10-Q 1 d737144d10q.htm 10-Q Prepared by R.R. Donnelley Financial -- 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2014

OR

 

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

For the transition period from                      to                     

Commission File Number 000-31293

 

 

EQUINIX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   77-0487526
(State of incorporation)  

(I.R.S. Employer

Identification No.)

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

(Address of principal executive offices, including ZIP code)

(650) 598-6000

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

The number of shares outstanding of the registrant’s Common Stock as of June 30, 2014 was 53,194,103.

 

 

 


Table of Contents

EQUINIX, INC.

INDEX

 

         

Page

No.

 

Part I – Financial Information

  

Item 1.

   Condensed Consolidated Financial Statements (unaudited):   
   Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013      3   
   Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013      4   
  

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013

     5   
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013      6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      55   

Item 4.

   Controls and Procedures      56   

Part II – Other Information

  

Item 1.

   Legal Proceedings      56   

Item 1A.

   Risk Factors      56   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      76   

Item 3.

   Defaults Upon Senior Securities      76   

Item 4.

   Mine Safety Disclosure      76   

Item 5.

   Other Information      77   

Item 6.

   Exhibits      77   

Signatures

     88   

Index to Exhibits

     89   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

EQUINIX, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

     June 30,
2014
    December 31,
2013
 
     (Unaudited)  
Assets   

Current assets:

    

Cash and cash equivalents

   $ 408,334      $ 261,894   

Short-term investments

     207,325        369,808   

Accounts receivable, net

     237,831        184,840   

Other current assets

     101,044        72,118   
  

 

 

   

 

 

 

Total current assets

     954,534        888,660   

Long-term investments

     88,690        398,390   

Property, plant and equipment, net

     4,924,162        4,591,650   

Goodwill

     1,058,363        1,042,153   

Intangible assets, net

     170,130        184,182   

Other assets

     443,732        387,324   
  

 

 

   

 

 

 

Total assets

   $ 7,639,611      $ 7,492,359   
  

 

 

   

 

 

 
Liabilities, Redeemable Non-Controlling Interests and Stockholders’ Equity   

Current liabilities:

    

Accounts payable and accrued expenses

   $ 260,121      $ 263,223   

Accrued property, plant and equipment

     83,796        64,601   

Current portion of capital lease and other financing obligations

     18,377        17,214   

Current portion of mortgage and loans payable

     54,470        53,508   

Other current liabilities

     146,551        147,958   
  

 

 

   

 

 

 

Total current liabilities

     563,315        546,504   

Capital lease and other financing obligations, less current portion

     1,116,230        914,032   

Mortgage and loans payable, less current portion

     176,184        199,700   

Convertible debt

     320,914        724,202   

Senior notes

     2,250,000        2,250,000   

Other liabilities

     302,753        274,955   
  

 

 

   

 

 

 

Total liabilities

     4,729,396        4,909,393   
  

 

 

   

 

 

 

Redeemable non-controlling interests (Note 10)

     227,156        123,902   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Common stock

     53        50   

Additional paid-in capital

     2,797,186        2,693,887   

Treasury stock

     (52,938     (84,663

Accumulated other comprehensive loss

     (77,514     (113,767

Retained earnings (accumulated deficit)

     16,272        (36,443
  

 

 

   

 

 

 

Total stockholders’ equity

     2,683,059        2,459,064   
  

 

 

   

 

 

 

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

   $ 7,639,611      $ 7,492,359   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

3


Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  
     (Unaudited)  

Revenues

   $ 605,161      $ 528,871      $ 1,185,214      $ 1,045,005   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

        

Cost of revenues

     292,859        267,109        580,384        525,700   

Sales and marketing

     75,254        59,478        142,682        117,754   

General and administrative

     111,675        88,632        214,978        179,450   

Restructuring charges

     —          (4,837     —          (4,837

Acquisition costs

     676        2,526        861        6,188   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     480,464        412,908        938,905        824,255   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     124,697        115,963        246,309        220,750   

Interest income

     744        917        2,178        1,664   

Interest expense

     (66,874     (61,001     (135,694     (121,332

Other income

     681        2,768        1,359        2,309   

Loss on debt extinguishment

     (51,183     (93,602     (51,183     (93,602
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

     8,065        (34,955     62,969        9,789   

Income tax benefit (expense)

     2,014        9,668        (11,553     (1,792
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     10,079        (25,287     51,416        7,997   

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

     1,249        (529     1,299        (970
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Equinix

   $ 11,328      $ (25,816   $ 52,715      $ 7,027   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic EPS

   $ 0.22      $ (0.52   $ 1.04      $ 0.14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     51,332        49,379        50,470        49,205   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS

   $ 0.22      $ (0.52   $ 1.04      $ 0.14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares

     51,652        49,379        50,884        49,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  
     (Unaudited)  

Net income (loss)

   $ 10,079      $ (25,287   $ 51,416      $ 7,997   

Other comprehensive income (loss), net of tax:

        

Foreign currency translation gain (loss)

     23,081        (30,666     38,051        (103,220

Unrealized gain (loss) on available for sale securities

     (74     (458     765        (360

Unrealized gain on cash flow hedges

     54        —          254        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     23,061        (31,124     39,070        (103,580
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax

     33,140        (56,411     90,486        (95,583
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     1,249        (529     1,299        (970

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

     (750     5,309        (2,817     4,540   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Equinix

   $ 33,639      $ (51,631   $ 88,968      $ (92,013
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

5


Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Six months ended
June 30,
 
     2014     2013  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 51,416      $ 7,997   

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

    

Depreciation

     215,596        202,637   

Stock-based compensation

     58,811        48,030   

Excess tax benefits from stock-based compensation

     (11,632     (22,421

Restructuring charges

     —          (4,837

Amortization of debt issuance costs and debt discounts

     11,126        11,637   

Amortization of intangible assets

     13,979        13,623   

Provision for allowance for doubtful accounts

     2,527        1,598   

Loss on debt extinguishment

     51,183        93,602   

Other items

     10,329        7,968   

Changes in operating assets and liabilities:

    

Accounts receivable

     (53,505     (43,761

Income taxes, net

     (92,513     (75,556

Other assets

     10,188        (18,036

Accounts payable and accrued expenses

     (14,172     396   

Other liabilities

     17,349        8,463   
  

 

 

   

 

 

 

Net cash provided by operating activities

     270,682        231,340   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments

     (115,222     (623,804

Sales of investments

     412,013        140,450   

Maturities of investments

     175,600        74,796   

Purchase of real estate

     (16,791     (2,960

Purchases of property, plant and equipment

     (265,723     (198,530

Change in restricted cash

     499        5,162   

Other investing activities, net

     12        (107
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     190,388        (604,993
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchases of treasury stock

     (255,383     —     

Proceeds from employee equity awards

     15,821        15,880   

Excess tax benefits from stock-based compensation

     11,632        22,421   

Proceeds from loans payable

     128        —     

Proceeds from senior notes

     —          1,500,000   

Repayment of capital lease and other financing obligations

     (9,283     (7,673

Repayment of mortgage and loans payable

     (27,094     (32,191

Repayment of convertible debt

     (29,479     —     

Repayment of senior notes

     —          (750,000

Debt extinguishment costs

     (22,552     (80,925

Debt issuance costs

     —          (20,786
  

 

 

   

 

 

 

Net cash provided by (used in ) financing activities

     (316,210     646,726   
  

 

 

   

 

 

 

Effect of foreign currency exchange rates on cash and cash equivalents

     1,580        (7,790
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     146,440        265,283   

Cash and cash equivalents at beginning of period

     261,894        252,213   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 408,334      $ 517,496   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Cash paid for taxes

   $ 105,284      $ 76,854   
  

 

 

   

 

 

 

Cash paid for interest

   $ 121,902      $ 96,280   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements

 

6


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Equinix, Inc. (“Equinix” or the “Company”) and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state the financial position and the results of operations for the interim periods presented. The condensed consolidated balance sheet data as of December 31, 2013 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 28, 2014. 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 18.3% for the six months ended June 30, 2014 and 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 tax payable related to windfall tax benefits for employee equity awards has been reflected as an adjustment to additional paid-in capital. For the six months ended June 30, 2014, the benefits arising from employee equity award activity that resulted in an adjustment to additional paid-in capital were approximately $11,091,000.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This ASU requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which companies expect to be entitled in exchange for those goods or services. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. This ASU is effective for fiscal years and interim periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the criteria for reporting discontinued operations. This ASU is required to be applied prospectively for disposals, or classifications as held for sale, of components of an entity that occur within fiscal years and interim periods beginning after December 15, 2014, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on disposals, or classifications as held for sale, of components of the Company that may occur in the future.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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. To the extent a net operating loss carryforward, a similar tax loss or a tax credit carryforward, is not available at the reporting date under the applicable tax law or an entity does not intend to use its deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not a reduction to deferred tax assets. This ASU is effective for fiscal years and interim periods beginning after December 15, 2013 with early adoption permitted. During the three months ended March 31, 2014, the Company adopted ASU 2013-11 and the adoption did not have a significant impact on its consolidated financial statements.

2. Earnings Per Share

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014      2013     2014      2013  

Net income (loss)

   $ 10,079       $ (25,287   $ 51,416       $ 7,997   

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

     1,249         (529     1,299         (970
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) attributable to Equinix, basic and diluted

   $ 11,328       $ (25,816   $ 52,715       $ 7,027   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares used to calculate basic EPS

     51,332         49,379        50,470         49,205   

Effect of dilutive securities:

          

Employee equity awards

     320         —          414         771   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares used to calculate diluted EPS

     51,652         49,379        50,884         49,976   
  

 

 

    

 

 

   

 

 

    

 

 

 

EPS attributable to Equinix:

          

Basic EPS

   $ 0.22       $ (0.52   $ 1.04       $ 0.14   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted EPS

   $ 0.22       $ (0.52   $ 1.04       $ 0.14   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
         2014              2013              2014              2013      

Shares reserved for conversion of 3.00% convertible subordinated notes

     3,151         3,604         3,258         3,613   

Shares reserved for conversion of 4.75% convertible subordinated notes

     2,849         4,432         3,636         4,432   

Common stock related to employee equity awards

     294         2,124         307         122   
  

 

 

    

 

 

    

 

 

    

 

 

 
     6,294         10,160         7,201         8,167   
  

 

 

    

 

 

    

 

 

    

 

 

 

3. Change In Accounting Estimate

During the three months ended June 30, 2014, the Company reassessed the estimated period over which revenue related to non-recurring installation fees is recognized. 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. This change was accounted for as a change in accounting estimate on a

 

8


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

prospective basis effective April 1, 2014. The change in the estimated period that revenue related to non-recurring installation fees is recognized had the following impact on the Company’s results of operations compared to the results that would have otherwise been recorded for the three and six months ended June 30, 2014 (in thousands, except per share amounts):

 

Revenues

   $ (1,751

Income from operations

     (1,751

Net income

     (1,342

EPS:

  

Basic

     (0.03

Diluted

     (0.03

4. Balance Sheet Components

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

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

 

     June 30,
2014
     December 31,
2013
 

Cash and cash equivalents:

     

Cash (1)

   $ 361,379       $ 186,007   

Cash equivalents:

     

Money market funds

     28,939         74,787   

U.S. government agency securities

     18,016         —     

Commercial paper

     —           1,100   
  

 

 

    

 

 

 

Total cash and cash equivalents

     408,334         261,894   
  

 

 

    

 

 

 

U.S. government securities

     238,902         305,021   

U.S. government agency securities

     27,786         125,917   

Corporate bonds

     6,650         190,177   

Certificates of deposit

     1,629         76,152   

Asset-backed securities

     5,829         68,938   

Commercial paper

     15,219         1,993   
  

 

 

    

 

 

 

Total marketable securities

     296,015         768,198   
  

 

 

    

 

 

 

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

   $ 704,349       $ 1,030,092   
  

 

 

    

 

 

 

 

(1) Excludes restricted cash.

As of June 30, 2014 and December 31, 2013, cash equivalents included investments which were readily convertible to cash and had original maturity dates of 90 days or less. The maturities of securities classified as short-term investments were one year or less as of June 30, 2014 and December 31, 2013. The maturities of securities classified as long-term investments were greater than one year and less than three years as of June 30, 2014 and December 31, 2013.

 

9


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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

 

     June 30, 2014      December 31, 2013  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

Due within one year

   $ 207,209       $ 207,325       $ 369,698       $ 369,808   

Due after one year through three years

     88,582         88,690         398,200         398,390   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 295,791       $ 296,015       $ 767,898       $ 768,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     June 30, 2014  
     Amortized
Cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair Value  

U.S. government securities

   $ 238,701       $ 201       $ —         $ 238,902   

U.S. government agency securities

     27,767         19         —           27,786   

Corporate bonds

     6,647         3         —           6,650   

Certificates of deposit

     1,629         —           —           1,629   

Asset-backed securities

     5,828         1         —           5,829   

Commercial paper

     15,219         —           —           15,219   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 295,791       $ 224       $ —         $ 296,015   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Amortized
Cost
     Gross
unrealized
gains
     Gross
unrealized
losses
    Fair Value  

U.S. government securities

   $ 304,897       $ 131       $ (7   $ 305,021   

U.S. government agency securities

     125,904         35         (22     125,917   

Corporate bonds

     190,068         149         (40     190,177   

Certificates of deposit

     76,126         27         (1     76,152   

Asset-backed securities

     68,914         33         (9     68,938   

Commercial paper

     1,989         4         —          1,993   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 767,898       $ 379       $ (79   $ 768,198   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of June 30, 2014, the Company did not have any securities in a loss position. 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):

 

     June 30,
2014
    December 31,
2013
 

Accounts receivable

   $ 382,610      $ 323,822   

Unearned revenue

     (136,894     (132,342

Allowance for doubtful accounts

     (7,885     (6,640
  

 

 

   

 

 

 
   $ 237,831      $ 184,840   
  

 

 

   

 

 

 

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 contracts.

Other Current Assets

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

 

     June 30,
2014
     December 31,
2013
 

Prepaid expenses

   $ 31,322       $ 26,578   

Taxes receivable

     46,306         21,584   

Deferred tax assets, net

     7,442         7,442   

Other receivables

     2,575         4,181   

Derivative instruments

     8,262         4,457   

Restricted cash, current

     3,287         3,210   

Other current assets

     1,850         4,666   
  

 

 

    

 

 

 
   $ 101,044       $ 72,118   
  

 

 

    

 

 

 

 

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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):

 

     June 30,
2014
    December 31,
2013
 

IBX plant and machinery

   $ 2,759,055      $ 2,640,907   

Leasehold improvements

     1,069,296        1,039,847   

Buildings (1)

     2,033,680        1,862,562   

IBX equipment

     545,549        490,677   

Computer equipment and software

     226,869        193,524   

Land

     122,040        122,035   

Furniture and fixtures

     25,260        24,134   

Construction in progress

     387,659        244,254   
  

 

 

   

 

 

 
     7,169,408        6,617,940   

Less accumulated depreciation

     (2,245,246     (2,026,290
  

 

 

   

 

 

 
   $ 4,924,162      $ 4,591,650   
  

 

 

   

 

 

 

 

(1) Includes site improvements.

International Business Exchange® (“IBX”) plant and machinery, leasehold improvements, buildings, computer equipment and software and construction in progress recorded under capital leases aggregated $539,421,000 and $428,974,000 as of June 30, 2014 and December 31, 2013, respectively. Depreciation on the assets recorded under capital leases is included in depreciation expense and accumulated depreciation on such assets totaled $67,687,000 and $56,041,000 as of June 30, 2014 and December 31, 2013, respectively.

 

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Table of Contents

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):

 

     June 30,
2014
     December 31,
2013
 

Goodwill:

     

Americas

   $ 476,789       $ 471,845   

EMEA

     446,007         435,041   

Asia-Pacific

     135,567         135,267   
  

 

 

    

 

 

 
   $ 1,058,363       $ 1,042,153   
  

 

 

    

 

 

 

 

     June 30,
2014
    December 31,
2013
 

Intangible assets:

    

Intangible asset – customer contracts

   $ 234,903      $ 233,038   

Intangible assets – favorable leases

     24,885        25,147   

Intangible asset – licenses

     9,697        9,697   

Intangible asset – others

     8,934        8,859   
  

 

 

   

 

 

 
     278,419        276,741   

Less accumulated amortization

     (108,289     (92,559
  

 

 

   

 

 

 
   $ 170,130      $ 184,182   
  

 

 

   

 

 

 

The Company’s goodwill and intangible assets in EMEA (Europe, Middle East and Africa), 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 and loss.

For the three and six months ended June 30, 2014, the Company recorded amortization expense of $7,074,000 and $13,979,000, respectively, associated with its intangible assets. For the three and six months ended June 30, 2013, the Company recorded amortization expense of $6,864,000 and $13,623,000, respectively, associated with its intangible assets. The Company’s estimated future amortization expense related to these intangibles is as follows (in thousands):

 

Year ending:

  

2014 (6 months remaining)

   $ 14,828   

2015

     29,312   

2016

     28,831   

2017

     27,255   

2018

     24,120   

Thereafter

     45,784   
  

 

 

 
   $ 170,130   
  

 

 

 

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Other Assets

Other assets consisted of the following (in thousands):

 

     June 30,
2014
     December 31,
2013
 

Deferred tax assets, net

   $ 299,739       $ 229,975   

Prepaid expenses, non-current

     49,799         61,039   

Debt issuance costs, net

     35,982         41,847   

Deposits

     32,445         25,543   

Restricted cash, non-current

     15,644         16,178   

Derivative instruments

     3,224         4,118   

Other assets, non-current

     6,899         8,624   
  

 

 

    

 

 

 
   $ 443,732       $ 387,324   
  

 

 

    

 

 

 

The increase in deferred tax assets, net was primarily due to the depreciation and amortization recapture as a result of changing the Company’s methods 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):

 

     June 30,
2014
     December 31,
2013
 

Accounts payable

   $ 21,019       $ 30,291   

Accrued compensation and benefits

     86,887         92,106   

Accrued interest

     46,696         48,310   

Accrued taxes

     39,607         32,047   

Accrued utilities and security

     34,010         31,314   

Accrued professional fees

     8,484         9,753   

Accrued repairs and maintenance

     5,039         3,557   

Accrued other

     18,379         15,845   
  

 

 

    

 

 

 
   $ 260,121       $ 263,223   
  

 

 

    

 

 

 

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Other Current Liabilities

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

 

     June 30,
2014
     December 31,
2013
 

Deferred tax liabilities, net

   $ 72,004       $ 72,004   

Deferred installation revenue

     41,644         43,145   

Customer deposits

     15,485         15,174   

Derivative instruments

     5,563         6,515   

Deferred recurring revenue

     6,033         5,007   

Deferred rent

     2,746         3,865   

Asset retirement obligations

     1,226         1,290   

Other current liabilities

     1,850         958   
  

 

 

    

 

 

 
   $ 146,551       $ 147,958   
  

 

 

    

 

 

 

Other Liabilities

Other liabilities consisted of the following (in thousands):

 

     June 30,
2014
     December 31,
2013
 

Asset retirement obligations, non-current

   $ 60,962       $ 58,258   

Deferred tax liabilities, net

     70,111         69,812   

Deferred installation revenue, non-current

     74,966         60,947   

Deferred rent, non-current

     44,576         37,955   

Accrued taxes, non-current

     25,980         27,052   

Customer deposits, non-current

     4,998         5,005   

Deferred recurring revenue, non-current

     1,948         2,082   

Other liabilities

     19,212         13,844   
  

 

 

    

 

 

 
   $ 302,753       $ 274,955   
  

 

 

    

 

 

 

The Company currently leases the majority of its IBX data centers and certain equipment under non-cancelable operating lease agreements expiring through 2043. 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.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

5. Derivatives and Hedging Activities

Derivatives Designated as Hedging Instruments

Cash Flow Hedges. The Company hedges its exposure to foreign currency exchange rate fluctuations for forecasted revenues and expenses in its EMEA region in order to help manage the Company’s exposure to foreign currency exchange rate fluctuations between the U.S. dollar and the British pound, Euro and Swiss franc. As of June 30, 2014, the Company had a total of 101 cash flow hedge instruments with maturity dates ranging from July 2014 to January 2015 as follows (in thousands):

 

     Notional
Amount
     Fair Value (1)     Accumulated
other
comprehensive
income (loss) (2)
 

Derivative assets

   $ 111,896       $ 2,006      $ 2,001   

Derivative liabilities

     155,716         (3,555     (3,497
  

 

 

    

 

 

   

 

 

 
   $ 267,612       $ (1,549   $ (1,496
  

 

 

    

 

 

   

 

 

 

 

(1) A total of $2,006 of derivative assets related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets. A total of $3,555 of derivative liabilities related to cash flow hedges are included in the condensed consolidated balance sheets within other current liabilities.
(2) Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).

As of December 31, 2013, the Company had a total of 69 cash flow hedge instruments with maturity dates ranging from January 2014 to January 2015 as follows (in thousands):

 

     Notional
Amount
     Fair Value (1)     Accumulated
other
comprehensive
income (loss) (2)
 

Derivative assets

   $ 127,968       $ 2,102      $ 2,107   

Derivative liabilities

     200,686         (3,855     (3,857
  

 

 

    

 

 

   

 

 

 
   $ 328,654       $ (1,753   $ (1,750
  

 

 

    

 

 

   

 

 

 

 

(1) A total of $2,099 and $3 of derivative assets related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets and other assets, respectively. A total of $3,818 and $37 of derivative liabilities related to cash flow hedges are included in the condensed consolidated balance sheets within other current liabilities and other liabilities, respectively.
(2) Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).

During the three and six months ended June 30, 2014, there were no ineffective cash flow hedges. During the three months ended June 30, 2014, the amount of gains (losses) reclassified from accumulated other comprehensive income (loss) to revenue and operating expenses were not significant. During the six months ended June 30, 2014, losses of $2,662,000 were reclassified from accumulated other comprehensive income (loss) to revenue and gains reclassified from accumulated other comprehensive income (loss) to operating expenses were not significant. The Company did not enter into any cash flow hedges during the six months ended June 30, 2013.

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. Gains and losses on these embedded derivatives are included within revenues in the Company’s condensed consolidated statements of operations. During the three months ended June 30, 2014 and 2013, gains (losses) associated with these embedded derivatives were not significant. During the six months ended June 30, 2014 and 2013, the Company recognized a net loss of $2,416,000 and net gain of $4,131,000, respectively, associated with these embedded derivatives.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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”). Gains and losses on these contracts are included in revenues along with gains and losses of the related embedded derivatives. The Company entered into various economic hedges of embedded derivatives during the three and six months ended June 30, 2014 and gains (losses) from these contracts were not significant for the periods then ended. The Company entered into various economic hedges of embedded derivatives during the three and six months ended June 30, 2013 and recognized a net loss of $2,091,000 and $3,095,000, respectively, for the periods then ended.

Foreign Currency Forward and Options Contracts. The Company also uses foreign currency forward and options contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of the foreign currency-denominated assets and liabilities change. Gains and losses on these contracts are included in other income (expense), net, along with those foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward and options contracts. The Company entered into various foreign currency forward and options contracts during the three and six months ended June 30, 2014 and recognized a net gain of $2,017,000 and $2,901,000, respectively for the periods then ended. The Company entered into various foreign currency forward and options contracts during the three and six months ended June 30, 2013 and gains (losses) from these foreign currency forward contracts were not significant during these periods.

 

17


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Offsetting Derivative Assets and Liabilities

The following table presents the fair value of derivative instruments recognized in the Company’s condensed consolidated balance sheets as of June 30, 2014 (in thousands):

 

     Gross
Amounts
     Gross
amounts
offset in the
balance
sheet
     Net
amounts (1)
     Gross
amounts not
offset in the
balance
sheet (2)
    Net  

Assets:

             

Designated as hedging instruments:

             

Foreign currency forward contracts

   $ 2,006       $ —         $ 2,006       $ (2,002   $ 4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Not designated as hedging instruments:

             

Embedded derivatives

     4,324         —           4,324         —          4,324   

Economic hedges of embedded derivatives

     492         —           492         —          492   

Foreign currency forward and option contracts

     4,664         —           4,664         (943     3,721   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     9,480         —           9,480         (943     8,537   

Additional netting benefit

     —           —           —           (787     (787
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 11,486       $ —         $ 11,486       $ (3,732   $ 7,754   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Designated as hedging instruments:

             

Foreign currency forward contracts

   $ 3,555       $ —         $ 3,555       $ (2,002   $ 1,553   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Not designated as hedging instruments:

             

Embedded derivatives

     379         —           379         —          379   

Economic hedges of embedded derivatives

     —           —           —           —          —     

Foreign currency forward and option contracts

     1,730         —           1,730         (943     787   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     2,109         —           2,109         (943     1,166   

Additional netting benefit

     —           —           —           (787     (787
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 5,664       $ —         $ 5,664       $ (3,732   $ 1,932   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) As presented in the Company’s condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.
(2) The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default.

 

18


Table of Contents

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, 2013 (in thousands):

 

     Gross
Amounts
     Gross
amounts
offset in the
balance
sheet
     Net
amounts (1)
     Gross
amounts not
offset in the
balance
sheet (2)
    Net  

Assets:

             

Designated as hedging instruments:

             

Foreign currency forward contracts

   $ 2,102       $ —         $ 2,102       $ (2,102   $ —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Not designated as hedging instruments:

             

Embedded derivatives

     6,296         —           6,296         —          6,296   

Foreign currency forward and option contracts

     177         —           177         (177     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     6,473         —           6,473         (177     6,296   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 8,575       $ —         $ 8,575       $ (2,279   $ 6,296   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Designated as hedging instruments:

             

Foreign currency forward contracts

   $ 3,855       $ —         $ 3,855       $ (2,102   $ 1,753   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Not designated as hedging instruments:

             

Embedded derivatives

     115         —           115         —          115   

Economic hedges of embedded derivatives

     1,315         —           1,315         —          1,315   

Foreign currency forward and option contracts

     1,289         —           1,289         (177     1,112   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     2,719         —           2,719         (177     2,542   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 6,574       $ —         $ 6,574       $ (2,279   $ 4,295   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) As presented in the Company’s condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.
(2) The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

6. Fair Value Measurements

The Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 were as follows (in thousands):

 

     Fair value
at June 30,
2014
     Fair value
measurement using
 
        Level 1      Level 2  

Assets:

     

Cash

   $ 361,379       $ 361,379       $ —     

Money market and deposit accounts

     28,939         28,939         —     

U.S. government securities

     238,902         238,902         —     

U.S. government agency securities

     45,802         —           45,802   

Corporate bonds

     6,650         —           6,650   

Certificates of deposit

     1,629         —           1,629   

Asset-backed securities

     5,829         —           5,829   

Commercial paper

     15,219         —           15,219   

Derivative instruments (1)

     11,486         —           11,486   
  

 

 

    

 

 

    

 

 

 
   $ 715,835       $ 629,220       $ 86,615   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Derivative instruments (1)

   $ 5,664       $ —         $ 5,664   
  

 

 

    

 

 

    

 

 

 

 

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

The Company did not have any Level 3 financial assets or financial liabilities as of June 30, 2014.

Valuation Methods

Fair value estimates are made as of a specific point in time based on methods using present value or other valuation techniques. These techniques involve uncertainties and are affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors.

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

The Company determined that the major security types held as of June 30, 2014 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

 

20


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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.

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

During the six months ended June 30, 2014, the Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis.

7. Related Party Transactions

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2014      2013      2014      2013  

Revenues

   $ 2,206       $ 7,264       $ 4,327       $ 15,740   

Costs and services

     3,278         2,068         3,439         4,533   

 

     As of June 30,  
     2014      2013  

Accounts receivable

   $ 1,698       $ 4,142   

Accounts payable

     —           514   

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 pursuant to the accounting standard for lessee’s involvement in asset construction due to the structural building work the Company undertook. As of June 30, 2014, the Company had a financing obligation liability totaling approximately $3,881,000 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.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

8. Leases

Capital Lease and Other Financing Obligations

New York 1 Capital Lease

In June 2014, the Company entered into a lease amendment to extend the lease term of the Company’s New York 1 IBX data center (the “New York 1 Lease”). 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 New York 1 Lease as a result of the lease amendment and determined that the lease should be accounted for as a capital lease (the “New York 1 Capital Lease”). The Company recorded a capital lease asset totaling approximately $28,269,000 and a capital lease liability totaling approximately $28,490,000 during the three months ended June 30, 2014. Monthly payments under the New York 1 Capital Lease will be made through December 2029.

Silicon Valley 2 Capital Lease

In March 2014, the Company entered into a lease amendment to extend the lease term of the Company’s Silicon Valley 2 IBX data center (the “Silicon Valley 2 Lease”). 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 Silicon Valley 2 Lease as a result of the lease amendment and determined that upon the amendment the lease should be accounted for as a capital lease (the “Silicon Valley 2 Capital Lease”). The Company recorded a capital lease asset totaling approximately $81,542,000 and a capital lease liability totaling approximately $82,000,000 during the three months ended March 31, 2014. Monthly payments under the Silicon Valley 2 Capital Lease commenced in March 2014 and will be made through September 2029. The Company has certain renewal options available after September 2029, which have not been included in the lease term.

Dallas IBX Financing

In January and April 2014, the Company took possession of additional space under the terms of an existing lease agreement and a lease amendment in a property in Dallas where the Company operates its Dallas 1, Dallas 2, Dallas 3 and Dallas 6 IBX data centers. Pursuant to the accounting standard for lessee’s involvement in asset construction, the Company is considered the accounting owner of the assets during the construction phase due to the building work that the Company undertook. As a result, the Company recorded incremental financed assets and corresponding financing obligation liabilities totaling approximately $28,089,000 during the three months ended June 30, 2014 and $13,908,000 during the three months ended March 31, 2014 (the “Dallas IBX Financing”). Monthly payments under the Dallas IBX Financing will be made through December 2029.

 

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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  

2014 (6 months remaining)

   $ 22,378      $ 21,194      $ 43,572   

2015

     57,380        54,197        111,577   

2016

     58,311        58,658        116,969   

2017

     59,604        58,717        118,321   

2018

     61,387        61,695        123,082   

Thereafter

     846,037        575,964        1,422,001   
  

 

 

   

 

 

   

 

 

 

Total minimum lease payments

     1,105,097        830,425        1,935,522   

Plus amount representing residual property value

     —          422,518        422,518   

Less estimated building costs

     —          (17,514     (17,514

Less amount representing interest

     (565,328     (640,591     (1,205,919
  

 

 

   

 

 

   

 

 

 

Present value of net minimum lease payments

     539,769        594,838        1,134,607   

Less current portion

     (10,173     (8,204     (18,377
  

 

 

   

 

 

   

 

 

 
   $ 529,596      $ 586,634      $ 1,116,230   
  

 

 

   

 

 

   

 

 

 

9. Debt Facilities

Mortgage and Loans Payable

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

 

     June 30,
2014
    December 31,
2013
 

U.S. term loan

   $ 120,000      $ 140,000   

ALOG financings

     65,972        67,882   

Mortgage payable

     42,634        43,497   

Other loans payable

     2,048        1,829   
  

 

 

   

 

 

 
     230,654        253,208   

Less current portion

     (54,470     (53,508
  

 

 

   

 

 

 
   $ 176,184      $ 199,700   
  

 

 

   

 

 

 

Convertible Debt

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

 

     June 30,
2014
    December 31,
2013
 

3.00% Convertible Subordinated Notes

   $ 178,787      $ 395,986   

4.75% Convertible Subordinated Notes

     157,889        373,724   
  

 

 

   

 

 

 
     336,676        769,710   

Less amount representing debt discount

     (15,762     (45,508
  

 

 

   

 

 

 
   $ 320,914      $ 724,202   
  

 

 

   

 

 

 

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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.

In June 2014, the Company entered into an agreement with a note holder to exchange an aggregate of $217,199,000 of the principal amount of the 3.00% Convertible Subordinated Notes for 1,948,578 shares of the Company’s common stock and $5,387,000 in cash, comprised of accrued interest and a premium. As a result, the Company recognized a loss on debt extinguishment of $4,210,000 during the three months ended June 30, 2014 in its condensed consolidated statement of operations. In the Company’s condensed consolidated statement of cash flows for the six months ended June 30, 2014, the premium paid was included within net cash used in financing activities and the accrued interest paid was included within net cash provided by operating activities.

The Company expects the remaining holders of the 3.00% Convertible Subordinated Notes to convert their notes into shares of the Company’s common stock prior to the 3.00% Convertible Subordinated Notes maturity date since the Company’s stock price is substantially greater than the base conversion price of the notes. As a result, the principal amount of the 3.00% Convertible Subordinated Notes has been classified as a non-current liability on the Company’s condensed consolidated balance sheet as of June 30, 2014 due to the Company’s expectation to settle the 3.00% Convertible Subordinated Notes in shares of the Company’s common stock instead of cash. However, if the Company’s stock price decreases to or below the base conversion price prior to the maturity date of the notes, the holders of the 3.00% Convertible Subordinated Notes will likely not convert their notes and, as a result, the Company will be required to settle the remaining principal amount of the notes in cash. As of June 30, 2014, had the remaining holders of the 3.00% Convertible Subordinated Notes converted their notes, the 3.00% Convertible Subordinated Notes would have been convertible into 1,620,518 shares of the Company’s common stock.

4.75% Convertible Subordinated Notes

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

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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

 

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

 

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

 

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

 

    at any time on or after March 15, 2016.

In May and June 2014, the Company entered into agreements with certain note holders to exchange an aggregate of $215,830,000 of the principal amount of the 4.75% Convertible Subordinated Notes for 2,411,851 shares of the Company’s common stock and $51,671,000 in cash, comprised of accrued interest, a premium and cash paid in lieu of issuing shares for certain note holders’ principal amount. As a result, the Company recognized a loss on debt extinguishment of $46,973,000 during the three months ended June 30, 2014 in its condensed consolidated statement of operations. The loss on debt extinguishment included the premium paid and the excess of the fair value of liability component of the 4.75% Convertible Subordinated Notes over its carrying amount, including debt discount and unamortized debt issuance costs, in accordance with the accounting standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). In the Company’s condensed consolidated statement of cash flows for the six months ended June 30, 2014, the premium paid and cash paid in lieu of issuing shares to settle a portion of the principal amount were included within net cash used in financing activities and the accrued interest paid was included within net cash provided by operating activities.

In May and June 2014, the Company also amended the capped call transactions (“the Capped Call”) that were entered into upon, but separate from, the issuance of the 4.75% Convertible Subordinated Notes. The Capped Call was amended to provide that early exchanges of the 4.75% Convertible Subordinated Notes would not result in the termination of a relative amount of the Capped Call if the Company did not exercise the Capped Call at the time the 4.75% Convertible Subordinated Notes were exchanged. Instead, the Capped Call will remain outstanding. The amendment to the Capped Call had no impact to the Company’s condensed consolidated financial statements for the six months ended June 30, 2014, pursuant to the accounting standard for derivative financial instruments indexed to, and potentially settled in, an entity’s own common stock and the accounting standard for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.

Holders of the 4.75% Convertible Subordinated Notes were eligible to convert their notes during the three months ended June 30, 2014 and are eligible to convert their notes during the three months ended September 30, 2014, since the Stock Price Condition Conversion Clause was met during the applicable periods. As of June 30, 2014, the Company has the intent and ability to settle the principal amount of any conversions of the 4.75% Convertible Subordinated Notes in shares of the Company’s common stock. As a result, the Company determined that the principal amount of the 4.75% Convertible Subordinated Notes should continue to be classified as a non-current liability on the Company’s condensed consolidated balance sheet as of June 30, 2014 due to the Company’s intent and ability to settle the principal amount of the 4.75% Convertible Subordinated Notes in shares of the Company’s common stock instead of cash or a combination of cash and shares of the Company’s common stock. As of June 30, 2014, had the remaining 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 1,872,587 shares of the Company’s common stock.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Loss on Debt Extinguishment

During the three and six months ended June 30, 2014, the Company recorded $51,183,000 of loss on debt extinguishment related to the exchanges of the 3.00% Convertible Subordinated Notes and 4.75% Convertible Subordinated Notes, as discussed above. During the three and six months ended June 30, 2013, the Company recorded $93,602,000 of loss on debt extinguishment related to the redemption of the $750,000,000 aggregate principal amount of 8.125% senior notes.

Senior Notes

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

 

     June 30,
2014
     December 31,
2013
 

5.375% Senior Notes due 2023

   $ 1,000,000       $ 1,000,000   

7.00% Senior Notes due 2021

     750,000         750,000   

4.875% Senior Notes due 2020

     500,000         500,000   
  

 

 

    

 

 

 
   $ 2,250,000       $ 2,250,000   
  

 

 

    

 

 

 

Maturities of Debt Facilities

The following table sets forth maturities of the Company’s debt, including mortgage and loans payable, convertible debt and senior notes, as of June 30, 2014 (in thousands):

 

Year ending:

  

2014 (6 months remaining)

   $ 206,154   

2015

     58,443   

2016 (1)

     220,339   

2017

     36,046   

2018

     9,639   

Thereafter

     2,286,709   
  

 

 

 
   $ 2,817,330   
  

 

 

 

 

(1) Gross of $15,762 debt discount from the 4.75% Convertible Subordinated Notes.

Fair Value of Debt Facilities

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

 

     June 30,
2014
     December 31,
2013
 

Mortgage and loans payable

   $ 234,024       $ 254,607   

Convertible debt

     503,911         1,009,744   

Senior notes

     2,373,750         2,302,290   

The Company has determined that the inputs used to value its debt facilities fall within Level 2 of the fair value hierarchy.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

Interest Charges

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2014      2013      2014      2013  

Interest expense

   $ 66,874       $ 61,001       $ 135,694       $ 121,332   

Interest capitalized

     4,079         2,658         7,485         5,550   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest charges incurred

   $ 70,953       $ 63,659       $ 143,179       $ 126,882   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013

   $  123,902   

Net loss attributable to redeemable non-controlling interests

     (1,299

Other comprehensive income attributable to redeemable non-controlling interests

     2,817   

Increase in redemption value of non-controlling interests

     100,065   

Impact of foreign currency translation

     1,671   
  

 

 

 

Balance as of June 30, 2014

   $ 227,156   
  

 

 

 

In June 2014, the Company, Riverwood Capital L.P. (“Riverwood”), and the other parties thereto, amended the shareholders’ agreement governing their investment in ALOG to extend the time period granted to the Company in 2014 to exercise its right to purchase Riverwood’s interest in ALOG, along with the approximate 10% of ALOG owned by ALOG management, to July 18, 2014. In July 2014, the Company purchased Riverwood’s interest in ALOG, along with the approximate 10% of ALOG owned by ALOG management (see Note 14).

11. Commitments and Contingencies

Purchase Commitments

Primarily as a result of the Company’s various IBX expansion projects, as of June 30, 2014, the Company was contractually committed for $267,162,000 of unaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided, in connection with the work necessary to open these IBX data centers and make them available to customers for installation. In addition, the Company had numerous other, non-capital purchase commitments in place as of June 30, 2014, such as commitments to purchase power in select locations through the remainder of 2014 and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of 2014 and thereafter. Such other miscellaneous purchase commitments totaled $205,555,000 as of June 30, 2014.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

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,
2013
    Net
Change
    Balance as of
June 30,

2014
 

Foreign currency translation gain (loss)

   $ (132,881   $ 38,051      $ (94,830

Unrealized gain (loss) on cash flow hedges

     (1,750     254        (1,496

Unrealized gain (loss) on available for sale securities

     (257     765        508   

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

     21,121        (2,817     18,304   
  

 

 

   

 

 

   

 

 

 
   $ (113,767   $ 36,253      $ (77,514
  

 

 

   

 

 

   

 

 

 

Changes in foreign currency exchange rates 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. As of June 30, 2014, the U.S. dollar was generally weaker relative to certain of the currencies of the foreign countries in which the Company operates. This overall weakness of the U.S. dollar had an overall positive impact on the Company’s consolidated financial position because the foreign denominations translated into more U.S. dollars as evidenced by a decrease in foreign currency translation loss for the six months ended June 30, 2014 as reflected in the above table. 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.

Treasury Stock

During the six months ended June 30, 2014, the Company repurchased a total of 1,315,353 shares of its common stock in the open market at an average price of $194.16 per share for total consideration of $255,383,000 under a share repurchase program that was approved by the Company’s Board of Directors in December 2013 (the “2013 Share Repurchase Program”). As of June 30, 2014, the Company may purchase up to an additional $195,818,000 in value of the Company’s common stock through December 31, 2014 under this share repurchase program.

During the six months ended June 30, 2014, the Company reissued a total of 1,704,061 shares of its treasury stock with a total value of $287,108,000, primarily related to the exchanges of the 3.00% Convertible Subordinated Notes and 4.75% Convertible Subordinated Notes.

Stock-Based Compensation

In March 2014, the Compensation Committee and the Stock Award Committee of the Company’s Board of Directors approved the issuance of an aggregate of 613,560 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 $179.18 and a weighted-average requisite service period of 3.34 years. The valuation of restricted stock units with only a service condition or a service and performance condition requires no significant assumptions as the fair value for these types of equity awards is based solely on the fair value of the Company’s stock price on the date of grant. The Company uses a Monte Carlo simulation option-pricing model to determine the fair value of restricted stock units with a service and market condition. There were no significant changes in the assumptions used to determine the fair value of restricted stock units with a service and market condition that were granted during March 2014 and restricted stock units granted during February 2013.

 

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EQUINIX, INC.

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
June 30,
     Six months ended
June 30,
 
     2014      2013      2014      2013  

Cost of revenues

   $ 2,228       $ 1,794       $ 4,098       $ 3,396   

Sales and marketing

     7,943         6,825         14,943         12,546   

General and administrative

     23,659         15,575         39,770         32,088   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 33,830       $ 24,194       $ 58,811       $ 48,030   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 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
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  

Adjusted EBITDA:

        

Americas

   $ 158,125      $ 154,291      $ 307,688      $ 298,808   

EMEA

     65,351        50,689        128,556        99,418   

Asia-Pacific

     51,801        43,055        99,421        90,697   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjusted EBITDA

     275,277        248,035        535,665        488,923   

Depreciation, amortization and accretion expense

     (116,074     (110,189     (229,684     (218,792

Stock-based compensation expense

     (33,830     (24,194     (58,811     (48,030

Restructuring charges

     —          4,837        —          4,837   

Acquisition costs

     (676     (2,526     (861     (6,188
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

   $ 124,697      $ 115,963      $ 246,309      $ 220,750   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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
June 30,
     Six months ended
June 30,
 
     2014      2013      2014      2013  

Total revenues:

           

Americas

   $ 342,256       $ 313,468       $ 672,289       $ 619,260   

EMEA

     157,162         127,009         308,592         246,978   

Asia-Pacific

     105,743         88,394         204,333         178,767   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 605,161       $ 528,871       $ 1,185,214       $ 1,045,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization:

           

Americas

   $ 62,765       $ 64,757       $ 122,792       $ 127,354   

EMEA

     27,709         23,254         57,421         46,129   

Asia-Pacific

     25,238         21,174         49,492         42,907   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 115,712       $ 109,185       $ 229,705       $ 216,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Capital expenditures:

           

Americas

   $ 87,707       $ 58,272 (1)     $ 155,222       $ 103,113 (1) 

EMEA

     27,101         32,293         42,665         48,862   

Asia-Pacific

     45,008         35,258         84,627 (2)       49,515   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 159,816       $ 125,823       $ 282,514       $ 201,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes the deposit of the purchase price for the New York IBX Data Center Acquisition totaling $2,960.
(2) Includes the purchase of real estate totaling $16,791.

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

 

     June 30,
2014
     December 31,
2013
 

Americas

   $ 2,779,115       $ 2,549,863   

EMEA

     1,188,295         1,188,559   

Asia-Pacific

     956,752         853,228   
  

 

 

    

 

 

 
   $ 4,924,162       $ 4,591,650   
  

 

 

    

 

 

 

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2014      2013      2014      2013  

Colocation

   $ 452,660       $ 398,087       $ 887,283       $ 792,918   

Interconnection

     90,969         78,353         177,995         154,344   

Managed infrastructure

     27,856         24,791         53,240         47,911   

Rental

     2,673         583         5,343         1,163   
  

 

 

    

 

 

    

 

 

    

 

 

 

Recurring revenues

     574,158         501,814         1,123,861         996,336   

Non-recurring revenues

     31,003         27,057         61,353         48,669   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 605,161       $ 528,871       $ 1,185,214       $ 1,045,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

No single customer accounted for 10% or greater of the Company’s revenues for the three and six months ended June 30, 2014 and 2013. No single customer accounted for 10% or greater of the Company’s gross accounts receivable as of June 30, 2014 and December 31, 2013.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

 

14. Subsequent Events

In July 2014, the Company purchased Riverwood’s interest in ALOG, along with the approximate 10% of ALOG owned by ALOG management, for cash consideration of approximately $225,000,000. As a result, the Company owns 100% of the outstanding shares of ALOG. The Company’s assessment of the accounting impact of the transaction is not yet complete.

In July 2014, the Company repurchased a total of 202,390 shares of its common stock in the open market at an average price of $210.36 per share for total consideration of $42,576,000 under the 2013 Share Repurchase Program.

 

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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

Overview

During the three months ended June 30, 2014, 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 entered into agreements with certain note holders to exchange an aggregate of $215.8 million of the principal amount of the 4.75% convertible subordinated notes for 2,411,851 shares of our common stock and cash payments totaling $51.7 million. We also entered into an agreement with a note holder to exchange an aggregate of $217.2 million of the principal amount of the 3.00% convertible subordinated notes for 1,948,578 shares of our common stock and a cash payment totaling $5.4 million. As a result, we recognized a loss on debt extinguishment totaling $51.2 million during the three months ended June 30, 2014 upon the exchange of the 4.75% convertible subordinated notes and 3.00% convertible subordinated notes.

Equinix provides global data center offerings 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 32 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 June 30, 2014, we operated or had partner International Business Exchange® (“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 Europe, Middle East and Africa (“EMEA”) region; and Australia, China, Hong Kong, Indonesia, Japan and Singapore in the Asia-Pacific region.

 

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We leverage our global data centers in 32 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.

Our customer count increased to approximately 6,093 as of June 30, 2014 versus approximately 5,647 as of June 30, 2013, an increase of 8%. 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 was approximately 77% as of June 30, 2014 and June 30, 2013; however, excluding the impact of our IBX data center expansion projects that have opened during the last 12 months, our utilization rate would have increased to approximately 81% as of June 30, 2014. Our utilization rate varies from market to market among our IBX data centers across the Americas, EMEA and Asia-Pacific regions. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market it may limit our ability for growth in that market. We perform demand studies on an ongoing basis to determine if future expansion is warranted in a market. In addition, power and cooling requirements for most customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally do not control the amount of power our customers draw from installed circuits, we have negotiated power consumption limitations with certain of our high power demand customers. This increased power consumption has driven the requirement to build out our new IBX data centers to support power and cooling needs twice that of previous IBX data centers. We could face power limitations in our IBX data 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 IBX data 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.

 

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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. During the three and six months ended June 30, 2014 and 2013, our largest customer accounted for approximately 2% of our recurring revenues for the periods then ended. Our 50 largest customers accounted for approximately 35% of our recurring revenues for the three months ended June 30, 2014 and 2013 and approximately 34% of our recurring revenues for the six months ended June 30, 2014 and 2013.

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 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 customer 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 offerings.

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 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,

 

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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

In September 2012, we announced that our Board of Directors approved a plan for Equinix to pursue conversion to a real estate investment trust (“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 addition to taxes owed with respect to our TRS operations. In particular, while state income tax regimes often parallel the federal income tax regime for REITs described above, many states do not completely follow federal rules and some may not follow them at all.

The REIT conversion implementation currently includes seeking a private letter ruling, or PLR, from the U.S. Internal Revenue Service, or 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 June 2013, we disclosed that we had been informed that the IRS had convened an internal working group to study what constitutes “real estate” for purposes of the REIT provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and that, pending the completion of the study, the IRS was unlikely to respond definitively to our pending PLR request. In November 2013, the IRS informed us that it was actively resuming work on our PLR request and would respond in due course. We do not expect that this delay will affect the timing of our plan to elect REIT status for the taxable year beginning January 1, 2015. We currently expect to receive a favorable PLR from the IRS in 2014 and combined with Board of Directors approval and completion of other necessary conversion actions, we thereafter would commit to a final REIT conversion

 

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plan. Once we reach this commitment, the financial statements for 2014 will reflect the necessary accounting adjustments including an adjustment to eliminate the U.S. deferred tax assets and liabilities balances discussed below as well as any tax consequences for the shareholder distributions also discussed below.

We currently estimate that we will incur approximately $75.0 to $85.0 million in costs to support the REIT conversion, of which $62.6 million has been incurred to date, in addition to related tax liabilities associated with a change in our methods 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 and is generally payable over a four-year period starting in 2012 even if we abandon the REIT conversion for any reason, including failure to obtain a favorable PLR response. To date, we have settled $254.7 million of the estimated federal and state tax liability related to the recapture of depreciation and amortization expenses. 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 $145.0 to $180.0 million in cash taxes during 2014 which includes taxes on our operations and any tax impacts required by our plan to convert to a REIT.

In accordance with tax rules applicable to REIT conversions, we expect to issue special distributions to our stockholders of approximately $700.0 million to $1.1 billion (the “Special Distributions”), 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. The Special Distributions will encompass our previously undistributed accumulated earnings and profits attributable to all taxable periods ending on or prior to our first year as a REIT, as well as some extraordinary items of taxable income that we expect to recognize in our first year as a REIT, such as depreciation recapture in respect of our accounting method changes commenced in our pre-REIT period as well as foreign earnings and profits that we will repatriate as dividend income. The estimated Special Distributions may change due to potential changes in certain factors impacting the calculations, such as finalization of our 2013 tax returns, the actual financial year 2014 performance of the entities to be included in the REIT structure and the impact of any other transactions we may undertake during 2014. We expect to make the Special Distributions after receiving a favorable PLR from the IRS and obtaining Board of Directors approval. We anticipate making a Special Distribution in the fourth quarter of 2014 with the balance distributed in 2015. The Special Distribution to be made in the fourth quarter of 2014 will consist exclusively of pre-REIT earnings and profits to ensure all such earnings and profits are distributed prior to the initial REIT year. In addition, commencing with our first year as a REIT, we intend to declare regular cash distributions to our stockholders.

In connection with our contemplated REIT conversion, we expect to reassess the deferred tax assets and liabilities of our U.S. operations to be included in the REIT structure during 2014 at the point in time when it is determined that all significant actions to effect the REIT conversion have occurred and we are committed to that course of action. The reevaluation will result in de-recognizing the deferred tax assets and liabilities of our REIT’s U.S. operations excluding the deferred tax liabilities associated with the depreciation and amortization recapture. The depreciation and amortization recapture is necessary as part of our REIT conversion efforts. The de-recognition of the deferred tax assets and liabilities of our REIT’s U.S. operations will occur because the expected recovery or settlement of the related assets and liabilities will not result in deductible or taxable amounts in any post-REIT conversion periods. As a result of the de-recognition of the aforementioned deferred tax assets and liabilities of our REIT’s U.S. operations and the continuing recognition of deferred tax liabilities associated with the depreciation and amortization recapture to be taxed in 2014 and 2015, we expect to record a significant tax provision expense in 2014.

 

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Results of Operations

Three Months Ended June 30, 2014 and 2013

Revenues. Our revenues for the three months ended June 30, 2014 and 2013 were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2014          %         2013          %         Actual     Constant
currency
 

Americas:

              

Recurring revenues

   $ 325,152         54   $ 300,102         57     8     10

Non-recurring revenues

     17,104         3     13,366         2     28     28
  

 

 

    

 

 

   

 

 

    

 

 

     
     342,256         57     313,468         59     9     10
  

 

 

    

 

 

   

 

 

    

 

 

     

EMEA:

              

Recurring revenues

     148,625         25     118,642         22     25     11

Non-recurring revenues

     8,537         1     8,367         2     2     (1 %) 
  

 

 

    

 

 

   

 

 

    

 

 

     
     157,162         26     127,009         24     24     10
  

 

 

    

 

 

   

 

 

    

 

 

     

Asia-Pacific:

              

Recurring revenues

     100,381         16     83,070         16     21     23

Non-recurring revenues

     5,362         1     5,324         1     1     3
  

 

 

    

 

 

   

 

 

    

 

 

     
     105,743         17     88,394         17     20     22
  

 

 

    

 

 

   

 

 

    

 

 

     

Total:

              

Recurring revenues

     574,158         95     501,814         95     14     12

Non-recurring revenues

     31,003         5     27,057         5     15     14
  

 

 

    

 

 

   

 

 

    

 

 

     
   $ 605,161         100   $ 528,871         100     14     12
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Revenues. Growth in Americas revenues was primarily due to (i) $12.3 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Dallas, New York, Rio de Janeiro, Seattle, Silicon Valley and Washington, D.C. metro areas, (ii) a $2.2 million increase in revenue related to early termination fees 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 three months ended June 30, 2014, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian real than during the three months ended June 30, 2013, resulting in approximately $3.8 million of unfavorable foreign currency impact to our Americas revenues during the three months ended June 30, 2014 compared to average exchange rates of the three months ended June 30, 2013. 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 New York, Philadelphia, Toronto, São Paulo and Silicon Valley metro areas, which are expected to open during the remainder of 2014 and 2015. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

EMEA Revenues. Our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 37% and 36%, respectively, of the regional revenues during the three months ended June 30, 2014 and 2013. Our EMEA revenue growth was primarily due to (i) approximately $14.1 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Frankfurt, London 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 and utilization rate, as discussed above. During the three months ended June 30, 2014, the impact of foreign currency fluctuations resulted in approximately $17.5 million of favorable foreign currency impact

 

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to our EMEA revenues primarily due to a generally weaker U.S. dollar relative to the British pound and Euro during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Amsterdam, London and Paris metro areas, which are expected to open during the remainder of 2014 and 2015. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 37% and 35%, respectively, of the regional revenues for the three months ended June 30, 2014 and 2013. Our Asia-Pacific revenue growth was primarily due to (i) approximately $4.8 million of revenue generated from our recently-opened IBX data center expansions in the Osaka, Singapore, Sydney 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 and utilization rate, as discussed above. During the three months ended June 30, 2014, the U.S. dollar was generally stronger relative to the Australian dollar, Japanese yen and Singapore dollar, than during the three months ended June 30, 2013, resulting in approximately $2.1 million of unfavorable foreign currency impact to our Asia-Pacific revenues during the three months ended June 30, 2014 when compared to average exchange rates of the three months ended June 30, 2013. 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, Melbourne, Osaka, Shanghai and Singapore metro areas, which are expected to open during the remainder of 2014 and 2015. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers’ contracts.

Cost of Revenues. Our cost of revenues for the three months ended June 30, 2014 and 2013 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2014        %       2013        %           Actual         Constant
currency
 

Americas

   $ 148,940         51   $ 146,821         55     1     3

EMEA

     81,454         28     68,248         26     19     12

Asia-Pacific

     62,465         21     52,040         19     20     22
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 292,859         100   $ 267,109         100     10     9
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months ended
June 30,
 
     2014     2013  

Cost of revenues as a percentage of revenues:

    

Americas

     44     47

EMEA

     52     54

Asia-Pacific

     59     59

Total

     48     51

Americas Cost of Revenues. Our Americas cost of revenues for the three months ended June 30, 2014 and 2013 included $52.9 million and $55.1 million, respectively, of depreciation expense. The decrease in depreciation expense was primarily due to $6.2 million of lower depreciation expense resulting from the increase in the useful lives of certain fixed assets when we entered into lease amendments to extend the lease term for certain IBX data centers, partially offset by an increase in depreciation expense due to our IBX data center expansion activity. Excluding depreciation expense, the increase in our Americas cost of revenues was primarily due to $2.2 million of higher compensation costs,

 

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including general salaries, bonuses, stock-based compensation and headcount growth (928 Americas cost of revenues employees as of June 30, 2014 versus 862 as of June 30, 2013) and $5.3 million of higher utility costs, partially offset by $4.0 million of lower rent and facility costs primarily as a result of either certain leases no longer being subject to operating lease treatment or the purchase of previously-leased sites. During the three months ended June 30, 2014, the impact of foreign currency fluctuations to our Americas cost of revenues resulted in approximately $2.5 million of favorable foreign currency impact to our Americas cost of revenues primarily due to generally stronger U.S. dollar relative to the Canadian dollar and Brazilian real during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. 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 June 30, 2014 and 2013 included $23.4 million and $20.2 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) $7.5 million of higher utility, rent and facilities costs, (ii) $5.6 million of higher costs associated with certain custom services provided to our customers and (iii) $2.0 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (428 employees included in EMEA cost of revenues as of June 30, 2014 versus 396 as of June 30, 2013). During the three months ended June 30, 2014, the impact of foreign currency fluctuations to our EMEA cost of revenues resulted in approximately $4.8 million of net unfavorable foreign currency impact to our EMEA cost of revenues primarily due to a generally weaker U.S. dollar relative to the British pound and Euro during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. We expect EMEA cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Our Asia-Pacific cost of revenues for the three months ended June 30, 2014 and 2013 included $24.1 million and $19.9 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 Asia-Pacific cost of revenues was primarily due to $5.3 million of higher costs associated with certain custom services provided to our customers and higher rent, facility and utility costs. For the three months ended June 30, 2014, the impact of foreign currency fluctuations to our Asia-Pacific cost of revenues expenses was not significant when compared to average exchange rates of the three months ended June 30, 2013. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

Sales and Marketing Expenses. Our sales and marketing expenses for the three months ended June 30, 2014 and 2013 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2014        %       2013        %           Actual         Constant
currency
 

Americas

   $ 42,783         57   $ 33,978         57     26     27

EMEA

     21,914         29     17,164         29     28     18

Asia-Pacific

     10,557         14     8,336         14     27     29
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 75,254         100   $ 59,478         100     27     25
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Three months ended
June 30,
 
     2014     2013  

Sales and marketing expenses as a percentage of revenues:

  

Americas

     13     11

EMEA

     14     14

Asia-Pacific

     10     9

Total

     12     11

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing

 

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expenses was primarily due to $4.9 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (428 Americas sales and marketing employees as of June 30, 2014 versus 349 as of June 30, 2013) and $3.3 million of higher advertising, promotion, travel and professional service fees. During the three months ended June 30, 2014, the impact of foreign currency fluctuations to our Americas sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2013. 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 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 $2.8 million of higher professional fees to support our growth and higher compensation costs, including sales compensation, general salaries, bonus and stock-based compensation. For the three months ended June 30, 2014, the impact of foreign currency fluctuations to our EMEA sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2013. 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 have increased. Although we anticipate that we will continue to invest in EMEA sales and marketing initiatives, we believe our EMEA sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $2.4 million of higher professional fees to support our growth and higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (136 Asia-Pacific sales and marketing employees as of June 30, 2014 versus 119 as of June 30, 2013). For the three months ended June 30, 2014, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2013. Over the past several years, we have been investing in our Asia-Pacific sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Asia-Pacific sales and marketing expenses have increased. Although we anticipate that we will continue to invest in Asia-Pacific sales and marketing initiatives, we believe our Asia-Pacific sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

General and Administrative Expenses. Our general and administrative expenses for the three months ended June 30, 2014 and 2013 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2014        %       2013        %           Actual         Constant
currency
 

Americas

   $ 82,066         73   $ 61,695         69     33     24

EMEA

     19,729         18     17,397         20     13     6

Asia-Pacific

     9,880         9     9,540         11     4     5
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 111,675         100   $ 88,632         100     26     25
  

 

 

    

 

 

   

 

 

    

 

 

     

 

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     Three months ended
June 30,
 
     2014     2013  

General and administrative expenses as a percentage of revenues:

    

Americas

     24     20

EMEA

     13     14

Asia-Pacific

     9     11

Total

     18     17

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to $4.4 million of higher professional fees to support our growth and our REIT conversion process and $11.7 million of higher compensation costs, including general salaries and bonuses. During the three months ended June 30, 2014, the impact of foreign currency fluctuations to our Americas general and administrative expenses was not significant when compared to average exchange rates for the three months ended June 30, 2013. 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, 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 $2.0 million of higher compensation costs, including general salaries, bonus, stock-based compensation and headcount growth (329 EMEA general and administrative employees as of June 30, 2014 versus 276 as of June 30, 2013). During the three months ended June 30, 2014, the impact of foreign currency fluctuations to our EMEA general and administrative expenses was not significant when compared to average exchange rates for the three months ended June 30, 2013. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Asia-Pacific General and Administrative Expenses. Our Asia-Pacific general and administrative expenses did not materially change and the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses for the three months ended June 30, 2014 was not significant when compared to average exchange rates of the three months ended June 30, 2013. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Restructuring Charges. During the three months ended June 30, 2014, we did not record any restructuring charges. During the three months ended June 30, 2013, we recorded a $4.8 million reversal of the restructuring charge accrual for our excess space in the New York 2 IBX data center as a result of our decision to purchase this property and utilize the space.

Acquisition Costs. During the three months ended June 30, 2014 and 2013, we recorded acquisition costs totaling $676,000 and $2.5 million, respectively, primarily attributed to Americas region.

Interest Income. Interest income was $744,000 and $917,000, respectively, for the three months ended June 30, 2014 and 2013. The average annualized yield for the three months ended June 30, 2014 was 0.13% versus 0.27% for the three months ended June 30, 2013. We expect interest income to

 

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decrease as a result of changes to our investment profile in both allocation of securities and a focus on greater liquidity in preparation for the Company’s conversion to a REIT. We also expect lower interest income as a result of lower invested cash balances associated with our conversion to a REIT.

Interest Expense. Interest expense increased to $66.9 million for the three months ended June 30, 2014 from $61.0 million for the three months ended June 30, 2014. This increase in interest expense was primarily due to the impact of additional financings such as various capital lease and other financing obligations to support our expansion projects. During the three months ended June 30, 2014 and 2013, we capitalized $4.1 million and $2.7 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur lower interest expense as a result of the exchanges of the 4.75% convertible subordinated notes and the 3.00% convertible subordinated notes during the three months ended June 30, 2014 and the upcoming maturity of the remaining principal amount of the 3.00% convertible subordinated notes in October 2014. However, we may incur additional indebtedness to support our growth, resulting in higher interest expense.

Other Income (Expense). We recorded $681,000 and $2.8 million of other income, respectively, for the three months ended June 30, 2014 and 2013, primarily due to foreign currency exchange gains during the periods.

Loss on Debt Extinguishment. During the three months ended June 30, 2014, we recorded a $51.2 million loss on debt extinguishment as a result of the exchanges of the 3.00% convertible subordinated notes and 4.75% convertible subordinated notes. During the three months ended June 30, 2013, we recorded a $93.6 million loss on debt extinguishment as a result of the redemption of our $750.0 million 8.125% senior notes.

Income Taxes. For the three months ended June 30, 2014, we recorded $2.0 million of income tax benefit primarily due to the $51.2 million loss on debt extinguishment. For the three months ended June 30, 2013, we recorded $9.7 million of income tax benefit primarily due to the $93.6 million loss on debt extinguishment. The effective tax rates for the three months ended June 30, 2014 and 2013 are not comparable as there was a pre-tax net income in the three months ended June 30, 2014 but a pre-tax net loss in the three months ended June 30, 2013. We expect to recognize a larger income tax provision in 2014 due to higher profitability than that of the prior year. The cash taxes for 2014 and 2013 are primarily for U.S. federal and state income taxes and foreign income taxes in certain foreign jurisdictions.

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. 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. Our adjusted EBITDA for the three months ended June 30, 2014 and 2013 were split among the following geographic regions (dollars in thousands):

 

     Three months ended June 30,     % change  
     2014        %       2013        %           Actual         Constant
currency
 

Americas

   $ 158,125         57   $ 154,291         62     2     3

EMEA

     65,351         24     50,689         21     29     5

Asia-Pacific

     51,801         19     43,055         17     20     23
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 275,277         100   $ 248,035         100     11     7
  

 

 

    

 

 

   

 

 

    

 

 

     

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 three months ended June 30, 2014, currency fluctuations resulted in approximately $1.5 million of unfavorable foreign currency impact on our Americas adjusted EBITDA primarily due to the generally stronger U.S. dollar relative to the Brazilian real and Canadian dollar during the three months ended June 30, 2014 compared to the three months ended June 30, 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, partially offset by higher adjusted operating expenses as a percentage of revenues primarily attributable to higher cost of revenues, utilities costs, rent and facilities costs. During the three months ended June 30, 2014, currency fluctuations resulted in approximately $12.0 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 British pound during the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Asia-Pacific Adjusted EBITDA. The increase in our Asia-Pacific adjusted EBITDA was primarily 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 cost of revenues, utilities costs and compensation costs, including general salaries, bonuses and headcount growth to support our growth. For the three months ended June 30, 2014, the impact of foreign currency fluctuations to our Asia-Pacific adjusted EBITDA was not significant when compared to average exchange rates of the three months ended June 30, 2013.

Six Months Ended June 30, 2014 and 2013

Revenues. Our revenues for the six months ended June 30, 2014 and 2013 were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Six months ended June 30,     % change  
     2014        %       2013        %           Actual         Constant
currency
 

Americas:

         

Recurring revenues

   $ 640,132         54   $ 595,200         57     8     9

Non-recurring revenues

     32,157         3     24,060         2     34     34
  

 

 

    

 

 

   

 

 

    

 

 

     
     672,289         57     619,260         59     9     10
  

 

 

    

 

 

   

 

 

    

 

 

     

EMEA:

         

Recurring revenues

     290,750         25     231,924         22     25     13

Non-recurring revenues

     17,842         1     15,054         2     19     10
  

 

 

    

 

 

   

 

 

    

 

 

     
     308,592         26     246,978         24     25     13
  

 

 

    

 

 

   

 

 

    

 

 

     

Asia-Pacific:

         

Recurring revenues

     192,979         16     169,212         16     14     18

Non-recurring revenues

     11,354         1     9,555         1     19     23
  

 

 

    

 

 

   

 

 

    

 

 

     
     204,333         17     178,767         17     14     19
  

 

 

    

 

 

   

 

 

    

 

 

     

Total:

          

Recurring revenues

     1,123,861         95     996,336         95     13     12

Non-recurring revenues

     61,353         5     48,669         5     26     24
  

 

 

    

 

 

   

 

 

    

 

 

     
     $1,185,214         100   $ 1,045,005         100     13     12
  

 

 

    

 

 

   

 

 

    

 

 

     

Americas Revenues. Growth in Americas revenues was primarily due to (i) $19.4 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Dallas, New York, Rio de Janeiro, Seattle, Silicon Valley and Washington, D.C. metro areas, (ii) a $2.5 million increase in revenue related to early termination fees 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 and utilization rate, as discussed above. During the six months ended June 30, 2014, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian real than during the six months ended June 30, 2013, resulting in approximately $11.7 million of unfavorable foreign currency impact to our Americas revenues during the six months ended June 30, 2014 when compared to average exchange rates of the six months ended June 30, 2013. 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 New York, Philadelphia, Toronto, São Paulo and Silicon Valley metro areas, which are expected to open during the remainder of 2014 and 2015. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

 

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EMEA Revenues. Our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 37% and 36%, respectively, of the regional revenues during the six months ended June 30, 2014 and 2013. Our EMEA revenue growth was primarily due to (i) approximately $30.0 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Frankfurt, London 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 and utilization rate, as discussed above. During the six months ended June 30, 2014, the impact of foreign currency fluctuations resulted in approximately $29.6 million of favorable foreign currency impact to our EMEA revenues primarily due to a generally weaker U.S. dollar relative to the British pound and Euro during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Amsterdam, London and Paris metro areas, which are expected to open during the remainder of 2014 and 2015. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.

Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 37% and 36%, respectively, of the regional revenues for the six months ended June 30, 2014 and 2013. Our Asia-Pacific revenue growth was primarily due to (i) approximately $10.1 million of revenue generated from our recently-opened IBX data center expansions in the Osaka, Singapore, Sydney 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 and utilization rate, as discussed above. During the six months ended June 30, 2014, the U.S. dollar was generally stronger relative to the Australian dollar, Japanese yen and Singapore dollar, than during the six months ended June 30, 2013, resulting in approximately $7.8 million of unfavorable foreign currency impact to our Asia-Pacific revenues during the six months ended June 30, 2014 when compared to average exchange rates of the six months ended June 30, 2013. 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, Melbourne, Osaka, Shanghai and Singapore metro areas, which are expected to open during the remainder of 2014 and 2015. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers’ contracts.

Cost of Revenues. Our cost of revenues for the six months ended June 30, 2014 and 2013 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % change  
     2014        %       2013        %           Actual         Constant
currency
 

Americas

   $ 290,705         50   $ 289,696         55     0     3

EMEA

     167,985         29     131,949         25     27     21

Asia-Pacific

     121,694         21     104,055         20     17     21
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 580,384         100   $ 525,700         100     10     11
  

 

 

    

 

 

   

 

 

    

 

 

     

 

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     Six months ended
June 30,
 
     2014     2013  

Cost of revenues as a percentage of revenues:

    

Americas

     43     47

EMEA

     54     53

Asia-Pacific

     60     58

Total

     49     50

Americas Cost of Revenues. Our Americas cost of revenues for the six months ended June 30, 2014 and 2013 included $103.3 million and $108.1 million, respectively, of depreciation expense. The decrease in depreciation expense was primarily due to $12.0 million of lower depreciation expense resulting from the increase in the useful lives of certain fixed assets when we entered into lease amendments to extend the lease term for certain IBX data centers, partially offset by an increase in depreciation expense due to our IBX data center expansion activity. Excluding depreciation expense, the increase in our Americas cost of revenues was primarily due to $8.7 million of higher utility costs, partially offset by $8.4 million of lower rent and facility costs primarily as a result of either certain leases no longer being subject to operating lease treatment or the purchase of previously-leased sites. During the six months ended June 30, 2014, the impact of foreign currency fluctuations to our Americas cost of revenues resulted in approximately $7.9 million of favorable foreign currency impact to our Americas cost of revenues primarily due to generally stronger U.S. dollar relative to the Canadian dollar and Brazilian real during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. We expect Americas cost of revenues to increase as we continue to grow our business.

EMEA Cost of Revenues. Our EMEA cost of revenues for the six months ended June 30, 2014 and 2013 included $49.6 million and $39.6 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) $18.7 million of higher utility, rent and facilities costs, (ii) $5.3 million of higher professional fees to support our growth and higher compensation costs, including general salaries, bonus, stock-based compensation and headcount growth (428 employees included in EMEA cost of revenues as of June 30, 2014 versus 396 as of June 30, 2013) and (iii) $2.0 million of higher costs associated with certain custom services provided to our customers. During the six months ended June 30, 2014, the impact of foreign currency fluctuations to our EMEA cost of revenues resulted in approximately $8.5 million of net unfavorable foreign currency impact to our EMEA cost of revenues primarily due to a generally weaker U.S. dollar relative to the British pound and Euro during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. We expect EMEA cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Our Asia-Pacific cost of revenues for the six months ended June 30, 2014 and 2013 included $47.4 million and $40.5 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 Asia-Pacific cost of revenues was primarily due to $6.7 million of higher utility, rent and facilities costs. During the six months ended June 30, 2014, the impact of foreign currency fluctuations to our Asia-Pacific cost of revenues resulted in approximately $4.6 million of net favorable foreign currency impact to our Asia-Pacific cost of revenues primarily due to a generally stronger U.S. dollar relative to Australian dollar, Japanese yen and Singapore dollar during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

 

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Sales and Marketing Expenses. Our sales and marketing expenses for the six months ended June 30, 2014 and 2013 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % change  
     2014      %     2013      %     Actual     Constant
currency
 

Americas

   $ 83,857         59   $ 69,554         59     21     22

EMEA

     38,998         27     33,068         28     18     11

Asia-Pacific

     19,827         14     15,132         13     31     35
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 142,682         100   $ 117,754         100     21     21
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Six months ended
June 30,
 
     2014     2013  

Sales and marketing expenses as a percentage of revenues:

    

Americas

     12     11

EMEA

     13     13

Asia-Pacific

     10     8

Total

     12     11

Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to $3.4 million of higher advertising, promotion and professional fees to support our growth and $8.7 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (428 Americas sales and marketing employees as of June 30, 2014 versus 349 as of June 30, 2013). During the six months ended June 30, 2014, the impact of foreign currency fluctuations to our Americas sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2013. 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 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 $5.5 million of higher professional fees to support our growth and higher compensation costs, including sales compensation, general salaries, bonuses and stock-based compensation expense. During the six months ended June 30, 2014, the impact of foreign currency fluctuations to our EMEA sales and marketing expenses resulted in approximately $2.0 million of net unfavorable foreign currency impact to our EMEA sales and marketing expenses primarily due to a generally weaker U.S. dollar relative to the British pound and Euro during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Over the past several years, we have been investing in our EMEA sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our EMEA sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in EMEA sales and marketing initiatives, we believe our EMEA sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $4.5 million of higher professional fees to support our growth and higher compensation costs, including sales compensation, general salaries, bonuses, stock-based

 

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compensation expense and headcount growth (136 Asia-Pacific sales and marketing employees as of June 30, 2014 versus 119 as of June 30, 2013). For the six months ended June 30, 2014, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2013. Over the past several years, we have been investing in our Asia-Pacific sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Asia-Pacific sales and marketing expenses have increased. Although we anticipate that we will continue to invest in Asia-Pacific sales and marketing initiatives, we believe our Asia-Pacific sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.

General and Administrative Expenses. Our general and administrative expenses for the six months ended June 30, 2014 and 2013 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % change  
     2014      %     2013      %     Actual     Constant
currency
 

Americas

   $ 157,423         73   $ 126,259         70     25     26

EMEA

     37,558         18     35,141         20     7     1

Asia-Pacific

     19,997         9     18,050         10     11     13
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 214,978         100   $ 179,450         100     20     20
  

 

 

    

 

 

   

 

 

    

 

 

     

 

     Six months ended
June 30,
 
     2014     2013  

General and administrative expenses as a percentage of revenues:

    

Americas

     23     20

EMEA

     12     14

Asia-Pacific

     10     10

Total

     18     17

Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to (i) $11.1 million of higher professional fees to support our growth and our REIT conversion process, (ii) $13.4 million of higher compensation costs, including general salaries and bonuses and (iii) $4.8 million of higher travel, recruiting, relocation, training and general office expenses to support our growth. During the six months ended June 30, 2014, the impact of foreign currency fluctuations to our Americas general and administrative expenses resulted in approximately $2.1 million of favorable foreign currency impact to our Americas general and administrative expenses primarily due to generally stronger U.S. dollar relative to the Canadian dollar and Brazilian real during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. 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, 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 compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (329 EMEA general and administrative employees as of June 30, 2014 versus 276 as of June 30, 2013). During the six months ended June 30, 2014, the impact of foreign currency fluctuations to our EMEA general and administrative expenses

 

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resulted in approximately $2.0 million of net unfavorable foreign currency impact to our EMEA general and administrative expenses primarily due to a generally weaker U.S. dollar relative to the British pound and Euro during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to $2.4 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (207 Asia-Pacific general and administrative employees as of June 30, 2014 versus 187 as of June 30, 2013). For the six months ended June 30, 2014, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant when compared to average exchange rates of the six months ended June 30, 2013. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.

Restructuring Charges. During the six months ended June 30, 2014, we did not record any restructuring charges. During the six months ended June 30, 2013, we recorded a $4.8 million reversal of the restructuring charge accrual for our excess space in the New York 2 IBX data center as a result of our decision to purchase this property and utilize the space.

Acquisition Costs. During the six months ended June 30, 2014 and 2013, we recorded acquisition costs totaling $861,000 and $6.2 million, respectively, primarily attributed to Americas region.

Interest Income. Interest income was $2.2 million and $1.7 million, respectively, for the six months ended June 30, 2014 and June 30, 2013. The average annualized yield for the six months ended June 30, 2014 was 0.42% versus 0.27% for the six months ended June 30, 2013. We expect interest income to decrease as a result of changes to our investment profile in both allocation of securities and a focus on greater liquidity in preparation for the Company’s conversion to a REIT. We also expect lower interest income as a result of lower invested cash balances associated with our conversion to a REIT.

Interest Expense. Interest expense increased to $135.7 million for the six months ended June 30, 2014 from $121.3 million for the six months ended June 30, 2013. This increase in interest expense was primarily due to the impact of our $1.5 billion senior notes offering in March 2013 and $16.8 million of higher interest expense from various capital lease and other financing obligations to support our expansion projects, which was partially offset by the redemption of our 8.125% senior notes in April 2013. During the six months ended June 30, 2014 and 2013, we capitalized $7.5 million and $5.6 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur lower interest expense as a result of the exchanges of the 4.75% convertible subordinated notes and the 3.00% convertible subordinated notes during the three months ended June 30, 2014 and the upcoming maturity of the remaining principal amount of the 3.00% convertible subordinated notes in October 2014. However, we may incur additional indebtedness to support our growth, resulting in higher interest expense.

Other Income (Expense). We recorded $1.4 million and $2.3 million of other income, respectively, for the six months ended June 30, 2014 and 2013, primarily due to foreign currency exchange gains during the periods.

Loss on Debt Extinguishment. During the six months ended June 30, 2014, we recorded a $51.2 million loss on debt extinguishment as a result of the exchanges of the 3.00% convertible subordinated notes and 4.75% convertible subordinated notes. During the six months ended June 30, 2013, we recorded a $93.6 million loss on debt extinguishment as a result of the redemption of our $750.0 million 8.125% senior notes.

 

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Income Taxes. For the six months ended June 30, 2014 and 2013, we recorded $11.6 million and $1.8 million of income tax expenses, respectively. Our effective tax rates were 18.3% for the six months ended June 30, 2014 and 2013. We expect to recognize a larger income tax provision in 2014 due to the higher profitability than that of the prior year. The cash taxes for 2014 and 2013 are primarily for U.S. federal and state income taxes and foreign income taxes in certain foreign jurisdictions.

Adjusted EBITDA. Adjusted EBITDA is a key factor in how we assess the performance of our segments, measure the operational cash generating abilities of our segments and develop regional growth strategies such as IBX data center expansion decisions. Our adjusted EBITDA for the six months ended June 30, 2014 and 2013 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     % change  
     2014      %     2013      %     Actual     Constant
currency
 

Americas

   $ 307,688         57   $ 298,808         61     3     4

EMEA

     128,556         24     99,418         20     29     9

Asia-Pacific

     99,421         19     90,697         19     10     14
  

 

 

    

 

 

   

 

 

    

 

 

     

Total

   $ 535,665         100   $ 488,923         100     10     7
  

 

 

    

 

 

   

 

 

    

 

 

     

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 six months ended June 30, 2014, currency fluctuations resulted in approximately $4.3 million of unfavorable foreign currency impact on our Americas adjusted EBITDA primarily due to the generally stronger U.S. dollar relative to the Brazilian real and Canadian dollar during the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

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, partially offset by higher adjusted operating expenses as a percentage of revenues primarily attributable to higher cost of revenues, utilities costs, rent and facilities costs. During the six months ended June 30, 2014, currency fluctuations resulted in approximately $20.2 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 British pound during the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

Asia-Pacific Adjusted EBITDA. The increase in our Asia-Pacific 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 cost of revenues, utilities costs, rent and facilities costs. The U.S. dollar was generally stronger relative to the Australian dollar, Japanese yen and Singapore dollar compared to the six months ended June 30, 2013, resulting in approximately $4.1 million of net unfavorable foreign currency impact to our Asia-Pacific adjusted EBITDA during the six months ended June 30, 2014 when compared to average exchange rates of the six months ended June 30, 2013.

Non-GAAP Financial Measures

We provide all information required in accordance with generally accepted accounting principles in the United States of America (“GAAP”), but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. Accordingly, we use non-GAAP financial measures to evaluate our operations. 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.

 

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Adjusted EBITDA

We use adjusted EBITDA to evaluate our operations and 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. We exclude these items in order for our lenders, investors, and industry analysts, who review and report on us, to better evaluate our operating performance and cash spending levels relative to our industry sector and competitors.

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

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

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.

 

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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
June 30,
    Six months ended
June 30,
 
     2014      2013     2014      2013  

Income from operations

   $ 124,697       $ 115,963      $ 246,309       $ 220,750   

Depreciation, amortization, and accretion expense

     116,074         110,189        229,684         218,792   

Stock-based compensation expense

     33,830         24,194        58,811         48,030   

Restructuring charges

     —           (4,837     —           (4,837

Acquisition costs

     676         2,526        861         6,188   
  

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ 275,277       $ 248,035      $ 535,665       $ 488,923   
  

 

 

    

 

 

   

 

 

    

 

 

 

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.

Constant Currency Presentation

Our revenues and certain operating expenses (cost of revenues, sales and marketing and general and administrative expenses) from our international operations have represented and will continue to represent a significant portion of our total revenues and certain operating expenses. As a result, our revenues and certain operating expenses have been and will continue to be affected by changes in the U.S. dollar against major international currencies such as the Brazilian real, British pound, Canadian dollar, Euro, Swiss franc, Australian dollar, Hong Kong dollar, Japanese yen, 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 with functional currencies other than the U.S. dollar are converted into U.S. dollars at the exchange rates in effect for the comparable prior period rather than the actual exchange rates in effect during the respective periods (i.e. average rates in effect for the three months ended June 30, 2013 are used as exchange rates for the three months ended June 30, 2014 when comparing the three months ended June 30, 2014 with the three months ended June 30, 2013 and average rates in effect for the six months ended June 30, 2013 are used as exchange rates for the six months ended June 30, 2014 when comparing the six months ended June 30, 2014 with the six months ended June 30, 2013).

Liquidity and Capital Resources

As of June 30, 2014, our total indebtedness was comprised of (i) convertible debt principal totaling $336.7 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 $3.6 billion consisting of (a) $2.3 billion of principal from our 7.00%, 5.375% and 4.875% senior notes, (b) $230.7 million of principal from our mortgage and loans payable and (c) $1.1 billion from our capital lease and other financing obligations.

 

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We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of 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 June 30, 2014, we had $704.3 million of cash, cash equivalents and short-term and long-term investments, of which approximately $469.7 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 $550.0 million revolving credit facility that forms part of our $750.0 million credit facility, referred to as the U.S. financing, any further financing activities we may pursue, and customer collections are our primary source of cash. While we believe we have a strong customer base and have continued to experience relatively strong collections, if the current market conditions were to deteriorate, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, all of which could have a material adverse effect on our liquidity.

As of June 30, 2014, we had 22 irrevocable letters of credit totaling $36.3 million issued and outstanding under the U.S. revolving credit line; as a result, we had a total of approximately $513.7 million of additional liquidity available to us under the U.S. revolving credit line. While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and to complete our publicly-announced IBX 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 plans with our existing resources, additional financing, either debt or equity, may be required to pursue certain new or unannounced additional 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.

Impact of REIT Conversion

We currently estimate that we will incur approximately $75.0 to $85.0 million in costs to support the REIT conversion, of which $62.6 million has been incurred to date, in addition to related tax liabilities associated with a change in our methods 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 and is generally payable over a four-year period starting in 2012 even if we abandon the REIT conversion for any reason, including failure to obtain a favorable PLR response. To date, we have settled $254.7 million of the estimated federal and state tax liability related to the recapture of depreciation and amortization expenses. 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 $145.0 to $180.0 million in cash taxes during 2014 which includes taxes on our operations and any tax impacts required by our plan to convert to a REIT.

In accordance with tax rules applicable to REIT conversions, we expect to issue Special Distributions to our stockholders of approximately $700.0 million to $1.1 billion, 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. The Special Distributions will encompass our previously undistributed accumulated earnings and profits attributable to all taxable periods ending on or prior to our first year as a REIT, as well as some extraordinary items of taxable income that we expect to recognize in our first year as a REIT, such as depreciation recapture in

 

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respect of our accounting method changes commenced in our pre-REIT period as well as foreign earnings and profits that we will repatriate as dividend income. The estimated Special Distributions may change due to potential changes in certain factors impacting the calculations, such as finalization of our 2013 tax returns, the actual financial year 2014 performance of the entities to be included in the REIT structure and the impact of any other transactions we may undertake during 2014. We expect to make the Special Distributions after receiving a favorable PLR from the IRS and obtaining Board of Directors approval. We anticipate making a Special Distribution in the fourth quarter of 2014 with the balance distributed in 2015. The Special Distribution to be made in the fourth quarter of 2014 will consist exclusively of pre-REIT earnings and profits to ensure all such earnings and profits are distributed prior to the initial REIT year. In addition, commencing with our first year as a REIT, we intend to declare regular cash distributions to our stockholders.

Sources and Uses of Cash

 

     Six Months Ended
June 30,
 
     2014     2013  

Net cash provided by operating activities

   $ 270,682      $ 231,340   

Net cash provided by (used in) investing activities

     190,388        (604,993

Net cash provided by (used in) financing activities

     (316,210     646,726   

Operating Activities. The increase in net cash provided by operating activities was primarily due to improved operating results and a reduction in excess tax benefits from stock-based compensation, partially offset by unfavorable working capital activities such as increased payments of certain accounts payable and accrued expenses and decreased collections of customer receivables, increased interest payments and increased income tax payments. During the three months ended June 30, 2014, we elected to make $54.1 million of incremental payments of our accounts payable balance to minimize the potential difficulties with converting accounts payables invoices in connection with the upgrade of our purchasing and accounts payables systems from Oracle 11i to R12. 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 June 2014 were instead collected in July 2014, which negatively impacted cash flows from operating activities for the six months ended June 30, 2014. We expect that we will continue to generate cash from our operating activities during the remainder of 2014 and beyond.

Investing Activities. The net cash provided by investing activities for the six months ended June 30, 2014 was primarily due to $587.6 million of sales and maturities of investments, partially offset by $115.2 million of purchases of investments, $265.7 million of capital expenditures primarily as a result of expansion activity and $16.8 million for the purchase of a plot of land in Melbourne, Australia. The net cash used in investing activities for the six months ended June 30, 2013 was primarily due to $623.8 million of purchases of investments and $201.5 million of capital expenditures as a result of expansion activity, partially offset by $215.2 million of sales and maturities of investments. During 2014, we expect that our IBX expansion construction activity will be similar to our 2013 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 July 2014, we purchased Riverwood Capital L.P.’s (“Riverwood”) interest in ALOG Data Centers do Brasil S.A. (“ALOG”), along with the approximate 10% of ALOG owned by ALOG management, for cash consideration of approximately
$225.0 million.

Financing Activities. The net cash used in financing activities for the six months ended June 30, 2014 was primarily due to $255.4 million of purchases of treasury stock under our share repurchase program that was approved by our Board of Directors in December 2013, $52.0 million paid in connection with the exchanges of the 3.00% convertible subordinated notes and 4.75% convertible subordinated notes and $36.4 million of repayments of other long-term debt and capital lease and other financing obligations, partially offset by $15.8 million of proceeds from employee equity awards and $11.6 million of excess tax

 

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benefits from stock-based compensation. The net cash provided by financing activities for the six months ended June 30, 2013 was primarily due to $1.5 billion of proceeds from the senior notes offering in March 2013, $22.4 million of excess tax benefits from stock-based compensation and $15.9 million of proceeds from employee equity awards, partially offset by $830.9 million for the redemption of the $750.0 million 8.125% senior notes, $39.9 million of repayments of various long-term debt and capital lease and other financing obligations and $20.8 million of debt issuance costs related to the senior notes offering in March 2013. Going forward, we expect that our financing activities will consist primarily of repayment of our debt and additional financings, including the potential use of the $513.7 million of additional liquidity available to us from our $550.0 million revolving credit facility, needed to support expansion opportunities, additional acquisitions or joint ventures, or our conversion to a REIT.

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 2053. The following represents our debt maturities, financings, leases and other contractual commitments as of June 30, 2014 (in thousands):

 

     2014
(6 months)
     2015      2016      2017      2018      Thereafter      Total  

Convertible debt (1)

   $ 178,787       $ —         $ 157,889       $ —         $ —         $ —         $ 336,676   

Senior notes (2)

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

U.S. term loan (2)

     20,000         40,000         40,000         20,000         —           —           120,000   

ALOG financings (2)

     6,466         16,811         20,689         14,229         7,777         —           65,972   

ALOG loans payable (2)

     —           366         439         439         439         73         1,756   

Mortgage payable (2)

     613         1,266         1,321         1,379         1,438         36,617         42,634   

Other loans payable (2)

     292         —           —           —           —           —           292   

Interest (3)

     75,717         147,464         140,962         134,361         132,841         441,320         1,072,665   

Capital lease and other financing obligations (4)

     43,572         111,577         116,969         118,321         123,082         1,422,001         1,935,522   

Operating leases (5)

     46,793         92,400         89,519         84,860         81,494         621,702         1,016,768   

Other contractual commitments (6)

     359,760         72,822         3,756         3,548         2,970         29,861         472,717   

Asset retirement obligations (7)

     1,226         1,452         565         8,146         3,330         47,469         62,188   

ALOG acquisition contingent considerations (8)

     1,594         2,124         3,765         —           —           —           7,483   

Redeemable non-controlling interests

     227,156         —           —           —           —           —           227,156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 961,976       $ 486,282       $ 575,874       $ 385,283       $ 353,371       $ 4,849,043       $ 7,611,829   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents principal only. As of June 30, 2014, had the remaining holders of the 3.00% convertible subordinated notes due 2014 converted their notes, the 3.00% convertible subordinated notes would have been convertible into approximately 1.6 million shares of our common stock, which would have a total value of $340.5 million based on the closing price of our common stock on June 30, 2014. As of June 30, 2014, had the remaining holders of the 4.75% convertible subordinated notes due 2016 converted their notes, the 4.75% convertible subordinated notes would have been convertible into approximately 1.9 million shares of our common stock, which would have a total value of $393.4 million based on the closing price of our common stock on June 30, 2014.
(2) Represents principal only.
(3) Represents interest on convertible debt, senior notes, U.S. term loan, ALOG financings, ALOG loans payable, mortgage payable and other loans payable based on their approximate interest rates as of June 30, 2014.
(4) Excludes any subrental income.
(5) Represents minimum operating lease payments, excluding potential lease renewals.
(6) Represents off-balance sheet arrangements. Other contractual commitments are described below.
(7) Represents liability, net of future accretion expense.
(8) Represents unaccrued ALOG acquisition contingent consideration, subject to reduction for any post-closing balance sheet adjustments and any claims for indemnification, and includes the portion of the contingent consideration that will be funded by Riverwood Capital L.P., who has an indirect, non-controlling equity interest in ALOG. As of June 30, 2014, we accrued approximately $626 of ALOG acquisition contingent consideration.

In connection with certain of our leases and other contracts requiring deposits, we entered into 22 irrevocable letters of credit totaling $36.3 million under the senior revolving credit line. These letters of credit were provided in lieu of cash deposits under the senior revolving credit line. If the landlords for these IBX leases decide to draw down on these letters of credit triggered by an event of default under the lease, we will be required to fund these letters of credit either through cash collateral or borrowing under the senior revolving credit line. These contingent commitments are not reflected in the table above.

 

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We had accrued liabilities related to uncertain tax positions totaling approximately $26.0 million as of June 30, 2014. These liabilities, which are reflected on our balance sheet, are not reflected in the table above since it is unclear when these liabilities will be paid.

Primarily as a result of our various IBX data center expansion projects, as of June 30, 2014, we were contractually committed for $267.2 million of unaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided in connection with the work necessary to complete construction and open these IBX data centers prior to making them available to customers for installation. This amount, which is expected to be paid during the remainder of 2014 and thereafter, is reflected in the table above as “other contractual commitments.”

We had other non-capital purchase commitments in place as of June 30, 2014, such as commitments to purchase power in select locations and other open purchase orders, which contractually bind us for goods or services to be delivered or provided during 2014 and beyond. Such other purchase commitments as of June 30, 2014, which total $205.6 million, are also reflected in the table above as “other contractual commitments.”

In addition, although we are not contractually obligated to do so, we expect to incur additional capital expenditures of approximately $110.0 million to $150.0 million, in addition to the $267.2 million in contractual commitments discussed above as of June 30, 2014, in our various IBX data center expansion projects during 2014 and thereafter in order to complete the work needed to open these IBX data centers. These non-contractual capital expenditures are not reflected in the table above. If we so choose, whether due to economic factors or other considerations, we could delay these non-contractual capital expenditure commitments to preserve liquidity.

Critical Accounting Policies and Estimates

Equinix’s financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are affected by management’s application of accounting policies. On an ongoing basis, management evaluates its estimates and judgments. Critical accounting policies for Equinix that affect our more significant judgment and estimates used in the preparation of our condensed consolidated financial statements include accounting for income taxes, accounting for business combinations, accounting for impairment of goodwill and accounting for property, plant and equipment, which are discussed in more detail under the caption “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2013.

Recent Accounting Pronouncements

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

While there have been no significant changes in our market risk, investment portfolio risk, interest rate risk, foreign currency risk and commodity price risk exposures and procedures during the six months ended June 30, 2014 as compared to the respective risk exposures and procedures disclosed in

 

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Quantitative and Qualitative Disclosures About Market Risk, set forth in Part II Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2013, the U.S. dollar weakened relative to certain of the currencies of the foreign countries in which we operate during the six months ended June 30, 2014. This has significantly impacted our consolidated financial position and results of operations during this period, including the amount of revenue that we reported. Continued strengthening or weakening of the U.S. dollar will continue to have a significant impact to us in future periods.

 

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

None

 

Item 1A. Risk Factors

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

 

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Risks Related to REIT Conversion

Although we have chosen to pursue conversion to a REIT, we may not be successful in converting to a REIT effective January 1, 2015, or at all.

In September 2012, our Board of Directors approved a plan for us to convert to a REIT. There are significant implementation and operational complexities to address before we can timely convert to a REIT, including obtaining a favorable PLR from the IRS, completing internal reorganizations, modifying accounting, information technology and real estate systems, and making required stockholder payouts. Even if we are able to satisfy the existing REIT requirements or any future REIT requirements, the tax laws, regulations and interpretations governing REITs may change at any time in ways that could be disadvantageous to us.

Additionally, several conditions must be met in order to complete the conversion to a REIT, and the timing and outcome of many of these conditions are beyond our control. For example, we cannot provide assurance that the IRS will ultimately provide us with a favorable PLR or that any favorable PLR will be received in a timely manner for us to convert successfully to a REIT as of January 1, 2015. Even if the transactions necessary to implement REIT conversion are effected, our Board of Directors may decide not to elect REIT status, or to delay such election, if it determines in its sole discretion that it is not in the best interests of us or our stockholders. We can provide no assurance if or when conversion to a REIT will be successful. Furthermore, the effective date of the REIT conversion could be delayed beyond January 1, 2015, in which event we could not elect REIT status until the taxable year beginning January 1, 2016, at the earliest. Failure to timely convert to a REIT or maintain REIT status could result in dissatisfaction in our stockholder base.

We may not realize the anticipated benefits to stockholders, including the achievement of significant tax savings for us and regular distributions to our stockholders.

Even if we convert to a REIT and elect REIT status, we cannot provide assurance that our stockholders will experience benefits attributable to our qualification and taxation as a REIT, including our ability to reduce our corporate level U.S. federal income tax through distributions to stockholders and to make regular distributions to stockholders. The realization of the anticipated benefits to stockholders will depend on numerous factors, many of which are outside our control. In addition, future cash distributions to stockholders will depend on our cash flows, as well as the impact of alternative, more attractive investments as compared to dividends.

We may not qualify or remain qualified as a REIT.

Although we plan to operate in a manner consistent with the REIT qualification rules subsequent to our planned REIT conversion, we cannot provide assurance that we will, in fact, qualify as a REIT or remain so qualified. REIT qualification involves the application of highly technical and complex provisions of the Code to our operations as well as various factual determinations concerning matters and circumstances not entirely within our control. There are limited judicial or administrative interpretations of these provisions.

If we fail to qualify as a REIT, we still will have incurred substantial costs to support our REIT conversion and may still be subject to federal and state tax liability of approximately $360.0 to $380.0 million resulting from the recapture of depreciation and amortization expenses. If we fail to qualify as a REIT in any taxable year after the REIT conversion, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates with respect to each such taxable year for which the statute of limitations remains open. In addition, we will be subject to monetary penalties for the failure. This treatment would significantly reduce our net earnings and cash flow because of our additional tax liability and the penalties for the years involved, which could significantly impact our financial condition.

Legislative or other actions affecting REITs could have a negative effect on us or our stockholders.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Federal and state tax laws are constantly under review by persons

 

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involved in the legislative process, the IRS, the U.S. Department of the Treasury and state taxing authorities. Changes to the tax laws, regulations and administrative interpretations, which may have retroactive application, could adversely affect us. In addition, some of these changes could have a more significant impact on us as compared to other REITs due to the nature of our business and our substantial use of TRSs. We cannot predict with certainty whether, when, in what forms, or with what effective dates, the tax laws, regulations and administrative interpretations applicable to us may be changed.

Complying with REIT requirements may limit our flexibility or cause us to forego otherwise attractive opportunities.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets and the amounts we distribute to our stockholders. For example, under the Code, no more than 25% of the value of the assets of a REIT may be represented by securities of our TRS, and other nonqualifying assets. This limitation may affect our ability to make large investments in other non-REIT qualifying operations or assets. In addition, in order to maintain qualification as a REIT, annually we will be required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. Even if we maintain our qualification as a REIT, we will be subject to U.S. federal income tax at regular corporate rates for our undistributed REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, as well as U.S. federal income tax at regular corporate rates for income recognized by our TRS. Because of these distribution requirements, we will likely not be able to fund future capital needs and investments from operating cash flow. As such, compliance with REIT tests may hinder our ability to make certain attractive investments, including the purchase of significant nonqualifying assets and the material expansion of non-real estate activities.

There are uncertainties relating to our estimate of the Special Distributions, as well as the timing of the Special Distributions and the percentage of common stock and cash we may distribute.

We have provided an estimated range of the Special Distributions. The Special Distributions will encompass our previously undistributed accumulated earnings and profits attributable to all taxable periods ending on or prior to our first year as a REIT, as well as some extraordinary items of taxable income that we expect to recognize in 2015, such as depreciation recapture in respect of our accounting method changes commenced in our pre-REIT period as well as foreign earnings and profits that we repatriate as dividend income. We are in the process of conducting a study of our pre-REIT accumulated earnings and profits as of the close of our 2013 taxable year using our historic tax returns and other available information. This is a very involved and complex study, which is not yet complete, and the actual results of the study relating to our pre-REIT accumulated earnings and profits as of the close of our 2013 taxable year may be materially different from our current estimates. In addition, the estimated range of our Special Distributions is based on our estimated and projected taxable income for our 2014 taxable year and our current business plans and performance, but our actual earnings and profits will vary depending on, among other items, the timing of certain transactions, our actual taxable income and performance for 2014 and possible changes in legislation or tax rules and IRS revenue procedures relating to distributions of earnings and profits. In addition, our actual extraordinary taxable income items for 2015 may be materially different from our current estimates and projections. For these reasons and others, our actual Special Distributions may be materially different from our estimated range.

We anticipate distributing a portion of the Special Distributions in the fourth quarter of 2014, with the balance distributed in 2015, but the timing of the planned Special Distributions, which may or may not occur, may be affected by potential tax law changes, the completion of various phases of the REIT conversion process and other factors beyond our control.

We also anticipate paying up to 20% of the Special Distributions in the form of cash and at least 80% in the form of common stock. We may in fact decide, based on our cash flows and strategic plans, IRS revenue procedures relating to distributions of earnings and profits, leverage and other factors, to pay these amounts in a different mix of cash and common stock.

 

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We may restructure or issue debt or raise equity to satisfy our Special Distributions and other conversion costs.

Depending on the ultimate size and timing of the Special Distributions and the cash outlays associated with our conversion to a REIT, we may restructure or issue debt and/or issue equity to fund these disbursements, even if the then-prevailing market conditions are not favorable for these transactions. Whether we issue debt or equity, at what price and amount and other terms of any such issuances will depend on many factors, including alternative sources of capital, our then existing leverage, our need for additional capital, market conditions and other factors beyond our control. If we raise additional funds through the issuance of equity securities or debt convertible into equity securities, the percentage of stock ownership by our existing stockholders may be reduced. In addition, new equity securities or convertible debt securities could have rights, preferences, and privileges senior to those of our current stockholders, which could substantially decrease the value of our securities owned by them. Depending on the share price we are able to obtain, we may have to sell a significant number of shares in order to raise the capital we deem necessary to execute our long-term strategy, and our stockholders may experience dilution in the value of their shares as a result. Furthermore, satisfying our Special Distributions and other conversion costs may increase the financing we need to fund capital expenditures, future growth and expansion initiatives. As a result, our indebtedness could increase. See “Other Risks” for further information regarding our substantial indebtedness.

There are uncertainties relating to the costs associated with implementing the REIT conversion.

We have provided an estimated range of our tax and other costs to convert to a REIT, including estimated tax liabilities associated with a change in our methods of depreciating and amortizing various assets and annual compliance costs. Our estimate of these taxes and other costs, however, may not be accurate, and such costs may actually be higher than our estimates due to unanticipated outcomes in the process of obtaining a PLR, changes in our business support functions and support costs, the unsuccessful execution of internal planning, including restructurings and cost reduction initiatives, or other factors.

Restrictive loan covenants could prevent us from satisfying REIT distribution requirements.

If we are successful in converting to a REIT, restrictions in our credit facility and our indentures may prevent us from satisfying our REIT distribution requirements, and we could fail to qualify for taxation as a REIT. If these limits do not jeopardize our qualification for taxation as a REIT but nevertheless prevent us from distributing 100% of our REIT taxable income, we would be subject to federal corporate income tax, and potentially a nondeductible excise tax, on the retained amounts. See “Other Risks” for further information on our restrictive loan covenants.

We have no experience operating as a REIT, which may adversely affect our business, financial condition or results of operations if we successfully convert to a REIT.

We have no experience operating as a REIT, and our senior management has no experience operating a REIT. Our pre-REIT operating experience may not be sufficient to prepare us to operate successfully as a REIT. Our inability to operate successfully as a REIT, including the failure to maintain REIT status, could adversely affect our business, financial condition or results of operations.

Our certificate of incorporation contains restrictions on the ownership and transfer of our stock, though they may not be successful in preserving our planned REIT status.

In order for us to qualify as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year other than the first year for which we elect to be taxed as a REIT. In addition, rents from “affiliated tenants” will not qualify as qualifying REIT income if we own 10% or more by vote or value

 

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of the customer, whether directly or after application of attribution rules under the Code. Subject to certain exceptions, our certificate of incorporation prohibits any stockholder from owning beneficially or constructively more than (i) 9.8% in value of the outstanding shares of all classes or series of our capital stock or (ii) 9.8% in value or number, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. We refer to these restrictions collectively as the “ownership limits” and we included them in our certificate of incorporation to facilitate our compliance with REIT tax rules, should we become a REIT. The constructive ownership rules under the Code are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding common stock (or the outstanding shares of any class or series of our stock) by an individual or entity could cause that individual or entity or another individual or entity to own constructively in excess of the relevant ownership limits. Any attempt to own or transfer shares of our common stock or of any of our other capital stock in violation of these restrictions may result in the shares being automatically transferred to a charitable trust or may be void. Even though our certificate of incorporation contains the ownership limits, there can be no assurance that these provisions will be effective to prevent our REIT status from being jeopardized, if we do become a REIT, including under the affiliated tenant rule. Furthermore, there can be no assurance that we will be able to monitor and enforce the ownership limits. If the restrictions in our certificate of incorporation are not effective and as a result we fail to satisfy the REIT tax rules described above, then absent an applicable relief provision, we will fail to qualify as a REIT.

Other Risks

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

Over the last several years, we have completed several acquisitions, including that of Switch & Data Facilities Company, Inc. (“Switch and Data”) in 2010, an approximate 53% controlling equity interest in ALOG in 2011 and the remaining outstanding shares of ALOG in July 2014, Asia Tone Limited and ancotel GmbH in 2012, an acquisition of a Dubai IBX data center in 2012 and the Frankfurt Kleyer 90 Hotel acquisition in 2013. We may make additional acquisitions in the future, which may include (i) acquisitions of businesses, products, services or technologies that we believe to be complementary, (ii) acquisitions of new IBX data centers or real estate for development of new IBX data centers or (iii) acquisitions through investments in local data center operators. We may pay for future acquisitions by using our existing cash resources (which may limit other potential uses of our cash), incurring additional debt (which may increase our interest expense, leverage and debt service requirements) and/or issuing shares (which may dilute our existing stockholders and have a negative effect on our earnings per share). Acquisitions expose us to potential risks, including:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    the possible loss or reduction in value of acquired businesses;

 

    the possibility that future acquisitions may present new complexities in deal structure, related complex accounting and coordination with new partners, particularly in light of our planned status as a REIT;

 

    the possibility that future acquisitions may be in geographies and regulatory environments, to which we are unaccustomed;

 

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

 

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

 

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

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

We cannot assure that the price of any future acquisitions of IBX data centers will be similar to prior IBX data center acquisitions. In fact, we expect costs required to build or render new IBX data centers operational to increase in the future. If our revenue does not keep pace with these potential acquisition and expansion costs, we may not be able to maintain our current or expected margins as we absorb these additional expenses. There is no assurance we would successfully overcome these risks or any other problems encountered with these acquisitions.

Our substantial debt could adversely affect our cash flows and limit our flexibility to raise additional capital.

We have a significant amount of debt and may need to incur additional debt to support our growth. Additional debt may also be incurred to fund future acquisitions, the Special Distributions or the other cash outlays associated with conversion to a REIT. As of June 30, 2014, our total indebtedness was approximately $4.0 billion, our stockholders’ equity was $2.7 billion and our cash and investments totaled $704.3 million. In addition, as of June 30, 2014, we had approximately $513.7 million of additional liquidity available to us from our $550.0 million revolving credit facility as part of a $750.0 million credit facility

 

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agreement entered into with a group of lenders in the U.S. Some of our debt contains covenants which may limit our operating flexibility. In addition to our substantial debt, we lease a majority of our IBX data centers and certain equipment under non-cancellable lease agreements, the majority of which are accounted for as operating leases. As of June 30, 2014, our total minimum operating lease commitments under those lease agreements, excluding potential lease renewals, was approximately $1,016.8 million, which represents off-balance sheet commitments.

Our substantial amount of debt and related covenants, and our off-balance sheet commitments, could have important consequences. For example, they could:

 

    require us to dedicate a substantial portion of our cash flow from operations to make interest and principal payments on our debt and in respect of other off-balance sheet arrangements, reducing the availability of our cash flow to fund future capital expenditures, working capital, execution of our expansion strategy and other general corporate requirements;

 

    make it more difficult for us to satisfy our obligations under our various debt instruments;

 

    increase our vulnerability to general adverse economic and industry conditions and adverse changes in governmental regulations;

 

    limit our flexibility in planning for, or reacting to, changes in our business and industry, which may place us at a competitive disadvantage compared with our competitors;

 

    limit our operating flexibility through covenants with which we must comply, such as limiting our ability to repurchase shares of our common stock;

 

    limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity, which would also limit our ability to further expand our business; and

 

    make us more vulnerable to increases in interest rates because of the variable interest rates on some of our borrowings to the extent we have not entirely hedged such variable rate debt.

The occurrence of any of the foregoing factors could have a material adverse effect on our business, results of operations and financial condition. In addition, the performance of our stock price may trigger events that would require the write-off of a significant portion of our debt issuance costs related to our convertible debt, which may have a material adverse effect on our results of operations.

We may also need to refinance a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing may not be as favorable as the terms of our existing debt. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. These risks could materially adversely affect our financial condition, cash flows and results of operations.

Global economic uncertainty and debt issues could adversely impact our business and financial condition.

The varying pace of global economic recovery continues to create uncertainty and unpredictability and add risk to our future outlook. An uncertain global economy could also result in churn in our customer base, reductions in revenues from our offerings, longer sales cycles, slower adoption of new technologies and increased price competition, adversely affecting our liquidity. The uncertain economic environment could also have an impact on our foreign exchange forward contracts if our counterparties’ credit deteriorates or they are otherwise unable to perform their obligations. Finally, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to do so which could have an impact on our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in the future.

 

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The market price of our stock may continue to be highly volatile, and the value of an investment in our common stock may decline.

Since January 1, 2013, the closing sale price of our common stock on the NASDAQ Global Select Market has ranged from $155.18 to $229.67 per share. The market price of the shares of our common stock has been and may continue to be highly volatile. General economic and market conditions, and market conditions for telecommunications stocks in general, may affect the market price of our common stock.

Announcements by us or others, or speculations about our future plans, may also have a significant impact on the market price of our common stock. These may relate to:

 

    our operating results or forecasts;

 

    new issuances of equity, debt or convertible debt by us;

 

    changes to our capital allocation, tax planning or business strategy;

 

    our planned conversion to a REIT;

 

    a stock repurchase program;

 

    developments in our relationships with corporate customers;

 

    announcements by our customers or competitors;

 

    changes in regulatory policy or interpretation;

 

    governmental investigations;

 

    changes in the ratings of our debt or stock by rating agencies or securities analysts;

 

    our purchase or development of real estate and/or additional IBX data centers;

 

    our acquisitions of complementary businesses; or

 

    the operational performance of our IBX data centers.

The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for telecommunications companies, and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock. In addition, if we are unsuccessful in our planned conversion to a REIT, the market price of our common stock may decrease, and the decrease may be material. Furthermore, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and/or damages, and divert management’s attention from other business concerns, which could seriously harm our business.

If we are not able to generate sufficient operating cash flows or obtain external financing, our ability to fund incremental expansion plans may be limited.

Our capital expenditures, together with ongoing operating expenses, obligations to service our debt and the cash outlays associated with our REIT conversion, will be a substantial drain on our cash flow and may decrease our cash balances. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. Our inability to obtain additional debt and/or equity financing or to generate sufficient cash from operations may require us to prioritize projects or curtail capital expenditures which could adversely affect our results of operations.

 

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Fluctuations in foreign currency exchange rates in the markets in which we operate internationally could harm our results of operations.

We may experience gains and losses resulting from fluctuations in foreign currency exchange rates. To date, the majority of our revenues and costs are denominated in U.S. dollars; however, the majority of revenues and costs in our international operations are denominated in foreign currencies. Where our prices are denominated in U.S. dollars, our sales and revenues could be adversely affected by declines in foreign currencies relative to the U.S. dollar, thereby making our offerings more expensive in local currencies. We are also exposed to risks resulting from fluctuations in foreign currency exchange rates in connection with our international expansions. To the extent we are paying contractors in foreign currencies, our expansions could cost more than anticipated as a result of declines in the U.S dollar relative to foreign currencies. In addition, fluctuating foreign currency exchange rates have a direct impact on how our international results of operations translate into U.S. dollars.

Although we currently undertake, and may decide in the future to further undertake, foreign exchange hedging transactions to reduce foreign currency transaction exposure, we do not currently intend to eliminate all foreign currency transaction exposure. In addition, REIT compliance rules may restrict our ability to enter into hedging transactions that would be outstanding when we are a REIT. Therefore, any weakness of the U.S. dollar may have a positive impact on our consolidated results of operations because the currencies in the foreign countries in which we operate may translate into more U.S. dollars. However, if the U.S. dollar strengthens relative to the currencies of the foreign countries in which we operate, our consolidated financial position and results of operations may be negatively impacted as amounts in foreign currencies will generally translate into fewer U.S. dollars. For additional information on foreign currency risk, refer to our discussion of foreign currency risk in “Quantitative and Qualitative Disclosures About Market Risk” included in Item 3 of this Quarterly Report on Form 10-Q.

Changes in U.S. or foreign tax laws, regulations, or interpretations thereof, including changes to tax rates, may adversely affect our financial statements and cash taxes.

We are a U.S. company with global subsidiaries and are subject to income taxes in the U.S. and many foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. Although we believe that we have adequately assessed and accounted for our potential tax liabilities, and that our tax estimates are reasonable, there can be no certainty that additional taxes will not be due upon audit of our tax returns or as a result of changes to the tax laws and interpretations thereof. The U.S. Congress as well as the governments of many of the countries in which we operate are actively discussing changes to the corporate recognition and taxation of worldwide income. The nature and timing of any changes to each jurisdiction’s tax laws and the impact on our future tax liabilities cannot be predicted with any accuracy but could materially and adversely impact our results of operations and financial position including cash flows.

We are continuing to invest in our expansion efforts but may not have sufficient customer demand in the future to realize expected returns on these investments.

We are considering the acquisition or lease of additional properties and the construction of new IBX data centers beyond those expansion projects already announced. We will be required to commit substantial operational and financial resources to these IBX data centers, generally 12 to 18 months in advance of securing customer contracts, and we may not have sufficient customer demand in those markets to support these centers once they are built. In addition, unanticipated technological changes could affect customer requirements for data centers, and we may not have built such requirements into our new IBX data centers. Either of these contingencies, if they were to occur, could make it difficult for us to realize expected or reasonable returns on these investments.

Our offerings have a long sales cycle that may harm our revenues and operating results.

A customer’s decision to purchase our offerings typically involves a significant commitment of resources. In addition, some customers will be reluctant to commit to locating in our IBX data centers until

 

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they are confident that the IBX data center has adequate carrier connections. As a result, we have a long sales cycle. Furthermore, we may devote significant time and resources in pursuing a particular sale or customer that does not result in revenue. We have also significantly expanded our sales force in the past year, and it will take time for these new hires to become fully productive.

Delays due to the length of our sales cycle may materially and adversely affect our revenues and operating results, which could harm our ability to meet our forecasts and cause volatility in our stock price.

Any failure of our physical infrastructure or offerings could lead to significant costs and disruptions that could reduce our revenue and harm our business reputation and financial results.

Our business depends on providing customers with highly reliable solutions. We must safehouse our customers’ infrastructure and equipment located in our IBX data centers. We own certain of our IBX data centers, but others are leased by us, and we rely on the landlord for basic maintenance of our leased IBX data centers. If such landlord has not maintained a leased property sufficiently, we may be forced into an early exit from the center which could be disruptive to our business. Furthermore, we continue to acquire IBX data centers not built by us. If we discover that these IBX data centers and their infrastructure assets are not in the condition we expected when they were acquired, we may be required to incur substantial additional costs to repair or upgrade the centers.

The offerings we provide in each of our IBX data centers are subject to failure resulting from numerous factors, including:

 

    human error;

 

    equipment failure;

 

    physical, electronic and cybersecurity breaches;

 

    fire, earthquake, hurricane, flood, tornado and other natural disasters;

 

    extreme temperatures;

 

    water damage;

 

    fiber cuts;

 

    power loss;

 

    terrorist acts;

 

    sabotage and vandalism; and

 

    failure of business partners who provide our resale products.

Problems at one or more of our IBX data centers, whether or not within our control, could result in service interruptions or significant equipment damage. We have service level commitment obligations to certain of our customers, including our significant customers. As a result, service interruptions or significant equipment damage in our IBX data centers could result in difficulty maintaining service level commitments to these customers and potential claims related to such failures. Because our IBX data centers are critical to many of our customers’ businesses, service interruptions or significant equipment damage in our IBX data centers could also result in lost profits or other indirect or consequential damages to our customers. We cannot guarantee that a court would enforce any contractual limitations on our liability in the event that one of our customers brings a lawsuit against us as a result of a problem at one of our IBX data centers. In addition, any loss of service, equipment damage or inability to meet our service level commitment obligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results.

 

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Furthermore, we are dependent upon Internet service providers, telecommunications carriers and other website operators in the Americas, Asia-Pacific and EMEA regions and elsewhere, some of which have experienced significant system failures and electrical outages in the past. Our customers may in the future experience difficulties due to system failures unrelated to our systems and offerings. If, for any reason, these providers fail to provide the required services, our business, financial condition and results of operations could be materially and adversely impacted.

We are currently making significant investments in our back office information technology systems, including those surrounding the customer experience from initial quote to customer billing, and upgrading our worldwide financial application suite. Difficulties, distractions or disruptions to these efforts may interrupt our normal operations and adversely affect our business and operating results.

Commencing in 2012, we began a significant project to overhaul our back office systems that support the customer experience from initial quote to customer billing. Additionally, commencing in 2013, we began to devote significant resources to the upgrade of our worldwide financial application suite from Oracle’s version 11i to R12. Both projects have continued into 2014. Oracle has already begun to discontinue its support for our current business application suite. As a result of that discontinued support and our continued work on these projects, we may experience difficulties with our systems, management distraction and significant business disruptions. Difficulties with our systems may interrupt our ability to accept and deliver customer orders and impact our overall financial operations, including our accounts payable, accounts receivables, general ledger, close processes, internal financial controls and our ability to otherwise run and track our business. We may need to expend significant attention, time and resources to correct problems or find alternative sources for performing these functions. Such significant investments in our back office systems may take longer to complete and cost more than originally planned. In addition, we may not realize the full benefits we hoped to achieve and there is a risk of an impairment charge if we decide that portions of these projects will not ultimately benefit the company or are de-scoped. Any such difficulty or disruption may adversely affect our business and operating results.

The insurance coverage that we purchase may prove to be inadequate.

We carry liability, property, business interruption and other insurance policies to cover insurable risks to our company. We select the types of insurance, the limits and the deductibles based on our specific risk profile, the cost of the insurance coverage versus its perceived benefit and general industry standards. Our insurance policies contain industry standard exclusions for events such as war and nuclear reaction. We purchase minimal levels of earthquake insurance for certain of our IBX data centers, but for most of our data centers, including many in California, we have elected to self-insure. The earthquake and flood insurance that we do purchase would be subject to high deductibles and any of the limits of insurance that we purchase could prove to be inadequate, which could materially and adversely impact our business, financial condition and results of operations.

Our construction of additional new IBX data centers or IBX data center expansions, could involve significant risks to our business.

In order to sustain our growth in certain of our existing and new markets, we must expand an existing data center, lease a new facility or acquire suitable land, with or without structures, to build new IBX data centers from the ground up. Expansions or new builds are currently underway, or being contemplated, in many of our markets. Any related construction requires us to carefully select and rely on the experience of one or more designers, general contractors, and associated subcontractors during the design and construction process. Should a designer, general contractor, or significant subcontractor experience financial or other problems during the design or construction process, we could experience significant delays, increased costs to complete the project and/or other negative impacts to our expected returns.

 

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Site selection is also a critical factor in our expansion plans. There may not be suitable properties available in our markets with the necessary combination of high power capacity and fiber connectivity, or selection may be limited. Thus, while we may prefer to locate new IBX data centers adjacent to our existing locations it may not always be possible. In the event we decide to build new IBX data centers separate from our existing IBX data centers, we may provide interconnection solutions to connect these two centers. Should these solutions not provide the necessary reliability to sustain connection, this could result in lower interconnection revenue and lower margins and could have a negative impact on customer retention over time.

Environmental regulations may impose upon us new or unexpected costs.

We are subject to various federal, state, local and international environmental and health and safety laws and regulations, including those relating to the generation, storage, handling and disposal of hazardous substances and wastes. Certain of these laws and regulations also impose joint and several liability, without regard to fault, for investigation and cleanup costs on current and former owners and operators of real property and persons who have disposed of or released hazardous substances into the environment. Our operations involve the use of hazardous substances and materials such as petroleum fuel for emergency generators, as well as batteries, cleaning solutions and other materials. In addition, we lease, own or operate real property at which hazardous substances and regulated materials have been used in the past. At some of our locations, hazardous substances or regulated materials are known to be present in soil or groundwater, and there may be additional unknown hazardous substances or regulated materials present at sites we own, operate or lease. At some of our locations, there are land use restrictions in place relating to earlier environmental cleanups that do not materially limit our use of the sites. To the extent any hazardous substances or any other substance or material must be cleaned up or removed from our property, we may be responsible under applicable laws, regulations or leases for the removal or cleanup of such substances or materials, the cost of which could be substantial.

In addition, we are subject to environmental, health and safety laws regulating air emissions, storm water management and other issues arising in our business. While these obligations do not normally impose material costs upon our operations, unexpected events, equipment malfunctions and human error, among other factors, can lead to violations of environmental laws, regulations or permits. Furthermore, environmental laws and regulations change frequently and may require additional investment to maintain compliance. Noncompliance with existing, or adoption of more stringent, environmental or health and safety laws and regulations or the discovery of previously unknown contamination could require us to incur costs or become the basis of new or increased liabilities that could be material.

Environmental regulations are subject to change, in particular, in connection with emissions of greenhouse gases (“GHGs”), such as carbon dioxide, which is produced by combustion of fossil fuels to produce electricity. More stringent regulations would tend to increase the costs of electricity for our operations, which is one of our significant costs of business. Regulations to limit GHG emissions are in force in the European Union for some time, and are not likely to change our costs of operation significantly in the near future. In the U.S., however, the U.S. Environmental Protection Agency (“EPA”) has recently proposed regulations that would require states to reduce GHG emissions by 30% by 2030. These regulations are focused upon reducing emissions from coal-fired power plants and increasing investment in energy efficiency, renewable energy and increased use of natural gas. These changes, if implemented, could adversely affect our electricity costs. Our facilities are currently not directly subject to the EPA GHG emissions reduction regulations. We will continue to monitor the developments of this regulatory program to evaluate its impact on our facilities and business.

Several states within the U.S. have adopted laws intended to limit fossil fuel consumption and/or encourage renewable energy development for the same purpose. For example, California enacted AB-32, the Global Warming Solutions Act of 2006, prescribing a statewide cap on global warming pollution with a goal of reaching 1990 GHG emission levels by 2020, and established a mandatory emissions reporting program. Regulations adopted by the California Air Resources Board require allowances to be

 

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surrendered for emissions of GHGs. The first phase of the cap-and-trade program commenced on January 1, 2013, and increased our electricity costs in California by approximately 5%. The full effect on the price we pay for electricity cannot yet be determined, but the increase could exceed 5% of our costs of electricity at our California locations. The AB 32 cap-and-trade program will be expanded effective January 1, 2015, to cover nearly all uses of fossil fuels. Such regulations will directly affect our cost of fuel (for example, for emergency generators) in California.

We do not anticipate that the climate change-related laws and regulations will force us to modify our operations to limit the emissions of GHG. We could, however, be directly subject to taxes, fees or costs, or could indirectly be required to reimburse electricity providers for such costs representing the GHG attributable to our electricity or fossil fuel consumption. These cost increases could materially increase our costs of operation or limit the availability of electricity or emergency generator fuels. The physical impacts of climate change, including extreme weather conditions such as heat waves, could materially increase our costs of operation due to, for example, an increase in our energy use in order to maintain the temperature and internal environment of our data centers necessary for our operations. To the extent any environmental laws enacted or regulations impose new or unexpected costs, our business, results of operations or financial condition may be adversely affected.

If we are unable to recruit or retain qualified personnel, our business could be harmed.

We must continue to identify, hire, train and retain IT professionals, technical engineers, operations employees, and sales, marketing, finance and senior management personnel who maintain relationships with our customers and who can provide the technical, strategic and marketing skills required for our company to grow. There is a shortage of qualified personnel in these fields, and we compete with other companies for the limited pool of talent. The failure to recruit and retain necessary personnel, including, but not limited to, members of our executive team, could harm our business and our ability to grow our company.

We may not be able to compete successfully against current and future competitors.

We must be able to differentiate our IBX data centers and product offerings from those of our competitors. In addition to competing with other neutral colocation providers, we compete with traditional colocation providers, including telecommunications companies, carriers, internet service providers, managed services providers and large REITs who also operate in our market and may enjoy a cost advantage in providing offerings similar to those provided by our IBX data centers. We may experience competition from our landlords which could also reduce the amount of space available to us for expansion in the future. Rather than leasing available space in our buildings to large single tenants, they may decide to convert the space instead to smaller square foot units designed for multi-tenant colocation use, blurring the line between retail and wholesale space. We may also face competition from existing competitors or new entrants to the market seeking to replicate our global IBX data center concept by building or acquiring data centers, offering colocation on neutral terms or by replicating our strategy and messaging. Finally, customers may also decide it is cost-effective for them to build out their own data centers. Once customers have an established data center footprint, either through a relationship with one of our competitors or through in-sourcing, it may be extremely difficult to convince them to relocate to our IBX data centers.

Some of our competitors may adopt aggressive pricing policies, especially if they are not highly leveraged or have lower return thresholds than we do. As a result, we may suffer from pricing pressure that would adversely affect our ability to generate revenues. Some of these competitors may also provide our target customers with additional benefits, including bundled communication services or cloud services, and may do so in a manner that is more attractive to our potential customers than obtaining space in our IBX data centers. Similarly, with growing acceptance of cloud-based technologies, Equinix is at risk losing customers that may decide to fully leverage cloud infrastructure offerings instead of managing their own. Competitors could also operate more successfully or form alliances to acquire significant market share.

 

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Failure to compete successfully may materially adversely affect our financial condition, cash flows and results of operations.

Our business could be harmed by prolonged power outages or shortages, increased costs of energy or general lack of availability of electrical resources.

Our IBX data centers are susceptible to regional costs of power, power shortages, planned or unplanned power outages and limitations, especially internationally, on the availability of adequate power resources.

Power outages, such as those relating to the earthquake and tsunami in Japan in 2011 or Superstorm Sandy, which hit the U.S. East Coast in 2012, could harm our customers and our business. We attempt to limit our exposure to system downtime by using backup generators and power supplies; however, we may not be able to limit our exposure entirely even with these protections in place. Some of our IBXs are located in leased buildings where, depending upon the lease requirements and number of tenants involved, we may or may not control some or all of the infrastructure including generators and fuel tanks. As a result, in the event of a power outage, we may be dependent upon the landlord, as well as the utility company, to restore the power.

In addition, global fluctuations in the price of power can increase the cost of energy, and although contractual price increase clauses exist in the majority of our customer agreements, we may not always choose to pass these increased costs on to our customers.

In each of our markets, we rely on third parties to provide a sufficient amount of power for current and future customers. At the same time, power and cooling requirements are growing on a per unit basis. As a result, some customers are consuming an increasing amount of power per cabinet. We generally do not control the amount of power our customers draw from their installed circuits. This means that we could face power limitations in our IBX data centers. This could have a negative impact on the effective available capacity of a given center and limit our ability to grow our business, which could have a negative impact on our financial performance, operating results and cash flows.

We may also have difficulty obtaining sufficient power capacity for potential expansion sites in new or existing markets. We may experience significant delays and substantial increased costs demanded by the utilities to provide the level of electrical service required by our current IBX data center designs.

If our internal controls are found to be ineffective, our financial results or our stock price may be adversely affected.

Our most recent evaluation of our controls resulted in our conclusion that, as of December 31, 2013, in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, our internal controls over financial reporting were effective. Our ability to manage our operations and growth, and to successfully implement our planned REIT conversion and other systems upgrades designed to support our growth, will require us to further develop our controls and reporting systems and implement or amend new or existing controls and reporting systems. If, in the future, our internal control over financial reporting is found to be ineffective, or if a material weakness is identified in our controls over financial reporting, our financial results may be adversely affected. Investors may also lose confidence in the reliability of our financial statements which could adversely affect our stock price.

In addition, in May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued a new version of its internal control framework, which will be deemed by COSO to supersede the 1992 version of the framework effective December 15, 2014. We are in the process of developing our plan of transition to the 2013 edition of the framework to our assessment of our internal control over financial reporting. It is possible that during the course of the transition to the new framework and its application to our assessment of our internal controls, we may determine that deficiencies exist in our internal controls, possibly rising to the level of material weakness. Such an occurrence, or a failure to effectively remedy such a deficiency, could harm investor confidence in the accuracy and timeliness of our financial reports and negatively impact the market price of our common stock.

 

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If we cannot effectively manage our international operations, and successfully implement our international expansion plans, our revenues may not increase and our business and results of operations would be harmed.

For the years ended December 31, 2013, 2012 and 2011, we recognized approximately 46%, 44% and 41%, respectively, of our revenues outside the U.S. For the six months ended June 30, 2014, we recognized approximately 48% of our revenues outside the U.S. We currently operate outside of the U.S. in Canada, Brazil, EMEA and Asia-Pacific.

To date, the network neutrality of our IBX data centers and the variety of networks available to our customers has often been a competitive advantage for us. In certain of our acquired IBX data centers in the Asia-Pacific region the limited number of carriers available reduces that advantage. As a result, we may need to adapt our key revenue-generating offerings and pricing to be competitive in those markets. In addition, we are currently undergoing expansions or evaluating expansion opportunities outside of the U.S. Undertaking and managing expansions in foreign jurisdictions may present unanticipated challenges to us.

Our international operations are generally subject to a number of additional risks, including:

 

    the costs of customizing IBX data centers for foreign countries;

 

    protectionist laws and business practices favoring local competition;

 

    greater difficulty or delay in accounts receivable collection;

 

    difficulties in staffing and managing foreign operations, including negotiating with foreign labor unions or workers’ councils;

 

    difficulties in managing across cultures and in foreign languages;

 

    political and economic instability;

 

    fluctuations in currency exchange rates;

 

    difficulties in repatriating funds from certain countries;

 

    our ability to obtain, transfer, or maintain licenses required by governmental entities with respect to our business;

 

    unexpected changes in regulatory, tax and political environments;

 

    our ability to secure and maintain the necessary physical and telecommunications infrastructure;

 

    compliance with the Foreign Corrupt Practices Act;

 

    compliance with economic and trade sanctions enforced by the Office of Foreign Assets Control of the U.S. Department of Treasury; and

 

    compliance with evolving governmental regulation with which we have little experience.

In addition, compliance with international and U.S. laws and regulations that apply to our international operations increases our cost of doing business in foreign jurisdictions. These laws and regulations include data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, export requirements, economic and trade sanctions, U.S. laws such as the Foreign Corrupt Practices Act and local laws which also prohibit corrupt payments to governmental officials.

 

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Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our offerings in one or more countries, could delay or prevent potential acquisitions, and could also materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate and address these risks and manage these difficulties.

Economic uncertainty in developing markets could adversely affect our revenue and earnings.

We conduct business, or are contemplating expansion, in developing markets with economies that tend to be more volatile than those in the U.S. and Western Europe. The risk of doing business in developing markets such as Brazil, China, India, Indonesia, Russia, the United Arab Emirates and other economically volatile areas could adversely affect our operations and earnings. Such risks include the financial instability among customers in these regions, political instability, fraud or corruption and other non-economic factors such as irregular trade flows that need to be managed successfully with the help of the local governments. In addition, commercial laws in some developing countries can be vague, inconsistently administered and retroactively applied. If we are deemed not to be in compliance with applicable laws in developing countries where we conduct business, our prospects and business in those countries could be harmed, which could then have a material adverse impact on our results of operations and financial position. Our failure to successfully manage economic, political and other risks relating to doing business in developing countries and economically and politically volatile areas could adversely affect our business.

The use of high power density equipment may limit our ability to fully utilize our older IBX data centers.

Some customers have increased their use of high power density equipment, such as blade servers, in our IBX data centers which has increased the demand for power on a per cabinet basis. Because many of our IBX data centers were built a number of years ago, the current demand for power may exceed the designed electrical capacity in these centers. As power, not space, is a limiting factor in many of our IBX data centers, our ability to fully utilize those IBX data centers may be limited. The ability to increase the power capacity of an IBX data center, should we decide to, is dependent on several factors including, but not limited to, the local utility’s ability to provide additional power; the length of time required to provide such power; and/or whether it is feasible to upgrade the electrical infrastructure of an IBX data center to deliver additional power to customers. Although we are currently designing and building to a higher power specification than that of many of our older IBX data centers, there is a risk that demand will continue to increase and our IBX data centers could become underutilized sooner than expected.

We expect our operating results to fluctuate.

We have experienced fluctuations in our results of operations on a quarterly and annual basis. The fluctuations in our operating results may cause the market price of our common stock to be volatile. We may experience significant fluctuations in our operating results in the foreseeable future due to a variety of factors, including, but not limited to:

 

    fluctuations of foreign currencies in the markets in which we operate;

 

    the timing and magnitude of depreciation and interest expense or other expenses related to the acquisition, purchase or construction of additional IBX data centers or the upgrade of existing IBX data centers;

 

    demand for space, power and services at our IBX data centers;

 

    changes in general economic conditions, such as an economic downturn, or specific market conditions in the telecommunications and Internet industries, both of which may have an impact on our customer base;

 

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    charges to earnings resulting from past acquisitions due to, among other things, impairment of goodwill or intangible assets, reduction in the useful lives of intangible assets acquired, identification of additional assumed contingent liabilities or revised estimates to restructure an acquired company’s operations;

 

    the duration of the sales cycle for our offerings and our ability to ramp our newly-hired sales persons to full productivity within the time period we have forecasted;

 

    restructuring charges or reversals of existing restructuring charges, which may be necessary due to revised sublease assumptions, changes in strategy or otherwise;

 

    acquisitions or dispositions we may make;

 

    the financial condition and credit risk of our customers;

 

    the provision of customer discounts and credits;

 

    the mix of current and proposed products and offerings and the gross margins associated with our products and offerings;

 

    the timing required for new and future IBX data centers to open or become fully utilized;

 

    competition in the markets in which we operate;

 

    conditions related to international operations;

 

    increasing repair and maintenance expenses in connection with aging IBX data centers;

 

    lack of available capacity in our existing IBX data centers to generate new revenue or delays in opening new or acquired IBX data centers that delay our ability to generate new revenue in markets which have otherwise reached capacity;

 

    changes in rent expense as we amend our IBX data center leases in connection with extending their lease terms when their initial lease term expiration dates approach or changes in shared operating costs in connection with our leases, which are commonly referred to as common area maintenance expenses;

 

    the timing and magnitude of other operating expenses, including taxes, expenses related to the expansion of sales, marketing, operations and acquisitions, if any, of complementary businesses and assets;

 

    the cost and availability of adequate public utilities, including power;

 

    changes in employee stock-based compensation;

 

    overall inflation;

 

    increasing interest expense due to any increases in interest rates and/or potential additional debt financings;

 

    our planned REIT conversion, including the timing of expenditures and other cash outlays associated with the REIT conversion;

 

    changes in our tax planning strategies or failure to realize anticipated benefits from such strategies;

 

    changes in income tax benefit or expense; and

 

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    changes in or new generally accepted accounting principles (“GAAP”) in the U.S. as periodically released by the Financial Accounting Standards Board (“FASB”).

Any of the foregoing factors, or other factors discussed elsewhere in this report, could have a material adverse effect on our business, results of operations and financial condition. Although we have experienced growth in revenues in recent quarters, this growth rate is not necessarily indicative of future operating results. Prior to 2008, we had generated net losses every fiscal year since inception. It is possible that we may not be able to generate net income on a quarterly or annual basis in the future. In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to lease and personnel expenses, depreciation and amortization and interest expenses. Therefore, our results of operations are particularly sensitive to fluctuations in revenues. As such, comparisons to prior reporting periods should not be relied upon as indications of our future performance. In addition, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors.

We have incurred substantial losses in the past and may incur additional losses in the future.

As of June 30, 2014, our retained earnings were $16.3 million. Although we have generated net income for each fiscal year since 2008, which was our first full year of net income since our inception, we are also currently investing heavily in our future growth through the build out of multiple additional IBX data centers and IBX data center expansions as well as acquisitions of complementary businesses. As a result, we will incur higher depreciation and other operating expenses, as well as acquisition costs and interest expense, that may negatively impact our ability to sustain profitability in future periods unless and until these new IBX data centers generate enough revenue to exceed their operating costs and cover our additional overhead needed to scale our business for this anticipated growth. The current global financial uncertainty may also impact our ability to sustain profitability if we cannot generate sufficient revenue to offset the increased costs of our recently-opened IBX data centers or IBX data centers currently under construction. In addition, costs associated with the acquisition and integration of any acquired companies, as well as the additional interest expense associated with debt financing we have undertaken to fund our growth initiatives, may also negatively impact our ability to sustain profitability. Finally, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis.

The failure to obtain favorable terms when we renew our IBX data center leases, or the failure to renew such leases, could harm our business and results of operations.

While we own certain of our IBX data centers, others are leased under long-term arrangements with lease terms expiring at various dates through 2053. These leased centers have all been subject to significant development by us in order to convert them from, in most cases, vacant buildings or warehouses into IBX data centers. Most of our IBX data center leases have renewal options available to us. However, many of these renewal options provide for the rent to be set at then-prevailing market rates. To the extent that then-prevailing market rates are higher than present rates, these higher costs may adversely impact our business and results of operations, or we may decide against renewing the lease. In the event that an IBX data center lease does not have a renewal option, we may not be successful in negotiating a renewal of the lease with the landlord. A failure to renew a lease could force us to exit a building prematurely, which could be disruptive to our business, harm our customer relationships, expose us to liability under our customer contracts, cause us to take impairment charges and negatively affect our operating results.

We depend on a number of third parties to provide Internet connectivity to our IBX data centers; if connectivity is interrupted or terminated, our operating results and cash flow could be materially and adversely affected.

The presence of diverse telecommunications carriers’ fiber networks in our IBX data centers is critical to our ability to retain and attract new customers. We are not a telecommunications carrier, and as such, we rely on third parties to provide our customers with carrier services. We believe that the availability of

 

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carrier capacity will directly affect our ability to achieve our projected results. We rely primarily on revenue opportunities from the telecommunications carriers’ customers to encourage them to invest the capital and operating resources required to connect from their centers to our IBX data centers. Carriers will likely evaluate the revenue opportunity of an IBX data center based on the assumption that the environment will be highly competitive. We cannot provide assurance that each and every carrier will elect to offer its services within our IBX data centers or that once a carrier has decided to provide Internet connectivity to our IBX data centers that it will continue to do so for any period of time.

Our new IBX data centers require construction and operation of a sophisticated redundant fiber network. The construction required to connect multiple carrier facilities to our IBX data centers is complex and involves factors outside of our control, including regulatory processes and the availability of construction resources. Any hardware or fiber failures on this network may result in significant loss of connectivity to our new IBX data center expansions. This could affect our ability to attract new customers to these IBX data centers or retain existing customers.

If the establishment of highly diverse Internet connectivity to our IBX data centers does not occur, is materially delayed or is discontinued, or is subject to failure, our operating results and cash flow will be adversely affected.

We may be vulnerable to security breaches which could disrupt our operations and have a material adverse effect on our financial performance and operating results.

A party who is able to compromise the security measures on our networks or the security of our infrastructure could misappropriate either our proprietary information or the personal information of our customers, or cause interruptions or malfunctions in our operations or our customers’ operations. As we provide assurances to our customers that we provide the highest level of security, such a compromise could be particularly harmful to our brand and reputation. We may be required to expend significant capital and resources to protect against such threats or to alleviate problems caused by breaches in security. As techniques used to breach security change frequently, and are generally not recognized until launched against a target, we may not be able to implement security measures in a timely manner or, if and when implemented, we may not be able to determine the extent to which these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, regulatory penalties, loss of existing or potential customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results.

We have government customers, which subjects us to risks including early termination, audits, investigations, sanctions and penalties.

We derive some revenues from contracts with the U.S. government, state and local governments and foreign governments. Some of these customers may terminate all or part of their contracts at any time, without cause.

There is increased pressure for governments and their agencies, both domestically and internationally, to reduce spending. Some of our federal government contracts are subject to the approval of appropriations being made by the U.S. Congress to fund the expenditures under these contracts. Similarly, some of our contracts at the state and local levels are subject to government funding authorizations.

Additionally, government contracts are generally subject to audits and investigations which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business.

 

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Because we depend on the development and growth of a balanced customer base, including key magnet customers, failure to attract, grow and retain this base of customers could harm our business and operating results.

Our ability to maximize revenues depends on our ability to develop and grow a balanced customer base, consisting of a variety of companies, including enterprises, cloud, digital content and financial companies, and network service providers. We consider certain of these customers to be key magnets in that they draw in other customers. The more balanced the customer base within each IBX data center, the better we will be able to generate significant interconnection revenues, which in turn increases our overall revenues. Our ability to attract customers to our IBX data centers will depend on a variety of factors, including the presence of multiple carriers, the mix of our offerings, the overall mix of customers, the presence of key customers attracting business through vertical market ecosystems, the IBX data center’s operating reliability and security and our ability to effectively market our offerings. However, some of our customers may face competitive pressures and may ultimately not be successful or may be consolidated through merger or acquisition. If these customers do not continue to use our IBX data centers it may be disruptive to our business. Finally, the uncertain economic climate may harm our ability to attract and retain customers if customers slow spending, or delay decision-making, on our offerings, or if customers begin to have difficulty paying us and we experience increased churn in our customer base. Any of these factors may hinder the development, growth and retention of a balanced customer base and adversely affect our business, financial condition and results of operations.

We may be subject to securities class action and other litigation, which may harm our business and results of operations.

We may be subject to securities class action or other litigation. For example, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Litigation can be lengthy, expensive, and divert management’s attention and resources. Results cannot be predicted with certainty and an adverse outcome in litigation could result in monetary damages or injunctive relief that could seriously harm our business, results of operations, financial condition or cash flows.

We may not be able to protect our intellectual property rights.

We cannot make assurances that the steps taken by us to protect our intellectual property rights will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. We also are subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property, or acquire licenses to the intellectual property that is the subject of the alleged infringement.

Government regulation may adversely affect our business.

Various laws and governmental regulations, both in the U.S. and abroad, governing Internet related services, related communications services and information technologies remain largely unsettled, even in areas where there has been some legislative action. For example, the Federal Communications Commission is considering proposed Internet rules and regulation of broadband that may result in material changes in the regulations and contribution regime affecting us and our customers. Likewise, as part of a review of the current equity market structure, the Securities and Exchange Commission and the Commodity Futures Trading Commission (“CFTC”) have both sought comments regarding the regulation of independent data centers, such as us, which provide colocation for financial markets and exchanges. The CFTC is also considering regulation of companies that use automated and high-frequency trading systems. Any such regulation may ultimately affect our provision of offerings.

It also may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, telecommunications services and taxation, apply to the Internet and to related offerings such as ours, and substantial resources may be required to comply with regulations or bring any non-compliant business practices into compliance with such regulations. In addition, the development of the market for online commerce and the displacement of traditional telephony service by the Internet and related communications services may prompt an increased call for more stringent consumer protection laws or other regulation both in the U.S. and abroad that may impose additional burdens on companies conducting business online and their service providers.

 

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The adoption, or modification of laws or regulations relating to the Internet and our business, or interpretations of existing laws, could have a material adverse effect on our business, financial condition and results of operations.

Industry consolidation may have a negative impact on our business model.

If customers combine businesses, they may require less colocation space, which could lead to churn in our customer base. Regional competitors may also consolidate to become a global competitor. Consolidation of our customers and/or our competitors may present a risk to our business model and have a negative impact on our revenues.

Terrorist activity throughout the world and military action to counter terrorism could adversely impact our business.

The continued threat of terrorist activity and other acts of war or hostility contribute to a climate of political and economic uncertainty. Due to existing or developing circumstances, we may need to incur additional costs in the future to provide enhanced security, including cybersecurity, which would have a material adverse effect on our business and results of operations. These circumstances may also adversely affect our ability to attract and retain customers, our ability to raise capital and the operation and maintenance of our IBX data centers.

We have various mechanisms in place that may discourage takeover attempts.

Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a third party from acquiring control of us in a merger, acquisition or similar transaction that a stockholder may consider favorable. Such provisions include:

 

    ownership limitations and transfer restrictions relating to our stock that are intended to facilitate our compliance with certain REIT rules relating to share ownership;

 

    authorization for the issuance of “blank check” preferred stock;

 

    the prohibition of cumulative voting in the election of directors;

 

    limits on the persons who may call special meetings of stockholders;

 

    limits on stockholder action by written consent; and

 

    advance notice requirements for nominations to the Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders in certain situations, may also discourage, delay or prevent someone from acquiring or merging with us.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosure

Not applicable.

 

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Item 5. Other Information

None.

 

Item 6. Exhibits

 

         

Incorporated by Reference

    

Exhibit
Number

  

Exhibit Description

  

        Form        

  

    Filing Date/    

Period End

Date

  

    Exhibit    

  

Filed

    Herewith    

3.1    Amended and Restated Certificate of Incorporation of the Registrant, as amended to date.    10-K/A    12/31/02    3.1   
3.2    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant    8-K    6/14/11    3.1   
3.3    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant    8-K    6/11/13    3.1   
3.4    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant             X
3.5    Certificate of Designation of Series A and Series A-1 Convertible Preferred Stock.    10-K/A    12/31/02    3.3   
3.6    Amended and Restated Bylaws of the Registrant.    10-K    12/31/13    3.5   
4.1    Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6.            
4.2    Indenture dated September 26, 2007 by and between Equinix, Inc. and U.S. Bank National Association, as trustee.    8-K    9/26/07    4.4   
4.3    Form of 3.00% Convertible Subordinated Note Due 2014 (see Exhibit 4.2).            
4.4    Indenture dated June 12, 2009 by and between Equinix, Inc. and U.S. Bank National Association, as trustee.    8-K    6/12/09    4.1   
4.5    Form of 4.75% Convertible Subordinated Note Due 2016 (see Exhibit 4.4).            
4.6    Indenture dated July 13, 2011 by and between Equinix, Inc. and U.S. Bank National Association as trustee    8-K    7/13/11    4.1   

 

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Incorporated by Reference

    

Exhibit
Number

  

Exhibit Description

  

        Form        

  

    Filing Date/    

Period End

Date

  

    Exhibit    

  

Filed

    Herewith    

  4.7    Form of 7.00% Senior Note due 2021 (see Exhibit 4.6)    8-K    7/13/11    4.2   
  4.8    Indenture for the 2020 Notes dated March 5, 2013 by and between Equinix, Inc. and U.S. Bank National Association as trustee    8-K    3/5/13    4.1   
  4.9    Form of 4.875% Senior Note due 2020 (see Exhibit 4.8)    8-K    3/5/13    4.2   
  4.10    Indenture for the 2023 Notes dated March 5, 2013 by and between Equinix, Inc. and U.S. Bank National Association as trustee    8-K    3/5/13    4.3   
  4.11    Form of 5.375% Senior Note due 2023 (see Exhibit 4.10)    8-K    3/5/13    4.4   
  4.12    Form of Registrant’s Common Stock Certificate             X
10.1    Form of Indemnification Agreement between the Registrant and each of its officers and directors.    S-4 (File No. 333-93749)    12/29/99    10.5   
10.2    2000 Equity Incentive Plan, as amended.    10-Q    3/31/12    10.2   
10.3    2000 Director Option Plan, as amended.    10-K    12/31/07    10.4   
10.4    2001 Supplemental Stock Plan, as amended.    10-K    12/31/07    10.5   
10.5    Equinix, Inc. 2004 Employee Stock Purchase Plan, as amended.             X
10.6    Severance Agreement by and between Stephen Smith and Equinix, Inc. dated December 18, 2008.    10-K    12/31/08    10.31   
10.7    Severance Agreement by and between Peter Van Camp and Equinix, Inc. dated December 10, 2008.    10-K    12/31/08    10.32   
10.8    Severance Agreement by and between Keith Taylor and Equinix, Inc. dated December 19, 2008.    10-K    12/31/08    10.33   
10.9    Severance Agreement by and between Peter Ferris and Equinix, Inc. dated December 17, 2008.    10-K    12/31/08    10.34   

 

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Incorporated by Reference

    

Exhibit
Number

  

Exhibit Description

  

        Form        

  

    Filing Date/    

Period End

Date

  

    Exhibit    

  

Filed

    Herewith    

10.10    Change in Control Severance Agreement by and between Eric Schwartz and Equinix, Inc. dated December 19, 2008.    10-K    12/31/08    10.35   
10.11    Confirmation for Base Capped Call Transaction dated as of June 9, 2009 between Equinix, Inc. and Deutsche Bank AG, London Branch.    8-K    6/12/09    10.1   
10.12    Confirmation for Additional Capped Call Transaction dated as of June 9, 2009 between Equinix, Inc. and Deutsche Bank AG, London Branch.    8-K    6/12/09    10.2   
10.13    Confirmation for Base Capped Call Transaction dated as of June 9, 2009 between Equinix, Inc. and JPMorgan Chase Bank, National Association, London Branch.    8-K    6/12/09    10.4   
10.14    Confirmation for Additional Capped Call Transaction dated as of June 9, 2009 between Equinix, Inc. and JPMorgan Chase Bank, National Association, London Branch.    8-K    6/12/09    10.5   
10.15    Confirmation for Base Capped Call Transaction dated as of June 9, 2009 between Equinix, Inc. and Goldman, Sachs & Co.    8-K    6/12/09    10.7   
10.16    Confirmation for Additional Capped Call Transaction dated as of June 9, 2009 between Equinix, Inc. and Goldman, Sachs & Co.    8-K    6/12/09    10.8   
10.17    Switch & Data 2007 Stock Incentive Plan.    S-1/A (File No. 333-137607) filed by Switch & Data Facilities Company, Inc.    2/5/07    10.9