guaranteed by the parent, Equinix, Inc., is
secured by the assets of the Company’s subsidiaries in Japan, Singapore, Hong
Kong and Australia, including a pledge of their shares, and has several
financial covenants, with which the Company must comply quarterly. As of
September 30, 2008, the Company was in compliance with all financial covenants
associated with the Asia-Pacific Financing.
As of
September 30, 2008, the Company had borrowed 23,000,000 Singapore dollars, or
approximately $16,024,000, at an approximate interest rate per annum of 3.04%;
2,932,500,000 Japanese yen, or approximately $27,636,000, at an approximate
interest rate per annum of 2.70%; 13,210,000 Australian dollars, or
approximately $10,468,000, at an approximate interest rate per annum of 9.06%;
and 87,776,000 Hong Kong dollars, or approximately $11,305,000, at an
approximate interest rate per annum of 5.51%. Collectively, the total amount
borrowed was approximately equal to $65,433,000, leaving approximately
$23,677,000 available to borrow under the Asia-Pacific Financing.
European
Financing
During
the nine months ended September 30, 2008, the Company received additional
advances totaling approximately 29,351,000 British pounds, or approximately
$57,089,000, under the European Financing, leaving the amount available to
borrow under the European Financing totaling approximately 9,627,000 British
pounds, or approximately $17,141,000. As of September 30, 2008, a total of
approximately 71,822,000 British pounds, or approximately $127,879,000, was
outstanding under the European Financing with an approximate blended interest
rate of 7.78% per annum. Loans payable under the European Financing bear
interest at floating rates. The European Financing is available to fund certain
of
the Company’s expansion projects in France, Germany, Switzerland and the United
Kingdom.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Loans
payable under the European Financing have a final maturity date of June 2014.
The European Financing is collateralized by certain of the Company’s assets in
Europe and contains several financial covenants with which the Company must
comply quarterly. As of September 30, 2008, the Company was in compliance with
all financial covenants associated with the European Financing.
In May
2008, the Company entered into three interest rate swap agreements and
re-designated two older ineffective interest rate swap agreements with a total
of two counterparties to hedge the interest payments on the equivalent of
$113,710,000 notional amount of the European Financing, which will mature in
August 2009 and May 2011. Under the terms of the interest rate swap
transactions, the Company receives interest payments based on rolling one-month
EURIBOR and LIBOR terms and pays fixed interest rates ranging from 5.97% to
8.16%. The Company’s disclosures on derivatives and fair value are contained in
Note 1 – Derivative and Hedging Activities and Fair Value
Measurements.
Netherlands
Financing
In
February 2008, as a result of the Virtu Acquisition, a wholly-owned subsidiary
of the Company assumed senior credit facilities totaling approximately 5,500,000
Euros (the "Netherlands Financing"), which are callable by the lender and bear
interest at a floating rate (three month EURIBOR plus 1.25%). As of
September 30, 2008, a total of 4,319,000 Euros, or approximately $6,087,000, was
outstanding under the Netherlands Financing with an approximate blended interest
rate of 6.53% per annum. The Netherlands Financing is collateralized by
substantially all of the Company’s operations in the Netherlands. The
Netherlands Financing contains several financial covenants, which must be
complied with on an annual basis. The Company's wholly-owned subsidiary in
the Netherlands was not in compliance with the December 31, 2007 financial
covenants; however, in April 2008, the Company obtained a waiver from the lender
for such non-compliance. Although the Netherlands Financing has a payment
schedule with a final payment date in January 2016, as of September 30, 2008,
the Company had reflected the total amount outstanding under the Netherlands
Financing as a current liability within the current portion of mortgage and
loans payable on the accompanying balance sheet as it is not currently a
committed facility.
Silicon
Valley Bank Credit Line
In
February 2008, the Company terminated the Silicon Valley Bank Credit Line. As a
result, all letters of credit previously issued under the Silicon Valley Bank
Credit Line, totaling $12,144,000, were cash collateralized. The Company reports
such restricted cash within other assets on the accompanying balance sheets. As
of the termination date, the Company had no borrowings outstanding under the
Silicon Valley Bank Credit Line and no termination penalties were
incurred.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Maturities
Combined
aggregate maturities for the Company’s various debt facilities and other
financing obligations as of September 30, 2008 were as follows (in
thousands):
|
|
Convertible
debt
(1)
|
|
|
Mortgage and
loans payable (1)
|
|
|
Capital
lease and other financing obligations
(2)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
(three months remaining)
|
|
$ |
― |
|
|
$ |
13,784 |
|
|
$ |
2,943 |
|
|
$ |
16,727 |
|
2009
|
|
|
32,250 |
|
|
|
40,484 |
|
|
|
11,879 |
|
|
|
84,613 |
|
2010
|
|
|
― |
|
|
|
149,378 |
(3) |
|
|
11,930 |
|
|
|
161,308 |
|
2011
|
|
|
― |
|
|
|
37,854 |
|
|
|
12,039 |
|
|
|
49,893 |
|
2012
|
|
|
250,000 |
|
|
|
25,380 |
|
|
|
11,729 |
|
|
|
287,109 |
|
2013
and thereafter
|
|
|
395,986 |
|
|
|
149,478 |
|
|
|
111,717 |
|
|
|
657,181 |
|
|
|
|
678,236 |
|
|
|
416,358 |
|
|
|
162,237 |
|
|
|
1,256,831 |
|
Less
amount representing interest
|
|
|
― |
|
|
|
― |
|
|
|
(73,516 |
) |
|
|
(73,516 |
) |
Plus
amount representing residual property value
|
|
|
― |
|
|
|
― |
|
|
|
10,360 |
|
|
|
10,360 |
|
|
|
|
678,236 |
|
|
|
416,358 |
|
|
|
99,081 |
|
|
|
1,193,675 |
|
Less
current portion of principal
|
|
|
(32,250 |
) |
|
|
(41,486 |
) |
|
|
(3,986 |
) |
|
|
(77,722 |
) |
|
|
$ |
645,986 |
|
|
$ |
374,872 |
|
|
$ |
95,095 |
|
|
$ |
1,115,953 |
|
__________________________
(1)
|
Represents
principal only.
|
(2)
|
Represents
principal and interest in accordance with minimum lease
payments.
|
(3)
|
The
loan payable under the Chicago IBX Financing has a maturity date of
January 31, 2010, with options to extend for up to an additional two
years, in one-year increments, upon satisfaction of certain extension
conditions.
|
13.
Commitments and Contingencies
Legal
Matters
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 Company’s 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. 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 Company’s 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
Company’s 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. On December 5, 2006, the Second Circuit vacated a
decision by the district court granting class certification in six “focus”
cases, which are intended to serve as test cases. Plaintiffs selected these six
cases, which do not include Equinix. On April 6, 2007, the Second Circuit denied
a petition for rehearing filed by plaintiffs, but noted that plaintiffs could
ask the district court to certify more narrow classes than those that were
rejected. On August 14, 2007, plaintiffs filed amended complaints in the six
focus cases. On September 27, 2007, plaintiffs moved to certify a
class in the six focus cases. On November 14, 2007, the issuers and
the underwriters named as defendants in the six focus cases moved to dismiss the
amended complaints against them. On March 26, 2008, the district
court dismissed the Section 11 claims of those members of the putative classes
in the focus cases who sold their securities for a price in excess of the
initial offering price and those who purchased outside the previously certified
class period. With
respect to all other claims, the motions to dismiss were denied. On
October 10, 2008, at the request of the plaintiffs, plaintiffs’ motion for class
certification was withdrawn, without prejudice.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
On
June 29, 2006 and September 18, 2006, shareholder derivative actions
were filed in the Superior Court of the State of California, County of San
Mateo, naming Equinix as a nominal defendant and several of Equinix’s current
and former officers and directors as individual defendants. These actions were
consolidated, and the consolidated complaint was filed in January 2007. In March
2007, the state court stayed this action in deference to a federal shareholder
derivative action filed in the United States District Court for the Northern
District of California in October 2006. The federal action named Equinix as a
nominal defendant and several current and former officers and directors as
individual defendants. This complaint alleged that the individual defendants
breached their fiduciary duties and violated California and federal securities
laws as a result of purported backdating of stock options, insider trading and
the dissemination of false statements. On April 12, 2007, the federal
action was voluntarily dismissed without prejudice pursuant to a joint
stipulation entered as an order by the court. On May 3, 2007, the state
court lifted the stay on proceedings in the state court action. On March 3,
2008, the state court plaintiff filed a second amended consolidated complaint
after the court granted two motions to dismiss prior complaints with leave to
amend. The second amended consolidated complaint alleged that the individual
defendants breached their fiduciary duties and violated California securities
law as a result of purported backdating of stock option grants, insider trading
and the dissemination of false financial statements. The second amended
consolidated complaint sought to recover, on behalf of Equinix, unspecified
monetary damages, corporate governance changes, equitable and injunctive
relief, restitution and fees and costs. On July 8, 2008, the state court granted
the Company’s motion to dismiss the second amended consolidated complaint
without leave to amend and entered a final judgment dismissing the action and
all claims asserted therein in their entirety without leave to amend. The time
for the state court plaintiff to appeal the judgment expired on September 9,
2008.
On August
22, 2008, a complaint was filed against the Company, 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 the
Company merged Pihana and i-STT (a subsidiary of Singapore Technologies
Telemedia Pte Ltd) into the internet exchange services business of the
Company. 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 the Company 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 the Company held by Defendants” (a group
that includes more than 30 individuals and entities). An amended complaint,
which adds new plaintiffs (other alleged holders of Pihana common stock) but is
otherwise substantially similar to the original pleading, was filed on September
29, 2008. On October 13, 2008, a complaint was filed 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. The
Company believes that plaintiffs’ claims and alleged damages are without merit
and it intends to defend the litigation vigorously.
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 these litigations is
reasonably possible, a range of potential loss cannot be determined at this
time. As a result, the Company has not accrued for any amounts
in connection with these legal matters as of September 30, 2008. The
Company and its officers and directors intend to continue to defend the actions
vigorously.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Other
Purchase Commitments
Primarily
as a result of the Company’s various IBX expansion projects, as of September 30,
2008, the Company was contractually committed for $156,625,000 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, 2008, such as commitments to purchase power in select locations,
primarily in the U.S., Australia, Germany, Singapore and the United Kingdom,
through the remainder of 2008 and thereafter, and other open purchase orders for
goods or services to be delivered or provided during the remainder of 2008 and
thereafter. Such other miscellaneous purchase commitments totaled $73,154,000 as
of September 30, 2008.
14.
Other Comprehensive Income and Loss
The
components of other comprehensive income and loss are as follows (in
thousands):
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,389 |
|
|
$ |
4,124 |
|
|
$ |
15,039 |
|
|
$ |
885 |
|
Unrealized
gain (loss) on available for sale securities
|
|
|
(717 |
) |
|
|
271 |
|
|
|
(964 |
) |
|
|
269 |
|
Unrealized
loss on interest rate swaps
|
|
|
(3,584 |
) |
|
|
— |
|
|
|
(2,345 |
) |
|
|
— |
|
Foreign
currency translation gain (loss)
|
|
|
(64,097 |
) |
|
|
6,732 |
|
|
|
(57,361 |
) |
|
|
6,634 |
|
Comprehensive
income (loss)
|
|
$ |
(61,009 |
) |
|
$ |
11,127 |
|
|
$ |
(45,631 |
) |
|
$ |
7,788 |
|
During
the three months ended September 30, 2008, the U.S. dollar strengthened relative
to certain of the currencies of the foreign countries in which the Company
operates. This has significantly impacted the Company’s consolidated
financial position (as evidenced above in the Company’s foreign currency
translation losses), as well as its consolidated results of operations as
amounts in foreign currencies are generally translating into less U.S. dollars.
To the extent the U.S. dollar strengthens further, this will continue to have a
significant impact to the Company’s consolidated financial position and results
of operations including the amount of revenue that the Company reports in future
periods.
There
were no significant tax effects on comprehensive income for the three and nine
months ended September 30, 2008 and 2007.
15.
Segment Information
The Company and its subsidiaries are principally engaged in a single reporting
segment: the design, build-out and operation of network neutral IBX
centers. Virtually all revenues result from the operation of these
IBX centers. However, the Company operates in three distinct
geographic regions, comprised of the U.S., Asia-Pacific and
Europe. The Company’s chief operating decision-maker evaluates
performance, makes operating decisions and allocates resources based on
financial data consistent with the presentation in the accompanying condensed
consolidated financial statements and based on these three geographic
regions. The Company has evaluated the criteria for aggregation of
its geographic regions under SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information”, and believes it meets each of the
respective criteria set forth therein. The Company’s geographic regions have
similar long-term economic characteristics and maintain similar sales forces,
each of which offers all of the Company’s services due to the similar nature of
such services. In addition, the geographic regions utilize similar
means for delivering the Company’s services and have similarity in the types of
customers.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
While the Company believes it operates in one reporting segment, the Company
nonetheless provides the following geographic disclosures (in
thousands):
|
|
Three
months ended
September
30,
|
|
|
|
Nine
months ended
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2007
|
|
|
Total
revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
114,859 |
|
|
$ |
83,685 |
|
|
|
$ |
321,302 |
|
|
|
$ |
234,461 |
|
|
Asia-Pacific
|
|
|
21,579 |
|
|
|
14,643 |
|
|
|
|
60,356 |
|
|
|
|
40,813 |
|
|
Europe
|
|
|
47,297 |
|
|
|
5,454 |
|
|
|
|
132,339 |
|
|
|
|
5,454 |
|
|
|
|
$ |
183,735 |
|
|
$ |
103,782 |
|
|
|
$ |
513,997 |
|
|
|
$ |
280,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
26,898 |
|
|
$ |
19,426 |
|
|
|
$ |
73,987 |
|
|
|
$ |
57,868 |
|
|
Asia-Pacific
|
|
|
4,355 |
|
|
|
2,521 |
|
|
|
|
12,298 |
|
|
|
|
5,812 |
|
|
Europe
|
|
|
10,340 |
|
|
|
1,311 |
|
|
|
|
29,061 |
|
|
|
|
1,311 |
|
|
|
|
$ |
41,593 |
|
|
$ |
23,258 |
|
|
|
$ |
115,346 |
|
|
|
$ |
64,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
16,252 |
|
|
$ |
6,386 |
|
|
|
$ |
44,840 |
|
|
|
$ |
8,000 |
|
|
Asia-Pacific
|
|
|
2,119 |
|
|
|
312 |
|
|
|
|
3,932 |
|
|
|
|
1,951 |
|
|
Europe
|
|
|
3,164 |
|
|
|
(619 |
) |
|
|
|
69 |
|
|
|
|
(619 |
) |
|
|
|
$ |
21,535 |
|
|
$ |
6,079 |
|
|
|
$ |
48,841 |
|
|
|
$ |
9,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
36,971 |
|
|
$ |
141,749 |
|
|
|
$ |
129,852 |
|
|
|
$ |
378,272 |
|
|
Asia-Pacific
|
|
|
33,021 |
|
|
|
9,445 |
|
|
|
|
75,232 |
|
|
|
|
35,350 |
|
|
Europe
|
|
|
25,453 |
|
|
|
544,446 |
|
(1)
|
|
|
123,703 |
|
(2)
|
|
|
544,446 |
|
(1)
|
|
|
$ |
95,445 |
|
|
$ |
695,640 |
|
|
|
$ |
328,787 |
|
|
|
$ |
958,068 |
|
|
__________________________
(1)
|
Includes
the purchase price for IXEurope Acquisition, net of
cash acquired, totaling
$541,792,000.
|
(2)
|
Includes
the purchase price for Virtu Acquisition, net of cash acquired, totaling
$23,241,000.
|
The
Company’s long-lived assets are located in the following geographic areas (in
thousands):
|
|
September
30,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
United
States
|
|
$ |
1,062,568 |
|
$ |
959,637 |
|
Asia-Pacific
|
|
|
155,128 |
|
|
91,478 |
|
Europe
|
|
|
731,585 |
|
|
703,992 |
|
|
|
$ |
1,949,281 |
|
$ |
1,755,107 |
|
For
information on the Company’s goodwill, refer to “Goodwill and Other Intangible
Assets” in Note 1.
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colocation
|
|
$ |
141,938 |
|
|
$ |
75,282 |
|
|
$ |
396,261 |
|
|
$ |
200,682 |
|
Interconnection
|
|
|
24,357 |
|
|
|
18,798 |
|
|
|
69,897 |
|
|
|
53,171 |
|
Managed
infrastructure
|
|
|
6,968 |
|
|
|
4,830 |
|
|
|
20,301 |
|
|
|
13,214 |
|
Rental
|
|
|
254 |
|
|
|
378 |
|
|
|
812 |
|
|
|
1,011 |
|
Recurring
revenues
|
|
|
173,517 |
|
|
|
99,288 |
|
|
|
487,271 |
|
|
|
268,078 |
|
Non-recurring
revenues
|
|
|
10,218 |
|
|
|
4,494 |
|
|
|
26,726 |
|
|
|
12,650 |
|
|
|
$ |
183,735 |
|
|
$ |
103,782 |
|
|
$ |
513,997 |
|
|
$ |
280,728 |
|
No single
customer accounted for 10% or greater of the Company’s revenues for the three
and nine months ended September 30, 2008 and 2007. No single customer accounted
for 10% or greater of the Company’s gross accounts receivable as of September
30, 2008 and December 31, 2007.
16.
Restructuring Charges
In
December 2004, in light of the availability of fully built-out data centers in
select markets at costs significantly below those costs the Company would incur
in building out new space, the Company made the decision to exit leases for
excess space adjacent to one of the Company’s New York metro area IBXs, as well
as space on the floor above its original Los Angeles IBX. As a result
of the Company’s decision to exit these spaces, the Company recorded
restructuring charges totaling $17,685,000, which represents the present value
of the Company’s estimated future cash payments, net of any estimated subrental
income and expense, through the remainder of these lease terms, as well as the
write-off of all remaining property and equipment attributed to the partial
build-out of the excess space on the floor above its Los Angeles IBX as outlined
below.
The
Company estimated the future cash payments required to exit these two leased
spaces, net of any estimated subrental income and expense, through the remainder
of these lease terms and then calculated the present value of such future cash
flows in order to determine the appropriate restructuring charge to
record. The Company records accretion expense to accrete its accrued
restructuring liability up to an amount equal to the total estimated future cash
payments necessary to complete the exit of these leases. Should the
actual lease exit costs differ from the Company’s estimates, the Company may
need to adjust its restructuring charges associated with the excess lease
spaces, which would impact net income in the period such determination was
made.
A summary
of the movement in the 2004 accrued restructuring charges from December 31, 2007
to September 30, 2008 is outlined as follows (in thousands):
|
|
Accrued
restructuring charge as of December 31,
2007
|
|
|
Accretion
expense
|
|
|
Restructuring
charge adjustment
|
|
|
Cash
payments
|
|
|
Accrued restructuring
charge as of September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
lease exit costs
|
|
$ |
12,140 |
|
|
$ |
563 |
|
|
$ |
799 |
|
|
$ |
(2,034 |
) |
|
$ |
11,468 |
|
|
|
|
12,140 |
|
|
$ |
563 |
|
|
$ |
799 |
|
|
$ |
(2,034 |
) |
|
|
11,468 |
|
Less
current portion
|
|
|
(3,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,172 |
) |
|
|
$ |
8,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,296 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The
Company recorded an additional restructuring charge of $799,000 as a result of
revised sublease assumptions on one of these two excess space leases as new
information became available during the three months ended September 30, 2008.
As the Company currently has no plans to enter into lease terminations with
either of the landlords associated with these two excess space leases, 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 deferred rent and other liabilities on the
accompanying condensed consolidated balance sheets as of September 30, 2008 and
December 31, 2007. The Company is contractually committed to these two excess
space leases through 2015.
17.
Recent Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS 141, “Business
Combinations.” SFAS 141(R) establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired or a gain from a bargain purchase. SFAS 141R
also determines disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of a fiscal year that begins on or after December 15, 2008
and there are also implications for acquisitions that occur prior to this date.
The Company is currently evaluating the impact that the adoption of SFAS No. 141
(R) will have on its financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends
ARB 51, Consolidated Financial Statements, and requires all entities to report
non-controlling (minority) interests in subsidiaries within equity in the
consolidated financial statements, but separate from the parent shareholders’
equity. SFAS 160 also requires any acquisitions or dispositions of
non-controlling interests that do not result in a change of control to be
accounted for as equity transactions. Further, SFAS 160 requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS
160 is effective for fiscal years beginning on or after December 15, 2008.
As of September 30, 2008, all of the Company’s subsidiaries were wholly-owned.
As a result, SFAS 160 is not presently expected to impact the
Company.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.
133” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities and, thereby, improves the transparency of
financial reporting. SFAS 161 is effective for fiscal years beginning on or
after November 15, 2008. The Company is currently evaluating the impact
that the adoption of SFAS 161 will have on its financial statement
disclosures.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends
the factors an entity should consider in developing renewal or extension
assumptions used in determining the useful life or recognized intangible assets
under SFAS 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 applies
prospectively to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset acquisitions. FSP FAS
142-3 is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2008. Early adoption is prohibited. The
Company is currently evaluating the impact that the adoption of FSP FAS 142-3
will have on its financial statements.
In
May 2008, the FASB issued FASB Staff Position No. APB 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion” (“FSP APB 14-1”). FSP APB 14-1 specifies that issuers of convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlement) should separately account for the liability and equity
components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for fiscal years beginning after December 15,
2008. The Company is currently evaluating the impact that the
adoption of FSP APB 14-1 will have on its financial statements. The Company
believes that FSP APB 14-1 will have a significant impact to the amount of
interest expense the Company
records commencing with the first quarter of 2009.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
18.
Subsequent Events
In
October 2008, the Company received additional advances totaling approximately
3,200,000 British pounds, or approximately $5,600,000, under the European
Financing with an approximate blended interest rate of 6.97% per annum. As a
result, the remaining amount available to borrow under the European Financing
totals approximately 6,400,000 British pounds or approximately
$11,400,000.
In
October 2008, the Company received additional advances totaling approximately
56,550,000 Hong Kong dollars, or approximately $7,300,000, under the
Asia-Pacific Financing with an approximate interest rate of 5.48% per
annum. As a result, the remaining amount available to borrow under the
Asia-Pacific Financing totals approximately $16,350,000.
In
October 2008, an indirect wholly-owned subsidiary of the Company entered into an
agreement for lease for property and a warehouse building located in a suburb of
London, England (the “Agreement for Lease”). The Agreement for Lease
provides for the completion of certain works within a specified time frame and
the entry into a definitive lease (the “Lease”) upon the completion of those
works. The Lease will have a term of 20 years, with an option to
terminate on the part of the tenant after 15 years upon six months’ prior
notice, and a total cumulative rent obligation of approximately $41,607,000 over
the first 15 years of the Lease. On the fifteenth anniversary of the
Lease, the rent can be reviewed and adjusted to market rents, as set out in the
Lease.
Item
2.
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.
Overview
Equinix
provides network neutral colocation, interconnection and managed services to
enterprises, content companies, systems integrators and the world’s largest
network providers. On September 14, 2007, we completed the acquisition of
IXEurope Plc, or IXEurope, headquartered in London, U.K., whereby IXEurope
became our wholly-owned subsidiary. We refer to this transaction as the IXEurope
acquisition. On February 5, 2008, we completed the acquisition of Virtu Secure
Webservices B.V., or Virtu, based in the Netherlands, whereby Virtu became our
wholly-owned subsidiary. We refer to this transaction as the Virtu acquisition.
Virtu, a similar business to ours, operated network neutral data centers in the
Netherlands, and the Virtu acquisition supplements our existing European
operations. As of September 30, 2008, we operate IBX centers in the Chicago,
Dallas, Los Angeles, New York, Silicon Valley and Washington, D.C. metro areas
in the United States, Australia, Hong Kong, Japan and Singapore in the
Asia-Pacific region, and France, Germany, the Netherlands, Switzerland and the
United Kingdom in the Europe region.
Direct
interconnection to our aggregation of networks, which serve more than 90% of the
world’s Internet routes, allows our customers to increase performance while
significantly reducing costs. Based on our network neutral model and the quality
of our IBX centers, we believe we have established a critical mass of customers.
As more customers locate in our IBX centers, it benefits their suppliers and
business partners to do so as well to gain the full economic and performance
benefits of direct interconnection. These partners, in turn, pull in their
business partners, creating a “network effect” of customer adoption. Our
interconnection services enable scalable, reliable and cost-effective
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 network effect. This critical mass and the resulting
network effect, combined with our strong financial position, continue to drive
new customer growth and bookings.
Historically,
our market has been served by large telecommunications carriers who have bundled
their telecommunications products and services with their colocation offerings.
Each of these colocation providers own and operate a network. We do not own or
operate a network, yet have greater than 300 networks operating out of our IBX
centers. As a result, we are able to offer our customers a substantial choice of
networks given our network neutrality thereby allowing our customers to choose
from numerous network service providers. We believe this is a distinct and
sustainable competitive advantage.
On a
consolidated basis, and excluding customers acquired in the Virtu acquisition,
our customer count increased to 2,203 as of September 30, 2008 versus 1,881 as
of December 30, 2007, an increase of 17%. 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
IXEurope and the Virtu acquisitions, our utilization rate increased to 78% as of
September 30, 2008 versus 73% as of December 31, 2007; however, further
excluding the impact of our IBX center expansion projects that have opened
during the last 12 months, our utilization rate would have been 89% as of
September 30, 2008. Our utilization rate varies from market to market among our
IBX centers in our markets across the U.S., Asia-Pacific and Europe. 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 draw our
customers take 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 centers to
support power and cooling needs twice that of previous IBX centers. We could
face power limitations in our centers even though we may have additional
physical cabinet capacity available within a specific IBX 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 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. Dependent on the particular deal, these transactions may
require upfront cash payments and additional capital expenditures or may be
funded 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.
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 are a significant component of our total
revenues, comprising greater than 90% of our total revenues. Over the past few
years, greater than half of our then existing customers order new services in
any given quarter representing greater than half of the new orders received in
each quarter.
Our
non-recurring revenues are primarily comprised of installation services related
to a customer’s initial deployment and professional services that we perform.
These services are considered to be non-recurring as they are billed typically
once and only 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. As a percentage of total revenues, we expect non-recurring
revenues to represent less than 10% of total revenues for the foreseeable
future.
Our U.S.
revenues are derived primarily from colocation and interconnection services
while our Asia-Pacific and Europe revenues are derived primarily from colocation
and managed infrastructure services.
The
largest cost components of our cost of revenues are depreciation, rental
payments related to our leased IBX centers, utility costs, including electricity
and bandwidth, IBX 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 add or open new
IBX 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 of 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.
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
headquarters office lease and some depreciation expense.
Due to
our recurring revenue model and a cost structure which has a large base that is
fixed in nature and 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 to our growth. This is
evident in the trends noted below in our discussion on our results of
operations.
Critical
Accounting Policies and Estimates
Equinix's
financial statements and accompanying notes are prepared in accordance with
generally accepted accounting principles in the United States of America.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These estimates and assumptions are affected by management's
application of accounting policies. On an on-going basis, management evaluates
its estimates and judgments. Critical accounting policies for Equinix that
affect our more significant judgment and estimates used in the preparation of
our condensed consolidated financial statements include accounting for business
combinations, accounting for stock-based compensation, accounting for income
taxes and accounting for restructuring charges, which are discussed in more
detail under the caption "Critical Accounting Policies and Estimates" in our
2007 Annual Report on Form 10-K.
Results
of Operations
Our
results of operations for the three and nine months ended September 30, 2007
include the operations of IXEurope from September 14 to September 30, 2007, but
do not include the operations of Virtu, as the Virtu acquisition closed on
February 5, 2008. Our results of operations for the nine months ended September
30, 2008 include the operations of Virtu from February 5, 2008 to September 30,
2008.
Three
Months Ended September 30, 2008 and 2007
Revenues. Our
revenues for the three months ended September 30, 2008 and 2007 were split
between the following revenue classifications and geographic regions (dollars in
thousands):
|
|
Three
months ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
%
|
|
|
2007
|
|
%
|
|
|
$ |
|
% |
|
U.S:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
revenues
|
|
$ |
109,422 |
|
60 |
% |
|
$ |
80,583 |
|
78 |
% |
|
$ |
28,839 |
|
36 |
% |
Non-recurring
revenues
|
|
|
5,437 |
|
3 |
% |
|
|
3,102 |
|
3 |
% |
|
|
2,335 |
|
75 |
% |
|
|
|
114,859 |
|
63 |
% |
|
|
83,685 |
|
81 |
% |
|
|
31,174 |
|
37 |
% |
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
revenues
|
|
|
19,921 |
|
11 |
% |
|
|
13,525 |
|
13 |
% |
|
|
6,396 |
|
47 |
% |
Non-recurring
revenues
|
|
|
1,658 |
|
1 |
% |
|
|
1,118 |
|
1 |
% |
|
|
540 |
|
48 |
% |
|
|
|
21,579 |
|
12 |
% |
|
|
14,643 |
|
14 |
% |
|
|
6,936 |
|
47 |
% |
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
revenues
|
|
|
44,174 |
|
24 |
% |
|
|
5,180 |
|
5 |
% |
|
|
38,994 |
|
753 |
% |
Non-recurring
revenues
|
|
|
3,123 |
|
1 |
% |
|
|
274 |
|
0 |
% |
|
|
2,849 |
|
1040 |
% |
|
|
|
47,297 |
|
25 |
% |
|
|
5,454 |
|
5 |
% |
|
|
41,843 |
|
767 |
% |
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
revenues
|
|
|
173,517 |
|
95 |
% |
|
|
99,288 |
|
96 |
% |
|
|
74,229 |
|
75 |
% |
Non-recurring
revenues
|
|
|
10,218 |
|
5 |
% |
|
|
4,494 |
|
4 |
% |
|
|
5,724 |
|
127 |
% |
|
|
$ |
183,735 |
|
100 |
% |
|
$ |
103,782 |
|
100 |
% |
|
$ |
79,953 |
|
77 |
% |
U.S. Revenues. The period
over period growth in recurring revenues was primarily the result of an increase
in orders from both our existing customers and new customers acquired 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 centers, as well as selective
price increases in each of our IBX markets. During the three months ended
September 30, 2008, we recorded $10.1 million of incremental revenues not
generated during the same period of last year associated with our newly opened
IBX centers or IBX center expansions in the Chicago, New York, and Washington,
D.C. metro areas and with additional expansion activity currently taking place
in the Los Angeles and New York metro areas. We expect our U.S. recurring
revenues, particularly from colocation and interconnection services, to remain
our most significant source of revenue for the foreseeable future.
Asia-Pacific
Revenues. Our revenues from Singapore, the largest revenue
contributor in this region, represented approximately 38% of the regional
revenues for both the three months ended September 30, 2008 and 2007. As in the
U.S., Asia-Pacific revenue growth was due to an increase in orders from both our
existing customers and new customers acquired 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 centers, as well as selective price increases in
each of our IBX markets. During the three months ended September 30, 2008, we
recorded $3.7 million of incremental revenues not generated during the same
period of last year associated with our new IBX center in Tokyo, which we
acquired in December 2006, and from our IBX center expansions in Hong Kong and
Singapore. We expect that our Asia-Pacific revenues will continue to grow in
future periods as a result of our recently-opened IBX center expansions in the
Hong Kong, Singapore and Tokyo metro areas and additional expansion activity
currently taking place in the Singapore and Sydney metro areas.
Europe Revenues. Our revenues
from the United Kingdom, the largest revenue contributor in this region,
represented approximately 37% of the regional revenues for the three months
ended September 30, 2008. We expect our Europe revenues to grow in future
periods, as a result of our recently-opened IBX center expansions in the
Amsterdam, Frankfurt, London and Paris metro areas and additional expansion
activity currently taking place in the Amsterdam, London and Paris metro
areas.
Cost of
Revenues. Our
cost of revenues for the three months ended September 30, 2008 and 2007 were
split between the following geographic regions (dollars in
thousands):
|
|
Three
months ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
%
|
|
|
2007
|
|
%
|
|
|
$
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
63,790 |
|
58 |
% |
|
$ |
49,695 |
|
79 |
% |
|
$ |
14,095 |
|
28 |
% |
Asia-Pacific
|
|
|
13,346 |
|
12 |
% |
|
|
9,165 |
|
15 |
% |
|
|
4,181 |
|
46 |
% |
Europe
|
|
|
32,727 |
|
30 |
% |
|
|
4,031 |
|
6 |
% |
|
|
28,696 |
|
712 |
% |
Total
|
|
$ |
109,863 |
|
100 |
% |
|
$ |
62,891 |
|
100 |
% |
|
$ |
46,972 |
|
75 |
% |
|
|
Three
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cost
of revenues as a percentage of revenues:
|
|
|
|
|
|
|
U.S.
|
|
56 |
% |
|
59 |
% |
Asia-Pacific
|
|
62 |
% |
|
63 |
% |
Europe
|
|
69 |
% |
|
74 |
% |
Total
|
|
60 |
% |
|
61 |
% |
U.S. Cost of Revenues. U.S.
cost of revenues for the three months ended September 30, 2008 and 2007 included
$24.9 million and $17.5 million, respectively, of depreciation expense. Growth
in depreciation expense was due to our IBX center expansion
activity. Excluding depreciation expense, the increase in U.S. cost of
revenues was primarily due to overall growth related to our revenue growth
and costs associated with our expansion projects, including higher
compensation costs and an increase in utility costs in line with increasing
customer installations. We anticipate that our U.S. cost of revenues will
continue to increase in the foreseeable future to the extent that the occupancy
levels in our U.S. IBX centers increase and as
our newly-opened IBX centers or IBX center expansions in the Chicago, New York,
Silicon Valley and Washington, D.C. metro areas commence operations more fully
during the remainder of 2008 and from our additional expansion activity
currently taking place in the Los Angeles and New York metro areas. We expect
U.S. cost of revenues to increase as we continue to grow our business;
however, as a percentage of revenues, we expect it to decrease although this
trend may periodically be impacted when a large expansion project opens and
before it starts generating any meaningful revenue.
Asia-Pacific Cost of
Revenues. Asia-Pacific cost of revenues for the three months ended
September 30, 2008 and 2007 included $4.2 million and $2.5 million,
respectively, of depreciation expense. Growth in depreciation expense was
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 connection with
revenue growth, such as increasing utility and bandwidth costs in line with
increasing customer installations and revenues attributed to customer growth, as
well as additional rent expense associated with new leases in connection with
the Hong Kong and Singapore expansion projects. We anticipate that our
Asia-Pacific cost of revenues will increase in the foreseeable future in
connection with overall revenue growth and from our additional expansion
activity currently taking place in the Singapore and Sydney metro
areas. We expect Asia-Pacific cost of revenues to increase as we continue
to grow our business; however, as a percentage of revenues, we expect it to
decrease although this trend may periodically be impacted when a large
expansion project opens and before it starts generating any meaningful
revenue.
Europe Cost of
Revenues. Europe cost of revenues for the three months ended
September 30, 2008 and 2007 included $8.3 million and $981,000, respectively, of
depreciation expense. We anticipate our Europe cost of revenues will increase in
future periods, both as we sell out the available space in our existing data
centers and as our newly-opened IBX centers or IBX center expansions in the
Amsterdam, Frankfurt, London and Paris metro areas commence operations more
fully during the remainder of 2008 and from our additional expansion activity
currently taking place in the Amsterdam, London and Paris metro area
markets. We expect Europe cost of revenues to increase as we continue
to grow our business; however, as a percentage of revenues, we expect it to
decrease although this trend may periodically be impacted when a large expansion
project opens and before it starts generating any meaningful
revenue.
Sales and
Marketing Expenses. Our sales and marketing expenses for the three months
ended September 30, 2008 and 2007 were split between the following geographic
regions (dollars in thousands):
|
|
Three
months ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
%
|
|
|
2007
|
|
%
|
|
|
$
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
9,628 |
|
60 |
% |
|
$ |
7,454 |
|
77 |
% |
|
$ |
2,174 |
|
29 |
% |
Asia-Pacific
|
|
|
2,200 |
|
14 |
% |
|
|
1,478 |
|
15 |
% |
|
|
722 |
|
49 |
% |
Europe
|
|
|
4,181 |
|
26 |
% |
|
|
698 |
|
8 |
% |
|
|
3,483 |
|
499 |
% |
Total
|
|
$ |
16,009 |
|
100 |
% |
|
$ |
9,630 |
|
100 |
% |
|
$ |
6,379 |
|
66 |
% |
|
|
Three
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Sales
and marketing expenses as a percentage of revenues:
|
|
|
|
|
|
|
U.S.
|
|
8 |
% |
|
9 |
% |
Asia-Pacific
|
|
10 |
% |
|
10 |
% |
Europe
|
|
9 |
% |
|
13 |
% |
Total
|
|
9 |
% |
|
9 |
% |
U.S. Sales and Marketing
Expenses.
The increase in U.S. sales and marketing expenses was primarily due to increased
sales compensation as a result of revenue growth and expenditures related to our
branding initiatives. We expect U.S. sales and marketing expenses to
increase as we continue to grow our business and invest further in various
branding initiatives; however, as a percentage of revenues, we expect them to
decrease.
Asia-Pacific Sales and Marketing
Expenses. The increase in Asia-Pacific sales and marketing expenses
was primarily due to sales compensation, including stock-based compensation, as
a result of revenue growth. We expect Asia-Pacific sales and marketing expenses
to increase as we continue to grow our business; however, as a percentage of
revenues, we expect them to decrease.
Europe Sales and Marketing Expenses. We
expect Europe sales and marketing expenses to increase as we continue to grow
our business; however, as a percentage of revenues, we expect them to
decrease.
General and
Administrative Expenses. Our general and administrative expenses for the
three months ended September 30, 2008 and 2007 were split between the following
geographic regions (dollars in thousands):
|
Three
months ended September 30,
|
|
Change
|
|
|
2008
|
|
%
|
|
2007
|
|
%
|
|
$ |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
24,390 |
|
69 |
% |
|
$ |
20,150 |
|
80 |
% |
|
$ |
4,240 |
|
21 |
% |
Asia-Pacific
|
|
|
3,914 |
|
11 |
% |
|
|
3,688 |
|
15 |
% |
|
|
226 |
|
6 |
% |
Europe
|
|
|
7,225 |
|
20 |
% |
|
|
1,344 |
|
5 |
% |
|
|
5,881 |
|
438 |
% |
Total
|
|
$ |
35,529 |
|
100 |
% |
|
$ |
25,182 |
|
100 |
% |
|
$ |
10,347 |
|
41 |
% |
|
|
Three
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
General
and administrative expenses as a percentage of revenues:
|
|
|
|
|
|
|
U.S.
|
|
21 |
% |
|
24 |
% |
Asia-Pacific
|
|
18 |
% |
|
25 |
% |
Europe
|
|
15 |
% |
|
25 |
% |
Total
|
|
19 |
% |
|
24 |
% |
U.S. General and Administrative
Expenses. The increase in U.S. general and administrative expenses
was primarily due to higher compensation costs, including stock-based
compensation, and headcount growth (254 U.S. general and administrative
employees as of September 30, 2008 versus 218 as of September 30, 2007), and an
increase in professional fees related to various consulting projects to support
our growth. Going forward, we expect U.S. general and administrative expenses to
increase as we continue to scale our operations to support our growth; however,
as a percentage of revenues, we expect them to decrease.
Asia-Pacific General and
Administrative Expenses. Our Asia-Pacific general and administrative
expenses were relatively flat period over period. However, going forward, 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 expect them to decrease.
Europe General and Administrative
Expenses. Our Europe
general and administrative expenses are expected to increase in future periods
as we continue to scale our operations to support our growth and in connection
with various integration initiatives related to investments in systems and
internal control compliance; however, as a percentage of revenues, we expect
them to decrease.
Restructuring
Charges. During the three months ended September 30, 2008, we
recorded a restructuring charge adjustment of $799,000 from revised sublease
assumptions for our excess space lease in the Los Angeles metro area as a result
of new information becoming available in the quarter. The original restructuring
charge for this lease, along with one other lease in the New York metro area,
was recorded in the fourth quarter of 2004 and totaled $17.7 million. We are
contractually committed to these two excess space leases through 2015. During
the three months ended September 30, 2007 no restructuring charges were
recorded.
Interest
Income. Interest income decreased to $441,000 for the three months
ended September 30, 2008 from $3.3 million for the three months ended September
30, 2007. Interest income decreased primarily
due to realized losses from our investment portfolio including a $1.5 million
loss on one of our money market accounts as more fully described in Note 5 of
Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly
Report on Form 10-Q, as well as from lower yields on invested balances. The
average yield for the three months ended September 30, 2008 was 2.23% versus
5.22% for the three months ended September 30, 2007. We expect our interest
income to decrease for the foreseeable future due primarily to lower yields
on our investment portfolio.
Interest
Expense.
Interest expense increased to $13.9 million for the three months ended September
30, 2008 from $5.7 million for the three months ended September 30, 2007.
The increase in interest expense was primarily due to new financings entered
into during 2007 and 2008 consisting of (i) our $110.0 million Chicago IBX
financing, which was drawn down during the construction period of the Chicago
metro area IBX expansion project, with an approximate interest rate of 5.25% per
annum; (ii) our approximately $89.1 million Asia-Pacific financing, of
which approximately $65.4 million was outstanding as of September 30, 2008 with
an approximate blended interest rate of 4.28% per annum; (iii) our $396.0
million 3.00% convertible subordinated notes offering in September 2007; (iv)
our approximately $163.0 million European financing, of which approximately
$127.9 million was outstanding as of September 30, 2008 with an approximate
blended interest rate of 7.78% per annum and (v) our Netherlands financing of
approximately $6.1 million, acquired as a result of the Virtu acquisition, with
an approximate blended interest rate of 6.53% per annum. During the three months
ended September 30, 2008 and 2007, we capitalized $1.4 million and $3.0 million,
respectively, of interest expense to construction in progress. Going forward, we
expect to incur higher interest expense as we fully utilize or recognize the
full impact of our existing financings to fund our expansion efforts and as we
complete expansion efforts and cease to capitalize interest
expense.
Other
Income
(Expense). For the
three months ended September 30, 2008, we recorded $520,000 of other
expense, primarily attributable to foreign currency exchange losses during the
period. For the three months ended September 30, 2007, we recorded $3.2 million
of other income, primarily due to foreign currency exchange gains including a
foreign exchange gain of $1.5 million as a result of hedging a portion of the
IXEurope acquisition purchase price with forward contracts.
Income
Taxes. For the three months ended September 30, 2008 and 2007, we
recorded $187,000 and $215,000, respectively, of income tax expense. The tax
expense recorded in both the three months ended September 30, 2008 and 2007
was primarily attributable to our foreign operations. We have not incurred any
significant cash income tax expense since inception and we do not expect to
incur any significant cash income tax expense during the remainder of
2008.
Nine
Months Ended September 30, 2008 and 2007
Revenues. Our
revenues for the nine months ended September 30, 2008 and 2007 were split
between the following revenue classifications and geographic regions (dollars in
thousands):
|
|
Nine
months ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
%
|
|
|
2007
|
|
%
|
|
|
$ |
|
% |
|
U.S:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
revenues
|
|
$ |
308,319 |
|
60 |
% |
|
$ |
225,379 |
|
80 |
% |
|
$ |
82,940 |
|
37 |
% |
Non-recurring
revenues
|
|
|
12,983 |
|
3 |
% |
|
|
9,082 |
|
4 |
% |
|
|
3,901 |
|
43 |
% |
|
|
|
321,302 |
|
63 |
% |
|
|
234,461 |
|
84 |
% |
|
|
86,841 |
|
37 |
% |
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
revenues
|
|
|
55,587 |
|
11 |
% |
|
|
37,519 |
|
13 |
% |
|
|
18,068 |
|
48 |
% |
Non-recurring
revenues
|
|
|
4,769 |
|
1 |
% |
|
|
3,294 |
|
1 |
% |
|
|
1,475 |
|
45 |
% |
|
|
|
60,356 |
|
12 |
% |
|
|
40,813 |
|
14 |
% |
|
|
19,543 |
|
48 |
% |
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
revenues
|
|
|
123,365 |
|
24 |
% |
|
|
5,180 |
|
2 |
% |
|
|
118,185 |
|
2282 |
% |
Non-recurring
revenues
|
|
|
8,974 |
|
1 |
% |
|
|
274 |
|
0 |
% |
|
|
8,700 |
|
3175 |
% |
|
|
|
132,339 |
|
25 |
% |
|
|
5,454 |
|
2 |
% |
|
|
126,885 |
|
2326 |
% |
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
revenues
|
|
|
487,271 |
|
95 |
% |
|
|
268,078 |
|
95 |
% |
|
|
219,193 |
|
82 |
% |
Non-recurring
revenues
|
|
|
26,726 |
|
5 |
% |
|
|
12,650 |
|
5 |
% |
|
|
14,076 |
|
111 |
% |
|
|
$ |
513,997 |
|
100 |
% |
|
$ |
280,728 |
|
100 |
% |
|
$ |
233,269 |
|
83 |
% |
U.S.
Revenues. The period over period growth in recurring revenues was
primarily the result of an increase in orders from both our existing customers
and new customers acquired 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 centers, as well as selective price increases in each of our IBX
markets. During the nine months ended September 30, 2008, we recorded $26.3
million of incremental revenues not generated during the same period of last
year associated with our newly opened IBX centers or IBX center expansions in
the Chicago, New York, Silicon Valley and Washington, D.C. metro areas and with
additional expansion activity currently taking place in the Los Angeles and New
York metro areas. We expect our U.S. recurring revenues, particularly from
colocation and interconnection services, to remain our most significant source
of revenue for the foreseeable future.
Asia-Pacific
Revenues. Our revenues from Singapore, the largest revenue
contributor in this region, represented approximately 36% of the regional
revenues for both the nine months ended September 30, 2008 and 2007. As in the
U.S., Asia-Pacific revenue growth was due to an increase in orders from both our
existing customers and new customers acquired 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 centers, as well as selective price increases in
each of our IBX markets. During the nine months ended September 30, 2008, we
recorded $9.0 million of incremental revenues not generated during the same
period of last year associated with our new IBX center in Tokyo, which we
acquired in December 2006, and from our IBX center expansions in Hong Kong and
Singapore. We expect that our Asia-Pacific revenues will continue to grow in
future periods as a result of our recently-opened IBX center expansions in the
Hong Kong, Singapore and Tokyo metro areas and additional expansion activity
currently taking place in the Singapore and Sydney metro areas.
Europe Revenues. Our revenues
from the United Kingdom, the largest revenue contributor in this region,
represented approximately 39% of the regional revenues for the nine months ended
September 30, 2008. We expect our Europe revenues to grow in future periods, as
a result of our recently-opened IBX center expansions in the Amsterdam,
Frankfurt, London and Paris metro areas and additional expansion activity
currently taking place in the Amsterdam, London and Paris metro
areas.
Cost of
Revenues. Our cost of revenues for nine months ended September 30, 2008
and 2007 were split between the following geographic regions (dollars in
thousands):
|
|
Nine
months ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
%
|
|
|
2007
|
|
%
|
|
|
$ |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
175,625 |
|
57 |
% |
|
$ |
143,123 |
|
84 |
% |
|
$ |
32,502 |
|
23 |
% |
Asia-Pacific
|
|
|
38,124 |
|
12 |
% |
|
|
24,111 |
|
14 |
% |
|
|
14,013 |
|
58 |
% |
Europe
|
|
|
92,608 |
|
31 |
% |
|
|
4,031 |
|
2 |
% |
|
|
88,577 |
|
2197 |
% |
Total
|
|
$ |
306,357 |
|
100 |
% |
|
$ |
171,265 |
|
100 |
% |
|
$ |
135,092 |
|
79 |
% |
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cost
of revenues as a percentage of revenues:
|
|
|
|
|
|
|
U.S.
|
|
55 |
% |
|
61 |
% |
Asia-Pacific
|
|
63 |
% |
|
59 |
% |
Europe
|
|
70 |
% |
|
74 |
% |
Total
|
|
60 |
% |
|
61 |
% |
U.S. Cost of Revenues. U.S.
cost of revenues for the nine months ended September 30, 2008 included
$67.6 million of depreciation expense and $2.6 million of stock-based
compensation expense. U.S. cost of revenues for the nine months ended September
30, 2007 included $53.0 million of depreciation expense and $2.6 million of
stock-based compensation expense. Growth in depreciation expense was due to
our IBX center expansion activity. Excluding depreciation expense, the
increase in U.S. cost of revenues was primarily due to overall growth related to
our revenue growth and costs associated with our expansion projects,
including higher compensation costs and an increase in utility costs in
line with increasing customer
installations. We anticipate that our U.S. cost of revenues will continue to
increase in the foreseeable future to the extent that the occupancy levels in
our U.S. IBX centers increase and as our newly-opened IBX centers or IBX center
expansions in the Chicago, New York, Silicon Valley and Washington, D.C. metro
areas commence operations more fully during the remainder of 2008 and from our
additional expansion activity currently taking place in the Los Angeles and New
York metro areas. We expect U.S. cost of revenues to increase as we
continue to grow our business; however, as a percentage of revenues, we expect
it to decrease although this trend may periodically be impacted when a large
expansion project opens and before it starts generating any meaningful
revenue.
Asia-Pacific Cost of
Revenues. Asia-Pacific cost of revenues for the nine months ended
September 30, 2008 and 2007 included $11.9 million and $5.7 million,
respectively, of depreciation expense. Growth in depreciation expense was 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 connection with
revenue growth, such as increasing utility and bandwidth costs in line with
increasing customer installations and revenues attributed to customer growth, as
well as additional rent expense associated with new leases in connection with
the Hong Kong and Singapore expansion projects. We anticipate that our
Asia-Pacific cost of revenues will increase in the foreseeable future in
connection with overall revenue growth and our additional expansion activity
currently taking place in the Singapore and Sydney metro areas. We expect
Asia-Pacific cost of revenues to increase as we continue to grow our
business; however, as a percentage of revenues, we expect it to decrease
although this trend may periodically be impacted when a large expansion project
opens and before it starts generating any meaningful revenue.
Europe Cost of
Revenues. Europe cost of revenues for the nine months ended
September 30, 2008 included $23.1 million of depreciation expense. We anticipate
our Europe cost of revenues will increase in future periods, as we sell out the
available space in our existing data centers, as our newly-opened IBX centers or
IBX center expansions in the Amsterdam, Frankfurt, London and Paris metro areas
commence operations more fully during the remainder of 2008 and from our
additional expansion activity currently taking place in the Amsterdam, London
and Paris metro area markets. We expect Europe cost of revenues to
increase as we continue to grow our business; however, as a percentage of
revenues, we expect it to decrease although this trend may periodically be
impacted when a large expansion project opens and before it starts generating
any meaningful revenue.
Sales and
Marketing Expenses. Our sales and marketing expenses for the nine months
ended September 30, 2008 and 2007 were split between the following geographic
regions (dollars in thousands):
|
|
Nine
months ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
%
|
|
|
2007
|
|
%
|
|
|
$
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
26,799 |
|
57 |
% |
|
$ |
22,434 |
|
81 |
% |
|
$ |
4,365 |
|
19 |
% |
Asia-Pacific
|
|
|
6,490 |
|
14 |
% |
|
|
4,470 |
|
16 |
% |
|
|
2,020 |
|
45 |
% |
Europe
|
|
|
13,361 |
|
29 |
% |
|
|
698 |
|
3 |
% |
|
|
12,663 |
|
1814 |
% |
Total
|
|
$ |
46,650 |
|
100 |
% |
|
$ |
27,602 |
|
100 |
% |
|
$ |
19,048 |
|
69 |
% |
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Sales
and marketing expenses as a percentage of revenues:
|
|
|
|
|
|
|
U.S.
|
|
8 |
% |
|
10 |
% |
Asia-Pacific
|
|
11 |
% |
|
11 |
% |
Europe
|
|
10 |
% |
|
13 |
% |
Total
|
|
9 |
% |
|
10 |
% |
U.S. Sales and Marketing
Expenses. The increase in U.S. sales and marketing expenses was
primarily due to increased sales compensation costs as a result of revenue
growth and expenditures related to our branding initiatives. We expect U.S.
sales and marketing expenses to increase as we continue to grow our business and
invest further in various branding initiatives; however, as a percentage of
revenues, we expect them to decrease.
Asia-Pacific Sales and Marketing
Expenses. The increase in Asia-Pacific sales and marketing expenses
was primarily due to an increase in sales compensation over the prior period
associated with the overall growth in this region. We expect Asia-Pacific sales
and marketing expenses to increase as we continue to grow our business; however,
as a percentage of revenues, we expect them to decrease.
Europe Sales and Marketing Expenses. We
expect Europe sales and marketing expenses to increase as we continue to grow
our business; however, as a percentage of revenues, we expect them to
decrease.
General and
Administrative Expenses. Our general and administrative expenses for the
nine months ended September 30, 2008 and 2007 were split between the following
geographic regions (dollars in thousands):
|
|
Nine
months ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
%
|
|
|
2007
|
|
%
|
|
|
$
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
73,239 |
|
66 |
% |
|
$ |
60,497 |
|
84 |
% |
|
$ |
12,742 |
|
21 |
% |
Asia-Pacific
|
|
|
11,810 |
|
11 |
% |
|
|
10,281 |
|
14 |
% |
|
|
1,529 |
|
15 |
% |
Europe
|
|
|
26,301 |
|
23 |
% |
|
|
1,344 |
|
2 |
% |
|
|
24,957 |
|
1857 |
% |
Total
|
|
$ |
111,350 |
|
100 |
% |
|
$ |
72,122 |
|
100 |
% |
|
$ |
39,228 |
|
54 |
% |
|
|
Nine
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
General
and administrative expenses as a percentage of revenues:
|
|
|
|
|
|
|
U.S.
|
|
23 |
% |
|
26 |
% |
Asia-Pacific
|
|
20 |
% |
|
25 |
% |
Europe
|
|
20 |
% |
|
25 |
% |
Total
|
|
22 |
% |
|
26 |
% |
U.S. General and Administrative
Expenses. Excluding depreciation expense, the increase in U.S.
general and administrative expenses was primarily due to higher compensation
costs, including general salary increases, benefits, stock-based compensation
and headcount growth (254 U.S. general and administrative employees as of
September 30, 2008 versus 218 as of September 30, 2007), an increase in
depreciation as a result of our investment in systems and an increase in
professional fees related to various consulting projects to support our growth.
Going forward, we expect U.S. general and administrative expenses to increase as
we continue to scale our operations to support our growth; however, as a
percentage of revenues, we expect them to decrease.
Asia-Pacific General and
Administrative Expenses. The increase in Asia-Pacific general and
administrative expenses was primarily due to higher compensation costs,
including general salary increases and bonuses. Going forward, 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 expect them to decrease.
Europe General and Administrative
Expenses. Our Europe
general and administrative expenses are expected to increase in future periods
as we continue to scale our operations to support our growth and in connection
with various integration initiatives related to investments in systems and
internal control compliance; however, as a percentage of revenues, we expect
them to decrease.
Restructuring
Charges. During the nine months ended September 30, 2008 and 2007,
we recorded a restructuring charge adjustment of $799,000 and $407,000,
respectively, from revised sublease assumptions for our excess space lease in
the Los Angeles metro area as a result of new information becoming
available in the quarter. The original restructuring charge for this lease,
along with one other lease in the New York metro area, was recorded in the
fourth quarter of 2004 and totaled $17.7 million. We are contractually committed
to these two excess space leases through 2015.
Interest
Income. Interest income decreased to $6.3 million for the nine
months ended September 30, 2008 from $10.3 million for the nine months ended
September 30, 2007. Interest income decreased primarily due to realized losses
from our investment portfolio including a $1.5 million loss on one of our money
market accounts as more fully described in Note 5 of Notes to Condensed
Consolidated Financial Statements in Item 1 of this Quarterly Report on Form
10-Q, as well as from lower yields on invested balances. The average yield for
the nine months ended September 30, 2008 was 3.0% versus 5.22% for the nine
months ended September 30, 2007. We expect our interest income to decrease for
the foreseeable future due primarily to lower yields on our investment
portfolio.
Interest
Expense.
Interest expense increased to $40.3 million for the nine months ended September
30, 2008 from $15.2 million for the nine months ended September 30, 2007.
The increase in interest expense was primarily due to new financings entered
into during 2007 and 2008 consisting of (i) our $110.0 million Chicago IBX
financing, which was drawn down during the construction period of the Chicago
metro area IBX expansion project, with an approximate interest rate
of 5.25% per annum; (ii) our $250.0 million 2.50% convertible subordinated notes
offering in March 2007; (iii) our approximately $89.1 million Asia-Pacific
financing, of which approximately $65.4 million was outstanding as of September
30, 2008 with an approximate blended interest rate of 4.28% per annum; (iv) our
$396.0 million 3.00% convertible subordinated notes offering in September 2007;
(v) our approximately $163.0 million European financing, of which approximately
$127.9 million was outstanding as of September 30, 2008 with an approximate
blended interest rate of 7.78% per annum and (vi) our Netherlands financing of
approximately $6.1 million, acquired as a result of the Virtu acquisition, with
an approximate blended interest rate of 6.53% per annum. During the nine months
ended September 30, 2008 and 2007, we capitalized $4.6 million and $6.1 million,
respectively, of interest expense to construction in progress. Going forward, we
expect to incur higher interest expense as we fully utilize or recognize the
full impact of our existing financings to fund our expansion efforts and as we
complete expansion efforts and cease to capitalize interest
expense.
Other
Income. For the nine months ended September 30, 2008, we recorded
$602,000 of other income, primarily attributable to foreign currency exchange
gains during the period. For the nine months ended September 30, 2007, we
recorded $3.2 million of other income, primarily due to foreign currency
exchange gains including a foreign exchange gain of $1.5 million as a result of
hedging a portion of the IXEurope acquisition purchase price with forward
contracts.
Loss on
Conversion and
Extinguishment of Debt.
During the three months ended March 31, 2007, we retired $54.0 million of our
convertible subordinated debentures in exchange for approximately 1.4 million
newly issued shares of our common stock. As a result, we recorded a $3.4 million
loss on debt conversion in accordance with FASB No. 84, “Induced Conversions of
Convertible Debt,” due to the inducement fee. In addition, in September 2007, a
senior bridge loan was terminated unused and, as a result, we recorded a $2.5
million loss on debt extinguishment reflecting the immediate write-off of
debt issuance costs previously capitalized to secure the senior bridge loan.
Therefore, during the nine months ended September 30, 2007, we recognized a
total of $5.9 million of loss on debt conversion and extinguishment. During the
nine months ended September 30, 2008 there were no similar
transactions.
Income
Taxes. For the nine months ended September 30, 2008 and 2007, we
recorded $400,000 and $766,000, respectively, of income tax expense. The tax
provision recorded in both the nine months ended September 30, 2008 and
2007 was primarily attributable to our foreign operations. We have not incurred
any significant cash income tax expense since inception and we do not expect to
incur any significant cash income tax expense during the remainder of
2008.
Liquidity
and Capital Resources
As of
September 30, 2008, our total indebtedness was comprised of (i) convertible
debt totaling $678.2 million from our convertible subordinated debentures, our
2.50% convertible subordinated notes and our 3.00% convertible subordinated
notes and (ii) non-convertible debt and financing obligations totaling
$515.5 million from our Washington D.C. metro area IBX capital lease, San Jose
IBX equipment and fiber financing, Chicago IBX equipment financing, Los Angeles
IBX financing, Ashburn campus mortgage payable, Chicago IBX financing,
Asia-Pacific financing, European financing, Netherlands financing and other
financing obligations.
We
believe we have sufficient cash, coupled with anticipated cash generated from
operating activities, to meet our operating requirements and complete our
publicly announced expansion projects for at least the next 12 months. As of
September 30, 2008, we had $330.2 million of cash, cash equivalents and
short-term and long-term investments (which is net of a $1.5 million impairment
loss we realized in September 2008 on our $50.9 million investment in The
Reserve Primary Fund, which is referred to as the Reserve, as more fully
described in Note 5 of Notes to Condensed Consolidated Financial Statements in
Item 1 of this Quarterly Report on Form 10-Q). If the current market
conditions continue to deteriorate, we may suffer further losses on our
investment portfolio, which could have a material adverse effect on our
liquidity. Besides our investment portfolio and any financing
activities we may pursue, customer collections are our primary source of
cash. While we believe we have a well diversified customer base with
no concentration of credit risk with any single customer, we have a number of
large customers in the financial services sector. While we believe we
have a strong customer base and have experienced strong collections in the past,
if the current market conditions continue to deteriorate we may experience
increased churn in our customer base, including reductions in their commitments
to us, which could also have a material adverse effect on our
liquidity.
As of
September 30, 2008, we had a total of $40.8 million of additional liquidity
available to us, comprised of $23.7 million under the Asia-Pacific financing,
for expansion projects in Hong Kong and Sydney, and $17.1 million under the
European financing for general working capital and expansion projects in France,
Germany, Switzerland and the United Kingdom, which, given the state of the
current credit market, we believe we will be able to fully
utilize. Regarding our indebtedness as of September 30, 2008, as
noted above, $515.5 million was non-convertible senior debt, of which $254.7
million of this amount is with a single lender. Although these are
committed facilities, most of which are fully drawn or advanced for which
we are amortizing debt repayments of either principal and/or interest
only, and we are in full compliance with all covenants related to them,
deteriorating market and liquidity conditions may give rise to issues which
may impact the lenders' ability to hold these debt commitments to their
full term.
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 centers, in certain of our existing markets which are at or near
capacity within the next year. While we will be able to fund some of
these expansion plans with our existing resources, to pursue certain of these
additional expansion plans additional financing, either debt or equity, may be
required. However, if current market conditions continue to persist, or
deteriorate further, we would be unable to secure additional financing or any
such additional financing may 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,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
Net
cash provided by operating activities
|
|
$ |
191,263 |
|
|
$ |
106,139 |
|
Net
cash used in investing activities
|
|
|
(434,850 |
) |
|
|
(951,206 |
) |
Net
cash provided by financing activities
|
|
|
112,950 |
|
|
|
1,107,012 |
|
Operating Activities. The
increase in net cash provided by operating activities was primarily due to
improved operating results as discussed above, strong collections of accounts
receivable, management of vendor payments and growth in customer installations,
which increases deferred installation revenue, a liability account. We expect
that we will continue to generate cash from our operating activities throughout
the remainder of 2008 and beyond.
Investing Activities. Net
cash used in investing activities for the nine months ended September 30, 2008
was primarily the result of $305.5 million of capital expenditures required to
bring our recently announced and current IBX expansion projects to Equinix
standards and to support our growing customer base, as well as the Virtu
acquisition of $23.2 million, and the net purchase of our short-term and
long-term investments. Net cash
used in investing activities for the nine months ended September 30, 2007 was
primarily the result of the IXEurope acquisition for $541.7 million, the
purchase of one of our San Jose IBX properties and an adjacent piece of land
totaling $71.5 million, the purchase of our Los Angeles IBX property for $49.1
million and $295.8 million of other capital expenditures required to bring our
recently announced and current IBX expansion projects to Equinix standards and
to support our growing customer base, partially offset by net maturities of our
short-term and long-term investments.
Financing Activities. Net cash provided by
financing activities for the nine months ended September 30, 2008, was primarily
the result of $102.1 million in gross proceeds from our loans payable in
connection with our European financing, Asia-Pacific financing and Chicago IBX
financing, partially offset by debt issuance costs and principal payments for
our capital leases and other financing obligations and our mortgage and loans
payable. Net cash provided by financing activities for the nine months
ended September 30, 2007, was primarily the result of $646.0 million in gross
proceeds from our convertible subordinated debt offerings, $339.9 million in net
proceeds from our common stock offering, $118.8 million in gross proceeds from
our loans payable in connection with the Chicago IBX financing and the
Asia-Pacific financing and $27.6 million in proceeds from our various employee
stock plans, partially offset by debt issuance costs and principal payments for
our capital leases and other financing obligations and the Ashburn campus
mortgage payable.
Debt
Obligations
Chicago IBX Financing. During the
nine months ended September 30, 2008, we received additional advances totaling
$4.4 million, bringing the cumulative and final loan payable to approximately
$110.0 million. As of September 30, 2008, the loan payable carried an
approximate interest rate of 5.25% per annum. The loan payable under the Chicago
IBX financing bears interest at a floating rate. The loan payable under the
Chicago IBX financing has a maturity date of January 31, 2010, with options to
extend for up to an additional two years, in one-year increments, upon
satisfaction of certain extension conditions. The Chicago IBX financing is
collateralized by the assets of one of our Chicago IBX centers.
In May 2008, we entered into an interest
rate swap agreement with one counterparty to hedge the interest payments on a
$105.0 million notional amount of the Chicago IBX financing, which will mature
in February 2011. Under the terms of the interest rate swap transaction, we
receive interest payments based on rolling one-month LIBOR terms and pay
interest at the fixed rate of 6.34%.
Asia-Pacific Financing. In
January 2008, the Asia-Pacific financing was amended to enable our subsidiary in
Australia to borrow up to 32.0 million Australian dollars, or approximately
$25.4 million, under the same general terms, amending the Asia-Pacific financing
into an approximately $69.0 million multi-currency credit facility agreement. In
June 2008, the Asia-Pacific financing was further amended to enable our
subsidiary in Hong Kong to borrow up to 156.0 million Hong Kong dollars, or
approximately $20.1 million, under the same general terms, amending the
Asia-Pacific financing into an approximately $89.1 million multi-currency credit
facility agreement. Loans payable under the Asia-Pacific financing bear interest
at floating rates. Loans payable under the Asia-Pacific financing have a final
maturity date of June 2012. The Asia-Pacific financing is guaranteed by the
parent, Equinix, Inc., is secured by the assets of our subsidiaries in Japan,
Singapore, Hong Kong and Australia, including a pledge of their shares, and has
several financial covenants, with which we must comply quarterly. As of
September 30, 2008, we were in compliance with all financial covenants
associated with the Asia-Pacific financing. As of September 30, 2008, we had
borrowed 23.0 million Singapore dollars, or approximately $16.0 million, at an
approximate interest rate per annum of 3.04%; 2.9 billion Japanese yen, or
approximately $27.6 million, at an approximate interest rate per annum of 2.70%;
13.2 million Australian dollars, or approximately $10.5 million, at an
approximate interest rate per annum of 9.06% and 87.8 million Hong Kong dollars,
or approximately $11.2 million, at an approximate interest rate per annum of
5.51%. Collectively, the total amount borrowed was approximately equal to $65.4
million, leaving approximately $23.7 million of available balance to borrow
under the Asia-Pacific financing. In October 2008, we received an additional
advance of 56.6 million Hong Kong dollars, or approximately $7.3 million, at an
approximate interest rate per annum of 5.48% under the Asia-Pacific financing.
Collectively, the total amount borrowed under the Asia-Pacific financing was
approximately $72.7 million, leaving approximately $16.4 million available to
borrow.
European Financing. During
the nine months ended September 30, 2008, we received additional advances
totaling approximately 29.4 million British pounds, or approximately $57.1
million, under the European financing, leaving the amount available to borrow
totaling approximately 9.6 million British pounds, or approximately $17.1
million. As of September 30, 2008, a total of approximately 71.8 million British
pounds, or approximately $127.9 million, was outstanding under the European
financing with an approximate blended interest rate of 7.78% per annum. Loans
payable under the European financing bear interest at floating rates. The
European financing is available to fund certain of our expansion projects in
France, Germany, Switzerland and the United Kingdom. Loans payable under the
European financing have a final maturity date of June 2014. The European
financing is collateralized by certain of our assets in Europe and contains
several financial covenants with which we must comply quarterly. As of September
30, 2008, we were in compliance with all financial covenants associated with the
European financing. In October 2008, we received additional advances totaling
approximately 3.2 million British pounds, or approximately $5.6 million, under
the European financing with an approximate blended interest rate of 6.97% per
annum. As a result, the amount available to borrow under the European financing
totals approximately 6.4 million British pounds or approximately $11.4
million.
In May
2008, we entered into three interest rate swap agreements and re-designated two
older ineffective interest rate swap agreements with a total of two
counterparties to hedge the interest payments on the equivalent of $113.7
million notional amount of the European financing, which will mature in August
2009 and May 2011. Under the terms of the interest rate swap
transactions, we receive interest payments based on rolling one-month EURIBOR
and LIBOR terms and pay fixed interest rates ranging from 5.97% to
8.16%.
Netherlands Financing. In February 2008, as a
result of the Virtu acquisition, our wholly-owned subsidiary assumed senior
credit facilities totaling 5.5 million Euros bearing interest at a floating rate
(three month EURIBOR plus 1.25%). As of September 30, 2008, a total of
approximately 4.3 million Euros, or approximately $6.1 million, was outstanding
under the Netherlands financing with an approximate blended interest rate of
6.53% per annum. The Netherlands financing is collateralized by substantially
all of our operations in the Netherlands. The Netherlands financing contains
several financial covenants, which must be complied with on an annual
basis. Our wholly-owned subsidiary in the Netherlands was not in compliance
with the December 31, 2007 financial covenants; however, in April 2008, we
obtained a waiver from the lender for such non-compliance. Although the
Netherlands financing has a payment schedule with a final payment date in
January 2016, as of September 30, 2008, we had reflected the total amount
outstanding under the Netherlands financing as a current liability within the
current portion of mortgage and loans payable on the accompanying balance sheet
as it is not currently a committed facility.
$75.0 Million Silicon Valley Bank
Revolving Credit Line. In February 2008, we terminated the $75.0 million
Silicon Valley Bank revolving credit line. As a result, all letters of credit
issued and outstanding under the $75.0 million Silicon Valley Bank revolving
credit line, totaling $12.1 million, were cash collateralized. As of the
termination date, we had no borrowings outstanding under the Silicon Valley Bank
revolving credit line and no termination penalties were incurred.
Debt
Maturities, Financings, Leases and Other Contractual Commitments
We lease
a majority of our IBX centers and certain equipment under non-cancelable lease
agreements expiring through 2027. The following represents our debt maturities,
financings, leases and other contractual commitments as of September 30, 2008
(in thousands):
|
|
2008
(3
months)
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
and thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt (1)
|
|
$ |
― |
|
$ |
32,250 |
|
$ |
― |
|
$ |
― |
|
$ |
250,000 |
|
$ |
395,986 |
|
$ |
678,236 |
|
Chicago
IBX financing (1)
|
|
|
― |
|
|
― |
|
|
109,991 |
(5) |
|
― |
|
|
― |
|
|
― |
|
|
109,991 |
|
Asia-Pacific
financing (1)
|
|
|
3,638 |
|
|
19,054 |
|
|
21,811 |
|
|
18,173 |
|
|
2,757 |
|
|
― |
|
|
65,433 |
|
European
financing (1)
|
|
|
934 |
|
|
9,342 |
|
|
14,750 |
|
|
16,618 |
|
|
19,322 |
|
|
66,913 |
|
|
127,879 |
|
Netherlands
financing (1)
|
|
|
6,087 |
|
|
― |
|
|
― |
|
|
― |
|
|
― |
|
|
― |
|
|
6,087 |
|
Interest
(2)
|
|
|
9,569 |
|
|
36,037 |
|
|
28,895 |
|
|
26,308 |
|
|
19,524 |
|
|
27,654 |
|
|
147,987 |
|
Mortgage
payable (3)
|
|
|
2,541 |
|
|
10,164 |
|
|
10,164 |
|
|
10,164 |
|
|
10,165 |
|
|
133,503 |
|
|
176,701 |
|
Other
note payable (3)
|
|
|
2,500 |
|
|
10,000 |
|
|
― |
|
|
― |
|
|
― |
|
|
― |
|
|
12,500 |
|
Capital
lease and other financing obligations (3)
|
|
|
2,943 |
|
|
11,880 |
|
|
11,930 |
|
|
12,039 |
|
|
11,729 |
|
|
111,717 |
|
|
162,238 |
|
Operating
leases under accrued restructuring charges (3)
|
|
|
495 |
|
|
3,935 |
|
|
4,002 |
|
|
4,128 |
|
|
4,374 |
|
|
11,274 |
|
|
28,208 |
|
Operating
leases (4)
|
|
|
13,964 |
|
|
57,005 |
|
|
54,331 |
|
|
50,322 |
|
|
49,338 |
|
|
284,819 |
|
|
509,779 |
|
Other
contractual commitments (4)
|
|
|
77,896 |
|
|
132,991 |
|
|
15,717 |
|
|
3,175 |
|
|
― |
|
|
― |
|
|
229,779 |
|
|
|
$ |
120,567 |
|
$ |
322,658 |
|
$ |
271,591 |
|
$ |
140,927 |
|
$ |
367,209 |
|
$ |
1,031,866 |
|
$ |
2,254,818 |
|
_________________________
(1)
|
Represents
principal only.
|
(2)
|
Represents
interest on convertible debt, Chicago IBX financing, Asia-Pacific
financing, European financing and Netherlands financing based on their
approximate interest rates as of September 30,
2008.
|
(3)
|
Represents
principal and interest.
|
(4)
|
Represents
off-balance sheet arrangements. Other contractual commitments
are described below.
|
(5)
|
The
loan payable under the Chicago IBX financing has a maturity date of
January 31, 2010, with options to extend for up to an additional two
years, in one-year increments, upon satisfaction of certain extension
conditions. Given the current market climate, we intend to extend the
maturity of the loan payable under the Chicago IBX
financing.
|
Primarily
as a result of our various IBX expansion projects, as of September 30, 2008, we
were contractually committed for $156.6 million of unaccrued capital
expenditures, primarily for IBX equipment not yet delivered and labor not yet
provided, in connection with the work necessary to complete construction and
open these IBX centers prior to making them available to customers for
installation. This amount, which is expected to be paid during the remainder of
2008 and 2009, is reflected in the table above as “other contractual
commitments.”
We have
other non-capital purchase commitments in place as of September 30, 2008, such
as commitments to purchase power in select locations, primarily in the U.S.,
Australia, Germany, Singapore and the United Kingdom, through the remainder of
2008 and thereafter, and other open purchase orders, which contractually bind us
for goods or services to be delivered or provided during the remainder of 2008
and beyond. Such other purchase commitments as of September 30, 2008, which
total $73.2 million, are also reflected in the table above as “other contractual
commitments.”
In
addition, although we are not contractually obligated to do so, we expect to
incur additional capital expenditures of approximately $100.0 million to $150.0
million, in addition to the $156.6 million in contractual commitments as
discussed above as of September 30, 2008, in our various IBX expansion projects
during the remainder of 2008 and 2009 in order to complete the work needed to
open these IBX centers. These non-contractual capital expenditures are not
reflected in the table above. If the current economic environment persists,
we could delay these non-contractual capital expenditure commitments to preserve
liquidity.
Recent
Accounting Pronouncements
See Note
16 of Notes to Condensed Consolidated Financial Statements in Item 1 of this
Quarterly Report on Form 10-Q.
Market
Risk
The
following discussion about market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements. We may be exposed to market risks related to
impairments of our investment portfolio, changes in interest rates and foreign
currency exchange rates and fluctuations in the prices of certain commodities,
primarily electricity.
We
currently employ interest rate swaps and foreign currency forward exchange
contracts for the purpose of hedging certain specifically identified exposures.
The use of these financial instruments is intended to mitigate some of the risks
associated with either fluctuations in interest rates or currency exchange
rates, but does not eliminate such risks. We do not use financial instruments
for trading or speculative purposes.
Investment
Portfolio Risk
All of
our cash equivalents and marketable securities are designated as
available-for-sale and are therefore recorded at fair market value on our
condensed consolidated balance sheets with the unrealized gains or losses
reported as a separate component of other comprehensive income or loss. We
consider various factors in determining whether we should recognize an
impairment charge for our securities, including the length of time and extent to
which the fair value has been less than our cost basis and our intent and
ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery in market value. As more fully described in Note
5 of Notes to Condensed Consolidated Financial Statements in Item 1 of this
Quarterly Report on Form 10-Q, in September 2008, we incurred a realized loss
from our investment portfolio (consisting of a single money market account)
totaling $1.5 million. If market conditions continue to deteriorate
and liquidity constraints become even more pronounced, we could sustain more
losses from our investment portfolio. As our securities mature, we have been
increasing our holdings in U.S. government securities, such as Treasury bills
and Treasury notes of a short-term duration and lower yield. As a result, we
expect our interest income to decrease in future periods.
As of
September 30, 2008, our investment portfolio of cash equivalents and marketable
securities consisted of money market fund investments, commercial paper,
corporate notes, asset backed securities, certificates of deposit and U.S
government and agency obligations. Excluding the U.S. government holdings
which carry a lower risk and lower return in comparison to other
securities in the portfolio, the invested amount in our investment portfolio
most susceptible to market risk totaled $206.6 million.
Interest
Rate Risk
Our
exposure to market risk resulting from changes in interest rates relates
primarily to our investment portfolio and variable-rate financings in place in
the U.S., Asia-Pacific and Europe. The fair market value of our
marketable securities could be adversely impacted due to a rise in interest
rates, but we do not believe such impact would be material. Securities with
longer maturities are subject to a greater interest rate risk than those with
shorter maturities and as of September 30, 2008 our portfolio maturity was
relatively short. If current interest rates were to increase or decrease by 10%
from their position as of September 30, 2008, the fair market value of our
investment portfolio could increase or decrease by approximately
$155,000.
An
immediate 10% increase or decrease in current interest rates from their position
as of September 30, 2008 would furthermore not have a material impact on
our debt obligations due to the fixed nature of the majority of our debt
obligations. However, the interest expense associated with our Chicago IBX
financing, Asia-Pacific financing, European financing and Netherlands financing,
which bear interest at variable rates tied to local cost of funds or
LIBOR/SIBOR/EURIBOR, could be affected. For every 100 basis point change in
interest rates, our annual interest expense could increase or decrease by a
total of $3.1 million based on the total balance of our borrowings under the
Chicago IBX financing, Asia-Pacific financing, European financing and
Netherlands financing as of September 30, 2008. To mitigate the risk of
fluctuations in floating rates, we utilize interest rate swaps (receive
floating/ pay fixed). As of September 30, 2008, we had entered into a total of
six swap agreements with maturity dates of less than three years, comprised of
five swap agreements for the European financing with an aggregate notional
amount of 38.3 million British pounds and 32.3 million Euros, or approximately
$113.7 million, and one swap agreement for the Chicago IBX
financing with an aggregate notional amount of $105.0 million. Under the five
swap agreements for the European financing, we pay fixed rates of interest
ranging from 5.97% to 8.16% on the notional amount and the counterparty pays us
rates of interest on the notional amount based on LIBOR/EURIBOR. Under the swap
agreement for the Chicago IBX financing, we pay a fixed rate of 6.34% on the
notional amount and the counterparty pays us rates of interest on the notional
amount based on one-month LIBOR. The fair values or changes in fair value of
these swaps are recorded on our consolidated balance sheets in other
comprehensive income or loss.
The fair
market value of our long-term fixed interest rate debt is subject to interest
rate risk. Generally, the fair market value of fixed interest rate debt will
increase as interest rates fall and decrease as interest rates rise. These
interest rate changes may affect the fair market value of the fixed interest
rate debt but do not impact our earnings or cash flows. The fair market value of
our convertible subordinated debentures and convertible subordinated notes is
based on quoted market prices. The estimated fair value of our convertible
subordinated debentures at September 30, 2008 was approximately $56.9 million.
The estimated fair value of our 2.50% convertible subordinated notes at
September 30, 2008 was approximately $200.0 million. The estimated fair
value of our 3.00% convertible subordinated notes at September 30, 2008 was
approximately $328.9 million.
We may
enter into additional interest rate hedging agreements in the future to mitigate
our exposure to interest rate risk.
Foreign
Currency Risk
The
majority of our recognized revenue is denominated in U.S. dollars, generated
mostly from customers in the U.S. However, approximately 37% of our revenues and
41% of our operating costs are in the Europe and Asia-Pacific regions and a
large portion of those revenues and costs are denominated in a currency other
than the U.S. dollar, primarily the British pound, Euro, Swiss
franc, Singapore dollar, Japanese yen and Hong Kong and Australian dollars.
As a result, our operating results and cash flows are impacted by currency
fluctuations relative to the U.S. dollar. To protect against certain reductions
in value caused by changes in currency exchange rates, we have established a
risk management program to offset some of the risk of carrying assets and
liabilities denominated in foreign currency. Our risk management program
reduces, but does not entirely eliminate, the impact of currency exchange rate
movements and its impact to the statements of operations and does not currently
address balance sheet exposure. As of September 30, 2008, the outstanding
foreign currency contracts had maturities of 180 days or less.
For the
foreseeable future, we anticipate that approximately 35-40% of our revenues and
operating costs will continue to be generated and incurred outside of the U.S.
in currencies other than the U.S. dollar. While we hedge certain of
our balance sheet foreign currency assets and liabilities, we do not hedge
revenue. During fiscal 2007 and the first half of 2008, the U.S.
dollar had been generally weaker relative to the currencies of the foreign
countries in which we operate. This overall weakness of the U.S.
dollar had a positive impact on our consolidated results of operations because
the foreign denominations translated into more U.S. dollars. However,
during the past several months, the U.S. dollar has strengthened relative to
certain of the currencies of the foreign countries in which we
operate. This has significantly impacted our consolidated financial
position and results of operations as amounts in foreign currencies are
generally translating into less U.S. dollars. To the extent the
U.S. dollar strengthens further, this will continue to have a significant impact
to our consolidated financial position and results of operations including the
amount of revenue that we report in future periods.
We may
enter into significant hedging activities in the future to mitigate our exposure
to foreign currency risk as our exposure to foreign currency risk continues to
increase due to our growing foreign operations; however, we do not currently
intend to eliminate all foreign currency transaction exposure.
Commodity
Price Risk
Certain
operating costs incurred by us are subject to price fluctuations caused by the
volatility of underlying commodity prices. The commodities most likely to have
an impact on our results of operations in the event of price changes are
electricity, supplies and equipment used in our IBX centers. We are closely
monitoring the cost of electricity at all of our locations. We have entered into
several power contracts to purchase
power at fixed prices during 2008 and beyond in certain locations in the U.S.,
as well as Australia, Germany, Singapore and the United
Kingdom.
In
addition, as we are building new, “greenfield” IBX centers, we are subject to
commodity price risk for building materials related to the construction of these
IBX centers, such as steel and copper. In addition, the lead-time to procure
certain pieces of equipment, such as generators, is substantial. Any delays in
procuring the necessary pieces of equipment for the construction of our IBX
centers could delay the anticipated openings of these new IBX centers and, as a
result, increase the cost of these projects.
We do not
currently employ forward contracts or other financial instruments to address
commodity price risk other than the power contracts discussed
above.
(a) Evaluation
of Disclosure Controls and Procedures. Our Chief
Executive Officer and our Chief Financial Officer, after evaluating the
effectiveness of our “disclosure controls and procedures” (as defined in the
Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) or
15d-15(e)) as of the end of the period covered by this quarterly report, have
concluded that our disclosure controls and procedures are effective based on
their evaluation of these controls and procedures required by paragraph (b) of
Exchange Act Rules 13a-15 or 15d-15.
(b) Changes
in Internal Control over Financial Reporting. There were no
changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules
13a-15 or 15d-15 that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
On July
30, 2001 and August 8, 2001, putative shareholder class action lawsuits were
filed against us, certain of our officers and directors (the “Individual
Defendants”), and several investment banks that were underwriters of our 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. 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 us 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 our 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 our 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 us, but denied the motion to dismiss the Section 11
claim. On December 5, 2006, the Second Circuit vacated a decision by
the district court granting class certification in six “focus” cases, which are
intended to serve as test cases. Plaintiffs selected these six cases, which do
not include Equinix. On April 6, 2007, the Second Circuit denied a petition for
rehearing filed by plaintiffs, but noted that plaintiffs could ask the district
court to certify more narrow classes than those that were rejected. On August
14, 2007, plaintiffs filed amended complaints in the six focus
cases. On September 27, 2007, plaintiffs moved to certify a class in
the six focus cases. On November 14, 2007, the issuers and the
underwriters named as defendants in the six focus cases moved to dismiss the
amended complaints against them. On March 26, 2008, the district
court dismissed the Section 11 claims of those members of the putative classes
in the focus cases who sold their securities for a price in excess of the
initial offering price and those who purchased outside the previously certified
class period. With respect to all other claims, the motions to
dismiss were denied. On October 10, 2008, at the request of the
plaintiffs, plaintiffs’ motion for class certification was withdrawn, without
prejudice.
Due to
the inherent uncertainties of litigation, we cannot accurately predict the
ultimate outcome of the matter. We
are unable at this time to determine whether the outcome of the litigation would
have a material impact on our results of operations, financial condition or cash
flows. We intend to continue to defend the action
vigorously.
On
June 29, 2006 and September 18, 2006, shareholder derivative actions
were filed in the Superior Court of the State of California, County of San
Mateo, naming Equinix as a nominal defendant and several of Equinix’s current
and former officers and directors as individual defendants. These actions were
consolidated, and the consolidated complaint was filed in January 2007. In March
2007, the state court stayed this action in deference to a federal shareholder
derivative action filed in the United States District Court for the Northern
District of California in October 2006. The federal action named Equinix as a
nominal defendant and several current and former officers and directors as
individual defendants. This complaint alleged that the individual defendants
breached their fiduciary duties and violated California and federal securities
laws as a result of purported backdating of stock options, insider trading and
the dissemination of false statements. On April 12, 2007, the federal
action was voluntarily dismissed without prejudice pursuant to a joint
stipulation entered as an order by the court. On May 3, 2007, the state
court lifted the stay on proceedings in the state court action. On March 3,
2008, the state court plaintiff filed a second amended consolidated complaint
after the court granted two motions to dismiss prior complaints with leave to
amend. The second amended consolidated complaint alleged that the individual
defendants breached their fiduciary duties and violated California securities
law as a result of purported backdating of stock option grants, insider trading
and the dissemination of false financial statements. The second amended
consolidated complaint sought to recover, on behalf of Equinix, unspecified
monetary damages, corporate governance changes, equitable and injunctive
relief, restitution and fees and costs. On July 8, 2008, the state court granted
our motion to dismiss the second amended consolidated complaint without leave to
amend and entered a final judgment dismissing the action and all claims asserted
therein in their entirety without leave to amend. The time for the state court
plaintiff to appeal the judgment expired on September 9, 2008.
Responding
to, investigating and/or defending against civil litigations and government
inquiries regarding our stock option grants and practices would present a
substantial cost to us in both cash and the attention of certain management and
may have a negative impact on our operations. In addition, in the event of any
negative finding or assertion by a court of law or any third-party claim related
to our stock option granting practices, we may be liable for damages, fines or
other civil or criminal remedies, or be required to restate our prior period
financial statements or adjust our current period financial statements. Any such
adverse action could have a material adverse effect on our business and current
market value.
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 million value of Equinix held
by Defendants” (a group that includes more than 30 individuals and entities). An
amended complaint, which adds new plaintiffs (other alleged holders of Pihana
common stock) but is otherwise substantially similar to the original pleading,
was filed on September 29, 2008. On October 13, 2008, a complaint was filed 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. We believe that plaintiffs’ claims and alleged damages are
without merit and we intend to defend the litigation vigorously.
Due to
the inherent uncertainties of litigation, we cannot accurately predict the
ultimate outcome of the matter. We are unable at this time to determine whether
the outcome of the litigation would have a material impact on our results of
operations, financial condition or cash flows.
In addition to the other information contained in this report, the following
risk factors should be considered carefully in evaluating our business and
us:
We
may not be able to successfully integrate IXEurope and achieve the benefits we
expect from the
IXEurope acquisition.
We will only achieve the benefits that are expected to result from the IXEurope
acquisition if we can successfully integrate its administrative, finance,
operations, sales and marketing organizations, and implement appropriate systems
and controls.
The
success of the IXEurope acquisition and integration into our operations will
involve a number of risks, including, but not limited to:
|
•
|
|
the
possible diversion of our management’s attention from other business
concerns, including our previously announced expansion plans in the U.S.
and Asia-Pacific regions;
|
|
•
|
|
the
potential inability to successfully pursue or realize some or all of the
anticipated revenue opportunities associated with the IXEurope
acquisition, some of which were anticipated in our purchase
price;
|
|
•
|
|
the
potential that our existing customer base will not choose us as their
global colocation solution as
expected;
|
|
•
|
|
the
potential inability to maintain our historic levels of stability, uptime
and quality for our customers;
|
|
•
|
|
the
possible loss of IXEurope’s key
employees;
|
|
•
|
|
the
potential inability to achieve expected operating efficiencies in
IXEurope’s operations, including through the thorough integration of our
operations, marketing, sales and financial
systems;
|
|
•
|
|
the
increased complexity and diversity of our operations after the IXEurope
acquisition compared to our prior
operations;
|
|
•
|
|
the
impact on our internal controls and compliance with the regulatory
requirements under the Sarbanes-Oxley Act of 2002;
and
|
|
•
|
|
unanticipated
problems, expenses or liabilities.
|
If
we fail to integrate IXEurope successfully and/or fail to realize the intended
benefits of the IXEurope acquisition, our results of operations could be
materially and adversely affected. In addition, the IXEurope acquisition
resulted in a substantial goodwill asset, which will be subject to an annual
impairment analysis. If this goodwill were to be impaired in the future, it
could have a significant negative impact on our results of operations and
financial condition.
Our
substantial debt could adversely affect our cash flows and limit our flexibility
to raise additional capital.
We have a significant amount of debt. As of September 30, 2008, our total
indebtedness was approximately $1.2 billion and our stockholders’ equity was
$837.3 million.
Our substantial amount of debt could have important consequences. For example,
it could:
·
|
require
us to dedicate a substantial portion of our cash flow from operations to
make payments on our debt, reducing the availability of our cash flow to
fund future capital expenditures, working capital, execution of our
expansion strategy and other general corporate
requirements;
|
·
|
make
it more difficult for us to satisfy our obligations under our various debt
instruments;
|
·
|
increase
our vulnerability to general adverse economic and industry conditions and
adverse changes in governmental
regulations;
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and industry, which may place us at a competitive disadvantage compared
with our competitors;
|
·
|
limit
our ability to borrow additional funds, even when necessary to maintain
adequate liquidity; and
|
·
|
make
us more vulnerable to increases in interest rates because of the variable
interest rates on some of our borrowings, a portion of which we have now
hedged.
|
The
occurrence of any of the foregoing factors could have a material adverse effect
on our business, results of operations and financial condition. In addition, the
performance of our stock price may trigger events that would require the
write-off of a significant portion of our debt issuance costs related to our
convertible debt, which may have a material adverse effect on our results of
operations and financial condition.
In
addition, of our total indebtedness as of September 30, 2008, $515.5 million was
non-convertible senior debt (of which $254.7 million is with a single
lender). Although these are committed facilities, most of which are
fully drawn or advanced for which we are amortizing debt
repayments of either principal and/or interest only, and we are in
full compliance with all covenants related to them, deteriorating market and
liquidity conditions may give rise to issues which may impact the lenders'
ability to hold these debt commitments to their full term.
Accordingly, these lenders of committed and drawn facilities may attempt to call
this debt which would have a material adverse effect on our liquidity, even
though no call provisions exist without being in default.
If
we are not able to generate sufficient operating cash flows or obtain external
financing, our ability to fund incremental expansion plans may be
limited.
Our
capital expenditures, together with ongoing operating expenses and obligations
to service our debts, will be a substantial drain on our cash flow and may
decrease our cash balances. We recognize that the capital markets are currently
limited for external financing opportunities. Additional debt or equity
financing, especially in the current credit-constrained climate, may not be
available when needed or, if available, may not be available on satisfactory
terms. Further, as of September 30, 2008, we had a total of $40.8 million of
additional liquidity available to us from our Asia-Pacific and European
financings (of which approximately $12.9 million was subsequently drawn in
October 2008 through the date of this filing). Although these are
committed facilities and we are in full compliance with all covenants related to
them, given the current economic environment, the lenders may elect to cancel
any unused portions of these facilities at any time, which would have a
significant impact on our liquidity. Our inability to obtain needed debt
and/or equity financing or to generate sufficient cash from operations may
require us to prioritize projects or curtail capital expenditures which could
adversely affect our results of operations.
We
are exposed to fluctuations in the market values of our portfolio investments
and in interest rates; impairment of our investments could harm our results of
operations.
We
maintain an investment portfolio of various holdings, types and maturities,
including money market funds and other short-term and long-term
securities. These securities are classified as available-for-sale
and, consequently, are recorded on our consolidated balance sheets at fair value
with unrealized gains or losses as a separate component of accumulated other
comprehensive income or loss. Our portfolio includes fixed income securities,
the values of which are subject to market price volatility. If the
market price declines, we may recognize in our statements of operations the
decline in fair value of our investments below the cost basis when the decline
is judged to be other-than-temporary. For information regarding the
sensitivity of and risks associated with the market value of our portfolio and
interest rates, refer to our discussion of our investment portfolio and interest
rate risks in “Quantitative and Qualitative Disclosures About Market Risk”
included in Part I, Item 3 of this Quarterly Report on Form 10-Q.
The
global financial crisis may have an impact on our business and financial
condition in ways that we currently cannot predict.
The
continued credit crisis and related turmoil in the global financial markets
has had and may continue to have an impact on our business and our financial
condition. For example, we are currently unable to access cash invested
with The Reserve Primary Fund, a prime obligations money market
fund that has suspended redemptions and is being liquidated. We had
invested approximately $50.9 million in this fund, which had a fair value of
$49.4 million as of September 30, 2008. Despite making
redemption requests for the entire amount of our investment, we have not
received any distribution as of October 24, 2008. While we expect to
receive substantially all of our current holdings in this fund within the next
12 months, it is possible we may encounter difficulties in receiving
distributions given the current credit market conditions. If the current market
conditions continue to deteriorate, we may suffer further losses on our
investment portfolio, which could have a material adverse effect on our
liquidity.
The
global financial crisis could impact our liquidity in other ways. Customer
collections are our primary source of cash. While we believe we have
a well diversified customer base and no concentration of credit risk with
any single customer, we have a number of large customers in the financial
services sector. While we believe we have a strong customer base and
have experienced strong collections in the past, if the current market
conditions continue to deteriorate we may experience increased churn in our
customer base, including reductions in their commitments to us, which could also
have a material adverse effect on our liquidity. Deteriorating market and
liquidity conditions may also give rise to issues which may impact our
lenders' ability to hold their debt commitments to us to their full
term. Accordingly, while this would be highly unusual, these lenders of
committed and drawn facilities could attempt to call this debt which would have
a material adverse effect on our liquidity, even though no call provisions exist
without being in default.
The
credit crisis could also have an impact on our foreign exchange
forward contract and interest rate swap hedging contracts if our counterparties
are forced to file for bankruptcy or are otherwise unable to perform their
obligations.
Finally,
our ability to access the capital markets may be severely restricted at a time
when we would like, or need, to do so, which could have an impact on our
flexibility to pursue additional expansion opportunities and maintain our
desired level of revenue growth in the future.
Fluctuations
in foreign currency exchange rates in the markets in which we operate
internationally could harm our results of operations.
We may
experience gains and losses resulting from fluctuations in foreign currency
exchange rates. To date, the majority of our revenues and costs have been
denominated in U.S. dollars; however, the majority of revenues and costs in our
international operations have been denominated in foreign
currencies. Where our prices are denominated in U.S. dollars, our
sales could be adversely affected by declines in foreign currencies relative to
the U.S. dollar, thereby making our products and services more expensive in
local currencies. We are also exposed to risks resulting from
fluctuations in foreign currency exchange rates in connection with our
international expansions. To the extent we are paying contractors in foreign
currencies, our expansions could cost more than anticipated from declines in the
U.S dollar relative to foreign currencies.
In addition, fluctuating foreign currency exchange rates have a direct impact on
how our international results of operations translate into U.S.
dollars.
Although
we have in the past, and may decide in the future, to undertake foreign exchange
hedging transactions to reduce foreign currency transaction exposure, we do not
currently intend to eliminate all foreign currency transaction
exposure. For example, while we hedge certain of our balance sheet
foreign currency assets and liabilities, we do not hedge
revenue. During fiscal 2007 and the first half of 2008, the U.S.
dollar had been generally weaker relative to the currencies of the foreign
countries in which we operate. This overall weakness of the U.S.
dollar had a positive impact on our consolidated results of operations because
the foreign denominations translated into more U.S. dollars. However,
during the past several months, the U.S. dollar has strengthened relative to
certain of the currencies of the foreign countries in which we
operate. This has significantly impacted our consolidated financial
position and results of operations as amounts in foreign currencies are
generally translating into less U.S. dollars. To the extent the
U.S. dollar strengthens further, this will continue to have a significant impact
to our consolidated financial position and results of operations including the
amount of revenue that we report in future periods. For additional
information on foreign currency risk, refer to our discussion of foreign
currency risk in “Quantitative and Qualitative Disclosures About Market Risk”
included in Part I, Item 3 of this Quarterly Report on Form 10-Q.
We
have incurred substantial losses in the past and may incur additional losses in
the future.
Although
we have generated cash from operations for the past several years and expect
this trend to continue, we have incurred substantial losses in the
past. As of September 30, 2008 our accumulated deficit was $543.6
million. Although we have generated net income in our first, second and third
quarters of 2008, we are also currently investing heavily in our future growth
through the build-out of several additional IBX centers and IBX center
expansions. As a result, we will incur higher depreciation and other
operating expenses, as well as interest expense, that will negatively impact our
ability to sustain profitability unless and until these new IBX centers generate
enough revenue to exceed their operating costs and cover our additional
overhead needed to scale our business for this anticipated growth. In addition,
costs associated with the IXEurope acquisition and the integration of the two
companies, as well as the additional interest expense associated with debt
financing we have undertaken to fund our growth initiatives, may also negatively
impact our ability to achieve and sustain profitability. Finally, given the
competitive and evolving nature of the industry in which we operate, we may not
be able to sustain or increase profitability on a quarterly or annual
basis.
We
are continuing to invest in our expansion efforts but may not have sufficient
customer demand in the future to realize expected returns on these
investments.
We are
considering the acquisition or lease of additional properties and the
construction of new IBX centers beyond those expansion projects already
announced. We will be required to commit substantial operational and financial
resources to these IBX centers, generally 12–18 months in advance of securing
customer contracts, and we may not have sufficient customer demand in those
markets to support these centers once they are built. In addition, unanticipated
technological changes could affect customer requirements for data centers and we
may not have built such requirements into our new IBX centers. Any of these
contingencies, if they were to occur, could make it difficult for us to realize
expected or reasonable returns on these investments.
Our
construction of additional new IBX centers could involve significant risks to
our business.
In order
to sustain our growth in certain of our existing and new markets, we must
acquire suitable land with or without structures to build new IBX centers from
the ground up. We call these “greenfield builds.” Greenfield builds are
currently underway, or being contemplated, in several key markets. A greenfield
build involves substantial planning and lead-time, much longer time to
completion than an IBX retrofit of an existing data center, and significantly
higher costs of construction, equipment and materials, which could have a
negative impact on our returns. A greenfield build also requires us to carefully
select and rely on the experience of one or more general contractors and
associated subcontractors during the construction process. Should a general
contractor or significant subcontractor experience financial or other problems
during the construction process, we could experience significant delays,
increased costs to complete the project and other negative impacts to our
expected returns. Site selection is also a critical factor in our expansion
plans, and there may not be suitable properties available in our markets with
the necessary combination of high power capacity and fiber
connectivity.
While we
may prefer to locate new IBX centers adjacent to our existing locations, we may
be limited by the inventory and location of suitable properties as well as by
the need for adequate power and fiber to the site. In the event we decide to
build new IBX centers separate from our existing IBX centers, we may provide
services to interconnect these two centers. Should these services not provide
the necessary reliability to sustain service, this could result in lower
interconnection revenue, lower margins and could have a negative impact on
customer retention over time.
Any
failure of our physical infrastructure or services could lead to significant
costs and disruptions that could reduce our revenue and harm our business
reputation and financial results.
Our
business depends on providing customers with highly reliable service. We must
protect our customers’ IBX infrastructure and their equipment located in our IBX
centers. We continue to acquire IBX centers not built by us. If we discover that
these IBX centers and their infrastructure assets are not in the condition we
expected when they were acquired, we may be required to incur substantial
additional costs to repair or upgrade the centers. The services we provide in
each of our IBX centers are subject to failure resulting from numerous factors,
including:
|
•
|
|
physical
or electronic security breaches;
|
|
•
|
|
fire,
earthquake, flood, tornados and other natural
disasters;
|
|
•
|
|
sabotage
and vandalism; and
|
|
•
|
|
the
failure of business partners who provide our resale
products.
|
Problems
at one or more of our IBX centers, whether or not within our control, could
result in service interruptions or significant equipment damage. We have service
level commitment obligations to certain of our customers, including our
significant customers. As a result, service interruptions or significant
equipment damage in our IBX centers could result in difficulty maintaining
service level commitments to these customers and potential claims related to
such failures. Because our IBX centers are critical to many of our
customers’ businesses, service interruptions or significant equipment damage in
our IBX centers could also result in lost profits or other indirect or
consequential damages to our customers. We cannot guarantee
that a court would enforce any contractual limitations on our liability in the
event that one of our customers brings a lawsuit against us as the result of a
problem at one of our IBX centers.
We may
incur significant liability to our customers in connection with a loss of power
or our failure to meet other service level commitment obligations, or if we are
held liable for a substantial damage award. In addition, any loss of
service, equipment damage or inability to meet our service level commitment
obligations could reduce the confidence of our customers and could consequently
impair our ability to obtain and retain customers, which would adversely affect
both our ability to generate revenues and our operating results.
Furthermore,
we are dependent upon Internet service providers, telecommunications carriers
and other website operators in the U.S., Asia-Pacific region, Europe and
elsewhere, some of which have experienced significant system failures and
electrical outages in the past. Users of our services may in the future
experience difficulties due to system failures unrelated to our systems and
services. If for any reason, these providers fail to provide the required
services, our business, financial condition and results of operations could be
materially adversely impacted.
We
expect our operating results to fluctuate.
We have
experienced fluctuations in our results of operations on a quarterly and annual
basis. The fluctuations in our operating results may cause the market price of
our common stock to decline. We expect to experience significant fluctuations in
our operating results in the foreseeable future due to a variety of factors,
including, but not limited to:
|
•
|
|
financing
or other expenses related to the acquisition, purchase or construction of
additional IBX centers;
|
|
•
|
|
fluctuations
of foreign currencies in the markets in which we
operate;
|
|
•
|
|
mandatory
expensing of employee stock-based
compensation;
|
|
•
|
|
demand
for space, power and services at our IBX
centers;
|
|
•
|
|
changes
in general economic conditions, such as the current economic downturn, and
specific market conditions in the telecommunications and Internet
industries, both of which may have an impact on our customer
base;
|
|
•
|
|
costs
associated with the write-off or exit of unimproved or underutilized
property;
|
|
•
|
|
the
provision of customer discounts and
credits;
|
|
•
|
|
the
mix of current and proposed products and services and the gross margins
associated with our products and
services;
|
|
•
|
|
the
timing required for new and future centers to open or become fully
utilized;
|
|
•
|
|
competition
in the markets in which we operate;
|
|
•
|
|
conditions
related to international
operations;
|
|
•
|
|
increasing
repair and maintenance expenses in connection with aging IBX
centers;
|
|
•
|
|
lack
of available capacity in our existing IBX centers to book new revenue or
delays in opening up new or acquired IBX centers that delay our ability to
book new revenue in markets which have otherwise reached
capacity;
|
|
•
|
|
the
timing and magnitude of other operating expenses, including taxes, capital
expenditures and expenses related to the expansion of sales, marketing,
operations and acquisitions, if any, of complementary businesses and
assets; and
|
|
•
|
|
the
cost and availability of adequate public utilities, including
power.
|
Any of
the foregoing factors, or other factors discussed elsewhere in this report,
could have a material adverse effect on our business, results of operations and
financial condition. Although we have experienced growth in revenues in recent
quarters, this growth rate is not necessarily indicative of future operating
results. We have generated net losses every fiscal year since inception. It is
possible that we may not be able to generate positive net income on a quarterly
or annual basis in the future. In addition, a relatively large portion of our
expenses are fixed in the short-term, particularly with respect to lease and
personnel expenses, depreciation and amortization and interest expenses.
Therefore, our results of operations are particularly sensitive to fluctuations
in revenues. As such, comparisons to prior reporting periods should not be
relied upon as indications of our future performance. In addition, our operating
results in one or more future quarters may fail to meet the expectations of
securities analysts or investors. If this occurs, we could experience an
immediate and significant decline in the trading price of our
stock.
Our
inability to use our tax net operating losses will cause us to pay taxes at an
earlier date and in greater amounts, which may harm our operating
results.
We
believe that our ability to use our pre-2003 tax net operating losses, or NOLs,
in any taxable year is subject to limitations under Section 382 of the
United States Internal Revenue Code of 1986, as amended, or the Code, as a
result of the significant change in the ownership of our stock that resulted
from our combination with i-STT Pte Ltd and Pihana Pacific, Inc. in 2002. We
expect that a significant portion of our NOLs that accrued prior to
December 31, 2002 will expire unused as a result of this
limitation.
We
are exposed to potential risks from legislation requiring companies to evaluate
controls under Section 404 of the Sarbanes-Oxley Act of 2002.
Although
we received an unqualified opinion regarding the effectiveness of our internal
controls over financial reporting as of December 31, 2007, in the course of
our ongoing evaluation of our internal controls over financial reporting we have
identified certain areas which we would like to improve and are in the process
of evaluating and designing enhanced processes and controls to address these
areas identified during our evaluation, none of which we believe constitutes or
will constitute a material change. However, we cannot be certain that our
efforts will be effective or sufficient for us, or our independent registered
public accounting firm, to issue unqualified reports in the future, especially
as our business continues to grow and evolve.
IXEurope,
since it was acquired in September 2007, was scoped out of internal control
testing for 2007; however, it will be in scope for 2008. It may be difficult to
design and implement effective financial controls for combined operations, and
differences in existing controls of any acquired businesses, including IXEurope,
may result in weaknesses that require remediation when the financial controls
and reporting are combined.
Our
ability to manage our operations and growth will require us to improve our
operational, financial and management controls, as well as our internal
reporting systems and controls. We may not be able to implement improvements to
our internal reporting systems and controls in an efficient and timely manner
and may discover deficiencies in existing systems and controls.
If
we cannot effectively manage our international operations, and successfully
implement our international expansion plans, our revenues may not increase and
our business and results of operations would be harmed.
For the
years ended December 31, 2007, 2006 and 2005, we recognized 23%, 14% and
13%, respectively, of our revenues outside the U.S. For the nine months ended
September 30, 2008, we recognized 37% of our revenues outside the
U.S.
To date,
the neutrality of our IBX centers and the variety of networks available to our
customers has often been a competitive advantage for us. In certain of our
acquired IBX centers the limited number of carriers available reduces that
advantage. As a result, we may need to adapt our key revenue-generating services
and pricing to be competitive in that market.
We are
currently undergoing expansions or evaluating expansion opportunities in Europe
and in the Asia-Pacific region. Undertaking and managing expansions in foreign
jurisdictions may present unanticipated challenges to us. In addition, any
expansion requires substantial operational and financial resources, and we may
not have sufficient customer demand to support the expansion once complete.
Unanticipated technological changes could also affect customer requirements for
data centers and we may not have built such requirements into our expanded IBX
centers.
Our
international operations are generally subject to a number of additional risks,
including:
|
•
|
|
the
costs of customizing IBX centers for foreign
countries;
|
|
•
|
|
protectionist
laws and business practices favoring local
competition;
|
|
•
|
|
greater
difficulty or delay in accounts receivable
collection;
|
|
•
|
|
difficulties
in staffing and managing foreign operations, including negotiating with
foreign labor unions or workers’
councils;
|
|
•
|
|
political
and economic instability;
|
|
•
|
|
our
ability to obtain, transfer, or maintain licenses required by governmental
entities with respect to our business;
and
|
|
•
|
|
compliance
with evolving governmental regulation with which we have little
experience.
|
The
increased use of high power density equipment may limit our ability to fully
utilize our IBX centers.
Customers
are increasing their use of high-density electrical power equipment, such as
blade servers, in our IBX centers which has significantly increased the demand
for power on a per cabinet basis. Because most of our centers were built several
years ago, the current demand for electrical power may exceed the designed
electrical capacity in these centers. As electrical power, not space, is
typically the limiting factor in our IBX data centers, our ability to fully
utilize those IBX centers may be limited. The availability of sufficient power
may also pose a risk to the successful operation of our new IBX centers. The
ability to increase the power capacity of an IBX, should we decide to, is
dependent on several factors including, but not limited to, the local utility’s
ability to provide additional power; the length of time required to provide such
power; and/or whether it is feasible to upgrade the electrical infrastructure of
an IBX to deliver additional power to customers. Although we are currently
designing and building to a much higher power specification, there is a risk
that demand will continue to increase and our IBX centers could become obsolete
sooner than expected.
We
have made, and may continue to make, acquisitions which pose integration and
other risks that could harm our business.
We have
recently acquired several new IBX centers, and we may seek to acquire additional
IBX centers, real estate for development of new IBX centers, or complementary
businesses, such as IXEurope and Virtu, products, services or technologies. As a
result of these acquisitions, we may be required to incur additional debt and
expenditures and issue additional shares of our common stock to pay for the
acquired businesses, products, services or technologies, which may dilute our
stockholders’ ownership interest and may delay, or prevent, our profitability.
These acquisitions may also expose us to risks such as:
|
•
|
|
the
potential inability to successfully pursue or realize some or all of the
anticipated revenue opportunities associated with an acquisition, some of
which would be anticipated in any purchase
price;
|
|
•
|
|
the
possibility that we may not be able to successfully integrate acquired
businesses or achieve the level of quality in such businesses to which our
customers are accustomed;
|
|
•
|
|
the
possibility that additional capital expenditures may be
required;
|
|
•
|
|
the
possibility that senior management may be required to spend considerable
time negotiating agreements and integrating acquired
businesses;
|
|
•
|
|
the
possible loss or reduction in value of acquired
businesses;
|
|
•
|
|
the
possibility that our customers may not accept either the existing
equipment infrastructure or the “look-and-feel” of a new or different IBX
center;
|
|
•
|
|
the
possibility that carriers may find it cost-prohibitive or impractical to
bring fiber and networks into a new IBX
center;
|
|
•
|
|
the
possibility of pre-existing undisclosed liabilities regarding the property
or IBX center, including but not limited to environmental or asbestos
liability, of which our insurance may be insufficient or for which we may
be unable to secure insurance coverage;
and
|
|
•
|
|
the
possibility that the concentration of our IBX centers in the Silicon
Valley, Los Angeles and Tokyo, Japan metro areas may increase our exposure
to seismic activity, especially if these centers are located on or near
fault zones.
|
We cannot
assure you that the price for any future acquisitions will be similar to prior
IBX acquisitions. In fact, we expect acquisition costs, including capital
expenditures required to build or render new IBX centers operational, to
increase in the future. If our revenue does not keep pace with these
potential acquisition and expansion costs, we may not be able to maintain our
current or expected margins as we absorb these additional expenses. There
is no assurance we would successfully overcome these risks or any other problems
encountered with these acquisitions.
Our
business could be harmed by prolonged electrical power outages or shortages,
increased costs of energy or general lack of availability of electrical
resources.
Our IBX centers are susceptible to regional costs of power,
electrical power shortages, planned or unplanned power outages and limitations,
especially internationally, on the availability of adequate power
resources.
Power
outages, such as those that occurred in California during 2001, the Northeast in
2003, and from the tornados on the U.S. east coast in 2004, could harm our
customers and our business. We attempt to limit exposure to system downtime by
using backup generators and power supplies; however, we may not be able to limit
our exposure entirely even with these protections in place, as was the case with
the power outages we experienced in our Chicago and Washington, D.C. metro area
IBX centers in 2005 and London metro area IBX centers in 2007.
In
addition, global fluctuations in the price of power can increase the cost of
energy, and although contractual price increase clauses exist in the majority of
our customer agreements, we may not always choose to pass these increased costs
on to our customers.
In each
of our markets, we rely on third parties to provide a sufficient amount of power
for current and future customers. At the same time, power and cooling
requirements are growing on a per unit basis. As a result, some customers
are consuming an increasing amount of power per cabinet. We generally
do not control the amount of electric power our customers draw from their
installed circuits. This means that we could face power limitations in our
centers. This could have a negative impact on the effective available
capacity of a given center and limit our ability to grow our business, which
could have a negative impact on our financial performance, operating
results and cash flows.
We may
also have difficulty obtaining sufficient power capacity for potential expansion
sites in new or existing markets. We may experience significant delays and
substantial increased costs demanded by the utilities to provide the level of
electrical service required by our current IBX center designs.
We
may be forced to take steps, and may be prevented from pursuing certain business
opportunities, to ensure compliance with certain tax-related covenants agreed to
by us.
We agreed
to a covenant in connection with our combination with i-STT Pte Ltd and Pihana
Pacific, Inc. in 2002 (which we refer to as the FIRPTA covenant) that we would
use all commercially reasonable efforts to ensure that at all times from and
after the closing of the combination none of our capital stock issued to STT
Communications would constitute “United States real property interests” within
the meaning of Section 897(c) of the Code. Under Section 897(c) of the
Code, our capital stock issued to STT Communications would generally constitute
“United States real property interests” at such point in time that the fair
market value of the “United States real property interests” owned by us equals
or exceeds 50% of the sum of the aggregate fair market values of (a) our
“United States real property interests,” (b) our interests in real property
located outside the United States and (c) any other assets held by us which
are used or held for use in our trade or business. Currently, the fair market
value of our “United States real property interests” is significantly below the
50% threshold. However, in order to ensure compliance with the FIRPTA covenant,
we may be limited with respect to the business opportunities we may pursue,
particularly if the business opportunities would increase the amounts of “United
States real property interests” owned by us or decrease the amount of other
assets owned by us. In addition, we may take proactive steps to avoid our
capital stock being deemed a “United States real property interest,” including,
but not limited to, (a) a sale-leaseback transaction with respect to some
or all of our real property interests, or (b) the formation of a holding
company organized under the laws of the Republic of Singapore which would issue
shares of its capital stock in exchange for all of our outstanding stock (which
would require the submission of that transaction to our stockholders for their
approval and the consummation of that exchange). We will take these actions only
if such actions are commercially reasonable for our stockholders and us. We have
entered into an agreement with STT Communications and its affiliate pursuant to
which we will no longer be bound by the FIRPTA covenant as of September 30,
2009. If we were to breach this covenant, we may be liable for damages to
STT Communications.
Increases
in property taxes could adversely affect our business, financial condition and
results of operations.
Our IBX
centers are subject to state and local real property taxes in the U.S. and
certain of our European jurisdictions. The state and local real property taxes
on our IBX centers may increase as property tax rates change and as the value of
the properties are assessed or reassessed by taxing authorities. Many state and
local governments are facing budget deficits, which may cause them to increase
assessments or taxes. If property taxes increase, our business, financial
condition and operating results could be adversely
affected.
A
small number of our stockholders has voting control over a substantial portion
of our stock and has influence over matters requiring stockholder
consent.
Several
of our stockholders each hold voting control over greater than 10% of our
outstanding common stock. In addition, these stockholders are not prohibited
from buying shares of our stock in public or private transactions. As a result,
each of these stockholders is able to exercise significant control over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, which could prevent or delay a
third party from acquiring or merging with us.
Our
non-U.S. customers include numerous related parties of STT
Communications.
We
continue to have contractual and other business relationships and may engage in
material transactions with affiliates of STT Communications, a greater than 10%
stockholder. Circumstances may arise in which the interests of STT
Communications’ affiliates may conflict with the interests of our other
stockholders. In addition, entities affiliated with STT Communications make
investments in various companies. They have invested in the past, and may invest
in the future, in entities that compete with us. In the context of negotiating
commercial arrangements with affiliates, conflicts of interest have arisen in
the past and may arise, in this or other contexts, in the future. We cannot
assure you that any conflicts of interest will be resolved in our
favor.
Environmental
regulations may impose upon us new or unexpected costs.
We are
subject to various environmental and health and safety laws and regulations,
including those relating to the generation, storage, handling and disposal of
hazardous substances and wastes. Certain of these laws and regulations also
impose joint and several liability, without regard to fault, for investigation
and cleanup costs on current and former owners and operators of real property
and persons who have disposed of or released hazardous substances into the
environment. Our operations involve the use of hazardous substances and
materials such as petroleum fuel for emergency generators, as well as batteries,
cleaning solutions and other materials. In addition, we lease, own or
operate real property at which hazardous substances and regulated materials have
been used in the past. At some of our locations, hazardous substances or
regulated materials are known to be present in soil or groundwater and there may
be additional unknown hazardous substances or regulated materials present at
sites we own, operate or lease. At some of our locations, there are land use
restrictions in place relating to earlier environmental cleanups that do not
materially limit our use of the sites. To the extent any hazardous substances
or any other substance or material must be cleaned up or removed from our
property, we may be responsible under applicable laws, regulations or leases for
the removal or cleanup of such substances or materials, the cost of which could
be substantial.
In
addition, we are subject to environmental, health and safety laws regulating air
emissions, storm water management and other issues arising in our
business. While these obligations do not normally impose material
costs upon our operations, unexpected events, equipment malfunctions and human
error, among other factors, can lead to violations of environmental laws,
regulations or permits. Noncompliance with existing, or adoption of
more stringent, environmental or health and safety laws and regulations or the
discovery of previously unknown contamination could require us to incur costs or
become the basis of new or increased liabilities that could be
material.
Fossil
fuel combustion creates greenhouse gas emissions that are linked to global
climate change. Regulations to limit greenhouse gas emissions are
coming into force in the European Union in an effort to prevent or reduce
climate change. In the United States, federal proposals are under
consideration that would implement some form of regulation or taxation to
mitigate greenhouse gas emissions. Several states within the United
States have adopted laws intended to limit fossil fuel consumption and/or
encourage renewable energy development for the same purpose. The
proposals include a tax on carbon, a carbon “cap-and-trade” market, and/or other
restrictions on carbon and greenhouse gas emissions. California’s
recently enacted Global Warming Solutions Act of 2006 established a statewide
greenhouse gas emissions cap and will require mandatory emissions
reporting. We do not anticipate to be directly regulated by each of
the potential or developing climate change-related laws, but such legislation is
likely to increase the costs of electricity or fossil fuels, and these cost
increases could materially increase our costs of operation or limit the
availability of electricity or emergency generator fuels. If laws
reducing greenhouse gas emissions are passed, we may be required to modify our
emergency power sources systems, buildings or other infrastructure in order to
comply, the cost of which could be substantial.
To the
extent any of these environmental regulations impose new or unexpected costs,
our business, results of operations or financial conditions may be adversely
affected.
We
depend on a number of third parties to provide Internet connectivity to our IBX
centers; if connectivity is interrupted or terminated, our operating results and
cash flow could be materially adversely affected.
The
presence of diverse telecommunications carriers’ fiber networks in our IBX
centers is critical to our ability to retain and attract new customers. We are
not a telecommunications carrier, and as such we rely on third parties
to provide our customers with carrier services. We believe that the
availability of carrier capacity will directly affect our ability to
achieve our projected results. We rely primarily on revenue opportunities from
the telecommunications carriers’ customers to encourage them to invest the
capital and operating resources required to connect from their centers to our
IBX centers. Carriers will likely evaluate the revenue opportunity of an IBX
center based on the assumption that the environment will be highly competitive.
We cannot assure you that any carrier will elect to offer its services within
our IBX centers or that once a carrier has decided to provide Internet
connectivity to our IBX centers that it will continue to do so for any period of
time. Further, many carriers are experiencing business difficulties or
announcing consolidations. As a result, some carriers may be forced to downsize
or terminate connectivity within our IBX centers, which could have an adverse
effect on our operating results.
Our new
IBX centers require construction and operation of a sophisticated redundant
fiber network. The construction required to connect multiple carrier facilities
to our IBX centers is complex and involves factors outside of our control,
including regulatory processes and the availability of construction resources.
If the establishment of highly diverse Internet connectivity to our IBX centers
does not occur, is materially delayed or is discontinued, or is subject to
failure, our operating results and cash flow will be adversely affected. Any
hardware or fiber failures on this network may result in significant loss of
connectivity to our new IBX expansion centers. This could affect our ability to
attract new customers to these IBX centers or retain existing
customers.
We
may be vulnerable to security breaches which could disrupt our operations and
have a material adverse effect on our financial performance and operating
results.
A party
who is able to compromise the security measures on our networks or the security
of our infrastructure could misappropriate either our proprietary information or
the personal information of our customers, or cause interruptions or
malfunctions in our operations. We may be required to expend significant capital
and resources to protect against such threats or to alleviate problems caused by
breaches in security. As techniques used to breach security change
frequently, and are generally not recognized until launched against a target, we
may not be able to implement security measures in a timely manner or, if and
when implemented, these measures could be circumvented. Any breaches
that may occur could expose us to increased risk of lawsuits, loss of existing
or potential customers, harm to our reputation and increases in our security
costs, which could have a material adverse effect on our financial performance
and operating results.
A
small number of customers account for a significant portion of our revenues, and
the loss of any of these customers could significantly harm our business,
financial condition and results of operations.
While no
single customer accounted for 10% of our revenues for the nine months ended
September 30, 2008 or the year ended December 31, 2007, our top 10
customers accounted for 21%, inclusive of the impact of the IXEurope acquisition
and exclusive of the impact of the Virtu acquisition, and 23%, exclusive of the
impact of the IXEurope acquisition, respectively, of our revenues during these
periods. As of September 30, 2008, excluding customers acquired in the Virtu
acquisition, we had 2,203 customers. We expect that a small percentage of our
customers will continue to account for a significant portion of our revenues for
the foreseeable future. We cannot guarantee that we will retain these customers
or that they will maintain their commitments in our IBX centers at current
levels. If we lose any of these key customers, or if any
of them decide to reduce the level of their commitment to us, our business,
financial condition and results of operations could be adversely
affected.
We
resell products and services of third parties that may require us to pay for
such products and services even if our customers fail to pay us for them, which
may have a negative impact on our operating results.
In order
to provide resale services such as bandwidth, managed services and other network
management services, we contract with third party service providers. These
services require us to enter into fixed term contracts for services with third
party suppliers of products and services. If we experience the loss of a
customer who has purchased a resale product, we will remain obligated to
continue to pay our suppliers for the term of the underlying contracts. The
payment of these obligations without a corresponding payment from customers will
reduce our financial resources and may have a material adverse effect on our
operating and financial results and cash flows.
We
may not be able to compete successfully against current and future
competitors.
Our IBX
centers and other products and services must be able to differentiate themselves
from those of other providers of space and services for telecommunications
companies, webhosting companies and other colocation providers. In addition to
competing with neutral colocation providers, we must compete with traditional
colocation providers, including local phone companies, long distance phone
companies, Internet service providers and web-hosting facilities. Similarly,
with respect to our other products and services, including managed services,
bandwidth services and security services, we must compete with more established
providers of similar services. Most of these companies have longer operating
histories and significantly greater financial, technical, marketing and other
resources than us.
Because
of their greater financial resources, some of our competitors have the ability
to adopt aggressive pricing policies, especially if they have been able to
restructure their debt or other obligations. As a result, in the future, we may
suffer from pricing pressure that would adversely affect our ability to generate
revenues and adversely affect our operating results. In addition, these
competitors could offer colocation on neutral terms, and may start doing so in
the same metropolitan areas in which we have IBX centers. Some of these
competitors may also provide our target customers with additional benefits,
including bundled communication services, and may do so in a manner that is more
attractive to our potential customers than obtaining space in our IBX centers.
If these competitors were able to adopt aggressive pricing policies together
with offering colocation space, our ability to generate revenues would be
materially adversely affected.
We may
also face competition from persons seeking to replicate our IBX concept by
building new centers or converting existing centers that some of our competitors
are in the process of divesting. We may continue to see increased competition
for data center space and customers from large REITS who also operate in our
market. We may experience competition from our landlords, some of which are
REITS, in this regard. Rather than leasing available space in our buildings to
large single tenants, they may decide to convert the space instead to smaller
square foot units designed for multi-tenant colocation use. Landlords/REITS may
enjoy a cost effective advantage in providing services similar to those provided
by our IBXs, and in addition to the risk of losing customers to these parties
this could also reduce the amount of space available to us for expansion in the
future. Competitors may operate more successfully or form alliances to acquire
significant market share. Furthermore, enterprises that have already invested
substantial resources in outsourcing arrangements may be reluctant or slow to
replace, limit or compete with their existing systems by becoming a customer.
Customers may also decide it is cost effective for them to build out their own
data centers which could have a negative impact on our results of operations. In
addition, other companies may be able to attract the same potential customers
that we are targeting. Once customers are located in competitors’ facilities, it
may be extremely difficult to convince them to relocate to our IBX
centers.
Because
we depend on the retention of key employees, failure to maintain competitive
compensation packages, including equity incentives, may be disruptive to our
business.
Our
success in retaining key employees and discouraging them from moving to a
competitor is an important factor in our ability to remain competitive. As is
common in our industry, our employees are typically compensated through grants
of equity awards in addition to their regular salaries. In addition to granting
equity awards to selected new hires, we periodically grant new equity awards to
certain employees as an
incentive to remain with us. To the extent we are unable to offer competitive
compensation packages to our employees and adequately maintain equity incentives
due to equity expensing or otherwise, and should employees decide to leave us,
this may be disruptive to our business and may adversely affect our business,
financial condition and results of operations.
Because
we depend on the development and growth of a balanced customer base, failure to
attract and retain this base of customers could harm our business and operating
results.
Our
ability to maximize revenues depends on our ability to develop and grow a
balanced customer base, consisting of a variety of companies, including network
service providers, site and performance management companies, and enterprise and
content companies. The more balanced the customer base within each IBX center,
the better we will be able to generate significant interconnection revenues,
which in turn increases our overall revenues. Our ability to attract customers
to our IBX centers will depend on a variety of factors, including the presence
of multiple carriers, the mix of products and services offered by us, the
overall mix of customers, the IBX center’s operating reliability and security
and our ability to effectively market our services. In addition, some of our
customers are, and are likely to continue to be, Internet companies that face
many competitive pressures and that may not ultimately be successful. If these
customers do not succeed, they will not continue to use the IBX centers. This
may be disruptive to our business and may adversely affect our business,
financial condition and results of operations.
Our
products and services have a long sales cycle that may materially adversely
affect our business, financial condition and results of operations.
A
customer’s decision to license cabinet space in one of our IBX centers and to
purchase additional services typically involves a significant commitment of
resources. In addition, some customers will be reluctant to commit to locating
in our IBX centers until they are confident that the IBX center has adequate
carrier connections. As a result, we have a long sales cycle. Furthermore, we
may expend significant time and resources in pursuing a particular sale or
customer that does not result in revenue. Delays due to the length of our sales
cycle may materially adversely affect our business, financial condition and
results of operations.
The
failure to obtain favorable terms when we renew our IBX center leases could harm
our business and results of operations.
While we
own certain of our IBX centers, others are leased under long-term arrangements
with lease terms expiring at various dates ranging from 2010 to 2027. These
leased centers have all been subject to significant development by us in order
to convert them from, in most cases, vacant buildings or warehouses into IBX
centers. All of our IBX center leases have renewal options available to us.
However, these renewal options provide for rent set at then-prevailing market
rates. To the extent that then-prevailing market rates are higher than present
rates, these higher costs may adversely impact our business and results of
operations.
If
the market price of our stock continues to be highly volatile, the value of an
investment in our common stock may decline.
Since
January 1, 2007, the closing sale price of our common stock on the NASDAQ Global
Select Market ranged from $53.00 to $116.66 per share. The market price of the
shares of our common stock has been and may continue to be highly volatile.
General economic and market conditions, and market conditions for
telecommunications stocks in general, may affect the market price of our common
stock.
In
addition, actual sales, or the market’s perception with respect to possible
sales, of a substantial number of shares of our common stock within a narrow
period of time could cause our stock price to fall. On November 9, 2005, 4.3
million shares of our common stock were sold by i-STT Investments (Bermuda) Ltd.
to Credit Suisse First Boston Capital LLC (“CSFB Capital”) pursuant to a Forward
Purchase Agreement (the “Purchase Agreement”) under which i-STT Bermuda will
(subject to its right to settle its obligations under the Purchase Agreement in
cash) be obligated to deliver up to 4.3 million shares of Equinix common stock
on November 15, 2008 in settlement of its obligations under the Purchase
Agreement. CSFB will, in turn, use such shares of our common stock,
or cash, as the case may be, to settle its obligations to the purchasers of its
5.50% Shared Appreciation Income Linked Securities (“SAILS”) due November 15,
2008. The release of 4.3 million shares of our common stock to the
purchasers of the SAILS, and their subsequent resale by such purchasers on the
market, could cause our stock price to fall.
Announcements
by others or us may also have a significant impact on the market price of our
common stock. These announcements may relate to:
|
•
|
|
new
issuances of equity, debt or convertible debt by
us;
|
|
•
|
|
developments
in our relationships with corporate
customers;
|
|
•
|
|
announcements
by our customers or competitors;
|
|
•
|
|
changes
in regulatory policy or
interpretation;
|
|
•
|
|
governmental
investigations;
|
|
•
|
|
changes
in the ratings of our stock by securities
analysts;
|
|
•
|
|
our
purchase or development of real estate and/or additional IBX
centers;
|
|
•
|
|
acquisitions
by us of complementary businesses;
or
|
|
•
|
|
the
operational performance of our IBX
centers.
|
The stock
market has from time to time experienced extreme price and volume fluctuations,
which have particularly affected the market prices for emerging
telecommunications companies, and which have often been unrelated to their
operating performance. These broad market fluctuations may adversely affect the
market price of our common stock.
We
are subject to securities class action and other litigation, which may harm our
business and results of operations.
During
the quarter ended September 30, 2001, putative shareholder class action
lawsuits were filed against us, a number of our officers and directors, and
several investment banks that were underwriters of our initial public offering.
Similar complaints were filed against more than 300 other issuers, their
officers and directors, and investment banks. The suits allege that the
underwriter defendants agreed to allocate stock in our 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. Plaintiffs allege that the prospectus for our initial
public offering was false and misleading and in violation of the securities laws
because it did not disclose these arrangements. A previously agreed upon
settlement with the plaintiffs has been terminated. On August 14, 2007, the
plaintiffs filed amended complaints in six cases selected as test, or “focus,”
cases and moved for class certification on September 27, 2007. On October
10, 2008, at the request of Plaintiffs, Plaintiffs’ motion for class
certification was withdrawn, without prejudice. If Plaintiffs re-file
their motion and it is successful, it is likely that they will amend their
complaint against Equinix.
On June 29, 2006 and September 18, 2006, shareholder derivative actions were
filed in the Superior Court of the State of California, County of San Mateo,
naming Equinix as a nominal defendant and several of Equinix's current and
former officers and directors as individual defendants. These actions were
consolidated, and the consolidated complaint was filed in January 2007. In March
2007, the state court stayed this action in deference to a federal shareholder
derivative action filed in the United States District Court for the Northern
District of California in October 2006. The federal action named Equinix as a
nominal defendant and several current and former officers and directors as
individual defendants. This complaint alleged that the individual defendants
breached their fiduciary duties and violated California and federal securities
laws as a result of purported backdating of stock options, insider trading and
the dissemination of false statements. On April 12, 2007, the federal action was
voluntarily dismissed without prejudice pursuant to a joint stipulation entered
as an order by the court. On May 3, 2007, the state court lifted the stay on
proceedings in the state court action. On March 3, 2008, the state court
plaintiff filed a second amended consolidated complaint after the court granted
two motions to dismiss prior complaints with leave to amend. The second amended
consolidated complaint alleged that the individual defendants breached their
fiduciary duties and violated California securities law as a result of purported
backdating of stock option grants, insider trading and the dissemination of
false financial statements. The second amended consolidated complaint sought to
recover, on behalf of Equinix, unspecified monetary damages, corporate
governance changes, equitable and injunctive relief, restitution and fees and
costs. On July 8, 2008, the state court granted our motion to dismiss the second
amended consolidated complaint without leave to amend and entered a final
judgment dismissing the action and all claims asserted therein in their entirety
without leave to amend. The time for the state court plaintiff to appeal the
judgment expired on September 9, 2008.
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 million value of Equinix held
by Defendants” (a group that includes more than thirty individuals and
entities). An amended complaint, which adds new plaintiffs (other
alleged holders of Pihana common stock), but is otherwise substantially similar
to the original pleading, was filed on September 29, 2008. On October
13, 2008, a complaint was filed 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. We believe
that plaintiffs’ claims and alleged damages are without merit and we intend to
defend the litigation vigorously.
Due to the inherent uncertainties of litigation, we cannot accurately predict
the ultimate outcome of the matter. We are unable at this time to determine
whether the outcome of the litigation would have a material impact on our
results of operations, financial condition or cash flows.
We
continue to participate in the defense of litigation, as discussed above, which
may increase our expenses and divert management’s attention and resources. In
addition, we may, in the future, be subject to other litigation. For example,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. Any
adverse outcome in litigation could seriously harm our business and results of
operations.
Risks
Related to Our Industry
If
the use of the Internet does not continue to grow, our revenues may not
grow.
Acceptance
and use of the Internet may not continue to develop at historical rates. Demand
for Internet services and products are subject to a high level of uncertainty
and are subject to significant pricing pressure. As a result, we cannot be
certain that a viable market for our IBX centers will be sustained. If the
market for our IBX centers grows more slowly than we currently anticipate, our
revenues may not grow and our operating results could suffer.
Government
regulation may adversely affect the use of the Internet and our
business.
Various laws and governmental regulations governing Internet related services,
related communications services and information technologies and electronic
commerce remain largely unsettled, even in areas where there has been some
legislative action. This is true both in the U.S. and the various foreign
countries in which we operate. It may take years to determine whether and how
existing laws, such as those governing intellectual property, privacy, libel,
telecommunications services and taxation, apply to the Internet and to related
services such as ours. We have limited experience with such international
regulatory issues and substantial resources may be required to comply with
regulations or bring any non-compliant business practices into compliance with
such regulations. In addition, the development of the market for online commerce
and the displacement of traditional telephony service by the Internet and
related communications services may prompt an increased call for more stringent
consumer protection laws or other regulation both in the U.S. and abroad that
may impose additional burdens on companies conducting business online and their
service providers. The compliance with, adoption or modification of, laws or
regulations relating to the Internet, or interpretations of existing laws, could
have a material adverse effect on our business, financial condition and results
of operation.
Industry
consolidation may have a negative impact on our business model.
The
telecommunications industry is currently undergoing consolidation. As customers
combine businesses, they may require less colocation space, and there may be
fewer networks available to choose from. Given the competitive and evolving
nature of this industry, further consolidation of our customers and/or our
competitors may present a risk to our network neutral business model and have a
negative impact on our revenues. In addition, increased utilization levels
industry-wide could lead to a reduced amount of attractive expansion
opportunities available to us.
Terrorist
activity throughout the world and military action to counter terrorism could
adversely impact our business.
The
September 11, 2001 terrorist attacks in the U.S., the ensuing declaration
of war on terrorism and the continued threat of terrorist activity and other
acts of war or hostility appear to be having an adverse effect on business,
financial and general economic conditions internationally. These effects may, in
turn, increase our costs due to the need to provide enhanced security, which
would have a material adverse effect on our business and results of operations.
These circumstances may also adversely affect our ability to attract and retain
customers, our ability to raise capital and the operation and maintenance of our
IBX centers. We may not have adequate property and liability insurance to cover
catastrophic events or attacks.
None.
None.
None.
None.
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
|
Filing
Date/
Period
End Date
|
|
Exhibit
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
Combination
Agreement, dated as of October 2, 2002, by and among Equinix, Inc., Eagle
Panther Acquisition Corp., Eagle Jaguar Acquisition Corp., i-STT Pte Ltd,
STT Communications Ltd., Pihana Pacific, Inc. and Jane Dietze, as
representative of the stockholders of Pihana Pacific, Inc.
|
|
Def.
Proxy 14A
|
|
12/12/02
|
|
|
|
|
3.1 |
|
Amended
and Restated Certificate of Incorporation of the Registrant, as amended to
date.
|
|
10-K/A |
|
12/31/02
|
|
3.1 |
|
|
3.2 |
|
Certificate
of Designation of Series A and Series A-1 Convertible Preferred
Stock.
|
|
10-K/A |
|
12/31/02
|
|
3.3 |
|
|
3.3 |
|
Bylaws
of the Registrant.
|
|
10-K |
|
12/31/02
|
|
3.2 |
|
|
3.4 |
|
Certificate
of Amendment of the Bylaws of the Registrant.
|
|
10-Q |
|
6/30/03
|
|
3.4 |
|
|
4.1 |
|
Reference
is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
|
|
|
|
|
|
|
|
|
4.2 |
|
Registration
Rights Agreement (see Exhibit 10.7).
|
|
|
|
|
|
|
|
|
4.3 |
|
Indenture
dated February 11, 2004 by and between Equinix, Inc. and U.S. Bank
National Association, as trustee.
|
|
10-Q |
|
3/31/04
|
|
10.99 |
|
|
4.4 |
|
Indenture
dated March 30, 2007 by and between Equinix, Inc. and U.S. Bank National
Association, as trustee.
|
|
8-K |
|
3/30/07
|
|
4.4 |
|
|
4.5 |
|
Form
of 2.50% Convertible Subordinated Note Due 2012 (see Exhibit
4.4).
|
|
|
|
|
|
|
|
|
4.6 |
|
Indenture
dated September 26, 2007 by and between Equinix, Inc. and U.S. Bank
National Association, as trustee.
|
|
8-K |
|
9/26/07
|
|
4.4 |
|
|
4.7 |
|
Form
of 3.00% Convertible Subordinated Note Due 2014 (see Exhibit
4.6).
|
|
|
|
|
|
|
|
|
10.1 |
|
Form
of Indemnification Agreement between the Registrant and each of its
officers and directors.
|
|
|
|
12/29/99
|
|
10.5 |
|
|
10.2+ |
|
Lease
Agreement with Carlyle-Core Chicago LLC, dated as of September 1,
1999.
|
|
S-4/A
(File No. 333-93749)
|
|
5/9/00
|
|
10.9 |
|
|
|
|
|
|
Incorporated by
Reference
|
|
|
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
|
Filing
Date/
Period
End Date
|
|
Exhibit
|
|
Filed
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
10.3 |
|
2000
Equity Incentive Plan, as amended.
|
|
10-K |
|
12/31/07
|
|
10.3 |
|
|
10.4 |
|
2000
Director Option Plan, as amended.
|
|
10-K |
|
12/31/07
|
|
10.4 |
|
|
10.5 |
|
2001
Supplemental Stock Plan, as amended.
|
|
10-K |
|
12/31/07
|
|
10.5 |
|
|
10.6 |
|
Form
of Severance Agreement entered into by the Company and each of the
Company’s executive officers.
|
|
10-Q |
|
9/30/02
|
|
10.58 |
|
|
10.7 |
|
Registration
Rights Agreement by and among Equinix and the Initial Purchasers, dated as
of December 31, 2002.
|
|
10-K |
|
12/31/02
|
|
10.75 |
|
|
10.8 |
|
Securities
Purchase and Admission Agreement, dated April 29, 2003, among Equinix,
certain of Equinix’s subsidiaries, i-STT Investments Pte Ltd, STT
Communications Ltd and affiliates of Crosslink Capital.
|
|
8-K |
|
5/1/03
|
|
10.1 |
|
|
10.9+ |
|
Lease
Agreement dated as of April 21, 2004 between Eden Ventures LLC and
Equinix, Inc.
|
|
10-Q |
|
6/30/04
|
|
10.103 |
|
|
10.10 |
|
Equinix,
Inc. 2004 International Employee Stock Purchase Plan effective as of June
3, 2004.
|
|
10-Q |
|
6/30/04
|
|
10.105 |
|
|
10.11 |
|
Equinix,
Inc. Employee Stock Purchase Plan effective as of June 3,
2004.
|
|
10-Q |
|
6/30/04
|
|
10.106 |
|
|
10.12 |
|
Form
of Restricted Stock Agreement for Equinix’s executive officers under the
Company’s 2000 Equity Incentive Plan.
|
|
10-K |
|
12/31/05
|
|
10.115 |
|
|
10.13 |
|
Lease
Agreement dated June 9, 2005 between Equinix Operating Co., Inc. and
Mission West Properties L.P. and associated Guaranty of Equinix,
Inc.
|
|
10-Q |
|
6/30/05
|
|
10.117 |
|
|
10.14 |
|
Letter
Agreement dated October 6, 2005 among Equinix, Inc., STT Communications
Ltd. and I-STT Investments Pte. Ltd.
|
|
8-K |
|
10/6/05
|
|
99.1 |
|
|
10.15 |
|
Lease
Agreement dated December 21, 2005 between Equinix Operating Co., Inc. and
iStar El Segundo, LLC and associated Guaranty of Equinix,
Inc.
|
|
10-K |
|
12/31/05
|
|
10.126 |
|
|
10.16+ |
|
Loan
and Security Agreement and Note between Equinix RP II, LLC and SFT I, Inc.
dated December 21, 2005 and associated Guaranty of Equinix,
Inc.
|
|
10-K |
|
12/31/05
|
|
10.127 |
|
|
|
|
|
|
Incorporated
by Reference |
|
|
Exhibit Number |
|
Exhibit Description |
|
Form |
|
Filing
Date/ Period End
Date
|
|
Exhibit |
|
Filed Herewith |
|
|
|
|
|
|
|
|
|
|
|
10.17 |
|
Lease
Agreement dated as of December 21, 2005 between Equinix RP II, LLC and
Equinix, Inc.
|
|
10-K |
|
12/31/05
|
|
10.128 |
|
|
10.18 |
|
Lease
Agreement dated September 14, 2006 between 777 Sinatra Drive Corp. and
Equinix, Inc.
|
|
10-Q |
|
9/30/06
|
|
10.135 |
|
|
10.19 |
|
First
Omnibus Modification Agreement dated December 27, 2006 by and among SFT I,
Inc. (“SFT I”), Equinix RP II, LLC (“RP II”) and Equinix, Inc.
(“Equinix”), Amended and Restated Promissory Note dated December 27, 2006
by RP II in favor of SFT I and Reaffirmation of Guaranty dated December
27, 2006 by RP II and Equinix in favor of SFT I.
|
|
10-K |
|
12/31/06
|
|
10.37 |
|
|
10.20 |
|
First
Amendment to Deed of Lease dated December 27, 2006 by and between Equinix
RP II, LLC and Equinix Operating Co., Inc.
|
|
10-K |
|
12/31/06
|
|
10.38 |
|
|
10.21 |
|
Development
Loan and Security Agreement dated February 2, 2007 by and between CHI 3,
LLC and SFT I, Inc. and related Promissory Notes One through
Four.
|
|
10-Q |
|
3/31/07
|
|
10.37 |
|
|
10.22 |
|
Guaranty
dated February 2, 2007 by and between Equinix, Inc. and SFT I,
Inc.
|
|
10-Q |
|
3/31/07
|
|
10.38 |
|
|
10.23 |
|
Completion
and Payment Guaranty dated February 2, 2007 by and between Equinix, Inc.
and SFT I, Inc.
|
|
10-Q |
|
3/31/07
|
|
10.39 |
|
|
10.24 |
|
Master
Lease dated February 2, 2007 by and between CHI 3, LLC and Equinix
Operating Co., Inc. and associated Guaranty of Lease by Equinix,
Inc.
|
|
10-Q |
|
3/31/07
|
|
10.40 |
|
|
10.25 |
|
Severance
Agreement dated March 16, 2007 by and between Stephen M. Smith and
Equinix, Inc.
|
|
10-Q |
|
3/31/07
|
|
10.44 |
|
|
10.26 |
|
Form
of Restricted Stock Agreements for Stephen M. Smith under the Equinix,
Inc. 2000 Equity Incentive Plan.
|
|
10-Q |
|
3/31/07
|
|
10.45 |
|
|
10.27 |
|
Facility
Agreement dated August 31, 2007 by and among Equinix Singapore Pte. Ltd.,
Equinix Japan K.K., the Additional Borrowers (as defined therein), the
Lenders (as defined therein), and ABN AMRO BANK N.V., and related
Guarantee dated August 31, 2007 by Equinix, Inc.
|
|
10-Q |
|
9/30/07
|
|
10.47 |
|
|
|
|
|
|
Incorporated
by Reference |
|
|
Exhibit
Number
|
|
Exhibit
Description |
|
Form
|
|
Filing
Date/ Period End
Date
|
|
Exhibit
|
|
Filed Herewith |
|
|
|
|
|
|
|
|
|
|
|
10.28 |
|
£82,000,000
Senior Facilities Agreement dated June 29, 2007 by and among IXEurope plc,
CIT Bank Limited, as arranger, CIT Capital Finance (UK) Limited, as
administrative agent and security trustee and the Lenders (as defined
therein).
|
|
10-Q |
|
9/30/07
|
|
10.49 |
|
|
10.29 |
|
Amendment
and Accession Agreement, dated as of January 31, 2008, by and among
Equinix Singapore Pte. Ltd., Equinix Japan K.K. and Equinix Australia Pty.
Limited, as Borrowers, ABN AMRO Bank N.V., Singapore Branch, ABN AMRO Bank
N.V., Japan Branch and ABN AMRO Australia Pty Limited, as Lenders and ABN
AMRO Bank N.V., as Facility Agent, Arranger and Collateral Agent and
related Amendment No. 1 to Guarantee by Equinix, Inc.
|
|
10-K |
|
12/31/07
|
|
10.32 |
|
|
10.30 |
|
2008
Equinix Annual Incentive Plan.
|
|
10-K |
|
12/31/07
|
|
10.33 |
|
|
10.31 |
|
Form
of Restricted Stock Unit Agreement for Equinix’s executive officers under
the Company’s 2000 Equity Incentive Plan.
|
|
10-K |
|
12/31/07
|
|
10.34 |
|
|
10.32 |
|
Equinix,
Inc. Sub-Plan to the 2004 International Employee Stock Purchase Plan for
Participants Located in the European Economic Area.
|
|
10-Q |
|
3/31/08
|
|
10.32 |
|
|
10.33 |
|
Letter
Agreement, dated April 22, 2008, by and between Eric Schwartz and Equinix,
Inc.
|
|
10-Q |
|
6/30/08
|
|
10.34 |
|
|
10.34 |
|
Severance
Agreement, dated May 22, 2006, by and between Eric Schwartz and Equinix,
Inc.
|
|
10-Q |
|
6/30/08
|
|
10.35 |
|
|
10.35 |
|
Letter
Agreement, dated April 25, 2008, by and between Peter Ferris and Equinix,
Inc.
|
|
10-Q |
|
6/30/08
|
|
10.36 |
|
|
10.36 |
|
Letter
Amendment, dated May 6, 2008, to £82,000,000 Senior Facilities Agreement
dated June 29, 2007, by and among Equinix Group Limited, CIT Bank Limited,
as arranger, CIT Capital Finance (UK) Limited, as administrative agent and
security trustee and the Lenders (as defined therein).
|
|
10-Q |
|
6/30/08
|
|
10.37 |
|
|
10.37 |
|
Second
Amendment and Accession Agreement, dated as of June 6, 2008, by and among
Equinix Singapore Pte. Ltd., Equinix Japan K.K., Equinix Australia Pty.
Limited and Equinix Hong Kong Limited, as Borrowers, ABN AMRO Bank N.V.
and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., Hong Kong
Branch, as Lenders and ABN AMRO Bank N.V., as Facility Agent, Arranger and
Collateral Agent and related Amendment No. 2 to Guarantee by Equinix,
Inc.
|
|
10-Q |
|
6/30/08
|
|
10.38 |
|
|
10.38 |
|
Letter
Agreement, dated July 22, 2008, by and between Marjorie Backaus and
Equinix, Inc.
|
|
|
|
|
|
|
|
X
|
10.39 |
|
Lease
Agreement, dated September 30, 2008, by and between Equinix Paris SAS and
Digital Realty (Paris 2) SCI, and related guarantee by Equinix,
Inc.
|
|
|
|
|
|
|
|
X
|
21.1 |
|
Subsidiaries
of Equinix, Inc.
|
|
|
|
|
|
|
|
X
|
31.1 |
|
Chief
Executive Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
X
|
31.2 |
|
Chief
Financial Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
X
|
32.1 |
|
Chief
Executive Officer Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
X
|
32.2 |
|
Chief
Financial Officer Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
X
|
+
Confidential treatment has been requested for certain portions which are omitted
in the copy of the exhibit electronically filed with the Securities and Exchange
Commission. The omitted information has been filed separately with the
Securities and Exchange Commission pursuant to Equinix’s application for
confidential treatment.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
EQUINIX,
INC. |
|
|
|
Date: October
24, 2008 |
|
|
|
By: |
/s/
Keith
D.
Taylor
|
|
|
Chief
Financial Officer |
|
|
(Principal
Financial and Accounting
Officer) |
Exhibit
Number
|
|
Description
of Document
|
|
|
|
10.38 |
|
Letter
Agreement, dated July 22, 2008, by and between Marjorie Backaus and
Equinix, Inc.
|
10.39 |
|
Lease
Agreement, dated September 30, 2008, by and between Equinix Paris SAS and
Digital Realty (Paris 2) SCI, and related guarantee by Equinix,
Inc.
|
21.1 |
|
Subsidiaries
of Equinix, Inc.
|
31.1 |
|
Chief
Executive Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2 |
|
Chief
Financial Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1 |
|
Chief
Executive Officer Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2 |
|
Chief
Financial Officer Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
72