10-Q 1 d222006d10q.htm FORM 10-Q Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

September 30, 2011 For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from              to             

Commission File Number 000-31293

 

 

EQUINIX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   77-0487526
(State of incorporation)  

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices, including ZIP code)

(650) 598-6000

(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 September 30, 2011 was 47,409,736.

 

 

 


EQUINIX, INC.

INDEX

 

    

Page

No.

 

Part I - Financial Information

  
Item 1.   Condensed Consolidated Financial Statements (unaudited):   
  Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010      3   
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010      4   
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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      32   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      54   
Item 4.   Controls and Procedures      54   

Part II - Other Information

  
Item 1.   Legal Proceedings      55   
Item 1A.   Risk Factors      57   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      74   
Item 3.   Defaults Upon Senior Securities      74   
Item 4.   [Removed and Reserved]      74   
Item 5.   Other Information      74   

Item 6.

  Exhibits      75   
Signatures      81   

Index to Exhibits

     82   

 

2


PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

EQUINIX, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

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

Current assets:

    

Cash and cash equivalents

   $ 370,523      $ 442,841   

Short-term investments

     700,246        147,192   

Accounts receivable, net

     144,185        116,358   

Other current assets

     115,344        71,657   
  

 

 

   

 

 

 

Total current assets

     1,330,298        778,048   

Long-term investments

     99,419        2,806   

Property, plant and equipment, net

     3,122,094        2,650,953   

Goodwill

     867,280        774,365   

Intangible assets, net

     153,505        150,945   

Other assets

     158,091        90,892   
  

 

 

   

 

 

 

Total assets

   $ 5,730,687      $ 4,448,009   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 181,093      $ 145,854   

Accrued property, plant and equipment

     90,181        91,667   

Current portion of capital lease and other financing obligations

     11,367        7,988   

Current portion of loans payable

     74,652        19,978   

Current portion of convertible debt

     243,176        —     

Other current liabilities

     55,687        52,628   
  

 

 

   

 

 

 

Total current liabilities

     656,156        318,115   

Capital lease and other financing obligations, less current portion

     376,848        253,945   

Loans payable, less current portion

     161,984        100,337   

Convertible debt, less current portion

     691,520        916,337   

Senior notes

     1,500,000        750,000   

Other liabilities

     253,300        228,760   
  

 

 

   

 

 

 

Total liabilities

     3,639,808        2,567,494   
  

 

 

   

 

 

 

Redeemable non-controlling interests (Note 1)

     66,372        —     
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Stockholders’ equity:

    

Common stock

     47        46   

Additional paid-in capital

     2,417,781        2,341,586   

Accumulated other comprehensive loss

     (120,416     (112,018

Accumulated deficit

     (272,905     (349,099
  

 

 

   

 

 

 

Total stockholders’ equity

     2,024,507        1,880,515   
  

 

 

   

 

 

 

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

   $ 5,730,687      $ 4,448,009   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

3


EQUINIX, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011     2010     2011     2010  
     (unaudited)  

Revenues

   $ 417,601      $ 330,347      $ 1,175,530      $ 875,090   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

        

Cost of revenues

     228,153        185,476        638,301        481,108   

Sales and marketing

     43,070        31,205        113,769        79,586   

General and administrative

     65,976        58,640        194,258        155,961   

Restructuring charges

     1,587        1,886        2,186        6,243   

Acquisition costs

     699        1,114        2,729        11,957   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     339,485        278,321        951,243        734,855   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     78,116        52,026        224,287        140,235   

Interest income

     679        310        1,526        1,307   

Interest expense

     (51,114     (38,363     (126,152     (101,653

Other-than-temporary impairment recovery on investments

     —          206        —          3,626   

Loss on debt extinguishment and interest rate swaps, net

     —          —          —          (4,831

Other income (expense)

     (1,694     1,654        1,438        193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     25,987        15,833        101,099        38,877   

Income tax expense

     (5,348     (4,637     (24,582     (15,756
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     20,639        11,196        76,517        23,121   

Net income attributable to redeemable non-controlling interests

     (320     —          (323     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Equinix.

   $ 20,319      $ 11,196      $ 76,194      $ 23,121   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Equinix, after adjustments related to redeemable non-controlling interests (Note 3):

        

Basic earnings per share

   $ 0.21      $ 0.24      $ 1.40      $ 0.54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     47,202        45,745        46,861        42,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.20      $ 0.24      $ 1.37      $ 0.53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     47,943        46,676        47,694        44,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

4


EQUINIX, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Nine months ended
September 30,
 
     2011     2010  
     (unaudited)  

Cash flows from operating activities:

    

Net income

   $ 76,517      $ 23,121   

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

    

Depreciation

     240,096        175,359   

Stock-based compensation

     53,060        50,020   

Restructuring charges

     2,186        6,243   

Amortization of intangible assets

     14,207        9,378   

Amortization of debt issuance costs and debt discounts

     23,816        19,403   

Accretion of asset retirement obligation and accrued restructuring charges

     3,473        2,501   

Loss on debt extinguishment and interest rate swaps, net

     —          4,831   

Provision for allowance for doubtful accounts

     3,609        1,454   

Other items

     1,933        903   

Changes in operating assets and liabilities:

    

Accounts receivable

     (26,299     (38,486

Other assets

     (7,217     12,717   

Accounts payable and accrued expenses

     (9,492     16,047   

Other liabilities

     24,099        (13,510
  

 

 

   

 

 

 

Net cash provided by operating activities

     399,988        269,981   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments

     (1,027,855     (599,845

Sales of investments

     104,800        24,778   

Maturities of investments

     274,620        506,811   

Purchase of Switch and Data, net of cash acquired

     —          (113,289

Purchase of ALOG, net of cash acquired

     (41,954     —     

Purchase of Paris 4 IBX property

     (14,951     —     

Purchase of Frankfurt IBX property

     (9,042     —     

Purchases of property, plant and equipment

     (495,515     (436,046

Increase in restricted cash

     (95,932     (1,160

Release of restricted cash

     1,000        244   

Other investing activities

     10        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,304,819     (618,507
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from employee equity awards

     35,704        36,179   

Proceeds from senior notes

     750,000        750,000   

Proceeds from loans payable

     90,635        115,811   

Repayment of capital lease and other financing obligations

     (7,404     (14,114

Repayment of mortgage and loans payable

     (21,273     (469,077

Debt issuance costs

     (15,551     (23,124
  

 

 

   

 

 

 

Net cash provided by financing activities

     832,111        395,675   
  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     402        (4,056
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (72,318     43,093   

Cash and cash equivalents at beginning of period

     442,841        346,056   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 370,523      $ 389,149   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for taxes

   $ 7,172      $ 3,129   
  

 

 

   

 

 

 

Cash paid for interest

   $ 100,283      $ 70,772   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

5


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 nine months ended September 30, 2011.

Income Taxes

The Company’s effective tax rates were 24.3% and 40.5% for the nine months ended September 30, 2011 and 2010, respectively. During the nine months ended September 30, 2011, the Company’s unrecognized tax benefits increased by approximately $21,557,000 due to the ALOG Acquisition. A portion of these unrecognized tax benefits served to reduce the deferred tax assets acquired from the ALOG Acquisition.

Stock-Based Compensation

In February and March 2011, the Compensation Committee and the Stock Award Committee of the Board of Directors approved the issuance of an aggregate of 706,270 shares of restricted stock units to certain employees, including executive officers, pursuant to the 2000 Equity Incentive Plan as part of the Company’s annual refresh program. These equity awards are subject to vesting provisions and had an average fair value per share on the dates of the grant of $85.64. Compensation expense related to these awards is expected to be amortized over a weighted-average period of 3.2 years.

 

6


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In July 2011, ALOG, in which the Company has an indirect controlling interest (see Note 2), granted 885,840 stock options to purchase common shares of ALOG to certain of ALOG’s employees (the “ALOG Stock Options”). The ALOG Stock Options are accounted for as liability-classified awards under the accounting standard for share-based payments and will be re-measured each reporting period prospectively until the underlying shares are settled. Under certain circumstances, the ALOG Stock Options are eligible for net cash settlement by the stock option holders. The ALOG Stock Options vest annually and have a vesting period of 4 years. The average fair value per share of the ALOG Stock Options on the date of the grant was approximately $2.50, which was computed using the Black-Scholes model with assumptions as follows:

 

Average exercise price

   $ 8.34   

Expected life (years)

     2.75   

Dividend yield

     0

Volatility

     55

Risk-free interest rate

     12.9

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011      2010     2011      2010  

Cost of revenues

   $ 1,573       $ 1,619      $ 4,417       $ 4,957   

Sales and marketing

     4,153         3,627        10,629         10,316   

General and administrative

     13,481         11,704        38,014         34,747   

Restructuring charges

     —           (3     —           1,488   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 19,207       $ 16,947      $ 53,060       $ 51,508   
  

 

 

    

 

 

   

 

 

    

 

 

 

Redeemable Non-Controlling Interests

The following table provides a summary of the activities of the Company’s redeemable non-controlling interests (in thousands):

 

Balance at December 31, 2010

   $ —     

ALOG Acquisition (see Note 2)

     66,777   

Net income attributable to redeemable non-controlling interests

     323   

Foreign currency loss attributable to redeemable non-controlling interests

     (9,096

Change in redemption value of non-controlling interests

     10,639   

Impact of foreign currency exchange

     (2,271
  

 

 

 

Balance at September 30, 2011

   $ 66,372   
  

 

 

 

Recent Accounting Pronouncements

In September 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-08, Testing Goodwill for Impairment. This ASU provides companies with the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing the qualitative factors, a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if a company concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. If the carrying value of a reporting unit exceeds its fair value, then a company is required to perform the second step of the two-step goodwill impairment test. This guidance is effective for goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements, if any, and whether to early adopt this standard.

 

7


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. This ASU is intended to increase the prominence of other comprehensive income in financial statements by presenting the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance; therefore, adoption of the new guidance in the first quarter of fiscal 2012 will not have any impact on the 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 $20,000,000, is payable by Zion in April 2013, subject to reduction for any post-closing balance sheet adjustments and any claims for indemnification (the “Contingent Consideration”). The Company’s portion of the Contingent Consideration is 19,080,000 Brazilian reais, or approximately $11,000,000. ALOG operates three data centers in Brazil and is headquartered in Rio de Janeiro. ALOG will continue to operate under the ALOG trade name. There were no historical transactions between Equinix, Riverwood, Zion and ALOG.

Beginning in April 2014 and ending in May 2016, Equinix will have the right to purchase all of Riverwood's interest in Zion at a price equal to the greater of (i) its then current fair market value and (ii) a net purchase price that implies a compounded internal rate of return in U.S. dollars ("IRR") for Riverwood's investment of 12%. If Equinix exercises its right to purchase Riverwood's shares, Equinix also will have the right, and under certain circumstances may be required, to purchase the remaining approximate 10% of shares of ALOG that Zion does not own, which are held by ALOG management (collectively, the “Call Options”). If Equinix purchases all of Riverwood’s interest in Zion at a price equal to its then current fair market value, the purchase price of the remaining approximate 10% of shares that are held by ALOG management will be equal to its then current fair market value. If Equinix purchases all of Riverwood’s interest in Zion at a net purchase price that implies an IRR for Riverwood’s investment of 12%, the purchase price per share of the remaining approximate 10% of shares that are held by ALOG management will be equal to the greater of (i) 50% of the purchase price per share of capital stock of ALOG in the ALOG Acquisition and (ii) a purchase price per share that implies an IRR equal to the sum of the IRR implied by the fair market value of the capital stock of ALOG plus 2%, declining over time.

Also beginning in April 2014 and ending in May 2016, Riverwood will have the right to require Equinix to purchase all of Riverwood's interests in Zion at a price equal to the greater of (i) its then current fair market value and (ii) a net purchase price that implies an IRR for Riverwood's investment of 8%, declining over time. If Riverwood exercises its right to require Equinix to purchase Riverwood's shares, Equinix will have the right, and under certain circumstances may be required, to purchase the remaining approximate 10% of shares of ALOG that Zion does not own, which are held by ALOG management (collectively, the “Put Options”). If Equinix purchases all of Riverwood’s interest in Zion at a price equal to its then current fair market value, the purchase price of the remaining approximate 10% of shares that are held by ALOG management will be equal to its then current fair market value. If Equinix purchases all of Riverwood’s interest in Zion at a net purchase price that implies an IRR for Riverwood’s investment of 8%, declining over time, the purchase price per share of the remaining approximate 10% of shares that are held by ALOG management will be equal to the greater of (i) 50% of the purchase price per share of capital stock of ALOG in the ALOG Acquisition and (ii) a purchase price per share that implies an IRR equal to the sum of the IRR implied by the fair market value of the capital stock of ALOG plus 2%, declining over time.

 

8


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

As the Company has an approximate 53% indirect controlling equity interest in ALOG, it began consolidating the results of 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 $678,000 and $2,307,000, respectively, for the three and nine months ended September 30, 2011 related to ALOG, which were included in the consolidated statements of operations.

Purchase Price Allocation

The ALOG Acquisition was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price was allocated to 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   

Prepaid expense and other current assets

     575   

Property, plant and equipment

     52,542   

Goodwill

     104,799   

Intangible assets

     19,295   

Other non-current assets

     6,987   
  

 

 

 

Total assets acquired

     200,723   

Accounts payable and accrued expenses

     (49,965

Debt

     (25,669

Other current liabilities

     (4,643

Other non-current liabilities

     (1,946

Redeemable non-controlling interests

     (66,777
  

 

 

 

Net assets acquired

   $ 51,723   
  

 

 

 

The 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.

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

 

Intangible assets

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

Customer contracts

     $17,093       5 – 7    5.9

Other

     2,202       3 – 6    4.3

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

 

9


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

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 September 30, 2011 for the three and nine months ended September 30, 2011. The following table sets forth the results of operations of ALOG which were included in the Company’s consolidated statements of operations (in thousands):

 

     Three months ended      Nine months ended  
     September 30, 2011  

Revenues

   $ 17,858       $ 29,582   

Net income

     807         804   

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

3. Earnings Per Share

The Company computes its earnings per share (“EPS”) using the two-class method as prescribed by the accounting standard for earnings per share. The two-class method is an earnings allocation method for computing EPS when an entity’s capital structure includes either two or more classes of common stock or includes common stock and participating securities. The two-class method calculates EPS based on distributed earnings (i.e., adjustments to redeemable non-controlling interests) and undistributed earnings. Undistributed losses are not allocated to participating securities under the two-class method unless the participating security has a contractual obligation to share in losses on a basis that is objectively determinable. Common shares of ALOG and Zion are considered participating securities in which the Company has indirect controlling equity interests.

 

10


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2011     2010      2011     2010  

Net income

   $ 20,639      $ 11,196       $ 76,517      $ 23,121   

Adjustments attributable to redeemable non-controlling interests

     (10,959     —           (10,962     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to Equinix, basic and diluted

   $ 9,680      $ 11,196       $ 65,555      $ 23,121   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average shares used to compute basic earnings per share

     47,202        45,745         46,861        42,961   
  

 

 

   

 

 

    

 

 

   

 

 

 

Effect of dilutive securities:

         

Employee equity awards

     741        931         833        1,079   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average shares used to compute diluted earnings per share

     47,943        46,676         47,694        44,040   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per share attributable to Equinix:

         

Basic

   $ 0.21      $ 0.24       $ 1.40      $ 0.54   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ 0.20      $ 0.24       $ 1.37      $ 0.53   
  

 

 

   

 

 

    

 

 

   

 

 

 

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

 

     Three months ended
September 30,
     Nine months  ended
September 30,
 
     2011      2010      2011      2010  

Shares reserved for conversion of 2.50% convertible subordinated notes

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

Shares reserved for conversion of 3.00% convertible subordinated notes

     2,945         2,945         2,945         2,945   

Shares reserved for conversion of 4.75% convertible subordinated notes

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

Common stock related to employee equity awards

     685         667         657         933   
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,295         10,277         10,267         10,543   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. Balance Sheet Components

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

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

 

     September 30,
2011
     December 31,
2010
 

Cash and cash equivalents:

     

Cash

   $ 81,432       $ 85,297   

Cash equivalents:

     

Money markets

     285,891         110,563   

U.S. government securities

     —           246,981   

U.S. government agencies securities

     3,200         —     
  

 

 

    

 

 

 

Total cash and cash equivalents

     370,523         442,841   
  

 

 

    

 

 

 

Marketable securities:

     

U.S. government securities

     622,699         144,976   

U.S. government agencies securities

     117,555         —     

Corporate bonds

     43,463         2,645   

Certificates of deposit

     7,859         —     

Foreign government securities

     7,348         —     

Asset-backed securities

     741         2,377   
  

 

 

    

 

 

 

Total marketable securities

     799,665         149,998   
  

 

 

    

 

 

 

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

   $ 1,170,188       $ 592,839   
  

 

 

    

 

 

 

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

 

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

U.S. government securities

   $ 622,722       $ 41       $ (64   $ 622,699   

U.S. government agencies securities

     117,600         99         (144     117,555   

Corporate bonds

     43,538         9         (84     43,463   

Certificates of deposit

     7,859         —           —          7,859   

Foreign government securities

     7,358         —           (10     7,348   

Asset-backed securities

     720         21         —          741   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 799,797       $ 170       $ (302   $ 799,665   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

U.S. government securities

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

Corporate bonds

     2,632         13         —          2,645   

Asset-backed securities

     2,266         112         (1     2,377   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

   

 

 

 

 

12


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

While certain marketable securities carry unrealized losses, the Company expects that it will receive both principal and interest according to the stated terms of each of the securities and that the decline in market value is primarily due to changes in the interest rate environment from the time the securities were purchased as compared to interest rates at September 30, 2011.

The following table summarizes the fair value and gross unrealized losses related to 66 available-for-sale securities with an aggregate cost basis of $147,838,000, aggregated by type of investment and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2011 (in thousands):

 

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

U.S. government securities

   $ 49,936       $ (64   $ —         $ —     

U.S. government agencies securities

     65,260         (144     —           —     

Corporate bonds

     27,020         (84     —           —     

Foreign government securities

     5,320         (10     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 147,536       $ (302   $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

 

While the Company does not believe it holds investments that are other-than-temporarily impaired and believes that the Company’s investments will mature at par as of September 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):

 

     September 30,
2011
    December 31,
2010
 

Accounts receivable

   $ 249,339      $ 210,919   

Unearned revenue

     (100,670     (90,753

Allowance for doubtful accounts

     (4,484     (3,808
  

 

 

   

 

 

 
   $ 144,185      $ 116,358   
  

 

 

   

 

 

 

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

 

13


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Other Current Assets

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

 

     September 30,
2011
     December 31,
2010
 

Restricted cash, current

   $ 57,015       $ —     

Deferred tax assets, net

     20,274         38,696   

Prepaid expenses

     19,656         17,810   

Taxes receivable

     11,551         6,857   

Other receivables

     1,680         4,779   

Foreign currency forward contract receivable

     381         —     

Other current assets

     4,787         3,515   
  

 

 

    

 

 

 
   $ 115,344       $ 71,657   
  

 

 

    

 

 

 

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

Property, Plant and Equipment, Net

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

 

     September 30,
2011
    December 31,
2010
 

IBX plant and machinery

   $ 1,788,389      $ 1,524,559   

Leasehold improvements

     947,323        826,540   

Buildings

     525,768        395,752   

IBX equipment

     344,178        263,995   

Site improvements

     313,086        307,933   

Computer equipment and software

     130,244        114,263   

Land

     92,092        89,312   

Furniture and fixtures

     17,628        15,602   

Construction in progress

     199,565        128,535   
  

 

 

   

 

 

 
     4,358,273        3,666,491   

Less accumulated depreciation

     (1,236,179     (1,015,538
  

 

 

   

 

 

 
   $ 3,122,094      $ 2,650,953   
  

 

 

   

 

 

 

Leasehold improvements, IBX plant and machinery, computer equipment and software and buildings recorded under capital leases aggregated $128,312,000 and $117,289,000 at September 30, 2011 and December 31, 2010, respectively. Amortization on the assets recorded under capital leases is included in depreciation expense and accumulated depreciation on such assets totaled $31,300,000 and $29,235,000 as of September 30, 2011 and December 31, 2010, respectively.

 

14


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Goodwill and Intangible Assets

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

 

     September 30,
2011
    December 31,
2010
 

Goodwill:

    

Americas

   $ 497,107      $ 408,730   

EMEA

     350,264        345,486   

Asia-Pacific

     19,909        20,149   
  

 

 

   

 

 

 
   $ 867,280      $ 774,365   
  

 

 

   

 

 

 

Intangible assets:

    

Intangible asset – customer contracts

   $ 171,577      $ 156,621   

Intangible asset – favorable leases

     18,207        18,285   

Intangible asset – others

     5,336        3,483   
  

 

 

   

 

 

 
     195,120        178,389   

Accumulated amortization

     (41,615     (27,444
  

 

 

   

 

 

 
   $ 153,505      $ 150,945   
  

 

 

   

 

 

 

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

 

     Americas     EMEA      Asia-Pacific     Total  

Balance at December 31, 2010

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

ALOG acquisition (see Note 2)

     104,799        —           —          104,799   

Impact of foreign currency exchange

     (16,422     4,778         (240     (11,404
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2011

   $ 497,107      $ 350,264       $ 19,909      $ 867,280   
  

 

 

   

 

 

    

 

 

   

 

 

 

The 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

     (3,383     819         (2,564
  

 

 

   

 

 

    

 

 

 

Intangible assets, gross at September 30, 2011

   $ 134,351      $ 60,769       $ 195,120   
  

 

 

   

 

 

    

 

 

 

 

15


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the three and nine months ended September 30, 2011, the Company recorded amortization expense of $5,043,000 and $14,207,000, respectively, associated with its intangible assets. For the three and nine months ended September 30, 2010, the Company recorded amortization expense of $4,357,000 and $9,378,000, respectively, associated with its intangible assets. The Company’s estimated future amortization expense related to these intangibles is as follows (in thousands):

 

Year ending:

  

2011 (three months remaining)

   $ 4,859   

2012

     19,436   

2013

     19,389   

2014

     19,024   

2015

     18,558   

Thereafter

     72,239   
  

 

 

 

Total

   $ 153,505   
  

 

 

 

Other Assets

Other assets consisted of the following (in thousands):

 

     September 30,
2011
     December 31,
2010
 

Restricted cash, non-current

   $ 37,255       $ 4,309   

Debt issuance costs, net

     43,627         34,066   

Deposits

     31,918         24,604   

Prepaid expenses, non-current

     20,333         9,597   

Deferred tax assets, net

     19,446         16,955   

Other assets, non-current

     5,512         1,361   
  

 

 

    

 

 

 
   $ 158,091       $ 90,892   
  

 

 

    

 

 

 

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

Accounts Payable and Accrued Expenses

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

 

     September 30,
2011
     December 31,
2010
 

Accounts payable

   $ 21,521       $ 12,585   

Accrued compensation and benefits

     53,192         53,259   

Accrued taxes

     34,594         15,707   

Accrued interest

     32,704         25,456   

Accrued utilities and security

     18,613         18,346   

Accrued repairs and maintenance

     3,385         2,894   

Accrued professional fees

     2,945         3,786   

Accrued other

     14,139         13,821   
  

 

 

    

 

 

 
   $ 181,093       $ 145,854   
  

 

 

    

 

 

 

 

16


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Other Current Liabilities

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

 

     September 30,
2011
     December 31,
2010
 

Deferred installation revenue

   $ 34,913       $ 31,149   

Customer deposits

     11,251         12,624   

Deferred recurring revenue

     3,201         2,349   

Accrued restructuring charges

     2,751         3,089   

Deferred rent

     1,548         585   

Deferred tax liabilities

     993         993   

Foreign currency forward contract payable

     275         58   

Asset retirement obligations

     363         445   

Other current liabilities

     392         1,336   
  

 

 

    

 

 

 
   $ 55,687       $ 52,628   
  

 

 

    

 

 

 

Other Liabilities

Other liabilities consisted of the following (in thousands):

 

     September 30,
2011
     December 31,
2010
 

Deferred tax liabilities, net

   $ 93,678       $ 103,717   

Asset retirement obligations, non-current

     55,010         46,322   

Deferred rent, non-current

     46,938         43,705   

Deferred installation revenue, non-current

     23,207         19,488   

Accrued taxes, non-current

     16,020         —     

Deferred recurring revenue, non-current

     5,904         4,897   

Customer deposits, non-current

     5,660         4,206   

Accrued restructuring charges, non-current

     4,478         3,952   

Other liabilities

     2,405         2,473   
  

 

 

    

 

 

 
   $ 253,300       $ 228,760   
  

 

 

    

 

 

 

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

5. Derivatives and Hedging Activities

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

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

 

17


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table sets forth the 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
September 30,
    Nine months  ended
September 30,
 
     2011      2010     2011      2010  

Net gain (loss)

   $ 1,397       $ (1,677   $ 163       $ 19   

6. Fair Value Measurements

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

 

     Fair value
as of
September 30,
2011
     Fair value measurement using  
        Level 1      Level 2      Level 3  

Assets:

           

U.S. government obligations

   $ 622,699       $ —         $ 622,699       $ —     

U.S. government agency obligations

     120,755         —           120,755         —     

Cash and money markets

     367,323         367,323         —           —     

Corporate bonds

     43,463         —           43,463         —     

Certificates of deposit

     7,859         7,859         —           —     

Foreign government securities

     7,348         —           7,348         —     

Asset-backed securities

     741         —           741         —     

Foreign currency forward contracts (1)

     381         —           381         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,170,569       $ 375,182       $ 795,387       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency forward contracts (1)

   $ 275       $ —         $ 275       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

           
  (1) Amounts are included within other current assets and other current liabilities in the 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 September 30, 2011 were primarily U.S. government securities, cash and money market funds, corporate bonds, certificate of deposits and foreign government securities. The Company’s fair value assessment includes an evaluation by each of these securities available-for-sale, all of which continue to be classified within Level 2 of the fair value hierarchy. The types of instruments valued based on other observable inputs include available-for-sale debt investments in other public companies, governmental units and other agencies. Such instruments are generally classified within Level 2 of the fair value hierarchy.

 

18


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

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

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

7. Related Party Transactions

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

 

     Three months  ended
September 30,
     Nine months ended
September 30,
 
     2011      2010      2011      2010  

Revenues

   $ 6,608       $ 5,758       $ 19,388       $ 16,792   

Costs and services

     915         1,840         2,709         2,649   

 

     As of September 30,  
     2011      2010  

Accounts receivable

   $ 5,271       $ 4,397   

Accounts payable

     461         246   

In connection with the ALOG Acquisition, the Company acquired a lease for one of the Brazilian IBX data centers in which the lessor is a member of ALOG management. This lease contains an option to purchase the underlying property for fair market value on the date of purchase. The Company accounts for this lease as a financing obligation as a result of structural building work pursuant to the accounting standard for lessee’s involvement in asset construction. As of September 30, 2011, the Company had a financing obligation liability totaling approximately $4,576,000 related to this lease on its balance sheet. This amount is considered a related party liability, which is not reflected in the related party data presented above.

 

19


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

8. Capital Lease and Other Financing Obligations

Hong Kong 2 IBX Lease

In August 2010, an indirect wholly-owned subsidiary of the Company entered into a lease agreement for rental of space which will be used for its second IBX data center in Hong Kong. Additionally, in December 2010, the Company entered into a license agreement with the same Landlord to obtain the right to make structural changes to the leased space (the “Hong Kong 2 IBX Lease”). The Hong Kong 2 IBX Lease has a term of 12 years and a total cumulative rent obligation of approximately $40,447,000. Pursuant to the accounting standard for 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 and a related financing obligation liability totaling approximately $38,036,000 (using the exchange rate as of September 30, 2011).

New York 5 IBX Lease

In May 2011, the Company entered into a lease amendment for two buildings that the Company will develop and ultimately convert into its eighth IBX data center in the New York metro area (the “NY 5 IBX Expansion Project” and the “NY 5 Lease Amendment”). Under the NY 5 Lease Amendment, the Company exercised its first five year renewal option available in the original lease agreement, which was entered into in April 2010. The NY 5 Lease Amendment has a remaining term of 16.7 years and a total cumulative remaining rent obligation of approximately $41,168,000 commencing May 2011. The Company began the specified construction for one of the two buildings in June 2011. Pursuant to the accounting standard for 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 totaling approximately $11,541,000 and a corresponding financing obligation liability totaling approximately $12,244,000 as of September 30, 2011. The other building is being accounted for as a capital lease.

DC 10 Lease

In December 2010, the Company entered into a lease for a building that the Company and the landlord will jointly develop to meet the Company’s needs and which the Company will ultimately convert into its 10th IBX data center in the Washington, D.C. metro area (the “DC 10 IBX Expansion Project” and the “DC 10 Lease”). The DC 10 Lease has a term of 12 years commencing from the date the landlord delivers the completed building to the Company, which is expected to occur in the fourth quarter of 2011. Monthly payments under the DC 10 Lease are expected to commence six months after the date the landlord delivers the completed building to the Company and will be made through the end of the lease term at an effective interest rate of 11.1%. The DC 10 Lease has a total cumulative rent obligation of approximately $27,752,000. The landlord began construction of the building to the 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 landlord and the Company is undertaking. As a result, the Company will be recording a building asset during the construction period and a related financing liability (the “DC 10 IBX Building Financing”), while the underlying land will be considered an operating lease. In connection with the DC 10 IBX Building Financing, the Company recorded a building asset totaling approximately $11,304,000 and a corresponding financing obligation liability totaling approximately $11,514,000, representing the estimated percentage-of-completion of the building as of September 30, 2011.

 

20


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Singapore 1 IBX Lease

In March 2011, the Company entered into a lease amendment to add space to its currently existing IBX data center in Singapore (the “Singapore IBX Expansion Project” and the “Singapore 1 IBX Lease”). The Company exercised an option to convert part of the space within the Singapore IBX Expansion project to meet the Company’s needs. The Singapore 1 IBX Lease has a remaining term of 6.1 years and a total cumulative remaining rent obligation of approximately $15,374,000 (using the exchange rate as of September 30, 2011) commencing in April 2011. The Company began construction in July 2011. Pursuant to the accounting standard for 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 Company is undertaking. As a result, the Company recorded a building asset during the construction period and a related financing liability (the “Singapore 1 IBX Building Financing”). In connection with the Singapore 1 IBX Building Financing, in July 2011, the Company recorded a building asset and a corresponding financing obligation liability totaling approximately $43,358,000 (using the exchange rate as of September 30, 2011).

Maturities of Capital Lease and Other Financing Obligations

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

 

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

2011 (three months remaining)

   $ 4,685      $ 4,757      $ 9,442   

2012

     18,368        20,999        39,367   

2013

     18,008        22,039        40,047   

2014

     18,602        22,956        41,558   

2015

     18,978        23,926        42,904   

Thereafter

     139,270        192,688        331,958   
  

 

 

   

 

 

   

 

 

 

Total minimum lease payments

     217,911        287,365        505,276   

Plus amount representing residual property value

     —          195,618        195,618   

Less estimated building costs

     —          (4,521     (4,521

Less amount representing interest

     (81,625     (226,533     (308,158
  

 

 

   

 

 

   

 

 

 

Present value of net minimum lease payments

     136,286        251,929        388,215   

Less current portion

     (7,981     (3,386     (11,367
  

 

 

   

 

 

   

 

 

 
   $ 128,305      $ 248,543      $ 376,848   
  

 

 

   

 

 

   

 

 

 

9. Debt Facilities

Loans Payable

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

 

     September 30,
2011
    December 31,
2010
 

New Asia-Pacific financing

   $ 184,844      $ 120,315   

Paris 4 IBX financing

     40,054        —     

ALOG debt

     11,738        —     
  

 

 

   

 

 

 
     236,636        120,315   

Less current portion of principal

     (74,652     (19,978
  

 

 

   

 

 

 
   $ 161,984      $ 100,337   
  

 

 

   

 

 

 

 

21


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Senior Revolving Credit Line

In September 2011, the Company entered into a $150,000,000 senior unsecured revolving credit facility (the “Senior Revolving Credit Line”) with a group of lenders (the “Lenders”). The Senior Revolving Credit Line replaced the Company’s $25,000,000 revolving credit facility with Bank of America (the “Bank of America Revolving Credit Line”). As a result, the outstanding letters of credit issued under the Bank of America Revolving Credit Line were all transferred into the Senior Revolving Credit Line. The Company may use the Senior Revolving Credit Line for working capital, capital expenditures, issuance of letters of credit, general corporate purposes and to refinance a portion of the Company’s existing debt obligations. The Senior Revolving Credit Line has a five-year term and allows the Company to borrow, repay and re-borrow over the term. The Senior Revolving Credit Line provides a sublimit for the issuance of letters of credit of up to $100,000,000 and a sublimit for swing line borrowings of up to $25,000,000. Borrowings under the Senior Revolving Credit Line carry an interest rate of US$ LIBOR plus an applicable margin ranging from 1.25% to 1.75% per annum, which varies as a function of the Company’s senior leverage ratio. The Company is also subject to a quarterly non-utilization fee ranging from 0.30% to 0.40% per annum, the pricing of which will also vary as a function of the Company’s senior leverage ratio. Additionally, the Company may increase the size of the Senior Revolving Credit Line at its election by up to $100,000,000, subject to approval by the Lenders and based on current market conditions. The Senior Revolving Credit Line contains several financial covenants, which the Company must comply with quarterly, including a leverage ratio, fixed charge coverage ratio and a minimum net worth covenant. As of September 30, 2011, the Company was in compliance with all financial covenants associated with the Senior Revolving Credit Line.

As of September 30, 2011, the Company’s cost of borrowing under the Senior Revolving Credit Line was 1.99% per annum. As of September 30, 2011, the Company had 14 irrevocable letters of credit totaling $18,960,000 issued and outstanding under the Senior Revolving Credit Line. As a result, the amount available to borrow was $131,040,000 as of September 30, 2011.

Paris 4 IBX Financing

In March 2011, the Company entered into two agreements with two unrelated parties to purchase and develop a building that will ultimately become the 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 $20,160,000, payable to a company that held exclusive rights (including power rights) to the property and was already in the process of developing the property into a data center and will now, instead, become the anchor tenant in the Paris 4 IBX data center once it is open for business. The second agreement was entered into with the developer of the property and allowed the Company to take immediate title to the building and associated land and also requires the developer to construct the data center to the Company’s specifications and deliver the completed data center to the Company in July 2012 for a total fee of approximately $101,725,000. Both agreements include extended payment terms. The Company made payments under both agreements totaling approximately $35,687,000 in March 2011 and the remaining payments due totaling approximately $86,197,000 are payable on various dates through March 2013 (the “Paris 4 IBX Financing”). Of the amounts paid or payable under the Paris 4 IBX Financing, a total of approximately $14,951,000 was allocated to land and building assets, $3,444,000 was allocated to a deferred charge, which will be netted against revenue associated with the anchor tenant of the Paris 4 IBX data center over the term of the customer contract, and the remainder totaling $103,490,000 was or will be allocated to construction costs inclusive of interest charges. The Company has imputed an interest rate of 5.90% per annum on the Paris 4 IBX Financing as of September 30, 2011. The Company will record additional construction costs and increase the Paris 4 IBX Financing liability over the course of the construction period. The Paris 4 IBX Financing also required the Company to post approximately $89,676,000 of cash into a restricted cash account to ensure liquidity for the developer during the construction period. As a result, the Company’s restricted cash balances (both current and non-current) have increased (refer to “Other Current Assets” and “Other Assets” in Note 4).

 

22


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Senior Notes

The Company’s senior notes consisted of the following (in thousands):

 

     September 30,
2011
     December 31,
2010
 

8.125% senior notes due 2018

   $ 750,000       $ 750,000   

7.00% senior notes due 2021

     750,000         —     
  

 

 

    

 

 

 
     1,500,000         750,000   
  

 

 

    

 

 

 

7.00% Senior Notes

In July 2011, the Company issued $750,000,000 aggregate principal amount of 7.00% Senior Notes due July 15, 2021 (the “7.00% Senior Notes”). Interest is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2012.

The 7.00% Senior Notes are governed by an indenture dated July 6, 2011 between the Company, as issuer, and U.S. Bank National Association, as trustee (the “7.00% Senior Notes Indenture”). The 7.00% Senior Notes Indenture contains covenants that limit the Company’s ability and the ability of its subsidiaries to, among other things:

 

   

incur additional debt;

 

   

pay dividends or make other restricted payments;

 

   

purchase, redeem or retire capital stock or subordinated debt;

 

   

make asset sales;

 

   

enter into transactions with affiliates;

 

   

incur liens;

 

   

enter into sale-leaseback transactions;

 

   

provide subsidiary guarantees;

 

   

make investments; and

 

   

merge or consolidate with any other person.

Each of these restrictions has a number of important qualifications and exceptions. The 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 including the Company’s convertible debt. The 7.00% Senior Notes are effectively junior to any of the Company’s existing and future secured indebtedness and any secured indebtedness of its subsidiaries. The 7.00% Senior Notes are also structurally subordinated to all debt and other liabilities (including trade payables) of the Company’s subsidiaries and will continue to be subordinated to the extent that these subsidiaries do not guarantee the 7.00% Senior Notes in the future.

 

23


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

At any time prior to July 15, 2014, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 7.00% Senior Notes outstanding under the 7.00% Senior Notes Indenture, at a redemption price equal to 107.000% of the principal amount of the 7.00% Senior Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings, provided that (i) at least 65% of the aggregate principal amount of the 7.00% Senior Notes issued under the 7.00% Senior Notes Indenture remains outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur within 90 days of the date of the closing of such equity offerings. On or after July 15, 2016, the Company may redeem all or a part of the 7.00% Senior Notes, on any one or more occasions, at the redemption prices set forth below plus accrued and unpaid interest thereon, if any, up to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on July 15 of the years indicated below:

 

     Redemption price of the Senior Notes

2016

   103.500%

2017

   102.333%

2018

   101.167%

2019 and thereafter

   100.000%

In addition, at any time prior to July 15, 2016, the Company may also redeem all or a part of the 7.00% Senior Notes at a redemption price equal to 100% of the principal amount of the 7.00% Senior Notes redeemed plus applicable premium (the “Applicable Premium”) and accrued and unpaid interest, if any, to, but not including, the date of redemption (the “Redemption Date”). The Applicable Premium means the greater of:

 

   

1.0% of the principal amount of the 7.00% Senior Notes to be redeemed; and

 

   

the excess of: (a) the present value at such redemption date of (i) the redemption price of the 7.00% Senior Notes to be redeemed at July 15, 2016 as shown in the above table, plus (ii) all required interest payments due on these 7.00% Senior Notes through July 15, 2016 (excluding accrued but unpaid interest, if any, to, but not including the redemption date), computed using a discount rate equal to the yield to maturity as of the redemption date of the United States Treasury securities with a constant maturity most nearly equal to the period from the redemption date to July 15, 2016, plus 0.50%; over (b) the principal amount of the 7.00% Senior Notes to be redeemed.

Upon a change in control, the Company will be required to make an offer to purchase each holder’s 7.00% Senior Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase.

Debt issuance costs related to the 7.00% Senior Notes, net of amortization, were $13,927,000 as of September 30, 2011.

Convertible Debt

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

 

     September 30,
2011
    December 31,
2010
 

2.50% convertible subordinated notes due April 2012

   $ 250,000      $ 250,000   

3.00% convertible subordinated notes due October 2014

     395,986        395,986   

4.75% convertible subordinated notes due June 2016

     373,750        373,750   
  

 

 

   

 

 

 
     1,019,736        1,019,736   

Less amount representing debt discount

     (85,040     (103,399
  

 

 

   

 

 

 
     934,696        916,337   

Less current portion

     (243,176     —     
  

 

 

   

 

 

 
   $ 691,520      $ 916,337   
  

 

 

   

 

 

 

 

24


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Maturities of Debt Facilities

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

 

Year ending:

  

2011 (three months remaining)

   $ 1,546   

2012

     317,207   

2013

     63,339   

2014

     460,444   

2015

     33,257   

Thereafter

     1,795,539   
  

 

 

 
   $ 2,671,332   
  

 

 

 

Fair Value of Debt Facilities

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

 

     September 30,
2011
     December 31,
2010
 

Loans payable

   $ 244,827       $ 126,958   

Senior notes

     1,520,802         816,270   

Convertible debt

     1,019,348         995,012   

Interest Charges

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2011      2010      2011      2010  

Interest expense

   $ 51,114       $ 38,363       $ 126,152       $ 101,653   

Interest capitalized

     3,325         2,010         9,266         8,746   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest charges incurred

   $ 54,439       $ 40,373       $ 135,418       $ 110,399   
  

 

 

    

 

 

    

 

 

    

 

 

 

10. Commitments and Contingencies

Legal Matters

IPO Litigation

On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against the Company, certain of its officers and directors (the “Individual Defendants”), and several investment banks that were underwriters of the 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.

 

25


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The parties in the approximately 300 coordinated cases, including the parties in the Equinix case, reached a settlement. It provides for releases of existing claims and claims that could have been asserted relating to the conduct alleged to be wrongful from the class of investors participating in the settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Equinix. On October 6, 2009, the Court granted final approval to the settlement. The settlement approval was appealed to the United States Court of Appeals for the Second Circuit. One appeal was dismissed and the second appeal was remanded to the district court to determine if the appellant is a class member with standing to appeal. The district court ruled that the appellant is not a class member with standing to appeal. The appellant has filed with the United States Court of Appeals for the Second Circuit a notice of appeal of the district court opinion that he is not a class member.

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

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

Pihana Litigation

On August 22, 2008, a complaint was filed against Equinix, certain former officers and directors of Pihana Pacific, Inc. (“Pihana”), certain investors in Pihana, and others. The lawsuit was filed in the First Circuit Court of the State of Hawai’i, and arises out of December 2002 agreements pursuant to which Equinix merged Pihana and i-STT (a subsidiary of Singapore Technologies Telemedia Pte Ltd) into the Internet exchange services business of Equinix. Plaintiffs, who were allegedly holders of Pihana common stock, allege that their rights as shareholders were violated, and the transaction was effectuated improperly, by Pihana's majority shareholders, officers and directors, with the alleged assistance of Equinix and others. Among other things, plaintiffs contend that they effectively had a right to block the transaction, that this supposed right was disregarded, and that they improperly received no consideration when the deal was completed. The complaint seeks to recover unspecified punitive damages, equitable relief, fees and costs, and compensatory damages in an amount that plaintiffs allegedly “believe may be all or a substantial portion of the approximately $725,000,000 value of Equinix held by Defendants” (a group that includes more than 30 individuals and entities). An amended complaint, which added new plaintiffs (other alleged holders of Pihana common stock) but is otherwise substantially similar to the original pleading, was filed on September 29, 2008 (the “Amended Complaint”). On October 13, 2008, a complaint was filed in a separate action by another purported holder of Pihana common stock, naming the same defendants and asserting substantially similar allegations as the August 22, 2008 and September 29, 2008 pleadings. On December 12, 2008, the court entered a stipulated order, which consolidated the two actions under one case number and set January 22, 2009 as the last day for Defendants to move to dismiss or otherwise respond to the Amended Complaint, the operative complaint in this case. On January 22, 2009, motions to dismiss the Amended Complaint were filed by Equinix and other Defendants. On April 24, 2009, plaintiffs filed a Second Amended Complaint (“SAC”) to correct the naming of certain parties. The SAC is otherwise substantively identical to the Amended Complaint, and all motions to dismiss the Amended Complaint have been treated as responsive to the SAC. On September 1, 2009, the Court heard Defendants’ motions to dismiss the SAC and ruled at the hearing that all claims against all Defendants are time-barred. The Court also considered whether there were further independent grounds for dismissing the claims, and supplemental briefing was submitted with respect to claims against one defendant and plaintiffs’ renewed request for further leave to amend. On March 23, 2010, the Court entered final Orders granting the motions to dismiss as to all Defendants and issued a minute Order denying plaintiffs’ renewed request for further leave to amend. On May 21, 2010, plaintiffs filed a Notice of Appeal, and plaintiffs’ appeal is currently pending before the Hawaii Supreme Court. In January 2011, one group of co-defendants (Morgan Stanley and certain persons and entities affiliated with it) entered into a separate settlement with plaintiffs. The trial court determined that the settlement was made in “good faith” in accordance with Hawai‘i statutory law, and certain non-settling defendants (including Equinix) filed an appeal from that order before the Intermediate Court of Appeals. That appeal has been stayed pending resolution of plaintiffs’ appeal before the Hawai‘i Supreme Court. The Company believes that plaintiffs’ claims and alleged damages are without merit and it intends to continue to defend the litigation vigorously.

 

26


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

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

Alleged Class Action and Shareholder Derivative Actions

On March 4, 2011, an alleged class action entitled Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., et al., No. CV-11-1016-SC, was filed in the United States District Court for the Northern District of California, against Equinix and two of its officers. The suit asserts purported claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for allegedly misleading statements regarding the 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.

 

27


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

Other Purchase Commitments

Primarily as a result of the Company’s various IBX expansion projects, as of September 30, 2011, the Company was contractually committed for $221,305,000 of unaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided, in connection with the work necessary to open these IBX centers and make them available to customers for installation. In addition, the Company had numerous other, non-capital purchase commitments in place as of September 30, 2011, such as commitments to purchase power in select locations through the remainder of 2011 and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of 2011 and thereafter. Such other miscellaneous purchase commitments totaled $99,309,000 as of September 30, 2011.

11. Other Comprehensive Income and Loss

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2011     2010     2011     2010  

Net income

   $ 20,639      $ 11,196      $ 76,517      $ 23,121   

Unrealized loss on available for sale securities, net of tax of $17, $1, $1 and $123, respectively

     (241     (3     (267     (185

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

     —          —          —          4,933   

Foreign currency translation gain (loss)

     (88,659     61,292        (17,227     (10,831
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax

     (68,261     72,485        59,023        17,038   

Net income, net of tax, attributable to redeemable non-controlling interests

     (320     —          (323     —     

Other comprehensive loss, net of tax, attributable to redeemable non-controlling interests

     10,163        —          9,096        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax, attributable to Equinix

   $ (58,418   $ 72,485      $ 67,796      $ 17,038   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes in foreign currencies, particularly the British pound and Euro, can have a significant impact to the Company’s consolidated balance sheets (as evidenced above in the Company’s foreign currency translation gain or loss), as well as its consolidated results of operations, as amounts in foreign currencies are generally translating into more U.S. dollars when the U.S. dollar weakens or less U.S. dollars when the U.S. dollar strengthens. During the three months ended September 30, 2011, the U.S. dollar strengthened against certain of the currencies of the foreign countries in which the Company operates. This has significantly impacted the Company’s condensed consolidated balance sheets (as evidenced in the Company’s foreign currency translation loss in this period), as well as its condensed consolidated statements of operations as amounts denominated in foreign currencies are generally translating into less U.S. dollars. To the extent that the U.S. dollar weakens or strengthens in future periods, this will continue to impact the Company’s consolidated financial statements including the amount of revenue that the Company reports in future periods.

12. Segment Information

During the nine months ended September 30, 2011, the Company changed its reportable segments as a result of the incorporation of legal entities in South America and the Middle East. The 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.

 

28


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2011     2010      2011     2010  

Total revenues:

         

Americas

   $ 268,854      $ 215,325       $ 755,270      $ 555,527   

EMEA

     92,324        72,794         262,974        203,042   

Asia-Pacific

     56,423        42,228         157,286        116,521   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 417,601      $ 330,347       $ 1,175,530      $ 875,090   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total depreciation and amortization:

         

Americas

   $ 57,610      $ 50,414       $ 166,780      $ 120,822   

EMEA

     19,187        15,232         54,223        43,186   

Asia-Pacific

     13,949        7,652         33,300        20,729   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 90,749      $ 73,298       $ 254,303      $ 184,737   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations:

         

Americas

   $ 51,659      $ 31,921       $ 148,050      $ 84,051   

EMEA

     16,305        10,258         41,954        26,251   

Asia-Pacific

     10,152        9,847         34,283        29,933   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 78,116      $ 52,026       $ 224,287      $ 140,235   
  

 

 

   

 

 

    

 

 

   

 

 

 

Capital expenditures:

         

Americas

   $ 52,849 (1)    $ 75,508       $ 176,575 (1)    $ 372,555 (2) 

EMEA

     33,475        33,447         172,098        111,672   

Asia-Pacific

     45,201        34,986         212,789        65,108   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 131,525      $ 143,941       $ 561,462      $ 549,335   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

  (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):

 

     September 30,
2011
     December 31,
2010
 

Americas

   $ 1,834,565       $ 1,764,630   

EMEA

     746,217         596,609   

Asia-Pacific

     541,312         289,714   
  

 

 

    

 

 

 
   $ 3,122,094       $ 2,650,953   
  

 

 

    

 

 

 

 

29


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2011      2010      2011      2010  

Colocation

   $ 312,900       $ 257,295       $ 895,221       $ 690,974   

Interconnection

     59,256         48,837         170,516         119,011   

Managed infrastructure

     24,383         7,805         49,951         22,400   

Rental

     812         790         2,100         1,695   
  

 

 

    

 

 

    

 

 

    

 

 

 

Recurring revenues

     397,351         314,727         1,117,788         834,080   

Non-recurring revenues

     20,250         15,620         57,742         41,010   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 417,601       $ 330,347       $ 1,175,530       $ 875,090   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

13. Restructuring Charges

Switch and Data Restructuring Charge

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

 

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

   $ 1,035   

Severance-related expenses (2)

     392   

Cash payments

     (1,066
  

 

 

 

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

   $ 361   
  

 

 

 

 

  (1) Included within other current liabilities.
  (2) Included in the consolidated statements of operations as a restructuring charge.

2004 Restructuring Charge

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

 

Accrued restructuring charge as of December 31, 2010

   $ 6,006   

Accretion expense

     275   

Restructuring charge adjustment (1)

     1,794   

Cash payments

     (1,207
  

 

 

 

Accrued restructuring charge as of September 30, 2011

     6,868   
  

 

 

 

Less current portion

     (2,390
  

 

 

 
   $ 4,478   
  

 

 

 

 

  (1) Recorded during the three months ended September 30, 2011 as a result of revised sublease assumptions on the Company’s excess space in the New York metro area.

 

30


EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

As the Company currently has no plans to enter into a lease termination with the landlord associated with the excess space lease in the New York metro area, the Company has reflected its accrued restructuring liability as both a current and non-current liability. The Company reports accrued restructuring charges within other current liabilities and other liabilities on the accompanying consolidated balance sheets as of September 30, 2011 and December 31, 2010. The Company is contractually committed to this excess space lease through 2015.

14. Subsequent Events

In October 2011, the Company entered into a lease for land and a building that the Company and the landlord will jointly develop to meet the Company’s needs and which the Company will ultimately convert into an IBX data center in the Seattle, Washington metro area (the “Seattle 3 Lease”). The Seattle 3 Lease has a fixed term of 15 years, with options to renew, and a total cumulative rent obligation of approximately $110,000,000, exclusive of renewal periods. Rental payments on the Seattle 3 Lease will commence when several conditions primarily related to the completion of the construction on the building have been met by the landlord, which is estimated to be in 2013. The landlord began modifying the building structure to the Company’s specifications in October 2011.

 

31


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 38 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 September 30, 2011, we operated or had partner IBX data centers in the Atlanta, Boston, Buffalo, Chicago, Cleveland, Dallas, Denver, Detroit, Indianapolis, Los Angeles, Miami, Nashville, New York, Philadelphia, Phoenix, Pittsburgh, Rio De Janeiro, Sao Paulo, Seattle, Silicon Valley, St. Louis, Tampa, Toronto, Washington, D.C. metro areas in the Americas region; France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom in the Europe, Middle East, Africa (EMEA) region; and Australia, Hong Kong, Japan, China and Singapore in the Asia-Pacific region.

 

32


We leverage our global data centers in 38 markets around the world as a global service delivery platform which serves more than 90% of the 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 4,633 as of September 30, 2011 versus 4,151 as of September 30, 2010, an increase of 12%. This increase was due to organic growth in our business. Our utilization rate represents the percentage of our cabinet space billing versus net sellable cabinet space available taking into account power limitations. Excluding the impact of the ALOG acquisition, our utilization rate increased to 81% as of September 30, 2011 versus approximately 73% as of September 30, 2010; however, excluding the impact of our IBX data center expansion projects that have been open for less than four full quarters, our utilization rate would have increased to approximately 86% as of September 30, 2011. Our utilization rate varies from market to market among our IBX data centers across the Americas, EMEA and Asia-Pacific regions. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market it may limit our ability for growth in that market. We perform demand studies on an ongoing basis to determine if future expansion is warranted in a market. In addition, power and cooling requirements for most customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally do not control the amount of power our customers draw from installed circuits, we have negotiated power consumption limitations with certain of our high power demand customers. This increased power consumption has driven the requirement to build out our new IBX data centers to support power and cooling needs twice that of previous IBX data centers. We could face power limitations in our centers even though we may have additional physical cabinet capacity available within a specific IBX data center. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows.

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

 

33


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

Our non-recurring revenues are primarily comprised of installation services related to a 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.

 

34


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

Constant Currency Presentation

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

Results of Operations

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

 

35


Three Months Ended September 30, 2011 and 2010

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

 

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

Americas:

              

Recurring revenues

   $ 259,265         62   $ 208,096         63     25     25

Non-recurring revenues

     9,589         2     7,229         2     33     33
  

 

 

    

 

 

   

 

 

    

 

 

     
     268,854         64     215,325         65     25     25
  

 

 

    

 

 

   

 

 

    

 

 

     

EMEA:

              

Recurring revenues

     85,108         20     66,279         20     28     19

Non-recurring revenues

     7,216         2     6,515         2     11     2
  

 

 

    

 

 

   

 

 

    

 

 

     
     92,324         22     72,794         22     27     17
  

 

 

    

 

 

   

 

 

    

 

 

     

Asia-Pacific:

              

Recurring revenues

     52,978         13     40,352         12     31     19

Non-recurring revenues

     3,445         1     1,876         1     84     69
  

 

 

    

 

 

   

 

 

    

 

 

     
     56,423         14     42,228         13     34     22
  

 

 

    

 

 

   

 

 

    

 

 

     

Total:

              

Recurring revenues

     397,351         95     314,727         95     26     23

Non-recurring revenues

     20,250         5     15,620         5     30     24
  

 

 

    

 

 

   

 

 

    

 

 

     
   $ 417,601         100   $ 330,347         100     26     23
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Revenues. The increase in our Americas revenues was primarily due to (i) $17.9 million of incremental revenues from the impact of the ALOG acquisition and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers, including $2.8 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas and Silicon Valley metro areas. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Chicago, Dallas, New York, Seattle and Washington, D.C. metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

EMEA Revenues. During the three months ended September 30, 2011, our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 35% of the regional revenues. During the three months ended September 30, 2010, our revenues from Germany, the largest revenue contributor in the EMEA region for the period, represented approximately 36% of the regional revenues. Our EMEA revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the three months ended September 30, 2011, we recorded approximately $7.7 million of revenue from our recently-opened IBX data center expansions in the Amsterdam, London and Paris metro areas. During the three months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended September 30, 2010, resulting in approximately $7.0 million of favorable foreign currency impact to our EMEA revenues during the three months ended September 30, 2011 on a constant currency basis. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Amsterdam, Frankfurt and Paris metro areas, which are expected to open during the remainder of 2011 and 2012. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

 

36


Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 39% and 38%, respectively, of the regional revenues for the three months ended September 30, 2011 and 2010. Our Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the three months ended September 30, 2011, we recorded approximately $4.2 million of revenue generated from our IBX data center expansions in the Hong Kong, Singapore, Sydney and Tokyo metro areas. During the three months ended September 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the three months ended September 30, 2010, resulting in approximately $5.1 million of favorable foreign currency impact to our Asia-Pacific revenues during the three months ended September 30, 2011 on a constant currency basis. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and the additional IBX data center expansion currently taking place in the Hong Kong metro area which is expected to open during the remainder of 2011. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers’ contracts.

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

 

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

Americas

   $ 138,121         61   $ 118,572         64     16     16

EMEA

     54,839         24     43,722         24     25     15

Asia-Pacific

     35,193         15     23,182         12     52     38
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 228,153         100   $ 185,476         100     23     19
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months  ended
September 30,
 
     2011     2010  

Cost of revenues as a percentage of revenues:

    

Americas

     51     55

EMEA

     59     60

Asia-Pacific

     62     55

Total

     55     56

Americas Cost of Revenues. Our Americas cost of revenues for the three months ended September 30, 2011 and 2010 included $49.2 million and $44.1 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to both our organic IBX data center expansion activity and the ALOG acquisition. Excluding depreciation expense, the increase in our Americas cost of revenues was primarily due to (i) $9.3 million of incremental cost of revenues resulting from the ALOG acquisition and (ii) incremental costs associated with our organic expansion projects and revenue growth, such as $2.7 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth and $1.6 million of higher compensation expense, including general salaries, bonuses and headcount growth (497 Americas cost of revenues employees as of September 30, 2011 versus 481 as of September 30, 2010). We expect Americas cost of revenues to increase as we continue to grow our business.

 

37


EMEA Cost of Revenues. EMEA cost of revenues for the three months ended September 30, 2011 and 2010 included $17.5 million and $13.7 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in EMEA cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $2.4 million in utility costs arising from increased customer installations and revenues attributed to customer growth and (ii) $1.2 million of higher compensation expense, including general salaries, bonuses and headcount growth (273 EMEA cost of revenues employees as of September 30, 2011 versus 230 as of September 30, 2010). During the three months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended September 30, 2010, resulting in approximately $4.6 million of unfavorable foreign currency impact to our EMEA cost of revenues during the three months ended September 30, 2011 on a constant currency basis. We expect EMEA cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the three months ended September 30, 2011 and 2010 included $13.5 million and $7.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) $2.6 million in higher utility costs and (ii) an increase of $1.2 million of rent and facility costs. During the three months ended September 30, 2011, the U.S. dollar was generally weaker relative to Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the three months ended September 30, 2010, resulting in approximately $3.2 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the three months ended September 30, 2011 on a constant currency basis. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

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

 

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

Americas

   $ 29,126         67   $ 21,251         68     37     37

EMEA

     9,329         22     6,253         20     49     39

Asia-Pacific

     4,615         11     3,701         12     25     14
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 43,070         100   $ 31,205         100     38     35
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months  ended
September 30,
 
     2011     2010  

Sales and marketing expenses as a percentage of revenues:

    

Americas

     11     10

EMEA

     10     9

Asia-Pacific

     8     9

Total

     10     9

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to (i) $2.8 million of incremental sales and marketing expenses from the ALOG acquisition and (ii) $5.3 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (221 Americas sales and marketing employees as of September 30, 2011 versus 182 as of September 30, 2010). We have been investing in our Americas sales and marketing initiatives to further increase our revenue and we anticipate this increased investment will continue over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues are expected to continue to increase. In the long-term, we generally expect Americas sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

 

38


EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to an increase of $1.7 million in compensation costs, including sales compensation, general salaries, bonuses and headcount growth (108 EMEA sales and marketing employees as of September 30, 2011 versus 75 as of September 30, 2010) and higher professional services from various consulting projects to support our growth. During the three months ended September 30, 2011, the impact of foreign currency fluctuations to our EMEA sales and marketing expenses was not significant on a constant currency basis. We intend to invest further in our EMEA sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our EMEA sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect EMEA sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (70 Asia-Pacific sales and marketing employees as of September 30, 2011 versus 56 as of September 30, 2010). For the three months ended September 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant on a constant currency basis. We intend to invest further in our Asia-Pacific sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our Asia-Pacific sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

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

 

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

Americas

   $ 47,684         72   $ 41,346         71     15     15

EMEA

     11,851         18     11,796         20     —          (6 %) 

Asia-Pacific

     6,441         10     5,498         9     17     10
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 65,976         100   $ 58,640         100     13     11
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months  ended
September 30,
 
     2011     2010  

General and administrative expenses as a percentage of revenues:

    

Americas

     18     19

EMEA

     13     16

Asia-Pacific

     11     13

Total

     16     18

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to (i) $2.2 million of incremental general and administrative expenses from the ALOG acquisition, (ii) $2.4 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (565 Americas general and administrative employees as of September 30, 2011 versus 491 as of September 30, 2010), and (iii) $1.4 million of higher depreciation expense as a result of our ongoing efforts to support our growth, such as investments in systems. Over the course of the past year, we have been investing in our Americas general and administrative functions to scale this region effectively for growth, which has included taking on additional office space to accommodate our headcount growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including further investment in our back office systems; however, as a percentage of revenues, we generally expect them to decrease.

 

39


EMEA General and Administrative Expenses. Our EMEA general and administrative expenses did not change significantly during the three months ended September 30, 2011 compared to the three months ended September 30, 2010. For the three months ended September 30, 2011, the impact of foreign currency fluctuations to our EMEA general and administrative expenses was not significant on a constant currency basis. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to higher compensation costs, including general salaries, bonuses and headcount growth (153 Asia-Pacific general and administrative employees as of September 30, 2011 versus 120 as of September 30, 2010). For the three months ended September 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant on a constant currency basis. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Restructuring Charges. During the three months ended September 30, 2011, we recorded restructuring charges totaling $1.6 million primarily related to revised sublease assumptions on our excess leased space in the New York metro area. Our excess space lease in the New York metro area remains abandoned and continues to carry a restructuring charge. During the three months ended September 30, 2010, we recorded restructuring charges totaling $1.9 million primarily related to one-time termination benefits attributed to certain Switch and Data employees.

Acquisition Costs. During the three months ended September 30, 2011, we recorded acquisition costs totaling $699,000 primarily related to the ALOG acquisition. During the three months ended September 30, 2010, we recorded acquisition costs totaling $1.1 million primarily related to our EMEA region.

Interest Income. Interest income increased to $679,000 for the three months ended September 30, 2011 from $310,000 for the three months ended September 30, 2010. The increase was primarily due to higher yields and higher invested balances as a result of the proceeds from the 7.00% senior notes offering in July 2011. The average yield for the three months ended September 30, 2011 was 0.25% versus 0.17% for the three months ended September 30, 2010. We generally expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries and from the utilization of cash to finance our expansion activities.

Interest Expense. Interest expense for the three months ended September 30, 2011 and 2010 was $51.1 million and $38.4 million, respectively. The increase in interest expense was primarily due to our $750.0 million 7.00% senior notes offering in July 2011. During the three months ended September 30, 2011 and 2010, we capitalized $3.3 million and $2.0 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we recognize the full impact of our $750.0 million 7.00% senior notes partially offset by repayment of debt. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering, which is approximately $53.9 million annually. We may incur additional indebtedness to support our growth, resulting in further interest expense.

 

40


Other-Than-Temporary Impairment Recovery On Investments . During the three months ended September 30, 2011, no other-than-temporary impairment recovery on investments was recorded. During the three months ended September 30, 2010, we recorded a $206,000 other-than-temporary impairment recovery on investments due to an additional distribution from one of our money market accounts we had previously written down during 2008 and 2009.

Other Income (Expense). For the three months ended September 30, 2011, we recorded $1.7 million of other expense primarily due to foreign currency exchange losses during the period. For the three months ended September 30, 2010, we recorded $1.7 million of other income, primarily due to foreign currency exchange gains during the period.

Income Taxes. For the three months ended September 30, 2011 and 2010, we recorded $5.3 million and $4.6 million of income tax expenses, respectively. Our effective tax rates were 20.6% and 29.3%, respectively, for the three months ended September 30, 2011 and 2010. The lower effective tax rate for the three months ended September 30, 2011 was primarily due to discrete tax benefits. We will reassess our valuation allowance related to our foreign operations in the future, which may result in discrete quarterly benefits and a reduction of our valuation allowance. The cash taxes for 2011 and 2010 are primarily for state income taxes and foreign income taxes.

Nine Months Ended September 30, 2011 and 2010

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

 

     Nine months ended September 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas:

              

Recurring revenues

   $ 727,853         62   $ 536,307         61     36     36

Non-recurring revenues

     27,417         2     19,220         2     43     43
  

 

 

    

 

 

   

 

 

    

 

 

     
     755,270         64     555,527         63     36     36
  

 

 

    

 

 

   

 

 

    

 

 

     

EMEA:

              

Recurring revenues

     240,942         21     186,388         21     29     21

Non-recurring revenues

     22,032         2     16,654         2     32     24
  

 

 

    

 

 

   

 

 

    

 

 

     
     262,974         23     203,042         23     30     21
  

 

 

    

 

 

   

 

 

    

 

 

     

Asia-Pacific:

              

Recurring revenues

     148,993         12     111,385         13     34     21

Non-recurring revenues

     8,293         1     5,136         1     61     50
  

 

 

    

 

 

   

 

 

    

 

 

     
     157,286         13     116,521         14     35     23
  

 

 

    

 

 

   

 

 

    

 

 

     

Total:

              

Recurring revenues

     1,117,788         95     834,080         95     34     30

Non-recurring revenues

     57,742         5     41,010         5     41     36
  

 

 

    

 

 

   

 

 

    

 

 

     
   $ 1,175,530         100   $ 875,090         100     34     31
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Revenues. The increase in our Americas revenues was primarily due to (i) $121.0 million of incremental revenue from the impact of the Switch and Data acquisition and the ALOG acquisition and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers, including $4.9 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas and Silicon Valley metro areas. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Chicago, Dallas, New York, Seattle and Washington, D.C. metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

 

41


EMEA Revenues. During the nine months ended September 30, 2011, our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 34% of the regional revenues. During the nine months ended September 30, 2010, our revenues from Germany, the largest revenue contributor in the EMEA region for the period, represented approximately 36% of the regional revenues. Our EMEA revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the nine months ended September 30, 2011, we recorded approximately $20.2 million of revenue from our recently-opened IBX data center expansions in the Amsterdam, London and Paris metro areas. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the nine months ended September 30, 2010, resulting in approximately $17.3 million of favorable foreign currency impact to our EMEA revenues during the nine months ended September 30, 2011 on a constant currency basis. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in the recently-opened BX data center expansions and additional IBX data center expansions currently taking place in the Amsterdam, Frankfurt and Paris metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 40% and 37%, respectively, of the regional revenues for the nine months ended September 30, 2011 and 2010. Our Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the nine months ended September 30, 2011, we recorded approximately $6.5 million of revenue generated from our IBX data center expansions in the Hong Kong, Singapore, Sydney and Tokyo metro areas. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the nine months ended September 30, 2010, resulting in approximately $14.5 million of favorable foreign currency impact to our Asia-Pacific revenues during the nine months ended September 30, 2011 on a constant currency basis. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and the additional IBX data center expansion currently taking place in the Hong Kong metro area which is expected to open during the remainder of 2011. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers’ contracts.

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

 

     Nine months ended September 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas

   $ 388,175         61   $ 291,061         60     33     n/a   

EMEA

     157,983         25     127,232         27     24     15

Asia-Pacific

     92,143         14     62,815         13     47     33
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 638,301         100   $ 481,108         100     33     29
  

 

 

    

 

 

   

 

 

    

 

 

     

 

42


     Nine months  ended
September 30,
 
     2011     2010  

Cost of revenues as a percentage of revenues:

    

Americas

     51     52

EMEA

     60     63

Asia-Pacific

     59     54

Total

     54     55

Americas Cost of Revenues. Our Americas cost of revenues for the nine months ended September 30, 2011 and 2010 included $142.7 million and $107.5 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to both our organic IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in Americas cost of revenues included $55.7 million of incremental cost of revenues resulting from the Switch and Data acquisition and the ALOG acquisition. In addition, excluding the impact of the Switch and Data acquisition and the ALOG acquisition, we incurred incremental costs associated with our organic expansion projects and revenue growth, such as $4.1 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth. We expect Americas cost of revenues to increase as we continue to grow our business.

EMEA Cost of Revenues. EMEA cost of revenues for the nine months ended September 30, 2011 and 2010 included $49.1 million and $38.8 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in EMEA cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $6.9 million in utility costs arising from increased customer installations and revenues attributed to customer growth, (ii) $4.3 million of higher compensation expense, including general salaries, bonuses and headcount growth (273 EMEA cost of revenues employees as of September 30, 2011 versus 230 as of September 30, 2010) and (iii) a general increase of $4.9 million among numerous cost categories, such as professional fees for various consulting projects, repair and maintenance costs and rent and facility costs incurred to support our revenue growth. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the nine months ended September 30, 2010, resulting in approximately $11.1 million of unfavorable foreign currency impact to our EMEA cost of revenues during the nine months ended September 30, 2011 on a constant currency basis. We expect EMEA cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the nine months ended September 30, 2011 and 2010 included $32.1 million and $20.1 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) $6.6 million in higher utility costs, (ii) an increase of $5.2 million of rent and facility costs, (iii) $2.0 million of higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (148 Asia-Pacific cost of revenues employees as of September 30, 2011 versus 99 as of September 30, 2010) and (iv) $1.2 million of higher professional services related to various consulting projects to support our growth. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the nine months ended September 30, 2010, resulting in approximately $8.4 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the nine months ended September 30, 2011 on a constant currency basis. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

 

43


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

 

     Nine months ended September 30,     % Change  
     2011      %     2010      %     Actual     Constant
currency
 

Americas

   $ 74,620         66   $ 52,709         66     42     n/a   

EMEA

     26,466         23     17,159         22     54     44

Asia-Pacific

     12,683         11     9,718         12     31     21
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 113,769         100   $ 79,586         100     43     40
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Nine months  ended
September 30,
 
     2011     2010  

Sales and marketing expenses as a percentage of revenues:

    

Americas

     10     9

EMEA

     10     8

Asia-Pacific

     8     8

Total

     10     9

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses included (i) $4.2 million of incremental sales and marketing expenses resulting from the ALOG acquisition, (ii) $11.6 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (221 Americas sales and marketing employees as of September 30, 2011 versus 182 as of September 30, 2010), (iii) $2.2 million of higher bad debt expense, which is partially due to the revenue growth as discussed above and partially due to the growth in the Americas collection team that has initiated additional collection efforts and procedures, and (iv) $1.5 million of higher recruiting costs. We have been investing in our Americas sales and marketing initiatives to further increase our revenue and we anticipate this increased investment will continue over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues have increased and are expected to continue to increase. In the long-term, we generally expect Americas sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to (i) $6.1 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (108 EMEA sales and marketing employees as of September 30, 2011 versus 75 as of September 30, 2010) and $1.3 million of higher professional fees to support our growth. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the nine months ended September 30, 2010, resulting in approximately $1.7 million of unfavorable foreign currency impact to our EMEA sales and marketing expenses during the nine months ended September 30, 2011 on a constant currency basis. We intend to invest further in our EMEA sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our EMEA sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect EMEA sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $1.9 million of higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (70 Asia-Pacific sales and marketing employees as of September 30, 2011 versus 56 as of September 30, 2010). For the nine months ended September 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant on a constant currency basis. We intend to invest further in our Asia-Pacific sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our Asia-Pacific sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we generally expect them to decrease in the long-term.

 

44


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

 

     Nine months ended September 30,     % Change  
     2011          %     2010          %     Actual     Constant
currency
 

Americas

   $ 139,640         72   $ 110,271         71     27     n/a   

EMEA

     36,557         19     31,635         20     16     8

Asia-Pacific

     18,061         9     14,055         9     29     19
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 194,258         100   $ 155,961         100     25     22
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Nine months  ended
September 30,
 
     2011     2010  

General and administrative expenses as a percentage of revenues:

    

Americas

     18     20

EMEA

     14     16

Asia-Pacific

     11     12

Total

     17     18

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses included (i) $3.8 million of incremental general and administrative expenses resulting from the ALOG acquisition, (ii) $15.6 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (565 Americas general and administrative employees as of September 30, 2011 versus 491 as of September 30, 2010), and (iii) $6.0 million of higher depreciation expense as a result of our ongoing efforts to support our growth, such as investments in systems. Over the course of the past year, we have been investing in our Americas general and administrative functions to scale this region effectively for growth, which has included taking on additional office space to accommodate our headcount growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including further investment in our back office systems; however, as a percentage of revenues, we generally expect them to decrease.

EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to (i) $2.9 million of higher compensation costs, including general salaries, bonuses and headcount growth (171 EMEA general and administrative employees as of September 30, 2011 versus 154 as of September 30, 2010) and (ii) $1.7 million of higher professional fees related to various consulting projects to support our growth. During the nine months ended September 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the nine months ended September 30, 2010, resulting in approximately $2.3 million of unfavorable foreign currency impact to our EMEA general and administrative expenses during the nine months ended September 30, 2011 on a constant currency basis. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

 

45


Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to $2.7 million of higher compensation costs, including general salaries, bonuses and headcount growth (153 Asia-Pacific general and administrative employees as of September 30, 2011 versus 120 as of September 30, 2010). During the nine months ended September 30, 20141, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the nine months ended September 30, 2010, resulting in approximately $1.4 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the nine months ended September 30, 2011 on a constant currency basis. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Restructuring Charges. During the nine months ended September 30, 2011, we recorded restructuring charges totaling $2.2 million primarily related to revised sublease assumptions on our excess leased space in the New York metro area. Our excess space lease in the New York metro area remains abandoned and continues to carry a restructuring charge. During the nine months ended September 30, 2010, we recorded restructuring charges totaling $6.2 million primarily related to one-time termination benefits attributed to certain Switch and Data employees.

Acquisition Costs. During the nine months ended September 30, 2011, we recorded acquisition costs totaling $2.7 million primarily related to the ALOG acquisition. During the nine months ended September 30, 2010, we recorded acquisition costs totaling $12.0 million primarily related to the Switch and Data acquisition. Our acquisition costs primarily relate to our Americas geographic region.

Interest Income. Interest income increased to $1.5 million for the nine months ended September 30, 2011 from $1.3 million for the nine months ended September 30, 2010. Interest income increased primarily due to higher yields. The average yield for the nine months ended September 30, 2011 was 0.35% versus 0.19% for the nine months ended September 30, 2010. We generally expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries, and from the utilization of cash to finance our expansion activities.

Interest Expense. Interest expense increased to $126.2 million for the nine months ended September 30, 2011 from $101.7 million for the nine months ended September 30, 2010. This increase in interest expense was primarily due to the impact of our $750.0 million 7.00% senior notes offering, additional financings such as capital lease and other financing obligations to support our expansion projects and additional advances from our new Asia-Pacific financing. During the nine months ended September 30, 2011 and 2010, we capitalized $9.3 million and $8.7 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering, which is approximately $53.9 million annually. We may incur additional indebtedness to support our growth, resulting in further interest expense.

Other-Than-Temporary Impairment Recovery On Investments. During the nine months ended September 30, 2011, no other-than-temporary impairment recovery on investments was recorded. During the nine months ended September 30, 2010, we recorded a $3.6 million other-than-temporary impairment recovery on investments due to an additional distribution from one of our money market accounts we had previously written down during 2008 and 2009.

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

 

46


Other Income (Expense). For the nine months ended September 30, 2011 and 2010, we recorded $1.4 million and $193,000, respectively, of other income, primarily due to foreign currency exchange gains during the period.

Income Taxes. For the nine months ended September 30, 2011 and 2010, we recorded $24.6 million and $15.8 million of income tax expenses, respectively. Our effective tax rates were 24.3% and 40.5% for the nine months ended September 30, 2011 and 2010, respectively. The lower effective tax rate for the nine months ended September 30, 2011 was primarily due to increased foreign losses benefited in 2011 and discrete tax benefits. We will continue to reassess our valuation allowance related to our foreign operations in the future, which may result in a further reduction of our valuation allowance. The cash taxes for 2011 and 2010 are primarily for state income taxes and foreign income taxes.

Non-GAAP Financial Measures

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

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

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

 

47


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

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

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2011      2010      2011      2010  

Income from operations

   $ 78,116       $ 52,026       $ 224,287       $ 140,235   

Depreciation, amortization and accretion expense

     92,019         74,485         257,970         187,433   

Stock-based compensation expense

     19,207         16,950         53,060         50,020   

Restructuring charges

     1,587         1,886         2,186         6,243   

Acquisitions costs

     699         1,114         2,729         11,957   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 191,628       $ 146,461       $ 540,232       $ 395,888   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2011      2010      2011      2010  

Americas:

           

Income from operations

   $ 51,659       $ 31,921       $ 148,050       $ 84,051   

Depreciation, amortization and accretion expense

     58,414         51,108         169,142         122,363   

Stock-based compensation expense

     15,176         12,683         41,545         37,346   

Restructuring charges

     1,587         1,886         2,186         6,243   

Acquisitions costs

     677         349         2,599         11,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 127,513       $ 97,947       $ 363,522       $ 261,195   
  

 

 

    

 

 

    

 

 

    

 

 

 

EMEA:

           

Income from operations

   $ 16,305       $ 10,258       $ 41,954       $ 26,251   

Depreciation, amortization and accretion expense

     19,354         15,531         54,710         43,752   

Stock-based compensation expense

     2,308         2,502         6,750         7,183   

Acquisitions costs

     —           765         14         765   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 37,967       $ 29,056       $ 103,428       $ 77,951   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asia-Pacific:

           

Income from operations

   $ 10,152       $ 9,847       $ 34,283       $ 29,933   

Depreciation, amortization and accretion expense

     14,251         7,846         34,118         21,318   

Stock-based compensation expense

     1,723         1,765         4,765         5,491   

Acquisitions costs

     22         —           116         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 26,148       $ 19,458       $ 73,282       $ 56,742   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Liquidity and Capital Resources

As of September 30, 2011, our total indebtedness was comprised of (i) convertible debt principal totaling $1.0 billion from our 2.50% convertible subordinated notes (gross of discount), our 3.00% convertible subordinated notes, and our 4.75% convertible subordinated notes (gross of discount) and (ii) non-convertible debt and financing obligations totaling $2.1 billion consisting of (a) $1.5 billion of principal from our 8.125% and 7.00% senior notes, (b) $236.7 million of principal from our loans payable and (c) $388.2 million from our capital lease and other financing obligations.

We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of the current portion of our debt due, and to complete our publicly-announced expansion projects. As of September 30, 2011, we had $1.2 billion of cash, cash equivalents and short-term and long-term investments. Besides our investment portfolio and any further financing activities we may pursue, customer collections are our primary source of cash. While we believe we have a strong customer base and have continued to experience relatively strong collections, if the current market conditions were to deteriorate, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, all of which could have a material adverse effect on our liquidity.

 

49


As of September 30, 2011, we had a total of approximately $135.7 million of additional liquidity available to us, consisting of (i) approximately $131.0 million under the $150.0 million senior revolving credit facility and (ii) approximately $4.7 million under the new Asia-Pacific financing. While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and to complete our publicly-announced IBX expansion plans, we may pursue additional expansion opportunities, primarily the build-out of new IBX data centers, in certain of our existing markets which are at or near capacity within the next year, as well as potential acquisitions. While we will be able to fund these expansion plans with our existing resources, additional financing, either debt or equity, may be required to pursue certain new or unannounced additional expansion plans. However, if current market conditions were to deteriorate, we may be unable to secure additional financing or any such additional financing may only be available to us on unfavorable terms. An inability to pursue additional expansion opportunities will have a material adverse effect on our ability to maintain our desired level of revenue growth in future periods.

Sources and Uses of Cash

 

     Nine Months Ended
September 30,
 
     2011     2010  
     (in thousands)  

Net cash provided by operating activities

   $ 399,988      $ 269,981   

Net cash used in investing activities

     (1,304,809     (618,507

Net cash provided by financing activities

     832,111        395,675   

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

Investing Activities. The increase in net cash used in investing activities was primarily due to higher purchases of investments from the proceeds of our 7.00% senior notes offering and an increase in restricted cash. For the foreseeable future, we expect that our IBX expansion construction activity will increase somewhat compared to our current spending levels. However, if the opportunity to expand is greater than planned and we have sufficient funding to increase the expansion opportunities available to us.

Financing Activities. Lower net cash provided by financing activities for the nine months ended September 30, 2010 was primarily due to repayment of our debt facilities, including the Chicago IBX financing, the European financing, the Asia-Pacific financing, the Singapore financing and the Netherlands financing; however, the Asia-Pacific financing and the Singapore financing were replaced by the new Asia-Pacific financing. We expect that our financing activities will consist primarily of the repayment of our debt for the fourth quarter.

Debt Obligations

7.00% Senior Notes. In July 2011, we issued $750.0 million aggregate principal amount of 7.00% senior notes due July 15, 2021, which are referred to as the 7.00% senior notes. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2012.

 

50


The 7.00% senior notes are unsecured and rank equal in right of payment to our existing or future senior debt and senior in right of payment to our existing and future subordinated debt. The 7.00% senior notes are effectively junior to any of our existing and future secured indebtedness and any indebtedness of our subsidiaries. The 7.00% senior notes are also structurally subordinated to all debt and other liabilities (including trade payables) of our subsidiaries and will continue to be subordinated to the extent that these subsidiaries do not guarantee the 7.00% senior notes in the future.

The 7.00% Senior Notes are governed by an indenture which contains covenants that limit the Company’s ability and the ability of its subsidiaries to, among other things:

 

   

incur additional debt;

 

   

pay dividends or make other restricted payments;

 

   

purchase, redeem or retire capital stock or subordinated debt;

 

   

make asset sales;

 

   

enter into transactions with affiliates;

 

   

incur liens;

 

   

enter into sale-leaseback transactions;

 

   

provide subsidiary guarantees;

 

   

make investments; and

 

   

merge or consolidate with any other person.

At any time prior to July 15, 2014, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 7.00% senior notes outstanding at a redemption price equal to 107.000% of the principal amount of the 7.00% senior notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings, provided that (i) at least 65% of the aggregate principal amount of the 7.00% senior notes issued remains outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur within 90 days of the date of the closing of such equity offerings. On or after July 15, 2016, we may redeem all or a part of the 7.00% senior notes, on any one or more occasions, at the redemption prices set forth below plus accrued and unpaid interest thereon, if any, up to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on July 15 of the years indicated below:

 

     Redemption price of the Senior Notes

2016

   103.500%

2017

   102.333%

2018

   101.167%

2019 and thereafter

   100.000%

In addition, at any time prior to July 15, 2016, we may also redeem all or a part of the 7.00% senior notes at a redemption price equal to 100% of the principal amount of the 7.00% senior notes redeemed plus applicable premium, which is referred to as the applicable premium, and accrued and unpaid interest, if any, to, but not including, the date of redemption, which is referred to as the redemption date. The applicable premium means the greater of:

 

   

1.0% of the principal amount of the 7.00% senior notes to be redeemed; and

 

   

the excess of: (a) the present value at such redemption date of (i) the redemption price of the 7.00% senior notes to be redeemed at July 15, 2016 as shown in the above table, plus (ii) all required interest payments due on these 7.00% senior notes through July 15, 2016 (excluding accrued but unpaid interest, if any, to, but not including the redemption date), computed using a discount rate equal to the yield to maturity as of the redemption date of the United States Treasury securities with a constant maturity most nearly equal to the period from the redemption date to July 15, 2016, plus 0.50%; over (b) the principal amount of the 7.00% senior notes to be redeemed.

Upon a change in control, we will be required to make an offer to purchase each holder’s 7.00% senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase.

 

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Debt issuance costs related to the 7.00% senior notes, net of amortization, were $13.9 million as of September 30, 2011.

Senior Revolving Credit Line. In September 2011, we entered into a $150.0 million senior unsecured revolving credit facility with a group of lenders, which is referred to as the lenders. This transaction is referred to as the senior revolving credit line. The senior revolving credit line replaced our $25.0 million credit facility with Bank of America, which is referred to as the $25.0 million Bank of America revolving credit line. As a result, the outstanding letters of credit issued under the $25.0 million Bank of America revolving credit line were all transferred to the senior revolving credit line. We may use the senior revolving credit line for working capital, capital expenditures, issuance of letters of credit, general corporate purposes and to refinance a portion of our existing debt obligations. The senior revolving credit line has a five-year term and allows us to borrow, repay and re-borrow over the term. The senior revolving credit line provides a sublimit for the issuance of letters of credit of up to $100.0 million and a sublimit for swing line borrowings of up to $25.0 million. Borrowings under the senior revolving credit line carry an interest rate of US$ LIBOR plus an applicable margin ranging from 1.25% to 1.75% per annum, which varies as a function of our senior leverage ratio. We are also subject to a quarterly non-utilization fee ranging from 0.30% to 0.40% per annum, pricing of which will also vary as a function of our senior leverage ratio. Additionally, we may increase the size of the senior revolving credit line at our election by up to $100.0 million, subject to approval by the lenders and based on current market conditions. The senior revolving credit line contains several financial covenants, which we must comply with quarterly, including a leverage ratio, fixed charge coverage ratio and a minimum net worth covenant. As of September 30, 2011, our cost of borrowing under the senior revolving credit line was 1.99% per annum. As of September 30, 2011, we had 14 irrevocable letters of credit totaling approximately $19.0 million issued and outstanding under the senior revolving credit line. As a result, the amount available to borrow was $131.0 million as of September 30, 2011.

Paris 4 IBX Financing. In March 2011, we entered into two agreements with two unrelated parties to purchase and develop a building that will ultimately become our fourth IBX data center in the Paris metro area. The first agreement allowed us the right to purchase the property for a total fee of approximately $20.2 million, payable to a company that held exclusive rights (including power rights) to the property and was already in the process of developing the property into a data center and will now, instead, become the anchor tenant in the Paris 4 IBX data center once it is open for business. The second agreement was entered into with the developer of the property and allowed us to take immediate title to the building and associated land and also requires the developer to construct the data center to our specifications and deliver the completed data center to us in July 2012 for a total fee of approximately $101.7 million. Both agreements include extended payment terms. We made payments under both agreements totaling approximately $35.7 million in March 2011 and the remaining payments due totaling approximately $86.2 million are payable on various dates through March 2013, which is referred to as the Paris 4 IBX financing. Of the amounts paid or payable under the Paris 4 IBX financing, a total of $15.0 million was allocated to land and building assets, $3.4 million was allocated to a deferred charge, which will be netted against revenue associated with the anchor tenant of the Paris 4 IBX data center over the term of the customer contract, and the remainder totaling $103.5 million was or will be allocated to construction costs inclusive of interest charges. We have imputed an interest rate of 5.90% per annum on the Paris 4 IBX financing as of September 30, 2011, a total of $40.1 million was outstanding under the Paris 4 IBX financing. We will record additional construction costs and increase the Paris 4 IBX financing liability over the course of the construction period. The Paris 4 IBX financing also required us to post approximately $89.7 million of cash into a restricted cash account to ensure liquidity for the developer during the construction period.

 

52


Contractual Obligations and Off-Balance-Sheet Arrangements

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

 

<
     2011
(3 months)
     2012      2013      2014      2015      Thereafter      Total  

Convertible debt (1)

   $ —         $ 250,000       $ —         $