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, 2011

OR

 

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

For the transition period from             to             

Commission File Number 000-31293

 

 

EQUINIX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

One Lagoon Drive, Fourth Floor, Redwood City, California 94065

(Address of principal executive offices, including ZIP code)

(650) 598-6000

(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, 2011 was 47,035,026.

 

 

 


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, 2011 and December 31, 2010      3   
   Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010      4   
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010      5   
   Notes to Condensed Consolidated Financial Statements      6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      51   

Item 4.

   Controls and Procedures      51   

Part II - Other Information

  

Item 1.

   Legal Proceedings      52   

Item 1A.

   Risk Factors      54   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      71   

Item 3.

   Defaults Upon Senior Securities      71   

Item 4.

   [Removed and Reserved]      71   

Item 5.

   Other Information      71   

Item 6.

   Exhibits      72   

Signatures

     78   

Index to Exhibits

     79   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

EQUINIX, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

     June 30,
2011
    December 31,
2010
 
     (unaudited)  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 297,872      $ 442,841   

Short-term investments

     94,246        147,192   

Accounts receivable, net

     140,316        116,358   

Other current assets

     116,654        71,657   
  

 

 

   

 

 

 

Total current assets

     649,088        778,048   

Long-term investments

     30,960        2,806   

Property, plant and equipment, net

     3,085,202        2,650,953   

Goodwill

     897,461        774,365   

Intangible assets, net

     163,771        150,945   

Other assets

     142,709        90,892   
  

 

 

   

 

 

 

Total assets

   $ 4,969,191      $ 4,448,009   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 189,739      $ 145,854   

Accrued property, plant and equipment

     90,652        91,667   

Current portion of capital lease and other financing obligations

     9,461        7,988   

Current portion of loans payable

     31,459        19,978   

Current portion of convertible debt

     240,134        —     

Other current liabilities

     59,006        52,628   
  

 

 

   

 

 

 

Total current liabilities

     620,451        318,115   

Capital lease and other financing obligations, less current portion

     337,274        253,945   

Loans payable, less current portion

     201,233        100,337   

Convertible debt, less current portion

     688,300        916,337   

Senior notes

     750,000        750,000   

Other liabilities

     238,684        228,760   
  

 

 

   

 

 

 

Total liabilities

     2,835,942        2,567,494   
  

 

 

   

 

 

 

Redeemable non-controlling interests (Note 2)

     69,050        —     
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Stockholders’ equity:

    

Common stock

     47        46   

Additional paid-in capital

     2,399,055        2,341,586   

Accumulated other comprehensive loss

     (41,679     (112,018

Accumulated deficit

     (293,224     (349,099
  

 

 

   

 

 

 

Total stockholders’ equity

     2,064,199        1,880,515   
  

 

 

   

 

 

 

Total liabilities, redeemable non-controlling interests and stockholders’ equity

   $ 4,969,191      $ 4,448,009   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2011     2010     2011     2010  
     (unaudited)  

Revenues

   $ 394,900      $ 296,094      $ 757,929      $ 544,743   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

        

Cost of revenues

     215,572        162,582        410,148        295,632   

Sales and marketing

     37,063        28,913        70,699        48,381   

General and administrative

     65,681        54,166        128,282        97,321   

Restructuring charges

     103        4,357        599        4,357   

Acquisition costs

     1,615        5,849        2,030        10,843   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     320,034        255,867        611,758        456,534   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     74,866        40,227        146,171        88,209   

Interest income

     632        491        847        997   

Interest expense

     (37,677     (37,615     (75,038     (63,290

Other-than-temporary impairment recovery on investments

     —          —          —          3,420   

Loss on debt extinguishment and interest rate swaps, net

     —          (1,454     —          (4,831

Other income (expense)

     1,021        (1,481     3,132        (1,461
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     38,842        168        75,112        23,044   

Income tax expense

     (8,109     (2,442     (19,234     (11,119
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     30,733        (2,274     55,878        11,925   

Net (income) loss attributable to redeemable non-controlling interests

     (3     —          (3     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Equinix.

   $ 30,730      $ (2,274   $ 55,875      $ 11,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to Equinix:

        

Basic earnings (loss) per share

   $ 0.65      $ (0.05   $ 1.20      $ 0.29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     46,924        43,507        46,688        41,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ 0.64      $ (0.05   $ 1.18      $ 0.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     50,664        43,507        50,454        42,694   
  

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
     2011     2010  
     (unaudited)  

Cash flows from operating activities:

    

Net income

   $ 55,878      $ 11,925   

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

    

Depreciation

     154,393        106,418   

Stock-based compensation

     33,853        33,070   

Restructuring charges

     599        4,357   

Amortization of intangible assets

     9,164        5,021   

Amortization of debt issuance costs and debt discounts

     15,609        12,243   

Accretion of asset retirement obligation and accrued restructuring charges

     2,264        1,379   

Loss on debt extinguishment and interest rate swaps, net

     —          4,831   

Allowance for doubtful accounts

     2,231        974   

Other items

     2,536        424   

Changes in operating assets and liabilities:

    

Accounts receivable

     (16,310     (31,757

Other assets

     (2,693     7,957   

Accounts payable and accrued expenses

     (9,524     19,060   

Other liabilities

     10,118        (19,184
                

Net cash provided by operating activities

     258,118        156,718   
                

Cash flows from investing activities:

    

Purchases of investments

     (275,364     (284,926

Sales of investments

     81,963        2,203   

Maturities of investments

     222,195        330,021   

Purchase of Switch and Data, net of cash acquired

     —          (113,289

Purchase of ALOG, net of cash acquired

     (41,954     —     

Purchase of Paris 4 IBX property

     (14,951     —     

Purchase of Frankfurt IBX property

     (9,042     —     

Purchases of property, plant and equipment

     (363,990     (292,105

Increase in restricted cash

     (95,932     (1,160

Release of restricted cash

     944        244   

Other investing activities

     5        —     
                

Net cash used in investing activities

     (496,126     (359,012
                

Cash flows from financing activities:

    

Proceeds from employee equity awards

     24,597        22,153   

Proceeds from senior notes

     —          750,000   

Proceeds from loans payable

     77,917        98,958   

Repayment of capital lease and other financing obligations

     (4,323     (12,401

Repayment of mortgage and loans payable

     (10,102     (458,028

Debt issuance costs

     (125     (23,119
                

Net cash provided by financing activities

     87,964        377,563   
                

Effect of foreign currency exchange rates on cash and cash equivalents

     5,075        (9,983
                

Net increase (decrease) in cash and cash equivalents

     (144,969     165,286   

Cash and cash equivalents at beginning of period

     442,841        346,056   
                

Cash and cash equivalents at end of period

   $ 297,872      $ 511,342   
                

Supplemental cash flow information:

    

Cash paid for taxes

   $ 6,825      $ 1,496   
                

Cash paid for interest

   $ 60,462      $ 33,067   
                

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

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, 2010 has been derived from audited consolidated financial statements at that date. The consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles in the United States of America. For further information, refer to the Consolidated Financial Statements and Notes thereto included in Equinix’s Form 10-K as filed with the SEC on February 25, 2011. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.

Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Equinix and its subsidiaries, including the operations of ALOG Data Centers do Brasil S.A. and its subsidiaries (“ALOG”) from April 25, 2011 (see Note 2) and Switch & Data Facilities Company, Inc. (“Switch and Data”) from April 30, 2010. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the consolidated financial statement presentation as of and for the three and six months ended June 30, 2011.

Income Taxes

The Company’s effective tax rates were 25.6% and 48.3% for the six months ended June 30, 2011 and 2010, respectively. The Company’s unrecognized tax benefits increased by approximately $25,767,000 during the three months ended June 30, 2011 due to the ALOG Acquisition. A portion of these unrecognized tax benefits served to reduce the deferred tax assets acquired from the ALOG Acquisition.

Stock-Based Compensation

In February and March 2011, the Compensation Committee and the Stock Award Committee of the Board of Directors approved the issuance of an aggregate of 706,270 shares of restricted stock units to certain employees, including executive officers, pursuant to the 2000 Equity Incentive Plan as part of the Company’s annual refresh program. These equity awards are subject to vesting provisions and had a total fair value as of the dates of grant of $60,485,000, which is expected to be amortized over a weighted-average period of 3.2 years.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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,
 
     2011      2010      2011      2010  

Cost of revenues

   $ 1,499       $ 1,744       $ 2,844       $ 3,338   

Sales and marketing

     3,610         3,758         6,476         6,689   

General and administrative

     13,209         12,594         24,533         23,043   

Restructuring charges

     —           1,491         —           1,491   
                                   
   $ 18,318       $ 19,587       $ 33,853       $ 34,561   
                                   

Recent Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income. This ASU is intended to increase the prominence of other comprehensive income in financial statements by presenting the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance; therefore, adoption of the new guidance in the first quarter of fiscal 2012 will not have any impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”), which amends ASC 820, Fair Value Measurement. ASU 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or IFRSs. ASU 2011-14 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-14 clarifies the FASB’s intent about the application of existing fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively; therefore, the Company will adopt ASU 2011-04 in its first quarter of fiscal 2012. The Company does not expect the adoption of ASU 2011-04 to have a material impact on its consolidated financial statements.

2. Business Combination

ALOG Acquisition

On April 25, 2011 (the “Acquisition Date”), Zion RJ Participações S.A. (“Zion”), a Brazilian joint-stock company controlled by a wholly-owned subsidiary of the Company and co-owned by RW Brasil Fundo de Investimento em Participações, a subsidiary of Riverwood Capital L.P. (“Riverwood”), completed the acquisition of approximately 90% of the outstanding capital stock of ALOG. As a result, the Company acquired an approximate 53% indirect, controlling equity interest in ALOG (the “ALOG Acquisition”). The Company paid a total of approximately 82,194,000 Brazilian reais in cash on the closing date, or approximately $51,723,000, to purchase the ALOG capital stock. An additional 36,000,000 Brazilian reais, or approximately $22,000,000, is payable by Zion in April 2013, subject to reduction for any post-closing balance sheet adjustments and any claims for indemnification (the “Contingent Consideration”). The Company’s portion of the Contingent Consideration is 19,080,000 Brazilian reais, or approximately $12,000,000. ALOG operates three data centers in Brazil and is headquartered in Rio de Janeiro. ALOG will continue to operate under the ALOG trade name. There were no historical transactions between Equinix, Riverwood, Zion and ALOG.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Beginning in April 2014 and ending in May 2016, Equinix will have the right to purchase all of Riverwood’s interest in Zion at a price equal to the greater of (i) its then current fair market value and (ii) a net purchase price that implies a compounded internal rate of return in U.S. dollars (“IRR”) for Riverwood’s investment of 12%. If Equinix exercises its right to purchase Riverwood’s shares, Equinix also will have the right, and under certain circumstances may be required, to purchase the remaining approximate 10% of shares of ALOG that Zion does not own, which are held by ALOG management (collectively, the “Call Options”).

Also beginning in April 2014 and ending in May 2016, Riverwood will have the right to require Equinix to purchase all of Riverwood’s interests in Zion at a price equal to the greater of (i) its then current fair market value and (ii) a net purchase price that implies an IRR for Riverwood’s investment of 8%, declining over time. If Riverwood exercises its right to require Equinix to purchase Riverwood’s shares, Equinix will have the right, and under certain circumstances may be required, to purchase the remaining approximate 10% of shares of ALOG that Zion does not own, which are held by ALOG management (collectively, the “Put Options”).

As the Company has an approximate 53% indirect controlling equity interest in ALOG, it began consolidating the results of ALOG’s operations on the Acquisition Date. Upon consolidation, all amounts pertaining to the approximate 10% of ALOG that Zion does not own, as well as Riverwood’s interest in ALOG and Zion are reported as redeemable non-controlling interests in the Company’s consolidated financial statements. The Company incurred acquisition costs of $1,556,000 and $1,922,000, respectively, for the three and six months ended June 30, 2011 related to ALOG, which were included in the consolidated statements of operations.

Purchase Price Allocation

The ALOG Acquisition was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price was allocated to ALOG’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 ALOG, the preliminary purchase price allocation was as follows (in thousands):

 

Cash and cash equivalents

   $ 9,769   

Accounts receivable

     6,756   

Property, plant and equipment

     52,542   

Goodwill

     104,799   

Intangible assets

     19,295   

Other assets

     7,562   
  

 

 

 

Total assets acquired

     200,723   

Accounts payable and accrued expenses

     (49,965

Loans payable

     (19,724

Capital leases and other financing obligations

     (5,945

Other liabilities

     (6,589

Redeemable non-controlling interests

     (66,777
  

 

 

 

Net assets acquired

   $ 51,723   
  

 

 

 

The Company’s preliminary purchase price includes the Company’s current estimate of the fair value of the Contingent Consideration. The Company continues to evaluate certain assets and liabilities related to the ALOG Acquisition. Additional information, which existed as of the Acquisition Date but was unknown to the Company at that time, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the Acquisition Date. Changes to the assets and liabilities recorded may result in a corresponding adjustment to goodwill.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

Intangible assets

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

Customer contracts

   $ 17,093       5 – 7      5.9   

Other

     2,202       3 – 6      4.3   

The fair value of customer contracts was estimated by applying an income approach. The fair value was determined by calculating the present value of estimated future operating cash flows generated from exisiting customers less costs to realize the revenue. The Company applied a discount rate of approximately 15.6%, which reflects the nature of the asset as it relates to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer contracts include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value of the other acquired identifiable intangible assets were estimated by applying an income or cost approach as appropriate. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.

The Company determined the fair value of the loans payable assumed in the ALOG Acquisition by estimating ALOG’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 approximated the fair value as of the Acquisition Date.

The Company determined the fair value of the redeemable non-controlling interests assumed in the ALOG Acquisition based on the consideration transferred, which included the values ascribed to the Call Options and Put Options. The Company will record an adjustment each reporting period to these redeemable non-controlling interests such that the carrying value of the redeemable non-controlling interests equals the greater of fair value or a minimum IRR as outlined in the Put Options.

A total of $104,799,000 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 ALOG and the significant synergies expected to arise after the ALOG Acquisition. A portion of the goodwill is expected to be deductible for local tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the ALOG Acquisition is attributable to the Company’s Americas reportable segment (see Note 12) and reporting unit (see Note 4).

The consolidated financial statements of the Company include the operations of ALOG from April 25, 2011 through June 30, 2011 for the three and six months ended June 30, 2011. For the three and six months ended June 30, 2011, ALOG recognized revenues of $11,724,000 and had an inconsequential amount of net income, which were included in the Company’s condensed consolidated statements of operations.

The ALOG acquisition was not material to the Company’s consolidated balance sheets and results of operations; therefore, the Company does not present unaudited pro forma combined consolidated financial information.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

3. Earnings Per Share

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2011     2010     2011     2010  

Net income (loss), basic

   $ 30,733      $ (2,274   $ 55,878      $ 11,925   

Net (income) loss attributable to redeemable non-controlling interests

     (3     —          (3     —     
                                

Net income (loss) attributable to Equinix, basic

     30,730        (2,274     55,875        11,925   

Interest on convertible debt, net of tax

     1,746        —          3,485        —     
                                

Net income (loss) attributable to Equinix, diluted

   $ 32,476      $ (2,274   $ 59,360      $ 11,925   
                                

Weighted-average shares used to compute basic earnings per share

     46,924        43,507        46,688        41,546   
                                

Effect of dilutive securities:

        

3.00% convertible subordinated notes

     2,945        —          2,945        —     

Employee equity awards

     795        —          821        1,148   
                                

Weighted-average shares used to compute diluted earnings per share

     50,664        43,507        50,454        42,694   
                                

Earnings (loss) per share attributable to Equinix:

        

Basic

   $ 0.65      $ (0.05   $ 1.20      $ 0.29   
                                

Diluted

   $ 0.64      $ (0.05   $ 1.18      $ 0.28   
                                

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,
 
     2011      2010      2011      2010  

Shares reserved for conversion of 2.50% convertible subordinated notes

     2,232         2,232         2,232         2,232   

Shares reserved for conversion of 3.00% convertible subordinated notes

     —           2,945         —           2,945   

Shares reserved for conversion of 4.75% convertible subordinated notes

     4,433         4,433         4,433         4,433   

Common stock related to employee equity awards

     644         3,752         646         937   
                                   
     7,309         13,362         7,311         10,547   
                                   

 

10


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

4. Balance Sheet Components

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

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

 

     June 30,
2011
     December 31,
2010
 

Cash and cash equivalents:

     

Cash

   $ 75,080       $ 85,297   

Cash equivalents:

     

Money markets

     130,790         110,563   

U.S. government and agency obligations

     92,002         246,981   
  

 

 

    

 

 

 

Total cash and cash equivalents

     297,872         442,841   
  

 

 

    

 

 

 

Marketable securities:

     

U.S. government and agency obligations

     93,699         144,976   

Corporate bonds

     16,673         2,645   

Certificates of deposit

     13,214         —     

Asset-backed securities

     1,620         2,377   
  

 

 

    

 

 

 

Total marketable securities

     125,206         149,998   
  

 

 

    

 

 

 

Total cash, cash equivalents and short-term and long-term investments

   $ 423,078       $ 592,839   
  

 

 

    

 

 

 

The following table summarizes the fair value and gross unrealized gains and losses related to the Company’s short-term and long-term investments in marketable securities designated as available-for-sale securities as of (in thousands):

 

     June 30, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. government and agency obligations

   $ 93,699       $ 9       $ (9   $ 93,699   

Corporate bonds

     16,664         12         (3     16,673   

Certificates of deposit

     13,214         —           —          13,214   

Asset-backed securities

     1,538         82         —          1,620   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 125,115       $ 103       $ (12   $ 125,206   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. government and agency obligations

   $ 144,972       $ 4       $ —        $ 144,976   

Corporate bonds

     2,632         13         —          2,645   

Asset-backed securities

     2,266         112         (1     2,377   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 149,870       $ 129       $ (1   $ 149,998   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of June 30, 2011 and December 31, 2010, cash equivalents included investments which were readily convertible to cash and had original maturity dates of 90 days or less. The maturities of securities classified as short-term investments were one year or less as of June 30, 2011 and December 31, 2010. The maturities of securities classified as long-term investments were greater than one year and less than three years as of June 30, 2011 and December 31, 2010.

 

11


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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, 2011.

The following table summarizes the fair value and gross unrealized losses related to 19 available-for-sale securities with an aggregate cost basis of $75,969,000, aggregated by type of investment and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2011 (in thousands):

 

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

U.S. government and agency obligations

   $ 66,991       $ (9   $ —         $ —     

Corporate bonds

     8,978         (3     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 75,969       $ (12   $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

 

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, 2011, the Company’s investments are subject to the currently adverse market conditions. If market conditions were to deteriorate, the Company could sustain other-than-temporary impairments to its investment portfolio which could result in additional realized losses being recorded in interest income, net or securities markets could become inactive which could affect the liquidity of the Company’s investments.

Accounts Receivable

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

 

     June 30,
2011
    December 31,
2010
 

Accounts receivable

   $ 243,249      $ 210,919   

Unearned revenue

     (98,640     (90,753

Allowance for doubtful accounts

     (4,293     (3,808
  

 

 

   

 

 

 
   $ 140,316      $ 116,358   
  

 

 

   

 

 

 

Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The Company generally invoices its customers at the end of a calendar month for services to be provided the following month. Accordingly, unearned revenue consists of pre-billing for services that have not yet been provided, but which have been billed to customers in advance in accordance with the terms of their contract.

 

12


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Other Current Assets

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

 

     June 30,
2011
     December 31,
2010
 

Restricted cash, current

   $ 61,657       $ —     

Deferred tax assets, net

     22,093         38,696   

Prepaid expenses

     15,912         17,810   

Taxes receivable

     11,327         6,857   

Other receivables

     1,199         4,779   

Other current assets

     4,466         3,515   
                 
   $ 116,654       $ 71,657   
                 

Restricted cash, current has increased as a result of the Paris 4 IBX Financing (see Note 9).

Property, Plant and Equipment

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

 

     June 30,
2011
    December 31,
2010
 

IBX plant and machinery

   $ 1,772,176      $ 1,524,559   

Leasehold improvements

     965,980        826,540   

Buildings

     495,038        395,752   

Site improvements

     311,441        307,933   

IBX equipment

     336,419        263,995   

Computer equipment and software

     129,868        114,263   

Land

     96,206        89,312   

Furniture and fixtures

     18,112        15,602   

Construction in progress

     125,546        128,535   
                
     4,250,786        3,666,491   

Less accumulated depreciation

     (1,165,584     (1,015,538
                
   $ 3,085,202      $ 2,650,953   
                

Leasehold improvements, IBX plant and machinery, computer equipment and software and buildings recorded under capital leases aggregated $129,445,000 and $117,289,000 at June 30, 2011 and December 31, 2010, respectively. Amortization on the assets recorded under capital leases is included in depreciation expense and accumulated depreciation on such assets totaled $29,287,000 and $29,235,000 as of June 30, 2011 and December 31, 2010, respectively.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Goodwill and Intangible Assets

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

 

     June 30,
2011
    December 31,
2010
 

Goodwill:

    

Americas

   $ 515,456      $ 408,730   

EMEA

     360,867        345,486   

Asia-Pacific

     21,138        20,149   
                
   $ 897,461      $ 774,365   
                

Intangible assets:

    

Intangible asset – customer contracts

   $ 176,908      $ 156,621   

Intangible asset – favorable leases

     18,770        18,285   

Intangible asset – others

     5,619        3,483   
                
     201,297        178,389   

Accumulated amortization

     (37,526     (27,444
                
   $ 163,771      $ 150,945   
                

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

 

     Americas      EMEA      Asia-Pacific      Total  

Balance at December 31, 2010

   $ 408,730       $ 345,486       $ 20,149       $ 774,365   

ALOG acquisition (see Note 2)

     104,799         —           —           104,799   

Impact of foreign currency exchange

     1,927         15,381         989         18,297   
                                   

Balance at June 30, 2011

   $ 515,456       $ 360,867       $ 21,138       $ 897,461   
                                   

The Company’s goodwill and intangible assets in EMEA (see Note 12), denominated in British pounds and Euros, goodwill in Asia-Pacific, denominated in Singapore dollars, and certain goodwill and intangibles in Americas, denominated in Canadian dollars and Brazilian reais, are subject to foreign currency fluctuations. The Company’s foreign currency translation gains and losses, including goodwill and intangibles, are a component of other comprehensive income and loss.

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

 

     Americas      EMEA      Total  

Intangible assets, gross at December 31, 2010

   $ 118,439       $ 59,950       $ 178,389   

ALOG acquisition (see Note 2)

     19,295         —           19,295   

Impact of foreign currency exchange

     786         2,827         3,613   
                          

Intangible assets, gross at June 30, 2011

   $ 138,520       $ 62,777       $ 201,297   
                          

 

14


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

For the three and six months ended June 30, 2011, the Company recorded amortization expense of $4,891,000 and $9,164,000, respectively, associated with its intangible assets. 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 intangible assets. The Company’s estimated future amortization expense related to these intangibles is as follows (in thousands):

 

Year ending:

  

2011 (six months remaining)

   $ 10,157   

2012

     20,313   

2013

     20,264   

2014

     19,863   

2015

     19,378   

Thereafter

     73,796   
  

 

 

 

Total

   $ 163,771   
  

 

 

 

Other Assets

Other assets consisted of the following (in thousands):

 

     June 30,
2011
     December 31,
2010
 

Restricted cash, non-current

   $ 40,243       $ 4,309   

Debt issuance costs, net

     31,008         34,066   

Deposits

     22,925         24,604   

Prepaid expenses, non-current

     22,031         9,597   

Deferred tax assets, net

     21,200         16,955   

Other assets, non-current

     5,302         1,361   
  

 

 

    

 

 

 
   $ 142,709       $ 90,892   
  

 

 

    

 

 

 

Restricted cash, non-current has increased primarily as a result of the Paris 4 IBX Financing (see Note 9).

Accounts Payable and Accrued Expenses

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

 

     June 30,
2011
     December 31,
2010
 

Accounts payable

   $ 21,202       $ 12,585   

Accrued compensation and benefits

     49,666         53,259   

Accrued taxes

     49,580         15,707   

Accrued interest

     26,488         25,456   

Accrued utilities and security

     20,466         18,346   

Accrued professional fees

     3,918         3,786   

Accrued repairs and maintenance

     3,638         2,894   

Accrued other

     14,781         13,821   
  

 

 

    

 

 

 
   $ 189,739       $ 145,854   
  

 

 

    

 

 

 

 

15


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Other Current Liabilities

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

 

     June 30,
2011
     December 31,
2010
 

Deferred installation revenue

   $ 34,229       $ 31,149   

Customer deposits

     11,949         12,624   

Deferred recurring revenue

     3,911         2,349   

Accrued restructuring charges

     2,572         3,089   

Deferred rent

     2,487         585   

Foreign currency forward contract payable

     1,291         58   

Deferred tax liabilities

     993         993   

Asset retirement obligations

     378         445   

Other current liabilities

     1,196         1,336   
                 
   $ 59,006       $ 52,628   
                 

Other Liabilities

Other liabilities consisted of the following (in thousands):

 

     June 30,
2011
     December 31,
2010
 

Deferred tax liabilities, net

   $ 95,671       $ 103,717   

Asset retirement obligations, non-current

     53,739         46,322   

Deferred rent, non-current

     46,221         43,705   

Deferred installation revenue, non-current

     22,678         19,488   

Customer deposits, non-current

     6,408         4,206   

Deferred recurring revenue, non-current

     5,613         4,897   

Accrued restructuring charges, non-current

     3,277         3,952   

Other liabilities

     5,077         2,473   
                 
   $ 238,684       $ 228,760   
                 

The Company currently leases the majority of its IBX data centers and certain equipment under non-cancelable operating lease agreements expiring through 2035. The IBX data center lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company has negotiated some rent expense abatement periods for certain leases to better match the phased build-out of its centers. The Company accounts for such abatements and increasing base rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent.

5. Derivatives and Hedging Activities

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

The Company has not designated the foreign currency forward contracts as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these contracts are included in other income (expense), net, along with those foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the three and six months ended June 30, 2011 and 2010.

 

16


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table sets forth the Company’s net gain (loss), which is reflected in other income (expense) on the accompanying condensed consolidated statement of operations, in connection with its foreign currency forward contracts (in thousands):

 

     Three months ended
June  30,
     Six months ended
June  30,
 
     2011      2010      2011      2010  

Net gain (loss)

   $ 2,032       $ 644       $ 1,234       $ 1,696   

6. Fair Value Measurements

The Company’s financial assets, liabilities and redeemable non-controlling interests measured at fair value on a recurring basis as of June 30, 2011 were as follows (in thousands):

 

    

Fair value as

of June 30,

     Fair value measurement using  
     2011      Level 1      Level 2      Level 3  

Assets:

           

U.S. government and agency obligations

   $ 185,701       $ —         $ 185,701       $ —     

Cash and money markets

     205,870         205,870         —           —     

Corporate bonds

     16,673         —           16,673         —     

Certificate of deposits

     13,214         13,214         —           —     

Asset-backed securities

     1,620         —           1,620         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 423,078       $ 219,084       $ 203,994       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency forward contracts (1)

   $ 1,291       $ —         $ 1,291       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Redeemable non-controlling interests :

           

Redeemable non-controlling interests

   $ 69,050       $ —         $ —         $ 69,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts are included within other current liabilities in the Company’s accompanying condensed consolidated balance sheets.

Cash, Cash Equivalents and Investments. The fair value of the Company’s investments in available-for-sale money market funds approximates their face value. Such instruments are included in cash equivalents. These instruments include available-for-sale debt investments related to the Company’s investments in the securities of other public companies, governmental units and other agencies. The fair value of these investments is based on the quoted market price of the underlying shares. Fair value estimates are made as of a specific point in time based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors.

The Company considers each category of investments held to be an asset group. The asset groups held at June 30, 2011 were primarily U.S. government securities, cash and money market funds, corporate bonds, certificate of deposits and asset-backed securities. The Company’s fair value assessment includes an evaluation by each of these securities held for sale, all of which continue to be classified within Level 2 of the fair value hierarchy. The types of instruments valued based on other observable inputs include available-for-sale debt investments in other public companies, governmental units and other agencies. Such instruments are generally classified within Level 2 of the fair value hierarchy.

 

17


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company uses the specific identification method in computing realized gains or losses. Short-term and long-term investments are classified as “available-for-sale” and are carried at fair value based on quoted market prices with unrealized gains and losses reported in stockholders’ equity as a component of other comprehensive income or loss, net of any related tax effect. The Company reviews its investment portfolio quarterly to determine if any securities may be other-than-temporarily impaired due to increased credit risk, changes in industry or sector of a certain instrument or ratings downgrades over an extended period of time. The Company determined that these quoted market prices qualify as Level 1 and Level 2.

Derivative Assets and Liabilities. For foreign currency derivatives, the Company uses forward contract and option valuation models employing market observable inputs, such as spot currency rates, time value and option volatilities with adjustments made to these values utilizing the credit default swap rates of our foreign exchange trading counterparties. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit risk valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2011, the Company had assessed the significance of the impact of the credit risk valuation adjustments on the overall valuation of its derivative positions and had determined that the credit risk valuation adjustments were not significant to the overall valuation of its derivatives. Therefore, they are categorized as Level 2.

Redeemable Non-Controlling Interests. For redeemable non-controlling interests, fair value is measured using a discounted cash flow methodology. Significant inputs to the discounted cash flow analysis include forecasted operating results, discount rate and terminal value of cash flows.

The following table provides a summary of the activities of the Company’s Level 3 fair value measurements for its redeemable non-controlling interests during the six months ended June 30, 2011 (in thousands):

 

Balance at December 31, 2010

   $   

ALOG Acquisition (see Note 2)

     66,777   

Net income attributable to redeemable non-controlling interests

     3   

Foreign currency gain attributable to redeemable non-controlling interests

     1,067   

Change in redemption value of non-controlling interests

     935   

Impact of foreign currency exchange

     268   
  

 

 

 

Balance at June 30, 2011

   $ 69,050   
  

 

 

 

During the three and six months ended June 30, 2011, the Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis.

7. Related Party Transactions

The Company has several significant stockholders and other related parties that are also customers and/or vendors. The Company’s activity of related party transactions was as follows (in thousands):

 

     Three months ended
June  30,
     Six months ended
June 30,
 
     2011      2010      2011      2010  

Revenues

   $ 6,969       $ 5,642       $ 12,780       $ 11,034   

Costs and services

     1,406         416         1,794         809   

 

     As of June 30,  
     2011      2010  

Accounts receivable

   $ 5,330       $ 3,937   

Accounts payable

     479         9   

 

18


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In connection with the ALOG Acquisition, the Company acquired a lease for one of the Brazilian IBX data centers in which the lessor is a member of ALOG management. This lease contains an option to purchase the underlying property for fair market value on the date of purchase. The Company accounts for this lease as a financing obligation as a result of structural building work pursuant to the accounting standard for lessee’s involvement in asset construction. As of June 30, 2011, the Company had a financing obligation liability totaling approximately $5,499,000 related to this lease on its balance sheet. This amount is considered a related party liability, which is not reflected in the related party data presented above.

8. Capital Lease and Other Financing Obligations

Hong Kong 2 IBX Lease

In August 2010, an indirect wholly-owned subsidiary of the Company entered into a lease agreement for rental of space which will be used for its second IBX data center in Hong Kong. Additionally, in December 2010, the Company entered into a license agreement with the same Landlord to obtain the right to make structural changes to the leased space (the “Hong Kong 2 IBX Lease”). The Hong Kong 2 IBX Lease has a term of 12 years and a total cumulative rent obligation of approximately $40,483,000 (using the exchange rate as of June 30, 2011). Pursuant to the accounting standards for lessee’s involvement in asset construction, the Company is now considered the owner of the leased space during the construction phase due to the structural work that the Company is now undertaking, which commenced in January 2011. As a result, in January 2011, the Company recorded a building asset totaling approximately $37,924,000 (using the exchange rate as of June 30, 2011) and a related financing obligation liability totaling approximately $38,036,000 (using the exchange rate as of June 30, 2011).

New York 5 IBX Lease

In May 2011, the Company entered into a lease amendment for two buildings that the Company will develop and ultimately convert into its eighth IBX data center in the New York metro area (the “NY 5 IBX Expansion Project” and the “NY 5 Lease Amendment”). Under the NY 5 Lease Amendment, the Company exercised its first five year renewal option available in the original lease agreement, which was entered into in April 2010. The NY 5 Lease Amendment has a remaining term of 16.7 years and a total cumulative remaining rent obligation of approximately $41,168,000 commencing May 2011. The Company began the specified construction for one of the two buildings in June 2011. Pursuant to the accounting standard for lessee’s involvement in asset construction, the Company is considered the owner of the building during the construction phase due to the structural building work that the Company is undertaking. As a result, the Company will be recording a building asset during the construction period and a related financing liability (the “NY 5 IBX Building Financing”), while the underlying land will be considered an operating lease. The building is expected to be completed during the second half of 2012. In connection with the NY 5 IBX Building Financing, the Company recorded a building asset and a corresponding financing obligation liability totaling approximately $12,126,000 as of June 30, 2011. The other building is being accounted for as a capital lease.

DC 10 Lease

In December 2010, the Company entered into a lease for a building that the Company and the landlord will jointly develop to meet the Company’s needs and which the Company will ultimately convert into its tenth IBX data center in the Washington, D.C. metro area (the “DC 10 IBX Expansion Project” and the “DC 10 Lease”). The DC 10 Lease has a term of 12 years commencing from the date the landlord delivers the completed building to the Company, which is expected to occur by the end of 2011. Monthly payments under the DC 10 Lease are expected to commence six months after the date the landlord delivers the completed building to the Company and will be made through the end of the lease term at an effective interest rate of 11.1%. The DC 10 Lease has a total cumulative rent obligation of approximately $27,752,000. The landlord began construction of the building to the Company’s specifications in May 2011. Pursuant to the accounting standard for lessee’s involvement in asset construction, the Company is considered the owner of the building during the construction phase due to the building work that the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

landlord and the Company is undertaking. As a result, the Company will be recording a building asset during the construction period and a related financing liability (the “DC 10 IBX Building Financing”), while the underlying land will be considered an operating lease. In connection with the DC 10 IBX Building Financing, the Company recorded a building asset and a corresponding financing obligation liability totaling approximately $4,542,000, representing the estimated percentage-of-completion of the building as of June 30, 2011.

Maturities of Capital Lease and Other Financing Obligations

The Company’s capital lease and other financing obligations are summarized as follows (dollars in thousands):

 

     As of June 30, 2011  
     Capital
lease
obligations
    Other
financing
obligations
    Total  

2011 (six months remaining)

   $ 8,116      $ 9,280      $ 17,396   

2012

     15,992        20,976        36,968   

2013

     15,517        22,127        37,644   

2014

     16,067        23,159        39,226   

2015

     16,396        24,258        40,654   

Thereafter

     129,477        205,113        334,590   
  

 

 

   

 

 

   

 

 

 

Total minimum lease payments

     201,565        304,913        506,478   

Plus amount representing residual property value

     —          166,040        166,040   

Less estimated building costs

     —          (11,303     (11,303

Less amount representing interest

     (78,349     (236,131     (314,480
  

 

 

   

 

 

   

 

 

 

Present value of net minimum lease payments

     123,216        223,519        346,735   

Less current portion

     (6,764     (2,697     (9,461
  

 

 

   

 

 

   

 

 

 
   $ 116,452      $ 220,822      $ 337,274   
  

 

 

   

 

 

   

 

 

 

9. Debt Facilities

Loans Payable

The Company’s loans payable consisted of the following (in thousands):

 

     June 30,
2011
    December 31,
2010
 

New Asia-Pacific financing

   $ 192,844      $ 120,315   

Paris 4 IBX financing

     20,594        —     

ALOG debt

     19,254        —     
  

 

 

   

 

 

 
     232,692        120,315   

Less current portion of principal

     (31,459     (19,978
  

 

 

   

 

 

 
   $ 201,233      $ 100,337   
  

 

 

   

 

 

 

New Asia-Pacific Financing

During the six months ended June 30, 2011, the Company received additional advances totaling approximately $77,917,000 under the New Asia-Pacific Financing leaving the amount available to borrow totaling approximately $17,679,000. The outstanding loans payable under the New Asia-Pacific Financing had a blended interest rate of 5.19% as of June 30, 2011. As of June 30, 2011, the Company was in compliance with all financial covenants associated with the New Asia-Pacific Financing.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Paris 4 IBX Financing

In March 2011, the Company entered into two agreements with two unrelated parties to purchase and develop a building that will ultimately become the Company’s fourth IBX data center in the Paris metro area. The first agreement allowed the Company the right to purchase the property for a total fee of approximately $21,779,000 payable to a company that held exclusive rights (including power rights) to the property and was already in the process of developing the property into a data center and will now, instead, become the anchor tenant in the Paris 4 IBX data center once it is open for business. The second agreement was entered into with the developer of the property and allowed the Company to take immediate title to the building and associated land and also requires the developer to construct the data center to the Company’s specifications and deliver the completed data center to the Company in July 2012 for a total fee of approximately $109,892,000. Both agreements include extended payment terms. The Company made payments under both agreements totaling approximately $35,687,000 in March 2011 and the remaining payments due totaling approximately $95,983,000 are payable on various dates through March 2013 (the “Paris 4 IBX Financing”). Of the amounts paid or payable under the Paris 4 IBX Financing, a total of $14,951,000 was allocated to land and building assets, $3,721,000 was allocated to a deferred charge, which will be netted against revenue associated with the anchor tenant of the Paris 4 IBX data center over the term of the customer contract, and the remainder totaling $112,998,000 was or will be allocated to construction costs inclusive of interest charges. The Company has imputed an interest rate of 5.90% per annum on the Paris 4 IBX Financing as of June 30, 2011. The Company will record additional construction costs and increase the Paris 4 IBX Financing liability over the course of the construction period. The Paris 4 IBX Financing also required the Company to post approximately $96,876,000 of cash into a restricted cash account to ensure liquidity for the developer during the construction period. As a result, the Company’s restricted cash balances (both current and non-current) have increased (refer to “Other Current Assets” and “Other Assets” in Note 4).

Convertible Debt

The Company’s convertible debt consisted of the following (in thousands):

 

     June 30,
2011
    December 31,
2010
 

2.50% convertible subordinated notes due April 2012

   $ 250,000      $ 250,000   

3.00% convertible subordinated notes due October 2014

     395,986        395,986   

4.75% convertible subordinated notes due June 2016

     373,750        373,750   
  

 

 

   

 

 

 
     1,019,736        1,019,736   

Less amount representing debt discount

     (91,302     (103,399
  

 

 

   

 

 

 
     928,434        916,337   

Less current portion

     (240,134     —     
  

 

 

   

 

 

 
   $ 688,300      $ 916,337   
  

 

 

   

 

 

 

Maturities of Debt Facilities

The following table sets forth maturities of the Company’s debt, including loans payable, senior notes and convertible debt, as of June 30, 2011 (in thousands):

 

Year ending:

  

2011 (six months remaining)

   $ 13,788   

2012

     296,515   

2013

     64,943   

2014

     459,436   

2015

     33,970   

Thereafter

     1,042,474   
  

 

 

 
   $ 1,911,126   
  

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Fair Value of Debt Facilities

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

 

     June 30,
2011
     December 31,
2010
 

Loans payable

   $ 241,160       $ 126,958   

Senior notes

     829,740         816,270   

Convertible debt

     1,050,689         995,012   

Interest Charges

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2011      2010      2011      2010  

Interest expense

   $ 37,677       $ 37,615       $ 75,038       $ 63,290   

Interest capitalized

     3,317         2,988         5,941         6,736   
                                   

Interest charges incurred

   $ 40,994       $ 40,603       $ 80,979       $ 70,026   
                                   

10. Commitments and Contingencies

Legal Matters

IPO Litigation

On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against the Company, certain of its officers and directors (the “Individual Defendants”), and several investment banks that were underwriters of the 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. The settlement approval was appealed to the United States Court of Appeals for the Second Circuit. One appeal was dismissed and the second appeal was remanded to the district court to determine if the appellant is a class member with standing to appeal.

 

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

The Company believes that while an unfavorable outcome to this litigation is reasonably possible, a range of potential loss cannot be determined at this time. The Company has not accrued any amounts in connection with this legal matter as of June 30, 2011 as the Company concluded that an unfavorable outcome is not probable.

Pihana Litigation

On August 22, 2008, a complaint was filed against Equinix, certain former officers and directors of Pihana Pacific, Inc. (“Pihana”), certain investors in Pihana, and others. The lawsuit was filed in the First Circuit Court of the State of Hawaii, and arises out of December 2002 agreements pursuant to which Equinix merged Pihana and i-STT (a subsidiary of Singapore Technologies Telemedia Pte Ltd) into the Internet exchange services business of Equinix. Plaintiffs, who were allegedly holders of Pihana common stock, allege that their rights as shareholders were violated, and the transaction was effectuated improperly, by Pihana’s majority shareholders, officers and directors, with the alleged assistance of Equinix and others. Among other things, plaintiffs contend that they effectively had a right to block the transaction, that this supposed right was disregarded, and that they improperly received no consideration when the deal was completed. The complaint seeks to recover unspecified punitive damages, equitable relief, fees and costs, and compensatory damages in an amount that plaintiffs allegedly “believe may be all or a substantial portion of the approximately $725,000,000 value of Equinix held by Defendants” (a group that includes more than 30 individuals and entities). An amended complaint, which 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, and plaintiffs’ appeal is currently pending before the Hawaii Supreme Court. In January 2011, one group of co-defendants (Morgan Stanley and certain persons and entities affiliated with it) entered into a separate settlement with plaintiffs. The trial court determined that the settlement was made in “good faith” in accordance with Hawaii statutory law, and certain non-settling defendants (including the Company) filed an appeal from that order. That appeal is now pending before the Intermediate Court of Appeals. 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.

The Company believes that while an unfavorable outcome to this litigation is reasonably possible, a range of potential loss cannot be determined at this time. The Company has not accrued any amounts in connection with this legal matter as of June 30, 2011 as the Company concluded that an unfavorable outcome is not probable.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Alleged Class Action and Shareholder Derivative Actions

On March 4, 2011, an alleged class action entitled Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., et al., No. CV-11-1016-SC, was filed in the United States District Court for the Northern District of California, against Equinix and two of its officers. The suit asserts purported claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for allegedly misleading statements regarding the Company’s business and financial results. The suit is purportedly brought on behalf of purchasers of the Company’s common stock between July 29, 2010 and October 5, 2010, and seeks compensatory damages, fees and costs. Defendants have not yet responded to the claims in this action.

On March 8, 2011, an alleged shareholder derivative action entitled Rikos v. Equinix, Inc., et al., No. CGC-11-508940, was filed in California Superior Court, County of San Francisco, against Equinix (as a nominal defendant), the members of the Company’s board of directors, and two of its officers. The suit is based on allegations similar to those in the federal securities class action and, allegedly on the Company’s behalf, asserts purported state law causes of action against the individual defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The suit seeks, among other things, compensatory and treble damages, restitution and other equitable relief, and fees and costs. Defendants have not yet responded to the claims in this action.

On May 20, 2011, an alleged shareholder derivative action entitled Stopa v. Clontz, et al., No. CV-11-2467-SC was filed in the United States District Court for the Northern District of California, purportedly on behalf of the Company, against the members of the Company’s board of directors. The suit is based on allegations similar to those in the federal securities class action and the state court derivative action, and asserts causes of action against the individual defendants for breach of fiduciary duty for allegedly disseminating false and misleading information, breach of fiduciary duty for allegedly failing to maintain internal controls, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets. On June 10, 2011, the court signed an order relating this case to the federal securities class action. Defendants have not yet responded to the claims in this action.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of these matters. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.

The Company believes that while an unfavorable outcome to this litigation is reasonably possible, a range of potential loss cannot be determined at this time. The Company has not accrued any amounts in connection with this legal matter as of June 30, 2011 as the Company concluded that an unfavorable outcome is not probable.

Other Purchase Commitments

Primarily as a result of the Company’s various IBX expansion projects, as of June 30, 2011, the Company was contractually committed for $234,464,000 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, 2011, such as commitments to purchase power in select locations through the remainder of 2011 and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of 2011 and thereafter. Such other miscellaneous purchase commitments totaled $118,799,000 as of June 30, 2011.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

11. 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,
 
     2011     2010     2011     2010  

Net income (loss)

   $ 30,733      $ (2,274   $ 55,878      $ 11,925   

Unrealized gain (loss) on available for sale securities, net of tax of $4, $59, $18 and $65, respectively

     (5     (78     (26     (182

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

     —          —          —          4,933   

Foreign currency translation gain (loss)

     20,749        (32,034     71,432        (72,123
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     51,477        (34,386     127,284        (55,447

Comprehensive income attributable to redeemable non-controlling interests

     (1,070     —          (1,070     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Equinix

   $ 50,407      $ (34,386   $ 126,214      $ (55,447
  

 

 

   

 

 

   

 

 

   

 

 

 

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 six months ended June 30, 2011, the U.S. dollar weakened 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 gain in this period), as well as its condensed consolidated statements of operations as amounts denominated in foreign currencies are generally translating into more U.S. dollars. To the extent that the U.S. dollar weakens or strengthens in future periods, this will continue to impact the Company’s consolidated financial statements including the amount of revenue that the Company reports in future periods.

12. Segment Information

During the six months ended June 30, 2011, the Company changed its reportable segments as a result of the incorporation of legal entities in South America and the Middle East. The Company’s prior North America segment was re-designated as the Americas segment, which includes both North and South America, and the Europe segment was re-designated as the Europe, Middle East and Africa (“EMEA”) segment. The change in reportable segments did not impact the 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 Americas, EMEA and 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2011     2010     2011     2010  

Total revenues:

        

Americas

   $ 253,889      $ 191,646      $ 486,416      $ 340,202   

EMEA

     88,611        66,084        170,650        130,248   

Asia-Pacific

     52,400        38,364        100,863        74,293   
                                
   $ 394,900      $ 296,094      $ 757,929      $ 544,743   
                                

Total depreciation and amortization:

        

Americas

   $ 56,470      $ 42,542      $ 109,170      $ 70,408   

EMEA

     18,358        13,601        35,036        27,954   

Asia-Pacific

     10,394        6,607        19,351        13,077   
                                
   $ 85,222      $ 62,750      $ 163,557      $ 111,439   
                                

Income from operations:

        

Americas

   $ 49,072      $ 22,529      $ 96,391      $ 52,130   

EMEA

     14,178        7,672        25,649        15,993   

Asia-Pacific

     11,616        10,026        24,131        20,086   
                                
   $ 74,866      $ 40,227      $ 146,171      $ 88,209   
                                

Capital expenditures:

        

Americas

   $ 74,848 (1)    $ 201,081 (2)    $ 123,726 (1)    $ 297,047 (2) 

EMEA

     55,774        38,381        138,623        78,225   

Asia-Pacific

     109,249        22,532        167,588        30,122   
                                
   $ 239,871      $ 261,994      $ 429,937      $ 405,394   
                                

 

  (1) Includes the purchase price for the ALOG Acquisition, net of cash acquired, which totaled $41,954,000.
  (2) Includes the purchase price for the Switch and Data Acquisition, net of cash acquired, which totaled $113,289,000.

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

 

     June 30,
2011
     December 31,
2010
 

Americas

   $ 1,821,800       $ 1,764,630   

EMEA

     759,293         596,609   

Asia-Pacific

     504,109         289,714   
                 
   $ 3,085,202       $ 2,650,953   
                 

 

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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,
 
     2011      2010      2011      2010  

Colocation

   $ 301,586       $ 233,320       $ 582,321       $ 433,679   

Interconnection

     58,907         40,942         112,982         70,174   

Managed infrastructure

     15,369         7,295         23,846         14,595   

Rental

     666         560         1,288         905   
  

 

 

    

 

 

    

 

 

    

 

 

 

Recurring revenues

     376,528         282,117         720,437         519,353   

Non-recurring revenues

     18,372         13,977         37,492         25,390   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 394,900       $ 296,094       $ 757,929       $ 544,743   
  

 

 

    

 

 

    

 

 

    

 

 

 

No single customer accounted for 10% or greater of the Company’s revenues for the three and six months ended June 30, 2011 and 2010. No single customer accounted for 10% or greater of the Company’s gross accounts receivable as of June 30, 2011 and December 31, 2010.

13. Restructuring Charges

Switch and Data Restructuring Charge

During the six months ended June 30, 2011, the Company recorded restructuring charges related to one-time termination benefits, primarily comprised of severance, attributed to certain Switch and Data employees as presented below (in thousands):

 

Accrued restructuring charge as of December 31, 2010 (1)

   $ 1,035   

Severance-related expenses (2)

     599   

Cash payments

     (1,189
  

 

 

 

Accrued restructuring charge as of June 30, 2011(1)

   $ 445   
  

 

 

 

 

(1)    Included within other current liabilities.

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

       

       

2004 Restructuring Charge

A summary of the activity in the 2004 accrued restructuring charge associated with estimated lease exit costs from December 31, 2010 to June 30, 2011 is outlined as follows (in thousands):

 

Accrued restructuring charge as of December 31, 2010

   $ 6,006   

Accretion expense

     185   

Cash payments

     (787
  

 

 

 

Accrued restructuring charge as of June 30, 2011

     5,404   
  

 

 

 

Less current portion

     2,127   
  

 

 

 
   $ 3,277   
  

 

 

 

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, 2011 and December 31, 2010. The Company is contractually committed to this excess space lease through 2015.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

14. Subsequent Events

On July 13, 2011, the Company issued $750,000,000 aggregate principal amount of 7.00% Senior Notes due July 15, 2021 (the “7.00% Senior Notes”). Interest is payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 2012. The 7.00% 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 7.00% Senior Notes contain covenants that have a number of qualifications and exceptions similar to the Company’s 8.125% Senior Notes that were issued in February 2010. The Company expects to incur approximately $53,900,000 of interest expense annually from the 7.00% Senior Notes.

 

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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

On April 25, 2011, as more fully described in Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, Zion RJ Participações S.A., referred to as Zion, a Brazilian joint-stock company controlled by our wholly-owned subsidiary and co-owned by RW Brasil Fundo de Investimento em Participações, a subsidiary of Riverwood Capital L.P., referred to as Riverwood, completed the acquisition of approximately 90% of the outstanding capital stock of ALOG Data Centers do Brasil S.A. and its subsidiaries, referred to as ALOG, which resulted in Equinix acquiring an indirect, controlling interest in ALOG of approximately 53%. This transaction is referred to as the ALOG acquisition.

In July 2011, we issued $750.0 million aggregate principal amount of 7.00% senior notes due July 15, 2021, which is referred to as the 7.00% senior notes offering. We intend to use the net proceeds from the 7.00% senior notes offering for general corporate purposes, including the funding of our expansion activities, and the repayment of our 2.50% convertible subordinated notes due April 15, 2012.

Overview

Equinix provides global data center services that protect and connect the world’s most valued information assets. Global enterprises, financial services companies, and content and network service providers rely upon Equinix’s leading insight and data centers in 37 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, 2011, we operated or had partner IBX data centers in the Atlanta, Boston, Buffalo, Chicago, Cleveland, Dallas, Denver, Detroit, Indianapolis, Los Angeles, Miami, Nashville, New York, Philadelphia, Phoenix, Pittsburgh, Rio De Janeiro, Sao Paulo, Seattle, Silicon Valley, St. Louis, Tampa, Toronto, Washington, D.C. metro areas in the Americas region; France, Germany, the Netherlands, Switzerland and the United Kingdom in the Europe, Middle East, Africa (EMEA) region; and Australia, Hong Kong, Japan, China and Singapore in the Asia-Pacific region.

 

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We leverage our global data centers in 37 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 delivery platform and the quality of our IBX data centers, we believe we have established a critical mass of customers. As more customers locate in our IBX data centers, it benefits their suppliers and business partners to colocate as well in order to gain the full economic and performance benefits of our services. These partners, in turn, pull in their business partners, creating a “marketplace” for their services. Our global delivery platform enables scalable, reliable and cost-effective colocation, interconnection and traffic exchange thus lowering overall cost and increasing flexibility. Our focused business model is based on our critical mass of customers and the resulting “marketplace” effect. This global delivery platform, combined with our strong financial position, continues to drive new customer growth and bookings as we drive scale into our global business.

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

Excluding the ALOG acquisition, our customer count increased to 4,135 as of June 30, 2011 versus 3,661 as of June 30, 2010, an increase of 13%. This increase was due to organic growth in our business. Our utilization rate represents the percentage of our cabinet space billing versus net sellable cabinet space available taking into account power limitations. Excluding the impact of the ALOG acquisition, our utilization rate increased to 76% as of June 30, 2011 versus approximately 74% as of June 30, 2010; however, excluding the impact of our IBX data center expansion projects that have been open for less than four full quarters, our utilization rate would have increased to approximately 86% as of June 30, 2011. Our utilization rate varies from market to market among our IBX data centers across the Americas, EMEA and Asia-Pacific regions. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market it may limit our ability for growth in that market. We perform demand studies on an ongoing basis to determine if future expansion is warranted in a market. In addition, power and cooling requirements for most customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally do not control the amount of power our customers draw from installed circuits, we have negotiated power consumption limitations with certain of our high power demand customers. This increased power consumption has driven the requirement to build out our new IBX data centers to support power and cooling needs twice that of previous IBX data centers. We could face power limitations in our centers even though we may have additional physical cabinet capacity available within a specific IBX data center. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows.

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

 

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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. In addition, during the past three years, in any given quarter, greater than half of our monthly recurring revenue bookings came from existing customers, contributing to our revenue growth.

Our non-recurring revenues are primarily comprised of installation services related to a 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. Additionally, revenue from contract settlements, when a customer wishes to terminate their contract early, is generally recognized on a cash basis, when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future.

Our Americas revenues are derived primarily from colocation and interconnection services while our EMEA and Asia-Pacific revenues are derived primarily from colocation and managed infrastructure services.

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

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

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

 

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Due to our recurring revenue model, and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth, we expect our cost of revenues, sales and marketing expenses and general and administrative expenses to decline as a percentage of revenue over time, although we expect each of them to grow in absolute dollars in connection with our growth. This is evident in the trends noted below in our discussion on our results of operations. However, for cost of revenues, this trend may periodically be impacted when a large expansion project opens or is acquired and before it starts generating any meaningful revenue. Furthermore, in relation to cost of revenues, we note that the Americas region has a lower cost of revenues as a percentage of revenue than either EMEA or Asia-Pacific. This is due to both the increased scale and maturity of the Americas region compared to either EMEA or Asia-Pacific, as well as a higher cost structure outside of Americas, particularly in EMEA. While we expect all three regions to continue to see lower cost of revenues as a percentage of revenues in future periods, we expect the trend of Americas having the lowest cost of revenues as a percentage of revenue and EMEA having the highest to continue. As a result, to the extent that revenue growth outside Americas grows in greater proportion than revenue growth in Americas, our overall cost of revenues as a percentage of revenues may increase in future periods. Sales and marketing expenses and general and administrative expenses may also periodically increase as a percentage of revenue as we continue to scale our operations to support our growth.

Constant Currency Presentation

Our revenues and certain operating expenses (cost of revenues, sales and marketing and general and administrative expenses) from our international operations have represented and will continue to represent a significant portion of our total revenues and certain operating expenses. As a result, our revenues and certain operating expenses have been and will continue to be affected by changes in the U.S. dollar against major international currencies such as the Brazilian real, British pound, Canadian dollar, Euro, Swiss franc, Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present period-over-period percentage changes in our revenues and certain operating expenses on a constant currency basis in addition to the historical amounts as reported. Presenting constant currency results of operations is a non-GAAP financial measure and is not meant to be considered in isolation or as an alternative to GAAP results of operations. However, we have presented this non-GAAP financial measure to provide investors with an additional tool to evaluate our operating results. To present this information, our current and comparative prior period revenues and certain operating expenses from entities reporting in currencies other than the U.S. dollar are converted into U.S. dollars at constant exchange rates rather than the actual exchange rates in effect during the respective periods (i.e. average rates in effect for the three months ended June 30, 2010 are used as exchange rates for the three months ended June 30, 2011 when comparing the three months ended June 30, 2011 with the three months ended June 30, 2010 and average rates in effect for the six months ended June 30, 2010 are used as exchange rates for the six months ended June 30, 2011 when comparing the six months ended June 30, 2011 with the six months ended June 30, 2010).

Results of Operations

Our results of operations for the three months and six months ended June 30, 2011 include the operations of ALOG from April 25, 2011. Our results of operations for the three months and six months ended June 30, 2011 and 2010 include the operations of Switch & Data Facilities Company, Inc., which is referred to as Switch and Data, from May 1, 2010.

 

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Three Months Ended June 30, 2011 and 2010

Revenues. Our revenues were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Three months ended June 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas:

              

Recurring revenues

   $ 245,199         62   $ 184,794         63     33     n/a   

Non-recurring revenues

     8,690         2     6,852         2     27     n/a   
                                      
     253,889         64     191,646         65     32     n/a   
                                      

EMEA:

              

Recurring revenues

     81,506         21     60,664         20     34     20

Non-recurring revenues

     7,105         2     5,420         2     31     16
                                      
     88,611         23     66,084         22     34     19
                                      

Asia-Pacific:

              

Recurring revenues

     49,823         13     36,659         12     36     21

Non-recurring revenues

     2,577         1     1,705         1     51     40
                                      
     52,400         14     38,364         13     37     22
                                      

Total:

              

Recurring revenues

     376,528         95     282,118         95     33     28

Non-recurring revenues

     18,372         5     13,976         5     31     24
                                      
   $ 394,900         100   $ 296,094         100     33     28
                                      

Americas Revenues. The increase in our Americas revenues was primarily due to (i) $37.3 million of incremental revenues from the impact of the Switch and Data acquisition and the ALOG acquisition and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers including $5.1 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas, Silicon Valley and Washington, D.C. metro areas. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Chicago, New York and Washington, D.C. metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

 

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EMEA Revenues. Our revenues from Germany and the U.K., the largest revenue contributors in the EMEA region for the period, each represented approximately 34% of the regional revenues during the three months ended June 30, 2011. During the three months ended June 30, 2010, our revenues from Germany, the largest revenue contributor in the EMEA region for the period, represented approximately 36% of the regional revenues. Our EMEA revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the three months ended June 30, 2011, we recorded approximately $2.2 million of revenue from our recently-opened IBX data center expansions in the London and Paris metro areas. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended June 30, 2010, resulting in approximately $9.8 million of favorable foreign currency impact to our EMEA revenues during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Amsterdam, Frankfurt and Paris metro areas, which are expected to open during the remainder of 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 40% and 38%, respectively, of the regional revenues for the three months ended June 30, 2011 and 2010. Our Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the three months ended June 30, 2011, we recorded approximately $1.1 million of revenue generated from our IBX data center expansions in the Singapore, Sydney and Tokyo metro areas. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the three months ended June 30, 2010, resulting in approximately $5.6 million of favorable foreign currency impact to our Asia-Pacific revenues during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and the additional IBX data center expansion currently taking place in the Hong Kong metro area which is expected to open during the remainder of 2011. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers’ contracts.

Cost of Revenues. Our cost of revenues was split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas

   $ 132,468         61   $ 100,416         61     32     n/a   

EMEA

     53,173         25     41,678         26     28     13

Asia-Pacific

     29,931         14     20,488         13     46     31
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 215,572         100   $ 162,582         100     33     27
  

 

 

    

 

 

   

 

 

    

 

 

     

 

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     Three months ended
June 30,
 
     2011     2010  

Cost of revenues as a percentage of revenues:

    

Americas

     52     52

EMEA

     60     63

Asia-Pacific

     57     53

Total

     55     55

Americas Cost of Revenues. Our Americas cost of revenues for the three months ended June 30, 2011 and 2010 included $48.3 million and $37.0 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to both our organic IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in our Americas cost of revenues included $17.6 million of incremental cost of revenues resulting from the Switch and Data acquisition and the ALOG acquisition. In addition, excluding the impact from the Switch and Data acquisition and the ALOG acquisition, we incurred incremental costs associated with our organic expansion projects and revenue growth, such as $1.4 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth. We expect Americas cost of revenues to increase as we continue to grow our business.

EMEA Cost of Revenues. EMEA cost of revenues for the three months ended June 30, 2011 and 2010 included $16.5 million and $12.2 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in EMEA cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $2.7 million in utility costs arising from increased customer installations and revenues attributed to customer growth and (ii) $1.6 million of higher compensation expense, including general salaries, bonuses and headcount growth (266 EMEA cost of revenues employees as of June 30, 2011 versus 219 as of June 30, 2010). During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended June 30, 2010, resulting in approximately $6.1 million of unfavorable foreign currency impact to our EMEA cost of revenues during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We expect EMEA cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the three months ended June 30, 2011 and 2010 included $10.0 million and $6.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) $2.1 million in higher utility costs and (ii) an increase of $2.1 million of rent and facility costs. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the three months ended June 30, 2010, resulting in approximately $3.1 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

 

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Sales and Marketing Expenses. Our sales and marketing expenses were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas

   $ 23,683         64   $ 19,506         67     21     n/a   

EMEA

     8,699         23     5,915         21     47     31

Asia-Pacific

     4,681         13     3,492         12     34     24
                                      

Total

   $ 37,063         100   $ 28,913         100     27     24
                                      

 

     Three months ended
June 30,
 
     2011     2010  

Sales and marketing expenses as a percentage of revenues:

    

Americas

     9     10

EMEA

     10     9

Asia-Pacific

     9     9

Total

     9     10

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses, inclusive of both acquisitions and organic growth, was primarily due to $2.2 million of higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (264 Americas sales and marketing employees as of June 30, 2011 versus 187 as of June 30, 2010). We have been investing in our Americas sales and marketing initiatives to further increase our revenue and we anticipate this increased investment will continue over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues are expected to continue to increase. In the long-term, we generally expect Americas sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to an increase of $1.9 million in compensation costs, including sales compensation, general salaries, bonuses and headcount growth (99 EMEA sales and marketing employees as of June 30, 2011 versus 67 as of June 30, 2010) and higher professional services from various consulting projects to support our growth. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended June 30, 2010, resulting in approximately $900,000 of unfavorable foreign currency impact to our EMEA sales and marketing expenses during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We intend to invest further in our EMEA sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our EMEA sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect EMEA sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

 

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Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (63 Asia-Pacific sales and marketing employees as of June 30, 2011 versus 52 as of June 30, 2010). For the three months ended June 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2010. We intend to invest further in our Asia-Pacific sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our Asia-Pacific sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

General and Administrative Expenses. Our general and administrative expenses were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas

   $ 47,007         72   $ 38,989         72     21     n/a   

EMEA

     12,549         19     10,819         20     16     4

Asia-Pacific

     6,125         9     4,358         8     41     29
                                      

Total

   $ 65,681         100   $ 54,166         100     21     18
                                      

 

     Three months ended
June 30,
 
     2011     2010  

General and administrative expenses as a percentage of revenues:

    

Americas

     19     20

EMEA

     14     16

Asia-Pacific

     12     11

Total

     17     18

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses, inclusive of both acquisitions and organic growth, was primarily due to (i) $4.5 million of higher compensation costs, including general salaries, bonuses and headcount growth (671 Americas general and administrative employees as of June 30, 2011 versus 504 as of June 30, 2010), and (ii) $1.5 million of higher depreciation expense as a result of our ongoing efforts to support our growth, such as investments in systems. Over the course of the past year, we have been investing in our Americas general and administrative functions, which has included taking on additional office space to accommodate the headcount growth, as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including further investment in our back office systems; however, as a percentage of revenues, we generally expect them to decrease.

 

 

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EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to $1.2 million of higher professional services related to various consulting projects to support our growth. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended June 30, 2010, resulting in approximately $1.3 million of unfavorable foreign currency impact to our EMEA general and administrative expenses during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to $1.2 million of higher compensation costs, including general salaries, bonuses and headcount growth (143 Asia-Pacific general and administrative employees as of June 30, 2011 versus 116 as of June 30, 2010). For the three months ended June 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant when compared to average exchange rates of the three months ended June 30, 2010. 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, 2011 and 2010, we recorded restructuring charges totaling $103,000 and $4.4 million, respectively, primarily related to one-time termination benefits attributed to certain Switch and Data employees.

Acquisition Costs. During the three months ended June 30, 2011, we recorded acquisition costs totaling $1.6 million primarily related to the ALOG acquisition. During the three months ended June 30, 2010, we recorded acquisition costs totaling $5.8 million related to the Switch and Data acquisition. We do not expect to incur significant additional acquisition costs related to the ALOG acquisition. Our acquisition costs primarily all relate to our Americas geographic region.

Interest Income. Interest income increased to $632,000 for the three months ended June 30, 2011 from $491,000 for the three months ended June 30, 2010. The increase was primarily due to higher yields for new investments in Brazil and France. The average yield for the three months ended June 30, 2011 was 0.55% versus 0.20% for the three months ended June 30, 2010. Although we expect our interest income to increase slightly on a prospective basis as a result of the proceeds from the 7.00% senior notes offering, we generally expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries and from the utilization of cash to finance our expansion activities.

Interest Expense. Interest expense for the three months ended June 30, 2011 and 2010 was $37.7 million and $37.6 million, respectively. During the three months ended June 30, 2011 and 2010, we capitalized $3.3 million and $3.0 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering beginning in July 2011, which is approximately $53.9 million annually.

Loss on debt extinguishment and interest rate swaps, net. During the three months ended June 30, 2011, no loss on debt extinguishment and interest rate swaps, net was recorded. During the three months ended June 30, 2010, we recorded a $1.5 million loss on debt extinguishment and interest rate swaps, net, primarily related to the write-off of debt issuance costs as a result of repaying and terminating the Asia-Pacific financing and Singapore financing.

 

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Other Income (Expense). For the three months ended June 30, 2011, we recorded $1.0 million of other income, primarily due to foreign currency exchange gains during the period. 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.

Income Taxes. For the three months ended June 30, 2011 and 2010, we recorded $8.1 million and $2.4 million of income tax expenses, respectively. Our effective tax rate was 20.9% for the three months ended June 30, 2011. 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. The cash taxes for 2011 and 2010 are primarily for state income taxes and foreign income taxes.

Six Months Ended June 30, 2011 and 2010

Revenues. Our revenues were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Six months ended June 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas:

              

Recurring revenues

   $ 468,588         62   $ 328,211         60     43     n/a   

Non-recurring revenues

     17,828         2     11,991         2     49     n/a   
                                      
     486,416         64     340,202         62     43     n/a   
                                      

EMEA:

              

Recurring revenues

     155,834         21     120,109         22     30     22

Non-recurring revenues

     14,816         2     10,139         2     46     38
                                      
     170,650         23     130,248         24     31     23
                                      

Asia-Pacific:

              

Recurring revenues

     96,015         13     71,033         13     35     22

Non-recurring revenues

     4,848         1     3,260         1     49     38
                                      
     100,863         14     74,293         14     36     23
                                      

Total:

              

Recurring revenues

     720,437         95     519,353         95     39     35

Non-recurring revenues

     37,492         5     25,390         5     48     43
                                      
   $ 757,929         100   $ 544,743         100     39     36
                                      

Americas Revenues. The increase in our Americas revenues was primarily due to (i) $97.6 million of incremental revenue from the impact of the Switch and Data acquisition and the ALOG acquisition and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers including $8.0 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas, Silicon Valley and Washington, D.C. metro areas. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Chicago, New York and Washington, D.C. metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

 

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EMEA Revenues. Our revenues from Germany and the U.K., the largest revenue contributors in the EMEA region for the period, each represented approximately 34% of the regional revenues during the six months ended June 30, 2011. During the six months ended June 30, 2010, our revenues from Germany, the largest revenue contributor in the EMEA region for the period, represented approximately 36% of the regional revenues. Our EMEA revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the six months ended June 30, 2011, we recorded approximately $4.5 million of revenue from our recently-opened IBX data center expansions in the London and Paris metro areas. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the six months ended June 30, 2010, resulting in approximately $10.3 million of favorable foreign currency impact to our EMEA revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Amsterdam, Frankfurt and Paris metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 40% and 37%, respectively, of the regional revenues for the six months ended June 30, 2011 and 2010. Our Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the six months ended June 30, 2011, we recorded approximately $1.2 million of revenue generated from our IBX data center expansions in the Singapore, Sydney and Tokyo metro areas. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the six months ended June 30, 2010, resulting in approximately $9.4 million of favorable foreign currency impact to our Asia-Pacific revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and the additional IBX data center expansion currently taking place in the Hong Kong metro area which is expected to open during the remainder of 2011. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers’ contracts.

 

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Cost of Revenues. Our cost of revenues was split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas

   $ 250,054         61   $ 172,489         58     45     n/a   

EMEA

     103,144         25     83,510         28     24     16

Asia-Pacific

     56,950         14     39,633         14     44     31
                                      

Total

   $ 410,148         100   $ 295,632         100     39     35
                                      

 

     Six months ended
June 30,
 
     2011     2010  

Cost of revenues as a percentage of revenues:

    

Americas

     51     51

EMEA

     60     64

Asia-Pacific

     56     53

Total

     54     54

Americas Cost of Revenues. Our Americas cost of revenues for the six months ended June 30, 2011 and 2010 included $93.5 million and $63.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to both our organic IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in Americas cost of revenues included $43.6 million of incremental cost of revenues resulting from the Switch and Data acquisition and the ALOG acquisition. In addition, excluding the impact of the Switch and Data acquisition and the ALOG acquisition, we incurred incremental costs associated with our organic expansion projects and revenue growth, such as (i) $2.2 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth and (ii) $1.2 million of higher rent and facility costs. We expect Americas cost of revenues to increase as we continue to grow our business.

EMEA Cost of Revenues. EMEA cost of revenues for the six months ended June 30, 2011 and 2010 included $31.6 million and $25.0 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in EMEA cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) $3.1 million of higher compensation expense, including general salaries, bonuses and headcount growth (266 EMEA cost of revenues employees as of June 30, 2011 versus 219 as of June 30, 2010), (ii) an increase of $4.6 million in utility costs arising from increased customer installations and revenues attributed to customer growth and (iii) $1.6 million of higher professional costs related to various consulting projects to support our growth. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the six months ended June 30, 2010, resulting in approximately $6.6 million of unfavorable foreign currency impact to our EMEA cost of revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. We expect EMEA cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the six months ended June 30, 2011 and 2010 included $18.6 million and $12.7 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation

 

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expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $4.1 million of rent and facility costs and (ii) $4.0 million in higher utility costs. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the six months ended June 30, 2010, resulting in approximately $5.1 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

Sales and Marketing Expenses. Our sales and marketing expenses were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas

   $ 45,494         64   $ 31,458         65     45     n/a   

EMEA

     17,137         24     10,906         23     57     47

Asia-Pacific

     8,068         12     6,017         12     34     26
                                      

Total

   $ 70,699         100   $ 48,381         100     46     42
                                      

 

     Six months ended
June 30,
 
     2011     2010  

Sales and marketing expenses as a percentage of revenues:

    

Americas

     9     9

EMEA

     10     8

Asia-Pacific

     8     8

Total

     9     9

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses, inclusive of both acquisitions and organic growth, was primarily due to (i) $7.1 million of higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (264 Americas sales and marketing employees as of June 30, 2011 versus 187 as of June 30, 2010), (ii) $1.9 million of higher bad debt expense, which is partially due to the revenue growth as discussed above and partially due to the growth of the Americas collection team that has initiated additional collection efforts and procedures, and (iii) $1.5 million of higher recruiting costs. We have been investing in our Americas sales and marketing initiatives to further increase our revenue and we anticipate this increased investment will continue over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues have increased and are expected to continue to increase. In the long-term, we generally expect Americas sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

 

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EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to $4.4 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (99 EMEA sales and marketing employees as of June 30, 2011 versus 67 as of June 30, 2010) and higher professional fees to support our growth. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the six months ended June 30, 2010, resulting in approximately $1.1 million of unfavorable foreign currency impact to our EMEA sales and marketing expenses during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. We intend to invest further in our EMEA sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our EMEA sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect EMEA sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (63 Asia-Pacific sales and marketing employees as of June 30, 2011 versus 52 as of June 30, 2010). For the six months ended June 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2010. We intend to invest further in our Asia-Pacific sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our Asia-Pacific sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

General and Administrative Expenses. Our general and administrative expenses were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas

   $ 91,956         72   $ 68,925         71     33     n/a   

EMEA

     24,706         19     19,839         20     25     17

Asia-Pacific

     11,620         9     8,557         9     36     25
                                      

Total

   $ 128,282         100   $ 97,321         100     32     29
                                      

 

     Six months ended
June 30,
 
     2011     2010  

General and administrative expenses as a percentage of revenues:

    

Americas

     19     20

EMEA

     14     15

Asia-Pacific

     12     12

Total

     17     18

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses, inclusive of both acquisitions and organic growth, was primarily due to (i) $13.6 million of higher compensation costs, including general salaries, bonuses and headcount growth (671 Americas general and administrative employees as of June 30, 2011 versus 504 as of June 30, 2010), and (ii) $4.7 million of higher depreciation expense as a result of our ongoing efforts to support our growth, such as investments in systems. Over the course of the past year, we have been investing in our Americas general and administrative functions, which has included taking on additional office space to accommodate the headcount growth, as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including further investment in our back office systems; however, as a percentage of revenues, we generally expect them to decrease.

 

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EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to (i) $2.3 million of higher compensation costs, including general salaries, bonuses and headcount growth (163 EMEA general and administrative employees as of June 30, 2011 versus 143 as of June 30, 2010) and (ii) $1.8 million of higher professional fees related to various consulting projects to support our growth. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the six months ended June 30, 2010, resulting in approximately $1.6 million of unfavorable foreign currency impact to our EMEA general and administrative expenses during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to $1.9 million of higher compensation costs, including general salaries, bonuses and headcount growth (143 Asia-Pacific general and administrative employees as of June 30, 2011 versus 116 as of June 30, 2010). During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the six months ended June 30, 2010, resulting in approximately $1.0 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. 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, 2011 and 2010, we recorded restructuring charges totaling $599,000 and $4.4 million, respectively, primarily related to one-time termination benefits attributed to certain Switch and Data employees.

Acquisition Costs. During the six months ended June 30, 2011, we recorded acquisition costs totaling $2.0 million primarily related to the ALOG acquisition. During the six months ended June 30, 2010, we recorded acquisition costs totaling $10.8 million related to the Switch and Data acquisition. We do not expect to incur significant additional acquisition costs related to the ALOG acquisition. Our acquisition costs primarily all relate to our Americas geographic region.

Interest Income. Interest income decreased to $847,000 for the six months ended June 30, 2011 from $997,000 for the six months ended June 30, 2010. Interest income decreased primarily due to lower invested balances. The average yield for the six months ended June 30, 2011 was 0.43% versus 0.19% for the six months ended June 30, 2010. Although we expect our interest income to increase slightly on a prospective basis as a result of the proceeds from the 7.00% senior notes offering, we generally expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries, and from the utilization of cash to finance our expansion activities.

 

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Interest Expense. Interest expense increased to $75.0 million for the six months ended June 30, 2011 from $63.3 million for the six months ended June 30, 2010. This increase in interest expense was primarily due to the full impact of our $750.0 million 8.125% senior notes, additional financings such as capital lease and other financing obligations to support our expansion projects and additional advances from our new Asia-Pacific financing. This increase was partially offset by repayments of the Chicago IBX financing in March 2010, the European financing in April 2010, the Netherlands financing in June 2010 and mortgage payable in December 2010. During the six months ended June 30, 2011 and 2010, we capitalized $5.9 million and $6.7 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering beginning in July 2011, which is approximately $53.9 million annually.

Other-Than-Temporary Impairment Recovery On Investments. During the six months ended June 30, 2011, no other-than-temporary impairment loss or recovery on investments was recorded. During the six months ended June 30, 2010, we recorded a $3.4 million other-than-temporary impairment recovery on investments due to an additional distribution from one of our money market accounts we had previously written down during 2008 and 2009.

Loss on debt extinguishment and interest rate swaps, net. During the six months ended June 30, 2011, no loss on debt extinguishment and interest rate swaps, net was recorded. During the six months ended June 30, 2010, we recorded a $4.8 million loss on debt extinguishment and interest rate swaps, net, which is comprised of (i) a net gain of $2.7 million representing principal discount/premium and the write-off of related debt issuance costs and (ii) a loss of $7.5 million primarily resulted from the termination of an interest rate swap associated with the Chicago IBX financing as a result of repaying and terminating the Chicago IBX financing in March 2010 and the write-off of interest rate swaps associated with the European financing due to these interest rate swaps no longer being effective hedges as a result of repaying and terminating the European financing in April 2010.

Other Income (Expense). For the six months ended June 30, 2011, we recorded $3.1 million of other income, primarily due to foreign currency exchange gains during the period. 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.

Income Taxes. For the six months ended June 30, 2011 and 2010, we recorded $19.2 million and $11.1 million of income tax expenses, respectively. Our effective tax rates were 25.6% and 48.3% for the six months ended June 30, 2011and 2010, respectively. Our effective tax rate in the six months ended June 30, 2011 was lower than the six months ended June 30, 2010 due to increased foreign losses benefited in 2011. The cash taxes for 2011 and 2010 are primarily for state income taxes and foreign income taxes.

Non-GAAP Financial Measures

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

 

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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,
 
     2011      2010      2011      2010  

Income from operations

   $ 74,866       $ 40,227       $ 146,171       $ 88,209   

Depreciation, amortization and accretion expense

     86,426         63,626         165,951         112,948   

Stock-based compensation expense

     18,318         18,096         33,853         33,070   

Restructuring charges

     103         4,357         599         4,357   

Acquisitions costs

     1,615         5,849         2,030         10,843   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 181,328       $ 132,155       $ 348,604       $ 249,427   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2011      2010      2011      2010  

Americas:

           

Income from operations

   $ 49,072       $ 22,529       $ 96,391       $ 52,130   

Depreciation, amortization and accretion expense

     57,246         43,081         110,728         71,255   

Stock-based compensation expense

     14,527         13,650         26,369         24,663   

Restructuring charges

     103         4,357         599         4,357   

Acquisitions costs

     1,556         5,849         1,922         10,843   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 122,504       $ 89,466       $ 236,009       $ 163,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

EMEA:

           

Income from operations

   $ 14,178       $ 7,672       $ 25,649       $ 15,993   

Depreciation, amortization and accretion expense

     18,512         13,737         35,356         28,221   

Stock-based compensation expense

     2,147         2,531         4,442         4,681   

Acquisitions costs

     12         —           14         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 34,849       $ 23,940       $ 65,461       $ 48,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asia-Pacific:

           

Income from operations

   $ 11,616       $ 10,026       $ 24,131       $ 20,086   

Depreciation, amortization and accretion expense

     10,668         6,808         19,867         13,472   

Stock-based compensation expense

     1,644         1,915         3,042         3,726   

Acquisitions costs

     47         —           94         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 23,975       $ 18,749       $ 47,134       $ 37,284   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2011, our total indebtedness was comprised of (i) convertible debt principal totaling $1.0 billion from our 2.50% convertible subordinated notes (gross of discount), our 3.00% convertible

 

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subordinated notes, and our 4.75% convertible subordinated notes (gross of discount) and (ii) non-convertible debt and financing obligations totaling $1.3 billion consisting of (a) $750.0 million of principal from our 8.125% senior notes, (b) $232.7 million of principal from our loans payable and (c) $346.7 million from our capital lease and other financing obligations. However, in July 2011, our non-convertible debt and financing obligations increased to $2.1 billion as a result of the 7.00% senior notes offering.

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, 2011, we had $423.1 million of cash, cash equivalents and short-term and long-term investments and in July 2011, we received net proceeds from the 7.00% senior notes offering of approximately $735.6 million. Besides our investment portfolio and any further financing activities we may pursue, customer collections are our primary source of cash. While we believe we have a strong customer base and have continued to experience relatively strong collections, if the current market conditions were to deteriorate, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, all of which could have a material adverse effect on our liquidity.

As of June 30, 2011, we had a total of approximately $23.8 million of additional liquidity available to us, consisting of (i) approximately $17.7 million under the new Asia-Pacific financing and (ii) $6.1 million under the $25.0 million Bank of America revolving credit line. While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and to complete our publicly-announced IBX expansion plans, we may pursue additional expansion opportunities, primarily the build-out of new IBX data centers, in certain of our existing markets which are at or near capacity within the next year, as well as potential acquisitions. While we will be able to fund these expansion plans with our existing resources, additional financing, either debt or equity, may be required to pursue certain new or unannounced additional expansion plans. However, if current market conditions were to deteriorate, we may be unable to secure additional financing or any such additional financing may only be available to us on unfavorable terms. An inability to pursue additional expansion opportunities will have a material adverse effect on our ability to maintain our desired level of revenue growth in future periods.

Sources and Uses of Cash

 

     Six Months Ended
June 30,
 
     2011     2010  
     (in thousands)  

Net cash provided by operating activities

   $ 258,118      $ 156,718   

Net cash used in investing activities

     (496,126     (359,012

Net cash provided by financing activities

     87,964        377,563   

Operating Activities. The increase in net cash provided by operating activities was primarily due to improved operating results and improved collections of accounts receivable and growth in customer installations, which increases deferred installation revenue. Although customer collections improved in the six months ended June 30, 2011 as compared to June 30, 2010, customer collections can vary widely from quarter to quarter. It is not uncommon for some large customer receivables that were anticipated to be collected in one quarter to slip to the next quarter. For example, some large customer receivables that were anticipated to be collected in June 2011 actually were collected in July 2011 instead, which negatively impacted cash flows from operating activities for the six months ended June 30, 2011. However, overall, customer collections remain relatively strong. We expect that we will continue to generate cash from our operating activities during the remainder of 2011 and beyond.

Investing Activities. The increase in net cash used in investing activities was primarily due to higher capital expenditures as a result of expansion activity and increase in restricted cash. During the six months ended June 30, 2011 and 2010, these capital expenditures were $364.0 million and $292.1 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. Higher 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. We expect that our financing activities will consist primarily of the proceeds from the 7.00% senior notes offering, partially offset by the repayment of our debt during the remainder of 2011.

Debt Obligations

New Asia-Pacific Financing. During the six months ended June 30, 2011, we received additional advances totaling approximately $77.9 million under the new Asia-Pacific financing, leaving the amount available to borrow totaling approximately $17.7 million. The outstanding loans payable under the new Asia-Pacific financing had a blended interest rate of 5.19% as of June 30, 2011. As of June 30, 2011, we were in compliance with all financial covenants associated with the new Asia-Pacific financing.

Paris 4 IBX Financing. In March 2011, we entered into two agreements with two unrelated parties to purchase and develop a building that will ultimately become our fourth IBX data center in the Paris metro area. The first agreement allowed us the right to purchase the property for a total fee of approximately $21.8 million payable to a company that held exclusive rights (including power rights) to the property and was already in the process of developing the property into a data center and will now, instead, become the anchor tenant in the Paris 4 IBX data center once it is open for business. The second agreement was entered into with the developer of the property and allowed us to take immediate title to the building and associated land and also requires the developer to construct the data center to our specifications and deliver the completed data center to us in July 2012 for a total fee of approximately $109.9 million. Both agreements include extended payment terms. We made payments under both agreements totaling approximately $35.7 million in March 2011 and the remaining payments due totaling approximately $96.0 million are payable on various dates through March 2013, which is referred to as Paris 4 IBX financing. Of the amounts paid or payable under the Paris 4 IBX financing, a total of $15.0 million was allocated to land and building assets, $3.7 million was allocated to a deferred charge, which will be netted against revenue associated with the anchor tenant of the Paris 4 IBX data center over the term of the customer contract, and the remainder totaling $113.0 million was or will be allocated to construction costs inclusive of interest charges. We have imputed an interest rate of 5.90% per annum on the Paris 4 IBX financing as of June 30, 2011, a total of $20.6 million was outstanding under the Paris 4 IBX financing. We will record additional construction costs and increase the Paris 4 IBX financing liability over the course of the construction period. The Paris 4 IBX financing also required us to post approximately $96.9 million of cash into a restricted cash account to ensure liquidity for the developer during the construction period.

 

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Contractual Obligations and Off-Balance-Sheet Arrangements

We lease a majority of our IBX centers and certain equipment under non-cancelable lease agreements expiring through 2035. The following represents our debt maturities, financings, leases and other contractual commitments as of June 30, 2011 (in thousands):

 

     2011
(6 months)
     2012      2013      2014      2015      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)

     10,353         35,150         55,012         59,860         32,469         —           192,844   

Paris 4 IBX financing (2)

     —           87,824         6,823         —           —           —           94,647   

ALOG debt (1)

     3,435         6,792         3,775         3,590         1,501         161         19,254   

Interest (3)

     54,487         104,042         97,670         91,678         79,031         161,391         588,299   

Capital lease and other financing obligations (4)

     17,396         36,968         37,644         39,226         40,654         334,590         506,478   

Operating leases under accrued restructuring charges (5)

     1,684         2,429         2,444         2,459         1,444         —           10,460   

Operating leases (6)

     58,029         115,797         116,736         110,954         92,975         507,168         1,001,659   

Other contractual commitments (7)

     265,863         82,456         3,244         1,700         —           —           353,263   

Asset retirement obligations (8)

     378         —           1,043         1,244         5,651         45,801         54,117   

ALOG acquisition contingent consideration (9)

     —           —           23,070         —           —           —           23,070   

Redeemable non-controlling interests

     —           —           —           69,050         —           —           69,050   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 411,625       $ 721,458       $ 347,461       $ 775,748       $ 253,725       $ 2,172,860       $ 4,682,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents principal only.
(2) Represents total payments to be made to complete the construction of the Paris 4 IBX center.
(3) Represents interest on convertible debt, 8.125% senior notes and new Asia-Pacific financing based on their approximate interest rates as of June 30, 2011.
(4) Represents principal and interest.
(5) Excludes any subrental income.
(6) Represents minimum operating lease payments, excluding potential lease renewals.
(7) Represents off-balance-sheet arrangements. Other contractual commitments are described below.
(8) Represents liability, net of future accretion expense.
(9) Represents an off-balance sheet arrangement for the ALOG acquisition contingent consideration and includes the portion of the contingent consideration that will be funded by Riverwood.

In connection with certain of our leases, we entered into 14 irrevocable letters of credit totaling $18.9 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.

We had accrued liabilities related to uncertain tax positions totaling approximately $17.5 million as of June 30, 2011. These liabilities, which are reflected on our balance sheet, are not reflected in the table above since it is unclear when these liabilities would be paid.

As a result of the 7.00% senior notes offering due 2021, our senior notes increased to $1.5 billion in July 2011 and we expect to incur additional interest expense of $53.9 million annually.

Primarily as a result of our various IBX expansion projects, as of June 30, 2011, we were contractually committed for $234.5 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 2011 and 2012, is reflected in the table above as “Paris 4 IBX financing” and “other contractual commitments.”

 

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We had other non-capital purchase commitments in place as of June 30, 2011, such as commitments to purchase power in select locations and other open purchase orders, which contractually bind us for goods or services to be delivered or provided during the remainder of 2011 and beyond. Such other purchase commitments as of June 30, 2011, which total $118.8 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 $300.0 million to $350.0 million, in addition to the $234.5 million in contractual commitments discussed above as of June 30, 2011, in our various IBX expansion projects during the remainder of 2011 and thereafter 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 Policies and Estimates

Equinix’s financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are affected by management’s application of accounting policies. On an on-going basis, management evaluates its estimates and judgments. Critical accounting policies for Equinix that affect our more significant judgment and estimates used in the preparation of our condensed consolidated financial statements include accounting for income taxes, accounting for business combinations, accounting for impairment of goodwill and accounting for property, plant and equipment, which are discussed in more detail under the caption “Critical Accounting Policies and 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, 2010.

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

While there have been no 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, 2011 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, 2010, the U.S. dollar weakened relative to certain of the currencies of the foreign countries in which we operate during the six months ended June 30, 2011. 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 or weakening of the U.S. dollar will continue to have a significant impact to us in future periods.

 

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.

 

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(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.

The parties in the approximately 300 coordinated cases, including the parties in the Equinix case, reached a settlement. It provides for releases of existing claims and claims that could have been asserted relating to the conduct alleged to be wrongful from the class of investors participating in the settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Equinix. On October 6, 2009, the Court granted final approval to the settlement. The settlement approval was appealed to the United States Court of Appeals for the Second Circuit. One appeal was dismissed and the second appeal was remanded to the district court to determine if the appellant is a class member with standing to appeal.

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 its results of operations, financial condition or cash flows. We intend to continue to defend the action vigorously if the settlement does not survive the remaining appeal.

 

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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