10-Q 1 d586403d10q.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 September 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 September 30, 2013 was 49,776,739.

 

 

 


Table of Contents

EQUINIX, INC.

INDEX

 

    

Page

No.

 

Part I - Financial Information

  

Item 1.

 

Condensed Consolidated Financial Statements (unaudited):

  
 

Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

     3   
 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012

     4   
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012

     5   
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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

     39   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     66   

Item 4.

 

Controls and Procedures

     66   

Part II - Other Information

  

Item 1.

 

Legal Proceedings

     67   

Item 1A.

 

Risk Factors

     67   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     86   

Item 3.

 

Defaults Upon Senior Securities

     86   

Item 4.

 

Mine Safety Disclosure

     86   

Item 5.

 

Other Information

     86   

Item 6.

 

Exhibits

     87   

Signatures

     95   

Index to Exhibits

     96   


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

EQUINIX, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

     September 30,
2013
    December 31,
2012
(as revised)
 
     (unaudited)  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 399,742      $ 252,213   

Short-term investments

     346,038        166,492   

Accounts receivable, net

     199,644        163,840   

Other current assets

     59,350        57,547   
  

 

 

   

 

 

 

Total current assets

     1,004,774        640,092   

Long-term investments

     442,195        127,819   

Property, plant and equipment, net

     4,381,020        3,915,738   

Goodwill

     1,036,179        1,042,564   

Intangible assets, net

     182,345        201,562   

Other assets

     342,531        208,022   
  

 

 

   

 

 

 

Total assets

   $ 7,389,044      $ 6,135,797   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 299,135      $ 268,853   

Accrued property, plant and equipment

     91,468        63,509   

Current portion of capital lease and other financing obligations

     16,979        15,206   

Current portion of loans payable

     40,185        52,160   

Other current liabilities

     134,458        149,344   
  

 

 

   

 

 

 

Total current liabilities

     582,225        549,072   

Capital lease and other financing obligations, less current portion

     862,410        545,853   

Loans payable, less current portion

     156,787        188,802   

Convertible debt

     720,215        708,726   

Senior notes

     2,250,000        1,500,000   

Other liabilities

     263,352        245,725   
  

 

 

   

 

 

 

Total liabilities

     4,834,989        3,738,178   
  

 

 

   

 

 

 

Redeemable non-controlling interests (Note 10)

     101,059        84,178   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Common stock

     50        49   

Additional paid-in capital

     2,692,210        2,582,238   

Treasury stock

     (35,903     (36,676

Accumulated other comprehensive loss

     (121,731     (101,042

Accumulated deficit

     (81,630     (131,128
  

 

 

   

 

 

 

Total stockholders’ equity

     2,452,996        2,313,441   
  

 

 

   

 

 

 

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

   $ 7,389,044      $ 6,135,797   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012
(as revised)
    2013     2012
(as revised)
 
     (unaudited)  

Revenues

   $ 543,084      $ 484,835      $ 1,588,089      $ 1,381,317   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

        

Cost of revenues

     268,960        250,946        794,660        695,288   

Sales and marketing

     61,619        53,211        179,373        147,224   

General and administrative

     96,874        83,290        276,324        241,730   

Restructuring charge

     —          —          (4,837     —     

Acquisition costs

     438        4,542        6,626        6,883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     427,891        391,989        1,252,146        1,091,125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     115,193        92,846        335,943        290,192   

Interest income

     929        1,054        2,593        2,708   

Interest expense

     (61,957     (50,207     (183,289     (149,812

Other income (expense)

     985        507        3,294        (1,491

Loss on debt extinguishment

     —          (5,204     (93,602     (5,204
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     55,150        38,996        64,939        136,393   

Income tax expense

     (12,397     (12,348     (14,189     (41,088
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     42,753        26,648        50,750        95,305   

Net income from discontinued operations, net of tax

     —          679        —          1,228   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     42,753        27,327        50,750        96,533   

Net income attributable to redeemable non-controlling interests

     (282     (362     (1,252     (1,843
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Equinix

   $ 42,471      $ 26,965      $ 49,498      $ 94,690   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic EPS from continuing operations

   $ 0.86      $ 0.54      $ 1.00      $ 1.96   

Basic EPS from discontinued operations

     —          0.02        —          0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic EPS

   $ 0.86      $ 0.56      $ 1.00      $ 1.98   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     49,555        48,361        49,325        47,779   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS from continuing operations

   $ 0.83      $ 0.53      $ 0.99      $ 1.91   

Diluted EPS from discontinued operations

     —          0.01        —          0.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS

   $ 0.83      $ 0.54      $ 0.99      $ 1.93   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     53,581        52,655        50,050        51,724   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

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EQUINIX, INC.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012
(as revised)
    2013     2012
(as revised)
 
     (unaudited)  

Net income

   $ 42,753      $ 27,327      $ 50,750      $ 96,533   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation gain (loss)

     78,113        41,782        (25,107     26,887   

Unrealized gain on available for sale securities

     438        113        78        14   
  

 

 

   

 

 

   

 

 

   

 

 

 
     78,551        41,895        (25,029     26,901   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

     121,304        69,222        25,721        123,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to redeemable non-controlling interests

     (282     (362     (1,252     (1,843

Other comprehensive (income) loss attributable to redeemable non-controlling interests

     (200     240        4,340        3,155   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Equinix

   $ 120,822      $ 69,100      $ 28,809      $ 124,746   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

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EQUINIX, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Nine months ended
September 30,
 
     2013     2012
(as revised)
 
     (unaudited)  

Cash flows from operating activities:

    

Net income

   $ 50,750      $ 96,533   

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

    

Depreciation

     305,651        278,430   

Stock-based compensation

     75,310        61,432   

Excess tax benefits from stock-based compensation

     (27,372     (53,174

Restructuring charge

     (4,837     —     

Amortization of debt issuance costs and debt discounts

     17,602        18,057   

Amortization of intangible assets

     20,445        16,668   

Provision for allowance for doubtful accounts

     3,160        4,031   

Loss on debt extinguishment

     93,602        5,204   

Other items

     6,699        6,524   

Changes in operating assets and liabilities:

    

Accounts receivable

     (40,292     (46,900

Income taxes, net

     (71,567     21,196   

Other assets

     (21,046     18,805   

Accounts payable and accrued expenses

     17,399        7,335   

Other liabilities

     12,398        (5,807
  

 

 

   

 

 

 

Net cash provided by operating activities

     437,902        428,334   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments

     (814,422     (365,934

Sales of investments

     176,971        338,192   

Maturities of investments

     139,674        542,155   

Deposit for purchase of real estate

     (891     —     

Purchase of New York 2 IBX data center

     (73,441     —     

Purchases of property, plant and equipment

     (369,565     (554,092

Purchase of Asia Tone, net of cash acquired

     755        (194,205

Purchase of ancotel, net of cash acquired

     —          (84,236

Deposit for purchase of Frankfurt Kleyer 90 Carrier Hotel

     (1,353     —     

Increase in restricted cash

     (836,767     (8,270

Release of restricted cash

     843,088        87,437   
  

 

 

   

 

 

 

Net cash used in investing activities

     (935,951     (238,953
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchases of treasury stock

     —          (13,364

Proceeds from employee equity awards

     28,082        50,139   

Excess tax benefits from stock-based compensation

     27,372        53,174   

Proceeds from senior notes

     1,500,000        —     

Proceeds from loans payable

     1,734        258,542   

Repayment of capital lease and other financing obligations

     (12,226     (8,907

Repayment of loans payable

     (42,304     (315,779

Repayment of convertible debt

     —          (250,007

Repayment of senior notes

     (750,000     —     

Debt extinguishment costs

     (84,675     —     

Debt issuance costs

     (22,435     (8,767
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     645,548        (234,969
  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     30        6,452   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     147,529        (39,136

Cash and cash equivalents at beginning of period

     252,213        278,823   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 399,742      $ 239,687   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for taxes

   $ 86,736      $ 19,578   
  

 

 

   

 

 

 

Cash paid for interest

   $ 135,958      $ 157,917   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

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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.

Income Taxes

The Company’s effective tax rates were 21.8% and 30.1% for the nine months ended September 30, 2013 and 2012, respectively. The lower effective tax rate during the nine months ended September 30, 2013 was primarily due to the expected loss in the U.S. for the year as a result of the loss on debt extinguishment recorded during the period (see Note 9) and the recognition of deferred tax assets in a certain jurisdiction in our EMEA region.

The Company re-evaluated the valuation allowance situation in certain jurisdictions in its EMEA region as a result of a new organizational structure that centralized the majority of its EMEA business management activities in the Netherlands which became effective during the three months ended September 30, 2013. The Company concluded that a portion of the valuation allowance previously assessed against the net deferred tax assets in a certain jurisdiction is no longer necessary. As such, the Company recognized a deferred tax asset of $1,906,000 during the three months ended September 30, 2013.

The Company is entitled to a deduction for federal and state tax purposes with respect to employee equity award activity. The reduction in income taxes payable related to windfall tax benefits for employee equity awards has been reflected as an adjustment to additional paid-in capital. For the nine months ended September 30, 2013, the benefits arising from employee equity award activity that resulted in an adjustment to additional paid-in capital were approximately $27,372,000.

 

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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
    Nine months
ended
 
     September 30, 2012  

Revenues

   $ 8,826      $ 26,796   

Cost of revenues

     (6,585     (22,469

Operating expenses

     (913     (2,077

Income taxes

     (649     (1,022
  

 

 

   

 

 

 

Net income from discontinued operations

   $ 679      $ 1,228   
  

 

 

   

 

 

 

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.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU requires companies to present an unrecognized tax benefit, or a portion thereof, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that these instances are not available at the reporting date. This ASU is effective for fiscal years and interim periods beginning after December 15, 2013 with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have to its consolidated financial statements, if any.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

2.   Change In Accounting Principle, Reclassifications and Revision of Previously-Issued Financial Statements

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 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 periods’ condensed consolidated financial statements.

Reclassifications and Revision of Previously-Issued Financial Statements

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 lives. 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 was extended. This change was originally incorrectly accounted for as a change in accounting estimate on a prospective basis effective April 1, 2013. During the three months ended September 30, 2013, the Company determined that these longer lives should have been identified and utilized for revenue recognition purposes beginning in 2006. As a result, the Company’s installation revenues were overstated by $2,572,000, $1,548,000, $1,548,000 and $1,548,000 for the three months ended March 31, 2013, September 30, 2012, June 30, 2012 and March 31, 2012, respectively; and understated by $3,858,000 for the three months ended June 30, 2013. This error did not impact the Company’s reported total cash flows from operating activities.

Also, during the three months ended December 31, 2012, the Company determined that within the Company’s cash flows from operating activities section of its condensed consolidated statement of cash flows for the nine months ended September 30, 2012, excess tax benefits from stock-based compensation of $60,977,000 were recorded within changes in other assets when they should have been attributed to income taxes payable, and therefore included within changes in accounts payable and accrued expenses. This error has been corrected in the condensed consolidated statement of cash flows for the nine months ended September 30, 2012 presented herein, and did not impact the Company’s condensed consolidated statement of cash flows for the first and second quarters of 2012. The Company’s consolidated statement of cash flows for the year ended December 31, 2012 properly reflected excess tax benefits from stock-based compensation. Additionally, the Company changed its presentation of the impact of income taxes on cash flows from operating activities to present it within a single line within the consolidated statement of cash flows during the year ended December 31, 2012. This item has no impact on the Company’s reported total cash flows from operating activities.

The Company assessed the materiality of the above errors, as well as the previously-identified immaterial errors described below, individually and in the aggregate on prior periods’ financial statements in accordance with the SEC’s Staff Accounting Bulletins No. 99 and 108 and, based on an analysis of quantitative and qualitative factors, determined that the errors were not individually material to any of the Company’s prior interim and annual financial statements and, therefore, the previously-issued financial statements

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

could continue to be relied upon and that the amendment of previously filed reports with the SEC was not required. The Company also determined that correcting the cumulative amount of the non-recurring installation fees of $27,170,000 as of December 31, 2012 in 2013 would be material to the projected 2013 consolidated financial statements and as such the Company will revise its previously-issued consolidated financial statements the next time the financial statements for those periods are filed.

As the Company will revise its previously-issued consolidated financial statements as described above, as part of the revision the Company also corrected certain previously-identified immaterial errors that were either uncorrected or corrected in a period subsequent to the period in which the error originated including (i) certain recoverable taxes in Brazil that were incorrectly recorded in the Company’s statements of operations, which had the effect of overstating both revenues and cost of revenues; (ii) errors related to certain foreign currency embedded derivatives in Asia-Pacific, which have an effect on revenue; (iii) an error in the Company’s statement of cash flows related to the acquisition of Asia Tone Limited (“Asia Tone”) that affects both cash flows from operating and investing activities and (iv) errors in depreciation, stock-based compensation and property tax accruals in the U.S.

All financial information contained in the accompanying footnotes to these condensed consolidation financial statements has been revised to reflect the correction of these errors.

The following table presents the effect of the aforementioned revisions on the Company’s revenues, net income and basic and diluted EPS for the years ended December 31, 2012, 2011 and 2010 (in thousands, except per share data):

 

     Years ended December 31,  
     2012     2011     2010  

Revenues

   $ (8,368   $ (4,159   $ (7,562

Cost of revenues

     (622     4,827        (289

General and administrative

     1,133        —          —     

Income from operations

     (7,857     668        (7,851

Income tax expense

     3,219        104        1,749   

Net income

     (4,638     772        (6,102

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

      

Basic EPS from continuing operations

     (0.09     0.01        (0.14

Basic EPS

     (0.09     0.01        (0.14

Diluted EPS from continuing operations

     (0.09     0.02        (0.14

Diluted EPS

     (0.09     0.02        (0.13

 

10


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table presents the effect of the aforementioned revision on the Company’s condensed consolidated balance sheet as of December 31, 2012 (in thousands):

 

     As of December 31, 2012  
     As reported     Revision (1)     As revised  
Assets       

Cash and cash equivalents

   $ 252,213      $ —        $ 252,213   

Short-term investments

     166,492        —          166,492   

Accounts receivable, net

     163,840        —          163,840   

Other current assets

     57,206        341        57,547   
  

 

 

   

 

 

   

 

 

 

Total current assets

     639,751        341        640,092   

Long-term investments

     127,819        —          127,819   

Property, plant and equipment, net

     3,918,999        (3,261     3,915,738   

Goodwill

     1,042,564        —          1,042,564   

Intangible assets, net

     201,562        —          201,562   

Other assets

     202,269        5,753        208,022   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,132,964      $ 2,833      $ 6,135,797   
  

 

 

   

 

 

   

 

 

 
Liabilities and Stockholders’ Equity       

Current liabilities:

      

Accounts payable and accrued expenses

   $ 268,853        —        $ 268,853   

Accrued property, plant and equipment

     63,509        —          63,509   

Current portion of capital lease and other financing obligations

     15,206        —          15,206   

Current portion of loans payable

     52,160        —          52,160   

Other current liabilities

     139,561        9,783        149,344   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     539,289        9,783        549,072   

Capital lease and other financing obligations, less current portion

     545,853        —          545,853   

Loans payable, less current portion

     188,802        —          188,802   

Convertible debt

     708,726        —          708,726   

Senior notes

     1,500,000        —          1,500,000   

Other liabilities

     230,843        14,882        245,725   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     3,713,513        24,665        3,738,178   
  

 

 

   

 

 

   

 

 

 

Redeemable non-controlling interests

     84,178        —          84,178   
  

 

 

   

 

 

   

 

 

 

Common stock

     49        —          49   

Additional paid-in capital

     2,583,371        (1,133     2,582,238   

Treasury stock

     (36,676     —          (36,676

Accumulated other comprehensive loss

     (101,042     —          (101,042

Accumulated deficit

     (110,429     (20,699     (131,128
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     2,335,273        (21,832     2,313,441   
  

 

 

   

 

 

   

 

 

 

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

   $ 6,132,964      $ 2,833      $ 6,135,797   
  

 

 

   

 

 

   

 

 

 

 

  (1) The impact of revising the estimated periods over which revenue from non-recurring installation fees is recognized, depreciation of certain fixed assets and amortization of stock-based compensation expense.

 

11


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table presents the effect of the aforementioned revisions on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2012 (in thousands, except per share data):

 

     Three months ended September 30, 2012  
     As reported     Revision (1)     As revised  

Revenues

   $ 488,730      $ (3,895   $ 484,835   

Costs and operating expenses:

      

Cost of revenues

     251,487        (541     250,946   

Sales and marketing

     53,211        —          53,211   

General and administrative

     83,621        (331     83,290   

Acquisition costs

     4,542        —          4,542   
  

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     392,861        (872     391,989   
  

 

 

   

 

 

   

 

 

 

Income from operations

     95,869        (3,023     92,846   

Interest income

     1,054        —          1,054   

Interest expense

     (50,207     —          (50,207

Other income

     507        —          507   

Loss on debt extinguishment

     (5,204     —          (5,204
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     42,019        (3,023     38,996   

Income tax expense

     (13,498     1,150        (12,348
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     28,521        (1,873     26,648   

Net income from discontinued operations, net of tax

     679        —          679   
  

 

 

   

 

 

   

 

 

 

Net income

     29,200        (1,873     27,327   

Net income attributable to redeemable non-controlling interests

     (362     —          (362
  

 

 

   

 

 

   

 

 

 

Net income attributable to Equinix

     28,838        (1,873     26,965   
  

 

 

   

 

 

   

 

 

 

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

      

Basic EPS from continuing operations

     0.58        (0.04     0.54   

Basic EPS

     0.60        (0.04     0.56   

Diluted EPS from continuing operations

     0.57        (0.04     0.53   

Diluted EPS

     0.58        (0.04     0.54   

 

  (1) The impact of revising the estimated periods over which revenue from non-recurring installation fees is recognized, depreciation of certain fixed assets, recoverable taxes, amortization of stock-based compensation expense and embedded derivatives.

 

12


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

     Nine months ended September 30, 2012  
     As reported     Revision (1)     As revised  

Revenues

   $ 1,389,224      $ (7,907   $ 1,381,317   

Costs and operating expenses:

      

Cost of revenues

     693,874        1,414        695,288   

Sales and marketing

     147,224        —          147,224   

General and administrative

     242,532        (802     241,730   

Acquisition costs

     6,883        —          6,883   
  

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     1,090,513        612        1,091,125   
  

 

 

   

 

 

   

 

 

 

Income from operations

     298,711        (8,519     290,192   

Interest income

     2,708        —          2,708   

Interest expense

     (149,812     —          (149,812

Other expense

     (1,491     —          (1,491

Loss on debt extinguishment

     (5,204     —          (5,204
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     144,912        (8,519     136,393   

Income tax expense

     (44,489     3,401        (41,088
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     100,423        (5,118     95,305   

Net income from discontinued operations, net of tax

     1,228        —          1,228   
  

 

 

   

 

 

   

 

 

 

Net income

     101,651        (5,118     96,533   

Net income attributable to redeemable non-controlling interests

     (1,843     —          (1,843
  

 

 

   

 

 

   

 

 

 

Net income attributable to Equinix

   $ 99,808      $ (5,118   $ 94,690   
  

 

 

   

 

 

   

 

 

 

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

      

Basic EPS from continuing operations

   $ 2.06      $ (0.10   $ 1.96   

Basic EPS

     2.09        (0.11     1.98   

Diluted EPS from continuing operations

     2.01        (0.10     1.91   

Diluted EPS

     2.03        (0.10     1.93   

 

  (1) The impact of revising the estimated periods over which revenue from non-recurring installation fees is recognized, depreciation of certain fixed assets, recoverable taxes, amortization of stock-based compensation expense, embedded derivatives and property taxes.

 

13


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table presents the effect of the aforementioned revisions and reclassification on the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2012 (in thousands):

 

     Nine months ended September 30, 2012  
     As reported     Revision (1)     Revision (2)     Reclassification     As revised  

Cash flows from operating activities:

          

Net income

   $ 101,651      $ —        $ (5,118   $ —        $ 96,533   

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

          

Depreciation

     278,214        —          216        —          278,430   

Stock-based compensation

     62,234        —          (802     —          61,432   

Excess tax benefits from stock-based compensation

     (53,174     —          —          —          (53,174

Amortization of debt issuance costs and debt discount

     18,057        —          —          —          18,057   

Amortization of intangibles

     16,668        —          —          —          16,668   

Provision for allowance for doubtful accounts

     4,031        —          —          —          4,031   

Loss on debt extinguishment

     5,204        —          —          —          5,204   

Other items

     5,622        —          902        —          6,524   

Changes in operating assets and liabilities:

          

Accounts receivable

     (46,900     —          —          —          (46,900

Income taxes, net

     —          —          (3,401     24,597        21,196   

Other assets

     31,020        (60,977     1,031        47,731        18,805   

Accounts payable and accrued expenses

     19,307        60,977        2,256        (75,205     7,335   

Other liabilities

     (19,007     —          10,323        2,877        (5,807
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     422,927        —          5,407        —          428,334   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Purchase of investments

     (365,934     —          —          —          (365,934

Sales of investments

     338,192        —          —          —          338,192   

Maturities of investments

     542,155        —          —          —          542,155   

Purchases of property, plant and equipment

     (554,092     —          —          —          (554,092

Purchase of Asia Tone, net of cash acquired

     (188,798     —          (5,407     —          (194,205

Purchase of ancotel, net of cash acquired

     (84,236     —          —          —          (84,236

Increase in restricted cash

     (8,270     —          —          —          (8,270

Release of restricted cash

     87,437        —          —          —          87,437   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   $ (233,546   $ —        $ (5,407   $ —        $ (238,953
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The excess tax benefits were originally included within other assets and is corrected and included within accounts payable and accrued expenses.
(2) The impact of revising the estimated periods over which revenue from non-recurring installation fees is recognized, depreciation of certain fixed assets, recoverable taxes, amortization of stock-based compensation expense, embedded derivatives, property taxes and purchase price of Asia Tone.

 

14


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

3.   Earnings Per Share

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

 

     Three months ended
September,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  

Net income from continuing operations

   $ 42,753      $ 26,648      $ 50,750      $ 95,305   

Net income attributable to redeemable non-controlling interests

     (282     (362     (1,252     (1,843
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations attributable to Equinix, basic

     42,471        26,286        49,498        93,462   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of assumed conversion of convertible debt:

        

Interest expense, net of tax

     1,865        1,696        —          5,073   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations attributable to Equinix, diluted

   $ 44,336      $ 27,982      $ 49,498      $ 98,535   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute basic EPS

     49,555        48,361        49,325        47,779   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of dilutive securities:

        

Convertible debt

     3,467        3,328        —          2,945   

Employee equity awards

     559        966        725        1,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute diluted EPS

     53,581        52,655        50,050        51,724   
  

 

 

   

 

 

   

 

 

   

 

 

 

EPS from continuing operations attributable to Equinix:

        

EPS from continuing operations, basic

   $ 0.86      $ 0.54      $ 1.00      $ 1.96   
  

 

 

   

 

 

   

 

 

   

 

 

 

EPS from continuing operations, diluted

   $ 0.83      $ 0.53      $ 0.99      $ 1.91   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2013      2012      2013      2012  

Shares reserved for conversion of 2.50% convertible subordinated notes

     —           —           —           863   

Shares reserved for conversion of 3.00% convertible subordinated notes

     —           —           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

     436         137         269         114   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,868         4,570         8,314         5,410   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


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):

 

     September 30,
2013
     December 31,
2012
 

Cash and cash equivalents:

     

Cash (1)

   $ 234,194       $ 150,864   

Cash equivalents:

     

U.S. government securities

     —           3,009   

Money markets

     162,148         98,340   

Commercial paper

     3,400         —     
  

 

 

    

 

 

 

Total cash and cash equivalents

     399,742         252,213   
  

 

 

    

 

 

 

Marketable securities:

     

U.S. government securities

     303,322         126,941   

U.S. government agencies securities

     139,606         72,979   

Certificates of deposit

     48,363         48,386   

Commercial paper

     999         1,993   

Corporate bonds

     211,318         37,975   

Asset-backed securities

     84,625         6,037   
  

 

 

    

 

 

 

Total marketable securities

     788,233         294,311   
  

 

 

    

 

 

 

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

   $ 1,187,975       $ 546,524   
  

 

 

    

 

 

 

 

  (1) Excludes restricted cash.

As of September 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 September 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 September 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):

 

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

Due within one year

   $ 336,549       $ 336,699       $ 166,445       $ 166,492   

Due after one year through three years

     451,478         451,534         127,795         127,819   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 788,027       $ 788,233       $ 294,240       $ 294,311   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


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):

 

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

U.S. government securities

   $ 303,155       $ 178       $ (11   $ 303,322   

U.S. government agencies securities

     139,598         59         (51     139,606   

Corporate bonds

     211,318         101         (101     211,318   

Certificates of deposit

     48,329         34         —          48,363   

Commercial paper

     997         2         —          999   

Asset-backed securities

     84,630         24         (29     84,625   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 788,027       $ 398       $ (192   $ 788,233   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     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   

Corporate bonds

     48,373         18         (5     48,386   

Certificates of deposit

     37,954         29         (8     37,975   

Commercial paper

     6,036         2         (1     6,037   

Asset-backed securities

     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 as of September 30, 2013.

The following table summarizes the fair value and gross unrealized losses related to 143 available-for-sale securities aggregated by type of investment and length of time that individual securities have been in a continuous unrealized loss position, as of September 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
 

U.S. government agencies securities

   $ 40,294       $ (40   $ 2,965       $ (11

U.S. government securities

     17,826         (11     —           —     

Corporate bonds

     99,257         (101     —           —     

Asset-backed securities

     59,781         (29     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 217,158       $ (181   $ 2,965       $ (11
  

 

 

    

 

 

   

 

 

    

 

 

 

While the Company does not believe that as of September 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 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.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Accounts Receivable

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

 

     September 30,
2013
    December 31,
2012
 

Accounts receivable

   $ 331,808      $ 290,326   

Unearned revenue

     (127,266     (122,770

Allowance for doubtful accounts

     (4,898     (3,716
  

 

 

   

 

 

 
   $ 199,644      $ 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):

 

     September 30,
2013
     December 31,
2012
 

Prepaid expenses

   $ 24,682       $ 21,349   

Deferred tax assets, net

     8,448         8,448   

Taxes receivable

     10,045         8,829   

Restricted cash

     3,211         9,380   

Derivative instruments

     2,723         3,205   

Other receivables

     5,703         3,428   

Other current assets

     4,538         2,908   
  

 

 

    

 

 

 
   $ 59,350       $ 57,547   
  

 

 

    

 

 

 

 

18


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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):

 

     September 30,
2013
    December 31,
2012
 

IBX plant and machinery

   $ 2,501,903      $ 2,292,873   

Leasehold improvements

     1,016,048        1,078,834   

Buildings

     1,157,171        762,294   

IBX equipment

     471,078        410,456   

Site improvements

     537,113        352,367   

Computer equipment and software

     174,994        150,382   

Land

     116,514        98,007   

Furniture and fixtures

     22,816        21,982   

Construction in progress

     307,544        379,750   
  

 

 

   

 

 

 
     6,305,181        5,546,945   

Less accumulated depreciation

     (1,924,161     (1,631,207
  

 

 

   

 

 

 
   $ 4,381,020      $ 3,915,738   
  

 

 

   

 

 

 

IBX plant and machinery, leasehold improvements, buildings, computer equipment and software and construction in progress recorded under capital leases aggregated $394,753,000 and $146,591,000 as of September 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 $52,427,000 and $39,842,000 as of September 30, 2013 and December 31, 2012, respectively.

Purchase of New York 2 IBX Data Center. 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 2 IBX Data Center Purchase”). 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). The remainder of the building was leased by another party, which became the Company’s tenant upon closing. In July 2013, the Company completed the New York 2 IBX Data Center Purchase for net cash consideration of $73,441,000. The New York 2 IBX Data Center Purchase was accounted for as an asset acquisition and the purchase price was allocated to the assets acquired based on their relative fair values.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Goodwill and Intangible Assets

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

 

     September 30,
2013
    December 31,
2012
 

Goodwill:

    

Americas

   $ 476,394      $ 482,765   

EMEA

     424,417        423,529   

Asia-Pacific

     135,368        136,270   
  

 

 

   

 

 

 
   $ 1,036,179      $ 1,042,564   
  

 

 

   

 

 

 

Intangible assets:

    

Intangible asset – customer contracts

   $ 222,530      $ 222,571   

Intangible asset – favorable leases

     28,669        27,785   

Intangible asset – licenses

     9,697        9,397   

Intangible asset – others

     9,865        9,889   
  

 

 

   

 

 

 
     270,761        269,642   

Accumulated amortization

     (88,416     (68,080
  

 

 

   

 

 

 
   $ 182,345      $ 201,562   
  

 

 

   

 

 

 

The Company’s goodwill and intangible assets in EMEA, denominated in the United Arab Emirates dirham, British pounds and Euros, goodwill and intangible assets in Asia-Pacific, denominated in Chinese yuan, Hong Kong dollars and Singapore dollars and certain goodwill and intangible assets 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 intangible assets, are a component of other comprehensive income (loss).

For the three and nine months ended September 30, 2013, the Company recorded amortization expense of $6,822,000 and $20,445,000, respectively, associated with its intangible assets. For the three and nine months ended September 30, 2012, the Company recorded amortization expense of $6,864,000 and $13,623,000, 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 (three months remaining)

   $ 6,938   

2014

     27,540   

2015

     27,061   

2016

     26,586   

2017

     25,016   

Thereafter

     69,204   
  

 

 

 

Total

   $ 182,345   
  

 

 

 

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Other Assets

Other assets consisted of the following (in thousands):

 

     September 30,
2013
     December 31,
2012
 

Prepaid expenses, non-current

   $ 34,267       $ 34,478   

Deferred tax assets, net

     207,653         90,985   

Debt issuance costs, net

     43,776         36,704   

Deposits

     26,781         27,069   

Restricted cash, non-current

     15,720         8,131   

Derivative instruments

     3,428         —     

Other assets, non-current

     10,906         10,655   
  

 

 

    

 

 

 
   $ 342,531       $ 208,022   
  

 

 

    

 

 

 

The increase in deferred tax assets, net was primarily due to the depreciation and amortization recapture as a result of changing the Company’s method of depreciating and amortizing various data center assets for tax purposes in connection with the Company’s plan to convert to a real estate investment trust (“REIT”).

Accounts Payable and Accrued Expenses

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

 

     September 30,
2013
     December 31,
2012
 

Accounts payable

   $ 28,483       $ 27,659   

Accrued compensation and benefits

     79,745         85,619   

Accrued interest

     68,882         48,436   

Accrued taxes

     59,990         47,477   

Accrued utilities and security

     28,195         24,974   

Accrued professional fees

     9,697         6,699   

Accrued repairs and maintenance

     4,109         2,938   

Accrued other

     20,034         25,051   
  

 

 

    

 

 

 
   $ 299,135       $ 268,853   
  

 

 

    

 

 

 

Other Current Liabilities

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

 

     September 30,
2013
     December 31,
2012
 

Deferred installation revenue

   $ 41,883       $ 49,455   

Deferred recurring revenue

     6,723         8,910   

Deferred tax liabilities, net

     68,204         68,204   

Deferred rent

     3,564         5,410   

Customer deposits

     12,373         12,927   

Derivative instruments

     850         1,097   

Accrued restructuring charges

     —           2,379   

Other current liabilities

     861         962   
  

 

 

    

 

 

 
   $ 134,458       $ 149,344   
  

 

 

    

 

 

 

 

21


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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Other Liabilities

Other liabilities consisted of the following (in thousands):

 

     September 30,
2013
     December 31,
2012
 

Deferred installation revenue, non-current

   $ 59,995       $ 41,950   

Deferred recurring revenue, non-current

     3,814         5,381   

Asset retirement obligations, non-current

     59,579         63,150   

Deferred rent, non-current

     39,205         38,041   

Deferred tax liabilities, net

     61,680         61,310   

Accrued taxes, non-current

     24,408         19,373   

Customer deposits, non-current

     5,285         6,185   

Accrued restructuring charges, non-current

     —           3,300   

Derivative instruments, non-current

     56         —     

Other liabilities

     9,330         7,035   
  

 

 

    

 

 

 
   $ 263,352       $ 245,725   
  

 

 

    

 

 

 

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 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 nine months ended September 30, 2013, the Company recognized a net gain of $2,841,000 associated with these embedded derivatives. During the three months ended September 30, 2013 and the three and nine months ended September 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.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 nine months ended September 30, 2013 and recognized a net loss of $2,270,000 for the nine months ended September 30, 2013. Gains (losses) from these foreign currency forward contracts were not significant during the three months ended September 30, 2013. The Company did not enter into any economic hedges of embedded derivatives during the three and nine months ended September 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 its 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 the foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the three and nine months ended September 30, 2013 and 2012 and gains (losses) from these foreign currency forward contracts were not significant during these periods.

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 September 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

   $ 4,808       $ —         $ 4,808       $ —        $ 4,808   

Economic hedges of embedded derivatives

     552         —           552         —          552   

Foreign currency forward contracts

     791         —           791         (128     663   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 6,151       $ —         $ 6,151       $ (128   $ 6,023   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Embedded derivatives

   $ 290       $ —         $ 290       $ —        $ 290   

Foreign currency forward contracts

     616         —           616         (128     488   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 906       $ —         $ 906       $ (128   $ 778   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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.

 

6.   Fair Value Measurements

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

 

     Fair value at
September 30,

2013
     Fair value
measurement using
 
        Level 1      Level 2  

Assets:

        

Cash

   $ 234,194       $ 234,194       $ —     

U.S. government securities

     303,322         303,322         —     

U.S. government agency securities

     139,606         —           139,606   

Money market and deposit accounts

     162,148         162,148         —     

Certificates of deposit

     48,363         —           48,363   

Commercial paper

     4,399         —           4,399   

Corporate bonds

     211,318         —           211,318   

Asset-backed securities

     84,625         —           84,625   

Derivative instruments (1)

     6,151         —           6,151   
  

 

 

    

 

 

    

 

 

 
   $ 1,194,126       $ 699,664       $ 494,462   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Derivative instruments (1)

   $ 906       $ —         $ 906   
  

 

 

    

 

 

    

 

 

 

 

  (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 September 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.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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, including 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 condensed consolidated financial statements and underlying estimates.

The Company determined that the major security types held as of September 30, 2013 were primarily cash and money market funds, U.S. government and agency securities, corporate bonds, certificate of deposits, 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 nine months ended September 30, 2013, the Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis.

 

25


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

7.   Related Party Transactions

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2013      2012      2013      2012  

Revenues

   $ 2,233       $ 10,656       $ 17,973       $ 25,588   

Costs and services

     132         654         4,665         1,682   

 

     As of September 30,  
     2013      2012  

Accounts receivable

   $ 1,938       $ 7,034   

Accounts payable

     —           282   

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 September 30, 2013, the Company had a financing obligation liability totaling approximately $3,916,000 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.

 

8.   Leases

Capital Lease and Other Financing Obligations

Digital Realty Capital Leases

In September 2013, the Company entered into lease amendments with Digital Realty Trust, Inc. to extend the lease term of the Company’s Chicago 1, Dallas 4, Washington D.C. 3, Los Angeles 1 and Miami 2 IBX data centers. The leases were originally accounted for as operating leases, with the exception of the Washington D.C. 3 lease which was originally accounted for as a capital lease. Pursuant to the accounting standard for leases, the Company reassessed the lease classification of the leases as a result of the lease amendments and determined that upon the amendments each of the leases should be accounted for as capital leases (the “Digital Realty Capital Leases”). The Company recorded incremental capital lease assets totaling approximately $138,826,000 and liabilities totaling approximately $143,972,000 during the three months ended September 30, 2013. Monthly payments under the Digital Realty Capital Leases commenced in October 2013 and will be made through October 2034.

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 “Toronto 1 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. Monthly payments under the Toronto 1 Capital Lease commenced in June 2013 and will be made through April 2040.

 

26


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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. Monthly payments under the Singapore 2 IBX Financing commenced in May 2013 and will be made through September 2022.

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 $159,040,000, exclusive of renewal periods. The landlord began construction of the building to the Company’s specifications in August 2013. 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, while the underlying land is considered an operating lease. As a result, the Company recorded a building asset and corresponding financing liability totaling approximately $1,672,000 during the three months ended September 30, 2013. Monthly payments under the Singapore 3 IBX Financing are expected to commence in January 2015 and will be made through December 2034.

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 landlord delivers the completed building to the Company. 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, as of September 30, 2013, the Company has recorded a building asset and a related financing liability totaling approximately $21,375,000, while the underlying land is considered an operating lease. Monthly payments under the Toronto Lease will commence in October 2015 and will be made through September 2029.

 

27


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 (three months remaining)

   $ 9,368      $ 9,878      $ 19,246   

2014

     38,342        44,364        82,706   

2015

     40,397        52,291        92,688   

2016

     40,713        56,755        97,468   

2017

     41,399        56,861        98,260   

Thereafter

     597,772        568,607        1,166,379   
  

 

 

   

 

 

   

 

 

 

Total minimum lease payments

     767,991        788,756        1,556,747   

Plus amount representing residual property value

     —          387,107        387,107   

Less estimated building costs

     —          (69,768     (69,768

Less amount representing interest

     (384,842     (609,855     (994,697
  

 

 

   

 

 

   

 

 

 

Present value of net minimum lease payments

     383,149        496,240        879,389   

Less current portion

     (9,601     (7,378     (16,979
  

 

 

   

 

 

   

 

 

 
   $ 373,548      $ 488,862      $ 862,410   
  

 

 

   

 

 

   

 

 

 

 

9.   Debt Facilities

Loans Payable

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

 

     September 30,
2013
    December 31,
2012
 

U.S. term loan

   $ 150,000      $ 180,000   

ALOG financing

     46,792        48,807   

Paris 4 IBX financing

     115        8,071   

Other loans payable

     65        4,084   
  

 

 

   

 

 

 
     196,972        240,962   

Less current portion

     (40,185     (52,160
  

 

 

   

 

 

 
   $ 156,787      $ 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 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 from the calculation of total leverage for the period ended March 31, 2013, 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

In September 2013, the Company entered into an amendment to the U.S. Financing. The amendment allows the Company greater flexibility to make cash dividends and distributions to its stockholders to the extent required to qualify the Company as a REIT (including cash dividends and distributions of undistributed accumulated earnings and profits) and to make cash dividends and distributions on an ongoing basis to the extent required for the Company to continue to be qualified as a REIT or to avoid the imposition of income or franchise taxes on the Company. The amendment also replaced the maximum senior leverage ratio covenant with a maximum senior net leverage ratio covenant and modified the minimum fixed charge coverage ratio and tangible net worth covenants. In addition, the amendment modified certain defined terms used in the calculation of the financial covenants to exclude certain expenses incurred by the Company in connection with its planned REIT conversion. The amendment also permits the Company to request an increase in the U.S. Revolving Credit Line of up to an additional $250,000,000, subject to the receipt of lender commitments. As of September 30, 2013, the Company was in compliance with all financial covenants.

Convertible Debt

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

 

     September 30,
2013
    December 31,
2012
 

3.00% Convertible Subordinated Notes

   $ 395,986      $ 395,986   

4.75% Convertible Subordinated Notes

     373,724        373,730   
  

 

 

   

 

 

 
     769,710        769,716   

Less amount representing debt discount

     (49,495     (60,990
  

 

 

   

 

 

 
   $ 720,215      $ 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 September 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 3,317,015 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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.

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 were eligible to convert their notes during the three months ended September 30, 2013 and are eligible to convert their notes during the three months ended December 31, 2013, since the Stock Price Condition Conversion Clause was met during the three months ended June 30, 2013 and September 30, 2013, respectively. As of September 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 4,432,339 shares of the Company’s common stock.

Senior Notes

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

 

     September 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.

 

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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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

 

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.

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 $19,081,000 as of September 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

interest, in cash of $836,511,000, which included the applicable premium paid of $80,925,000. As a result, 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, during the three months ended June 30, 2013.

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 September 30, 2013 (in thousands):

 

Year ending:

  

2013 (three months remaining)

   $ 10,180   

2014

     448,852   

2015

     53,230   

2016

     377,532   

2017

     26,870   

Thereafter

     2,250,523   
  

 

 

 
   $ 3,167,187   
  

 

 

 

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 as of (in thousands):

 

     September 30,
2013
     December 31,
2012
 

Loans payable

   $ 197,144       $ 238,793   

Convertible debt

     1,060,227         1,144,568   

Senior notes

     2,226,540         1,661,400   

The fair value of the Company’s 3.00% 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
September 30,
     Nine months ended
September 30,
 
     2013      2012      2013      2012  

Interest expense

   $ 61,957       $ 50,207       $ 183,289       $ 149,812   

Interest capitalized

     2,346         6,315         7,896         19,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest charges incurred

   $ 64,303       $ 56,522       $ 191,185       $ 169,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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

     1,252   

Other comprehensive loss attributable to redeemable non-controlling interests

     (4,340

Increase in redemption value of non-controlling interests

     20,913   

Impact of foreign currency exchange

     (944
  

 

 

 

Balance as of September 30, 2013

   $ 101,059   
  

 

 

 

 

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 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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 September 30, 2013, the Company was contractually committed for $136,057,000 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 September 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 $213,824,000 as of September 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
September 30,

2013
 

Foreign currency translation loss

   $ (114,678   $ (25,107   $ (139,785

Unrealized gain on available for sale securities

     41        78        119   

Other comprehensive loss attributable to redeemable non-controlling interests

     13,595        4,340        17,935   
  

 

 

   

 

 

   

 

 

 
   $ (101,042   $ (20,689   $ (121,731
  

 

 

   

 

 

   

 

 

 

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 nine months ended September 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 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2013      2012      2013      2012  

Cost of revenues

   $ 2,270       $ 1,726       $ 5,666       $ 4,577   

Sales and marketing

     7,250         4,795         19,796         13,505   

General and administrative

     17,760         15,585         49,848         43,022   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 27,280       $ 22,106       $ 75,310       $ 61,104   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges, impairment charges and acquisition costs as presented below (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  

Adjusted EBITDA:

        

Americas

   $ 150,304      $ 139,929      $ 449,112      $ 408,885   

EMEA

     57,139        46,392        156,557        138,217   

Asia-Pacific

     41,002        38,695        131,699        101,069   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted EBITDA

     248,445        225,016        737,368        648,171   

Depreciation, amortization and accretion expense

     (105,534     (105,522     (324,326     (289,992

Stock-based compensation expense

     (27,280     (22,106     (75,310     (61,104

Restructuring charge

     —          —          4,837        —     

Acquisitions costs

     (438     (4,542     (6,626     (6,883
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 115,193      $ 92,846      $ 335,943      $ 290,192   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  

Total revenues:

        

Americas

   $ 319,413      $ 291,836      $ 938,673      $ 854,871   

EMEA

     133,254        111,825        380,232        315,594   

Asia-Pacific

     90,417        81,174        269,184        210,852   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 543,084      $ 484,835      $ 1,588,089      $ 1,381,317   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization:

        

Americas

   $ 64,001      $ 60,058      $ 191,355      $ 175,195   

EMEA

     24,274        21,876        70,403        57,311   

Asia-Pacific

     21,626        22,675        64,533        54,615   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 109,901      $ 104,609      $ 326,291      $ 287,121   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures:

        

Americas

   $ 154,704 (1)    $ 95,744      $ 257,817 (1)    $ 278,488   

EMEA

     42,847 (4)      135,145 (2)      91,709 (4)      217,686 (2) 

Asia-Pacific

     45,454 (5)      254,263 (3)      94,969 (5)      330,952 (3) 
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 243,005      $ 485,152      $ 444,495      $ 827,126   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) Includes the purchase price for the New York 2 IBX Data Center Purchase, which totaled $73,441.
  (2) Includes purchase price for the acquisition of ancotel GmbH, net of cash acquired, which totaled $84,236.
  (3) Includes purchase price for the acquisition of Asia Tone, net of cash acquired, which totaled $188,798.
  (4) Includes the deposit for the purchase of the Frankfurt Kleyer 90 Carrier Hotel totaling $1,353.
  (5) Includes the deposit for a real estate purchase totaling $891 and purchase price adjustment for the acquisition of Asia Tone totaling $755.

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

 

     September 30,
2013
     December 31,
2012
 

Americas

   $ 2,496,504       $ 2,139,774   

EMEA

     1,057,349         994,912   

Asia-Pacific

     827,167         781,052   
  

 

 

    

 

 

 
   $ 4,381,020       $ 3,915,738   
  

 

 

    

 

 

 

Revenue information by category is as follows (in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2013      2012      2013      2012  

Colocation

   $ 408,569       $ 365,787       $ 1,201,487       $ 1,047,995   

Interconnection

     81,650         70,681         235,994         198,598   

Managed infrastructure services

     24,413         23,231         72,324         65,302   

Rental

     934         783         2,097         2,347   
  

 

 

    

 

 

    

 

 

    

 

 

 

Recurring revenues

     515,566         460,482         1,511,902         1,314,242   

Non-recurring revenues

     27,518         24,353         76,187         67,075   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 543,084       $ 484,835       $ 1,588,089       $ 1,381,317   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

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

 

14.   Restructuring Charges

In May 2013, the Company entered into a binding commitment to purchase the New York 2 IBX data center for leased space in respect of which the Company had previously recorded a restructuring reserve (see Note 4). As a result, the Company recorded a reversal to its outstanding accrued restructuring charge during the three months ended June 30, 2013.

A summary of the movement in the accrued restructuring charges during the nine months ended September 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 September 30, 2013

   $ —     
  

 

 

 

 

15.   Subsequent Events

In October 2013, the Company completed the purchase of a property located in Frankfurt, Germany for gross consideration of approximately $90,651,000 (the “Frankfurt Kleyer 90 Carrier Hotel Acquisition”). A portion of the building was leased to the Company and was being used by the Company as its Frankfurt 5 IBX data center. The remainder of the building was leased by other parties, which became the Company’s tenants upon closing. The Frankfurt Kleyer 90 Carrier Hotel Acquisition will be accounted for as a business acquisition using the acquisition method of accounting in accordance with the accounting standard for business combinations. The preliminary purchase price allocation for the Frankfurt Kleyer 90 Carrier Hotel Acquisition is not currently available as the appraisals necessary to assess fair values of assets acquired and liabilities assumed are not yet complete.

In October 2013, the Company initiated a program to hedge its exposure to foreign currency exchange rate fluctuations for forecasted revenues and expenses in its EMEA region in order to manage the Company’s exposure to foreign currency exchange rate fluctuations between the U.S. dollar and the British Pound, Euro and Swiss Franc. The foreign currency forward contracts that the Company uses to hedge this exposure are designated as cash flow hedges.

In November 2013, ALOG executed a 60,000,000 Brazilian real credit facility agreement, or approximately $27,019,000. The credit facility has a five-year term with semi-annual principal payments beginning in the third year of its term and quarterly interest payments during the entire term. The credit facility bears an interest rate of 2.25% above the local borrowing rate. ALOG expects to receive the proceeds from the credit facility upon satisfaction of certain conditions.

 

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

 

    Overview

 

    Results of Operations

 

    Non-GAAP Financial Measures

 

    Liquidity and Capital Resources

 

    Contractual Obligations and Off-Balance-Sheet Arrangements

 

    Critical Accounting Policies and Estimates

 

    Recent Accounting Pronouncements

In 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.

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 May 2013, we entered into a binding purchase and sale agreement for a property located in the New York metro area, which is referred to as the New York 2 IBX data center purchase. A portion of the building was leased to us and was being used by us as our New York 2 IBX data center. The lease was originally accounted for as an operating lease, and we had previously recorded a restructuring charge related to the lease, as fully more described in Note 14 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. The remainder of the building was leased by another party, which became our tenant upon closing. In July 2013, we completed the New York 2 IBX data center purchase for net cash consideration of $73.4 million. The New York 2 IBX data center purchase was accounted for as an asset acquisition and the purchase price was allocated to the assets acquired based on their relative fair values.

 

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In October 2013, we completed the purchase of a property located in Frankfurt, Germany for gross consideration of approximately $90.7 million, which is referred to as the Frankfurt Kleyer 90 carrier hotel acquisition. A portion of the building was leased to us and was being used by us as our Frankfurt 5 IBX data center. The remainder of the building was leased by other parties, which became our tenants upon closing. The Frankfurt Kleyer 90 carrier hotel acquisition will be accounted for as a business acquisition using the acquisition method of accounting in accordance with the accounting standard for business combinations. The preliminary purchase price allocation for the Frankfurt Kleyer 90 carrier hotel acquisition is not currently available as the appraisals necessary to assess fair values of assets acquired and liabilities assumed are not yet complete.

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 colocation, (ii) interconnection and (iii) exchange and outsourced IT infrastructure services. As of September 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 the acquisition of the Dubai IBX data center, referred to as the Dubai IBX data center acquisition, our customer count increased to approximately 5,851 as of September 30, 2013 versus approximately 5,261 as of September 30, 2012, an increase of 11%. 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. Our utilization rate increased to approximately 77% as of September 30, 2013 versus approximately 76% as of September 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 September 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

 

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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 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.

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 our customers. In addition, the

 

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cost of electricity is generally higher in the summer months as compared to other times of the year. To the extent we incur increased utility costs, such increased costs could materially impact our financial condition, results of operations and cash flows. Furthermore, to the extent we incur increased electricity costs as a result of either climate change policies or the physical effects of climate change, such increased costs could materially impact our financial condition, results of operations and cash flows.

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

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

Due to our recurring revenue model, and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth, we expect our cost of revenues, sales and marketing expenses and general and administrative expenses to decline as a percentage of 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.

 

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The REIT conversion implementation currently includes seeking a private letter ruling, or PLR, from the IRS. Our PLR request has multiple components, and our timely conversion to a REIT will require favorable rulings from the IRS on certain technical tax issues. 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 $360.0 to $380.0 million, which amount became payable over a four-year period starting in 2012 even if we abandon the REIT conversion for any reason. 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 nine months ended September 30, 2013 include the operations of ancotel GmbH, referred to as ancotel, Asia Tone Limited, referred to as Asia Tone, and the Dubai IBX data center.

Reclassifications and Revision of Previously-Issued Financial Statements

During the three months ended June 30, 2013, we reassessed the estimated period over which revenue related to non-recurring installation fees is recognized as a result of observed trends in customer contract lives. 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. We undertook this review due to our determination 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 was extended. This change was originally incorrectly accounted for as a change in accounting estimate on a prospective basis effective April 1, 2013. During the three months ended September 30, 2013, we determined that these longer lives should have been identified and utilized for revenue recognition purposes beginning in 2006. As a result, our installation revenues, and therefore adjusted EBITDA, were overstated by $6.2 million, $3.5 million and $5.3 million for the years ended December 31, 2012, 2011 and 2010, respectively; overstated by $2.6 million, $1.5 million, $1.5 million and $1.5 million for the three months ended March 31, 2013, September 30, 2012, June 30, 2012 and March 31, 2012, respectively; and understated by $3.9 million for the three months ended June 30, 2013. This error did not impact our reported total cash flows from operating activities.

Also, during the three months ended December 31, 2012, we determined that within our cash flows from operating activities section of our condensed consolidated statement of cash flows for the nine months ended September 30, 2012, excess tax benefits from stock-based compensation of $61.0 million were recorded within changes in other assets when they should have been attributed to income taxes payable,

 

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and therefore included within changes in accounts payable and accrued expenses. This error has been corrected in the condensed consolidated statement of cash flows for the nine months ended September 30, 2012, and did not impact our condensed consolidated statement of cash flows for the first and second quarter of 2012. Our consolidated statement of cash flows for the year ended December 31, 2012 properly reflected excess tax benefits from stock-based compensation. Additionally, we changed our presentation of the impact of income taxes on cash flows from operating activities to present it within a single line within the consolidated statement of cash flows during the year ended December 31, 2012. This item has no impact on our reported total cash flows from operating activities.

We assessed the materiality of the above errors, as well as the previously-identified immaterial errors described below, individually and in the aggregate on prior periods’ financial statements in accordance with the SEC’s Staff Accounting Bulletins No. 99 and 108 and, based on an analysis of quantitative and qualitative factors, determined that the errors were not material to any of our prior interim and annual financial statements and, therefore, the previously-issued financial statements could continue to be relied upon and that the amendment of previously filed reports with the SEC was not required. We also determined that correcting the cumulative of the non-recurring installation fees of $27.2 million as of December 31, 2012 in 2013 would be material to the projected 2013 consolidated financial statements and as such we will revise our previously-issued consolidated financial statements the next time the financial statements for those periods are filed. Refer to Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional details.

As we will revise our previously-issued consolidated financial statements as described above, as part of the revision we also corrected certain previously-identified immaterial errors that were either uncorrected or corrected in a period subsequent to the period in which the error originated including (i) certain recoverable taxes in Brazil that were incorrectly recorded in our statements of operations, which had the effect of overstating both revenues and cost of revenues; (ii) errors related to certain foreign currency embedded derivatives in Asia-Pacific, which have an effect on revenue; (iii) an error in our statement of cash flows related to the acquisition of Asia Tone that affects both cash flows from operating and investing activities and (iv) errors in depreciation, stock-based compensation and property tax accruals in the U.S.

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 September 30, 2012 are used as exchange rates for the three months ended September 30, 2013 when comparing the three months ended September 30, 2013 with the three months ended September 30, 2012 and average rates in effect for the nine months ended September 30, 2012 are used as exchange rates for the nine months ended September 30, 2013 when comparing the nine months ended September 30, 2013 with the nine months ended September 30, 2012).

 

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Three Months Ended September 30, 2013 and 2012

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

 

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

Americas:

              

Recurring revenues

   $ 306,290         56   $ 280,234         58     9     10

Non-recurring revenues

     13,123         2     11,602         2     13     14
  

 

 

    

 

 

   

 

 

    

 

 

     
     319,413         58     291,836         60     9     10
  

 

 

    

 

 

   

 

 

    

 

 

     

EMEA:

              

Recurring revenues

     124,470         23     104,126         21     20     15

Non-recurring revenues

     8,784         2     7,699         2     14     (3 %) 
  

 

 

    

 

 

   

 

 

    

 

 

     
     133,254         25     111,825         23     19     14
  

 

 

    

 

 

   

 

 

    

 

 

     

Asia-Pacific:

              

Recurring revenues

     84,806         16     76,122         16     11     19

Non-recurring revenues

     5,611         1     5,052         1     11     15
  

 

 

    

 

 

   

 

 

    

 

 

     
     90,417         17     81,174         17     11     19
  

 

 

    

 

 

   

 

 

    

 

 

     

Total:

              

Recurring revenues

     515,566         95     460,482         95     12     13

Non-recurring revenues

     27,518         5     24,353         5     13     9
  

 

 

    

 

 

   

 

 

    

 

 

     
   $ 543,084         100   $ 484,835         100     12     13
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Revenues. Growth in Americas revenues was primarily due to (i) $12.5 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Los Angeles, 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. During the three months ended September 30, 2013, currency fluctuations resulted in approximately $2.8 million of unfavorable foreign currency impact to our Americas revenues primarily due to generally stronger U.S. dollar relative to the Brazilian reais and Canadian dollar during the three months ended September 30, 2013 compared to the three months ended September 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, New York, Toronto, Sao Paolo and Washington, D.C. metro areas, which are expected to open during the remainder of 2013, 2014 and first half of 2015. Our estimates of future revenue growth also 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 37%, respectively, of the regional revenues during the three months ended September 30, 2013 and 2012. Our EMEA revenue growth was primarily due to (i) approximately $2.9 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Frankfurt and Zurich 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. During the three months ended September 30, 2013, currency fluctuations resulted in approximately $5.6 million of net favorable foreign currency impact to our EMEA revenues primarily due to generally weaker U.S. dollar relative to the Euro and Swiss franc during the three months ended September 30, 2013 compared to the three months ended September 30, 2012. We expect that our EMEA revenues will continue to grow in future periods as a result of the Frankfurt Kleyer 90 carrier hotel acquisition and 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 and 2015. In addition, we anticipate that a cash flow hedging program we commenced in October 2013 for our EMEA region should reduce some of our foreign currency volatility prospectively. Our estimates of future revenue growth also take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

 

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Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 35% and 36%, respectively, of the regional revenues for the three months ended September 30, 2013 and 2012. Our Asia-Pacific revenue growth was due to (i) revenue generated from our recently-opened IBX data center expansions in the Singapore and Tokyo 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. During the three months ended September 30, 2013, currency fluctuations resulted in approximately $6.3 million of net unfavorable foreign currency impact to our Asia-Pacific revenues primarily due to generally stronger U.S. dollar relative to the Australian dollar, Japanese yen and Singapore dollar during the three months ended September 30, 2013 compared to the three months ended September 30, 2012. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional expansions currently taking place in the Hong Kong, Osaka, Tokyo, Shanghai, Singapore and Sydney metro areas, which are expected to open during the remainder of 2013 and 2014. Our estimates of future revenue growth also 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 September 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

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

Americas

   $ 144,316         54   $ 137,075         55     5     6

EMEA

     69,963         26     61,642         24     13     11

Asia-Pacific

     54,681         20     52,229         21     5     13
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 268,960         100   $ 250,946         100     7     9
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months ended
September 30,
 
     2013     2012  

Cost of revenues as a percentage of revenues:

    

Americas

     45     47

EMEA

     53     55

Asia-Pacific

     60     64

Total

     50     52

Americas Cost of Revenues. Our Americas cost of revenues for the three months ended September 30, 2013 and 2012 included $54.7 million and $50.3 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) $3.0 million of higher utility costs and repairs and maintenance expense and (ii) $2.2 million of higher property taxes, partially offset by a $4.9 million reversal of asset retirement obligations associated with certain leases that were amended during the three months ended September 30, 2013. During the three months ended September 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 September 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 three months ended September 30, 2013 and 2012 included $21.1 million and $18.6 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 EMEA cost of revenues was primarily due to $3.9 million of higher utility costs. During the three months ended September 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 September 30, 2012. Commencing in the fourth quarter of 2013, we expect that our EMEA cost of

 

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revenues will increase as a result of the Frankfurt Kleyer 90 carrier hotel acquisition. Overall, we expect EMEA cost of revenues to increase as we continue to grow our business. In addition, we anticipate that a cash flow hedging program we commenced in October 2013 for our EMEA region should reduce some of our foreign currency volatility prospectively.

Asia-Pacific Cost of Revenues. Our Asia-Pacific cost of revenues for the three months ended September 30, 2013 and 2012 included $20.4 million and $21.5 million, respectively, of depreciation expense. Excluding depreciation expense, the increase in our Asia-Pacific cost of revenues was primarily due to higher costs associated with certain custom services provided to our customers and higher utility costs. During the three months ended September 30, 2013, currency fluctuations resulted in approximately $4.2 million of net favorable foreign currency impact to our Asia-Pacific cost of revenues primarily due to generally stronger U.S. dollar relative to Australian dollar, Japanese yen and Singapore dollar during the three months ended September 30, 2013 compared to the three months ended September 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 September 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

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

Americas

   $ 35,594         58   $ 31,891         60     12     13

EMEA

     16,340         26     13,978         26     17     15

Asia-Pacific

     9,685         16     7,342         14     32     42
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 61,619         100   $ 53,211         100     16     17
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months ended
September 30,
 
     2013     2012  

Sales and marketing expenses as a percentage of revenues:

    

Americas

     11     11

EMEA

     12     12

Asia-Pacific

     11     9

Total

     11     11

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to $4.6 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (387 Americas sales and marketing employees as of September 30, 2013 versus 322 as of September 30, 2012), partially offset by lower bad debt expense and professional fees. During the three months ended September 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 September 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 $2.1 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (212 EMEA sales and marketing employees as of September 30, 2013 versus 183 as of September 30, 2012). For the three months ended September 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 September 30, 2012.

 

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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. In addition, we anticipate that a cash flow hedging program we commenced in October 2013 for our EMEA region should reduce some of our foreign currency volatility prospectively.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher bad debt expense and higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (125 Asia-Pacific general and administrative employees as of September 30, 2013 versus 94 as of September 30, 2012). For the three months ended September 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 September 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 September 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

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

Americas

   $ 68,729         71   $ 60,303         72     14     14

EMEA

     17,911         18     14,767         18     21     21

Asia-Pacific

     10,234         11     8,220         10     25     29
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 96,874         100   $ 83,290         100     16     17
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months ended
September 30,
 
     2013     2012  

General and administrative expenses as a percentage of revenues:

    

Americas

     22     21

EMEA

     13     13

Asia-Pacific

     11     10

Total

     18     17

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to $3.6 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (898 Americas general and administrative employees as of September 30, 2013 versus 853 as of September 30, 2012) and $3.4 million of higher professional fees. During the three months ended September 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 September 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. We are also incurring costs to support our REIT conversion process. Collectively, these investments in our back office systems and our REIT conversion process have resulted in increased

 

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professional fees. 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 these investments 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. The impact of foreign currency fluctuations to our EMEA general and administrative expenses for the three months ended September 30, 2013 was not significant when compared to average exchange rates of the three months ended September 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 including certain corporate reorganization activities, which has resulted in an increased level of professional fees. 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. In addition, we anticipate that a cash flow hedging program we commenced in October 2013 for our EMEA region should reduce some of our foreign currency volatility prospectively.

Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (203 Asia-Pacific general and administrative employees as of September 30, 2013 versus 169 as of September 30, 2012). For the three months ended September 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 September 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.

Acquisition Costs. During the three months ended September 30, 2013, we recorded acquisition costs totaling $438,000 primarily attributed to the EMEA region. During the three months ended September 30, 2012, we recorded acquisition costs totaling $4.5 million primarily attributed to the ancotel and Asia Tone acquisitions.

Interest Income. Interest income decreased to $929,000 for the three months ended September 30, 2013 compared to $1.1 million for the three months ended September 30, 2012. The average annualized yield for the three months ended September 30, 2013 was 0.27% versus 0.76% for the three months ended September 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 $62.0 million for the three months ended September 30, 2013 from $50.2 million for the three months ended September 30, 2012. This increase in interest expense was primarily due to the impact of our $1.5 billion senior notes offering in March 2013, $5.5 million of higher interest expense from various capital lease and other financing obligations to support our expansion projects and less capitalized interest expense, partially offset by the redemption of our 8.125% senior notes in April 2013. During the three months ended September 30, 2013 and 2012, we capitalized $2.3 million and $6.3 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 $985,000 and $507,000, respectively, of other income for the three months ended September 30, 2013 and 2012, primarily due to foreign currency exchange gains during the periods.

 

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Loss on Debt Extinguishment. During the three months ended September 30, 2013, we did not record any loss on debt extinguishment. During the three months ended September 30, 2012, we recorded $5.2 million of loss on debt extinguishment due to the repayment and termination of our outstanding loans payable in Asia-Pacific, referred to as the Asia-Pacific financing.

Income Taxes. For the three months ended September 30, 2013 and 2012, we recorded $12.4 million and $12.3 million, respectively, of income tax expense. Our effective tax rates were 22.5% and 31.7%, respectively, for the three months ended September 30, 2013 and 2012. 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 centralized 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 September 30, 2013, we did not have any discontinued operations. For the three months ended September 30, 2012, our net income from discontinued operations was $679,000. 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.

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. Adjusted EBITDA is the result of our revenues less our adjusted operating expenses. Our adjusted operating expenses exclude depreciation expense, amortization expense, accretion expense, stock-based compensation, restructuring charge, impairment charges and acquisition costs. Periodically, we enter into new lease agreements or amend existing lease agreements. To the extent we conclude that a lease is an operating lease, the rent expense may decrease our adjusted EBITDA whereas to the extent we conclude that a lease is a capital or financing lease, and this lease was previously reported as an operating lease, this outcome may increase our adjusted EBITDA. Our adjusted EBITDA for the three months ended September 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

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

Americas

   $ 150,304         60   $ 139,929         62     7     8

EMEA

     57,139         23     46,392         21     23     14

Asia-Pacific

     41,002         17     38,695         17     6     13
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 248,445         100   $ 225,016         100     10     10
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Adjusted EBITDA. The increase in our Americas adjusted EBITDA was due to higher revenues as result of our IBX data center expansion activity and organic growth as described above, partially offset by higher adjusted operating expenses as a percentage of revenues primarily attributable to higher professional fees to support our growth. During the three months ended September 30, 2013, the impact of foreign currency fluctuations to our Americas adjusted EBITDA was not significant when compared to average exchange rates of the three months ended September 30, 2012. Effective September 30, 2013, we amended certain Americas lease agreements which converted four of these leases from operating to capital leases, which is expected to increase Americas adjusted EBITDA by approximately $2.2 million each quarter commencing with the fourth quarter of 2013.

 

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EMEA Adjusted EBITDA. The increase in our EMEA adjusted EBITDA was primarily due to higher revenues as result of our IBX data center expansion activity and organic growth as described above. During the three months ended September 30, 2013, currency fluctuations resulted in approximately $4.2 million of net favorable foreign currency impact to our EMEA adjusted EBITDA primarily due to generally weaker U.S. dollar relative to the Euro and Swiss franc during the three months ended September 30, 2013 compared to the three months ended September 30, 2012. We expect to enter into new EMEA lease agreements that will be accounted for as operating leases, which we expect will decrease EMEA adjusted EBITDA when these anticipated lease agreements are executed.

Asia-Pacific Adjusted EBITDA. Our Asia-Pacific adjusted EBITDA did not materially change. During the three months ended September 30, 2013, currency fluctuations resulted in approximately $2.7 million of net unfavorable foreign currency impact to our Asia-Pacific adjusted EBITDA primarily due to generally stronger U.S. dollar relative to the Australian dollar, Japanese yen and Singapore dollar during the three months ended September 30, 2013 compared to the three months ended September 30, 2012.

Nine months ended September 30, 2013 and 2012

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

 

     Nine months ended September 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas:

              

Recurring revenues

   $ 901,490         57   $ 824,732         60     9     10

Non-recurring revenues

     37,183         2     30,139         2     23     24
  

 

 

    

 

 

   

 

 

    

 

 

     
     938,673         59     854,871         62     10     11
  

 

 

    

 

 

   

 

 

    

 

 

     

EMEA:

              

Recurring revenues

     356,394         22     291,269         21     22     23

Non-recurring revenues

     23,838         2     24,325         2     (2 %)      (11 %) 
  

 

 

    

 

 

   

 

 

    

 

 

     
     380,232         24     315,594         23     20     20
  

 

 

    

 

 

   

 

 

    

 

 

     

Asia-Pacific:

              

Recurring revenues

     254,018         16     198,241         14     28     34

Non-recurring revenues

     15,166         1     12,611         1     20     23
  

 

 

    

 

 

   

 

 

    

 

 

     
     269,184         17     210,852         15     28     33
  

 

 

    

 

 

   

 

 

    

 

 

     

Total:

              

Recurring revenues

     1,511,902         95     1,314,242         95     15     16

Non-recurring revenues

     76,187         5     67,075         5     14     11
  

 

 

    

 

 

   

 

 

    

 

 

     
   $ 1,588,089         100   $ 1,381,317         100     15     16
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Revenues. Growth in Americas revenues was primarily due to (i) $34.4 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. During the nine months ended September 30, 2013, currency fluctuations resulted in approximately $6.9 million of unfavorable foreign currency impact to our Americas revenues primarily due to generally stronger U.S. dollar relative to the Brazilian reais and Canadian dollar during the nine months ended September 30, 2013 compared to the nine months ended September 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, New York, Toronto, Sao Paolo and Washington, D.C. metro areas, which are expected to open during the remainder of 2013, 2014 and first half of 2015. Our estimates of future revenue growth also 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 nine

 

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months ended September 30, 2013 and 2012. Our EMEA revenue growth was due to (i) $14.8 million of additional revenue from the impact of the ancotel and Dubai IBX data center acquisitions, (ii) $6.1 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. During the nine months ended September 30, 2013, currency fluctuations resulted in approximately $2.1 million of net favorable foreign currency impact to our EMEA revenues primarily due to generally weaker U.S. dollar relative to Euro and Swiss franc during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. We expect that our EMEA revenues will continue to grow in future periods as a result of the Frankfurt Kleyer 90 carrier hotel acquisition and 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 and 2015. In addition, we anticipate that a cash flow hedging program we commenced in October 2013 for our EMEA region should reduce some of our foreign currency volatility prospectively. Our estimates of future revenue growth also 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 38%, respectively, of the regional revenues for the nine months ended September 30, 2013 and 2012. Our Asia-Pacific revenue growth was due to (i) $29.3 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. During the nine months ended September 30, 2013, currency fluctuations resulted in approximately $11.3 million of net unfavorable foreign currency impact to our Asia-Pacific revenues primarily due to generally stronger U.S. dollar relative to Australian dollar, Japanese yen and Singapore dollar during the nine months ended September 30, 2013 compared to the nine months ended September 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, Shanghai, Singapore and Sydney metro areas, which are expected to open during the remainder of 2013 and 2014. Our estimates of future revenue growth also 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 nine months ended September 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Nine months ended September 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas

   $ 434,012         55   $ 399,022         57     9     10

EMEA

     201,912         25     166,957         24     21     21

Asia-Pacific

     158,736         20     129,309         19     23     29
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 794,660         100   $ 695,288         100     14     16
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Nine months ended
September 30,
 
     2013     2012  

Cost of revenues as a percentage of revenues:

    

Americas

     46     47

EMEA

     53     53

Asia-Pacific

     59     61

Total

     50     50

 

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Americas Cost of Revenues. Our Americas cost of revenues for the nine months ended September 30, 2013 and 2012 included $162.8 million and $146.6 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) $5.5 million of higher costs associated with certain custom services provided to our customers, (ii) $5.3 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (898 Americas cost of revenues employees as of September 30, 2013 versus 853 as of September 30, 2012), (iii) $4.3 million of higher taxes, including property taxes, and (iv) $4.7 million of higher utilities and repair and maintenance expense, partially offset by a $4.9 million reversal of asset retirement obligations associated with certain leases that were amended during the three months ended September 30, 2013. During the nine months ended September 30, 2013, currency fluctuations resulted in approximately $4.7 million of favorable foreign currency impact to our Americas cost of revenues primarily due to generally stronger U.S. dollar relative to the Brazilian reais and Canadian dollar during the nine months ended September 30, 2013 compared to the nine months ended September 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 nine months ended September 30, 2013 and 2012 included $60.7 million and $50.4 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 (i) the impact of the ancotel and Dubai IBX data center acquisitions, which resulted in $5.8 million of additional cost of revenues for the nine months ended September 30, 2013, (ii) $7.3 million of higher utility costs, (iii) $5.6 million of costs associated with certain custom services provided to our customers, (iv) $3.6 million of higher compensation expense and (v) higher professional fees to support our growth. During the nine months ended September 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 nine months ended September 30, 2012. Commencing in the fourth quarter of 2013, we expect that our EMEA cost of revenues will increase as a result of the Frankfurt Kleyer 90 carrier hotel acquisition. Overall, we expect EMEA cost of revenues to increase as we continue to grow our business. In addition, we anticipate that a cash flow hedging program we commenced in October 2013 for our EMEA region should reduce some of our foreign currency volatility prospectively.

Asia-Pacific Cost of Revenues. Our Asia-Pacific cost of revenues for the nine months ended September 30, 2013 and 2012 included $61.0 million and $52.4 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 $13.2 million of additional cost of revenues, (ii) $3.2 million of higher utility costs and (iii) higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (excluding the impact of the Asia Tone acquisition, 235 Asia-Pacific cost of revenues employees as of September 30, 2013 versus 174 as of September 30, 2012). During the nine months ended September 30, 2013, currency fluctuations resulted in approximately $7.7 million of net favorable foreign currency impact to our Asia-Pacific cost of revenues primarily due to generally stronger U.S. dollar relative to Australian dollar, Japanese yen and Singapore dollar during the nine months ended September 30, 2013 compared to the nine months ended September 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 nine months ended September 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Nine months ended September 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas

   $ 105,148         59   $ 92,726         63     13     14

EMEA

     49,408         27     35,827         24     38     38

Asia-Pacific

     24,817         14     18,671         13     33     39
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 179,373         100   $ 147,224         100     22     23
  

 

 

    

 

 

   

 

 

    

 

 

     

 

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     Nine months ended
September 30,
 
     2013     2012  

Sales and marketing expenses as a percentage of revenues:

    

Americas

     11     11

EMEA

     13     11

Asia-Pacific

     9     9

Total

     11     11

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to $12.9 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (387 Americas sales and marketing employees as of September 30, 2013 versus 322 as of September 30, 2012) and higher advertising and promotion costs, partially offset by $2.5 million of lower bad debt expense. During the nine months ended September 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 nine months ended September 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) the impact of the ancotel and Dubai IBX data center acquisitions, which resulted in $4.5 million of additional sales and marketing expenses for the nine months ended September 30, 2013, and (ii) $7.1 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (excluding the impact of acquisitions, 181 EMEA sales and marketing employees as of September 30, 2013 versus 144 as of September 30, 2012). For the nine months ended September 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 nine months ended September 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. In addition, we anticipate that a cash flow hedging program we commenced in October 2013 for our EMEA region should reduce some of our foreign currency volatility prospectively.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $2.8 million of additional sales and marketing expenses from the impact of the Asia Tone acquisition. For the nine months ended September 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 nine months ended September 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.

 

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

 

     Nine months ended September 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas

   $ 194,988         71   $ 178,108         74     9     9

EMEA

     53,052         19     40,025         16     33     33

Asia-Pacific

     28,284         10     23,597         10     20     22
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 276,324         100   $ 241,730         100     14     15
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Nine months ended
September 30,
 
     2013     2012  

General and administrative expenses as a percentage of revenues:

    

Americas

     21     21

EMEA

     14     13

Asia-Pacific

     11     11

Total

     17     17

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to $10.1 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (691 Americas general and administrative employees as of September 30, 2013 versus 660 as of September 30, 2012). During the nine months ended September 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 nine months ended September 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. We are also incurring costs to support our REIT conversion process. Collectively, these investments in our back office systems and our REIT conversion process have resulted in increased professional fees. 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 these investments 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) $5.4 million of higher professional fees and (ii) $3.2 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (excluding the impact of acquisitions, 269 EMEA general and administrative employees as of September 30, 2013 versus 194 as of September 30, 2012). The impact of foreign currency fluctuations to our EMEA general and administrative expenses for the nine months ended September 30, 2013 was not significant when compared to average exchange rates of the nine months ended September 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 including certain corporate reorganization activities, which has resulted in an increased level of professional fees. 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. In addition, we anticipate that a cash flow hedging program we commenced in October 2013 for our EMEA region should reduce some of our foreign currency volatility prospectively.

Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific 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 (excluding the impact of the Asia

 

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Tone acquisition, 199 Asia-Pacific general and administrative employees as of September 30, 2013 versus 168 as of September 30, 2012). For the nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2012, we did not record any restructuring charge.

Acquisition Costs. During the nine months ended September 30, 2013, we recorded acquisition costs totaling $6.6 million primarily attributed to our Americas region. During the nine months ended September 30, 2012, we recorded acquisition costs totaling $6.9 million primarily attributed to the ancotel and Asia Tone acquisitions.

Interest Income. Interest income was $2.6 million and $2.7 million, respectively, for the nine months ended September 30, 2013 and 2012. The average annualized yield for the nine months ended September 30, 2013 was 0.27% versus 0.41% for the nine months ended September 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 $183.3 million for the nine months ended September 30, 2013 from $149.8 million for the nine months ended September 30, 2012. This increase in interest expense was primarily due to the impact of our $1.5 billion senior notes offering in March 2013, $15.4 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 nine months ended September 30, 2013 and 2012, we capitalized $7.9 million and $19.6 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 $3.3 million of other income and $1.5 million of other expense, respectively, for the nine months ended September 30, 2013 and 2012, primarily due to foreign currency exchange gains and losses during the periods.

Loss on Debt Extinguishment. During the nine months ended September 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 nine months ended September 30, 2012, we recorded a $5.2 million loss on debt extinguishment due to the repayment and termination of our outstanding Asia-Pacific financing.

Income Taxes. For the nine months ended September 30, 2013 and 2012, we recorded $14.2 million and $41.1 million of income tax expenses, respectively. Our effective tax rates were 21.8% and 30.1% for the nine months ended September 30, 2013 and 2012, respectively. The lower tax rate for the nine months ended September 30, 2013 was primarily due to the $93.6 million loss on debt extinguishment recorded during the nine months ended September 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.

 

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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 centralized 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 nine months ended September 30, 2013, we did not have any discontinued operations. For the nine months ended September 30, 2012, our net income from discontinued operations was $1.2 million. 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.

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. Adjusted EBITDA is the result of our revenues less our adjusted operating expenses. Our adjusted operating expenses exclude depreciation expense, amortization expense, accretion expense, stock-based compensation, restructuring charge, impairment charges and acquisition costs. Periodically, we enter into new lease agreements or amend existing lease agreements. To the extent we conclude that a lease is an operating lease, the rent expense may decrease our adjusted EBITDA whereas to the extent we conclude that a lease is a capital or financing lease, and this lease was previously reported as an operating lease, this outcome may increase our adjusted EBITDA. Our adjusted EBITDA for the nine months ended September 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):

 

     Nine months ended September 30,     % change  
     2013      %     2012      %     Actual     Constant
currency
 

Americas

   $ 449,112         61   $ 408,885         63     10     10

EMEA

     156,557         21     138,217         21     13     11

Asia-Pacific

     131,699         18     101,069         16     30     35
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 737,368         100   $ 648,171         100     14     15
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Adjusted EBITDA. The increase in our Americas adjusted EBITDA was due to higher revenues as result of our IBX data center expansion activity and organic growth as described above. During the nine months ended September 30, 2013, the U.S. dollar was generally stronger relative to the Brazilian reais and Canadian dollar compared to the nine months ended September 30, 2012, resulting in approximately $2.5 million of net unfavorable foreign currency impact to our Americas adjusted EBITDA during the nine months ended September 30, 2013 when compared to average exchange rates of the nine months ended September 30, 2012. Effective September 30, 2013, we amended certain Americas lease agreements which converted four of these leases from operating to capital leases, which is expected to increase Americas adjusted EBITDA by approximately $2.2 million each quarter commencing with the fourth quarter of 2013.

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 $9.7 million of adjusted EBITDA during the nine months ended September 30, 2013. Excluding acquisitions, the increase was due to higher revenues as result of our IBX data center expansion activity and organic growth as described above, partially offset by higher adjusted operating expenses as a percentage of revenues primarily attributable to higher sales and marketing compensation costs, including general salaries, bonus and headcount growth, and higher professional fees to support our growth. During the nine months ended September 30, 2013, currency fluctuations resulted in approximately $2.5 million of net favorable foreign currency impact to our EMEA adjusted EBITDA primarily due to generally weaker U.S. dollar relative to Euro and Swiss franc during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. We expect to enter into new EMEA lease agreements that will be accounted for as operating leases, which we expect will decrease EMEA adjusted EBITDA when these anticipated lease agreements are executed.

 

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Asia-Pacific Adjusted EBITDA. The increase in our Asia-Pacific adjusted EBITDA was primarily due to the impact of the Asia Tone acquisition, which generated $14.8 million of adjusted EBITDA during the nine months ended September 30, 2013. Excluding the acquisition, the increase was due to higher revenues as result of our IBX data center expansion activity and organic growth as described above. During the nine months ended September 30, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen compared to the nine months ended September 30, 2012, resulting in approximately $4.8 million of net unfavorable foreign currency impact to our Asia-Pacific adjusted EBITDA during the nine months ended September 30, 2013 when compared to average exchange rates of the nine months ended September 30, 2012.

Non-GAAP Financial Measures

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

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

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

 

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

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

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2013      2012      2013     2012  

Income from operations

   $ 115,193       $ 92,846       $ 335,943      $ 290,192   

Depreciation, amortization and accretion expense

     105,534         105,522         324,326        289,992   

Stock-based compensation expense

     27,280         22,106         75,310        61,104   

Restructuring charge

     —           —           (4,837     —     

Acquisition costs

     438         4,542         6,626        6,883   
  

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 248,445       $ 225,016       $ 737,368      $ 648,171   
  

 

 

    

 

 

    

 

 

   

 

 

 

Our adjusted EBITDA results have improved each year and in each region in total dollars due to the improved operating results discussed earlier in “Results of Operations”, as well as due to the nature of our business model which consists of a recurring revenue stream and a cost structure which has a large base that is fixed in nature as discussed earlier in “Overview”. Although we have also been investing in our future growth as described above (e.g. through additional IBX data center expansions, acquisitions and increased investments in sales and marketing expenses), we believe that our adjusted EBITDA results will continue to improve in future periods as we continue to grow our business.

Liquidity and Capital Resources

As of September 30, 2013, our total indebtedness was comprised of (i) convertible debt principal totaling $769.7 million from our 3.00% convertible subordinated notes and our 4.75% convertible subordinated notes (gross of discount) and (ii) non-convertible debt and financing obligations totaling $3.4 billion consisting of (a) $2.3 billion of principal from our 7.00%, 5.375% and 4.875% senior notes, (b) $197.0 million of principal from our loans payable and (c) $885.0 million from our capital lease and other financing obligations.

We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of the current portion of our debt as it becomes due, payment of tax liabilities related to the decision to convert to a REIT (see below) and completion of our publicly-announced expansion projects. As of September 30, 2013, we had $1.2 billion of cash, cash equivalents and short-term and long-term investments, of which approximately $931.6 million was held in the U.S. We believe that our current expansion activities in the U.S. can be funded with our U.S.-based cash and cash equivalents and investments. Besides our investment portfolio, additional liquidity available to us from the $750.0 million credit facility, referred to as the U.S. financing, and any further financing activities we may pursue, customer collections are our primary source of cash. While we believe we have a

 

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strong customer base and have continued to experience relatively strong collections, if the current market conditions were to deteriorate, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, all of which could have a material adverse effect on our liquidity.

As of September 30, 2013, we had a total of approximately $521.0 million of additional liquidity available to us under the U.S. financing and ALOG financing. While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and to complete our publicly-announced IBX data center expansion plans, we may pursue additional expansion opportunities, primarily the build out of new IBX data centers, in certain of our existing markets which are at or near capacity within the next year, as well as potential acquisitions, and have also announced our planned conversion to a REIT (see below). While we expect to fund these expansion plans with our existing resources, additional financing, either debt or equity, may be required to pursue certain new or unannounced additional expansion plans, including acquisitions. However, if current market conditions were to deteriorate, we may be unable to secure additional financing or any such additional financing may only be available to us on unfavorable terms. An inability to pursue additional expansion opportunities will have a material adverse effect on our ability to maintain our desired level of revenue growth in future periods.

In October 2013, we initiated a program to hedge our exposure to foreign currency exchange rate fluctuations for forecasted revenues and expenses in our EMEA region in order to manage our exposure to foreign currency exchange rate fluctuations between the U.S. dollar and the British Pound, Euro and Swiss Franc. The foreign currency forward contracts that we use to hedge this exposure are designated as cash flow hedges.

Impact of REIT Conversion

In accordance with tax rules applicable to REIT conversions, we expect to issue special distributions to our stockholders of undistributed accumulated earnings and profits of approximately $700.0 million to $1.1 billion, which is collectively referred to as the E&P distribution, which we expect to pay out in a combination of up to 20% in cash and at least 80% in the form of our common stock. We expect to make the E&P distribution only after receiving a favorable PLR from the IRS and anticipate making a significant portion of the E&P distribution before 2015, with the balance distributed in 2015. In addition, following the completion of the REIT conversion, we intend to declare regular distributions to our stockholders.

There are significant tax and other costs associated with implementing the REIT conversion, and certain tax liabilities may be incurred regardless of the whether we ultimately succeed in converting to a REIT. 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 method 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 $360.0 to $380.0 million, which amount became payable over a four-year period starting in 2012 even if we abandon the REIT conversion for any reason. We expect to utilize all our net operating loss carryforwards for federal and state income tax purposes in 2013. 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.

Sources and Uses of Cash

 

     Nine Months Ended
September 30,
 
     2013     2012  

Net cash provided by operating activities

   $ 437,902      $ 428,334   

Net cash used in investing activities

     (935,951     (238,953

Net cash provided by (used in) financing activities

     645,548        (234,969

Operating Activities. The increase in net cash provided by operating activities was primarily due to improved operating results, partially offset by unfavorable working capital activities, such as increased

 

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payments of income taxes. Although our collections remain strong, it is possible for some large customer receivables that were anticipated to be collected in one quarter to slip to the next quarter. For example, some large customer receivables that were anticipated to be collected in September 2013 were instead collected in October 2013, which negatively impacted cash flows from operating activities for the nine months ended September 30, 2013. We expect that we will continue to generate cash from our operating activities during the remainder of 2013 and beyond.

Investing Activities. The net cash used in investing activities for the nine months ended September 30, 2013 was primarily due to $814.4 million of purchases of investments, $369.6 million of capital expenditures as a result of expansion activity and $73.4 million for the New York 2 IBX data center purchase, partially offset by $316.6 million of sales and maturities of investments. The net cash used in investing activities for the nine months ended September 30, 2012 was primarily due to $365.9 million of purchases of investments, $554.1 million of capital expenditures as a result of expansion activity and $278.4 million of cash paid for the Asia Tone and ancotel acquisitions, partially offset by $880.3 million of sales and maturities of investments and $87.4 million of release of restricted cash primarily related to payments made in connection with the Paris 4 IBX financing. During 2013, we expect that our IBX expansion construction activity will be less than our 2012 levels. However, if the opportunity to expand is greater than planned and we have sufficient funding to increase the expansion opportunities available to us, we may increase the level of capital expenditures to support this growth as well as pursue additional acquisitions or joint ventures. In October 2013, we closed the Frankfurt Kleyer 90 carrier hotel acquisition for gross consideration of $90.7 million.

Financing Activities. The net cash provided by financing activities for the nine months ended September 30, 2013 was primarily due to $1.5 billion of proceeds from the senior notes offering in March 2013, $27.4 million of excess tax benefits from stock-based compensation and $28.1 million of proceeds from employee equity awards, partially offset by $834.7 million for the redemption of the $750.0 million 8.125% senior notes, $54.5 million of repayments of various long-term debt and capital lease and other financing obligations and $22.4 million of debt issuance costs primarily related to the senior notes offering in March 2013. The net cash used in financing activities for the nine months ended September 30, 2012 was primarily due to $574.7 million of repayments of the principal amount of the 2.50% convertible subordinated notes, our loans payable and capital lease and other financing obligations, partially offset by $249.6 million of proceeds from drawdowns of new financings entered into during the period and $53.2 million of excess tax benefits from stock-based compensation. Going forward, we expect that our financing activities will consist primarily of repayment of our debt for the foreseeable future. However, we may pursue additional financings in the future to support expansion opportunities, additional acquisitions or joint ventures. In November 2013, ALOG executed a 60.0 million Brazilian real, or $27.0 million, credit facility agreement and it expects to receive the proceeds from this credit facility upon satisfaction of certain conditions.

Debt Obligations

4.875% Senior Notes and 5.375% Senior Notes. In March 2013, we issued $1.5 billion aggregate principal amount of senior notes, which consist of $500.0 million aggregate principal amount of 4.875% senior notes due April 1, 2020 and $1.0 billion aggregate principal amount of 5.375% senior notes due April 1, 2023. 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.

The 4.875% senior notes and the 5.375% senior notes are governed by separate indentures dated March 5, 2013, which is referred to as the senior notes indentures, between us, as issuer, and U.S. Bank National Association, as trustee (the “Senior Notes Indentures”). The senior notes indentures contain covenants that limit our ability and the ability of our 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;

 

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    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 our existing or future senior debt and senior in right of payment to our existing and future subordinated debt. The 4.875% senior notes and the 5.375% senior notes are effectively junior with our secured indebtedness and indebtedness of our subsidiaries.

At any time prior to April 1, 2016, we 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 us and our 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, we 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, we 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, which is referred to as the 4.875% senior notes applicable premium, and accrued and unpaid interest, if any, to, but not including, the date of redemption, which is referred to as 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.

At any time prior to April 1, 2016, we 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 us and our subsidiaries); and (ii) the redemption must occur within 90 days of the date of the closing of such equity offering.

 

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On or after April 1, 2018, we 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, we 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, which is referred to as the 5.375% senior notes applicable premium, and accrued and unpaid interest, if any, to, but not including, the date of redemption, which is referred to as 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 $19.1 million as of September 30, 2013. In March 2013, we placed $836.4 million 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, we issued $750.0 million aggregate principal amount of 8.125% senior notes due March 1, 2018. The indenture governing the 8.125% senior notes permitted us 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, we redeemed all of the 8.125% senior notes and incurred a loss on debt extinguishment. See Note 9 to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

U.S. Financing. In February 2013, we entered into an amendment to a credit agreement with a group of lenders for a $750.0 million credit facility, referred to as the U.S. financing, which is comprised of a $200.0 million term loan facility, referred to as the U.S. term loan, and a $550.0 million multicurrency revolving credit facility, referred to as the U.S. revolving credit line. The amendment modified certain definitions of items used in the calculation of the financial covenants with which we 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 us 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 from the calculation of total leverage for the period ended March 31, 2013, 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.

In September 2013, we entered into an amendment to the U.S. financing. The amendment allows us greater flexibility to make cash dividends and distributions to our stockholders to the extent required to qualify us as a REIT (including cash dividends and distributions of undistributed accumulated earnings and

 

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profits) and to make cash dividends and distributions on an ongoing basis to the extent required for us to continue to be qualified as a REIT or to avoid the imposition of income or franchise taxes on us. The amendment also replaced the maximum senior leverage ratio covenant with a maximum senior net leverage ratio covenant and modified the minimum fixed charge coverage ratio and tangible net worth covenants. In addition, the amendment modified certain defined terms used in the calculation of the financial covenants to exclude certain expenses incurred by us in connection with our planned REIT conversion. The amendment also permits us to request an increase in the U.S. revolving credit line of up to an additional $250.0 million, subject to the receipt of lender commitments. As of September 30, 2013, we were in compliance with all financial covenants.

Contractual Obligations and Off-Balance-Sheet Arrangements

We lease a majority of our IBX data centers and certain equipment under non-cancelable lease agreements expiring through 2040. The following represents our debt maturities, financings, leases and other contractual commitments as of September 30, 2013 (in thousands):

 

     2013
(3 months)
     2014      2015      2016      2017      Thereafter      Total  

Convertible debt (1)

   $ —         $ 395,986       $ —         $ 373,724       $ —         $ —         $ 769,710   

Senior notes

     —           —           —           —           —           2,250,000         2,250,000   

U.S. term loan (2)

     10,000         40,000         40,000         40,000         20,000         —           150,000   

ALOG financing (2)

     —           12,866         12,866         12,866         6,433         —           45,031   

ALOG loans payable (2)