10-Q 1 d543601d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2013

OR

 

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

For the transition period from                      to                     

Commission File Number 000-31293

 

 

EQUINIX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

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

(Address of principal executive offices, including ZIP code)

(650) 598-6000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)    Yes  x    No  ¨ and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

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

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

The number of shares outstanding of the registrant’s Common Stock as of June 30, 2013 was 49,418,143.

 

 

 


Table of Contents

EQUINIX, INC.

INDEX

 

    

Page

No.

 

    Part I – Financial Information

  

Item 1.

  Condensed Consolidated Financial Statements (unaudited):      3   
  Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012      3   
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012      4   
  Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012      5   
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012      6   
  Notes to Condensed Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      33   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      60   

Item 4.

  Controls and Procedures      60   

    Part II – Other Information

  

Item 1.

  Legal Proceedings      61   

Item 1A.

  Risk Factors      61   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      80   

Item 3.

  Defaults Upon Senior Securities      80   

Item 4.

  Mine Safety Disclosure      80   

Item 5.

  Other Information      80   

Item 6.

  Exhibits      81   

Signatures

     89   

Index to Exhibits

     90   


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

EQUINIX, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

     June 30,
2013
    December 31,
2012
 
     (unaudited)  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 517,496      $ 252,213   

Short-term investments

     323,460        166,492   

Accounts receivable, net

     201,336        163,840   

Other current assets

     55,317        57,206   
  

 

 

   

 

 

 

Total current assets

     1,097,609        639,751   

Long-term investments

     375,971        127,819   

Property, plant and equipment, net

     4,103,344        3,918,999   

Goodwill

     1,012,102        1,042,564   

Intangible assets, net

     184,740        201,562   

Other assets

     304,083        202,269   
  

 

 

   

 

 

 

Total assets

   $ 7,077,849      $ 6,132,964   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 258,027      $ 268,853   

Accrued property, plant and equipment

     101,015        63,509   

Current portion of capital lease and other financing obligations

     85,262        15,206   

Current portion of loans payable

     40,360        52,160   

Other current liabilities

     122,871        139,561   
  

 

 

   

 

 

 

Total current liabilities

     607,535        539,289   

Capital lease and other financing obligations, less current portion

     684,873        545,853   

Loans payable, less current portion

     164,919        188,802   

Convertible debt

     716,265        708,726   

Senior notes

     2,250,000        1,500,000   

Other liabilities

     245,768        230,843   
  

 

 

   

 

 

 

Total liabilities

     4,669,360        3,713,513   
  

 

 

   

 

 

 

Redeemable non-controlling interests (Note 10)

     96,614        84,178   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Common stock

     50        49   

Additional paid-in capital

     2,651,396        2,583,371   

Treasury stock

     (36,284     (36,676

Accumulated other comprehensive loss

     (200,082     (101,042

Accumulated deficit

     (103,205     (110,429
  

 

 

   

 

 

 

Total stockholders’ equity

     2,311,875        2,335,273   
  

 

 

   

 

 

 

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

   $ 7,077,849      $ 6,132,964   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

3


Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  
     (unaudited)  

Revenues

   $ 525,669      $ 457,249      $ 1,045,124      $ 900,494   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

        

Cost of revenues

     267,693        225,289        526,961        442,387   

Sales and marketing

     59,478        47,603        117,754        94,013   

General and administrative

     88,632        80,595        178,317        158,911   

Restructuring charge

     (4,837     —          (4,837     —     

Acquisition costs

     2,526        1,666        6,188        2,341   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     413,492        355,153        824,383        697,652   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     112,177        102,096        220,741        202,842   

Interest income

     917        963        1,664        1,654   

Interest expense

     (61,001     (46,787     (121,332     (99,605

Other income (expense)

     2,768        (1,844     2,309        (1,998

Loss on debt extinguishment

     (93,602     —          (93,602     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (38,741     54,428        9,780        102,893   

Income tax benefit (expense)

     10,612        (17,138     (1,586     (30,991
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (28,129     37,290        8,194        71,902   

Net income from discontinued operations, net of tax

     —          350        —          549   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (28,129     37,640        8,194        72,451   

Net income attributable to redeemable non-controlling interests

     (529     (1,193     (970     (1,481
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Equinix

   $ (28,658   $ 36,447      $ 7,224      $ 70,970   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share (“EPS”) attributable to Equinix:

        

Basic EPS from continuing operations

   $ (0.58   $ 0.75      $ 0.15      $ 1.48   

Basic EPS from discontinued operations

     —          0.01        —          0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic EPS

   $ (0.58   $ 0.76      $ 0.15      $ 1.49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     49,379        48,016        49,205        47,485   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS from continuing operations

   $ (0.58   $ 0.72      $ 0.14      $ 1.43   

Diluted EPS from discontinued operations

     —          0.01        —          0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS

   $ (0.58   $ 0.73      $ 0.14      $ 1.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     49,379        52,351        49,976        51,633   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

4


Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  
     (unaudited)  

Net income (loss)

   $ (28,129   $ 37,640      $ 8,194      $ 72,451   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax:

        

Foreign currency translation loss

     (30,666     (49,207     (103,220     (14,895

Unrealized loss on available for sale securities

     (458     (177     (360     (99
  

 

 

   

 

 

   

 

 

   

 

 

 
     (31,124     (49,384     (103,580     (14,994
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax

     (59,253     (11,744     (95,386     57,457   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to redeemable non-controlling interests

     (529     (1,193     (970     (1,481

Other comprehensive loss attributable to redeemable non-controlling interests

     5,309        3,974        4,540        2,915   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Equinix

   $ (54,473   $ (8,963   $ (91,816   $ 58,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

5


Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Six months ended
June 30,
 
     2013     2012  
     (unaudited)  

Cash flows from operating activities:

    

Net income

   $ 8,194      $ 72,451   

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

    

Depreciation

     202,493        178,615   

Stock-based compensation

     46,897        39,652   

Excess tax benefits from stock-based compensation

     (22,421     —     

Restructuring charge

     (4,837     —     

Amortization of debt issuance costs and debt discounts

     11,637        13,009   

Amortization of intangible assets

     13,623        9,751   

Provision for allowance for doubtful accounts

     1,598        2,446   

Loss on debt extinguishment

     93,602        —     

Accretion of asset retirement obligation and accrued restructuring charges

     2,402        2,370   

Other items

     5,566        1,525   

Changes in operating assets and liabilities:

    

Accounts receivable

     (43,761     (34,541

Income taxes, net

     (75,762     23,222   

Other assets

     (18,036     16,846   

Accounts payable and accrued expenses

     396        (9,887

Other liabilities

     9,749        5,316   
  

 

 

   

 

 

 

Net cash provided by operating activities

     231,340        320,775   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments

     (623,804     (165,818

Sales of investments

     140,450        274,211   

Maturities of investments

     74,796        517,594   

Purchase of New York IBX data center

     (2,960     —     

Purchases of property, plant and equipment

     (198,530     (341,974

Increase in restricted cash

     (836,763     (51

Release of restricted cash

     841,925        79,351   

Other investing activities, net

     (107     —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (604,993     363,313   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchases of treasury stock

     —          (13,364

Proceeds from employee equity awards

     15,880        36,473   

Excess tax benefits from stock-based compensation

     22,421        —     

Proceeds from senior notes

     1,500,000        —     

Proceeds from loans payable

     —          8,909   

Repayment of capital lease and other financing obligations

     (7,673     (5,858

Repayment of loans payable

     (32,191     (77,299

Repayment of convertible debt

     —          (250,007

Repayment of senior notes

     (750,000     —     

Debt extinguishment costs

     (80,925     —     

Debt issuance costs

     (20,786     (7,520
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     646,726        (308,666
  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     (7,790     (149
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     265,283        375,273   

Cash and cash equivalents at beginning of period

     252,213        278,823   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 517,496      $ 654,096   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for taxes

   $ 76,854      $ 6,765   
  

 

 

   

 

 

 

Cash paid for interest

   $ 97,639      $ 92,301   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

6


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 as of December 31, 2012 has been derived from audited consolidated financial statements as of 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 (“GAAP”). 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 26, 2013. 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. 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 condensed consolidated financial statement presentation as of and for the three and six months ended June 30, 2013.

Income Taxes

The Company’s effective tax rates were 16.2% and 30.1% for the six months ended June 30, 2013 and 2012, respectively. The lower effective tax rate during the six months ended June 30, 2013 was primarily due to expected lower income in the U.S. for the year as a result of the loss on debt extinguishment recorded during the period (see Note 9).

The Company is entitled to a deduction for federal and state tax purposes with respect to employee equity award activity. The reduction in income tax payable related to windfall tax benefits for employee equity awards has been reflected as an adjustment to additional paid-in capital. For the six months ended June 30, 2013, the benefits arising from employee equity award activity that resulted in an adjustment to additional paid-in capital were approximately $22,421,000.

 

7


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Discontinued Operations

In August 2012, the Company entered into an agreement to sell 16 of the Company’s IBX data centers located throughout the U.S. to an investment group including 365 Main, Crosslink Capital, Housatonic Partners and Brightwood Capital for net proceeds of $76,458,000 (the “Divestiture”). The Divestiture closed in November 2012. The Company’s operating results from its discontinued operations associated with the Divestiture consisted of the following (in thousands):

 

     Three months
ended
    Six months
ended
 
     June 30, 2012  

Revenues

   $ 9,015      $ 17,970   

Cost of revenues

     (7,903     (15,884

Operating expenses

     (542     (1,164

Income taxes

     (220     (373
  

 

 

   

 

 

 

Net income from discontinued operations

   $ 350      $ 549   
  

 

 

   

 

 

 

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, Disclosures about Offsetting Assets and Liabilities. This ASU requires companies to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB issued ASU 2013-01, clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies that the scope of ASU 2011-11 only applies to derivatives accounted for in accordance with ASC 815, Derivatives and Hedging, and securities borrowing and securities lending transactions. This new guidance is effective for interim and annual periods beginning on or after January 1, 2013 and retrospective disclosure is required for all comparative periods presented. During the three months ended March 31, 2013, the Company adopted these ASUs and their adoption did not have a material impact on its consolidated financial statements since the ASUs enhance currently required disclosures.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income when applicable or to cross-reference the reclassifications with other disclosures that provide additional detail about the reclassification made when the reclassifications are not made to net income. This ASU is effective for fiscal years and interim periods, beginning after December 15, 2012. During the three months ended March 31, 2013, the Company adopted ASU 2013-02 and the adoption did not have a material impact on its consolidated financial statements since the Company did not have material reclassifications in any periods presented.

 

8


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

2. Earnings Per Share

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Net income (loss) from continuing operations

   $ (28,129   $ 37,290      $ 8,194      $ 71,902   

Net income attributable to redeemable non-controlling interests

     (529     (1,193     (970     (1,481
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations attributable to Equinix, basic

     (28,658     36,097        7,224        70,421   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of assumed conversion of convertible debt:

        

Interest expense, net of tax

     —          1,678        —          3,377   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations attributable to Equinix, diluted

   $ (28,658   $ 37,775      $ 7,224      $ 73,798   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute basic EPS

     49,379        48,016        49,205        47,485   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of dilutive securities:

        

Convertible debt

     —          3,185        —          2,945   

Employee equity awards

     —          1,150        771        1,203   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute diluted EPS

     49,379        52,351        49,976        51,633   
  

 

 

   

 

 

   

 

 

   

 

 

 

EPS from continuing operations attributable to Equinix:

        

EPS from continuing operations, basic

   $ (0.58   $ 0.75      $ 0.15      $ 1.48   
  

 

 

   

 

 

   

 

 

   

 

 

 

EPS from continuing operations, diluted

   $ (0.58   $ 0.72      $ 0.14      $ 1.43   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2013      2012      2013      2012  

Shares reserved for conversion of 2.50% convertible subordinated notes

     —           368         —           1,300   

Shares reserved for conversion of 3.00% convertible subordinated notes

     3,604         —           3,613         —     

Shares reserved for conversion of 4.75% convertible subordinated notes

     4,432         4,433         4,432         4,433   

Common stock related to employee equity awards

     2,124         137         122         100   
  

 

 

    

 

 

    

 

 

    

 

 

 
     10,160         4,938         8,167         5,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

3. Change In Accounting Principle and Estimate

Change in Accounting Principle

Commencing in 2013, the Company changed its method of accounting for income taxes by excluding the effects of subsequent events that are not recognized in the Company’s consolidated financial statements in determining its estimated annual effective tax rate for interim reporting periods. Prior to the change, the Company’s policy was to include the effects of subsequent events that occurred subsequent to the interim balance sheet date in its estimated annual effective tax rate. The Company believes that the change is preferable as it provides consistency with the reporting of activity on a pre-tax basis and aligns with other income tax guidance which requires items such as changes in tax rates to be reflected in the period such laws become effective. In addition, the Company believes this change results in a more comparable method for interim tax accounting with other companies in its industry. This change did not have a significant impact to the Company’s condensed consolidated financial statements as of and for the three months ended March 31, 2012, the three and six months ended June 30, 2012 and the three and nine months ended September 30, 2012 and as a result, the Company did not retrospectively adjust its prior period’s condensed consolidated financial statements.

Change in Accounting Estimate

During the three months ended June 30, 2013, the Company reassessed the estimated period over which revenue related to non-recurring installation fees is recognized as a result of observed trends in customer contract life. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the expected life of the installation. The Company undertook this review due to its determination that its customers were generally benefitting from their installations longer than originally anticipated and, therefore, the estimated period that revenue related to non-recurring installation fees is recognized has been extended. This change was accounted for as a change in accounting estimate on a prospective basis effective April 1, 2013. The change in the estimated period that revenue related to non-recurring installation fees is recognized had the following impact on the Company’s results of operations compared to the results that would have otherwise been recorded for the three and six months ended June 30, 2013 (in thousands, except per share amounts):

 

Revenues

   $ (5,835

Income from operations

     (5,835

Net income

     (4,889

EPS:

  

Basic

     (0.10

Diluted

     (0.10

 

10


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

4. Balance Sheet Components

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

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

 

     June 30,
2013
     December 31,
2012
 

Cash and cash equivalents:

     

Cash (1)

   $ 160,492       $ 150,864   

Cash equivalents:

     

Money markets

     357,004         98,340   

U.S. government securities

     —           3,009   
  

 

 

    

 

 

 

Total cash and cash equivalents

     517,496         252,213   
  

 

 

    

 

 

 

Marketable securities:

     

U.S. government securities

     275,186         126,941   

Corporate bonds

     175,207         37,975   

U.S. government agencies securities

     120,898         72,979   

Asset-backed securities

     67,200         6,037   

Certificates of deposit

     59,942         48,386   

Commercial paper

     998         1,993   
  

 

 

    

 

 

 

Total marketable securities

     699,431         294,311   
  

 

 

    

 

 

 

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

   $ 1,216,927       $ 546,524   
  

 

 

    

 

 

 

 

  (1) Excludes restricted cash.

As of June 30, 2013 and December 31, 2012, cash equivalents included investments which were readily convertible to cash and had original maturity dates of 90 days or less. The maturities of securities classified as short-term investments were one year or less as of June 30, 2013 and December 31, 2012. The maturities of securities classified as long-term investments were greater than one year and less than three years as of June 30, 2013 and December 31, 2012.

The following table summarizes the cost and estimated fair value of marketable securities based on stated effective maturities as of (in thousands):

 

     June 30, 2013      December 31, 2012  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

Due within one year

   $ 323,436       $ 323,460       $ 166,445       $ 166,492   

Due after one year through three years

     376,555         375,971         127,795         127,819   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 699,991       $ 699,431       $ 294,240       $ 294,311   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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

 

     June 30, 2013  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  

U.S. government securities

   $ 275,280       $ 28       $ (122   $ 275,186   

Corporate bonds

     175,504         17         (314     175,207   

U.S. government agencies securities

     121,002         41         (145     120,898   

Asset-backed securities

     67,291         —           (91     67,200   

Certificates of deposit

     59,918         24         —          59,942   

Commercial paper

     996         2         —          998   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 699,991       $ 112       $ (672   $ 699,431   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2012  
     Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair value  

U.S. government securities

   $ 126,938       $ 40       $ (37   $ 126,941   

U.S. government agencies securities

     72,948         68         (37     72,979   

Certificates of deposit

     48,373         18         (5     48,386   

Corporate bonds

     37,954         29         (8     37,975   

Asset-backed securities

     6,036         2         (1     6,037   

Commercial paper

     1,991         2         —          1,993   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 294,240       $ 159       $ (88   $ 294,311   
  

 

 

    

 

 

    

 

 

   

 

 

 

While certain marketable securities carry unrealized losses, the Company expects that it will receive both principal and interest according to the stated terms of each of the securities and that the decline in market value is primarily due to changes in the interest rate environment from the time the securities were purchased as compared to interest rates at June 30, 2013.

The following table summarizes the fair value and gross unrealized losses related to 238 available-for-sale securities with an aggregate cost basis of $421,280,000 aggregated by type of investment and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2013 (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
 

Corporate bonds

   $ 148,054       $ (313   $ —         $ —     

Asset-backed securities

     64,863         (91     —           —     

U.S. government securities

     165,152         (122     —           —     

U.S. government agencies securities

     40,544         (130     2,956         (16
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 418,613       $ (656   $ 2,956       $ (16
  

 

 

    

 

 

   

 

 

    

 

 

 

While the Company does not believe that as of June 30, 2013, it holds investments that are other-than-temporarily impaired and believes that the Company’s investments will mature at par, the Company’s investments are subject to changes in market conditions. If market conditions were to deteriorate, the

 

12


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Company could sustain other-than-temporary impairments to its investment portfolio which could result in additional realized losses being recorded in interest income, net, or securities markets could become inactive which could affect the liquidity of the Company’s investments.

Accounts Receivable

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

 

     June 30,
2013
    December 31,
2012
 

Accounts receivable

   $ 330,585      $ 290,326   

Unearned revenue

     (125,753     (122,770

Allowance for doubtful accounts

     (3,496     (3,716
  

 

 

   

 

 

 
   $ 201,336      $ 163,840   
  

 

 

   

 

 

 

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.

Other Current Assets

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

 

     June 30,
2013
     December 31,
2012
 

Prepaid expenses

   $ 20,679       $ 21,349   

Other receivables

     9,301         3,428   

Deferred tax assets, net

     8,107         8,107   

Taxes receivable

     7,479         8,829   

Restricted cash

     4,302         9,380   

Derivative instruments

     2,573         3,205   

Other current assets

     2,876         2,908   
  

 

 

    

 

 

 
   $ 55,317       $ 57,206   
  

 

 

    

 

 

 

 

13


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Property, Plant and Equipment

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

 

     June 30,
2013
    December 31,
2012
 

IBX plant and machinery

   $ 2,441,901      $ 2,304,360   

Leasehold improvements

     1,101,328        1,078,834   

Buildings

     980,768        754,139   

IBX equipment

     444,426        410,456   

Site improvements

     424,997        352,367   

Computer equipment and software

     169,614        150,382   

Land

     113,852        98,007   

Furniture and fixtures

     21,374        21,982   

Construction in progress

     217,535        379,750   
  

 

 

   

 

 

 
     5,915,795        5,550,277   

Less accumulated depreciation

     (1,812,451     (1,631,278
  

 

 

   

 

 

 
   $ 4,103,344      $ 3,918,999   
  

 

 

   

 

 

 

IBX plant and machinery, leasehold improvements, buildings, computer equipment and software and construction in progress recorded under capital leases aggregated $294,900,000 and $149,923,000 as of June 30, 2013 and December 31, 2012, respectively. Amortization on the assets recorded under capital leases is included in depreciation expense and accumulated depreciation on such assets totaled $48,654,000 and $42,272,000 as of June 30, 2013 and December 31, 2012, respectively.

Goodwill and Intangible Assets

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

 

     June 30,
2013
    December 31,
2012
 

Goodwill:

    

Americas

   $ 476,213      $ 482,765   

EMEA

     400,474        423,529   

Asia-Pacific

     135,415        136,270   
  

 

 

   

 

 

 
   $ 1,012,102      $ 1,042,564   
  

 

 

   

 

 

 

Intangible assets:

    

Intangible asset – customer contracts

   $ 217,328      $ 222,571   

Intangible asset – favorable leases

     36,927        37,182   

Intangible asset – others

     9,689        9,889   
  

 

 

   

 

 

 
     263,944        269,642   

Accumulated amortization

     (79,204     (68,080
  

 

 

   

 

 

 
   $ 184,740      $ 201,562   
  

 

 

   

 

 

 

The Company’s goodwill and intangible assets in EMEA, denominated in the United Arab Emirates dirham, British pounds and Euros, goodwill in Asia-Pacific, denominated in Chinese yuan, Hong Kong dollars and 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 (loss).

 

14


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

For the three and six months ended June 30, 2013, the Company recorded amortization expense of $6,864,000 and $13,623,000, respectively, associated with its intangible assets. For the three and six months ended June 30, 2012, the Company recorded amortization expense of $4,741,000 and $9,589,000, respectively, associated with its intangible assets. The Company’s estimated future amortization expense related to these intangibles is as follows (in thousands):

 

Year ending:

  

2013 (six months remaining)

   $ 13,485   

2014

     26,688   

2015

     26,212   

2016

     25,742   

2017

     24,266   

Thereafter

     68,347   
  

 

 

 

Total

   $ 184,740   
  

 

 

 

Other Assets

        Other assets consisted of the following (in thousands):

 

     June 30,
2013
     December 31,
2012
 

Deferred tax assets, net

   $ 173,149       $ 85,232   

Debt issuance costs, net

     44,100         36,704   

Prepaid expenses, non-current

     36,363         34,478   

Deposits

     28,349         27,069   

Restricted cash, non-current

     7,398         8,131   

Derivative instruments

     3,879         —     

Other assets, non-current

     10,845         10,655   
  

 

 

    

 

 

 
   $ 304,083       $ 202,269   
  

 

 

    

 

 

 

Accounts Payable and Accrued Expenses

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

 

     June 30,
2013
     December 31,
2012
 

Accrued compensation and benefits

   $ 75,234       $ 85,619   

Accrued interest

     54,614         48,436   

Accrued taxes

     35,581         47,477   

Accounts payable

     34,223         27,659   

Accrued utilities and security

     23,539         24,974   

Accrued professional fees

     6,150         6,699   

Accrued repairs and maintenance

     4,027         2,938   

Accrued other

     24,659         25,051   
  

 

 

    

 

 

 
   $ 258,027       $ 268,853   
  

 

 

    

 

 

 

 

15


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Other Current Liabilities

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

 

     June 30,
2013
     December 31,
2012
 

Deferred tax liabilities, net

   $ 69,689       $ 69,689   

Deferred installation revenue

     24,969         38,187   

Customer deposits

     13,457         12,927   

Deferred recurring revenue

     7,620         8,910   

Deferred rent

     5,753         5,410   

Derivative instruments

     847         1,097   

Accrued restructuring charges

     —           2,379   

Other current liabilities

     536         962   
  

 

 

    

 

 

 
   $ 122,871       $ 139,561   
  

 

 

    

 

 

 

Other Liabilities

        Other liabilities consisted of the following (in thousands):

 

     June 30,
2013
     December 31,
2012
 

Asset retirement obligations, non-current

   $ 63,855       $ 63,150   

Deferred tax liabilities, net

     60,752         62,292   

Deferred installation revenue, non-current

     45,804         26,086   

Deferred rent, non-current

     39,466         41,951   

Accrued taxes, non-current

     21,173         19,373   

Customer deposits, non-current

     5,402         6,185   

Deferred recurring revenue, non-current

     4,689         5,381   

Derivative instruments, non-current

     39         —     

Accrued restructuring charges, non-current

     —           3,300   

Other liabilities

     4,588         3,125   
  

 

 

    

 

 

 
   $ 245,768       $ 230,843   
  

 

 

    

 

 

 

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 IBX data 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 has certain embedded derivatives in its customer contracts and also employs foreign currency forward contracts to partially offset its business exposure to foreign exchange risk for certain existing foreign currency-denominated assets and liabilities and certain forecasted transactions.

Derivatives Not Designated as Hedges

Embedded Derivatives. The Company is deemed to have foreign currency forward contracts embedded in certain of the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved. These embedded derivatives are separated from their host

 

16


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

contracts and carried on the Company’s balance sheet at their fair value. The majority of these embedded derivatives arise as a result of the Company’s foreign subsidiaries pricing their customer contracts in the U.S. dollar.

The Company has not designated these foreign currency embedded derivatives as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these embedded derivatives are included within revenues in the Company’s condensed consolidated statements of operations. During the three and six months ended June 30, 2013, the Company recognized a net gain of $1,678,000 and $4,131,000, respectively, associated with these embedded derivatives. During the three and six months ended June 30, 2012, gains (losses) from these embedded derivatives were not significant.

Economic Hedges of Embedded Derivatives. The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved (“economic hedges of embedded derivatives”). 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 economic hedges of embedded derivatives as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these contracts are included in revenues along with gains and losses of the related embedded derivatives. The Company entered into various economic hedges of embedded derivatives during the three and six months ended June 30, 2013 and recognized a net loss of $2,091,000 and $3,095,000, respectively, for the periods then ended. The Company did not enter into any economic hedges of embedded derivatives during the three and six months ended June 30, 2012.

Foreign Currency Forward Contracts. The Company also 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.

The Company has not designated the foreign currency forward contracts as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these contracts are included in other income (expense), net, along with those foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the three and six months ended June 30, 2013 and 2012 and gains (losses) from these foreign currency forward contracts were not significant during these periods.

 

17


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Offsetting Derivative Assets and Liabilities

The following table presents the fair value of derivative instruments recognized in the Company’s condensed consolidated balance sheets as of June 30, 2013 (in thousands):

 

     Gross
amounts
     Gross
amounts
offset in the
balance
sheet
     Net
amounts (1)
     Gross
amounts
not offset

in the
balance
sheet
    Net  

Assets:

             

Embedded derivatives

   $ 5,878       $ —         $ 5,878       $ —        $ 5,878   

Economic hedges of embedded derivatives

     185         —           185         (42     143   

Foreign currency forward contracts

     389         —           389         (270     119   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 6,452       $ —         $ 6,452       $ (312   $ 6,140   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Embedded derivatives

   $ 120       $ —         $ 120       $ —        $ 120   

Economic hedges of embedded derivatives

     382         —           382         (42     340   

Foreign currency forward contracts

     384         —           384         (270     114   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 886       $ —         $ 886       $ (312   $ 574   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) As presented in the Company’s condensed consolidated balance sheets.

The following table presents the fair value of derivative instruments recognized in the Company’s condensed consolidated balance sheets as of December 31, 2012 (in thousands):

 

     Gross
amounts
     Gross
amounts
offset in the
balance
sheet
    Net
amounts (1)
     Gross
amounts
not offset
in the
balance
sheet
     Net  

Assets:

             

Embedded derivatives

   $ 3,205       $ —        $ 3,205       $ —         $ 3,205   

Foreign currency forward contracts

     13         (13     —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 3,218       $ (13   $ 3,205       $ —         $ 3,205   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities:

             

Embedded derivatives

   $ 890       $ —        $ 890       $ —         $ 890   

Foreign currency forward contracts

     220         (13     207         —           207   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 1,110       $ (13   $ 1,097       $ —         $ 1,097   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) As presented in the Company’s condensed consolidated balance sheets.

 

18


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

6. Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 were as follows (in thousands):

 

     Fair value at
June 30,

2013
     Fair value
measurement using
 
        Level 1      Level 2  

Assets:

        

Cash

   $ 160,492       $ 160,492       $ —     

Money market and deposit accounts

     357,004         357,004         —     

U.S. government securities

     275,186         275,186         —     

Corporate bonds

     175,207         —           175,207   

U.S. government agency securities

     120,898         —           120,898   

Asset-backed securities

     67,200         —           67,200   

Certificates of deposit

     59,942         —           59,942   

Commercial paper

     998         —           998   

Derivative instruments (1)

     6,452         —           6,452   
  

 

 

    

 

 

    

 

 

 
   $ 1,223,379       $ 792,682       $ 430,697   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Derivative instruments (1)

   $ 886       $ —         $ 886   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes embedded derivatives, economic hedges of embedded derivatives and foreign currency forward contracts. Amounts are included within other current assets, other assets, other current liabilities and other liabilities in the Company’s accompanying condensed consolidated balance sheet.

The Company did not have any Level 3 financial assets or financial liabilities as of June 30, 2013.

Valuation Methods

Fair value estimates are made as of a specific point in time based on methods 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.

Cash, Cash Equivalents and Investments. The fair value of the Company’s investments in money market funds approximates their face value. Such instruments are included in cash equivalents. The Company’s U.S. government securities and money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices for identical instruments in active markets. The fair value of the Company’s other investments approximate their face value. These investments include certificates of deposit and 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 priced based on the quoted market price for similar instruments or nonbinding market prices that are corroborated by observable market data. Such instruments are classified within Level 2 of the fair value hierarchy. The Company determines the fair values of its Level 2 investments by using inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, custody bank, third-party pricing vendors, or other sources. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is responsible for its consolidated financial statements and underlying estimates.

The Company determined that the major security types held as of June 30, 2013 were primarily cash and money market funds, U.S. government and agency securities, corporate bonds, certificate of deposits,

 

19


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

commercial paper and asset-backed securities. The Company uses the specific identification method in computing realized gains and losses. Short-term and long-term investments are classified as available-for-sale and are carried at fair value 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.

During the three months ended March 31, 2013, after reviewing the fair value hierarchy and its valuation criteria, the Company reclassified its U.S. government securities from within Level 2 to Level 1 of the fair value hierarchy because treasury securities issued by the U.S. government are valued using quoted prices for identical instruments in active markets.

Derivative Assets and Liabilities. For foreign currency derivatives, including embedded derivatives and economic hedges of embedded derivatives, the Company uses forward contract models employing market observable inputs, such as spot currency rates and forward points with adjustments made to these values utilizing published credit default swap rates of its foreign exchange trading counterparties. The Company has determined that the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, therefore the derivatives are categorized as Level 2.

During the six months ended June 30, 2013, the Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis.

7. Related Party Transactions

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2013      2012      2013      2012  

Revenues

   $ 7,264       $ 10,189       $ 15,740       $ 15,752   

Costs and services

     2,068         692         4,533         1,027   

 

     As of June 30,  
     2013      2012  

Accounts receivable

   $ 4,142       $ 6,559   

Accounts payable

     514         296   

In connection with the acquisition of ALOG Data Centers do Brasil S.A. and its subsidiaries (“ALOG”) (the “ALOG Acquisition”), the Company acquired a lease for one of the Brazilian IBX data centers in which the lessor is a member of ALOG management. This lease contains an option to purchase the underlying property for fair market value on the date of purchase. The Company accounts for this lease as a financing obligation as a result of structural building work pursuant to the accounting standard for lessee’s involvement in asset construction. As of June 30, 2013, the Company had a financing obligation liability totaling approximately $3,915,000 related to this lease on its condensed consolidated balance sheet. This amount is considered a related party liability, which is not reflected in the related party data presented above.

 

20


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

8. Leases

Capital Lease and Other Financing Obligations

New York 2 Capital Lease

In May 2013, the Company entered into a binding purchase and sale agreement for a property located in the New York metro area (the “New York IBX Data Center Acquisition”). A portion of the building was leased to the Company and was being used by the Company as its New York 2 IBX data center. The lease was originally accounted for as an operating lease, and the Company had previously recorded a restructuring charge related to the lease (see Note 14). As a result of the New York IBX Data Center Acquisition, the Company accounted for the lease as a capital lease prior to the close of the acquisition in July 2013 (see Note 15). The remainder of the building was leased by another party, which became the Company’s tenant upon closing. During the three months ended June 30, 2013, the Company recorded a capital lease asset and liability totaling approximately $67,288,000, which will be reversed upon the close of the New York IBX Data Center Acquisition.

Toronto 1 Capital Lease

In May 2013, the Company entered into a lease amendment for its first IBX data center in Toronto, Canada (the “Toronto 1 Lease”) to extend the lease term. The lease was originally accounted for as an operating lease. Pursuant to the accounting standard for leases, the Company reassessed the lease classification of the Toronto 1 Lease as a result of the lease amendment and determined that substantially all of the lease should be accounted for as a capital lease. The Company recorded a capital lease asset totaling approximately $67,346,000 and liability totaling approximately $68,370,000 during the three months ended June 30, 2013.

Singapore 2 IBX Financing

In May 2013, the Company commenced construction work to make structural changes to its leased space within its second IBX data center in Singapore (the “Singapore 2 IBX Financing”). The lease was originally accounted for as an operating lease. Pursuant to the accounting standard for lessee’s involvement in asset construction, the Company is considered the owner of the assets during the construction period. As a result, the Company recorded a building asset totaling approximately $34,749,000 and corresponding financing liability totaling approximately $36,030,000 during the three months ended June 30, 2013.

Singapore 3 IBX Financing

In March 2013, the Company entered into a lease for land and a building that the Company and the landlord will jointly develop into the Company’s third IBX data center in the Singapore metro area (the “Singapore 3 Lease”). The Singapore 3 Lease has a term of 20 years, with an option to purchase the property. If the option to purchase the property is not exercised, the Company has options to extend the lease. The total cumulative minimum rent obligation over the term of the lease is approximately $157,396,000, exclusive of renewal periods. Pursuant to the accounting standard for lessee’s involvement in asset construction, the Company will be considered the owner of the building during the construction phase due to the building work that the landlord and the Company will be undertaking. As a result, the Company will record a building asset and a related financing liability, while the underlying land will be considered an operating lease, when the construction of the building commences, which is expected to occur during the third quarter of 2013.

Toronto 2 IBX Financing

In November 2012, the Company entered into a lease for land and a building that the Company and the landlord would jointly develop to meet its needs and which it would ultimately convert into its second IBX data center in the Toronto, Canada metro area (the “Toronto 2 IBX Financing” and the “Toronto Lease”). The Toronto Lease has a fixed term of 15 years, with options to renew, commencing from the date the

 

21


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

landlord delivers the completed building to the Company. Monthly payments under the Toronto Lease will commence in October 2015 and will be made through the end of the lease term at an effective interest rate of 8.51%. The Toronto Lease has a total cumulative minimum rent obligation of approximately $140,565,000, exclusive of renewal periods. The landlord began construction of the building to the Company’s specifications in February 2013. 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 are undertaking. As a result, during the six months ended June 30, 2013, the Company recorded a building asset and a related financing liability totaling approximately $11,907,000, while the underlying land is considered an operating lease.

Maturities of Capital Lease and Other Financing Obligations

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

 

     Capital lease
obligations
    Other
financing
obligations
    Total  

2013 (six months remaining)

   $ 13,738      $ 19,092      $ 32,830   

2014

     27,873        42,615        70,488   

2015

     28,397        46,693        75,090   

2016

     27,914        50,826        78,740   

2017

     28,264        50,854        79,118   

Thereafter

     305,761        466,995        772,756   
  

 

 

   

 

 

   

 

 

 

Total minimum lease payments

     431,947        677,075        1,109,022   

Plus amount representing residual property value

     67,019        356,710        423,729   

Less estimated building costs

     —          (46,396     (46,396

Less amount representing interest

     (191,999     (524,221     (716,220
  

 

 

   

 

 

   

 

 

 

Present value of net minimum lease payments

     306,967        463,168        770,135   

Less current portion

     (78,391     (6,871     (85,262
  

 

 

   

 

 

   

 

 

 
   $ 228,576      $ 456,297      $ 684,873   
  

 

 

   

 

 

   

 

 

 

9. Debt Facilities

Loans Payable

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

 

     June 30,
2013
    December 31,
2012
 

U.S. term loan

   $ 160,000      $ 180,000   

ALOG financing

     44,924        48,807   

Paris 4 IBX financing

     317        8,071   

Other loans payable

     38        4,084   
  

 

 

   

 

 

 
     205,279        240,962   

Less current portion

     (40,360     (52,160
  

 

 

   

 

 

 
   $ 164,919      $ 188,802   
  

 

 

   

 

 

 

U.S. Financing

In February 2013, the Company entered into an amendment to a credit agreement with a group of lenders for a $750,000,000 credit facility (the “U.S. Financing”), comprised of a $200,000,000 term loan facility (the “U.S. Term Loan”) and a $550,000,000 multicurrency revolving credit facility (the “U.S. Revolving Credit Line”). The amendment modified certain definitions of items used in the calculation of the

 

22


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

financial covenants with which the Company must comply on a quarterly basis to exclude the write-off of any unamortized debt issuance costs that were incurred in connection with the issuance of the 8.125% Senior Notes; to exclude one-time transaction costs, fees, premiums and expenses incurred by the Company in connection with the issuance of the 4.875% Senior Notes and 5.375% Senior Notes and the redemption of the 8.125% Senior Notes; and to exclude the 8.125% Senior Notes provided that certain conditions in connection with the redemption of the 8.125% Senior Notes were satisfied. The amendment also postponed the step-down of the maximum senior leverage ratio covenant from the three months ended March 31, 2013 to the three months ended September 30, 2013.

Convertible Debt

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

 

     June 30,
2013
    December 31,
2012
 

3.00% Convertible Subordinated Notes

   $ 395,986      $ 395,986   

4.75% Convertible Subordinated Notes

     373,726        373,730   
  

 

 

   

 

 

 
     769,712        769,716   

Less amount representing debt discount

     (53,447     (60,990
  

 

 

   

 

 

 
   $ 716,265      $ 708,726   
  

 

 

   

 

 

 

3.00% Convertible Subordinated Notes

In September 2007, the Company issued $395,986,000 aggregate principal amount of 3.00% Convertible Subordinated Notes due October 15, 2014 (the “3.00% Convertible Subordinated Notes”). Holders of the 3.00% Convertible Subordinated Notes may convert their notes at their option on any day up to and including the business day immediately preceding the maturity date into shares of the Company’s common stock. The base conversion rate is 7.436 shares of common stock per $1,000 principal amount of 3.00% Convertible Subordinated Notes, subject to adjustment. This represents a base conversion price of approximately $134.48 per share of common stock. If, at the time of conversion, the applicable stock price of the Company’s common stock exceeds the base conversion price, the conversion rate will be determined pursuant to a formula resulting in the receipt of up to 4.4616 additional shares of common stock per $1,000 principal amount of the 3.00% Convertible Subordinated Notes, subject to adjustment. However, in no event would the total number of shares issuable upon conversion of the 3.00% Convertible Subordinated Notes exceed 11.8976 per $1,000 principal amount of 3.00% Convertible Subordinated Notes, subject to anti-dilution adjustments, or the equivalent of $84.05 per share of the Company’s common stock or a total of 4,711,283 shares of the Company’s common stock. As of June 30, 2013, had the holders of the 3.00% Convertible Subordinated Notes converted their notes, the 3.00% Convertible Subordinated Notes would have been convertible into 3,466,917 shares of the Company’s common stock.

4.75% Convertible Subordinated Notes

In June 2009, the Company issued $373,750,000 aggregate principal amount of 4.75% Convertible Subordinated Notes due June 15, 2016 (the “4.75% Convertible Subordinated Notes”). Upon conversion, holders will receive, at the Company’s election, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. However, the Company may at any time irrevocably elect for the remaining term of the 4.75% Convertible Subordinated Notes to satisfy its obligation in cash up to 100% of the principal amount of the 4.75% Convertible Subordinated Notes converted, with any remaining amount to be satisfied, at the Company’s election, in shares of its common stock or a combination of cash and shares of its common stock. Upon conversion, if the Company elects to pay a sufficiently large portion of the conversion obligation in cash, additional consideration beyond the $373,750,000 of gross proceeds received will be required.

 

23


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The initial conversion rate is 11.8599 shares of common stock per $1,000 principal amount of 4.75% Convertible Subordinated Notes, subject to adjustment. This represents an initial conversion price of approximately $84.32 per share of common stock. Holders of the 4.75% Convertible Subordinated Notes may convert their notes at any time prior to the close of business on the business day immediately preceding the maturity date under the following circumstances:

 

   

during any fiscal quarter (and only during that fiscal quarter) ending after December 31, 2009, if the sale price of the Company’s common stock, for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than 130% of the conversion price per share of common stock on such last trading day, which was $109.62 per share (the “Stock Price Condition Conversion Clause”);

 

   

subject to certain exceptions, during the five business day period following any 10 consecutive trading day period in which the trading price of the 4.75% Convertible Subordinated Notes for each day of such period was less than 98% of the product of the sale price of the Company’s common stock and the conversion rate;

 

   

upon the occurrence of specified corporate transactions described in the 4.75% Convertible Subordinated Notes Indenture, such as a consolidation, merger or binding share exchange in which the Company’s common stock would be converted into cash or property other than securities; or

 

   

at any time on or after March 15, 2016.

Holders of the 4.75% Convertible Subordinated Notes are eligible to convert their notes during the three months ended June 30, 2013 and September 30, 2013, since the Stock Price Condition Conversion Clause was met during the three months ended March 31, 2013 and June 30, 2013, respectively. As of June 30, 2013, had the holders of the 4.75% Convertible Subordinated Notes converted their notes, the 4.75% Convertible Subordinated Notes would have been convertible into a maximum of 4,432,362 shares of the Company’s common stock.

Senior Notes

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

 

     June 30,
2013
     December 31,
2012
 

5.375% senior notes due 2023

   $ 1,000,000       $ —     

7.00% senior notes due 2021

     750,000         750,000   

4.875% senior notes due 2020

     500,000         —     

8.125% senior notes due 2018

     —           750,000   
  

 

 

    

 

 

 
   $ 2,250,000       $ 1,500,000   
  

 

 

    

 

 

 

4.875% Senior Notes and 5.375% Senior Notes

In March 2013, the Company issued $1,500,000,000 aggregate principal amount of senior notes, which consist of $500,000,000 aggregate principal amount of 4.875% Senior Notes due April 1, 2020 (the “4.875% Senior Notes”) and $1,000,000,000 aggregate principal amount of 5.375% Senior Notes due April 1, 2023, (the “5.375% Senior Notes”). Interest on both the 4.875% Senior Notes and the 5.375% Senior Notes is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2013.

 

24


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The 4.875% Senior Notes and the 5.375% Senior Notes are governed by separate indentures dated March 5, 2013, between the Company, as issuer, and U.S. Bank National Association, as trustee (the “Senior Notes Indentures”). The Senior Notes Indentures contain 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 4.875% Senior Notes and the 5.375% Senior Notes are unsecured and rank equal in right of payment with the Company’s existing or future senior debt and senior in right of payment with the Company’s existing and future subordinated debt. The 4.875% Senior Notes and the 5.375% Senior Notes are effectively junior to the Company’s secured indebtedness and indebtedness of its subsidiaries.

At any time prior to April 1, 2016, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 4.875% Senior Notes outstanding at a redemption price equal to 104.875% of the principal amount of the 4.875% 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 4.875% Senior Notes issued under the 4.875% Senior Notes indenture remains outstanding immediately after the occurrence of such redemption (excluding the 4.875% Senior Notes held by the Company and its subsidiaries); and (ii) the redemption must occur within 90 days of the date of the closing of such equity offering.

On or after April 1, 2017, the Company may redeem all or a part of the 4.875% Senior Notes, on any one or more occasions, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years indicated below:

 

     Redemption price of the 4.875% Senior Notes  

2017

     102.438

2018

     101.219

2019 and thereafter

     100.000

At any time prior to April 1, 2017, the Company may also redeem all or a part of the 4.875% Senior Notes at a redemption price equal to 100% of the principal amount of the 4.875% Senior Notes redeemed plus an applicable premium (the “4.875% Senior Notes Applicable Premium”), and accrued and unpaid interest, if any, to, but not including, the date of redemption (the “4.875% Senior Notes Redemption Date”). The 4.875% Senior Notes Applicable Premium means the greater of:

 

   

1.0% of the principal amount of the 4.875% Senior Notes; and

 

   

the excess of: (a) the present value at such redemption date of (i) the redemption price of the 4.875% Senior Notes at April 1, 2017 as shown in the above table, plus (ii) all required interest payments due on the 4.875% Senior Notes through April 1, 2017 (excluding accrued but unpaid interest, if any, to, but not including the 4.875% Senior Notes Redemption Date), computed using a discount rate equal to the yield to maturity of the U.S. Treasury securities with a constant maturity most nearly equal to the period from the 4.875% Senior Notes Redemption Date to April 1, 2017, plus 0.50%; over (b) the principal amount of the 4.875% Senior Notes.

 

25


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

At any time prior to April 1, 2016, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 5.375% Senior Notes outstanding at a redemption price equal to 105.375% of the principal amount of the 5.375% 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 5.375% Senior Notes issued under the 5.375% Senior Notes indenture remains outstanding immediately after the occurrence of such redemption (excluding the 5.375% Senior Notes held by the Company and its subsidiaries); and (ii) the redemption must occur within 90 days of the date of the closing of such equity offering.

On or after April 1, 2018, the Company may redeem all or a part of the 5.375% Senior Notes, on any one or more occasions, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years indicated below:

 

     Redemption price of the 5.375% Senior Notes  

2018

     102.688

2019

     101.792

2020

     100.896

2021 and thereafter

     100.000

At any time prior to April 1, 2018, the Company may also redeem all or a part of the 5.375% Senior Notes at a redemption price equal to 100% of the principal amount of the 5.375% Senior Notes redeemed plus an applicable premium (the “5.375% Senior Notes Applicable Premium”), and accrued and unpaid interest, if any, to, but not including, the date of redemption (the “5.375% Senior Notes Redemption Date”). The 5.375% Senior Notes Applicable Premium means the greater of:

 

   

1.0% of the principal amount of the 5.375% Senior Notes; and

 

   

the excess of: (a) the present value at such redemption date of (i) the redemption price of the 5.375% Senior Notes at April 1, 2018 as shown in the above table, plus (ii) all required interest payments due on the 5.375% Senior Notes through April 1, 2018 (excluding accrued but unpaid interest, if any, to, but not including the 5.375% Senior Notes Redemption Date), computed using a discount rate equal to the yield to maturity of the U.S. Treasury securities with a constant maturity most nearly equal to the period from the 5.375% Senior Notes Redemption Date to April 1, 2018, plus 0.50%; over (b) the principal amount of the 5.375% Senior Notes.

Debt issuance costs related to the 4.875% Senior Notes and 5.375% Senior Notes, net of amortization, were $19,602,000 as of June 30, 2013. In March 2013, the Company placed $836,400,000 of the proceeds from the issuance of the 4.875% and 5.375% Senior Notes into a restricted cash account for the redemption of the 8.125% Senior Notes.

8.125% Senior Notes

In February 2010, the Company issued $750,000,000 aggregate principal amount of 8.125% Senior Notes due March 1, 2018 (the “8.125% Senior Notes”). The indenture governing the 8.125% Senior Notes permitted the Company to redeem the 8.125% Senior Notes at the redemption prices set forth in the 8.125% Senior Notes indenture plus accrued and unpaid interest to, but not including the redemption date.

In April 2013, the Company redeemed the entire principal amount of the 8.125% Senior Notes pursuant to the optional redemption provisions in the indenture governing the 8.125% Senior Notes, plus accrued interest, in cash of $836,511,000, which included the applicable premium paid of $80,925,000. During the three months ended June 30, 2013, the Company recognized a loss on debt extinguishment of $93,602,000, which included the applicable premium paid, the write-off of unamortized debt issuance costs of $8,927,000 and $3,750,000 of other transaction-related fees related to the redemption of the 8.125% Senior Notes.

 

26


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Maturities of Debt Facilities

The following table sets forth maturities of the Company’s debt, including loans payable, convertible debt and senior notes, as of June 30, 2013 (in thousands):

 

Year ending:

  

2013 (six months remaining)

   $ 20,356   

2014

     448,821   

2015

     52,835   

2016

     373,114   

2017

     26,418   

Thereafter

     2,250,000   
  

 

 

 
   $ 3,171,544   
  

 

 

 

Fair Value of Debt Facilities

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

 

     June 30,
2013
     December 31,
2012
 

Loans payable

   $ 203,692       $ 238,793   

Convertible debt

     1,045,900         1,144,568   

Senior notes

     2,287,925         1,661,400   

The fair value of the Company’s 3% Convertible Subordinated Notes and senior notes, which are traded in the public debt market, is based on quoted market prices and is classified within Level 1 of the fair value hierarchy. The fair value of the Company’s loans payable and 4.75% Convertible Subordinated Notes is estimated by considering the Company’s credit rating, current rates available to the Company for debt of the same remaining maturities and terms of the debt and is classified within Level 2 of the fair value hierarchy.

Interest Charges

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2013      2012      2013      2012  

Interest expense

   $ 61,001       $ 46,787       $ 121,332       $ 99,605   

Interest capitalized

     2,658         6,381         5,550         10,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest charges incurred

   $ 63,659       $ 53,168       $ 126,882       $ 110,338   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

10. Redeemable Non-Controlling Interests

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

 

Balance as of December 31, 2012

   $ 84,178   

Net income attributable to redeemable non-controlling interests

     970   

Other comprehensive loss attributable to redeemable non-controlling interests

     (4,540

Increase in redemption value of non-controlling interests

     16,995   

Impact of foreign currency exchange

     (989
  

 

 

 

Balance as of June 30, 2013

   $ 96,614   
  

 

 

 

11. Commitments and Contingencies

Legal Matters

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 filed a motion to dismiss on November 7, 2011. On March 2, 2012, the Court granted defendants’ motion to dismiss without prejudice and gave plaintiffs thirty days in which to amend their complaint. Pursuant to stipulation and order of the court entered on March 16, 2012, the parties agreed that plaintiffs would have up to and through May 2, 2012 to file a Second Amended Complaint. On May 2, 2012 plaintiffs filed a Second Amended Complaint asserting the same basic allegations as in the prior complaint. On June 15, 2012, defendants moved to dismiss the Second Amended Complaint. On September 19, 2012, the Court took the hearing on defendants’ motion to dismiss the Second Amended Complaint off calendar and notified the parties that it would make its decision on the pleadings. Subsequently, on September 24, 2012 the Court requested the parties submit supplemental briefing on or before October 9, 2012. The supplemental briefing was submitted on October 9, 2012. On December 5, 2012, the Court granted defendants’ motion to dismiss the Second Amended Complaint without prejudice and on January 15, 2013, Plaintiffs filed their Third Amended Complaint. On February 26, 2013, defendants moved to dismiss the Third Amended Complaint. On June 12, 2013, the Court granted defendants’ motion to dismiss the Third Amended Complaint and dismissed the case with prejudice. On July 3, 2013, plaintiffs stipulated that they will not appeal any prior orders issued by the Court in this action, including the Court’s June 12, 2013 order dismissing the Third Amended Complaint with prejudice.

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, purportedly on behalf of Equinix, and naming Equinix (as a nominal defendant), the members of its board of directors, and two of its officers as defendants. The suit is based on allegations similar to those in the federal securities class action and asserts causes of action against the individual defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. By agreement and order of the court, this case has been temporarily stayed pending proceedings in the class action. On June 25, 2013, the parties entered into a stipulation dismissing the case with prejudice, and on July 11, 2013, the Court entered an order of dismissal with prejudice.

On May 20, 2011, an alleged shareholder derivative action entitled Stopa v. Clontz, et al., No. CV-11-2467-SC, was filed in the U.S. District Court for the Northern District of California, purportedly on behalf of

 

28


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Equinix, naming Equinix (as a nominal defendant) and the members of its board of directors as defendants. 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, 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. Plaintiffs filed an amended complaint on December 14, 2011. By agreement and order of the court, this case has been temporarily stayed pending proceedings in the class action. On July 9, 2013, the parties entered into a stipulation dismissing the case with prejudice, and on July 10, 2013, the Court entered an order of dismissal with prejudice.

Other Purchase Commitments

Primarily as a result of the Company’s various IBX expansion projects, as of June 30, 2013, the Company was contractually committed for $162,428,000 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 data centers and make them available to customers for installation. In addition, the Company had numerous other, non-capital purchase commitments in place as of June 30, 2013, such as commitments to purchase power in select locations through the remainder of 2013 and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of 2013 and thereafter. Such other miscellaneous purchase commitments totaled $231,068,000 as of June 30, 2013.

12. Stockholders’ Equity

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):

 

     Balance as of
December 31,
2012
    Net
change
    Balance as of
June  30,

2013
 

Foreign currency translation loss

   $ (114,678   $ (103,220   $ (217,898

Unrealized gain (loss) on available for sale securities

     41        (360     (319

Other comprehensive loss attributable to redeemable non-controlling interests

     13,595        4,540        18,135   
  

 

 

   

 

 

   

 

 

 
   $ (101,042   $ (99,040   $ (200,082
  

 

 

   

 

 

   

 

 

 

Changes in foreign currencies can have a significant impact to the Company’s consolidated balance sheets (as evidenced above in the Company’s foreign currency translation gain or loss), as well as its consolidated results of operations, as amounts in foreign currencies are generally translating into more U.S. dollars when the U.S. dollar weakens or less U.S. dollars when the U.S. dollar strengthens. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to certain of the currencies of the foreign countries in which the Company operates. This overall strength of the U.S. dollar had an overall unfavorable impact on the Company’s consolidated results of operations because the foreign currencies translated into less U.S. dollars. This also impacted the Company’s condensed consolidated balance sheets, as amounts denominated in foreign currencies are generally translating into less U.S. dollars. In future periods, the volatility of the U.S. dollar as compared to the other currencies in which the Company operates could have a significant impact on its consolidated financial position and results of operations including the amount of revenue that the Company reports in future periods.

Stock-Based Compensation

In February and March 2013, the Compensation Committee and the Stock Award Committee of the Company’s Board of Directors approved the issuance of an aggregate of 572,104 shares of restricted stock units to certain employees, including executive officers, pursuant to the 2000 Equity Incentive Plan, as part

 

29


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

of the Company’s annual refresh program. These equity awards are subject to vesting provisions and have a weighted-average grant date fair value of $205.07 and a weighted-average requisite service period of 3.42 years.

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2013      2012      2013      2012  

Cost of revenues

   $ 1,794       $ 1,534       $ 3,396       $ 2,851   

Sales and marketing

     6,825         4,675         12,546         8,710   

General and administrative

     15,575         14,235         30,955         27,908   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 24,194       $ 20,444       $ 46,897       $ 39,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Segment Information

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 reportable segments. The Company defines adjusted EBITDA as income or loss from continuing operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges, impairment charges and acquisition costs as presented below (in thousands):

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2013     2012     2013     2012  

Adjusted EBITDA:

        

Americas

   $ 152,610      $ 140,882      $ 299,140      $ 274,080   

EMEA

     49,292        45,205        98,346        92,089   

Asia-Pacific

     42,275        31,393        90,151        61,907   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted EBITDA

     244,177        217,480        487,637        428,076   

Depreciation, amortization and accretion expense

     (110,117     (93,274     (218,648     (183,424

Stock-based compensation expense

     (24,194     (20,444     (46,897     (39,469

Restructuring charge

     4,837        —          4,837        —     

Acquisitions costs

     (2,526     (1,666     (6,188     (2,341
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 112,177      $ 102,096      $ 220,741      $ 202,842   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The Company also provides the following additional segment disclosures (in thousands):

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2013     2012      2013     2012  

Total revenues:

         

Americas

   $ 312,443      $ 288,121       $ 620,997      $ 567,250   

EMEA

     125,612        102,697         245,906        204,033   

Asia-Pacific

     87,614        66,431         178,221        129,211   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 525,669      $ 457,249       $ 1,045,124      $ 900,494   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total depreciation and amortization:

         

Americas

   $ 64,685      $ 57,988       $ 127,210      $ 114,091   

EMEA

     23,254        18,162         46,129        35,435   

Asia-Pacific

     21,174        16,015         42,907        31,940   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 109,113      $ 92,165       $ 216,246      $ 181,466   
  

 

 

   

 

 

    

 

 

   

 

 

 

Capital expenditures:

         

Americas

   $ 58,272 (1)    $ 110,696       $ 103,113 (1)    $ 182,744   

EMEA

     32,293        39,837         48,862        82,541   

Asia-Pacific

     35,258        45,951         49,515        76,689   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 125,823      $ 196,484       $ 201,490      $ 341,974   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

  (1) Includes the deposit of the purchase price for the New York IBX Data Center Acquisition totaling $2,960.

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

 

     June 30,
2013
     December 31,
2012
 

Americas

   $ 2,330,425       $ 2,143,035   

EMEA

     995,160         994,912   

Asia-Pacific

     777,759         781,052   
  

 

 

    

 

 

 
   $ 4,103,344       $ 3,918,999   
  

 

 

    

 

 

 

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2013      2012      2013      2012  

Colocation

   $ 398,333       $ 347,227       $ 793,444       $ 682,213   

Interconnection

     78,353         65,034         154,344         127,917   

Managed infrastructure

     25,201         20,744         48,790         42,982   

Rental

     583         781         1,163         1,564   
  

 

 

    

 

 

    

 

 

    

 

 

 

Recurring revenues

     502,470         433,786         997,741         854,676   

Non-recurring revenues

     23,199         23,463         47,383         45,818   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 525,669       $ 457,249       $ 1,045,124       $ 900,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

No single customer accounted for 10% or greater of the Company’s revenues for the three and six months ended June 30, 2013 and 2012. No single customer accounted for 10% or greater of the Company’s gross accounts receivable as of June 30, 2013 and December 31, 2012.

 

31


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

14. Restructuring Charges

During the three months ended June 30, 2013, the Company entered into the New York IBX Data Center Acquisition for space that the Company had previously decided to exit its lease (see Note 15). As a result, the Company recorded a reversal to its outstanding accrued restructuring charge.

A summary of the movement in the 2004 accrued restructuring charges during the six months ended June 30, 2013 is outlined as follows (in thousands):

 

Accrued restructuring charge as of December 31, 2012

   $ 5,679   

Accretion expense

     137   

Restructuring charge adjustments

     (4,837

Cash payments

     (979
  

 

 

 

Accrued restructuring charge as of June 30, 2013

   $ —     
  

 

 

 

15. Subsequent Events

In July 2013, the Company completed the New York IBX Data Center Acquisition for net cash consideration of approximately $73,371,000. The New York IBX Data Center Acquisition will be accounted for using the acquisition method of accounting in accordance with the accounting standard for business combinations. The preliminary purchase price allocation for the New York IBX Data Center Acquisition is not currently available as the appraisals necessary to assess fair values of assets acquired and liabilities assumed are not yet complete.

 

32


Table of Contents

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

 

   

Overview

 

   

Results of Operations

 

   

Non-GAAP Financial Measures

 

   

Liquidity and Capital Resources

 

   

Contractual Obligations and Off-Balance-Sheet Arrangements

 

   

Critical Accounting Policies and Estimates

 

   

Recent Accounting Pronouncements

In April 2013, as more fully described in Note 9 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we redeemed all of our $750.0 million 8.125% senior notes, plus accrued interest, with $836.5 million in cash, which includes the applicable premium paid of $80.9 million. During the three months ended June 30, 2013, we recognized a loss on debt extinguishment of $93.6 million, which included the applicable premium paid, the write-off of unamortized debt issuance costs of $8.9 million and $3.8 million of other transaction-related fees related to the redemption of the 8.125% senior notes.

In March 2013, as more fully described in Note 9 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we issued $1.5 billion aggregate principal amount of senior notes, which is referred to as the senior notes offering, consisting of $500.0 million aggregate principal amount of 4.875% senior notes due April 1, 2020, which are referred to as the 4.875% senior notes, and $1.0 billion aggregate principal amount of 5.375% senior notes due April 1, 2023, which are referred to as the 5.375% senior notes. We used a portion of the net proceeds from the senior notes offering for the redemption of our 8.125% senior notes and intend to use the remaining net proceeds for general corporate purposes, including the funding of our expansion activities and distributions to our stockholders in connection with our proposed conversion to a real estate investment trust, which is referred to as a REIT.

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 31 markets around the world for the safehousing 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 solutions: (i) premium data center

 

33


Table of Contents

colocation, (ii) interconnection and (iii) exchange and outsourced IT infrastructure services. As of June 30, 2013, we operated or had partner IBX data centers in the Atlanta, Boston, Chicago, Dallas, Denver, Los Angeles, Miami, New York, Philadelphia, Rio De Janeiro, Sao Paulo, Seattle, Silicon Valley, Toronto and Washington, D.C. metro areas in the Americas region; France, Germany, Italy, the Netherlands, Switzerland, the United Arab Emirates and the United Kingdom in the EMEA region; and Australia, Hong Kong, Indonesia, Japan, China and Singapore in the Asia-Pacific region.

We leverage our global data centers in 31 markets around the world as a global platform which allows our customers to increase information and application delivery performance while significantly reducing costs. Based on our global 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 offerings. These partners, in turn, pull in their business partners, creating a “marketplace” for their services. Our global 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 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 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 solutions in the U.S. alone. Each of these data center solutions providers can bundle various colocation, interconnection and network offerings, and outsourced IT infrastructure services. We are able to offer our customers a global platform that supports global reach to 15 countries, proven operational reliability, improved application performance and network choice, and a highly scalable set of offerings.

Excluding the impact of acquisitions of the Dubai IBX data center, Asia Tone Limited, referred to as Asia Tone, and ancotel GmbH, referred to as ancotel, our customer count increased to approximately 6,354 as of June 30, 2013 versus approximately 5,854 as of June 30, 2012, an increase of 9%. 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 Asia Tone and ancotel, our utilization rate decreased to approximately 77% as of June 30, 2013 versus approximately 80% as of June 30, 2012; however, excluding the impact of our IBX data center expansion projects that have opened during the last 12 months, our utilization rate would have been approximately 80% as of June 30, 2013. 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 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

 

34


Table of Contents

the current market location, amount of incremental investment required by us in the targeted property, lead-time to break-even on a free cash flow basis 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.

Our business is based on a recurring revenue model comprised of colocation and related interconnection and managed infrastructure offerings. We consider these offerings recurring because 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 because 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 expected life of the installation. Additionally, revenue from contract settlements, when a customer wishes to terminate their contract early, is recognized when no remaining performance obligations exist and collectability is reasonably assured, 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. As more fully described in Note 3 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, during the three months ended June 30, 2013, we determined that our customers were generally benefitting from their installations longer than originally anticipated and, therefore, the estimated period that revenue related to non-recurring installation fees is recognized has been extended.

Our Americas revenues are derived primarily from colocation and related interconnection offerings, and 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 generally 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.

 

35


Table of Contents

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

Due to our recurring revenue model, and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth, we expect our cost of revenues, sales and marketing expenses and general and administrative expenses to decline as a percentage of revenues 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 about 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 the EMEA or Asia-Pacific region, as well as a higher cost structure outside of the 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 the Americas having the lowest cost of revenues as a percentage of revenues to continue. As a result, to the extent that revenue growth outside the Americas grows in greater proportion than revenue growth in the 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 revenues as we continue to scale our operations to support our growth.

Potential REIT Conversion

On September 13, 2012, we announced that our board of directors approved a plan for Equinix to pursue conversion to a REIT. We have begun implementation of the REIT conversion, and we plan to make a tax election for REIT status for the taxable year beginning January 1, 2015. Any REIT election made by us must be effective as of the beginning of a taxable year; therefore, as a calendar year taxpayer, if we are unable to convert to a REIT by January 1, 2015, the next possible conversion date would be January 1, 2016.

If we are able to convert to and qualify as a REIT, we will generally be permitted to deduct from federal income taxes the dividends we pay to our stockholders. The income represented by such dividends would not be subject to federal taxation at the entity level but would be taxed, if at all, at the stockholder level. Nevertheless, the income of our domestic taxable REIT subsidiaries, or TRS, which will hold our U.S. operations that may not be REIT-compliant, will be subject, as applicable, to federal and state corporate income tax. Likewise, our foreign subsidiaries will continue to be subject to foreign income taxes in jurisdictions in which they hold assets or conduct operations, regardless of whether held or conducted through TRS or through qualified REIT subsidiaries, or QRS. We will also be subject to a separate corporate income tax on any gains recognized during a specified period (generally 10 years) following the REIT conversion that are attributable to “built-in” gains with respect to the assets that we own on the date we convert to a REIT. Our ability to qualify as a REIT will depend upon our continuing compliance following our REIT conversion with various requirements, including requirements related to the nature of our assets, the sources of our income and the distributions to our stockholders. If we fail to qualify as a REIT, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and property. In particular, while state income tax regimes often parallel the federal income tax regime for REITs described above, many states do not completely follow federal rules and some may not follow them at all.

The REIT conversion implementation currently includes seeking a private letter ruling, or PLR, from the IRS. Our PLR request has multiple components, and the conversion to a REIT will require favorable rulings from the IRS on numerous technical tax issues, including classification of our data center assets

 

36


Table of Contents

as qualified real estate assets. We submitted the PLR request to the IRS in the fourth quarter of 2012. In the course of our communications with the IRS relating to our PLR request, the IRS informed us that it has convened an internal working group to study the current legal standards the IRS uses to define “real estate” for purposes of the REIT provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and that, pending the completion of the study, the IRS is unlikely to issue PLRs on what constitutes real estate for REIT purposes. While we anticipate that the formation of the IRS working group may delay receipt of our PLR from the IRS, we do not expect any such potential delay will affect the timing of our plan to elect REIT status for the taxable year beginning January 1, 2015.

We currently estimate that we will incur approximately $50.0 to $80.0 million in costs to support the REIT conversion, in addition to related tax liabilities associated with a change in our method of depreciating and amortizing various data center assets for tax purposes from our prior methods to current methods that are more consistent with the characterization of such assets as real property for REIT purposes. The total recapture of depreciation and amortization expenses across all relevant assets is expected to result in federal and state tax liability of approximately $340.0 to $420.0 million, which amount will be payable in the four-year period starting in 2012 even if we abandon the REIT conversion for any reason, including the failure to receive the PLR we are seeking. Prior to the decision to convert to a REIT, our balance sheet reflected our income tax liability as a non-current deferred tax liability. As a result of the decision to convert to a REIT, our non-current tax liability has been and will continue to be gradually and proportionally reclassified from non-current to current over the four-year period, which started in the third quarter of 2012. The current liability reflects the tax liability that relates to additional taxable income expected to be recognized within the twelve-month period from the date of the balance sheet. If the REIT conversion is successful, we also expect to incur an additional $5.0 to $10.0 million in annual compliance costs in future years. We expect to pay between $150.0 to $180.0 million in cash taxes during 2013.

Results of Operations

Our results of operations for three and six months ended June 30, 2013 include the operations of ancotel, Asia Tone and the Dubai IBX data center.

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, Singapore dollar and United Arab Emirates dirham. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present period-over-period percentage changes in our revenues and certain operating expenses on a constant currency basis in addition to the historical amounts as reported. Presenting constant currency results of operations is a non-GAAP financial measure and is not meant to be considered in isolation or as an alternative to GAAP results of operations. However, we have presented this non-GAAP financial measure to provide investors with an additional tool to evaluate our operating results. To present this information, our current and comparative prior period revenues and certain operating expenses from entities reporting in currencies other than the U.S. dollar are converted into U.S. dollars at constant exchange rates rather than the actual exchange rates in effect during the respective periods (i.e. average rates in effect for the three months ended June 30, 2012 are used as exchange rates for the three months ended June 30, 2013 when comparing the three months ended June 30, 2013 with the three months ended June 30, 2012 and average rates in effect for the six months ended June 30, 2012 are used as exchange rates for the six months ended June 30, 2013 when comparing the six months ended June 30, 2013 with the six months ended June 30, 2012).

 

37


Table of Contents

Three Months Ended June 30, 2013 and 2012

Revenues. Our revenues for the three months ended June 30, 2013 and 2012 were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas:

              

Recurring revenues

   $ 300,758         57   $ 275,813         60     9     10

Non-recurring revenues

     11,685         2     12,308         3     (5 %)      (5 %) 
  

 

 

    

 

 

   

 

 

    

 

 

     
     312,443         59     288,121         63     8     9
  

 

 

    

 

 

   

 

 

    

 

 

     

EMEA:

              

Recurring revenues

     118,642         23     95,610         22     24     25

Non-recurring revenues

     6,970         1     7,087         1     (2 %)      2
  

 

 

    

 

 

   

 

 

    

 

 

     
     125,612         24     102,697         23     22     23
  

 

 

    

 

 

   

 

 

    

 

 

     

Asia-Pacific:

              

Recurring revenues

     83,070         16     62,363         13     33     38

Non-recurring revenues

     4,544         1     4,068         1     12     14
  

 

 

    

 

 

   

 

 

    

 

 

     
     87,614         17     66,431         14     32     36
  

 

 

    

 

 

   

 

 

    

 

 

     

Total:

              

Recurring revenues

     502,470         96     433,786         95     16     17

Non-recurring revenues

     23,199         4     23,463         5     (1 %)      0
  

 

 

    

 

 

   

 

 

    

 

 

     
   $ 525,669         100   $ 457,249         100     15     16
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Revenues. Growth in Americas revenues was primarily due to (i) $10.3 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Dallas, Los Angeles, Miami, New York, Seattle and Washington, D.C. metro areas 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, as discussed above. The growth in revenue was partially offset by a $3.4 million decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas revenues was not significant when compared to average exchange rates of the three months ended June 30, 2012. 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 centers or IBX data center expansions and additional expansions currently taking place in the Dallas, Rio de Janeiro, Silicon Valley, Toronto and Washington, D.C. metro areas, which are expected to open during the remainder of 2013 and 2014. 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.

EMEA Revenues. Our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 36% and 38%, respectively, of the regional revenues during the three months ended June 30, 2013 and 2012. Our EMEA revenue growth was due to (i) $6.7 million of additional revenue from the impact of the ancotel and Dubai IBX data center acquisitions, (ii) approximately $9.8 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Frankfurt, London, Paris and Zurich metro areas and (iii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $1.5 million decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA revenues was not significant when compared to average exchange rates of the three months ended June 30, 2012. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in recently-opened

 

38


Table of Contents

IBX data centers or IBX data center expansions and additional expansions currently taking place in the Frankfurt and London metro areas, which are expected to open during the remainder of 2013. 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 35% and 40%, respectively, of the regional revenues for the three months ended June 30, 2013 and 2012. Our Asia-Pacific revenue growth was due to (i) $13.5 million of additional revenue from the impact of the Asia Tone acquisition, (ii) approximately $2.4 million of revenue generated from our recently-opened IBX data center expansions in the Hong Kong, Singapore, Sydney and Tokyo metro areas and (iii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $883,000 decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the three months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen than during the three months ended June 30, 2012, resulting in approximately $3.0 million of unfavorable foreign currency impact to our Asia-Pacific revenues during the three months ended June 30, 2013 when compared to average exchange rates of the three months ended June 30, 2012. 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 additional expansions currently taking place in the Hong Kong, Osaka, Tokyo, Singapore and Sydney metro areas, which are expected to open during the remainder of 2013 and 2014. 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.

Cost of Revenues. Our cost of revenues for the three months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas.

   $ 147,405         55   $ 131,879         59     12     12

EMEA

     68,248         26     54,177         24     26     27

Asia-Pacific

     52,040         19     39,233         17     33     38
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 267,693         100   $ 225,289         100     19     20
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months ended
June  30,
 
     2013     2012  

Cost of revenues as a percentage of revenues:

    

Americas .

     47     46

EMEA

     54     53

Asia-Pacific

     59     59

Total

     51     49

Americas Cost of Revenues. Our Americas cost of revenues for the three months ended June 30, 2013 and 2012 included $55.0 million and $48.2 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity. Excluding depreciation expense, the increase in our Americas cost of revenues was primarily due to higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (862 Americas cost of revenues employees as of June 30, 2013 versus 822 as of June 30, 2012), higher repairs and maintenance expense and higher costs associated with certain custom services provided to our customers. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas cost of revenues was not significant when compared to average exchange rates of the three months ended June 30, 2012. We expect Americas cost of revenues to increase as we continue to grow our business.

 

39


Table of Contents

EMEA Cost of Revenues. Our EMEA cost of revenues for the three months ended June 30, 2013 and 2012 included $20.2 million and $16.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in our EMEA cost of revenues was primarily due to the impact of the ancotel and Dubai IBX data center acquisitions, which resulted in $2.8 million of additional cost of revenues for the three months ended June 30, 2013, as well as $2.4 million of higher utility costs, higher costs associated with certain custom services provided to our customers and higher compensation costs. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA cost of revenues was not significant when compared to average exchange rates of the three months ended June 30, 2012. We expect EMEA cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Our Asia-Pacific cost of revenues for the three months ended June 30, 2013 and 2012 included $19.9 million and $15.5 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity and the Asia Tone acquisition. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily due to the impact of the Asia Tone acquisition, which resulted in $6.0 million of additional cost of revenues, and higher utility costs. During the three months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen than during the three months ended June 30, 2012, resulting in approximately $2.1 million of favorable foreign currency impact to our Asia-Pacific cost of revenues during the three months ended June 30, 2013 when compared to average exchange rates of the three months ended June 30, 2012. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

Sales and Marketing Expenses. Our sales and marketing expenses for the three months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas.

   $ 33,978         57   $ 29,907         63     14     14

EMEA

     17,164         29     11,365         24     51     52

Asia-Pacific

     8,336         14     6,331         13     32     35
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 59,478         100   $ 47,603         100     25     26
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months ended
June  30,
 
     2013     2012  

Sales and marketing expenses as a percentage of revenues:

    

Americas. .

     11     10

EMEA

     14     11

Asia-Pacific

     10     10

Total

     11     10

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to $3.7 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (349 Americas sales and marketing employees as of June 30, 2013 versus 287 as of June 30, 2012) and higher advertising and promotion costs. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. Over the past several years, we have

 

40


Table of Contents

been investing in our Americas sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in Americas sales and marketing initiatives, we believe our Americas sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to (i) $2.6 million of additional sales and marketing expenses from the impact of the ancotel and Dubai IBX data center acquisitions and (ii) $2.3 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (172 EMEA sales and marketing employees, excluding the impact of acquisitions, as of June 30, 2013 versus 143 as of June 30, 2012). For the three months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. Over the past several years, we have been investing in our EMEA sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our EMEA sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in EMEA sales and marketing initiatives, we believe our EMEA sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $1.2 million of additional sales and marketing expenses from the impact of the Asia Tone acquisition. For the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. Over the past several years, we have been investing in our Asia-Pacific sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Asia-Pacific sales and marketing expenses have increased. Although we anticipate that we will continue to invest in Asia-Pacific sales and marketing initiatives, we believe our Asia-Pacific sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

General and Administrative Expenses. Our general and administrative expenses for the three months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas

   $ 61,695         69   $ 59,664         74     3     4

EMEA

     17,397         20     12,952         16     34     36

Asia-Pacific

     9,540         11     7,979         10     20     21
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 88,632         100   $ 80,595         100     10     10
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months ended
June  30,
 
     2013     2012  

General and administrative expenses as a percentage of revenues:

    

Americas

     20     21

EMEA

     14     13

Asia-Pacific

     11     12

Total

     17     18

 

41


Table of Contents

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to $2.9 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (707 Americas general and administrative employees as of June 30, 2013 versus 642 as of June 30, 2012), partially offset by lower professional fees. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas general and administrative expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. 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 additional investments into improving our back office systems. We expect our current efforts to improve our back office systems will continue over the next several years. 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 this investment in our back office systems and the REIT conversion process.

EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to $2.4 million of higher professional fees, additional general and administrative expenses from the impact of the ancotel acquisition and higher compensation costs. The impact of foreign currency fluctuations to our EMEA general and administrative expenses for the three months ended June 30, 2013 was not significant when compared to average exchange rates of the three months ended June 30, 2012. 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 additional general and administrative expenses from the impact of the Asia Tone acquisition and higher compensation costs. For the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. 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 Charge. During the three months ended June 30, 2013, we recorded a $4.8 million reversal of the restructuring charge accrual for our excess space in the New York 2 IBX data center as a result of our decision to purchase this property and utilize the space. During the three months ended June 30, 2012, we did not record any restructuring charge.

Acquisition Costs. During the three months ended June 30, 2013, we recorded acquisition costs totaling $2.5 million primarily attributed to Americas region. During the three months ended June 30, 2012, we recorded acquisition costs totaling $1.7 million primarily attributed to the ancotel and Asia Tone acquisitions.

Interest Income. Interest income was $917,000 and $963,000, respectively, for the three months ended June 30, 2013 and 2012. The average annualized yield for the three months ended June 30, 2013 was 0.27% versus 0.24% for the three months ended June 30, 2012. We expect our interest income to remain at these low levels for the foreseeable future due to the impact of a continued low interest rate environment and a portfolio more weighted towards short-term securities.

Interest Expense. Interest expense increased to $61.0 million for the three months ended June 30,

 

42


Table of Contents

2013 from $46.8 million for the three months ended June 30, 2012. This increase in interest expense was primarily due to the impact of our $1.5 billion senior notes offering in March 2013, $5.4 million of higher interest expense from various capital lease and other financing obligations to support our expansion projects and less capitalized interest expense, which was partially offset by the redemption of our 8.125% senior notes in April 2013. During the three months ended June 30, 2013 and 2012, we capitalized $2.7 million and $6.4 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 $1.5 billion senior notes offering, partially offset by the redemption of our 8.125% senior notes, which will contribute approximately $17.7 million in incremental interest expense annually. However, we may incur additional indebtedness to support our growth, resulting in higher interest expense.

Other Income (Expense). We recorded $2.8 million of other income and $1.8 million of other expense, respectively, for the three months ended June 30, 2013 and 2012, primarily due to foreign currency exchange gains and losses during the periods.

Loss on Debt Extinguishment. During the three months ended June 30, 2013, we recorded a $93.6 million loss on debt extinguishment as a result of the redemption of our $750.0 million 8.125% senior notes. During the three months ended June 30, 2012, we did not have any loss on debt extinguishment.

Income Taxes. For the three months ended June 30, 2013, we recorded $10.6 million of income tax benefit primarily due to the $93.6 million loss on debt extinguishment. For the three months ended June 30, 2012, we recorded $17.1 million of income tax expense. Our effective tax rates were 27.4% and 31.5%, respectively, for the three months ended June 30, 2013 and 2012. The 2013 income tax provision is expected to be lower than 2012 primarily due to the loss on debt extinguishment recorded during the three months ended June 30, 2013 and the corporate structure reorganization in the EMEA region, as discussed below. We expect cash income taxes during the remainder of 2013 will primarily be related to the impact of recognizing the depreciation and amortization recapture as a result of changing our method of depreciating and amortizing various data center assets for tax purposes in connection with our REIT conversion plan. The cash taxes for 2013 and 2012 are primarily for U.S. federal and state income taxes and foreign income taxes in certain foreign jurisdictions.

To better align our EMEA corporate structure and intercompany relationship with the nature of our business activities and regional centralization, we commenced certain reorganization activities during the fourth quarter of 2012 in the EMEA region. The new organizational structure will centralize the majority of our EMEA business management activities in the Netherlands effective July 1, 2013. As a result, we expect our overall effective tax rate will be lower in subsequent periods as the new structure begins to take full effect. Assuming a successful conversion to a REIT, and no material changes to tax rules and regulations, we expect our effective long-term worldwide cash tax rate to ultimately decrease to a range of 10% to 15%.

Net Income from Discontinued Operations. During the three months ended June 30, 2013, we did not have any discontinued operations. For the three months ended June 30, 2012, our net income from discontinued operations was $350,000. For additional information, see “Discontinued Operations” in Note 1 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

 

43


Table of Contents

Adjusted EBITDA. Adjusted EBITDA is a key factor in how we assess the performance of our segments, measure the operational cash generating abilities of our segments and develop regional growth strategies such as IBX data center expansion decisions. Our adjusted EBITDA for the three months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas

   $ 152,610         63   $ 140,882         65     8     9

EMEA

     49,292         20     45,205         21     9     9

Asia-Pacific

     42,275         17     31,393         14     35     39
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 244,177         100   $ 217,480         100     12     13
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Adjusted EBITDA. The increase in our Americas adjusted EBITDA was due to our improved income from continuing operations, as the growth in revenues exceeded the increase in operating expenses after excluding depreciation expense, amortization expense, accretion expense, stock-based compensation, restructuring charges and acquisition costs, which are excluded from adjusted EBITDA.

EMEA Adjusted EBITDA. The increase in our EMEA adjusted EBITDA was primarily due to the impact of the Dubai IBX data center and ancotel acquisitions, which generated $1.6 million of adjusted EBITDA during the three months ended June 30, 2013. Additionally, the increase was due to our improved income from continuing operations, as the growth in revenues exceeded the increase in operating expenses after excluding depreciation expense, amortization expense, accretion expense, stock-based compensation and acquisition costs, which are excluded from adjusted EBITDA.

Asia-Pacific Adjusted EBITDA. Our Asia-Pacific adjusted EBITDA for the three months ended June 30, 2013, included $6.8 million of adjusted EBITDA from the impact of the Asia Tone acquisition. Additionally, the increase was due to our improved income from continuing operations. The growth in revenues exceeded the increase in operating expenses after excluding depreciation expense, amortization expense, accretion expense, stock-based compensation and acquisition costs, which are excluded from adjusted EBITDA.

 

44


Table of Contents

Six Months Ended June 30, 2013 and 2012

Revenues. Our revenues for the six months ended June 30, 2013 and 2012 were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Six months ended June 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas:

              

Recurring revenues

   $ 596,605         57   $ 545,845         61     9     10

Non-recurring revenues

     24,392         2     21,405         2     14     14
  

 

 

    

 

 

   

 

 

    

 

 

     
     620,997         59     567,250         63     9     10
  

 

 

    

 

 

   

 

 

    

 

 

     

EMEA:

              

Recurring revenues

     231,924         22     187,143         21     24     25

Non-recurring revenues

     13,982         2     16,890         2     (17 %)      (17 %) 
  

 

 

    

 

 

   

 

 

    

 

 

     
     245,906         24     204,033         23     21     21
  

 

 

    

 

 

   

 

 

    

 

 

     

Asia-Pacific:

              

Recurring revenues

     169,212         16     121,688         13     39     43

Non-recurring revenues

     9,009         1     7,523         1     20     22
  

 

 

    

 

 

   

 

 

    

 

 

     
     178,221         17     129,211         14     38     42
  

 

 

    

 

 

   

 

 

    

 

 

     

Total:

              

Recurring revenues

     997,741         95     854,676         95     17     18

Non-recurring revenues

     47,383         5     45,818         5     3     4
  

 

 

    

 

 

   

 

 

    

 

 

     
   $ 1,045,124         100   $ 900,494         100     16     17
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Revenues. Growth in Americas revenues was primarily due to (i) $19.5 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Dallas, Los Angeles, Miami, New York, Seattle and Washington, D.C. metro areas 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, as discussed above. The growth in revenue was partially offset by a $3.4 million decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian reais than during the six months ended June 30, 2012, resulting in approximately $4.1 million of unfavorable foreign currency impact to our Americas revenues during the six months ended June 30, 2013 when compared to average exchange rates of the six months ended June 30, 2012. 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 centers or IBX data center expansions and additional expansions currently taking place in the Dallas, Rio de Janeiro, Silicon Valley, Toronto and Washington, D.C. metro areas, which are expected to open during the remainder of 2013 and 2014. 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.

EMEA Revenues. Our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 36% and 39%, respectively, of the regional revenues during the six months ended June 30, 2013 and 2012. Our EMEA revenue growth was due to (i) $13.0 million of additional revenue from the impact of the ancotel and Dubai IBX data center acquisitions, (ii) approximately $17.5 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Frankfurt, London, Paris and Zurich metro areas and (iii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $1.5 million decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the six months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA revenues was not significant when

 

45


Table of Contents

compared to average exchange rates of the six months ended June 30, 2012. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Frankfurt and London metro areas, which are expected to open during the remainder of 2013. 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 36% and 40%, respectively, of the regional revenues for the six months ended June 30, 2013 and 2012. Our Asia-Pacific revenue growth was due to (i) $26.4 million of additional revenue from the impact of the Asia Tone acquisition, (ii) approximately $4.2 million of revenue generated from our recently-opened IBX data center expansions in the Hong Kong, Singapore, Sydney and Tokyo metro areas and (iii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $883,000 decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen than during the six months ended June 30, 2012, resulting in approximately $5.0 million of unfavorable foreign currency impact to our Asia-Pacific revenues during the six months ended June 30, 2013 when compared to average exchange rates of the six months ended June 30, 2012. 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 additional expansions currently taking place in the Hong Kong, Osaka, Tokyo, Singapore and Sydney metro areas, which are expected to open during the remainder of 2013 and 2014. 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.

Cost of Revenues. Our cost of revenues for the six months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas.

   $ 290,957         55   $ 259,992         59     12     13

EMEA

     131,949         25     105,315         24     25     26

Asia-Pacific

     104,055         20     77,080         17     35     40
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 526,961         100   $ 442,387         100     19     21
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Six months ended
June  30,
 
     2013     2012  

Cost of revenues as a percentage of revenues:

    

Americas .

     47     46

EMEA

     54     52

Asia-Pacific

     58     60

Total

     50     49

Americas Cost of Revenues. Our Americas cost of revenues for the six months ended June 30, 2013 and 2012 included $107.9 million and $95.3 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity. Excluding depreciation expense, the increase in our Americas cost of revenues was primarily due to (i) $3.9 million of higher costs associated with certain custom services provided to our customers, (ii) $3.6 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (862 Americas cost of revenues employees as of June 30, 2013 versus 822 as of June 30, 2012)

 

46


Table of Contents

and (iii) $3.0 million of higher taxes, including property taxes. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian reais than during the six months ended June 30, 2012, resulting in approximately $2.8 million of favorable foreign currency impact to our Americas cost of revenues during the six months ended June 30, 2013 when compared to average exchange rates of the six months ended June 30, 2012. We expect Americas cost of revenues to increase as we continue to grow our business.

EMEA Cost of Revenues. Our EMEA cost of revenues for the six months ended June 30, 2013 and 2012 included $39.6 million and $31.8 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in our EMEA cost of revenues was primarily due to (i) the impact of the ancotel and Dubai IBX data center acquisitions, which resulted in $5.5 million of additional cost of revenues for the six months ended June 30, 2013, (ii) $4.7 million of costs associated with certain custom services provided to our customers, (iii) $3.7 million of higher utility costs, (iv) $2.4 million of higher compensation expense and (v) higher professional fees to support our growth. During the six months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA cost of revenues was not significant when compared to average exchange rates of the six months ended June 30, 2012. We expect EMEA cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Our Asia-Pacific cost of revenues for the six months ended June 30, 2013 and 2012 included $40.5 million and $30.9 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity and the Asia Tone acquisition. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily due to (i) the impact of the Asia Tone acquisition, which resulted in $11.5 million of additional cost of revenues, and (ii) $2.9 million of higher utility costs. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen than during the six months ended June 30, 2012, resulting in approximately $3.5 million of favorable foreign currency impact to our Asia-Pacific cost of revenues during the six months ended June 30, 2013 when compared to average exchange rates of the six months ended June 30, 2012. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

Sales and Marketing Expenses. Our sales and marketing expenses for the six months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas.

   $ 69,554         59   $ 60,835         65     14     15

EMEA

     33,068         28     21,849         23     51     53

Asia-Pacific

     15,132         13     11,329         12     34     37
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 117,754         100   $ 94,013         100     25     26
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Six months ended
June  30,
 
     2013     2012  

Sales and marketing expenses as a percentage of revenues:

    

Americas.

     11     11

EMEA

     13     11

Asia-Pacific

     8     9

Total

     11     10

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to $8.3 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (349 Americas sales and

 

47


Table of Contents

marketing employees as of June 30, 2013 versus 287 as of June 30, 2012) and higher advertising and promotion costs. During the six months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. Over the past several years, we have been investing in our Americas sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in Americas sales and marketing initiatives, we believe our Americas sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to (i) $5.1 million of additional sales and marketing expenses from the impact of the ancotel and Dubai IBX data center acquisitions and (ii) $5.0 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (172 EMEA sales and marketing employees, excluding the impact of acquisitions, as of June 30, 2013 versus 143 as of June 30, 2012). For the six months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. Over the past several years, we have been investing in our EMEA sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our EMEA sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in EMEA sales and marketing initiatives, we believe our EMEA sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $2.5 million of additional sales and marketing expenses from the impact of the Asia Tone acquisition. For the six months ended June 30, 2013, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. Over the past several years, we have been investing in our Asia-Pacific sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Asia-Pacific sales and marketing expenses have increased. Although we anticipate that we will continue to invest in Asia-Pacific sales and marketing initiatives, we believe our Asia-Pacific sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

General and Administrative Expenses. Our general and administrative expenses for the six months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas

   $ 125,126         70   $ 118,276         74     6     6

EMEA

     35,141         20     25,258         16     39     41

Asia-Pacific

     18,050         10     15,377         10     17     18
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 178,317         100   $ 158,911         100     12     13
  

 

 

    

 

 

   

 

 

    

 

 

     

 

48


Table of Contents
     Six months ended
June  30,
 
     2013     2012  

General and administrative expenses as a percentage of revenues:

    

Americas .

     20     21

EMEA

     14     12

Asia-Pacific

     10     12

Total

     17     18

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to $6.9 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (707 Americas general and administrative employees as of June 30, 2013 versus 642 as of June 30, 2012), partially offset by $2.9 million of lower professional fees. During the six months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas general and administrative expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. 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 additional investments into improving our back office systems. We expect our current efforts to improve our back office systems will continue over the next several years. 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 this investment in our back office systems and the REIT conversion process.

EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to (i) $2.6 million of additional general and administrative expenses from the impact of the ancotel and Dubai IBX data center acquisitions, (ii) $3.0 million of higher professional fees and (iii) $2.6 million of higher compensation costs. The impact of foreign currency fluctuations to our EMEA general and administrative expenses for the six months ended June 30, 2013 was not significant when compared to average exchange rates of the six months ended June 30, 2012. 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 additional general and administrative expenses from the impact of the Asia Tone acquisition and higher compensation costs. For the six months ended June 30, 2013, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. 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 Charge. During the six months ended June 30, 2013, we recorded a $4.8 million reversal of the restructuring charge accrual for our excess space in the New York 2 IBX data center as a result of our decision to purchase this property and utilize the space. During the six months ended June 30, 2012, we did not record any restructuring charge.

Acquisition Costs. During the six months ended June 30, 2013, we recorded acquisition costs totaling $6.2 million primarily attributed to Americas region. During the six months ended June 30, 2012, we recorded acquisition costs totaling $2.3 million primarily attributed to the ancotel and Asia Tone acquisitions.

 

49


Table of Contents

Interest Income. Interest income was $1.7 million for both the six months ended June 30, 2013 and June 30, 2012. The average annualized yield for the six months ended June 30, 2013 was 0.27% versus 0.24% for the six months ended June 30, 2012. We expect our interest income to remain at these low levels for the foreseeable future due to the impact of a continued low interest rate environment and a portfolio more weighted towards short-term securities.

Interest Expense. Interest expense increased to $121.3 million for the six months ended June 30, 2013 from $99.6 million for the six months ended June 30, 2012. This increase in interest expense was primarily due to the impact of our $1.5 billion senior notes offering in March 2013, $9.9 million of higher interest expense from various capital lease and other financing obligations to support our expansion projects and less capitalized interest expense, which was partially offset by the redemption of our 8.125% senior notes in April 2013. During the six months ended June 30, 2013 and 2012, we capitalized $5.6 million and $10.7 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 $1.5 billion senior notes offering, partially offset by the redemption of our 8.125% senior notes, which will contribute approximately $17.7 million in incremental interest expense annually. However, we may incur additional indebtedness to support our growth, resulting in higher interest expense.

Other Income (Expense). We recorded $2.3 million of other income and $2.0 million of other expense, respectively, for the six months ended June 30, 2013 and 2012, primarily due to foreign currency exchange gains and losses during the periods.

Loss on Debt Extinguishment. During the six months ended June 30, 2013, we recorded a $93.6 million loss on debt extinguishment as a result of the redemption of our $750.0 million 8.125% senior notes. During the six months ended June 30, 2012, we did not have any loss on debt extinguishment.

Income Taxes. For the six months ended June 30, 2013 and 2012, we recorded $1.6 million and $31.0 million of income tax expenses, respectively. Our effective tax rates were 16.2% and 30.1% for the six months ended June 30, 2013 and 2012, respectively. The lower tax rate for the six months ended June 30, 2013 was primarily due to the $93.6 million loss on debt extinguishment recorded during the six months ended June 30, 2013. The 2013 income tax provision is expected to be lower than 2012 primarily due to the loss on debt extinguishment recorded during the period and the corporate structure reorganization in the EMEA region, as discussed below. We expect that cash income taxes during the remainder of 2013 will primarily be related to the impact of recognizing depreciation and amortization recapture as a result of changing our method of depreciating and amortizing various data center assets for tax purposes in connection with our REIT conversion plan. The cash taxes for 2013 and 2012 are primarily for U.S. federal and state income taxes and foreign income taxes in certain foreign jurisdictions.