10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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 June 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-31293

 

 

EQUINIX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   77-0487526
(State of incorporation)   (I.R.S. Employer Identification No.)

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  ¨ and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s Common Stock as of June 30, 2010 was 45,589,839.

 

 

 


Table of Contents

EQUINIX, INC.

INDEX

 

     Page No.
Part I - Financial Information
Item 1.    Condensed Consolidated Financial Statements (unaudited):   
   Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009    3
   Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009    4
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009    5
   Notes to Condensed Consolidated Financial Statements    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    32
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    53
Item 4.    Controls and Procedures    54
Part II - Other Information
Item 1.    Legal Proceedings    54
Item 1A.    Risk Factors    56
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    73
Item 3.    Defaults Upon Senior Securities    73
Item 4.    Removed and Reserved    73
Item 5.    Other Information    73
Item 6.    Exhibits    74

Signatures

   80

Index to Exhibits

   81

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

EQUINIX, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

     June 30,
2010
    December 31,
2009
 
     (unaudited)  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 511,342      $ 346,056   

Short-term investments

     206,111        248,508   

Accounts receivable, net

     106,255        64,767   

Other current assets

     64,527        68,556   
                

Total current assets

     888,235        727,887   

Long-term investments

     4,497        9,803   

Property, plant and equipment, net

     2,400,809        1,808,115   

Goodwill

     760,087        381,050   

Intangible assets, net

     157,340        51,015   

Other assets

     71,240        60,280   
                

Total assets

   $ 4,282,208      $ 3,038,150   
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 138,725      $ 99,053   

Accrued property, plant and equipment

     85,350        109,876   

Current portion of capital lease and other financing obligations

     7,995        6,452   

Current portion of mortgage and loans payable

     21,968        58,912   

Other current liabilities

     45,531        41,166   
                

Total current liabilities

     299,569        315,459   

Capital lease and other financing obligations, less current portion

     207,305        154,577   

Mortgage and loans payable, less current portion

     167,351        371,322   

Senior notes

     750,000        —     

Convertible debt

     904,769        893,706   

Other liabilities

     203,017        120,603   
                

Total liabilities

     2,532,011        1,855,667   
                

Commitments and contingencies (Note 9)

    

Stockholders’ equity:

    

Common stock

     46        39   

Additional paid-in capital

     2,288,816        1,665,662   

Accumulated other comprehensive loss

     (164,610     (97,238

Accumulated deficit

     (374,055     (385,980
                

Total stockholders’ equity

     1,750,197        1,182,483   
                

Total liabilities and stockholders’ equity

   $ 4,282,208      $ 3,038,150   
                

See accompanying notes to condensed consolidated financial statements

 

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EQUINIX, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010     2009     2010     2009  
     (unaudited)  

Revenues

   $ 296,094      $ 213,168      $ 544,743      $ 412,399   
                                

Costs and operating expenses:

        

Cost of revenues

     162,582        118,534        295,632        230,339   

Sales and marketing

     28,913        16,369        48,381        30,772   

General and administrative

     54,166        37,456        97,321        72,606   

Restructuring charges

     4,357        (220     4,357        (6,053

Acquisition costs

     5,849        —          10,843        —     
                                

Total costs and operating expenses

     255,867        172,139        456,534        327,664   
                                

Income from operations

     40,227        41,029        88,209        84,735   

Interest income

     491        680        997        1,596   

Interest expense

     (37,615     (15,912     (63,290     (29,363

Other-than-temporary impairment recovery (loss) on investments

     —          —          3,420        (2,687

Loss on debt extinguishment and interest rate swaps, net

     (1,454     —          (4,831     —     

Other income (expense)

     (1,481     2,610        (1,461     1,191   
                                

Income before income taxes

     168        28,407        23,044        55,472   

Income tax expense

     (2,442     (10,967     (11,119     (22,575
                                

Net income (loss)

   $ (2,274   $ 17,440      $ 11,925      $ 32,897   
                                

Earnings (loss) per share:

        

Basic earnings (loss) per share

   $ (0.05   $ 0.46      $ 0.29      $ 0.87   
                                

Weighted-average shares

     43,507        38,152        41,546        38,007   
                                

Diluted earnings (loss) per share

   $ (0.05   $ 0.44      $ 0.28      $ 0.84   
                                

Weighted-average shares

     43,507        39,318        42,721        39,008   
                                

See accompanying notes to condensed consolidated financial statements

 

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EQUINIX, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Six months ended
June 30,
 
     2010     2009  
     (unaudited)  

Cash flows from operating activities:

    

Net income

   $ 11,925      $ 32,897   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     106,418        83,921   

Stock-based compensation

     33,070        24,997   

Restructuring charges

     4,357        (6,053

Amortization of intangible assets

     5,021        2,646   

Amortization of debt issuance costs and debt discounts

     12,243        5,714   

Accretion of asset retirement obligation and accrued restructuring charges

     1,379        536   

Loss on debt extinguishment and interest rate swaps, net

     4,831        —     

Other items

     1,398        3,825   

Changes in operating assets and liabilities:

    

Accounts receivable

     (31,757     (1,026

Other assets

     7,957        3,494   

Accounts payable and accrued expenses

     19,060        12,965   

Other liabilities

     (19,184     1,527   
                

Net cash provided by operating activities

     156,718        165,443   
                

Cash flows from investing activities:

    

Purchases of investments

     (284,926     (149,763

Sales of investments

     2,203        20,754   

Maturities of investments

     330,021        16,472   

Purchase of Switch and Data, net of cash acquired

     (113,289     —     

Purchases of property, plant and equipment

     (292,105     (179,607

Purchase of restricted cash

     (1,160     (893

Release of restricted cash

     244        11,013   

Other investing activities

     —          79   
                

Net cash used in investing activities

     (359,012     (281,945
                

Cash flows from financing activities:

    

Proceeds from employee equity awards

     22,153        8,954   

Proceeds from senior notes

     750,000        —     

Proceeds from convertible debt

     —          373,750   

Proceeds from loans payable

     98,958        744   

Repayment of capital lease and other financing obligations

     (12,401     (2,338

Repayment of mortgage and loans payable

     (458,028     (23,522

Capped call costs

     —          (49,664

Debt issuance costs

     (23,119     (9,956

Other financing obligations

     —          (252
                

Net cash provided by financing activities

     377,563        297,716   
                

Effect of foreign currency exchange rates on cash and cash equivalents

     (9,983     3,796   
                

Net increase in cash and cash equivalents

     165,286        185,010   

Cash and cash equivalents at beginning of period

     346,056        220,207   
                

Cash and cash equivalents at end of period

   $ 511,342      $ 405,217   
                

Supplemental cash flow information:

    

Cash paid for taxes

   $ 1,496      $ 1,220   
                

Cash paid for interest

   $ 33,067      $ 27,034   
                

See accompanying notes to condensed consolidated financial statements

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Equinix, Inc. (“Equinix” or the “Company”) and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state the financial position and the results of operations for the interim periods presented. The condensed consolidated balance sheet data at December 31, 2009 has been derived from audited consolidated financial statements at that date. The consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles in the United States of America. For further information, refer to the Consolidated Financial Statements and Notes thereto included in Equinix’s Form 10-K as filed with the SEC on February 22, 2010. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.

On April 30, 2010, the Company completed its acquisition of Switch & Data Facilities Company, Inc. (“Switch and Data”), a publicly-held company headquartered in Tampa, Florida (the “Switch and Data Acquisition”) (see Note 2).

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements include the accounts of Equinix and its subsidiaries, including the operations of Switch and Data from the date of acquisition (see Note 2). All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the consolidated financial statement presentation as of and for the three and six months ended June 30, 2010.

Property, Plant and Equipment

During the year ended December 31, 2009, the Company reassessed the estimated useful lives of certain of its property, plant and equipment as part of a review of the related assumptions. As a result, the estimated useful lives of certain of the Company’s property, plant and equipment were affected.

The Company undertook this review due to its determination that it was generally using certain of its existing assets longer than originally anticipated and, therefore, certain estimated useful lives have been lengthened. The change in the estimated useful lives of certain of the Company’s property, plant and equipment was accounted for as a change in accounting estimate on a prospective basis effective July 1, 2009 under the accounting standard related to changes in accounting estimates.

The change in estimated useful lives of certain of the Company’s property, plant and equipment, which has resulted in less depreciation expense than would have otherwise been recorded, resulted in the following increases (in thousands, except per share amounts):

 

     Three months
ended
   Six months
ended
     June 30, 2010

Income from operations

   $ 3,922    $ 7,890

Net income

     2,209      4,445

Earnings per share:

     

Basic and diluted

     0.05      0.10

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share for the periods presented (in thousands, except per share amounts):

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010     2009    2010    2009

Numerator:

          

Numerator for basic earnings (loss) per share

   $ (2,274   $ 17,440    $ 11,925    $ 32,897
                            

Effect of assumed conversion of convertible debt:

          

Interest expense, net of tax

     —          —        —        22
                            

Numerator for diluted earnings (loss) per share

   $ (2,274   $ 17,440    $ 11,925    $ 32,919
                            

Denominator:

          

Weighted-average shares

     43,507        38,152      41,546      38,007
                            

Effect of dilutive securities:

          

Convertible subordinated debentures

     —          367      —        426

Employee equity awards

     —          799      1,175      575
                            

Total dilutive potential shares

     —          1,166      1,175      1,001
                            

Denominator for diluted earnings per share

     43,507        39,318      42,721      39,008
                            

Earnings (loss) per share:

          

Basic

   $ (0.05   $ 0.46    $ 0.29    $ 0.87
                            

Diluted

   $ (0.05   $ 0.44    $ 0.28    $ 0.84
                            

The following table sets forth weighted-average outstanding potential shares of common stock that are not included in the diluted earnings per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010    2009    2010    2009

Shares reserved for conversion of 2.50% convertible subordinated notes

   2,232    2,232    2,232    2,232

Shares reserved for conversion of 3.00% convertible subordinated notes

   2,945    2,945    2,945    2,945

Shares reserved for conversion of 4.75% convertible subordinated notes

   4,433    1,072    4,433    539

Common stock warrants

   —      1    —      1

Common stock related to employee equity awards

   3,752    1,192    785    2,028
                   
   13,362    7,442    10,395    7,745
                   

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Fair Value of Financial Instruments

The following table sets forth the estimated fair values of the Company’s mortgage and loans payable, senior notes and convertible debt as of (in thousands):

 

     June 30, 2010    December 31, 2009
     Carrying
Value
   Fair Value    Carrying
Value
   Fair Value

Mortgage and Loans Payable:

           

Mortgage payable

   $ 90,361    $ 88,896    $ 91,756    $ 83,406

Chicago IBX financing

     —        —        109,991      109,700

Asia-Pacific financing

     —        —        64,559      60,827

New Asia-Pacific financing

     98,958      94,985      —        —  

European financing

     —        —        130,058      111,375

Netherlands financing

     —        —        9,311      7,941

Singapore financing

     —        —        24,559      21,739
                           
   $ 189,319    $ 183,881    $ 430,234    $ 394,988
                           

Senior Notes:

           

Senior notes

   $ 750,000    $ 752,681    $ —      $ —  
                           

Convertible Debt:

           

2.50% convertible subordinated notes

   $ 228,457    $ 236,824    $ 222,943    $ 228,935

3.00% convertible subordinated notes

     395,986      372,722      395,986      461,324

4.75% convertible subordinated notes

     280,326      335,133      274,777      307,248
                           
   $ 904,769    $ 944,679    $ 893,706    $ 997,507
                           

Income Taxes

The Company’s effective tax rates were 48.3% and 40.7% for the six months ended June 30, 2010 and 2009, respectively. The increase in the effective tax rate for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009 was primarily due to an increase in foreign losses, which did not benefit the Company’s effective tax rate.

The Company’s unrecognized tax benefits increased by $12,932,000 during the three months ended June 30, 2010 due to the Switch and Data Acquisition. These unrecognized tax benefits served to reduce the deferred tax assets acquired from the Switch and Data Acquisition.

Interest Charges

The following table sets forth total interest costs incurred and total interest costs capitalized for the periods presented (in thousands):

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010    2009    2010    2009

Interest expense

   $ 37,615    $ 15,912    $ 63,290    $ 29,363

Interest capitalized

     2,988      3,810      6,736      7,769
                           

Interest charges incurred

   $ 40,603    $ 19,722    $ 70,026    $ 37,132
                           

Stock-Based Compensation

In February and March 2010, the Compensation Committee and the Stock Award Committee of the Board of Directors approved the issuance of an aggregate of 597,063 shares of restricted stock units to certain employees, including executive officers, pursuant to the 2000 Equity Incentive Plan as part of the

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 dates of grant of $60,226,000, which is expected to be amortized over a weighted-average period of 2.56 years.

In April 2010, as a result of the Switch and Data Acquisition, the Company issued 476,943 options to purchase the Company’s common shares and 98,509 restricted stock units of the Company’ common shares to Switch and Data employees in exchange for their outstanding options to purchase shares of and restricted stock units of Switch and Data (see Note 2). An aggregate fair value of approximately $35,395,000 was attributed to these equity awards, of which $16,508,000 was included as part of the consideration of the Switch and Data Acquisition and the remaining $18,887,000 is expected to be amortized over a weighted-average period of 2.14 years.

The following table presents, by operating expense category, the Company’s stock-based compensation expense recognized in the Company’s condensed consolidated statement of operations (in thousands):

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010     2009    2010     2009

Cost of revenues

   $ 1,744      $ 1,458    $ 3,338      $ 2,552

Sales and marketing

     3,758        2,838      6,689        5,018

General and administrative

     12,594        9,163      23,043        17,427

Restructuring charges

     1,491 (1)      —        1,491 (1)      —  
                             
   $ 19,587      $ 13,459    $ 34,561      $ 24,997
                             

 

(1)    See “Switch and Data Restructuring Charge” in Note 12.

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified beginning in fiscal years on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its condensed consolidated financial statements, if any.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (“ASU 2010-06”), which amends the use of fair value measures and the related disclosures. ASU 2010-06 requires new disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, which is effective for interim and annual periods beginning after December 15, 2009. ASU 2010-06 also requires disclosure of activity in Level 3 fair value measurements on a gross basis, which is effective for fiscal years beginning after December 15, 2010. The Company adopted ASU 2010-06 during the three months ended March 31, 2010 with respect to the new disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, and its adoption did not have any significant impact on the Company’s condensed consolidated financial statements. The Company is currently evaluating the impact that the disclosure of activity in Level 3 fair value measurements will have on its consolidated financial statements, if any.

2. Switch and Data Acquisition

On April 30, 2010 (the “Acquisition Date”), the Company acquired 100% of the issued and outstanding share capital of Switch and Data, a publicly-held company headquartered in Tampa, Florida. Switch and Data operated 34 data centers in the U.S. and Canada. The combined company operates under the Equinix name. There were no historical transactions between Equinix and Switch and Data.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company included Switch and Data’s results of operations from May 1, 2010 and estimated fair value of assets acquired and liabilities assumed in its condensed consolidated balance sheets beginning April 30, 2010. The Company incurred acquisition costs of $5,849,000 and $10,843,000, respectively, for the three and six months ended June 30, 2010 related to the Switch and Data Acquisition which was included in the condensed consolidated statements of operations.

Additionally, as a result of the Switch and Data Acquistion, the Company incurred a restructuring charge of $4,372,000 during the three months ended June 30, 2010 (see Note 12).

Fair Value of Consideration Transferred

Under the final terms of the Switch and Data Acquisition, each stock-electing share received 0.19409 shares of Equinix common stock, each cash-electing share received $19.06 in cash, and each non-electing share received 0.11321688 shares of Equinix common stock and $7.94189104 in cash, in each case subject to the terms of the merger agreement. Additionally, the Company assumed Switch and Data’s outstanding employee equity awards. The following table presents the fair value of consideration transferred to acquire Switch and Data at the Acquisition Date (in thousands):

 

Cash (1)

   $ 134,007

Common stock (2)

     549,389

Switch and Data employee equity awards (3)

     16,508
      

Total

   $ 699,904
      

 

(1)    Represents payment for approximately 20% of Switch and Data’s total common stock outstanding as of the Acquisition Date.

(2)    Fair value of 5,458,413 shares of the Company’s common stock issued in exchange for approximately 80% of Switch and Data’s total common stock outstanding as of the Acquisition Date. The value of the Company’s common stock issued was determined based on the Company’s closing share price on the Acquisition Date, or $100.65 per share.

(3)    Represents fair value attributed to vested shares of Switch and Data employee equity awards which the Company assumed. The Company issued 476,943 options to purchase the Company’s common stock and 98,509 restricted stock units of the Company’s common stock to Switch and Data employees with an aggregate fair value of $35,395,000 in exchange for their options to purchase shares of and restricted stock units of Switch and Data (see Note 1, “Stock-Based Compensation”).

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Purchase Price Allocation

The Switch and Data Acquisition was accounted for using the acquisition method of accounting in accordance with the accounting standard for business combinations. Under the acquisition method of accounting, the total purchase price was allocated to Switch and Data’s net tangible and intangible assets based upon their fair value as of the Acquisition Date. Based upon the purchase price and the valuation of Switch and Data, the purchase price allocation was as follows (in thousands):

 

Cash and cash equivalents

   $ 20,718   

Accounts receivable

     12,763   

Other current assets

     2,125   

Property, plant and equipment

     464,640   

Goodwill

     407,383   

Intangible asset – customer contracts

     98,920   

Intangible asset – favorable leases

     13,680   

Intangible asset – other

     3,370   

Other assets

     1,471   
        

Total assets acquired

     1,025,070   

Accounts payable and accrued expenses

     (24,512

Accrued property, plant and equipment

     (10,363

Current portion of capital leases

     (10,402

Current portion of loan payable

     (138,938

Other current liabilities

     (12,157

Capital leases, less current portion

     (38,998

Unfavorable leases

     (2,580

Deferred tax liability

     (66,422

Other liabilities

     (20,794
        

Net assets acquired

   $ 699,904   
        

The following table presents certain information on the acquired identifiable intangible assets (dollars in thousands):

 

Intangible assets

   Fair value     Estimated
useful lives
(years)
   Weighted-
average
estimated
useful lives
(years)

Customer contracts

   $ 98,920      11    11

Favorable leases

     13,680      3 – 16    8.6

Other

     3,370      0 – 10    4.9

Unfavorable leases

     (2,580   3 – 15    8.3

The fair value of customer contracts was estimated by applying an income approach. The fair value was determined by calculating the present value of estimated future operating cash flows generated from exisiting customers less costs to realize the revenue. The Company applied a discount rate of approximately 14%, which reflects the nature of the asset, to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer contracts include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair values of favorable and unfavorable leases were estimated by applying an income approach. The fair value was determined by calculating the difference between the discounted cash flows over the remaining term of each lease using contractual lease rates and market lease rates. The Company applied a discount rate ranging from 8.25% to 11.5% depending on the type, location and duration of each lease. Another significant assumption used in estimating the fair values of the favorable and unfavorable leases was the market lease rates. The fair value of the other acquired identifiable intangible assets were estimated by applying an income or cost approach as appropriate. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company determined the fair value of the revolving credit facility assumed in the Switch and Data Acquisition by estimating Switch and Data’s debt rating and reviewed market data with a similar debt rating and other characteristics of the debt, including the maturity date and security type. The Company determined that the book value of $138,938,000 approximated the fair value as of the Acquisition Date.

The Company determined the fair value of the two property capital lease liabilities assumed in the Switch and Data Acquisition of $40,425,000 by calculating the present value of future cash flows using a discount rate of approximately 8.6%, which was equal to the average yield of industrial bonds with similar remaining terms as the leases. The Company determined that the fair value of the equipment capital lease liability assumed in the Switch and Data Acquisition was equal to the fair value of the underlying assets of $9,155,000 as of the Acquisition Date because the lease contained a bargain purchase option and the title of the leased property is expected to be transferred to the Company at the end of the lease term. A total of $407,383,000 has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill is attributable to the workforce of Switch and Data and the significant synergies expected to arise after the Switch and Data Acquisition. Goodwill is not expected to be deductible for tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the Switch and Data Acquisition is attributable to the Company’s North American reportable segment (see Note 11) and reporting unit (see Note 4). The Company intends to test goodwill attributable to the North American reporting unit annually as of November 30th, commencing with November 30, 2010.

For additional information on the Switch and Data debt assumed, refer to Note 8.

The Company continues to evaluate certain assets and liabilities related to the Switch and Data Acquisition. Additional information, which existed as of the Acquisition Date but was unknown to the Company at that time, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the Acquisition Date. Changes to the assets and liabilities recorded may result in a corresponding adjustment to goodwill.

Unaudited Pro forma Combined Condensed Consolidated Statements of Operations

The consolidated financial statements of the Company include the operations of Switch and Data from May 1, 2010 through June 30, 2010. Switch and Data recognized revenues of $37,592,000 and incurred net losses of $6,127,000 for the period from May 1, 2010 through June 30, 2010, which were included in the Company’s consolidated financial statements.

The following unaudited pro forma combined consolidated financial information has been prepared to give effect to the Switch and Data Acquisition by the Company using the acquisition method of accounting and the Company’s repayment of Switch and Data’s outstanding debt and equipment capital lease (Note 8). The unaudited pro forma combined consolidated financial information reflect certain adjustments related to the Switch and Data Acquisition, such as additional depreciation and amortization expense on assets acquired from Switch and Data. These pro forma statements were prepared as if the Switch and Data Acquistion and the repayment of Switch and Data’s outstanding debt and equipment capital lease had been completed as of the beginning of each period presented.

The unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the acquisition occurred on January 1, 2010 and 2009, nor is it necessarily indicative of the future results of operations of the combined company.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table sets forth the unaudited pro forma consolidated combined results of operations (in thousands, except per share data):

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010    2009    2010    2009

Revenues

   $ 315,354    $ 262,528    $ 620,698    $ 508,892

Net income

     3,870      14,226      19,373      24,971

Earnings per share:

           

Basic earnings per share

     0.09      0.33      0.43      0.57

Diluted earnings per share

     0.08      0.32      0.42      0.56

3. IBX Acquisitions and Expansions

Amsterdam IBX Expansion Project

In April 2010, an indirect wholly-owned subsidiary of the Company amended its existing lease agreements for its two adjacent Amsterdam properties. One of these properties is the Company’s existing Amsterdam IBX data center and the Company is now developing the second property to become its second Amsterdam IBX data center (the “Amsterdam IBX Expansion Project”). The Company’s development plans involve modifying the two building structures to connect the two adjacent buildings into a single campus. The two Amsterdam properties were previously accounted for as operating leases. Pursuant to the accounting standards for lessee’s involvement in asset construction and for leasing transactions involving special-purpose entities, the Company is now considered the owner of the two leased buildings during the construction phase due to the structural building work that the Company is now undertaking, while the underlying land is considered an operating lease. As a result, during the three months ended June 30, 2010, the Company recorded a building asset and a related financing obligation liability (the “Amsterdam IBX Building Financing”) totaling $10,164,000 (using the exchange rate as of June 30, 2010).

Sydney 3 IBX Expansion Project

In June 2010, an indirect wholly-owned subsidiary of the Company entered into a lease for a building that the Company and the landlord will both jointly develop to meet the Company’s needs and which the Company will ultimately convert into its third IBX data center in Sydney, Australia (the “Sydney 3 IBX Expansion Project” and the “Sydney 3 Lease”). The Sydney 3 Lease has a term of 15 years and a total cumulative rent obligation of approximately $24,737,000 (using the exchange rate as of June 30, 2010) commencing September 2010. The landlord began modifying the building structure to the Company’s specifications in June 2010. Pursuant to the accounting standards for lessee’s involvement in asset construction and for leasing transactions involving special-purpose entities, the Company is now considered the owner of the building during the construction phase due to the structural building work that the landlord is now undertaking on the Company’s behalf. As a result, the Company will be recording a building asset during the construction period and a related financing liability (the “Sydney 3 IBX Building Financing”), while the underlying land will be considered an operating lease. The building is expected to be completed during the first half of 2011. In connection with the Sydney 3 IBX Building Financing, the Company recorded a building asset and a corresponding financing obligation liability totaling approximately $5,942,000 (using the exchange rate as of June 30, 2010), representing the fair value of the existing building structure and the estimated percentage-of-completion of the building as of June 30, 2010.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

4. Balance Sheet Components

Cash, Cash Equivalents and Short-Term and Long-Term Investments

Cash, cash equivalents and short-term and long-term investments consisted of the following (in thousands) as of:

 

     June 30, 2010  
     Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  

U.S. government and agency obligations

   $ 583,569      $ 91      $ (38   $ 583,622   

Cash and money markets

     129,381        —          —          129,381   

Corporate bonds

     5,322        62        (14     5,370   

Asset-backed securities

     3,489        90        (2     3,577   
                                

Total available-for-sale securities

     721,761        243        (54     721,950   

Less amounts classified as cash and cash equivalents

     (511,355     (2     15        (511,342
                                

Total securities classified as investments

     210,406        241        (39     210,608   

Less amounts classified as short-term investments

     (206,042     (106     37        (206,111
                                

Total long-term investments

   $ 4,364      $ 135      $ (2   $ 4,497   
                                

Cash, cash equivalents and short-term and long-term investments consisted of the following as of (in thousands):

 

     December 31, 2009  
     Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  

U.S. government and agency obligations

   $ 437,764      $ 162      $ (3   $ 437,923   

Cash and money markets

     147,059        —          —          147,059   

Corporate bonds

     12,400        203        —          12,603   

Asset-backed securities

     5,543        134        (4     5,673   

Other securities

     1,108        1        —          1,109   
                                

Total available-for-sale securities

     603,874        500        (7     604,367   

Less amounts classified as cash and cash equivalents

     (346,059     —          3        (346,056
                                

Total securities classified as investments

     257,815        500        (4     258,311   

Less amounts classified as short-term investments

     (248,300     (208     —          (248,508
                                

Total long-term investments

   $ 9,515      $ 292      $ (4   $ 9,803   
                                

As of June 30, 2010 and December 31, 2009, cash equivalents included investments which were readily convertible to cash and had original maturity dates of 90 days or less. The maturities of securities classified as short-term investments were one year or less as of June 30, 2010 and December 31, 2009. The maturities of securities classified as long-term investments were greater than one year and less than three years as of June 30, 2010 and December 31, 2009.

In January 2010, the Company received an additional distribution of $3,420,000 from its investment in the Reserve Primary Fund (the “Reserve”), a 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 held in Lehman Brothers Holdings, Inc. (“Lehman Brothers”) at zero. 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. During the years ended December 31, 2008 and 2009, the Company recorded

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

other-than-temporary impairment losses on the Reserve. The Company also received distributions of its outstanding funds held by the Reserve during the years ended December 31, 2008 and 2009. As of December 31, 2009, the Company had no amounts remaining outstanding on its consolidated balance sheet for the Reserve. As a result, during the three months ended March 31, 2010, the Company recorded a recovery of other-than-temporary impairment loss, which is included in the Company’s condensed consolidated statement of operations. During the six months ended June 30, 2009, the Company recorded an other-than-temporary impairment loss of $2,687,000 in connection with its investment in the Reserve, which is included in the Company’s condensed consolidated statement of operations.

As of June 30, 2010, 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
gains/(losses)
 

Cash and cash equivalents

   $ 2    $ (15   $ (13

Short-term investments

     106      (37     69   

Long-term investments

     135      (2     133   
                       
   $ 243    $ (54   $ 189   
                       

While certain marketable securities carry unrealized losses, the Company expects that it will receive both principal and interest according to the stated terms of each of the securities and that the decline in market value is primarily due to changes in the interest rate environment from the time the securities were purchased as compared to interest rates at June 30, 2010.

The following table summarizes the fair value and gross unrealized losses related to 19 available-for-sale securities with an aggregate cost basis of $458,229,000, aggregated by type of investment and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2010 (in thousands):

 

     Securities in a loss
position for less than 12
months
    Securities in a loss
position for 12 months
or more
 
     Fair value    Gross
unrealized
losses
    Fair
value
   Gross
unrealized
losses
 

U.S. government and agency obligations

   $ 456,901    $ (38   $ —      $ —     

Corporate bonds

     709      (14     —        —     

Asset-backed securities

     —        —          565      (2
                              
   $ 457,610    $ (52   $ 565    $ (2
                              

While the Company does not believe it holds investments that are other-than-temporarily impaired and believes that the Company’s investments will mature at par, as of June 30, 2010, the Company’s investments are subject to the currently adverse market conditions. If market conditions were to deteriorate further, the Company could sustain other-than-temporary impairments to its investment portfolio which could result in additional realized losses being recorded 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 in order to meet its near term liquidity and capital expenditure requirements. As a result, the Company expects to recognize lower interest income in future periods.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Accounts Receivable

Accounts receivables, net, consisted of the following (in thousands):

 

     June 30,
2010
    December 31,
2009
 

Accounts receivable

   $ 173,175      $ 126,122   

Unearned revenue

     (64,849     (59,635

Allowance for doubtful accounts

     (2,071     (1,720
                
   $ 106,255      $ 64,767   
                

Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The Company generally invoices its customers at the end of a calendar month for services to be provided the following month, although this practice varies in the Company’s Europe region. Accordingly, unearned revenue consists of pre-billing for services that have not yet been provided, but which have been billed to customers in advance in accordance with the terms of their contract. The Company anticipates conforming the accounting of Switch and Data’s monthly billings with that of the Company’s in the third quarter of 2010.

Other Current Assets

Other current assets consisted of the following (in thousands):

 

     June 30,
2010
   December 31,
2009

Deferred tax assets, net

   $ 42,405    $ 46,822

Prepaid expenses

     11,232      10,277

Taxes receivable

     6,130      7,081

Foreign currency forward contract receivable

     2,194      498

Other receivables

     1,005      2,083

Other current assets

     1,561      1,795
             
   $ 64,527    $ 68,556
             

Property, Plant and Equipment

Property, plant and equipment consisted of the following (in thousands):

 

     June 30,
2010
    December 31,
2009
 

IBX plant and machinery

   $ 1,258,411      $ 925,360   

Leasehold improvements

     875,051        552,548   

Buildings

     263,589        277,247   

Site improvements

     235,880        231,437   

IBX equipment

     209,927        175,030   

Computer equipment and software

     101,283        85,472   

Land

     81,552        84,681   

Furniture and fixtures

     12,529        11,428   

Construction in progress

     236,777        243,129   
                
     3,274,999        2,586,332   

Less accumulated depreciation

     (874,190     (778,217
                
   $ 2,400,809      $ 1,808,115   
                

Leasehold improvements, IBX plant and machinery, computer equipment and software and buildings recorded under capital leases aggregated $140,427,000 and $87,138,000 at June 30, 2010 and December 31, 2009, respectively. Amortization on the assets recorded under capital leases is included in depreciation expense and accumulated depreciation on such assets totaled $24,197,000 and $13,118,000 as of June 30, 2010 and 2009, respectively.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As of June 30, 2010 and December 31, 2009, the Company had accrued property, plant and equipment expenditures of $85,350,000 and $109,876,000, respectively. The Company’s planned capital expenditures during the remainder of 2010 and thereafter in connection with recently acquired IBX properties and expansion efforts are substantial. For further information, refer to “Other Purchase Commitments” in Note 9.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets, net, consisted of the following (in thousands):

 

     June 30,
2010
    December 31,
2009
 

Goodwill:

    

North America

   $ 407,383      $ —     

Europe

     334,137        362,569   

Asia-Pacific

     18,567        18,481   
                
     760,087        381,050   
                

Other intangibles:

    

Intangible asset – customer contracts

     154,284        60,499   

Intangible asset – favorable leases

     17,825        4,690   

Intangible asset – others

     3,477        111   
                
     175,586        65,301   

Accumulated amortization

     (18,246     (14,286
                
     157,340        51,015   
                
   $ 917,427      $ 432,065   
                

Changes in the carrying amount of goodwill by geographic regions are as follows (in thousands):

 

     North
America
   Europe     Asia-
Pacific
   Total  

Balance at December 31, 2009

   $ —      $ 362,569      $ 18,481    $ 381,050   

Switch and Data acquisition (see Note 2)

     407,383      —          —        407,383   

Impact of foreign currency exchange

     —        (28,432     86      (28,346
                              

Balance at June 30, 2010

   $ 407,383    $ 334,137      $ 18,567    $ 760,087   
                              

The Company’s goodwill and intangible assets in Europe, denominated in British pounds and Euros, goodwill in Asia-Pacific, denominated in Singapore dollars, and certain intangible assets in North America, denominated in Canadian dollars, 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.

The Company will test the goodwill attributable to the North American reporting unit for impairment annually as of November 30th, commencing on November 30, 2010 (see Note 2). The Company has historically tested the goodwill attributable to the Europe and Asia-Pacific reporting units annually as of August 31st and December 31st, respectively. The Company changed its method of applying the accounting principle related to annual goodwill impairment testing by conforming the testing of goodwill for all three reporting units to November 30th of each year, commencing November 30, 2010. The Company will test the Europe reporting unit as of August 31st as in prior years and will then perform a re-test as of November 30, 2010 to conform it to the other regions.

For the three and six months ended June 30, 2010, the Company recorded amortization expense of $3,633,000 and $5,021,000, respectively, associated with its other intangible assets. For the three and six months ended June 30, 2009, the Company recorded amortization expense of $1,370,000 and $2,646,000, respectively, associated with its other intangible assets.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Changes in the gross book value of intangible assets by geographic regions are as follows (in thousands):

 

     North
America
    Europe     Asia-
Pacific
   Total  

Intangible assets, gross at December 31, 2009

   $ 2,293      $ 63,008      $ —      $ 65,301   

Switch and Data acquisition (see Note 2)

     115,970        —          —        115,970   

Impact of foreign currency exchange

     (506     (5,179     —        (5,685
                               

Intangible assets, gross at June 30, 2010

   $ 117,757      $ 57,829      $ —      $ 175,586   
                               

The Company’s estimated future amortization expense related to these intangibles is as follows (in thousands):

 

Year ending:

  

2010 (six months remaining)

   $ 7,674

2011

     15,105

2012

     14,955

2013

     14,910

2014

     14,665

2015 and thereafter

     90,031
      

Total

   $ 157,340
      

Other Assets

Other assets consisted of the following (in thousands):

 

     June 30,
2010
   December 31,
2009

Debt issuance costs, net

   $ 38,034    $ 19,762

Deposits

     23,988      28,032

Restricted cash

     3,553      3,021

Prepaid expenses, non-current

     3,126      3,247

Deferred tax assets, non-current

     1,051      5,171

Other assets, non-current

     1,488      1,047
             
   $ 71,240    $ 60,280
             

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following (in thousands):

 

     June 30,
2010
   December 31,
2009

Accounts payable

   $ 18,366    $ 14,874

Accrued compensation and benefits

     37,124      35,809

Accrued interest

     26,997      6,235

Accrued taxes

     19,030      14,508

Accrued utilities and security

     15,683      13,526

Accrued professional fees

     4,394      4,657

Accrued acquisition costs

     8,155      —  

Accrued other

     8,976      9,444
             
   $ 138,725    $ 99,053
             

Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

 

     June 30,
2010
   December 31,
2009

Deferred installation revenue

   $ 27,569    $ 26,319

Customer deposits

     10,037      8,406

Deferred recurring revenue

     2,445      2,689

Accrued restructuring charges

     3,687      2,043

Deferred tax liabilities

     814      814

Deferred rent

     405      403

Other current liabilities

     574      492
             
   $ 45,531    $ 41,166
             

Other Liabilities

Other liabilities consisted of the following (in thousands):

 

     June 30,
2010
   December 31,
2009

Deferred tax liabilities, non-current

   $ 88,835    $ 25,937

Asset retirement obligations

     42,779      17,710

Deferred rent, non-current

     37,316      34,288

Deferred installation revenue, non-current

     19,352      18,228

Customer deposits, non-current

     4,995      5,813

Deferred recurring revenue, non-current

     4,968      5,160

Interest rate swap payable, non-current

     —        8,496

Accrued restructuring charges, non-current

     3,688      3,876

Other liabilities

     1,084      1,095
             
   $ 203,017    $ 120,603
             

The increase in deferred tax liabilities, non-current was primarily due to a $66,422,000 deferred tax liability recorded in connection with the Switch and Data Acquisition (see Note 2).

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table summarizes the activity of the Company’s asset retirement obligation liability (in thousands):

 

Asset retirement obligations as of December 31, 2009

   $ 17,710   

Additions (1)

     24,482   

Accretion expense

     1,237   

Impact of foreign currency exchange

     (650
        

Asset retirement obligations as of June 30, 2010

   $ 42,779   
        

 

(1)    Includes $20,262,000 assumed in connection with the Switch and Data Acquisition.

       

The Company currently leases the majority of its IBX data centers and certain equipment under non-cancelable operating lease agreements expiring through 2030. The IBX data center lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company has negotiated rent expense abatement periods to better match the phased build-out of its centers. The Company accounts for such abatements and increasing base rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent.

5. Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2010 were as follows (in thousands):

 

     Fair value at
June  30,

2010
   Fair value measurement using
        Level 1    Level 2    Level 3

Assets:

           

U.S. Government and Agency obligations

   $ 583,622    $ —      $ 583,622    $ —  

Cash and money markets

     129,381      129,381      —        —  

Corporate bonds

     5,370      —        5,370      —  

Asset-backed securities

     3,577      —        3,577      —  

Derivative assets (1)

     2,194      —        2,194      —  
                           
   $ 724,144    $ 129,381    $ 594,763    $ —  
                           

 

(1)    Included in the consolidated balance sheets within other current assets.

The Company’s investments in money market funds, which are classified within Level 1 of the fair value hierarchy, are valued using quoted prices for identical instruments in active markets. The Company’s investments in U.S. government and agency securities, corporate bonds and asset-back securities are classified within Level 2 of the fair value hierarchy. Level 2 investments are valued based upon published clearing prices for similar securities with recent trades.

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 with adjustments made to these values utilizing the credit default swap rates of our foreign exchange trading counterparties. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit risk valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2010, the Company had assessed the significance of the impact of the credit risk valuation adjustments on the overall valuation of its derivative positions and had determined that the credit risk valuation adjustments were not significant to the overall valuation of its derivatives. Therefore, they are categorized as Level 2.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

During the six months ended June 3010, the Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis.

During the six months ended June 30, 2010, there were no impairment charges recorded in connection with the Company’s goodwill and long-lived assets (see Note 4). The Company performs impairment tests for its goodwill at least annually (or whenever events or circumstances indicate a triggering event has occurred indicating that the carrying amount of the asset may not be recoverable). The Company performs impairment tests for its long-lived assets other than goodwill whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

6. Derivatives and Hedging Activities

The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of the foreign currency-denominated assets and liabilities change. Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date.

The Company has not designated the foreign currency forward contracts as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these contracts are included in other income (expense), net, along with those foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the six months ended June 30, 2010 and 2009. As of June 30, 2010, the Company had gross assets totaling $2,415,000 and gross liabilities totaling $221,000 representing the fair values of these foreign currency forward contracts. The Company recorded its foreign currency forward contracts, net, by counter party, within other current assets. During the three and six months ended June 30, 2010, the Company recognized a net gain of $644,000 and $1,696,000, respectively, in connection with its foreign currency forward contracts, which is reflected in other income (expense) on the accompanying condensed consolidated statement of operations. During the three and six months ended June 30, 2009, the Company recognized a net loss of $1,535,000 and $1,359,000, respectively, in connection with its foreign currency forward contracts, which is reflected in other income (expense) on the accompanying statement of operations.

During the three months ended June 30, 2010, the Company terminated its outstanding interest rate swap instruments (see Note 8). As of June 30, 2010, there were no outstanding interest rate swap instruments.

7. Related Party Transactions

The Company has several significant stockholders and other related parties that are also customers and/or vendors. For the three and six months ended June 30, 2010, revenues recognized from related parties were $5,642,000 and $11,034,000, respectively. For the three and six months ended June 30, 2009, revenues recognized from related parties were $5,843,000 and $11,654,000, respectively. As of June 30, 2010 and 2009, accounts receivable with these related parties were $3,937,000 and $4,199,000, respectively. For the three and six months ended June 30, 2010, costs and services procured from related parties were $416,000 and $809,000, respectively. For the three and six months ended June 30, 2009, costs and services procured from related parties were $153,000 and $299,000, respectively. As of June 30, 2010 and 2009, accounts payable with these related parties were $9,000 and $33,000, respectively.

8. Debt Facilities and Other Financing Obligations

Senior Notes

In February 2010, the Company issued $750,000,000 aggregate principal amount of 8.125% Senior Notes due March 1, 2018 (the “Senior Notes”). Interest is payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2010.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Senior Notes are governed by an Indenture dated March 3, 2010 between the Company, as issuer, and U.S. Bank National Association, as trustee (the “Senior Notes Indenture”). The Senior Notes Indenture contains covenants that limit the Company’s ability and the ability of its subsidiaries to, among other things:

 

   

incur additional debt;

 

   

pay dividends or make other restricted payments;

 

   

purchase, redeem or retire capital stock or subordinated debt;

 

   

make asset sales;

 

   

enter into transactions with affiliates;

 

   

incur liens;

 

   

enter into sale-leaseback transactions;

 

   

provide subsidiary guarantees;

 

   

make investments; and

 

   

merge or consolidate with any other person.

Each of these restrictions has a number of important qualifications and exceptions. The Senior Notes are unsecured and rank equal in right of payment to the Company’s existing or future senior debt and senior in right of payment to the Company’s existing and future subordinated debt. The Senior Notes will be effectively junior to any of the Company’s existing and future secured indebtedness and any indebtedness of its subsidiaries.

At any time prior to March 1, 2013, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the Senior Notes outstanding under the Senior Notes Indenture, at a redemption price equal to 108.125% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings, provided that (i) at least 65% of the aggregate principal amount of the Senior Notes issued under the Senior Notes Indenture remains outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur within 90 days of the date of the closing of such equity offerings. On or after March 1, 2014, the Company may redeem all or a part of the Senior Notes, on any one or more occasions, at the redemption prices set forth below plus accrued and unpaid interest thereon, if any, up to, but not including, the applicable redemption date, if redeemed during the one-year period beginning on March 1 of the years indicated below:

 

     Redemption price of the Senior Notes  

2014

   104.0625

2015

   102.0313

2016 and thereafter

   100.0000

In addition, at any time prior to March 1, 2014, the Company may also redeem all or a part of the Senior Notes at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed plus applicable premium (the “Applicable Premium”) and accrued and unpaid interest, if any, to, but not including, the date of redemption (the “Redemption Date”). The Applicable Premium means the greater of:

 

   

1.0% of the principal amount of the Senior Notes; and

 

   

the excess of: (a) the present value at such redemption date of (i) the redemption price of the Senior Notes at March 1, 2014 as shown in the above table, plus (ii) all required interest payments due on the Senior Notes through March 1, 2014 (excluding accrued but unpaid interest, if any, to, but not including the redemption date), computed using a discount rate equal to the yield to maturity of the United States Treasury securities with a constant maturity most nearly equal to the period from the redemption date to March 1, 2014, plus 0.50%; over (b) the principal amount of the Senior Notes.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Upon a change in control, the Company will be required to make an offer to purchase each holder’s Senior Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase.

Debt issuance costs related to the Senior Notes, net of amortization, were $13,964,000 as of June 30, 2010.

New Asia-Pacific Financing

In May 2010, five wholly-owned subsidiaries of the Company, located in Australia, Hong Kong, Japan and Singapore, completed a new multi-currency credit facility agreement for approximately $202,742,000 (the “New Asia-Pacific Financing”), comprising 79,153,000 Australian dollars, 370,433,000 Hong Kong dollars, 99,434,000 Singapore dollars and 1,513,400,000 Japanese yen. The New Asia-Pacific Financing replaced the Company’s existing Asia-Pacific Financing and Singapore Financing. The New Asia-Pacific Financing has a five-year term with semi-annual principal payments and quarterly debt service and consist of two tranches: (i) Tranche A was available for immediate drawing upon satisfaction of certain conditions precedent and was used to refinance the existing Asia-Pacific Financing and Singapore Financing and (ii) Tranche B is available for drawing in Australian, Hong Kong and Singapore dollars only for up to 24 months following the effective date of the New Asia-Pacific Financing. The New Asia Pacific Financing bears an interest rate of 3.50% above the local borrowing rates for the first 12 months and interest rates between 2.50%-3.50% above the local borrowing rates thereafter, depending on the leverage ratio within these five subsidiaries of the Company. The New Asia-Pacific Financing contains financial covenants with which the Company and its five subsidiaries must comply quarterly. The New Asia-Pacific Financing is guaranteed by the parent, Equinix, Inc., and is secured by certain of the Company’s five subsidiaries’ assets and share pledges. In May 2010, the Company’s five subsidiaries drew-down a total of approximately $98,958,000 from Tranche A and Tranche B under the New Asia-Pacific Financing, primarily for the prepayment and termination of the existing Asia-Pacific Financing and the Singapore Financing. As of June 30, 2010, the Company’s five subsidiaries had fully utilized Tranche A under the New Asia-Pacific Financing. The loans payable under the New Asia-Pacific Financing have a final maturity date of March 2015. As of June 30, 2010, the Company and its five subsidiaries were in compliance with all financial covenants in connection with the New Asia-Pacific Financing. As of June 30, 2010, $98,958,000 was outstanding under the New Asia-Pacific Financing at an approximate blended interest rate of 5.30% per annum.

Debt issuance costs associated with the New Asia-Pacific Financing, net of amortization, were $8,136,000 as of June 30, 2010. Debt issuance costs associated with the previously-existing Asia-Pacific Financing and the Singapore Financing were written-off and recorded as losses on debt extinguishment (refer to ““Loss on Debt Extinguishment and Interest Rate Swaps, Net” below).

Chicago IBX Financing

In March 2010, the Company prepaid and terminated the Chicago IBX Financing, of which principal of $109,991,000 was outstanding as of December 31, 2009. The Chicago IBX Financing was prepaid to the lender for an amount equal to 95.909% of the then outstanding principal balance outstanding, plus accrued and unpaid interest, resulting in a gain of $4,460,000. On the same date, the Company paid and terminated the interest rate swap associated with the Chicago IBX Financing totaling $3,160,000. For additional information, refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below.

European Financing

In April 2010, the Company prepaid and terminated the European Financing at par for a total payment of approximately $121,748,000 plus accrued and unpaid interest. On the same date, the Company terminated three interest rate swaps associated with the European Financing and paid a total of $4,272,000 to terminate these interest rate swaps. For additional information, refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Netherlands Financing

In June 2010, the Company prepaid and terminated the Netherlands Financing at par for a total payment of approximately $7,965,000 plus accrued and unpaid interest.

Switch and Data Debt

In May 2010, the Company prepaid and terminated at par a revolving credit facility assumed in connection with the Switch and Data Acquisition for a total payment of $138,938,000 plus accrued and unpaid interest. On the same date, the Company terminated the associated interest rate swap acquired related to this revolving credit facility and paid a total of $9,789,000 to terminate this interest rate swap. For additional information, refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below.

In May 2010, the Company prepaid and terminated an equipment capital lease assumed in connection with the Switch and Data Acquisition for a total payment of $9,191,000, resulting in a loss of $36,000. For additional information, refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below.

In April 2010, the Company also assumed two other capital leases in connection with the Switch and Data Acquisition related to two properties in North Bergen, New Jersey (the “New Jersey Capital Lease”) and Sunnyvale, California (the “Sunnyvale Capital Lease”). The Company assumed a capital lease obligation for the New Jersey Capital Lease totaling $24,660,000 with monthly payments due through July 2023 at an effective interest rate of 8.6% per annum. The Company assumed a capital lease obligation for the Sunnyvale Capital Lease totaling $15,585,000 with monthly payments due through July 2022 at an effective interest rate of 8.6% per annum.

Bank of America Revolving Credit Line

In February 2010, the Company amended the Bank of America Revolving Credit Line and extended the maturity date to February 11, 2011. In addition, the Bank of America Revolving Credit Line was amended to permit the Company to fund the cash payment portion of the pending acquisition of Switch and Data and to repay or retire its outstanding loan obligations upon the closing of the Switch and Data Acquisition. The Bank of America Revolving Credit Line will be used primarily to fund the Company’s working capital and to enable the Company to issue letters of credit. The effect of issuing letters of credit under the Bank of America Revolving Credit Line reduces the amount available for borrowing under the Bank of America Revolving Credit Line. The Company may borrow, repay and reborrow under the Bank of America Revolving Credit Line at either the prime rate or at a borrowing margin of 2.75% over one, three or six month LIBOR, subject to a minimum borrowing cost of 3.00%. The Bank of America Revolving Credit Line contains three financial covenants, which the Company must comply with quarterly, consisting of a tangible net worth ratio, a debt service ratio and a senior leverage ratio and is collateralized by the Company’s domestic accounts receivable balances. As of June 30, 2010, the Company was in compliance with all financial covenants in connection with the Bank of America Revolving Credit Line. The Bank of America Revolving Credit Line is available for renewal subject to mutual agreement by both parties. As of June 30, 2010, the Company had issued 16 irrevocable letters of credit totaling $18,429,000 under the Bank of America Revolving Credit Line. As a result, the amount available to borrow was $6,571,000 as of June 30, 2010.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Loss on Debt Extinguishment and Interest Rate Swaps, Net

Loss on debt extinguishment and interest rate swaps, net consisted of the following (in thousands):

 

     Three months
ended
    Six months
ended
 
     June 30, 2010  

Principal discount on the Chicago IBX financing

   $ —        $ 4,460   

Principal premium on the Switch and Data equipment capital lease

     (36     (36

Write-off of unamortized debt issuance costs:

    

Chicago IBX financing

     —          (474

Asia-Pacific financing

     (720     (720

Singapore financing

     (502     (502
                

Subtotal – gain (loss) on debt extinguishment

     (1,258     2,728   
                

Termination of interest rate swaps:

    

Chicago IBX financing interest rate swap

     —          (3,160

European financing interest rate swaps

     (69     (4,272

Switch and Data interest rate swap

     (83     (83

Interest rate swap termination fees

     (44     (44
                

Subtotal – loss on interest rate swaps

     (196     (7,559
                

Loss on debt extinguishment and interest rate swaps, net

   $ (1,454   $ (4,831
                

Maturities

Combined aggregate maturities for the Company’s various debt facilities and other financing obligations as of June 30, 2010 were as follows (in thousands):

 

     Convertible
debt (1)
    Senior
notes (1)
   Mortgage
and loans
payable (1)
    Capital lease
and other
financing
obligations (2)
    Total  

2010 (six months remaining)

   $ —        $ —      $ 11,358      $ 11,414      $ 22,772   

2011

     —          —        21,263        25,047        46,310   

2012

     250,000        —        23,449        25,462        298,911   

2013

     —          —        26,426        25,940        52,366   

2014

     395,986        —        22,480        26,810        445,276   

2015 and thereafter

     373,750        750,000      84,343        229,533        1,437,626   
                                       
     1,019,736        750,000      189,319        344,206        2,303,262   

Less amount representing interest

     —          —        —          (171,597     (171,597

Less amount representing debt discount

     (114,967     —        —          —          (114,967

Less estimated building costs

     —          —        —          (3,166     (3,166

Plus amount representing residual property value

     —          —        —          45,857        45,857   
                                       
     904,769        750,000      189,319        215,300        2,059,388   

Less current portion of principal

     —          —        (21,968     (7,995     (29,963
                                       
   $ 904,769      $ 750,000    $ 167,351      $ 207,305      $ 2,029,425   
                                       

 

(1) Represents principal only.
(2) Represents principal and interest in accordance with minimum lease payments.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

9. Commitments and Contingencies

Legal Matters

IPO Litigation

On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against the Company, certain of its officers and directors (the “Individual Defendants”), and several investment banks that were underwriters of the 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. These lawsuits have been coordinated before a single judge. The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 against the Company and the Individual Defendants. The plaintiffs have since dismissed the Individual Defendants without prejudice. The suits allege that the Underwriter Defendants agreed to allocate stock in the 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.

The parties in the approximately 300 coordinated cases, including the parties in the Equinix case, reached a settlement. It provides for releases of existing claims and claims that could have been asserted relating to the conduct alleged to be wrongful from the class of investors participating in the settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Equinix. On October 6, 2009, the Court granted final approval to the settlement. Six notices of appeal and one petition seeking permission to appeal, from a group of objectors who also filed a notice of appeal, have been filed.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows. The Company intends to continue to defend the action vigorously if the settlement does not survive the appeal.

Pihana Litigation

On August 22, 2008, a complaint was filed against Equinix, certain former officers and directors of Pihana Pacific, Inc. (“Pihana”), certain investors in Pihana, and others. The lawsuit was filed in the First Circuit Court of the State of Hawaii, and arises out of December 2002 agreements pursuant to which Equinix merged Pihana and i-STT (a subsidiary of Singapore Technologies Telemedia Pte Ltd) into the internet exchange services business of Equinix. Plaintiffs, who were allegedly holders of Pihana common stock, allege that their rights as shareholders were violated, and the transaction was effectuated improperly, by Pihana’s majority shareholders, officers and directors, with the alleged assistance of Equinix and others. Among other things, plaintiffs contend that they effectively had a right to block the transaction, that this supposed right was disregarded, and that they improperly received no consideration when the deal was completed. The complaint seeks to recover unspecified punitive damages, equitable relief, fees and costs, and compensatory damages in an amount that plaintiffs allegedly “believe may be all or a substantial portion of the approximately $725,000,000 value of Equinix held by Defendants” (a group that includes more than 30 individuals and entities). An amended complaint, which 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 (the “Amended Complaint”). On October 13, 2008, a complaint was filed in a separate action by another purported holder of Pihana common stock, naming the same defendants and asserting substantially similar allegations as the August 22, 2008 and September 29, 2008 pleadings. On December 12, 2008, the court entered a stipulated order, which consolidated the two actions under one case number and set January 22, 2009 as the last day for Defendants to move to dismiss or otherwise respond to the

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Amended Complaint, the operative complaint in this case. On January 22, 2009, motions to dismiss the Amended Complaint were filed by Equinix and other Defendants. On April 24, 2009, plaintiffs filed a Second Amended Complaint (“SAC”) to correct the naming of certain parties. The SAC is otherwise substantively identical to the Amended Complaint, and all motions to dismiss the Amended Complaint have been treated as responsive to the SAC. On September 1, 2009, the Court heard Defendants’ motions to dismiss the SAC and ruled at the hearing that all claims against all Defendants are time-barred. The Court also considered whether there were further independent grounds for dismissing the claims, and supplemental briefing was submitted with respect to claims against one defendant and plaintiffs’ renewed request for further leave to amend. On March 23, 2010, the Court entered final Orders granting the motions to dismiss as to all Defendants and issued a minute Order denying Plaintiffs’ renewed request for further leave to amend. On May 21, 2010, Plaintiffs filed a Notice of Appeal. The Company believes that plaintiffs’ claims and alleged damages are without merit and it intends to continue 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.

Switch and Data Litigation

In the fourth quarter of 2009, three purported stockholder class action lawsuits were filed against the Company in connection with the Company’s proposed merger with Switch and Data. The first, filed October 27, 2009 in the Delaware Chancery Court, names Equinix, Sundance Acquisition Corporation, Switch and Data, and the members of Switch and Data’s board of directors as defendants. The lawsuit alleges that the Switch and Data directors breached their fiduciary duties to Switch and Data’s stockholders in connection with the proposed merger, and that Equinix aided and abetted these alleged breaches. The second complaint, filed October 30, 2009 in Florida state court, raises similar claims against the same defendants. The third complaint, filed on December 7, 2009 in the United States District Court for the Middle District of Florida, likewise raises similar claims but did not name Sundance Acquisition Corporation as a defendant. Both the second and third complaints included claims alleging that Switch and Data had failed to disclose material information concerning the merger to stockholders.

On January 19, 2010, counsel for parties in all three lawsuits entered into a memorandum of understanding in which they agreed upon the terms of a settlement of all three lawsuits. In connection with this settlement, the three lawsuits and all claims asserted therein are expected to be dismissed with prejudice. The proposed settlement is conditional upon, among other things, consummation of the merger and final approval of the proposed settlement by the Florida state court. The proposed settlement contemplates that plaintiffs’ counsel will apply to the Florida state court for an award of attorneys’ fees and costs in an aggregate amount of $900,000, and that the defendants will not oppose or undermine this application. The Company expects that approximately 70 percent of these attorneys’ fees will be paid by insurance maintained by Switch and Data, and that the Company will pay the remainder. Pursuant to this agreement, the parties sought and obtained stays of the Florida federal and Delaware actions pending approval of the settlement. On March 22, 2010, the parties entered into a stipulation of settlement and release, adopting the terms of the memorandum of understanding outlined above. Pursuant to this stipulation, on March 25, 2010, the parties filed a Joint Motion for Class Certification and Preliminary Approval of Settlement in Florida state court. On May 7, 2010, the Court granted the motion and scheduled a final approval hearing for August 9, 2010. If final approval of the settlement is granted, then the parties will seek dismissal with prejudice of the other two actions. If the settlement is not finalized, the Company intends to continue to defend the action 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.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Litigation Summary

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 with the exception of the Switch and Data litigation. As a result, the Company had not accrued for any amounts in connection with these legal matters as of June 30, 2010 with the exception of the Switch and Data litigation. The Company and its officers and directors intend to continue to defend the actions vigorously.

Other Purchase Commitments

Primarily as a result of the Company’s various IBX expansion projects, as of June 30, 2010, the Company was contractually committed for $77,324,000 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 June 30, 2010, 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 2010 and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of 2010 and thereafter. Such other miscellaneous purchase commitments totaled $98,550,000 as of June 30, 2010.

10. Other Comprehensive Income and Loss

The components of other comprehensive income (loss) are as follows (in thousands):

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010     2009    2010     2009

Net income (loss)

   $ (2,274   $ 17,440    $ 11,925      $ 32,897

Unrealized gain (loss) on available for sale securities, net of tax of $59, $118, $65 and $406, respectively

     (78     163      (182     557

Unrealized gain on interest rate swaps, net of tax of $0, $517, $3,469 and $371, respectively

     —          713      4,933        439

Foreign currency translation gain (loss)

     (32,034     73,075      (72,123     58,283
                             

Comprehensive income (loss)

   $ (34,386   $ 91,391    $ (55,447   $ 92,176
                             

Changes in foreign currencies, particularly the British pound and Euro, can have a significant impact to the Company’s consolidated balance sheets (as evidenced above in the Company’s foreign currency translation gain or loss), as well as its consolidated results of operations, as amounts in foreign currencies are generally translating into more U.S. dollars when the U.S. dollar weakens or less U.S. dollars when the U.S. dollar strengthens. During the three and six months ended June 30, 2010, the U.S. dollar strengthened against certain of the currencies of the foreign countries in which the Company operates. This has significantly impacted the Company’s condensed consolidated balance sheets (as evidenced in the Company’s foreign currency translation losses), as well as its condensed consolidated statements of operations as amounts denominated in foreign currencies are generally translating into less U.S. dollars. To the extent that the U.S. dollar strengthens further, this will continue to impact the Company’s consolidated financial statements including the amount of revenue that the Company reports in future periods.

11. Segment Information

During the three months ended June 30, 2010, the Company changed its reportable segments as a result of the addition of Switch and Data’s Canadian operations in connection with the Switch and Data Acquisition. The Company’s prior U.S. segment is now re-designated as the North America segment. The change in reportable segments did not impact the Company’s prior periods’ segment disclosures. While the Company has a single line of business, which is the design, build-out and operation of IBX data centers, it has determined that it has three reportable segments comprised of its North America, Europe and

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Asia-Pacific geographic regions. The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources based on the Company’s revenue and adjusted EBITDA performance both on a consolidated basis and based on these three geographic regions.

The Company provides the following segment disclosures as follows (in thousands):

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010     2009    2010     2009

Total revenues:

         

North America (1)

   $ 191,646      $ 129,746    $ 340,202      $ 254,640

Europe

     66,084        55,056      130,248        102,856

Asia-Pacific

     38,364        28,366      74,293        54,903
                             
   $ 296,094      $ 213,168    $ 544,743      $ 412,399
                             

Total depreciation and amortization:

         

North America (1)

   $ 42,542      $ 26,995    $ 70,408      $ 52,844

Europe

     13,601        11,203      27,954        20,768

Asia-Pacific

     6,607        6,693      13,077        12,955
                             
   $ 62,750      $ 44,891    $ 111,439      $ 86,567
                             

Income from operations:

         

North America (1)

   $ 22,529      $ 28,748    $ 52,130      $ 62,689

Europe

     7,672        7,887      15,993        13,313

Asia-Pacific

     10,026        4,394      20,086        8,733
                             
   $ 40,227      $ 41,029    $ 88,209      $ 84,735
                             

Capital expenditures:

         

North America (1)

   $ 201,081 (2)    $ 36,831    $ 297,047 (2)    $ 112,930

Europe

     38,381        21,384      78,225        41,265

Asia-Pacific

     22,532        12,551      30,122        25,412
                             
   $ 261,994      $ 70,766    $ 405,394      $ 179,607
                             

 

(1)    Includes the operations of Switch and Data from May 1, 2010 through June 30, 2010.

(2)    Includes the purchase price for the Switch and Data Acquisition, net of cash acquired, which totaled $113,289,000.

The Company’s long-lived assets are located in the following geographic areas as of (in thousands):

 

     June 30,
2010
   December 31,
2009

North America

   $ 1,693,687    $ 1,130,637

Europe

     498,190      493,492

Asia-Pacific

     208,932      183,986
             
   $ 2,400,809    $ 1,808,115
             

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Revenue information on a services basis is as follows (in thousands):

 

     Three months ended
June 30,
   Six months ended
June 30,
     2010    2009    2010    2009

Colocation

   $ 233,320    $ 170,041    $ 433,679    $ 327,525

Interconnection

     40,942      26,134      70,174      51,331

Managed infrastructure

     7,295      7,131      14,595      14,508

Rental

     560      239      905      503
                           

Recurring revenues

     282,117      203,545      519,353      393,867

Non-recurring revenues

     13,977      9,623      25,390      18,532
                           
   $ 296,094    $ 213,168    $ 544,743    $ 412,399
                           

No single customer accounted for 10% or greater of the Company’s revenues for the three and six months ended June 30, 2010 and 2009. No single customer accounted for 10% or greater of the Company’s gross accounts receivable as of June 30, 2010 and December 31, 2009.

12. Restructuring Charges

Switch and Data Restructuring Charge

During the three months ended June 30, 2010, the Company recorded a restructuring charge related to one-time termination benefits, primarily comprised of severance, attributed to certain Switch and Data employees as presented below (in thousands):

 

Severance-related expenses (1)(2)

   $ 4,372   

Cash payments

     (765

Non-cash payments (2)

     (1,491
        

Accrued restructuring charge as of June 30, 2010 (3)

   $ 2,116   
        

 

(1)    Included in the condensed consolidated statements of operations as a restructuring charge.

(2)    Includes a stock-based compensation charge incurred as a result of modifying equity awards for one of the former Switch and Data executives to accelerate vesting.

(3)    Included within other current liabilities.

        

        

       

As of June 30, 2010, the Company’s remaining accrued restructuring charge associated with the Switch and Data Acquisition is expected to be paid out during the remainder of 2010. The Company anticipates that it will incur additional restructuring charges in connection with the Switch and Data Acquisition related to one-time termination benefits during the remainder of 2010 and the first four months of 2011.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

2004 Restructuring Charge

A summary of the movement in the 2004 accrued restructuring charge from December 31, 2009 to June 30, 2010 is outlined as follows (in thousands):

 

     Accrued
restructuring
charge as of
December 31,
2009
    Restructuring
charge
    Accretion
expense
   Cash
payments
    Accrued
restructuring
charge as of
June 30,
2010
 

Estimated lease exit costs

   $ 5,919      $ (15   $ 142    $ (787   $ 5,259   
                                       
     5,919        (15     142      (787     5,259   
                           

Less current portion

     (2,043            (1,571
                       
   $ 3,876             $ 3,688   
                       

As the Company currently has no plans to enter into a lease termination with the landlord associated with the excess space lease in the New York metro area, the Company has reflected its accrued restructuring liability as both a current and non-current liability. The Company reports accrued restructuring charges within other current liabilities and other liabilities on the accompanying consolidated balance sheets as of June 30, 2010 and December 31, 2009. The Company is contractually committed to this excess space lease through 2015.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Liquidity and Capital Resources” below and “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. All forward-looking statements in this document are based on information available to us as of the date of this Report and we assume no obligation to update any such forward-looking statements.

Our management’s discussion and analysis of financial condition and results of operations is intended to assist readers in understanding our financial information from our management’s perspective and is presented as follows:

 

   

Overview

 

   

Results of Operations

 

   

Non-GAAP Financial Measures

 

   

Liquidity and Capital Resources

 

   

Contractual Obligations and Off-Balance-Sheet Arrangements

 

   

Critical Accounting Policies and Estimates

 

   

Recent Accounting Pronouncements

In February 2010, we issued $750.0 million aggregate principal amount of 8.125% senior notes due March 1, 2018 which we refer to as the senior notes offering.

On April 30, 2010, as more fully described in Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we completed the acquisition of Switch & Data Facilities Company, Inc., referred to as Switch and Data, a publicly-held company headquartered in Tampa, Florida. We refer to this transaction as the Switch and Data acquisition. Switch and Data operated 34 data centers in the U.S. and Canada. The combined company operates under the Equinix name.

Overview

Equinix provides global data center services that protect and connect the world’s most valued information assets. Global enterprises, financial services companies, and content and network service providers rely upon Equinix’s leading insight and our 87 data centers in 35 markets around the world for the safeguarding of their critical IT equipment and the ability to directly connect to the networks that enable today’s information-driven economy. Equinix offers the following data center services: premium data center colocation, interconnection and exchange services, and outsourced IT infrastructure services. As of June 30, 2010, we operated IBX data centers in the Atlanta, Boston, Buffalo, Chicago, Cleveland, Dallas, Denver, Detroit, Indianapolis, Los Angeles, Miami, Nashville, New York, Philadelphia, Phoenix, Pittsburgh, Seattle, Silicon Valley, St. Louis, Tampa, Toronto and Washington, D.C. metro areas in North America; France, Germany, the Netherlands, Switzerland and the United Kingdom in Europe; and Australia, Hong Kong, Japan and Singapore in Asia-Pacific.

We leverage our global data centers in 35 markets around the world as a global service delivery platform which serves more than 90% of the world’s Internet routes and allows our customers to increase information and application delivery performance while significantly reducing costs. Based on our global

 

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delivery platform and the quality of our IBX data centers, we believe we have established a critical mass of customers. As more customers locate in our IBX data centers, it benefits their suppliers and business partners to colocate as well in order to gain the full economic and performance benefits of our services. These partners, in turn, pull in their business partners, creating a “marketplace” for their services. Our global delivery platform enables scalable, reliable and cost-effective colocation, interconnection and traffic exchange thus lowering overall cost and increasing flexibility. Our focused business model is based on our critical mass of customers and the resulting “marketplace” effect. This global delivery platform, combined with our strong financial position, continues to drive new customer growth and bookings as we drive scale into our global business.

Historically, our market has been served by large telecommunications carriers who have bundled their telecommunications products and services with their colocation offerings. The data center services market landscape has evolved to include cloud computing/utility providers, application hosting providers and systems integrators, managed infrastructure hosting providers and colocation providers with over 350 companies providing data center services in the United States alone. Each of these data center services providers can bundle various colocation, interconnection and network services, and outsourced IT infrastructure services. We are able to offer our customers a global platform that supports global reach to 12 countries, proven operational reliability, improved application performance and network choice, and a highly scalable set of services.

Our customer count increased to 3,661 as of June 30, 2010 versus 2,430 as of June 30, 2009, an increase of 51%. This significant increase was primarily due to the Switch and Data acquisition in April 2010. 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 Switch and Data acquisition, our utilization rate decreased to 76% as of June 30, 2010 versus approximately 83% as of June 30, 2009; however, excluding the impact of our IBX data center expansion projects that have opened during the last 12 months, our utilization rate would have increased to approximately 86% as of June 30, 2010. Including the impact of the Switch and Data acquisition, our utilization rate was 74% as of June 30, 2010. Our utilization rate varies from market to market among our IBX data centers across our North America, Europe and Asia-Pacific regions. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market it may limit our ability for growth in that market. We perform demand studies on an ongoing basis to determine if future expansion is warranted in a market. In addition, power and cooling requirements for most customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally do not control the amount of power our customers draw from installed circuits, we have negotiated power consumption limitations with certain of our high power demand customers. This increased power consumption has driven the requirement to build out our new IBX data centers to support power and cooling needs twice that of previous IBX data centers. We could face power limitations in our centers even though we may have additional physical cabinet capacity available within a specific IBX data center. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows.

Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and service offerings. As was the case with our recent expansions and acquisitions, our expansion criteria will be dependent on a number of factors such as demand from new and existing customers, quality of the design, power capacity, access to networks, capacity availability in the current market location, amount of incremental investment required by us in the targeted property, lead-time to break-even and in-place customers. Like our recent expansions and acquisitions, the right combination of these factors may be attractive to us. Depending on the circumstances, these transactions may require additional capital expenditures funded by upfront cash payments or through long-term financing arrangements, in order to bring these properties up to Equinix standards. Property expansion may be in the form of purchases of real property, long-term leasing arrangements or acquisitions. Future purchases, construction or acquisitions may be completed by us or with partners or potential customers to minimize the outlay of cash, which can be significant.

 

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Our business is based on a recurring revenue model comprised of colocation, interconnection and managed infrastructure services. We consider these services recurring as our customers are generally billed on a fixed and recurring basis each month for the duration of their contract, which is generally one to three years in length. Our recurring revenues have comprised more than 90% of our total revenues during the past three years and during the past three years, in any given quarter, greater than half of our monthly recurring revenue bookings came from existing customers, contributing to our revenue growth.

Our non-recurring revenues are primarily comprised of installation services related to a 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 upon completion of the installation or professional services work performed. The majority of these non-recurring revenues are typically billed on the first invoice distributed to the customer in connection with their initial installation. However, revenues from installation services are deferred and recognized ratably over the longer of the term of the related contract or expected life of the services. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future.

Our North America revenues are derived primarily from colocation and interconnection services while our Europe and Asia-Pacific revenues are derived primarily from colocation and managed infrastructure services.

The largest components of our cost of revenues are depreciation, rental payments related to our leased IBX data centers, utility costs, including electricity and bandwidth, IBX data center employees’ salaries and benefits, including stock-based compensation, repairs and maintenance, supplies and equipment and security services. A substantial majority of our cost of revenues is fixed in nature and should not vary significantly from period to period, unless we expand our existing IBX data centers or open or acquire new IBX data centers. However, there are certain costs which are considered more variable in nature, including utilities and supplies, that are directly related to growth in our existing and new customer base. We expect the cost of our utilities, specifically electricity, will increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth in consumption by the customer. In addition, the cost of electricity is generally higher in the summer months as compared to other times of the year. To the extent we incur increased utility costs, such increased costs could materially impact our financial condition, results of operations and cash flows. Furthermore, to the extent we incur increased electricity costs as a result of either climate change policies or the physical effects of climate change, such increased costs could materially impact our financial condition, results of operations and cash flows.

Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, including stock-based compensation, sales commissions, marketing programs, public relations, promotional materials and travel, as well as bad debt expense and amortization of customer contract intangible assets.

General and administrative expenses consist primarily of salaries and related expenses, including stock-based compensation, accounting, legal and other professional service fees, and other general corporate expenses such as our corporate regional headquarters office leases and some depreciation expense.

Due to our recurring revenue model, and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth, we expect our cost of revenues, sales and marketing expenses and general and administrative expenses to decline as a percentage of revenue over time, although we expect each of them to grow in absolute dollars in connection with our growth. This is evident in the trends noted below in our discussion on our results of operations. However, for cost of revenues, this trend may periodically be impacted when a large expansion project opens or is acquired and before it starts generating any meaningful revenue. Furthermore, in relation to cost of revenues, we note that the North America region has a lower cost of revenues as a percentage of revenue than either Europe or Asia-Pacific. This is due to both the increased scale and maturity of the North America region compared to either Europe or Asia-Pacific, as well as a higher cost structure

 

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outside of North America, particularly in Europe. While we expect all three regions to continue to see lower cost of revenues as a percentage of revenues in future periods, we expect the trend of North America having the lowest cost of revenues as a percentage of revenue and Europe having the highest to continue. As a result, to the extent that revenue growth outside North America grows in greater proportion than revenue growth in North America, our overall cost of revenues as a percentage of revenues may increase slightly in future periods. Sales and marketing expenses and general and administrative expenses may also periodically increase as a percentage of revenue as we continue to scale our operations to support our growth.

Results of Operations

Our results of operations for the three months and six months ended June 30, 2010 include the operations of Switch and Data from May 1, 2010.

Three Months Ended June 30, 2010 and 2009

Revenues. Our revenues for the three months ended June 30, 2010 and 2009 were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Three months ended June 30,     Change  
     2010    %     2009    %     $    %  

North America:

               

Recurring revenues

   $ 184,794    63   $ 125,051    59   $ 59,743    48

Non-recurring revenues

     6,852    2     4,695    2     2,157    46
                                   
     191,646    65     129,746    61     61,900    48
                                   

Europe:

               

Recurring revenues

     60,664    20     51,508    24     9,156    18

Non-recurring revenues

     5,420    2     3,548    2     1,872    53
                                   
     66,084    22     55,056    26     11,028    20
                                   

Asia-Pacific:

               

Recurring revenues

     36,659    12     26,986    12     9,673    36

Non-recurring revenues

     1,705    1     1,380    1     325    24
                                   
     38,364    13     28,366    13     9,998    35
                                   

Total:

               

Recurring revenues

     282,118    95     203,545    95     78,573    39

Non-recurring revenues

     13,976    5     9,623    5     4,353    45
                                   
   $ 296,094    100   $ 213,168    100   $ 82,926    39
                                   

North America Revenues. The increase in North America revenues was primarily due to the impact of the Switch and Data acquisition, which resulted in $37.6 million of additional revenue for the three months ended June 30, 2010. The following table presents our North America revenues excluding the impact of the Switch and Data acquisition (dollars in thousands):

 

     Three months ended
June 30,
   Change  
     2010    2009    $    %  

North America:

           

Recurring revenues

   $ 147,875    $ 125,051    $ 22,824    18

Non-recurring revenues

     6,179      4,695      1,484    32
                       
   $ 154,054    $ 129,746    $ 24,308    19
                       

Excluding the impact of the Switch and Data acquisition, 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 during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers, as well as selective price increases in

 

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each of our IBX markets. Additionally, during the three months ended June 30, 2010, we recorded $9.6 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Los Angeles and New York metro areas.

We expect that our North America revenues, including those of the acquired Switch and Data operations, will continue to grow in future periods as a result of continued growth in the recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Atlanta, Dallas, Silicon Valley and Washington, D.C. metro areas, which are expected to open during the remainder of 2010 and first quarter of 2011.

Europe Revenues. During the three months ended June 30, 2010, our revenues from Germany, the largest revenue contributor in the Europe region for the period, represented approximately 36% of the regional revenues. During the three months ended June 30, 2009, our revenues from the United Kingdom, the largest revenue contributor in the Europe region for the period, represented approximately 36% of the regional revenues. Our Europe revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the three months ended June 30, 2010, we recorded approximately $6.9 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Dusseldorf, Frankfurt, Geneva, London, Munich, Paris and Zurich metro areas. We expect that our Europe revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Amsterdam and Frankfurt metro areas, which are expected to open during the remainder of 2010.

Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 38% and 36%, respectively, of the regional revenues for the three months ended June 30, 2010 and 2009. Our Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the three months ended June 30, 2010, we recorded approximately $1.8 million of revenue generated from our IBX center expansions in the Hong Kong and Singapore metro areas. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX center expansions and additional expansions currently taking place in the Singapore, Sydney and Tokyo metro areas which are expected to open during the remainder of 2010.

Cost of Revenues. Our cost of revenues for the three months ended June 30, 2010 and 2009 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     Change  
     2010    %     2009    %     $    %  

North America

   $ 100,416    61   $ 66,667    56   $ 33,749    51

Europe

     41,678    26     34,598    29     7,080    20

Asia-Pacific

     20,488    13     17,269    15     3,219    19
                                   

Total

   $ 162,582    100   $ 118,534    100   $ 44,048    37
                                   

 

     Three months ended
June 30,
 
     2010     2009  

Cost of revenues as a percentage of revenues:

    

North America

   52   51

Europe

   63   63

Asia-Pacific

   53   61

Total

   55   56

 

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North America Cost of Revenues. The increase in our North America cost of revenues was primarily due to the impact of the Switch and Data acquisition, which resulted in $27.3 million of additional cost of revenues for the three months ended June 30, 2010. Our North America cost of revenues for the three months ended June 30, 2010 and 2009 included $37.0 million and $25.3 million, respectively, of depreciation expense, including $9.6 million of depreciation expense from the impact of the Switch and Data acquisition for the three months ended June 30, 2010.

Excluding the impact of the Switch and Data acquisition, our North America cost of revenues during the three months ended June 30, 2010 was $73.1 million, which represents an increase of 10% from the three months ended June 30, 2009. This increase was primarily due to growth in depreciation expense as a result of our IBX center expansion activity; however, this growth was partially offset by a $2.3 million decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation, the increase was primarily due to overall growth related to our revenue growth and costs associated with our expansion projects, including an increase of $2.1 million in rent and facility costs. We expect North America cost of revenues to increase as we continue to grow our business.

Europe Cost of Revenues. Europe cost of revenues for the three months ended June 30, 2010 and 2009 included $12.2 million and $9.6 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity; however, this growth was partially offset by a $261,000 decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation expense, the increase in Europe cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as higher utility costs arising from increased customer installations and revenues attributed to customer growth and higher repair and maintenance costs. We expect Europe cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the three months ended June 30, 2010 and 2009 included $6.4 million and $6.5 million, respectively, of depreciation expense. Decrease in depreciation expense was primarily due to a $1.4 million decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009; however, this decrease was partially offset by growth in depreciation expense as a result of our IBX center expansion activity. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as an increase of $1.0 million in utility costs arising from increased customer installations and revenues attributed to customer growth, an increase in rent and facility costs and higher repair and maintenance costs. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

Sales and Marketing Expenses. Our sales and marketing expenses for the three months ended June 30, 2010 and 2009 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     Change  
     2010    %     2009    %     $    %  

North America

   $ 19,506    67   $ 9,330    57   $ 10,176    109

Europe

     5,915    21     4,728    29     1,187    25

Asia-Pacific

     3,492    12     2,311    14     1,181    51
                                   

Total

   $ 28,913    100   $ 16,369    100   $ 12,544    77
                                   

 

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     Three months ended
June 30,
 
     2010     2009  

Sales and marketing expenses as a percentage of revenues:

    

North America

   10   7

Europe

   9   9

Asia-Pacific

   9   8

Total

   10   8

North America Sales and Marketing Expenses. The increase in our North America sales and marketing expenses was primarily due to the impact of the Switch and Data acquisition, which resulted in $5.4 million of additional sales and marketing expenses including $1.7 million of amortization expense for customer contracts for the three months ended June 30, 2010.

Excluding the impact of the Switch and Data acquisition, our North America sales and marketing expenses during the three months ended June 30, 2010 were $14.1 million, which represents an increase of 51% from the three months ended June 30, 2009. This increase was primarily due to $3.7 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (138 North America sales and marketing employees as of June 30, 2010 versus 103 as of June 30, 2009).

We generally expect North America 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 generally expect them to decrease. However, we have decided to invest further in our North America sales and marketing team in 2010 including anticipated headcount growth and new product innovation efforts and, as a result, this trend will be temporarily impacted.

Europe Sales and Marketing Expenses. The increase in our Europe sales and marketing expenses was primarily due to higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth(67 Europe sales and marketing employees as of June 30, 2010 versus 54 as of June 30, 2009). Going forward, although we are carefully monitoring our spending given the current economic environment, we generally expect Europe sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (52 Asia-Pacific sales and marketing employees as of June 30, 2010 versus 35 as of June 30, 2009). Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease.

General and Administrative Expenses. Our general and administrative expenses for the three months ended June 30, 2010 and 2009 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     Change  
     2010    %     2009    %     $     %  

North America

   $ 38,989    72   $ 25,221    67   $ 13,768      55

Europe

     10,819    20     7,843    21     2,976      38

Asia-Pacific

     4,358    8     4,392    12     (34   (1 %) 
                                    

Total

   $ 54,166    100   $ 37,456    100   $ 16,710      45
                                    

 

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     Three months ended
June 30,
 
     2010     2009  

General and administrative expenses as a percentage of revenues:

    

North America

   20   19

Europe

   16   14

Asia-Pacific

   11   15

Total

   18   18

North America General and Administrative Expenses. The increase in our North America general and administrative expenses was primarily due to the impact of the Switch and Data acquisition, which resulted in $6.5 million of additional general and administrative expenses for the three months ended June 30, 2010.

Excluding the impact of the Switch and Data acquisition, our North America general and administrative expenses during the three months ended June 30, 2010 was $32.4 million, which represents an increase of 29% from the three months ended June 30, 2009. The increase in our North America general and administrative expenses was primarily due to $5.5 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (352 North America general and administrative employees as of June 30, 2010 versus 285 as of June 30, 2009) and higher professional services related to various consulting projects to support our growth.

Going forward, although we are carefully monitoring our spending given the current economic environment, we expect North America general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Europe General and Administrative Expenses. The increase in our Europe general and administrative expenses was primarily due to $2.1 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (143 Europe general and administrative employees as of June 30, 2010 versus 94 as of June 30, 2009). Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our Europe general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Asia-Pacific General and Administrative Expenses. Our Asia-Pacific general and administrative expenses did not significantly change. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Restructuring Charges. During the three months ended June 30, 2010, we recorded restructuring charges totaling $4.4 million primarily related to one-time termination benefits attributed to certain Switch and Data employees. For additional information, see “Restructuring Charges” in Note 12 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. We anticipate that we will incur additional restructuring charges in connection with the Switch and Data acquisition also related to one-time termination benefits during the remainder of 2010 and the first four months of 2011. During the three months ended June 30, 2009, we recorded a reduction to restructuring charges of $220,000 from revised sublease assumptions on our excess space in the New York metro area. Our restructuring charges all relate to our North America geographic region.

Acquisition Costs. During the three months ended June 30, 2010, we recorded acquisition costs totaling $5.8 million related to the Switch and Data acquisition. During the three months ended June 30, 2009, we did not record any acquisition costs. We do not expect to incur significant additional acquisition costs related to the Switch and Data acquisition. Our acquisition costs all relate to our North America geographic region.

 

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Interest Income. Interest income decreased to $491,000 for the three months ended June 30, 2010 from $680,000 for the three months ended June 30, 2009. Interest income decreased primarily due to lower yields on invested balances. The average yield for the three months ended June 30, 2010 was 0.20% versus 0.48% for the three months ended June 30, 2009. We expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries and from the utilization of cash to finance our expansion activities.

Interest Expense. Interest expense increased to $37.6 million for the three months ended June 30, 2010 from $15.9 million for the three months ended June 30, 2009. This increase in interest expense was primarily due to additional financings entered into during 2009 and 2010 consisting of (i) our $750.0 million 8.125% senior notes offering in February 2010, (ii) our $373.8 million 4.75% convertible subordinated notes offering in June 2009 and (iii) our new Asia-Pacific financing in May 2010, of which $99.0 million was outstanding as of June 30, 2010 with an approximate blended interest rate of 5.30% per annum, which replaced both our previously-existing Asia-Pacific and Singapore financings. This increase was partially offset by our repayment of the Chicago IBX financing in March 2010 and the European financing in April 2010. During the three months ended June 30, 2010 and 2009, we capitalized $3.0 million and $3.8 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we recognize the full impact of our new Asia-Pacific financing, although this has been partially offset by repayment of debt, such as the European financing, and capitalized interest, which we expect to increase during the remainder of 2010 as we intend to embark on more expansion projects. We may also incur additional indebtedness to support our growth, resulting in further interest expense.

Loss on debt extinguishment and interest rate swaps, net. During the three months ended June 30, 2010, we recorded a $1.5 million loss on debt extinguishment and interest rate swaps, net. See “Loss on Debt Extinguishment and Interest Rate Swaps, Net” in Note 8 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. We did not record a loss on debt extinguishment and interest rate swaps, net, during the three months ended June 30, 2009.

Other Income (Expense). For the three months ended June 30, 2010, we recorded $1.5 million of other expense, primarily due to foreign currency exchange losses during the period. For the three months ended June 30, 2009, we recorded $2.6 million of other income, primarily due to foreign currency exchange gains during the period.

Income Taxes. For the three months ended June 30, 2010 and 2009, we recorded $2.4 million and $11.0 million of income tax expenses, respectively. During the three months ended June 30, 2010, our effective tax rate was not meaningful for comparison purposes because of an increase in the amount of foreign losses not benefited in our effective tax rate and an expected decline in our income before income taxes in the U.S. resulting from the effects of the Switch and Data acquisition. Our effective tax rate was 40.7% for the three months ended June 30, 2009. We expect cash income taxes during the remainder of 2010 to be significantly lower than income tax expense for the year because we still have a large amount of net operating loss carry-forwards in most of the jurisdictions in which we operate, which can be used to offset the taxable profit generated in 2010. The cash tax for 2010 is primarily for the U.S. Alternative Minimum Tax and foreign income taxes, while cash tax for 2009 was primarily for the U.S. Alternative Minimum Tax, the California state income tax and foreign income taxes.

 

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Six Months Ended June 30, 2010 and 2009

Revenues. Our revenues for the six months ended June 30, 2010 and 2009 were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Six months ended June 30,     Change  
     2010    %     2009    %     $    %  

North America:

               

Recurring revenues

   $ 328,211    60   $ 245,212    60   $ 82,999    34

Non-recurring revenues

     11,991    2     9,428    2     2,563    27
                                   
     340,202    62     254,640    62     85,562    34
                                   

Europe:

               

Recurring revenues

     120,109    22     96,383    23     23,726    25

Non-recurring revenues

     10,139    2     6,473    2     3,666    57
                                   
     130,248    24     102,856    25     27,392    27
                                   

Asia-Pacific:

               

Recurring revenues

     71,033    13     52,272    12     18,761    36

Non-recurring revenues

     3,260    1     2,631    1     629    24
                                   
     74,293    14     54,903    13     19,390    35
                                   

Total:

               

Recurring revenues

     519,353    95     393,867    95     125,486    32

Non-recurring revenues

     25,390    5     18,532    4     6,858    37
                                   
   $ 544,743    100   $ 412,399    100   $ 132,344    32
                                   

North America Revenues. The increase in North America revenues was primarily due to the impact of the Switch and Data acquisition, which resulted in $37.6 million of additional revenue for the six months ended June 30, 2010. The following table presents our North America revenues excluding the impact of the Switch and Data acquisition (dollars in thousands):

 

     Six months ended
June 30,
   Change  
     2010    2009    $    %  

North America:

           

Recurring revenues

   $ 291,292    $ 245,212    $ 46,080    19

Non-recurring revenues

     11,318      9,428      1,890    20
                       
   $ 302,610    $ 254,640    $ 47,970    19
                       

Excluding the impact of the Switch and Data acquisition, 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 during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers, as well as selective price increases in each of our IBX markets. Additionally, during the six months ended June 30, 2010, we recorded $17.4 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Los Angeles and New York metro areas.

We expect that our North America revenues, including those of the acquired Switch and Data operations, will continue to grow in future periods as a result of continued growth in the recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Atlanta, Dallas, Silicon Valley and Washington, D.C. metro areas, which are expected to open during the remainder of 2010 and first quarter of 2011.

Europe Revenues. During the six months ended June 30, 2010, our revenues from Germany, the largest revenue contributor in the Europe region for the period, represented approximately 36% of the regional revenues. During the six months ended June 30, 2009, our revenues from the United Kingdom, the largest revenue contributor in the Europe region for the period, represented approximately 37% of the

 

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regional revenues. Our Europe revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the six months ended June 30, 2010, we recorded approximately $13.2 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Dusseldorf, Frankfurt, Geneva, London, Munich, Paris and Zurich metro areas. We expect that our Europe revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Amsterdam and Frankfurt metro areas, which are expected to open during the remainder of 2010.

Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 37% and 36%, respectively, of the regional revenues for the six months ended June 30, 2010 and 2009. Our Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the six months ended June 30, 2010, we recorded approximately $4.0 million of revenue generated from our IBX center expansions in the Hong Kong and Singapore metro areas. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX center expansions and additional expansions currently taking place in the Singapore, Sydney and Tokyo metro areas which are expected to open during the remainder of 2010.

Cost of Revenues. Our cost of revenues for the six months ended June 30, 2010 and 2009 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     Change  
     2010    %     2009    %     $    %  

North America

   $ 172,489    58   $ 130,478    57   $ 42,011    32

Europe

     83,510    28     66,440    28     17,070    26

Asia-Pacific

     39,633    14     33,421    15     6,212    19
                                   

Total

   $ 295,632    100   $ 230,339    100   $ 65,293    28
                                   

 

     Six months ended
June 30,
 
     2010     2009  

Cost of revenues as a percentage of revenues:

    

North America

   51   51

Europe

   64   65

Asia-Pacific

   53   61

Total

   54   56

North America Cost of Revenues. The increase in our North America cost of revenues was primarily due to the impact of the Switch and Data acquisition, which resulted in $27.3 million of additional cost of revenues for the six months ended June 30, 2010. Our North America cost of revenues for the six months ended June 30, 2010 and 2009 included $63.4 million and $49.5 million, respectively, of depreciation expense, including $9.6 million of depreciation expense from the impact of the Switch and Data acquisition for the six months ended June 30, 2010.

Excluding the impact of the Switch and Data acquisition, our North America cost of revenues during the six months ended June 30, 2010 was $145.2 million, which represents an increase of 11% from the six months ended June 30, 2009. This increase was primarily due to growth in depreciation expense as resulted from our IBX center expansion activity; however, this growth was partially offset by a $4.6 million decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation, the increase was primarily due to overall growth related to our revenue growth and costs associated with our

 

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expansion projects, including (i) an increase of $4.2 million in rent and facility costs, (ii) $1.7 million in higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (323 North America employees as of June 30, 2010 versus 292 as of June 30, 2009) and (iii) an increase of $1.6 million in utility costs as a result of increased customer installations. We expect North America cost of revenues to increase as we continue to grow our business.

Europe Cost of Revenues. Europe cost of revenues for the six months ended June 30, 2010 and 2009 included $25.0 million and $17.7 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity; however, this growth was partially offset by a $526,000 decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation expense, the increase in Europe cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $2.6 million of utility costs arising from increased customer installations and revenues attributed to customer growth, (ii) $1.5 million of higher rent and facility costs, (iii) $1.4 million of higher compensation expense, (iv) $1.2 million of higher professional services related to our various consulting projects to support our growth in Europe and (v) $1.1 million of higher repair and maintenance costs. We expect Europe cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the six months ended June 30, 2010 and 2009 included $12.7 million and $12.6 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity; however, this growth was partially offset by a $2.8 million decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as $2.0 million of higher utility costs and an increase of $1.5 million of rent and facility costs. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

Sales and Marketing Expenses. Our sales and marketing expenses for the six months ended June 30, 2010 and 2009 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     Change  
     2010    %     2009    %     $    %  

North America

   $ 31,458    65   $ 17,464    57   $ 13,994    80

Europe

     10,906    23     8,662    28     2,244    26

Asia-Pacific

     6,017    12     4,646    15     1,371    30
                                   

Total

   $ 48,381    100   $ 30,772    100   $ 17,609    57
                                   

 

     Six months ended
June 30,
 
     2010     2009  

Sales and marketing expenses as a percentage of revenues:

    

North America

   9   7

Europe

   8   8

Asia-Pacific

   8   8

Total

   9   7

North America Sales and Marketing Expenses. The increase in our North America sales and marketing expenses was primarily due to the impact of the Switch and Data acquisition, which resulted in $5.4 million of additional sales and marketing expenses including $1.7 million of amortization expense for customer contracts for the six months ended June 30, 2010.

 

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Excluding the impact of the Switch and Data acquisition, our North America sales and marketing expenses during the six months ended June 30, 2010 were $26.1 million, which represents an increase of 49% from the six months ended June 30, 2009. This increase was primarily due to $6.2 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (138 North America sales and marketing employees as of June 30, 2010 versus 103 as of June 30, 2009).

We generally expect North America 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 generally expect them to decrease. However, we have decided to invest further in our North America sales and marketing team in 2010 including anticipated headcount growth and new product innovation efforts and, as a result, this trend will be temporarily impacted.

Europe Sales and Marketing Expenses. The increase in our Europe sales and marketing expenses was primarily due to $1.6 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (67 Europe sales and marketing employees as of June 30, 2010 versus 54 as of June 30, 2009). Going forward, although we are carefully monitoring our spending given the current economic environment, we generally expect Europe sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $985,000 of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (52 Asia-Pacific sales and marketing employees as of June 30, 2010 versus 35 as of June 30, 2009); however, our Asia-Pacific sales and marketing expenses for the six months ended June 30, 2010 included the benefit of a $680,000 accrual reversal associated with adjusting the estimated costs of an annual sales recognition program which is an out-of-period adjustment. This $680,000 out-of-period adjustment represents the correction of errors attributable to the year ended December 31, 2009, which we have concluded was not material to any previously-reported historical annual or quarterly period for the year ended December 31, 2009. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease.

General and Administrative Expenses. Our general and administrative expenses for the six months ended June 30, 2010 and 2009 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     Change  
     2010    %     2009    %     $    %  

North America

   $ 68,925    71   $ 50,062    69   $ 18,863    38

Europe

     19,839    20     14,441    20     5,398    37

Asia-Pacific

     8,557    9     8,103    11     454    6
                                   

Total

   $ 97,321    100   $ 72,606    100   $ 24,715    34
                                   

 

     Six months ended
June 30,
 
     2010     2009  

General and administrative expenses as a percentage of revenues:

    

North America

   20   20

Europe

   15   14

Asia-Pacific

   12   15

Total

   18   18

 

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North America General and Administrative Expenses. The increase in our North America general and administrative expenses was primarily due to the impact of the Switch and Data acquisition, which resulted in $6.5 million of additional general and administrative expenses for the six months ended June 30, 2010.

Excluding the impact of the Switch and Data acquisition, our North America general and administrative expenses during the six months ended June 30, 2010 was $62.4 million, which represents an increase of 25% from the six months ended June 30, 2009. This increase in our North America general and administrative expenses was primarily due to $10.1 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (352 North America general and administrative employees as of June 30, 2010 versus 285 as of June 30, 2009).

Going forward, although we are carefully monitoring our spending given the current economic environment, we expect North America general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Europe General and Administrative Expenses. The increase in our Europe general and administrative expenses was primarily due to $3.4 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (143 Europe general and administrative employees as of June 30, 2010 versus 94 as of June 30, 2009). Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our Europe general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to higher compensation costs. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Restructuring Charges. During the six months ended June 30, 2010, we recorded restructuring charges totaling $4.4 million primarily related to one-time termination benefits attributed to certain Switch and Data employees. For additional information, see “Restructuring Charges” in Note 12 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. We anticipate that we will incur additional restructuring charges in connection with the Switch and Data acquisition also related to one-time termination benefits during the remainder of 2010 and the first four months of 2011. During the six months ended June 30, 2009, we recorded reductions of restructuring charges totaling $6.1 million, primarily due to a reversal of a restructuring charge accrual of $5.8 million for our excess space in the Los Angeles metro area as a result of our decision to utilize this space to expand our original Los Angeles IBX center. Our excess space lease in the New York metro area remains abandoned and continues to carry a restructuring charge. Our restructuring charges all relate to our North America geographic region.

Acquisition Costs. During the six months ended June 30, 2010, we recorded acquisition costs totaling $10.8 million related to the Switch and Data acquisition. During the six months ended June 30, 2009, we did not record any acquisition costs. We do not expect to incur significant additional acquisition costs related to the Switch and Data acquisition. Our acquisition costs all relate to our North America geographic region.

Interest Income. Interest income decreased to $997,000 for the six months ended June 30, 2010 from $1.6 million for the six months ended June 30, 2009. Interest income decreased primarily due to lower yields on invested balances. The average yield for the six months ended June 30, 2010 was 0.19% versus 0.72% for the six months ended June 30, 2009. We expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries, and from the utilization of cash to finance our expansion activities.

 

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Interest Expense. Interest expense increased to $63.3 million for the six months ended June 30, 2010 from $29.4 million for the six months ended June 30, 2009. This increase in interest expense was primarily due to additional financings entered into during 2009 and 2010 consisting of (i) our $750.0 million 8.125% senior notes offering in February 2010, (ii) our $373.8 million 4.75% convertible subordinated notes offering in June 2009 and (iii) our new Asia-Pacific financing in April 2010, of which $99.0 million was outstanding as of June 30, 2010 with an approximate interest rate of 5.30% per annum, which replaced both our previously-existing Asia-Pacific and Singapore financings. This increase was partially offset by our repayment of the Chicago IBX financing in March 2010 and the European financing in April 2010. During the six months ended June 30, 2010 and 2009, we capitalized $6.7 million and $7.8 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we recognize the full impact of our new Asia-Pacific financing, although this has been partially offset by repayment of debt, such as the Chicago IBX financing in March 2010 and the European financing in April 2010, and capitalized interest, which we expect to increase during the remainder of 2010 as we intend to embark on more expansion projects. We may also incur additional indebtedness to support our growth, resulting in further interest expense.

Other-Than-Temporary Impairment Recovery (Loss) On Investments. For the six months ended June 30, 2010, we recorded a $3.4 million recovery of other-than-temporary impairment loss on investments due to an additional distribution from one of our money market accounts as more fully described in Note 4 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. During the six months ended June 30, 2009, we recorded $2.7 million of other-than-temporary impairment loss on this same money market account.

Loss on debt extinguishment and interest rate swaps, net. During the six months ended June 30, 2010, we recorded a $4.8 million loss on debt extinguishment and interest rate swaps, net. See “Loss on Debt Extinguishment and Interest Rate Swpas, Net” in Note 8 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. We did not record loss on debt extinguishment and interest rate swaps, net, during the six months ended June 30, 2009.

Other Income (Expense). For the six months ended June 30, 2010, we recorded $1.5 million of other expense, primarily due to foreign currency exchange losses during the period. For the six months ended June 30, 2009, we recorded $1.2 million of other income, primarily due to foreign currency exchange gains during the period.

Income Taxes. For the six months ended June 30, 2010 and 2009, we recorded $11.1 million and $22.6 million of income tax expenses, respectively. Our effective tax rates were 48.3% and 40.7% for the six months ended June 30, 2010 and 2009, respectively. The increase in the effective tax rate for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009 was due primarily to an increase in foreign losses which did not benefit the Company’s effective tax rate. We expect cash income taxes during the remainder of 2010 to be significantly lower than income tax expense for the year because we still have a large amount of net operating loss carry-forwards in most of the jurisdictions in which we operate, which can be used to offset the taxable profit generated in 2010. The cash tax for 2010 is primarily for the U.S. Alternative Minimum Tax and foreign income taxes, while cash tax for 2009 was primarily for the U.S. Alternative Minimum Tax, the California state income tax and foreign income taxes.

Non-GAAP Financial Measures

We provide all information required in accordance with generally accepted accounting principles (GAAP), but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. Accordingly, we use non-GAAP financial measures, primarily adjusted EBITDA, to evaluate our operations. In presenting adjusted EBITDA, we exclude certain items that we believe are not good indicators of our current or future operating performance. These items are depreciation, amortization, accretion of asset retirement obligations and accrued restructuring charges, stock-based compensation, restructuring charges and acquisition costs. Legislative and regulatory requirements encourage the use of and emphasis on GAAP financial metrics and require companies to

 

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explain why non-GAAP financial metrics are relevant to management and investors. We exclude these items in order for our lenders, investors, and industry analysts, who review and report on us, to better evaluate our operating performance and cash spending levels relative to our industry sector and competitors.

For example, we exclude depreciation expense as these charges primarily relate to the initial construction costs of our IBX data centers and do not reflect our current or future cash spending levels to support our business. Our IBX data centers are long-lived assets, and have an economic life greater than 10 years. The construction costs of our IBX data centers do not recur and future capital expenditures remain minor relative to our initial investment. This is a trend we expect to continue. In addition, depreciation is also based on the estimated useful lives of our IBX data centers. These estimates could vary from actual performance of the asset, are based on historical costs incurred to build out our IBX data centers, and are not indicative of current or expected future capital expenditures. Therefore, we exclude depreciation from our operating results when evaluating our operations.

In addition, in presenting the non-GAAP financial measures, we exclude amortization expense related to certain intangible assets, as it represents a cost that may not recur and is not a good indicator of our current or future operating performance. We exclude accretion expense, both as it relates to asset retirement obligations as well as accrued restructuring charge liabilities, as these expenses represent costs which we believe are not meaningful in evaluating our current operations. We exclude non-cash stock-based compensation expense as it represents expense attributed to equity awards that have no current or future cash obligations. As such, we, and many investors and analysts, exclude this stock-based compensation expense when assessing the cash generating performance of our operations. We also exclude restructuring charges from our non-GAAP financial measures. The restructuring charges relate to our decisions to exit leases for excess space adjacent to several of our IBX data centers, which we did not intend to build out, or our decision to reverse such restructuring charges or severance charges related to the Switch and Data acquisition. Finally, we also exclude acquisition costs from our non-GAAP financial measures. The acquisition costs relate to costs we incur in connection with business combinations. Management believes such items as restructuring charges and acquisition costs are non-core transactions; however, these types of costs will or may occur in future periods.

Our management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. However, we have presented such non-GAAP financial measures to provide investors with an additional tool to evaluate our operating results in a manner that focuses on what management believes to be our core, ongoing business operations. We believe that the inclusion of this non-GAAP financial measure provides consistency and comparability with past reports and provides a better understanding of the overall performance of the business and its ability to perform in subsequent periods. We believe that if we did not provide such non-GAAP financial information, investors would not have all the necessary data to analyze Equinix effectively.

Investors should note, however, that the non-GAAP financial measures used by us may not be the same non-GAAP financial measures, and may not be calculated in the same manner, as that of other companies. In addition, whenever we use non-GAAP financial measures, we provide a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure.

 

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We define adjusted EBITDA as income or loss from operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges and acquisition costs as presented below (dollars in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010    2009     2010    2009  

Income from operations

   $ 40,227    $ 41,029      $ 88,209    $ 84,735   

Depreciation, amortization and accretion expense

     63,626      45,266        112,948      87,233   

Stock-based compensation expense

     18,096      13,459        33,070      24,997   

Restructuring charges

     4,357      (220     4,357      (6,053

Acquisitions costs

     5,849      —          10,843      —     
                              

Adjusted EBITDA

   $ 132,155    $ 99,534      $ 249,427    $ 190,912   
                              

The geographic split of our adjusted EBITDA is presented below (dollars in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2010    2009     2010    2009  

North America:

          

Income from operations

   $ 22,529    $ 28,748      $ 52,130    $ 62,689   

Depreciation, amortization and accretion expense

     43,081      27,274        71,255      53,313   

Stock-based compensation expense

     13,650      10,212        24,663      19,028   

Restructuring charges

     4,357      (220     4,357      (6,053

Acquisitions costs

     5,849      —          10,843      —     
                              

Adjusted EBITDA

   $ 89,466    $ 66,014      $ 163,248    $ 128,977   
                              

Europe:

          

Income from operations

   $ 7,672    $ 7,887      $ 15,993    $ 13,313   

Depreciation, amortization and accretion expense

     13,737      11,234        28,221      20,835   

Stock-based compensation expense

     2,531      1,480        4,681      2,832   
                              

Adjusted EBITDA

   $ 23,940    $ 20,601      $ 48,895    $ 36,980   
                              

Asia-Pacific:

          

Income from operations

   $ 10,026    $ 4,394      $ 20,086    $ 8,733   

Depreciation, amortization and accretion expense

     6,808      6,758        13,472      13,085   

Stock-based compensation expense

     1,915      1,767        3,726      3,137   
                              

Adjusted EBITDA

   $ 18,749    $ 12,919      $ 37,284    $ 24,955   
                              

Our adjusted EBITDA results have improved each year and in each region due to the improved operating results discussed earlier in “Results of Operations”, as well as the nature of our business model consisting of a recurring revenue stream and a cost structure which has a large base that is fixed in nature that is also discussed earlier in “Overview”. We believe that our adjusted EBITDA results will continue to improve in future periods as we continue to grow our business.

Liquidity and Capital Resources

As of June 30, 2010, our total indebtedness was comprised of (i) convertible debt principal totaling $1.0 billion from our 2.50% convertible subordinated notes (gross of discount), our 3.00% convertible subordinated notes, and our 4.75% convertible subordinated notes (gross of discount) and (ii) non-convertible debt and financing obligations totaling $1.2 billion consisting of (a) $750.0 million of principal from our senior notes, (b) $189.3 million of principal from our mortgage and loans payable and (c) $215.3 million from our capital lease and other financing obligations.

 

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We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of our current portion of debt due, and to complete our publicly-announced expansion projects. As of June 30, 2010, we had $722.0 million of cash, cash equivalents and short-term and long-term investments. 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 strong customer base and have continued to experience relatively strong collections, if the current market conditions were to deteriorate further, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, all of which could have a material adverse effect on our liquidity.

As of June 30, 2010, we had a total of approximately $110.3 million of additional liquidity available to us, which consists of (i) approximately $103.7 million under the new Asia-Pacific financing and (ii) $6.6 million under the $25.0 million Bank of America revolving credit line. Our indebtedness as of June 30, 2010, as noted above, included approximately $1.0 billion of non-convertible senior debt. Although these are committed facilities, most of which are fully drawn or utilized and 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 effective June 30, 2010, 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 data centers, in certain of our existing markets which are at or near capacity within the next year, as well as potential acquisitions. While we will be able to fund some of these expansion plans with our existing resources, additional financing, either debt or equity, may be required to pursue certain of these additional expansion plans. However, if current market conditions were to deteriorate further, we may 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

 

     Six Months Ended
June 30,
 
     2010     2009  
     (in thousands)  

Net cash provided by operating activities

   $ 156,718      $ 165,443   

Net cash used in investing activities

     (359,012     (281,945

Net cash provided by financing activities

     377,563        297,716   

Operating Activities. The decrease in net cash provided by operating activities was primarily due to growth in accounts receivable and payments related to the termination of several interest rate swaps totaling $17.3 million. We expect that we will continue to generate cash from our operating activities during the remainder of 2010 and beyond.

Investing Activities. The increase in net cash used in investing activities was primarily due to higher capital expenditures as a result of expansion activity and the Switch and Data acquisition. During the six months ended June 30, 2010 and 2009, these capital expenditures were $292.1 million and $179.6 million, respectively. We expect that our IBX expansion construction activity will be at consistent levels. However, if the opportunity to expand is greater than planned and we have sufficient funding to increase the expansion opportunities available to us, we may increase the level of capital expenditures to support this growth.

 

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Financing Activities. The net cash provided by financing activities for the six months ended June 30, 2010 was primarily due to our $750.0 million 8.125% senior notes offering in February 2010, partially offset by repayment of our debt facilities, including the Chicago IBX financing, the European financing, the Asia-Pacific financing, the Singapore financing and the Netherlands financing; however, the Asia-Pacific financing and the Singapore financing were replaced by the new Asia-Pacific financing. Net cash provided by financing activities during the six months ended June 30, 2009 was primarily due to our 4.75% convertible notes offering, partially offset by repayment of our debt facilities. We expect that our financing activities will consist primarily of repayment of our debt during the remainder of 2010.

Debt Obligations

Senior Notes. In February 2010, we issued $750.0 million aggregate principal amount of 8.125% senior notes due March 1, 2018, which are referred to as the senior notes. Interest is payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2010.

The senior notes are unsecured and rank equal in right of payment to our existing or future senior debt and senior in right of payment to our existing and future subordinated debt. The senior notes will be effectively junior to any of our existing and future secured indebtedness and any indebtedness of our subsidiaries.

At any time prior to March 1, 2013, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the senior notes outstanding at a redemption price equal to 108.125% of the principal amount of the senior notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings, provided that (i) at least 65% of the aggregate principal amount of the senior notes remains outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur within 90 days of the date of the closing of such equity offerings. On or after March 1, 2014, we may redeem all or a part of the 8.125% senior notes, on any one or more occasions, at the redemption prices set forth below plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date, if redeemed during the one-year period beginning on March 1 of the years indicated below:

 

     Redemption price of the
senior notes
 

2014

   104.0625

2015

   102.0313

2016 and thereafter

   100.0000

In addition, at any time prior to March 1, 2014, we may also redeem all or a part of the senior notes at a redemption price equal to 100% of the principal amount of the senior notes redeemed plus applicable premium plus accrued and unpaid interest, if any, to, but not including, the date of redemption.

Upon a change in control, we will be required to make an offer to purchase each holder’s senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase.

New Asia-Pacific Financing. In May 2010, our five wholly-owned subsidiaries, located in Australia, Hong Kong, Japan and Singapore, completed a new multi-currency credit facility agreement for approximately $202.7 million, which is referred to as the new Asia-Pacific financing, comprising 79.2 million Australian dollars, 370.4 million Hong Kong dollars, 99.4 million Singapore dollars and 1.5 billion Japanese yen. The new Asia-Pacific financing replaced our existing Asia-Pacific financing and Singapore financing. The new Asia-Pacific financing has a five-year term with semi-annual principal payments and quarterly debt service and consist of two tranches: (i) Tranche A was available for immediate drawing upon satisfaction of certain conditions precedent and was used to refinance the existing Asia-Pacific financing and Singapore financing and (ii) Tranche B is available for drawing in Australian, Hong Kong and Singapore dollars only for up to 24 months following the effective date of the new Asia-Pacific

 

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financing. The new Asia Pacific financing bears an interest rate of 3.50% above the local borrowing rates for the first 12 months and interest rates between 2.50%-3.50% above the local borrowing rates thereafter, depending on the leverage ratio within our five subsidiaries. The new Asia-Pacific financing contains financial covenants with which we must comply quarterly. The new Asia-Pacific financing is guaranteed by us and is secured by certain of our five subsidiaries’ assets and share pledges. In May 2010, our five subsidiaries drew-down a total of approximately $99.0 million from Tranche A and Tranche B under the new Asia-Pacific financing, primarily for the prepayment and termination of the existing Asia-Pacific financing and the Singapore financing. As of June 30, 2010, our five subsidiaries had fully utilized Tranche A under the new Asia-Pacific financing. The loans payable under the new Asia-Pacific financing have a final maturity date of March 2015. As of June 30, 2010, we were in compliance with all financial covenants in connection with the new Asia-Pacific financing. As of June 30, 2010, approximately $99.0 million was outstanding under the new Asia-Pacific financing at an approximate blended interest rate of 5.30% per annum, leaving approximately $103.7 million available for future borrowings under the new Asia-Pacific financing.

Chicago IBX Financing. In March 2010, we prepaid and terminated the Chicago IBX financing, of which principal of $110.0 million was outstanding as of December 31, 2009. The Chicago IBX financing was prepaid to the lender for an amount equal to 95.909% of the then outstanding principal balance outstanding, plus accrued and unpaid interest, resulting in a gain of $4.5 million. On the same date, we paid and terminated the interest rate swap associated with the Chicago IBX financing totaling $3.2 million.

European Financing. In April 2010, we prepaid and terminated the European financing at par for a total payment of approximately $121.7 million plus accrued and unpaid interest. On the same date, we terminated three interest rate swaps associated with the European financing and paid a total of $4.2 million to terminate these interest rate swaps.

Netherlands Financing. In June 2010, we prepaid and terminated the Netherlands financing at par for a total payment of approximately $8.0 million plus accrued and unpaid interest.

Switch and Data Debt. In May 2010, we prepaid and terminated at par a revolving credit facility assumed in connection with the Switch and Data acquisition for a total payment of $138.9 million plus accrued and unpaid interest. On the same date, the Company terminated the associated interest rate swap acquired related to this revolving credit facility and paid a total of $9.8 million to terminate this interest rate swap.

In May 2010, we prepaid and terminated an equipment capital lease assumed in connection with the Switch and Data acquisition for a total payment of $9.2 million.

In April 2010, we also assumed two other capital leases in connection with the Switch and Data acquisition related to two properties in North Bergen, New Jersey, which is referred to as the New Jersey capital lease, and Sunnyvale, California, which is referred to as the Sunnyvale capital lease. We assumed a capital lease obligation for the New Jersey capital lease with a fair value of $24.7 million at the acquisition date and monthly payments due through July 2023 at an effective interest rate of 8.6% per annum. We assumed a capital lease obligation for the Sunnyvale capital lease with a fair value of $15.6 million at the acquisition date and monthly payments due through July 2022 at an effective interest rate of 8.6% per annum.

$25.0 Million Bank of America Revolving Credit Line. In February 2010, we amended the $25.0 million Bank of America revolving credit line and extended the maturity date to February 11, 2011. In addition, the $25.0 million Bank of America revolving credit line was amended to permit us to fund the cash payment portion of the pending acquisition of Switch and Data and to repay or retire its outstanding loan obligations upon the closing of the Switch and Data acquisition. The $25.0 million Bank of America revolving credit line will be used primarily to fund our working capital and to enable us to issue letters of credit. The effect of issuing letters of credit under the $25.0 million Bank of America revolving credit line reduces the amount available for borrowing under the $25.0 million Bank of America revolving credit line. We may borrow, repay and reborrow under the $25.0 million Bank of America revolving credit line at

 

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either the prime rate or at a borrowing margin of 2.75% over one, three or six month LIBOR, subject to a minimum borrowing cost of 3.00%. The $25.0 million Bank of America revolving credit line contains three financial covenants, which we must comply with quarterly, consisting of a tangible net worth ratio, a debt service ratio and a senior leverage ratio and is collateralized by our domestic accounts receivable balances. As of June 30, 2010, we were in compliance with all financial covenants in connection with the $25.0 million Bank of America revolving credit line. The $25.0 million Bank of America revolving credit line is available for renewal subject to mutual agreement by both parties. As of June 30, 2010, we had issued 16 irrevocable letters of credit totaling $18.4 million under the $25.0 million Bank of America revolving credit line. As a result, the amount available to borrow was $6.6 million as of June 30, 2010.

Contractual Obligations and Off-Balance Sheet Arrangements

We lease a majority of our IBX centers and certain equipment under non-cancelable lease agreements expiring through 2030. The following represents our debt maturities, financings, leases and other contractual commitments as of June 30, 2010 (in thousands):

 

     2010
(6 months)
   2011    2012    2013    2014    2015 and
thereafter
   Total

Convertible debt (1)

   $ —      $ —      $ 250,000    $ —      $ 395,986    $ 373,750    $ 1,019,736

Senior notes (1)

     —        —        —        —        —        750,000      750,000

New Asia-Pacific financing (1)

     9,927      18,199      20,147      22,826      18,578      9,281      98,958

Interest (2)

     50,257      100,506      96,459      92,291      88,875      240,150      668,538

Mortgage payable (3)

     5,082      10,164      10,164      10,165      10,165      113,174      158,914

Capital lease and other financing obligations (3)

     11,414      25,047      25,462      25,940      26,810      229,533      344,206

Operating leases under accrued restructuring charges (4)

     1,392      2,182      2,369      2,382      2,395      1,405      12,125

Operating leases (5)

     51,036      100,710      102,813      103,390      99,122      502,772      959,843

Other contractual commitments (6)

     122,781      38,470      14,615      8      —        —        175,874

Asset retirement obligations (7)

     —        —        —        —        —        42,779      42,779
                                                
   $ 251,889    $ 295,278    $ 522,029    $ 257,002    $ 641,931    $ 2,262,844    $ 4,230,973
                                                

 

(1) Represents principal only.
(2) Represents interest on convertible debt, senior notes and new Asia-Pacific financing based on their approximate interest rates as of June 30, 2010.
(3) Represents principal and interest.
(4) Excludes any subrental income.
(5) Represents minimum operating lease payments, excluding potential lease renewals.
(6) Represents off-balance sheet arrangements. Other contractual commitments are described below.
(7) Represents liability, net of future accretion expense.

In connection with some of our leases, we entered into 15 irrevocable letters of credit totaling $17.4 million with Bank of America. These letters of credit were provided in lieu of cash deposits under the $25.0 million Bank of America revolving credit line and automatically renew in successive one-year periods until the final lease expiration date. If the landlords for these IBX leases decide to draw down on these letters of credit triggered by an event of default under the lease, we will be required to fund these letters of credit either through cash collateral or borrowing under the $25.0 million Bank of America revolving credit line. These contingent commitments are not reflected in the table above.

Primarily as a result of our various IBX expansion projects, as of June 30, 2010, we were contractually committed for $77.3 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 data centers prior to making them available to customers for installation. This amount, which is expected to be paid during the remainder of 2010 and 2011, is reflected in the table above as “other contractual commitments.”

 

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We had other non-capital purchase commitments in place as of June 30, 2010, such as commitments to purchase power in select locations, primarily in the U.S., Australia, Singapore and Tokyo, during the remainder of 2010 and thereafter, and other open purchase orders, which contractually bind us for goods or services to be delivered or provided during the remainder of 2010 and beyond. Such other purchase commitments as of June 30, 2010, which total $98.5 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 $150.0 million to $200.0 million, in addition to the $77.3 million in contractual commitments discussed above as of June 30, 2010, in our various IBX expansion projects during the remainder of 2010 in order to complete the work needed to open these IBX data centers. These non-contractual capital expenditures are not reflected in the table above. If we so choose, whether due to economic factors or other considerations, we could delay these non-contractual capital expenditure commitments to preserve liquidity.

Critical Accounting 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 income taxes, accounting for impairment of goodwill and accounting for property, plant and equipment, which are discussed in more detail under the caption “Critical Accounting Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2009.

Recent Accounting Pronouncements

See Note 1 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As more fully described in Cash, Cash Equivalents and Short-Term and Long-Term Investments in Note 4 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we received an additional distribution of $3.4 million from our investment in the Reserve Primary Fund in January 2010. In addition, as more fully described in Debt Facilities and Other Financing Obligations in Note 8 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, during the six months ended June 30, 2010, we terminated and paid all interest rate swaps outstanding for a total payment of $17.3 million in connection with the prepayment and termination of several debt facilities that bore interest rates at variable rates. As of June 30, 2010, we had only one debt instrument remaining with variable interest rates, which is our new Asia-Pacific financing. While there have been no other significant changes in our market risk, investment portfolio risk, interest rate risk, foreign currency risk and commodity price risk exposures and procedures during the three and six months ended June 30, 2010 as compared to the respective risk exposures and procedures disclosed in Quantitative and Qualitative Disclosures About Market Risk, set forth in Part II Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2009, during the six months ended June 30, 2010, the U.S. dollar 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 during this period including the amount of revenue that we reported. Continued strengthening of the U.S. dollar may continue to have a significant impact to us in future periods.

 

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Item 4. Controls and Procedures

(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 (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Limitations on the Effectiveness of Controls. Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed and operated to be effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

IPO Litigation

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. These lawsuits have been coordinated before a single judge. The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 against 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.

 

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The parties in the approximately 300 coordinated cases, including the parties in the Equinix case, reached a settlement. It provides for releases of existing claims and claims that could have been asserted relating to the conduct alleged to be wrongful from the class of investors participating in the settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Equinix. On October 6, 2009, the Court granted final approval to the settlement. Six notices of appeal and one petition seeking permission to appeal, from a group of objectors who also filed a notice of appeal, have been filed.

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 if the settlement does not survive the appeal.

Pihana Litigation

On August 22, 2008, a complaint was filed against Equinix, certain former officers and directors of Pihana Pacific, Inc. (“Pihana”), certain investors in Pihana, and others. The lawsuit was filed in the First Circuit Court of the State of Hawaii, and arises out of December 2002 agreements pursuant to which Equinix merged Pihana and i-STT (a subsidiary of Singapore Technologies Telemedia Pte Ltd) into the internet exchange services business of Equinix. Plaintiffs, who were allegedly holders of Pihana common stock, allege that their rights as shareholders were violated, and the transaction was effectuated improperly, by Pihana’s majority shareholders, officers and directors, with the alleged assistance of Equinix and others. Among other things, plaintiffs contend that they effectively had a right to block the transaction, that this supposed right was disregarded, and that they improperly received no consideration when the deal was completed. The complaint seeks to recover unspecified punitive damages, equitable relief, fees and costs, and compensatory damages in an amount that plaintiffs allegedly “believe may be all or a substantial portion of the approximately $725.0 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 (the “Amended Complaint”). On October 13, 2008, a complaint was filed in a separate action by another purported holder of Pihana common stock, naming the same defendants and asserting substantially similar allegations as the August 22, 2008 and September 29, 2008 pleadings. On December 12, 2008, the court entered a stipulated order, which consolidated the two actions under one case number and set January 22, 2009 as the last day for Defendants to move to dismiss or otherwise respond to the Amended Complaint, the operative complaint in this case. On January 22, 2009, motions to dismiss the Amended Complaint were filed by Equinix and other Defendants. On April 24, 2009, plaintiffs filed a Second Amended Complaint (“SAC”) to correct the naming of certain parties. The SAC is otherwise substantively identical to the Amended Complaint, and all motions to dismiss the Amended Complaint have been treated as responsive to the SAC. On September 1, 2009, the Court heard Defendants’ motions to dismiss the SAC and ruled at the hearing that all claims against all Defendants are time-barred. The Court also considered whether there were further independent grounds for dismissing the claims, and supplemental briefing was submitted with respect to claims against one defendant and plaintiffs’ renewed request for further leave to amend. On March 23, 2010, the Court entered final Orders granting the motions to dismiss as to all Defendants and issued a minute Order denying Plaintiffs’ renewed request for further leave to amend. On May 21, 2010, Plaintiffs filed a Notice of Appeal. We believe that plaintiffs’ claims and alleged damages are without merit and we intend to continue 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.

 

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Switch and Data Litigation

In the fourth quarter of 2009, three purported stockholder class action lawsuits were filed against us in connection with our proposed merger with Switch and Data. The first, filed October 27, 2009 in the Delaware Chancery Court, names Equinix, Sundance Acquisition Corporation, Switch and Data, and the members of Switch and Data’s board of directors as defendants. The lawsuit alleges that the Switch and Data directors breached their fiduciary duties to Switch and Data’s stockholders in connection with the proposed merger, and that Equinix aided and abetted these alleged breaches. The second complaint, filed October 30, 2009 in Florida state court, raises similar claims against the same defendants. The third complaint, filed on December 7, 2009 in the United States District Court for the Middle District of Florida, likewise raises similar claims but did not name Sundance Acquisition Corporation as a defendant. Both the second and third complaints included claims alleging that Switch and Data had failed to disclose material information concerning the merger to stockholders.

On January 19, 2010, counsel for parties in all three lawsuits entered into a memorandum of understanding in which they agreed upon the terms of a settlement of all three lawsuits. In connection with this settlement, the three lawsuits and all claims asserted therein are expected to be dismissed with prejudice. The proposed settlement is conditional upon, among other things, consummation of the merger and final approval of the proposed settlement by the Florida state court. The proposed settlement contemplates that plaintiffs’ counsel will apply to the Florida state court for an award of attorneys’ fees and costs in an aggregate amount of $900,000, and that the defendants will not oppose or undermine this application. We expect that approximately 70 percent of these attorneys’ fees will be paid by insurance maintained by Switch and Data, and that we will pay the remainder. Pursuant to this agreement, the parties sought and obtained stays of the Florida federal and Delaware actions pending approval of the settlement. On March 22, 2010, the parties entered into a stipulation of settlement and release, adopting the terms of the memorandum of understanding outlined above. Pursuant to this stipulation, on March 25, 2010, the parties filed a Joint Motion for Class Certification and Preliminary Approval of Settlement in Florida state court. On May 7, 2010, the Court granted the motion and scheduled a final approval hearing for August 9, 2010. If final approval of the settlement is granted, then the parties will seek dismissal with prejudice of the other two actions. If the settlement is not finalized, we intend to continue to defend the action 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.

 

Item 1A. Risk Factors

In addition to the other information contained in this report, the following risk factors should be considered carefully in evaluating our business and us:

Acquisitions present many risks, and we may not realize the financial or strategic goals that were contemplated at the time of any transaction.

Over the last several years, we have completed several acquisitions, including that of IXEurope plc in 2007, Virtu Secure Webservices B.V. in 2008, Upminster GmbH in 2009 and Switch and Data in 2010. We may make additional acquisitions in the future, which may include acquisitions of businesses, products, services or technologies that we believe to be complementary, as well as acquisitions of new IBX data centers or real estate for development of new IBX data centers. We may pay for future acquisitions by using our existing cash resources (which may limit other potential uses of our cash), incurring additional debt (which may increase our interest expense, leverage and debt service requirements) and/or issuing shares (which may dilute our existing stockholders and have a negative effect on our earnings per share). Acquisitions expose us to several potential risks, including:

 

   

the possible disruption of our ongoing business and diversion of management’s attention by acquisition, transition and integration activities;

 

   

our potential inability to successfully pursue or realize some or all of the anticipated revenue opportunities associated with an acquisition;

 

   

the possibility that we may not be able to successfully integrate acquired businesses or achieve anticipated operating efficiencies or cost savings;

 

   

the possibility that announced acquisitions may not be completed, due to failure to satisfy the conditions to closing or for other reasons;

 

   

the dilution of our existing stockholders as a result of our issuing stock in transactions, such as our acquisition of Switch and Data, where 80% of the consideration payable to Switch and Data’s stockholders consisted of shares of our common stock;

 

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the possibility of customer dissatisfaction if we are unable to achieve levels of quality and stability on par with past practices;

 

   

the possibility that our customers may not accept either the existing equipment infrastructure or the “look-and-feel” of a new or different IBX data center;

 

   

the possibility that additional capital expenditures may be required or that transaction expenses associated with acquisitions may be higher than anticipated;

 

   

the possibility that required financing to fund the requirements of an acquisition may not be available on acceptable terms or at all;

 

   

the possibility that we may be unable to obtain required approvals from governmental authorities under antitrust and competition laws on a timely basis or at all, which could, among other things, delay or prevent us from completing an acquisition, limit our ability to realize the expected financial or strategic benefits of an acquisition or have other adverse effects on our current business and operations;

 

   

the possible loss or reduction in value of acquired businesses;

 

   

the possibility that carriers may find it cost-prohibitive or impractical to bring fiber and networks into a new IBX data center;

 

   

the possibility of litigation or other claims in connection with or as a result of an acquisition, including claims from terminated employees, customers, former stockholders or other third parties; and

 

   

the possibility of pre-existing undisclosed liabilities, including but not limited to lease or landlord related liability, environmental or asbestos liability, for which insurance coverage may be insufficient or unavailable.

The occurrence of any of these risks could have a material adverse effect on our business, results of operations, financial condition or cash flows.

We cannot assure you that the price for any future acquisitions of IBX data centers will be similar to prior IBX data center acquisitions. In fact, we expect acquisition costs, including capital expenditures required to build or render new IBX data 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 substantial debt could adversely affect our cash flo